SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from                                                                                to                                                            

Commission file number 0-18387

Pegasus Aircraft Partners II, L.P.

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

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

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

Units of Limited Partnership Interest
(Title of Class)

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

     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.  þ

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

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Pegasus Aircraft Partners II, L.P.
Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 2004

Table of Contents

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PART I

ITEM 1. BUSINESS

General

     Pegasus Aircraft Partners II, L.P. (the “Partnership” or the “Registrant”) is a limited partnership organized under the laws of the State of Delaware on April 26, 1989. The general partners of the Partnership are Pegasus Aircraft Management Corporation, the Managing General Partner, a California corporation that is a wholly owned subsidiary of Pegasus Capital Corporation, and Air Transport Leasing, Inc., the Administrative General Partner, a Delaware corporation that is a wholly owned subsidiary of UBS Americas, Inc. UBS Americas is the successor to Paine Webber Group, Inc. (Pegasus Aircraft Management Corporation and Air Transport Leasing, Inc. are herein referred to as the “General Partners”).

     On August 15, 1989, the Partnership commenced an offering of units of limited partnership interest (“Units”). The offering of the Units was terminated during the third quarter of 1990, when the total capitalization of the Partnership reached $145.1 million. The Partnership incurred $16,295,000 of commissions and other expenses in connection with the sale of these Units.

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

     Although it is likely to liquidate sooner, the Partnership is required to dissolve and distribute all of its assets no later than December 31, 2007. In 2002, the Partnership sold two of its Boeing 727-200s, its Airbus A-300, its Lockheed L-1011, its engines from the Boeing 727 formerly leased to Falcon Express and its 50% ownership for the Partnership (McDonnell Douglas MD-81). These sales resulted in the Partnership owning three aircraft, a DC-9, a DC-10 freighter and a Boeing 727-200 freighter, all of which are parked. Due to the age and number of aircraft of similar type available for lease and sale, the Partnership accepted payments from the former lessees in lieu of the aircraft meeting the return conditions specified in the leases and the aircraft are being offered for sale in an “as-is, where is” condition. The net proceeds of the prior aircraft sales were generally utilized to pay off the Partnership’s debt.

Outlook for the Airline and Aircraft Leasing Industries

     The airline industry’s results historically have been highly correlated to general economic activity. During the recent past, there has been a downturn in the world economic climate. This economic downturn was exacerbated by the terrorist attacks in the United States on September 11, 2001, as well as the war in Iraq and the Severe Acute Respiratory Syndrome (SARS) outbreak in Asia and elsewhere. While improving economies in most parts of the world and the US have begun to increase passenger and air freight traffic, significantly higher jet fuel costs have adversely affected operating results and cash flow of airlines and air freight operators. A large number of carriers filed for bankruptcy protection and are operating in bankruptcy, including United Airlines and US Airways. Passenger and freighter aircraft leasing and equipment sales continue to be a highly competitive business.

     Given the age and maintenance status of the Partnership’s three remaining aircraft and the intention to sell in an “as-is, where-is” condition, the Partnership is competing in the used aircraft sales and parts segment of the market. Many used aircraft of a type similar to the Partnership’s aircraft are off-lease and are parked, available for sale, leases or part-out. A number of these aircraft are newer or are in a better maintenance status than that of the Partnership’s aircraft. Also, the number of carriers using this type of equipment has declined significantly.

Aircraft Portfolio

     The Partnership’s net asset value at December 31, 2004 was estimated to be $0.33 per Unit. It should be noted that the net asset value per unit amount is only an estimate of values as of that date, and is not necessarily representative of the values that will ultimately be realized upon the disposition of the remaining aircraft and is also different from the per unit amount basis used for the liquidating distribution.

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     The following table describes the Partnership’s aircraft portfolio at December 31, 2004:

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.

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

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

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

     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.

Aircraft Noise Regulations

     On November 5, 1990, Congress enacted into law the Airport Noise and Capacity Act of 1990 (the “Act”). On September 24, 1991, the FAA issued the final rules of implementation for the Act. The Act provided that Stage II aircraft would be phased out from operation within United States airspace by December 31, 1999.

     Implementing regulations proposed by the FAA required each United States operator to increase its Stage III airplane fleet to 50 percent by December 31, 1996; to 75 percent by December 31, 1998, and to 100 percent by December 31, 1999.

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

     Stage III hushkitting and re-engineering for the Boeing 727-200 and the McDonnell Douglas DC-9-30 aircraft have been approved by the FAA. The Partnership’s Boeing 727-200 aircraft has had a Federal Express hushkit installed.

     The European Commission has promulgated rules relating to aircraft noise that ban aircraft that are modified (“hushkitted”) to achieve Stage III noise compliance from European airspace after the year 2002.

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Competition

     The aircraft leasing industry is highly competitive. There are many aircraft manufacturers, distributors, airlines and other operators, equipment managers, leasing companies, financial institutions and other parties engaged in leasing, managing or remarketing aircraft, many of which have significantly greater financial resources and greater experience than the Partnership. Many used aircraft of a type similar to the Partnership’s aircraft are off-lease and are parked, available for sale, leases or part-out. A number of these aircraft are newer or are in a better maintenance status than that of the Partnership’s aircraft. Also, the number of carriers using the type of equipment owned by the Partnership has declined significantly.

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

     None.

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

     No matters were submitted to a vote of the Limited Partners of the Partnership, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II

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

     There is no organized trading market for the purchase and sale of the Units and certain measures have been adopted and implemented to assure that no organized trading market will develop. Effective July 15, 2003, the Partnership halted third party transfers of units.

     As of March 1, 2005, the number of Limited Partners of record was approximately 6,978.

     The Partnership declared the following distributions to its Limited Partners out of cash flow received from operations during 2004 and 2003:

(1) Distribution declared in second quarter for Unit holders as of August 1, 2003.

     Total distributions to all partners for 2004 and 2003 were declared as follows (in thousands):

     Distributions may be characterized for tax, accounting and economic purposes as a return of capital, a return on capital, or both. The portion of each cash distribution by a partnership, which exceeds its net income, may be deemed a return of capital. Based on the net loss reported by the Partnership for the years ended December 31, 2004 and 2003, all of the cash distributions paid to the partners, in the aggregate, for the year ended December 31, 2003 constituted a return of capital. Also, based on the amount of cumulative net income reported by the Partnership for accounting purposes, approximately 88% of the cash distributions paid to the partners from the inception of the Partnership through December 31, 2004 constituted a return of capital. However, the total actual return on capital over the Partnership’s life can be determined only at the termination of the Partnership after all cash flows, including proceeds from the sale of the aircraft, have been realized. On June 25, 2003 the Partnership declared distributions to record holders of August 1, 2003, which were paid in the third quarter 2003.

     The Partnership sold 4.5 aircraft and the Falcon engines in 2002 and used the proceeds from the asset sales to retire debt. The Partnership has no more indebtedness, but does have cash flow that consists of interest or dividends on its money market investments. The asset sales have resulted in the Partnership having only three off-lease aircraft left and therefore it is not generating any cash flow from operations. The Partnership is attempting to sell the remaining three aircraft in an “as-is, where-is” condition. With the sale of the final aircraft, the Partnership will continue to hold its funds in an interest bearing money-market account.

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

Liquidity and Capital Resources

     The Partnership owns and manages one commercial passenger aircraft and two freighter aircraft, all of which are off-lease. The Partnership is attempting to sell the remaining three aircraft, in an “as-is, where-is” condition. With the sale of the final aircraft, the Partnership will continue to hold its funds in an interest bearing money-market account. A final distribution of the funds, net of intervening expenses and any other liabilities, is anticipated to be made within twelve months of the final aircraft sale.

     The Partnership invests working capital and cash flow from operations prior to its distributions to the partners in a fund that invests in short-term, highly liquid investments. At December 31, 2004, the Partnership’s unrestricted cash and cash equivalents of $2,725,000 were primarily invested in such a fund. This amount was $721,000 less than the Partnership’s unrestricted cash and cash equivalents at December 31, 2003 of $3,446,000. This decrease in unrestricted cash was primarily attributable to cash used in operating activities and payment of previously accrued payables.

     Net cash used in operating activities was $721,000 and $371,000 in 2004 and 2003, respectively, as compared to net cash provided by operating activities of $14.7 million in 2002. In the aggregate, for this three-year period, net cash provided by operating activities totaled $13.6 million. The $721,000 of cash used in operating activities in 2004 is comprised of a net loss, adjusted for changes in assets and liabilities, as discussed below.

     Other assets decreased by $10,000, or 40%, from $25,000 at December 31, 2003 to $15,000 at December 31, 2004, primarily due to the receipt of returned insurance premium credits of $21,000, which was partially offset by an increase in the insurance premium credits of $10,000 and pre-paid insurance of $1,000 during the year ended December 31, 2004.

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     Accounts payable and accrued expenses increased by $49,000, or 37%, from $132,000 at December 31, 2003 to $181,000 at December 31, 2004, primarily due to the receipt of a $50,000 deposit, during the year ended December 31, 2004, for the sale of a DC-10 aircraft. The deposit is reimbursable to the purchaser net of costs expended to test and evaluate the aircraft prior to sale.

     Payables to affiliates decreased by $439,000, or 45%, from $974,000 at December 31, 2003 to $535,000 at December 31, 2004, primarily due to a payment to the General Partners of previously accrued management fees.

     Partnership capital was $2,399,000 at December 31, 2004, a decrease of approximately $341,000 or 12% from $2,740,000 at December 31, 2003, due to net loss of $341,000 during the year ended December 31, 2004.

     Cash distributions declared by the Partnership were $0 for 2004, approximately $2.9 million for 2003 ($.40 per Unit) and $11 million for 2002 ($1.50 per Unit). In the aggregate, for this three-year period, cash distributions declared by the Partnership totaled $13.9 million.

Critical 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 on a straight line basis over the lease term.

Depreciation:
Aircraft are recorded at expected liquidation value. Depreciation has been suspended on the aircraft as they are not in service.

The Partnership determined the critical accounting principles by considering accounting policies that involve the most complex or subjective decisions or assessments. The Partnership identified the most critical accounting policies to be those related to lease revenue recognition and depreciation methods. 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 2004 revenue was the result of interest income from cash and cash equivalents deposited in money market accounts. Due to the off lease status of the Partnership’s three remaining aircraft in 2004, there was no revenue generated from the leasing of the Partnership’s aircraft.

     The Partnership also incurred certain general and administrative expenses in connection with the operations of the Partnership. General and administrative expenses consist primarily of investor reporting expenses, transfer agent and audit fees, and the cost of accounting services.

2004 as compared to 2003

     The Partnership’s net loss was $341,000 for the year ended December 31, 2004 (“2004 Period”) as compared to $67,000 net loss for the year ended December 31, 2003 (“2003 Period”).

     The Partnership’s higher net loss for the 2004 Period, as compared to the 2003 Period, is primarily due to lower revenues in the 2004 Period, compared to the 2003 Period. The Partnership had a gain from an aircraft insurance settlement in the 2003 Period, with no corresponding amount in the 2004 Period.

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     Gain on aircraft from insurance proceeds decreased by $819,000, from $819,000 for the 2003 Period to $0 for the 2004 Period, due to the proceeds received from insurance compensation for hail damage to the McDonnell Douglas DC-9 formerly leased to Aeromexico (see Note 4 also).

     Write down of aircraft decreased by $515,000, or 100%, from $515,000 for the 2003 Period to $0 for the 2004 Period. During the 2003 Period, the carrying values of the three aircraft owned by the Partnership were reduced by a total of $515,000 to reflect management’s estimate of the market value for these types of aircraft and the price management was negotiating to sell the aircraft for, as the remaining assets of the Partnership are being liquidated.

     Direct lease expenses decreased by 31%, or $47,000, from $151,000 for the 2003 Period to $104,000 for the 2004 Period. This decrease was due primarily to lower aircraft storage and maintenance costs in the 2004 Period as compared to the 2003 Period.

2003 as compared to 2002

     The Partnership’s net loss was $67,000 for the year ended December 31, 2003 (“2003 Period”) as compared to $25,000 net loss for the year ended December 31, 2002 (“2002 Period”).

     The Partnership’s higher net loss for the 2003 Period, as compared to the 2002 Period, is primarily due to lower revenues in the 2003 Period, compared to the 2002 Period. The Partnership had rental income, income for early lease terminations, the reversal of accrued management fees and other income from maintenance reserves and security deposits in the 2002 Period, with no corresponding amounts in the 2003 Period.

     Rentals from operating leases decreased from $3,370,000 for the 2002 Period to zero in the 2003 Period, principally due to the sale in 2002 of the Boeing 727 formerly leased to Kitty Hawk, and the off-lease status in the 2003 Period of the DC-10, formerly leased to Emery, the Boeing 727, formerly leased to TNT and the DC-9, formerly leased to Aeromexico.

     Gain on aircraft from insurance proceeds increased by $819,000, from zero for the 2002 Period to $819,000 for the 2003 Period, due to the proceeds received from insurance compensation for hail damage to the McDonnell Douglas DC-9 formerly leased to Aeromexico (see Note 4 also).

     Gain on the sale of aircraft decreased from $435,000 for the 2002 Period to zero for the 2003 Period. This decrease was attributable to an absence of sales of aircraft in the 2003 Period as compared to the net gain recognized in the 2002 Period on the sale of the Boeing 727, formerly leased to Capital Cargo, the sale of the A-300 airframe and engines, the sale of the Boeing 727, formerly leased to Kitty Hawk and the sale of the off-lease L-1011 aircraft.

     Equity in deficits of the MD-81 trust decreased from $548,000 for the 2002 Period to zero for the 2003 Period due to the sale of the MD-81 in October 2002.

     Depreciation expense decreased from $1,267,000 for the 2002 Period to zero for the 2003 Period due to the off lease status of the remaining aircraft in the 2003 Period.

     Write down of aircraft decreased by $16,503,000, or 97%, from $17,018,000 for the 2002 Period to $515,000 for the 2003 Period primarily due to the Partnership owning fewer aircraft during the 2003 Period as compared to the 2002 Period and the value of those aircraft already having been substantially written down in the 2002 Period. During the 2003 Period, the carrying values of the three aircraft owned by the Partnership were reduced by a total of $515,000 to reflect the market value for these types of aircraft and the price management is currently negotiating to sell these aircraft for, as the remaining assets of the Partnership are being liquidated.

     Interest expense decreased by $393,000, from $393,000 for the 2002 Period to zero for the 2003 Period, due to the retirement of the note in May 2002.

     General and administrative expenses decreased by 48%, or $245,000, from $511,000 for the 2002 Period to $266,000 for the 2003 Period. This decrease was primarily due to legal fees related to the Capital Cargo litigation in the 2002 Period that were not incurred in the 2003 Period.

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     Direct lease expenses decreased by 47%, or $131,000, from $282,000 for the 2002 Period to $151,000 for the 2003 Period. This decrease was due primarily to the recording of a refund due to the Partnership for insurance premiums paid in 2002 in the 2003 Period and lower aircraft storage and maintenance costs in the 2003 Period as compared to the 2002 Period.

Inflation and Changing Prices

     As jet fuel costs are a major component of the cost of operating an aircraft, periods of high fuel prices, as experienced in 2004, have negatively impacted the passenger airline and air freight industries. The Partnership owns three aircraft that are being offered for sale on as “as-is, where is” basis.

Risks and Uncertainties

     The events of September 11, 2001 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 industry. Certain prohibitions on passenger planes carrying cargo have increased cargo for the fully dedicated air freight business. . While general world economic activity has recently increased, higher jet fuel prices have significantly strained the operating finances of airlines and air freight operators. The age and maintenance status of the Partnership’s aircraft make the equipment potentially attractive to more thinly capitalized operators and used parts firms, thereby making the sale of the aircraft more uncertain.

Sarbanes-Oxley Act

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PEGASUS AIRCRAFT PARTNERS II, L.P.

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     In our opinion, the accompanying balance sheets and the related statements of loss, of partners’ capital and of cash flows present fairly, in all material respects, the financial position of Pegasus Aircraft Partners II, L.P. (the “Partnership”) at December 31, 2004 and December 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 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 statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 disclosure 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

Los Angeles, California
February 25, 2005

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PEGASUS AIRCRAFT PARTNERS II, L.P.

BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

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

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PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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

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PEGASUS AIRCRAFT PARTNERS II, L.P.

STATEMENTS OF PARTNERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002