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                                  United States
                       Securities and Exchange Commission
                              Washington, DC 20549

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                                    Form 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                      For the year ended December 31, 1996

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                      MCDONNELL DOUGLAS FINANCE CORPORATION
             (Exact name of registrant as specified in its charter)

  Delaware                         95-2564584                   0-10795
(State or other               (I.R.S. Employer           (Commission File No.)
jurisdiction of               Identification No.)
Incorporation or
 Organization)

     4060 Lakewood Boulevard, 6th Floor - Long Beach, California 90808-1700
                    (Address of principal executive offices)

                                 (562) 627-3000
              (Registrant's telephone number, including area code)

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

                                      None

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

                     Common stock, par value $100 per share

Indicate by check mark whether the registrant (1) has filed all reports required
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months,  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
best of 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|

As of March 31, 1997,  there were 50,000  shares of the  Company's  common stock
outstanding.

Registrant meets the conditions set forth in General Instruction J(1)(a) and (b)
of Form 10-K and is  therefore  filing  this Form  with the  reduced  disclosure
format.

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<PAGE>


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<PAGE>



                                                   Table of Contents


                                                                           Page


Part I

   Item 1.  Business.......................................................3
   Item 2.  Properties....................................................17
   Item 3.  Legal Proceedings.............................................18
   Item 4.  Submission of Matters to a Vote of Security Holders *

Part II

   Item 5.  Market for Registrant's Common Equity and Related Stockholder
            Matters.......................................................18
   Item 6.  Selected Financial Data.......................................18
   Item 7.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations.....................................20
   Item 8.  Financial Statements and Supplementary Data...................22
   Item 9.  Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure......................................40

Part III

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


Part IV

   Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..40
            Signatures.......................................................44
            Exhibits.........................................................45


---------------------------------
*Omitted pursuant to General Instruction J(2)(c)of Form 10-K.


<PAGE>


                                                           Part I

Item 1.  Business

General

McDonnell  Douglas  Finance  Corporation  (together  with its  subsidiaries  the
"Company") is a wholly-owned  subsidiary of McDonnell Douglas Financial Services
Corporation ("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation
("McDonnell  Douglas").  The  Company was  incorporated  in Delaware in 1968 and
originally financed only McDonnell Douglas manufactured commercial jet transport
aircraft.  While  this  continues  to  represent  a  significant  portion of the
Company's  business,  the Company also provides a diversified range of financing
including  loans,  finance  leases and  operating  leases,  primarily  involving
equipment for  commercial and  industrial  customers.  At December 31, 1996, the
Company had 70 employees.

On  December  14,  1996,  McDonnell  Douglas and The Boeing  Company  ("Boeing")
entered into a definitive agreement whereby a wholly-owned  subsidiary of Boeing
will  merge  into  McDonnell  Douglas  in  a  stock-for-stock  transaction  with
McDonnell  Douglas  surviving  as  a  wholly-owned  subsidiary  of  Boeing.  The
transaction  is subject to approval by the  shareholders  of both  companies and
certain regulatory agencies;  it is expected to close as early as mid-1997.  The
following discussions  throughout this Form 10-K do not consider any effects the
merger may have on the Company or on its  relationship  with McDonnell  Douglas.
See "Relationship with McDonnell Douglas."

The Company now  operates  in  principally  two  segments:  commercial  aircraft
financing and commercial  equipment leasing ("CEL").  Prior to 1995, the Company
operated in three  segments:  commercial  aircraft  financing,  CEL and non-core
businesses. Non-core businesses represented market segments in which the Company
is no longer  active,  and the Company  continues  to manage and  liquidate  the
remaining non-core businesses as market  opportunities occur. Based on trends to
date,  the Company does not expect to incur  significant  losses  related to the
disposal  of its  non-core  businesses.  At  December  31,  1996 and  1995,  the
portfolio  balances  for non-core  businesses  totaled  $44.9  million and $80.6
million.

Information on the Company's continuing  businesses is included in the following
tables.

<TABLE>
<CAPTION>
New Business Volume
                                                                             Years ended December 31,
                                                   -----------------------------------------------------------------------------
(Dollars in millions)                                    1996           1995           1994           1993           1992
<S>                                                   <C>             <C>            <C>            <C>            <C>
Commercial aircraft financing                         $    475.3      $    349.7     $    117.9     $    411.4     $    153.2
Commercial equipment leasing                               392.0           241.1           84.1           41.5           50.7
                                                   -----------------------------------------------------------------------------
                                                      $    867.3      $    590.8     $    202.0     $    452.9     $    203.9
                                                 =============================================================================
</TABLE>

<TABLE>
<CAPTION>
Portfolio Balances
                                                                                    December 31,
                                                  -----------------------------------------------------------------------------
(Dollars in millions)                                    1996           1995           1994           1993           1992

<S>                                                   <C>             <C>            <C>            <C>            <C>
Commercial aircraft financing                         $  1,814.9      $  1,405.7     $  1,333.0     $  1,237.5     $  1,001.1
Commercial equipment leasing                               769.8           502.4          369.4          422.3          557.4
                                                   -----------------------------------------------------------------------------
                                                      $  2,584.7      $  1,908.1     $  1,702.4     $  1,659.8     $  1,558.5
                                                   =============================================================================
</TABLE>

For  financial   information  about  the  Company's   segments,   see  Notes  to
Consolidated Financial Statements included in Item 8.


Commercial Aircraft Financing Segment

The  Company's  commercial  aircraft  financing  group,  located in Long  Beach,
California,  provides financing for customers purchasing  aircraft.  The Company
primarily  purchases  aircraft  from  McDonnell  Douglas  and  provides  airline
customers financing  alternatives,  including lease transactions and secured and
unsecured notes receivable  financing.  A substantial majority of the commercial
aircraft  portfolio is comprised of aircraft  manufactured by McDonnell Douglas.
Additionally,  this group assists the McDonnell Douglas aircraft financing group
with respect to financing some McDonnell Douglas aircraft by others.

Portfolio balances for the Company's  commercial  aircraft financing segment are
summarized as follows:

<TABLE>
Commercial Aircraft Portfolio by Aircraft Type
<CAPTION>
                                                                                     December 31,
                                                       --------------------------------------------------------------------------
   (Dollars in millions)                                   1996           1995            1994           1993           1992
   McDonnell Douglas aircraft financing:
<S>                                                      <C>            <C>            <C>             <C>            <C>
      Finance leases                                     $   1,132.6    $     857.4    $     748.2     $     732.3    $     506.2
      Operating leases                                         402.0          256.8          197.8           176.9           93.7
      Notes receivable                                          82.9          110.9          194.8           125.9          169.4
                                                       -------------- -------------- --------------- -------------- --------------
                                                             1,617.5        1,225.1        1,140.8         1,035.1          769.3
                                                       -------------- -------------- --------------- -------------- --------------
   Other commercial aircraft financing:
      Finance leases                                           136.9          126.1          125.2           123.0          149.9
      Operating leases                                          56.0           49.6           43.1            55.9           57.6
      Notes receivable                                           4.5            4.9           23.9            23.5           24.3
                                                       -------------- -------------- --------------- -------------- --------------
                                                               197.4          180.6          192.2           202.4          231.8
                                                       -------------- -------------- --------------- -------------- --------------
                                                         $   1,814.9    $   1,405.7    $   1,333.0     $   1,237.5    $   1,001.1

                                                       ============== ============== =============== ============== ==============
</TABLE>


<TABLE>
Commercial Aircraft Portfolio by Product Type
<CAPTION>
                                                                                    December 31,
                                                     ----------------------------------------------------------------------------
(Dollars in millions)                                     1996           1995           1994            1993           1992
Aircraft leases:
   Finance leases
<S>                                                    <C>            <C>            <C>            <C>             <C>
      Domestic                                         $     950.0    $     776.2    $     653.3    $     638.9     $     601.5
      Foreign                                                319.5          207.3          220.1          216.5            54.6
   Operating leases
      Domestic                                               357.2          183.5          161.9          149.7           111.4
      Foreign                                                100.8          122.9           79.0           83.0            39.9
                                                     -----------------------------------------------------------------------------
                                                           1,727.5        1,289.9        1,114.3        1,088.1           807.4
                                                     -----------------------------------------------------------------------------
Aircraft related notes receivable:
      Domestic obligors                                       22.6           31.2           53.4           51.4            88.0
      Foreign obligors                                        64.8           84.6          165.3           98.0           105.7
                                                     -----------------------------------------------------------------------------
                                                              87.4          115.8          218.7          149.4           193.7
                                                     -----------------------------------------------------------------------------
                                                       $   1,814.9    $   1,405.7    $   1,333.0    $   1,237.5     $   1,001.1
                                                     =============================================================================
</TABLE>

At December 31, 1996, the Company's  commercial aircraft portfolio was comprised
of  finance  leases to 27  customers  (24  domestic  and three  foreign)  with a
carrying amount of $1,269.5  million (48.3% of total Company  portfolio),  notes
receivable from six customers (three domestic and three foreign) with a carrying
amount of $87.4 million (3.3% of total Company  portfolio) and operating  leases
to 14 customers (ten domestic and four foreign) with a carrying amount of $458.0
million (17.4% of total Company portfolio).

At December  31,  1996,  61.5% of the  Company's  total  portfolio  consisted of
financings related to McDonnell Douglas aircraft,  compared with 61.6% and 62.8%
in 1995 and 1994.

o  Factors Affecting the Commercial Aircraft Financing Portfolio

   A substantial  portion of the Company's total portfolio is concentrated among
   the Company's  largest  commercial  aircraft  financing  customers.  The five
   largest  commercial  aircraft  financing  customers  accounted  for  $1,172.4
   million  (44.6% of total  Company  portfolio)  and $865.2  million  (43.5% of
   Company total portfolio) at December 31, 1996 and 1995.

   The Company's largest customer,  Federal Express  Corporation,  accounted for
   $316.1  million  (12.0% of the total Company  portfolio)  and $220.4  million
   (11.1% of total Company portfolio) at December 31, 1996 and 1995.

   The Company's second largest  customer,  P. T. Garuda  Indonesia  ("Garuda"),
   accounted  for $279.4  million  (10.6% of the total  Company  portfolio)  and
   $182.7 million (9.2% of the total Company portfolio) at December 31, 1996 and
   1995.  At December 31, 1996,  $101.6  million of Garuda's  outstandings  were
   represented  by an  aircraft  which  the  Company  has the  right  to sell to
   McDonnell Douglas in June of 1997 at the Company's original purchase price.

   Trans World  Airlines,  Inc.  ("TWA")  accounted for $249.5  million (9.5% of
   total  Company   portfolio)  and  $279.9  million  (14.1%  of  total  Company
   portfolio)  at  December  31,  1996 and 1995.  In 1996,  1995 and  1994,  TWA
   accounted for 18.0%,  21.6% and 19.8% of the Company's  operating  income; no
   other customer accounted for more than 10% of the Company's operating income.
   TWA continues to operate under a reorganization plan, confirmed by the United
   States  Bankruptcy  Court in 1995, that  restructured  its  indebtedness  and
   leasehold  obligations to its creditors.  In addition,  TWA continues to face
   financial and operational challenges due in part to an airliner crash in July
   1996 and turnover of key management,  which occurred  during 1996.  McDonnell
   Douglas  provides  to the Company  guaranties  of certain  obligations  under
   various lease  agreements  between the Company and TWA. At December 31, 1996,
   the maximum  aggregate  coverage under such guaranties was $45.6 million.  In
   addition,  McDonnell Douglas provides supplemental guaranties in favor of the
   Company for up to an additional $10.0 million of the Company's  financings to
   TWA. These guaranties  supplement individual guaranties provided by McDonnell
   Douglas with  respect to certain of the  Company's  financings  to TWA to the
   extent that the estimated fair market value of the financings (after applying
   the individual guaranties) is less than the net asset value of the financings
   on the Company's books. The supplemental  guaranties terminate in March 1998,
   but may be extended under certain limited  circumstances.  The reorganization
   plan and TWA's current  financial  condition have not had and, assuming TWA's
   financial condition does not further deteriorate, and taking into account the
   McDonnell  Douglas  guaranties,  are not expected to have a material  adverse
   effect on the  Company's  earnings,  cash flow,  or financial  position.  See
   "Aircraft Financing Guaranties."

   Great Lakes  Aviation,  Ltd.  ("Great Lakes") is in arrears in the payment of
   rent under the lease of two Embraer Brasilia commuter  aircraft.  Great Lakes
   has stated that it will submit to the Company a proposal for repayment of the
   delinquent sums. The net asset value of the aircraft leased to Great Lakes at
   December  31, 1996,  was $14.4  million.  Taking into  account the  available
   allowance for losses,  the Company does not expect this transaction to have a
   material adverse impact on its earnings, cash flow, or financial condition.

   The $100.0 million  aircraft  purchase  bridge facility made available by the
   Company  to  ValuJet  Airlines,  Inc.  ("ValuJet")  in 1995 was  reduced to a
   maximum of $50.0  million  by mutual  agreement  during the third  quarter of
   1996.  This facility  expires upon delivery to ValuJet of the first scheduled
   new McDonnell  Douglas MD-95 aircraft,  presently  expected to occur in 1999.
   Borrowings  under  this  agreement  must be  repaid  within  180 days and the
   interest rate is based on the London Interbank Offering Rate ("LIBOR"). There
   were no amounts  outstanding  under this  agreement at December 31, 1996.  At
   December 31, 1995, receivables outstanding pursuant to this agreement totaled
   $8.7 million.

o  Current Commercial Aircraft Market Conditions

   The  Company's  financial  performance  is  dependent  in part  upon  general
   economic  conditions  which may affect the  profitability  of the  commercial
   airlines with which the Company does business.  The Company continues to look
   for  opportunities to expand its commercial  aircraft  portfolio while taking
   advantage of improving market conditions to reduce  concentration and certain
   exposure levels.

   The  Company  believes  that  realizable  values  for its  aircraft  at lease
   maturity are likely to remain above the values actually  booked,  but this is
   subject  to  many  uncertainties  including  those  referred  to in  "Factors
   Affecting  Aircraft  Financing  Volume." If aircraft  values  decline and the
   Company  is  required  as a  result  of  customer  defaults  to  repossess  a
   substantial  number of aircraft  prior to the expiration of the related lease
   or financing,  the Company could incur substantial  losses in remarketing the
   aircraft,  which  could  have a  material  adverse  effect  on the  Company's
   earnings, cash flow or financial position.

o  Aircraft Leasing

   The Company normally purchases commercial aircraft for lease to airlines only
   when such  aircraft are subject to a signed lease  contract.  At December 31,
   1996,  the  Company  owned or  participated  in the  ownership  of 133 leased
   commercial  aircraft,  including  71  that  were  manufactured  by  McDonnell
   Douglas.

o  Factors Affecting Aircraft Financing Volume

   The  Company's  financial  performance  is  dependent  in part  upon  general
   economic  conditions  which may affect the  profitability  of the  commercial
   airlines with which the Company does business. During 1996, McDonnell Douglas
   received  orders  amounting  to four  percent  of the total  narrow-body  and
   wide-body  orders  received in the commercial  aircraft  industry.  McDonnell
   Douglas  expected  to receive a higher  level of orders in 1996.  As the year
   progressed,  it became apparent that McDonnell  Douglas's share of commercial
   aircraft orders would be minimal.  Airline customer orders in which McDonnell
   Douglas expected to participate were instead recorded by its competitors.  In
   addition,  a few  significant  customers  previously  supportive of McDonnell
   Douglas have either  expressed  reduced  confidence  in  McDonnell  Douglas's
   existing  product  line or have made  decisions  to convert to  aircraft of a
   competitor.   During  this  same  period,   McDonnell   Douglas  studied  the
   feasibility  of  developing  a  new  high-capacity,  long-range  three-engine
   jetliner,   designated   the  MD-XX.   In  October  1996,   subsequent  to  a
   disappointing first nine months of new orders,  McDonnell Douglas decided not
   to proceed  with this  proposed  aircraft.  Several  factors  influenced  the
   decision.  Key  among  those  were a high  level of risk,  marketplace  price
   expectations,   and  the  amount  of  product  and  internal   infrastructure
   investment  (estimated  at up to $15  billion)  required  to bring  McDonnell
   Douglas to the level of the other major players in the  commercial  aerospace
   industry.

   McDonnell  Douglas's  presence in the commercial  aerospace  industry will be
   focused on its  existing  product line of MD-80 and MD-90 twin jets and MD-11
   trijet  commercial  aircraft,  its  MD-95  twin jet in  development,  and its
   commercial aircraft modification,  support, spare parts and related services.
   The impact of the decision  not to proceed with the MD-XX on existing  orders
   and options and on future  orders of its existing  product  line,  and on the
   Company,  is  uncertain.  However,  as mentioned  above,  reduced  confidence
   expressed by a few significant  existing  customers and customer  movement is
   likely to have negative ramifications.  McDonnell Douglas has emphasized cost
   reduction  efforts  during  recent  years and those  efforts  will  continue.
   Significant price  competition also currently exists in the marketplace,  and
   McDonnell Douglas's competitors offer broader product lines.

   The Company anticipates continued  fluctuations in the volume of its aircraft
   financing  transactions.  At December 31, 1996, the Company had unused credit
   lines  available to a customer  totaling  $50.0  million.  The Company had no
   other commitments to provide aircraft related financing at December 31, 1996.
   See "Competition and Economic Factors."

   The  following  lists  information  on new business  volume for the Company's
commercial aircraft financing segment:

<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                     -----------------------------------------------------------------------------
   (Dollars in millions)                                  1996           1995           1994            1993           1992
   McDonnell Douglas aircraft financing volume:
<S>                                                    <C>            <C>            <C>            <C>             <C>
      Finance leases                                   $     234.1    $     220.6    $      53.0    $     357.3     $      95.0
      Operating leases                                       196.9           81.9           15.7           33.8            53.5
      Notes receivable                                        24.2           36.2           41.3           19.1             4.7
                                                     -----------------------------------------------------------------------------
                                                             455.2          338.7          110.0          410.2           153.2
                                                     -----------------------------------------------------------------------------
   Other commercial aircraft financing volume:
      Finance leases                                          20.1            7.7            7.9            -               -
      Operating leases                                         -              3.3            -              0.7             -
      Notes receivable                                         -              -              -              0.5             -
                                                     -----------------------------------------------------------------------------
                                                              20.1           11.0            7.9            1.2             -
                                                     -----------------------------------------------------------------------------
                                                       $     475.3    $     349.7    $     117.9    $     411.4     $     153.2
                                                     =============================================================================
</TABLE>

o  Aircraft Financing Guaranties

   At December 31, 1996,  the Company had $521.3  million of  guaranties  in its
   favor with respect to its commercial aircraft financing portfolio relating to
   transactions  with a  carrying  amount  of  $1,356.6  million  (74.7%  of the
   commercial aircraft financing portfolio). The following table summarizes such
   guaranties:

<TABLE>
<CAPTION>
                                                                                      Domestic        Foreign
   (Dollars in millions)                                                              Airlines       Airlines         Total
                                                                                   ----------------------------------------------
   Amounts guaranteed by:
<S>                                                                                  <C>            <C>            <C>
      McDonnell Douglas                                                              $     240.6    $     229.6    $     470.2
      Other                                                                                 38.2           12.9           51.1
                                                                                   ----------------------------------------------
   Total guaranties                                                                  $     278.8    $     242.5    $     521.3
                                                                                   ==============================================
</TABLE>

   The Company has no reason to believe that any such guaranteed amounts will be
   ultimately  unenforceable or uncollectible.  See "Relationship With McDonnell
   Douglas."


Commercial Equipment Leasing Segment

CEL  provides  single-investor,  tax-oriented  lease  financing  as its  primary
product. In addition,  CEL participates in senior secured bank loans. CEL, which
maintains its principal  operations in Long Beach,  California and has marketing
offices in  Chicago,  Illinois  and  Detroit,  Michigan,  obtains  its  business
primarily  through  direct   solicitation  by  its  marketing   personnel.   CEL
specializes  in leasing  equipment such as machine  tools,  executive  aircraft,
highway vehicles, containers and chassis, and printing equipment and other types
of equipment  which it believes will  maintain  strong  collateral  and residual
values.  The lease term is generally between three and ten years and transaction
sizes usually range between $2.0 million and $20.0 million.

Portfolio balances for the Company's CEL segment are summarized as follows:

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                     -----------------------------------------------------------------------------
(Dollars in millions)                                     1996           1995           1994            1993           1992
<S>                                                    <C>            <C>            <C>            <C>             <C>
Finance leases                                         $     361.7    $     266.3    $     216.8    $     235.2     $     325.9
Operating leases                                             231.5          169.1          133.4          157.5           179.9
Notes receivable                                             176.6           67.0           18.5           28.8            50.7
Preferred and preference stock                                 -              -              0.7            0.8             0.9
                                                     -----------------------------------------------------------------------------
                                                       $     769.8    $     502.4    $     369.4    $     422.3     $     557.4
                                                     =============================================================================
</TABLE>

o  Factors Affecting CEL Volume

   As the Company's borrowing costs have declined in recent years, CEL's ability
   to compete more effectively has increased significantly.  In 1996, CEL booked
   $392.0 million of new business volume, representing a $150.9 million increase
   over 1995 bookings. At year end, CEL's backlog of business was $76.6 million,
   compared to $116.6 million at December 31, 1995.

   The Company is presently attempting to grow its CEL portfolio at a relatively
   faster  rate than its  commercial  aircraft  portfolio  in order to achieve a
   better  balance  of its  overall  portfolio.  Additionally,  the  Company  is
   considering  increasing the amount of its financings to foreign borrowers and
   lessees.  For a  discussion  of  additional  risks  associated  with  foreign
   financings, see "Cross-Border Outstandings."

   The following lists  information on new business volume for the Company's CEL
segment:

<TABLE>
<CAPTION>
                                                                               Years ended December 31,
                                                     -----------------------------------------------------------------------------
   (Dollars in millions)                                  1996           1995           1994            1993           1992
<S>                                                    <C>            <C>            <C>            <C>             <C>
   Finance leases                                      $     160.9    $     102.0    $      53.9    $      15.3     $      24.9
   Operating leases                                          107.0           70.5           24.3           22.9            18.2
   Notes receivable                                          124.1           68.6            5.9            3.3             7.6
                                                     -----------------------------------------------------------------------------
                                                       $     392.0    $     241.1    $      84.1    $      41.5     $      50.7
                                                     =============================================================================

</TABLE>

Cross-Border Outstandings

The  extension of credit to borrowers  located  outside of the United  States is
called "cross-border" credit. In addition to the credit risk associated with any
borrower,  these  particular  credits  are also  subject  to  "country  risk" --
economic  and  political  risk  factors  specific to the country of the borrower
which may make the borrower unable or unwilling to pay principal and interest or
otherwise  perform according to contractual  terms.  Other risks associated with
these credits  include the  possibility  of  insufficient  foreign  exchange and
restrictions  on  its  availability.   The  countries  in  which  the  Company's
cross-border  outstandings  exceeded 1% of consolidated  assets, net of domestic
guaranties, consisted of the following at December 31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>

                                                                                      December 31,
                                                              --------------------------------------------------------------
                                                                  Finance         Notes        Operating
(Dollars in millions)                                             Leases       Receivable       Leases          Total
Country
1996
<S>                                                             <C>            <C>            <C>            <C>
Indonesia                                                       $     120.8    $       -      $       -      $     120.8
Mexico                                                                 27.0            9.5           13.2           49.7
Italy                                                                   -              -             44.4           44.4
                                                              -------------------------------------------------------------
                                                                $     147.8    $       9.5    $      57.6    $     214.9
                                                              =============================================================
1995
Indonesia                                                       $     132.6    $       -      $       -      $     132.6
Italy                                                                   -              -             48.8           48.8
                                                              =============================================================
                                                                $     132.6    $       -      $      48.8    $     181.4
                                                              =============================================================
1994
Indonesia                                                       $     144.8    $       -      $       -      $     144.8
Japan                                                                   -             35.1            -             35.1
Mexico                                                                 21.4            -             23.9           45.3
                                                              -------------------------------------------------------------
                                                                $     166.2    $      35.1    $      23.9    $     225.2
                                                              =============================================================
</TABLE>

At  December  31,  1996 and  1994  there  were no  countries  in which  customer
outstandings  were  between  0.75%  and 1% of the  Company's  total  assets.  At
December  31,  1995,  the Company had  equipment  in Mexico under both a finance
lease and an operating  lease agreement with an aggregate net carrying amount of
$15.6 million and equipment in Belgium under an operating lease agreement with a
net carrying amount of $16.0 million,  representing  outstandings  between 0.75%
and 1% of the Company's total assets.

Maturities and Sensitivity to Interest Rate Changes

The following table shows the maturity  distribution  and sensitivity to changes
in interest rates of the Company's domestic and foreign financing receivables at
December 31, 1996:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                Domestic        Foreign          Total
Maturity Distribution
<S>                                                                                <C>             <C>             <C>
   1997                                                                            $     519.4     $      55.1     $     574.5
   1998                                                                                  197.6            41.9           239.5
   1999                                                                                  222.6            43.5           266.1
   2000                                                                                  172.8            43.7           216.5
   2001                                                                                  162.4            47.8           210.2
   2002 and thereafter                                                                   731.4           320.2         1,051.6
                                                                                 -------------------------------------------------
                                                                                   $   2,006.2     $     552.2     $   2,558.4
                                                                                 =================================================

Financing Receivables Due 1998 and Thereafter
   Fixed interest rates                                                            $   1,383.0     $     237.6     $   1,620.6
   Variable interest rates                                                               103.8           259.5           363.3
                                                                                 -------------------------------------------------
                                                                                   $   1,486.8     $     497.1     $   1,983.9
                                                                                 =================================================
</TABLE>


Allowance for Losses on Financing Receivables and Credit Loss Experience

<TABLE>

Analysis of Allowance for Losses on Financing Receivables
<CAPTION>

                                                                                     December 31,
                                                     -----------------------------------------------------------------------------
(Dollars in millions)                                     1996           1995           1994            1993           1992
Allowance for losses on financing
<S>                                                    <C>            <C>            <C>            <C>             <C>
   receivables at beginning of year                    $      42.3    $      40.7    $      35.6    $      37.4     $      46.7
Provision for losses                                          14.2           12.2            9.9            8.6            19.1
Write-offs, net of recoveries                                 (6.0)         (10.6)          (4.9)         (10.4)          (27.4)
Other                                                         (1.9)           -              0.1            -              (1.0)
                                                     -----------------------------------------------------------------------------
Allowance for losses on financing
   receivables at end of year                          $      48.6    $      42.3    $      40.7    $      35.6     $      37.4
                                                     =============================================================================

Allowance as percent of total portfolio                        1.8%           2.1%           2.2%           1.9%            2.1%

Net write-offs as percent of average
   portfolio                                                   0.3%           0.6%           0.3%           0.6%            1.4%

More than 90 days delinquent:
   Amount of delinquent installments                   $       2.1    $      10.0    $       2.8    $       3.7     $       4.6
   Total receivables due from delinquent
      obligors                                         $      23.4    $      12.1    $      43.2    $     108.4     $      10.5
   Total receivables due from delinquent
      obligors as a percentage of total
      portfolio                                               0.9%           0.6%           2.4%           5.9%            0.6%
</TABLE>

The  portfolio at December 31, 1996  includes  five CEL obligors and one airline
obligor to which  payment  extensions  have been  granted.  At December 31, 1996
payments so extended  amounted to $7.7 million ($5.0  million  airline-related),
and the aggregate carrying amount of the related  receivables was $282.6 million
($249.5 million airline-related).

Receivable Write-offs, Net of Recoveries by Segment

The following table summarizes the loss experience for the Company's  continuing
businesses:
<TABLE>
<CAPTION>

                                                                        Years ended                    % of Respective
                                                                        December 31,                  Average Portfolio
                                                              ------------------------------------------------------------------
(Dollars in millions)                                              1996             1995            1996             1995
<S>                                                             <C>             <C>                                   <C>
Commercial aircraft financing                                   $       -       $       5.0             -  %          0.37%
Commercial equipment leasing                                            3.0             1.7           0.51            0.41
                                                              ---------------------------------
                                                                $       3.0     $       6.7
                                                              =================================
</TABLE>

In its  analysis  of the  allowance  for losses on  financing  receivables,  the
Company has taken into  consideration the current economic and market conditions
and provided  $14.2 million and $12.2  million in 1996 and 1995 for losses.  The
Company  believes  that the  allowance  for losses on financing  receivables  is
adequate at December 31, 1996 to cover  potential  losses in the Company's total
portfolio.  If, however,  certain major customers defaulted and the Company were
forced to take  possession of and dispose of significant  amounts of aircraft or
equipment,  losses in excess of the allowance could be incurred,  which would be
charged directly against earnings.

The Company's  receivable  write-offs,  net of recoveries,  decreased in 1996
as compared to 1995 primarily  attributable  to certain aircraft that were
repossessed during 1995.

Nonaccrual and Past Due Financing Receivables

Financing  receivables  accounted  for on a  nonaccrual  basis  consisted of the
following at December 31:
<TABLE>
<CAPTION>

(Dollars in millions)                                                                         1996            1995
<S>                                                                                       <C>             <C>
Domestic                                                                                  $       1.6     $      17.0
Foreign                                                                                          13.8            13.6
                                                                                        ---------------------------------
                                                                                          $      15.4     $      30.6
                                                                                        =================================
</TABLE>

Interest on receivables which are  contractually  past due 90 days or more as to
principal and interest payments is being accrued for domestic financings of $0.9
million and $0.6 million at December 31, 1996 and 1995.


Borrowing Operations

The  Company  principally  relies on funds from  operations  and  borrowings  to
operate its business. Borrowings include commercial paper, secured and unsecured
senior and subordinated  long-term debt, and bank  borrowings.  The Company also
utilizes  interest  rate  swap  agreements  to  manage  interest  costs and risk
associated  with changing  interest  rates.  See Note 7 of Notes to Consolidated
Financial Statements included as Item 8.

The Company has a joint revolving  credit  agreement under which the Company may
borrow up to $240  million,  reduced by borrowings of up to $16 million that can
be made by MDFS under this agreement.  At December 31, 1996 and 1995, borrowings
under  commercial  paper and uncommitted  short-term  bank  facilities  totaling
$141.0  million and $10.0  million,  respectively,  were  supported by available
unused  commitments under the revolving credit  agreement.  The Company also has
available  approximately  $95  million in  uncommitted,  short-term  bank credit
facilities.  At December  31, 1996 and 1995,  there were no amounts  outstanding
under the revolving credit agreement.

The Company has an effective shelf registration statement relating to up to $750
million aggregate principal amount of debt securities. The Company established a
$500 million  medium-term note program under the shelf  registration  and, as of
December  31,  1996,  has issued and sold $490  million in  aggregate  principal
amount of  securities  under the  program.  On January  15,  1997,  the  Company
authorized  the  sale and  issuance  of the  remaining  $250  million  aggregate
principal amount of such securities under the shelf registration.

The  following  table sets forth the average  debt of the  Company by  borrowing
classification:

<TABLE>
<CAPTION>


(Dollars in millions)
                                          Average                      Average                      Average
         Years ended                     Short-Term                   Long-Term                      Total
        December 31,                        Debt                         Debt                         Debt
<S>         <C>                    <C>                              <C>                      <C>
            1996                   $        49.5                    $     1,501.0            $     1,550.5
            1995                            71.4                          1,183.6                  1,255.0
            1994                           108.0                          1,167.3                  1,275.3
            1993                           113.0                          1,153.7                  1,266.7
            1992                           118.2                          1,513.1                  1,631.3
</TABLE>

The weighted average interest rates on all outstanding indebtedness computed for
the relevant period were as follows:
<TABLE>
<CAPTION>
                                     Weighted Average             Weighted Average             Weighted Average
         Years ended                    Short-Term                    Long-Term                   Total Debt
        December 31,                   Interest Rate                Interest Rate                Interest Rate
<S>         <C>                       <C>                                 <C>                    <C>
            1996                       5.66%                              7.60%                  7.56%
            1995                       6.34                               8.19                   8.12
            1994                       5.27                               8.76                   8.50
            1993                       5.97                               9.53                   9.19
            1992                      12.38                               8.75                   9.00
</TABLE>

The Company's  access to capital at rates that allow for a reasonable  return on
new business is affected by credit  rating  agencies'  ratings of the  Company's
debt. Currently,  the Company's senior debt is rated A- and subordinated debt is
rated BBB+ by both  Standard and Poor's  ("S&P") and Duff & Phelps Credit Rating
Company  ("DCR").  Moody's  Investors  Service  ("Moody's")  rates the Company's
senior and subordinate  debt Baa2 and Baa3,  respectively.  Commercial  paper is
rated A2, D1- and P2 by S&P,  DCR and  Moody's,  respectively.  On December  16,
1996,  all three  rating  agencies  placed the Company on review  with  positive
implications.

Although security ratings impact the rate at which the Company can borrow funds,
a security rating is not a recommendation  to buy, sell or hold  securities.  In
addition,  a security rating is subject to revision or withdrawal at any time by
the  assigning   rating   organization  and  each  rating  should  be  evaluated
independently of any other rating.


Competition and Economic Factors

The  Company is  subject  to  competition  from  other  financial  institutions,
including  commercial banks,  finance companies and leasing  companies,  some of
which are larger than the Company and have greater financial resources,  greater
leverage ability and lower effective  borrowing costs. These factors permit many
competitors  to  provide  financing  at lower  rates  than the  Company.  In its
commercial  equipment leasing and commercial  aircraft financing  segments,  the
ability of the Company to compete in the  marketplace  is  principally  based on
rates which the Company  charges its  customers,  which rates are related to the
Company's  access  to and cost of funds and to the  ability  of the  Company  to
utilize tax  benefits  attendant  to leasing.  See  "Borrowing  Operations"  and
"Relationship With McDonnell Douglas."  Competitive factors also include,  among
other things,  the Company's ability to be relatively  flexible in its financing
arrangements with new and existing customers.

The  Company  has in the past  obtained a  significant  portion  of its  leasing
business and notes  receivable in connection with the lease or sale of McDonnell
Douglas aircraft.  The Company's relationship with McDonnell Douglas has in many
cases presented opportunities for such business and has caused McDonnell Douglas
to offer to the Company  substantially all of the financing receivables taken by
McDonnell  Douglas  upon  the  sale  of its  aircraft.  See  "Relationship  With
McDonnell  Douglas." In past years many customers have obtained their  financing
for  McDonnell  Douglas  aircraft  through  sources  other  than the  Company or
McDonnell  Douglas,   reflecting  a  broader  range  of  competitive   financing
alternatives  available to McDonnell  Douglas  customers.  Consolidation  in the
United  States  airline  industry  as a result of  bankruptcies  and mergers has
resulted in an increase in the concentration of the Company's  McDonnell Douglas
aircraft  financings in a smaller  number of larger  airlines and there has been
greater   concentration  of  the  Company's  portfolio  in  commercial  aircraft
financing.  With a larger  portion of the  portfolio  concentrated  in McDonnell
Douglas aircraft  financings,  the risk to the Company resulting from any future
declining  creditworthiness of airlines has increased.  See "Commercial Aircraft
Financing Segment" and "Allowance for Losses on Financing Receivables and Credit
Loss Experience."

Aircraft owned or financed by the Company may become significantly less valuable
because of the  discontinuation  of existing aircraft models or the introduction
of new aircraft  models which may be more  economical  to operate,  the aging of
particular  aircraft,   technological   obsolescence  such  as  that  caused  by
legislation  for noise abatement which will over time prohibit the use of older,
noisier  (Stage  2)  aircraft  in the  United  States  by year end  2000,  or an
oversupply  of aircraft  for sale.  In any such event,  carrying  amounts on the
Company's books may be reduced if, in the judgment of management,  such carrying
amounts are greater than market value (including estimated lease values),  which
would result in recognition of a loss to the Company.  At December 31, 1996, the
Company's carrying amount of Stage 2 aircraft totaled $63.3 million (3.5% of the
Company's  total  aircraft  portfolio,  including  any aircraft held for sale or
re-lease);  however, all of the Company's Stage 2 aircraft will have book values
approximating the aircraft's scrap value by the year 2000.

Although the Company is  particularly  subject to risks attendant to the airline
and aircraft  manufacturing  industries,  the ability of the Company to generate
new business also is dependent upon, among other factors,  the capital equipment
requirements  of United States and foreign  businesses and the  availability  of
capital.


Relationship With McDonnell Douglas

McDonnell  Douglas  is  principally  engaged  in  the  design,  development  and
production of government and commercial  aerospace products.  For the year ended
December 31, 1996,  McDonnell Douglas recorded revenues of $13.8 billion and net
earnings of $788 million. At December 31, 1996,  McDonnell Douglas had assets of
$11.6 billion and shareholders' equity of $3.0 billion.

If the financial  well-being of McDonnell  Douglas (or any other future ultimate
shareholder of the Company) were to decline  significantly below current levels,
the Company's  ability to enter into significant  amounts of new business in the
future could be materially  constrained.  Two of the principal industry segments
in which McDonnell Douglas operates,  military aircraft and commercial aircraft,
are  especially  competitive  and  have  a  limited  number  of  customers.  The
commercial  aircraft business is market sensitive,  which causes  disruptions in
production and procurement and attendant costs,  and requires large  investments
to develop new  derivatives  of existing  aircraft  or new  aircraft.  McDonnell
Douglas  announced  in October  1996 that it decided  not to build the MD-XX,  a
proposed  new  trijet,  due to  projected  costs  and other  factors.  McDonnell
Douglas's  market share of firm order  backlog for new  commercial  aircraft has
declined significantly in the past several years. McDonnell Douglas's commercial
backlog  decreased  during  1996,  while  backlog for its two major  competitors
increased  substantially.  McDonnell  Douglas's  ability to generate  additional
orders is subject to its ability to operate  successfully as a niche player. See
"Commercial  Aircraft  Financing  Segment," for further discussion of this risk.
Approximately  39 percent of McDonnell  Douglas's  firm  backlog for  commercial
aircraft is scheduled  for delivery  during 1997 and an additional 20 percent is
scheduled during 1998. If difficulties recur in the commercial airline industry,
airlines  may  decline  deliveries  of  aircraft,  request  changes in  delivery
schedules,  or default on  contracts  for firm  orders.  At December  31,  1996,
McDonnell  Douglas has provided  $470.2  million of  guaranties on the Company's
aircraft portfolio,  including first loss guaranties. In the event a substantial
portion  of  the  guaranties  become  payable  and in the  unlikely  event  that
McDonnell  Douglas is unable to honor its  obligations  under these  guaranties,
such event could have a material adverse effect on the Company's earnings,  cash
flow or financial position.  In addition,  McDonnell Douglas is the obligor in a
small number of the Company's commercial aircraft  transactions and largely as a
result thereof, at December 31, 1996, McDonnell Douglas was the lessee for $83.9
million of the Company's commercial aircraft portfolio.

For a further  description  of  significant  factors which may affect  McDonnell
Douglas,  see McDonnell Douglas's Form 10-K for the year ended December 31, 1996
(Securities   and   Exchange   Commission   file  number   1-3685).   Until  the
Boeing-McDonnell  Douglas  merger  is  completed,  its  impact,  if any,  on the
Company's relationship with McDonnell Douglas cannot be determined. Consummation
of the Boeing-McDonnell  Douglas merger would result in the Company having a new
ultimate  shareholder  and this  could  result  in  significant  changes  in the
Company's  relationship with McDonnell  Douglas and the Operating  Agreement and
tax arrangement discussed below.

o  Operating Agreement

   The relationship  between the Company and McDonnell Douglas is governed by an
   operating  agreement (the "Operating  Agreement"),  which formalizes  certain
   aspects of the relationship between the companies, principally those relating
   to the purchase  and sale of  McDonnell  Douglas  aircraft  receivables,  the
   leasing  of  McDonnell  Douglas  aircraft,  the resale of  McDonnell  Douglas
   aircraft  returned to, or repossessed by, the Company under leases or secured
   notes, and the allocation of federal income taxes between the companies.

   Under the Operating Agreement,  McDonnell Douglas is required to offer to the
   Company all promissory  notes,  conditional sales contracts and certain other
   receivables  obtained by McDonnell Douglas in connection with the sale of its
   commercial  transport  aircraft,  except for any  receivable  that  McDonnell
   Douglas acquires in a transaction which, in its opinion,  involves unusual or
   exceptional  circumstances or which it acquires with the expressed  intention
   of selling to a purchaser other than the Company.

   The Company is  obligated  under the  Operating  Agreement  to  purchase  all
   aircraft receivables offered by McDonnell Douglas, unless (a) it is unable or
   deems it inappropriate  to obtain or allocate funds for the acquisition,  (b)
   the receivables do not meet the Company's customary standards as to terms and
   conditions or creditworthiness,  or (c) the amount of the receivable offered,
   when added to the amount of  receivables of the same obligor then held by the
   Company, would exceed the amount that the Company deems prudent to hold.

   The prices to be paid for notes receivable  purchased from McDonnell  Douglas
   are  intended  to produce  reasonable  returns to the  Company,  taking  into
   account the rates of return realized by independent  finance  companies,  the
   Company's assessment of the credit risk and the Company's projected borrowing
   costs and  expenses.  In cases  where  credit  risks  associated  with a note
   receivable  are not  acceptable  to the  Company,  the  Company may refuse to
   accept the note  receivable or may condition its acceptance upon receipt of a
   guaranty  from  McDonnell  Douglas  with a  negotiated  fee to be paid by the
   Company  for the  guaranty.  See  "Commercial  Aircraft  Financing  Segment -
   Aircraft Financing Guaranties."

   With  respect to aircraft  leasing  activities,  unlike the purchase of other
   aircraft  receivables which are acquired by McDonnell Douglas and sold to the
   Company,  the Company may make lease  proposals  directly to the  prospective
   customers.  If a lease proposal is accepted,  the Company enters into a lease
   with the customer and purchases the aircraft  from  McDonnell  Douglas on the
   terms  negotiated  between  McDonnell  Douglas  and the  customer.  Under the
   Operating  Agreement  the Company may make a lease  proposal to any  customer
   desiring  to lease an  aircraft  for two years or more,  but the  Company may
   decline to make a  proposal  or may  condition  its  proposal  upon a full or
   partial guaranty from McDonnell Douglas, with a negotiated fee, if any, to be
   paid by the Company for the guaranty.

   The  Company  has the  option  under  the  Operating  Agreement  to tender to
   McDonnell  Douglas any McDonnell  Douglas aircraft returned to or repossessed
   by the Company  under a lease or security  instrument at a price equal to the
   fair market value of the aircraft less 10%. This  provision  does not include
   McDonnell  Douglas  aircraft leased under a partnership  arrangement in which
   the Company is one of the partners,  or McDonnell Douglas aircraft subject to
   third  party  liens or other  security  interests,  unless  the  Company  and
   McDonnell  Douglas determine that purchase by McDonnell Douglas is desirable.
   At December 31,  1996,  the carrying  amount of  McDonnell  Douglas  aircraft
   potentially  excluded  by this  provision  amounted  to  approximately  $48.2
   million.

o  Federal Income Taxes

   The Company and  McDonnell  Douglas  presently  file a  consolidated  federal
   income tax return, with the consolidated tax payments,  if any, being made by
   McDonnell  Douglas.   The  Operating  Agreement  provides  that  so  long  as
   consolidated federal tax returns are filed,  payments shall be made, directly
   or  indirectly,  by  McDonnell  Douglas to the  Company or by the  Company to
   McDonnell  Douglas,  as  appropriate,  equal to the  difference  between  the
   consolidated  tax liability and  McDonnell  Douglas's tax liability  computed
   without  consolidation with the Company.  If, subsequent to any such payments
   by McDonnell  Douglas,  it incurs tax losses which may be carried back to the
   year for which such payments were made, the Company  nevertheless will not be
   obligated to repay to McDonnell Douglas any portion of such payments.

   The Company and  McDonnell  Douglas have been  operating  since 1975 under an
   informal  arrangement,  which  has  entitled  the  Company  to rely  upon the
   realization of tax benefits for the portion of projected  taxable earnings of
   McDonnell  Douglas  allocated  to the  Company.  This has been  important  in
   planning  the volume of and pricing  for the  Company's  leasing  activities.
   Under the current arrangement, McDonnell Douglas presently charges or credits
   the Company for the corresponding increase or decrease in McDonnell Douglas's
   taxes  (disregarding  alternative minimum taxes) resulting from the Company's
   inclusion in the consolidated federal income tax return of McDonnell Douglas.
   Intercompany  payments  are made when such taxes are due or tax  benefits are
   realized  by  McDonnell  Douglas  based  on the  assumption,  pursuant  to an
   informal  arrangement,  that taxes are due or tax benefits are realized up to
   100% of the amounts  forecasted  by the Company with the amounts in excess of
   such forecast due in the year realized by McDonnell Douglas.

   The  Company's  ability to price its  business  competitively  and obtain new
   business volume is significantly  dependent on its ability to realize the tax
   benefits  generated  by its leasing  business.  In some cases,  the yields on
   receivables,  without regard to tax benefits,  may be less than the Company's
   related financing costs. To the extent that McDonnell Douglas would be unable
   on a  long-term  basis to  utilize  such  tax  benefits,  or if the  informal
   arrangement  is not  continued  in its present  form,  the  Company  would be
   required  to  restructure  its  financing  activities  and to reprice its new
   financing  transactions  so as to make  them  profitable  without  regard  to
   McDonnell  Douglas's  utilization  of  tax  benefits  since  there  can be no
   assurance that the Company would be able to utilize such benefits  currently.
   No  assurances  can  be  given  that  the  Company  would  be  successful  in
   restructuring  its  financing  activities.   See  "Competition  and  Economic
   Factors."

o  Intercompany Services

   McDonnell Douglas provides to the Company certain payroll,  employee benefit,
   facilities and other services, for which the Company generally pays McDonnell
   Douglas  the  actual  cost.  See Note 9 of Notes  to  Consolidated  Financial
   Statements included as Item 8.

o  Intercompany Credit Arrangements

   The Company and McDonnell Douglas maintain separate borrowing  facilities and
   there are no  arrangements  for joint use of credit  lines by the  companies.
   Bank credit and other  borrowing  facilities are negotiated by the Company on
   its own behalf.  There are no provisions in the  Company's  debt  instruments
   that provide that a default by  McDonnell  Douglas on McDonnell  Douglas debt
   constitutes a default on Company  debt.  There are no  guaranties,  direct or
   indirect, by McDonnell Douglas of the payment of any debt of the Company.

   The Company has an  arrangement  with  McDonnell  Douglas,  terminable at the
   discretion of either of the parties, pursuant to which the Company may borrow
   from  McDonnell  Douglas and  McDonnell  Douglas may borrow from the Company,
   funds for  periods up to 30 days at a market  rate of  interest.  Under these
   arrangements,  there were no  outstanding  balances at December  31, 1996 and
   1995.  During 1996,  the Company did not borrow under this  agreement and did
   not lend to McDonnell Douglas.

   Under a similar  arrangement,  the Company may borrow from MDFS, and MDFS may
   borrow from the  Company,  funds for  periods up to 30 days at the  Company's
   cost of funds for short-term borrowings.  Under this arrangement,  borrowings
   of $20.3 million and $3.7 million were  outstanding  at December 31, 1996 and
   1995.  During 1996, the Company's  highest level of borrowings  from MDFS and
   highest  level  of  loans to MDFS  were  $40.5  million  and  $67.8  million,
   respectively.

   Under another  arrangement,  McDonnell Douglas Realty Company, a wholly-owned
   subsidiary  of  McDonnell  Douglas,  owed the Company  $1.7 million and $14.6
   million  at  December  31,  1996 and 1995.  The note is payable on demand and
   accrues interest at a rate equal to a market rate of interest.


Item 2.  Properties

The Company leases all of its office space and other  facilities.  The Company's
principal office is subleased from McDonnell Douglas,  at fair market value. The
Company believes that its properties,  including the equipment  located therein,
are suitable and adequate to meet the requirements of its business.


Item 3.  Legal Proceedings

 On November 1, 1996, The Allen Austin Harris Group, Inc.  ("Plaintiff") filed a
complaint in the Superior Court of the State of  California,  County of Alameda,
against the Company,  McDonnell  Douglas,  McDonnell  Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants").  The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the  Defendants,  seeks more than $57.0  million in alleged  damages  (primarily
consisting of lost profits) based on various  theories.  The Company believes it
has meritorious  defenses to all of the allegations and that the litigation will
have  no  material  adverse  effect  on the  Company's  earnings,  cash  flow or
financial condition.

A number of legal  proceedings  and  claims are  pending  or have been  asserted
against the Company.  A substantial  number of such legal proceedings and claims
are  covered  by third  parties,  including  insurance  companies.  The  Company
believes that the final outcome of such  proceedings  and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.


                                                          Part II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

All of the Company's  preferred and common stock is owned by MDFS. In 1996,  the
Company  did not  declare  or pay any  dividends  to  MDFS on its  common  stock
compared to dividends of $27.5  million  declared and paid in 1995.  The Company
paid  $3.5  million  in  dividends  on its  preferred  stock in 1996  and  1995.
Preferred  stock  dividends  of $0.6  million  payable  to MDFS were  accrued at
December 31, 1996.

The  provisions  of various  credit and debt  agreements  require the Company to
maintain a minimum net worth,  restrict  indebtedness,  and limit cash dividends
and other distributions.  Under the most restrictive provision, $68.4 million of
the Company's income retained for growth was available for dividends at December
31, 1996.


Item 6.  Selected Financial Data

The selected consolidated  financial data should be read in conjunction with the
Company's  consolidated  financial  statements  at December 31, 1996 and for the
year then  ended and with  "Item 7.  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations."  The following table sets forth
selected consolidated financial data for the Company:



<PAGE>
<TABLE>
<CAPTION>


                                                                               Years Ended December 31,
                                                     ------------------------------------------------------------------------------
(Dollars in millions)                                      1996           1995           1994           1993            1992

<S>                                                    <C>             <C>            <C>            <C>            <C>
Financing volume                                       $     867.3     $     590.8    $     202.0    $     453.0    $       206.5
                                                     ==============================================================================

Operating income:
   Finance lease income                                $     118.6     $     104.3    $     100.7    $      90.1    $       113.0
   Interest on notes receivable                               24.4            27.2           29.4           38.9             47.9
   Operating lease income, net                                55.1            41.1           38.5           35.9             33.3
   Net gain on disposal or re-lease of assets                 19.6             8.7           11.1           23.7             37.1
   Postretirement benefit curtailment                          -               -              -              -                2.8
   Other                                                       3.8             9.3            7.1            8.3             17.4
                                                     ------------------------------------------------------------------------------
                                                             221.5           190.6          186.8          196.9            251.5
                                                     ------------------------------------------------------------------------------
Expenses:
   Interest expense                                          117.3           101.9          108.3          116.4            145.9
   Provision for losses                                       14.2            12.2            9.9            8.6             19.1
   Operating expenses                                         11.7            11.3           15.2           20.3             27.4
   Other                                                       3.4             4.9           12.3           12.4             14.3
                                                     ------------------------------------------------------------------------------
                                                             146.6           130.3          145.7          157.7            206.7
                                                     ------------------------------------------------------------------------------
Income from continuing operations before
   provision for income taxes and
   cumulative effect of accounting change                     74.9            60.3           41.1           39.2             44.8
Provision for income taxes                                    26.1            21.0           12.8           22.4             12.7
                                                     ------------------------------------------------------------------------------
Income from continuing operations before
   cumulative effect of accounting change                     48.8            39.3           28.3           16.8             32.1
Discontinued operations, net                                   -               -              -              -               (2.5)
Cumulative effect of accounting change                         -               -              -              -               (1.9)
                                                     ------------------------------------------------------------------------------
Net income                                             $      48.8     $      39.3    $      28.3    $      16.8    $        27.7
                                                     ==============================================================================

Dividends declared                                     $       3.5     $      31.0    $      30.5    $       3.6    $       105.8

Ratio of income to fixed charges(1)                            1.62            1.57           1.37           1.33             1.30

Balance sheet data:
   Total assets                                        $   2,666.6     $   2,049.6    $   1,929.6    $   2,055.5    $     1,999.0
   Total debt                                              1,850.2         1,339.7        1,215.1        1,361.2          1,330.4
   Shareholder's equity                                      325.5           280.2          271.9          269.4            256.4

Dividends accrued on preferred stock at
   year end                                            $       0.6     $       0.6    $       0.6    $       0.6    $         0.5
---------------
<FN>

(1) For the purpose of computing  the ratio of income to fixed  charges,  income
    consists  of  income  from  continuing   operations   before  income  taxes,
    cumulative effect of accounting change and fixed charges;  and fixed charges
    consist of interest expense and preferred stock dividends.
</FN>
</TABLE>


<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

The following  should be read in  conjunction  with the  consolidated  financial
statements included in Item 8.

From  time to  time,  the  Company  may make  certain  statements  that  contain
projections  or  "forward-looking"   information  (as  defined  in  the  Private
Securities  Litigation  Reform Act of 1995) that involve  risk and  uncertainty.
Certain  statements in this Form 10-K, and particularly in Items 1, 3 and 7, may
contain forward-looking  information.  The subject matter of such statements may
include,  but are not  limited  to,  the  consummation  of the  Boeing-McDonnell
Douglas merger and its possible effects, future earnings,  costs,  expenditures,
losses, residual values, and various business environment trends. In addition to
those contained herein, forward-looking statements and properties may be made by
management orally or in writing including,  but not limited to, various sections
of the Company's  filings with the Securities and Exchange  Commission under the
Securities Act of 1933 and the Securities Exchange Act of 1934.

Actual results and trends in the future may differ  materially from  projections
depending on a variety of factors including,  but not limited to, the timing and
consummation   of  the   Boeing-McDonnell   Douglas  merger  and  the  Company's
relationship with McDonnell Douglas as well as its new ultimate shareholder, the
capital equipment requirements of United States and foreign businesses,  capital
availability and cost, changes in laws and tax benefits,  competition from other
financial institutions, the Company's successful execution of internal operating
plans, defaults by customers, regulatory uncertainties, and legal proceedings.

Capital Resources and Liquidity

The Company has significant liquidity requirements. The Company attempts to fund
its business such that  scheduled  receipts  from its  portfolio  will cover its
expenses and debt payments as they become due. The Company believes that, absent
a severe or prolonged economic downturn which results in defaults  materially in
excess of those provided for, receipts from the portfolio will cover the payment
of expenses and debt payments when due. If cash provided by operations, issuance
of commercial  paper,  borrowings under bank credit lines and term borrowings do
not provide the necessary  liquidity,  the Company would be required to restrict
its new business volume unless it obtained access to other sources of capital at
rates that would allow for a reasonable return on new business.  The Company has
a $240 million  revolving  credit agreement which is reduced by borrowings of up
to $16 million  made by MDFS.  At December 31, 1996 and 1995,  borrowings  under
commercial  paper and uncommitted  short-term  bank  facilities  totaling $141.0
million and $10.0  million,  respectively,  were  supported by available  unused
commitments under the revolving credit agreement.  The Company also accesses the
public  debt  market  and  anticipates  using  proceeds  from  the  issuance  of
additional public debt to fund future growth. In 1996, the Company issued $355.0
million of public senior and subordinated unsecured notes. See "Item 1. Business
- Borrowing Operations."


1996 vs. 1995

Finance lease income  increased  $14.3 million (13.7%) in 1996 compared to 1995,
primarily  attributable to increased volume for 1996 and the 1995 fourth quarter
financings of two MD-11aircraft.

Interest on notes  receivable in 1996 was $2.8 million  (10.3%) lower than 1995,
primarily  attributable to aircraft repossessed under defaulted loans and leased
in 1995 and notes that matured in 1995.

Operating lease income, net of depreciation expense, increased $14.0 million
(34.1%) in 1996 compared to 1995,  primarily  attributable to the March 1996
financing of two MD-11s and the March 1995 financing of two MD-82 aircraft
under operating lease agreements.

Net gain on disposal or re-lease of assets increased $10.9 million (greater than
125%) in 1996 compared to 1995, attributable primarily to equipment sales within
the  commercial  equipment  leasing  portfolio  and sales within the  commercial
aircraft financing portfolio.

Interest  expense  increased  $15.4  million  (15.1%) in 1996  compared to 1995,
primarily  attributable to a higher level of debt borrowings in 1996,  resulting
from increased financing activity.

Provision for losses  increased  $2.0 million  (16.4%)  during 1996  compared
to 1995,  primarily  attributable  to increased financing activity.


1995 vs. 1994

Portfolio  income (lease and interest  income)  increased  $4.0 million  (2.4%),
primarily attributable to increased financing volume.

Net gain on disposal or re-lease of assets decreased $2.4 million (21.6%) during
1995  compared to 1994,  primarily  attributable  to a $1.3 million gain in 1994
from a sale of an  executive  jet within the CEL  portfolio  and $1.2 million of
losses in 1995 due to a prepayment of a commercial aircraft financing note.

Other  income  increased  $2.2  million  (31.0%)  during 1995  compared to 1994,
primarily  attributable  to a $1.0 million gain  recognized in 1995 related to a
debt  maturity,   and  $0.6  million  recognized  in  1995  related  to  certain
arrangements in connection with the Company's deferral agreement with TWA.

Interest  expense  decreased  $6.4 million  (5.9%) during 1995 compared to 1994,
primarily  attributable  to the Company's  refinancing  of a portion of its high
coupon debt with lower coupon debt.

Provision  for losses  increased  $2.3 million  (23.2%)  during 1995 compared to
1994, primarily  attributable to the overall increase in the Company's portfolio
balances.  The allowance for losses on financing receivables as a percent of the
portfolio  at  December  31,  1995 and  December  31,  1994  was 2.1% and  2.2%,
respectively.

Operating  expenses decreased $3.9 million (25.7%) during 1995 compared to 1994,
attributable  primarily  to the  closing  of  certain  of the  Company's  former
non-core businesses.

Other  expenses  decreased  $7.4 million  (60.2%)  during 1995 compared to 1994,
attributable  primarily  to a decrease  of $3.2  million  related to real estate
owned expenses and the 1994  realization  of the Company's $3.5 million  foreign
translation loss.



<PAGE>



Item 8.  Financial Statements and Supplementary Data

The following pages include the consolidated financial statements of the Company
as described in Item 14 (a) 1 and (a) 2 of Part IV herein.


<PAGE>


                         Report of Independent Auditors


Shareholder and Board of Directors
McDonnell Douglas Finance Corporation

We have audited the accompanying consolidated balance sheet of McDonnell Douglas
Finance  Corporation (a wholly-owned  subsidiary of McDonnell  Douglas Financial
Services Corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related  consolidated  statements of income and income retained for growth,  and
cash flows for each of the three years in the period  ended  December  31, 1996.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
McDonnell Douglas Finance  Corporation and subsidiaries at December 31, 1996 and
1995, and the consolidated  results of their operations and their cash flows for
each of the three years in the period ended  December 31,  1996,  in  conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements  taken  as a whole,  present  fairly  in all  material  respects  the
information set forth therein.

We have also previously  audited, in accordance with generally accepted auditing
standards,  the  consolidated  balance sheets as of December 31, 1994,  1993 and
1992, and the related consolidated  statements of income and income retained for
growth,  and cash flows for the years ended  December 31, 1993 and 1992 (none of
which are presented separately herein); and we expressed unqualified opinions on
those consolidated  financial  statements.  In our opinion,  the information set
forth in the  selected  financial  data for each of the five years in the period
ended  December  31, 1996,  appearing  on pages 19 - 20 is fairly  stated in all
material  respects in relation to the  consolidated  financial  statements  from
which it has been derived.


/s/ ERNST & YOUNG LLP

January 22, 1997


<PAGE>

<TABLE>

McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Balance Sheet

<CAPTION>

                                                                                             December 31,
(Dollars in millions, except stated value and par value)                               1996                 1995
-------------------------------------------------------------------------------------------------------------------------

ASSETS
    Financing receivables:
<S>                                                                                 <C>                  <C>
       Investment in finance leases                                                 $    1,631.2         $    1,249.7
       Notes receivable                                                                    308.9                263.5
                                                                               ------------------------------------------
                                                                                         1,940.1              1,513.2
       Allowance for losses on financing receivables                                       (48.6)               (42.3)
                                                                               ------------------------------------------
                                                                                         1,891.5              1,470.9
    Cash and cash equivalents                                                               16.9                 12.6
    Equipment under operating leases, net                                                  689.5                475.5
    Equipment held for sale or re-lease                                                     14.0                 28.6
    Accounts with McDonnell Douglas and MDFS                                                 -                   18.5
    Other assets                                                                            54.7                 43.5
                                                                               ------------------------------------------
                                                                                    $    2,666.6         $    2,049.6
                                                                               ==========================================

LIABILITIES AND SHAREHOLDER'S EQUITY
    Short-term notes payable                                                        $      161.3         $       13.7
    Accounts payable and accrued expenses                                                   47.7                 41.8
    Other liabilities                                                                      103.0                 82.5
    Deferred income taxes                                                                  340.2                305.4
    Long-term debt:
       Senior                                                                            1,594.1              1,206.3
       Subordinated                                                                         94.8                119.7
                                                                               ------------------------------------------
                                                                                         2,341.1              1,769.4
                                                                               ------------------------------------------

    Commitments and contingencies -- Note 8

    Shareholder's equity:
       Preferred stock -- no par value; authorized 100,000 shares:
         Series A; $5,000 stated value; authorized, issued and outstanding
         10,000 shares                                                                      50.0                 50.0
       Common stock $100 par value; authorized 100,000 shares; issued and
         outstanding 50,000 shares                                                           5.0                  5.0
       Capital in excess of par value                                                       89.5                 89.5
       Income retained for growth                                                          181.0                135.7
                                                                               ------------------------------------------
                                                                                           325.5                280.2
                                                                               ------------------------------------------
                                                                                    $    2,666.6         $    2,049.6
                                                                               ==========================================
</TABLE>

See notes to consolidated financial statements.


<PAGE>

<TABLE>

McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Income and Income Retained for Growth
<CAPTION>

                                                                                    Years Ended December 31,
 (Dollars in millions)                                                        1996            1995             1994
-----------------------------------------------------------------------------------------------------------------------
 OPERATING INCOME
<S>                                                                        <C>             <C>              <C>
        Finance lease income                                               $     118.6     $     104.3      $    100.7
        Interest income on notes receivable                                       24.4            27.2            29.4
        Operating lease income, net of depreciation expense of $57.6,
          $48.2 and $39.9 in 1996, 1995 and 1994, respectively                    55.1            41.1            38.5
        Net gain on disposal or re-lease of assets                                19.6             8.7            11.1
        Other                                                                      3.8             9.3             7.1
                                                                         --------------- ---------------- ---------------
                                                                                 221.5           190.6           186.8
                                                                         --------------- ---------------- ---------------

 EXPENSES
        Interest expense                                                         117.3           101.9           108.3
        Provision for losses                                                      14.2            12.2             9.9
        Operating expenses                                                        11.7            11.3            15.2
        Other                                                                      3.4             4.9            12.3
                                                                         --------------- ---------------- ---------------
                                                                                 146.6           130.3           145.7
                                                                         --------------- ---------------- ---------------
 Income before provision for income taxes                                         74.9            60.3            41.1
 Provision for income taxes                                                       26.1            21.0            12.8
                                                                         --------------- ---------------- ---------------
 Net income                                                                       48.8            39.3            28.3
 Income retained for growth at beginning of year                                 135.7           127.4           129.6
 Dividends                                                                        (3.5)          (31.0)          (30.5)
                                                                         --------------- ---------------- ---------------
 Income retained for growth at end of year                                 $     181.0     $     135.7    $      127.4
                                                                         =============== ================ ===============
</TABLE>

See notes to consolidated financial statements.


<PAGE>

<TABLE>

McDonnell Douglas Finance Corporation and Subsidiaries
Consolidated Statement of Cash Flows

<CAPTION>
                                                                                    Years Ended December 31,
(Dollars in millions)                                                        1996             1995            1994
-------------------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                                        <C>             <C>              <C>
     Net income                                                            $      48.8     $     39.3       $      28.3
     Adjustments to reconcile net income to net cash provided by (used
       in) operating activities:
         Depreciation expense - equipment under operating leases                  57.6           48.2              39.9
         Net gain on disposal or re-lease of assets                              (19.6)          (8.7)            (11.1)
         Provision for losses                                                     14.2           12.2               9.9
         Change in assets and liabilities:
           Accounts with McDonnell Douglas and MDFS                               18.5           26.4              25.5
           Other assets                                                          (11.2)          40.4               5.8
           Accounts payable and accrued expenses                                   5.9            8.8             (18.5)
           Other liabilities                                                      20.5          (10.0)             18.0
           Deferred income taxes                                                  34.8           (0.7)              7.2
         Other, net                                                               (1.7)           0.4               9.2
                                                                        -------------------------------------------------
                                                                                 167.8          156.3             114.2
                                                                        -------------------------------------------------

INVESTING ACTIVITIES
     Net change in short-term notes and leases receivable                        (91.2)          60.6             (58.6)
     Purchase of equipment for operating leases                                 (303.9)        (155.7)            (40.0)
     Proceeds from disposition of equipment, notes and leases                    109.8          109.6             109.0
         receivable
     Collection of notes and leases receivable                                   172.2          181.6             170.5
     Acquisition of notes and leases receivable                                 (557.2)        (435.6)           (179.0)
                                                                        -------------------------------------------------
                                                                                (670.3)        (239.5)              1.9
                                                                        -------------------------------------------------

FINANCING ACTIVITIES
     Net change in short-term borrowings                                         147.6          (90.1)            (98.8)
     Debt having maturities more than 90 days:
         Proceeds                                                                608.7          572.8             229.9
         Repayments                                                             (246.0)        (358.0)           (280.1)
     Payment of cash dividends                                                    (3.5)         (42.0)            (19.5)
                                                                        -------------------------------------------------
                                                                                 506.8           82.7            (168.5)
                                                                        -------------------------------------------------
Increase (decrease) in cash and cash equivalents                                   4.3           (0.5)            (52.4)
Cash and cash equivalents at beginning of year                                    12.6           13.1              65.5
                                                                        =================================================
Cash and cash equivalents at end of year                                   $      16.9     $     12.6       $      13.1
                                                                        =================================================
</TABLE>

See notes to consolidated financial statements.


<PAGE>


McDonnell Douglas Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996


Note 1 -- Organization and Summary of Significant Accounting Policies

Organization   McDonnell  Douglas  Finance  Corporation  (the  "Company")  is  a
wholly-owned  subsidiary of McDonnell  Douglas  Financial  Services  Corporation
("MDFS"), a wholly-owned subsidiary of McDonnell Douglas Corporation ("McDonnell
Douglas").  The  Company  was  incorporated  in  Delaware  in 1968 and  provides
equipment financing and leasing arrangements to a diversified range of customers
and industries. The Company's primary operations include two financial reporting
segments:  commercial aircraft financing and commercial  equipment leasing.  The
commercial  aircraft  financing segment provides customer  financing services to
McDonnell  Douglas  components,  primarily  Douglas Aircraft  Company,  and also
provides  financing for the acquisition of non- McDonnell Douglas aircraft.  The
commercial  equipment leasing segment is principally involved in large financing
and leasing transactions for a diversified range of equipment.

Consolidation The consolidated  financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and  transactions  have been  eliminated.  Certain  prior year amounts have been
reclassified to conform to the 1996 presentation.

Estimates The  preparation of financial  statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions.  These estimates and assumptions affect the reported amounts in the
financial  statements and accompanying  notes.  Actual results could differ from
those estimates.

Finance Leases At lease commencement,  the Company records the lease receivable,
estimated  residual  value of the leased  equipment  and unearned  lease income.
Income  from  leases  is  recognized  over  the  terms  of the  leases  so as to
approximate a level rate of return on the net investment. Residual values, which
are reviewed  periodically,  represent  the  estimated  amount to be received at
lease termination from the disposition of leased equipment.

Initial  Direct Costs Initial  direct costs are deferred and amortized  over the
related financing terms.

Cash  Equivalents  The Company  considers  all cash  investments  with  original
maturities of three months or less to be cash  equivalents.  Cash equivalents at
December 31, 1996 and 1995 were $15.3 million and $10.0 million. At December 31,
1996 and 1995,  the Company  has  classified  as other  assets  restricted  cash
deposited  with banks in interest  bearing  accounts of $42.5  million and $37.2
million for specific lease rents and  contractual  purchase  options  related to
certain  aircraft  leased by the Company under capital  lease  obligations,  and
security  against  recourse   provisions  related  to  certain  note  and  lease
receivable sales.

Allowance  for  Losses on  Financing  Receivables  The  allowance  for losses on
financing receivables includes  consideration of such factors as the risk rating
of individual credits, economic and political conditions, guaranties, prior loss
experience and results of periodic credit reviews.

Collateral that is repossessed in satisfaction of a receivable is transferred to
equipment held for sale or re-lease at the lower of the former receivable amount
or estimated net realizable value.

Equipment Under Operating Leases Rental equipment subject to operating leases is
recorded  at cost and  depreciated  over  its  useful  life or lease  term to an
estimated salvage value, primarily on a straight-line basis.

During 1996, the Company adopted Statement of Financial Accounting Standards No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed  Of." The adoption  thereof had no material  effect on the
Company's financial position or operating results.

Income  Taxes The  operations  of the Company are  included in the  consolidated
federal  income tax return of McDonnell  Douglas.  McDonnell  Douglas  presently
charges or credits  the Company  for the  corresponding  increase or decrease in
McDonnell Douglas's taxes resulting from such inclusion.  Intercompany  payments
are made when such  taxes are due or tax  benefits  are  realized  by  McDonnell
Douglas based on the assumption, pursuant to an informal arrangement, that taxes
are due or tax benefits are realized up to 100% of the amounts forecasted by the
Company with the amounts in excess of such  forecast due in the year realized by
McDonnell Douglas.

Taxes on income are  computed at current tax rates  after  adjusting  income for
items that do not have tax  consequences.  Deferred  income  taxes  reflect  the
impact of  temporary  differences  between the amount of assets and  liabilities
recognized for financial  reporting  purposes and the amounts recognized for tax
purposes.

Note 2 -- Proposed Merger with The Boeing Company

On  December  14,  1996,  McDonnell  Douglas and The Boeing  Company  ("Boeing")
entered into a definitive  agreement whereby a wholly owned subsidiary of Boeing
will merge into McDonnell Douglas in a stock-for-stock  transaction, as a result
of which  McDonnell  Douglas  will become a wholly owned  subsidiary  of Boeing.
Under the terms of the transaction,  McDonnell Douglas shareholders will receive
0.65 share (1.3 shares if the previously announced Boeing 2-for-1 stock split is
approved by Boeing  shareholders  prior to consummation of the merger) of Boeing
common stock for each share of McDonnell  Douglas common stock.  The transaction
is subject  to  approval  by the  shareholders  of both  companies  and  certain
regulatory agencies; it is expected to close as early as mid-1997.

Note 3 -- Investment in Finance Leases

The  following  lists the  components  of the  investment  in finance  leases at
December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                        1996             1995
<S>                                                                                      <C>               <C>
Minimum lease payments receivable                                                        $   2,252.1       $   1,687.0
Estimated residual value of leased assets                                                      423.6             309.4
Unearned income                                                                             (1,047.7)           (749.6)
Deferred initial direct costs                                                                    3.2               2.9
                                                                                       ----------------------------------
                                                                                         $   1,631.2       $   1,249.7
                                                                                       ==================================
</TABLE>

The  following  lists the  components  of the  investment  in finance  leases at
December 31 that relate to aircraft  leased by the Company under capital  leases
that have been subleased to others under finance leases:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                        1996             1995
<S>                                                                                      <C>               <C>
Minimum lease payments receivable                                                        $     568.1       $     417.4
Estimated residual value of leased assets                                                       83.3              54.6
Unearned income                                                                               (300.8)           (217.8)
Deferred initial direct costs                                                                    0.7               0.6
                                                                                       ----------------------------------
                                                                                         $     351.3       $     254.8
                                                                                       ==================================
</TABLE>

At December  31, 1996,  finance  lease  receivables  of $63.3  million  serve as
collateral to senior long-term debt.

At December 31, 1996,  finance  lease  receivables  are due in  installments  as
follows: 1997, $504.7 million; 1998, $216.1 million; 1999, $237.9 million; 2000,
$190.7 million; 2001, $173.0 million; 2002 and thereafter, $929.7 million.

Under a finance  lease  agreement,  the  Company  leases a DC-10-30  aircraft to
McDonnell  Douglas.  The lease  requires  monthly rent  payments of $0.4 million
through  April 14, 2004. At December 31, 1996 and 1995,  the carrying  amount of
this aircraft was $28.5 million and $30.1 million.


Note 4 -- Notes Receivable

The following lists the components of notes receivable at December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                        1996             1995
<S>                                                                                        <C>               <C>
Principal                                                                                  $   306.3         $  261.7
Accrued interest                                                                                 2.8              2.1
Unamortized discount                                                                            (0.8)            (0.9)
Deferred initial direct costs                                                                    0.6              0.6
                                                                                       ---------------------------------
                                                                                           $   308.9         $  263.5
                                                                                       =================================
</TABLE>

At December 31, 1996,  notes  receivables  are due in  installments  as follows:
1997,  $69.7 million;  1998,  $23.5 million;  1999,  $28.1 million;  2000, $25.8
million; 2001, $37.3 million; 2002 and thereafter, $121.9 million.

The $100.0  million  aircraft  purchase  bridge  facility made  available by the
Company to ValuJet  Airlines,  Inc.  ("ValuJet")  in 1995 was reduced in maximum
scope to $50.0  million by mutual  agreement  during the third  quarter of 1996.
This  facility  expires  upon  delivery  to ValuJet of the first  scheduled  new
McDonnell  Douglas  MD-95  aircraft,   presently  expected  to  occur  in  1999.
Borrowings  under this agreement must be repaid within 180 days and the interest
rate is based on the London  Interbank  Offering Rate  ("LIBOR").  There were no
amounts  outstanding  under this agreement at December 31, 1996. At December 31,
1995, receivables outstanding pursuant to this agreement totaled $8.7 million.


Note 5 -- Equipment Under Operating Leases

Equipment under operating leases consisted of the following at December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                      1996             1995
<S>                                                                                     <C>             <C>
Commercial aircraft                                                                     $     543.7     $     364.1
Executive aircraft                                                                            153.9            99.5
Highway vehicles                                                                               61.7            70.9
Printing equipment                                                                             50.7            34.1
Machine tools and production equipment                                                         34.1            30.2
Other                                                                                          16.4            18.2
                                                                                      ---------------------------------
                                                                                              860.5           617.0
Accumulated depreciation                                                                     (158.9)         (132.7)
Rentals receivable                                                                             11.6             7.3
Deferred lease income                                                                         (25.0)          (17.3)
Deferred initial direct costs                                                                   1.3             1.2
                                                                                      ---------------------------------
                                                                                        $     689.5     $     475.5
                                                                                      =================================
</TABLE>

At December 31, 1996,  future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows:  1997, $112.8 million;
1998,  $95.7 million;  1999,  $81.4 million;  2000,  $60.4 million;  2001, $52.8
million; 2002 and thereafter, $392.7 million.

At December  31,  1996,  equipment  under  operating  leases of $8.7 million are
assigned as collateral  to senior  long-term  debt.  Equipment  under  operating
leases of $203.1  million at December 31, 1996,  relate to  commercial  aircraft
leased by the Company under capital lease obligations.

Under an operating  lease  agreement,  the Company  leases two MD-82 aircraft to
McDonnell  Douglas.  The leases require  quarterly rent payments of $1.0 million
through May 31,  2002.  At  December  31,  1996,  the  carrying  amount of these
aircraft  was $26.5  million.  Prior to 1996,  the  Company  leased  four  MD-82
aircraft to McDonnell  Douglas.  At December 31,  1995,  the carrying  amount of
these aircraft was $54.0 million.

During 1996, the Company entered into an operating lease  agreement,  to lease a
DC-10-30 aircraft to McDonnell Douglas.  The lease requires monthly rent payment
of $0.4 million  through 2004. At December 31, 1996, the carrying amount of this
aircraft was $28.9 million.

Under a separate  operating  lease  agreement,  the Company  leases an executive
aircraft to McDonnell Douglas.  The lease requires monthly rent payments of $0.2
million through January 2002. At December 31, 1996 and 1995, the carrying amount
of this aircraft was $15.6 million and $16.2 million.


Note 6 -- Income Taxes

The  components  of the  provision  (benefit)  for taxes on income for the years
ended December 31 were as follows:

<TABLE>
<CAPTION>

(Dollars in millions)                                                        1996             1995            1994
Current:
<S>                                                                       <C>             <C>              <C>
     Federal                                                              $   (12.8)      $    18.5        $      3.0
     State                                                                      4.1             3.2               2.6
                                                                        -------------------------------------------------
                                                                               (8.7)           21.7               5.6
                                                                        -------------------------------------------------
Deferred:
     Federal                                                                   34.8            (0.7)              7.2
                                                                        -------------------------------------------------
                                                                          $    26.1       $    21.0        $     12.8
                                                                        =================================================
</TABLE>

Temporary  differences  represent the cumulative  taxable or deductible  amounts
recorded in the financial  statements in different  years than recognized in the
tax returns.  The components of the net deferred income tax liability  consisted
of the following at December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                       1996             1995
Deferred tax assets:
<S>                                                                                      <C>              <C>
    Allowance for losses                                                                 $     17.0       $     14.8
    Other                                                                                       6.0              5.2
                                                                                      ----------------------------------
                                                                                               23.0             20.0
                                                                                      ----------------------------------
Deferred tax liabilities:
    Leased assets                                                                            (358.5)          (322.8)
    Other                                                                                      (4.7)            (2.6)
                                                                                      ----------------------------------
                                                                                             (363.2)          (325.4)
                                                                                      ----------------------------------
Net deferred tax liability                                                               $   (340.2)      $   (305.4)
                                                                                      ==================================
</TABLE>

Income  taxes  computed  at the United  States  federal  income tax rate and the
provision  (benefit)  for taxes on income  differ as follows for the years ended
December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                        1996             1995            1994
<S>                                                                        <C>             <C>              <C>
Tax computed at federal statutory rate                                     $     26.2      $     21.1       $     14.4
State income taxes, net of federal tax benefit                                    2.6             2.1              1.7
Foreign sales corporation benefit                                                (1.5)           (2.1)             -
Effect of foreign tax rates                                                       -               -                1.6
United States tax effect from the sale of MD Bank                                 -               -               (3.2)
Effect of investment tax credits                                                 (0.7)           (0.9)            (0.8)
Other                                                                            (0.5)            0.8             (0.9)
                                                                        =================================================
                                                                           $     26.1      $     21.0       $     12.8
                                                                        =================================================
</TABLE>

During  December  1994,  the Company  disposed of its  investment  in  McDonnell
Douglas  Bank  Limited,   a  former  United  Kingdom  company  and  an  indirect
wholly-owned  subsidiary of the Company, for $23.8 million and recognized a loss
on  disposition   totaling  $3.2  million.   The  cumulative   foreign  currency
translation  adjustment  was  recognized  and  charged  to  other  expenses.  In
addition, tax benefits totaling $3.2 million were recognized as a result of this
sale.

MDFS is currently under  examination by the Internal Revenue Service ("IRS") for
the tax years 1986 through 1992. The outcome of the IRS audit is not expected to
have a  material  effect on the  Company's  financial  condition  or  results of
operations.

The  Company  received  income tax  refunds  from MDC of $15.4  million and $2.1
million in 1996 and 1995.  The Company  made income tax payments to MDC of $15.2
million in 1994.


Note 7 -- Indebtedness

Short-term notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>

                                                                                          Weighted Average Interest
                                                                                             Rate at End of Year
                                                             Balance at End of Year
                                                          -------------------------------------------------------------
(Dollars in millions)                                         1996           1995            1996           1995

<S>                                                         <C>           <C>                 <C>           <C>
Commercial paper                                            $     96.0    $       -           6.43%           -   %
Uncommitted credit facilities                                     45.0           10.0         6.02           6.05
MDFS                                                              20.3            3.7         5.75           6.38
                                                          ------------------------------
                                                            $    161.3    $      13.7
                                                          ==============================
</TABLE>

During 1996, MDFS and the Company amended their joint revolving credit agreement
to provide,  among other things, for increased  borrowing capacity and to extend
the maturity date to August 2001. Under the amended  agreement,  the Company may
borrow a maximum of $240.0 million,  reduced by MDFS borrowings  under this same
agreement,  which are limited to $16.0 million. The interest rate, at the option
of MDFS or the Company, is either a floating rate,  generally based on a defined
prime rate,  or fixed rate related to LIBOR.  There were no amounts  outstanding
under this  agreement  at December  31,  1996.  At  December  31, 1996 and 1995,
borrowings  under  commercial  paper and uncommitted  short-term bank facilities
totaling  $141.0  million and $10.0  million,  respectively,  were  supported by
available unused commitments under the revolving credit agreement.

The Company has available approximately $95.0 million in uncommitted, short-term
bank credit  facilities  whereby the Company may borrow, at interest rates which
are negotiated at the time of the borrowings, upon such terms as the Company and
the banks may mutually agree. At December 31, 1996 and 1995, borrowings on these
credit facilities totaled $45.0 million and $10.0 million.

Senior long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                                         1996            1995

<S>                                                                                       <C>              <C>
7.0% Notes due through 1996                                                               $       -        $       0.3
7.0% Notes due through 1998, net of discount based on imputed
    interest rate of 10.88%                                                                       1.0              1.8
Variable rate note due 1998                                                                      15.0             15.0
3.9% Notes due through 1999, net of discount based on imputed
    interest rates of 9.15% - 10.6%                                                               4.7              6.3
5.75% - 6.875% Notes due through 2000, net of discount based on
    imputed interest rates of 9.75% - 11.4%                                                       6.7              8.4
6.9% - 9.4% Notes due through 2001                                                               54.1             69.8
5.0% - 8.375% Retail medium term notes due through 2011                                          76.5             84.5
5.48% - 13.55% Medium term notes due through 2017                                               960.2            773.8
Capital lease obligations due through 2008                                                      475.9            246.4
                                                                                        ---------------------------------
                                                                                          $   1,594.1      $   1,206.3
                                                                                        =================================
</TABLE>

Subordinated long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>

(Dollars in millions)                                                                         1996            1995
<S>                                                                                       <C>              <C>
9.26% Note due 1996                                                                       $       -        $       5.0
12.35% Note due 1996                                                                              -               10.0
5.48% - 8.31% Medium term notes due through 2004                                                 94.8            104.7
                                                                                        ---------------------------------
                                                                                          $      94.8      $     119.7
                                                                                        =================================
</TABLE>

The Company uses interest  rate swap  agreements  to manage  interest  costs and
risks  associated with changing  interest rates.  The differential to be paid or
received  is accrued as  interest  rates  change and is  recognized  in interest
expense over the life of the agreements.  The Company  believes it has no market
rate  risk  as  the  interest  rate  swaps  are  matched  with  specific   debt.
Counterparties   to  the  interest  rate  swap  contracts  are  major  financial
institutions  and  credit  loss  from   counterparty   non-performance   is  not
anticipated. At December 31, 1996, the Company had interest rate swap agreements
outstanding as follows:
<TABLE>
<CAPTION>

                                      Contract          Notional
(Dollars in millions)                 Maturity         Principal           Receive Rate                Pay Rate
<S>                                  <C>              <C>                  <C>                      <C>
Capital lease obligations            2006 - 2008      $    399.9            Floating(1)             6.65% - 7.599%
Medium term notes                       1997                20.0            Floating(1)                  6.65%
Medium term notes                    2000 - 2001            50.0           6.83% - 8.61%              Floating(1)
-------------
<FN>
       (1) Floating rates are based on LIBOR or Federal Funds.
</FN>
</TABLE>

As  of  December  31,  1996,   $55.1  million  of  senior   long-term  debt  was
collateralized by equipment. This debt is composed of the 7.0% Notes due through
1998 and the 6.9% - 9.4% Notes due through 2001.

Payments  required on long-term  debt and capital lease  obligations  during the
years ending December 31 are as follows:
<TABLE>
<CAPTION>
                                                                                        Long-Term           Capital
(Dollars in millions)                                                                      Debt             Leases
<S>                                                                                    <C>                <C>
1997                                                                                   $     176.8        $      72.1
1998                                                                                         228.3               72.1
1999                                                                                         204.8               69.3
2000                                                                                         137.8               87.8
2001                                                                                         142.8               67.5
2002 and thereafter                                                                          327.6              347.3
                                                                                    -------------------------------------
                                                                                           1,218.1              716.1
Deferred debt expenses                                                                        (5.1)              (0.5)
Imputed interest                                                                               -               (239.7)
                                                                                    -------------------------------------
                                                                                       $   1,213.0        $     475.9
                                                                                    =====================================
</TABLE>

The  provisions  of various  credit and debt  agreements  require the Company to
maintain a minimum net worth,  restrict  indebtedness,  and limit cash dividends
and other distributions.  Under the most restrictive provision, $68.4 million of
the Company's income retained for growth was available for dividends at December
31, 1996.

Interest  payments  totaled  $113.9  million in 1996,  $99.2 million in 1995 and
$110.8 million in 1994.


Note 8 -- Commitments and Contingencies

On November 1, 1996, The Allen Austin Harris Group, Inc.  ("Plaintiff")  filed a
complaint in the Superior Court of the State of  California,  County of Alameda,
against the Company,  McDonnell  Douglas,  McDonnell  Douglas Aerospace - Middle
East Limited and the Selah Group, Inc. (the "Defendants").  The Plaintiff, which
had hoped to establish a manufacturing plant abroad with various assistance from
the  Defendants,  seeks more than $57.0  million in alleged  damages  (primarily
consisting of lost profits) based on various  theories.  The Company believes it
has meritorious  defenses to all of the allegations and that the litigation will
have  no  material  adverse  effect  on the  Company's  earnings,  cash  flow or
financial condition.

A number of legal  proceedings  and  claims are  pending  or have been  asserted
against the Company.  A substantial  number of such legal proceedings and claims
are  covered  by third  parties,  including  insurance  companies.  The  Company
believes that the final outcome of such  proceedings  and claims will not have a
material adverse effect on its earnings, cash flow, or financial position.

Trans World Airlines,  Inc. "(TWA")  accounted for $249.5 million (9.5% of total
Company  portfolio)  and $279.9  million  (14.1% of total Company  portfolio) at
December  31, 1996 and 1995.  TWA  continues to operate  under a  reorganization
plan, confirmed by the United States Bankruptcy Court in 1995, that restructured
its indebtedness and leasehold  obligations to its creditors.  In addition,  TWA
continues  to  face  financial  and  operational  challenges  due in  part to an
airliner  crash in July 1996 and  turnover  of key  management,  which  occurred
during 1996.  McDonnell  Douglas  provides  guaranties  to the Company under the
various lease agreements  between the Company and TWA. At December 31, 1996, the
maximum aggregate coverage under such guaranties was $45.6 million. In addition,
McDonnell Douglas provides  supplemental  guaranties in favor of the Company for
up to an  additional  $10.0 million of the  Company's  financings to TWA.  These
guaranties  supplement  individual guaranties provided by McDonnell Douglas with
respect to certain of the  Company's  financings  to TWA to the extent  that the
estimated  fair market value of the  financings  (after  applying the individual
guaranties)  is less than the net asset value of the financings on the Company's
books. The supplemental  guaranties terminate in March 1998, but may be extended
under certain limited  circumstances.  The reorganization plan and TWA's current
financial  condition have not had and,  assuming TWA's financial  condition does
not further  deteriorate,  are not expected to have a material adverse effect on
the Company's earnings, cash flow, or financial position.

A United States based operator of commuter aircraft is in arrears in the payment
of rent under the lease of two Embraer Brasilia commuter  aircraft.  The airline
has stated that it will submit to the Company a proposal  for  repayment  of the
delinquent  sums. The net asset value of the aircraft  leased to this airline at
December 31, 1996, totaled $14.4 million.  The Company does not expect to suffer
a material adverse impact on its earnings,  cash flow, or financial condition on
the account of this transaction.

At December 31, 1996 and 1995, the Company had  commitments  to provide  leasing
and other financing totaling $76.6 million and $116.6 million.

In conjunction with prior asset dispositions,  at December 31, 1996, the Company
is subject to a maximum recourse of $28.5 million.  Based on trends to date, the
Company's exposure to such loss is not expected to be significant.

The Company  leases  aircraft  under capital leases which have been subleased to
others.  At December 31, 1996,  the Company had guaranteed the repayment of $7.0
million in capital lease obligations associated with a 50% partner.

The  Company's  principal  office  is leased  from  McDonnell  Douglas  under an
operating lease agreement,  expiring in 1999. Rent expense for all office leases
under  operating  lease  agreements in 1996, 1995 and 1994 totaled $0.3 million,
$0.9 million and $1.1 million.  At December 31, 1996,  the minimum future rental
commitments under these noncancelable leases payable over the remaining lives of
the leases aggregate $1.8 million.


Note 9 -- Transactions with McDonnell Douglas and MDFS

Accounts with McDonnell  Douglas and MDFS consisted of the following at December
31:
<TABLE>
<CAPTION>

(Dollars in millions)                                                                   1996              1995
<S>                                                                                 <C>              <C>
Note receivable                                                                     $      1.7       $     14.6
Federal income tax receivable                                                              6.7              0.7
State income tax payable                                                                  (3.5)            (0.7)
Other receivables (payables)                                                              (4.9)             3.9
                                                                                  ------------------------------------
                                                                                    $      -         $     18.5
                                                                                  ====================================
</TABLE>

The  Company  has  arrangements  with  McDonnell  Douglas,   terminable  at  the
discretion  of either of the  parties,  pursuant to which the Company may borrow
from McDonnell Douglas and McDonnell Douglas may borrow from the Company,  funds
for  periods  up  to  30  days  at  a  market  rate  of  interest.  Under  these
arrangements, there were no outstanding balances at December 31, 1996 and 1995.

Under a similar  arrangement,  the Company may borrow from MDFS and MDFS and its
subsidiaries may borrow from the Company, funds for periods up to 30 days at the
Company's cost of funds for  short-term  borrowings.  Under these  arrangements,
borrowings  of $20.3 million and $3.7 million were  outstanding  at December 31,
1996 and 1995.

At December 31, 1996 and 1995, the Company had a note  receivable from McDonnell
Douglas Realty Company, a wholly owned subsidiary of McDonnell Douglas,  of $1.7
million and $14.6 million. The note is payable on demand and accrues interest at
a rate equal to a market rate of interest.

During 1995,  the Company sold, at net book value,  McDonnell  Douglas  aircraft
subject to direct finance leases to MDFS totaling $60.1 million.

During 1996,  1995 and 1994, the Company  purchased  aircraft  subject to leases
from  McDonnell  Douglas in the amount of $501.9  million,  $276.8  million  and
$227.1 million,  respectively.  During 1996, 1995 and 1994, the Company recorded
operating income from McDonnell Douglas relating to financings aggregating $14.9
million, $16.2 million and $14.8 million, respectively.

At  December  31,  1996 and 1995,  $470.2  million  and  $285.2  million  of the
commercial  aircraft  financing  portfolio was guaranteed by McDonnell  Douglas.
Fees related to these  guaranties  that were paid to McDonnell  Douglas  totaled
$1.6  million,   $1.9  million  and  $0.9  million  in  1996,   1995  and  1994,
respectively.  During 1996,  1995 and 1994, the Company  collected $2.1 million,
$0.5 million and $1.7 million, respectively, under these guaranties.

The Series A Preferred Stock is redeemable at the Company's option at $5,000 per
share,  has no voting  privileges  and is  entitled  to  cumulative  semi-annual
dividends of $175 per share. Such dividends have priority over cash dividends on
the Company's  common stock.  Accrued  dividends on preferred  stock amounted to
$0.6 million at December 31, 1996 and 1995.

Substantially  all  employees  of  McDonnell  Douglas and its  subsidiaries  are
members of defined benefit pension plans and insurance plans.  McDonnell Douglas
also provides eligible employees the opportunity to participate in savings plans
that permit both pretax and after-tax contributions. McDonnell Douglas generally
charges the Company  with the actual  cost of these  plans  attributable  to the
Company's  employees which are included with other McDonnell Douglas charges for
support services and reflected in operating expenses.  McDonnell Douglas charges
for services  provided  during 1996,  1995 and 1994 totaled $1.3  million,  $1.1
million  and  $0.9  million,   respectively.   Additionally,   the  Company  was
compensated by certain  affiliates for a number of support  services,  which are
netted against operating expenses,  amounting to $0.9 million,  $1.2 million and
$0.2 million in 1996, 1995 and 1994, respectively.


Note 10 -- Fair Value of Financial Instruments

The estimated  fair value amounts of the Company's  financial  instruments  have
been  determined  by the  Company,  using  appropriate  market  information  and
valuation  methodologies.  The following  methods and  assumptions  were used to
estimate the fair value of each class of financial instruments:

Cash and Cash  Equivalents The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.

Notes Receivable Fair values for variable rate notes that reprice frequently and
with no significant change in credit risk are based on carrying values. The fair
values of fixed rate notes are estimated in discounted cash flow analyses,  with
the use of  interest  rates  currently  offered on loans with  similar  terms to
borrowers of similar credit quality.

Short and Long-Term  Debt Carrying  amounts of borrowings  under the  short-term
revolving  credit  agreements  approximate  their fair value. The fair values of
long-term debt, excluding capital lease obligations,  are estimated according to
public  quotations or discounted cash flow analyses,  which are based on current
incremental borrowing rates for similar types of borrowing arrangements.

Interest  Rate Hedges The fair values of the  Company's  interest rate swaps are
based on quoted market prices of comparable instruments.

Financing  Commitments  Risks  associated  with  changes in  interest  rates are
minimized  during  the  commitment  term  because  the  rates are set at the
date of funding based on current  market  conditions,  the fair value of the
underlying collateral  and the credit  worthiness of the customers.  As a
result,  the fair value of these financings is expected to equal the amounts
funded.

The  notional  amounts,  carrying  amounts  and  estimated  fair  values  of the
Company's financial instruments at December 31 were as follows:

<TABLE>
<CAPTION>
                                                                1996                               1995
                                                ------------------------------------------------------------------------
                                                              Assets (Liabilities)               Assets (Liabilities)
                                                            -------------------------           ------------------------
                                                  Notional    Carrying      Fair      Notional   Carrying      Fair
(Dollars in millions)                              Amount      Amount      Value       Amount     Amount      Value
ASSETS
<S>                                               <C>         <C>         <C>         <C>         <C>        <C>
   Cash and cash equivalents                      $    -      $   16.9    $   16.9    $    -      $   12.6   $   12.6
   Notes receivable                                    -         308.9       317.0         -         263.5      270.0
                                                       -                                   -
LIABILITIES
   Short-term notes payable to banks                   -        (161.2)     (161.2)        -         (13.7)     (13.7)
   Long-term debt:
     Senior, excluding capital lease
       obligations                                     -      (1,136.5)   (1,154.3)        -        (976.8)  (1,025.7)
     Subordinated                                      -         (97.8)      (99.2)        -        (123.5)    (127.8)

OFF BALANCE SHEET INSTRUMENTS
   Commitments to extend credit                      (76.6)        -         (76.6)     (116.6)        -       (116.6)
   Interest rate swaps                               469.9         -          (3.1)      208.4         -        (11.8)

</TABLE>


Note 11 -- Segment Information and Concentration of Credit Risk

The  Company's  financing  and leasing  portfolio  consisted of the following at
December 31:

<TABLE>
<CAPTION>

(Dollars in millions)                                                    1996                          1995
Commercial aircraft financing:
<S>                                                            <C>               <C>         <C>                <C>
       MDC aircraft financing                                  $  1,617.5        61.5%       $  1,225.1         61.6%
       Other commercial aircraft financing                          197.4         7.5             180.6          9.1
                                                            --------------------------------------------------------------
                                                                  1,814.9        69.0           1,405.7         70.7
                                                            --------------------------------------------------------------
Commercial equipment leasing:
       Transportation equipment                                     109.1         4.2              58.3          2.9
       Printing and publishing                                       57.7         2.2              35.7          1.8
       Transportation services                                       57.2         2.2              69.3          3.5
       Other                                                        545.8        20.7             339.1         17.0
                                                            --------------------------------------------------------------
                                                                    769.8        29.3             502.4         25.2
                                                            --------------------------------------------------------------
Other                                                                44.9         1.7              80.6          4.1
                                                            --------------------------------------------------------------
Total portfolio                                                $  2,629.6       100.0%       $  1,988.7        100.0%
                                                            ==============================================================
</TABLE>

A substantial  portion of the Company's total portfolio is concentrated  among a
small number of the Company's largest commercial  aircraft financing  customers.
The single largest  commercial  aircraft financing customer accounted for $316.1
million  (12.0% of total Company  portfolio)  and $220.4 million (11.1% of total
Company  portfolio) at December 31, 1996 and 1995. The second largest commercial
aircraft financing customer accounted for $279.4 million (10.6% of total Company
portfolio) and $182.7 million (9.2% of total Company  portfolio) at December 31,
1996  and  1995.  The  five  largest  commercial  aircraft  financing  customers
accounted for $1,172.4  million  (44.6% of total Company  portfolio)  and $865.2
million  (43.5% of total  Company  portfolio)  at December 31, 1996 and 1995. At
December 31, 1996 and 1995, there were no significant concentrations by customer
within the commercial equipment leasing portfolio.

In 1996,  1995 and 1994, a single  aircraft  financing  customer  accounted  for
18.0%,  21.6% and 19.8% of the Company's  operating  income;  no other  customer
accounted for more than 10% of the Company's operating income.

The Company  generally  holds title to all leased  equipment and generally has a
perfected  security  interest  in the  assets  financed  through  note  and loan
arrangements.

Information about the Company's  operations in its different financial reporting
segments for the past three years ending December 31 is as follows:
<TABLE>
<CAPTION>

(Dollars in millions)                                                        1996             1995            1994
Operating income:
<S>                                                                       <C>             <C>              <C>
   Commercial aircraft financing                                          $     145.2     $     123.5      $     120.9
   Commercial equipment leasing                                                  68.1            52.7             49.6
   Other                                                                          7.5            12.4             15.6
   Corporate                                                                      0.7             2.0              0.7
                                                                        -------------------------------------------------
                                                                          $     221.5     $     190.6      $     186.8
                                                                        =================================================

Income (loss) before taxes on income:
   Commercial aircraft financing                                          $      55.2     $      36.2      $      26.6
   Commercial equipment leasing                                                  25.4            27.2             27.7
   Other                                                                          0.7             1.4             (5.3)
   Corporate                                                                     (6.4)           (4.5)            (7.9)
                                                                        -------------------------------------------------
                                                                          $      74.9     $      60.3      $      41.1
                                                                        =================================================

Identifiable assets at December 31:
   Commercial aircraft financing                                          $   1,844.6     $   1,443.6      $   1,364.1
   Commercial equipment leasing                                                 767.0           507.3            382.7
   Other                                                                         53.2            97.3            160.2
   Corporate                                                                      1.8             1.4             22.6
                                                                        -------------------------------------------------
                                                                          $   2,666.6     $   2,049.6      $   1,929.6
                                                                        =================================================

Depreciation expense - equipment under operating leases:
   Commercial aircraft financing                                          $      35.1     $      26.2      $      17.2
   Commercial equipment leasing                                                  22.5            22.0             22.2
   Other                                                                          -               -                0.5
                                                                        -------------------------------------------------
                                                                          $      57.6     $      48.2      $      39.9
                                                                        =================================================

Equipment acquired for operating leases, at cost:
   Commercial aircraft financing                                          $     196.9     $      85.2      $      15.7
   Commercial equipment leasing                                                 107.0            70.5             24.3
                                                                        -------------------------------------------------
                                                                                303.9     $     155.7      $      40.0
                                                                        =================================================
</TABLE>

Operating  income from  financing of assets  located  outside the United  States
totaled $45.5 million,  $45.7 million and $41.7 million in 1996,  1995 and 1994,
respectively.


<PAGE>



McDonnell Douglas Finance Corporation and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
<TABLE>
<CAPTION>

 (Dollars in millions)
                            Balance              Charged
    Allowance for             at                   to                                                           Balance
      Losses on            Beginning              Costs                                                         at End
      Financing               of                   and                                                            of
     Receivables             Year               Expenses               Other            Deductions(1)            Year

<S>     <C>            <C>                  <C>                  <C>                  <C>                  <C>
        1996           $      42.3          $      14.2          $      (1.9)         $      (6.0)         $      48.6

        1995           $      40.7          $      12.2          $       -            $     (10.6)         $      42.3

        1994           $      35.6          $       9.9          $       0.1          $      (4.9)         $      40.7

-----------------------------
<FN>
      (1) Write-offs net of recoveries
</FN>
</TABLE>



Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

         None.


                                                       Part IV

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

                                                                   Page Number
                                                                   in Form 10-K
  (a) 1.   Financial Statements:
             Report of Independent Auditors..................................23
             Consolidated Balance Sheet at December 31, 1996 and 1995........24
             Consolidated Statement of Income and Income Retained for
               Growth for the Years Ended December 31, 1996,
               1995and 1994..................................................25
             Consolidated Statement of Cash Flows for the Years Ended
               December 31, 1996, 1995 and 1994..............................26
             Notes to Consolidated Financial Statements......................27

      2.   Financial Statement Schedules:

           Schedule II -- Valuation and Qualifying Accounts..................40

           Schedules  for  which   provision  is  made  in  the  applicable
           regulation  of  the  Securities  and  Exchange  Commission  (the
           "SEC"),  except Schedule II, which is included herein, have been
           omitted because they are not required, or the information is set
           forth in the financial statements or notes thereto.

      3.   Exhibits:

      3.1  Restated  Certificate of Incorporation of the Company dated June
           29, 1989, incorporated herein by reference to Exhibit 3.1 to the
           Company's Form 10-K for the year ended December 31, 1993.

      3.2  By-Laws of the Company, as amended to date, incorporated herein by
           reference to Exhibit 3.2 to the Company's Form 10-K for the year
           ended December 31, 1993.

      4.1  Indenture,  dated as of April 1, 1983,  between  the Company and
           Bankers  Trust  Company,  incorporated  herein by  reference  to
           Exhibit 4(a) to the Company's  Form S-3  Registration  Statement
           (File No. 2-83007).

      4.2  First Supplemental Indenture, dated as of June 12, 1995, between
           the Company and Bankers Trust  Company,  incorporated  herein by
           reference to Exhibit 4(b) to the Company's Form S-3 Registration
           Statement (File No.
           33-58989).

      4.3  Subordinated  Indenture,  dated  as of  June  15,  1988,  by and
           between the Company and  Bankers  Trust  Company of  California,
           N.A.,  as  Subordinated   Indenture  Trustee,   incorporated  by
           reference to Exhibit 4(b) to the Company's Form S-3 Registration
           Statement (File No. 33-26674).

      4.4  First Supplemental Subordinated Indenture,  dated as of June 12,
           1995,  between  the  Company  and  Bankers  Trust  Company,   as
           successor Trustee to Bankers Trust Company of California,  N.A.,
           incorporated   herein  by  reference  to  Exhibit  4(d)  to  the
           Company's Form S-3 Registration Statement (File No. 33-58989).

      4.5  Indenture, dated as of April 15, 1987, incorporated herein by
           reference to Exhibit 4 to the Company's Form S-3 Registration
           Statement (File No. 33-26674).

      4.6  Form of Series II Medium Term Note, incorporated by reference to
           Exhibit 4(c) to the Form 8-K of the Company dated as of August 22,
           1983.

      4.7  Form of Series III Medium Term Note, incorporated herein by
           reference to Exhibit 4(b) to the Company's Form
           S-3 Registration Statement (File No. 2-98001).

      4.8  Form of Series V Medium Term Note, incorporated herein by reference
           to Exhibit 4(b) to the Company's Form S-3 Registration (File No.
           33-13735).

      4.9  Form of Series VI Medium Term Note, incorporated by reference to
           Exhibit 4 to the Form S-3 Registration Statement of the Company,
           as filed with the SEC on April 24, 1987.

      4.10 Form of Series VII Medium Term Note, incorporated by reference to
           Exhibit 4 to the Form S-3 Registration
           Statement of the Company, as filed with the SEC on April 24, 1987.

      4.11 Form of Series VIII Senior Medium Term Note, incorporated herein by
           reference to Exhibit 4(c) to the Company's Form S-3 Registration
           Statement (File No. 33-26674).

      4.12 Form of Series VIII Subordinated Medium Term Note, incorporated
           herein by reference to Exhibit 4(d) to the Company's Form S-3
           Registration Statement (File No. 33-26674).

      4.13 Form of Series IX Senior Medium Term Note, incorporated herein by
           reference to Exhibit 4(c) to the Company's Form S-3 Registration
           Statement (File No. 33-31419).

      4.14 Form of  Series  IX  Senior  Federal  Funds  Medium  Term  Note,
           incorporated   herein  by  reference  to  Exhibit  4(d)  of  the
           Company's Form 8-K dated May 16, 1995.

      4.15 Form of Series IX Subordinated Medium Term Note, incorporated herein
           by reference to Exhibit 4(d) to the Company's Form S-3 Registration
           (File No. 33-31419).

      4.16 Form of General Term Note(R), incorporated herein by reference to
           Exhibit 4(c) to the Company's Form 8-K dated May 26, 1993.

      4.17 Form of Series X Senior Fixed Rate Medium Term Note, incorporated
           herein by reference to Exhibit 4(e) to the
           Company's Form S-3 Registration Statement (File No. 33-58989).

      4.18 Form of Series X Senior Floating Rate Medium Term Note, incorporated
           herein by reference to Exhibit 4(h) to the Company's Form S-3
           Registration Statement (File No. 33-58989.)

      4.19 Form of series X  Subordinated  Fixed  Rate  Medium  Term  Note,
           incorporated   herein  by  reference  to  Exhibit  4(f)  to  the
           Company's Form S-3 Registration Statement (File No. 33-58989).

      4.20 Form of Series X Subordinated Floating Rate Medium Term Note,
           incorporated herein by reference to Exhibit 4(g) to the Company's
           Form S-3 Registration Statement (File No. 33-58989).

Pursuant to Item 601  (b)(4)(iii)  of Regulation  S-K, the Company is not filing
certain  instruments with respect to its long-term debt because the total amount
of securities  currently  provided for under each of such  instruments  does not
exceed 10 percent of the total assets of the Company and its  subsidiaries  on a
consolidated  basis.  The  Company  hereby  agrees to furnish a copy of any such
instrument to the SEC upon request.

      10.1      Amended and Restated Operating Agreement,  dated as of April 12,
                1993,   among   McDonnell   Douglas,   the   Company  and  MDFS,
                incorporated   herein  by  reference  to  Exhibit  10.1  to  the
                Company's Form 10-K for the year ended December 31, 1993.

      10.2      Operating  Agreement,  effective as of February 8, 1989,  by and
                between the Company and MDFS,  incorporated  herein by reference
                to Exhibit  10.3 to the  Company's  Form 10-K for the year ended
                December 31, 1989.

      10.3      By-Laws  of  McDonnell  Douglas,   as  amended  March  6,  1996,
                incorporated by reference from McDonnell  Douglas's  Exhibit 3.2
                to its Form 10-K  Report for the year ended  December  31,  1995
                (file No. 1-3685).

      10.4      Supplemental Guaranty Agreement,  dated as of December 30, 1993,
                by and between the Company and McDonnell  Douglas,  incorporated
                herein by reference to Exhibit 10.4 to the  Company's  Form 10-K
                for the year ended December 31, 1993.

      10.5      Amendment No. 1 to Supplemental Guaranty Agreement, dated as
                of March  28, 1996.

      10.6      Guaranty Amendment Agreement, dated as of June 28, 1996, by and
                between the Company and McDonnell Douglas.

      10.7      Supplemental Guaranty Agreement,  dated as of December 30, 1993,
                by and between the Company and McDonnell  Douglas,  incorporated
                herein by reference to Exhibit 10.5 to the  Company's  Form 10-K
                for the year ended December 31, 1994.

      10.8      Amendment No. 1 to Supplemental Guaranty Agreement, dated as of
                March 28, 1996, between the Company and McDonnell Douglas.

      10.9      Agreement,  dated as of December  30,  1994,  by and between the
                Company and McDonnell Douglas  incorporated  herein by reference
                to Exhibit  10.6 to the  Company's  Form 10-K for the year ended
                December 31, 1994.

      10.10     Credit  Agreement,  dated as of September  29,  1994,  among the
                Company,  MDFS and the banks listed therein  incorporated herein
                by reference to Exhibit 10.7 to the Company's  Form 10-K for the
                year ended December 31, 1994.

      10.11     Amendment  No.  1,  dated  as of  August  31,  1995,  to  Credit
                Agreement,  dated as of September  29, 1994,  among the Company,
                MDFS  and the  banks  listed  therein,  incorporated  herein  by
                reference  to  Exhibit  10 to the  Company's  Form  10-Q for the
                quarterly period ended September 30, 1995.

      10.12     Amendment  No.  2,  dated  as of  August  16,  1996,  to  Credit
                Agreement,  dated as of September  29, 1994,  among the Company,
                MDFS and the banks listed therein,  incorporated by reference to
                Exhibit 10 to the Company's  Form 10-Q for the quarterly  period
                ended September 30, 1996.

      12        Statement regarding computation of ratio of earnings to fixed
                charges.

      23.1      Consent of Ernst & Young LLP.

      27        Financial Data Schedule.

  (b) Reports on Form 8-K

                None.


<PAGE>


                                   Signatures


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

                               McDonnell Douglas Finance Corporation

                               By   /s/ STEVEN W. VOGEDING
                                    ----------------------------------
                                    Steven W. Vogeding
March 31, 1997                      Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the registrant and in the
capacities and on the dates indicated.

            Signature                        Title                 Date


       /s/ JAMES F. PALMER                                    March 31, 1997
----------------------------------                            --------------
         James F. Palmer            Chairman and Director


    /s/ THOMAS J. MOTHERWAY
----------------------------------
       Thomas J. Motherway          President and Director    March 31, 1997
                                                            --------------
  (Principal Executive Officer)


     /s/ STEVEN W. VOGEDING
----------------------------------
       Steven W. Vogeding           Vice President and        March 31, 1997
                                    Chief Financial Officer   --------------
  (Principal Financial Officer)


      /s/ F. MARK KUHLMANN                                    March 31, 1997
----------------------------------                            --------------
        F. Mark Kuhlmann            Director


----------------------------------                            --------------
        Michael M. Sears            Director


     /s/ MAURA R. MIZUGUCHI                                   March 31, 1997
----------------------------------                            --------------
       Maura R. Mizuguchi           Controller
 (Principal Accounting Officer)

     /s/ DANIEL O. ANDERSON                                   March 31, 1997
----------------------------------                            --------------
       Daniel O. Anderson           Vice President -
                                    Operations and Director