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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, 1998

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                           BOEING CAPITAL 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, 1999,  there were 50,000  shares of the  Company's  common stock
outstanding.

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

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<PAGE>



                                Table of Contents


<TABLE>
<CAPTION>
<S>     <C>                                                               <C>
                                                                         Page  
   Item 1.     Business.....................................................3
   Item 2.     Properties..................................................17
   Item 3.     Legal Proceedings...........................................17
   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.....................................................19
   Item 6.     Selected Financial Data.....................................20
   Item 7.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations...................................21
   Item 8.     Financial Statements and Supplementary Data.................25
   Item 9.     Changes in and Disagreements with Accountants on Accounting
               1and Financial Disclosure...................................44

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.
               .............................................................45
               Signatures...................................................49
               Exhibits.....................................................50


---------------------------------
*Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
</TABLE>


<PAGE>


                                     Part I

Item 1.  Business

General

Boeing Capital  Corporation  (formerly  McDonnell  Douglas Finance  Corporation)
(together with its subsidiaries  the "Company") is a wholly-owned  subsidiary of
Boeing Capital  Services  Corporation  ("BCSC"),  a  wholly-owned  subsidiary of
McDonnell  Douglas  Corporation   ("McDonnell   Douglas"),   which  in  turn  is
wholly-owned by The Boeing Company  ("Boeing").  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  and  financing.  The  Company's  strategy  is to
generate  and  participate  in  finance  transactions  in  which  the  Company's
structuring  and  analysis  can provide  high  returns on its  invested  equity.
Currently,  the commercial aircraft financing group is active in providing lease
and debt financing to domestic and  international  airlines,  and the Company is
active in providing  lease and debt financing to a broad range of commercial and
industrial customers. At December 31, 1998, the Company had 69 employees.

On August 1, 1997, the Boeing-McDonnell  Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996,  among Boeing,
West  Acquisition  Corp.,  a  wholly-owned  subsidiary  of Boeing  ("Sub"),  and
McDonnell  Douglas  (the  "Merger  Agreement").  Under the  terms of the  Merger
Agreement,  Sub was  merged  into  McDonnell  Douglas,  with  McDonnell  Douglas
surviving as a wholly-owned subsidiary of Boeing.

The many possible ramifications of strategic decisions to be made by Boeing with
respect  to  the  Company  are  currently  unknown  and,  therefore,  cannot  be
quantified  at  this  time.  Boeing  is  actively  conducting  a  review  of the
operations and the strategic value of the Company,  which review could lead to a
decision to divest all or part of the Company's  assets or to sell the Company's
stock, presently held indirectly by Boeing.

Boeing has  announced  that it will not produce MD-80 and MD-90  aircraft  after
early 2000.  Boeing has also stated that it plans to phase out production of the
MD-11  aircraft,  with final  deliveries  now scheduled for 2001.  The Company's
commercial aircraft portfolio as of December 31, 1998 included 32 MD-80s,  three
MD-90s and five MD-11s,  representing  an aggregate of $963.8 million in net
asset value (34.4% of total Company portfolio).  The  Company's  commercial
aircraft portfolio as of December 31, 1997 included 33 MD-80s,  three MD-90s and
seven MD-11s,  representing  an aggregate of $1,176.1 million in net asset
value (43.6% of total Company portfolio). The Company periodically  reviews the 
carrying and residual  values of all  aircraft in its portfolio.  Such  reviews
include the effects,  if any, of the foregoing announcements as they become 
known or can be reasonably  estimated.  While management  believes that current
booked residual values are conservative, significant  declines in market value 
could impact the gain or loss on disposition of these aircraft.

The Company now  operates  in  principally  two  segments:  commercial  aircraft
financing and commercial equipment leasing and financing ("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.  At December 31, 1998 and 1997,  the portfolio
balances  for  non-core  businesses  totaled  $1.4  million  and $12.2  million,
respectively.

Information  on the  Company's  principal  segments is included in the following
tables.

New Business Volume
<TABLE>
<CAPTION>                                                                             Years ended December 31,
                                                    ----------------------------------------------------------------------------
(Dollars in millions)                                   1998           1997           1996           1995             1994
<S>                                                 <C>            <C>             <C>           <C>             <C>         
Commercial aircraft financing                       $     201.6    $      176.3    $     475.3   $      349.7    $      117.9
Commercial equipment leasing                              491.0           414.8          392.0          241.1            84.1
                                                    ----------------------------------------------------------------------------
                                                    $     692.6    $      591.1    $     867.3   $      590.8    $      202.0
                                                    ============================================================================
</TABLE>


<TABLE>
<CAPTION>

Portfolio Balances
                                                                                   December 31,
                                                    ----------------------------------------------------------------------------
(Dollars in millions)                                   1998            1997           1996           1995            1994
<S>                                                 <C>            <C>             <C>            <C>             <C>        
Commercial aircraft financing                       $   1,573.5    $   1,711.5     $   1,814.9    $    1,405.7    $   1,333.0
Commercial equipment leasing                            1,225.0          976.6           769.8           502.4          369.4
                                                    ----------------------------------------------------------------------------
                                                    $   2,798.5    $   2,688.1     $   2,584.7    $    1,908.1    $   1,702.4
                                                    ============================================================================
</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. A substantial
majority  of the value of the  commercial  aircraft  portfolio  is derived  from
aircraft  manufactured  by  McDonnell  Douglas.  The  Company's  strategy  is to
generate  and  participate  in  finance  transactions  in  which  the  Company's
structuring  and  analysis  can provide  high  returns on its  invested  equity.
Currently,  the commercial aircraft financing group is active in providing lease
and debt financing to domestic and international airlines.

The Company has not been involved in the  financing of any new  Boeing/McDonnell
Douglas aircraft subsequent to the  Boeing-McDonnell  Douglas merger (except for
one unusual  instance  where the Company  provided  financing for one Boeing 737
aircraft in response to a third party's request). Under Boeing's strategy (which
is currently  under  review),  the Company  does not expect  Boeing to provide a
material amount of new aircraft financing opportunities.  In addition to the new
Boeing 737  discussed  above,  the  Company has  financed  seven used Boeing 737
aircraft,  two used  Boeing  767  aircraft  and one  used  Boeing  757  aircraft
subsequent to the  Boeing-McDonnell  Douglas merger. It is the present intent of
the  Company's  management  to achieve more balance in the  commercial  aircraft
portfolio between Boeing and McDonnell Douglas aircraft.

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

Commercial Aircraft Portfolio by Aircraft Type
                                                                               December 31,
                                                 -------------------------------------------------------------------------
(Dollars in millions)                               1998           1997           1996           1995           1994

<S>                                              <C>           <C>            <C>            <C>            <C>       
Boeing/McDonnell Douglas aircraft
   financing:
     Finance leases                               $     803.3   $     964.9    $    1,132.6   $     857.4    $     748.2
    Operating leases                                   513.3         495.2           402.0         256.8          197.8
    Notes receivable                                    82.9          61.9            82.9         110.9          194.8
                                                 -------------------------------------------------------------------------
                                                     1,399.5       1,522.0         1,617.5       1,225.1        1,140.8
                                                 -------------------------------------------------------------------------

Other commercial aircraft financing:
   Finance leases                                      131.6         133.3           136.9         126.1          125.2
   Operating leases                                     30.4          51.9            56.0          49.6           43.1
   Notes receivable                                     12.0           4.3             4.5           4.9           23.9
                                                 -------------------------------------------------------------------------
                                                       174.0         189.5           197.4         180.6          192.2
                                                 -------------------------------------------------------------------------
                                                 $   1,573.5   $   1,711.5    $    1,814.9   $   1,405.7    $   1,333.0
                                                 =========================================================================
</TABLE>

Commercial Aircraft Portfolio by Product Type
<TABLE>
<CAPTION>
                                                                               December 31,
                                                 -------------------------------------------------------------------------
(Dollars in millions)                               1998           1997           1996           1995           1994
<S>                                              <C>           <C>            <C>            <C>             <C> 
Aircraft leases:
    Finance leases
      Domestic                                   $     786.9   $     863.1    $      950.0   $     776.2     $     653.3
      Foreign                                          148.0         235.1           319.5         207.3           220.1
    Operating leases
      Domestic                                         357.9         319.2           357.2         183.5           161.9
      Foreign                                          185.8         227.9           100.8         122.9            79.0
                                                 -------------------------------------------------------------------------
                                                     1,478.6       1,645.3         1,727.5       1,289.9         1,114.3
                                                 -------------------------------------------------------------------------
Aircraft related notes receivable:
    Domestic obligors                                   33.5           2.2            22.6          31.2            53.4
    Foreign obligors                                    61.4          64.0            64.8          84.6           165.3
                                                 -------------------------------------------------------------------------
                                                        94.9          66.2            87.4         115.8           218.7
                                                 -------------------------------------------------------------------------
                                                 $   1,573.5   $   1,711.5    $    1,814.9   $   1,405.7     $   1,333.0
                                                 =========================================================================
</TABLE>

At December 31, 1998, the Company's  commercial aircraft portfolio was comprised
of finance leases to 27 customers (23 domestic and four foreign) with a carrying
amount of $934.9 million (33.4% of total Company  portfolio),  notes  receivable
from five customers  (two domestic and three foreign) with a carrying  amount of
$94.9  million  (3.4% of total Company  portfolio)  and  operating  leases to 16
customers  (12  domestic  and four  foreign)  with a  carrying  amount of $543.7
million (19.4% of total Company portfolio).

At December  31,  1998,  50.0% of the  Company's  total  portfolio  consisted of
financings related to Boeing/McDonnell Douglas aircraft, compared with 56.4% and
61.5% in 1997 and 1996, respectively.

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 $895.4 million
   (32.0% of total Company portfolio) and $994.4 million (36.8% of total Company
   portfolio) at December 31, 1998 and 1997, respectively.

   The  Company's  largest  customer,  Federal  Express  Corporation  ("FedEx"),
   accounted for $303.0  million  (10.8% of total Company  portfolio) and $309.7
   million  (11.5% of total  Company  portfolio)  at December 31, 1998 and 1997,
   respectively.  On June 26,  1998,  FedEx  gave  notice to the  Company of its
   intention to  terminate  early (in late 1999) two lease  agreements  covering
   MD-11  freighter  aircraft  which FedEx leases from the Company.  Even if the
   leases are in fact  terminated  early,  the Company does not  anticipate  any
   material  adverse  effect on its  earnings,  cash flow or financial  position
   taking  into  account  current  demand  for the  aircraft,  a  guaranty  from
   McDonnell Douglas and certain other contractual rights including payments due
   to the Company upon early  termination,  as well as a commitment from another
   airline to lease the aircraft for a pre-determined rental amount.

   The  Company's  second  largest  customer,  World  Airways,  Inc.  ("World"),
   accounted for $176.4  million (6.3% of total Company  portfolio)  and $183.5
   million  (6.8% of total  Company  portfolio)  at December 31, 1998 and 1997,
   respectively.  World  experienced  losses in 1998 and its cash balances have
   fallen to relatively low levels. Also, Worldcorp Inc., the majority owner of
   World, has recently made a "prepackaged" filing under Chapter 11 of the U.S.
   bankruptcy code. With respect to the existing lease agreements between World
   and the Company,  World has requested that the Company  consider a reduction
   in rentals,  elimination of maintenance  reserve  payments and conversion of
   the subject two MD-11 aircraft to a freighter configuration.  The Company is
   studying these  requests and has concluded that any resulting  restructuring
   of these lease  transactions,  taking into account a guaranty from McDonnell
   Douglas,  is not expected to have a material adverse effect on the Company's
   earnings, cash flow or financial position.

   Trans World Airlines,  Inc.  ("TWA"),  the Company's third largest  customer,
   accounted for $163.3  million (5.8% of total  Company  portfolio)  and $196.6
   million  (7.3% of total  Company  portfolio)  at December  31, 1998 and 1997,
   respectively.  In 1998,  1997 and 1996,  TWA accounted  for 13.6%,  16.8% and
   18.0%,  respectively,  of the Company's  operating  income; no other customer
   accounted  for more than 10% of the  Company's  operating  income.  TWA faces
   significant  financial  and  operational   challenges  and,  until  recently,
   operated  under  a  reorganization   plan  confirmed  by  the  United  States
   Bankruptcy  Court in  1995.  McDonnell  Douglas  provides  guaranties  to the
   Company for certain  obligations  of TWA under the various  lease  agreements
   between the Company and TWA. At  December  31,  1998,  the maximum  aggregate
   coverage under such guaranties was $32.9 million.  As of the date hereof, TWA
   is  current on its  obligations  to the  Company.  If,  however,  TWA were to
   default on its obligations to the Company, this could have a material adverse
   effect on the Company's earnings, cash flow or financial position.

   In July 1998, the Company  terminated  early a lease agreement  covering one
   used DC-10-30  aircraft.  The Company has repossessed  such aircraft and has
   been  remarketing  it in a currently  weak market for this type of aircraft.
   Taking into account a guaranty from McDonnell  Douglas,  this transaction is
   not expected to have a material  adverse  effect on the Company's  earnings,
   cash flow or financial position.

   The Company had leased six Embraer EMB-120 aircraft to Westair.  As a result
   of  Westair's  cessation  of  operations  at the end of May 1998,  the lease
   agreements for such aircraft have been terminated and the aircraft have been
   returned to the Company.  The Company has been  remarketing  these  aircraft
   (along with two other used EMB-120s returned from another airline). Although
   the market for EMB-120s is currently  weak, the Company does not expect this
   transaction  to have a material  adverse  effect on the Company's  earnings,
   cash flow or financial position.

   The $100.0 million used aircraft  purchase  bridge facility made available by
   the Company to AirTran Airlines ("AirTran"), formerly ValuJet Airlines, Inc.,
   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 AirTran of
   the first scheduled new Boeing 717-200  (formerly 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, 1998 or 1997.

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  Commercial  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.

   Boeing has announced  that it will not produce MD-80 and MD-90 aircraft after
   early 2000.  Boeing has also stated that it plans to phase out  production of
   the MD-11  aircraft  with  final  deliveries  now  scheduled  for  2001.  The
   Company's  commercial  aircraft portfolio as of December 31, 1998 included 32
   MD-80s,  three MD-90s and five MD-11s, representing an aggregate of $963.8
   million in net asset value (34.4% of total Company portfolio).  The Company's
   commercial aircraft  portfolio as of December  31, 1997  included 33 MD-80s,
   three MD-90s and seven MD-11s,  representing  an aggregate of $1,176.1
   million in net asset value (43.6% of total Company portfolio). The Company 
   periodically reviews the carrying and residual values of all aircraft in its
   portfolio. Such  reviews  include  the  effects,  if any,  of the  foregoing
   announcements  as they become  known or can be  reasonably  estimated.  While
   management  believes that current booked  residual  values are  conservative,
   significant  declines  in  market  value  could  impact  the  gain or loss on
   disposition of these aircraft.

   Results in 1998 for  Asia-Pacific  airlines  were mixed.  Recessions  are now
   under way throughout Asia,  impacting the economies of Japan,  Malaysia,  the
   Philippines,  Hong Kong, Singapore,  Indonesia, Thailand and South Korea. Air
   travel  declined  in a number of regional  markets.  Passenger  load  factors
   declined and some  airlines  reported  net losses.  With growth in the region
   lower  than  past  forecasts,   airlines,   including  those  in  China,  are
   reassessing  the number and timing of aircraft  contracted to deliver  during
   the next several  years.  Except for the lease of the two Boeing 737 aircraft
   leased to Jet Airways  (India)  Pvt.  Ltd.  discussed in  "Relationship  With
   Boeing and McDonnell  Douglas," the Company has no commercial aircraft leased
   to airlines in the Asia-Pacific region.

   For further  discussion on the commercial jet aircraft  market and the
   airline  industry,  see  "Competition  and Economic
   Factors."

o  Commercial 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,
   1998,  the  Company  owned or  participated  in the  ownership  of 132 leased
   commercial  aircraft,  a majority  of which were  manufactured  by  McDonnell
   Douglas.

o  Factors Affecting Commercial Aircraft Financing Volume

   The Company's commercial aircraft group has historically derived the majority
   of its new business  volume by financing  new  McDonnell  Douglas  aircraft.
   Following the  Boeing-McDonnell  Douglas merger, this source of new business
   has not been available to the Company and, accordingly,  the Company has not
   financed any new  Boeing/McDonnell  Douglas aircraft (except for one unusual
   instance where the Company provided financing for one Boeing 737 aircraft in
   response to a third party's  request).  Under  Boeing's  strategy  (which is
   currently  under  review),  the Company does not expect  Boeing to provide a
   material amount of new aircraft financing  opportunities.  See "Relationship
   with Boeing and McDonnell Douglas."

   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 anticipates continued  fluctuations in the volume of its aircraft
   financing  transactions.  At December 31, 1998, 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, 1998.
   See "Competition and Economic Factors."

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

<TABLE>
<CAPTION>
                                                                     Years ending December 31,
                                             ---------------------------------------------------------------------------
  (Dollars in millions)                         1998            1997           1996           1995            1994
  Boeing/McDonnell Douglas aircraft
    financing volume:
<S>                                          <C>            <C>            <C>            <C>             <C>        
      Finance leases                         $     78.3     $       7.1    $     234.1    $      220.6    $      53.0
      Operating leases                             75.3           146.5          196.9            81.9           15.7
      Notes receivable                             25.5            18.2           24.2            36.2           41.3
                                             ---------------------------------------------------------------------------
                                                  179.1           171.8          455.2           338.7          110.0
                                             ---------------------------------------------------------------------------
Other commercial aircraft
    financing volume:
      Finance leases                               22.5             4.5           20.1             7.7            7.9
      Operating leases                              -               -              -               3.3            -
                                             ---------------------------------------------------------------------------
                                                   22.5             4.5           20.1            11.0            7.9
                                             ---------------------------------------------------------------------------
                                             $    201.6     $     176.3    $     475.3    $      349.7    $     117.9
                                             ===========================================================================
</TABLE>

   In 1998,  $143.1 million of the $179.1 million in  Boeing/McDonnell  Douglas
   aircraft  financing volume related to Boeing  aircraft.  There are no Boeing
   commercial  aircraft in the Company's  portfolio from transactions  prior to
   1997. There are no Airbus aircraft in the Company's portfolio.

o  Commercial Aircraft Financing Guaranties

   At December 31, 1998,  the Company had $319.7 of guaranties in its favor with
   respect  to  its  commercial   aircraft   financing   portfolio  relating  to
   transactions  with  a  carrying  amount  of  $881.6  million  (56.0%  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                                         $       206.9         $        77.6       $       284.5
   Other                                                              23.2                  12.0                35.2
                                                             -----------------------------------------------------------
                                                             $       230.1         $        89.6       $       319.7
                                                             ===========================================================
</TABLE>

The Company has no reason to believe  that the amounts  guaranteed  by McDonnell
Douglas will be  ultimately  uncollectible.  See  "Relationship  with Boeing and
McDonnell Douglas."

Commercial Equipment Leasing and Financing Segment

The CEL group provides single-investor, tax-oriented lease financing, as well as
loans secured by equipment.  In addition,  the CEL group  participates in senior
secured  bank  loans.  CEL  obtains  its  business   primarily   through  direct
solicitation by its marketing  personnel and maintains its principal  operations
in Long Beach, California with marketing offices in Atlanta,  Georgia;  Chicago,
Illinois;  and Detroit,  Michigan.  CEL  specializes in leasing and financing of
commercial   equipment  such  as  executive  aircraft,   production   equipment,
transportation equipment,  printing equipment and other types of equipment which
it believes will maintain  strong  collateral and residual  values.  The term is
generally  between  three and ten  years and  transaction  sizes  usually  range
between $2.0 million and $30.0 million.

Portfolio balances for the Company's CEL segment are summarized as follows:
<TABLE>
<CAPTION>

                                                                               December 31,
                                                 -------------------------------------------------------------------------
(Dollars in millions)                                 1998          1997          1996           1995           1994
<S>                                              <C>          <C>            <C>           <C>            <C>         
Finance leases                                   $     430.1  $     410.9    $      361.7  $      266.3   $      216.8
Operating leases                                       345.5        375.1           231.5         169.1          133.4
Notes receivable                                       449.4        190.6           176.6          67.0           18.5
Preferred and preference stock                           -            -               -             -              0.7
                                                 --------------------------------------------------------------------------
                                                 $   1,225.0  $     976.6    $      769.8  $      502.4   $      369.4
                                                 =========================================================================
</TABLE>

o  Factors Affecting CEL Volume

   The  particular  portion of the  commercial  equipment  leasing and financing
   market in which the Company operates is highly competitive. However, in 1998,
   CEL  booked  $491.0  million of new  business  volume,  representing  a $76.2
   million increase  (18.4%) over 1997 bookings.  As shown in the table below, a
   significant  portion  of the new CEL  business  volume  in  recent  years has
   consisted  of  secured  loans  rather  than lease  financings.  Of the $491.0
   million  in new  business  volume  for  CEL in  1998,  $36.7  million  (7.5%)
   represented  business  with foreign  lessees or  borrowers.  In 1997,  of the
   $414.8  million  in new  business  volume  for  CEL,  $58.8  million  (14.2%)
   represented  business with foreign lessees or borrowers.  For a discussion of
   additional  risks  associated  with  foreign  financing,   see  "Cross-Border
   Outstandings."  At December  31, 1998,  CEL's  backlog of business was $163.3
   million,  compared  to $79.7  million at December  31,  1997.  The  Company's
   ability to compete in the commercial  equipment  leasing and financing market
   is dependent to a significant  extent upon its  comparative  borrowing  costs
   relative to  competitors.  The  Company's  borrowing  costs  increased in the
   second half of 1998. See "Borrowing Operations."

   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

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

<TABLE>
<CAPTION>
                                                                     Years ended December 31,
                                        ----------------------------------------------------------------------------------
(Dollars in millions)                        1998             1997             1996             1995             1994
<S>                                     <C>              <C>             <C>              <C>              <C>         
Finance leases                          $       91.8     $      109.5    $       160.9    $       102.0    $       53.9
Operating leases                                81.9            199.7            107.0             70.5            24.3
Notes receivable                               317.3            105.6            124.1             68.6             5.9
                                        ----------------------------------------------------------------------------------
                                        $      491.0     $      414.8    $       392.0    $       241.1    $       84.1
                                        ==================================================================================
</TABLE>

o  Factors Affecting the CEL Portfolio

   The  Company's  CEL  portfolio  is  diversified  among  executive   aircraft,
   production equipment, transportation equipment, printing equipment, and other
   equipment  types.  Executive  aircraft  represent the highest  concentration,
   accounting for $326.2  million (11.7% of total Company  portfolio) and $342.3
   million  (12.7% of total  Company  portfolio)  at December 31, 1998 and 1997,
   respectively.  At  December  31,  1998  and  1997,  no  single  CEL  customer
   represented a significant portion of the Company's total portfolio. Executive
   aircraft financing, as well as the rest of the CEL portfolio, is dependent in
   part upon general economic  conditions which may affect the  profitability of
   the Company's  customers and residual value of the equipment  financed by the
   CEL group. The Company believes that realizable  values at lease maturity for
   its  commercial  equipment  are  generally  likely to remain above the values
   actually booked, but this is subject to many uncertainties including economic
   conditions.

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.

Approximately 17.9% of the total Company portfolio consisted of amounts due from
customers  outside the United  States.  Substantially  all of these  amounts are
payable  in U.S.  dollars,  and,  in  management's  opinion,  related  risks are
adequately covered by guaranties and allowance for losses.  Overall, the Company
has not experienced  materially  adverse  financial  consequences as a result of
sales and financing activities outside the United States. 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, 1998,  1997
and 1996:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                           -----------------------------------------------------------------
                                                            Finance Leases       Notes         Operating
(Dollars in millions)                                                         Receivable        Leases           Total
Country
1998
<S>                                                        <C>              <C>             <C>             <C>         
Mexico                                                     $      132.8     $       48.0    $        -      $      180.8
India                                                               -                -              48.6            48.6
Italy                                                               -                2.6            34.9            37.5
Sweden                                                              -                -              50.1            50.1
Spain                                                               -                -              36.4            36.4
                                                           -----------------------------------------------------------------
                                                           $      132.8     $       50.6    $      170.0    $      353.4
                                                           -----------------------------------------------------------------

1997
Indonesia                                                  $      110.5     $        -      $        -      $      110.5
Mexico                                                             50.1             54.1             -             104.2
Sweden                                                              -                -              55.1            55.1
India                                                               -                -              50.4            50.4
Italy                                                               -                3.5            39.8            43.3
Spain                                                               -                -              39.4            39.4
United Kingdom                                                     10.9              -              28.2            39.1
                                                           -----------------------------------------------------------------
                                                           $      171.5     $       57.6    $      212.9    $      442.0
                                                           =================================================================

1996
Indonesia                                                  $      120.8     $        -      $        -      $      120.8
Mexico                                                             27.0             31.2            13.2            71.4
Italy                                                               -                -              44.4            44.4
                                                           -----------------------------------------------------------------
                                                           $      147.8     $       31.2    $       57.6    $      236.6
                                                           =================================================================
</TABLE>

At December 31, 1998, the Company had customer outstandings between 0.75% and 1%
of the  Company's  total  assets  in Canada  and the  United  Kingdom,  with net
carrying  value amounts of $25.6  million and $25.1  million,  respectively.  At
December  31,  1997  and  1996,  there  were  no  countries  in  which  customer
outstandings were 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, 1998:
<TABLE>
<CAPTION>

(Dollars in millions)                                                        Domestic          Foreign           Total
                                                                           -------------------------------------------------
Maturity Distribution
<S> <C>                                                                    <C>              <C>             <C>          
    1999                                                                   $      301.6     $       29.8    $       331.4
    2000                                                                          201.3             30.0            231.3
    2001                                                                          197.6             33.5            231.1
    2002                                                                          185.3             28.1            213.4
    2003                                                                          176.0             37.3            213.3
    2004 and thereafter                                                           920.9            162.0          1,082.9
                                                                           -------------------------------------------------
                                                                           $    1,982.7     $      320.7    $     2,303.4
                                                                           =================================================

Financing Receivables due 2000 and Thereafter
    Fixed interest rates                                                   $    1,494.6     $      208.0    $     1,702.6
    Variable interest rates                                                       186.5             82.9            269.4
                                                                           -------------------------------------------------
                                                                           $    1,681.1     $      290.9    $     1,972.0
                                                                           =================================================
</TABLE>

Allowance for Losses on Financing Receivables and Credit Loss Experience

Analysis of Allowance for Losses on Financing Receivables

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                      ---------------------------------------------------------------------------
(Dollars in millions)                                    1998             1997          1996          1995            1994
<S>                                                   <C>              <C>            <C>          <C>            <C>
Allowance for losses on financing      
   receivables at beginning of year                   $      55.9      $      48.6    $    42.3    $     40.7     $     35.6
Provision for losses                                          7.4             11.5         14.2          12.2            9.9
Write-offs, net of recoveries                                (2.5)            (2.5)        (6.0)        (10.6)          (4.9)
Other                                                         1.3             (1.7)        (1.9)          -              0.1
                                                      ===========================================================================
Allowance for losses on financing
   receivables at end of year                         $      62.1      $      55.9    $    48.6    $     42.3     $     40.7
                                                      ===========================================================================

Allowance as percent of total receivables                          %               %            %              %             %
                                                              3.3              3.1          2.5           2.8            2.8
Net write-offs as percent of average receivables              0.1  %           0.1 %        0.3 %              %         0.3 %
                                                                                                          0.7
More than 90 days delinquent:
   Amount of delinquent installments                  $       0.5      $       1.8    $     2.1    $     10.0     $      2.8
   Total receivables due from delinquent
      obligors                                        $       6.7      $      15.5    $    23.4    $     12.1     $     43.2
   Total receivables due from delinquent
      obligors as a percentage of total
      receivables                                             0.4  %           0.9 %        1.2 %         0.8  %         3.0  %
</TABLE>

The  portfolio  at December  31, 1998  includes  one CEL obligor and two airline
obligors to which payment  extensions  have been granted.  At December 31, 1998,
payments so extended  amounted to $1.2 million ($1.1  million  airline-related),
and the aggregate  carrying amount of the related  receivables was $18.8 million
($15.5 million airline-related).

Receivable Write-offs, Net of Recoveries by Segment

CEL had $2.3 million in net write-offs (0.3% of CEL average receivables),  while
commercial  aircraft financing had no net write-offs of receivables for the year
ended December 31, 1998. The Company's primary  operations had no net write-offs
of receivables for the year ended December 31, 1997.

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 $7.4 million and $11.5 million in 1998 and 1997, respectively,  for
losses.  The  Company  believes  that the  allowance  for  losses  on  financing
receivables  is adequate at December 31, 1998 to cover  potential  losses in the
Company's total receivables.  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,  increased in 1998, as
compared to 1997,  primarily  attributable  to certain CEL  repossessions  which
occurred in 1998.

Nonaccrual and Past Due Financing Receivables

Financing  receivables accounted for on a nonaccrual basis consisted of domestic
financings  of $13.0  million and $1.4  million at  December  31, 1998 and 1997,
respectively.  There were no foreign  financing  receivables  on  nonaccrual  at
December 31, 1998 or December 31, 1997.

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 $0.2
million and $4.6 million at December 31, 1998 and 1997, respectively.

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 $240.0  million,  reduced by borrowings of up to $16.0 million that
can be made by BCSC under this agreement.  At December 31, 1998 and 1997,  there
were no amounts  outstanding under the revolving credit  agreement.  At December
31, 1998 and 1997, borrowings under commercial paper totaling $122.0 million and
$80.0  million,  respectively,  were supported by available  unused  commitments
under  the  revolving   credit   agreement.   The  Company  also  has  available
approximately $85.0 million in uncommitted, short-term bank credit facilities.

On October  10,  1997,  the  Company  filed  with the  Securities  and  Exchange
Commission  ("Commission") a Form S-3 Registration  Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997,  the  Commission  declared such  Registration  Statement to be
effective.  Since October 1997, the Company has authorized the sale and issuance
from time to time at the Company's  discretion  of up to $900.0  million of such
debt securities in the form of the Company's  Series X medium-term  notes. As of
December 31, 1998,  the Company had issued and sold $571.4  million in aggregate
principal  amount of such notes,  with $406.4  million of the notes being issued
during 1998 at interest  rates  ranging from 5.35% to 6.54% and with  maturities
ranging from 10 months to 10 years.

During the second half of 1998, the Company's  borrowing rates were increased by
virtue of a  significant  increase  in the  spreads  required  to be paid by the
Company over rates for comparable  U.S.  Treasury  Notes.  Such higher rates can
reasonably   be   expected   to  have  a  negative   impact  on  the   Company's
competitiveness  as a financier on  transactions  where the Company is unable to
pass  through to customers  such  increased  rates.  These  increased  borrowing
spreads  and  consequent  higher  interest  rates  were  caused by a variety  of
factors,  including without limitation the Company's credit rating downgrade and
outlook change  discussed below and the  uncertainty of the Company's  strategic
fit at Boeing, as well as general financial market conditions.

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

(Dollars in millions)
                            Average         Average            Average
         Years ended      Short-Term       Long-Term           Total
        December 31,         Debt            Debt              Debt
            1998         $     134.6    $     1,646.2    $    1,780.8
            1997               114.0          1,606.2         1,720.2
            1996                49.5          1,501.0         1,550.5
            1995                71.4          1,183.6         1,225.0
            1994               108.0          1,167.3         1,275.3

The weighted average interest rates on all outstanding indebtedness computed for
the relevant period were as follows:

                          Weighted Average   Weighted Average  Weighted Average
         Years ended         Short-Term          Long-Term        Total Debt
        December 31,        Interest Rate      Interest Rate    Interest Rate
            1998                5.83%             7.21%             7.12%
            1997                5.72              7.34              7.25
            1996                5.66              7.60              7.56
            1995                6.34              8.19              8.12
            1994                5.27              8.76              8.50

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.

On March 16, 1998,  Moody's Investors Service  ("Moody's") said that it upgraded
the ratings of the  Company.  The  Company's  senior  unsecured  debt rating was
raised to A3 from Baa2 and its subordinated  debt rating was raised to Baa1 from
Baa3. The Company's  commercial paper rating was raised to Prime-1 from Prime-2.
Moody's said these ratings increases consider, among other things, "the improved
and  steady  performance  of Boeing  Capital's  business  over the last  several
years." Moody's stated that "Further rating  considerations  include uncertainty
regarding  Boeing's  long-term  commitment to this business unit." Moody's noted
that "the  strategic  fit of Boeing  Capital  is  unclear  in  Boeing's  overall
strategy."  The rating  agency went on to say that "Boeing has not  maintained a
finance  subsidiary  of its own in the  past,  but  has  preferred  to keep  its
customer financing exposure on its own balance sheet."

On September 15, 1998,  Moody's  placed Boeing and the Company's debt ratings on
review for possible  downgrade.  The current  Moody's  ratings for the Company's
senior unsecured debt,  subordinated  debt and commercial paper are A3, Baa1 and
Prime-1, respectively, and were confirmed on December 21, 1998.

On June 8, 1998,  Standard & Poor's Corporation  ("Standard & Poor's") announced
that it lowered its credit ratings on Boeing and the Company. The ratings of the
Company's senior  unsecured debt and  subordinated  debt were lowered from AA to
AA-  and AA- to A+,  respectively.  On  December  3,  1998,  Standard  &  Poor's
announced  that it lowered its credit  ratings  again on Boeing and the Company.
The ratings of the Company's senior  unsecured debt and  subordinated  debt were
lowered  from AA- to A+ and A+ to A,  respectively.  The outlook for the Company
was deemed to be  "developing."  Standard & Poor's stated that ratings "could be
raised if [the  Company]  is retained as a  continuing  operation  of Boeing Co.
Ratings could be lowered if [the Company] is divested to a weaker entity."

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 "Commercial  Equipment  Leasing
Segment - Factors Affecting CEL Volume," "Relationship With Boeing and McDonnell
Douglas" and "Borrowing  Operations."  Competitive  factors also include,  among
other things,  the Company's ability to be relatively  flexible in its financing
arrangements  with  new  and  existing   customers.   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 is
also dependent upon, among other factors, the capital equipment  requirements of
United States and foreign businesses and the availability of capital.

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.  This  relationship  has been
materially changed as a result of the Boeing-McDonnell  Douglas merger and under
Boeing's strategy (which is currently under review), the Company does not expect
Boeing to provide a material amount of new aircraft financing opportunities. See
"Relationship With Boeing and 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. See
"Commercial Aircraft Financing Segment."

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  and  regulations  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.  Additionally,  legislation  and
regulations  may in the future prohibit use in certain parts of the world (e.g.,
Europe) of certain  types of  aircraft  which have been  upgraded by hushkits to
meet the more  stringent  Stage 3  requirements.  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,  1998,  the  Company's  carrying  amount of Stage 2 aircraft  totaled  $22.1
million (1.4% 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. For
a discussion of the effects of the upcoming  discontinuance of MD-80,  MD-90 and
MD-11 aircraft,  see "Commercial  Aircraft Financing Segment - Factors Affecting
Current Commercial Aircraft Market Conditions."

For the five-year period 1994-1998, the average annual growth rate for worldwide
passenger  traffic was  approximately  6.0%.  Boeing's  20-year  forecast of the
average  long-term  growth  rate in  passenger  traffic  is  approximately  4.7%
annually,  based on projected  average  worldwide annual economic real growth of
2.9% over the 20-year period.

Based on global economic growth  projections over the long term, and taking into
consideration  increasing utilization levels of the worldwide aircraft fleet and
requirements to replace older aircraft, Boeing projects the total commercial jet
aircraft  market  over the next 20 years at more  than  $1,000  billion  in 1998
dollars.

Relationship With Boeing and McDonnell Douglas

Boeing,  together with its subsidiary  McDonnell Douglas, is principally engaged
in the design, development and production of government and commercial aerospace
products.  For the year ended  December 31, 1998,  Boeing  recorded  revenues of
$56.2 billion and net earnings of $1.1 billion. At December 31, 1998, Boeing had
assets of $36.7 billion and  shareholders'  equity of $12.3  billion.  Boeing is
actively  conducting a review of the operations  and the strategic  value of the
Company,  which  review  could lead to a  decision  to divest all or part of the
Company's  assets or to sell the Company's  stock,  presently held indirectly by
Boeing.

If the  financial  well-being  of  Boeing  were to  decline  significantly,  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  Boeing  operates,  military  aircraft  and  commercial  aircraft,  are
especially  competitive and have a limited number of customers.  At December 31,
1998,  McDonnell  Douglas  has  provided  $284.5  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 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, 1998, McDonnell Douglas was the lessee for $48.4
million of the Company's commercial aircraft portfolio.

In August 1998,  the  Company's  lease  agreements  with P.T.  Garuda  Indonesia
("Garuda")  relating to two MD-11  aircraft  were  terminated  and the aircraft,
which were returned by Garuda in July 1998, were sold to Boeing for an aggregate
sales price of $162.8  million,  which resulted in a gain to the Company of $3.3
million.

For a further  description of significant  factors which may affect Boeing,  see
Boeing's Form 10-K for the year ended December 31, 1998 (Securities and Exchange
Commission file number 001-00442).

o  Operating Agreement

   The relationship  between the Company and McDonnell Douglas is governed by an
   operating  agreement  (the  "Operating  Agreement"),  which was  intended  to
   formalize  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.  Now that McDonnell Douglas is a subsidiary of Boeing,
   Boeing has entered into a  substantially  similar  agreement with the Company
   with respect to the allocation of federal income taxes,  but not with respect
   to the purchase,  sale and financing of any commercial aircraft.  Although it
   remains in full force and effect, the Operating  Agreement,  as it relates to
   future  commercial  aircraft  financings,  now has  little  if any  practical
   significance, as Boeing is not a party to it. This is illustrated by the fact
   that since the  Boeing-McDonnell  Douglas  merger,  the  Company has not been
   involved in the  financing  of any new  commercial  aircraft  (except for one
   unusual  instance  where the Company  provided  financing  for one Boeing 737
   aircraft in response to a third party's request). Further, it does not appear
   that any future financings would be covered by the Operating Agreement. It is
   also  uncertain  whether the Operating  Agreement  will be amended or whether
   Boeing will become a party to it in its current or amended form.

   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,  1998,  the carrying  amount of  McDonnell  Douglas  aircraft
   potentially  excluded  by this  provision  amounted to  approximately  $589.3
   million.

o  Federal Income Taxes

   The Company and  McDonnell  Douglas  presently  file a  consolidated  federal
   income tax return with Boeing,  with the consolidated  tax payments,  if any,
   being  made by  Boeing.  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.

   In addition,  Boeing,  BCSC and the Company have entered into agreements (the
   "Boeing Operating  Agreements") with provisions  substantially similar to the
   Operating  Agreement  among the Company,  BCSC and  McDonnell  Douglas  which
   remains in effect. Amounts payable under the Boeing Operating Agreements take
   into account payments made under the Operating Agreement, provided that in no
   event will the Company  receive an amount  which is  materially  less,  or be
   obligated to pay an amount which is  materially  greater,  than it would have
   received, or been obligated to pay, under the Operating Agreement.

   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,  Boeing  presently  charges or  credits  the
   Company  for  the  corresponding  increase  or  decrease  in  Boeing's  taxes
   (disregarding   alternative  minimum  taxes)  resulting  from  the  Company's
   inclusion  in  the   consolidated   federal  income  tax  return  of  Boeing.
   Intercompany  payments  are made when such taxes are due or tax  benefits are
   realized  by  Boeing  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 Boeing.

   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  Boeing  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  Boeing'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."

   There can  likewise  be no  assurance  that  these (and  other)  intercompany
   arrangements  will not change as time permits the Company's Board members and
   shareholder   to  study  and  become  more   familiar   with  these   working
   arrangements.  While it is  difficult  to predict  the  applicability  of the
   alternative  minimum tax to Boeing and the effect thereof under such informal
   arrangement,  if Boeing were subject to alternative minimum tax liability for
   an  extended  period,  it  could  have  a  material  adverse  impact  on  the
   competitiveness  of the Company's pricing of new business and on the earnings
   of the Company.

o  Intercompany Services

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

o  Intercompany Credit Arrangements

   The  Company  maintains  separate  borrowing  facilities  and  there  are  no
   arrangements  for joint  use of such  credit  lines by  Boeing  or  McDonnell
   Douglas.  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 Boeing or  McDonnell  Douglas on
   their  respective  debt  constitutes a default on Company debt.  There are no
   guaranties, direct or indirect, by Boeing or McDonnell Douglas of the payment
   of any debt of the Company.

   The Company may borrow from BCSC,  and BCSC 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 this arrangement,  borrowings of $64.7
   million and $51.0  million  were  outstanding  at December 31, 1998 and 1997,
   respectively.  During 1998,  the Company's  highest level of borrowings  from
   BCSC was $64.7 million. The Company had no loans to BCSC during 1998 or 1997.


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 a rate  that was
considered fair market value at the inception of the lease. 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. (the "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,  but is unable to determine
at this stage of  discovery  if the  litigation  will have any  future  material
adverse effect on its earnings, cash flow or financial position.

The  Company is a party to  litigation  in the  United  States  District  Court,
Southern District of Florida,  entitled  McDonnell  Douglas Finance  Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International,  Inc. and
Craig  L.  Dobbin  with  Related  Counter-Claims  (collectively  referred  to as
"Aviaco").  The  foregoing  litigation  arose  out of an action  brought  by the
Company  in July 1991  seeking  remedies  on account  of  defaults  by the other
parties to the  litigation  under loan and related  documents  involving a $17.9
million loan made by the Company.  In January 1994, in response to the Company's
foreclosure  of two aircraft and a related  aircraft lease  agreement  which had
been collateral for the loan, Aviaco filed a counter-claim  against the Company,
asserting nine claims for alleged  damages based on various tort and contractual
theories relating to the Company's foreclosure.

The case  proceeded to jury trial on the three of nine claims which survived the
Company's  Motion for Summary  Judgment.  The case was  submitted to the jury on
October 16, 1997.  On October 17, 1997,  the jury returned a verdict in favor of
Aviaco awarding  aggregate  damages of  approximately  $12.2 million,  including
damages of  approximately  $10.0 million for the failure to exercise  reasonable
care with regard to the related lease agreement.

In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record  evidence or by  applicable  law. On February 13, 1998,  the Judge
ruled in favor of the Company and set aside the $10.0 million award.

On March 2, 1998, the Judge entered a Final Judgment  against the Company in the
aggregate amount,  including prejudgment interest, of approximately $2.8 million
with post judgment  interest thereon at the rate of 5.42% per annum.  Aviaco has
appealed  the Final  Judgment  to the United  States  Court of  Appeals  for the
Eleventh Circuit. Taking into account amounts reserved for this litigation,  the
Company  does not expect such  litigation  to have any future  material  adverse
effect on its earnings, cash flow or financial position.

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.

<PAGE>




                                     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 BCSC. In 1998 and
1997,  the  Company  declared  and paid  dividends  of $40.0  million  and $25.0
million,  respectively,  on its  common  stock to BCSC.  The  Company  paid $3.9
million and $3.5 million in dividends on its  preferred  stock in 1998 and 1997,
respectively.  Preferred  stock  dividends of $0.6 million  payable to BCSC were
accrued at December 31, 1998.

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, $56.9 million of
the Company's income retained for growth was available for dividends at December
31, 1998.



<PAGE>


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, 1998 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:
<TABLE>
<CAPTION>

                                                                        Years ended December 31,
(Dollars in millions)                              1998           1997            1996            1995           1994

<S>                                            <C>            <C>            <C>              <C>            <C>        
Financing volume                               $      692.6   $     591.1    $      867.3     $     590.8    $     202.0
                                               ============================================================================

Operating income:
   Finance lease income                        $      119.5   $     136.9    $      118.6     $     104.3    $     100.7
   Interest on notes receivable                        36.6          26.3            24.4            27.2           29.4
   Operating lease income, net                         67.7          56.7            55.1            41.1           38.5
   Net gain on disposal or re-lease
      of assets                                        33.4          21.0            19.6             8.7           11.1
   Other                                                2.9           5.5             3.8             9.3            7.1
                                               ----------------------------------------------------------------------------
                                                      260.1         246.4           221.5           190.6          186.8
                                               ----------------------------------------------------------------------------

Expenses:
   Interest expense                                   126.7         124.7           117.3           101.9          108.3
   Provision for losses                                 7.4          11.5            14.2            12.2            9.9
   Operating expenses                                  12.6          13.1            11.7            11.3           15.2
   Other                                                8.8           9.3             3.4             4.9           12.3
                                               ----------------------------------------------------------------------------
                                                      155.5         158.6           146.6           130.3          145.7
                                               ----------------------------------------------------------------------------

Income before provision for income
   taxes                                              104.6          87.8            74.9            60.3           41.1
Provision for income taxes                             33.1          31.7            26.1            21.0           12.8
                                               ----------------------------------------------------------------------------
Net income                                     $       71.5   $      56.1    $       48.8     $      39.3    $      28.3
                                               ============================================================================

Dividends declared                             $       43.9   $      28.5    $        3.5     $      31.0    $      30.5

Ratio of income to fixed charges (1)                    1.80          1.68            1.62            1.57           1.37

Balance sheet data:
   Total assets                                $    2,861.4   $   2,722.8    $    2,653.6     $   2,049.6    $   1,929.6
   Total debt                                       1,970.3       1,797.9         1,850.2         1,339.7        1,215.1
   Shareholder's equity                               380.7         353.1           325.5           280.2          271.9

Dividends accrued on preferred
   stock at year end                           $        0.6   $       0.6    $        0.6     $       0.6    $       0.6

(1) For the purpose of computing  the ratio of income to fixed  charges,  income
    consists of income before provision for income taxes and fixed charges;  and
    fixed charges consist of interest expense and preferred stock dividends.

</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  not  be  limited   to,  the   effects  on  the  Company  of  the
Boeing-McDonnell  Douglas merger and the Year 2000 date  conversion,  as well as
future  earnings,  costs,  expenditures,  losses,  residual  values and  various
business   environment   trends.   In  addition  to  those   contained   herein,
forward-looking  statements  and  projections  may be made by  management of the
Company 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 effects on
the  Company  of  the   Boeing-McDonnell   Douglas   merger  and  the  Company's
relationship with Boeing, as well as strategic decisions relating to the Company
to be made by Boeing,  the capital  equipment  requirements of United States and
foreign  businesses,  capital  availability  and cost,  changes  in laws and tax
benefits,  the tax  position  of  Boeing  (including  the  applicability  of the
alternative  minimum tax),  competition from other financial  institutions,  the
Company's  successful  execution of internal  operating plans and Year 2000 date
conversion  plans,  the impact of Year 2000 issues on the  Company's  customers,
vendors and service providers,  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 $240.0 million  revolving  credit agreement which is reduced by borrowings
of up to $16.0 million made by BCSC.  At December 31, 1998 and 1997,  borrowings
under commercial paper totaling $122.0 million and $80.0 million,  respectively,
were  supported by  available  unused  commitments  under the  revolving  credit
agreement. The Company has available approximately $85.0 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,  1998 and 1997,
borrowings  under  these  credit  facilities  totaled  $50.0  million  and $18.0
million, respectively.

The Company also accesses the public debt market and anticipates  using proceeds
from the issuance of additional  public debt to fund future  growth.  On October
10,  1997,  the  Company  filed  with the  Securities  and  Exchange  Commission
("Commission") a Form S-3 Registration Statement for a public shelf registration
of $1.2 billion of its debt securities (SEC File No. 333-37635).  On October 31,
1997, the Commission declared such Registration Statement to be effective. Since
October 1997, the Company has authorized the sale and issuance from time to time
at the Company's  discretion of up to $900.0 million of such debt  securities in
the form of the Company's  Series X medium-term  notes. As of December 31, 1998,
the Company had issued and sold $571.4 million in aggregate  principal amount of
such  notes,  with  $406.4  million of the notes  being  issued  during  1998 at
interest rates ranging from 5.35% to 6.54% and with  maturities  ranging from 10
months to 10 years.

During the second half of 1998, the Company's  borrowing rates were increased by
virtue of a  significant  increase  in the  spreads  required  to be paid by the
Company over rates for comparable  U.S.  Treasury  Notes.  Such higher rates can
reasonably   be   expected   to  have  a  negative   impact  on  the   Company's
competitiveness  as a financier on  transactions  where the Company is unable to
pass  through to customers  such  increased  rates.  These  increased  borrowing
spreads  and  consequent  higher  interest  rates  were  caused by a variety  of
factors,  including without limitation the Company's credit rating downgrade and
outlook change and the uncertainty of the Company's  strategic fit at Boeing, as
well as general financial market  conditions.  See "Item 1. Business - Borrowing
Operations."

The Company,  as of December 31, 1998, has $113.7 million in aggregate  deposits
in  Japanese  banks for the  purpose of  defeasing  certain  obligations  of the
Company under Japanese leveraged leases of aircraft.  Currently,  these deposits
cannot  be moved to  other  financial  institutions  without  significant  cost.
However,  as of the date hereof,  all such banks  holding such  deposits held an
investment grade rating from either Standard & Poor's or Moody's.

1998 vs. 1997

Finance lease income  decreased  $17.4 million (12.7%) in 1998 compared to 1997,
primarily  attributable  to a decrease in finance leases as a result of aircraft
sales.

Interest  on  notes  receivable  increased  $10.3  million  (39.2%)  from  1997,
primarily  attributable to new volume of CEL notes  receivable of $317.3 million
during 1998.

Operating lease income increased $11.0 million (19.4%) in 1998 compared to 1997,
primarily  attributable  to the  operating  lease  financing of four used Boeing
aircraft during the last four months of 1997.

Gain on disposal or re-lease of assets  increased  $12.4  million  (59.0%)  from
1997,  primarily  attributable  to sales  within  the  commercial  aircraft  and
commercial equipment leasing portfolios.

Other income decreased $2.6 million (47.3%) from 1997, primarily attributable to
prepayment fees of $2.0 million received in 1997.

Provision  for losses on  receivables  decreased  $4.1  million  (35.7%) in 1998
compared to 1997,  primarily  attributable to the Company's  determination  that
additional  provisions for losses were not necessary or  appropriate  during the
current year, as the Company's  core business  segments did not  experience  net
write-offs during the year ended December 31, 1997.

1997 vs. 1996

Finance lease income  increased  $18.3 million (15.4%) in 1997 compared to 1996,
primarily  attributable  to the financings of two MD-11 aircraft  funded in late
1996 under finance lease agreements.

Interest  expense  increased  $7.4  million  (6.3%)  in 1997  compared  to 1996,
attributable  to a higher level of borrowings in 1997,  resulting from increased
financing activity in late 1996.

Provision for losses  decreased  $2.7 million  (19.0%) in 1997 compared to 1996,
primarily attributable to the Company's determination that additional provisions
for losses  relating to the  commercial  aircraft  portfolio  in excess of those
previously  provided were not necessary or appropriate during the current period
and to a decrease in new aircraft lease volume,  which aggregated $176.3 million
in 1997, compared to aircraft lease volume of $475.3 million in 1996.

Other  expenses  increased  $5.9  million  (173.5%)  in 1997  compared  to 1996,
primarily  attributable to maintenance expenses of approximately $5.3 million on
an airplane that was repossessed in March 1997.

Year 2000 Date Conversion

The Year 2000 issue exists because many computer  systems and  applications  use
two-digit  date fields to designate a year.  As the century date change  occurs,
date-sensitive  systems may recognize the year 2000 as 1900, or not at all. This
inability  to  recognize  or properly  treat the year 2000 may cause  systems to
process financial and operational information incorrectly.

The Company has assessed  (and  continues to  re-assess)  the impact of the Year
2000 issue on its information  technology  ("IT") systems.  In 1996, the Company
initiated a conversion from its existing lease administration system to programs
that the  Company  has been  advised are Year 2000  compliant.  This  conversion
project has not yet been  completed  although the majority of the tasks involved
in such project have been  accomplished and it is expected that the project will
be completed during the second quarter of 1999. If the conversion project is not
completed  before the end of 1999, the Company's  operations  could be adversely
and materially affected. The Company has begun to develop a contingency plan for
the possible  unavailability of its new lease  administration  system. This plan
essentially  involves the  remediation,  if  necessary,  of the  existing  lease
administration system. With respect to the other IT systems, the Company intends
to develop contingency plans during 1999 relating to possible Year 2000 problems
to the extent it deems necessary and appropriate, taking into account the advice
of its outside  consultants,  who are expected to complete their analysis in the
second quarter of 1999.

Although  the  Company  does not  consider  it likely  that  Year 2000  problems
inherent within its IT systems will result in significant  operational problems,
the  possibility of such problems cannot be discounted at this time. The Company
is retaining  outside  consultants  to assist in its ongoing  assessment  of its
computer  system's  vulnerability  to Year 2000  problems.  Also,  the Company's
preliminary  estimate that it will complete its overall Year 2000 project by the
end of the third  quarter of 1999 is subject to the  findings  of the  Company's
ongoing assessment.

With respect to non-IT systems, the Company has assessed and continues to assess
the  impact of Year 2000  issues on these  systems.  The  Company  is  retaining
outside  consultants  to assist in its ongoing  assessment of possible Year 2000
problems relating to non-IT systems.

The  total  cost of the  Year  2000  project  to date has  been  funded  through
operating cash flows and has not had a material  adverse effect on the Company's
earnings,  cash flow or financial  position.  Based on information  available to
date,  the cost of the Year  2000  project,  including  any  remediation  of the
Company's  IT and non-IT  systems,  is not  expected to have a material  adverse
effect on the Company's earnings, cash flow or financial position.

No assurance  can be given,  however,  that Year 2000  problems of third parties
(such as vendors,  customers  and other  financial  institutions  with which the
Company  does  business)  will not  materially  impact  operations  or operating
results.  The Company is assessing the Year 2000 readiness of such third parties
whose lack of Year 2000 readiness  could result in a material  adverse impact on
the  Company.  The  Company  has  identified  and  sent to  certain  significant
customers and other  significant  third parties  inquiries  regarding their Year
2000 readiness.  The Company has not received a response from many of such third
parties and therefore is not yet in a position to assess this risk.  The Company
presently  expects  to  have  completed   preliminary   assessment  (subject  to
cooperation  where  necessary  from such third parties) by the end of the second
quarter of 1999. The Company  expects this assessment will need to be updated in
some respects throughout 1999.

This entire discussion of Year 2000 issues contains forward-looking  information
which is subject to uncertainty  and risk. See  "Forward-Looking  Information is
Subject to Risk and Uncertainty" at the outset of this Item 7.

Market Risk Exposure

The Company has  financial  instruments  that are subject to interest rate risk,
principally short-term investments,  fixed-rate notes receivable attributable to
customer financing,  and debt obligations issued at a fixed rate.  Historically,
the Company has not  experienced  material  gains or losses due to interest rate
changes when selling fixed-rate notes receivable. Additionally, the Company uses
interest rate swaps to manage  exposure to interest  rate changes.  Based on the
current  holdings  of  short-term  investments,  fixed-rate  notes,  as  well as
underlying  swaps,  the exposure to interest  rate risk is not  considered to be
material.  Fixed-rate  debt  obligations  currently  issued by the  Company  are
generally not callable until maturity.


<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>




                          Independent Auditors' Report


Shareholder and Board of Directors
Boeing Capital Corporation

We have audited the accompanying  consolidated  balance sheets of Boeing Capital
Corporation (a wholly-owned  subsidiary of Boeing Capital Services  Corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related  consolidated
statements  of income and income  retained  for  growth,  and cash flows for the
years then ended.  Our audits also  included the  financial  statement  schedule
listed  in  Part  IV  Item 14 (a).  These  financial  statements  and  financial
statement schedule are the responsibility of the Corporation's  management.  Our
responsibility  is to express an opinion on these financial  statements 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  financial  position of Boeing  Capital
Corporation  and  subsidiaries at December 31, 1998 and 1997, and the results of
their  operations  and their cash flows for the years then ended,  in conformity
with  generally  accepted  accounting  principles.  Also,  in our opinion,  such
financial  statement  schedule,   when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.


/s/ DELOITTE & TOUCHE LLP

Seattle, Washington
January 26, 1999


<PAGE>



                          Independent Auditors' Report


Shareholder and Board of Directors
McDonnell Douglas Finance Corporation

We have  audited  the  consolidated  balance  sheet  (not  presented  herein) of
McDonnell  Douglas Finance  Corporation (a wholly-owned  subsidiary of McDonnell
Douglas  Financial  Services  Corporation)  and  subsidiaries as of December 31,
1996, and the related consolidated  statements of income and income retained for
the year then ended.  Our audit 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 audit.

We conducted our audit 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 audit provides 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
the  consolidated  results of their operations and their cash flows for the year
then ended, 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,  presents 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, 1995 and 1994, and
the related  consolidated  statements of income and income  retained for growth,
and cash flows for the year ended December 31, 1994 (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 three  years in the period  ended  December  31,
1996, appearing on page 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>


Boeing Capital Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>


                                                                                                     December 31,
(Dollars in millions, except stated value and par value)                                       1998                1997
-------------------------------------------------------------------------------------------------------------------------------

ASSETS
    Financing receivables:
<S>                                                                                      <C>                <C>            
      Investment in finance leases                                                       $      1,365.0     $       1,509.1
      Notes receivable                                                                            545.7               269.0
                                                                                         --------------------------------------
                                                                                                1,910.7             1,778.1
      Allowance for losses on financing receivables                                               (62.1)              (55.9)
                                                                                         --------------------------------------
                                                                                                1,848.6             1,722.2
    Cash and cash equivalents                                                                      20.3                39.1
    Equipment under operating leases, net                                                         889.2               922.2
    Equipment held for sale or re-lease                                                            62.3                 0.7
    Other assets                                                                                   41.0                38.6
                                                                                         --------------------------------------
                                                                                         $      2,861.4     $       2,722.8
                                                                                         ======================================

LIABILITIES AND SHAREHOLDER'S EQUITY
    Short-term notes payable                                                             $        236.7     $         149.0
    Accounts payable and accrued expenses                                                          35.6                49.1
    Accounts with Boeing, McDonnell Douglas and BCSC                                                6.7                37.2
    Other liabilities                                                                              84.8                97.2
    Deferred income taxes                                                                         383.3               388.3
    Long-term debt:
      Senior                                                                                    1,678.7             1,579.0
      Subordinated                                                                                 54.9                69.9
                                                                                         --------------------------------------
                                                                                                2,480.7             2,369.7
                                                                                         --------------------------------------

    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                                                                  236.2              208.6
                                                                                         --------------------------------------
                                                                                                  380.7              353.1
                                                                                         --------------------------------------
                                                                                         $      2,861.4     $      2,722.8
                                                                                         ======================================
</TABLE>

See notes to consolidated financial statements.


<PAGE>


Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Income and Income Retained for Growth
<TABLE>
<CAPTION>


                                                                                         Years ended December 31,
(Dollars in millions)                                                           1998              1997                1996
--------------------------------------------------------------------------------------------------------------------------------

OPERATING INCOME
<S>                                                                        <C>               <C>               <C>          
   Finance lease income                                                    $      119.5      $      136.9      $       118.6
   Interest income on notes receivable                                             36.6              26.3               24.4
   Operating lease income, net of depreciation expense of
      $70.6, $61.1 and $57.6 in 1998, 1997 and 1996,
      respectively                                                                 67.7              56.7               55.1
   Net gain on disposal or re-lease of assets                                      33.4              21.0               19.6
   Other                                                                            2.9               5.5                3.8
                                                                           -----------------------------------------------------
                                                                                  260.1             246.4              221.5
                                                                           -----------------------------------------------------

EXPENSES
   Interest expense                                                               126.7             124.7              117.3
   Provision for losses                                                             7.4              11.5               14.2
   Operating expenses                                                              12.6              13.1               11.7
   Other                                                                            8.8               9.3                3.4
                                                                           -----------------------------------------------------
                                                                                  155.5             158.6              146.6
                                                                           -----------------------------------------------------
Income before provision for income taxes                                          104.6              87.8               74.9
Provision for income taxes                                                         33.1              31.7               26.1
                                                                           -----------------------------------------------------
Net income                                                                         71.5              56.1               48.8
Income retained for growth at beginning of year                                   208.6             181.0              135.7
Dividends                                                                         (43.9)            (28.5)              (3.5)
                                                                           -----------------------------------------------------
Income retained for growth at end of year                                  $      236.2      $      208.6      $       181.0
                                                                           =====================================================

</TABLE>

See notes to consolidated financial statements.



<PAGE>


Boeing Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                          Years ended December 31,
(Dollars in millions)                                                            1998              1997              1996
--------------------------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                                          <C>              <C>               <C>          
    Net income                                                               $       71.5     $       56.1      $        48.8
    Adjustments to reconcile net income to net cash
       provided by operating activities:
         Depreciation expense - equipment under operating
             leases                                                                  70.6             61.1               57.6
         Net gain on disposal or re-lease of assets                                 (33.4)           (21.0)             (19.6)
         Provision for losses                                                         7.4             11.5               14.2
         Change in assets and liabilities:
             Accounts with Boeing, McDonnell Douglas and
                BCSC                                                                (30.5)            37.2               18.5
             Other assets                                                            (2.4)             3.1                1.8
             Accounts payable and accrued expenses                                  (13.5)             1.4                5.9
             Other liabilities                                                      (12.4)             7.2                7.5
             Deferred income taxes                                                   (5.0)            48.1               34.8
         Other, net                                                                  (1.0)            (0.7)              (1.7)
                                                                             ---------------------------------------------------
                                                                                     51.3            204.0              167.8
                                                                             ---------------------------------------------------

INVESTING ACTIVITIES
    Net change in short-term notes and leases receivable                            (51.9)           101.7              (91.2)
    Purchase of equipment for operating leases                                     (157.2)          (346.2)            (303.9)
    Proceeds from disposition of equipment, notes and leases
       receivable                                                                   323.7            177.4              115.0
    Collection of notes and leases receivable                                       235.9            209.6              167.0
    Acquisition of notes and leases receivable                                     (548.9)          (243.0)            (557.2)
                                                                             ---------------------------------------------------
                                                                                   (198.4)          (100.5)            (670.3)
                                                                             ---------------------------------------------------

FINANCING ACTIVITIES
    Net change in short-term borrowings                                              87.7            (12.3)             147.6
    Debt having maturities more than 90 days:
       Proceeds                                                                     436.8            226.8              608.7
       Repayments                                                                  (352.3)          (267.3)            (246.0)
    Payment of cash dividends                                                       (43.9)           (28.5)              (3.5)
                                                                             ---------------------------------------------------
                                                                                    128.3            (81.3)             506.8
                                                                             ---------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                (18.8)            22.2                4.3
Cash and cash equivalents at beginning of year                                       39.1             16.9               12.6
                                                                             ---------------------------------------------------
Cash and cash equivalents at end of year                                     $       20.3     $       39.1      $        16.9
                                                                             ===================================================
</TABLE>

See notes to consolidated financial statements.



<PAGE>


Boeing Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998


Note 1 -- Organization and Summary of Significant Accounting Policies

Organization  Boeing Capital  Corporation  (formerly  McDonnell  Douglas Finance
Corporation)  (the  "Company") is a  wholly-owned  subsidiary of Boeing  Capital
Services Corporation  ("BCSC"),  a wholly-owned  subsidiary of McDonnell Douglas
Corporation  ("McDonnell Douglas"),  which in turn is wholly-owned by The Boeing
Company  ("Boeing").  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 and financing.  The Company's strategy is to generate and participate in
finance transactions in which the Company's structuring and analysis can provide
high  returns  on  its  invested  equity.  Currently,  the  commercial  aircraft
financing  group is active in providing lease and debt financing to domestic and
international  airlines, and the Company as a whole is active in providing lease
and debt financing to a broad range of commercial and industrial customers.

Principles of 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 1996 and
1997 amounts have been reclassified to conform to the 1998 presentation.

Use of Estimates The  preparation  of financial  statements  in conformity  with
generally accepted accounting principles requires management to make assumptions
and estimates  that  directly  affect the amounts  reported in the  consolidated
financial  statements.  Significant estimates for which changes in the near term
are considered  reasonably  possible and that may have a material  impact on the
financial statements are addressed in these notes to the consolidated  financial
statements.

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, 1998 and 1997 were $19.7 million and $37.9  million,  respectively.
At December  31,  1998 and 1997,  the Company  has  classified  as other  assets
restricted  cash  deposited  with banks in  interest  bearing  accounts of $34.1
million  and  $27.6  million,   respectively,   for  specific  lease  rents  and
contractual  purchase  options related to certain aircraft leased by the Company
under capital lease obligations.

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, collateral value of the underlying equipment and results of periodic
credit reviews.

Equipment  Held  for  Sale  or  Re-lease   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.

Income  Taxes The  operations  of the Company are  included in the  consolidated
federal  income  tax  return of Boeing.  McDonnell  Douglas or Boeing  presently
charges or credits  the Company  for the  corresponding  increase or decrease in
taxes  resulting from such inclusion.  Intercompany  payments are made when such
taxes are due or tax benefits  are  realized by Boeing 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 Boeing.

Federal,  state and foreign income taxes are computed at current tax rates, less
tax credits. Taxes are adjusted both for items that do not have tax consequences
and for the cumulative  effect of any changes in tax rates from those previously
used to determine  deferred tax assets or  liabilities.  Tax provisions  include
amounts  that are  currently  payable,  plus  changes in deferred tax assets and
liabilities  that arise because of temporary  differences  between the time when
items of income and expense are  recognized  for financial  reporting and income
tax purposes.  Under an informal  arrangement,  the current  provision for state
income taxes based on an agreed upon rate is paid to Boeing and the state income
tax deferred asset or liability is carried on Boeing's books.

Segment  Information The Company has adopted  Statement of Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information."  The  adoption  thereof  had no material  effect on the  Company's
financial position or operating results. For segment information, see Note 11.

Software Costs Statement of Position  ("SOP") 98-1  "Accounting for the Costs of
Computer Software Developed and Obtained for Internal Use," issued in March 1998
requires  capitalization  of certain  costs of computer  software  developed  or
obtained for internal  use. The SOP is effective for  financial  statements  for
fiscal years beginning  after December 15, 1998.  Management of the Company does
not believe that SOP 98-1 will have a material impact on the Company's earnings,
cash flows or financial position when adopted.

Note 2 -- The Effects of the Boeing-McDonnell Douglas Merger

On August 1, 1997, the Boeing-McDonnell  Douglas merger was consummated pursuant
to an Agreement and Plan of Merger dated as of December 14, 1996,  among Boeing,
West  Acquisition  Corp.,  a  wholly-owned  subsidiary  of Boeing  ("Sub"),  and
McDonnell  Douglas  (the  "Merger  Agreement").  Under the  terms of the  Merger
Agreement,  Sub was  merged  into  McDonnell  Douglas,  with  McDonnell  Douglas
surviving as a wholly-owned subsidiary of Boeing.

The many possible ramifications of strategic decisions to be made by Boeing with
respect  to  the  Company  are  currently  unknown  and,  therefore,  cannot  be
quantified  at  this  time.  Boeing  is  actively  conducting  a  review  of the
operations and the strategic value of the Company,  which review could lead to a
decision to divest all or part of the Company's  assets or to sell the Company's
stock, presently held indirectly by Boeing.

The Company and McDonnell Douglas  presently file a consolidated  federal income
tax return with Boeing,  with the consolidated tax payments,  if any, being made
by Boeing.  The  operating  agreement  between the Company,  BCSC and  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.

In addition,  Boeing,  BCSC and the Company have  entered into  agreements  (the
"Boeing  Operating  Agreements")  with provisions  substantially  similar to the
Operating Agreement among the Company,  BCSC and McDonnell Douglas which remains
in effect.  Amounts  payable  under the Boeing  Operating  Agreements  take into
account payments made under the Operating  Agreement,  provided that in no event
will the Company receive an amount which is materially  less, or be obligated to
pay an amount which is materially greater,  than it would have received, or been
obligated to pay, under the Operating Agreement.

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,  Boeing  presently  charges or credits the Company for the
corresponding  increase or decrease in Boeing's taxes (disregarding  alternative
minimum  taxes)  resulting  from the  Company's  inclusion  in the  consolidated
federal  income tax return of Boeing.  Intercompany  payments are made when such
taxes are due or tax benefits  are  realized by Boeing 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 Boeing.

There  can  be no  assurance,  however,  that  these  (and  other)  intercompany
arrangements  will not change as time permits the  Company's  Board  members and
shareholder  to study and become more familiar with these working  arrangements.
While it is difficult to predict the  applicability  of the alternative  minimum
tax to Boeing and the effect thereof under such informal arrangement,  if Boeing
were subject to  alternative  minimum tax liability for an extended  period,  it
could have a material  adverse  impact on the  competitiveness  of the Company's
pricing of new business and on the earnings of the Company.

Boeing has  announced  that it will not produce MD-80 and MD-90  aircraft  after
early 2000.  Boeing has also stated that it plans to phase out production of the
MD-11,  with final  deliveries now scheduled for 2001. The Company's  commercial
aircraft portfolio as of December 31, 1998 included 32 MD-80s,  three MD-90s and
five MD-11s,  representing  an aggregate of  $963.8 million in net asset value 
(34.4% of  total   Company  portfolio).  The  Company's  commercial  aircraft 
portfolio as of December  31,  1997  included  33  MD-80s,   three  MD-90s  and
seven  MD-11s, representing an aggregate of $1,176.1 million in net asset value 
(43.6% of total Company portfolio). The Company periodically reviews the 
carrying and residual values of all aircraft in its portfolio. Such reviews 
include the effects, if any, of the foregoing  announcements  as they become 
known or can be  reasonably  estimated. While management  believes that current
booked residual values are conservative, significant  declines  in  market  
value  could  impact  the  gain  or  loss  on disposition of these aircraft.

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)                                                                        1998               1997
<S>                                                                                    <C>                <C>         
Minimum lease payments receivable                                                      $    1,760.7       $    1,985.8
Estimated residual value of leased assets                                                     378.9              405.6
Unearned income                                                                              (778.6)            (885.9)
Deferred initial direct costs                                                                   4.0                3.6
                                                                                       ------------------------------------
                                                                                       $    1,365.0       $    1,509.1
                                                                                       ====================================
</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)                                                                        1998               1997
<S>                                                                                    <C>                 <C>         
Minimum lease payments receivable                                                      $      501.1        $      534.3
Estimated residual value of leased assets                                                      83.3                83.3
Unearned income                                                                              (252.4)             (276.2)
Deferred initial direct costs                                                                   1.0                 0.8
                                                                                       -----------------------------------
                                                                                       $      333.0        $      342.2
                                                                                       ===================================
</TABLE>

At December  31, 1998,  finance  lease  receivables  of $38.2  million  serve as
collateral to senior long-term debt.

At December 31, 1998,  finance  lease  receivables  are due in  installments  as
follows: 1999, $268.7 million; 2000, $196.5 million; 2001, $187.3 million; 2002,
$160.1 million; 2003, $149.0 million; 2004 and thereafter, $799.1 million.

Under a finance  lease  agreement,  the  Company  leases a DC-10-30  aircraft to
McDonnell  Douglas.  This lease  requires  monthly rent payments of $0.4 million
through  April 14, 2004. At December 31, 1998 and 1997,  the carrying  amount of
this aircraft was $24.7 million and $26.7 million, respectively.

Note 4 -- Notes Receivable

The following lists the components of notes receivable at December 31:
<TABLE>
<CAPTION>

(Dollars in millions)                                                                         1998              1997
<S>                                                                                     <C>               <C>         
Principal                                                                               $      542.7      $      265.9
Accrued interest                                                                                 3.6               2.8
Unamortized discount                                                                            (1.6)             (0.5)
Deferred initial direct costs                                                                    1.0               0.8
                                                                                        ------------------------------------
                                                                                        $      545.7      $      269.0
                                                                                        ====================================
</TABLE>

At December 31, 1998,  notes  receivables  are due in  installments  as follows:
1999,  $62.7 million;  2000,  $34.8 million;  2001,  $43.9 million;  2002, $53.3
million; 2003, $64.2 million; 2004 and thereafter, $283.8 million.

Note 5 -- Equipment Under Operating Leases

Equipment under operating leases consisted of the following at December 31:
<TABLE>
<CAPTION>

(Dollars in millions)                                                                          1998              1997
<S>                                                                                      <C>                <C>         
Commercial aircraft                                                                      $      668.0       $      651.1
Executive aircraft                                                                              289.3              313.1
Machine tools and production equipment                                                           56.2               52.6
Highway vehicles                                                                                 33.7               51.4
Printing equipment                                                                               27.2               32.2
Other                                                                                            25.3               15.3
                                                                                         -----------------------------------
                                                                                              1,099.7            1,115.7
Accumulated depreciation                                                                       (208.5)            (185.3)
Rentals receivable                                                                               15.3               15.1
Deferred lease income                                                                           (19.5)             (24.0)
Deferred initial direct costs                                                                     2.2                1.7
Allowance for uncollectible rents                                                                 -                 (1.0)
                                                                                         -----------------------------------
                                                                                         $      889.2       $      922.2
                                                                                         ===================================
</TABLE>

At December 31, 1998,  future minimum rentals scheduled to be received under the
noncancelable portion of operating leases are as follows:  1999, $161.9 million;
2000,  $89.9 million;  2001,  $76.2 million;  2002,  $65.7 million;  2003, $62.4
million; 2004 and thereafter, $338.7 million.

At December 31, 1998,  equipment  under  operating  leases of $77.6  million are
assigned as collateral  to senior  long-term  debt.  Equipment  under  operating
leases of $187.4  million at December 31, 1998,  relate to  commercial  aircraft
leased by the Company under capital lease obligations.

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.  In March 1998,  MDC entered into a sublease with
Caledonian Airways Limited ("Caledonian"),  whereby Caledonian pays $0.2 million
of the $0.4 million in monthly rent payments. At December 31, 1998 and 1997, the
carrying   amount  of  this  aircraft  was  $23.7  million  and  $26.9  million,
respectively.

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)                                                       1998               1997                1996
Current:
<S>                                                                   <C>                <C>                 <C>          
   Federal                                                            $       32.1       $       (21.3)      $      (12.8)
   State                                                                       6.0                 4.9                4.1
                                                                      --------------------------------------------------------
                                                                              38.1               (16.4)              (8.7)
Deferred:
   Federal                                                                    (5.0)               48.1               34.8
                                                                      --------------------------------------------------------
                                                                      $       33.1       $        31.7       $       26.1
                                                                      ========================================================
</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:

(Dollars in millions)                        1998               1997
Deferred tax assets:       
   Allowance for losses                $         21.7     $         19.6
   Other                                          8.0                5.7
                                       -------------------------------------
                                                 29.7               25.3
                                       -------------------------------------

Deferred tax liabilities:
   Leased assets                               (412.9)            (410.9)
   Other                                         (0.1)              (2.7)
                                       -------------------------------------
                                               (413.0)            (413.6)
                                       -------------------------------------
Net deferred tax liability             $       (383.3)    $       (388.3)
                                       =====================================

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)                                    1998              1997              1996
<S>                                                <C>               <C>                <C>         
Tax computed at federal statutory rate             $        36.6     $       30.7       $       26.2
State income taxes, net of federal tax benefit               3.9              3.2                2.6
Foreign sales corporation benefit                           (6.9)            (1.2)              (1.5)
Effect of investment tax credits                            (0.5)            (0.9)              (0.7)
Other                                                        -               (0.1)              (0.5)
                                                   ------------------------------------------------------
                                                   $        33.1     $       31.7       $       26.1
                                                   ======================================================

The Company is  currently  under  examination  by the Internal  Revenue  Service
("IRS") for the tax years 1986 through 1995. 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  paid  income tax  payments  to  Boeing/McDonnell  Douglas of $46.6
million in 1998. The Company received income tax payments from  Boeing/McDonnell
Douglas of $32.4 million and $16.2 million in 1997 and 1996,  respectively.  The
Company paid income tax payments to other federal and state tax agencies of $1.4
million, $1.7 million and $0.8 million in 1998, 1997 and 1996, respectively.

Note 7 -- Indebtedness

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


                                                              December 31,
                                     ---------------------------------------------------------------
                                                                       Weighted Average Interest
(Dollars in millions)                   Balance at End of Year            Rate at End of Year
                                     ---------------------------------------------------------------
                                          1998            1997           1998           1997
<S>                                  <C>             <C>                    <C>             <C>   
Commercial paper                     $      122.0    $       80.0           5.46  %         7.00 %
Uncommitted credit facilities                50.0            18.0           5.47            5.93
BCSC                                         64.7            51.0           5.20            5.96
                                     ------------------------------
                                     $      236.7    $      149.0
                                     ==============================
</TABLE>

During 1996, BCSC 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 BCSC borrowings  under this same
agreement,  which are limited to $16.0 million. The interest rate, at the option
of BCSC 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, 1998 and 1997.  At December 31, 1998 and
1997,  borrowings  under  commercial  paper  totaling  $122.0  million and $80.0
million, respectively,  were supported by available unused commitments under the
revolving credit agreement.

The Company has available approximately $85.0 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, 1998 and 1997,  borrowings  under
these credit facilities totaled $50.0 million and $18.0 million, respectively.

On October  10,  1997,  the  Company  filed  with the  Securities  and  Exchange
Commission  ("Commission") a Form S-3 Registration  Statement for a public shelf
registration of $1.2 billion of its debt securities (SEC File No. 333-37635). On
October 31, 1997,  the  Commission  declared such  Registration  Statement to be
effective.  Since October 1997, the Company has authorized the sale and issuance
from time to time at the Company's  discretion  of up to $900.0  million of such
debt securities in the form of the Company's  Series X medium-term  notes. As of
December 31, 1998,  the Company had issued and sold $571.4  million in aggregate
principal  amount of such notes,  with $406.4  million of the notes being issued
during 1998 at interest  rates  ranging from 5.35% to 6.54% and with  maturities
ranging from 10 months to 10 years.
<TABLE>
<CAPTION>
Senior long-term debt consisted of the following at December 31:



(Dollars in millions)
                                                                                   1998                  1997
<S>                                                                              <C>                   <C>                        
7.0% Notes due through 1998, net of discount based on imputed         
   interest rate of 10.88%                                                       $             -       $             0.2
Variable rate note due 1998                                                                    -                    15.0
3.9% Notes due through 1999, net of discount based on imputed
   interest rates of 9.15% - 10.6%                                                             1.1                   2.9
5.75% - 6.875% Notes due through 2000, net of discount based on
   imputed interest rates of 9.75% - 11.4%                                                     3.2                   5.0
6.9% - 9.43% Notes due through 2001                                                           33.5                  44.2
13.84% - 14.28% Notes due through 2003, net of discount based on
   inputed interest rate of 6.10%                                                             30.0                   -
6.0% - 8.25% Retail medium-term notes due through 2011                                        11.3                  76.6
5.35% - 13.55% Medium-term notes due through 2017                                          1,191.3                 990.5
Capital lease obligations due through 2008                                                   408.3                 444.6
                                                                                 ------------------------------------------
                                                                                 $         1,678.7     $         1,579.0
                                                                                 ==========================================
</TABLE>

At December 31, 1998 and 1997,  subordinated  long-term  debt consisted of $54.9
million and $69.9 million,  respectively,  in medium-term notes due through 2004
with interest rates ranging from 5.48% to 8.31%.

The derivative  financial  instruments held by the Company at December 31, 1998,
consisted of  specifically  tailored  interest rate swaps.  The Company does not
trade in derivatives for speculative purposes.

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, 1998, 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>            <C>     <C>  
Capital lease obligations    2006 - 2008  $   350.4     Floating(1)   6.65% - 7.60%
Medium-term notes            2000 - 2001       50.0    6.83% - 8.61%   Floating(1)
Medium-term notes               2003           30.0     Floating(1)       5.99%

-------------
   (1) Floating rates are based on LIBOR.
</TABLE>

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities,"  which is  required  to be  adopted  in fiscal  years
beginning  after  June  15,  1999.  Because  of  the  Company's  limited  use of
derivatives,  management  does  not  anticipate  that  the  adoption  of the new
Statement will have a material  adverse effect on the Company's  earnings,  cash
flows or financial position.

As  of  December  31,  1998,   $63.5  million  of  senior   long-term  debt  was
collateralized by equipment. This debt is comprised of the 13.84% - 14.28% notes
due through 2003 and the 6.9% - 9.43% notes due through 2001.

Payments  required on long-term  debt and capital lease  obligations  during the
years ending December 31 are as follows:

                                Long-Term              Capital
(Dollars in millions)             Debt                 Leases
1999                       $        275.1        $         66.3
2000                                133.5                  83.6
2001                                217.1                  63.8
2002                                163.8                  54.9
2003                                158.3                  60.0
2004 and thereafter                 382.2                 220.7
                           ------------------------------------------
                                  1,330.0                 549.3
Deferred debt expenses               (4.7)                 (0.2)
Imputed interest                      -                  (140.8)
                           ------------------------------------------
                           $      1,325.3        $        408.3
                           ==========================================

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, $56.9 million of
the Company's income retained for growth was available for dividends at December
31, 1998.

Interest  payments  totaled $123.0  million in 1998,  $124.4 million in 1997 and
$113.9 million in 1996.

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,  but is unable to determine
at this stage of  discovery  if the  litigation  will have any  future  material
adverse effect on its earnings, cash flow or financial position.

The  Company is a party to  litigation  in the  United  States  District  Court,
Southern District of Florida,  entitled  McDonnell  Douglas Finance  Corporation
adv. Aviaco International Leasing, Inc., Aviaco Traders International,  Inc. and
Craig  L.  Dobbin  with  Related  Counter-Claims  (collectively  referred  to as
"Aviaco").  The  foregoing  litigation  arose  out of an action  brought  by the
Company  in July 1991  seeking  remedies  on account  of  defaults  by the other
parties to the  litigation  under loan and related  documents  involving a $17.9
million loan made by the Company.  In January 1994, in response to the Company's
foreclosure  of two aircraft and a related  aircraft lease  agreement  which had
been collateral for the loan, Aviaco filed a counter-claim  against the Company,
asserting nine claims for alleged  damages based on various tort and contractual
theories relating to the Company's foreclosure.

The case  proceeded to jury trial on the three of nine claims which survived the
Company's  Motion for Summary  Judgment.  The case was  submitted to the jury on
October 16, 1997.  On October 17, 1997,  the jury returned a verdict in favor of
Aviaco awarding  aggregate  damages of  approximately  $12.2 million,  including
damages of  approximately  $10.0 million for the failure to exercise  reasonable
care with regard to the related lease agreement.

In December of 1997, the Company filed a Motion for Judgment as a Matter of Law,
arguing, inter alia, to set aside the $10.0 million award as not being supported
by the record  evidence or by  applicable  law. On February 13, 1998,  the Judge
ruled in favor of the Company and set aside the $10.0 million award.

On March 2, 1998, the Judge entered a Final Judgment  against the Company in the
aggregate amount,  including  prejudgment interest of approximately $2.8 million
with post judgment  interest thereon at the rate of 5.42% per annum.  Aviaco has
appealed  the Final  Judgment  to the United  States  Court of  Appeals  for the
Eleventh Circuit. Taking into account amounts reserved for this litigation,  the
Company  does not expect such  litigation  to have any future  material  adverse
effect on its earnings, cash flow or financial position.

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 $163.3 million (5.8% of total
Company  portfolio)  and $196.6  million  (7.3% of total  Company  portfolio) at
December 31, 1998 and 1997,  respectively.  TWA faces significant  financial and
operational challenges and, until recently, operated under a reorganization plan
confirmed  by the United  States  Bankruptcy  Court in 1995.  McDonnell  Douglas
provides  guaranties  to the Company for  certain  obligations  of TWA under the
various lease agreements  between the Company and TWA. At December 31, 1998, the
maximum  aggregate  coverage under such guaranties was $32.9 million.  As of the
date hereof, TWA is current on its obligations to the Company.  If, however, TWA
were to default on its  obligations  to the Company,  this could have a material
adverse effect on the Company's earnings, cash flow or financial position.

World  Airways,  Inc.  ("World")  accounted  for $176.4  million  (6.3% of total
Company  portfolio)  and $183.5  million  (6.8% of total  Company  portfolio) at
December 31, 1998 and 1997,  respectively.  World experienced losses in 1998 and
its cash balances have fallen to relatively low levels.  Also,  Worldcorp  Inc.,
the majority  owner of World,  has recently  made a  "prepackaged"  filing under
Chapter 11 of the U.S.  bankruptcy  code.  With  respect to the  existing  lease
agreements  between World and the Company,  World has requested that the Company
consider a reduction in rentals, elimination of maintenance reserve payments and
conversion of the subject two MD-11 aircraft to a freighter  configuration.  The
Company  is  studying  these  requests  and has  concluded  that  any  resulting
restructuring of these lease  transactions,  taking into account a guaranty from
McDonnell  Douglas,  is not  expected to have a material  adverse  effect on the
Company's earnings, cash flow or financial position.

On June 26,  1998,  Federal  Express  Corporation  ("FedEx")  gave notice to the
Company of its intention to terminate early (in late 1999) two lease  agreements
covering MD-11 freighter  aircraft which FedEx leases from the Company.  Even if
the leases are in fact  terminated  early,  the Company does not  anticipate any
material adverse effect on its earnings,  cash flow or financial position taking
into account current demand for the aircraft,  a guaranty from McDonnell Douglas
and certain other contractual  rights including payments due to the Company upon
early  termination,  as well as a commitment  from another  airline to lease the
aircraft for a pre-determined rental amount.

In July 1998, the Company  terminated early a lease agreement  covering one used
DC-10-30  aircraft.  The  Company has  repossessed  such  aircraft  and has been
remarketing it in a currently weak market for this type of aircraft. Taking into
account a guaranty from McDonnell  Douglas,  this transaction is not expected to
have a material adverse effect on the Company's earnings, cash flow or financial
position.

The $100.0 million used aircraft  purchase bridge facility made available by the
Company to AirTran Airlines  ("AirTran"),  formerly ValuJet  Airlines,  Inc., 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 AirTran of the
first scheduled new Boeing 717-200 (formerly 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, 1998 or
1997.

At December 31, 1998 and 1997, the Company had  commitments  to provide  leasing
and other financing totaling $163.3 million and $102.2 million, respectively.

In conjunction with prior asset dispositions,  at December 31, 1998, the Company
is subject to a maximum recourse of $52.4 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, 1998,  the Company had guaranteed the repayment of $4.8
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 1998, 1997 and 1996 totaled $0.8 million,
$0.8 million and $0.4 million,  respectively.  At December 31, 1998, the minimum
future rental  commitments  under these  noncancelable  leases  payable over the
remaining lives of the leases aggregated $0.2 million.

Note 9 -- Transactions with Boeing, McDonnell Douglas and BCSC

Accounts with Boeing,  McDonnell  Douglas and BCSC consisted of the following at
December 31:

(Dollars in millions)                         1998                1997
Federal income tax payable              $       0.7        $       11.6
State income tax payable                        5.8                 4.1
Other payables                                  0.2                21.5
                                        -------------------------------------
                                        $       6.7        $       37.2
                                        =====================================

The Company may borrow from BCSC, and BCSC 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 this arrangement,  borrowings of $64.7 million and
$51.0 million were outstanding at December 31, 1998 and 1997, respectively.

In August 1998,  the Company's  lease  agreements  with P.T.  Garuda  ("Garuda")
relating to two MD-11  aircraft were  terminated  and the  aircraft,  which were
returned by Garuda in July 1998,  were sold, at estimated fair value,  to Boeing
for an aggregate  sales price of $162.8 million.  The Company  recorded a pretax
gain of $3.3  million,  which is included in net gain on disposal or re-lease of
assets.

In December 1997, the Company acquired from Boeing all of the outstanding shares
of a corporation  which had been formed for the exclusive  purpose of owning and
leasing two used Boeing 737-400  aircraft for a purchase price of $51.2 million.
The aircraft continue to be owned by the corporation and are presently leased to
Jet Airways (India) Pvt. Ltd. under leases expiring in 1999.

During 1997 and 1996,  the  Company  purchased  aircraft  subject to leases from
Boeing and McDonnell  Douglas in the amount of $51.9 million and $501.9 million,
respectively.  There were no such  aircraft  purchases  from Boeing or McDonnell
Douglas in 1998.  During 1998,  1997 and 1996,  the Company  recorded  operating
income from Boeing and McDonnell Douglas relating to financings aggregating $7.1
million, $12.1 million and $14.9 million, respectively.

In November  1997,  the Company  sold,  at  estimated  fair value,  an executive
aircraft formerly leased to McDonnell  Douglas to Boeing for $16.8 million.  The
Company  recorded a pretax gain of $1.8  million in 1997,  which was included in
net gain on disposal or re-lease of assets.

At December 31, 1998 and 1997, $284.5 million and $334.9 million,  respectively,
was guaranteed by McDonnell  Douglas for  commercial  aircraft  financing.  Fees
related to these  guaranties  that were paid to McDonnell  Douglas  totaled $1.0
million,  $1.1  million and $1.6 million in 1998,  1997 and 1996,  respectively.
During 1998, 1997 and 1996, the Company  collected  $12.3 million,  $6.9 million
and $2.1 million, respectively, under these guaranties.

The Company's Series A Preferred Stock, owned entirely by BCSC, 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, 1998 and
1997.

Substantially  all  employees  of Boeing  and its  subsidiaries  are  members of
defined benefit pension plans and insurance plans. Boeing also provides eligible
employees  the  opportunity  to  participate  in savings  plans that permit both
pretax and after-tax  contributions.  Boeing generally  charges the Company with
the actual cost of these plans attributable to the Company's employees which are
included  with other  Boeing  charges  for support  services  and  reflected  in
operating  expenses.  Boeing charges for services provided during 1998, 1997 and
1996  totaled  $1.6  million,  $1.3  million  and  $1.3  million,  respectively.
Additionally,  the Company was compensated by certain affiliates for a number of
support services, which are netted against operating expenses, amounting to $0.6
million, $1.1 million and $0.9 million in 1998, 1997 and 1996, 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-Term and Long-Term Debt Carrying amounts of borrowings  exclude netting of
deferred  debt  costs.  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>
                                                                1998                                   1997
                                          -------------------------------------------------------------------------------
                                                         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                $     -     $    20.3     $   20.3     $   -       $   39.1     $   39.1
    Notes receivable                               -         545.7        567.3         -          269.0        298.8

LIABILITIES
    Short-term notes payable to banks              -        (236.7)      (236.7)        -         (149.0)      (149.0)
    Long-term debt:
       Senior, excluding capital lease
          obligations                              -      (1,275.0)    (1,308.7)        -       (1,139.0)    (1,191.0)
       Subordinated                                -         (55.0)       (58.7)        -          (70.0)       (74.8)

OFF-BALANCE SHEET INSTRUMENTS
    Commitments to extend credit                (163.3)        -         (163.3)     (102.2)         -         (102.2)
    Interest rate swaps                          430.4         -          (16.1)      426.1          -           (4.7)
</TABLE>

Note 11 -- Segment Information and Concentration of Credit Risk

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 $303.0
million  (10.8% of total Company  portfolio)  and $309.7 million (11.5% of total
Company  portfolio)  at  December  31, 1998 and 1997,  respectively.  The second
largest  commercial  aircraft  financing  customer  accounted for $176.4 million
(6.3% of total Company portfolio) and $183.5 million (10.7% of total portfolio),
at  December  31,  1998 and  1997,  respectively.  The five  largest  commercial
aircraft  financing  customers  accounted  for  $895.4  million  (32.0% of total
Company  portfolio)  and $994.4  million  (36.8% of total Company  portfolio) at
December 31, 1998 and 1997,  respectively.  At December 31, 1998 and 1997, there
were no significant  concentrations by customer within the commercial  equipment
leasing portfolio.

In 1998,  1997 and 1996, a single  aircraft  financing  customer  accounted  for
13.6%,  16.8% and 18.0%,  respectively,  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)                                             1998               1997              1996
Operating income:
<S>                                                          <C>                <C>               <C>           
    Commercial aircraft financing                            $       145.8      $       155.5     $        145.2
    Commercial equipment leasing                                     113.5               88.0               68.1
    Other                                                              0.3                2.6                7.5
    Corporate                                                          0.5                0.3                0.7
                                                             =====================================================
                                                             $       260.1      $       246.4     $        221.5
                                                             =====================================================

Income (loss) before provision for income taxes:
    Commercial aircraft financing                            $        58.9      $        58.7     $         55.2
    Commercial equipment leasing                                      51.5               37.7               25.4
    Other                                                              2.2               (0.2)               0.7
    Corporate                                                         (8.0)              (8.4)              (6.4)
                                                             =====================================================
                                                             $       104.6      $        87.8     $         74.9
                                                             =====================================================

Identifiable assets at December 31:
    Commercial aircraft financing                            $     1,632.5      $     1,728.8     $      1,831.6
    Commercial equipment leasing                                   1,223.1              973.3              767.0
    Other                                                              1.1               17.9               53.2
    Corporate                                                          4.7                2.8                1.8
                                                             =====================================================
                                                             $     2,861.4      $     2,722.8     $      2,653.6
                                                             =====================================================

Portfolio at December 31:
    Commercial aircraft financing                            $     1,573.5      $     1,711.5     $      1,814.9
    Commercial equipment leasing                                   1,225.0              976.6              769.8
    Other                                                              1.4               12.2               44.9
                                                             =====================================================
                                                             $     2,799.9      $     2,700.3     $      2,629.6
                                                             =====================================================

Depreciation expense - equipment under operating leases:
    Commercial aircraft financing                            $        40.2      $        26.9     $         35.1
    Commercial equipment leasing                                      30.4               34.2               22.5
                                                             =====================================================
                                                             $        70.6      $        61.1     $         57.6
                                                             =====================================================

Equipment acquired for operating leases, at cost:
    Commercial aircraft financing                            $        75.3      $       146.5     $        196.9
    Commercial equipment leasing                                      81.9              199.7              107.0
                                                             =====================================================
                                                             $       157.2      $       346.2     $        303.9
                                                             =====================================================
</TABLE>

Operating  income from  financing of assets  located  outside the United  States
totaled $55.4 million,  $36.0 million and $28.5 million in 1998,  1997 and 1996,
respectively.


<PAGE>


Boeing Capital Corporation and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts

<TABLE>
<CAPTION>


(Dollars in millions)

  Allowance for
    Losses on           Balance at        Charged to
    Financing           Beginning          Costs and                                                   Balance at End
   Receivables           of Year           Expenses              Other           Deductions (1)            of Year
<S>    <C>           <C>                <C>                 <C>                 <C>                  <C>          
       1998          $       55.9       $       7.4         $       1.3         $       (2.5)        $        62.1

       1997          $       48.6       $      11.5         $      (1.7)        $       (2.5)        $        55.9

       1996          $       42.3       $      14.2         $      (1.9)        $       (6.0)        $        48.6

---------------------------------------
   (1)   Write-offs, net of recoveries

</TABLE>


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

   None.


<PAGE>




                                     Part IV

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

<TABLE>
<CAPTION>

<S>   <C>     <C>                                                                                 <C>    <C>
                                                                                                   Page Number
                                                                                                  in Form 10-K
(a)   1.      Financial Statements:

              Independent Auditors' Reports..............................................................26
              Consolidated Balance Sheets at December 31, 1998 and 1997..................................28
              Consolidated Statements of Income and Income Retained for
                 Growth for the Years Ended December 31, 1998,
                 1997 and 1996...........................................................................29
              Consolidated Statements of Cash Flows for the Years Ended
                 December 31, 1998, 1997 and 1996........................................................30
              Notes to Consolidated Financial Statements.................................................31

      2.      Financial Statement Schedules:

              Schedule II -- Valuation and Qualifying Accounts............................................44
</TABLE>

              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        Amendment to  Certificate  of  Incorporation  of the Company dated
              August 11, 1997,  incorporated herein by reference to Exhibit 3(i)
              to the Company's Form 10-Q, for the period ended June 30, 1997.

   3.3        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).

   4.21       Form of Series X Senior Fixed Rate Medium-Term Note,  incorporated
              by  reference  to  Exhibit   4(e)  to  the   Company's   Form  S-3
              Registration Statement (File No. 333-37635).

   4.22       Form  of  Series  X  Subordinated  Fixed  Rate  Medium-Term  Note,
              incorporated  by reference to Exhibit 4(f) to the  Company's  Form
              S-3 Registration Statement (File No. 333-37635).

   4.23       Form  of  Series  X  Senior   Floating  Rate   Medium-Term   Note,
              incorporated  by reference to Exhibit 4(g) to the  Company's  Form
              S-3 Registration Statement (File No. 333-37635).

   4.24       Form of Series X  Subordinated  Floating  Rate  Medium-Term  Note,
              incorporated  by reference to Exhibit 4(h) to the  Company's  Form
              S-3 Registration Statement (File No. 333-37635).


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       Amended and Restated  Operating  Agreement,  dated as of August 1,
              1997,  incorporated  herein  by  reference  to  Exhibit  10 to the
              Company's Form 10-Q for the quarter ended September 30, 1997.

   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       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.

   10.5       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.

   10.6       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.

   10.7       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.        Computation of Ratio of Earnings to Fixed Charges.

   23.1       Independent Auditors' Consent.

   23.2       Consent of Independent Auditors.

   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.

                                             Boeing Capital Corporation

                                             By   /s/ STEVEN W. VOGEDING
                                             ----------------------------------
                                             Steven W. Vogeding
                                             Vice President and Chief Financial
                                             Officer
 March 31, 1999

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.

<TABLE>
<CAPTION>

<S>             <C>                                                <C>                                   <C>    
                Signature                                          Title                                  Date


         /s/ DEBORAH C. HOPKINS
------------------------------------------
           Deborah C. Hopkins                              Chairman and Director                      March 31, 1999
                                                                                                  ----------------------

         /s/ THOMAS J. MOTHERWAY
------------------------------------------
           Thomas J. Motherway                            President and Director                      March 31, 1999
                                                                                                  ----------------------
      (Principal Executive Officer)


         /s/ DANIEL O. ANDERSON
------------------------------------------
           Daniel O. Anderson                    Vice President - Operations and Director             March 31, 1999
                                                                                                  ----------------------

         /s/ THEODORE J. COLLINS
------------------------------------------
           Theodore J. Collins                                   Director                             March 31, 1999
                                                                                                  ----------------------


         /s/ STEVEN W. VOGEDING
------------------------------------------
           Steven W. Vogeding                   Vice President and Chief Financial Officer            March 31, 1999
                                                                                                  ----------------------
      (Principal Financial Officer)


         /s/ MAURA R. MIZUGUCHI
------------------------------------------
           Maura R. Mizuguchi                                   Controller                            March 31, 1999
                                                                                                  ----------------------
     (Principal Accounting Officer)


</TABLE>