<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                      ------------------------------------

                                   FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM             TO

                        COMMISSION FILE NUMBER 333-56575
                      ------------------------------------

                        MORGAN STANLEY AIRCRAFT FINANCE
            Exact Name of Registrant as specified in trust agreement

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-3521640
         (State or other jurisdiction                         I.R.S. Employer
      of incorporation or organization)                    Identification Number
</TABLE>

                          C/O WILMINGTON TRUST COMPANY
                           1100 NORTH MARKET STREET,
                              RODNEY SQUARE NORTH
                              WILMINGTON, DELAWARE
                                   19890-0001
                                 (302-651-1000)
             (Address and telephone number, including area code, of
                    Registrant's principal executive office)

                      ------------------------------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                      Yes  [X]                    No  [ ]
                      ------------------------------------

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                                     OUTSTANDING AT
ISSUER                                                              CLASS          SEPTEMBER 30, 1999
-------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>
Morgan Stanley Aircraft Finance............................  Beneficial Interest          One
-------------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                        MORGAN STANLEY AIRCRAFT FINANCE

                FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1999

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
PART I. FINANCIAL INFORMATION...............................      2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)....................      2
  -- Interim Condensed Consolidated Financial Statements
     (Unaudited)............................................      2
  -- Notes to the Interim Condensed Consolidated Financial
     Statements (Unaudited).................................      6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.................     13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK.........................................     25
PART II. OTHER INFORMATION..................................     27
ITEM 1. NOT APPLICABLE
ITEM 2. NOT APPLICABLE
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................     27
SIGNATURES..................................................     28
INDEX TO EXHIBITS...........................................     29
APPENDIX 1..................................................     30
</TABLE>

                                        1
<PAGE>   3

                         PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

                 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  AUG 31,       NOV 30,
                                                                   1999           1998
                                                                -----------    ----------
                                                                (UNAUDITED)
<S>                                                             <C>            <C>
                           ASSETS
Cash and cash equivalents...................................    $   37,592     $   34,850
Receivables:
  Lease income, net.........................................         1,600          3,744
  Investment income and other...............................           138            153
Aircraft under operating leases, net........................       897,816        933,111
Investment in capital lease, net............................        18,406         21,581
Underwriting and other issuance related costs, net of
  amortization..............................................        16,214         17,053
                                                                ----------     ----------
Total Assets................................................    $  971,766     $1,010,492
                                                                ==========     ==========
            LIABILITIES AND BENEFICIAL INTERESTHOLDER'S DEFICIT
Payables:
  Interest payable to Noteholders...........................    $    2,489     $    2,655
Deferred rental income......................................         4,765          7,351
Liability for maintenance...................................        58,423         52,489
Other liabilities...........................................        12,662         15,865
Notes payable:
  Subclass A-1..............................................       400,000        400,000
  Subclass A-2..............................................       244,883        274,062
  Subclass B-1..............................................        91,989         94,819
  Subclass C-1..............................................       100,000        100,000
  Subclass D-1..............................................       110,000        110,000
                                                                ----------     ----------
                                                                 1,025,211      1,057,241
                                                                ----------     ----------
Commitments and contingencies
Beneficial Interestholder's Deficit:
  Beneficial Interest.......................................             1              1
  Deemed Distribution.......................................       (15,305)       (15,305)
  Accumulated Deficit.......................................       (38,141)       (31,445)
                                                                ----------     ----------
  Total Beneficial Interestholder's Deficit.................       (53,445)       (46,749)
                                                                ----------     ----------
Total Liabilities and Beneficial Interestholder's Deficit...    $  971,766     $1,010,492
                                                                ==========     ==========
</TABLE>

     See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)

                                        2
<PAGE>   4

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

            INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   THREE MONTHS ENDED      NINE MONTHS ENDED
                                                       AUGUST 31,              AUGUST 31,
                                                  --------------------    --------------------
                                                    1999        1998        1999        1998
                                                  --------    --------    --------    --------
                                                                  (UNAUDITED)
<S>                                               <C>         <C>         <C>         <C>
Revenues:
  Lease income, net...........................    $ 27,898    $ 30,932    $ 87,031    $ 88,737
  Investment income on collection account.....         463         724       1,344       1,685
                                                  --------    --------    --------    --------
  Total revenues..............................      28,361      31,656      88,375      90,422
                                                  --------    --------    --------    --------
Expenses:
  Interest expense............................      15,491      17,693      47,886      34,357
  Depreciation expense........................      11,765      11,765      35,295      27,111
  Operating expenses:
     Service provider and other fees..........       2,153       1,805       6,444       7,481
     Maintenance and other aircraft related
       costs..................................       2,448         305       5,446       2,601
                                                  --------    --------    --------    --------
  Total expenses..............................      31,857      31,568      95,071      71,550
                                                  --------    --------    --------    --------
Net (loss)/income.............................    $ (3,496)   $     88    $ (6,696)   $ 18,872
                                                  ========    ========    ========    ========
</TABLE>

     See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)

                                        3
<PAGE>   5

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
            INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED    NINE MONTHS ENDED
                                                             AUGUST 31, 1999      AUGUST 31, 1998
                                                            -----------------    -----------------
                                                                         (UNAUDITED)
<S>                                                         <C>                  <C>
Cash flows from operating activities
  Net (loss)/income.....................................        $  (6,696)           $  18,872
  Adjustments to reconcile net (loss)/income to net cash
     provided by operating activities:
  Depreciation expense -- aircraft under operating
     leases.............................................           35,295               27,111
  Amortization of underwriting and other issuance
     related costs......................................              839                  553
  Provision for doubtful accounts.......................            7,249                  674
  Changes in assets and liabilities:
     Receivables:
       Investment income and other......................               15                 (165)
       Lease income.....................................           (1,574)              (2,845)
     Investment in capital lease........................             (356)               4,118
     Liability for maintenance..........................            5,934               10,127
     Interest payable to Noteholders....................             (166)               2,890
     Deferred rental income.............................           (2,586)               6,807
     Other liabilities..................................           (3,203)                 958
                                                                ---------            ---------
Net cash provided by operating activities...............           34,751               69,100
                                                                ---------            ---------
Cash flows from investing activities
  Purchase of aircraft..................................               --             (887,315)
                                                                ---------            ---------
Net cash used for investing activities..................               --             (887,315)
                                                                ---------            ---------
Cash flows from financing activities
  Proceeds from Notes, net of issuance costs............               --            1,041,610
  Proceeds from borrowings from Morgan Stanley Financing
     Inc................................................               --              853,490
  Repayment of borrowings from Morgan Stanley Financing
     Inc., including beneficial interest distribution...               --             (976,257)
  Repayments of Notes...................................          (32,009)             (56,434)
  Other costs incurred relating to the issuance of
     Notes..............................................               --               (9,500)
                                                                ---------            ---------
Net cash (used for)/provided by financing activities....          (32,009)             852,909
                                                                ---------            ---------
Net increase in cash and cash equivalents...............            2,742               34,694
Cash and cash equivalents at beginning of period........           34,850                   --
                                                                ---------            ---------
Cash and cash equivalents at end of period..............        $  37,592            $  34,694
                                                                =========            =========
</TABLE>

     See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)

                                        4
<PAGE>   6

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

       INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN BENEFICIAL
                               INTEREST/(DEFICIT)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                RETAINED       TOTAL
                                                                                EARNINGS     BENEFICIAL
                                                  BENEFICIAL      DEEMED      (ACCUMULATED    INTEREST
                                                   INTEREST    DISTRIBUTION     DEFICIT)     (DEFICIT)
                                                  ----------   ------------   ------------   ----------
                                                                       (UNAUDITED)
<S>                                               <C>          <C>            <C>            <C>
Balance at November 30, 1997...................    $      1      $     --       $  4,704      $  4,705
Net income.....................................          --            --         18,872        18,872
Deemed Distribution............................          --       (15,305)            --       (15,305)
Borrowings from Morgan Stanley Financing Inc.
  converted into Beneficial Interest...........     919,859            --             --       919,859
Payment of Beneficial Interest Distribution to
  Morgan Stanley Financing Inc.................    (919,859)           --        (56,398)     (976,257)
                                                   --------      --------       --------      --------
Balance at August 31, 1998.....................    $      1      $(15,305)      $(32,822)     $(48,126)
                                                   ========      ========       ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                RETAINED       TOTAL
                                                                                EARNINGS     BENEFICIAL
                                                  BENEFICIAL      DEEMED      (ACCUMULATED    INTEREST
                                                   INTEREST    DISTRIBUTION     DEFICIT)     (DEFICIT)
                                                  ----------   ------------   ------------   ----------
                                                                       (UNAUDITED)
<S>                                               <C>          <C>            <C>            <C>
Balance at November 30, 1998...................    $      1      $(15,305)      $(31,445)     $(46,749)
Net loss.......................................          --            --         (6,696)       (6,696)
                                                   --------      --------       --------      --------
Balance at August 31, 1999.....................    $      1      $(15,305)      $(38,141)     $(53,445)
                                                   ========      ========       ========      ========
</TABLE>

     See Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)

                                        5
<PAGE>   7

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

  NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

     Morgan Stanley Aircraft Finance ("MSAF") is a special purpose business
trust that was formed on October 30, 1997 under the laws of Delaware. MSAF and
its subsidiaries ("MSAF Group") were formed to conduct certain limited
activities, including acquiring, financing, re-financing, owning, leasing,
re-leasing, selling, maintaining and modifying commercial aircraft. All of the
beneficial interest of MSAF Group is owned by Morgan Stanley Financing, Inc.
("MSF"), a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW").
MSAF Group's obligations, including its financial debt obligations, are not
obligations of, or guaranteed by, MSDW, MSF or any person other than MSAF Group.

     The interim condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the financial
statements and related disclosures. Management believes that the estimates
utilized in the preparation of the interim condensed consolidated financial
statements are prudent and reasonable. Actual results could differ materially
from these estimates.

     All material intercompany transactions have been eliminated.

     The interim condensed consolidated financial statements should be read in
conjunction with MSAF Group's consolidated financial statements and notes
thereto as of and for the twelve months ended November 30, 1998 ("Fiscal 1998").
The interim condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for the fair statement of the results for the interim
period. The results of operations for interim periods are not necessarily
indicative of results for the entire year.

     Certain reclassifications have been made to prior year amounts to conform
to the current presentation.

     New Accounting Pronouncement

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As issued,
SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". SFAS No. 137 deferred the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. MSAF Group is in the process of
evaluating the impact of adopting SFAS No. 133.

NOTE 2 -- CONCENTRATIONS OF CREDIT RISK

     Credit risk with respect to operating lease receivables is generally
diversified due to the number of lessees comprising MSAF Group's customer base
and the different geographic areas in which they operate. At August 31, 1999
MSAF Group had leased aircraft to 28 lessees in 19 countries.

     Many of MSAF Group's lessees are in a relatively weak financial position
because of the difficult economic conditions in the civil aviation industry as a
whole and because, in general, weakly capitalized airlines are more likely to
seek operating leases. In addition, at August 31, 1999, 11 of MSAF Group's
aircraft are being leased to lessees domiciled in certain emerging market
nations, including those located in Eastern Europe, the Middle East, Latin
America and Asia. Emerging market economies have been affected by severe
economic and financial difficulties. The exposure of MSAF Group's aircraft to
particular countries and customers is managed partly through concentration
limits and through obtaining security from lessees by way

                                        6
<PAGE>   8
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

of deposits. MSAF Group will continue to manage its exposure to particular
countries, regions and lessees through concentration limits.

NOTE 3 -- AIRCRAFT

<TABLE>
<CAPTION>
                                                                AUG 31, 1999    NOV 30, 1998
                                                                ------------    ------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                             <C>             <C>
Stage 3 Aircraft and one spare engine:
Cost........................................................      $972,030        $972,030
Less: Accumulated depreciation..............................       (74,214)        (38,919)
                                                                  --------        --------
                                                                  $897,816        $933,111
                                                                  ========        ========
Aircraft cost includes $38.7 million of maintenance
  liabilities that MSAF Group assumed at the date of
  purchase.
FLEET ANALYSIS:
On lease for a further period of:
More than five years........................................             8               7
From one to five years......................................            22              20
Less than one year..........................................             2               5
                                                                  --------        --------
Total aircraft portfolio (including one spare engine and
  excluding aircraft under capital lease)...................            32              32
                                                                  ========        ========
</TABLE>

     At August 31, 1999, there was one non-revenue earning aircraft in MSAF
Group's portfolio which is currently undergoing maintenance work.

NOTE 4 -- INVESTMENT IN CAPITAL LEASE

     One of MSAF Group's aircraft has been leased to a customer under a
sales-type capital lease. The components of MSAF Group's investment in this
lease are as follows:

<TABLE>
<CAPTION>
                                                                AUG 31, 1999    NOV 30, 1998
                                                                ------------    ------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                             <C>             <C>
Minimum lease payments receivable...........................      $ 29,564        $ 26,662
Less: Allowance for doubtful accounts.......................          (308)           (136)
                                                                  --------        --------
Net minimum lease payments receivable.......................        29,256          26,526
Less: Unearned income.......................................       (10,850)         (4,945)
                                                                  --------        --------
Net investment in capital lease.............................      $ 18,406        $ 21,581
                                                                  ========        ========
</TABLE>

     At August 31, 1999, minimum lease payments for each of the five succeeding
fiscal years are $4 million.

     Unearned income is recognized over the term of the lease using the interest
method.

     The provision for doubtful accounts related to this lease of $3.5 million
for the nine months ended August 31, 1999 is recorded as a reduction of lease
income revenues in the Interim Condensed Consolidated Statements of Operations.

     The lessee associated with this capital lease has been experiencing severe
financial difficulties and has been adversely affected by economic uncertainty
in Latin America and the devaluation of the Brazilian currency in January 1999.
As a result, in August 1999 MSAF Group and the lessee agreed to modify the terms
of the existing capital lease by increasing the total rental payments to be
received and by extending the lease

                                        7
<PAGE>   9
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

term. The balances of the net minimum lease payments receivable and unearned
income have been adjusted to reflect the amended terms of the capital lease.

NOTE 5 -- LEASE INCOME RECEIVABLE

     Lease income receivable was as follows:

<TABLE>
<CAPTION>
                                                                AUG 31, 1999    NOV 30, 1998
                                                                ------------    -------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                             <C>             <C>
Lease income receivable.....................................      $  2,228        $  4,297
Less: Allowance for doubtful accounts.......................          (628)           (553)
                                                                  --------        --------
Lease income receivable, net................................      $  1,600        $  3,744
                                                                  ========        ========
</TABLE>

     The provision for doubtful accounts of $3.7 million for the nine months
ended August 31, 1999 is recorded as a reduction of lease income revenues in the
Interim Condensed Consolidated Statements of Operations.

NOTE 6 -- LIABILITY FOR MAINTENANCE

     Activity in the liability for maintenance account was as follows:

<TABLE>
<CAPTION>
                                                                AUG 31, 1999    NOV 30, 1998
                                                                ------------    ------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                             <C>             <C>
Balance, beginning of period................................      $ 52,489        $     --
Liabilities assumed from International Lease Finance
  Corporation...............................................            --          38,735
Collections from lessees....................................        13,702          15,837
Reimbursements to lessees...................................        (9,111)         (2,633)
Net accruals and transfers..................................         1,343             550
                                                                  --------        --------
Balance, end of period......................................      $ 58,423        $ 52,489
                                                                  ========        ========
</TABLE>

NOTE 7 -- NOTES PAYABLE

     MSAF Group has acquired 32 aircraft and one spare engine having an
aggregate cost of $972 million. MSAF Group financed these purchases primarily
through borrowings from MSF and from the net proceeds from MSAF Group's private
placement of securitized notes as discussed below.

     On March 3, 1998, MSAF Group completed an offering of $1,050 million of
securitized notes (the "Notes") on a basis exempt from registration under the
Securities Act of 1933, as amended. Simultaneous with the private placement, the
loan provided by MSF was automatically converted into a beneficial interest held
by MSF. MSAF Group primarily utilized the proceeds from the Notes to pay a
beneficial interest distribution to MSF and to acquire an additional aircraft.
With the exception of MSAF Group, the Notes are not obligations of, or
guaranteed by, MSDW or any of its subsidiaries, including MSF.

     Underwriting and other issuance related costs of $17.9 million which were
incurred in connection with the offering are being amortized over the expected
life of the Notes, which is currently estimated to be 16 years.

                                        8
<PAGE>   10
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

     The repayment terms of each subclass of Notes are such that certain
principal amounts are expected to be repaid based on certain assumptions (the
"Expected Final Payment Date") or refinanced through the issuance of new Notes,
but in any event are ultimately due for repayment on specified final maturity
dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final
Maturity Dates and interest rates applicable to each subclass of the Notes are
listed below:

<TABLE>
<CAPTION>
                                INITIAL
                               PRINCIPAL
                                 AMOUNT                         EXPECTED FINAL    FINAL MATURITY
SUBCLASS OF NOTE             (IN THOUSANDS)    INTEREST RATE     PAYMENT DATE          DATE
----------------             --------------    -------------    --------------    --------------
<S>                          <C>               <C>              <C>               <C>
Subclass A-1.............       $400,000        LIBOR+0.21%     March 15, 2000    March 15, 2023
Subclass A-2.............        340,000        LIBOR+0.35%     Sept. 15, 2005    March 15, 2023
Subclass B-1.............        100,000        LIBOR+0.65%     March 15, 2013    March 15, 2023
Subclass C-1.............        100,000              6.90%     March 15, 2013    March 15, 2023
Subclass D-1.............        110,000              8.70%     March 15, 2014    March 15, 2023
</TABLE>

     If the Subclass A-1 Notes are not repaid on or before the Expected Final
Payment Date for such subclass, such subclass of Notes will accrue interest
thereafter at a rate equal to the stated interest rate therefore, plus 0.50% per
annum ("Step-Up Interest").

     MSAF Group filed a registration statement with the Securities and Exchange
Commission (the "SEC") with respect to an exchange offer (the "Exchange Offer")
for exchange Notes with terms identical to the Notes which was declared
effective on January 12, 1999. The Exchange Offer was consummated on January 18,
1999. MSAF Group paid an additional 0.50% on each of the subclasses of debt
during the period from November 30, 1998 to January 18, 1999, as required under
the terms of the Notes.

     The dates on which principal repayments on the Notes will actually occur
will depend on the cash flows generated by the rental income from MSAF Group's
portfolio of aircraft. Amounts received by MSAF Group are available for
distribution and are paid in accordance with the priorities specified in the
Indenture relating to the Notes.

     Cash paid for interest on the Notes amounted to $43.9 million for the nine
month period ended August 31, 1999, as compared to $30.2 million for the nine
month period ended August 31, 1998. The interest expense for Fiscal 1999 is not
comparable to Fiscal 1998 as the Notes were not issued until March 3, 1998.

NOTE 8 -- LIQUIDITY FACILITIES

     MSAF Group requires liquidity in order to finance many of its primary
business activities, including maintenance obligations, security deposit return
obligations, operating expenses and obligations under the Notes. MSAF Group's
primary sources of liquidity are cash bank deposits and letters of credit.

     The Company's cash account (the "Collection Account") is primarily funded
through the receipt of rental payments from lessees.

     In connection with the issuance of the Notes, the Company entered into two
credit agreements. Under a Custody and Loan Agreement (the "ILFC Facility")
between International Lease Finance Corporation ("ILFC") and MSAF Group, ILFC
will hold substantially all of the cash security deposits paid by lessees with
respect to MSAF Group's aircraft portfolio and will retain the interest earnings
on such security deposits. In addition, ILFC has agreed to extend loans to MSAF
Group in a maximum amount of $10 million plus the aggregate amount of cash
security deposits held by ILFC. Under a Loan Agreement (the "MSDW Facility")
between MSDW and MSAF Group, MSDW has agreed to extend loans in a maximum amount
of $10 million.
                                        9
<PAGE>   11
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

     As of August 31, 1999, the aggregate amount available under the ILFC
Facility and the MSDW Facility was approximately $40.0 million.

NOTE 9 -- DERIVATIVE FINANCIAL INSTRUMENTS

     The leasing revenues of MSAF Group are generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to leases entered into in the future. In general, an
interest rate exposure arises to the extent that MSAF Group's fixed and floating
interest obligations in respect of the Notes do not correlate to the mix of
fixed and floating rental payments for different rental periods. This interest
rate exposure can be managed through the use of interest rate swaps and other
derivative instruments. The Subclass A-1, A-2 and B-1 Notes bear floating rates
of interest and the Subclass C-1 and D-1 Notes bear fixed rates of interest.
MSAF Group is a party to eight interest rate swaps with Morgan Stanley Capital
Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In six of these
swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR on a
total notional balance of $1,000 million and in two of these swaps, MSAF Group
pays one month LIBOR and receives a fixed monthly coupon on a total notional
balance of $200 million.

     All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counterparty, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF Group by
MSCS. Although MSAF Group's floating rate liability at March 3, 1998 was
approximately $800 million (after the repayment of principal due to an
undelivered aircraft), the net economic effect of assigning all eight swaps to
MSAF Group with an aggregate notional amount of $1.2 billion was to fix the
interest rate liability at the November 12, 1997 interest rate. MSAF Group
required this certainty both in furtherance of its interest rate management
policy not to be adversely exposed to material movements in interest rates from
November 12, 1997 (shortly after MSAF entered into the Asset Purchase Agreement)
and by fixing the principal liabilities relating to the transaction, to
facilitate the structuring of the transaction.

     On the date that the eight interest rate swaps were assigned from MSCS to
MSAF Group, such swaps had an aggregate fair value of approximately $(15.3)
million. No consideration was paid to or received by MSAF Group in connection
with the assumption of these swap positions. MSAF Group has recorded the
assumption of these interest rate swaps at their fair value by recognizing a
liability within Other liabilities in its Condensed Consolidated Balance Sheets,
with a corresponding charge to Deemed Distribution, a component of Beneficial
Interestholder's Deficit.

     Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and receive
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges, is recognized as an adjustment to interest expense. The
portion of these swaps not deemed to be an effective hedge is accounted for on a
mark-to-market basis with changes in fair value reflected in interest expense.
Gains and losses resulting from the termination of such interest rate swap
contracts prior to their stated maturity are deferred and recognized when the
offsetting gain or loss is recognized on the hedged transaction. The fair value
of these interest rate swaps at August 31, 1999 was $5.0 million.

     The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
                                       10
<PAGE>   12
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense. At August 31, 1999, the fair value of these swaps was $(6.7)
million.

     The gross notional amounts of these swaps are indicative of MSAF Group's
degree of use of such swaps but do not represent MSAF Group's exposure to credit
or market risk. Credit risk arises from the failure of the counterparty to
perform according to the terms of the swap contract. MSAF Group's exposure to
credit risk at any point in time is represented by the fair value of the swap
contracts reported as assets. MSAF Group does not currently require collateral
to support swap contracts with credit risk. The credit risk of these swap
contracts is monitored by MSAF Group's Trustees.

     MSAF Group does not utilize derivative financial instruments for trading
purposes.

NOTE 10 -- RELATED PARTY TRANSACTIONS

     Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as
Administrative Agent and Financial Advisor, respectively. During the nine month
period ended August 31, 1999, Cabot Aircraft Services Limited received a fee of
$1.2 million for providing these services, which is calculated as a percentage
of the operating lease rentals received. Morgan Stanley & Co. Incorporated
received advisory fees of $0.04 million in this period.

     Prior to the issuance of the Notes, MSAF Group received approximately $920
million of non-interest bearing financing from MSF which was utilized to
purchase 31 of the 32 aircraft and a spare engine in its aircraft portfolio. At
the time of the issuance of the Notes, this loan was automatically converted
into a beneficial interest and a payment of approximately $976 million was made
in the form of a distribution on such beneficial interest and comprised the
following amounts (dollars in millions):

<TABLE>
<S>                                                           <C>
Non-interest bearing loans (subsequently converted into
  beneficial interest)......................................  $920
Distribution (comprising $21 million in lease rentals
  accrued to the date of issuance of the Notes with the
  balance representing finance and other charges paid to
  MSF)......................................................    56
                                                              ----
Total Beneficial Interest Distribution......................  $976
                                                              ====
</TABLE>

     In connection with the issuance of the Notes, MSAF Group paid approximately
$7.1 million in subscription discounts and commissions to subsidiaries of MSDW.

     MSAF Group's counterparty to its interest rate swap agreements is MSCS, a
wholly-owned subsidiary of MSDW.

     MSAF Group's management is comprised of six trustees, including the
Delaware trustee, as MSAF Group has no employees or executive officers. Three of
MSAF Group's six trustees are employees of MSDW. The two remaining trustees and
the Delaware trustee are unaffiliated with MSDW.

NOTE 11 -- COMMITMENTS

     MSAF Group did not have any material contractual commitments for capital
expenditures at August 31, 1999.

     In accordance with the terms of a servicing agreement (the "Servicing
Agreement"), ILFC (the "Servicer") is performing certain aircraft related
activities with respect to MSAF Group's aircraft portfolio. Such activities
include marketing MSAF Group's aircraft for lease or sale and monitoring lessee
compliance

                                       11
<PAGE>   13
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

with lease terms including terms relating to payment, maintenance and insurance.
In accordance with the Servicing Agreement, fees payable to ILFC by MSAF Group
are calculated as a percentage of the lease rentals contracted and received, in
addition to a base fee and certain incentive-based fees.

     The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.

NOTE 12 -- PROPOSED ACQUISITION

     During the fourth quarter of Fiscal 1999, MSAF Group intends to acquire a
portfolio of 28 commercial jet aircraft from certain subsidiaries of MSDW. MSAF
Group intends to finance this acquisition by issuing additional notes.

                                       12
<PAGE>   14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

INTRODUCTION

     The MSAF Group entities were organized in late 1997 and since that time
their principal business activity has been the acquisition of aircraft and the
placement of such aircraft on operating lease. MSAF Group's future business is
expected to consist principally of aircraft operating lease activities,
acquisitions of additional aircraft and sales of aircraft. Cash flows generated
from such activities will be used to service interest and principal on the
Notes, any refinancing notes and any additional notes but only after various
expenses of MSAF Group have been paid for, including any taxes, obligations to
lessees including maintenance obligations, fees and expenses of ILFC and other
service providers and payments to MSAF Group's interest rate swap
counterparties.

     MSAF Group's ability to generate sufficient cash from its aircraft assets
to service the Notes will depend primarily on (i) the rental rates it can
achieve on leases and the lessees' ability to perform according to the terms of
those leases and (ii) the prices it can achieve on any aircraft sales. MSAF
Group's ability to service the Notes will also depend on the level of its
operating expenses, including maintenance obligations which will increase as the
aircraft age, and on any unforeseen contingent liabilities arising.

     MSAF Group's cash receipts and disbursements are determined, in part, by
the overall economic condition of the operating leasing market. The operating
leasing market, in turn, is affected by various cyclical factors including
interest rates, the availability of credit, fuel costs and general and regional
economic conditions affecting lessee operations and trading; manufacturer
production levels; passenger demand; retirement and obsolescence of aircraft
models; manufacturers exiting or entering the market or ceasing to produce
aircraft types; re-introduction into service of aircraft previously in storage;
governmental regulation; and air traffic control infrastructure constraints such
as limitations on the number of landing slots.

     MSAF Group's ability to compete against other lessors is determined, in
part, by (i) the composition of its fleet in terms of mix, relative age and
popularity of the aircraft types; (ii) operating restrictions imposed by the
Indenture, and (iii) the ability of other lessors, who may possess substantially
greater financial resources, to offer leases on more favorable terms than MSAF
Group.

     Any statements contained herein that are not historical facts, or that
might be considered an opinion or projection, whether expressed or implied, are
meant as, and should be considered, forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on assumptions and opinions concerning a variety of known
and unknown risks. If any assumptions or opinions prove incorrect, any
forward-looking statements made on that basis may also prove materially
incorrect.

RECENT DEVELOPMENTS

     THE AIRCRAFT

     As of August 31, 1999, the total number of aircraft owned by MSAF Group was
32 aircraft plus a spare engine. 31 aircraft and the engine were on lease to 28
lessees in 19 countries. As of August 31, 1999, one aircraft, a B747-300B which
is currently undergoing maintenance work, was non-revenue earning.

     LESSEE DIFFICULTIES

     As of October 1, 1999, six existing lessees were in arrears. The seven
aircraft on lease to the six lessees in arrears represent approximately 18.3% of
the appraised value of the portfolio at September 30, 1998. The total amount
outstanding and overdue for the six lessees in respect of rental payments,
maintenance reserves and other miscellaneous amounts due under the leases
(excluding restructured arrears) amounted to approximately $3.2 million. MSAF
Group holds security deposits of $2.8 million against these arrears. The
weighted average number of days past due of such arrears was 51 days.

     Two of the six lessees, both based in Brazil, have restructured their
arrears. See "Latin America (Emerging)" below. In the case of one lessee,
representing 2.1% of the portfolio by appraised value at
                                       13
<PAGE>   15

September 30, 1998, the total rental payments, maintenance reserves and other
amounts owed at March 24, 1999, the date of the restructuring, was $0.5 million.
Under the restructuring, this amount is due to be repaid in full by February
2000. At October 1, 1999, $0.1 million of restructured arrears were due and
unpaid.

     In the case of the other lessee, representing 2.9% of the portfolio by
appraised value at September 30, 1998, the total rental payments, maintenance
reserves and other amounts owed at August 18, 1999, the date of the
restructuring, was $3.5 million. The total arrears restructured, including
default interest, was $3.7 million. In August 1999, MSAF Group and the lessee
agreed to modify the terms of the existing capital lease by increasing the total
rental payments to be received and by extending the lease term.

     In addition, as of October 1, 1999, an aggregate of $4.4 million (net of
security deposits) was owed to MSAF Group from three of its former lessees. $3.8
million of this aggregate relates to a single Brazilian lessee. In two cases,
MSAF Group has leased the aircraft to other lessees. The third aircraft is
currently non-revenue earning and relates to a single Brazilian lessee (See
Latin America (Emerging) below).

     REGIONAL ANALYSIS OF EXISTING ARREARS

     The categorization of countries into geographical regions, Developed
Markets, Emerging Markets and Other is determined using Morgan Stanley Capital
International, Inc. ("MSCI") designations.

     EUROPE AND MIDDLE EAST (EMERGING)

     MSAF Group currently leases 9.0% of the portfolio by appraised value at
September 30, 1998 in the Europe and Middle East (Emerging) region. One of the
existing lessees in arrears is based in Turkey. At October 1, 1999, the total
rental and maintenance arrears owed by this lessee was $0.7 million. The
aircraft represents 4.3% of the appraised value of the portfolio at September
30, 1998.

     EUROPE (DEVELOPED)

     MSAF Group currently leases 31.6% of the portfolio by appraised value at
September 30, 1998 in the Europe (Developed) region. At October 1, 1999, one of
the existing lessees based in Ireland was in arrears for rental and maintenance
obligations of $0.3 million (net of security deposit). The aircraft represents
3.1% of the appraised value of the portfolio at September 30, 1998.

     ASIA (EMERGING)

     MSAF Group currently leases 13.0% of the portfolio by appraised value at
September 30, 1998 in the Asia (Emerging) region. At October 1, 1999 none of
these lessees were in arrears.

     LATIN AMERICA (EMERGING)

     MSAF Group currently leases 11.4% of the portfolio in the Latin America
(Emerging) region (6.4% in Mexico and 5.0% in Brazil) by appraised value of the
portfolio at September 30, 1998. Two existing lessees in arrears are based in
Latin America.

     Brazil has experienced significant downturns in its economy and financial
markets, with large decreases in financial asset prices, and, since it devalued
its currency on January 13, 1999, dramatic decreases in the value of its
currency.

     In July 1999, a former Brazilian lessee negotiated early termination of a
B747-300 lease that was scheduled to expire in April 2003. The total amount of
rental payments and maintenance reserves due under this lease (net of security
deposit of $1.0 million) to July 1999, the date of the termination agreement was
$3.8 million. The former lessee, under the provisions of a restructuring
agreement, has agreed to repay arrears of $4.8 million (excluding security
deposit) and approximately $6.0 million for certain maintenance and downtime
costs over the next eight years. Payments to MSAF Group will be made
semi-annually beginning October 15, 1999 with final payment due on October 15,
2007. The aircraft is currently undergoing maintenance work by the former
lessee, which is scheduled for completion in February 2000, prior to re-

                                       14
<PAGE>   16

leasing. It is likely that the aircraft will be non-revenue earning for several
months as re-leasing may be difficult as the market for this aircraft type is
currently weak. The former lessee will bear the cost of storing and insuring the
aircraft until May 2000 (or earlier if the Servicer can secure a new lessee).
This aircraft represents approximately 6.1% of the portfolio by appraised value
at September 30, 1998.

     An existing Brazilian lessee, representing 2.9% of the appraised value of
the portfolio at September 30, 1998, has been operating one A310-300 subject to
a capital lease and has not made lease payments since September 1998. In August
1999, MSAF Group and the lessee agreed to modify the terms of the existing
capital lease by increasing the total rental payments to be received and by
extending the lease term. As of October 1, 1999, $0.4 million of arrears were
due and unpaid.

     The rental arrears of the second existing Brazilian lessee, which accounts
for 2.1% of the appraised value of the portfolio at September 30, 1998, were
restructured in March 1999. At October 1, 1999, $0.1 million of restructured
arrears and $1.2 million of current arrears were due and unpaid. MSAF Group
holds a security deposit of $0.7 million against the current arrears.

     NORTH AMERICA (DEVELOPED)

     MSAF Group currently leases 12.8% of the portfolio by appraised value at
September 30, 1998 in the North America (Developed) region. At October 1, 1999,
one existing lessee based in the U.S. was in arrears and owed $0.5 million in
rental and maintenance obligations on two aircraft. MSAF Group holds security
deposits of $0.8 million for this lessee. The two aircraft on lease to this
lessee represent approximately 3.8% of appraised value of the portfolio at
September 30, 1998.

     OTHER

     MSAF Group currently leases 16.1% of the portfolio by appraised value at
September 30, 1998 in other regions. As of October 1, 1999, one of the existing
lessees was in arrears for rental and maintenance obligations, which is covered
by the security deposit held in respect of this lessee. The aircraft represents
2.1% of the appraised value of the portfolio at September 30, 1998.

     A lease with Guyana Airways was terminated by agreement on April 2, 1999
with rental arrears of $1.3 million. The total estimated costs of redelivery are
likely to be in excess of amounts to be received from Guyana Airways. The
aircraft is a B757-200 and accounts for 3.3% of the appraised value of the
portfolio at September 30, 1998. The aircraft was re-leased to National
Airlines, a U.S. carrier in June 1999.

     PROPOSED AIRWORTHINESS DIRECTIVE

     On August 11, 1999 the United States Federal Aviation Administration issued
a Notice of Proposed Rule Making ("NPRM") relating to fire safety standards in
certain types of aircraft. As proposed, the resulting Airworthiness Directive
("AD") would require operators of those aircraft to replace the current fire
insulation blankets. MSAF Group cannot determine whether this NPRM will result
in an AD. If the NPRM results in an AD, MSAF Group's one MD-82 and two MD-83
aircraft would be affected. Under the relevant leases, all costs of compliance
with ADs are obligations of the lessees.

     PROPOSED ACQUISITION

     During the fourth quarter of Fiscal 1999, MSAF Group intends to acquire a
portfolio of 28 commercial jet aircraft from certain subsidiaries of MSDW. MSAF
Group intends to finance this acquisition by issuing additional notes.

                                       15
<PAGE>   17

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 31, 1999,
AND THE THREE MONTHS ENDED AUGUST 31, 1998

     NET (LOSS)/INCOME

     For the three month period ended August 31, 1999 MSAF Group incurred a net
loss of ($3.5) million, as compared to net income of $0.1 million for the three
month period ended August 31, 1998. The decrease reflects lower rental revenues
and higher maintenance and other aircraft related costs, partially offset by a
decrease in interest expense.

     MSAF Group is a Delaware business trust treated as a branch of MSF for U.S.
federal, state and local income tax purposes. As such, MSAF Group is not subject
to U.S. federal, state and local income taxes.

     LEASE INCOME

     Lease income for the three month period ended August 31, 1999 amounted to
$27.9 million as compared to $30.9 million for the three month period ended
August 31, 1998. Lease income for the three month period ended August 31, 1999
is lower due to aircraft being re-leased in less favorable economic conditions,
coupled with lost revenues from one grounded aircraft. MSAF Group's operating
results for the three month period ended August 31, 1999 were adversely affected
by provisions for doubtful accounts totaling $1.2 million. Such provisions were
recorded by MSAF Group due to financial difficulties experienced by certain of
MSAF Group's existing lessees, as well as to reserve against amounts owed to
MSAF Group by certain of its former lessees whose aircraft have already been
repossessed (see "LESSEE DIFFICULTIES"). Provisions for doubtful accounts were
$0.7 million in the three month period ended August 31, 1998. Lease income may
decline in future periods due to potential lessee defaults and arrears including
those discussed above.

     MSAF Group records the cash prepayments made by lessees for maintenance as
a component of the liability for maintenance account which appears on the
Interim Condensed Consolidated Balance Sheets. When the lessee incurs
maintenance expenditures, MSAF Group must return a corresponding amount of the
prepayment to the lessee. At this time, MSAF Group will forward cash to the
lessee, with a corresponding decrease to the liability for maintenance account.
MSAF Group will only reimburse the lessee for the cost of maintenance
expenditures to the extent that sufficient prepayments have been made by the
lessee. At the time an aircraft is re-leased to a new lessee, an assessment is
made of the expected maintenance reserve requirements; any excess reserve is
then released to lease income. No maintenance reserves were released to lease
income in the three month period ended August 31, 1999 and 1998.

     INVESTMENT INCOME

     Investment income for the three month period ended August 31, 1999 amounted
to $0.5 million as compared to $0.7 million in the three month period ended
August 31, 1998. Investment income represents interest income on MSAF Group's
cash and cash equivalents.

     INTEREST EXPENSE

     Interest expense, including swap costs of $1.3 million, amounted to $15.5
million for the three month period ended August 31, 1999. Interest expense,
including swap costs of $0.8 million, amounted to $17.7 million for the three
month period ended August 31, 1998. Interest expense relates to the interest
paid on the Notes which were issued on March 3, 1998. The decline in interest
expense is due to lower average interest rates and principal balances of the
Notes for the three month period ended August 31, 1999 as compared to the prior
year period. The weighted average interest rate on the Subclass A-1 to D-1 Notes
during the three month period ended August 31, 1999 was 5.89% and during the
three month period ended August 31, 1998 was 6.36%. The average debt in respect
of the Subclass A-1 to D-1 Notes during the three month period ended August 31,
1999 was $949.3 million, and the three month period ended August 31, 1998 was
$1,010.0 million.

     MSAF Group is a party to eight interest rate swaps with Morgan Stanley
Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In six of
these swaps, MSAF Group pays a fixed monthly
                                       16
<PAGE>   18

coupon and receives one month LIBOR on a notional balance of $1,000 million and
in two of these swaps, MSAF Group pays one month LIBOR and receives a fixed
monthly coupon on a notional balance of $200 million.

     All eight swaps were originally entered into by MSCS, with an internal
swaps desk as the counterparty, on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight swaps were assigned to MSAF Group by
MSCS and on such date such swaps had an aggregate fair value of approximately
$(15.3) million. No consideration was paid to or received by MSAF Group in
connection with the assumption of these swap positions. MSAF Group has recorded
the assumption of these interest rate swaps at their fair value by recognizing a
liability within Other liabilities in its Interim Condensed Consolidated Balance
Sheets, with a corresponding charge to Deemed Distribution, a component of
Beneficial Interestholder's Deficit.

     Four of the swaps assumed from MSCS having an aggregate notional principal
amount of $800 million are accounted for as hedges of its obligations under the
Notes. Under these swap arrangements MSAF Group will pay fixed and receive
floating amounts on a monthly basis. The fair value of the liability assumed
relating to those swaps which are being accounted for as hedges is being
deferred and recognized when the offsetting gain or loss is recognized on the
hedged transaction. This amount and the differential payable or receivable on
such interest rate swap contracts, to the extent such swaps are deemed to be
effective hedges for accounting purposes, are recognized as an adjustment to
interest expense. The portion of these swaps not deemed to be effective hedges
for accounting purposes are accounted for on a mark-to-market basis with changes
in fair value reflected in interest expense.

     The remaining four swaps assumed by MSAF Group have an aggregate gross
notional principal amount of $400 million. Under these swap arrangements, MSAF
Group will pay/receive fixed and receive/pay floating amounts on a monthly
basis. MSAF Group determined that these swaps do not qualify for hedge
accounting. The fair value of the liability assumed related to these swaps is
accounted for on a mark-to-market basis with changes in fair value reflected in
interest expense.

     Notwithstanding the different accounting treatments for the various swaps,
all eight swaps were required to hedge MSAF Group's interest rate exposure on an
economic basis. In November 1997, MSAF Group had contracted to purchase the
aircraft and their associated fixed rate leases but, prior to the time of
pricing the Notes, was exposed to movements in interest rates with respect to
its anticipated liabilities under the Notes. Accordingly, in November 1997, six
swaps with a notional balance of $1,000 million were entered into by MSCS under
which MSAF Group would pay fixed amounts and receive floating amounts. Once the
Notes were priced in February 1998, MSAF Group could determine that to hedge the
interest rate exposure associated with its variable rate debt it required swaps
with a notional balance of approximately $800 million. Accordingly, in February
1998, MSCS entered into re-balancing swaps with a notional amount of $200
million under which MSAF Group would pay floating amounts and receive fixed
amounts.

     The net economic effect of assigning all eight swaps with a gross notional
amount of $1.2 billion to MSAF Group on March 3, 1998 was to fix MSAF Group's
interest rate liability at November 12, 1997, shortly after the date MSAF Group
incurred its exposure to movements in interest rates when it agreed to purchase
the aircraft with associated fixed rate leases. See "Interest Rate Risk
Management" below for more information regarding MSAF Group's swaps positions
and hedging policy.

     DEPRECIATION

     Depreciation expense amounted to $11.8 million for the three month period
ended August 31, 1999 and 1998.

     OPERATING EXPENSES

     Service Provider and Other Fees.  Service provider and other fees for the
three month period ended August 31, 1999 were $2.2 million as compared to $1.8
million in the three month period ended August 31, 1998. The most significant
element in both periods was the aircraft servicing fee paid to ILFC which
amounted to $1.3 million in the three month period ended August 31, 1999 and
$0.9 million in the three

                                       17
<PAGE>   19

month period ended August 31, 1998. The higher servicing fee in Fiscal 1999
reflects an increase in the annual base fee payable to ILFC. MSAF Group's
service provider expenses also included $0.4 million in respect of
administrative agency and cash management fees in the three months ended August
31, 1999 as compared to $0.5 million in the three months ended August 31, 1998.

     Maintenance and Other Aircraft Related Costs.  Maintenance and other
aircraft related costs for the three month period ended August 31, 1999 were
$2.4 million as compared to $0.3 million for the three month period ended August
31, 1998. The expense for the quarter ended August 31, 1999 includes certain
maintenance and redelivery costs incurred by MSAF Group associated with an
aircraft previously leased to Guyana Airways. Such costs were necessary to
prepare the aircraft for a new lessee (see "LESSEE DIFFICULTIES"). The expense
also includes an accrual for maintenance costs to be incurred on an aircraft
leased to a Brazilian carrier.

     Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the three month period ended
August 31, 1999, which amounted to $0.5 million, as compared to $0.2 million for
the three month period ended August 31, 1998. It is expected that re-leasing
costs will increase over the next several months due to costs relating to
reconfiguring aircraft for new lessees upon redelivery.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED AUGUST 31, 1999,
AND THE NINE MONTHS ENDED AUGUST 31, 1998

     MSAF Group's results of operations for the nine months ended August 31,
1999 are not directly comparable to those of the nine months ended August 31,
1998 as MSAF Group did not own its aircraft portfolio throughout the entire nine
month period ended August 31, 1998. In addition, the Notes were issued on March
3, 1998 and accordingly, MSAF Group did not incur any interest expense for the
first three months of the nine month period ended August 31, 1998.

     NET (LOSS)/INCOME

     For the nine month period ended August 31, 1999 MSAF Group incurred a net
loss of ($6.7) million as compared to net income of $18.9 million for the nine
month period ended August 31, 1998. The decrease primarily reflects higher
interest expense, depreciation expense and maintenance and other aircraft
related costs.

     LEASE INCOME

     Lease income for the nine month period ended August 31, 1999 amounted to
$87.0 million as compared to $88.7 million for the nine month period ended
August 31, 1998. MSAF Group's operating results for the nine month period ended
August 31, 1999 were adversely affected by provisions for doubtful accounts
aggregating $7.2 million. Such provisions were recorded by MSAF Group due to
financial difficulties experienced by certain of its existing lessees, as well
as to reserve against amounts owed to MSAF Group by certain of its former
lessees whose aircraft have already been repossessed (see "LESSEE
DIFFICULTIES"). Provisions for doubtful accounts amounted to $0.7 million for
the nine month period ended August 31, 1998. The increase in provisions for
doubtful accounts were partially offset by an increase in lease revenues, as
MSAF Group did not own all of the aircraft throughout the nine month period
ended August 31, 1998.

     INVESTMENT INCOME

     Investment income for the nine month period ended August 31, 1999 was $1.3
million as compared to $1.7 million for the nine month period ended August 31,
1998.

     Investment income has declined as the excess cash held in March 1998 was
utilized to acquire an additional aircraft during Fiscal 1998, as well as the
return of excess cash to investors in respect of an undelivered aircraft.

                                       18
<PAGE>   20

     INTEREST EXPENSE

     Interest expense, including swap costs of $4.2 million, amounted to $47.9
million for the nine month period ended August 31, 1999. Interest expense,
including swap costs of $1.3 million, amounted to $34.4 million for the nine
month period ended August 31, 1998. The increase reflects that MSAF Group did
not issue the Notes until March 1998. The weighted average interest rate on the
Subclass A-1 to D-1 Notes during the nine month period ended August 31, 1999 was
5.99% and the average debt in respect of the Subclass A-1 to D-1 Notes
outstanding during the nine month period ended August 31, 1999 was $963.9
million.

     DEPRECIATION

     Depreciation expense for the nine month period ended August 31, 1999
amounted to $35.3 million, as compared to $27.1 million for the nine month
period ended August 31, 1998. The increase in Fiscal 1999 reflects that MSAF
Group did not own all of the aircraft throughout the entire nine month period
ended August 31, 1998.

     OPERATING EXPENSES

     Service Provider and Other Fees.  Service provider and other fees for the
nine month period ended August 31, 1999 were $6.4 million as compared to $7.5
million for the nine month period ended August 31, 1998. The most significant
element in both periods was the aircraft servicing fee paid to ILFC, which
amounted to $4.0 million in the nine month period ended August 31, 1999, and
$4.6 million in the nine month period ended August 31, 1998. The fee paid in the
nine month period ended August 31, 1998 included an initial upfront fee of $2.0
million paid to ILFC at the inception of the Servicing Agreement. MSAF Group's
service provider expenses also included $1.2 million in respect of
administrative agency and cash management fees in the nine month period ended
August 31, 1999 as compared to $0.9 million in the nine month period ended
August 31, 1998. These fees were lower in the nine month period ended August 31,
1998 as MSAF Group did not own all of the aircraft throughout that period.

     Maintenance and Other Aircraft Related Costs.  Maintenance and other
aircraft related costs for the nine month period ended August 31, 1999 were $5.4
million as compared to $2.6 million for the nine month period ended August 31,
1998. The expense for the nine month period ended August 31, 1999 includes
certain provisions for maintenance and redelivery costs on aircraft.

     Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the nine month period ended
August 31, 1999, which amounted to $2.0 million, as compared to $0.6 million for
the nine month period ended August 31, 1998. The increase reflects a higher
level of re-leasing events during the nine month period ended August 31, 1999.

FINANCIAL RESOURCES AND LIQUIDITY

     Refer to Appendix 1 for additional information regarding the cash
performance of MSAF Group for the period from May 12, 1999 to August 16, 1999.

     LIQUIDITY

     MSAF Group's cash and cash equivalents at August 31, 1999 were $37.6
million. Of this amount, $25 million represents the cash portion of the
Liquidity Reserve Amount (as defined below) and $12.6 million represents rental
and maintenance receipts and cash held for accrued expenses.

     In addition to the $25 million cash portion at August 31, 1999, the
Liquidity Reserve Amount also contained $40.0 million of undrawn credit and
liquidity facilities from MSDW and ILFC.

                                       19
<PAGE>   21

     CASH FLOWS FROM OPERATING ACTIVITIES

     Operating cash flows depend on many factors including the performance of
lessees and MSAF Group's ability to re-lease aircraft, the average interest
rates of the Notes, the effectiveness of MSAF Group's interest rate hedging
policies and whether MSAF Group will be able to refinance certain subclasses of
Notes that may not be repaid with lease cash flows.

     Net cash provided by operating activities for the nine month period ended
August 31, 1999 amounted to $34.8 million, principally reflecting non-cash
depreciation expense of $35.3 million, a net loss of ($6.7) million and
provision for doubtful accounts of $7.2 million.

     Net cash provided by operating activities for the nine month period ended
August 31, 1998 amounted to $69.1 million, principally reflecting net income of
$18.9 million, non-cash depreciation expense of $27.1 million, an increase in
the liability for maintenance of $10.1 million and an increase in deferred
rental income of $6.8 million.

     CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES

     In the nine month period ended August 31, 1999, MSAF Group did not utilize
any cash for investing activities, while in the nine month period ended August
31, 1998, cash of $887.3 million was used to acquire aircraft.

     In the nine month period ended August 31, 1999, the $32.0 million of cash
used for financing activities reflected repayments of principal on the Notes. In
the nine month period ended August 31, 1998, net cash flows from financing
activities were $852.9 million, reflecting proceeds received from the issuance
of Notes, repayment of borrowings from MSF and repayments of principal on the
Notes.

     INDEBTEDNESS

     MSAF Group's indebtedness primarily consisted of the Subclass A-1 to D-1
Notes in the amount of $946.9 million at August 31, 1999.

     LIQUIDITY RESERVE AMOUNT

     The "LIQUIDITY RESERVE AMOUNT" is intended to serve as a source of
liquidity for MSAF Group's maintenance obligations, security deposit return
obligations, operating expenses, contingent liabilities and Note obligations.
The Liquidity Reserve Amount may be funded with cash and letters of credit,
guarantees or other credit support instruments ("ELIGIBLE CREDIT FACILITIES")
provided by, or supported with further Eligible Credit Facilities provided by, a
person (an "ELIGIBLE PROVIDER") whose short-term unsecured debt is rated P-1 by
Moody's Investors Service, A-1+ by Standard & Poor's, or D-1+ by Duff & Phelps
or is otherwise designated as an Eligible Provider by the Controlling Trustees.
Both the ILFC facility discussed below under "-- ILFC Facility" and the MSDW
facility discussed below under "-- MSDW Facility" are Eligible Credit Facilities
and comprise part of the Liquidity Reserve Amount. There are currently no other
Eligible Credit Facilities in place.

     The Liquidity Reserve Amount was approximately $65.0 million on August 31,
1999. The "MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded with cash and with
Eligible Credit Facilities and was approximately $15 million on August 31, 1999.
The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount may be
increased or decreased from time to time for any reason (including upon
acquisitions of additional aircraft) by an action of the Controlling Trustees in
light of changes in, inter alia, the condition of the Aircraft, the terms and
conditions of the leases, the financial condition of the lessees, sales of
aircraft and prevailing industry conditions; provided that MSAF Group will
obtain confirmation in advance in writing from the rating agencies that any
proposed reduction in the Liquidity Reserve Amount or the Minimum Liquidity
Reserve Amount will not result in a lowering or withdrawal by any of the rating
agencies of their respective ratings of any Notes.

                                       20
<PAGE>   22

     If the balance of cash on deposit, together with the amount available for
drawing under any Eligible Credit Facilities, should fall below the Liquidity
Reserve Amount at any time (including as a result of MSAF Group's determination
that the Liquidity Reserve Amount should be increased, as required by the rating
agencies or otherwise), MSAF Group may continue to make all payments, and any
credit or liquidity enhancement facilities may be drawn to fund such payments,
including required payments on the Notes, which rank prior to, or equally with,
payments of the minimum principal payment amount on the class D Notes under the
Indenture and any Permitted Accruals other than in respect of Modification
Payments, provided that the balance of cash on deposit, together with the amount
available for drawing under any Eligible Credit Facilities, does not fall below
the Minimum Liquidity Reserve Amount at its then current level. "MODIFICATION
PAYMENTS" are any capital expenditures for the purpose of effecting any optional
improvement or modification of any aircraft, or for the optional conversion of
any aircraft from a passenger aircraft to a freighter or mixed-use aircraft, for
the purpose of purchasing or otherwise acquiring any engines or parts outside of
the ordinary course of business. "PERMITTED ACCRUALS" are amounts in respect of
expenses and costs that are not regular, monthly recurring expenses, including
Modification Payments and refinancing expenses, if any, anticipated to become
due and payable in any future interest accrual period. However, the balance of
cash on deposit, together with the amount available for drawing under any
Eligible Credit Facilities, may fall below the Minimum Liquidity Reserve Amount
at its then current level and MSAF Group may continue to make payments of, and
any credit or liquidity enhancement facilities may be drawn to fund such
payments, all accrued and unpaid interest on any subclass of the most senior
class of Notes then outstanding to avoid an event of default, with respect to
the Notes and, on the final maturity date of any subclass thereof, principal of,
any subclass of the most senior class of Notes then outstanding to avoid an
event of default with respect to the Notes.

     Amounts drawn under any Eligible Credit Facility will either be repayable
at the third level in the priority of payments, as set forth in the Indenture
before the First Collection Account Top-Up (any such facility, a "PRIMARY
ELIGIBLE CREDIT FACILITY") or at the 11th level in the priority of payments,
before the Second Collection Account Top-Up (any such facility, a "SECONDARY
ELIGIBLE CREDIT FACILITY"). The "FIRST COLLECTION ACCOUNT TOP-UP" is the amount,
if positive, equal to (A) the Minimum Liquidity Reserve Amount less (B) amounts
available for drawing under any Primary Eligible Credit Facilities. The "SECOND
COLLECTION ACCOUNT TOP-UP" is the amount, if positive, equal to (A) the
Liquidity Reserve Amount less (B) an amount equal to cash amounts reserved at
the third level in the priority of payments plus amounts available for drawing
under any Eligible Credit Facilities.

     The Liquidity Reserve Amount and the Minimum Liquidity Reserve Amount have
been determined largely based on an analysis of historical experience,
assumptions regarding MSAF Group's future experience and the frequency and cost
of certain contingencies in respect of the aircraft currently owned by MSAF
Group, and are intended to provide liquidity for meeting the cost of maintenance
obligations and non-maintenance, aircraft-related contingencies such as removing
regulatory liens, complying with airworthiness directives (AD's), repossessing
and re-leasing aircraft. In analyzing the future impact of these costs,
assumptions have been made regarding their frequency and amount based upon
historical experience. There can be no assurance, however, that historical
experience will prove to be relevant in the future or that actual cash received
by MSAF Group in the future will not be significantly less than that assumed.
Any significant variation may materially adversely affect the ability of MSAF
Group to make payments of interest and principal on the Notes.

     ILFC FACILITY

     Under the ILFC facility, ILFC will hold certain security deposits with
respect to the aircraft currently owned by MSAF Group as custodian for the
benefit of the MSAF Group. ILFC will hold all cash security deposits paid with
respect to the aircraft in MSAF Group's initial portfolio other than, (i)
amounts determined in good faith by ILFC to be no longer held on behalf of a
lessee, whether upon expiry of or default under the applicable lease or
otherwise, and (ii) any cash security deposits in an amount exceeding three
months' rent with respect to a single aircraft and paid by a single lessee. Any
interest accruing on amounts of aircraft security deposits that are being held
by ILFC will generally accrue for the benefit of ILFC.

                                       21
<PAGE>   23

     In addition, under the ILFC facility, ILFC will make loans to MSAF Group
which MSAF Group may use for the same purposes as those for which the Liquidity
Reserve Amount may be applied as discussed above under "-- Liquidity Reserve
Amount," including to pay interest and minimum principal payment amounts payable
under the Indenture on the Notes. ILFC's obligation to make such amounts
available shall be limited to the ILFC facility commitment which was
approximately $30.0 million on August 31, 1999. The ILFC facility commitment
shall be equal to, (i) at any time before an early termination of the Servicing
Agreement for a reason other than a sale of all the aircraft in MSAF Group's
current portfolio or the repayment or defeasance of MSAF Group's debt (a
"FACILITY REDUCTION EVENT"), the sum of, (A) $10 million plus, (B) total
security deposits held by ILFC for the benefit of MSAF Group at such time minus,
(C) all drawings previously made by MSAF Group under the ILFC facility and
required to be repaid to ILFC but not repaid at such time, and (ii) at any time
from and after a Facility Reduction Event, $10 million minus all ILFC facility
drawn amounts required to be repaid to ILFC but not repaid at such time.

     The ILFC facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the ILFC facility, MSAF Group
will be obligated, to the extent there are available collections remaining after
payment of the minimum principal payment amount on the class D Notes under the
Indenture, to repay ILFC facility drawn amounts to ILFC, together with interest
accrued thereon at 3% per annum, calculated on the basis of a 360-day year
consisting of twelve 30-day months and compounded daily.

     ILFC's agreement to provide the ILFC facility will expire on the earliest
of, (i) May 26, 2023, (ii) a sale of all the aircraft, and (iii) the repayment
or defeasance of all MSAF Group's debt.

     At any time and for so long as ILFC is not an Eligible Provider, ILFC's
obligations under the ILFC facility will be supported by an Eligible Credit
Facility satisfactory to MSAF Group provided by an Eligible Provider at ILFC's
expense (a "BACK-UP FACILITY").

     MSAF Group may borrow under the ILFC facility, (i) in order to pay interest
and minimum principal payment amounts on the Notes, (ii) upon a downgrade in the
short-term unsecured debt rating of the provider of the Back-Up Facility such
that it is no longer an Eligible Provider, and (iii) upon failure by the
provider of the Back-Up Facility to renew the Back-Up Facility (the events
described in clause (ii) and (iii), each, a "SUSPENSION EVENT"). If for any
reason ILFC fails to make any loan requested when due, MSAF Group may draw on
the Back-Up Facility.

     In the event of a loan by ILFC, or a drawing on the Back-Up Facility, in a
Suspension Event (a "SUSPENSION DRAWING"), MSAF Group will hold the drawing
proceeds and such proceeds will comprise part of the cash portion of the
Liquidity Reserve Amount. In the event of any drawing, the obligation to
reimburse the provider of the Back-Up Facility shall be solely ILFC's obligation
and the provider of the Back-Up Facility shall have no recourse to MSAF Group
for any such amounts that are not reimbursed by ILFC.

     Immediately following and after giving effect to any Suspension Drawing,
ILFC shall set off and apply the security deposits held by it on the date of
such Suspension Drawing on MSAF Group's behalf against the principal amount of
any ILFC facility drawn amounts then outstanding, which shall be deemed repaid
in the amount of such set-off and application. After giving effect to such
set-off and application, MSAF Group shall be obliged to repay only up to $10
million of any outstanding ILFC facility drawn amounts unless and until ILFC has
procured, at its expense, a replacement Back-Up Facility acceptable to MSAF
Group. MSAF Group shall be obliged to pay interest on the proceeds of a
Suspension Drawing at 3% per annum, calculated on the basis of a 360-day year
consisting of twelve 30-day months and compounded daily.

     MSDW FACILITY

     Under the MSDW facility, MSDW will make loans to MSAF Group which MSAF
Group may use for the same purposes as those for which the Liquidity Reserve
Amount may be applied as discussed above under "-- Liquidity Reserve Amount,"
including to pay interest and minimum principal payment amounts on the Notes.
MSDW's obligation to make such amounts available shall be limited to the MSDW
facility
                                       22
<PAGE>   24

commitment. The MSDW facility commitment, at any time, shall be equal to the sum
of, (A) $10 million minus, (B) all drawings previously made by MSAF Group under
the MSDW facility and not repaid at such time.

     The MSDW facility is a Secondary Eligible Credit Facility and, accordingly,
on the Note payment date following any drawing on the MSDW facility, MSAF Group
will be obligated, to the extent that there are Available Collections remaining
after payment of the minimum principal payment amount on the class D Notes, to
repay MSDW facility drawn amounts to MSDW, together with interest accrued
thereon at 3% per annum, calculated on the basis of a 360-day year consisting of
twelve 30-day months and compounded daily.

     MSDW's agreement to provide the MSDW facility will expire on the earlier
of, (i) a sale of all the aircraft, and (ii) the repayment or defeasance of all
MSAF Group's debt. MSDW has been designated by the Controlling Trustees as an
Eligible Provider. MSDW's long-term unsecured debt is currently rated Aa3 by
Moody's, A+ by Standard & Poor's and AA by Duff & Phelps.

     OTHER FACILITIES

     There are currently no Primary Eligible Credit Facilities in place. MSAF
Group may put in place other Eligible Credit Facilities from time to time, each
of which shall be designated by the Controlling Trustees as a Primary Eligible
Credit Facility or a Secondary Eligible Credit Facility. In addition, MSAF Group
may from time to time put in place other credit or liquidity enhancement
facilities which are not Eligible Credit Facilities. Amounts drawn under any
such other facilities are repayable at the 11th level in the order of
priorities, before the Second Collection Account Top-Up.

     YEAR 2000 READINESS

     Many existing computer systems use only two digits to identify a year in
the date field. These systems were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. MSAF Group is continuing the process of assessing the potential impact of
the year 2000 issue on its operations. Since substantially all of MSAF Group's
operational functions have been delegated to outside service providers in
accordance with the terms of their respective service agreements, it has no
information systems of its own, but relies instead on the systems of such
service providers, principally ILFC. MSAF Group may, however, suffer a material
adverse impact on its business and results of operations if information
technology upon which its lessees and service providers rely is not year 2000
compliant. ILFC has assessed its computer and information systems to determine
the extent of its exposure to year 2000 risks. ILFC believes that all of its
critical computer and information systems are year 2000 compliant.

     The administrative agent and financial advisor have reviewed their year
2000 exposure and believe that their systems are year 2000 compliant. If the
administrative agent's or financial advisor's systems are not fully year 2000
compliant, MSAF Group does not expect the consequences of such noncompliance to
have a material adverse effect on its business and results of operations. The
cash manager has announced that it has tested all of its payment systems and it
believes it will be able to process payments correctly after January 2000. MSAF
Group may suffer a material adverse effect on its business and results of
operations if information technology upon which the cash manager relies is not
year 2000 compliant.

     ILFC continues to monitor the status of MSAF Group's lessees year 2000
compliance. This monitoring includes reviewing whether MSAF Group's lessees have
obtained limited insurance writeback endorsements ("YEAR 2000 ENDORSEMENTS").
Year 2000 Endorsements will provide for reimbursement of losses arising from a
year 2000 failure where the losses result from an accident involving an aircraft
or an injury to a third party. Insurers will provide Year 2000 Endorsements to
those airlines that satisfy insurers that they have identified and are
adequately addressing year 2000 issues. All of MSAF Group's lessees have
obtained Year 2000 Endorsements.

     Year 2000 Endorsements are currently available to MSAF Group for its
off-lease aircraft. MSAF Group also maintains contingent insurance designed to
protect it in circumstances where it fails to collect under the

                                       23
<PAGE>   25

lessees insurance, however, the contingent insurance may not be available where
the lessee's policy does not contain Year 2000 Endorsements.

     Noncompliance by a lessee could result in lost revenue for the lessee and
an inability to make lease payments to MSAF Group. Noncompliance by the lessee's
financial institutions could also adversely affect the ability to process lease
payments. ILFC, on behalf of MSAF Group, has inquired of each lessee about
whether it has addressed year 2000 compliance issues with its financial
institutions. At October 1, 1999, ILFC has not received responses from the
lessees regarding their financial institutions year 2000 compliance.

     Our worst case scenario would be that a large number of lessees are unable
to operate their aircraft and generate revenues and as a result are unable to
make lease payments to MSAF Group. MSAF Group is unable to determine at this
time the likelihood or magnitude of any resulting lost revenue or whether the
consequences of year 2000 failures will have a material impact on MSAF Group's
business or financial position.

     If a noncompliant lessee cannot operate its aircraft and cannot make
contractual lease payments due to year 2000 issues, MSAF Group's contingency
plans include for ILFC to repossess aircraft from lessees in default and
re-lease such aircraft to a compliant lessee. MSAF Group cannot assure that ILFC
would be able to repossess or re-lease such aircraft at favorable terms on a
timely basis. If a significant number of aircraft could not be re-leased at
favorable terms or at all, it may have a material adverse effect on MSAF Group's
business.

     Aircraft and air traffic control systems also depend heavily on
microprocessors and software technology. If the systems employed by the aircraft
are not year 2000 compliant, MSAF Group's business and results of operations may
be adversely affected. Major aircraft manufacturers, including Boeing and
Airbus, are conducting year 2000 reviews of the systems employed on their
aircraft and are advising owners, operators and service providers of the steps
to be taken to address any year 2000 problems that are identified. According to
Boeing's most recent public disclosure, Boeing believes that its systems were
100% compliant at July 31, 1999. Airbus has recently announced that all parts of
its business are year 2000 compliant. Among the aircraft systems that have been
identified as being susceptible to year 2000 problems are certain on-board
aircraft management and navigation systems. The nature and extent of the risks
posed by potential failure of aircraft and aircraft control systems because of
year 2000 problems has not been fully determined. MSAF Group cannot assure that
its lessees will follow the advice of aircraft manufacturers regarding the steps
to be taken to address year 2000 compliance. It is not clear whether or to what
extent manufacturers, owners or lessees will be responsible for the costs
necessary to make aircraft systems year 2000 compliant. Accordingly, MSAF Group
is currently not able to make any estimate of the amount, if any, it may be
required to spend to remediate year 2000 problems associated with the aircraft.
Such expenditures could, however, have a material adverse impact on the ability
of MSAF Group to make payments on the Notes.

                                       24
<PAGE>   26

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

     MSAF Group's principal market risk exposure is to changes in interest
rates. This exposure arises from its Notes and the derivative instruments used
to manage interest rate risk.

     The terms of each subclass of the Notes, including the outstanding
principal amount and estimated fair value as of August 31, 1999 are as follows:

<TABLE>
<CAPTION>
                         OUTSTANDING
                       PRINCIPAL AMOUNT        ANNUAL                                                FAIR VALUE
                        AT AUGUST 31,       INTEREST RATE       EXPECTED FINAL     FINAL MATURITY   AT AUGUST 31,
SUBCLASS OF NOTE             1999         (PAYABLE MONTHLY)      PAYMENT DATE           DATE            1999
----------------       ----------------   -----------------   ------------------   --------------   -------------
                           ($000'S)                                                                   ($000'S)
<S>                    <C>                <C>                 <C>                  <C>              <C>
Subclass A-1.........      $400,000         LIBOR + 0.21%         March 15, 2000   March 15, 2023     $399,700
Subclass A-2.........       244,883         LIBOR + 0.35%     September 15, 2005   March 15, 2023      243,095
Subclass B-1.........        91,989         LIBOR + 0.65%         March 15, 2013   March 15, 2023       87,102
Subclass C-1.........       100,000                 6.90%         March 15, 2013   March 15, 2023       88,640
Subclass D-1.........       110,000                 8.70%         March 15, 2014   March 15, 2023       96,800
</TABLE>

INTEREST RATE RISK MANAGEMENT

     The leasing revenues of MSAF Group are generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to future leases. In general, an interest rate exposure
arises to the extent that MSAF Group's fixed and floating interest obligations
in respect of the Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure can be
managed through the use of interest rate swaps and other derivative instruments.
The subclass A-1, A-2 and B-1 Notes bear floating rates of interest and the
subclass C-1 and D-1 Notes bear fixed rates of interest.

     MSAF Group is a party to eight interest rate swaps (the "INITIAL SWAPS")
with MSCS. In six of these swaps MSAF Group pays a fixed monthly coupon and
receives one month LIBOR and in two of these swaps MSAF Group pays one month
LIBOR and receives a fixed monthly coupon on the notional balances as set out
below:

<TABLE>
<CAPTION>
                                                                                         FAIR VALUE
NOTIONAL                                              FIXED MONTHLY    FIXED MONTHLY    AT AUGUST 31,
BALANCE      EFFECTIVE DATE        MATURITY DATE        PAY RATE       RECEIVE RATE         1999
--------    -----------------    -----------------    -------------    -------------    -------------
($000'S)                                                   (%)              (%)           ($000'S)
<S>         <C>                  <C>                  <C>              <C>              <C>
 100,000    November 12, 1997    November 15, 1999       6.0550               --             (122)
 300,000    November 12, 1997    November 15, 2000       6.1325               --             (400)
 200,000    November 12, 1997    November 15, 2002       6.2150               --            1,651
 200,000    November 12, 1997    November 15, 2004       6.2650               --            3,846
 150,000    November 12, 1997    November 15, 2007       6.3600               --            4,807
  50,000    November 12, 1997    November 15, 2009       6.4250               --            1,948
 150,000    February 19, 1998    November 15, 2007           --            5.860           (9,561)
  50,000    February 19, 1998    November 15, 2009           --            5.905           (3,870)
</TABLE>

     All eight swaps were originally entered into by MSCS with an internal swaps
desk as the counterparty on November 12, 1997 and February 19, 1998,
respectively. On March 3, 1998, all eight of the above swaps were assigned to
MSAF Group by MSCS. Although MSAF Group's floating rate liability March 3, 1998
was approximately $800 million (after the repayment of principal due to the
undelivered aircraft), the net economic effect of assigning all eight swaps to
MSAF Group with an aggregate notional amount of $1.2 billion was to fix the
interest rate liability at the November 12, 1997 interest rate. MSAF Group
required this certainty both in furtherance of its interest rate management
policy not to be adversely exposed to material movements in interest rates from
November 12, 1997 (shortly after MSAF Group entered into the asset
                                       25
<PAGE>   27

purchase agreement with ILFC for the acquisition of the aircraft and related
fixed rate leases) and, by fixing the principal liabilities relating to the
transaction, to facilitate the structuring of the transaction.

     MSAF Group regularly reviews its hedging requirements. In the future MSAF
Group expects to seek to enter into additional swaps or sell at market value or
unwind part or all of the initial and any future swaps in order to rebalance the
fixed and floating mix of interest obligations (including those arising as a
result of previous interest rate swaps entered into) and the fixed and floating
mix of rental payments.

     Through the use of interest rate swaps, and other interest rate hedging
products, it is MSAF Group's policy not to be adversely exposed to material
movements in interest rates. MSAF Group's interest rate management strategy will
need to be rebalanced with any acquisition of additional aircraft to reflect the
adjusted mix of fixed and floating rate rental payments arising from any such
acquisition. There can be no assurance, however, that MSAF Group's interest rate
risk management strategies will be effective in this regard. Any change to MSAF
Group's policy with regard to its dealing in interest rate hedging products will
be subject to periodic review by the rating agencies.

     The Controlling Trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits.
Counterparty risk will be monitored on an ongoing basis. Counterparties will be
subject to the prior approval of the Controlling Trustees. MSAF Group's
counterparties are currently all affiliates of MSDW. Future counterparties will
consist primarily of the affiliates of major United States and European
financial institutions (including special-purpose derivative vehicles) which
have credit ratings, or which provide collateralization arrangements, consistent
with maintaining the ratings of the Notes.

     The change in the fair value of the eight interest rate swaps between
November 30, 1998 and August 31, 1999 was entirely due to changes in market
interest rates.

                                       26
<PAGE>   28

                          PART II.  OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

        27.1 Financial Data Schedule.

     (b)  Reports on Form 8-K: Morgan Stanley Aircraft Finance filed a Current
          Report on Form 8-K dated June 14, 1999, July 14, 1999 and August 12,
          1999 relating to the monthly report to holders of the Notes, and filed
          a Current Report on Form 8-K dated August 9, 1999, relating to a
          proposed acquisition.

                                       27
<PAGE>   29

                                   SIGNATURES

     Pursuant to the requirements 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.

Date: October 15, 1999
                                          MORGAN STANLEY AIRCRAFT FINANCE

                                          By:      /s/ ALEXANDER FRANK
                                            ------------------------------------
                                                      Alexander Frank
                                                     Signatory Trustee

                                       28
<PAGE>   30

                        MORGAN STANLEY AIRCRAFT FINANCE

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C>        <S>
 27.1      Financial Data Schedule
</TABLE>

                                       29
<PAGE>   31

                                                                      APPENDIX 1

                        MORGAN STANLEY AIRCRAFT FINANCE
      QUARTERLY ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

              THIRD QUARTER 1999, MAY 31, 1999 TO AUGUST 31, 1999

                                       30
<PAGE>   32

                                    CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                             -------
<S>                                                          <C>
I    BACKGROUND AND GENERAL INFORMATION.....................      32
II   COMPARISON OF ACTUAL CASHFLOWS VERSUS ASSUMPTIONS FOR
  THE THIRD QUARTER 1999....................................      33
III  COMPARISON OF THIRD QUARTER 1999 ACTUAL CASHFLOWS
  VERSUS THE PRIOR YEAR PERIOD..............................      35
IV  OTHER FINANCIAL DATA....................................      37
V   RECENT DEVELOPMENTS.....................................      37
VI  APPENDICES..............................................      41
</TABLE>

                                       31
<PAGE>   33

I BACKGROUND AND GENERAL INFORMATION

     On March 3, 1998, Morgan Stanley Aircraft Finance ("MSAF"), a Delaware
business trust, issued $1,050 million of Notes in five subclasses -- Subclass
A-1, Subclass A-2, Subclass B-1, Subclass C-1 and Subclass D-1 (the "NOTES").
The notes were issued in connection with MSAF Group's agreement to acquire 33
aircraft plus a spare engine with a total appraised value at September 30, 1997
of $1,115.51 million from International Lease Finance Corporation ("ILFC").

     All but one of the 33 aircraft was acquired by MSAF. The undelivered
aircraft was a B737-400 with an appraised value of $28.8 million. Pursuant to
the indenture relating to the Notes (the "INDENTURE"), MSAF decided not to
substitute this aircraft but to distribute to the Noteholders $27.1 million on
June 15, 1998. $26 million of this amount represents that portion of the
proceeds from the offering of the Notes relating to this aircraft and $1.1
million represents swap breakage costs paid by ILFC. As a result, the overall
size of the aircraft fleet is now 32 aircraft plus a spare engine and the
appraised value of the fleet reduced from $1,115.5 million to $1,086.7 million
at September 30, 1997.

     The fleet is appraised annually and the most recent appraisal dated
September 30, 1998 valued the portfolio at $1,029.4 million. Applying the
declining value assumption to the original September 30, 1997 fleet appraisal of
$1,086.7 million, the total appraised value was assumed to be $1,026.7 million
at August 16, 1999. See "Section IV -- Aircraft Values" below. As of October 1,
1999, 31 aircraft plus the engine were subject to lease contracts (or in one
case, a Conditional Sale Agreement) with 28 lessees in 19 countries as shown in
Appendix A attached. One aircraft was AOG ("Aircraft on Ground").

     The discussion and analysis that follows is based on the results of MSAF
and its subsidiaries as a single entity (collectively the "MSAF GROUP").

     MSAF Group is a special purpose vehicle, which owns aircraft subject to
operating leases and, in one certain instance, a Conditional Sale Agreement.
MSAF may also make aircraft acquisitions and aircraft sales. MSAF Group intends
to acquire additional commercial passenger or freight aircraft from various
sellers and will finance the acquisition of such aircraft by issuing additional
notes see "Section V -- Recent Developments". Any acquisition of further
aircraft will be subject to certain confirmations with respect to the Notes from
rating agencies and compliance with certain operating covenants of MSAF set out
in the Indenture.

     MSAF Group's cash receipts and disbursements are determined, in part, by
the overall economic condition of the operating leasing market. The operating
leasing market, in turn, is affected by various cyclical factors. These include
interest rates, the availability of credit, fuel costs and general and regional
economic conditions affecting lessee operations and trading. Other factors to
consider are manufacturer production levels, passenger demand, retirement and
obsolescence of aircraft models, manufacturers exiting or entering the market or
ceasing to produce aircraft types or re-introduction into service of aircraft
previously in storage. In addition, state regulations and air traffic control
infrastructure constraints such as limitations on the number of landing slots
can also impact on the operating leasing market.

     MSAF Group's ability to compete against other lessors is determined, in
part, by the composition of its fleet in terms of mix, relative age and
popularity of aircraft type. In addition, operating restrictions imposed by the
Indenture, and the ability of other lessors, who may possess substantially
greater financial resources, to offer leases on more favorable terms than MSAF.

     For the purposes of this report, the "THIRD QUARTER 1999", referred to in
Section II, shall comprise information from the three monthly cash reports dated
June 15, 1999, July 15, 1999 and August 16, 1999. The financial data in these
reports includes cash receipts from May 12, 1999 (first day of the Collection
Period for the June 1999 Report) up to August 10, 1999 (last day of the
Collection Period for the August 1999 Report). It also includes payments made by
MSAF between May 12, 1999 and up to August 16, 1999 (the Note Payment Date for
the August 1999 Report).

     Similarly, for the purposes of this report, the "PRIOR YEAR PERIOD",
referred to in Section III, shall comprise information from the monthly cash
report dated June 15, 1998, July 15, 1998 and August 17, 1998. The financial
data in these reports includes cash receipts from May 12, 1998 (first day of the
Collection Period
                                       32
<PAGE>   34

for the June 1998 Report) up to August 11, 1998 (last day of the Collection
Period for the August 1998 Report) and payments made by MSAF between May 12,
1998 to August 17, 1998 (the Note Payment Date for the August 1998 Report).

II COMPARISON OF ACTUAL CASHFLOWS VERSUS ASSUMPTIONS FOR THE
   THIRD QUARTER 1999

     The February 20, 1998 Offering Memorandum (the "OFFERING MEMORANDUM") and
the November 4, 1998 Prospectus (the "PROSPECTUS") for the Notes contain
assumptions in respect of MSAF Group's future cashflows and cash expenses (the
"ASSUMPTIONS"). For the purpose of this report, "NET CASH COLLECTIONS" is
defined as Total Cash Collections less Total Cash Expenses and Interest Payments
(net of Swap Payments). In the Third Quarter 1999, MSAF Group generated
approximately $12.1 million in Net Cash Collections, more than assumed in the
Prospectus by $1.4 million. An analysis of the quarterly Cash Collections, Cash
Expenses, Interest Payments and Principal Payments is given in Sections A, B, C
and D below and should be read in conjunction with Appendix B.

SECTION A -- CASH COLLECTIONS

     "Total Cash Collections" include lease rental payments, maintenance reserve
payments by lessees and cash interest paid on MSAF Group's cash balances. The
Prospectus assumed Total Cash Collections for the Third Quarter 1999 of $31.0
million. Total Cash Collections achieved in this period were $30.7 million, a
negative difference of $0.3 million. This difference is due to a combination of
the factors set out below.

     1)  Gross Lease Rentals.  Gross Lease Rentals for the Third Quarter 1999
amounted to $28.0 million or approximately $4.1 million less than $32.1 million
assumed in the period. This negative variance is due to a number of factors
listed below.

<TABLE>
<S>                                                         <C>
Arrears...................................................    $1.8 million
AOG.......................................................    $1.2 million
Resets/Restructuring......................................    $1.2 million
Other.....................................................  ($0.1) million
                                                            --------------
Total.....................................................    $4.1 million
                                                            ==============
</TABLE>

     2)  Other Cash Received.  Other Cash Received for the Third Quarter 1999
amounted to an inflow of $0.4 million. This consisted of a settlement received
of $0.2 million, relating to the repossession of three aircraft from two former
lessees in 1998 and also an amount of $0.2 million received from a former lessee
in respect of redelivery expenses. The Prospectus makes no assumption as to
Other Cash Received.

     3)  Security Deposits.  A security deposit of $1.0 million received in the
Third Quarter 1999 relates to a former lessee, based in Brazil, whose lease
terminated early. See "Section V -- Recent Developments."

     4)  Repossession Costs.  Repossession Costs for the Third Quarter 1999
amounted to an inflow of $0.1 million, compared to a cost of $1.4 million
assumed in the Prospectus for this period. The inflow of $0.1 million relates to
the difference between a cash accrual of $0.6 million that was set aside for
payment of expenses and actual expenses paid of $0.5 million. The actual costs
paid in the Third Quarter 1999 were primarily in relation to the Guyana Airways
early termination.

     5)  Net Lease Rentals.  The Prospectus assumes a 4.5% reduction in gross
lease rentals due to certain stress related costs (repossession costs, AOG
expenses and bad debts) ("NET LEASE RENTALS"). For the Third Quarter 1999,
assumed Net Lease Rentals were $30.6 million. Actual Net Lease Rentals for the
period were $29.6 million, $1.0 million less than the Assumptions principally
because of lower than assumed gross lease rentals, which were partially offset
by lower than assumed repossession and other stress related costs.

     6)  Net Maintenance.  In the Third Quarter 1999, net maintenance amounted
to an inflow of $0.6 million. Maintenance receipts were $4.8 million and
maintenance expenses were $4.2 million of which

                                       33
<PAGE>   35

$4.3 million was actual expenses paid offset by a decrease of $0.1 million in
the level of accrued maintenance expenses held since the Second Quarter 1999.

     Maintenance expenditure may vary significantly from period to period as it
is impacted by the timing and incidence of checks, where checks are performed,
the type and age of the aircraft as well as events such as lease extensions and
early redeliveries. The Prospectus assumes that maintenance receipts will equal
maintenance disbursements over the term of the Notes, and therefore, maintenance
receipts and maintenance disbursements are both assumed to be zero in each Note
Payment Period. In any particular Note Payment Period, however, there will be
actual maintenance receipts and disbursements and it is unlikely that
maintenance receipts will equal maintenance disbursements in any such period. It
is likely that maintenance disbursements will increase due to anticipated engine
overhauls and re-leasing expenses, which we originally expected to incur in the
first half of 1999, but which MSAF Group now expects to incur later this year.

     7)  Interest Received.  Actual interest received for the Third Quarter 1999
was $0.5 million compared to $0.4 million in the Prospectus. The difference is
due to a combination of two offsetting factors. Firstly, actual interest
received includes interest received on amounts in the Expense Account and
interim balances in the Collection Account that are not included in the
Prospectus assumptions. Secondly and partially offsetting the impact of these
cash balances on which interest has been earned, the Prospectus assumed a
reinvestment rate of 5.75% while the actual average reinvestment rate for the
period was approximately 4.93%.

SECTION B -- CASH EXPENSES

     "Total Cash Expenses" consists of Cash Operating Expenses and Selling,
General and Administrative Expenses. The Prospectus assumed Total Cash Expenses
of $3.6 million for the Third Quarter 1999. Actual Total Cash Expenses amounted
to $2.1 million, a variance of $1.5 million that is due to a combination of the
factors set out below.

     1)  Cash Operating Expenses includes any insurance, re-leasing and other
aircraft operating costs paid and/or accrued by the MSAF Group in the course of
the business activities permitted to be conducted by it under the Indenture.

     Insurance, re-leasing and other costs.  Insurance, re-leasing and other
costs amounted to $0.1 million, $1.0 million less than assumed in the
Prospectus. The actual costs paid in the Third Quarter 1999 consisted of the
quarterly premium for contingent insurance coverage for the portfolio and
insurance costs associated with repossession events that occurred in 1998.

     2)  Selling, General and Administrative Expenses ("SG&A") include all fees
paid to the Aircraft Servicer, Administration Agent, Independent Trustees and
miscellaneous service providers. Total SG&A costs for the Third Quarter 1999
were approximately $2.0 million compared to $2.4 million assumed in the
Prospectus. This variance of $0.4 million is due to a combination of the factors
set out below.

     Servicer fees.  Fees paid to ILFC, as Servicer, during the Third Quarter
1999 amounted to $1.3 million, which is $0.3 million lower than the assumed cost
of $1.6 million for the period. As a significant portion of the Servicer fees
are calculated as a percent of rental revenue actually received and as the gross
rental revenue is lower than expected, the fee paid to ILFC is also lower.

     Other Service provider fees and Overhead.  Other Service provider fees and
Overhead for the Third Quarter 1999 amounted to $0.7 million compared to a cost
of $0.8 million assumed in the Prospectus for this period. The variance of $0.1
million is due to the fact that fees and expenses for Other Service providers
were less than expected.

SECTION C -- INTEREST PAYMENTS (NET OF SWAP PAYMENTS)

     Interest Payments (net of Swap Payments).  Actual interest payments to
Noteholders net of swap effects were $16.4 million, lower than the assumed net
payments of $16.6 million for the Third Quarter 1999, reflecting faster than
expected amortization of the A-2 Notes.

                                       34
<PAGE>   36

SECTION D -- PRINCIPAL PAYMENTS

     Principal Payments.  Total principal distributions during the Third Quarter
1999 were $12.1 million, an excess of $1.4 million over assumed total debt
amortization of $10.7 million for this period. The principal amortization
payments were made with respect to the A-2 and B-1 Notes.

III COMPARISON OF THIRD QUARTER 1999 ACTUAL CASHFLOWS VERSUS THE PRIOR YEAR
    PERIOD

     In the Third Quarter 1999, MSAF Group generated approximately $12.1 million
in Net Cash Collections, $2.2 million lower than achieved in the Prior Year
Period. An analysis of the quarterly Cash Collections, Cash Expenses, Interest
Payments and Principal Payments for the Third Quarter 1999 and the Prior Year
Period is given in Sections A, B, C and D below and should be read in
conjunction with Appendix C.

SECTION A -- CASH COLLECTIONS

     "Total Cash Collections" include lease rental payments, maintenance reserve
payments by lessees and cash interest paid on MSAF Group's cash balances. Total
Cash Collections achieved in the Third Quarter 1999 were $30.7 million, $3.3
million lower than achieved in the Prior Year Period. This difference is due to
a combination of the factors set out below.

     1)  Gross Lease Rentals.  Gross Lease Rentals for the Third Quarter 1999
amounted to $28.0 million or approximately $3.0 million less than in the Prior
Year Period. This variance is due to a number of factors set out below.

<TABLE>
<S>                                                         <C>
Arrears...................................................    $1.6 million
AOG.......................................................    $0.8 million
Resets/Restructuring......................................    $0.6 million
                                                            --------------
Total.....................................................    $3.0 million
                                                            ==============
</TABLE>

     2)  Other Cash Received.  Other Cash Received in the Third Quarter 1999
amounted to an inflow of $0.4 million, compared to $0.5 million received in the
Prior Year Period. This $0.4 million consisted of a settlement received of $0.2
million, relating to the repossession of three aircraft from two former lessees
in 1998 and also an amount of $0.2 million received from a former lessee in
respect of redelivery expenses. Other cash received of $0.5 million in the Prior
Year Period consists mainly of an amount of $0.4 million paid by ILFC, the
Servicer, in respect of a lease rental guarantee on one aircraft.

     3)  Security Deposits.  A security deposit received in the Third Quarter
1999 relates to a former lessee, based in Brazil, whose lease terminated early.
See "Section V -- Recent Developments". No security deposits were drawn down in
the Prior Year Period.

     4)  Repossession Costs.  Repossession Costs for the Third Quarter 1999
amounted to an inflow of $0.1 million compared to an outflow of $0.3 million in
the Prior Year Period. The inflow of $0.1 million in the Third Quarter 1999
relates to the difference between a cash accrual of $0.6 million that was set
aside for payment of expenses and actual expenses paid of $0.5 million. The
actual costs paid in the Third Quarter 1999 related mainly to expenses incurred
as a result of the Guyana Airways early termination. The outflow of $0.3 million
in the Prior Year Period relates to the difference between a cash accrual of
$0.1 million that was set aside for payment of expenses and actual expenses paid
of $0.4 million. Costs incurred related to the repossession of three aircraft
from two lessees in April 1998.

     5)  Net Lease Rentals.  Actual Net Lease Rentals in the Third Quarter 1999
were $29.6 million, $1.5 million less than achieved in the Prior Year Period due
primarily to lower gross lease rentals and other cash received which was
partially offset by receipt of a security deposit and lower repossession costs.

                                       35
<PAGE>   37

     6)  Net Maintenance.  In the Third Quarter 1999, net maintenance amounted
to an inflow of $0.6 million, compared to a net maintenance inflow of $2.1
million in the Prior Year Period. This variance of $1.5 million was due
primarily to higher maintenance expenses in 1999 that were partially offset by
higher maintenance receipts in 1999.

     7)  Interest Received.  Actual interest received for the Third Quarter 1999
was $0.5 million, compared to $0.8 million received in the Prior Year Period.
The difference is due to a combination of two factors. Firstly, the higher
interest earned in the 1998 period was due primarily to a larger cash balance
held on deposit in the Aircraft Purchase Account to fund the acquisition of two
aircraft that had not yet been delivered. This cash in the Aircraft Purchase
Account was used to purchase an aircraft in May 1998 and the balance was
distributed to Noteholders in June 1998. Secondly, the average reinvestment rate
for the Prior Year Period was 5.47%, compared to an average reinvestment rate of
4.93% in the Third Quarter 1999.

SECTION B -- CASH EXPENSES

     "Total Cash Expenses" consists of Cash Operating Expenses and Selling,
General and Administrative Expenses.

     1)  Cash Operating Expenses includes any insurance, re-leasing and other
aircraft operating costs paid and/or accrued by the MSAF Group in the course of
the business activities permitted to be conducted by it under the Indenture.

     Insurance, re-leasing and other costs.  Insurance, re-leasing and other
costs amounted to $0.1 million in the Third Quarter 1999. This compared to $0.4
million in the Prior Year Period. The actual costs paid in the Third Quarter
1999 consisted of the quarterly premium for contingent insurance coverage for
the portfolio and also insurance costs associated with repossession events that
occurred in 1998. Actual costs in the Prior Year Period were $0.4 million and
related primarily to re-leasing.

     2)  Selling, General and Administrative Expenses (SG&A) include all fees
paid to the Aircraft Servicer, Administration Agent, Independent Trustees and
other miscellaneous service providers. Total SG&A costs for the Third Quarter
1999 were approximately $2.0 million compared to $1.5 million in the Prior Year
Period. This difference is due to a combination of the factors set out below.

     Servicer fees.  Fees paid to ILFC, as Servicer, during the Third Quarter
1999 were $1.3 million, an increase of $0.4 million over the Prior Year Period.
The increase in the fee over the Prior Year Period is primarily due to a step-up
in the Base fee from $83k per month in 1998 to $167k per month in 1999. This was
offset by lower rent collected fees paid due to lower rentals collected.

     Other Service provider fees and Overhead.  The total expenses for Other
Service provider fees and Overhead was $0.7 million for the Third Quarter 1999,
versus $0.6 million for the Prior Year Period, a variance of $0.1 million. While
the Administration Agent's fee was lower in the Third Quarter 1999, (in direct
proportion to the lower gross lease rental line), other service provider fees
were higher than in the Prior Year Period. This was due to a number of payments
including the registration with the Securities and Exchange Commission ("SEC"),
1998 year-end audit, legal fees and annual listing fees for the Notes.

SECTION C -- INTEREST PAYMENTS (NET OF SWAP PAYMENTS)

     Interest Payments (net of Swap Payments).  Actual interest payments to
Noteholders, net of swap effects, were $16.4 million in the Third Quarter 1999,
compared to $17.8 million in the Prior Year Period. This variance of $1.8
million is due to lower principal balances outstanding on the A-2 and B-1 Notes.

     EXCEPTIONAL ITEM

     Exceptional Item.  Total proceeds of $27.1 million received as a result of
the non-delivery of one aircraft were recorded as an exceptional item in the
Prior Year Period.

                                       36
<PAGE>   38

SECTION D -- PRINCIPAL PAYMENTS

     Principal Payments.  Total Principal Payments in the Third Quarter 1999,
were $12.1 million, which is $29.3 million lower than in the Prior Year Period.
The higher distribution in the Prior Year Period was as a result of the return
to the Noteholders of the proceeds from the non-delivery of the aircraft ($27.1
million) and higher Net Cash Collections ($2.2 million).

IV OTHER FINANCIAL DATA

     An analysis of the cash performance to August 16, 1999 is shown in Appendix
D.

     CASH

     Cash held at August 16, 1999 was $30.2 million. This includes $25.0 million
that represents the cash portion of the Liquidity Reserve Amount. This is a
source of liquidity for, among other things, maintenance obligations, security
deposit return obligations, and cash operating expenses and contingent
liabilities. The remainder of $5.2 million represents accrued expenses and is
held in the Expense Account to cover primarily maintenance expenses but also
operating expenses expected to fall due in the next quarter.

     In addition to the $30.2 million cash balance held at August 16, 1999 the
Liquidity Reserve Amount also contained a credit and liquidity facility from
Morgan Stanley Dean Witter & Co. and ILFC for $40.0 million. This facility was
not drawn upon in the Third Quarter 1999.

     AIRCRAFT VALUES

     Under the terms of the Notes, MSAF Group is obliged to obtain new
appraisals of the Base Value of each aircraft from three independent appraisers
each year. The annual appraisal must be delivered to the Trustee no later than
October 31 of each year. The most recent annual appraisal was as of September
30, 1998 and the next appraisal is due to be delivered to the Trustee no later
than October 31, 1999. Details of the most recent appraisal, dated September 30,
1998, are shown in Appendix A.

     The actual appraised value of the fleet, as at September 30, 1998 was
$1,029.4 million versus an assumed value of $1,058.3 million as at November 17,
1998. Generally, where the appraisals indicate a Base Value decline
significantly in excess of the value decline assumed under the terms of the
Notes, excess cash flow is redirected to the extent required to the Class A
Notes via the Class A Scheduled Principal Payment Amount. As the decline in
value was within the limits permitted by the Indenture, there was no requirement
to redirect cash flow to the Class A Notes.

     A-D NOTE BALANCE

     As of August 16, 1999, the aggregate amount of Class A-D Notes outstanding
was $946.9 million, approximately $12.1 million lower than assumed due to higher
than assumed principal repayments with respect to the Class A-2 Notes.

V RECENT DEVELOPMENTS

     ACQUISITION OF ADDITIONAL AIRCRAFT

     MSAF Group advises that it intends to acquire a portfolio of 28 commercial
jet aircraft from certain subsidiaries of Morgan Stanley Dean Witter & Co.
("MSDW"). MSDW acquired two Fokker-50 aircraft from an affiliate of GE Capital
Corporation on March 19, 1999 and agreed to acquire 26 aircraft from ILFC on
August 6, 1999. MSAF Group intends to finance this acquisition by issuing
additional notes.

     LEASING ACTIVITY IN THE THIRD QUARTER 1999

     In the Third Quarter 1999 there were no scheduled re-leasing events. One
lease that was scheduled to expire in April 2003 terminated early. No aircraft
were placed on lease during the quarter. As at October 1,

                                       37
<PAGE>   39

1999 MSAF Group owned 33 aircraft assets; 32 aircraft and an engine. 31 of the
aircraft and the engine were on lease to 28 lessees in 19 countries. One
aircraft, a B747-300B was AOG and non-revenue earning.

     TABLE 1

<TABLE>
<CAPTION>
                                                              # AIRCRAFT
                                                              ----------
<S>                                                           <C>
Fleet size*.................................................      33
Scheduled terminations......................................       0
Unscheduled terminations....................................       1
                                                                 ---
Total terminations..........................................       1
Aircraft placed on lease this quarter.......................       0
                                                                 ---
Aircraft on Ground (AOG) October 1, 1999....................       1
Average remaining term to lease expiry (months).............      48
Aircraft coming off lease during 12 month period ending
  October 1, 2000...........................................       2
% of fleet coming off lease during 12 month period ending
  October 1, 2000...........................................     4.9%
                                                                 ===
</TABLE>

---------------

* includes engine

     As of October 1, 1999, two aircraft, equating to 4.9% of the portfolio by
appraised value at September 30, 1998, will come off lease within 12 months. A
Letter of Intent has been signed for one of these aircraft. The average
remaining term to lease expiry (weighted by appraised value at September 30,
1998) for the entire fleet was 48 months as of October 1, 1999.

     LESSEE DIFFICULTIES

     TABLE 2

<TABLE>
<CAPTION>
                                                                         RESTRUCTURED    FORMER LESSEE
                                                      CURRENT ARREARS      ARREARS          ARREARS
                                                      ---------------    ------------    -------------
<S>                                                   <C>                <C>             <C>
# lessees.........................................        6                  2               3
Days over due.....................................        51                NA              NA
Arrears ($ m).....................................      $3.2 m            $0.1 m          $4.4 m
Security deposits.................................      $2.8 m              NA              NA
</TABLE>

     As of October 1, 1999 six lessees were in arrears. The seven aircraft on
lease to these lessees represented 18.3% of the portfolio by appraised value at
September 30, 1998. The total amount of rental payments, maintenance reserves
and other amounts due under the leases (excluding restructured arrears) was $3.2
million. We hold security deposits of $2.8 million against these arrears. The
weighted average number of days past due of such arrears was 51 days.

     Two of the six lessees, both based in Brazil, have restructured their
arrears. See "Latin America (Emerging)" below. In the case of one lessee,
representing 2.1% of the portfolio by appraised value at September 30, 1998, the
total rental payments, maintenance reserves and other amounts owed at March 24,
1999, the date of the restructuring, was $0.5 million. Under the restructuring,
this amount is due to be repaid in full by February 2000. At October 1, 1999,
$0.1 million of restructured arrears were due and unpaid.

     In the case of the other lessee, representing 2.9% of the portfolio by
appraised value at September 30, 1998, the total rental payments, maintenance
reserves and other amounts owed at August 18, 1999, the date of the
restructuring, was $3.5 million. The total arrears restructured, including
default interest, was $3.7 million. The restructured amounts were capitalized
and added to the lessee's Conditional Sale Agreement loan balance, with an
extension to the term of the loan.

     In addition, as of October 1, 1999 an aggregate of $4.4 million (net of
security deposits) was owed to MSAF Group from three of its former lessees. $3.8
million of this aggregate relates to a single Brazilian lessee.

                                       38
<PAGE>   40

In two cases, MSAF Group has re-leased the aircraft to other carriers. The third
aircraft is off lease undergoing maintenance work prior to re-marketing to a new
lessee. See "Latin America (Emerging)" below.

     REGIONAL ANALYSIS OF CURRENT ARREARS

     The categorization of countries into geographical regions, Developed
Markets, Emerging Markets and Other is determined using Morgan Stanley Capital
International, Inc. ("MSCI") designations. A regional analysis of current
arrears is shown in Table 3 below.

     TABLE 3

<TABLE>
<CAPTION>
                                                                                                  CURRENT
                                REGION                   # COUNTRIES   # AIRCRAFT   # LESSEES   ARREARS $M
                                ------                   -----------   ----------   ---------   -----------
<S>                             <C>                      <C>           <C>          <C>         <C>
Developed.....................  Europe                        1             1           1           0.4
                                North America                 1             2           1           0.5
Emerging......................  Europe and Middle East        1             1           1           0.7
                                Asia                          0             0           0           0.0
                                Latin America                 1             2           2           1.6
Other.........................  Other                         1             1           1           0.0
                                                             --            --          --           ---
TOTAL ARREARS.................                                5             7           6           3.2
                                                             ==            ==          ==           ===
</TABLE>

     LATIN AMERICA (EMERGING)

     MSAF Group currently leases 11.4% of the portfolio in Latin America (6.4%
in Mexico and 5.0% in Brazil) by appraised value at September 30, 1998. Two of
the six current lessees in arrears are based in Latin America.

     Brazil has experienced significant downturns in its economy and financial
markets, with large decreases in financial asset prices and, since it devalued
its currency on January 13, 1999, dramatic decrease in the value of its
currency.

     One current lessee, whose lease is a conditional sale agreement, has been
in arrears since September 1998. After protracted negotiations with ILFC, the
lessee agreed to a restructuring of its arrears balance. The total rental
payments, maintenance reserves and other amounts owed at August 18, 1999, the
date of the restructuring, was $3.5 million. The total amount restructured,
including default interest, was $3.7 million. The restructured amounts were
capitalized and added to the lessee's conditional sale agreement loan balance,
with an extension to the term of the loan. At October 1, 1999, $0.4 million of
arrears were due and unpaid. This aircraft is an A310-300 and represented 2.9%
of the portfolio by appraised value at September 30, 1998.

     The arrearage of the second current Brazilian lessee was restructured in
March 1999. The total rental payments, maintenance reserves and other amounts
owed at the date of the restructuring was $0.5 million. Under the restructuring,
this amount is due to be repaid in full by February 2000. At October 1, 1999,
$0.1 million of restructured arrears and $1.2 million of current arrears were
due and unpaid. We hold a security deposit of $0.7 million against the current
arrears. This aircraft is a B737-300 and represented 2.1% of the portfolio by
appraised value at September 30, 1998.

     A former Brazilian lessee has recently negotiated an early termination of
its lease of a B747-300 aircraft that was scheduled to expire in April 2003. The
total amount of rental payments and maintenance reserves due under this lease
(net of security deposit of $1.0 million) to July 1999, the date of the
termination agreement, was $3.8 million. The former lessee, under the provisions
of an interest bearing repayment note for $10.8 million, will repay arrears of
$4.8 million (excluding security deposit) and approximately $6.0 million for
certain maintenance and downtime costs over the next eight years.

     The aircraft is currently undergoing maintenance, which is scheduled for
completion in February 2000, prior to re-leasing. It is likely that the aircraft
will be non-revenue earning for several months as re-leasing may be difficult
because the market for this aircraft type is currently weak. The former lessee
will bear the cost of storing and insuring the aircraft until May 2000 (or
earlier if the Servicer can secure a new lessee). This aircraft represents
approximately 6.1% of the portfolio by appraised value at September 30, 1998.

                                       39
<PAGE>   41

     EUROPE AND MIDDLE EAST (EMERGING)

     MSAF Group currently leases 9.0% of the portfolio by appraised value at
September 30, 1998 in the Europe and Middle East region. One of the six current
lessees in arrears is based in Europe and Middle East. At October 1, 1999, the
total rental and maintenance arrears owed by this lessee was $0.7 million. This
aircraft, an A321-100, represented 4.3% of the portfolio by appraised value at
September 30, 1998.

     ASIA (EMERGING)

     MSAF Group leases 13.0% of the portfolio by appraised value at September
30, 1998 in the Asia Region. As of October 1, 1999, none of these lessees were
in arrears.

     EUROPE (DEVELOPED)

     MSAF Group currently leases 31.6% of the portfolio by appraised value at
September 30, 1998 in the Europe (Developed) region. One of the six current
lessees in arrears is based in the Europe (Developed) region.

     At October 1, 1999, the total rental and maintenance arrears owed by this
lessee was $0.4 million. We hold security deposits of $0.1 million for this
lessee. This aircraft, an A320-200, represented approximately 3.1% of the
portfolio by appraised value at September 30, 1998.

NORTH AMERICA (DEVELOPED)

     MSAF Group currently leases 12.8% of the portfolio by appraised value at
September 30, 1998 in the North America (Developed) region. One of the six
current lessees in arrears is based in the North America (Developed) region. As
of October 1, 1999, the total rental and maintenance arrears owed by this lessee
was $0.5 million. We hold security deposits of $0.8 million for this lessee. The
two aircraft on lease to this lessee represented 3.8% of the portfolio by
appraised value at September 30, 1998.

OTHER

     MSAF Group currently leases 16.1% of its portfolio by appraised value at
September 30, 1998 in the "Other" region. One of the six current lessees in
arrears is based in the "Other" region. At October 1, 1999, the total rental and
maintenance arrears owed by this lessee was $0.1 million. We hold security
deposits of $0.5 million for this lessee. This aircraft, a B737-300, represented
2.1% of the portfolio by appraised value at September 30, 1998.

     On April 2, 1999, a lease with Guyana Airways was terminated by agreement
with rental arrears of $1.3 million. Guyana made a payment of $3.0 million to
MSAF Group in settlement of its arrears and maintenance obligations. The
estimated costs of maintenance work and redelivery are likely to be in excess of
the settlement amount received. The aircraft was re-leased to National Airlines,
a U.S. carrier, in June 1999. This aircraft, a B757-200ER represented 3.3% of
the portfolio by appraised value at September 30, 1998.

PROPOSED AIRWORTHINESS DIRECTIVE

     On August 11, 1999 the United States Federal Aviation Administration issued
a Notice of Proposed Rule Making ("NPRM") relating to fire safety standards in
certain types of aircraft. As proposed, the resulting Airworthiness Directive
("AD") would require operators of those aircraft to replace the current fire
insulation blankets. MSAF Group cannot determine whether this NPRM will result
in an AD. If the NPRM results in an AD, MSAF Group's one MD-82 and two MD-83's
aircraft would be affected. Under the relevant leases, all costs of compliance
with ADs are obligations of the lessees.

                                       40
<PAGE>   42

                                                                      APPENDIX A

                        MORGAN STANLEY AIRCRAFT FINANCE

                               PORTFOLIO DETAILS
         ALL AMOUNTS IN THOUSANDS OF US DOLLARS UNLESS OTHERWISE STATED

FIGURES AS OF OCTOBER 1, 1999
<TABLE>
<CAPTION>
                                                                                                                   30-SEP-98
                                                                                                                   ADJUSTED
                    COUNTRY OF                                                ENGINE        SERIAL     DATE OF       BASE
REGION(1)           CURRENT LESSEE   CURRENT LESSEE       AIRCRAFT TYPE    CONFIGURATION    NUMBER   MANUFACTURE   VALUE(2)
---------           --------------   --------------       -------------   ---------------   ------   -----------   ---------
<S>                 <C>              <C>                  <C>             <C>               <C>      <C>           <C>
1 Europe..........  France           Air Liberte          MD-83           JT8D-219          49822      Dec-88         19,433
2 (Developed).....  France           l'Aeropostale        B737-300        CFM 56-3C1        23788      May-87         21,420
3.................  Greece           Olympic Airways      B737-400        CFM 56-3C1        25371      Jan-92         27,137
4.................  Netherlands      KLM                  engine          CF6-80C2B6F       704279     Jun-95          5,593
5.................  Netherlands      Transavia            B737-300        CFM 56-3C1        27635      May-95         29,863
6.................  Ireland          TransAer             A320-200        V2500-A1            414      May-93         31,503
7.................  Norway           Braathens Airways    B737-500        CFM 56-3B1        25165      Apr-93         20,860
8.................  UK               Britannia            B767-200ER      CF6-80A           23807      Aug-87         36,390
9.................  UK               Caledonian Airways   A320-200        V2500-A1            393      Feb-93         31,310
10................  UK               Air 2000             B767-300ER      CF6-80C2B6F       26256      Apr-93         67,767
11................  UK               Flying Colours       B757-200ER      RB211-535-E4-37   24367      Feb-89         34,870
SUB-TOTAL.........
12 North America..  USA              Alaska Airlines      B737-400        CFM 56-3C1        25104      May-93         28,210
13 (Developed)....  USA              TWA                  MD-83           JT8D-219          49824      Mar-89         20,423
14................  USA              TWA                  MD-82           JT8D-217C         49825      Mar-89         18,270
15................  USA              National Airlines    B757-200ER      RB211-535-E4      24260      Dec-88         33,953
16................  Canada           Canadian Airlines    A320-200        V2500-A1            279      Feb-92         30,467
SUB-TOTAL.........
17 Europe            Hungary         Malev                F-70            TAY MK620-15      11564      Dec-95         15,627
18 and Middle
  East............  Hungary          Malev                F-70            TAY MK620-15      11565      Feb-96         16,353
19 (Emerging).....  Hungary          Malev                F-70            TAY MK620-15      11569      Mar-96         16,460
20................  Turkey           Air Alfa             A321-100        V2530-A5            597      May-96         44,623
SUB-TOTAL.........
21 Asia...........  Korea            Asiana               B767-300        CF6-80C2B6F       24798      Oct-90         56,127
22 (Emerging).....  Taiwan           China Airlines       A300-600R       PW 4158             555      Mar-90         50,720
23................  China            China Hainan         B737-300        CFM 56-3C1        26295      Dec-93         26,783
SUB-TOTAL.........
24 Latin America..  Brazil           Passaredo            A310-300        JT9D-7R4E1          437      Nov-86         30,183
25 (Emerging).....  Brazil           VASP                 B737-300        CFM 56-3B2        24299      Nov-88         21,407
26................  Mexico           Aero Mexico          B757-200ER      PW 2037           26272      Mar-94         42,727
27................  Mexico           TAESA                B737-400        CFM 56-3B2        24234      Oct-88         22,340
SUB-TOTAL.........

<CAPTION>

                    % OF    REGION
REGION(1)           TOTAL     %
---------           -----   ------
<S>                 <C>     <C>
1 Europe..........  1.9%
2 (Developed).....  2.1%
3.................  2.6%
4.................  0.6%
5.................  2.9%
6.................  3.1%
7.................  2.0%
8.................  3.5%
9.................  3.0%
10................  6.6%
11................  3.4%
SUB-TOTAL.........           31.6%
12 North America..  2.7%
13 (Developed)....  2.0%
14................  1.8%
15................  3.3%
16................  3.0%
SUB-TOTAL.........           12.8%
17 Europe           1.5%
18 and Middle
  East............  1.6%
19 (Emerging).....  1.6%
20................  4.3%
SUB-TOTAL.........            9.0%
21 Asia...........  5.5%
22 (Emerging).....  4.9%
23................  2.6%
SUB-TOTAL.........           13.0%
24 Latin America..  2.9%
25 (Emerging).....  2.1%
26................  4.1%
27................  2.2%
SUB-TOTAL.........           11.4%
</TABLE>

                                       41
<PAGE>   43
<TABLE>
<CAPTION>
                                                                                                                   30-SEP-98
                                                                                                                   ADJUSTED
                    COUNTRY OF                                                ENGINE        SERIAL     DATE OF       BASE
REGION(1)           CURRENT LESSEE   CURRENT LESSEE       AIRCRAFT TYPE    CONFIGURATION    NUMBER   MANUFACTURE   VALUE(2)
---------           --------------   --------------       -------------   ---------------   ------   -----------   ---------
<S>                 <C>              <C>                  <C>             <C>               <C>      <C>           <C>
28 Other..........  Fiji             Air Pacific          B767-300ER      CF6-80C2B4        26260      Sep-94         68,913
29................  Iceland          IcelandAir           B737-300        CFM 56-3B2        23811      Oct-87         21,423
30................  Oman             Oman Air             A310-300        JT9D-7R4E1          409      Nov-85         25,210
31................  Oman             Oman Air             A310-300        JT9D-7R4E1          410      Nov-85         25,377
32................  Malta            Air Malta            B737-300        CFM 56-3B2        25161      Feb-92         25,020
SUB-TOTAL.........
AOG
33 for Lease......                                        B747-300B       CF6-80C2          24106      Apr-88         62,673
                                                                                                                   ---------
Total.............                                                                                                 1,029,437
                                                                                                                   =========

<CAPTION>

                    % OF    REGION
REGION(1)           TOTAL     %
---------           -----   ------
<S>                 <C>     <C>
28 Other..........  6.7%
29................  2.1%
30................  2.4%
31................  2.5%
32................  2.4%
SUB-TOTAL.........           16.1%
AOG
33 for Lease......  6.1%      6.1%
                    ----    ------
Total.............  100.0%  100.0%
                    ====    ======
</TABLE>

---------------

(1) Regions are defined according to MSCI designations.

(2) Adjusted Base Value is the Base Value of each aircraft as per the September
     30, 1998 Appraisal

(3) Total Number of Lessees = 28

(4) Total Number of Countries = 19

                                       42
<PAGE>   44

                                                                      APPENDIX B

                        MORGAN STANLEY AIRCRAFT FINANCE
  COMPARISON OF ACTUAL CASHFLOWS VERSUS ASSUMPTIONS FOR THE THIRD QUARTER 1999
               ALL AMOUNTS IN US DOLLARS UNLESS OTHERWISE STATED

<TABLE>
<CAPTION>
                                                                              QUARTERLY DATA
                                           ------------------------------------------------------------------------------------
                                                                                           % OF ASSUMED GROSS LEASE REVENUES
                                               ACTUAL        ASSUMED*                   ---------------------------------------
MD&A REF                                      TO DATE         TO DATE      VARIANCE       ACTUAL       ASSUMED*      VARIANCE
--------                                   --------------   -----------   -----------   -----------   -----------   -----------
<C>         <S>                            <C>              <C>           <C>           <C>           <C>           <C>
SECTION A   CASH COLLECTIONS
     1      Gross Lease Rentals..........    27,974,801      32,077,095    (4,102,294)        87.2%        100.0%        -12.8%
     2      Other Cash Received..........       410,203               0       410,203          1.3%          0.0%          1.3%
     3      Security Deposits............     1,050,000               0     1,050,000          3.3%          0.0%          3.3%
     4      Repossession Costs...........       129,450      (1,443,469)    1,572,919          0.4%         -4.5%          4.9%
                                            -----------     -----------   -----------   -----------   -----------   -----------
     5      Net Lease Rentals............    29,564,454      30,633,626    (1,069,172)        92.2%         95.5%         -3.3%
            Maintenance Receipts.........     4,809,630               0     4,809,630         15.0%          0.0%         15.0%
            Maintenance Expenses.........    (4,172,425)              0    (4,172,425)       -13.0%          0.0%        -13.0%
                                            -----------     -----------   -----------   -----------   -----------   -----------
     6      Net Maintenance..............       637,205               0       637,205          2.0%          0.0%          2.0%
     7      Interest Received............       467,325         350,238       117,087          1.5%          1.1%          0.4%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            TOTAL CASH COLLECTIONS.......    30,668,984      30,983,864      (314,880)        95.7%         96.6%         -0.9%
SECTION B   CASH EXPENSES
     1      Cash Operating Expenses......
            Insurance, re-leasing and
            other costs..................       (58,524)     (1,122,698)    1,064,174         -0.2%         -3.5%          3.3%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            subtotal.....................       (58,524)     (1,122,698)    1,064,174         -0.2%         -3.5%          3.3%
     2      SG&A
            Servicer Fees................    (1,303,864)     (1,615,951)      312,087         -4.1%         -5.0%         -0.9%
            Other Servicer provider fees
              and Overhead...............      (726,014)       (813,345)       87,331         -2.3%         -2.6%          0.3%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            subtotal.....................    (2,029,878)     (2,429,296)      399,417         -6.4%         -7.6%          1.2%
            TOTAL CASH EXPENSES..........    (2,088,402)     (3,551,994)    1,463,592         -6.6%        -11.1%         -4.5%
SECTION C   INTEREST PAYMENTS (NET OF
            SWAP PAYMENTS)...............   (16,454,882)    (16,672,187)      217,305        -51.3%        -52.0%          0.7%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            TOTAL CASH EXPENSES AND
            INTEREST PAYMENTS............   (18,543,284)    (20,224,181)    1,680,897        -57.9%        -63.1%          5.2%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            NET CASH COLLECTIONS.........    12,125,700      10,759,683     1,366,017         37.8%         33.5%          4.3%
                                            -----------     -----------   -----------   -----------   -----------   -----------
SECTION D   PRINCIPAL PAYMENTS
            A-1..........................             0               0             0          0.0%          0.0%          0.0%
            A-2..........................    11,170,703       9,804,686     1,366,017         34.8%         30.5%          4.3%
            B-1..........................       954,997         954,997             0          3.0%          3.0%          0.0%
            C-1..........................             0               0             0          0.0%          0.0%          0.0%
            D-1..........................             0               0             0          0.0%          0.0%          0.0%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            subtotal.....................    12,125,700      10,759,683     1,366,017         37.8%         33.5%          4.3%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            TOTAL PAYMENTS TO
            NOTEHOLDERS..................    12,125,700      10,759,683     1,366,017         37.8%         33.5%          4.3%
                                            -----------     -----------   -----------   -----------   -----------   -----------
            Beneficial Interest
            Distributions................             0               0             0          0.0%          0.0%          0.0%
                                            ===========     ===========   ===========   ===========   ===========   ===========
</TABLE>

---------------
* Assumed Cash Collections and Cash Expenses have been adjusted for non-delivery
  of an aircraft.

                                       43
<PAGE>   45

                                                                      APPENDIX C

                        MORGAN STANLEY AIRCRAFT FINANCE

 COMPARISON OF THIRD QUARTER 1999 ACTUAL CASHFLOWS VERSUS THE PRIOR YEAR PERIOD
               ALL AMOUNTS IN US DOLLARS UNLESS OTHERWISE STATED

<TABLE>
<CAPTION>
                                                      THIRD QUARTER 1999   PRIOR YEAR PERIOD
                                                      ------------------   -----------------
                                                          ACTUAL TO            ACTUAL TO        VARIANCE
MD&A REF                                               AUGUST 16, 1999      AUGUST 17, 1998         $
--------                                              ------------------   -----------------   -----------
<C>         <S>                                       <C>                  <C>                 <C>
SECTION A   CASH COLLECTIONS
    1       Gross Lease Rentals.....................      27,974,801           30,894,896       (2,920,095)
    2       Other Cash Received.....................         410,203              541,484         (131,281)
    3       Security Deposits.......................       1,050,000                    0        1,050,000
    4       Repossession Costs......................         129,450             (345,785)         475,235
                                                         -----------          -----------      -----------
    5       Net Lease Rentals.......................      29,564,454           31,090,595       (1,526,141)
            Maintenance Receipts....................       4,809,630            4,281,134          528,496
            Maintenance Expenses....................      (4,172,425)          (2,153,566)      (2,018,859)
                                                         -----------          -----------      -----------
    6       Net Maintenance.........................         637,205            2,127,568       (1,490,363)
    7       Interest Received.......................         467,325              753,847         (286,522)
                                                         -----------          -----------      -----------
            TOTAL CASH COLLECTIONS..................      30,668,984           33,972,010       (3,303,026)
SECTION B   CASH EXPENSES
    1       Cash Operating Expenses
              Insurance, re-leasing and other
                 costs..............................         (58,524)            (346,133)        (287,609)
                                                         -----------          -----------      -----------
            Subtotal................................         (58,524)            (346,133)        (287,609)
    2       SG&A Expenses
            Servicer Fees...........................      (1,303,864)            (907,362)        (396,502)
              Other Servicer provider fees and
                 Overhead...........................        (726,014)            (624,518)        (101,496)
                                                         -----------          -----------      -----------
            Subtotal................................      (2,029,878)          (1,531,880)        (497,998)
                                                                                               -----------
            TOTAL CASH EXPENSES.....................      (2,088,402)          (1,878,013)        (210,389)
SECTION C   INTEREST PAYMENTS (NET OF SWAP
              PAYMENTS).............................     (16,454,882)         (17,785,714)       1,330,832
                                                         -----------          -----------      -----------
            TOTAL CASH EXPENSES AND INTEREST
              PAYMENTS..............................     (18,543,285)         (19,663,727)       1,120,443
                                                         -----------          -----------      -----------
            NET CASH COLLECTIONS....................      12,125,700           14,308,283       (2,182,584)
                                                         -----------          -----------      -----------
            EXCEPTIONAL ITEMS
              Note Distribution for undelivered
                 aircraft...........................                           27,143,085      (27,143,085)
                                                         -----------          -----------      -----------
            CASH COLLECTIONS AVAILABLE FOR
              DISTRIBUTION..........................      12,125,700           41,451,368      (29,325,669)
                                                         -----------          -----------      -----------
SECTION D   PRINCIPAL PAYMENTS
            A-1.....................................               0                    0                0
            A-2.....................................      11,170,703           38,027,196      (26,856,493)
            B-1.....................................         954,997            3,424,172       (2,469,175)
            C-1.....................................               0                    0                0
            D-1.....................................               0                    0                0
                                                         -----------          -----------      -----------
            Subtotal................................      12,125,700           41,451,368      (29,325,668)
                                                                   0
                                                         -----------          -----------      -----------
            TOTAL PAYMENTS TO NOTEHOLDERS...........      12,125,700           41,451,368      (29,325,668)
                                                         ===========          ===========      ===========
            Beneficial Interest Distributions.......               0                    0
                                                         -----------          -----------
</TABLE>

                                       44
<PAGE>   46

                                                                      APPENDIX D

                        MORGAN STANLEY AIRCRAFT FINANCE

            COMPARISON OF ACTUAL TO DATE CASHFLOWS VERSUS PROSPECTUS
               ALL AMOUNTS IN US DOLLARS UNLESS OTHERWISE STATED

<TABLE>
<CAPTION>
                                                                                               % OF ASSUMED GROSS
                                                                                                 LEASE RENTALS
                                              ACTUAL TO        ASSUMED*                   ----------------------------
                                           AUGUST 16, 1999     TO DATE       VARIANCE     ACTUAL   ASSUMED*   VARIANCE
                                           ---------------   ------------   -----------   ------   --------   --------
<S>                                        <C>               <C>            <C>           <C>      <C>        <C>
CASH COLLECTIONS
Gross Lease Rentals......................    171,626,144      188,853,486   (17,227,342)   90.8%    100.0%     -9.1%
Other Cash Received......................      2,563,790                0     2,563,790     1.4%      0.0%      1.4%
Security Deposits........................      4,210,816                0     4,210,816     2.2%      0.0%      2.2%
Repossession Costs -- Actual.............     (1,787,648)      (8,498,407)    6,710,759    -0.9%     -4.5%      3.6%
Repossession Costs -- Accrued............        (45,015)               0       (45,015)    0.0%      0.0%      0.0%
                                            ------------     ------------   -----------   ------    ------     -----
Net Lease Rentals........................    176,568,087      180,355,079    (3,786,992)   93.5%     95.5%     -2.0%
Maintenance Receipts.....................     24,994,506                0    24,994,506    13.2%      0.0%     13.2%
Maintenance Expenses -- Actual...........    (11,453,519)               0   (11,453,519)   -6.1%      0.0%     -6.1%
Maintenance Expenses -- Accrued..........     (4,958,983)               0    (4,958,983)   -2.6%      0.0%     -2.6%
                                            ------------     ------------   -----------   ------    ------     -----
Net Maintenance..........................      8,582,004                0     8,582,004     4.5%      0.0%      4.5%
Interest Received........................      3,349,796        2,031,533     1,318,263     1.8%      1.1%      0.7%
                                            ------------     ------------   -----------   ------    ------     -----
Total Cash Collections...................    188,499,887      182,386,612     6,113,275    99.8%     96.6%      3.2%
CASH EXPENSES
Cash Operating Expenses
  Insurance, re-leasing and other costs
    -- Actual............................     (1,647,148)      (6,609,872)    4,962,724    -0.9%     -3.5%      2.6%
  Insurance, re-leasing and other costs
    -- Accrued...........................        (94,952)               0       (94,952)   -0.1%      0.0%     -0.1%
                                            ------------     ------------   -----------   ------    ------     -----
subtotal.................................     (1,742,100)      (6,609,872)    4,867,772    -1.1%     -3.5%      2.5%
SG&A
  Servicer Fees..........................     (6,997,669)      (8,057,504)    1,059,835    -3.7%     -4.3%      0.6%
  Other Servicer provider fees and
    Overhead -- Actual...................     (3,852,129)      (4,725,166)      873,037    -2.0%     -2.5%      0.5%
  Other Servicer provider fees and
    Overhead -- Accrued..................        (93,472)               0       (93,472)    0.0%      0.0%      0.0%
                                            ------------     ------------   -----------   ------    ------     -----
subtotal.................................    (10,943,270)     (12,782,670)    1,839,400    -5.7%     -6.8%      1.0%
TOTAL CASH EXPENSES......................    (12,685,370)     (19,392,542)    6,707,172    -6.7%    -10.3%      3.6%
INTEREST PAYMENTS (NET OF SWAP
  PAYMENTS)..............................    (99,830,072)     (99,177,837)     (652,235)  -52.9%    -52.5%     -0.4%
                                            ------------     ------------   -----------   ------    ------     -----
TOTAL CASH EXPENSES AND INTEREST
  PAYMENTS...............................   (112,515,442)    (118,570,379)    6,054,937   -59.6%    -62.8%      3.2%
                                            ------------     ------------   -----------   ------    ------     -----
NET CASH COLLECTIONS.....................     75,984,445       63,816,233    12,168,212    40.2%     33.8%      6.4%
                                            ------------     ------------   -----------   ------    ------     -----
EXCEPTIONAL ITEMS
Note Distribution for undelivered
  aircraft...............................     27,143,085       27,143,085             0    14.4%     14.4%      0.0%
                                            ------------     ------------   -----------   ------    ------     -----
CASH COLLECTIONS AVAILABLE FOR
  DISTRIBUTION...........................    103,127,530       90,959,318    12,168,212    54.6%     48.2%      6.4%
                                            ------------     ------------   -----------   ------    ------     -----
Principal Payments
A-1......................................              0                0             0     0.0%      0.0%      0.0%
A-2......................................     95,116,883       82,948,671    12,168,212    50.4%     44.0%      6.4%
B-1......................................      8,010,647        8,010,647            (0)    4.2%      4.2%      0.0%
C-1......................................              0                0             0     0.0%      0.0%      0.0%
D-1......................................              0                0             0     0.0%      0.0%      0.0%
                                            ------------     ------------   -----------   ------    ------     -----
subtotal.................................    103,127,530       90,959,318    12,168,212    54.6%     48.2%      6.4%
TOTAL PAYMENTS TO NOTEHOLDERS............    103,127,530       90,959,318    12,168,212    54.6%     48.2%      6.4%
                                            ------------     ------------   -----------   ------    ------     -----
Beneficial Interest Distributions........             (0)               0            (0)    0.0%      0.0%      0.0%
                                            ============     ============   ===========   ======    ======     =====
</TABLE>

---------------

* Assumed Cash Collections and Cash Expenses have been adjusted for non-delivery
  of an aircraft.

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<PAGE>   47

<TABLE>
<CAPTION>
                                                         COVERAGE RATIOS
                                  -------------------------------------------------------------
                                     CLOSING                 ACTUAL                 ASSUMED*
                                  -------------           -------------           -------------
<S>                               <C>             <C>     <C>             <C>     <C>             <C>
Cash Collections Available for
 Distribution...................                            103,127,530              90,959,318
Add Back Interest and Swap
 Payments.......................                             99,830,072              99,177,837
Add Back Permitted Accruals.....                              1,600,000                      --
A  NET CASH COLLECTIONS (EXCL.
   INTEREST AND SWAP PYMTS).....                            204,557,602             190,137,155
B  Swaps........................                             10,236,989               5,390,403
C  Class A Interest.............                             57,069,644              60,946,652
D  Class A Minimum..............                             15,221,945              22,188,410
E  Class B Interest.............                              8,501,938               8,959,282
F  Class B Minimum..............                              8,010,647               8,010,647
G  Class C Interest.............                             10,071,667              10,005,000
H  Class C Minimum..............                                     --                      --
I  Class D Interest.............                             13,949,833              13,876,500
J  Class D Minimum..............                                     --                      --
K  Class A Scheduled............                                     --                      --
L  Class B Scheduled............                                     --                      --
M  Class C Scheduled............                                     --                      --
N  Class D Scheduled............                                     --                      --
O  Permitted Aircraft
 Modifications..................                              1,600,000                      --
P  Class A Supplemental.........                             79,894,938              60,760,261
                                                          -------------           -------------
TOTAL...........................                            204,557,602             190,137,155
                                                          -------------           -------------
INTEREST COVERAGE RATIO
Class A.........................                                   3.04                    2.87   = a/(b+c)
Class B.........................                                   2.25                    1.95   = a/(b+c+d+e)
Class C.........................                                   1.87                    1.65   = a/(b+c+d+e+f+g)
Class D.........................                                   1.66                    1.47   = a/(b+c+d+e+f+g+h+i)
DEBT COVERAGE RATIO
Class A.........................                                   1.66                    1.47   = a/(b+c+d+e+f+g+h+i+j+k)
Class B.........................                                   1.66                    1.47   = a/(b+c+d+e+f+g+h+i+j+k+l)
Class C.........................                                   1.66                    1.47   = a/(b+c+d+e+f+g+h+i+j+k+l+m)
Class D.........................                                   1.66                    1.47   = a/(b+c+d+e+f+g+h+i+j+k+l+m+n)
LOAN-TO-VALUE RATIOS
Assumed Portfolio Value.........  1,115,510,000                                   1,026,666,885
Adjusted Portfolio Value........                            993,815,944
Liquidity Reserve Amount
Of which -- Cash................     25,000,000              25,000,000              25,000,000
       -- Accrued Expenses......                              5,192,422
       -- Letters of Credit
         held...................     40,000,000              40,003,351              40,003,351
                                  -------------           -------------           -------------
Subtotal........................     65,000,000              70,195,773              65,003,351
Less Lessee Security Deposits...    (20,000,000)            (20,003,351)            (20,003,351)
                                  -------------           -------------           -------------
Subtotal........................     45,000,000              50,192,422              45,000,000
TOTAL ASSET VALUE...............  1,160,510,000           1,044,008,366           1,071,666,885
NOTE BALANCES AS AT 16-AUG-99
Class A.........................    740,000,000   63.8%     644,883,117   61.3%     657,051,329   61.8%
Class B.........................    100,000,000   72.4%      91,989,353   69.9%      91,989,353   70.6%
Class C.........................    100,000,000   81.0%     100,000,000   79.2%     100,000,000   80.2%
Class D.........................    110,000,000   90.5%     110,000,000   89.5%     110,000,000   90.7%
                                  -------------           -------------           -------------
TOTAL...........................  1,050,000,000             946,872,470             959,040,682
                                  -------------           -------------           -------------
</TABLE>

---------------
1.   Interest Coverage Ratio is equal to Net Cash Collections (excl. interest
     and swap payments) expressed as a ratio of the interest payable on each
     subclass of Notes plus the interest and minimum principal payments payable
     on each subclass of Notes that rank senior in priority of payment to the
     relevant subclass of Notes.

2.   Debt Service Ratio is equal to Net Cash Collections (excl. interest and
     swap payments) expressed as a ratio of the interest and minimum and
     scheduled principal payments payable on each subclass of Notes plus the
     interest and minimum and scheduled principal payments payable on each
     subclass of Notes that ranks equally with or senior to the relevant
     subclass of Notes in the priority of payments.

                                       46
<PAGE>   48

3.   Total Asset Value is equal to Total Assumed Portfolio Value plus Liquidity
     Reserve Amount minus Lessee Security Deposits.

4.   Assumed Portfolio Value represents the Initial Appraised Value of each
     aircraft in the Portfolio multiplied by the Depreciation Factor at
     Calculation date divided by the Depreciation Factor at Closing date.

5.   Adjusted Portfolio Value represents the Base Value of each aircraft in the
     Portfolio as determined by the most recent Appraisal multiplied by the
     Depreciation Factor at Calculation date divided by the Depreciation Factor
     at Closing date.

6.   The lower of the Assumed Portfolio Value or 105% of the Adjusted Portfolio
     Value is used to calculate the principal repayment amounts to Noteholders.

                                       47