<PAGE>   1


                       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 PERIOD ENDED FEBRUARY 28, 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

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

                          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                 March 31, 1999
------                              ---------------------       ----------------
<S>                                        <C>                       <C>
Morgan Stanley Aircraft Finance      Beneficial Interest               One
</TABLE>




<PAGE>   2




                         MORGAN STANLEY AIRCRAFT FINANCE

          FORM 10-Q FOR THE THREE MONTH PERIOD ENDED FEBRUARY 28, 1999

                                      INDEX

<TABLE>
<CAPTION>
                                                                                   PAGE NO.
                                                                                   --------
<S>                                                                                <C>
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

-   Interim Condensed Consolidated Financial Statements (Unaudited)
-   Notes to the Interim Condensed Consolidated Financial Statements (Unaudited)

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

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

SIGNATURES

INDEX TO EXHIBITS
</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>
                                                                FEBRUARY 28,     NOVEMBER 30,
                                                                   1999             1998
                                                                ------------    -------------
                                                                (UNAUDITED)
<S>                                                             <C>              <C>
                                 ASSETS
Cash and cash equivalents...................................   $    35,422       $   34,850
Receivables:
  Lease income, net.........................................         4,505            5,104         
  Investment income and other...............................           120              153
Aircraft under operating leases, net........................       921,346          933,111
Investment in capital lease, net............................        18,221           20,221
Underwriting and other issuance related costs, net of
  amortization..............................................        16,773           17,053
                                                               -----------       ----------
Total Assets................................................   $   996,387       $1,010,492
                                                               ===========       ==========
           LIABILITIES AND BENEFICIAL INTERESTHOLDER'S DEFICIT
Payables:
  Interest payable to Noteholders...........................   $     2,511       $    2,655
Deferred rental income......................................         6,713            7,351
Liability for maintenance...................................        53,188           51,939
Other liabilities...........................................        15,706           16,415             
Notes payable:
  Class A-1.................................................       400,000          400,000
  Class A-2.................................................       264,844          274,062
  Class B-1.................................................        93,888           94,819
  Class C-1.................................................       100,000          100,000
  Class D-1.................................................       110,000          110,000
                                                               -----------       ----------
                                                                 1,046,850        1,057,241
                                                               -----------       ----------
Commitments and contingencies
Beneficial Interestholder's Deficit:
  Beneficial Interest.......................................             1                1
  Deemed Distribution.......................................       (15,305)         (15,305)
  Accumulated Deficit.......................................       (35,159)         (31,445)
                                                               -----------       ---------- 
  Total Beneficial Interestholder's Deficit.................       (50,463)         (46,749)
                                                               -----------       ----------
Total Liabilities and Beneficial Interestholder's Deficit...   $   996,387       $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   THREE MONTHS ENDED
                                                           FEBRUARY 28, 1999    FEBRUARY 28, 1998
                                                           ------------------   -----------------
                                                                         (UNAUDITED)         
<S>                                                         <C>                 <C>
Revenues:                                                                     
  Lease income, net........................................      $ 27,088            $ 25,117
  Investment income on collection account..................           431                  --
                                                                 --------            --------
  Total revenues...........................................        27,519              25,117
                                                                 --------            --------
Expenses:                                                                     
  Interest expense.........................................        16,349                  --
  Depreciation expense.....................................        11,765               3,823
  Operating expenses:                                                         
     Service provider and other fees.......................         2,047               2,837
     Maintenance and other aircraft related costs..........         1,072                 375
                                                                 --------            --------
  Total expenses...........................................        31,233               7,035
                                                                 --------            --------
Net (loss)/income.........................................       $ (3,714)           $ 18,082
                                                                 ========            ========
</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>
                                                              THREE MONTHS ENDED    THREE MONTHS ENDED
                                                              FEBRUARY 28, 1999     FEBRUARY 28, 1998
                                                              ------------------    -----------------
                                                                            (UNAUDITED)                        
<S>                                                                <C>                   <C>
Cash flows from operating activities
  Net (loss)/income.........................................       $  (3,714)            $  18,082
  Adjustments to reconcile net (loss)/income to net cash
     provided by operating activities:
  Depreciation expense--aircraft under operating leases.....          11,765                 3,823
  Amortization of underwriting and other issuance related
     costs..................................................             280                    --
  Provision for doubtful accounts...........................           3,041                    --
  Changes in assets and liabilities:
     Receivables:
       Investment income and other..........................              33                  (600)
       Lease income.........................................          (1,048)               (1,021)
     Investment in capital lease............................             606                 2,891
     Liability for maintenance..............................           1,249                 3,662
     Interest payable to Noteholders........................            (144)                   --
     Deferred rental income.................................            (638)                8,029
     Other liabilities......................................            (709)                  375
                                                                   ---------             ---------
Net cash provided by operating activities...................          10,721                35,241
                                                                   ---------             ---------
Cash flows from investing activities                                                     
  Purchase of aircraft......................................              --              (859,668)
                                                                   ---------             ---------
Net cash used for investing activities......................              --              (859,668)
                                                                   ---------             ---------
Cash flows from financing activities                                                     
  Proceeds from borrowings from Morgan Stanley Financing                                 
     Inc....................................................              --               824,427
  Repayments of Notes.......................................         (10,149)                   --
                                                                   ---------             ---------
Net cash provided by financing activities...................         (10,149)              824,427
                                                                   ---------             ---------
Net increase in cash and cash equivalents...................             572                    --
Cash and cash equivalents at beginning of period............          34,850                    --
                                                                   ---------             ---------
Cash and cash equivalents at end of period..................       $  35,422             $      --
                                                                   =========             =========
</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
                                                                          EARNINGS             TOTAL
                                                          BENEFICIAL    (ACCUMULATED    BENEFICIAL INTEREST
                                                           INTEREST       DEFICIT)           (DEFICIT)
                                                          ----------    ------------    -------------------
                                                                         (UNAUDITED)
<S>                                                       <C>           <C>             <C>
Balance at November 30, 1997......................               1           4,704               4,705
Net income........................................              --          18,082              18,082
                                                          --------         -------             -------
Balance at February 28, 1998......................        $      1         $22,786             $22,787
                                                          ========         =======             =======
</TABLE>


<TABLE>
<CAPTION>
                                                                          RETAINED
                                                                          EARNINGS             TOTAL
                                          BENEFICIAL       DEEMED       (ACCUMULATED    BENEFICIAL 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..............................           --             --         (3,714)             (3,714)
                                           --------       --------       --------           ---------
Balance at February 28, 1999..........     $      1        (15,305)      $(35,159)          $ (50,463)
                                           ========       ========       ========           =========
</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 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 condensed consolidated financial statements are prudent and reasonable.
Actual results could differ materially from these estimates.
 
     All material intercompany transactions have been eliminated.
 
     The 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 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. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. 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 February 28, 1999
MSAF Group had leased aircraft to 29 lessees in 18 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 February 28, 1999, 14 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 of deposits. MSAF
Group will continue to manage its exposure to particular countries, regions and
lessees through concentration limits.


                                       6
<PAGE>   8
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)
 
NOTE 3 -- AIRCRAFT
 
<TABLE>
<CAPTION>
                                                                  FEBRUARY 28, 1999       NOVEMBER 30, 1998
                                                                  ------------------      -----------------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                               <C>                     <C>
Stage 3 Aircraft and one spare engine:
Cost........................................................           $972,030                $972,030
Less Accumulated depreciation...............................            (50,684)                (38,919)
                                                                       --------                --------
                                                                       $921,346                $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........................................                  7                       7
From one to five years......................................                 20                      20
Less than one year..........................................                  5                       5
                                                                       --------                --------
Total aircraft portfolio (including one spare engine and
excluding aircraft under capital lease).....................                 32                      32
                                                                       ========                ========
</TABLE>

     At February 28, 1999, there were no non-revenue earning aircraft in MSAF
Group's portfolio.
 
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>
                                                                  FEBRUARY 28, 1999       NOVEMBER 30, 1998
                                                                  ------------------      -----------------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                               <C>                     <C>
Minimum lease payments receivable...........................           $24,282                 $25,302
Less: Allowance for doubtful accounts.......................            (1,530)                   (136)
                                                                       -------                 -------
Net minimum lease payments receivable.......................            22,752                  25,166
Less: Unearned Income.......................................            (4,531)                 (4,945)
                                                                       -------                 -------
Net investment in capital lease.............................           $18,221                 $20,221
                                                                       =======                 =======
</TABLE>

     At February 28, 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 of $1.4 million for the three months
ended February 28, 1999 is recorded as a reduction of lease income revenues in
the Condensed Consolidated Statements of Operations.

NOTE 5 -- LEASE INCOME RECEIVABLE

     Lease income receivable was as follows:

<TABLE>
<CAPTION>
                                                                  FEBRUARY 28, 1999       NOVEMBER 30, 1998
                                                                  ------------------      -----------------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                               <C>                     <C>
Lease income receivable.....................................           $6,705                  $5,657
Less: Allowance for doubtful accounts.......................           (2,200)                   (553)
                                                                       ------                  ------
Lease income receivable, net................................           $4,505                  $5,104
                                                                       ======                  ======
</TABLE>

     The provision for doubtful accounts of $1.6 million for the three months
ended February 28, 1999 is recorded as a reduction of lease income revenues in
the Condensed Consolidated Statements of Operations.

NOTE 6 -- LIABILITY FOR MAINTENANCE

     Activity in the liability for maintenance account was as follows:

<TABLE>
<CAPTION>
                                                                  FEBRUARY 28, 1999       NOVEMBER 30, 1998
                                                                  ------------------      -----------------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                               <C>                     <C>
Balance, beginning of period................................           $51,939                 $   --
Liabilities assumed from International Lease
  Finance Corporation.......................................                --                  38,735
Collections from lessees....................................             3,999                  15,837
Reimbursements to lessees...................................            (2,750)                 (2,633)
                                                                       -------                 -------
Balance, end of period......................................           $53,188                 $51,939
                                                                       =======                 =======
</TABLE>
 
                                       7
<PAGE>   9
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)

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.

     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 therefor, 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 coupon of 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 $15.7 million for the three
month period ended February 28, 1999. There was no interest expense in the
comparable prior year period as the Notes were issued on 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.
 
     As of February 28, 1999, the aggregate amount available under the ILFC
Facility and the MSDW Facility was approximately $40.4 million.
 
                                       8
<PAGE>   10

                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)
 
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
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 counter party, 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 $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 February 28, 1999 was $(12.2) 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
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 February 28, 1999, the fair value of these swaps was $(7.2)
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

                                       9
<PAGE>   11
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES
 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
                                  (CONTINUED)
 

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 three month
period ended February 28, 1999, Cabot Aircraft Services Limited received a fee
of $0.4 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 $0.01 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, as MSAF Group has no
employees or executive officers. Three of MSAF Group's six trustees and one
alternate trustee are employees of MSDW. MSAF Group's remaining two trustees are
unaffiliated with MSDW.
 
NOTE 11 -- COMMITMENTS
 
     MSAF Group did not have any material contractual commitments for capital
expenditures at February 28, 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 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 received, in
addition to certain incentive-based fees.
 
     The Servicing Agreement expires in 2023, although each party has the right
to terminate the Servicing Agreement under certain circumstances.
 
                                       10
<PAGE>   12
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 February 28, 1999, the total number of aircraft owned by MSAF Group
was 32 aircraft plus a spare engine.

 
                                       11
<PAGE>   13
 

     LESSEE DIFFICULTIES
 
     As of April 1, 1999, two of MSAF Group's current lessees were in arrears.
The aircraft on lease to these two lessees in arrears represent 9.0% of the
appraised value of the portfolio at September 30, 1998 and both lessees are
based in Brazil. The amounts outstanding and overdue for the two lessees in
respect of rental payments, maintenance reserves and other miscellaneous amounts
due under the leases (net of default interest and certain cash in transit) with
respect to these lessees amounted to approximately $5.1 million. The weighted
average number of days past due of such arrears was 68 days. See "Latin America"
below.

     In addition, as of April 1, 1999, an aggregate of $2.8 million was owed to
MSAF Group from three of its former lessees. In each case, MSAF Group has
already repossessed the aircraft from the former lessee and has re-leased the
aircraft to another carrier. 
    


 
                                       12
<PAGE>   14
     ECONOMIC CRISES IN EMERGING MARKETS
     EUROPE/MIDDLE EAST
 
     In light of continued non-payment of rental and maintenance prepayments,
the Servicer agreed to terminate the lease with Onur Air early and repossess the
aircraft. The aircraft represents 4.3% of the appraised value of the portfolio
at September 30, 1998. As of April 1, 1999, Onur Air was in arrears, owing $1.4
million in rental and maintenance reserves (net of security deposits). Amounts
owed were restructured as part of the early termination agreement and are
scheduled for payment in full by October 1999. The aircraft has been re-leased
to Air Alfa, a Turkish based charter airline.

     ASIA
 
     Currently, MSAF Group leases 13.0% of its fleet in the Asia region (5.5% in
South Korea, 4.9% in Taiwan and 2.6% in China) and 6.7% in Pacific and other
regions (6.7% in Fiji) by appraised value of the portfolio at September 30,
1998. As of April 1, 1999 none of these lessees were in arrears although severe
financial difficulties have been reported for certain other air carriers in the
region. One of the lessees restructured its lease payments which will result in
a lower rental payment over the remaining lease term.
 
     LATIN AMERICA
 
     Considerable economic uncertainty currently affects the major economies in
Latin America. As of April 1, 1999, MSAF Group leased 17.4% of its fleet in
Latin America (6.3% in Mexico and 11.1% in Brazil) by appraised value of the
portfolio at September 30, 1998.

     In January 1999, Brazil decided to float its currency on the international
currency market which resulted in a devaluation of its currency and increased
exchange rate volatility. One of MSAF Group's Brazilian lessees, which accounts
for 6.1% of the appraised value of the portfolio at September 30, 1998, has
requested a short-term stay in lease payments due to financial difficulties
associated with the devaluation. The lessee is currently in discussions with its
principal lessors regarding its financial position, the outcome of which may
well be the restructuring of its lease payments to MSAF Group. The rentals of
another Brazilian lessee, representing 2.1% of the appraised value of the
portfolio at September 30, 1998, have been restructured. The lessee has agreed
with the Servicer to defer part of its rental for a six month period and to pay
the arrearage, with interest, in full by January 2000. The rental arrears of the
third Brazilian lessee, which accounts for 2.9% of the appraised value of the
portfolio at September 30, 1998, were restructured in December 1998, and the
lessee is in arrears with respect to the restructured payments amounts as well
as subsequent lease payments.

     OTHER

     In January 1999, the Servicer agreed with Guyana Airways to terminate the
lease early and repossess the aircraft. The airline has agreed to re-imburse
MSAF for certain arrears and costs of redelivery. The Guyana aircraft is a
B757-200 and accounts for 3.3% of the appraised value of the portfolio at
September 30, 1998. The aircraft is subject to a new lease with a US carrier,
National Airlines.

     NEW AIRCRAFT SAFETY STANDARD

     The U.S. Federal Aviation Administration (the "FAA") has indicated that it
will develop within the next six months a new test specification for insulation
for the purpose of increasing fire safety on aircraft. The FAA has also begun
discussion with the international aviation authorities on this matter. In
addition, the FAA has indicated that it will propose requiring the use of
improved insulation once the new test standard is developed. It is possible that
additional service bulletins, new maintenance practices and mandatory
airworthiness directives may be issued while the new standard for insulation is
developed. If new standards for insulation are implemented, MSAF Group could
incur significant costs in ensuring its aircraft comply with these standards
which could impact adversely on MSAF Group's results of operations. It is
currently not clear whether or to what extent manufacturers, owners or lessees
would be responsible for the costs necessary to bring aircraft in compliance
with such new test standards.
 
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 1999, AND THE
THREE MONTHS ENDED FEBRUARY 28, 1998
 
     MSAF Group's results of operations for the three months ended February 28,
1999 are not directly comparable with those of the three months ended February
28, 1998 because MSAF Group did not own its aircraft portfolio throughout the
entire prior year period. In addition, the Notes were issued on March 3, 1998
and accordingly, MSAF Group had no interest expense for the three month period
ended February 28, 1998.

     LEASE INCOME

     Lease Income for the three month period ended February 28, 1999 amounted to
$27.1 million compared with $25.1 million for the three month period ended
February 28, 1998. MSAF Group's operating results for the three month period
ended February 28, 1999 were adversely affected by provisions for doubtful
accounts aggregating $3.0 million. Such provisions were recorded due to
financial difficulties experienced by certain of its current 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"). No
provisions for doubtful accounts were recorded in the three month period ended
February 28, 1998. Lease income may decline in 1999 due to potential lessee
defaults and lessee arrears, particularly given the difficult operating
conditions for Latin American lessees as discussed above.
                                       13
<PAGE>   15
     MSAF Group records the cash prepayments made by lessees for maintenance as
a component of the liability for maintenance account which appears on the
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.
 
     INVESTMENT INCOME
 
     In the three month period ended February 28, 1999, MSAF Group earned
investment income of $0.4 million, which represents interest income on its cash
and cash equivalents.
     
     No investment income was earned in the three month period ended February
28, 1998, as all lease income was used to immediately repay the non-interest
bearing financing from MSF.
 
     INTEREST EXPENSE
 
     Interest expense, including swap costs of $0.8 million, amounted to $16.3
million in the three month period ended February 28, 1999. Interest expense
relates to the cost of the Notes which were issued on March 3, 1998. The
weighted average interest rate on the Subclass A-1 to D-1 Notes during the three
month period ended February 28, 1999 was 6.28% and the average debt in respect
of the Subclass A-1 to D-1 Notes outstanding during the three month period ended
February 28, 1999 was $973.81 million. No interest expense was incurred in the
three month period ended February 28, 1998.
 
     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 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 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.
 
                                      14
<PAGE>   16
 
     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

     The charge for depreciation for the three month period ended February 28,
1999 amounted to $11.8 million, compared with $3.8 million in the three month
period ended February 28, 1998, reflecting the fact that MSAF Group did not own
all of the aircraft throughout the entire prior year period.

     OPERATING EXPENSES

     Service Provider and Other Fees.  Service provider and other fees for the
three month period ended February 28, 1999 were $2.0 million compared with $2.8
million for the corresponding period in Fiscal 1998. The most significant
element in both periods was the aircraft servicing fee paid to ILFC, which
amounted to $1.4 million in the Fiscal 1999 period and $2.7 million in the
Fiscal 1998 period. The fee paid in the period ended February 28, 1998 included
an initial upfront fee paid at the inception of the Servicing Agreement. 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
February 28, 1999 compared with $0.1 million in the three months ended February
28, 1998. The lower fees paid for the three month period ended February 28, 1998
reflects the fact that 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 three month period ended February 28, 1999
amounted to $1.1 million compared to $0.4 million for the three month period 
ended February 28, 1998.

     Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the three month period ended
February 28, 1999, which amounted to approximately $0.6 million, compared to
$0.1 million for the corresponding period in Fiscal 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.

     NET INCOME

     In the three month period ended February 28, 1999 MSAF Group incurred a
net loss of ($3.7 million). MSAF Group's net income for the three month period
ended February 28, 1998 was $18.1 million.

     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.

                                      15
<PAGE>   17

FINANCIAL RESOURCES AND LIQUIDITY
 
     Refer to Appendix 1 for additional information regarding the cash
performance of MSAF Group for the period from November 17, 1998 to February 16,
1999.
 
     LIQUIDITY
 
     MSAF Group's cash and cash equivalents at February 28, 1999 were $35.4
million. Of this amount, $25 million represents the cash portion of the
Liquidity Reserve Amount (as defined below) and $10.4 million represents rental
and maintenance receipts and cash held for accrued expenses.
 
     In addition to the $25 million cash portion at February 28, 1999, the
Liquidity Reserve Amount also contained $40.4 million of undrawn credit and
liquidity facilities from MSDW and ILFC.
 
     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 cost of the
Notes, the effectiveness of MSAF Group's interest rate hedging policies, the
ability of MSAF Group's swap providers to perform under the terms of their swaps
and similar obligations 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 three month period ended
February 28, 1999 amounted to $10.7 million, principally reflecting non-cash
depreciation expense of $11.8 million, a net loss of ($3.7) million and
provision for doubtful accounts of $3.0 million.
    
     Net cash provided by operating activities for the three month period ended
February 28, 1998 amounted to $35.2 million, principally reflecting non-cash
depreciation expense of $3.8 million, net income of $18.1 million, maintenance
liabilities of $3.7 million and rental payment receivables of $8.0 million.

     CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES

     In the three month period ended February 28, 1999, no cash was used for
investing activities, while in the three month period ended February 28, 1998,
the use of cash flows for investing activities of $859.7 million was to acquire
aircraft.

     In the three month period ended February 28, 1999, $10.1 million of cash
for financing activities was used to repay principal on the Notes, while in the
three month period ended February 28, 1998, cash flows from financing activities
were $824.4 million, reflecting the proceeds from borrowings from MSF to acquire
aircraft.

     INDEBTEDNESS
 
     MSAF Group's indebtedness primarily consisted of the Subclass A-1 to D-1
Notes in the amount of $968.7 million at February 28, 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

                                       16

<PAGE>   18
 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 $65.4 million on February
28, 1999. The "MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded with cash and
with Eligible Credit Facilities and was approximately $15 million on February
28, 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.
 
     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),

                                      17
<PAGE>   19
 repossessing and releasing 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.
 
     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 $30.4 million on February 28, 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.
 
                                      18
<PAGE>   20
 
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 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 DISCLOSURE
 
     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. We have begun a process of assessing the potential impact of the year 2000
issue on our operations. Since substantially all of our operational functions
have been delegated to the Servicer we have no information systems of our own.
We may, however, suffer a material adverse impact on our business and results of
operations if information technology upon which the lessees and ILFC rely is not
year 2000 compliant.
 
     The administrative agent, cash manager and financial advisor each are
reviewing their year 2000 exposure and identifying the steps that will need to
be taken to ensure that their systems are year 2000 compliant. If the
administrative agent's or financial advisor's systems are not fully year 2000
compliant, we do not expect the consequences of such noncompliance to have a
material adverse effect on our business. MSAF Group may suffer a material
adverse impact on its business and results of operations if information
technology upon which the cash manager relies 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 were year 2000
 
                                      19
<PAGE>   21


compliant as of September 30, 1998. ILFC is conducting a survey of the critical
third parties with which it conducts business on our behalf to determine the
extent of their exposure to year 2000 risks and the status of their year 2000
compliance efforts. As of April 1, 1999, ILFC has received responses from all
but three of MSAF Group's 30 current lessees. Based on these responses, ILFC has
indicated to MSAF Group that approximately half of the lessees are or will be
year 2000 compliant by August 1999. ILFC is engaged in an ongoing dialog with
noncompliant lessees and continues to attempt to contact the three lessees that
have not yet responded. Nonetheless, significant uncertainties remain regarding
the status of year 2000 compliance efforts of critical third parties and the
risks to MSAF Group of noncompliance by such third parties.
 
     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.
 
     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, our contingency plans may
include for ILFC to repossess aircraft from lessees in default and then attempt
to re-lease such aircraft to a year 2000 compliant lessee. We cannot assure that
ILFC would be able to re-lease such aircraft at favorable terms or at all or
that there may not be a significant delay in re-leasing. 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 our 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, our 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. 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. We cannot assure
that our 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.
 
     The aviation insurance markets have sought to exclude any claims for losses
incurred as a result of year 2000 problems under existing policies. However, the
application of this exclusion may be mitigated by the availability of the
following limited writeback endorsements ("YEAR 2000 ENDORSEMENTS"): (i) hull
and aircraft liability coverage in respect of accidental loss of damage to
insured aircraft and for liability arising out of an accident involving the
insured aircraft as a result of a year 2000 occurrence and (ii) non aircraft
liability coverage with regard to liability caused by an accident and arising
out of a risk insured under the policy as a result of year 2000 failure.
Therefore, the effect of the Year 2000 Endorsements is to provide that losses
(including consequential losses) arising from a year 2000 failure will only be
paid where they result from an accident involving an aircraft or an injury to a
third party. Insurers will provide Year 2000 Endorsements to those airlines
which satisfy insurers that they have identified and are adequately addressing
the year 2000 issues affecting that airline. As of April 1, 1999, seven of MSAF
Group's current lessees have obtained Year 2000 insurance endorsements. MSAF
Group, in conjunction with ILFC and its insurance brokers, continues to assess
the year 2000 status of its lessees' aviation insurance.

     The Year 2000 Endorsements are currently available to MSAF Group in respect
of any of its off-lease aircraft. In addition, MSAF Group maintains contingent
insurance designed to protect the lessor in

                                       20
<PAGE>   22
 
circumstances where the lessor fails to collect from the insurances required to
be provided by the lessee. In respect of any insured claims for losses incurred
as a result of year 2000 problems, MSAF Group's contingent insurances are not
available if the operator's policy does not contain Year 2000 Endorsements.

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 February 28, 1999 are as
follows:
 
<TABLE>
<CAPTION>
                                                                                                      
                       Outstanding                                                                   
                    Principal Amount        Annual                                                    Fair Value at
                    at February 28,      Interest Rate     Expected Final Payment   Final Maturity     February 28,
Subclass Of Note          1999         (payable monthly)           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      $398,440
Subclass A-2            264,844         LIBOR + 0.35%       September 15, 2005      March 15, 2023       262,858
Subclass B-1             93,888         LIBOR + 0.65%           March 15, 2013      March 15, 2023        89,691
Subclass C-1            100,000                 6.90%           March 15, 2013      March 15, 2023        93,300
Subclass D-1            110,000                 8.70%           March 15, 2014      March 15, 2023       104,390 

</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 AT
NOTIONAL                                          FIXED MONTHLY   FIXED MONTHLY    FEBRUARY 28, 
BALANCE    EFFECTIVE DATE       MATURITY DATE       PAY RATE      RECEIVE RATE        1999
--------  -----------------   -----------------   -------------   -------------   -------------
($000'S)                                               (%)             (%)          ($000'S)
<C>       <S>                 <C>                 <C>             <C>             <C>
100,000   November 12, 1997   November 15, 1999      6.0550              --             (647)
300,000   November 12, 1997   November 15, 2000      6.1325              --           (3,234)
200,000   November 12, 1997   November 15, 2002      6.2150              --           (3,588)
200,000   November 12, 1997   November 15, 2004      6.2650              --           (4,771)
150,000   November 12, 1997   November 15, 2007      6.3600              --           (4,839)
 50,000   November 12, 1997   November 15, 2009      6.4250              --           (1,862)
150,000   February 19, 1998   November 15, 2007          --           5.860             (310)
 50,000   February 19, 1998   November 15, 2009          --           5.905             (214)
</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


                                       21
<PAGE>   23

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
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 swaps between November 30, 1998
and February 28, 1999 was primarily due to changes in market interest rates.


                                       22

<PAGE>   24


PART II.          OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              27.1  Financial Data Schedule of Morgan Stanley Aircraft Finance.

         (b)  Reports on Form 8-K: Morgan Stanley Aircraft Finance filed a
              Current Report on Form 8-K dated December 14, 1998, January 14, 
              1999 and February 12, 1999 relating to the monthly report to 
              holders of the Notes.


                                       23
<PAGE>   25


                                   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: April 14, 1999                           MORGAN STANLEY AIRCRAFT FINANCE


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


                                       24



<PAGE>   26



                                 MORGAN STANLEY AIRCRAFT FINANCE


                                        INDEX TO EXHIBITS


EXHIBIT NUMBER

27.1              Financial Data Schedule of Morgan Stanley Aircraft Finance


                                       25
<PAGE>   27
APPENDIX 1

                        MORGAN STANLEY AIRCRAFT FINANCE

              MANAGEMENT DISCUSSION & ANALYSIS OF CASH PERFORMANCE

BACKGROUND

          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'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 were acquired by MSAF. The undelivered
aircraft was a B737-400 with an appraised value of $28.82 million. Pursuant to
the indenture relating to the Notes (the "INDENTURE"), MSAF decided to
distribute to Noteholders $26.0 million which represents that portion of the
proceeds from the offering of the Notes relating to this aircraft on June 15,
1998. As a result, the overall size of the aircraft fleet is now 32 aircraft
plus a spare engine with a revised total appraised value at September 30, 1998
of $1,029.4 million. Applying the declining value assumption to the original
September 30, 1997 fleet appraisal, the total appraised value was assumed to be
$1,047.9 million at February 16, 1999. See "Aircraft Values" below. As of
April 1, 1999, all 32 aircraft plus the engine were subject to leases with 30
lessees in 19 countries as shown in Schedule A attached.

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


GENERAL

          MSAF Group is a special purpose vehicle which owns aircraft subject to
operating leases and, in one instance, a finance lease. MSAF may also make


                                      26
<PAGE>   28


aircraft acquisitions and aircraft sales. MSAF intends to acquire additional 
commercial passenger or freight aircraft from various sellers and will finance 
the acquisition of such aircraft by issuing additional notes. 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'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'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.

     This report presents information for the period from and including 
November 17, 1998 to and including the Note Payment Date on February 16, 1999. 
The financial data includes payments made by MSAF on February 16, 1999 but 
includes receipts from November 10, 1998 up to February 9, 1999, this being the 
calculation date for the February 16, 1999 Note Payment Date.

CASHFLOW PERFORMANCE RELATIVE TO THE ASSUMPTIONS

     The February 20, 1998 Offering Memorandum for the Notes (the "OFFERING 
MEMORANDUM") contains assumptions in respect of MSAF's future cashflows and 
cash expenses (the "ASSUMPTIONS"). In the period from November 17, 1998 to 
February 16, 1999, MSAF generated approximately $0.9 million in net cash 
collections in excess of the Assumptions, due to higher than expected net 
maintenance revenues.

     CASH COLLECTIONS

     "Cash Collections" comprise lease rental payments, maintenance reserve

                                      27
<PAGE>   29
payments by lessees and cash interest paid on MSAF's cash balances. The 
Offering Memorandum assumed Cash Collections for the period from November 17, 
1998 to February 16, 1999 of $30.2 million. Total Cash Collections achieved in 
this period were $32.0 million, a positive difference of $1.8 million. This 
difference is due to a combination of factors set out below.

     Gross lease rentals. Cash Collections relating to gross lease rentals for
the period from November 17, 1998 to February 16, 1999 amounted to $28.3 million
or approximately $3 million less than the $31.3 million assumed in the Offering
Memorandum. Lessee rental arrears, outstanding restructured payments, bad debts
and lost revenue due to AOG explain this variance. See "Developments-Lessee
Difficulties" below.

     Repossession and other stress related costs (net of security deposits
applied). Repossession and other stress related costs (net of security deposits
applied) for the period from November 17, 1998 to February 16, 1999 amounted to
an inflow of $0.7 million, as compared to a cost of $1.4 million in assumed
stress related costs for this period. The inflow of $0.7 million reflects the
application of a security deposit from one terminated lease. As of April 1,
1999, this aircraft was subject to a signed lease agreement with a new lessee.

     Net lease rentals. The Offering Memorandum assumes a 4.5% reduction in
gross lease rentals due to certain stress related costs (repossession costs, AOG
costs and arrearages) ("NET LEASE RENTALS"). For the period from November 17,
1998 to February 16, 1999, assumed Net Lease Rentals were $29.9 million. Actual
Net Lease Rentals for the period were $29.0 million, $0.9 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. It is likely that net lease rentals will remain weak in the
current financial year, due to potential lessee defaults, arrears and increased
repossession and other stress-related costs. See "Developments - Lessee
Difficulties" below.

     Maintenance. In the period from November 17, 1998 to February 16, 1999,
maintenance receipts were $4.3 million, exceeding maintenance disbursements of
$1.8 million by $2.5 million. The Offering Memorandum 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


                                        28
<PAGE>   30
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 1998 but which we now expect
to incur in the current year. As of February 16, 1999, there was approximately
$3.2 million held in the Expense Account for projected maintenance expenses over
the following three months.

     Interest received.  Actual interest received for the period from November
17, 1998 to February 16, 1999 was $0.5 million compared to $0.4 million assumed
in the Offering Memorandum for the same period. The difference is due to a
combination of two offsetting factors. First, actual interest received includes
interest received on amounts in the Expense Account and interim balances in the
Collection Account which are not included in the Offering Memorandum
assumptions. Second and partially offsetting the impact of these higher cash
balances on which interest has been earned, the Offering Memorandum assumed a
reinvestment rate of 5.75% while the average reinvestment rate for the period
was approximately 5.27%.

     Other cash received.  Other cash received for the period from November 17,
1998 to February 16, 1999 was approximately $0.1 million or $0.1 million more
than assumed in the Offering Memorandum. Other cash received consists of late
lease payment charges and interest earned on a former lessee's deposit.

     CASH EXPENSES

     "Cash Operating Expenses" includes all fees, costs or expenses paid by any
MSAF Group member in the course of the business activities permitted to be
conducted by it under the Indenture. The cash outflows in respect of
Operating Expenses shown in the Offering Memorandum were assumed to be $1.1
million for the period from November 17, 1998 to February 16, 1999. Total cash
expenses paid in this period were approximately $2.3 million, a negative
variance of $1.2 million. This variance is due to a combination of factors set
out below.


Cash Operating Expenses
-----------------------

     Insurance, re-leasing and other costs. Insurance, re-leasing and other
costs incurred were approximately $0.4 million from November 17, 1998 to
February 16, 1999, which was $0.7 million less than the assumed costs of $1.1
million for the period.

                                      29
<PAGE>   31
     Increase in Accrued Expenses. $1.8 million of accrued expenses was
transferred to the expense account in the period from November 17, 1998 to
February 16, 1999 and is expected to be payable in the current year. The balance
in the Expense Account on February 16, 1999 was $4.3 million. Approximately $3.2
million of this $4.3 million relates to accrued maintenance expenses while the
remaining $1.1 million relates to accrued insurance, re-leasing and other costs.
The Offering Memorandum assumes there are no accrued expenses.

SELLING, GENERAL AND ADMINISTRATIVE

     Servicer fees. Fees paid to ILFC, as Servicer, during the period from
November 17, 1998 to February 16, 1999 amounted to $1.8 million, which is $0.2
million higher than the assumed cost of $1.6 million for the period. A
significant portion of the Servicer fees are calculated as a percent of rental
revenue actually received. While actual rental revenue received was lower than
assumed in the Offering Memorandum, total fees paid were higher as they included
an Annual Incentive fee of $0.5 million, paid in December 1998.

     Other service provider fees and overhead. Other service provider fees and
overhead amounted to $0.4 million for the period from November 17, 1998 to
February 16th, 1999. This is $0.4 million below the assumed amount of $0.8
million for the period, partly due to a lower than assumed Administrative
Agent's fee because of lower rental revenues but mainly due to lower than
assumed overhead costs.

     NOTE PAYMENTS

     Interest payments. Actual interest payments to Noteholders net of swap
effects were $17.5 million, slightly higher than assumed net payments of $17.4
million for the period from November 17, 1998 to February 16, 1999.

     Principal payments. Total principal distributions in the period from
November 17, 1998, to February 16, 1999 were $10.1 million, an excess of $0.9
million over assumed total debt amortization for this period, reflecting the
higher than assumed net cash collections as discussed above. The principal
amortization payments were made with respect to the A-2 and B-1 Notes.

OTHER FINANCIAL DATA

                                       30
<PAGE>   32
     CASH

     Cash held at February 16, 1999 was $29.2 million. Of this amount, $25
million represents the cash portion of the Liquidity Reserve Amount (which is
used as a source of liquidity for, among other things, maintenance obligations,
security deposit return obligations, cash operating expenses and contingent
liabilities) and $4.3 million represents accrued expenses and is held in the
Expense Account. The $4.3 million of Accrued Expenses is in respect of likely
maintenance and re-leasing expenses expected to fall due in the next quarter.

     In addition to the $25 million cash portion at February 16, 1999, the
Liquidity Reserve Amount also contained $40.4 million of undrawn credit and
liquidity facilities from Morgan Stanley Dean Witter and ILFC.

     AIRCRAFT VALUES

     Under the terms of the Notes, MSAF is obliged to obtain annual appraisals
of the Base Value of each aircraft from three independent appraisers by October
31 of each year. 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. The most recent
appraisals occurred in September 30, 1998 and the next are due to occur no later
than October 31, 1999. A copy of the most recent Appraisals is attached in
Schedule A. The actual appraised value of the fleet at September 30, 1998 was
$1,029.4 million versus an assumed value of $1,058.3 million at November 17,
1999.

     A-D NOTE BALANCE

     As of February 16, 1999, the aggregate amount of Class A-D Notes
outstanding was $968.7 million, approximately $12.7 million lower than assumed
due to higher than assumed principal repayments with respect to the Class A-2
Notes.

                                       31





<PAGE>   33
DEVELOPMENTS


          LESSEE DIFFICULTIES

          As of April 1, 1999, two lessees were in arrears. The aircraft on
lease to the two lessees in arrears represent approximately 9.0% of the
appraised value of the portfolio at September 30, 1998 and both lessees are
based in Brazil. The amounts outstanding and overdue for the two lessees in
respect of Rental Payments, Maintenance Reserves and other miscellaneous amounts
due under the Leases (net of default interest and certain cash in transit) with
respect to these lessees amounted to approximately $5.1 million. The weighted
average number of days past due of such arrears was 68 days. See "Latin America"
below.

          Since November 30, 1998, two lessees have been terminated early. The
two early lease terminations were uncontested by the lessees. Both aircraft have
been re-leased to new lessees and the aircraft are currently undergoing
redelivery modifications prior to delivery, scheduled for April 1999.


          EUROPE/MIDDLE EAST

           In light of continued non-payment of rental and maintenance
prepayments, the Servicer agreed to terminate the lease with Onur Air early and
repossess the aircraft. The aircraft represents 4.3% of the appraised value of
the portfolio at September 30, 1998. As of April 1, 1999, Onur Air was in
arrears, owing $1.4 million in rental and maintenance reserves (net of security
deposits). Amounts owed were restructured as part of the early termination
agreement and are scheduled for repayment in full by October 1999. The aircraft
has been re-leased to Air Alfa, a Turkish based charter airline.


          ASIA 

          During the period from March 3, 1998 to February 16, 1999, the
economies of Asia continue to be severely affected by economic and financial
difficulties. Currently, MSAF leases 13.0% of its fleet in the Asia Region (5.5%
in South Korea, 4.9% in Taiwan and 2.6% in China) and 6.7% in Pacific and Other
regions (6.7% in Fiji) by appraised value of the portfolio at September 30,
1998. As of April 1, 1999 none of these lessees were in arrears although severe
financial difficulties have been reported for certain other air carriers in the
region. One of the lessees restructured its lease payments which will result in
a lower rental payment over the remaining lease term.



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     LATIN AMERICA

     Considerable uncertainty currently affects the major currencies in Latin
America. As of April 1, 1999, MSAF leased 17.4% of its fleet in Latin America
(6.3% in Mexico and 11.1% in Brazil) by appraised value of the portfolio at
September 30, 1998. 

     In January 1999, Brazil decided to float its currency on the international
currency market which resulted in a devaluation of its currency and increased
its exchange rate volatility. One of MSAF's Brazilian lessees, which accounts
for 6.1% of the appraised value of the portfolio at September 30, 1998, has
requested a short-term stay in lease payments during the current period of
exchange rate volatility. The lessee is currently in discussion with its
principal lessors, regarding its financial position, the outcome of which may
well be the restructuring of its lease payments to MSAF. The rentals of another
lessee, representing 2.1% of the appraised value of the portfolio at September
30, 1998, have been restructured. The lessee has agreed with the Servicer to
defer part of its rental for a six month period and to pay the arrearage, with
interest, in full by January next year. The rentals arrears of the third
Brazilian lessee, which accounts for 2.9% of the appraised value of the
portfolio at September 30, 1998, were recently restructured in December 1998,
and the lessee is in arrears with respect to the restructured payments amounts
as well as subsequent lease payments.


     In January 1999, the Servicer agreed with Guyana Airways to terminate the
lease early and repossess the aircraft. As part of the termination agreement,
the airline has agreed to repay certain arrears, costs and expenses associated
with the redelivery of this aircraft. The Guyana aircraft is a B757-200 and
accounts for 3.3% of the appraised value of the portfolio at September 30, 1998.
The aircraft is subject to a new lease with a US carrier, National Airlines.

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