<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 QUARTERLY PERIOD ENDED MAY 31, 2000

                                       OR

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

FOR THE TRANSITION PERIOD FROM             TO

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

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

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-3375162
         (State or other jurisdiction                         I.R.S. Employer
      of incorporation or organization)                    Identification Number
</TABLE>

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

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

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

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

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                                     OUTSTANDING AT
ISSUER                                                              CLASS            JUNE 30, 2000
-------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>
Morgan Stanley Aircraft Finance............................  Beneficial Interest          One
-------------------------------------------------------------------------------------------------------
</TABLE>

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

                        MORGAN STANLEY AIRCRAFT FINANCE

                  FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
PART I. FINANCIAL INFORMATION...............................      2
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)....................      2
  -- Interim Condensed Consolidated Financial Statements
     (Unaudited)............................................      2
  -- Notes to the Interim Condensed Consolidated Financial
     Statements (Unaudited).................................      6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS.................     13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK.........................................     23
PART II. OTHER INFORMATION..................................     25
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....................     25
SIGNATURES..................................................     26
INDEX TO EXHIBITS...........................................     27
APPENDIX I. CASH ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS......................     28
</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>
                                                                MAY 31,       NOV 30,
                                                                 2000           1999
                                                              -----------    ----------
                                                              (UNAUDITED)
<S>                                                           <C>            <C>
ASSETS
Cash and cash equivalents...................................  $   60,739     $   35,119
Receivables:
  Lease income, net.........................................       3,353          1,908
  Investment income and other...............................         302            161
Aircraft under operating leases, net........................   1,893,619        886,051
Investment in capital lease, net............................          --         18,300
Underwriting and other issuance related costs, net of
  amortization..............................................      25,435         15,935
                                                              ----------     ----------
Total Assets................................................  $1,983,448     $  957,474
                                                              ==========     ==========
LIABILITIES AND BENEFICIAL INTERESTHOLDER'S EQUITY / (DEFICIT)
Payables:
  Interest payable to Noteholders...........................  $    5,836     $    2,481
Deferred rental income......................................      14,265          5,318
Liability for maintenance...................................     114,883         57,437
Other liabilities...........................................      25,617         11,376
Notes payable:
  Subclass A-1..............................................          --        400,000
  Subclass A-2..............................................     223,428        234,533
  Subclass A-3..............................................     580,000             --
  Subclass A-4..............................................     200,000             --
  Subclass A-5..............................................     387,486             --
  Subclass B-1..............................................      88,583         91,023
  Subclass B-2..............................................      75,000             --
  Subclass C-1..............................................      99,780         99,987
  Subclass C-2..............................................      55,000             --
  Subclass D-1..............................................     110,000        110,000
                                                              ----------     ----------
                                                               1,979,878      1,012,155
                                                              ----------     ----------
Commitments and contingencies
Beneficial Interestholder's Equity / (Deficit):
  Beneficial Interest.......................................           1              1
  Deemed Contribution / (Distribution)......................      62,706        (15,305)
  Accumulated Deficit.......................................     (59,137)       (39,377)
                                                              ----------     ----------
  Total Beneficial Interestholder's Equity / (Deficit)......       3,570        (54,681)
                                                              ----------     ----------
Total Liabilities and Beneficial Interestholder's
  Equity/(Deficit)..........................................  $1,983,448     $  957,474
                                                              ==========     ==========
</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     SIX MONTHS ENDED
                                                              MAY 31,              MAY 31,
                                                        -------------------   ------------------
                                                          2000       1999       2000      1999
                                                        --------   --------   --------   -------
                                                            (UNAUDITED)          (UNAUDITED)
<S>                                                     <C>        <C>        <C>        <C>
Revenues:
  Lease income, net..................................   $52,567    $32,045    $ 78,283   $59,133
  Investment income on collection account............       973        450       1,512       881
                                                        -------    -------    --------   -------
  Total revenues.....................................    53,540     32,495      79,795    60,014
                                                        -------    -------    --------   -------
Expenses:
  Interest expense...................................    30,873     16,046      46,118    32,395
  Depreciation expense...............................    22,961     11,765      34,726    23,530
  Operating expenses:
     Service provider and other fees.................     5,572      2,244       7,254     4,291
     Maintenance and other aircraft related costs....     4,028      1,926      11,457     2,998
                                                        -------    -------    --------   -------
  Total expenses.....................................    63,434     31,981      99,555    63,214
                                                        -------    -------    --------   -------
Net (loss) / income..................................   $(9,894)   $   514    $(19,760)  $(3,200)
                                                        =======    =======    ========   =======
</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>
                                                              SIX MONTHS ENDED    SIX MONTHS ENDED
                                                                MAY 31, 2000        MAY 31, 1999
                                                              ----------------    ----------------
                                                                          (UNAUDITED)
<S>                                                           <C>                 <C>
Cash flows from operating activities
  Net loss..................................................     $  (19,760)          $ (3,200)
  Adjustments to reconcile net loss to net cash
     provided by operating activities:
  Depreciation expense -- aircraft under operating leases...         34,726             23,530
  Amortization of underwriting and other issuance related
     costs..................................................          2,951                559
  Provision for doubtful accounts...........................          1,113              6,021
  Changes in assets and liabilities:
     Receivables:
       Investment income and other..........................           (141)                10
       Lease income.........................................           (282)            (2,564)
     Investment in capital lease............................            (58)              (365)
     Liability for maintenance..............................          5,716              3,158
     Interest payable to Noteholders........................          3,355               (214)
     Deferred rental income.................................            309             (2,070)
     Other liabilities......................................          3,200             (2,417)
                                                                 ----------           --------
Net cash provided by operating activities...................         31,129             22,448
                                                                 ----------           --------
Cash flows from investing activities
  Purchase of net assets from MS Financing Inc., net of cash
     acquired...............................................       (876,793)                --
                                                                 ----------           --------
Net cash used for investing activities......................       (876,793)                --
                                                                 ----------           --------
Cash flows from financing activities
  Proceeds from issuance of notes payable, net of issuance
     costs..................................................      1,297,550                 --
  Repayment of Subclass A-1 notes...........................       (400,000)                --
  Repayments of notes payable...............................        (26,266)           (19,883)
                                                                 ----------           --------
Net cash provided by/(used for) financing activities........        871,284            (19,883)
                                                                 ----------           --------
Net increase in cash and cash equivalents...................         25,620              2,565
Cash and cash equivalents at beginning of period............         35,119             34,850
                                                                 ----------           --------
Cash and cash equivalents at end of period..................     $   60,739           $ 37,415
                                                                 ==========           ========
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

     In connection with the acquisition of certain net assets from MS Financing
Inc., MSAF Group received a capital contribution of $78.0 million (see Note 12).

     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 INTERESTHOLDER'S EQUITY / (DEFICIT)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              TOTAL
                                                                                            BENEFICIAL
                                               BENEFICIAL      DEEMED      ACCUMULATED       INTEREST
                                                INTEREST    DISTRIBUTION     DEFICIT        (DEFICIT)
                                               ----------   ------------   -----------   ----------------
                                                                      (UNAUDITED)
<S>                                            <C>          <C>            <C>           <C>
Balance at November 30, 1998................    $      1      $(15,305)     $(31,445)        $(46,749)
Net loss....................................          --            --        (3,200)          (3,200)
                                                --------      --------      --------         --------
Balance at May 31, 1999.....................    $      1      $(15,305)     $(34,645)        $(49,949)
                                                ========      ========      ========         ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                               TOTAL
                                                               DEEMED                        BENEFICIAL
                                               BENEFICIAL   DISTRIBUTION/   ACCUMULATED       INTEREST
                                                INTEREST    CONTRIBUTION      DEFICIT        (DEFICIT)
                                               ----------   -------------   -----------   ----------------
                                                                       (UNAUDITED)
<S>                                            <C>          <C>             <C>           <C>
Balance at November 30, 1999................    $      1      $(15,305)      $(39,377)        $(54,681)
Net loss....................................          --            --        (19,760)         (19,760)
Capital Contribution from MS Financing
  Inc.......................................          --        78,011             --           78,011
                                                --------      --------       --------         --------
Balance at May 31, 2000.....................    $      1      $ 62,706       $(59,137)        $  3,570
                                                ========      ========       ========         ========
</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. At May 31,
2000, all of the beneficial interest of MSAF Group was owned by MSDW Aircraft
Holdings ("MSDWAH"), a wholly-owned subsidiary of MS Financing Inc. ("MSF"). MSF
is 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, MSDWAH, MSF or any person other than
MSAF Group.

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

     All material intercompany transactions have been eliminated.

     The interim condensed consolidated financial statements should be read in
conjunction with MSAF Group's consolidated financial statements and notes
thereto as of and for the fiscal year ended November 30, 1999. The interim
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair statement of the results for the interim period. The
results of operations for interim periods are not necessarily indicative of
results for the entire year.

     New Accounting Pronouncement

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As issued,
SFAS No. 133 was effective for fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". SFAS No. 137 deferred the effective date of SFAS No. 133 for one year to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an amendment of FASB Statement No. 133". MSAF Group is in the
process of evaluating the impact of adopting SFAS No. 133, as amended by SFAS
No. 138.

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 May 31, 2000 MSAF
Group had leased 59 aircraft and one engine to 41 lessees in 25 countries.

     Certain 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 May 31, 2000, 17 of MSAF Group's aircraft
were leased to lessees domiciled in certain emerging market nations, including
those located in Eastern Europe, the Middle East, Latin America and Asia. The
exposure of MSAF Group's aircraft to particular

                                        6
<PAGE>   8
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

countries and customers is managed partly through concentration limits and
partly through obtaining security from lessees by way of deposits.

NOTE 3 -- AIRCRAFT

<TABLE>
<CAPTION>
                                                              MAY 31, 2000    NOV 30, 1999
                                                              -------------   ------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>             <C>
Stage 3 Aircraft and one engine:
Cost........................................................   $2,014,324       $972,030
Less: Accumulated depreciation..............................     (120,705)       (85,979)
                                                               ----------       --------
                                                               $1,893,619       $886,051
                                                               ==========       ========
</TABLE>

     During the three month period ended May 31, 2000, MSAF Group acquired a
portfolio of 29 commercial aircraft from MSF (see Note 12). In addition, during
the three month period ended May 31, 2000, an aircraft that was previously
subject to a sales-type capital lease was repossessed and the related lease was
terminated (see Note 4). This aircraft has been included as a component of
aircraft cost as of the date of repossession.

<TABLE>
<CAPTION>
                                                              MAY 31, 2000    NOV 30, 1999
                                                              -------------   ------------
<S>                                                           <C>             <C>
FLEET ANALYSIS:
On lease for a further period of:
More than five years........................................            8              9
From one to five years......................................           41             20
Less than one year..........................................           11              3
                                                               ----------       --------
Total aircraft portfolio (including one engine) on lease....           60             32
                                                               ==========       ========
</TABLE>

     At May 31, 2000 there were three non-revenue earning aircraft in MSAF
Group's portfolio. One of these was subject to a lease agreement and two were
subject to non-binding letters of intent for lease. At November 30, 1999 there
was one non-revenue earning aircraft in MSAF Group's portfolio.

NOTE 4 -- INVESTMENT IN CAPITAL LEASE

<TABLE>
<CAPTION>
                                                              MAY 31, 2000    NOV 30, 1999
                                                              -------------   ------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>             <C>
Minimum lease payments receivable...........................   $       --       $ 28,733
Less: Unearned income.......................................           --        (10,433)
                                                               ----------       --------
Net investment in capital lease.............................   $       --       $ 18,300
                                                               ==========       ========
</TABLE>

     The lessee associated with this capital lease had been experiencing severe
financial difficulties during fiscal 1999, due to the economic uncertainty in
Latin America and the devaluation of the Brazilian currency in January 1999. In
August 1999, MSAF Group and the lessee agreed to modify the terms of the capital
lease by increasing the total rental payments to be received and by extending
the lease term.

     The lessee's financial difficulties continued in fiscal 2000. As a result,
in April 2000, International Lease Finance Corporation ("ILFC"), the servicer of
MSAF Group's aircraft portfolio, repossessed the aircraft from the lessee and
terminated the capital lease contract. Accordingly, MSAF Group's net investment
in the capital lease as of the date of termination of $17.0 million has been
reclassified to "Aircraft under operating leases, net" (see Note 3).

                                        7
<PAGE>   9
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

NOTE 5 -- LEASE INCOME RECEIVABLE

     Lease income receivable was as follows:

<TABLE>
<CAPTION>
                                                              MAY 31, 2000    NOV 30, 1999
                                                              -------------   ------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>             <C>
Lease income receivable.....................................   $    4,685       $  2,271
Less: Allowance for doubtful accounts.......................       (1,332)          (363)
                                                               ----------       --------
Lease income receivable, net................................   $    3,353       $  1,908
                                                               ==========       ========
</TABLE>

     Activity in the allowance for doubtful accounts was as follows:

<TABLE>
<CAPTION>
                                                               SIX MONTHS      SIX MONTHS
                                                                  ENDED          ENDED
                                                              MAY 31, 2000    MAY 31, 1999
                                                              -------------   ------------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                           <C>             <C>
Balance, beginning of period................................   $      363       $    553
Provision for doubtful accounts.............................        1,113          3,134
Amounts written-off.........................................         (144)            --
                                                               ----------       --------
Balance, end of period......................................   $    1,332       $  3,687
                                                               ==========       ========
</TABLE>

NOTE 6 -- LIABILITY FOR MAINTENANCE

     Activity in the liability for maintenance account was as follows:

<TABLE>
<CAPTION>
                                                               SIX MONTHS
                                                                 ENDED
                                                              MAY 31, 2000    FISCAL 1999
                                                              ------------    -----------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                           <C>             <C>
Balance, beginning of period................................    $ 57,437       $ 52,489
Liabilities assumed from MSF................................      51,730             --
Collections from lessees....................................       8,725         17,709
Reimbursements to lessees...................................      (8,109)       (11,872)
Net accruals and transfers..................................       5,100           (889)
                                                                --------       --------
Balance, end of period......................................    $114,883       $ 57,437
                                                                ========       ========
</TABLE>

NOTE 7 -- NOTES PAYABLE

     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. During fiscal 1999, MSAF Group filed a
registration statement with the Securities and Exchange Commission (the "SEC")
with respect to an exchange offer for exchange Notes with terms virtually
identical to the Notes which was declared effective on January 12, 1999. The
exchange offer was consummated on January 18, 1999. With the exception of MSAF
Group, the Notes are not obligations of, or guaranteed by, MSDW or any of its
subsidiaries, including MSDWAH and MSF.

     On March 15, 2000, MSAF Group completed an offering of $1,310 million of
securitized notes (the "New Notes") on a basis exempt from registration under
the Securities Act of 1933, as amended. MSAF Group used the net proceeds from
the New Notes to finance in part the purchase of the 29 commercial aircraft from
MSF, to fund an increase of $5 million in cash and cash equivalents used for
liquidity purposes (see "Financial Resources and Liquidity -- Liquidity Reserve
Amount") and to redeem all $400 million of its Subclass A-1 notes. The New Notes
rank equally in right of payment of principal and interest with the

                                        8
<PAGE>   10
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

corresponding subclasses of MSAF Group's existing Notes. With the exception of
MSAF Group, the New Notes are not obligations of, or guaranteed by, MSDW or any
of its subsidiaries, including MSDWAH and MSF.

     MSAF Group is obligated to use its best efforts to consummate an exchange
offer (the "Exchange Offer") pursuant to which the New Notes would be exchanged
for substantially similar securities issued pursuant to an effective
registration statement under the Securities Act of 1933. If the Exchange Offer
is not consummated or a registration statement is not declared effective on or
prior to December 10, 2000, thereafter an additional incremental interest amount
will accrue on each subclass of the New Notes, at an annual rate of 0.50%. Such
additional incremental interest will be payable until the date that the Exchange
Offer is consummated or until such time as MSAF Group causes a shelf
registration statement with respect to resales of the New Notes to become
effective.

     Underwriting and financing costs which were incurred in connection with the
issuance of the Notes and the New Notes are being amortized over the expected
life of the borrowing to which they relate.

     The repayment terms of each subclass of the Notes and the New 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 refinancing 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 and the New Notes are listed below:

<TABLE>
<CAPTION>
                             INITIAL
                            PRINCIPAL
                              AMOUNT                          EXPECTED FINAL     FINAL MATURITY
SUBCLASS                  (IN THOUSANDS)    INTEREST RATE      PAYMENT DATE           DATE
--------                  --------------    -------------    ----------------    --------------
<S>                       <C>               <C>              <C>                 <C>
Subclass A-2..........       $340,000       LIBOR + 0.35%      Sept. 15, 2005    March 15, 2023
Subclass A-3..........        580,000       LIBOR + 0.52%      March 15, 2002    March 15, 2025
Subclass A-4..........        200,000       LIBOR + 0.54%      March 15, 2003    March 15, 2025
Subclass A-5..........        400,000       LIBOR + 0.58%       June 15, 2008    March 15, 2025
Subclass B-1..........        100,000       LIBOR + 0.65%      March 15, 2013    March 15, 2023
Subclass B-2..........         75,000       LIBOR + 1.05%      March 15, 2007    March 15, 2025
Subclass C-1..........        100,000               6.90%      March 15, 2013    March 15, 2023
Subclass C-2..........         55,000               9.60%    October 15, 2016    March 15, 2025
Subclass D-1..........        110,000               8.70%      March 15, 2014    March 15, 2023
</TABLE>

     If the Subclass A-3, A-4 or B-2 notes are not repaid on or before their
respective Expected Final Payment Dates, MSAF Group will pay additional interest
of 1.00% per annum on the Subclass A-3 and A-4 notes and 1.50% per annum on the
Subclass B-2 notes, until such notes are repaid in full.

     The dates on which principal repayments on the Notes and the New 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 and the New Notes.

     Cash paid for interest on the Notes and the New Notes amounted to $41.7
million for the six month period ended May 31, 2000 as compared to $29.7 million
for the six month period ended May 31, 1999. The interest expense for Fiscal
2000 is not comparable to Fiscal 1999, as the New Notes were not issued until
March 15, 2000.

     The estimated fair value of MSAF Group's outstanding notes payable was
$1,787.3 million and $902.9 million at May 31, 2000 and November 30, 1999,
respectively.
                                        9
<PAGE>   11
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

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 and the New
Notes. MSAF Group's primary sources of liquidity are cash bank deposits and
letters of credit.

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

     MSAF Group has entered into two credit agreements. Under a Custody and Loan
Agreement (the "ILFC Facility") between ILFC and MSAF Group, ILFC will hold
substantially all of the cash security deposits paid by certain 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 $20 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 $30 million.

     As of May 31, 2000, the aggregate amount available under the ILFC Facility
and the MSDW Facility was approximately $76.6 million.

NOTE 9 -- DERIVATIVE FINANCIAL INSTRUMENTS

     The leasing revenues of MSAF Group are generated primarily from rental
payments. Rental payments are currently entirely fixed but may be either fixed
or floating with respect to leases entered into in the future. In general, an
interest rate exposure with respect to the notes payable arises to the extent
that MSAF Group's fixed and floating interest obligations in respect of the
Notes and the New Notes do not correlate to the mix of fixed and floating rental
payments for different rental periods. This interest rate exposure with respect
to the notes payable can be managed through the use of interest rate swaps and
other derivative instruments. The Subclass A-2, A-3, A-4, A-5, B-1 and B-2 notes
bear floating rates of interest and the Subclass C-1, C-2 and D-1 notes bear
fixed rates of interest. MSAF Group is a party to thirteen interest rate swaps
with Morgan Stanley Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of
MSDW. In eleven of these swaps, MSAF Group pays a fixed monthly coupon and
receives one month LIBOR on a total notional balance of $1,600 million and in
two of these swaps, MSAF Group pays one month LIBOR and receives a fixed monthly
coupon on a total notional balance of $200 million.

     Nine of the swaps, having an aggregate notional principal amount of $1,400
million, are accounted for as hedges of the Notes and the New Notes. Under these
swap arrangements, MSAF Group pays fixed and receives 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 hedges, are recognized as adjustments
to 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 May 31, 2000 was
$22.1 million.

     The remaining four swaps have an aggregate gross notional principal amount
of $400 million. Under these swap arrangements, MSAF Group pays/receives fixed
and receives/pays floating amounts on a monthly basis. MSAF Group has 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 May 31, 2000,
the fair value of these swaps was $(6.1) million.
                                       10
<PAGE>   12
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

     The change in the fair value of the thirteen interest rate swaps between
February 29, 2000 and May 31, 2000 was due to changes in market interest rates
and payments being made under the swaps when they became due.

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

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

NOTE 10 -- RELATED PARTY TRANSACTIONS

     Under service agreements with MSAF Group, Cabot Aircraft Services Limited
and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as
Administrative Agent and Financial Advisor, respectively. During the three and
six month period ended May 31, 2000, Cabot Aircraft Services Limited received a
fee for providing these services of $0.3 million and $0.7 million, respectively,
which is calculated as a percentage of the operating lease rentals received.
Morgan Stanley & Co. Incorporated received advisory fees of $0.03 million in the
six month period ended May 31, 2000, and $0.01 million for the three month
period ended May 31, 2000.

     Simultaneously with the issuance of the New Notes and the acquisition of
certain net assets from MSF, MSAF Group received a non-cash capital contribution
of $78.0 million from MSF.

     In connection with the issuance of the New Notes, MSAF Group paid $5.9
million in subscription discounts and commissions to a subsidiary of MSDW.

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

     In connection with the offering of the New Notes on March 15, 2000, MSF
transferred the beneficial interest of MSAF Group to MSDWAH, a wholly-owned
subsidiary of MSF, and the number of trustees of MSAF Group was increased to
seven.

     At May 31, 2000, MSAF Group's management was comprised of seven trustees,
including the Delaware trustee, as MSAF Group has no employees or executive
officers. Four of MSAF Group's seven trustees were employees of MSDW. The three
remaining trustees, including the Delaware trustee, were unaffiliated with MSDW.

NOTE 11 -- COMMITMENTS

     MSAF Group did not have any material contractual commitments for capital
expenditures at May 31, 2000.

     In accordance with the terms of a second amended and restated servicing
agreement (the "Servicing Agreement"), ILFC 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 contracted and received, in addition to a base fee and certain
incentive-based fees.

                                       11
<PAGE>   13
                MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES

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

     For the initial 32 aircraft and one engine, the Servicing Agreement will
expire on May 26, 2023. For the additional 29 aircraft, the Servicing Agreement
will expire on May 1, 2025. However, each party has the right to terminate the
Servicing Agreement under certain circumstances.

NOTE 12 -- ACQUISITION OF NET ASSETS

     During the three month period ended May 31, 2000 MSAF Group acquired a
portfolio of 29 commercial aircraft, as well as certain other assets and
liabilities related to these aircraft, from MSF. The assets and liabilities
acquired have been recorded at MSF's historical book value at the date of
purchase. A summary of the net assets acquired is presented below:

<TABLE>
<CAPTION>
                                                              (DOLLARS IN THOUSANDS)
                                                              ----------------------
<S>                                                           <C>
Aircraft under operating leases, net of accumulated
  depreciation of $30,859...................................        $1,025,267
Cash and other assets.......................................            16,701
Deferred rental income......................................            (8,638)
Liability for Maintenance...................................           (51,730)
Security Deposits...........................................            (7,118)
Interest rate swap contracts (see Note 9)...................            (3,922)
                                                                    ----------
Net assets acquired.........................................        $  970,560
                                                                    ==========
</TABLE>

     MSAF Group financed the acquisition from the proceeds of the New Notes (see
Note 7) and a capital contribution from MSF.

NOTE 13 -- SUBSEQUENT EVENT

     INSURANCE CLAIM

     On April 2, 1999, the lease with respect to one B757-200ER with Guyana
Airways was terminated by mutual agreement. Certain of the technical records
were incomplete and/or missing. An insurance claim under MSAF Group's Technical
Records Policy was submitted in respect of the maintenance repairs and services
required to reconstruct the technical records. In June 2000, the insurance claim
was approved and MSAF Group received $3.9 million which will be included in the
interim condensed consolidated statement of operations for the period ending
August 31, 2000.

                                       12
<PAGE>   14

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

INTRODUCTION

     MSAF is a special purpose business trust that was formed on October 30,
1997 under the laws of Delaware. MSAF Group's 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 and the New 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 and the New 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 and the New Notes will also
depend on the level of its operating expenses, including maintenance obligations
which will increase as the aircraft age, and 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 the
level and volatility of 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 MSAF's
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 in this management's discussion and analysis of
financial condition and results of operations 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

     ACQUISITION OF ADDITIONAL AIRCRAFT

     During the three month period ended May 31, 2000, MSAF Group acquired a
portfolio of 29 commercial aircraft from MSF. All but one of the 29 aircraft
were delivered on March 15, 2000. The remaining aircraft, a B737-300 on lease to
Lithuanian Airlines, was delivered to MSAF Group on May 1, 2000. The acquisition
was financed by the issuance of additional securitized notes and by a non-cash
capital contribution from MSF.

     THE AIRCRAFT

     As of May 31, 2000, the total number of aircraft owned by MSAF Group was 61
aircraft plus an engine. As of May 31, 2000, 59 aircraft and the engine were
subject to lease contracts with 41 lessees in 25 countries. As of May 31, 2000,
the aircraft under one of the lease contracts had not been delivered to the
respective lessee, although this aircraft was delivered on June 20, 2000. MSAF
Group's two off-lease aircraft were subject to non-binding letters of intent for
lease.

                                       13
<PAGE>   15

     LESSEE DIFFICULTIES

     As of July 1, 2000, five current lessees were in arrears. The total amount
outstanding and overdue for the five lessees in respect of rental payments,
maintenance reserves and other miscellaneous amounts due under the leases
(excluding restructured arrears not yet due) amounted to $3.1 million. MSAF
Group holds security deposits of $4.9 million against these arrears. The
weighted average number of days past due of such arrears was 39 days.

     REGIONAL ANALYSIS OF EXISTING ARREARS

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

     EUROPE AND MIDDLE EAST (EMERGING)

     One of the five current lessees in arrears, Air Alfa, is based in the
Europe and Middle East (Emerging) region. At July 1, 2000, the total rental and
maintenance arrears owed by this lessee was $0.7 million, against which MSAF
Group holds a security deposit of $0.6 million. In April 2000, ILFC instituted
legal proceedings in Turkey to draw down upon the guarantee and repossess the
aircraft from Air Alfa. Since then, the airline has made certain payments
towards reducing its arrears balance.

     EUROPE (DEVELOPED)

     One of the five current lessees in arrears, Transaer, is based in the
Europe (Developed) region.

     In January 2000, MSAF Group reached an agreement with Transaer to defer
$1.4 million of rental and maintenance obligations. Repayment of the arrears
plus interest is scheduled to be made over a three-month period beginning on
June 1, 2000. At July 1, 2000, $0.7 million of these restructured payments were
due but unpaid. MSAF Group holds security deposits of $1.0 million against
Transaer's arrears.

     ASIA (EMERGING)

     At July 1, 2000 none of the lessees in this region were in arrears.

     PACIFIC (DEVELOPED)

     At July 1, 2000 none of the lessees in this region were in arrears.

     LATIN AMERICA (EMERGING)

     At July 1, 2000 none of the lessees in this region were in arrears.
However, during the three month period ended May 31, 2000, MSAF Group
repossessed two aircraft which were leased in Latin America, both in Brazil.

     A former Brazilian lessee, B.R.A., which had been operating one A310-300
subject to a capital lease, defaulted on its obligations under its lease and the
aircraft was repossessed on April 4, 2000. The lease had been scheduled to
expire in July 2007. The total amount of rental payments in arrears at the date
of the repossession was $1.3 million. There was no security deposit held by MSAF
Group to offset against the arrears balance. The aircraft is currently subject
to a non-binding letter of intent and is scheduled to be delivered to a new
lessee based in Singapore in September 2000.

     A second former Brazilian lessee, VASP, defaulted on its obligations under
its lease of a B737-300 aircraft and the aircraft was repossessed in May 2000,
following legal proceedings against VASP. The lease was scheduled to expire in
March 2003. The total amount of rental payments in arrears at the date of the
repossession was $0.5 million, against which MSAF Group drew down a security
deposit of $0.7 million. The aircraft is currently subject to a non-binding
letter of intent and is scheduled to be delivered to a new lessee based in
Brazil in July 2000.

                                       14
<PAGE>   16

     In July 1999, a former Brazilian lessee, VARIG, negotiated early
termination of a B747-300 lease that was scheduled to expire in April 2003. The
total amount of rental payments and maintenance reserves due under this lease
through July 1999, the date of the termination agreement, was $4.8 million,
against which MSAF Group drew down a security deposit of $1.1 million. Under the
provisions of a restructuring agreement, VARIG has agreed to repay arrears of
$4.8 million and approximately $6.0 million for certain maintenance and downtime
costs over the next eight years. Payments to MSAF Group will be made
semi-annually beginning October 15, 1999 with final payment due on October 15,
2007. As of July 1, 2000 VARIG had made all payments due under the restructuring
agreement.

     NORTH AMERICA (DEVELOPED)

     One of the five current lessees in arrears, TWA, is based in the North
America (Developed) region. At July 1, 2000, the total rental and maintenance
arrears owed by this lessee was $1.1 million, against which MSAF Group holds a
security deposit of $2.0 million.

     OTHER

     Two of the five current lessees in arrears are based in the Other region.

     At July 1, 2000, the total rental and maintenance arrears owed by Iceland
Air was $0.5 million, against which MSAF Group holds a security deposit of $0.6
million.

     At July 1, 2000, the total rental and maintenance arrears owed by
Lithuanian Airlines was $0.1 million, against which MSAF Group holds a security
deposit of $0.7 million.

     AIRWORTHINESS DIRECTIVE

     On May 25, 2000, the U.S. Federal Aviation Administration issued an
Airworthiness Directive relating to fire safety standards in certain types of
aircraft. The Airworthiness Directive, which applies to MSAF Group's one MD-82
and four MD-83 aircraft, requires operators of those aircraft to replace fire
insulation blankets covered with metalized Mylar. Under the leases of the
affected aircraft, all costs of compliance with Airworthiness Directives are the
obligation of the lessees.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2000,
AND THE THREE MONTHS ENDED MAY 31, 1999

     MSAF Group's results of operations for the three months ended May 31, 2000
and the three months ended May 31, 1999 are discussed below. The results are not
directly comparable due to MSAF Group's acquisition of a portfolio of 29
commercial aircraft from MSF.

     NET (LOSS)/INCOME

     For the three month period ended May 31, 2000, MSAF Group incurred a net
loss of ($9.9) million, as compared to net income of $0.5 million for the three
month period ended May 31, 1999. The decrease primarily reflects higher
interest, depreciation and operating expenses, partially offset by an increase
in rental revenues.

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

     LEASE INCOME

     Lease income for the three month period ended May 31, 2000 amounted to
$52.6 million as compared to $32.0 million for the three month period ended May
31, 1999. The increase in lease income is primarily due to MSAF Group's
acquisition of 29 commercial aircraft, partially offset by a reduction in lease
revenue associated with aircraft on ground.

                                       15
<PAGE>   17

     MSAF Group's operating results for the three month period ended May 31,
2000 included provisions for doubtful accounts totaling $0.2 million. Such
provisions were recorded by MSAF Group due to financial difficulties experienced
by certain of MSAF Group's 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"). Provisions for doubtful
accounts were $3.0 million in the three month period ended May 31, 1999. Lease
income may decline in future periods due to potential lessee defaults and
arrears including those discussed above.

     MSAF Group records the cash prepayments made by lessees for maintenance as
a component of the liability for maintenance account which appears on the
Interim Condensed Consolidated Balance Sheets. When the lessee incurs
maintenance expenditures, MSAF Group must return a corresponding amount of the
prepayment to the lessee. At this time, MSAF Group will forward cash to the
lessee, with a corresponding decrease to the liability for maintenance account.
MSAF Group will only reimburse the lessee for the cost of maintenance
expenditures to the extent that sufficient prepayments have been made by the
lessee. At the time an aircraft is re-leased to a new lessee, an assessment is
made of the expected maintenance reserve requirements; any excess reserve is
then released to lease income. No maintenance reserves were released to lease
income in the three month period ended May 31, 2000. In the three month period
ended May 31, 1999, MSAF Group released $1.4 million of excess maintenance
reserves which were received from certain of its former lessees.

     INVESTMENT INCOME

     Investment income for the three month period ended May 31, 2000 amounted to
$1.0 million as compared to $0.5 million in the three month period ended May 31,
1999. Investment income represents interest income on MSAF Group's cash and cash
equivalents.

     Investment income has increased due to a higher level of cash and cash
equivalents. The increase primarily reflects $15.8 million of cash balances
acquired from MSF in connection with MSAF Group's acquisition of 29 commercial
aircraft. Such cash balances primarily consist of security deposits and advance
rental payments made by certain lessees.

     INTEREST EXPENSE

     Interest expense, including swap costs of $1.2 million, amounted to $30.9
million for the three month period ended May 31, 2000. Interest expense,
including swap costs of $2.1 million, amounted to $16.0 million for the three
month period ended May 31, 1999. Interest expense relates to the interest paid
on the Notes and the New Notes. The increase in interest expense is primarily
due to the New Notes, which were issued on March 15, 2000, coupled with a higher
average interest rate on the existing Notes. The weighted average interest rate
on MSAF Group's notes payable during the three month period ended May 31, 2000
was 6.75% as compared to 5.81% during the three month period ended May 31, 1999.
The average principal balance in respect of MSAF Group's notes payable during
the three month period ended May 31, 2000 was $1,653.2 million as compared to
$965.6 million during the three month period ended May 31, 1999.

     MSAF Group is a party to thirteen interest rate swaps with Morgan Stanley
Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In eleven of
these swaps, MSAF Group pays a fixed monthly coupon and receives one month LIBOR
on a notional balance of $1,600 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.

     Nine of the swaps, having an aggregate notional principal amount of $1,400
million, are accounted for as hedges of the Notes and the New Notes. Under these
swap arrangements, MSAF Group pays fixed and receives 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 adjustments to interest expense.
                                       16
<PAGE>   18

     The remaining four swaps have an aggregate gross notional principal amount
of $400 million. Under these swap arrangements, MSAF Group pays/receives fixed
and receives/pays floating amounts on a monthly basis. MSAF Group has 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.

     See Item 3, "Quantitative and Qualitative Disclosures About Market Risk"
for more information regarding MSAF Group's swaps positions and hedging policy.

     DEPRECIATION

     Depreciation expense for the three month period ended May 31, 2000 amounted
to $23.0 million as compared to $11.8 million in the three month period ended
May 31, 1999. The increase is attributable to MSAF Group's acquisition of 29
commercial aircraft.

     OPERATING EXPENSES

     Service Provider and Other Fees.  Service provider and other fees for the
three month period ended May 31, 2000 were $5.6 million as compared to $2.2
million in the three month period ended May 31, 1999. The increase in the three
month period ended May 31, 2000 reflects certain fees and expenses incurred in
connection with MSAF Group's acquisition of 29 commercial aircraft from MSF. The
increase also reflects a higher aircraft servicing fee paid to ILFC, which
amounted to $2.0 million in the three month period ended May 31, 2000 and $1.3
million in the three month period ended May 31, 1999. The higher fees paid to
ILFC in the three month period ended May 31, 2000 reflected the increased fleet
size as a result of the acquisition of 29 commercial aircraft.

     Maintenance and Other Aircraft Related Costs.  Maintenance and other
aircraft related costs for the three month period ended May 31, 2000 were $4.0
million as compared to $1.9 million for the three month period ended May 31,
1999. The increase was primarily attributable to certain maintenance and
redelivery costs incurred by MSAF Group associated with two aircraft previously
leased to Oman Air and provisions for certain maintenance and redelivery costs
associated with the aircraft previously subject to a sales-type capital lease
(see "Lessee Difficulties").

     Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the three month period ended
May 31, 2000, which amounted to $0.4 million, as compared to $0.6 million for
the three month period ended May 31, 1999. It is expected that re-leasing costs
will increase over the next several months due to costs relating to
reconfiguring aircraft for new lessees upon redelivery.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 2000,
AND THE SIX MONTHS ENDED MAY 31, 1999

     MSAF Group's results of operations for the six months ended May 31, 2000
and the six months ended May 31, 1999 are discussed below. The results are not
directly comparable due to MSAF Group's acquisition of a portfolio of 29
commercial aircraft from MSF.

     NET LOSS

     For the six month period ended May 31, 2000, MSAF Group incurred a net loss
of ($19.8) million as compared to a net loss of ($3.2) million for the six month
period ended May 31, 1999. The increase in net loss reflects higher interest,
depreciation and operating expenses, partially offset by an increase in rental
revenues.

     LEASE INCOME

     Lease income for the six month period ended May 31, 2000 amounted to $78.3
million as compared to $59.1 million for the six month period ended May 31,
1999. The increase in lease income is primarily due to MSAF Group's acquisition
of 29 commercial aircraft, partially offset by a reduction in lease revenue
associated with aircraft on ground.
                                       17
<PAGE>   19

     MSAF Group's operating results for the six month period ended May 31, 2000
included provisions for doubtful accounts totaling $1.1 million. Such provisions
were recorded by MSAF Group due to financial difficulties experienced by certain
of MSAF Group's former lessees whose aircraft have already been repossessed (see
"Lessee Difficulties"). Provisions for doubtful accounts were $6.0 million in
the six month period ended May 31, 1999. Lease income may decline in future
periods due to potential lessee defaults and arrears including those discussed
above.

     INVESTMENT INCOME

     Investment income for the six month period ended May 31, 2000 amounted to
$1.5 million as compared to $0.9 million in the six month period ended May 31,
1999. Investment income represents interest income on MSAF Group's cash and cash
equivalents.

     Investment income has increased due to a higher level of cash and cash
equivalents in connection with MSAF Group's acquisition of 29 commercial
aircraft.

     INTEREST EXPENSE

     Interest expense, including swap costs of $0.9 million, amounted to $46.1
million for the six month period ended May 31, 2000. Interest expense, including
swap costs of $2.9 million, amounted to $32.4 million for the six month period
ended May 31, 1999. Interest expense relates to the interest paid on the Notes
and the New Notes. The increase in interest expense is primarily due to the New
Notes, which were issued on March 15, 2000, coupled with a higher average
interest rate on the existing Notes. The weighted average interest rate on MSAF
Group's notes payable during the six month period ended May 31, 2000 was 6.66%
as compared to 6.05% during the six month period ended May 31, 1999. The average
principal balance in respect of MSAF Group's notes payable during the six month
period ended May 31, 2000 was $1,377.4 million as compared to $969.7 million
during the six month period ended May 31, 1999.

     DEPRECIATION

     Depreciation expense for the six month period ended May 31, 2000 amounted
to $34.7 million as compared to $23.5 million in the six month period ended May
31, 1999. The increase is attributable to MSAF Group's acquisition of 29
commercial aircraft.

     OPERATING EXPENSES

     Service Provider and Other Fees.  Service provider and other fees for the
six month period ended May 31, 2000 were $7.3 million as compared to $4.3
million in the six month period ended May 31, 1999. The increase in the six
month period ended May 31, 2000 reflects certain fees and expenses incurred in
connection with MSAF Group's acquisition of 29 commercial aircraft from MSF. The
increase also reflects a higher aircraft servicing fee paid to ILFC, which
amounted to $3.0 million in the six month period ended May 31, 2000 and $2.7
million in the six month period ended May 31, 1999. The higher fees paid to ILFC
in the six month period ended May 31, 2000 reflected the increased fleet size as
a result of the acquisition of 29 commercial aircraft, partially offset by a
reduction in fees due to the lower rental revenues generated by the remainder of
the fleet as a result of aircraft on ground during the period.

     Maintenance and Other Aircraft Related Costs.  Maintenance and other
aircraft related costs for the six month period ended May 31, 2000 were $11.5
million as compared to $3.0 million for the six month period ended May 31, 1999.
The increase was primarily attributable to certain maintenance and redelivery
costs incurred by MSAF Group associated with two aircraft previously leased to
Oman Air, one previously leased to TAESA and provisions for certain maintenance
and redelivery costs associated with the aircraft previously subject to a
sales-type capital lease with B.R.A. (see "Lessee Difficulties").

     Included within maintenance and other aircraft related costs were
insurance, re-leasing and other costs incurred in the six month period ended May
31, 2000, which amounted to $0.8 million, as compared to

                                       18
<PAGE>   20

$1.2 million for the six month period ended May 31, 1999. 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.

FINANCIAL RESOURCES AND LIQUIDITY

     Refer to Appendix 1 for additional information regarding the cash
performance of MSAF Group for the period from February 16, 2000 to May 15, 2000.

     LIQUIDITY

     MSAF Group's cash and cash equivalents at May 31, 2000 were $60.7 million.
Of this amount, $30 million represents the cash portion of the Liquidity Reserve
Amount (as defined below) and $30.7 million represents rental, and maintenance
receipts and cash held for accrued expenses.

     In addition to the $30 million cash portion at May 31, 2000, the Liquidity
Reserve Amount also contained $76.6 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 interest
rates of the Notes and the New Notes, the effectiveness of MSAF Group's interest
rate hedging policies and whether MSAF Group will be able to refinance certain
subclasses of notes that may not be repaid with lease cash flows.

     Net cash provided by operating activities in the six month period ended May
31, 2000 amounted to $31.1 million, principally reflecting non-cash depreciation
expense of $34.7 million, a net loss of ($19.8) million and an increase in the
liability for maintenance account of $5.7 million.

     Net cash provided by operating activities in the six month period ended May
31, 1999 amounted to $22.4 million, principally reflecting non-cash depreciation
expense of $23.5 million, a net loss of ($3.2) million and an increase in the
provision for doubtful accounts of $6.0 million.

     CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES

     Net cash used for investing activities in the six month period ended May
31, 2000, amounted to $876.8 million which was used to purchase a portfolio of
29 commercial aircraft, as well as certain other assets and liabilities related
to these aircraft, from MSF. MSAF Group did not utilize any cash for investing
activities in the six month period ended May 31, 1999.

     Net cash provided by financing activities in the six month period ended May
31, 2000 amounted to $871.3 million, primarily reflecting the proceeds from the
offering of the New Notes and repayment of the subclass A-1 notes.

     Net cash used for financing activities in the six month period ended May
31, 1999 amounted to $19.9 million, reflecting repayments of principal on the
Notes.

     INDEBTEDNESS

     MSAF Group's indebtedness primarily consisted of the Notes and the New
Notes in the amount of $1,819.3 million at May 31, 2000.

     LIQUIDITY RESERVE AMOUNT

     The "LIQUIDITY RESERVE AMOUNT" is intended to serve as a source of
liquidity for MSAF Group's maintenance reimbursement 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
                                       19
<PAGE>   21

debt is rated P-1 by Moody's Investors Service, A-1+ by Standard & Poor's, or
F1+ by Fitch 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 $118.4 million on May 31,
2000. The "MINIMUM LIQUIDITY RESERVE AMOUNT" may be funded with cash and with
Eligible Credit Facilities and was approximately $30 million on May 31, 2000.
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 MSAF's controlling trustees
in light of changes in, among other things, 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 class of 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 and the New 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" refer to 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" refer to 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 the New
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 and the New 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 airworthi-
                                       20
<PAGE>   22

ness directives, repossessing and re-leasing aircraft. In analyzing the future
impact of these costs, assumptions have been made regarding their frequency and
amount based upon historical experience. There can be no assurance, however,
that historical experience will prove to be relevant in the future or that
actual cash received by MSAF Group in the future will not be significantly less
than that assumed. Any significant variation may materially adversely affect the
ability of MSAF Group to make payments of interest and principal on the Notes
and the New Notes.

     If at any time the aggregate outstanding principal balance of the Notes and
the New Notes is less than or equal to the Liquidity Reserve Amount, the balance
of funds, if any, in the Collection Account will be distributed in accordance
with the priority of payments.

     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 portfolio except (i) amounts that ILFC
determines in good faith to be no longer held on behalf of a lessee, whether
upon expiry of or default under the applicable lease or otherwise (ii) any cash
security deposits in an amount exceeding three months' rent with respect to a
single aircraft and paid by a single lessee and (iii) certain security deposits
that ILFC has transferred to MSAF Group. ILFC will retain any interest accruing
on amounts of aircraft security deposits that it holds.

     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 and the New Notes. ILFC's obligation to make
such amounts available shall be limited to the ILFC facility commitment, which
was approximately $46.6 million on May 31, 2000. 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, the sum
of (A) $20 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) after either of those events, $20 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 1, 2025, (ii) a sale of all the aircraft, and (iii) the repayment or
defeasance of all MSAF Group's debt.

     ILFC's short-term unsecured debt is currently rated P-1 by Moody's, A-1+ by
Standard & Poor's and F1+ by Fitch, so it is an Eligible Provider. 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.

     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 and
the New 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
                                       21
<PAGE>   23

(i) $30 million minus (ii) 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 MSAF's controlling trustees as an
Eligible Provider. MSDW's short-term unsecured debt is currently rated P-1 by
Moody's, A-1+ by Standard & Poor's and F1+ by Fitch.

     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 MSAF's 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.

                                       22
<PAGE>   24

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 payable and the derivative
instruments used to manage interest rate risk.

     The terms of each subclass of the Notes and the New Notes, including the
outstanding principal amount and estimated fair value as of May 31, 2000 were as
follows:

<TABLE>
<CAPTION>
                         OUTSTANDING                                                                 ESTIMATED
                       PRINCIPAL AMOUNT        ANNUAL                                                FAIR VALUE
                          AT MAY 31,        INTEREST RATE       EXPECTED FINAL         FINAL         AT MAY 31,
SUBCLASS OF NOTE             2000         (PAYABLE MONTHLY)      PAYMENT DATE      MATURITY DATE        2000
----------------       ----------------   -----------------   ------------------   --------------    ----------
                           ($000'S)                                                                   ($000'S)
<S>                    <C>                <C>                 <C>                  <C>               <C>
Subclass A-2.........      $223,428         LIBOR + 0.35%     September 15, 2005   March 15, 2023     $222,450
Subclass A-3.........       580,000         LIBOR + 0.52%         March 15, 2002   March 15, 2025      580,634
Subclass A-4.........       200,000         LIBOR + 0.54%         March 15, 2003   March 15, 2025      200,281
Subclass A-5.........       387,486         LIBOR + 0.58%          June 15, 2008   March 15, 2025      388,212
Subclass B-1.........        88,583         LIBOR + 0.65%         March 15, 2013   March 15, 2023       87,213
Subclass B-2.........        75,000         LIBOR + 1.05%         March 15, 2007   March 15, 2025       75,270
Subclass C-1.........        99,780                 6.90%         March 15, 2013   March 15, 2023       85,858
Subclass C-2.........        55,000                 9.60%       October 15, 2016   March 15, 2025       53,857
Subclass D-1.........       110,000                 8.70%         March 15, 2014   March 15, 2023       93,500
</TABLE>

INTEREST RATE RISK MANAGEMENT

     MSAF Group's policy is not to be adversely exposed to material movements in
interest rates. MSAF Group's leasing revenues are generated primarily from
rental payments, which 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 interest obligations in respect of its
notes payable do not correlate with rental payments for different rental
periods, including rental payments attributable to existing and future leases.
Future leases are relevant because the duration of MSAF Group's obligations
under its floating rate notes is significantly longer than the duration of lease
income under its fixed rate leases. MSAF Group currently manages this exposure
by entering into swaps. In the future MSAF Group may also use other derivative
instruments. Currently, MSAF Group's aim is to manage the exposure created by
its floating interest rate obligations given that future lease rates on new
leases may not be repriced at levels which fully reflect changes in market
interest rates in the previous lease period. Accordingly MSAF Group's current
swap portfolio tries to minimize the risk created by its longer term floating
interest rate obligations and measures that risk by reference to the duration of
those obligations and the expected sensitivity of future lease rates to future
market interest rates.

     The controlling trustees are responsible for reviewing and approving the
overall interest rate management policies and transaction authority limits. MSAF
Group's financial advisor, Morgan Stanley & Co. Incorporated, assists MSAF Group
in developing and implementing its interest rate risk management policies.

                                       23
<PAGE>   25

CURRENT SWAP PORTFOLIO

     As of May 31, 2000, MSAF Group was a party to thirteen interest rate swaps
with MSCS. In eleven of these swaps MSAF Group paid a fixed monthly coupon and
received one month LIBOR and in two of these swaps MSAF Group paid one month
LIBOR and received a fixed monthly coupon on the notional balances as set out
below:

<TABLE>
<CAPTION>
                                                                                        ESTIMATED
                                                                                        FAIR VALUE
NOTIONAL                                              FIXED MONTHLY    FIXED MONTHLY    AT MAY 31,
BALANCE      EFFECTIVE DATE        MATURITY DATE        PAY RATE       RECEIVE RATE        2000
--------    -----------------    -----------------    -------------    -------------    ----------
($000'S)                                                   (%)              (%)          ($000'S)
<S>         <C>                  <C>                  <C>              <C>              <C>
300,000..   November 12, 1997    November 15, 2000       6.1325               --         $  1,360
200,000..   November 12, 1997    November 15, 2002       6.2150               --            5,582
200,000..   November 12, 1997    November 15, 2004       6.2650               --            9,205
150,000..   November 12, 1997    November 15, 2007       6.3600               --            9,734
50,000..    November 12, 1997    November 15, 2009       6.4250               --            3,664
150,000..   February 19, 1998    November 15, 2007           --            5.860          (14,042)
50,000..    February 19, 1998    November 15, 2009           --            5.905           (5,434)
100,000..    January 24, 2000    November 22, 2006       7.3365               --              798
100,000..    January 24, 2000    November 22, 2009       7.4450               --              483
100,000..    January 24, 2000    November 22, 2011       7.4600               --              371
100,000..    January 24, 2000    November 22, 2014       7.3550               --            1,584
100,000..    January 24, 2000    November 22, 2019       7.3690               --            1,700
200,000..   February 25, 2000    February 25, 2002       7.1200               --            1,037
</TABLE>

POLICY REVIEW

     MSAF Group regularly reviews its hedging requirements. In the future, MSAF
Group expects to enter into further swaps or unwind part or all of the existing
and any future swaps. In addition, if MSAF Group acquires additional aircraft,
it may rebalance its swap portfolio.

COUNTERPARTIES

     MSAF Group will monitor counterparty risk 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 may consist of the affiliates of major U.S. and European
financial institutions (including special-purpose derivative vehicles) which
have credit ratings, or which provide collateralization arrangements, consistent
with maintaining the credit ratings of MSAF Group's notes payable.

                                       24
<PAGE>   26

                          PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

     27.1 Financial Data Schedule.

(b) Reports on Form 8-K: During the three-month period to which this report
    relates, MSAF filed the following Reports on Form 8-K, on the dates
    indicated:

     (i)   March 13, 2000 (containing a monthly report to holders of the Notes);

     (ii)  April 14, 2000 and May 11, 2000 (each containing a monthly report to
           holders of the Notes and the New Notes);

     (iii) March 16, 2000 (containing definitive information relating to the
           effect of the issuance of the New Notes on certain characteristics of
           the Notes); and

     (iv) May 30, 2000 (containing financial statements with respect to and pro
          forma financial information relating to its acquisition of 29 aircraft
          on March 15, 2000).

                                       25
<PAGE>   27

                                   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: July 14, 2000
                                          MORGAN STANLEY AIRCRAFT FINANCE

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

                                       26
<PAGE>   28

                        MORGAN STANLEY AIRCRAFT FINANCE

                               INDEX TO EXHIBITS

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

                                       27
<PAGE>   29





                                   APPENDIX I

                         MORGAN STANLEY AIRCRAFT FINANCE

         CASH ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                 THREE MONTH PERIOD FROM MARCH 2000 TO MAY 2000



                                       28
<PAGE>   30




                                    CONTENTS


<TABLE>
<CAPTION>
                                                                                         Page
                                                                                         ----
<S>                                                                                      <C>

I     BACKGROUND AND GENERAL INFORMATION...............................................  30

II(a) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE FOR MARCH 2000.........  32

II(b) COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR
      APRIL / MAY 2000.................................................................  41

III   OTHER FINANCIAL DATA.............................................................  50

IV    RECENT DEVELOPMENTS..............................................................  51

      APPENDICES.......................................................................  57
</TABLE>




                                       29


<PAGE>   31


I    BACKGROUND AND GENERAL INFORMATION

Morgan Stanley Aircraft Finance ("MSAF"), a Delaware business trust, is a
special purpose vehicle which owns aircraft subject to operating leases. Under
the terms of its Indenture, MSAF may acquire additional aircraft and sell
aircraft from the fleet. Any acquisition of additional 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.

INITIAL PORTFOLIO

On March 3, 1998, MSAF issued $1,050 million of Notes in connection with its
acquisition of 33 aircraft plus an engine with a total appraised value at
September 30, 1997 of $1,115.5 million from International Lease Finance
Corporation ("ILFC"). All but one of the 33 aircraft was acquired by MSAF.

NEW ISSUANCE

On March 15, 2000, MSAF refinanced the A-1 subclass Notes of $400 million as
part of a total issuance of $1,310 million of New Notes in five subclasses (A-3,
A-4, A-5, B-2 and C-2). In addition to the refinancing of the A-1 subclass,
these Notes were issued in association with MSAF's acquisition of 29 aircraft
with a total appraised value of $1,047.8 million as of November 30, 1999 from a
subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). MSDW acquired two
aircraft from an affiliate of GE Capital Corporation on March 19, 1999 and 27
aircraft from ILFC on August 6, 1999.

COMBINED PORTFOLIO

As a result, the overall size of the combined aircraft fleet is now 61 aircraft
plus an engine with a total appraised value of $2,000.9 million as of November
30, 1999. As of July 1, 2000, MSAF had 60 lease contracts in effect with 41
lessees based in 25 countries and two aircraft were off-lease as shown in
Appendix A attached.

MANAGEMENT DISCUSSION AND ANALYSIS

The discussion and analysis that follows in Section II is based on the results
of MSAF and its subsidiaries as a single entity (collectively the "MSAF GROUP")
for the reporting periods from March 2000 to May 2000.

Section II (a) covers the one-month period, March 2000, prior to the New
Issuance and the aircraft acquisition on March 15, 2000 and therefore relates to
the Initial Portfolio of 32 aircraft and engine only. The March 2000 cash flows
are compared against the 1998 Base Case.

For the purposes of this report, "MARCH 2000", referred to in Section II (a)
shall comprise information from the monthly cash report dated March 15, 2000.
The financial data in this reports includes cash receipts from February 10, 2000
(first day of the Collection Period for the March 2000 Report) up to March 9,
2000 (last day of the Collection Period for the March 2000 Report). It also
includes payments made by MSAF Group between February 16, 1999 and up to March
15, 2000 (the Note Payment Date for the March 2000 Report).



                                       30

<PAGE>   32


Section II (b) covers the two month period, April / May 2000, after the New
Issuance and the aircraft acquisition on March 15, 2000 and therefore relates to
the Combined Portfolio of 61 aircraft plus an engine. The April / May 2000 cash
flows are compared against the 2000 Base Case.

For the purposes of this report, "APRIL / MAY 2000", referred to in Section II
(b), shall comprise information from the monthly cash reports dated April 15,
2000 through to May 15, 2000. The financial data in these reports includes cash
receipts from March 10, 2000 (first day of the Collection Period for the April /
May 2000 Report) up to May 9, 2000 (last day of the Collection Period for the
April / May 2000 Report). It also includes payments made by MSAF Group between
March 16, 2000 and up to May 15, 2000 (the Note Payment Date for the April / May
2000 Report).

The discussion and analysis in Section III -- "Recent Developments" relates to
the combined fleet of 61 aircraft plus an engine.

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

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




                                       31
<PAGE>   33


II(a)  COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE
       FOR MARCH 2000

The February 20, 1998 Offering Memorandum (the "OFFERING MEMORANDUM") and the
November 4, 1998 Prospectus (the "PROSPECTUS") for the Notes contain assumptions
in respect of MSAF Group's future cash flows and cash expenses (the "1998 BASE
CASE"). For the purpose of this report, "NET CASH COLLECTIONS" is defined as
Total Cash Collections less Total Cash Expenses, Accrued Expenses, Interest
Payments, Swap Payments and Exceptional Items. A discussion of the Cash
Collections, Cash Expenses, Accrued Expenses, Interest Payments, Swap Payments,
Exceptional Items and Principal Payments is given below and should be read in
conjunction with the analysis in Appendix B.

CASH COLLECTIONS

"Total Cash Collections" include Net Lease Rentals (Contracted Lease Rentals
plus Movement in Current Arrears Balance less Net Stress-related Costs),
Interest Earned, Drawings from Expense Account and Net Maintenance.

<TABLE>
<CAPTION>
CASH COLLECTIONS                                   ACTUAL      BASE CASE    VARIANCE
                                                    $ M          $ M          $ M
                                                   ------      ---------    --------
<S>                                                 <C>          <C>         <C>
Lease Rentals                                       12.2         12.2         --
      - Renegotiated Leases                         (0.1)          --        (0.1)
      - Rental Resets                               (0.4)          --        (0.4)
                                                    ----         ----        ----
CONTRACTED LEASE RENTALS                            11.7         12.2        (0.5)

Movement in Current Arrears Balance                  0.2           --         0.2
Net Stress Related Costs                            (1.1)        (0.5)       (0.6)
                                                    ----         ----        ----
NET LEASE RENTALS                                   10.8         11.7        (0.9)

Interest Earned                                      0.1          0.1         0.0
Drawings from Expense Account                        1.2           --         1.2
Net Maintenance                                     (0.2)          --        (0.2)
                                                    ----         ----        ----
TOTAL CASH COLLECTIONS                              11.9         11.8         0.1
                                                    ====         ====        ====
</TABLE>

In March 2000, MSAF Group generated approximately $11.9 million in Total Cash
Collections, $0.1 million more than assumed in the 1998 Base Case. This
difference is due to a combination of the factors set out below (the numbers in
square brackets refer to the line item number shown in Appendix B).

[2]  RENEGOTIATED  LEASES

     Renegotiated Leases refers to the loss in rental revenue caused by a lessee
     negotiating a reduction in the lease rental. Typically, this can be a
     permanent reduction over the remaining lease term in exchange for other
     contractual concessions. In March 2000, the amount of revenue loss
     attributed to Renegotiated Leases of $0.1 million is due to a 14% reduction
     from the 1998 Base Case rental on a B767-300ER on lease to Air Pacific. The
     new rental was reset at the then prevailing market rate for B767-300ERs in
     exchange for a lease extension.



                                       32
<PAGE>   34


[3]  RENTAL RESETS

     Rental Resets is a measure of the loss in rental revenue when new lease
     rates are lower than those assumed in the 1998 Base Case. In March 2000, no
     new leases were written, however, lost revenue attributable to lease resets
     in previous quarters amounted to $0.4 million. The loss primarily relates
     to the decline in rentals received for two A310-300s. See Section IV --
     "Recent Developments" for a discussion of current re-leasing events.

[4]  CONTRACTED LEASE RENTALS

     Contracted Lease Rentals represents the current contracted lease rental
     rollout which equates to the 1998 Base Case Lease Rentals less adjustments
     for Renegotiated Leases and Rental Resets. For March 2000, Contracted Lease
     Rentals were $11.7 million, $0.5 million less than assumed in the 1998 Base
     Case. The difference is due to losses from renegotiated leases and rental
     resets as discussed above.

[5]  MOVEMENT IN CURRENT ARREARS BALANCE

     Current Arrears are the total contracted lease rentals outstanding from
     current lessees at a given date and excludes any amounts classified as Bad
     Debts. The current arrears balance at the start of the March 2000 payment
     period was $3.4 million versus $3.2 million at the end of the March 2000
     payment period, a decrease in arrears of $0.2 million.

<TABLE>
<CAPTION>
                                  CURRENT     CURRENT      MOVEMENT
                                  ARREARS     ARREARS     IN CURRENT    SECURITY
     AIRCRAFT                     2/15/00     3/15/00       ARREARS     DEPOSITS
       TYPE         COUNTRY         $ M         $ M           $ M         HELD
     --------       -------       -------     -------     ---------     --------
     <S>            <C>             <C>        <C>          <C>           <C>
     A320-200       Canada          0.2        0.5          (0.3)         0.3
     A310-300       Brazil          0.4        0.7          (0.3)          --
     B737-300       Brazil          1.6        0.5           1.1          0.7
     A321-100       Turkey          0.9        1.2          (0.3)         0.7
     A320-200       Ireland         0.3        0.3           0.0          0.5
                                    ---        ---           ---          ---
     TOTAL                          3.4        3.2           0.2          2.2
                                    ===        ===           ===          ===

</TABLE>

     As at March 15, 2000, five lessees were in arrears, owing $3.2 million,
     against which MSAF Group held security deposits of $2.2 million. See
     Section IV -- "Recent Developments" for information on the current level of
     arrears as of July 1, 2000.


     NET STRESS-RELATED COSTS

     Net Stress-related Costs is a combination of all the factors which can
     cause actual lease rentals received to differ from the Contracted Lease
     Rentals. The 1998 Base Case assumed net stress-related costs equal to 4.5%
     of the 1998 Base Case Lease Rentals.



                                       33

<PAGE>   35



     NET STRESS RELATED COSTS             ACTUAL     BASE CASE     VARIANCE
                                           $ M         $ M           $ M
                                          ------     ---------     --------
     Bad Debts                               --
     Security Deposits Drawn Down            --
     Restructured Arrears                  (0.1)
     AOG                                   (1.2)
     Other Leasing Income                   0.3
     Repossession Costs                    (0.1)
                                           ----         ----         ----
     NET STRESS RELATED COSTS              (1.1)        (0.5)        (0.6)
                                           ====         ====         ====

     For the March 2000 Payment Period, net stress-related costs amounted to
     $1.1 million (9.0% of 1998 Base Case Lease Rentals) compared to $0.5
     million assumed in the 1998 Base Case, a variance of $0.6 million that is
     due to the following six factors described in items [6] to [11] below.

[6]  BAD DEBTS AND [7] SECURITY DEPOSITS DRAWN DOWN

     Bad Debts are rental arrears owed by lessees who have defaulted and which
     are deemed irrecoverable. These arrears are partially offset by the draw
     down of security deposits held and amounts subsequently recovered from the
     defaulted lessee.

     In March 2000, no arrears were transferred to Bad Debts and no security
     deposits were drawn down. See Section IV -- "Recent Developments" for
     information on the current level of Bad Debts as of July 1, 2000.


[8]  RESTRUCTURED ARREARS

     Restructured Arrears refer to current arrears that have been capitalized
     and restructured into a note payable, which is repaid over an agreed
     period. Losses from restructured leases were $0.1 million in March 2000 and
     were due to a restructuring of arrears and lease payments of two lessees.
     See Section IV -- "Recent Developments" for information on the current
     level of Restructured Arrears as of July 1, 2000.

[9]  AIRCRAFT ON GROUND ("AOG")

     AOG is defined as the Base Case Lease Rental lost when an aircraft is
     off-lease and non-revenue earning.


     AOG Analysis for March  2000

<TABLE>
<CAPTION>
            AIRCRAFT TYPE     OLD LESSEE     NEW LESSEE              LOST RENTAL
            -------------     ----------     ----------              -----------
                                                                         $ M
     <S>    <C>               <C>            <C>                        <C>
     1      B747-300          VARIG          Air Atlanta Icelandic       0.8
     2      A310-300          Oman Air       Region Air                  0.1
     3      A310-300          Oman Air       Region Air                  0.1
     4      B737-400          TAESA          LOI                         0.2
                                                                         ---
            TOTAL                                                        1.2
                                                                         ===
</TABLE>


                                       34
<PAGE>   36

      The impact of AOG downtime amounted to $1.2 million during March 2000.
      This was in respect of four aircraft; one B747-300 previously on lease to
      VARIG which terminated early, two A310-300s previously on lease to Oman
      Air which terminated as scheduled and one B737-400 previously on lease to
      TAESA which terminated early. See Section IV -- "Recent Developments"
      below for information on the current level of AOG costs as of July 1,
      2000.

[10]  OTHER LEASING INCOME

      Other leasing income consists of miscellaneous income received in
      connection with a lease other than contracted rentals, maintenance
      receipts and security deposits, such as early termination payments or
      default interest. In March 2000, other leasing income amounted to $0.3
      million.

[11]  REPOSSESSION COSTS

      Repossession costs consist of legal and aircraft technical costs incurred
      as a result of repossessing an aircraft. In March 2000, repossession costs
      amounted to $0.1 million, which consists of consultancy fees incurred
      during the repossession of a B737-400 previously on lease to TAESA.

[13]  NET LEASE RENTALS

      Net Lease Rentals is Contracted Lease Rentals plus the movement in Current
      Arrears Balance less Net Stress-related Costs. In March 2000, net lease
      rentals amounted to $10.8 million, $0.9 million less than assumed in the
      1998 Base Case. The variance was attributable to the combined effect of
      lower contracted lease rentals, the decrease in current arrears and an
      increase in net stress-related costs discussed above.

[14]  INTEREST EARNED

      Interest earned relates to interest received on cash balances held in the
      Collection and Expense Accounts. Cash held in the Collection Account in
      March 2000 consisted of the cash liquidity reserve amount of $25.0 million
      plus the intra-month cash balances for all the rentals and maintenance
      payments collected prior to the monthly payment date. The Expense Account
      contains cash set aside to pay for expenses which are expected to be
      payable over the next three months ("Accrued Expenses"). The average
      interest rate for the period was 5.75%, the same as assumed in the 1998
      Base Case. In March 2000, interest earned amounted to $0.1 million the
      same as assumed in the 1998 Base Case.

[15]  DRAWINGS FROM EXPENSE ACCOUNT

      The Expense Account contains cash set aside each month from current cash
      collections to pay for expenses which are expected to be payable over the
      next three months. The level of Accrued Expenses is set each month by the
      Administrative Agent. In March 2000, $1.2 million was drawn from the
      Expense Account to pay for current expenses. The 1998 Base Case makes no
      assumption as to the level of Accrued Expenses. Accrued Expenses are
      discussed separately as line item number [28] in the Net Cash Collections
      section below.


                                       35


<PAGE>   37


[16]  NET MAINTENANCE

      Net maintenance refers to maintenance receipts less any maintenance
      reimbursements paid to lessees. In March 2000, actual maintenance receipts
      amounted to $0.9 million and maintenance expenditure amounted to $1.1
      million, generating negative net maintenance of $0.2 million.

      Maintenance expenditure included costs incurred in the overhaul of the
      airframe for two A310-300s. The 1998 Base Case makes no assumptions for
      net maintenance as it assumes that, over time, maintenance receipts will
      equal maintenance expenditure. However, it is unlikely that in any
      particular Note Payment Period, maintenance receipts will exactly equal
      maintenance expenditure.



                                       36
<PAGE>   38


CASH EXPENSES

"Total Cash Expenses" include Aircraft Operating Expenses and Selling, General
and Administrative ("SG&A") Expenses. In March 2000, total cash expenses were
$0.6 million, $0.6 million lower than the 1998 Base Case, which assumed total
cash expenses of $1.2 million.

<TABLE>
<CAPTION>
TOTAL CASH EXPENSES                       ACTUAL        BASE CASE       VARIANCE
                                           $ M             $ M            $ M
                                          ------        ---------       --------
<S>                                        <C>            <C>              <C>
Aircraft Operating Expenses                (0.1)          (0.4)            0.3
SG&A Expenses                              (0.5)          (0.8)            0.3
                                           ----           ----             ---
TOTAL CASH EXPENSES                        (0.6)          (1.2)            0.6
                                           ====           ====             ===
</TABLE>

The difference is due to a combination of lower Aircraft Operating Expenses and
SG&A Expenses as discussed below.

AIRCRAFT OPERATING EXPENSES include all operational costs related to the leasing
of an aircraft including costs of insurance, re-leasing and other overhead
costs. In March 2000, Aircraft Operating Expenses were $0.1 million compared to
$0.4 million per the 1998 Base Case, which assumes these costs to be 3.5% of the
1998 Base Case Lease Rentals.

[18]   INSURANCE

       No insurance costs were incurred in March 2000.

[19]   RE-LEASING AND OTHER OVERHEAD COSTS

       Re-leasing and other overhead costs consist of miscellaneous re-delivery
       and leasing costs associated with re-leasing events. In March 2000 these
       costs were $0.1 million.

SG&A EXPENSES relate to fees paid to the Aircraft Servicer and to other service
providers. In March 2000, SG&A Expenses were $0.5 million or $0.3 million lower
than assumed in the 1998 Base Case. The variance is described in items numbered
[21] and [23] below.

[21]   AIRCRAFT SERVICER FEES

       The Aircraft Servicer Fees are defined as amounts paid to the Aircraft
       Servicer, ILFC, in accordance with the terms of the Servicing Agreement.
       In March 2000, the total Aircraft Servicer fee paid was $0.3 million,
       $0.2 million lower than assumed in the 1998 Base Case, reflecting lower
       actual rentals achieved relative to 1998 Base Case Lease Rentals.


                                       37
<PAGE>   39


        Aircraft Servicer Fees consist of:

<TABLE>
<CAPTION>
                                             $ M
                                             ---
        <S>                                  <C>
        Base Fee                             0.1
        Rent Collected Fee                   0.1
        Rent Contracted Fee                  0.1
        Incentive Fee 1999/2000*             0.0
                                             ---
        TOTAL SERVICER FEE                   0.3
</TABLE>

        *For financial year ended November 30, 2000

        The Base Fee is a fixed amount per month per aircraft and changes only
        as aircraft are acquired or sold. The Rent Contracted Fee is equal to 1%
        of all rentals contracted. The Rent Collected Fee is equal to 1% of all
        rentals received. The Incentive fee is 10% of all cash flow received
        above a targeted annual amount set at the beginning of each financial
        year. No incentive fee was payable to ILFC in March 2000 for the
        financial year ended November 2000.

[23]    OTHER SERVICER FEES

        Other Servicer Fees relate to fees and expenses paid to other service
        providers including the Administrative Agent, Financial Advisor, legal
        advisors, accountants and Independent Trustees. In March 2000, Other
        Servicer Fees amounted to $0.2 million as compared to an assumed expense
        of $0.3 million in the 1998 Base Case, a positive variance of $0.1
        million. The variance is due primarily to lower than expected
        Administrative Agent fees and other overhead costs. The Administrative
        Agent fee is equal to 1.5% of rentals collected and declined in line
        with the reduced rentals actually received.




                                       38
<PAGE>   40


NET CASH COLLECTIONS

"NET CASH COLLECTIONS" equals Total Cash Collections less Total Cash Expenses,
Accrued Expenses, Interest Payments, Swap Payments and Exceptional Items.

<TABLE>
<CAPTION>
NET CASH COLLECTIONS                   ACTUAL         BASE CASE         VARIANCE
                                        $ M              $ M               $ M
                                       ------         ---------         --------
<S>                                     <C>              <C>              <C>
Total Cash Collections                  11.9             11.8              0.1
Total Cash Expenses                     (0.6)            (1.2)             0.6
Accrued Expenses                        (0.8)              --             (0.8)
Interest Payments                       (4.9)            (4.9)              --
Swap Payments                           (0.4)            (0.5)             0.1
Exceptional Items                         --               --               --
                                        ----             ----            -----
NET CASH COLLECTIONS                     5.2              5.2              0.0
                                        ====             ====            =====
</TABLE>


[26]  TOTAL CASH COLLECTIONS

      As discussed above in line items [1] to [17] above in Cash Collections,
      MSAF Group generated approximately $11.9 million in Total Cash
      Collections, $0.1 million more than assumed in the 1998 Base Case.

[27]  TOTAL CASH EXPENSES

      As discussed above in line items [18] to [25] above in Cash Expenses, MSAF
      Group incurred approximately $0.6 million in Total Cash Expenses, $0.6
      million less than assumed in the 1998 Base Case.

[28]  ACCRUED EXPENSES

      Accrued Expenses represent the level of cash set aside in the Expense
      Account each month to pay for expenses which are expected to be payable
      over the next 3 months. In March 2000, $0.8 million was added to the
      Closing Expense Account balance of $4.9 million (a total of to $5.7
      million) to fund future expenses, primarily maintenance.

[29]  INTEREST PAYMENTS AND [30] SWAP PAYMENTS

      In March 2000, interest payments to Noteholders amounted to $4.9 million,
      which was in line with the 1998 Base Case. While the total debt balance
      outstanding during the quarter was lower than expected in the 1998 Base
      Case, the interest payments were increased due to a higher than assumed
      LIBOR rate. The LIBOR rate for March 2000 was 5.89% versus an assumed
      LIBOR rate of 5.75%. The higher interest costs were offset by a reduction
      in the amount of swap payments. MSAF paid $0.4 million in swap costs, $0.1
      million less than assumed in the 1998 Base Case.

[31]  EXCEPTIONAL ITEMS

      Exceptional items refer to cash flows that occur infrequently and are
      outside the normal business activities of MSAF. There were no exceptional
      cash flows in March 2000.


                                       39

<PAGE>   41

[33]  PRINCIPAL PAYMENTS

      In the First Quarter 2000, total principal payments to Noteholders
      amounted to $5.2 million, the same as assumed in the 1998 Base Case.



                                       40
<PAGE>   42


II(b)  COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR
       APRIL / MAY 2000

The March 8, 2000 Offering Memorandum for the New Notes contain assumptions in
respect of MSAF Group's future cash flows and cash expenses (the "2000 BASE
CASE"). For the purpose of this report, "NET CASH COLLECTIONS" is defined as
Total Cash Collections less Total Cash Expenses, Accrued Expenses, Interest
Payments, Swap Payments and Exceptional Items. A discussion of the Cash
Collections, Cash Expenses, Accrued Expenses, Interest Payments, Swap Payments,
Exceptional Items and Principal Payments is given below and should be read in
conjunction with the analysis in Appendix C.

CASH COLLECTIONS

"Total Cash Collections" include Net Lease Rentals (Contracted Lease Rentals
plus Movement in Current Arrears Balance less Net Stress-related Costs),
Interest Earned, Drawings from Expense Account and Net Maintenance.

<TABLE>
<CAPTION>
TOTAL CASH COLLECTIONS                       ACTUAL      BASE CASE      VARIANCE
                                              $ M           $ M           $ M
                                             ------      ---------      --------
<S>                                            <C>           <C>           <C>
Lease Rentals                                  44.5          44.5            --
      - Renegotiated Leases                      --            --            --
      - Rental Resets                            --            --            --
                                              -----          ----          ----
CONTRACTED LEASE RENTALS                       44.5          44.5            --

Movement in Current Arrears Balance            (0.9)           --          (0.9)
Net Stress Related Costs                       (2.0)         (2.0)           --
                                              -----          ----          ----
NET LEASE RENTALS                              41.6          42.5          (0.9)

Interest Earned                                 0.6           0.4           0.2
Drawings from Expense Account                   5.1            --           5.1
Net Maintenance                                (3.1)           --          (3.1)
                                              -----          ----          ----
TOTAL CASH COLLECTIONS                         44.2          42.9           1.3
                                              =====          ====          ====
</TABLE>

In April / May 2000, MSAF Group generated approximately $44.2 million in Total
Cash Collections, $1.3 million more than assumed in the 2000 Base Case. This
difference is due to a combination of the factors set out below (the numbers in
brackets refer to the line item number shown in Appendix C).

[2]   RENEGOTIATED LEASES

      Renegotiated Leases refers to the loss in rental revenue caused by a
      lessee negotiating a reduction in the lease rental. Typically, this can be
      a permanent reduction over the remaining lease term in exchange for other
      contractual concessions. In April / May 2000, one lease was renegotiated
      resulting in a small decrease in the present value of the rental cash
      flows over the lease term. The new rental was agreed in exchange for an
      extension of the lease term.

[3]   RENTAL RESETS

      Rental Resets is a measure of the loss in rental revenue when new lease
      rates are

                                       41
<PAGE>   43



      lower than those assumed in the 2000 Base Case. In April / May 2000, no
      new leases were written. See Section IV -- "Recent Developments" for a
      discussion of current re-leasing events as at July 1, 2000.

[4]   CONTRACTED LEASE RENTALS

      Contracted Lease Rentals represents the current contracted lease rental
      rollout which equates to the 2000 Base Case Lease Rentals less adjustments
      for Renegotiated Leases and Rental Resets. For April / May 2000,
      Contracted Lease Rentals were $44.5 million, in line with rentals assumed
      in the 2000 Base Case.

[5]   MOVEMENT IN CURRENT ARREARS BALANCE

      Current Arrears is the total contracted lease rentals outstanding from
      current lessees at a given date and excludes any amounts classified as Bad
      Debts. The current arrears balance at the New Issuance date (March 15,
      2000) was assumed to be nil versus $1.5 million at the end of April / May
      2000, a difference in arrears of $0.9 million.

<TABLE>
<CAPTION>
      AIRCRAFT       COUNTRY         CURRENT ARREARS   CURRENT ARREARS     MOVEMENT IN         SECURITY
      TYPE                               3/15/00           5/15/00       CURRENT ARREARS    DEPOSITS HELD
      --------       -------         ---------------   ---------------   ---------------    -------------
                                            $ M              $ M               $ M               $ M
      <S>              <C>                   <C>               <C>               <C>               <C>
      A310-300         Brazil                0.0               0.7               0.7               0.0
      B737-300         USA                   0.0               0.2               0.2               0.2
                                             ---               ---               ---               ---
      TOTAL                                  0.0               0.9               0.9               0.2
                                             ===               ===               ===               ===
</TABLE>

      As at May 15, 2000, two lessees were in arrears, owing $0.9 million,
      against which MSAF Group held security deposits of $0.2 million. One of
      the two lessees, B.R.A., based in Brazil, defaulted in April / May 2000
      and the aircraft was repossessed. Rental arrears, associated with the
      lessee, at the time of the repossession totaled $1.3 million are now
      deemed irrecoverable and will be re-classified from Current Arrears to Bad
      Debts. See the discussion on Bad Debts below.

      ACTUAL CURRENT ARREARS AND BASE CASE ARREARS

      The Movement in Current Arrears Balance measures the difference in arrears
      balances between the start of the new Base Case, March 15, 2000, and May
      15, 2000. For the purposes of the Base Case only, any arrears owed by
      lessees as at March 15, 2000 were assumed to be zero. Actual current
      arrears were $3.2 million as at March 15, 2000 and these pertain to the
      Initial Portfolio only. Actual Current Arrears as at May 15, 2000 were
      $3.6 million and relate to the Combined Portfolio. See Section IV --
      "Recent Developments" for information on the current level of arrears as
      of July 1, 2000 which covers total arrears owed by lessees.

      NET STRESS-RELATED COSTS

      Net Stress-related Costs is a combination of all the factors which can
      cause actual lease rentals received to differ from the Contracted Lease
      Rentals. The 2000 Base Case assumed net stress-related costs equal to 4.5%
      of the 2000 Base Case Lease Rentals.


                                       42

<PAGE>   44
\
<TABLE>
<CAPTION>
     NET STRESS RELATED COSTS                ACTUAL      BASE CASE      VARIANCE
                                             ------      ---------      --------
                                               $ M          $ M            $ M
     <S>                                      <C>         <C>              <C>
     Bad Debts                                  --
     Security Deposits Drawn Down               --
     Restructured Arrears                       --
     AOG                                      (0.7)
     Other Leasing Income                     (1.2)
     Repossession Costs                       (0.1)
                                              ----        ----             ---
     NET STRESS RELATED COSTS                 (2.0)       (2.0)            0.0
                                              ====        ====             ===
</TABLE>

      For April / May 2000, net stress-related costs amounted to $2.0 million
      (4.5% of 2000 Base Case Lease Rentals), in line with the 2000 Base Case
      assumptions. A detailed analysis of net stress-related costs is provided
      in item [6] to [11] below.

[6]   BAD DEBTS AND [7] SECURITY DEPOSITS DRAWN DOWN

      Bad Debts are rental arrears owed by lessees who have defaulted and which
      are deemed irrecoverable. These arrears are partially offset by the draw
      down of security deposits held and amounts subsequently recovered from the
      defaulted lessee.

      In April / May 2000, no amounts were written off and no security deposits
      were drawn down. See Section IV -- "Recent Developments" for information
      on the current level of Bad Debts as of July 1, 2000.


[8]   RESTRUCTURED ARREARS

      Restructured arrears refer to current arrears that have been capitalized
      and restructured into a note payable, which is repaid over an agreed
      period. There were no losses from restructured arrears in April / May
      2000. See Section IV -- "Recent Developments" for information on the
      current level of Restructured Arrears as of July 1, 2000.

[9]   AIRCRAFT ON GROUND ("AOG")

      AOG is defined as the Base Case Lease Rental lost when an aircraft is
      off-lease and non-revenue earning.

      AOG Analysis for April / May 2000

<TABLE>
<CAPTION>
                  AIRCRAFT TYPE      OLD LESSEE      NEW LESSEE      LOST RENTAL
                  -------------      ----------      ----------      -----------
                                                                         $ M
        <S>       <C>                <C>             <C>                <C>
         1        A310-300           Oman Air        Region Air          0.2
         2        B737-400           TAESA           LOI                 0.5
                                                                        ----
                  TOTAL                                                  0.7
                                                                        ====
</TABLE>

      The impact of AOG downtime amounted to $0.7 million during April / May
      2000. This was in respect of two aircraft; one A310-300 previously on
      lease to Oman Air and terminated as scheduled and one B737-400 previously
      on lease to TAESA and terminated early. See Section IV -- "Recent
      Developments" below for information on the current level of AOG costs as
      of July 1, 2000.


                                       43
<PAGE>   45

[10]  OTHER LEASING INCOME

      Other leasing income consists of miscellaneous income received in
      connection with a lease other than contracted rentals, maintenance
      receipts and security deposits, such as early termination payments or
      default interest. In April / May 2000, other leasing income amounted to a
      negative $1.2 million which relates to rentals which the Base Case assumed
      would be received in this period but are due in the following month.

[11]  REPOSSESSION COSTS

      Repossession costs consist of legal and aircraft technical costs incurred
      as a result of repossessing an aircraft. In April / May 2000, repossession
      costs amounted to $0.1 million, which primarily related to consultancy
      fees incurred during the repossession of the B747-300 previously on lease
      to VARIG.

[13]  NET LEASE RENTALS

      Net Lease Rentals is Contracted Lease Rentals plus the Movement in Current
      Arrears Balance less Net Stress-related Costs. In April / May 2000, net
      lease rentals amounted to $41.6 million, $0.9 million less than assumed in
      the 2000 Base Case. The variance was primarily attributable to the
      increase in current arrears discussed above.

[14]  INTEREST EARNED

      Interest earned relates to interest received on cash balances held in the
      Collection and Expense Accounts. Cash held in the Collection Account in
      April / May 2000 consisted of the cash liquidity reserve amount of $30.0
      million plus the intra-month cash balances for all the rentals and
      maintenance payments collected prior to the monthly payment date. The
      Expense Account contains cash set aside to pay for expenses which are
      expected to be payable over the next three months. The average interest
      rate for the two-month period was 5.93%, slightly less than the 5.97%
      assumed in the 2000 Base Case. In April / May 2000, interest earned
      amounted to $0.6 million, $0.2 million more than assumed in the 2000 Base
      Case. The difference is due primarily to interest earned on the Aircraft
      Purchase Account prior to the acquisition of the Lithuanian B737-300 on
      May 1, 2000.

[15]  DRAWINGS FROM EXPENSE ACCOUNT

      The Expense Account contains cash set aside each month from current cash
      collections to pay for expenses which are expected to be payable over the
      next three months. The level of Accrued Expenses is set each month by the
      Administrative Agent. In April / May 2000, $5.1 million was drawn from the
      Expense account to pay current expenses. The 2000 Base Case makes no
      assumption as to the level of Accrued Expenses. Accrued Expenses are
      discussed separately as line item number [28] in the Net Cash Collections
      section below.


[16]  NET MAINTENANCE


                                       44
<PAGE>   46

      Net maintenance refers to maintenance receipts less any maintenance
      reimbursements paid to lessees. In April / May 2000, actual maintenance
      receipts amounted to $4.0 million and maintenance expenditure amounted to
      $7.1 million, generating negative net maintenance of $3.1 million.

      Maintenance expenditure included costs incurred in the overhaul of two
      engines on a B747-300 repossessed from Varig ($2.0 million), the overhaul
      of two A310-300 airframes previously on lease to Oman air ($2.8 million)
      and the reimbursement from reserves for the overhaul of two engines ($2.0
      million). The 2000 Base Case makes no assumptions for net maintenance as
      it assumes that, over time, maintenance receipts will equal maintenance
      expenditure. However, it is unlikely that in any particular Note Payment
      Period, maintenance receipts will exactly equal maintenance expenditure.



                                       45

<PAGE>   47


CASH EXPENSES

"Total Cash Expenses" include Aircraft Operating Expenses and SG&A Expenses. In
April / May 2000, total cash expenses were $2.6 million, $0.4 million higher
than the 2000 Base Case, which assumed total cash expenses of $2.2 million.

<TABLE>
<CAPTION>
TOTAL CASH EXPENSES                    ACTUAL         BASE CASE         VARIANCE
                                       ------         ---------         --------
                                         $ M             $ M               $ M
<S>                                     <C>             <C>                <C>
Aircraft Operating Expenses             (0.3)           (0.3)               --
SG&A Expenses                           (2.3)           (1.9)              0.4
                                        ----            ----               ---
TOTAL CASH EXPENSES                     (2.6)           (2.2)              0.4
                                        ====            ====               ===
</TABLE>

The difference is due to higher SG&A Expenses as discussed below.

AIRCRAFT OPERATING EXPENSES include all operational costs related to the leasing
of an aircraft including costs of insurance, re-leasing and other overhead
costs. In April / May 2000, Aircraft Operating Expenses amounted to $0.3
million, the same as assumed in the 2000 Base Case, which assumes these costs to
be 0.8% of the 2000 Base Case Lease Rentals.

[18]   INSURANCE

       Insurance costs of $0.2 million were incurred in April / May 2000 and
       relate to the payment of the quarterly premium in respect of the aircraft
       contingent insurance programme.

[19]   RE-LEASING AND OTHER OVERHEAD COSTS

       Re-leasing and other overhead costs consist of miscellaneous re-delivery
       and leasing costs associated with re-leasing events. In April / May 2000
       these costs amounted to $0.1 million.


SG&A EXPENSES relate to fees paid to the Aircraft Servicer and to other service
providers. In April / May 2000, SG&A Expenses were $2.3 million or $0.4 million
higher than assumed in the 2000 Base Case. The variance is described in items
numbered [21] and [23] below.

[21]   AIRCRAFT SERVICER FEES

       The Aircraft Servicer Fees are defined as amounts paid to the Aircraft
       Servicer, ILFC, in accordance with the terms of the Servicing Agreement.
       In April / May 2000, the total Aircraft Servicer fee paid was $1.5
       million, in line with 2000 Base Case assumptions.


                                       46

<PAGE>   48


        Aircraft Servicer Fees consist of:
<TABLE>
<CAPTION>
                                                       $ M
                                                       ---
                 <S>                                   <C>
                  Base Fee                             0.5
                  Rent Collected Fee                   0.5
                  Rent Contracted Fee                  0.5
                  Incentive Fee 1999/2000*             0.0
                                                       ---
                  TOTAL SERVICER FEE                   1.5
</TABLE>

        *For financial year ended November 30, 2000

        The Base Fee is a fixed amount per month per aircraft and changes only
        as aircraft are acquired or sold. The Rent Contracted Fee is equal to 1%
        of all rentals contracted. The Rent Collected Fee is equal to
        approximately 1.25% of all rentals received. The Incentive fee applies
        to the Initial Portfolio only and is set at 10% of all cash flow
        received above a targeted annual amount set at the beginning of each
        financial year. No incentive fee was payable to ILFC in April / May 2000
        for the financial year ended November 2000.

[23]    OTHER SERVICER FEES

        Other Servicer Fees relate to fees and expenses paid to other service
        providers including the Administrative Agent, Financial Advisor, legal
        advisors, accountants and Independent Trustees. In April / May 2000,
        Other Servicer Fees amounted to $0.8 million as compared to an assumed
        expense of $0.4 million in the 2000 Base Case, a positive variance of
        $0.4 million. The variance is due primarily to the payment of the annual
        premium for the Directors and Officers insurance coverage ($0.2
        million).


                                       47


<PAGE>   49


NET CASH COLLECTIONS

"NET CASH COLLECTIONS" equals Total Cash Collections less Total Cash Expenses,
Accrued Expenses, Interest Payments, Swap Payments and Exceptional Items.

<TABLE>
<CAPTION>
NET CASH COLLECTIONS                  ACTUAL          BASE CASE         VARIANCE
                                       $ M              $ M               $ M
                                      ------          ---------         --------
<S>                                    <C>              <C>               <C>
Total Cash Collections                  44.2             42.9              1.3
Total Cash Expenses                     (2.6)            (2.2)            (0.4)
Accrued Expenses                        (3.9)              --             (3.9)
Interest Payments                      (21.1)           (20.9)            (0.2)
Swap Payments                           (1.6)            (1.8)             0.2
Exceptional Items                         --               --               --
                                        ----             ----             ----
NET CASH COLLECTIONS                    15.0             18.0             (3.0)
                                        ====             ====             ====
</TABLE>


[26]    TOTAL CASH COLLECTIONS

        As discussed above in line items [1] to [17] above in Cash Collections,
        MSAF Group generated approximately $44.2 million in Total Cash
        Collections, $1.3 million more than assumed in the 2000 Base Case.

[27]    TOTAL CASH EXPENSES

        As discussed above in line items [18] to [25] above in Cash Expenses,
        MSAF Group incurred approximately $2.6 million in Total Cash Expenses,
        $0.4 million more than assumed in the 2000 Base Case.

[28]    ACCRUED EXPENSES

        Accrued Expenses represent the level of cash set aside in the Expense
        Account each month to pay for expenses which are expected to be payable
        over the next 3 months. In April / May 2000, $2.9 million was added to
        the Closing Expense Account balance of $1.6 million (a total of to $4.5
        million) to fund future expenses, primarily maintenance.

[29]    INTEREST PAYMENTS AND [30] SWAP PAYMENTS

        In April / May 2000, interest payments to Noteholders amounted to $21.1
        million. This is $0.2 million higher than the 2000 Base Case, which
        assumed interest costs for April / May 2000 to be $20.9 million. The
        higher interest cost was due to a higher than assumed debt balance
        outstanding during the two month period and a higher than assumed
        average LIBOR rate. The average LIBOR rate for April / May 2000 was
        6.07% versus an assumed LIBOR rate of 5.97%. The higher interest costs
        were offset by a reduction in the amount of swap payments. MSAF paid
        $1.6 million in swap costs, $0.2 million less than assumed in the 2000
        Base Case.

[31]    EXCEPTIONAL ITEMS

        Exceptional items refer to cash flows that occur infrequently and are
        outside the normal business activities of MSAF. There were no
        exceptional cash flows in April / May 2000.


                                       48
<PAGE>   50

 [33] PRINCIPAL PAYMENTS

      In April / May 2000, total principal payments to Noteholders amounted to
      $15.0 million, $3.0 million less than assumed in the 2000 Base Case,
      reflecting the lower Net Cash Collections available during this period,
      mainly as a result of the higher than expected maintenance costs.



                                       49
<PAGE>   51


III      OTHER FINANCIAL DATA

         An analysis of MSAF's Performance to Date as of May 15, 2000 versus the
         2000 Base Case and details of interest and debt coverage ratios and
         Loan-to-Value ratios (LTV's) as of May 15, 2000 are shown in Appendix
         D.

         CASH

         Cash held at May 15, 2000 was $44.7 million. This includes $30.0
         million that represents the cash portion of the Liquidity Reserve
         Amount at that time. This is a source of liquidity for, among other
         things, maintenance obligations, security deposit return obligations,
         and cash operating expenses and contingent liabilities. The balance
         consists of $10.2 million in lessee security deposits and $4.5 million
         in accrued expenses held in the Expense Account in respect of future
         maintenance obligations and other costs.

         In addition to the $44.7 million cash balance held at May 15, 2000, the
         Liquidity Reserve Amount also contained credit and liquidity facilities
         provided by MSDW and ILFC aggregating to $78.9 million. Neither of
         these facilities was drawn upon in April / May 2000.

         AIRCRAFT VALUES

         Under the terms of the Notes, MSAF Group is required to obtain new
         appraisals of the Base Value of each aircraft from a minimum of three
         independent appraisers each year. The annual appraisal must be
         delivered to the Trustee no later than October 31 of each year. The
         next appraisal is due to deliver to the Trustee no later than October
         31, 2000. The current appraisals as of November 30, 1999 are shown in
         Appendix A.

         A-D NOTE BALANCE

         As of May 15, 2000, the aggregate amount of Class A-D Notes outstanding
         was $1,819.3 million, approximately $3.0 million higher than assumed in
         the 2000 Base Case due to lower than assumed principal repayments with
         respect to the Class A-2 and A-5 Notes.


                                       50

<PAGE>   52


IV       RECENT DEVELOPMENTS

         Information is as of July 1, 2000.

         SECURITISATION OF 29 AIRCRAFT

         On March 15, 2000, MSAF Group issued additional subclasses of Notes,
         amounting to $1,310 million, in association with the refinancing of the
         subclass A-1 Note of $400 million and the acquisition, from a
         subsidiary of MSDW, of a portfolio of 29 commercial aircraft with an
         appraised value of $1,047.8 million as of November 30, 1999. All but
         one of the 29 aircraft was delivered on March 15, 2000. The remaining
         aircraft, a B737-300 on lease to Lithuanian Airlines, was delivered on
         May 1, 2000. The following discussion refers to the portfolio of 62
         aircraft assets, which was owned by MSAF Group as of July 1, 2000.

         RE-MARKETING TASK FOR PORTFOLIO OF 62 AIRCRAFT ASSETS

         As of July 1, 2000, two aircraft from a portfolio of 62 aircraft assets
         were off-lease. Both aircraft are currently the subject of non-binding
         letters of intent.

         SUMMARY

<TABLE>
<CAPTION>
                                                                                         No. of Aircraft
                                                                                         ---------------
         <S>                                                                                   <C>
         No. of Aircraft Assets subject to Lease Agreements                                     60
         No. of Aircraft Assets off-lease                                                        2
                                                                                               ---
         Total No. of Aircraft Assets                                                           62
                                                                                               ---

         No. of Aircraft Assets scheduled to expire before Dec 31, 2000                          2
         No. of Aircraft Assets scheduled to expire in the year to Dec 31, 2001                 11
                                                                                               ---
         Equals  Total Near-term re-marketing task                                              13
                                                                                               ---
         Of which LOI signed                                                                     2
                                                                                               ---
</TABLE>


       RE-MARKETING TASK: BY NUMBER OF AIRCRAFT

<TABLE>
<CAPTION>
 YEAR ENDING        2000       2001        2002        2003        2004       > 2005      TOTAL
 -----------        ----       ----        ----        ----        ----       ------      -----
<S>                 <C>        <C>         <C>         <C>         <C>         <C>         <C>
 A300                                                                1            1           2
 A310                                                     2                       1           3
 A320                            1           1            3                       1           6
 A321                                        1            1                                   2
 A330                            1                                                            1
 A340                                                     1                                   1
 B737                 2          6           1            4          4            3*         20
 B747                                        1            1                                   2
 B757                            2           1                                    5           8
 B767                                        2            1*         1            2           6
 F50                                                      2                                   2
 F70                                                      1          2                        3
 MD82                                                                1                        1
 MD83                             1                       1                       2           4
 Engine                                      1                                                1
                    ---         ---        ---          ---        ---          ---         ---
 TOTAL                2          11          8           17          9           15          62
                    ===         ===        ===          ===        ===          ===         ===
</TABLE>

     *Includes one aircraft currently subject to a non-binding letter of intent.


                                       51
<PAGE>   53


     RE-MARKETING TASK: BY APPRAISED VALUE*

     <TABLE>
     <CAPTION>
     YEAR ENDING     2000    2001     2002     2003     2004    > 2005    TOTAL
     -----------    -----   ------   ------   ------   ------   ------    ------
     <S>            <C>     <C>      <C>      <C>      <C>      <C>       <C>
     A300                                               2.55%    2.31%     4.86%
     A310                                      2.25%             1.38%     3.63%
     A320                    1.52%    1.61%    4.59%             1.49%     9.21%
     A321                             1.95%    1.98%                       3.93%
     A330                    4.00%                                         4.00%
     A340                                      4.58%                       4.58%
     B737           2.37%    6.59%    1.26%    5.13%    4.83%    2.85%    23.03%
     B747                             4.87%    2.45%                       7.32%
     B757                    3.93%    1.48%                      9.67%    15.08%
     B767                             5.50%    1.47%    3.01%    6.52%    16.50%
     F50                                       0.62%                       0.62%
     F70                                       0.68%    1.45%              2.13%
     MD82                                               0.89%              0.89%
     MD83                    0.95%             0.99%             2.00%     3.94%
     Engine                           0.28%                                0.28%
                    -----   ------   ------   ------   ------   ------    ------
     TOTAL          2.37%   16.99%   16.95%   24.74%   12.73%   26.22%      100%
                    =====   ======   ======   ======   ======   ======    ======
     </TABLE>

     *Appraised Value as at November 30,1999

      As of July 1, 2000 47 leases, representing 73.78% of the appraised
      value at November 30, 1999 are scheduled to expire before December 31,
      2004. As of July 1, 2000 the average remaining term to lease expiry
      date, weighted by appraised value at November 30, 1999 was 41 months.

      RE-MARKETING TASK FOR AIRCRAFT EXPIRING PRIOR TO DECEMBER 2000
      Two leases, representing 2.37% of the appraised value at November 30,
      1999 are scheduled to expire before December 31, 2000. One of the two
      aircraft, a B737-300, is likely to stay with its current operator and
      the Servicer is currently negotiating extended lease terms. The second
      aircraft, a B737-400, is not yet subject to a non-binding letter of
      intent, however the Servicer is in discussions with a potential
      operator.

      AIRCRAFT ON GROUND (AOG)

      As of July 1, 2000, there are two aircraft on the ground. The two
      aircraft are subject to non-binding letters of intent.

      AOG ANALYSIS JULY 1, 2000
      AIRCRAFT TYPE      OLD LESSEE     STATUS                EXPECTED
                                                              RE-LEASE DATE
      -------------      ----------     ------                -------------
      A310-300           B.R.A.         Subject to LOI        September 2000
      B737-300           VASP           Subject to LOI        August 2000

      One A310-300 aircraft was repossessed from B.R.A. in May 2000 and is
      currently subject to a non-binding letter of intent.

      One B737-300 aircraft was repossessed from VASP in May 2000 and is
      currently subject to a non-binding letter of intent.

      One B737-400 aircraft which was previously AOG, was released to a new
      lessee on June 20, 2000 on a short-term four-month lease.


                                       52
<PAGE>   54

         LESSEE DIFFICULTIES

         CURRENT AND RESTRUCTURED ARREARS

         As of July 1, 2000, five lessees were in arrears. The nine aircraft on
         lease to these lessees represented 13.9% of the portfolio by appraised
         value at November 30, 1999. The total amount of rental payments and
         maintenance reserves that was in arrears with respect to these five
         lessees was $3.1 million. MSAF Group holds security deposits of $4.9
         million against these arrears. The current arrears amount represents
         1.4% of annual lease rental payments. The weighted average number of
         days past due of such arrears was 39 days.

         In addition to the current arrears mentioned above, one lessee owes an
         additional $0.7 million of arrears which were restructured in January
         2000 for payment in July and August 2000.

         REGIONAL ANALYSIS OF CURRENT ARREARS

         The categorization of countries into the geographical regions of
         Developed Markets, Emerging Markets and Other is determined using
         Morgan Stanley Capital International, Inc. ("MSCI") designations. A
         regional analysis of current arrears as of July 1, 2000 is shown below.

<TABLE>
<CAPTION>
                                                  %
                                              Appraised    No. of    No. of    No. of   Current   Security
                         Region                 Value    Countries  Aircraft  Lessees   Arrears   Deposit
                         ------               ---------  ---------  --------  -------   -------   --------
                                                                                          $ M       $ M
         <S>             <C>                    <C>        <C>       <C>       <C>        <C>       <C>
         Developed       Europe                  3.1%        1         2         1         0.7       1.0
                         North America           5.3%        1         4         1         1.1       2.0
                         Pacific                  --         0         0         0           0         0
         Emerging        Europe and Middle       2.0%        1         1         1         0.7       0.6
                           East
                         Asia                     --         0         0         0         0.0       0.0
                         Latin America            --         0         0         0           0         0
         Other           Other                   3.5%        2         2         2         0.6       1.3
                                                -----      ---       ---       ---         ---       ---
                         TOTAL ARREARS          13.9%        5         9         5         3.1       4.9
                                                =====      ===       ===       ===         ===       ===
</TABLE>

         EUROPE (DEVELOPED)

         MSAF Group currently leases 27.5% of the portfolio by appraised value
         at November 30, 1999 in the Europe (Developed) region. One of the five
         lessees in arrears is based in this region. In January 2000, Transaer,
         a lessee based in Ireland, restructured rental and maintenance arrears
         into a note payable of $1.4 million. $0.7 million of these restructured
         payments were due but unpaid in June 2000 and are categorized as
         current arrears.

         Transaer has informed MSAF Group that it will not be able to meet its
         payment obligations due in July ($0.5 million) and August 2000 ($0.2
         million) under the restructuring agreement. Transaer is meeting its
         current obligations under the leases. MSAF Group holds security
         deposits of $1.0 million against the deferred arrears. These aircraft,
         both A320-200s, represented 3.1% of the portfolio by appraised value at
         November 30, 1999.

         NORTH AMERICA (DEVELOPED)

         MSAF Group currently leases 15.4% of the portfolio by appraised value
         at November 30, 1999 in the North America (Developed) region. One of
         the five lessees currently in arrears is based in the North America. As
         of July 1, 2000,


                                       53
<PAGE>   55

         the lessee owed rental arrears of $1.1 million against which MSAF Group
         holds security deposits of $2.0 million. This lessee habitually makes
         its rental payments approximately one week later than its contracted
         due date and therefore this is not deemed to be a receivables issue.
         The lessee leases one B757-200, one MD-82 and two MD83s, representing a
         total of 5.3% of the portfolio by appraised value at November 30, 1999.

         PACIFIC (DEVELOPED)

         MSAF Group currently leases 10.0% of the portfolio by appraised value
         at November 30, 1999 in the Pacific (Developed) region. As of July 1,
         2000, none of these lessees were in arrears.

         EUROPE AND MIDDLE EAST (EMERGING)

         MSAF Group currently leases 7.7% of the portfolio by appraised value at
         November 30, 1999 in the Europe and Middle East (Emerging) region. One
         of the five lessees in arrears is based in this region. As of July 1,
         2000, Air Alfa owed rental and maintenance arrears of $0.7 million,
         against which MSAF Group holds a security deposit of $0.6 million. In
         April 2000 the Servicer instituted legal steps in Turkey to draw down
         the guarantee and repossess the aircraft from Air Alfa. Since then the
         airline has made certain payments towards reducing its arrears balance.
         This aircraft, an A321-100, represented 2.0% of the portfolio by
         appraised value at November 30, 1999.

         ASIA (EMERGING)

         MSAF Group currently leases 16.5% of the portfolio by appraised value
         at November 30, 1999 in the Asia (Emerging) region. As of July 1, 2000,
         none of the lessees in this region were in arrears.

         LATIN AMERICA (EMERGING)

         MSAF Group currently leases 5.0% of the portfolio in Latin America (all
         in Mexico) by appraised value at November 30, 1999. None of the lessees
         currently in arrears are based in Latin America. However the two
         aircraft repossessed during the quarter were leased in Latin America
         and had been in arrears. See the Bad Debts Section below.

         OTHER

         MSAF Group currently leases 15.6% of the portfolio by appraised value
         at November 30, 1999 in the Other region. Two of the five lessees
         currently in arrears are based in the Other region.

         As of July 1, 2000, one lessee, based in Iceland, owed rental and
         maintenance reserves of $0.5 million, against which MSAF Group holds a
         security deposit of $0.6 million. This is a B747-300 and represented
         2.5% of the portfolio by appraised value at November 30, 1999. The
         other lessee is based in Lithuania and as at July 1, 2000 maintenance
         reserves of $0.1 million, against which MSAF Group holds a security
         deposit of $0.7 million. This is a B737-300 and represented 1.0% of the
         portfolio by appraised value at November 30, 1999. The lessee is
         experiencing financial difficulties and its ability to meet future
         payment obligations under the lease remain uncertain.


                                       54

<PAGE>   56


         BAD DEBTS

         In addition to the current arrears of $3.1 million and restructured
         arrears of $0.7 million, as of July 1, 2000, $1.3 million of rental and
         maintenance payments due to MSAF Group remain unpaid from one of its
         former lessees.

         ANALYSIS OF BAD DEBTS BALANCE AS OF JULY 1, 2000

<TABLE>
<CAPTION>
         Repossession Date   Aircraft    Former     Country    Bad Debts   Bad Debts   Security  Total
                             Type        Lessee                  Total     Recovered   Deposits
         -----------------   --------    ------     -------    ---------   ---------   --------  -----
                                                                  $ M         $ M        $ M      $ M
         <S>                 <C>         <C>        <C>          <C>          <C>        <C>     <C>
         May 2000            A310-300    B.R.A.     Brazil       (1.3)        0.0        0.0     (1.3)
         May 2000            B737-300    VASP       Brazil       (0.5)        0.0        0.7      0.2
                                                                 ----         ---        ---     ----
         TOTAL                                                   (1.8)        0.0        0.7     (1.1)
                                                                 ----         ---        ---     ----
</TABLE>

         A former Brazilian lessee, B.R.A., defaulted on its obligations under
         its lease of an A310-300 aircraft and the aircraft was repossessed in
         May 2000. The lease was scheduled to expire in July 2007. The total
         amount of rental payments due under the lease at the date of the
         repossession was $1.3 million. There was no security deposit held by
         MSAF Group to offset against the arrears balance. The aircraft is
         currently subject to a non-binding letter of intent and is scheduled to
         deliver to a new lessee in September 2000. This aircraft represents
         approximately 1.4% of the portfolio by appraised value at November 30,
         1999.

         A second Brazilian lessee, VASP, defaulted on its obligations under its
         lease of a B737-300 aircraft and the aircraft was repossessed on May
         19, 2000 following legal proceedings against VASP. The lease was
         scheduled to expire in March 2003. The total amount of rental payments
         due under the lease at the date of the repossession was $0.5 million
         against which we drew down a security deposit of $0.7 million. The
         aircraft is currently subject to a non-binding letter of intent and is
         scheduled to deliver to a new lessee in August 2000. This aircraft
         represents approximately 1.0% of the portfolio by appraised value at
         November 30, 1999.

         NOTE PAYABLE

         A former Brazilian lessee, VARIG, negotiated an early termination of
         its lease of a B747-300 aircraft in July 1999. The total amount of
         rental payments and maintenance reserves due under this lease, at the
         date of the termination agreement, was $4.8 million against which we
         drew down a security deposit of $1.1 million. Under the terms of the
         termination agreement, VARIG is scheduled to repay $10.8 million over
         eight years to offset arrears of $4.8 million and approximately $6.0
         million for maintenance and downtime costs. Provided no default has
         occurred by October 2005 under this note payable, the total remaining
         payments will be reduced by approximately $1.1 million on a pro-rata
         basis between October 2005 and October 2007, the scheduled final
         payment date under the note. As of July 1, 2000 VARIG had made all
         payments due under the note payable. This aircraft represents
         approximately 2.5% of the portfolio by appraised value at November 30,
         1999.

         INSURANCE CLAIM

         On April 2, 1999, one B757-200ER on lease to Guyana Airways was
         terminated by agreement. Certain of the technical records were
         incomplete and/or missing. An insurance claim under our Technical
         Records policy was submitted in


                                       55

<PAGE>   57

         respect of the maintenance work, repairs and services required to
         reconstruct the technical records. The insurance claim was approved and
         MSAF Group received $3.9 million in June 2000 to partially offset the
         substantial maintenance costs incurred in the Guyana repossession.

         AIRWORTHINESS DIRECTIVE

         On May 25, 2000, the United States Federal Aviation Administration
         issued an Airworthiness Directive relating to fire safety standards in
         certain types of aircraft. The Airworthiness Directive, which applies
         to our one MD-82 and four MD-83 aircraft, together representing 4.8% of
         our portfolio by appraised value at November 30, 1999, requires
         operators of those aircraft to replace fire insulation blankets covered
         with metalized Mylar. Under the leases of the affected aircraft, all
         costs of compliance with Airworthiness Directives are the obligation of
         the lessees.


                                       56
<PAGE>   58
MORGAN STANLEY AIRCRAFT FINANCE       PORTFOLIO ANALYSIS             APPENDIX A
                                         JULY 1, 2000

<TABLE>
<CAPTION>
     REGION (1)                    COUNTRY OF LESSEE                    LESSEE                        TYPE
     ----------                    -----------------                    ------                        ----
<S>                                <C>                                  <C>                           <C>
   1 EUROPE                        France                               Air Liberte                   MD-83
   2 (Developed)                   France                               L'Aeropostale                 B737-300QC
   3                               Ireland                              Aer Lingus                    A330-300
   4                               Ireland                              TransAer                      A320-200
   5                               Ireland                              TransAer                      A320-200
   6                               The Netherlands                      KLM                           Engine
   7                               The Netherlands                      KLM Cityhopper                F50
   8                               The Netherlands                      KLM Cityhopper                F50
   9                               The Netherlands                      Transavia                     B737-300
  10                               Norway                               Braathens                     B737-500
  11                               Norway                               Braathens                     B737-500
  12                               Spain                                Air Europa                    B737-400
  13                               United Kingdom                       Air 2000                      B757-200ER
  14                               United Kingdom                       Air 2000                      B767-300ER
  15                               United Kingdom                       Britannia                     B757-200ER
  16                               United Kingdom                       Britannia                     B767-200ER
  17                               United Kingdom                       JMC Airlines                  A320-200
  18                               United Kingdom                       JMC Airlines                  B757-200ER
  19                               United Kingdom                       Monarch                       A320-200
     subtotal

  20 NORTH AMERICA                 Canada                               Canada 3000                   A320-200
  21 (Developed)                   Canada                               Air Canada                    A320-200
  22                               United States of America             Alaska Airlines               B737-400
  23                               United States of America             Alaska Airlines               B737-400
  24                               United States of America             Continental                   B737-300
  25                               United States of America             National Airlines             B757-200ER
  26                               United States of America             Southwest                     B737-300
  27                               United States of America             Southwest                     B737-300
  28                               United States of America             TWA                           B757-200ER
  29                               United States of America             TWA                           MD-83
  30                               United States of America             TWA                           MD-82
  31                               United States of America             TWA                           MD-83
     subtotal

  32 PACIFIC                       Hong Kong                            Cathay Pacific                B747-400
  33 (Developed)                   New Zealand                          Air New Zealand               B767-300ER
  34                               Singapore                            Regionair                     A310-300
  35                               Singapore                            Regionair                     A310-300
     subtotal

  36 EUROPE AND                    Czech Republic                       Travel Service a.s.,          B737-400
  37 MIDDLE EAST                   Greece                               Olympic                       B737-400
  38 (Emerging)                    Hungary                              Malev                         F70
  39                               Hungary                              Malev                         F70
  40                               Hungary                              Malev                         F70
  41                               Turkey                               Air Alfa                      A321-100
  42                               Turkey                               Pegasus                       B737-400
     subtotal

  43 ASIA                          China                                China Hainan                  B737-300
  44 (Emerging)                    South Korea                          Asiana                        B767-300ER
  45                               South Korea                          Asiana                        B767-300ER
  46                               South Korea                          Asiana                        B737-400
  47                               South Korea                          Asiana                        B737-400
  48                               Taiwan                               China Airlines                A300-600R
  49                               Taiwan                               China Airlines                A300-600R
  50                               Taiwan                               F.E.A.T.                      B757-200ER
     subtotal

  51 LATIN AMERICA                 Mexico                               Aeromexico                    B757-200ER
  52 (Emerging)                    Mexico                               Aeromexico                    MD-83
  53                               Mexico                               Mexicana                      B757-200ER
     subtotal

  54 OTHER                         Fiji                                 Air Pacific                   B767-300ER
  55                               Iceland                              Icelandair                    B737-300
  56                               Iceland                              Air Atlanta Icelandic         B747-300
  57                               Macau                                Air Macau                     A321-100
  58                               Malta                                Air Malta                     B737-300
  59                               Mauritius                            Air Mauritius                 A340-300
  60                               Lithuania                            Lithuanian Airlines           B737-300
     subtotal

  61 AVAILABLE FOR LEASE           AOG                                  AOG                           A310-300
  62                               AOG                                  AOG                           B737-300
     subtotal
</TABLE>

<TABLE>
<CAPTION>

                                                                                    APPRAISED
                                                                                   VALUE AS OF
                                                 SERIAL                           NOV 30, 1999
     REGION (1)        ENGINE CONFIGURATION      NUMBER     DATE OF MANUFACTURE       ($MM)      % OF FLEET    REGIONAL
     ----------       ----------------------     ------     -------------------   ------------   ----------    --------
<S>                    <C>                       <C>              <C>               <C>              <C>       <C>
   1 EUROPE            JT8D-219                   49822           Dec-88            19.1             1.0%
   2 (Developed)       CFM 56-3C1                 23788           May-87            19.2             1.0%
   3                   CF6-80E1                      54           Apr-94            80.0             4.0%
   4                   V2500-A1                     414           May-93            30.6             1.5%
   5                   V2500-A1                     428           May-94            32.1             1.6%
   6                   CF6-80C2B6F               704279           Jul-95             5.5             0.3%
   7                   PW100-125B                 20233           Oct-91             6.2             0.3%
   8                   PW100-125B                 20232           Oct-91             6.3             0.3%
   9                   CFM 56-3C1                 27635           May-95            27.3             1.4%
  10                   CFM 56-3B1                 25165           Apr-93            19.7             1.0%
  11                   CFM 56-3C1                 26304           Sep-94            21.2             1.1%
  12                   CFM 56-3C1                 24707           Jun-91            24.7             1.2%
  13                   RB211-535-E4               23767           Apr-87            29.7             1.5%
  14                   CF6-80C2B6F                26256           Apr-93            63.8             3.2%
  15                   RB211-535-E4-37            26266           Feb-93            41.2             2.1%
  16                   CF6-80A                    23807           Aug-87            29.5             1.5%
  17                   V2500-A1                     393           Feb-93            30.4             1.5%
  18                   RB211-535-E4-37            24367           Feb-89            31.7             1.6%
  19                   CFM 56-5A3                   446           Oct-93            30.5             1.5%
     subtotal                                                                                                   27.5%

  20 NORTH AMERICA     CFM 56-5A3                   397           Mar-93            30.8             1.5%
  21 (Developed)       CFM 56-5A3                   279           Feb-92            29.9             1.5%
  22                   CFM 56-3C1                 25104           May-93            26.6             1.3%
  23                   CFM 56-3C1                 25105           Jul-93            26.6             1.3%
  24                   CFM 56-3B1                 26309           Dec-94            26.3             1.3%
  25                   RB211-535-E4               24260           Dec-88            33.5             1.7%
  26                   CFM 56-3B1                 23255           Jun-85            14.4             0.7%
  27                   CFM 56-3B1                 23256           Jul-85            15.3             0.8%
  28                   PW 2037                    28160           Jul-96            47.8             2.4%
  29                   JT8D-219                   49657           Apr-88            19.6             1.0%
  30                   JT8D-217C                  49825           Mar-89            17.8             0.9%
  31                   JT8D-219                   49824           Mar-89            20.4             1.0%
    subtotal                                                                                                   15.4%

  32 PACIFIC           RB211-252H2/19             24955           Sep-91            97.4             4.9%
  33 (Developed)       CF6-80C2B6                 24875           Jun-91            57.0             2.9%
  34                   JT9D-7R4E1                   409           Nov-85            22.3             1.1%
  35                   JT9D-7R4E1                   410           Nov-85            22.7             1.1%
     subtotal                                                                                                   10.0%

  36 EUROPE AND        CFM 56-3B2                 24234           Oct-88            21.9             1.1%
  37 MIDDLE EAST       CFM 56-3C1                 25371           Jan-92            25.1             1.3%
  38 (Emerging)        TAY MK620-15               11564           Dec-95            13.7             0.7%
  39                   TAY MK620-15               11565           Feb-96            14.3             0.7%
  40                   TAY MK620-15               11569           Mar-96            14.7             0.7%
  41                   V2530-A5                     597           May-96            39.7             2.0%
  42                   CFM 56-3C1                 26279           Jun-92            25.7             1.3%
     subtotal                                                                                                    7.7%

  43 ASIA              CFM 56-3C1                 26295           Dec-93            25.5             1.3%
  44 (Emerging)        CF6-80C2B6F                24798           Oct-90            53.1             2.7%
  45                   CF6-80C2B6F                25132           Feb-92            60.1             3.0%
  46                   CFM 56-3C1                 26291           Aug-93            27.6             1.4%
  47                   CFM 56-3C1                 26308           Oct-94            27.9             1.4%
  48                   PW 4158                      555           Mar-90            46.3             2.3%
  49                   PW 4158                      625           Mar-92            51.1             2.6%
  50                   PW 2037                    25044           May-91            37.5             1.9%
     subtotal                                                                                                   16.4%

  51 LATIN AMERICA     PW 2037                    26272           Mar-94            41.4             2.1%
  52 (Emerging)        JT8D-219                   53050           May-90            19.7             1.0%
  53                   PW 2040                    24965           Mar-92            39.1             2.0%
     subtotal                                                                                                    5.0%


  54 OTHER             CF6-80C2B4                 26260           Sep-94            66.6             3.3%
  55                   CFM 56-3B2                 23811           Oct-87            19.8             1.0%
  56                   CF6-80C2                   24106           Apr-88            49.0             2.5%
  57                   V2530-A5                     557           Dec-95            38.9             2.0%
  58                   CFM 56-3B2                 25161           Feb-92            24.6             1.2%
  59                   CFM 56-5C3G                   94           Mar-95            91.6             4.6%
  60                   CFM 56-3B2                 24449           Apr-90            21.7             1.1%
     subtotal                                                                                                   15.6%


  61 AVAILABLE FOR     JT9D-7R4E1                   437           Nov-86            27.6             1.4%
     LEASE             CFM 56-3B2                 24299           Nov-88            19.8             1.0%
     subtotal                                                                                                    2.4%
                                                                                 -------           ------      ------
                                                                   Total         2,000.9           100.0%      100.0%
                                                                                 =======           ======      ======

  62
</TABLE>

 (1)  Regions are defined according to the Morgan Stanley Capital
      International designations

<TABLE>
<S>                                                 <C>
 Number of aircraft on lease                            60
 Number aircraft off-lease                               2
 Total number of aircraft                               62
 Number of lessees                                      41
 Number of countries                                    25

 Total developed                                     52.8%
 Total emerging                                      29.2%
 Total other                                         15.6%
 Total AOG                                            2.4%
                                                    ------
                                                    100.0%
                                                    ======
</TABLE>



                                       57


<PAGE>   59
Morgan Stanley Aircraft Finance                                       Appendix B

    COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 1998 BASE CASE FOR MARCH 2000

<TABLE>
<CAPTION>
                                                                                     AMOUNTS STATED IN MILLIONS OF USD
                                                                           --------------------------------------------------
                                                                             ACTUAL              ASSUMED             VARIANCE
<S>               <C>              <C>                                       <C>                 <C>                 <C>
                                   CASH COLLECTIONS
    [1]                            Lease Rentals                              12.2                 12.2                 (0.0)
    [2]                            - Renegotiated Leases                      (0.1)                  --                 (0.1)
    [3]                            - Rental Resets                            (0.4)                  --                 (0.4)
                                                                           --------------------------------------------------
    [4]             [1].....[3]    CONTRACTED LEASE RENTALS                   11.7                 12.2                 (0.5)

    [5]                            Movement in Current Arrears Balance         0.2                   --                  0.2

                                   less Net Stress-related Costs
    [6]                             - Bad Debts                                 --
    [7]                             - Security Deposits Drawn Down              --
    [8]                             - Restructured Arrears                    (0.1)
    [9]                             - Aircraft on Ground ("AOG")              (1.2)
    [10]                            - Other Leasing Income                     0.3
    [11]                            - Repossession costs                      (0.1)
                                                                           --------------------------------------------------
    [12]            [6]....[11]    sub-total                                  (1.1)                (0.5)                (0.6)

    [13]         [4]+[5]+[12]      NET LEASE RENTALS                          10.8                 11.7                 (0.9)

                                                                           --------------------------------------------------
    [14]                           Interest Earned                             0.1                  0.1                 (0.0)

                                                                           --------------------------------------------------
    [15]                           Drawings from Expense Account               1.2                   --                  1.2

                                   Maintenance Receipts                        0.9                   --                  0.9
                                   Maintenance Expenditure                    (1.1)                  --                 (1.1)
                                                                           --------------------------------------------------
    [16]                           Net Maintenance                            (0.2)                  --                 (0.2)

    [17]      [13] + [14] +[15] +  TOTAL CASH COLLECTIONS                     11.9                 11.8                  0.1
                     [16]
                                                                           ==================================================

                                   CASH EXPENSES
                                   Aircraft Operating Expenses
    [18]                            - Insurance                                 --
    [19]                            - Re-leasing and other overheads          (0.1)
                                                                           --------------------------------------------------
    [20]           [18]+[19]       sub-total                                  (0.1)                (0.4)                 0.3

                                   SG&A Expenses
    [21]                           Aircraft Servicer Fees
                                    - Base Fee                                (0.1)
                                    - Rent Collected Fee                      (0.1)
                                    - Rent Contracted Fee                     (0.1)
                                    - Incentive Fee                             --
                                                                           --------------------------------------------------
    [22]                           sub-total                                  (0.3)                (0.5)                 0.2

                                    - Cabot                                   (0.1)                (0.2)                 0.1
                                    - Other                                   (0.1)                (0.1)                  --
                                                                           --------------------------------------------------
    [23]                           Other Servicer Fees                        (0.2)                (0.3)                 0.1

    [24]           [22]+[23]       sub-total                                  (0.5)                (0.8)                 0.3

    [25]          [20] +[24]       TOTAL CASH EXPENSES                        (0.6)                (1.2)                 0.6
                                                                           ==================================================

                                   NET CASH COLLECTIONS
    [26]             [17]          Total Cash Collections                     11.9                 11.8                  0.1
    [27]             [25]          Total Cash Expenses                        (0.6)                (1.2)                 0.6
    [28]                           Accrued Expenses                           (0.8)                  --                 (0.8)
    [29]                           Interest Payments                          (4.9)                (4.9)                 0.0
    [30]                           Swap Payments                              (0.4)                (0.5)                 0.1
    [31]                           Exceptional Items                            --                   --                   --
                                                                           --------------------------------------------------
    [32]            [26]...[31]      TOTAL                                     5.2                  5.2                  0.0
                                                                           ==================================================


    [33]                           PRINCIPAL PAYMENTS
                                   subclass A1                                  --                   --                   --
                                   subclass A2                                 4.8                  4.8                   --
                                   subclass A3                                  --                   --                   --
                                   subclass A4                                  --                   --                   --
                                   subclass A5                                  --                   --                   --
                                   subclass B1                                 0.3                  0.3                   --
                                   subclass B2                                  --                   --                   --
                                   subclass C1                                 0.1                  0.1                   --
                                   subclass C2                                  --                   --                   --
                                   subclass D1                                  --                   --                   --
                                                                           --------------------------------------------------
                                   TOTAL                                        5.2                  5.2                  --
                                                                           ==================================================


                                   DEBT BALANCES AS AT MARCH 15, 2000
                                   subclass A1                                400.0                400.0                  --
                                   subclass A2                                224.7                232.0                (7.3)
                                   subclass B1                                 89.7                 89.7                (0.0)
                                   subclass C1                                 99.9                 99.9                  --
                                   subclass D1                                110.0                110.0                  --
                                                                           --------------------------------------------------
                                   TOTAL                                      924.3                931.6                (7.3)
                                                                           --------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                 % OF 1998 BASE CASE
                                                                                      ----------------------------------------
                                                                                       ACTUAL          ASSUMED        VARIANCE
<S>               <C>              <C>                                                 <C>             <C>            <C>
                                   CASH COLLECTIONS
    [1]                            Lease Rentals                                       100.0%          100.0%            0.0%
    [2]                            - Renegotiated Leases                                -0.8%            0.0%           -0.8%
    [3]                            - Rental Resets                                      -3.3%            0.0%           -3.3%
                                                                                      ----------------------------------------
    [4]             [1].....[3]      CONTRACTED LEASE RENTALS                           95.9%          100.0%           -4.1%

    [5]                            Movement in Current Arrears Balance                   1.6%            0.0%            1.6%

                                   less Net Stress-related Costs
    [6]                             - Bad Debts                                          0.0%
    [7]                             - Security Deposits Drawn Down                       0.0%
    [8]                             - Restructured Arrears                              -0.8%
    [9]                             - Aircraft on Ground ("AOG")                        -9.8%
    [10]                            - Other Leasing Income                               2.5%
    [11]                            - Repossession costs                                -0.8%
                                                                                      ----------------------------------------
    [12]            [6]....[11]    sub-total                                            -9.0%           -4.5%           -4.5%

    [13]         [4]+[5]+[12]      NET LEASE RENTALS                                    88.5%           95.5%           -7.0%

                                                                                      ----------------------------------------
   [14]                            Interest Earned                                       0.8%            1.0%           -0.2%

                                                                                      ----------------------------------------
   [15]                            Drawings from Expense Account                         9.8%            0.0%            9.8%

                                   Maintenance Receipts                                  7.4%            0.0%            7.4%
                                   Maintenance Expenditure                              -9.0%            0.0%           -9.0%
                                                                                      ----------------------------------------
   [16]                            Net Maintenance                                      -1.6%            0.0%           -1.6%

   [17]       [13] + [14] +[15] +  TOTAL CASH COLLECTIONS                               97.5%           96.5%            1.0%
                     [16]
                                                                                      ========================================

                                   CASH EXPENSES
                                   Aircraft Operating Expenses
   [18]                             - Insurance                                          0.0%
   [19]                             - Re-leasing and other overheads                    -0.8%
                                                                                      ----------------------------------------
   [20]            [18]+[19]       sub-total                                            -0.3%           -3.5%            3.2%

                                   SG&A Expenses
   [21]                            Aircraft Servicer Fees
                                    - Base Fee                                          -1.3%
                                    - Rent Collected Fee                                -0.8%
                                    - Rent Contracted Fee                                0.7%
                                    - Incentive Fee                                      0.0%
                                                                                      ----------------------------------------
   [22]                            sub-total                                            -2.8%           -4.1%            1.3%

                                    - Cabot                                             -1.2%           -1.4%            0.2%
                                    - Other                                             -0.3%           -1.0%            0.7%
                                                                                      ----------------------------------------
   [23]                            Other Servicer Fees                                  -1.5%           -2.4%            0.9%

   [24]            [22]+[23]       sub-total                                            -4.3%           -6.5%            2.2%

   [25]           [20] +[24]       TOTAL CASH EXPENSES                                  -4.6%          -10.0%            5.4%
                                                                                      ========================================

                                   NET CASH COLLECTIONS
   [26]              [17]          Total Cash Collections                               97.5%           96.5%            1.1%
   [27]              [25]          Total Cash Expenses                                  -4.6%          -10.0%            5.4%
   [28]                            Accrued Expenses                                     -6.6%            0.0%           -6.6%
   [29]                            Interest Payments                                   -40.7%          -40.7%            0.0%
   [30]                            Swap Payments                                        -3.1%           -3.2%            0.1%
   [31]                            Exceptional Items                                     0.0%            0.0%            0.0%
                                                                                      ----------------------------------------
   [32]             [26]...[31]      TOTAL                                              42.6%           42.6%            0.0%
                                                                                      ========================================


   [33]                            PRINCIPAL PAYMENTS
                                   subclass A1                                           0.0%            0.0%            0.0%
                                   subclass A2                                          39.3%           39.3%            0.0%
                                   subclass A3                                           0.0%            0.0%            0.0%
                                   subclass A4                                           0.0%            0.0%            0.0%
                                   subclass A5                                           0.0%            0.0%            0.0%
                                   subclass B1                                           2.5%            2.5%            0.0%
                                   subclass B2                                           0.0%            0.0%            0.0%
                                   subclass C1                                           0.8%            0.8%            0.0%
                                   subclass C2                                           0.0%            0.0%            0.0%
                                   subclass D1                                           0.0%            0.0%            0.0%
                                                                                      ----------------------------------------
                                   TOTAL                                                42.6%           42.6%            0.0%
                                                                                      ========================================
</TABLE>



                                       58

<PAGE>   60
                                                                      APPENDIX C

MORGAN STANLEY AIRCRAFT FINANCE      COMPARISON OF ACTUAL CASH FLOWS VERSUS THE
                                        2000 BASE CASE FOR APRIL/MAY 2000

<TABLE>
<CAPTION>
                                                                                      AMOUNTS STATED IN MILLIONS OF USD
                                                                         -----------------------------------------------------------
                                                                                     ACTUAL         ASSUMED              VARIANCE
                                                                         -----------------------------------------------------------

     <S>           <C>              <C>                                              <C>            <C>                  <C>
                                    CASH COLLECTIONS
     [1]                            Lease Rentals                                      44.5             44.5                --
     [2]                             - Renegotiated Leases                               --               --                --
     [3]                             - Rental Resets                                     --               --                --
                                                                         ------------------------------------------------------
     [4]             [1].....[3]    CONTRACTED LEASE RENTALS                           44.5             44.5                --
                                                                                         --               --
     [5]                            Movement in Current Arrears Balance                (0.9)              --              (0.9)

                                    less Net Stress-related Costs
     [6]                             - Bad Debts                                         --               --                --
     [7]                             - Security Deposits Drawn Down                      --               --                --
     [8]                             - Restructured Arrears                              --               --                --
     [9]                             - Aircraft on Ground ("AOG")                      (0.7)              --                --
    [10]                             - Other Leasing Income                            (1.2)              --                --
    [11]                             - Repossession costs                              (0.1)              --                --
                                                                         ------------------------------------------------------
    [12]             [6]....[11]    sub-total                                          (2.0)            (2.0)               --

    [13]          [4]+[5]+[12]      NET LEASE RENTALS                                  41.6             42.5              (0.9)

                                                                         ------------------------------------------------------
    [14]                            Interest Earned                                     0.6              0.4               0.2

                                                                         ------------------------------------------------------
    [15]                            Drawings from Expense Account                       5.1               --               5.1

                                    Maintenance Receipts                                4.0               --               4.0
                                    Maintenance Expenditure                            (7.1)              --              (7.1)
                                                                         ------------------------------------------------------
    [16]                            Net Maintenance                                    (3.1)              --              (3.1)

    [17]       [13] + [14] +[15] +  TOTAL CASH COLLECTIONS                             44.2             42.9               1.3
                      [16]
                                                                         ======================================================


                                    CASH EXPENSES
                                    Aircraft Operating Expenses
    [18]                             - Insurance                                       (0.2)
    [19]                             - Re-leasing and other overheads                  (0.1)
                                                                         ------------------------------------------------------
    [20]            [18]+[19]       sub-total                                          (0.3)            (0.3)               --

                                    SG&A Expenses
    [21]                            Aircraft Servicer Fees
                                     - Base Fee                                        (0.5)
                                     - Rent Collected Fee                              (0.5)
                                     - Rent Contracted Fee                             (0.5)
                                     - Incentive Fee                                     --
                                                                         ------------------------------------------------------
    [22]                            sub-total                                          (1.5)            (1.5)               --

                                     - Cabot                                           (0.2)            (0.2)               --
                                     - Other                                           (0.6)            (0.2)             (0.4)
                                                                         ------------------------------------------------------
    [23]                            Other Servicer Fees                                (0.8)            (0.4)             (0.4)

    [24]            [22]+[23]       sub-total                                          (2.3)            (1.9)             (0.4)

    [25]           [20] +[24]       TOTAL CASH EXPENSES                                (2.6)            (2.2)             (0.4)
                                                                         ======================================================


                                    NET CASH COLLECTIONS
    [26]              [17]          Total Cash Collections                             44.2             42.9               1.3
    [27]              [25]          Total Cash Expenses                                (2.6)            (2.2)             (0.4)
    [28]                            Accrued Expenses                                   (3.9)               --             (3.9)
    [29]                            Interest Payments                                 (21.1)           (20.9)             (0.2)
    [30]                            Swap Payments                                      (1.6)            (1.8)              0.2
    [31]                            Exceptional Items                                    --               --                --
                                                                         ------------------------------------------------------
    [32]             [26]...[31]    TOTAL                                              15.0             18.0              (3.0)
                                                                         ======================================================


    [33]                            PRINCIPAL PAYMENTS
                                    subclass A2                                         1.3              2.4              (1.1)
                                    subclass A3                                          --               --                --
                                    subclass A4                                          --               --                --
                                    subclass A5                                        12.5             14.4              (1.9)
                                    subclass B1                                         1.1              1.1                --
                                    subclass B2                                          --               --                --
                                    subclass C1                                         0.1              0.1                --
                                    subclass C2                                          --               --                --
                                    subclass D1                                          --               --                --
                                                                         ------------------------------------------------------
                                    TOTAL                                              15.0             18.0              (3.0)
                                                                         ======================================================


                                    DEBT BALANCES                                 15-MAY-00        15-MAY-00
                                    -------------                                 ---------        ---------
                                    subclass A2                                       223.4            222.3               1.1
                                    subclass A3                                       580.0            580.0                --
                                    subclass A4                                       200.0            200.0                --
                                    subclass A5                                       387.5            385.6               1.9
                                    subclass B1                                        88.6             88.6                --
                                    subclass B2                                        75.0             75.0                --
                                    subclass C1                                        99.8             99.8                --
                                    subclass C2                                        55.0             55.0                --
                                    subclass D1                                       110.0            110.0                --
                                                                         ------------------------------------------------------
                                    TOTAL                                           1,819.3          1,816.3               3.0
                                                                         ======================================================

</TABLE>
<TABLE>
<CAPTION>
                                                                                              % OF 2000 BASE CASE

                                                                               --------------------------------------------------
                                                                                    ACTUAL           ASSUMED        VARIANCE
                                                                               --------------------------------------------------
<S>                <C>              <C>                                             <C>              <C>            <C>
                                    CASH COLLECTIONS
     [1]                            Lease Rentals                                  100.0%           100.0%            0.0%
     [2]                             - Renegotiated Leases                           0.0%             0.0%            0.0%
     [3]                             - Rental Resets                                 0.0%             0.0%            0.0%
                                                                               --------------------------------------------------
     [4]             [1].....[3]    CONTRACTED LEASE RENTALS                       100.0%           100.0%            0.0%

     [5]                            Movement in Current Arrears Balance             -2.0%             0.0%           -2.0%

                                    less Net Stress-related Costs
     [6]                             - Bad Debts                                     0.0%
     [7]                             - Security Deposits Drawn Down                  0.0%
     [8]                             - Restructured Arrears                          0.0%
     [9]                             - Aircraft on Ground ("AOG")                   -1.6%
    [10]                             - Other Leasing Income                         -2.7%
    [11]                             - Repossession costs                           -0.2%
                                                                               --------------------------------------------------
    [12]             [6]....[11]    sub-total                                       -4.5%            -4.5%            0.0%

    [13]          [4]+[5]+[12]      NET LEASE RENTALS                               93.5%            95.5%           -2.0%

                                                                               --------------------------------------------------
    [14]                            Interest Earned                                  1.3%             1.0%            0.3%

                                                                               --------------------------------------------------
    [15]                            Drawings from Expense Account                   11.5%             0.0%           11.5%

                                    Maintenance Receipts                             9.0%                             9.0%
                                    Maintenance Expenditure                        -16.0%                           -16.0%
                                                                               --------------------------------------------------
    [16]                            Net Maintenance                                  -7.0%            0.0%           -7.0%
                                                                               ==================================================

    [17]       [13] + [14] +[15] +  TOTAL CASH COLLECTIONS                           99.3%           96.5%            2.8%
                      [16]


                                    CASH EXPENSES
                                    Aircraft Operating Expenses
    [18]                             - Insurance                                     -0.5%
    [19]                             - Re-leasing and other overheads                -0.3%
                                                                               --------------------------------------------------
    [20]            [18]+[19]       sub-total                                        -0.8%           -0.8%            0.0%

                                    SG&A Expenses
    [21]                            Aircraft Servicer Fees
                                     - Base Fee                                      -1.1%
                                     - Rent Collected Fee                            -1.1%
                                     - Rent Contracted Fee                           -1.1%
                                     - Incentive Fee                                  0.0%
                                                                               --------------------------------------------------
    [22]                            sub-total                                        -3.4%           -3.4%            0.0%

                                     - Cabot                                         -0.4%           -0.4%            0.0%
                                     - Other                                         -1.3%           -0.4%           -0.9%
                                                                               --------------------------------------------------
    [23]                            Other Servicer Fees                              -1.7%           -0.8%           -0.9%

    [24]            [22]+[23]       sub-total                                        -5.1%           -4.2%           -0.9%

    [25]           [20] +[24]       TOTAL CASH EXPENSES                              -5.9%           -5.0%           -0.9%
                                                                               ==================================================

                                    NET CASH COLLECTIONS
    [26]              [17]          Total Cash Collections                           99.3%           96.5%            2.8%
    [27]              [25]          Total Cash Expenses                              -5.9%           -5.0%           -0.9%
    [28]                            Accrued Expenses                                 -8.8%            0.0%           -8.8%
    [29]                            Interest Payments                               -47.4%          -47.0%           -0.4%
    [30]                            Swap Payments                                    -3.6%           -4.0%            0.4%
    [31]                            Exceptional Items                                 0.0%            0.0%            0.0%
                                                                               --------------------------------------------------
    [32]             [26]...[31]    TOTAL                                            33.7%           40.5%           -6.8%
                                                                               ==================================================


    [33]                            PRINCIPAL PAYMENTS
                                    subclass A2                                      2.9%             5.4%           -2.5%
                                    subclass A3                                      0.0%             0.0%            0.0%
                                    subclass A4                                      0.0%             0.0%            0.0%
                                    subclass A5                                     28.1%            32.4%           -4.3%
                                    subclass B1                                      2.5%             2.5%            0.0%
                                    subclass B2                                      0.0%             0.0%            0.0%
                                    subclass C1                                      0.2%             0.2%            0.0%
                                    subclass C2                                      0.0%             0.0%            0.0%
                                    subclass D1                                      0.0%             0.0%            0.0%
                                                                               --------------------------------------------------
                                    TOTAL                                           33.7%            40.5%           -6.8%
                                                                               ==================================================
</TABLE>


                                       59
<PAGE>   61

Morgan Stanley               Debt Coverage Ratios                  Appendix D
Aircraft Finance          2nd Quarter -- May 15, 2000
<TABLE>
<CAPTION>
                                                             2000
                                      CLOSING    ACTUAL    BASE CASE    VARIANCE
                                      -------    ------    ---------    --------
<S>                                   <C>        <C>       <C>          <C>
     SOURCE OF FUNDS
     Net Cash Collections                         15.0       18.0        (3.00)
     Add Back Interest Payments                   21.1       20.9         0.20
     Add Back Swap Payments                        1.6        1.8        (0.20)
                                                  ----       ----        -----
a                                                 37.7       40.7        (3.00)
                                                  ----       ----        -----
     APPLICATION OF FUNDS
b    Swaps                                         1.6        1.8        (0.20)
c    Class A Interest                             15.6       15.4         0.20
d    Class A Minimum                               4.9        4.9         0.00
e    Class B Interest                              1.9        1.9         0.00
f    Class B Minimum                               1.0        1.0         0.00
g    Class C Interest                              2.0        2.0         0.00
h    Class C Minimum                                --         --         0.00
I    Class D Interest                              1.6        1.6         0.00
j    Class D Minimum                                --         --         0.00
k    Class A Scheduled                             0.1        0.1         0.00
l    Class B Scheduled                             0.1        0.1         0.00
m    Class C Scheduled                             0.1        0.1         0.00
n    Class D Scheduled                              --         --         0.00
o    Permitted Aircraft Modifications               --         --         0.00
p    Class A Supplemental                          8.8       11.8        (3.00)
                                                  ----       ----        -----
     Total                                        37.7       40.7        (3.00)
                                                  ====       ====        =====
</TABLE>

<TABLE>
<S>                                <C>      <C>
[1]  Interest Coverage Ratio
     Class A                       2.19     2.37 = a/(b+c)
     Class B                       1.57     1.70 = a/(b+c+d+e)
     Class C                       1.40     1.51 = a/(b+c+d+e+f+g)
     Class D                       1.32     1.43 = a/(b+c+d+e+f+g+h+i)

[2]  Debt Coverage Ratio
     Class A                       1.31     1.42 = a/(b+c+d+e+f+g+h+i+j+k)
     Class B                       1.31     1.42 = a/(b+c+d+e+f+g+h+i+j+k+l)
     Class C                       1.30     1.41 = a/(b+c+d+e+f+g+h+i+j+k+l+m)
     Class D                       1.30     1.41 = a/(b+c+d+e+f+g+h+i+j+k+l+m+n)
</TABLE>

<TABLE>
<CAPTION>
                                    2000 Base Case                 Actual                 2000 Base Case
     Loan-to-Value Ratios              15-Mar-00                 15-May-00                   15-May-00
     --------------------           --------------               ---------                --------------

<S>                                 <C>              <C>         <C>             <C>        <C>              <C>
[3]  Assumed Portfolio Value           2,000.9                     1,987.1                     1,987.1

     Cash                                 30.0                        30.0                        30.0
     - Accrued Expenses                    6.0                         4.5                         4.5
     - Security Deposits                   7.1                        10.2                        10.2
     subtotal cash                        43.1                        44.7                        44.7
     Letters of Credit                    82.1                        78.9                        78.9
                                       -------                     -------                     -------
     Total Liquidity Reserve             125.2                       123.6                       123.6

[4]  Total Asset Value                 2,126.2                     2,109.1                     2,109.1

     Note Balance
     ------------
     Class A                           1,404.7        66.1%        1,390.9       65.9%         1,387.9       65.8%
     Class B                             164.7        73.8%          163.6       73.7%           163.6       73.6%
     Class C                             154.9        81.1%          154.8       81.0%           154.8       80.9%
     Class D                             110.0        86.3%          110.0       86.3%           110.0       86.1%
                                       -------                     -------                     -------
     Total                             1,834.3                     1,819.3                     1,816.3
                                       =======                     =======                     =======
</TABLE>

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

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

[3] Assumed Portfolio Value represents the Inital Appraised Value of each
aircraft in the Portfolio multiplied by the Depreciation Factor at Calculation
date divided by the Depreciation Factor at Closing date.

[4] Total Asset Value is equal to Total Portfolio Value plus Liquidity Reserve
Amount


                                     60