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MILITARY AIRCRAFT; MISSILES, SPACE, AND ELECTRONIC SYSTEMS

     McDonnell  Douglas  Aerospace  and  Military  Transport  Aircraft  are  the
defense-related operating units of McDonnell Douglas Corp.

MCDONNELL DOUGLAS AEROSPACE (Primary locations)
-----------------------------------------------
TACTICAL AIRCRAFT AND MISSILE SYSTEMS
-------------------------------------
ST. LOUIS, MISSOURI
EMPLOYEES: 23,700 worldwide (including 20,000 in St. Louis)
HISTORY: Founded as the McDonnell Aircraft Co. in 1939 by James S. McDonnell.
MARKETS SERVED: U.S. and other national and international armed forces.
PRODUCTS/SERVICES:  F-15 Eagle dual-role fighter; multimission F/A-18 Hornet and
Super  Hornet  (in  development)   strike   fighters;   AV-8B  Harrier  II  Plus
vertical/short  takeoff and landing  tactical  aircraft;  T-45 Training  System;
Harpoon anti-ship missile; Standoff Land Attack Missile (SLAM) and SLAM Expanded
Response (in development);  Joint Direct Attack Munition (in development); Joint
Air-to-Surface  Standoff  Missile (in  development);  T-38 avionics  upgrade (in
development);  ACES II  ejection  seat;  training  systems,  technical  support;
research and development in aerospace structures, avionics, and systems.

HELICOPTER SYSTEMS
------------------
MESA, ARIZONA
EMPLOYEES: 3,200
HISTORY:  In 1984,  McDonnell  Douglas purchased Hughes  Helicopters,  which was
founded in 1934 by Howard R. Hughes Jr.
MARKETS  SERVED:  U.S.  and  other  national  and  international  armed  forces;
commercial   light-helicopter   operators;   police  forces  and  public-service
providers, including air ambulance services.
PRODUCTS/SERVICES:  AH-64D Apache Longbow multirole combat  helicopters;  MD 500
and MD 600 series of light helicopters,  most of which feature the NOTAR [TM](or
no-tail-rotor)  system for  anti-torque  and  directional  control;  MD Explorer
twin-turbine helicopter with the NOTAR system; and ordnance.

SPACE AND DEFENSE SYSTEMS
-------------------------
HUNTINGTON BEACH, CALIFORNIA
EMPLOYEES: 10,500 worldwide (including 6,800 in Huntington Beach)
HISTORY: Space and Defense Systems was formed from portions of the McDonnell and
Douglas aircraft companies, which were pioneers in U.S. space exploration.
MARKETS SERVED: U.S. National Aeronautics and Space Administration  (NASA); U.S.
military services; other national governments and space agencies; U.S. and other
national and international commercial-satellite manufacturers.
PRODUCTS/SERVICES:   Delta   II   medium-class   launch   vehicle;   Delta   III
intermediate-class  rocket (in development);  Delta IV family of small,  medium,
and heavy launch vehicles (in  development);  International  Space Station truss
structure and major systems;  payload  integration;  Mast Mounted Sight, Thermal
Imaging Sensor System, and other electronic systems.

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MILITARY TRANSPORT AIRCRAFT (Primary location)
----------------------------------------------
LONG BEACH, CALIFORNIA
EMPLOYEES: 9,400 (including 8,300 in Long Beach)
HISTORY:  Established in a 1996 reorganization,  the Military Transport Aircraft
division manages several transport and tanker aircraft programs.  Primarily,  it
builds the C-17  Globemaster III transport  airlifter,  which began as a Douglas
Aircraft  Co.  program.   Associated   facilities  operate  in  Macon,  Georgia;
Charleston, South Carolina; and Tulsa, Oklahoma.
MARKETS  SERVED:  U.S.  armed forces;  other  national and  international  armed
forces; and the commercial heavy-cargo transport industry.
PRODUCTS/SERVICES:  C-17 Globemaster III; KC-10/KDC-10 tankers; MD-17 commercial
heavy freighter (in development);  YC-15 technology demonstrator;  C-9D Skytrain
III; and the Advanced Transport Aircraft Systems research unit.

C-17 GLOBEMASTER III       [PICTURE OMITTED]
--------------------
The  most  versatile  airlifter  in  aviation  history,  the  C-17  can fly long
distances;  land on short,  unimproved  runways  close to the front  lines;  and
deliver heavy cargo. In 1996, the C-17 received Flight International's Aerospace
Industry  Award for the  manner  in which  the  airlifter  was  introduced  into
service.  In its first two years of  operational  service  (1995 and 1996),  the
Globemaster  III quickly  established  itself as the U.S.  Air  Force's  primary
airlifter.  It supported U.S.  peacekeeping and  humanitarian  relief efforts in
Bosnia (pictured),  Liberia,  Kuwait, Saudi Arabia, Rwanda, and other countries.
In Bosnia,  a squadron  of C-17s flew 25 percent of the  missions,  carrying  60
percent of the cargo to small airfields.  In 1996, the U.S.  government signed a
seven-year $14.2 billion contract with McDonnell Douglas for 80 C-17s beyond the
40 for which it had  previously  committed.  Meanwhile,  the C-17 passed fatigue
testing  equivalent to three design lifetimes (90,000 hours).  McDonnell Douglas
began efforts to certify and market a commercial version--the MD-17-- which will
serve a niche market for the delivery of outsize cargo,  such as large pieces of
oil exploration equipment,  construction equipment, or aerospace components. The
company  delivered  six new  C-17s  in 1996  and  refurbished  three of the test
aircraft, raising the number of Globemaster IIIs in USAF service to 28. A number
of potential customers abroad have expressed interest in the aircraft.

PROPULSION:  Four Pratt & Whitney  F117-PW-100 series turbofans,  each producing
40,440 lb. of thrust and  equipped  with  directed-flow  thrust  reversers  that
enable the C-17 to land on short runways and to back up while fully loaded.
DIMENSIONS:  Length 174 ft. (53 m.);  height 55 ft. (16.8 m.); 
wingspan 170 ft. (51.8 m.).
MAXIMUM PAYLOAD: 169,000 lb. (76,658 kg.).
CREW MEMBERS: Two pilots, one loadmaster.

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F/A-18 HORNET     [PICTURE OMITTED]
-------------
The F/A-18 is a multimission  aircraft known as a strike fighter. It is flown by
the U.S.  Navy and  Marine  Corps and by the air  forces of  Canada,  Australia,
Spain,  Kuwait,  Finland,  and  Switzerland.  It is the first tactical  aircraft
designed  from its  inception  to carry out both  air-to-air  and  air-to-ground
missions,  to operate  reliably,  and to be easy to  maintain  even  during long
periods when it is based on aircraft  carriers in the corrosive  environment  at
sea.  Production began in 1977. The upgraded Night Strike F/A-18C/D,  introduced
in 1989,  enables  crews to fly at night and in adverse  weather,  with improved
survivability  and  the  ability  to use a  greater  range  of  precision-guided
weapons. In 1996, McDonnell Douglas delivered 26 F/A-18C/Ds, including the first
two of  Switzerland's  34 Hornets.  The company also delivered 18 F/A-18 kits to
Finland and Switzerland, which are conducting final assembly of most of their 64
and 34 Hornets, respectively. By the end of the year, Finland had taken delivery
of 11 Hornets.  Delivery of  Malaysia's  eight Hornets will begin in March 1997.
Thailand's eight Hornets are to be delivered in 1999.

PROPULSION:   In  the  F/A-18C/D,  two  General  Electric  F404-GE-402  engines,
delivering 35,400 lb. of combined thrust (17,700 lb. each).
MAXIMUM PAYLOAD: Up to 14,900 lb. (6,757 kg.) externally.
DIMENSIONS: Length 56 ft. (17.1 m.); height 15.3 ft. (4.7 m.); 
wingspan 40.4 ft. (12.3 m.).
CREW MEMBERS: One in F/A-18A and C; two in F/A-18B and D.

F/A-18E/F SUPER HORNET     [PICTURE OMITTED]
----------------------
The F/A-18E/F Super Hornet will be the centerpiece of U.S. naval aviation as the
21st century unfolds.  Now in development and testing,  it is scheduled to enter
operational  service with the U.S.  Navy in 2001.  The Super Hornet adds greater
range and payload-carrying  ability, improves the Hornet's benchmark reliability
and maintainability, and allows for the extensive integration of new systems and
technologies.  It also  incorporates  stealth and other features to improve crew
survivability  significantly.  The first  flight was in November  1995.  By late
1996,  the Navy and McDonnell  Douglas were  flight-testing  five  developmental
aircraft.  During its initial sea trials in January 1997,  the Super Hornet made
its first arrested landings and catapulted  launches aboard an aircraft carrier.
The Department of the Navy has indicated a potential  purchase of 1,000 aircraft
-- at an  estimated  program  cost of $80  billion  -- through  2015.  McDonnell
Douglas is the prime contractor and Northrop Grumman the principal subcontractor
for all versions of the F/A-18.

PROPULSION:  Two General Electric F414 turbofan engines, producing 44,000 lb. of
combined thrust (22,000 lb. each).
MAXIMUM PAYLOAD: Up to 17,750 lb. (8,051 kg.) externally.
DIMENSIONS: Length 60.3 ft. (18.4 m.); height 16 ft. (4.9 m.); 
wingspan 44.9 ft. (13.7 m.).
CREW MEMBERS: One in F/A-18E; two in F/A-18F.

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F-15 EAGLE        [PICTURE OMITTED]
----------
The F-15 (A, B, C, and D versions)  was  originally  designed  for the U.S.  Air
Force as the world's premier  air-superiority  fighter.  The latest version, the
F-15E Strike Eagle, adds the capability for long-range, precision air-to-surface
interdiction,  making  the  Eagle  the  USAF's  most  able  fighter-bomber.  The
versatile,  dual-role aircraft carries a variety of air-to-air and air-to-ground
weapons. It can operate around the clock and in any weather. F-15 production has
been extended into 1999 by orders for 72 F-15S  aircraft for Saudi Arabia and 25
F-15I  aircraft  for  Israel.  In 1996,  ten F-15S  Eagles were  delivered,  and
assembly  began on the first F-15I.  The U.S. Air Force  procured six  attrition
F-15Es in fiscal year 1996,  and funding has been approved for six more aircraft
in fiscal year 1997.

PROPULSION:  Two Pratt & Whitney  F100-PW-100/220s  (25,000 lb.  thrust each) in
F-15C/D; two  F100-PW-220/229s  (29,000 lb. thrust each) in F-15E.  The General
Electric F110-GE-129 (29,000 lb. thrust each) is also an option.
MAXIMUM  PAYLOAD:  Up to 23,000 lb.  (10,433  kg.) in F-15C/D;  up to 19,000 lb.
(8,618 kg.) in F-15E (with conformal fuel tanks).
DIMENSIONS:  Length 63.8 ft. (19.5 m.); height 18.6 ft. (5.6 m.); 
wingspan 42.8 ft. (13 m.).
CREW MEMBERS: One in F-15A and C; one or two in F-15B and D trainers;
two in tactical F-15E.

AV-8B HARRIER II PLUS      [PICTURE OMITTED]
---------------------
With its  capability  for vertical and short  takeoffs and  landings,  the AV-8B
Harrier II can operate where other fixed-wing aircraft cannot. McDonnell Douglas
and British  Aerospace  jointly  developed the Harrier II in the early 1980s for
the U.S. Marine Corps and the British Royal Air Force. It is designed to provide
fast and  effective  interdiction  and support to forces on the ground.  The new
radar-equipped  configuration--called the Harrier II Plus (pictured)-- makes the
aircraft even more accurate and versatile.  Assembly of the Harrier II Pluses by
Spain and Italy -- partners  with the United States in the  development  of this
upgraded  aircraft -- will  continue  through  the  decade.  Through the Marines
Corps' remanufacturing  program, 72 day-attack Harriers IIs now in the fleet are
being converted to Harrier II Plus aircraft.  Remanufactured Harriers gain a new
service life at two-thirds  the cost of all-new  aircraft.  Four  remanufactured
Harrier II Pluses were delivered to the U.S. Marines in 1996.

PROPULSION:  One Rolls-Royce F402-RR-408 turbofan engine,  delivering 23,800 lb.
of thrust.
MAXIMUM PAYLOAD: 11,795 lb. (5,350 kg.) externally.
DIMENSIONS: Length 47.8 ft. (14.6 m.); height 11.6 ft. (3.5 m.);
wingspan 30.3 ft. (9.2 m.).
CREW MEMBERS: One (two in TAV-8B trainer).

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T-45 TRAINING SYSTEM (T45TS)        [PICTURE OMITTED]
---------------------------
The T45TS is the first totally integrated training system developed for and used
by the U.S.  Navy.  It includes  the T-45A  Goshawk  aircraft,  advanced  flight
simulators, academics,  computer-assisted instructional programs, a computerized
training-integration   system,  and  a  contractor  logistics  support  package.
McDonnell  Douglas and British  Aerospace  share  production  of the T-45A,  and
Hughes Training Inc. is the principal  subcontractor  for the simulators.  Plans
call for a total of 187 T-45A  Goshawks to be delivered  to the Navy.  Nine were
delivered in 1996. Fourteen more are scheduled for 1997. Training with the T45TS
began in January 1994. T-45 flying hours surpassed 100,000 in February 1997.

PROPULSION:  One Rolls-Royce F405-RR-401 Adour turbofan engine,  producing 5,845
lb. of thrust.
DIMENSIONS: Length 39.3 ft. (12 m.); height 13.5 ft. (4.1 m.);
wingspan 30.8 ft. (9.4 m.).
CREW MEMBERS: Two -- one instructor and one student pilot.

AH-64D APACHE LONGBOW       [PICTURE OMITTED]
---------------------
The  AH-64D  Apache  Longbow  is the  modernized,  more  capable  version of the
battle-proven  AH-64A  Apache.  The  AH-64D  is  the  most  lethal,  survivable,
deployable,  and maintainable multimission combat helicopter in the world. It is
available with or without the  distinctive  fire-control  radar dome. The Apache
Longbow  has a unique  ability to let pilots  see and share  information  on the
digital battlefield. That gives battlefield commanders the information they need
to make critical  decisions  rapidly.  In 1996,  McDonnell  Douglas delivered 38
AH-64A Apaches.  The U.S. Army plans to remanufacture  more than 750 AH-64s into
Apache Longbow.  Production of the AH-64Ds began in 1996; first delivery will be
in March 1997. Also awaiting delivery of AH-64Ds are the Netherlands,  which has
ordered 30, and the United Kingdom, which has ordered 67.

PROPULSION: Two General Electric T700-GE-701C turbine engines.
MAXIMUM PAYLOAD: 10,570 lb. (4,795 kg.).
DIMENSIONS:  Length 58.2 ft. (17.7 m.); 16.25 ft. (5 m.); main rotor diameter 48
ft. (14.6 m.).
CREW MEMBERS: One pilot and one co-pilot.

MD 500   [PICTURE OMITTED]
------
MD 500  series  helicopters--including  the MD  500E,  the MD  530F  and  the MD
520N--are among the fastest,  lightest, and most advanced rotorcraft in service.
They are  descended  from the U.S.  Army's OH-6A  Cayuse.  Although they are now
considered  primarily  civil  helicopters,  they are also  available in military
configurations.  The five-place MD 520N  (pictured)  features the  revolutionary
NOTAR[TM]  anti-torque  system  for  increased  safety  and  quiet  performance.
Helicopters  equipped  with the  NOTAR  system  have no tail  rotors.  McDonnell
Douglas delivered 14 MD 500 series helicopters in 1996.

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PROPULSION: One Allison Model 250-C20R gas turbine engine.*
DIMENSIONS: Length 32.1 ft. (9.8 m.); height 9.7 ft. (2.9 m.);
main rotor diameter 27.4 ft. (8.3 m.).*
USEFUL LOAD: 1,513 lb. (686 kg.).*

*All  specifications are for the MD 520N. Engines,  dimensions,  and useful load
vary from model to model.

MD 600N  [PICTURE OMITTED]
-------
This  soon-to-be  certified  eight-place  helicopter  is a  spacious,  versatile
performer,  well suited for a variety of uses. It features outstanding speed and
hovering ability. It also has the agility and exceptional handling for which the
MD 500 series,  from which it is descended,  is known.  With its advanced  NOTAR
[TM]  anti-torque  system,  the MD 600N is a member of an exclusive class of the
safest,  quietest  helicopters in the world. Other features include a six-bladed
main rotor and a powerful  engine and drive  system for  performance  on demand.
Deliveries will begin 1997.

PROPULSION: One Allison Model 250-C47M gas turbine engine.
USEFUL LOAD: 2,120 lb. (962 kg.).
DIMENSIONS: Length 36.9 ft. (11.2 m.); height 9.7 ft. (2.9 m.);
main rotor diameter 27.5 ft. (8.4 m.).

MD EXPLORER       [PICTURE OMITTED]
-----------
The  latest  version  of the  eight-place,  twin  engine  MD  Explorer  features
better-performing  engines for increased speed, range, and payload capabilities.
This  aircraft,  which secured the European  Joint  Aviation  Authorities'  Type
Certification  for 27  countries  in  1996,  is  expected  to  earn  Category  A
certification  in 1997.  Category A approval  will permit  greater  flexibility,
especially in areas with stringent  single-engine  operating rules. The aircraft
also  features a variety of advanced  technologies,  including an  all-composite
bearingless  main rotor,  flexbeam,  and blade  system.  It is equipped with the
NOTAR[TM] anti-torque system for enhanced safety and quiet performance.  Fifteen
MD Explorers were delivered in 1996 to customers in diverse  worldwide  markets.
The MD Explorer is especially popular with medical evacuation services.

PROPULSION: Two Pratt & Whitney 206E gas turboshaft engines.
USEFUL LOAD: 2,975 lb. (1,349 kg.).
DIMENSIONS:  Length  38.8 ft.  (11.8  m.);  height 12 ft.  (3.7 m.);  main rotor
diameter 33.8 ft. (10.3 m.).

C4I SYSTEMS       [PICTURE OMITTED]
-----------
McDonnell   Douglas's   command,   control,   communications,   computers,   and
intelligence (C4I) work encompasses  information warfare,  airborne surveillance
and detection,  and maritime warfare systems.  McDonnell Douglas's multisensored
Thermal Imaging Sensor System (TISS,  pictured) provides U.S. Navy surface ships
with the  capability  to detect  floating  mines,  speedboats,  and  swimmers in
near-zero  visibility.  The unit's Mast Mounted Sight, the precursor to TISS, is
in operation on nearly 500 helicopters and ships worldwide.

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BUSHMASTER III             [PICTURE OMITTED]
--------------
The 35 mm.  Bushmaster III (pictured on a Bradley fighting  vehicle) is a member
of the Chain Gun[TM] family of reliable automatic  cannons.  It incorporates all
the features of the 25 mm. M242 Bushmaster,  which is in service on land and sea
vehicles around the world.  The Bushmaster III, which fires NATO standard 35 mm.
ammunition,  is a compact,  cost-effective  answer to future  military  threats.
McDonnell  Douglas has  delivered  more than 10,000  M242  Bushmasters.  It also
builds the 30 mm.  M230  cannon for the apache  attack helicopter and the 30 mm.
Bushmaster  II  for  Norway.  Several  Chain  Gun  cannon  variants  are  now in
production at McDonnell Douglas and elsewhere under license.

DELTA II                   [PICTURE OMITTED]
--------
The Delta II medium-class  rocket is the world's most reliable expendable launch
vehicle. An updated version of the Delta rockets McDonnell Douglas has built and
launched  since 1960,  the Delta II serves a mix of  military,  commercial,  and
civil  customers.  McDonnell  Douglas has booked a full  manifest for the rocket
through the year 2002, launching  satellites from both Cape Canaveral,  Florida,
and Vandenberg Air Force Base, California.  The Delta II launched 10 payloads in
1996.

DIMENSIONS: Height 125 ft. (38.1 m.); diameter 8 ft. (2.4 m.).
PAYLOAD CAPACITY: 4,100 lb. (1,860 kg.) to geosynchronous transfer orbit.

DELTA III                  [PICTURE OMITTED]
---------
The Delta III  intermediate-class  rocket,  whose  development  was announced in
1995, is building on the  successful  Delta II heritage.  Delta III will deliver
more  than  twice  the  lifting  power of Delta  II.  Development  of Delta  III
continued  in 1996.  Hughes Space and  Communications  International  Inc.,  the
initial  customer,  has  scheduled  its  first  launch,  of the  Galaxy  X cable
television satellite, for 1998.

DIMENSIONS: Height 128.2 ft. (39.1 m.); upper-stage diameter 13.1 ft.
(4 m.); lower-stage diameter 7.8 ft. (2.4 m.).
PAYLOAD CAPACITY: 8,400 lb. (3,810 kg.) to geosynchronous transfer orbit.
 
DELTA IV/EELV              [PICTURE OMITTED]
-------------
In December 1996, the U.S.  Department of Defense selected  McDonnell Douglas as
one of the two  contractors  to compete for  development of the U.S. Air Force's
Evolved  Expendable Launch Vehicle (EELV).  Final selection is expected in 1998,
with the first flight in 2001. The value of the contract to the winner, over the
life of the development  program,  could reach $1.4 billion. The EELV program is
conceived  as a family  of  rockets  in the  small,  medium,  and  heavy  launch
categories.  McDonnell  Douglas's  design,  the Delta IV, is an extension of the
highly reliable Delta II and the new Delta III launch systems.

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DIMENSIONS:  Small-height  182.3 ft. (55.6 m.);  gross  liftoff wt.  509,000 lb.
(230,882 kg.); payload to geosynchronous transfer orbit 4,800 lb. (2,177.3 kg.).
Medium-height  197.6 ft. (60.2 m.); gross liftoff wt. 533,000 lb. (241,769 kg.);
payload to  geosynchronous  transfer  orbit 10,000 lb. (4536 kg.).  Heavy-height
225.4 ft. (68.7 m.); gross liftoff wt.  1,538,000 lb. (697,637 kg.);  payload to
geosynchronous transfer orbit 33,000 lb. (14,968.8 kg.).

INTERNATIONAL SPACE STATION         [PICTURE OMITTED]
---------------------------
As the major subcontractor on the International Space Station, McDonnell Douglas
is developing  and building five  integrated  truss  segments,  along with major
subsystems.  McDonnell  Douglas  also will provide  other  hardware and software
elements,  including  the  mobile  transporter  used  to  support  assembly  and
operations on orbit,  pressurized mating adapters used to dock the space shuttle
to the station, and outfitting for pressurized nodes that connect laboratory and
habitation modules.  Space agencies in the United States (NASA), Europe, Canada,
Japan, and Russia are  participating  in the program.  The first two launches of
hardware are planned for late 1997.

DIMENSIONS:  Length 355.6 ft. (108.4m.);  width 243.1 ft. (74.1m.); height 121.4
ft. (37m.).
TOTAL MASS AT COMPLETION:  900,000 LB. (408,240 KG.).
CREW MEMBERS:  Six astronauts full-time.

HARPOON  [PICTURE OMITTED]
-------
More than 25 years after its development began, the AGM 84A/C/D Harpoon is still
deployed as the U.S. Navy's primary anti-ship missile. It has been ordered by 24
customers  around the world.  It can be launched from  aircraft,  surface ships,
submarines, and land-based installations.

JOINT AIR-TO-SURFACE STANDOFF MISSILE (JASSM)        [PICTURE OMITTED]
---------------------------------------------
In June 1996,  McDonnell Douglas was named one of two contractors to compete for
development of the Joint Air-to-Surface  Standoff Missile. The JASSM is intended
to be  launched  from a variety  of U.S.  Air Force and U.S.  Navy  bombers  and
fighter aircraft. It will allow them to attack high-priority targets from beyond
the  range of enemy air  defenses.  The $130  million  contract  is for  program
definition and risk reduction.  In 1998, a single contractor will be selected to
complete the  development  program.  Production of 2,400 missiles is expected to
start in the year 2000. The total program is valued at $3 billion.


JOINT DIRECT ATTACK MUNITION (JDAM) [PICTURE OMITTED]
-----------------------------------
In October 1995,  McDonnell Douglas won a $63 million U.S. Department of Defense
competition to develop the Joint Direct Attack  Munition.  The DOD's fiscal year
1997 budget funds the purchase of 936 units. Orders could total about $4 billion
over the next two  decades.  JDAM is a guidance  kit that allows  purchasers  to
convert existing 1,000-pound and 2,000-pound  unguided,  free-falling bombs into
precision-guided  "smart" munitions that can autonomously  strike targets in any
weather conditions.  JDAM also minimizes  collateral damage while leaving strike
aircraft  crews less  exposed  to  hostile  fire.  Its first  free-flight  tests
occurred in late 1996.  JDAM is currently in flight  testing on the F/A-18,  the
B-52H, the B-1B, the B-2A, and the F-16.

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STANDOFF LAND ATTACK MISSILES (SLAM AND SLAM ER)              [PICTURE OMITTED]
------------------------------------------------
A derivative  of the Harpoon,  the AGM 84E Standoff  Land Attack  Missile is the
U.S. Navy's only  air-launched,  precision-guided  standoff  missile system.  In
March 1995,  the Navy  awarded  McDonnell  Douglas a $91.6  million  contract to
develop the SLAM Expanded Response (SLAM ER,  pictured).  This retrofit kit lets
users upgrade  existing  SLAMs to achieve longer range,  greater  effectiveness,
more resistance to jamming,  and easier mission planning.  In December 1996, the
first operational test SLAM ER was delivered to the U.S. Navy.  Low-rate initial
production of 60 missiles will begin in April 1997.

COMMERCIAL AIRCRAFT
-------------------
Douglas  Aircraft Co. is the  commercial  aircraft  component  of the  McDonnell
Douglas Corp.

DOUGLAS AIRCRAFT COMPANY (Primary location)
LONG BEACH, CALIFORNIA
EMPLOYEES: 14,200 worldwide (including 10,800 in Long Beach)
HISTORY:  Since its  founding  in 1920 by Donald W.  Douglas,  the  company  has
delivered more than 46,000 commercial and military  airplanes,  including a long
line of Douglas Commercial (DC) and McDonnell Douglas (MD) models.

In 1996,  Douglas Aircraft continued to serve the world's airlines by delivering
extended-range  models of the MD-11 trijet and  introducing  an Advanced  Common
Flightdeck for the MD-95.  Douglas also launched a major modification program to
convert DC-10 trijets into MD-10s.  The MD-10  conversion  provides  performance
upgrades and a new  two-person  cockpit that combines  features of the MD-11 and
the Advanced Common Flightdeck.

Late in the year, Boeing and McDonnell  Douglas announced a strategic  agreement
to work together on Boeing's future wide-body commercial airplane programs.

MARKETS SERVED: Passenger airlines and freight-shipping services.

PRODUCTS/SERVICES:  MD-11  wide-cabin  trijet;  MD-80  midsize  twin jet;  MD-90
advanced  technology,  midsize twin jet; MD-95 advanced  technology twin jet (in
development);  spare parts;  modifications,  including  conversion  of the DC-10
trijet into the advanced  technology  MD-10; and  collaboration on future Boeing
wide-body commercial aircraft.

MD-80    [PICTURE OMITTED]
-----
Almost  1,150 MD-80 twin jets have been  delivered  since the  airliner  entered
service  in  1980.  The  MD-80  features  commercial  aviation's  first  digital
flight-guidance  system. It is available in five models -- the MD-81, the MD-82,
the MD-83, the MD-88, and the smaller MD-87.

<PAGE>
                                                  [Company Pull-Out Section]

PROPULSION:  Two Pratt & Whitney  JT8D-200  engines  at 18,500 to 21,000  lb. of
thrust each.
DIMENSIONS: Length 147.8 ft. (45 m.); height 29.6 ft. (9 m.); wingspan 107.8 ft.
(32.9 m.). MD-87 length 130.4 ft. (39.7 m.).
CAPACITY:  155  (nominal).  MD-87  capacity  130  (nominal--varies  depending on
configuration).
RANGE:  1,800 to 2,880 statute mi. (2,897 to 4,635 km.),  depending on model and
configuration.

MD-90    [PICTURE OMITTED]
-----
The MD-90 twin jet is an advanced  midsize airliner that entered revenue service
in 1995. The MD-90 is the quietest large  commercial  jetliner in the skies. Its
engines are designed for fuel efficiency and reduced exhaust emissions.

PROPULSION:  Two  International  Aero Engines V2500s,  delivering  25,000 lb. of
thrust each.
DIMENSIONS: Length 152.6 ft. (46.5 m.); height 30.6 ft. (9.3 m.); 
wingspan 107.8 ft. (32.9 m.).
CAPACITY: 153 (nominal--varies depending on configuration).
RANGE:  2,400 to 3,205 statute mi. (3,862 to 5,157 km.),  depending on model and
configuration.

MD-95    [PICTURE OMITTED]
-----
The  MD-95  twin jet  airliner  was  launched  in 1995 to serve the  market  for
aircraft  that  carry  about 100  passengers.  ValuJet  Airlines  is the  launch
customer.  Its first  delivery is scheduled  for 1999.  The MD-95 is designed to
operate  economically on high-frequency,  short- to medium-range  routes such as
those now flown by hundreds of DC-9s and similar  aircraft.  Like all  McDonnell
Douglas twin jets, the MD-95 features popular  five-across  coach-class  seating
and an all-new interior,  with illuminated handrails and larger overhead baggage
racks.  The two-person  cockpit  introduces the new McDonnell  Douglas  Advanced
Common Flightdeck, featuring the latest technology:  liquid-crystal displays for
flight instruments and highly automated systems  controllers that can reduce the
pilot's  workload  in all  phases of  operation.  The MD-95 also  continues  the
environmental  tradition  of the MD-90 with reduced  fuel  consumption,  reduced
exhaust emissions, and significantly lower sound levels compared to similar-size
aircraft now in service.

PROPULSION:  Two BMW/Rolls-Royce BR715 engines,  delivering 18,500 to 21,000 lb.
of thrust each.
DIMENSIONS:  Length 124 ft. (37.8 m.);  height 29.3 ft. (8.9 m.);  
wingspan 93.3 ft. (28.4 m.).
CAPACITY: 106 (nominal--varies depending on configuration).
RANGE:  1,781  statute  mi.  (2,866  km.);  2,304  statute  mi.  (3,707 km.) for
extended-range model with optional auxiliary fuel tanks.

<PAGE>
                                                  [Company Pull-Out Section]

MD-11    [PICTURE OMITTED]
-----
More than 160 MD-11  wide-cabin  trijets have been delivered to customers around
the world.  Delivery  began in 1990.  The MD-11 is the only aircraft of its type
available in four models --  passenger,  all  freighter,  convertible  freighter
(which can be quickly reconfigured to carry passengers or freight),  and "combi"
(which carries  passengers  and freight on the main deck and additional  freight
below).  Although  outwardly  similar  to the  DC-10,  the MD-11 is  larger  and
features advanced aerodynamics,  propulsion,  aircraft systems, cockpit systems,
operating  economy.  Delivery  of an  extended-range  version -- the MD-11ER for
routes up to 8,300 statute miles (13,355 km.) -- began in 1996.

PROPULSION:  Three engines,  with three  available  options -- General  Electric
CF6-80C2 at 61,500 lb.  thrust each;  Pratt & Whitney 4460 at 60,000 lb.  thrust
each; or Pratt & Whitney 4462 at 62,000 lb. thrust each.
DIMENSIONS: Length 200.8 ft. (61.2 m.); height 57.8 ft. (17.6 m.);
wingspan 169.5 ft. (51.7 m.).
CAPACITY: Passenger version -- 233 to 410, depending on seating
configuration (300 nominal); freighter version -- 20,886 cubic feet of cargo.
RANGE:  4,550 to 8,300 statute  miles (7,160 to 13,355 km.),  depending on model
and total gross takeoff weight.

<PAGE>
                                   [Annual Report Page 26]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS


   The following  discussion should be read in conjunction with the consolidated
financial  statements  and  notes  thereto  beginning  on  page  35,  which  are
incorporated herein by this reference.

Forward-Looking Information Is Subject to Risk and Uncertainty

   Certain  statements  in  Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations  contain  "forward-looking"  information (as
defined in the Private  Securities  Litigation Reform Act of 1995) that involves
risk and uncertainty,  including  projections for the timing of the consummation
of the proposed Boeing merger,  future sales,  earnings,  production  levels and
costs,  aircraft deliveries,  research and development,  environmental and other
expenditures, and various business environment trends. Actual results and trends
in the future may differ materially depending on a variety of factors including,
but not limited to, changing  priorities or reductions in the U.S. and worldwide
defense and space budgets; global trade policies;  worldwide political stability
and economic  growth;  termination  of  government  contracts  due to unilateral
government action or the Company's failure to perform;  governmental  export and
import policies; the Company's successful execution of internal operating plans;
performance issues with key suppliers and subcontractors; factors that result in
significant and prolonged disruption to air travel worldwide;  aircraft delivery
delays or defaults by customers;  collective  bargaining  labor disputes;  other
regulatory  uncertainties;  and legal  proceedings.  For further  discussion  of
certain  risks and  uncertainties  that may affect  the  actual  results of any
forward-looking information contained herein, refer to the Form 8-K filed by the
Company with the Securities and Exchange Commission (SEC) on April 17, 1996.

Results of Operations

   McDonnell  Douglas  reported record earnings in 1996 of $788 million,  led by
the  military  aircraft  operations.  Earnings in this  segment were at a record
level for 1996,  surpassing  the  previous  record  year,  1995,  by more than 9
percent.  The C-17 and Apache Longbow  programs led the earnings  improvement in
the military  aircraft  segment.  Operating  earnings in each of the segments in
1996 exceeded 1995 results,  except for the  missiles,  space,  and  electronics
systems segment,  where operating  earnings were down $4 million.  Excluding the
effect of an accounting  charge related to the MD-11 trijet,  McDonnell  Douglas
had 1995  earnings  of $707  million,  an 18 percent  improvement  over the 1994
earnings of $598 million.  Military aircraft  operating earnings in 1995 were 28
percent higher than in 1994.

   Revenues for 1996 were $13.834  billion,  a 3 percent  decline  compared with
$14.332  billion  in 1995.  Revenues  in 1995 were 9 percent  greater  than 1994
revenues of $13.176 billion.  The revenue fluctuation over the three-year period
was  largely  attributed  to the number and mix of  aircraft  deliveries  in the
commercial  aircraft segment,  where revenue was down $574 million in 1996 after
increasing $736 million in 1995.  Military  aircraft  segment revenues were also
higher in 1995 as compared with 1996 and 1994.

<PAGE>

   McDonnell  Douglas and The Boeing Company  (Boeing) entered into a definitive
agreement on December 14, 1996, whereby a wholly owned subsidiary of Boeing will
merge into McDonnell  Douglas in a stock-for-stock  transaction,  as a result of
which McDonnell  Douglas will become a wholly owned subsidiary of Boeing.  Under
the terms of the transaction,  McDonnell Douglas  shareholders will receive 0.65
share of Boeing common stock for each share of McDonnell  Douglas  common stock.
The transaction is subject to approval by the shareholders of both companies and
certain regulatory  agencies;  and it is expected to close as early as mid-1997.
Approval of  shareholders  is expected to be considered at separate  meetings of
both  companies'  shareholders  in July 1997.  The following  discussions do not
consider  the  effects  the merger  will have on future  products  or  operating
results since the exact timing of the  consummation  is uncertain and the future
effects of the merger have not been quantified.
Military Aircraft
                         
   Operating  revenues in the military  aircraft  segment in 1996 were 3 percent
lower than in 1995,  following a 5 percent  increase in 1995 compared with 1994.
Revenue in the F/A-18E/F  program,  which is  transitioning  from development to
low-rate initial  production,  decreased in 1996 as compared with 1995. A 99-day
strike at the St.  Louis,  Missouri,  facilities,  which ended in  mid-September
1996, also reduced revenue in 1996.  Higher volume in the F/A-18C/D program from
production-rate  increases and more activity on the F-15 program  contributed to
revenue growth in 1995.
                                             [Annual Report Page 27]
   The military  aircraft  segment  reported record  operating  earnings of $990
million in 1996,  compared  with $905  million in 1995 and $708 million in 1994.
Operating  margins in the  segment  exceeded 12 percent in 1996,  compared  with
margins in excess of 11 percent in 1995 and 9 percent in 1994.  Increased volume
and improved margins on the C-17 and Apache Longbow programs led the improvement
in 1996.  Award  fees on the  F/A-18E/F  program,  partially  offset by a charge
associated with the settlement of claims on the T-45 program,  also  contributed
to the 1996  increase.  Improved  earnings in the C-17 and F-15 programs led the
increase  in 1995  over  1994.  Almost  all of the  C-17  activity  in 1995  was
associated with ongoing  production lots, as relatively minor activity  remained
on the  development  and  initial-production  lots.  Award  fees on the C-17 and
F/A-18  programs also  contributed  to the 1995  improvement.  The F-15 earnings
improvement  was  principally  a result  of  volume  increases.  The  1994  C-17
operating  earnings  were lower than in 1995  and  included  cost growth in the
development and initial-production  lots, reduced cost estimates associated with
a  1993  omnibus  settlement,   and  comparatively  lower  earnings  on  ongoing
production lots.

<PAGE>

Commercial Aircraft

   Operating revenues in the commercial aircraft segment decreased 15 percent in
1996,  after a 23 percent  increase in 1995.  Fewer deliveries of MD-11 trijets,
along with the inclusion of two trijet and three twin jet deliveries recorded as
operating  leases  with  minimal  revenue  recorded  at the  time  of  delivery,
accounted for the majority of the decrease. McDonnell Douglas delivered 24 MD-90
and 12 MD-80 twin jets  (including  three  under  lease  arrangements)  in 1996,
compared  with 14 MD-90 and 18 MD-80 twin jets in 1995 and 22 MD-80 twin jets in
1994.  McDonnell  Douglas  delivered  15  trijets  (including  two  under  lease
arrangements)in  1996,  compared  with  18  in  1995  and  17 in  1994.  Current
commercial  aircraft  production  plans for 1997  anticipate  MD-80/90  twin jet
deliveries to be slightly higher than 1996 deliveries,  with approximately twice
as many  deliveries  of MD-90s as MD-80s.  MD-11 trijet  deliveries  in 1997 are
expected to be slightly lower than in 1996.

   The  commercial  aircraft  segment had operating  earnings of $101 million in
1996.  Excluding  the  effect of a 1995  charge  related  to the  MD-11  trijet,
operating  earnings  were $39  million  in 1995 and  were $47  million  in 1994.
Earnings  from the sale of spare  parts and  related  services  continued  their
significant  contribution  to  segment  earnings  in  each of the  three  years.
Operating earnings on aircraft production programs, although improved in 1996 as
compared with 1995 and 1994, were near break-even.  Development  costs,  largely
related to the MD-95  program,  increased in 1996 over the 1995 and 1994 levels.
Insurance  recoveries  recorded in 1996 partially offset the higher  development
costs. Development costs in 1996 on the MD-95 were also reduced by participation
payments  received from MD-95  subcontractors.  Loss provisions on several MD-90
twin jets and a write-off of MD-80 inventory  amounts  contributed to lower 1995
earnings.

   Prior to October 1, 1995,  MD-11 production and tooling costs were charged to
cost of sales based on the  estimated  average  unit cost for the  program.  The
estimated  average  unit costs were based on cost  estimates  of a  301-aircraft
program.  The costs  incurred per unit in excess of the  estimated  average unit
cost were deferred, to be recovered by production and sale of lower-than-average
cost units. In applying the  program-average  method,  the Company estimated (1)
the  number of units to be  produced  and sold in the  program,  (2) the rate at
which the units were  expected to be produced  and sold,  and thus the period of
time to accomplish that, and (3) selling prices, production costs, and the gross
profit margin for the total  program.  The gross profit margin for the MD-11 was
unchanged from 1993 through  September 30, 1995.  After deducting  period costs,
the MD-11 program operated at a loss during this period.

   Effective October 1, 1995,  McDonnell Douglas changed its accounting for cost
of sales on the MD-11 aircraft  program from the  program-average  cost basis to
the specific-unit cost basis. At the same time, McDonnell Douglas revalued MD-11
program  support costs  previously  valued in  inventories  consistent  with the
program-average  cost concept.  MD-11 program support costs are now allocated to
current  production.  This change to the  specific-unit  costing  method for the
MD-11 program was made in recognition of production rates,  existing order base,
and  length of time  required  to  achieve  program  deliveries,  and thus,  the
resultant increased  difficulty - which became apparent in the fourth quarter of
1995 - in making the estimates  necessary  under the  program-average  method of
accounting.  Because  the  effect of this  change in  accounting  principle  was
inseparable from the effect of the change in accounting estimate, the change was
accounted for as a change in estimate. As a result, McDonnell Douglas recorded a
noncash charge to operations of $1.838 billion in the fourth quarter of 1995.

<PAGE>
                                             [Annual Report Page 28]
Missiles, Space, and Electronic Systems

   Operating  revenues in the missiles,  space,  and electronic  systems segment
were $2.178 billion in 1996, $1.917 billion in 1995, and $1.877 billion in 1994.
Higher revenue in the Delta II and Space Station  programs,  partially offset by
lower revenue in the missiles programs, contributed to the increases in 1996 and
1995.

   Operating  earnings in the missiles,  space,  and electronic  systems segment
were $194 million in 1996,  slightly  lower than $198 million in 1995,  and down
from $262 million in 1994.  Earnings  increases in 1996 as compared with 1995 in
the Delta II program were largely offset by increased  research and  development
expenditures  on the Delta III, a launch  vehicle under  development.  Increased
spending  on the Delta III and  increased  costs  related  to the  closing  of a
Florida missile facility contributed to lower earnings for 1995 as compared with
1994.

Financial Services and Other

   Operating  revenues in the financial  services and other segment increased to
$367  million in 1996,  compared  with $334  million in 1995 and $326 million in
1994. Operating earnings of this segment were $74 million in 1996, compared with
$61 million in 1995 and $50 million in 1994. The 1996 operating earnings were at
their highest level since 1990. Operating earnings in this segment have grown in
each of the last  three  years as a result  of  increased  volume  in  selective
markets.  Operating  earnings of the  financial  services and other  segment are
reduced by interest expense, an operating expense of that segment.

Interest Expense

   Interest expense related to aerospace segments was $121 million in 1996, $139
million in 1995,  and $141 million in 1994,  after  excluding from 1995 and 1994
the  reversal of interest  associated  with the  resolution  of tax issues.  The
interest  expense  decline  in  1996  reflects  lower  interest  on  income  tax
obligations and reduced  aerospace debt for most of the year.  Interest  expense
was  reduced by $23  million in 1995 and $10  million in 1994,  associated  with
resolving tax issues. See Note 9, "Income Taxes," page 45.

   Interest expense in the financial services and other segment was $127 million
in 1996,  up from $109 million in 1995. An increase in debt,  associated  with a
growth in the asset  portfolio,  caused the 1996 increase.  Interest  expense in
1995 was $9 million  lower than in 1994 as a result of the  refinancing  of high
coupon debt to lower rates.

   The  Company  settled  certain  state tax  issues in 1995,  resulting  in net
earnings of $35 million,  of which $14 million ($23 million  pretax)  related to
reductions in accrued  interest.  The Company settled certain  accounting method
and tax  credit  issues  with  the  Internal  Revenue  Service  (IRS) in 1994 in
connection with the an IRS audit of the years 1986 through 1989. Issues resolved
in 1994  resulted  in net  earnings  of $21  million,  of which $6 million  ($10
million pretax) related to reductions in accrued  interest.  See Note 9, "Income
Taxes," page 45.

<PAGE>

Liquidity

   DEBT  AND  CREDIT   ARRANGEMENTS.   MDC  Aerospace,   which   represents  the
consolidation of McDonnell Douglas Corporation and all of its subsidiaries other
than  McDonnell  Douglas  Financial  Services  Corporation  (MDFS) and McDonnell
Douglas Realty Company (MDRC),  has in place a number of credit  facilities with
banks and other institutions.  MDC Aerospace debt at December 31, 1996, was $1.4
billion, up from $1.2 billion at December 31, 1995. The increase in debt relates
largely  to the  issuance  of $250  million  of  10-year  notes in late 1996 for
general  corporate  purposes;  the  notes may be used to fund  $250  million  of
securities maturing in April 1997. Financial Services debt at December 31, 1996,
was $2.0 billion,  up from  approximately $1.5 billion at December 31, 1995. The
increase in debt is consistent with the increased portfolio of McDonnell Douglas
Finance Corporation (MDFC), a subsidiary of MDFS.

   MDC Aerospace has a revolving credit agreement (RCA), amended and restated in
January 1997,  under which MDC Aerospace may borrow up to $1.75 billion  through
January 2002.  MDC Aerospace has the option under the RCA to increase that limit
by 20 percent.  There were no amounts  outstanding under the RCA at December 31,
1996.

   During 1996, MDC Aerospace filed a shelf registration  statement with the SEC
relating to debt securities. The filing increased a prior offering, commenced in
1992 for up to $550  million of notes,  by an aggregate  principal  amount of $1
billion.  As of December 31, 1996,  MDC  Aerospace  had $948 million of unissued
debt securities registered with the SEC.

   The Company  also has an  agreement  with a financial  institution  to sell a
participation  interest  in a  designated  pool  of  government  and  commercial
receivables,  with  limited  recourse,  in  amounts  up to $300  million.  As of
December 31, 1996,  no receivable  interests  were sold.  See Note 3,  "Accounts
Receivable," page 42.
                                             [Annual Report Page 29]

   During 1996,  MDFS and MDFC amended  their joint RCA to provide,  among other
things,  for  increased  borrowing  capacity and to extend the maturity  date to
August  2001.  Under the  amended  agreement,  MDFC may borrow a maximum of $240
million, reduced by MDFS borrowings under this same agreement, which are limited
to $16 million.  There were no  outstanding  borrowings  under this agreement at
December 31, 1996. At December 31, 1996, $96 million of commercial  paper issued
by MDFC was  outstanding.  The joint RCA could  therefore be used to support the
full amount of commercial paper outstanding.

   During 1995, MDFC filed a shelf registration  statement with the SEC relating
to up to $750  million  aggregate  principal  amount  of debt  securities.  MDFC
established  a $500 million  medium-term  note program  under this  registration
statement, and as of December 31, 1996, had issued $490 million of such notes.

   During  1995,  MDFS  initiated a  medium-term  note  program  under a private
placement  of up to  $100  million  principal  amount.  This  note  program  was
increased  to $200  million in April 1996.  As of December  31,  1996,  MDFS had
issued $135 million of securities under this program.

<PAGE>

   Amounts available under the RCAs, note programs,  and the receivables program
discussed  above  may be used  to  meet  cash  requirements.  McDonnell  Douglas
believes that it has sufficient sources of capital to meet anticipated needs.

   During 1996,  rating  agencies raised their ratings of MDC Aerospace and MDFC
debt.  Moody's Investors Service Inc. raised its ratings of MDC Aerospace senior
debt to Baa1 from Baa2.  Standard & Poor's  raised its ratings of MDC  Aerospace
and MDFC senior debt to A- from BBB. The rating  agency also upgraded its rating
on MDFC subordinated debt to BBB+ from BBB-. Duff & Phelps Credit Rating Company
raised its rating of MDC Aerospace and MDFC senior debt to A- from BBB+.  MDFC's
subordinated debt was also raised to BBB+ from BBB.

   SHAREHOLDER  INITIATIVES.  On  October  28,  1994,  the  Company's  Board  of
Directors approved a stock repurchase plan that authorized  McDonnell Douglas to
purchase up to 36 million  shares,  or about 15 percent of its  then-outstanding
common stock.  Through  mid-December  1996,  the Company had acquired 29 million
shares,  or about 81 percent of its authorized  repurchase  amount, at a cost of
$1.1 billion.  The Company suspended common stock  acquisitions  associated with
the repurchase  program as a result of the proposed merger with Boeing. See Note
2 on page 42 for a further discussion of the proposed merger.

     In January  1996,  the McDonnell  Douglas  Board of Directors  authorized a
two-for-one split of the common stock and a 20 percent increase in the quarterly
dividend. In April 1996, McDonnell Douglas shareholders approved an amendment to
the Company's charter increasing the number of the Company's  authorized shares;
the  stock  split  was  effected  in the form of a stock  dividend  in May 1996.
Shareholders'  equity has been restated to give  retroactive  recognition to the
stock split for all periods presented by reclassifying,  from additional capital
or retained  earnings to common stock,  the par value of the  additional  shares
arising from the split.  In addition,  all  references to number of shares,  per
share  amounts,  and market prices of common stock have been restated to reflect
the stock split.

   AEROSPACE CASH AND CASH  EQUIVALENTS.  MDC Aerospace cash and cash 
equivalentswere $1.1  billion at December  31,  1996.  Included in this amount
are proceeds received from the 1996 fourth-quarter issuance of $250 million of
10-year notes.  These notes were issued for general  corporate  purposes and 
may be used to fund $250 million of securities that mature in April 1997. Cash 
provided by aerospace operations  was $824 million for 1996, prior to reductions
of $718 million used by McDonnell Douglas to purchase its common stock.

<PAGE>

   DEVELOPMENT  PROGRAMS. In October 1995, McDonnell Douglas launched the MD-95,
a 100-seat  medium-range  airliner.  Initial  deliveries of the MD-95 to ValuJet
Airlines Inc.  (ValuJet),  the launch customer for the MD-95,  are scheduled for
1999.  ValuJet's  operations were suspended for more than three months following
an airliner crash in May 1996.  The carrier  resumed  scaled-back  operations in
September  1996 and  affirmed  its  order for 50 MD-95s  in  December  1996.  No
additional orders for the MD-95 from other customers were received during 1996.

   McDonnell Douglas is currently developing the Delta III, an expendable launch
vehicle. Launch of the first Delta III is scheduled for 1998.

   The  MD-95  twin jet and the Delta  III  launch  vehicle  will  require  cash
expenditures  in  development,  inventory,  and tooling  during the next several
years,  which the Company  intends to fund from its cash flow or from  resources
available under its existing credit agreements.
                                                  [Annual Report Page 30]

   COMMERCIAL AIRCRAFT  FINANCING.  Airlines may decline deliveries of aircraft,
request changes in delivery schedules,  or default on contracts for firm orders.
Aircraft  delivery  delays or  defaults by  commercial  aircraft  customers  not
anticipated by the Company could have a negative short-term impact on cash flow.
During recent years,  several  airlines filed for  protection  under the Federal
Bankruptcy  Code or  became  delinquent  on  their  obligations  for  commercial
aircraft. As indicated in Note 16, "Commitments and Contingencies," page 51, the
Company also has outstanding guarantees of $868 million related to the marketing
of commercial aircraft.  The Company does not believe that the existence of such
guarantees,  after  considering  residual  values,  or  delays  or  defaults  by
commercial  aircraft  customers,  will have a material  adverse  effect upon its
earnings, cash flow, or financial position.

   McDonnell  Douglas has made lease,  loan  principal,  and  interest  payments
totaling $97 million and has agreed to make certain  additional  loan  principal
payments  through  January  1998 on behalf of Viacao  Aerea  Rio-Grandense  S.A.
(VARIG).  In addition,  Trans World Airlines Inc. (TWA),  the Company's  largest
aircraft-leasing  customer,  continues to operate under a  reorganization  plan,
confirmed  by  the  U.S.   Bankruptcy  Court  in  1995,  that  restructured  its
indebtedness and leasehold  obligations to its creditors.  TWA also continues to
face  financial and  operational  challenges due in part to an airliner crash in
July 1996 and turnover of key management,  which occurred  during 1996.  Neither
payments  on behalf of VARIG nor the  effects of TWA's  reorganization  plan and
current  financial  condition are expected to have a material  adverse effect on
earnings,  cash  flow,  or  financial  position  of the  Company.  See  Note 16,
"Commitments and Contingencies,"  page 51, for a further discussion of VARIG and
TWA.

   The Company,  including MDFC, has also made offers totaling $2.087 billion to
arrange or provide financing for ordered but undelivered  aircraft.  The Company
does not  anticipate  that the  existence of such  financing  offers will have a
material adverse effect on its earnings,  cash flow, or financial position.  See
Note 16, "Commitments and Contingencies," page 51.

<PAGE>

   CAPITAL EXPENDITURES. The Company's capital expenditures were $209 million in
1996,  $143 million in 1995, and $112 million in 1994. The 1996 level of capital
expenditures reflects a planned increase in such activity,  after a few years of
reduced expenditures. At December 31, 1996, the Company was not committed to the
purchase of a significant  amount of property,  plant,  and  equipment.  Capital
expenditures are expected to approximate $300 million in 1997.

   INFORMATION  SYSTEMS.  The Company has several information system improvement
initiatives  underway that will require increased  expenditures  during the next
several  years.  These  initiatives,  which  began in prior  years,  include the
conversion of certain Company computer systems to be Year 2000 compliant.

   The Year 2000 issue exists  because many  computer  systems and  applications
currently  use two-digit date fields to  designate a year.  As the century  date
change occurs,  date-sensitive  systems will recognize the year 2000 as 1900, or
not at all.  This  inability to  recognize  or properly  treat the year 2000 may
cause  systems  to  process  critical  financial  and  operational   information
incorrectly.  McDonnell Douglas, like many other companies, is expected to incur
expenditures over the next few years to address this issue.

   McDonnell Douglas has assessed and continues to assess the impact of the Year
2000 issue on its  operations,  including the development of cost estimates for,
and the extent of programming changes required to address,  this issue. Although
final cost  estimates have yet to be  determined,  it is anticipated  that these
Year 2000 costs will result in an increase to Company  expenses  during 1997 and
1998. The Company expects to complete its Year 2000 cost estimates by mid-1997.

<PAGE>

Business and Market Considerations

General

   McDonnell  Douglas is one of the largest U.S.  defense  contractors  and NASA
prime contractors.  McDonnell Douglas has a wide range of programs in production
and  development,  and is the world's  leading  producer  of military  aircraft.
McDonnell Douglas is also a manufacturer of large commercial transport aircraft.

                                             [Annual Report Page 31]
Military Aerospace Business

   The Company's most significant  customer in the military  aircraft and in the
missiles, space, and electronic systems segments is the U.S. Government. Certain
foreign governments also purchase a significant share of the Company's aerospace
products  directly or through  contracts  for foreign  military  sales with U.S.
Government agencies. Companies engaged in supplying military and space equipment
to the U.S.  Government  are  subject  to risks in  addition  to those  found in
commercial business.  These additional risks include dependence on Congressional
appropriations and annual administrative  allotment of funds, general reductions
in the U.S. and worldwide defense budgets,  and changes in Government  policies,
including  weapons export  policies.  In addition,  at times  McDonnell  Douglas
invests in competitive  programs  still in the  predevelopment  stage,  some of
which  may never  result  in  production.  Moreover,  the  costs of  maintaining
adequate  research and  development as well as  manufacturing  capabilities  are
substantial.

   The U.S.  Government  may terminate  its  contracts  (1) for its  convenience
whenever it believes that such termination  would be in the best interest of the
Government or (2) for default. Under contracts terminated for the convenience of
the Government,  a contractor is generally  entitled to receive payments for its
contract  cost and the  proportionate  share of its fee or earnings for the work
done, subject to the availability of funding.  The U.S. Government may terminate
a contract for default if the contractor materially breaches the contract.

   U.S.  Government  defense  spending,  which has declined in recent years,  is
expected to remain at about the same level in 1997 as it was in 1996, based upon
the fiscal year 1997 defense  budget.  In an era of shrinking or static  defense
budgets, military customers are more constrained in their ability to support new
development  programs.  Declines in new development programs can have a negative
impact on defense  contractors.  Additionally,  the loss of a major program or a
major  reduction or  stretch-out  in one or more programs  could have a material
adverse  impact on the  Company's  future  revenues,  earnings,  and cash  flow.
However,  any such impact could be mitigated by foreign sales and by programs to
upgrade existing products. Certain foreign sales may require some portion of the
production to be performed or completed in the purchasing country. In late 1996,
the Company was  eliminated in the downselect for the Joint Strike Fighter (JSF)
competition,  a significant  new DOD  development  program.  In early 1997,  the

<PAGE>

Company  agreed to work with  Boeing  on its JSF  program.  While the JSF is not
expected to have a major  impact on revenues or earnings  for at least a decade,
its impact on the  longer-term  future is potentially  great.  The Company does,
however,  believe  it is  well  positioned  in  this  defense  era;  the DOD has
indicated its  commitment to several of the  Company's  relatively  new programs
and/or to pursuing  significant  modifications  that will extend the duration of
existing production lines.  Because McDonnell Douglas is the largest producer of
military  aircraft,  the  extension of existing  programs  could have  favorable
competitive  results.  In light of the  uncertainty  regarding  the  changes  in
defense spending,  reported  financial  information may not be indicative of the
Company's  future  operating  results.  Production  contracts  awarded under the
fiscal year 1997 budget will generally continue through 1999.

   In  January  1997,  a Delta II rocket  carrying a Global  Positioning  System
satellite exploded shortly after launch. An investigation to determine the cause
of the mishap is underway.  As is standard in the industry,  other 1997 Delta II
launches have been delayed pending  determination of the cause of the explosion.
The extent or the impact of the mishap and of such delays  cannot be  determined
at this time.

Commercial Aircraft Business

   McDonnell Douglas is producing the MD-80 and MD-90 twin jets and MD-11 trijet
commercial  aircraft,  developing  the MD-95 twin jet commercial  aircraft,  and
supporting  commercial  aircraft,   spare  parts,  and  related  services.   The
commercial  aircraft business requires large investments to develop new aircraft
or derivatives of existing aircraft.

    During 1996,  McDonnell  Douglas  received orders for 17 MD-80 twin jets, 12
MD-90 twin jets,  and 9 MD-11  trijets.  This amounted to 4 percent of the total
narrow-body and wide-body orders received in the commercial  aircraft  industry.
Three of the nine trijet orders  received were for the freighter  configuration.
Not  included in these orders are five MD-11  freighters  requested by Lufthansa
Cargo; this contract was finalized early in 1997.  McDonnell Douglas expected to
receive  a higher  level of orders in 1996.  As the year  progressed,  it became
apparent  that  the  Company's  share of  commercial  aircraft  orders  would be
minimal.  Airline  customer orders in which the Company  expected to participate
were  instead  recorded  by its  competitors.  In  addition,  a few  significant
customers  previously  supportive  of 

                                              [Annual Report Page 32]

McDonnell  Douglas  have either  expressed
reduced confidence in the Company's existing product line or have made decisions
to convert to  aircraft of a  competitor.  During  this same  period,  McDonnell
Douglas  studied the  feasibility of developing a new  high-capacity  long-range
three-engine  jetliner,  designated the MD-XX. In October 1996,  subsequent to a
disappointing first nine months of new orders,  McDonnell Douglas decided not to
proceed with this proposed  aircraft.  Several factors  influenced the decision.
Key among those were a high level of risk,  marketplace price expectations,  and
the amount of product and internal  infrastructure  investment (estimated at $15
billion)  required to bring the Company to the level of the other major  players
in the commercial aerospace industry.

<PAGE>

  In  early  December,  McDonnell  Douglas  and  Boeing  agreed  on  a  plan  to
collaborate on future jetliner  design and  production.  In connection with this
agreement,  finalized in January 1997,  several hundred engineers of the Company
began work on jetliner design and production for Boeing.

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

    Estimated costs for development and initial production of new aircraft, such
as the MD-95, include assumptions,  analyses,  and forecasts that are subject to
continuous  reassessment  during the development and initial  production period.
Technological risks, as well as risks with suppliers and customers, are inherent
in development programs.

    Estimated  development  and initial  production  costs on new  aircraft  and
production  costs on existing  aircraft may  fluctuate  from current  estimates.
Fluctuations  on  development   programs   generally  diminish  as  the  project
approaches initial deliveries.

   See also  "Backlog,"  page 33, for a discussion  of certain  risks related to
commercial  aircraft  customers  and  "Commercial  Aircraft,"  page  27,  for  a
discussion of the status of commercial aircraft orders.

Government Business Audits, Reviews, and Investigations

   McDonnell Douglas, as a large defense contractor,  is subject to many audits,
reviews, and investigations by the U.S. Government of the Company's  negotiation
and performance of, accounting for, and general practices relating to Government
contracts.  An  indictment  of  a  contractor  may  result  in  suspension  from
eligibility  for  award of any new  Government  contract,  and a guilty  plea or
conviction may result in debarment from  eligibility for awards.  The Government
may, in certain cases, also terminate existing contracts,  recover damages,  and
impose  other  sanctions  and  penalties.  Based on presently  known facts,  the
Company believes that it has not engaged in any criminal misconduct with respect
to any of the matters  currently  known to be under  investigation  and that the
ultimate  resolution of these  investigations  will not have a material  adverse
effect on the Company's earnings, cash flow, or financial position.

<PAGE>

   In March 1991,  the SEC issued a Formal Order of Private  Investigation  (the
1991 SEC Investigation) looking into whether the Company violated the Securities
Act of  1933  and  the  Securities  Exchange  Act of  1934  in  connection  with
disclosures about and accounting for the A-12 program. In February 1993, the SEC
issued subpoenas requesting additional information, and broadened its inquiry to
include  the  C-17  program.  In  June  1996,  McDonnell  Douglas  resolved  the
investigation  commenced in 1993 relating to the Company's  disclosure about and
accounting  for the  C-17  program.  Without  admitting  or  denying  any of the
allegations  in the  complaint  for purposes of this SEC  proceeding  only,  and
solely for the  purposes  of  settlement  of the SEC's  complaint,  the  Company
simultaneously  agreed to the entry of an injunction enjoining it from violating
Section 13(a) of the Securities Exchange Act of 1934, and Rules 13a-1 and 12b-20
thereunder,  in the future,  and to the payment of a civil  penalty of $500,000.
This settlement concluded the investigation. Further, the 1991 SEC Investigation
was concluded without any action.

   In 1991,  McDonnell  Douglas and General Dynamics  Corporation  filed a legal
action to contest the U.S. Navy's  termination for default on the A-12 contract.
See Note 5, "Contracts in Process and Inventories,"  page 43 for a discussion of
the status of this action.

   In 1984, the Company  entered into a full-scale  development  letter contract
for the T-45 Training System. The final negotiated firm fixed-price contract was
agreed to in 1986. As a result of flight testing in late 1988, the Navy required
that changes be made to the T-45 aircraft. See Note 5, "Contracts in Process and
Inventories," page 43, for a discussion of the resolution of this matter.

                                             [Annual Report Page 33]
Environmental Expenditures

   The Company  believes that  expenditures  that may be required to comply with
federal,  state, and local provisions regulating the discharge of materials into
the environment or otherwise relating to the environment will not be material in
relation to its earnings, cash flow, or financial position. Compliance with such
regulations has not had a material effect on the Company's earnings,  cash flow,
or financial position.

   McDonnell  Douglas is a party to a number of  proceedings  brought  under the
Comprehensive  Environmental Response,  Compensation and Liability Act, commonly
known as  Superfund,  and under  similar  state  statutes.  The Company has been
identified  as a  potentially  responsible  party  (PRP) at 37 sites.  Of these,
McDonnell  Douglas  believes  that  it has de  minimis  liability  at 23  sites,
including 14 sites at which it believes that it has no future liability. At five
of the sites where the Company's  liability is not  considered to be de minimis,
the Company lacks  sufficient  information  to determine  its probable  share or
amount  of  liability.  At the  remaining  nine  sites  at which  the  Company's
liability  is  not  considered  to  be  de  minimis,  either  final  or  interim
cost-sharing  agreements  have  been  effected  between  the  cooperating  PRPs,
although such agreements do not fix the amount of cleanup costs that the parties
will bear. In addition,  the Company is remediating,  or has begun environmental
engineering  studies  to  determine  cleanup  requirements  for,  certain of its
current operating sites or former sites of industrial activity.

<PAGE>

   McDonnell   Douglas   estimates   include   reasonably   possible   costs  of
approximately  $63 million for study and  remediation  expenditures at Superfund
sites and for the Company's  current and former  operating  sites,  of which $44
million was accrued at December 31, 1996. Because of uncertainty inherent in the
estimation process, it is possible that actual costs will differ from estimates.
Ongoing   operating  and  maintenance  costs  at current  operating  sites  and
remediation  expenditures  on  property  held for sale are not  included  in the
amounts.  Claims for recovery are recorded as receivables and therefore have not
been  netted  against  the  environmental  liabilities.  A  receivable  has been
recorded from one insurance  carrier for agreed  reimbursement  of environmental
costs and totals $8 million at December 31, 1996. The Company  believes that any
amounts paid in excess of the accrued  liability will not have a material effect
on its earnings, cash flow, or financial position.

Backlog

   The Company's commercial backlog decreased during 1996, while backlog for its
two major competitors increased substantially. The Company's ability to generate
additional  orders is subject to its ability to operate  successfully as a niche
player. See "Business and Market Considerations - Commercial Aircraft Business,"
page 31, for a further discussion of this risk.  Approximately 39 percent of the
firm backlog for commercial  aircraft is scheduled for delivery  during 1997 and
an additional 20 percent  during 1998.  As an additional  risk, if  difficulties
recur in the commercial  airline  industry,  airlines may decline  deliveries of
aircraft,  request  changes in delivery  schedules,  or default on contracts for
firm  orders.  Purchase  options  and  announced  orders  for  which  definitive
contracts have not been executed are excluded from firm backlog.  See also the
"Firm Backlog" column in the table on page 34.


Inflation

   The effects of  inflation  have not been  significant  to  McDonnell  Douglas
because inflation rates have been relatively low.  Contracts for both government
and  commercial  products  generally  either  include  estimates of inflation or
adjust for inflation's effect.

<PAGE>
                                                     [Annual Report Page 34]
SELECTED FINANCIAL DATA BY INDUSTRY SEGMENT

     The Company has three aerospace  segments:  military  aircraft;  commercial
aircraft;  and missiles,  space, and electronic  systems.  The military aircraft
segment   produces  attack  and  fighter   aircraft,   military  and  commercial
helicopters,  military transport aircraft, training systems, and spare parts. It
also provides related services. The attack and fighter aircraft are capable of a
full spectrum of missions (air  superiority,  all-weather and day/night  attack,
close air  support,  reconnaissance,  etc.).  This  segment  offers  land-based,
aircraft  carrier-based,  and vertical/short  takeoff and landing aircraft.  The
commercial aircraft segment produces commercial aircraft and spare parts, and it
provides related services.  The missiles,  space, and electronic systems segment
produces tactical missiles, satellite launching vehicles, and defense electronic
components and systems.  It also works on space station  design and  development
and provides space shuttle payload integration.

     The  financial  services  and other  segment  is engaged in a wide range of
financial  services  including the financing of commercial and private aircraft,
commercial  equipment,  and real estate.  The segment also acquires and develops
properties for other McDonnell  Douglas segments and commercial  customers.  The
financial  services  and other  segment  includes  McDonnell  Douglas  Financial
Services Corporation and McDonnell Douglas Realty Company. Operating earnings of
the segment have been reduced by interest expense,  an operating expense of that
segment.  The financial  services and other segment includes  interest earned on
advances or loans to other  industry  segments  in its  operating  revenues  and
earnings. Other intersegment revenues and earnings were immaterial and have been
eliminated.  Assets of  individual  segments  have been stated net of applicable
progress payments.

   (Millions of dollars)                            Revenues

   December 31 or Years Then Ended        1996        1995        1994
                                       ---------   ---------   ---------

   Military aircraft                    $ 7,952     $ 8,158     $ 7,804
   Commercial aircraft                    3,317       3,891       3,155
   Missiles, space, and electronic
     systems                              2,178       1,917       1,877
   Financial services and other             367         334         326
                                       ---------   ---------   ---------
     Operating revenues                  13,814      14,300      13,162
   Nonoperating - net                        20          32          14
                                       ---------   ---------   ---------
                                        $13,834     $14,332     $13,176
                                       =========   =========   =========

<PAGE>
   (Millions of dollars)                          Earnings (Loss)

   December 31 or Years Then Ended        1996        1995        1994
                                       ---------   ---------   ---------

   Military aircraft                    $   990     $   905     $   708
   Commercial aircraft                      101      (1,799)         47
   Missiles, space, and electronic
     systems                                194         198         262
   Financial services and other              74          61          50
                                       ---------   ---------   ---------
     Operating earnings (loss)            1,359        (635)      1,067
   Nonoperating - net                        16          19          (3)
   General corporate expenses               (31)        (18)        (13)
   Interest expense                        (121)       (116)       (131)
   Income tax benefit (expense)            (435)        334        (322)
                                       ---------   ---------   ---------
                                        $   788     $  (416)    $   598
                                       =========   =========   =========

   (Millions of dollars)                     Firm Backlog (Unaudited)*

   December 31 or Years Then Ended        1996        1995        1994
                                       ---------   ---------   ---------

   Military aircraft                    $12,934     $10,121     $ 8,340
   Commercial aircraft                    7,000       7,175       7,544
   Missiles, space, and electronic
     systems                              3,745       2,344       1,619
                                       ---------   ---------   ---------
                                        $23,679     $19,640     $17,503
                                       =========   =========   =========

* Amounts as of December 31
(Millions of dollars)                                Assets*

   December 31 or Years Then Ended        1996        1995        1994
                                       ---------   ---------   ---------

   Military aircraft                    $ 3,657     $ 3,678     $ 3,860
   Commercial aircraft                    2,643       2,480       4,559
   Missiles, space, and electronic
     systems                              1,169       1,081       1,175
   Financial services and other           3,025       2,358       2,160
                                       ---------   ---------   ---------
                                         10,494       9,597      11,754
   Corporate                              1,137         869         462
                                       --------    --------    --------
                                        $11,631     $10,466     $12,216
                                       =========   =========   =========

*Amounts as of December 31



<PAGE>


                                             Property, Plant, and
   (Millions of dollars)                      Equipment Acquired

   December 31 or Years Then Ended        1996        1995        1994
                                       ---------   ---------   ---------

   Military aircraft                    $   122     $    76     $    88
   Commercial aircraft                       16          16          17
   Missiles, space, and electronic
     systems                                 47          40           4
   Financial services and other               1           1           2
                                       ---------   ---------   ---------
                                            186         133         111
   Corporate                                 23          10           1
                                       ---------   ---------   ---------
                                        $   209     $   143     $   112
                                       =========   =========   =========

   (Millions of dollars)                 Depreciation and Amortization

   December 31 or Years Then Ended        1996        1995         1994
                                        -------     -------      --------

   Military aircraft                    $   120     $   120     $   123
   Commercial aircraft                       47          46          53
   Missiles, space, and electronic
     systems                                 35          43          43
   Financial services and other              68          59          55
                                       ---------   ---------   ---------
                                            270         268         274
   Corporate                                  5           5           5
                                       ---------   ---------   ---------
                                        $   275     $   273     $   279
                                       =========   =========   =========



<PAGE>
                                                  [Annual Report Page 35]


                      CONSOLIDATED STATEMENT OF OPERATIONS
                    (Millions of dollars, except share data)


Years Ended December 31                      1996      1995      1994
                                           --------  --------  --------
Revenues                                   $13,834   $14,332   $13,176

Costs and expenses
  Cost of products, services, and rentals   11,282    12,027    11,026
  MD-11 accounting charge                              1,838
  General and administrative expenses          726       681       684
  Research and development                     355       311       297
  Interest expense
    Aerospace segments                         121       116       131
    Financial services and other segment       127       109       118
                                           --------  --------  --------
      Total costs and expenses              12,611    15,082    12,256
                                           --------  --------  --------
      Earnings (Loss) before Income Taxes    1,223      (750)      920

Income taxes (benefit)                         435      (334)      322
                                           --------  --------  --------
      Net Earnings (Loss)                  $   788   $  (416)  $   598
                                           ========  ========  ========
Earnings (Loss) per Share                  $  3.64   $ (1.83)  $  2.53
                                           ========  ========  ========
Dividends Declared per Share               $   .48   $   .40   $   .28
                                           ========  ========  ========
                            
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


<PAGE>
                                             [Annual Report Page 36]

BALANCE SHEET
(Millions of dollars and shares)
                                           McDonnell Douglas Corporation
                                           and Consolidated Subsidiaries
                                           ----------------------------
December 31                                         1996         1995
                                                 ---------    ---------
Assets
  Cash and cash equivalents                      $  1,094     $    797
  Accounts receivable                                 882          821
  Finance receivables and property on lease         3,090        2,347
  Contracts in process and inventories              3,486        3,421
  Prepaid income taxes
  Property, plant, and equipment                    1,453        1,471
  Investment in Financial Services
  Other assets                                      1,626        1,609
                                                 ---------    ---------
Total Assets                                     $ 11,631     $ 10,466
                                                 =========    =========
Liabilities And Shareholders' Equity

Liabilities
  Accounts payable and accrued expenses          $  2,595     $  2,284
  Accrued retiree benefits                          1,109        1,205
  Income taxes                                         83            3
  Advances and billings in excess of related
    costs                                           1,310        1,147
  Notes payable and long-term debt
    Aerospace segments                              1,438        1,251
    Financial services and other segment            1,995        1,469
                                                 ---------    ---------
                                                    8,530        7,359

Minority interest                                      63           66

Shareholders' equity
  Preferred stock - none issued
  Common stock - issued and outstanding
    1996, 209.6 shares; 1995, 223.6 shares            210          224
  Additional capital
  Retained earnings                                 2,850        2,835
  Unearned compensation                               (22)         (18)
                                                 ---------    ---------
                                                    3,038        3,041
                                                 ---------    ---------
Total Liabilities and Shareholders' Equity       $ 11,631     $ 10,466
                                                 =========    =========

                            
The accompanying notes are an integral part of the financial statements.


<PAGE>


                                             [Annual Report Page 37]


       MDC Aerospace                    Financial Services
  ----------------------              ----------------------
     1996         1995                   1996         1995
  ---------    ---------              ---------    ---------
 
  $  1,077     $    784               $     17     $     13
       964          934                                   2
       254          165                  2,836        2,182
     3,486        3,421
       278          315
     1,391        1,358                     62          113
       383          331
     1,535        1,527                     91           82
  ---------    ---------              ---------    ---------
  $  9,368     $  8,835               $  3,006     $  2,392
  =========    =========              =========    =========
 


  $  2,470     $  2,183               $    207     $    216
     1,109        1,205
                                           361          318

     1,265        1,111                     45           36
 
     1,423        1,229                     15           22
                                         1,995        1,469
  ---------    ---------              ---------    ---------
     6,267        5,728                  2,623        2,061
 
        63           66
 
 
 
 
       210          224
                                           238          238
     2,850        2,835                    145           93
       (22)         (18)
  ---------    ---------              ---------    ---------
     3,038        3,041                    383          331
  ---------    ---------              ---------    ---------
  $  9,368     $  8,835               $  3,006     $  2,392
  =========    =========              =========    =========

                            
As used on this  page,  "MDC  Aerospace"  means  the basis of  consolidation  as
described  in  Note  1 to  the  consolidated  financial  statements;  "Financial
Services" means McDonnell Douglas Financial Services  Corporation and all of its
affiliates  and  associated  companies and  McDonnell  Douglas  Realty  Company.
Transactions  between MDC Aerospace and Financial  Services have been eliminated
from the "McDonnell Douglas Corporation and Consolidated Subsidiaries" columns.

<PAGE>
                                              [Annual Report Page 38]

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                              (Millions of dollars)


Years Ended December 31                        1996      1995      1994
                                             --------  --------  --------
Common Stock
  Beginning balance                          $   224   $   234   $   236
  Shares purchased                               (15)      (10)       (4)
  Employee stock awards and options                1                   2
                                             --------  --------  --------
                                                 210       224       234
Additional Capital
  Beginning balance                                         74       137
  Shares purchased                               (28)      (92)      (88)
  Employee stock awards and options               28        18        25
                                             --------  --------  --------
                                                                      74
Retained Earnings
  Beginning balance                            2,835     3,576     3,043
  Net earnings (loss)                            788      (416)      598
  Shares purchased                              (669)     (235)
  Dividends declared                            (104)      (90)      (65)
                                             --------  --------  --------
                                               2,850     2,835     3,576


Unearned Compensation
  Beginning balance                              (18)      (12)
  Unamortized restricted stock compensation      (20)      (17)      (17)
  Compensation amortized                          16        11         5
                                             --------  --------  --------
                                                 (22)      (18)      (12)
                                             --------  --------  --------
Shareholders' Equity                         $ 3,038   $ 3,041   $ 3,872
                                             ========  ========  ========


                            
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>
                                                [Annual Report Page 39]

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                              (Millions of dollars)


Years Ended December 31                          1996      1995      1994
                                               --------  --------  -------
Operating Activities
  Net earnings (loss)                          $  788    $ (416)   $  598
  Adjustments to reconcile net earnings (loss)
    to net cash provided by operating
    activities
      Depreciation of property, plant, and
        equipment                                 190       196       213
      Depreciation of rental equipment             67        58        51
      Amortization of intangible and other
        assets                                     18        19        15
      Gain on sale of assets                                          (26)
      Pension income                             (130)     (165)     (132)
      Change in operating assets and
        liabilities
          Accounts receivable                     (61)      (49)     (217)
          Contracts in process and inventories    (65)      547       (32)
          MD-11 accounting charge                         1,838
          Accounts payable and accrued expenses   338      (186)      285
          Income taxes                             80      (720)      149
          Advances and billings in excess of
            related costs                         163       (53)      (51)
                                               -------   -------   -------
            Net Cash Provided by
              Operating Activities              1,388     1,069       853

Investing Activities
  Property, plant, and equipment acquired        (209)     (143)     (112)
  Finance receivables and property on lease      (792)     (304)      217
  Other                                            15        31        83
                                               -------   -------   -------
          Net Cash Provided (Used) by
            Investing Activities                 (986)     (416)      188



<PAGE>


Years Ended December 31                         1996      1995      1994
  (Continued)                                 --------  --------  --------

Financing Activities
  Net change in borrowings (maturities
    90 days or less)                              131      (103)       50
  Debt having maturities more than 90 days
    New borrowings                                920       695       450
    Repayments                                   (338)     (441)   (1,069)
  Proceeds of stock options exercised               1         1         3
  Common shares purchased                        (718)     (337)      (85)
  Dividends paid                                 (101)      (92)      (55)
                                              --------  --------  --------
          Net Cash Used by Financing
            Activities                           (105)     (277)     (706)
                                              --------  --------  --------
          Increase in Cash and
            Cash Equivalents                      297       376       335

Cash and cash equivalents at
  beginning of year                               797       421        86
                                              --------  --------  --------
Cash and cash equivalents at end
  of year                                     $ 1,094   $   797   $   421
                                              ========  ========  ========


                            
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

<PAGE>
                                                  [Annual Report Page 40]

                         
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                
                    (Millions of dollars, except share data)


1.  Accounting Policies

Basis of Presentation

The consolidated financial statements comprise the accounts of McDonnell Douglas
Corporation and its subsidiaries, including McDonnell Douglas Financial Services
Corporation  (MDFS),  which is the parent company of McDonnell  Douglas  Finance
Corporation (MDFC). In consolidation,  all significant intercompany balances and
transactions are eliminated.

The consolidating balance sheet represents the sum of all affiliates - companies
that  McDonnell  Douglas  Corporation  directly or indirectly  controls  through
majority  ownership or otherwise.  Financial data and related  measurements  are
presented in the following categories:

    MDC AEROSPACE.  This represents the consolidation of McDonnell
    Douglas Corporation including all of its subsidiaries other than
    MDFS and McDonnell Douglas Realty Company (MDRC).  Those two are
    presented on a one-line basis as Investment in Financial Services.

    FINANCIAL SERVICES.  This represents the consolidation of MDFS (and
    its subsidiaries) and MDRC, both wholly owned subsidiaries of
    McDonnell Douglas.

    MCDONNELL DOUGLAS CORPORATION AND CONSOLIDATED SUBSIDIARIES.  This
    represents the consolidation of McDonnell Douglas Corporation and
    all its subsidiaries (the Company).

Stock Split

In  January  1996  the  McDonnell  Douglas  Board  of  Directors   authorized  a
two-for-one split of the common stock. The stock split was completed in May 1996
after  receipt  of  shareholder  approval  in April 1996 of an  increase  in the
Company's  authorized common stock to 400 million shares.  Shareholders'  equity
has been  restated to give  retroactive  recognition  to the stock split for all
periods presented by reclassifying, from additional capital or retained earnings
to common stock, the par value of the additional  shares arising from the split.
In addition, all references to number of shares, per share amounts, stock option
data,  and market prices of common stock have been restated to reflect the stock
split.

<PAGE>

Nature of Operations

McDonnell  Douglas  is one of the  largest  defense  contractors  and NASA prime
contractors. It has a wide range of programs in production and development,  and
it is the world's leading producer of military  aircraft.  McDonnell  Douglas is
also a manufacturer of large  commercial  transport  aircraft.  The programs and
products that account for most of McDonnell  Douglas's  business volume are of a
highly technical  nature,  comparatively  few in number,  and high in unit cost;
they have traditionally had relatively long production lives.

McDonnell  Douglas's aerospace segments compete in an industry composed of a few
major  competitors  and a limited  number  of  customers.  The most  significant
customer of the Company's military aircraft segment and of its missiles,  space,
and  electronic  systems  segment  is  the  U.S.  Government.   Certain  foreign
governments  also  purchase  a  significant  share  of the  Company's  aerospace
products  either directly or through  contracts for foreign  military sales with
U.S. Government agencies.  The commercial aircraft business is market-sensitive,
which causes  disruptions in production and procurement and attendant  costs. It
also  requires  large  investments  to develop new  aircraft or  derivatives  of
existing aircraft.

Through MDFS,  McDonnell Douglas is engaged in aircraft financing and commercial
equipment  leasing.  MDRC is a full-service  developer and property manager.  It
serves  the  commercial  real  estate  market  as  well as  McDonnell  Douglas's
aerospace business.

Estimates

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

Revenue Recognition

Revenues and earnings on cost-reimbursement and fixed-price government contracts
are generally recognized on the percentage-of-completion method of accounting as
costs are incurred (cost-to-cost basis) in accordance with Statement of Position
81-1,  "Accounting for Performance of Construction  Type and Certain  Production
Type  Contracts" (SOP 81-1).  Revenues  include costs incurred plus a portion of
estimated fees or profits based on the  relationship  of costs incurred to total
estimated  costs.  Some  contracts  contain  incentive  provisions  that provide
increased  or  decreased   earnings  based  upon   performance  in  relation  to
established  targets.  Incentives  based  upon cost  performance  are  generally
recorded  currently,  and other  incentives  are recorded  when such amounts can
reasonably be  determined.  Revenues  relating to contracts or contract  changes
that have not been completely priced, negotiated,  documented, or funded are not
recognized unless realization is considered probable.

<PAGE>

Major contracts for complex military systems are performed over extended periods
and are  subject  to changes in scope of work and  delivery  schedules.  Pricing

                                                  [Annual Report Page 41]

negotiations  on changes and  settlement  of claims often extend over  prolonged
periods.  Any anticipated  losses on contracts  (estimated final contract costs,
excluding  period costs,  in excess of estimated  final  contract  revenues) are
charged to current  operations  as soon as they are evident.  Estimates of final
contract revenues on certain  fixed-price  development  contracts include future
revenue from expected recovery on claims.  Such revenues are generally  included
when it is probable  that the claim will result in additional  contract  revenue
and when the amount can be reasonably estimated.

Revenues  from  commercial  aircraft  programs are based on sales prices and are
recognized as aircraft are  delivered.  Cost of sales of the MD-80,  MD-90,  and
MD-11  aircraft  programs are  determined  on a  specific-unit  cost method.  As
described in Note 5, "Contracts in Process and  Inventories,"  effective October
1, 1995, McDonnell Douglas changed its accounting for the MD-11 aircraft program
to the specific-unit cost method. Prior to October 1, 1995, cost of sales of the
MD-11 aircraft program was determined on a program-average  cost method,  and it
was  computed  as a  percentage  of the sales price of the  aircraft.  Under the
program-average  cost method,  the  percentage  was  calculated  as the total of
estimated  production  and tooling costs for the entire  program  divided by the
estimated  sales prices of all aircraft in the program.  A constant gross margin
was achieved by deferring or  accelerating a portion of the average unit cost on
each unit delivered.

Revenues,  costs, and earnings on government  contracts and commercial  aircraft
programs are based,  in part, on estimates and as a result,  actual earnings may
differ  from  estimates.  Under the prior MD-11  program-average  cost method of
accounting,  such  adjustments  were made  prospectively.  Such  adjustments  on
government  contracts are made on a cumulative basis; the effect of such changes
is  recognized   currently.   Losses  anticipated  on  government  contracts  or
commercial  programs,  excluding period costs, are charged to operations as soon
as they are evident.

Revenues  and costs  from the  manufacturing  aspects of  sales-type  leases are
generally  recognized  at the  inception  of  such  leases.  Revenues  from  the
financing  aspects of sales-type and  direct-financing  leases are recognized by
the interest method. The interest method results in a constant rate of return on
the unrecovered investment.

<PAGE>

Contracts in Process and Inventories

Government contracts in process represent incurred costs plus estimated earnings
(unbilled  revenues),  less amounts billed to customers when items are completed
and delivered.  Incurred costs include  production  costs and related  overhead.
Commercial  products  in process  are  stated at the lower of cost  (principally
specific  unit) or market.  Material  and spare parts are stated at the lower of
cost (principally moving average) or market.

General and  administrative  expenses and research and development  expenses are
considered period costs and, accordingly, are charged to operations on a current
basis.

The U.S. Government has title to, or a security interest in, certain inventories
by reason of progress payments.

Cash and Cash Equivalents

Cash equivalents consist of short-term highly liquid investments  purchased with
a maturity of three  months or less.  Cash  equivalents  are stated at cost that
approximates market.

Finance Receivables and Property on Lease

Rental equipment  subject to operating leases is stated at cost; it is generally
depreciated by the straight-line method.

Property, Plant, and Equipment

Property,  plant,  and  equipment  is carried at cost and  depreciated  over the
useful lives of the various  classes of  properties,  primarily  by  accelerated
methods.

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

Intangible Assets

Intangible  assets  consist  principally  of computer  software,  deferred  debt
expense,  and deferred leasing costs.  Intangibles are being amortized over 3 to
10 years.

<PAGE>

Income Taxes

U.S.  and foreign  income  taxes are  computed  at current  tax rates,  less tax
credits. Taxes are adjusted both for items that do not have tax consequences and
for the cumulative effect of any changes in tax rates from those previously used
to determine deferred tax assets or liabilities.  Tax provisions include amounts
that are currently payable,  plus changes in deferred tax assets and liabilities
that  arise  because of  temporary  differences  between  the time when items of
income  and  expense  are  recognized  for  financial  reporting  and income tax
purposes.

The undistributed  earnings of foreign  subsidiaries are considered  permanently
invested for  continuing  operations;  accordingly,  no provisions  are made for
taxes that would become  payable  upon the  distribution  of such  earnings as a
dividend to the Company. The Company files a consolidated return for federal and
certain state

                                                  [Annual Report Page 42]

income taxes,  and dividends from domestic  subsidiaries  included
therein are not subject to federal or to most state income taxes.

Minority Interest

Minority  interest  represents the limited  partner's  equity interest in a real
estate  venture.  McDonnell  Douglas is the  general  partner in its real estate
partnership.   It  contributed   land,   buildings,   and  improvements  to  the
partnership.  At December 31, 1996,  McDonnell  Douglas's  participation  in the
partnership was approximately 50 percent.

Research and Development

Research and  development  costs include the costs of  independent  research and
development,  bid and proposal efforts,  and costs incurred in excess of amounts
estimated  to  be  recoverable  under  cost-sharing   research  and  development
agreements. All such costs are expensed as incurred.

Research and development  expense was reduced by $29 million in 1996, $5 million
in 1995,  and $32 million in 1994 for  risk-sharing  funds received from vendors
and subcontractors participating in the development of commercial aircraft. Some
amounts may be repayable under certain circumstances.

Environmental

Environmental  expenditures  that relate to current  operations  are expensed or
capitalized,  as appropriate.  Expenditures  that extend the life,  increase the
capacity,  or mitigate or prevent  environmental  contamination are capitalized.
Expenditures that relate to an existing  condition caused by past operations and
that do not  contribute to current or future  revenue  generation  are expensed.
Liabilities are recorded when environmental  assessments and/or remedial efforts
are probable,  and the costs can be reasonably estimated.  Estimated liabilities
are not  discounted  to  present  value.  See  also  Note 16,  "Commitments  and
Contingencies."

<PAGE>

Earnings per Share

Earnings per share  computations  are based upon the weighted  average of common
shares outstanding  during the year. Common stock equivalents  (options) are not
material.

Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based  Compensation,"  encourages,  but does
not require,  companies to record  compensation  cost for  stock-based  employee
compensation  plans at fair value.  McDonnell  Douglas has chosen to continue to
account  for  stock-based  compensation  plans  in  accordance  with  Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related  Interpretations.  The Company has  adopted the  disclosure-only  option
under SFAS No. 123 as of December 31, 1996. See also Note 13.

Reclassification

In 1996,  McDonnell  Douglas  reclassified cash flows related to certain finance
receivables  and  property  on lease  from  operating  activities  to  investing
activities.  The  prior  years  have  been  restated  to  conform  with the 1996
presentation.

2.  Proposed Merger with The Boeing Company

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

3.  Accounts Receivable

Accounts receivable consisted of the following:

     December 31                                     1996      1995
                                                   ------    ------
     MDC Aerospace
       U.S. Government - primarily from
         long-term contracts
           Billed                                   $ 361     $ 361
           Unbilled                                   283       322
                                                    ------    ------
                                                      644       683
       Commercial and other governments               238       136

     Financial Services                                           2
                                                    ------    ------
                                                    $ 882     $ 821
                                                    ======    ======

MDC Aerospace also had net  receivables  from Financial  Services of $82 million
and $115 million at December 31, 1996 and 1995, respectively.

<PAGE>

Unbilled  receivables at December 31, 1996,  include  unbillable amounts of $131
million. Unbillable amounts include the estimated sales value of items delivered
or other work performed that lacks contractual  documentation to permit billing.
Approximately  $52  million of the 1996  unbilled  amount is not  expected to be
collected within one year.

                                                  [Annual Report Page 43]

McDonnell  Douglas  has an  agreement  with a  financial  institution  to sell a
participation  interest  in a  designated  pool  of  government  and  commercial
receivables,  with limited  recourse,  in amounts up to $300 million.  Under the
agreement,  participation  interests in new  receivables  are sold as previously
sold amounts are collected.  The participation interests are sold at a discount,
which is  included in general and  administrative  expenses in the  consolidated
statement  of  operations.  The Company  acts as an agent for the  purchaser  by
performing record-keeping and collection functions. No receivable interests were
sold as of December 31, 1996 and 1995.

4.  Finance Receivables and Property on Lease

Finance and lease receivables and property on lease consisted of the following:

   December 31                                     1996         1995
                                                 --------     --------
   Financial Services
     Investment in finance leases
       Minimum lease payments                    $ 2,354      $ 1,800
       Residual values                               437          322
       Unearned income                            (1,092)        (801)
                                                 --------     --------
                                                   1,699        1,321

     Notes receivable                                322          271

     Allowances for doubtful receivables             (50)         (42)

     Investment in operating leases, net of
       accumulated depreciation of $185 in
       1996, $172 in 1995                            819          568

     Property held for sale or lease                  46           64
                                                 --------     --------
                                                   2,836        2,182

   MDC Aerospace                                     254          165
                                                 --------     --------
                                                 $ 3,090      $ 2,347
                                                 ========     ========

The aggregate amount of the scheduled  principal payments and installments to be
received on notes and lease  receivables  and the minimum rentals to be received
under  noncancelable  operating leases for Financial  Services  consisted of the
following at December 31, 1996:

                         Principal Payments
                          and Installments        Minimum Rentals
                         ------------------       ---------------
     1997                   $  590                     $124
     1998                      254                      105
     1999                      281                       90
     2000                      227                       69
     2001                      220                       61
     After 2001              1,104                      395

<PAGE>

Concentration of Credit Risk

Financial Services'  financing and leasing portfolio  (excluding $150 million at
December 31, 1996, and $135 million at December 31, 1995, of MDRC)  consisted of
the following:

  December 31                                1996               1995
                                       ---------------    ---------------

  Commercial aircraft financing
    McDonnell Douglas aircraft
      financing                        $1,659    61.8%    $1,286    62.8%
    Other commercial aircraft
      financing                           207     7.7%       194     9.5%
                                       ------   ------    ------   ------
                                        1,866    69.5%     1,480    72.3%

  Commercial equipment leasing            820    30.5%       567    27.7%
                                       ------   ------    ------   ------
    Total portfolio                    $2,686   100.0%    $2,047   100.0%
                                       ======   ======    ======   ======

The single largest  commercial  aircraft  financing  customer accounted for $375
million (14.0 percent of total portfolio) in 1996 and $282 million (13.8 percent
of total portfolio) in 1995. The five largest accounted for $1.231 billion (45.8
percent) and $921 million (45.0 percent) in 1996 and 1995, respectively.

There were no  significant  concentrations  by customer in  Financial  Services'
portfolio for commercial equipment leasing.

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

<PAGE>

5.  Contracts in Process and Inventories

Contracts in process and inventories consisted of the following:

     December 31                                     1996         1995
                                                   --------     --------
     Government contracts in process               $ 5,177      $ 5,451
     Commercial products in process                  2,211        1,936
     Material and spare parts                          713          634
     Progress payments to subcontractors               843        1,185
     Progress payments received                     (5,458)      (5,785)
                                                   --------     --------
                                                   $ 3,486      $ 3,421
                                                   ========     ========

Substantially  all  government  contracts in process (less  applicable  progress
payments received)  represent unbilled revenue and revenue that is currently not
billable.

The U.S.  Navy on  January 7,  1991,  notified  McDonnell  Douglas  and  General
Dynamics  Corporation  (the Team) that it was terminating for default the Team's
contract  for  development  and initial  production  of the A-12  aircraft,  and
demanded  repayment  of the amounts paid to the Team under such  contracts.  The
Team filed a legal action to contest the Navy's default  termination,  to assert
its  rights  to  convert  the  termination  to one for "the  convenience  of the
Government,"  and to obtain payment for work done and costs incurred on the A-12
contract but

                                                  [Annual Report Page 44]

not paid to date.  At December  31, 1996,  Contracts in Process and
Inventories  included  approximately  $574 million of recorded costs on the A-12
contract,  against which the Company has  established  a loss  provision of $350
million.  The amount of the provision,  which was established in 1990, was based
on the Company's belief that the termination for default would be converted to a
termination  for  convenience,  that the Team would  establish a minimum of $250
million in claims  adjustments,  that there was a range of  reasonably  possible
results on termination for  convenience,  and that it was prudent to provide for
what  the  Company  then  believed  was the  upper  range  of  possible  loss on
termination for convenience, namely $350 million.

On  December  19,  1995,  the U.S.  Court of  Federal  Claims  ordered  that the
Government's  termination  of the A-12  contract  for default be  converted to a
termination for  convenience of the Government.  On December 13, 1996, the Court
issued an opinion confirming its prior no-loss adjustment and no-profit recovery
order. In an early 1997 stipulation, the parties agreed that, based on the prior
orders and findings of the court,  plaintiffs  were  entitled to recover  $1.071
billion.  Furthermore, on January 22, 1997, the court issued an opinion in that
it ruled that  plaintiffs  are entitled to recover  interest on that  amount.  A
judgment is expected to be issued in the near future.

Although the  Government is expected to appeal the judgment,  McDonnell  Douglas
believes that it will be sustained. Final resolution of the A-12 litigation will
depend on such appeals and possible further  litigation,  or negotiations,  with
the Government. If sustained,  however, the expected damages judgment, including
interest, ultimately could result in pretax income ranging up to an amount which
could more than offset the loss provision established in 1990.

<PAGE>

In 1984, the Company entered into a full-scale  development  letter contract for
the T-45 Training System.  The final  negotiated firm  fixed-price  contract was
agreed to in 1986. As a result of flight testing in late 1988, the Navy required
that changes be made to the T-45  aircraft.  The Company made the  improvements;
and the  cost  of  these  changes  increased  the  cost  at  completion  for the
development and low-rate initial-production  contracts beyond the fixed price of
such contracts.

The Company submitted to the Navy claims for an equitable adjustment in contract
price,  and schedule and other  appropriate  relief for such  improvements;  the
Company recorded an expected $225 million recovery on such claims.

In August 1996,  the Company and the Navy agreed to settle the T-45 claims;  and
in September 1996, the Navy paid McDonnell  Douglas $209 million.  The agreement
also provided for the resolution of several  contract  issues and the conclusion
of certain  business  arrangements.  McDonnell  Douglas  recorded a $14  million
charge to pretax  earnings in the third quarter of 1996 in  connection  with the
settlement and the resolution of such contract issues.

Prior to October 1, 1995,  MD-11  production  and tooling  costs were charged to
cost of sales based on the  estimated  average  unit cost for the  program.  The
estimated  average  unit costs were based on cost  estimates  of a  301-aircraft
program.  The costs  incurred per unit in excess of the  estimated  average unit
cost were deferred, to be recovered by production and sale of lower-than-average
cost units. In applying the  program-average  method,  the Company estimated (1)
the  number of units to be  produced  and sold in the  program,  (2) the rate at
which the units were  expected to be produced  and sold,  and thus the period of
time to accomplish that, and (3) selling prices, production costs, and the gross
profit margin for the total program.

Effective October 1, 1995,  McDonnell Douglas changed its accounting for cost of
sales on the MD-11 aircraft program from the  program-average  cost basis to the
specific-unit  cost basis. At the same time,  McDonnell  Douglas  revalued MD-11
program  support costs  previously  valued in  inventories  consistent  with the
program-average  cost concept.  MD-11 program support costs are now allocated to
current  production.  This change to the  specific-unit  costing  method for the
MD-11 program was made in recognition of production rates,  existing order base,
and length of time  required  to  achieve  program  deliveries,  and  thus,  the
resultant increased  difficulty - which became apparent in the fourth quarter of
1995 - in making the estimates  necessary  under the  program-average  method of
accounting.  Because  the  effect of this  change in  accounting  principle  was
inseparable from the effect of the change in accounting estimate, the change was
accounted for as a change in estimate. As a result, McDonnell Douglas recorded a
noncash  charge to operations of $1.838  billion in the fourth  quarter of 1995.
The effect of the charge was to decrease 1995 net earnings by $1.123 billion, or
$4.95 per share.

<PAGE>

6.  Property, Plant, and Equipment

The major categories of properties consisted of the following:

     December 31                                   1996         1995
                                                 --------     --------
     MDC Aerospace
       Land                                      $    98      $    91
       Buildings and fixtures                      1,690        1,647
       Machinery and equipment                     2,201        2,161
       Accumulated depreciation                   (2,598)      (2,541)
                                                 --------     --------
                                                   1,391        1,358
     Financial Services -  net                        62          113
                                                 --------     --------
                                                 $ 1,453      $ 1,471
                                                 ========     ========

                                                  [Annual Report Page 45]
7.  Other Assets                   

Other assets consisted of the following:

     December 31                                   1996         1995
                                                  --------     --------
     MDC Aerospace
       Prepaid pension asset                     $ 1,306      $ 1,267
       Prepaid expenses                               71           69
       Intangible assets                              63           55
       Other                                          95          136
                                                 --------     --------
                                                   1,535        1,527
     Financial Services                               91           82
                                                 --------     --------
                                                 $ 1,626      $ 1,609
                                                 ========     ========

8.  Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

     December 31                                   1996         1995
                                                 --------     --------
     MDC Aerospace
       Accounts and drafts payable               $ 1,233      $ 1,065
       Accrued expenses                              834          783
       Employee compensation                         403          335
                                                 --------     --------
                                                   2,470        2,183
     Financial Services                              125          101
                                                 --------     --------
                                                 $ 2,595      $ 2,284
                                                 ========     ========

Financial Services also had net accounts payable to MDC Aerospace of $82 million
and $115 million as of December 31, 1996 and 1995, respectively.

<PAGE>

9.  Income Taxes

Income taxes consisted of the following:

     December 31                                   1996         1995
                                                  ------       ------
     Financial Services
       Current tax assets                        $  (23)      $   (6)
       Deferred tax liabilities                     384          324
                                                  ------       ------
        Net tax liability                           361          318

     MDC Aerospace
       Current tax liabilities                      148           62
       Deferred tax assets                         (426)        (377)
                                                  ------       ------
        Net tax asset                              (278)        (315)
                                                 -------       ------
                                                 $   83        $   3
                                                 =======       ======
Tax  effects  of  temporary  differences  that  gave  rise to the  deferred  tax
liability (asset) consisted of the following:

     December 31                                   1996         1995
                                                  ------       ------
     Financial Services
       Deferred tax assets
         Bad debts                              $   (18)      $  (42)
         Other                                       (6)         (14)

       Deferred tax liabilities
         Leased assets                              403          371
         Other                                        5            9
                                                 -------      -------
          Net deferred tax liabilities              384          324

     MDC Aerospace
       Deferred tax assets
         Retiree medical                           (420)        (453)
         Long-term contracts and related
           liabilities                             (369)        (422)
         Other                                     (263)        (147)

       Deferred tax liabilities
         Pension plan                               486          478
         Other                                      140          167
                                                 -------      -------
          Net deferred tax assets                  (426)        (377)
                                                 -------      -------

     Net deferred tax asset                      $  (42)      $  (53)
                                                 =======      =======
<PAGE>

The Company's income tax provision (benefit) consisted of the following:

     Years Ended December 31                 1996      1995      1994
                                            ------    ------    ------
     U.S. federal
       Current                              $ 350     $ 289     $  115
       Deferred                                26      (546)       151
                                            ------    ------    -------
                                              376      (257)       266
     State
       Current                                 61        33         20
       Deferred                                (6)     (112)        33
                                            ------    ------    -------
                                               55       (79)        53

     Foreign                                    4         2          3
                                            ------    ------    ------
     Income tax provision (benefit)        $  435     $(334)     $ 322
                                            ======    ======    =======

The  following  is a  reconciliation  of the  pro  forma  income  tax  provision
(benefit)  computed by applying the U.S. federal statutory rate of 35 percent to
the recorded income tax provision:

     Years Ended December 31                 1996      1995      1994
                                            ------    ------    ------
     Pro forma income tax provision (benefit)
       computed at the statutory U.S.
       federal income tax rate             $  428     $(262)    $ 322
     State income tax provision (benefit)
       net of effect on pro forma
       U.S. federal tax                        35       (31)       34
     Increase (decrease) in taxes
       resulting from:
         Export tax-exempt income             (20)      (10)       (8)
         Executive life insurance              (7)      (16)      (12)
         Settlement of tax issues                       (21)      (15)
         Other - net                           (1)        6         1
                                            ------    ------    ------
     Income tax provision (benefit)         $ 435     $(334)    $ 322
                                            ======    ======    ======
<PAGE>


Pretax earnings from foreign subsidiaries included in continuing operations, but
excluding the operations of McDonnell  Douglas Foreign Sales  Corporation,  were
$10 million in 1996, $4 million in 1995, and $2 million

                                                  [Annual Report Page 46]

in 1994.  Provisions for foreign income taxes are computed at applicable foreign
rates.  Undistributed  earnings of foreign  subsidiaries  are  considered  to be
permanently invested.  Accordingly,  no provision has been made for U.S. federal
income taxes on $128 million of undistributed earnings of foreign subsidiaries.

The Company  settled  certain  state tax issues in 1995,  which  resulted in net
earnings of $35  million,  of which $14 million  was  related to  reductions  in
accrued  interest and $21 million was related to tax  reductions.  In 1994,  the
Company  settled  certain  accounting  method  and tax  credit  issues  with the
Internal Revenue Service (IRS) in connection with an IRS audit of the years 1986
through 1989.  The  resolution  of these issues  resulted in net earnings of $21
million, of which $6 million was related to reductions in accrued interest.

McDonnell  Douglas has filed with the IRS refund claims dating back to 1986. The
Company is seeking to recover additional research and development tax credits it
believes  it is  due in  relation  to  several  of  its  government  fixed-price
development  programs.  McDonnell  Douglas has not recorded these credits as the
claims are under  review by the IRS.  Should the  Company  prevail,  the credits
earned will increase income.

10.  Debt and Credit Arrangements

Consolidated debt consisted of the following classifications:

                                        Current
 December 31                         Interest Rate    1996       1995
                                     -------------  --------   --------
 Short-term debt

   Financial Services                 5.9% -  6.8%   $   141    $    10

 Long-term debt

   MDC Aerospace
      Senior debt securities,
       due through 2012               6.9% -  9.8%     1,395      1,145
      Senior medium-term notes,
       due in 1997                    6.0% -  8.1%        20         75
      Other debt, due through 2005    5.8% - 11.5%         8          9
                                                    --------   --------
         Total MDC Aerospace long-term debt            1,423      1,229

Financial Services
      Senior debt securities,
        due through 2008              3.9% -  9.4%       159        217
      Senior medium-term notes,
        due through 2017              5.5% - 13.6%     1,104        867
      Subordinated medium-term notes,
        due through 2004              5.5% -  8.3%        95        120
      Other notes, due through 2017   6.5% - 10.4%        20          7
      Other debt, due through 2003        8.7%            15         22
      Capital lease obligations,
        due through 2008                                 476        248
                                                    --------   --------
         Total Financial Services long-term debt       1,869      1,481
                                                    --------   --------
Total long-term debt                                   3,292      2,710
                                                    --------   --------
Total debt                                           $ 3,433    $ 2,720
                                                    ========   ========
<PAGE>

The  aggregate  amount of  long-term  debt at  December  31,  1996,  maturing by
calendar year for 1997 to 2001, was as follows:

                       MDC Aerospace       Financial Services
                       -------------       ------------------
     1997              $   271                 $   212
     1998                    1                     286
     1999                    1                     288
     2000                  201                     222
     2001                    1                     189

The weighted  average  interest  rates on short-term  borrowings  outstanding at
December 31, 1996 and 1995, were 6.3 percent and 6.1 percent, respectively.

MDC Aerospace Credit Agreements

MDC Aerospace has a revolving credit  agreement  (RCA),  amended and restated in
January 1997,  under which MDC Aerospace may borrow up to $1.75 billion  through
January 2002. MDC Aerospace has the option to increase that limit by 20 percent.
Under the RCA, the interest rate, at the option of MDC Aerospace,  is a floating
rate  generally  based on (1) a defined prime rate,  (2) a fixed rate related to
the London interbank offered rate (LIBOR),  or (3) as quoted under a competitive
bid.  A fee is  charged  on the  amount  of the  commitment.  The  RCA  contains
restrictive  covenants including,  but not limited to, indebtedness,  subsidiary
indebtedness,   customer  financing,  and  liens.  There  were  no  RCA  amounts
outstanding at December 31, 1996.

During  1996,  MDC  Aerospace  filed a shelf  registration  statement  with  the
Securities and Exchange Commission (SEC) relating to debt securities. The filing
increased a prior  offering,  commenced in 1992 for up to $550 million of notes,
by an aggregate  principal amount of $1 billion.  In the fourth quarter of 1996,
the Company  issued $250  million of 6 7/8 percent  notes due in 2006 under this
shelf  registration.  As of December 31, 1996, MDC Aerospace had $948 million of
unissued debt  securities  registered with the SEC. The interest rate applicable
to each note and certain other  variable  terms are  established  at the date of
issue.

Financial Services Credit Agreements

During  1996,  MDFS and MDFC  amended  their joint RCA to  provide,  among other
things,  for  increased  borrowing  capacity and to extend the maturity  date to
August  2001.  Under the  amended  agreement,  MDFC may borrow a maximum of $240
million, reduced by MDFS borrowings under this same agreement, which are limited
to $16 million.  The interest  rate,  at the option of MDFC or MDFS, is either a
floating rate,  generally based on a defined prime rate or fixed rate related to
LIBOR. There were no outstanding borrowings under this agreement at December 31,
1996.  Commercial

                                                  [Annual Report Page 47]

paper  issued by MDFC in the amount of $96 million was  outstanding  at December
31,  1996.  The joint RCA could  therefore be used to support the full amount of
commercial paper outstanding.
<PAGE>

Various credit and debt agreements require MDFC to maintain a minimum net worth,
to  restrict  indebtedness,  and  to  limit  MDFC's  cash  dividends  and  other
distributions.

During the second  quarter of 1995,  MDFC filed a shelf  registration  statement
with the SEC relating to up to $750 million  aggregate  principal amount of debt
securities.  MDFC established a $500 million medium-term note program under this
registration statement. As of December 31, 1996, MDFC had issued $490 million of
such notes.

During July 1995,  MDFS  initiated a  medium-term  note program  under a private
placement  of up to  $100  million  principal  amount.  This  note  program  was
increased  to $200  million in April 1996.  As of December  31,  1996,  MDFS had
issued $135 million of securities under this program.

MDFC's  senior debt at  December  31,  1996,  included  $55  million  secured by
equipment that had a carrying  value of $72 million.  MDRC's debt of $35 million
at December 31, 1996,  was secured by  indentures of mortgage and deeds of trust
on its  interest in real estate  developments  that had a carrying  value of $50
million.

11.   Financial Instruments

McDonnell Douglas uses derivative  financial  instruments to manage well-defined
foreign exchange  subcontract price risks and foreign currency  denominated debt
risks,  and  on a  selective  basis  to  reduce  the  impact  of  interest  rate
fluctuations on certain debt  instruments.  McDonnell  Douglas does not trade in
derivatives for speculative purposes.

At  December  31,  1996,  the  notional  amount of  forward  exchange  contracts
denominated in currencies of major  industrial  countries was $333 million.  The
terms of the  currency  derivatives  vary,  but the longest is three  years.  At
December  31,  1996,  unrealized  gains,  net of  losses,  on  foreign  exchange
contracts  were $23 million.

At December 31, 1996,  MDFC had interest rate swap
agreements outstanding as follows:

                          Contract    Notional   Receive        Pay
                          Maturity     Amount     Rate          Rate


Capital lease
  obligations            2006 - 2008    $400     Floating   6.7% - 7.6%
Medium-term notes           1997        $ 20     Floating       6.7%
Medium-term notes        2000 - 2001    $ 50    6.8% - 8.6%   Floating
<PAGE>

The floating rates are based on LIBOR or on Federal Funds.

Because of the off-balance-sheet nature of derivative instruments,  counterparty
failure would result in recognition of unrealized gains and losses.  The Company
does not anticipate nonperformance by any of its counterparties.

The following  methods and  assumptions  were used in estimating  the fair value
disclosure amounts of financial instruments:

       CASH AND CASH  EQUIVALENTS:  The carrying  amount reported in the balance
       sheet for cash and cash equivalents approximates its fair value.

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

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

The carrying amounts and fair values of financial instruments were as follows:

                                 MDC Aerospace      Financial Services
                               ------------------   ------------------
                               Carrying    Fair     Carrying    Fair
                                Amount     Value     Amount     Value
                               --------   -------   --------   -------
  December 31, 1996
  -----------------
    Cash and cash
      equivalents               $1,077    $1,077     $   17   $    17
    Notes receivable               101       100        315       324
    Short-term notes
      payable                                           141       141
    Long-term debt               1,423     1,562      1,393     1,432

  December 31, 1995
  -----------------
    Cash and cash
      equivalents               $  784    $  784     $   13    $   13
    Notes receivable                67        67        265       273
    Short-term notes
      payable                                            10        10
    Long-term debt               1,229     1,404      1,233     1,302
<PAGE>

                                                     [Annual Report Page 48]

12.   Common and Preferred Shares

The authorized common stock of McDonnell Douglas is 400 million shares,  each of
$1.00 par value.  The following table summarizes  changes in shares  outstanding
for the periods presented:
                                                      Common Shares
                                                       Outstanding
                                                      -------------

     Balance January 1, 1995                           233,472,582

     Shares repurchased                                (10,430,200)
     Employee stock awards and options                     605,096
                                                      -------------
     Balance December 31, 1995                         223,647,478

     Shares repurchased                                (14,657,071)
     Employee stock awards and options                     604,198
                                                      -------------
     Balance December 31, 1996                         209,594,605
                                                      =============

In  January  1996,  the  McDonnell  Douglas  Board  of  Directors  authorized  a
two-for-one split of the common stock. Shareholders' equity has been restated to
give  retroactive  recognition  to the stock split for all periods  presented by
reclassifying, from additional capital or retained earnings to common stock, the
par value of the  additional  shares  arising from the split.  In addition,  all
references to number of shares,  per share amounts,  and market prices of common
stock have been restated to reflect the stock split.

In October 1994, the Company's  Board of Directors  approved a stock  repurchase
plan that authorized  McDonnell  Douglas to purchase up to 36 million shares, or
about 15 percent of its then-outstanding common stock. Repurchased common shares
are treated as authorized but unissued shares, and they remain available for use
to meet the  Company's  current and future  common  stock  requirements  for its
benefit plans and for other corporate purposes.  Through  mid-December 1996, the
Company had acquired 29 million  shares,  or about 81 percent of the  authorized
repurchase amount, at a cost of $1.1 billion. The Company suspended common stock
acquisitions  associated with the repurchase program as a result of the proposed
merger with Boeing. See Note 2 for a further discussion of the proposed merger.


<PAGE>

At December 31, 1996, a total of 11.9 million  shares of authorized and unissued
common stock was  reserved  for issuance of stock awards and options  granted or
authorized  to  be  granted.   Also,  23.8  million  shares  were  reserved  for
contributions  to the Company's  savings plans. At December 31, 1996, there were
10 million shares,  $1.00 par value,  preferred  stock  authorized for issuance;
however, none had been issued.

During 1990,  the Board of  Directors  declared a dividend  distribution  of one
preferred  stock  purchase  right (Right) for each  outstanding  share of common
stock. Among other provisions,  each Right may be exercised to purchase from the
Company one  one-hundredth  of a share of a new series of preferred  stock.  The
Rights are exercisable only after (1) a person or group has acquired or obtained
the right to acquire 20 percent or more of the Company's common stock or (2) the
commencement of a tender offer or exchange offer,  for 20 percent or more of the
voting power of the Company. In conjunction with the 1996 stock split, the Board
of Directors authorized the adjustment of the exercise price to $125. The Rights
expire  December 31,  2004.  They may be redeemed by the Company at a price of 1
cent per Right at any time until 10 business  days after the  acquisition  of 20
percent of the  Company's  common  stock.  The Board of Directors of the Company
retains the authority to amend or supplement the Rights.

If any person or group acquires 20 percent of the Company's  common stock,  each
holder of a Right will have the right to  receive  upon  exercise  the number of
shares of common  stock  having a market  value equal to two times the  exercise
price of the Right.  If the Company is acquired,  each Right may be exercised to
purchase  the number of shares of common stock of the  surviving  or  purchasing
company that at the time of such transaction  would have a market value equal to
two times the purchase price.

In December  1996,  the Board of Directors  approved the proposed  merger,  with
Boeing  becoming  the owner of 20  percent  or more of the  voting  power of the
Company.  The  Board  also  resolved  that  Boeing  would not be  considered  an
acquiring person or group as such term is defined in the Rights Agreement.

13.  Stock-Option and Incentive Plans

In April 1994,  the Company's  shareholders  approved the 1994  Performance  and
Equity  Incentive  Plan  (PEIP).  Under  the  PEIP,  11.4  million  shares  were
authorized  for  issuance  or sale  in  connection  with  stock  options,  stock
appreciation rights, restricted stock, performance shares, and other stock-based
awards. Options may be granted to officers and employees at an exercise price of
no less than the fair  market  value of the  shares on the date of grant.  As of
December 31, 1996, a total of 1.7 million restricted shares of McDonnell Douglas
common stock had been granted.  Compensation  related to these restricted shares
is being amortized to expense over periods of three to five years,  depending on
the award.  Unearned  compensation is reflected as a component of  shareholders'
equity.

Certain awards granted prior to approval of the PEIP remain  outstanding.  These
include  awards  made under the  Incentive  Award Plan (IA  Plan),  approved  by
shareholders  in 1986, in the form of stock,  nonqualified  stock  options,  and
incentive stock options.


<PAGE>

                                                  [Annual Report Page 49]

Options to purchase the McDonnell  Douglas  common stock have been granted under
the  Company's   compensation   plans.   In  1996,   the  Company   adopted  the
disclosure-only  alternative  under SFAS No. 123,  "Accounting  for  Stock-Based
Compensation."  If the  accounting  provisions  of the new  statement  had  been
adopted as of the beginning of 1996,  the effect on 1996 net earnings would have
been immaterial.

The following is a summary of options for McDonnell Douglas common stock:

     Years Ended December 31                     1996         1995
                                               --------     --------
     Granted under the PEIP
       Number of shares                                       40,000
       Price per share                                         $24
     Exercised under the IA Plan
       Number of shares                          84,100      136,610
       Price per share                           $6-$10       $6-$10

     December 31                                 1996         1995
                                               --------     --------
     Outstanding
       Number of shares                       1,030,686    1,114,786
       Price per share                           $9-$24       $6-$24
     Exercisable
       Number of shares                         290,686      184,786
       Price per share                           $9-$24       $6-$24

The  following  table  summarizes  additional  information  about stock  options
outstanding at December 31, 1996:

                                 Weighted
  Exercise      Outstanding      Average     Exercisable
   Price          Shares          Life*         Shares
-----------     -----------      -------       ---------

     $10           43,457           0.3         43,457
     $ 9           47,229           1.3         47,229
     $24           40,000           8.1         20,000
     $18          900,000          11.8        180,000

                ----------                     --------
Total           1,030,686          10.6        290,686
                ==========                     ========

*Weighted average contractual life remaining, in years.

At December 31, 1996, the weighted average exercise price of options outstanding
and exercisable was $18 and $16, respectively.

Under the terms of certain of these, and other cash award plans, consummation of
the  proposed  merger with Boeing would  result in  accelerating  the payment of
certain benefits that would otherwise have been payable over time, early vesting
of certain  benefits,  and the use of  modified  formulas  for  calculating  the
amounts of such  benefits.  The effect of the above has not been included in the
1996 McDonnell Douglas financial  statements,  but is expected to be included in
the estimated costs and expenses to be incurred in connection with  consummating
the proposed merger. In addition,  upon consummation,  the proposed merger would
result in outstanding stock option, stock appreciation right,  restricted stock,
performance  shares, and other stock-based  awards' being converted into similar
instruments of Boeing.

<PAGE>

14.  Retirement Plans

Most employees of the Company are participants in defined benefit pension plans,
including several multiemployer and foreign plans. In addition,  the Company has
a  supplementary  unfunded  pension  plan to  provide  those  benefits  that are
otherwise  due  employees  under the  defined  benefit  pension  plans'  benefit
formulas,  but that are in excess of the  benefits  the  Internal  Revenue  Code
permits companies to offer under the defined benefit pension plans. Benefits for
salaried  plans are based  primarily  on salary  and years of  service,  whereas
benefits for hourly plans are generally  based on a fixed dollar amount per year
of service.

The Company measures  pension cost and makes  contributions to its pension plans
according to independent actuarial valuations. It uses the projected unit credit
actuarial  cost  method  to  determine  pension  cost for  financial  accounting
purposes and,  beginning in 1996, to determine  funding  levels and pension cost
allocable to government contracts consistent with the provisions of SFAS No. 87,
"Employers'  Accounting  for  Pensions."  Funding  levels and pension  cost
allocable to  government  contracts  were  determined  by the  entry-age  normal
actuarial cost method prior to 1996.

The assets of the plans  consist  principally  of  marketable  fixed  income and
equity  securities.  At  December  31,  1996,  the plans held $35 million of the
Company's senior debt securities with varying interest rates and maturity dates,
as well as 144,000 shares of McDonnell Douglas common stock.

The following  assumptions  were used to determine net periodic  pension expense
(income)  and  the  actuarial  present  value  of  benefit  obligations  for the
significant domestic plans:
 
     Years Ended December 31              1996       1995       1994
                                        --------   --------   --------
     Discount rate
       January 1                           7.5%       8.25%       7.5%
       December 31                        7.75%        7.5%      8.25%

     Average rates of increase in
       compensation based upon age -
       salaried plans
         January 1                         4.5%        5.0%       5.0%
         December 31                       5.0%        4.5%       5.0%

     Expected return on plan assets        9.3%        9.3%       9.3%

<PAGE>

                                                  [Annual Report Page 50]

Periodic  pension expense  (income) for the significant  domestic  pension plans
included the following components:

     Years Ended December 31              1996       1995       1994
                                       --------     ------     ------
     Service cost for the year         $   110     $   91      $ 119
     Interest cost on pension
       benefit obligations                 339        305        278
     Return on plan assets
       Actual                           (1,058)    (1,285)       (64)
       Deferred gain (loss)                520        791       (403)
     Net amortization                      (41)       (67)       (62)
                                       --------    -------     ------
     Domestic plans                    $  (130)    $ (165)     $(132)
                                       ========    =======     ======
     Foreign and other plans           $     3     $    4      $   6
                                       ========    =======     ======

An analysis of the funded status of the significant pension plans follows:

     December 31                                    1996         1995
                                                  --------     --------
     Actuarial present value of accumulated
       benefit obligations
         Vested                                   $ 4,401      $ 4,002
         Nonvested                                    282          276
                                                  --------     --------
     Accumulated benefit obligation                 4,683        4,278

     Additional amounts related to projected
       future salary increases                        406          355
                                                  --------     --------
     Projected benefit obligation                   5,089        4,633

     Plan assets, at fair value                     6,976        6,140
                                                  --------     --------
     Excess of plan assets                          1,887        1,507

     Items not yet recognized in earnings
       Unrecognized net transition asset             (345)        (418)
       Unrecognized prior service cost                718          657
       Deferred net gain                             (970)        (490)
                                                  --------     --------
     Domestic plans                                 1,290        1,256

     Foreign plans                                     16           11
                                                  --------     --------
     Prepaid pension asset                        $ 1,306      $ 1,267
                                                  ========     ========

During 1995,  the Company  amended its  significant  domestic  pension  plans to
increase  pension  benefits  for  current  and  future  nonunion  retirees.  The
increases became effective December 1, 1996.

<PAGE>

Effective January 1, 1993, the Company amended its significant  domestic pension
plans to provide a supplemental  pension benefit to nonunion  retirees who elect
to  participate  in the new health  care plan  funded  entirely  by  participant
contributions.  The effect of this amendment was to increase  unrecognized prior
service cost as of December 31, 1992, by $385 million. The Company recorded this
liability in connection with the adoption of and subsequent  accounting for SFAS
No.  106,  "Employers'   Accounting  for  Postretirement   Benefits  Other  Than
Pensions," during 1992.

The Company has no intention of terminating  any of its pension plans.  However,
if a  qualified  defined  benefit  pension  plan is  terminated  and all accrued
liabilities to employees and their  beneficiaries  are satisfied,  all remaining
assets in the plan's  trust revert to the  employer  (except in certain  limited
circumstances where a change in control has occurred within the five-year period
preceding the  termination).  In such a case, the following  consequences  would
ensue:  First, a nondeductible  20 percent to 50 percent excise tax on the gross
amount of the reversion would be imposed.  Second,  under a regulation issued by
the U.S. Department of Defense and other Government  contracting  agencies,  the
Government  could assert a claim to an  equitable  share (to the extent that the
Government  participated  in  pension  costs  through  its  contracts  with  the
Company).  Third, any amount that the employer then retained would be treated as
taxable income.

In addition to the defined  benefit  pension  plans,  the Company gives eligible
employees  the  opportunity  to  participate  in savings  plans that permit both
pretax and after-tax  contributions.  Most domestic  employees  with at least 30
days of continuous  service are eligible to participate  in a plan.  Under these
plans,  the employee may contribute to various savings  alternatives,  including
the Company's  common stock. In most cases, the Company matches a portion of the
employee's contribution with contributions to the McDonnell Douglas Common Stock
Fund in the plans.  Generally,  the Company's contributions are vested after the
employee  completes five years of service.  The Company's  contributions  to the
savings plans during 1996, 1995, and 1994 totaled $94 million,  $78 million, and
$73 million, respectively.


<PAGE>

In  addition  to the above  plans,  the  Company  and  certain  of its  domestic
subsidiaries  provide  health  care  benefits  for  retirees  who are covered by
collective bargaining agreements.  Generally, such employees become eligible for
retiree health care upon  retirement from active service at or after age 55 with
10 or more years of service. Qualifying dependents are also eligible for medical
coverage.  The Company's  policy is to fund the cost of medical  benefits as the
claims are received. The retiree health care plan has provisions for participant
contributions,   deductibles, co-insurance  percentages,  out-of-pocket  limits,
schedules of reasonable  fees,  maintenance  of benefits  with other plans,  the
Medicare carve-out, and a maximum lifetime benefit per covered individual.

An analysis of the accrued retiree benefits follows:

     December 31                                   1996         1995
                                                 --------     --------
     Accumulated postretirement benefit
       obligation
         Retirees                                $   608      $   753
         Active participants fully eligible
           to retire                                 123          126
         Other active participants                    89          122
                                                 --------     --------
     Accumulated postretirement benefit
       obligation                                    820        1,001

     Items not yet recognized in earnings
         Unrecognized prior service gain             226          200
         Deferred net gain (loss)                     63          (92)
                                                 --------     --------
     Accrued retiree health care liability         1,109        1,109

     Liability for pension supplement                              96
                                                 --------     --------
     Accrued retiree benefits                    $ 1,109      $ 1,205
                                                 ========     ========
<PAGE>

                                                   [Annual Report Page 51]

Periodic postretirement benefit expense included the following components:

     Years Ended December 31                1996       1995       1994
                                           ------     ------     ------
     Service cost for the year             $   8      $   7      $   9
     Interest cost on accumulated
       postretirement benefit obligations     67         78         77
     Net amortization                        (20)       (17)       (10)
                                           ------     ------     ------
                                           $  55      $  68      $  76
                                           ======     ======     ======

The following assumptions were used to determine periodic postretirement benefit
costs and the actuarial present value of benefit obligations:

     Years Ended December 31                1996       1995       1994
                                           ------     ------     ------
     Discount rate
       January 1                            7.5%      8.25%      7.5%
       December 31                         7.75%       7.5%     8.25%

     Health care cost trend rate
       Preferred provider non-Medicare*     8.8%      10.3%     10.2%
       Point of service non-Medicare*       6.8%       8.0%
       Medicare*                            7.7%       8.9%      8.5%
       HMO premiums                         5.0%       5.0%      6.0%

     * Decreasing to 5.0% - 5.4% after 2003

Increasing the health care cost trend rates by one percentage point would result
in a 9 percent  increase in the sum of the service and interest cost  components
of  periodic  postretirement  benefit  cost and an 8.3  percent  increase in the
accumulated postretirement benefit obligation at December 31, 1996.

15.  Leased Properties

Rental  expense for leased  properties  was $73 million in 1996,  $61 million in
1995,  and $79  million  in 1994.  These  expenses,  substantially  all  minimum
rentals,  are net of sublease income.  The Company has negotiated  noncancelable
sublease  agreements on certain of its  facilities  and  equipment  totaling $40
million during the next several years.  Minimum rental  payments under operating
leases  with  initial or  remaining  terms of one year or more  aggregated  $291
million at December 31, 1996. Payments,  net of sublease amounts, due during the
next several years are as follows:  1997, $42 million;  1998, $34 million; 1999,
$27 million; 2000, $26 million; and 2001, $27 million.

In 1996, the Company purchased $378 million in data processing  services from an
unaffiliated  company  pursuant to an outsourcing of its  information-technology
operations  in 1992.  During  the  remaining  six-year  term of the  outsourcing
agreement,   data  processing   service   payments  are  expected  to  aggregate
approximately $2 billion.

<PAGE>

The Company has entered into  sale/leaseback  arrangements (as seller/lessee) as
financing  methods for certain of its commercial  aircraft  sales.  In a typical
arrangement,  the Company  sells the  aircraft to a  financial  institution  and
immediately  agrees to lease such  equipment for a specified  time.  The Company
subleases the aircraft to the aircraft  operator.  Profit on the  transaction is
deferred and  amortized  to income over the  leaseback  term on a  straight-line
basis. At the end of the leaseback term, the Company must either  repurchase the
aircraft at an agreed value or pay a defined amount upon sale of the aircraft by
the financial institution.  The following information,  at December 31, 1996, is
provided for existing sale/leasebacks.

            Minimum Lease Payments              Sublease rentals
            ----------------------              ----------------

       1997           $ 42                             $ 47
       1998             42                               46
       1999             43                               46
       2000             44                               46
       2001             46                               29
       Remainder        55                              168
                      ----                             ----
       Total          $272                             $382
                      ====                             ====
16.   Commitments and Contingencies

A number of legal  proceedings  and  claims are  pending  or have been  asserted
against the Company,  including legal proceedings and claims relating to alleged
injuries to persons  associated  with the  disposal of hazardous  substances.  A
substantial number of such legal proceedings and claims are covered by insurance
or settlements  with insurance  companies.  The Company  believes that the final
outcome of such  proceedings and claims will not have a material  adverse effect
on its earnings, cash flow, or financial position.

The marketing of commercial  aircraft sometimes results in agreements to provide
or to guarantee  long-term  financing  of some portion of the delivery  price of
aircraft, to lease aircraft, or to guarantee customer lease payments or aircraft
values.  At  December  31,  1996,  the Company had made offers of this nature to
customers  totaling  $2.087 billion related to aircraft on order or under option
scheduled for delivery  through the year 2017.  The Company had made  guarantees
and other commitments  totaling $868 million on delivered aircraft.  At December
31, 1996,  MDFS also had  commitments to provide  leasing and other financing in
the aggregate amount of $77 million. The Company does not expect these offers or
commitments  to have a material  adverse  effect on its earnings,  cash flow, or
financial position.

<PAGE>

The Company's outstanding  guarantees include amounts related to MD-11s operated
by Viacao Aerea  Rio-Grandense  S.A.  (VARIG).  During 1994,  VARIG notified its
aircraft  lenders  and  lessors  that it was  temporarily  suspending  payments,
pending the restructuring of its financial obligations.  In connection with that
restructur-

                                                      [Annual Report Page 52]

ing, the Company made lease, loan, and interest payments totaling $70 million on
behalf  of VARIG  in 1994  and  1995.  At  December  31,  1996,  VARIG  had made
repayments  totaling  $20 million to the Company.  During  January  1996,  VARIG
requested deferral of additional  obligations  covering the January 1996 through
January 1998 period.  VARIG and the Company agreed to defer up to $60 million in
certain payments owed to the Company,  with repayment by VARIG to begin in 1998.
At December 31, 1996, the Company had made payments  related to this  additional
deferral in the amount of $27 million on behalf of VARIG.  These  restructurings
and payments have not had and, if the  restructuring  steps are successful,  are
not expected to have a material adverse effect on the Company's  earnings,  cash
flow, or financial position.

Trans  World  Airlines  Inc.  (TWA),  the  Company's  largest   aircraft-leasing
customer,  continues to operate under a  reorganization  plan,  confirmed by the
U.S.  Bankruptcy Court in 1995, that restructured its indebtedness and leasehold
obligations to its creditors.  In addition,  TWA continues to face financial and
operational  challenges  due in part to an  airliner  crash  in  July  1996  and
turnover of key management,  which occurred during 1996. The reorganization plan
and TWA's current financial condition have not had and, assuming TWA's financial
condition  does not  further  deteriorate,  are not  expected to have a material
adverse effect on the Company's earnings, cash flow, or financial position.

The  Company  is  a  party  to  a  number  of  proceedings   brought  under  the
Comprehensive Environmental Response,  Compensation, and Liability Act, commonly
known as  Superfund,  and under  similar  state  statutes.  The Company has been
identified as a potentially  responsible  party (PRP) at 37 sites. Of these, the
Company  believes  that it has de minimis  liability  at 23 sites,  including 14
sites at which it believes that it has no future liability. At five of the sites
where the Company's  liability is not  considered to be de minimis,  the Company
lacks  sufficient  information  to  determine  its  probable  share or amount of
liability.  At the remaining nine sites at which the Company's  liability is not
considered  to be de minimis,  either final or interim  cost-sharing  agreements
have been effected between the cooperating PRPs, although such agreements do not
fix the amount of cleanup  costs that parties will bear.  In addition,  the
Company  is  remediating,  or has begun  environmental  engineering  studies  to
determine  cleanup  requirements  for, certain of its current operating sites or
former sites of industrial activity.

At  December  31,  1996,  the  accrued   liability  for  study  and  remediation
expenditures  at  Superfund  sites  and  at the  Company's  current  and  former
operating  sites was $44  million.  Because of the inherent  uncertainty  of the
estimation process, it is possible that actual costs will differ from estimates.
Ongoing   operating  and  maintenance  costs  at  current  operating  sites  and
remediation  expenditures  on  property  held for sale are not  included in this
amount.  The Company  believes  that any  amounts  paid in excess of the accrued
liability  will not have a  material  effect  on its  earnings,  cash  flow,  or
financial  position.  Claims  for  recovery  are  recorded  as  receivables  and
therefore they have not been netted against the  environmental  liabilities.  At
December 31, 1996, a receivable had been recorded from one insurance carrier for
agreed reimbursement of environmental costs for $8 million.

<PAGE>

17.  Operations of MDFS

The condensed  financial data presented below have been summarized from the MDFS
audited consolidated financial statements:

     Years Ended December 31              1996       1995       1994
                                         ------     ------     ------
     Earned income                       $ 229      $ 194      $ 190
     Costs and expenses                    156        136        154
     Net earnings                           48         37         25
     Dividends                                         26         25

18.  U.S. Government and Export Sales

Consolidated  sales to U.S.  Government  agencies  (including  sales to  foreign
governments  through  foreign  military  sales  contracts  with U.S.  Government
agencies) amounted to $9.507 billion in 1996, $9.621 billion in 1995, and $9.229
billion in 1994.  No other single  customer  accounted for 10 percent or more of
consolidated revenues in 1996, 1995, or 1994.

Foreign sales,  some of which were made through foreign military sales contracts
with the U.S. Government, are shown by geographical area in the table below:

     Years Ended December 31              1996       1995       1994
                                        -------    -------    -------
     North America                      $    42    $    35    $    58
     Central and South America              347        224         25
     Western Europe                       1,993      2,186      2,161
     Eastern Europe and Asia              1,018      1,531      1,032
     Africa and the Middle East           1,289      1,098        703
     South Pacific                          353        173        256
                                        -------    -------    -------
                                        $ 5,042    $ 5,247    $ 4,235
                                        =======    =======    =======

19.  Supplementary Payment Information

     Years Ended December 31              1996       1995       1994
                                        -------    -------    -------
     Interest paid                       $ 151      $ 265      $ 313
     Income taxes paid                     342        354        162

20.  Business Segment Reporting

Selected financial data by industry segment is presented on page 34.

               

<PAGE>
                                                  [Annual Report Page 53]
                         
                      REPORT OF MANAGEMENT RESPONSIBITIES

The financial  statements of McDonnell Douglas  Corporation and its consolidated
subsidiaries  have been prepared under the direction of management in conformity
with generally accepted accounting  principles and, particularly with respect to
long-term  contracts and  programs,  include  amounts  based upon  estimates and
judgments.  The  integrity  and  reliability  of the  data  in  these  financial
statements are the  responsibility of management.  In the opinion of management,
the  financial  statements  set forth a fair  presentation  of the  consolidated
financial  condition of McDonnell Douglas at December 31, 1996 and 1995, and the
consolidated  results of its  operations  for the years ended December 31, 1996,
1995, and 1994.

There are inherent  limitations in the  effectiveness  of any system of internal
control,  including  the  possibility  of human error and the  circumvention  or
overriding of controls.  Accordingly,  even an effective internal control system
can provide  only  reasonable  assurance  with  respect to  financial  statement
preparation.  Furthermore,  the  effectiveness of an internal control system can
change with circumstances.

McDonnell Douglas and its consolidated  subsidiaries maintain accounting systems
and  related  internal  controls  that,  in the opinion of  management,  provide
reasonable   assurances  that  transactions  are  executed  in  accordance  with
management's authorization, that financial statements are prepared in accordance
with  generally  accepted  accounting  principles,  and that assets are properly
accounted for and safeguarded.

Ethical decision making is fundamental to the Company's  management  philosophy.
Management recognizes its responsibility for fostering a strong ethical climate.
Written codes of ethics and  standards of business  conduct are  distributed  to
every employee, and each employee has been trained or will be trained in ethical
decision  making.  The Board of Directors'  Corporate  Responsibility  Committee
oversees standards of business conduct.

The Board of Directors has appointed four of its nonemployee members to an Audit
Committee.  This  committee  meets  periodically  with  management  and with the
internal and independent  auditors.  Both internal and independent auditors have
unrestricted  access to the Audit  Committee  to  discuss  the  results of their
examinations  and the  adequacy of internal  controls.  In  addition,  the Audit
Committee recommends independent auditors to the Board.


/s/ Harry C. Stonecipher
Harry C. Stonecipher
President and Chief Executive Officer


/s/ James F. Palmer
James F. Palmer
Senior Vice President and Chief Financial Officer
January 22, 1997


<PAGE>



REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



Shareholders and Board of Directors
McDonnell Douglas Corporation


We have audited the accompanying balance sheet (including the consolidating data
for MDC Aerospace and Financial  Services) of McDonnell Douglas  Corporation and
consolidated  subsidiaries  (MDC) as of  December  31,  1996 and  1995,  and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the three years in the period ended  December 31, 1996.  These
financial   statements  are  the   responsibility  of  MDC's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of McDonnell Douglas  Corporation
and   consolidated   subsidiaries  at  December  31,  1996  and  1995,  and  the
consolidated  results of MDC's  operations  and MDC's cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted accounting principles.

As discussed in Notes 1 and 5 to the consolidated financial statements,  in 1995
MDC changed its method of accounting for the MD-11 commercial aircraft program.





/s/ Ernst & Young LLP
Ernst & Young LLP
St. Louis, Missouri
January 22, 1997

<PAGE>
                                             [Annual Report Page 54]
Five-Year Consolidated Financial Summary
--------------------------------------------------------------------------------

(Dollar amounts in millions, except per share data)
--------------------------------------------------------------------------------
December 31 or Years Then Ended  1996     1995      1994     1993       1992
--------------------------------------------------------------------------------

Summary of Operations
Revenues by industry segment
  Military aircraft           $ 7,952  $ 8,158   $ 7,804  $ 6,852    $ 7,238
  Commercial aircraft           3,317    3,891     3,155    4,760      6,595
  Missiles, space, and 
    electronic systems          2,178    1,917     1,877    2,575      3,169
  Financial services and other    367      334       326      287        352
                              --------------------------------------------------
Operating revenues             13,814   14,300     13,162   14,474    17,354
Earnings (loss) from 
    continuing operations         788     (416)(a)    598      359       698(b)
  Per share                      3.64     (1.83)(a)  2.53     1.53      3.00(b)
Net earnings (loss)               788     (416)(a)    598      396      (781)(c)
  Per share                      3.64     (1.83)(a)  2.53     1.68     (3.35)(c)
  As a percentage of revenues     5.7%               4.5%     2.7%
  As a percentage of beginning  
    equity                       25.9%              17.5%    13.1%
Research and development          355      311        297      341       509
Interest expense
  Aerospace segments              121      116        131       89       309
  Financial services and 
    other segment                 127      109        118      126       159
Income taxes (benefit)            435     (334)       322      100       388
Cash dividends declared           104       90         65       55        55
  Per share                       .48      .40        .28      .23       .23
<PAGE>

--------------------------------------------------------------------------------
(Dollar amounts in millions, except per share data)
--------------------------------------------------------------------------------
December 31 or Years Then Ended  1996     1995       1994     1993      1992
--------------------------------------------------------------------------------
Balance Sheet Information
Cash and cash equivalents     $ 1,094  $   797    $   421  $    86  $     82
Receivables and property 
  on lease                      3,972    3,168      2,859    2,912     2,866
Contracts in process and
  inventories                   3,486    3,421      5,806    5,774     7,230
Property, plant, and equipment  1,453    1,471      1,597    1,750     1,991
Total assets                   11,631   10,466     12,216   12,026    13,781
Notes payable and 
    long-term debt
  Aerospace segments            1,438    1,251      1,272    1,625     2,767
  Financial services and other
    segment                     1,995    1,469      1,297    1,513     1,474
Shareholders' equity            3,038    3,041      3,872    3,413     3,022
  Per share                     14.50    13.60      16.58    14.46     12.85
Debt-to-equity ratios
  Aerospace segments              .54      .46        .36      .52      1.01
  Financial services and other 
    segment                      5.21     4.44       4.14     5.22      5.42

--------------------------------------------------------------------------------
General Information
Shares outstanding 
  (in millions)                 209.6    223.6      233.5    236.0     235.1
Shareholders of record         23,565   23,582     24,479    28,513   34,124
Personnel                      63,873   63,612     65,760    70,016   87,377
Salaries and wages            $ 3,294  $ 3,347    $ 3,238   $ 3,464  $ 4,258
Firm backlog                  $23,679   19,640    $17,503   $19,379  $24,052
Total backlog                 $44,361  $28,353    $29,232   $35,698  $41,806

(a Includes a charge of $1.123  billion  ($4.95 per share) related to the MD-11
   commercial aircraft.
(b)Includes a gain of $676  million  ($2.90 per share)  from a  postretirement
   benefit curtailment relating to SFAS No. 106.
(c)Includes a net  charge of $860  million  ($3.69  per share)  related to the
   initial adoption and subsequent curtailment gain associated with SFAS No.106.

Total backlog  includes firm backlog plus (i) U.S. and other  government  orders
not yet funded,  (ii) U.S.  and other  government  orders  being  negotiated  as
continuations  of authorized  programs and, (iii)  unearned price  escalation on
firm commercial aircraft orders.  Backlog is that of the aerospace segments only
and includes all but a minor portion of the work to be performed under long-term
contracts.  Customer  options and products  produced for lease are excluded from
backlog.

<PAGE>
                                                  [Annual Report Page 57]
Supplemental Information

Quarterly Common Stock Prices and Dividends

Cash  dividends of $.12 and $.10 a share were  declared for each quarter in 1996
and 1995, respectively.  The number of holders of McDonnell Douglas Common Stock
at January 31, 1997, was 23,573.

Stock Exchanges

McDonnell  Douglas  Corporation's  Common  Stock is  listed  on the New York and
Pacific  stock  exchanges  (ticker  symbol  MD) and is traded on these and other
exchanges. It is commonly abbreviated in market reports as "McDnD."

Shareholder Information

Both  the  McDonnell  Douglas  Corporation  and the  McDonnell  Douglas  Finance
Corporation   file  Forms  10-K  and  10-Q  with  the  Securities  and  Exchange
Commission.  Shareholders  may obtain copies of these reports,  and of McDonnell
Douglas's  Annual Report to  Shareholders,  on the Internet at www.mdc.com or by
writing or calling:

Shareholder Services
Mail Code S100-1240
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(800) 233-8193

A recorded summary of quarterly  financial results is also available through the
toll-free number shortly after release of the results.

Transfer Agent and Registrar

Correspondence  and  questions  concerning  shareholder  accounts,   payment  of
dividends, or transfer of stock should be addressed to:

First Chicago Trust Company of New York
Attn:  Shareholder Relations Department
P.O. Box 2500
Jersey City, NJ  07303-2500
(800) 446-2617
(201) 222-4955 (for the hearing impaired)

World Wide Web:  www.fctc.com
Electronic mail:  fctc@delphi.com

<PAGE>

Investor Relations

Securities analysts should contact:

Investor Relations
Mail Code S100-1320
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(314) 232-6358

Code of Ethics

McDonnell Douglas is committed to maintaining the highest standards of integrity
and ethical behavior in every aspect of its business.  The corporation  lives by
the credo  "Always  take the high road" - do what is right  rather  than what is
expedient.  If you have any questions about the corporation's  code of ethics or
standards of business conduct, contact:

Harold S. Coyle, Vice President, Corporate Ethics
Mail Code S100-1470
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(314) 232-7257

Corporate Public Relations

Members of the news media should contact:

Corporate Communications
Mail Code S100-1195
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(314) 233-8957

McDonnell Douglas issues its news releases through PR Newswire.  Faxed copies of
news releases are available at no charge. To get them, call Company News On-Call
at 1-800-758-5804.  This electronic system requests a six-digit code(543287) and
allows  callers to choose from a menu of McDonnell  Douglas news  releases.  The
requested  release will be faxed within minutes of the inquiry.  This service is
available  24 hours a day, 7 days a week.  News  releases are also posted on the
World  Wide Web  sites  of both  McDonnell  Douglas  (www.mdc.com)  and  On-Call
(www.prnewswire.com).

Web Address

www.mdc.com

<PAGE>

Other Reports

McDonnell Douglas employees,  retirees, and family members volunteered thousands
of hours of their  personal time to community  programs and projects  across the
nation during 1996. In addition,  the Employees'  Community  Funds in the United
States and Canada contributed more than $4.7 million to charitable organizations
and programs. The McDonnell Douglas Foundation contributed more than $12 million
to support  philanthropic  endeavors that included  science and math  education;
civic and cultural  programs;  health and social  services  (including  disaster
relief,  hunger alleviation,  and shelters for the homeless);  youth issues; and
the environment.

The 1996 community  relations report summarizes the charitable and philanthropic
activities of McDonnell Douglas and its employees. A copy may be requested from:

Community Relations                     [Picture Omitted]
Mail Code S100-1510
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(314) 233-4123

McDonnell  Douglas's  1996 safety,  health,  and  environmental  affairs  report
summarizes the corporation's progress in pollution prevention,  waste recycling,
and employee health and safety protection. To obtain a copy, contact:

Safety, Health, and Environmental Affairs    [Picture Omitted]
Mail Code S100-1210
McDonnell Douglas Corporation
P.O. Box 516
St. Louis, MO  63166-0516
(314) 233-9469

<PAGE>

                                                  [Annual Report Page 55]      
 
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

(Dollars in millions, except per share data)
--------------------------------------------------------------------------------
                            For Year Ended December 31,           
                   ---------------------------------------------
                                       1996                     
                   ---------------------------------------------
Quarter                1st        2nd        3rd        4th     
----------------------------------------------------------------
Revenues             $3,171     $3,264     $3,308     $4,091          
Gross Margin            604        592        610        619          
Net earnings            198        188        195        207
Earnings 
  per share (b)         .89        .87        .90        .98          
     
Market Price
      High              $48 5/8    $52 3/8    $53 1/4    $66 1/2      
      Low                42 1/8     42 1/2     42 1/2     49          


                            For Year Ended December 31,    
                   ---------------------------------------------
                                       1995                  
                   ---------------------------------------------
Quarter                1st        2nd        3rd        4th     
----------------------------------------------------------------
Revenues             $3,333     $3,922     $3,346     $3,731       
Gross Margin            512        558        536     (1,248)      
Net earnings                                                    
  (loss)                159        169        192       (936)      
Earnings (loss)                                                 
  per share (b)         .69        .74        .85      (4.18)      
                                                                
Market Price                                                    
      High              $29        $39 3/8    $43 1/8    $46 1/8   
      Low                23 1/4     27 7/8     37 7/8     38 1/4   
                                                                

(a) Includes MD-11 accounting charge of $1.838 billion ($1.123 billion
    after-tax) or $5.02 (b) per share.
(b) 1995 data restated to reflect a two-for-one stock split.

   The table above presents unaudited  quarterly  financial  information for the
years ended December 31, 1996 and 1995.  Gross margin is net of interest expense
of the financial services and other segment.
   The sum of the 1995  quarterly  earnings  per  share  does not equal the 1995
annual  earnings  per share.  This is because of a  combination  of two factors.
First, the number of shares outstanding  decreased each quarter, and second, the
MD-11 accounting charge had a significant impact on fourth-quarter earnings.
    The range of market prices for a share of McDonnell  Douglas Common Stock is
shown  above,  by  quarters  for 1996 and 1995.  Prices are as  reported  in the
consolidated transaction reporting system.