10-Q 1 a2043265z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-56575 ------------------------ MORGAN STANLEY AIRCRAFT FINANCE (Exact Name of Registrant as specified in trust agreement) DELAWARE 13-3375162 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization)

C/O WILMINGTON TRUST COMPANY 1100 NORTH MARKET STREET, RODNEY SQUARE NORTH WILMINGTON, DELAWARE 19890-0001 (302-651-1000) (Address and telephone number, including area code, of Registrant's principal executive office) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ ------------------------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

OUTSTANDING AT ISSUER CLASS ~~SEPTEMBER~~APRIL 301, ~~2000~~2001 ------ ------------------- --------------~~----~~ Morgan Stanley Aircraft Finance Beneficial Interest One

-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- MORGAN STANLEY AIRCRAFT FINANCE FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2001 INDEX

PAGE NO. -------- PART I. FINANCIAL INFORMATION....................................... 23 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)............................ 23 -- Interim Condensed Consolidated Financial Statements (Unaudited)............................................... 23 -- Notes to the Interim Condensed Consolidated Financial Statements (Unaudited).................................... 68 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 1415 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................ 2524 PART II. OTHER INFORMATION........................................... 2726 ITEM 1. NOT APPLICABLE ITEM 2. NOT APPLICABLE ITEM 3. NOT APPLICABLE ITEM 4. NOT APPLICABLE ITEM 5. NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... ~~27 SIGNATURES~~......... 26 SIGNATURES......................................... ~~28 INDEX TO EXHIBITS~~...................~~........................~~ 2927 APPENDIX 1. CASH ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 3028

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

~~AUG~~FEBRUARY 3128, ~~NOV~~NOVEMBER 30, 2001 2000 ~~1999~~ ------------ ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 7069,~~253~~753 $ 3570,~~119~~426 Receivables: Lease income, net......................................... 14,~~407~~521 12,~~908~~321 Investment income and other............................... ~~356~~330 ~~161~~381 Aircraft under operating leases, net........................ 1,~~868~~817,~~218~~058 ~~886~~1,~~051 Investment in capital lease~~842,818 ~~net............................ -- 18,300~~ Underwriting and other issuance related costs, net of amortization.............................................. 2422,~~527~~707 1523,~~935~~618 ---------- ---------- Total Assets................................................ $1,~~964~~914,~~761~~369 $ ~~957~~1,~~474~~939,564 ========== ========== LIABILITIES AND BENEFICIAL INTERESTHOLDER'S ~~EQUITY /~~ (DEFICIT)/EQUITY Payables: Interest payable to Noteholders........................... $ 54,~~796~~199 $ 25,~~481~~491 Deferred rental income...................................... 1211,~~353~~910 512,~~318~~097 Liability for maintenance................................... ~~112~~110,~~354~~840 57102,~~437~~436 Other liabilities........................................... 3126,~~000~~336 1125,~~376~~930 ~~Notes~~Derivative ~~payable: Subclass A-1~~contracts........................................~~......~~ --83,942 ~~400~~6,~~000~~005 Notes payable: Subclass A-2.............................................. ~~218~~205,~~212~~253 ~~234~~210,~~533~~523 Subclass A-3.............................................. 580,000 --580,000 Subclass A-4.............................................. 200,000 --200,000 Subclass A-5.............................................. ~~372~~348,~~287~~441 --357,386 Subclass B-1.............................................. 8683,~~892~~474 9185,~~023~~194 Subclass B-2.............................................. 7574,~~000~~970 --74,985 Subclass C-1.............................................. 9998,~~580~~980 99,~~987~~310 Subclass C-2.............................................. 55,000 --55,000 Subclass D-1.............................................. ~~110~~109,~~000~~978 110,000 ---------- ---------- 1,~~958~~993,~~474~~323 1,~~012~~924,~~155~~357 ---------- ---------- Commitments and contingencies Beneficial Interestholder's ~~Equity /~~ (Deficit)/Equity: Beneficial Interest....................................... 1 1 Deemed Contribution ~~/ (Distribution)~~....................................... 62,706 62,706 Other Comprehensive Income................................ (1577,~~305~~896) -- Accumulated Deficit....................................... (5663,~~420~~765) (3947,~~377~~500) ---------- ---------- Total Beneficial Interestholder's ~~Equity /~~ (Deficit)/Equity........ ~~6,287~~ (5478,~~681~~954) 15,207 ---------- ---------- Total Liabilities and Beneficial Interestholder's ~~Equity/~~(Deficit)/Equity.......................................... $1,~~964~~914,~~761~~369 $ ~~957~~1,~~474~~939,564 ========== ==========

See Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 3 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED ~~NINE~~THREE MONTHS ENDED ~~AUGUST~~FEBRUARY 3128, ~~AUGUST~~FEBRUARY 3129, ~~-------------------~~2001 2000 ------------------- ~~2000 1999 2000 1999~~ -------- -------- --~~------~~ ~~--------~~ (UNAUDITED) (~~UNAUDITED~~DOLLARS IN THOUSANDS) Revenues: Lease income, net...................................... $~~65,533~~ ~~$27~~53,~~898~~348 $~~143,816~~ ~~$87~~25,~~031~~716 Investment income on collection account................ 1,~~032~~097 ~~463~~539 ~~2,544 1,344~~ ------- -~~------~~ -------- ~~-------~~ Total revenues......................................... 6654,~~565~~445 2826,~~361~~255 ~~146,360 88,375~~ ------- -~~------~~ -------- ~~-------~~ Expenses: Interest expense....................................... 3332,~~285~~456 15,~~491~~245 ~~79,403 47,886~~ Depreciation expense................................... 25,~~401~~760 11,765 ~~60,127 35,295~~ Operating expenses: Service provider and other fees...................... 23,~~968~~144 21,~~153~~682 ~~10,222 6,444~~ Maintenance and other aircraft related costs......... 29,~~194~~350 27,~~448~~429 ~~13,651 5,446~~ ------- -~~------~~ -------- ~~-------~~ Total expenses......................................... 6370,~~848~~710 3136,~~857~~121 ~~163,403 95,071~~ ------- -~~------~~ -------- ~~-------~~ Net ~~income / (~~loss)................................................. $ ~~2,717 $~~(316,~~496~~265) $~~(17,043)~~ $(69,~~696~~866) ======= =~~======~~ ======== ~~=======~~

See Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 4 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

~~NINE~~THREE MONTHS ENDED ~~NINE~~THREE MONTHS ENDED ~~AUGUST~~FEBRUARY 3128, ~~2000~~FEBRUARY ~~AUGUST 31~~29, ~~1999~~2001 2000 ------------------ ------------------ (UNAUDITED) ~~Cash~~(DOLLARS ~~flows~~IN ~~from~~THOUSANDS) ~~operating activities~~ Net loss................................................... $ (1716,~~043~~265) $ (69,~~696~~866) ~~Adjustments~~Other tocomprehensive ~~reconcile net loss to net cash provided by operating activities~~income: ~~Depreciation~~Cumulative ~~expense--aircraft~~effect ~~under operating leases.... 60,127 35,295 Amortization~~ of ~~underwriting~~accounting ~~and other issuance related costs~~change.................~~.................................~~ ~~3,858 839 Provision for doubtful accounts.......................... 1,113 7,249 Changes in assets and liabilities: Receivables: Investment income and other..........................~~ (~~195) 15 Lease income......................................... 1~~31,~~666 (1,574~~309) Investment in capital lease............................ (58) (356) Liability for maintenance.............................. 3,187 5,934 Interest payable to Noteholders........................ 3,315 (166) Deferred rental income................................. (1,603) (2,586) Other liabilities...................................... 8,582 (3,203) --~~-------~~ ~~--------~~ Net ~~cash~~change ~~provided~~in bycash ~~operating~~flow ~~activities~~hedges.................. ~~62,949 34,751 --------- -------- Cash flows from investing activities Purchase of net assets from MS Financing Inc~~.~~, net of cash acquired~~......~~....................................~~ (~~876~~46,~~793~~587) -- --------- -------- ~~Net~~Comprehensive ~~cash used for investing activities~~income..................... ~~(876,793) -- --------- -------- Cash flows from financing activities Proceeds from issuance of notes payable, net of issuance costs~~................~~..................................~~ ~~1,297,550 -- Repayment of Subclass A-1 notes..........................~~ $(~~400~~94,~~000~~161) --$ ~~Repayments of notes payable..............................~~ (489,~~572~~866) (32,009) --------- -------- Net cash provided by/(used for) financing activities....... 848,978 (32,009) --------- -------- Net increase in cash and cash equivalents.................. 35,134 2,742 Cash and cash equivalents at beginning of period........... 35,119 34,850 --------- -------- Cash and cash equivalents at end of period................. $ 70,253 $ 37,592 ========= ========

See Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 5 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~TOTAL~~THREE ~~BENEFICIAL~~MONTHS ~~BENEFICIAL~~ENDED ~~DEEMED~~THREE ~~ACCUMULATED~~MONTHS ~~INTEREST~~ENDED ~~INTEREST~~FEBRUARY ~~DISTRIBUTION~~28, ~~DEFICIT~~FEBRUARY ~~(DEFICIT)~~29, 2001 2000 ---------- --------~~----~~ ----------- -------~~---~~ (UNAUDITED) ~~Balance~~(DOLLARS atIN ~~November~~THOUSANDS) ~~30,~~Cash ~~1998~~flows from operating activities Net loss............................................... $ ~~1 $~~(1516,~~305~~265) $(319,~~445~~866) ~~$(46~~Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense--aircraft under operating leases................................................. 25,~~749~~760 11,765 Amortization of underwriting and other issuance related costs.................................................. 911 280 Provision for doubtful accounts........................ 1,960 920 Changes in assets and liabilities: Receivables: Investment income and other........................ 51 (22) ~~Net~~Lease ~~loss~~income....................................... (4,160) (377) Investment in capital lease.......................... -- --242 Liability for maintenance............................ 8,404 7,498 Interest payable to Noteholders...................... (61,~~696~~292) (~~6,696~~84) Deferred rental income............................... (187) 332 Other liabilities.................................... 406 (83) Derivative contracts................................. 41 (260) -------- -------- Net cash provided by operating activities................ 15,629 10,345 -------- -------- ~~Balance~~Cash atflows ~~August~~from ~~31,~~financing ~~1999~~activities: Repayments of Notes.................................... $(16,302) ~~1 $~~(156,~~305~~073) $-------- ------- Net cash used for financing activities................... (3816,~~141~~302) $(536,~~445~~073) ~~=======~~-------- ~~========~~------- Net (decrease)/increase in cash and cash equivalents..... (673) 4,272 Cash and cash equivalents at beginning of period......... 70,426 35,119 -------- ------- Cash and cash equivalents at end of period............... $ 69,753 $39,391 ======== ========

See Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 6 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN BENEFICIAL INTERESTHOLDER'S EQUITY/(DEFICIT)

TOTAL ~~DEEMED~~ BENEFICIAL INTERESTHOLDER'S BENEFICIAL ~~DISTRIBUTION/~~DEEMED ACCUMULATED ~~INTEREST~~EQUITY INTEREST ~~CONTRIBUTION~~DISTRIBUTION DEFICIT (DEFICIT) ---------- ------------- ----------- ---------------- (UNAUDITED) (DOLLARS IN THOUSANDS) Balance at November 30, 1999..................~~....~~ $ 1 $(15,305) $(39,377) $(54,681) Net loss......................................~~....~~ -- -- (179,~~043~~866) (179,~~043~~866) ~~Capital Contribution from MS Financing Inc........~~ -- ~~78,011~~ -- ~~78,011~~ ---~~----~~ -------- -------- -------- Balance at ~~August~~February 3129, 2000..................~~......~~ $ 1 $ 62(15,~~706~~305) $(5649,~~420~~243) $ 6(64,~~287~~547) ======= ======== ======== ========

~~AUG~~TOTAL ~~31,~~BENEFICIAL ~~2000~~OTHER ~~NOV~~INTERESTHOLDER'S ~~30,~~BENEFICIAL ~~1999~~DEEMED ACCUMULATED COMPREHENSIVE EQUITY INTEREST CONTRIBUTION DEFICIT INCOME (DEFICIT) ---------- ------------ ----------- ------------- ---------------- (UNAUDITED) (DOLLARS IN THOUSANDS) ~~Stage~~Balance 3at ~~Aircraft~~November ~~and~~30, ~~one engine: Cost~~2000.....~~...................................................~~ $2 1 $62,~~014,324~~706 $~~972~~(47,~~030~~500) ~~Less:~~$ ~~Accumulated~~-- ~~depreciation~~$ 15,207 Net loss......................... -- -- (16,265) -- (16,265) Other comprehensive income....... -- -- -- (~~146~~77,~~106~~896) (8577,~~979~~896) ------- ------- -------- -------- -------- Balance at February 28, 2001..... $ 1 $62,~~868~~706 $(63,~~218~~765) $~~886~~(77,~~051~~896) $(78,954) ======= ======= ======== ======== ========

See Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 7 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--BASIS OF PRESENTATION Morgan Stanley Aircraft Finance ("MSAF") is a special-purpose statutory business trust that was formed on October 30, 1997 under the laws of Delaware. MSAF and its subsidiaries ("MSAF group") were formed to conduct certain limited activities, including acquiring, financing, re-financing, owning, leasing, re-leasing, selling, maintaining and modifying commercial aircraft. At February 28, 2001, all of the beneficial interest of MSAF group was owned by MSAF Holdings, a wholly-owned subsidiary of MSDW Aircraft Holdings ("MSDWAH"), which in turn is a wholly-owned subsidiary of MS Financing Inc. ("MSF"). MSF is a wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). MSAF group's obligations, including its financial debt obligations, are not obligations of, or guaranteed by, MSDW, MSDWAH, MSAF Holdings, MSF or any person other than MSAF group. The interim condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require management to make estimates and assumptions that affect the financial statements and related disclosures. Management believes that the estimates utilized in the preparation of the interim condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates. All material intercompany transactions have been eliminated. The interim condensed consolidated financial statements should be read in conjunction with MSAF group's consolidated financial statements and notes thereto as of and for the fiscal year ended November 30, 2000. The interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year. Certain reclassifications have been made to prior year amounts to conform to the current presentation. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133", which deferred the effective date of SFAS No. 133 for one year to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133". MSAF group adopted SFAS No. 133, as amended by SFAS No. 138, effective December 1, 2000. MSAF group recorded an increase to derivative contracts (a liability on the balance sheet reflecting the fair value of its outstanding swaps) and a corresponding charge to other comprehensive income (a component of beneficial interestholder's equity) of $31 million from the cumulative effect of the adoption of SFAS No. 133, as amended. MSAF group's adoption of SFAS No. 133, as amended, primarily affects the accounting for, among other things, MSAF group's derivatives used in connection with its interest rate risk management policies. 8 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 2--CONCENTRATIONS OF CREDIT RISK Credit risk with respect to operating lease receivables is generally diversified due to the number of lessees comprising MSAF group's customer base and the different geographic areas in which they operate. At February 28, 2001 MSAF group had leased 59 aircraft and one engine to 42 lessees in 27 countries. Certain of MSAF group's lessees are in a relatively weak financial position because of the difficult economic conditions in the civil aviation industry as a whole and because, in general, weakly capitalized airlines are more likely to seek operating leases. In addition, at February 28, 2001, 18 of MSAF group's aircraft were leased to lessees domiciled in certain emerging market nations, including those located in Eastern Europe, Latin America and Asia. The exposure of MSAF group's aircraft to particular countries and customers is managed partly through concentration limits and partly through obtaining security from lessees by way of cash deposits and/or letters of credit. NOTE 3--AIRCRAFT

~~AUG~~FEBRUARY 3128, ~~2000~~NOVEMBER ~~NOV~~ 30, ~~1999~~2001 2000 ------------ ------------ ~~FLEET~~(DOLLARS ~~ANALYSIS:~~IN OnTHOUSANDS) ~~lease~~Stage ~~for~~3 aAircraft ~~further~~and ~~period~~one ofengine: ~~More than five years~~Cost........................................ ~~7 9 From one to five years~~................~~......................~~ 43$2,014,324 20$2,014,324 Less: ~~than~~Accumulated ~~one year~~depreciation..............................~~............~~ 10(197,266) 3(171,506) ---------- ---------- ~~Total~~$1,817,058 ~~aircraft~~$1,842,818 ~~portfolio (including one engine) on lease.... 60 32~~ ========== ==========

~~AUG~~FEBRUARY 3128, ~~2000~~NOVEMBER ~~NOV~~ 30, ~~1999~~2001 2000 ------------ ------------ ~~(DOLLARS~~FLEET INANALYSIS: ~~THOUSANDS)~~On ~~Minimum~~ lease ~~payments~~for ~~receivable~~a further period of: More than five years........................................ $5 --5 $From ~~28,733~~one ~~Less:~~to ~~Unearned~~five ~~income~~years....................................... --46 ~~(10,433)~~44 ~~-------~~Less ~~--------~~than ~~Net~~one ~~investment in capital lease~~year.......................................... $9 9 --------- $---------- ~~18,300~~Total aircraft portfolio (including one engine) on lease.... 60 58 ========= ==========

At February 28, 2001 there were two non-revenue earning aircraft in MSAF group's portfolio. One of these was subject to a non-binding letter of intent for lease. At November 30, 2000 there were four non-revenue earning aircraft in MSAF group's portfolio. 9 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 4--LEASE INCOME RECEIVABLE Lease income receivable was as follows:

~~AUG~~FEBRUARY 3128, ~~2000~~NOVEMBER ~~NOV~~ 30, ~~1999~~2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) Lease income receivable..................................... $ 26,~~739~~826 $ 2,~~271~~666 Less: Allowance for doubtful accounts....................... (12,~~332~~305) (~~363~~345) --------- ---------- Lease income receivable, net................................ $ 14,~~407~~521 $ 12,~~908~~321 ========= ==========

Activity in the allowance for doubtful accounts was as follows:

~~NINE~~THREE MONTHS ~~NINE~~THREE MONTHS ENDED ENDED ~~AUG~~FEBRUARY 3128, ~~2000~~FEBRUARY ~~AUG 31~~29, ~~1999~~2001 2000 ------------ ------------ (DOLLARS IN THOUSANDS) Balance, beginning of period................................ $ ~~363~~345 $ ~~553~~363 Provision for doubtful accounts............................. 1,~~113~~960 ~~7,249~~244 ~~Amounts written~~-~~off......................................... (144) (7,174)~~ --------- ---------- Balance, end of period...................................... $ 12,~~332~~305 $ ~~628~~607 ========== ==========

NOTE 5--LIABILITY FOR MAINTENANCE Activity in the liability for maintenance account was as follows:

~~NINE~~THREE MONTHS ENDED ~~AUG~~FEBRUARY 3128, ~~2000~~2001 FISCAL ~~1999~~2000 ------------ ----------- (DOLLARS IN THOUSANDS) Balance, beginning of period................................ $102,436 $ 57,437 ~~$52,489~~ Liabilities assumed from MSF................................ -- 51,730 -- Collections from lessees.................................... 165,~~452~~687 1723,~~709~~787 Reimbursements to lessees................................... (112,~~729~~189) (1112,~~872~~107) Net accruals and transfers.................................. (14,~~536)~~906 (~~889~~18,411) -------- -------- Balance, end of period...................................... $~~112~~110,~~354~~840 $57102,~~437~~436 ======== ========

NOTE 6--NOTES PAYABLE On March 3, 1998, MSAF group completed an offering of $1,050 million of securitized notes (the "1998 Notes") on a basis exempt from registration under the Securities Act of 1933, as amended. During fiscal 1999, MSAF group filed a registration statement with the Securities and Exchange Commission (the "SEC") with respect to an exchange offer for exchange notes with terms virtually identical to the 1998 Notes, which was declared effective on January 12, 1999. The exchange offer was consummated on January 18, 1999. On March 15, 2000, MSAF group completed an offering of $1,310 million of securitized notes (the "2000 Notes") on a basis exempt from registration under the Securities Act of 1933, as amended. 10 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 6--NOTES PAYABLE (CONTINUED) MSAF group used the net proceeds from the 2000 Notes to finance in part the acquisition of the 29 commercial aircraft from MSF, to fund an increase of $5 million in cash and cash equivalents used for liquidity purposes (see "Financial Resources and Liquidity--Liquidity Reserve Amount") and to redeem all $400 million of its subclass A-1 notes. The 2000 Notes rank equally in right of payment of principal and interest with the corresponding subclasses of MSAF group's existing 1998 Notes. During fiscal 2000, MSAF group filed a registration statement with the SEC with respect to an exchange offer for exchange notes with terms virtually identical to the 2000 Notes, which was declared effective on October 31, 2000. The exchange offer was consummated on December 4, 2000. With the exception of MSAF group, the 1998 Notes and the 2000 Notes (collectively, the "Notes") are not obligations of, or guaranteed by, MSDW, MSDWAH, MSAF Holdings, MSF or any person other than MSAF group. Underwriting and financing costs which were incurred in connection with the Notes are being amortized over the expected life of the borrowings to which they relate. The repayment terms of each subclass of the Notes are such that certain principal amounts are expected to be repaid based on certain assumptions (the "Expected Final Payment Date") or refinanced through the issuance of refinancing notes, but in any event are ultimately due for repayment on specified final maturity dates (the "Final Maturity Date"). The Expected Final Payment Dates, Final Maturity Dates and interest rates applicable to each subclass of the Notes listed below:

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

If the subclass A-3, A-4 or B-2 notes are not repaid on or before their respective Expected Final Payment Dates, MSAF group will pay additional interest of 1.00% per annum on the subclass A-3 and A-4 notes and 1.50% per annum on the subclass B-2 notes, until such notes are repaid in full. The dates on which principal repayments on the Notes will actually occur will depend on the cash flows generated by the rental income from MSAF group's portfolio of aircraft. Amounts received by MSAF group are available for distribution and are paid in accordance with the priorities specified in the indenture relating to the Notes. Cash paid for interest on the Notes amounted to $32.1 million for the three month period ended February 28, 2001 as compared to $15.5 million for the three month period ended February 29, 2000. 11 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 6--NOTES PAYABLE (CONTINUED) The interest expense for fiscal 2001 is not comparable to fiscal 2000, as the 2000 Notes were not issued until March 15, 2000. The estimated fair value of MSAF group's outstanding notes payable was $1,738.9 million and $1,733.2 million at February 28, 2001 and November 30, 2000, respectively. NOTE 7--LIQUIDITY FACILITIES MSAF group requires liquidity in order to finance many of its primary business activities, including maintenance obligations, security deposit return obligations, operating expenses and obligations under the Notes. MSAF group's primary sources of liquidity are cash bank deposits and letters of credit. MSAF group's cash account (the "Collection Account") is primarily funded through the receipt of rental payments from lessees. MSAF group has entered into two credit agreements. Under a Custody and Loan Agreement (the "ILFC Facility") between ILFC and MSAF group, ILFC will hold substantially all of the cash security deposits paid by certain lessees with respect to MSAF group's aircraft portfolio and will retain the interest earnings on such security deposits. In addition, ILFC has agreed to extend loans to MSAF group in a maximum amount of $20 million plus the aggregate amount of cash security deposits held by ILFC. Under a Loan Agreement (the "MSDW Facility") between MSDW and MSAF group, MSDW has agreed to extend loans in a maximum amount of $30 million. As of February 28, 2001, the aggregate amount available under the ILFC Facility and the MSDW Facility was approximately $70.8 million. NOTE 8--DERIVATIVE FINANCIAL INSTRUMENTS The leasing revenues of MSAF group are generated primarily from rental payments. Rental payments are currently entirely fixed but may be either fixed or floating with respect to leases entered into in the future. In general, an interest rate exposure with respect to the Notes payable arises to the extent that MSAF group's fixed and floating interest obligations in respect of the Notes do not correlate to the mix of fixed and floating rental payments for different rental periods. This interest rate exposure with respect to the Notes payable can be managed through the use of interest rate swaps and other derivative instruments. The subclass A-2, A-3, A-4, A-5, B-1 and B-2 notes bear floating rates of interest and the subclass C-1, C-2 and D-1 notes bear fixed rates of interest. MSAF group is a party to twelve interest rate swaps with Morgan Stanley Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In ten of these swaps, MSAF group pays a fixed monthly coupon and receives one month LIBOR on a total notional balance of $1,300 million and in two of these swaps, MSAF group pays one month LIBOR and receives a fixed monthly coupon on a total notional balance of $200 million. Eight of the swaps, having an aggregate notional principal amount of $1,100 million, are designated and accounted for as cash flow hedges in accordance with SFAS No. 133, as amended. Under these swap arrangements, MSAF group pays fixed amounts (based upon annual interest rates ranging from 6.23% to 7.46%) and receives floating amounts (based upon one month LIBOR) on a monthly basis. The changes in the fair value of these swaps are recorded in other comprehensive 12 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 8--DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) income. Amounts in other comprehensive income are reclassified into interest expense in the same period or periods during which the hedged forecasted transaction affects earnings. During the three month period ended February 28, 2001, the amount of such reclassification was $0.9 million. The ineffective portion of the cash flow hedges (if any) is recorded within interest expense. The maturity dates of these swaps positions range from November, 2002 to November, 2019. The fair value of these interest rate swaps at February 28, 2001 was ($77.9) million. The remaining four swaps have an aggregate gross notional principal amount of $400 million. Under these swap arrangements, MSAF group pays/receives fixed and receives/pays floating amounts on a monthly basis. MSAF group has determined that these swaps do not qualify for hedge accounting. These swaps are accounted for on a mark-to-market basis with changes in fair value reflected in interest expense. At February 28, 2001, the fair value of these swaps was $(6.0) million. The change in fair value of the twelve interest rate swaps between November 30, 2000 and February 28, 2001 was due to changes in market interest rates and payments being made under the swaps when they became due. The gross notional amounts of these swaps are indicative of MSAF group's degree of use of such swaps but do not represent MSAF group's exposure to credit or market risk. Credit risk arises from the failure of the counterparty to perform according to the terms of the swap contract. MSAF group's exposure to credit risk at any point in time is represented by the fair value of the swap contracts reported as assets. MSAF group does not currently require collateral to support swap contracts with credit risk. The credit risk of these swap contracts is monitored by MSAF group's trustees. MSAF group does not utilize derivative financial instruments for trading purposes. NOTE 9--RELATED PARTY TRANSACTIONS Under service agreements with MSAF group, Cabot Aircraft Services Limited and Morgan Stanley & Co. Incorporated, both subsidiaries of MSDW, act as Administrative Agent and Financial Advisor, respectively. During the three month period ended February 28, 2001, Cabot Aircraft Services Limited received a fee of $0.3 million for providing these services, which is calculated as a percentage of the operating lease rentals received. Morgan Stanley & Co. Incorporated received advisory fees of $0.01 million in the three month period ended February 28, 2001. MSAF group's counterparty to its interest rate swap agreements is MSCS, a wholly-owned subsidiary of MSDW. At February 28, 2001, MSAF group's management was comprised of seven trustees, including the Delaware trustee, as MSAF group has no employees or executive officers. Four of MSAF group's seven trustees were employees of MSDW. The two remaining trustees and the Delaware trustee were unaffiliated with MSDW. NOTE 10--COMMITMENTS AND CONTINGENCIES MSAF group did not have any material contractual commitments for capital expenditures at February 28, 2001. 13 MORGAN STANLEY AIRCRAFT FINANCE AND SUBSIDIARIES NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --(CONTINUED) NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED) In accordance with the terms of a second amended and restated servicing agreement (the "Servicing Agreement"), ILFC is performing certain aircraft related activities with respect to MSAF group's aircraft portfolio. Such activities include marketing MSAF group's aircraft for lease or sale and monitoring lessee compliance with lease terms including terms relating to payment, maintenance and insurance. In accordance with the Servicing Agreement, fees payable to ILFC by MSAF group are calculated as a percentage of the lease rentals contracted and received, in addition to a base fee and certain incentive-based fees. For the initial 32 aircraft and one engine, the Servicing Agreement will expire on May 26, 2023. For the additional 29 aircraft, the Servicing Agreement will expire on May 1, 2025. However, each party has the right to terminate the Servicing Agreement under certain circumstances. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION MSAF is a special purpose business trust that was formed on October 30, 1997 under the laws of Delaware. MSAF group's principal business activity has been the acquisition of aircraft and the placement of such aircraft on operating lease. MSAF group's future business is expected to consist principally of aircraft operating lease activities, acquisitions of additional aircraft and sales of aircraft. Cash flows generated from such activities will be used to service interest and principal on its outstanding notes payable, any refinancing notes and any additional notes but only after various expenses of MSAF group have been paid for, including any taxes, obligations to lessees including maintenance obligations, fees and expenses of ILFC and other service providers and payments to MSAF group's interest rate swap counterparties. MSAF group's ability to generate sufficient cash from its aircraft assets to service the outstanding notes payable depends primarily on (1) the rental rates it can achieve on leases and the lessees' ability to perform according to the terms of those leases and (2) the prices it can achieve on any aircraft sales. MSAF group's ability to service the outstanding notes payable also depends on the level of its operating expenses, including maintenance obligations which will increase as the aircraft age, and any unforeseen contingent liabilities arising. MSAF group's cash receipts and disbursements are determined, in part, by the overall economic condition of the operating leasing market. The operating leasing market, in turn, is affected by various cyclical factors including the level and volatility of interest rates, the availability of credit, fuel costs and general and regional economic conditions affecting lessee operations and trading; manufacturer production levels; passenger demand; retirement and obsolescence of aircraft models; manufacturers exiting or entering the market or ceasing to produce aircraft types; re-introduction into service of aircraft previously in storage; governmental regulation; and air traffic control infrastructure constraints such as limitations on the number of landing slots. MSAF group's ability to compete against other lessors is determined, in part, by (1) the composition of its fleet in terms of mix, relative age and popularity of the aircraft types; (2) operating restrictions imposed by MSAF's indenture, and (3) the ability of other lessors, who may possess substantially greater financial resources, to offer leases on more favorable terms than MSAF group. Any statements contained in this management's discussion and analysis of financial condition and results of operations that are not historical facts, or that might be considered an opinion or projection, whether expressed or implied, are meant as, and should be considered, forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks. If any assumptions or opinions prove incorrect, any forward-looking statements made on that basis may also prove materially incorrect. RECENT DEVELOPMENTS THE AIRCRAFT As of April 1, 2001, the total number of aircraft owned by MSAF group was 61 aircraft plus an engine. Fifty eight aircraft and the engine were subject to lease contracts with 41 lessees in 27 countries. Two of the three off-lease aircraft were undergoing maintenance work and were subject to signed letters of intent for lease with lessees based in the Asia (Emerging) and Pacific (Developed) regions. On April 3, 2001, the third off-lease aircraft was recovered and is currently in a maintenance facility in the U.S. 15 LESSEE DIFFICULTIES As of April 1, 2001, five current lessees were in arrears. The total amount outstanding and overdue for the five lessees in respect of rental payments and maintenance reserves due under the leases amounted to $3.2 million. MSAF group holds security deposits of $3.3 million against these arrears. The weighted average number of days past due of such arrears was 64 days. REGIONAL ANALYSIS OF EXISTING ARREARS The categorization of countries into geographical regions, Developed Markets, Emerging Markets and Other is determined using Morgan Stanley Capital International, Inc. ("MSCI") designations. As of April 1, 2001, 17 of MSAF group's aircraft were leased to lessees domiciled in certain emerging market nations, including those located in Eastern Europe, Latin America and Asia. Due to the overall slowdown in the global economy it is possible that lessees in emerging markets may be adversely affected and experience payment difficulties. EUROPE AND MIDDLE EAST (EMERGING) As of April 1, 2001 none of the current lessees in this region were in arrears. A former Turkish lessee, Air Alfa, defaulted on its obligations under its lease of an A321-100 aircraft and the aircraft was repossessed in March 2001. The lease had been scheduled to expire in April 2003. The total arrears associated with the lease at the time of repossession amounted to $2.9 million. MSAF group drew down security deposits of $0.7 million against these arrears. The aircraft is currently the subject of a non-binding letter of intent for lease with a lessee based in the Asia (Emerging) region. EUROPE (DEVELOPED) One of the five current lessees in arrears, Air Europa, is based in the Europe (Developed) region. As of April 1, 2001, Air Europa owed maintenance arrears of $0.1 million against which MSAF group held a security deposit of $0.5 million. In January 2000, TransAer, a lessee based in Ireland, restructured rental and maintenance arrears for two A320-200 aircraft into a note payable of $1.4 million. The terms of the restructuring agreement were that amounts totaling $1.4 million would be repaid during June, July and August 2000. None of these restructured arrears were paid. On October 20, 2000, TransAer filed for bankruptcy, with total arrears outstanding of $1.6 million at that date. MSAF group drew down security deposits of $1.0 million against these arrears. The lease with respect to one of the A320-200 aircraft with TransAer was terminated on October 18, 2000. TransAer had been operating this aircraft on wet lease to Libyan Arab Airlines, which detained the aircraft. MSAF group believes that Libyan Arab Airlines had no right to keep possession of the aircraft and an insurance claim for loss of the aircraft was submitted. On April 3, 2001, the aircraft was recovered and returned to MSAF group's possession by agents of the British insurers underwriting the insurance policies against which MSAF group had submitted its claim, under an arrangement to which MSAF group had agreed after obtaining the U.S. Government's approval. The aircraft is currently in a maintenance facility in the U.S. undergoing maintenance work necessary to re-lease it. MSAF group does not yet know the cost of such maintenance work. MSAF group may incur further costs in relation to this matter, including costs with respect to the pending insurance claim. The lease with respect to the second A320-200 aircraft with TransAer was terminated on October 18, 2000. This aircraft was delivered to a new lessee based in Cyprus on February 17, 2001. 16 ASIA (EMERGING) One of the five current lessees in arrears, Asiana, is based in the Asia (Emerging) region. As of April 1, 2001, Asiana owed rental arrears of $0.6 million, against which MSAF group held a security deposit of $1.3 million. LATIN AMERICA (EMERGING) As of April 1, 2001 none of the current lessees in this region were in arrears. Three aircraft repossessed during fiscal 2000 had been on lease to lessees based in Latin America, two in Brazil and one in Mexico. In July 1999, a former Brazilian lessee, VARIG, negotiated early termination of a B747-300 lease that was scheduled to expire in April 2003. The total amount of rental payments and maintenance reserves due under this lease through July 1999, the date of the termination agreement, was $4.8 million, against which MSAF group drew down a security deposit of $1.1 million. Under the terms of the termination agreement, VARIG has agreed to repay arrears of $4.8 million and approximately $6.0 million for certain maintenance and downtime costs. Payments to MSAF group will be made semi-annually beginning October 15, 1999 with final payment due on October 15, 2007. As of April 1, 2001 VARIG had made all payments due under the restructuring agreement. MSAF group is recognizing this income on a cash basis as received. NORTH AMERICA (DEVELOPED) Two of the five current lessees in arrears are based in the North America (Developed) region. On December 6, 2000, National Airlines announced that it had voluntarily filed petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. MSAF group has one aircraft, a B757-200ER on lease to National Airlines. As of April 1, 2001, rental and maintenance arrears were $1.4 million against which MSAF group held a security deposit of $0.6 million. MSAF group has agreed to continue leasing this aircraft to National Airlines on a weekly basis subject to National Airlines making weekly lease rental payments. National Airlines is currently exploring all opportunities to raise financing but it is not yet clear whether the airline will raise the necessary financing to continue operations. On January 10, 2001, TWA announced that it and certain of its subsidiaries had voluntarily filed petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. TWA also announced that it had reached agreement with American Airlines in which American Airlines would acquire substantially all the assets of TWA. American Airlines has signed an agreement affirming its intention to continue the leases on all four aircraft but at lower rental rates to reflect the credit rating of American. In exchange for this reduction in rental rates, American Airlines has agreed to extend the current lease expiration dates for all four aircraft. MSAF group has four aircraft on lease to TWA, a B757-200ER, two MD-83's and one MD-82. As of April 1, 2001, rental arrears were $0.2 million relating to the MD-82, against which MSAF group held security deposits of $0.3 million. PACIFIC (DEVELOPED) As of April 1, 2001 none of the current lessees in this region were in arrears. OTHER One of the five current lessees in arrears is based in the Other region. 17 As of April 1, 2001, rental and maintenance arrears owed by Air Atlanta Icelandic were $0.9 million, against which MSAF group holds a security deposit of $0.6 million. AIRWORTHINESS DIRECTIVES The United States Federal Aviation Administration ("FAA") issued an Airworthiness Directive ("AD") in each of July and August 2000 requiring special detailed inspections to detect cracking of the main deck cargo door frames of Pemco-converted Boeing 737-200 and 737-300 freighters. The FAA issued a further AD to supersede the first two ADs, the result of which required operators to carry out modifications to the main deck cargo door frames. There are two aircraft in MSAF group's portfolio subject to this AD, and the costs of the modification were immaterial. On September 14, 2000 the FAA announced a proposal for the long-term redesign of the Boeing 737 rudder system and several short-term initiatives designed to enhance rudder safety on all Boeing 737 models. It may be some time before the FAA issues a formal AD. There are currently twenty B737 aircraft in MSAF group's portfolio. One of the twenty B737 aircraft is currently off-lease. Under the remaining nineteen leases all costs of compliance with ADs are the obligation of the lessees. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001 AND THE THREE MONTHS ENDED FEBRUARY 29, 2000 MSAF group's results of operations for the three months ended February 28, 2001 and the three months ended February 29, 2000 are discussed below. The results of these periods are not directly comparable due to MSAF group's acquisition of a portfolio of 29 commercial aircraft from MSF on March 15, 2000. NET LOSS MSAF group incurred a net loss of $16.3 million and $9.9 million for the three month periods ended February 28, 2001 and February 29, 2000, respectively. The increase primarily reflects increased interest and depreciation expenses, partially offset by higher lease income. MSAF is a Delaware business trust treated as a branch of MSF for U.S. federal, state and local income tax purposes. Accordingly, MSAF is not subject to U.S. federal, state and local income taxes. LEASE INCOME Lease income for the three month period ended February 28, 2001 amounted to $53.3 million as compared to $25.7 million for the three month period ended February 29, 2000. The increase in lease income is primarily due to MSAF group's acquisition of 29 commercial aircraft during fiscal 2000. MSAF group's operating results for the three month period ended February 28, 2001 were adversely affected by provisions for doubtful accounts totaling $2.0 million. Such provisions were recorded by MSAF group due to financial difficulties experienced by certain of MSAF group's current lessees, as well as to reserve against amounts owed to MSAF group by certain of its former lessees whose aircraft have already been repossessed (see "Lessee Difficulties"). Provisions for doubtful accounts were $0.9 million in the three month period ended February 29, 2000. Lease income may decline in future periods due to potential lessee defaults and arrears including those discussed above. MSAF group records the cash prepayments made by lessees for maintenance as a component of the liability for maintenance account which appears on the Interim Condensed Consolidated Balance Sheets. When the lessee incurs maintenance expenditures, MSAF group must return a corresponding amount of the prepayment to the lessee. At this time, MSAF group will forward cash to the lessee, with a corresponding decrease to the liability for maintenance account. MSAF group will only reimburse the lessee for the cost of maintenance expenditures to the extent that sufficient prepayments have been made by the lessee. At the time an aircraft is released to a new lessee, an assessment is made of the expected maintenance reserve requirements; any excess reserve is then released to lease income. 18 INVESTMENT INCOME Investment income for the three month period ended February 28, 2001 amounted to $1.1 million as compared to $0.5 million in the three month period ended February 29, 2000. Investment income represents interest income on MSAF group's cash and cash equivalents. Investment income has increased due to a higher level of cash and cash equivalents in connection with MSAF group's acquisition of 29 commercial aircraft. Such cash balances primarily consist of security deposits and advance rental payments made by certain lessees. INTEREST EXPENSE Interest expense, including swap costs of $1.6 million, amounted to $32.5 million for the three month period ended February 28, 2001. Interest expense, net of swap income of $0.3 million, amounted to $15.2 million for the three month period ended February 29, 2000. Interest expense primarily consists of interest paid on the 1998 Notes and the 2000 Notes. The increase in interest expense is primarily due to the 2000 Notes, which were issued on March 15, 2000, coupled with a higher average interest rate on the 1998 Notes. The weighted average interest rate on MSAF group's notes payable during the three month period ended February 28, 2001 was 7.14% as compared to 6.56% during the three month period ended February 29, 2000. The average principal balance in respect of MSAF group's notes payable during the three month period ended February 28, 2001 was $1,766.0 million as compared to $931.9 million during the three month period ended February 29, 2000. MSAF group is a party to twelve interest rate swaps with Morgan Stanley Capital Services Inc. ("MSCS"), a wholly-owned subsidiary of MSDW. In ten of these swaps, MSAF group paid a fixed monthly coupon and received one month LIBOR on a notional balance of $1,300 million and in two of these swaps, MSAF group paid one month LIBOR and received a fixed monthly coupon on a notional balance of $200 million. Eight of the swaps, having an aggregate notional principal amount of $1,100 million, are designated and accounted for as cash flow hedges. Under these swap arrangements, MSAF group pays fixed and receives floating amounts on a monthly basis. The changes in the fair value of these swaps are recorded in other comprehensive income. Amounts in other comprehensive income are reclassified into interest expense in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining four swaps have an aggregate gross notional principal amount of $400 million. Under these swap arrangements, MSAF group pays/receives fixed and receives/pays floating amounts on a monthly basis. MSAF group determined that these swaps do not qualify for hedge accounting. These swaps are accounted for on a mark-to-market basis with changes in fair value reflected in interest expense. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" below for more information regarding MSAF group's swaps positions and hedging policy. DEPRECIATION Depreciation expense for the three month period ended February 28, 2001 amounted to $25.8 million as compared to $11.8 million in the three month period ended February 29, 2000. The increase is attributable MSAF group's acquisition of 29 commercial aircraft during fiscal 2000. OPERATING EXPENSES SERVICE PROVIDER AND OTHER FEES. Service provider and other fees for the three month period ended February 28, 2001 were $3.1 million as compared to $1.7 million in the three month period ended 19 February 29, 2000. The most significant element in both periods was the aircraft servicing fee paid to ILFC, which amounted to $1.9 million in the three month period ended February 28, 2001 and $1.0 million in the three month period ended February 29, 2000. The higher fees paid to ILFC in the three month period ended February 28, 2001 reflected the increased fleet size as a result of MSAF group's acquisition of 29 commercial aircraft during fiscal 2000. MAINTENANCE AND OTHER AIRCRAFT RELATED COSTS. Maintenance and other aircraft related costs for the three month period ended February 28, 2001 were $9.4 million as compared to $7.4 million for the three month period ended February 29, 2000. The increase is primarily attributable to provisions for certain maintenance and redelivery costs associated with the aircraft leased to National, Air Alfa and TransAer (see "Lessee Difficulties"). Included within maintenance and other aircraft related costs were insurance, re-leasing and other costs incurred in the three month period ended February 28, 2001, which amounted to $1.4 million, as compared to $0.4 million for the three month period ended February 29, 2000. The increase was primarily attributable to certain insurance and re-leasing costs associated with the aircraft formerly leased to TransAer. FINANCIAL RESOURCES AND LIQUIDITY Refer to Appendix 1 for additional information regarding the cash performance of MSAF group for the period from December 2000 to February 2001. LIQUIDITY MSAF group's cash and cash equivalents at February 28, 2001 were $69.8 million. Of this amount, $30 million represents the cash portion of the Liquidity Reserve Amount (as defined below) and $39.8 million represents rental, maintenance receipts, certain security deposit receipts and cash held for accrued expenses. In addition to the $30 million cash portion at February 28, 2001, the Liquidity Reserve Amount also contained $70.8 million of undrawn credit and liquidity facilities from MSDW and ILFC. CASH FLOWS FROM OPERATING ACTIVITIES Operating cash flows depend on many factors including the performance of lessees and MSAF group's ability to re-lease aircraft, the average interest rates of the 1998 Notes and the 2000 Notes, the effectiveness of MSAF group's interest rate hedging policies and whether MSAF group will be able to refinance certain subclasses of notes that may not be repaid with lease cash flows. Net cash provided by operating activities in the three month period ended February 28, 2001 amounted to $15.6 million, principally reflecting non-cash depreciation expense of $25.8 million, a net loss of ($16.3) million and an increase in liability for maintenance of $8.4 million. Net cash provided by operating activities in the three month period ended February 29, 2000 amounted to $10.3 million, principally reflecting non-cash depreciation expense of $11.8 million, a net loss of ($9.9) million and an increase in liability for maintenance of $7.5 million. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES In both the three month periods ended February 28, 2001 and February 29, 2000, MSAF group did not utilize any cash for investing activities. Cash flows used for financing activities were $16.3 million in the three month period ended February 28, 2001 and $6.1 million in the three month period ended February 29, 2000. In both periods cash used for financing activities reflected principal repayments. 20 INDEBTEDNESS MSAF group's indebtedness primarily consisted of the 1998 Notes and the 2000 Notes in the amount of $1,756.1 million at February 28, 2001. See Item 3 "Quantitative and Qualitative Disclosures About Market Risk" below for a presentation of the outstanding principal amounts and estimated fair values of each subclass of notes as of February 28, 2001. LIQUIDITY RESERVE AMOUNT The "liquidity reserve amount" is intended to serve as a source of liquidity for MSAF group's maintenance reimbursement obligations, security deposit return obligations, operating expenses, contingent liabilities and note obligations. The liquidity reserve amount may be funded with cash and letters of credit, guarantees or other credit support instruments ("eligible credit facilities") provided by, or supported with further eligible credit facilities provided by, a person (an "eligible provider") whose short-term unsecured debt is rated P-1 by Moody's, A-1+ by Standard & Poor's, or F1+ by Fitch (as successor to DCR) or is otherwise designated as an eligible provider by the controlling trustees. Both the ILFC facility discussed below under "--ILFC Facility" and the MSDW facility discussed below under "--MSDW Facility" are eligible credit facilities and comprise part of the liquidity reserve amount. There are currently no other eligible credit facilities in place. The liquidity reserve amount was approximately $133.4 million on February 28, 2001. The "minimum liquidity reserve amount" may be funded with cash and with eligible credit facilities and was approximately $30 million in cash on February 28, 2001. The liquidity reserve amount and the minimum liquidity reserve amount may be increased or decreased from time to time for any reason (including upon acquisitions of additional aircraft) by an action of the controlling trustees in light of changes in, among other things, the condition of the aircraft, the terms and conditions of the leases, the financial condition of the lessees, sales of aircraft and prevailing industry conditions; PROVIDED that MSAF group will obtain confirmation in advance in writing from the rating agencies that any proposed reduction in the liquidity reserve amount or the minimum liquidity reserve amount will not result in a lowering or withdrawal by any of the rating agencies of their respective ratings of any class of notes. If the balance of cash on deposit, together with the amount available for drawing under any eligible credit facilities, should fall below the liquidity reserve amount at any time (including as a result of MSAF group's determination that the liquidity reserve amount should be increased, as required by the rating agencies or otherwise), MSAF group may continue to make all payments, and any credit or liquidity enhancement facilities may be drawn to fund such payments, including required payments on the 1998 Notes and the 2000 Notes, which rank prior to, or equally with, payments of the minimum principal payment amount on the class D notes under the indenture and any permitted accruals other than in respect of modification payments, provided that the balance of cash on deposit, together with the amount available for drawing under any eligible credit facilities, does not fall below the minimum liquidity reserve amount at its then current level. "Modification payments" refers to any capital expenditures for the purpose of effecting any optional improvement or modification of any aircraft, or for the optional conversion of any aircraft from a passenger aircraft to a freighter or mixed-use aircraft, for the purpose of Purchasing or otherwise acquiring any engines or parts outside of the ordinary course of business. "Permitted accruals" refers to amounts in respect of expenses and costs that are not regular, monthly recurring expenses, including modification payments and refinancing expenses, if any, anticipated to become due and payable in any future interest accrual period. However, the balance of cash on deposit, together with the amount available for drawing under any eligible credit facilities, may fall below the minimum liquidity reserve amount at its then current level and MSAF group may continue to make payments of, and any credit or liquidity enhancement facilities may be drawn to fund such payments, all accrued and unpaid interest on any subclass of the most senior class of notes then outstanding to avoid an event of default, with respect to the 1998 Notes and the 2000 Notes and, on 21 the final maturity date of any subclass thereof, principal of any subclass of the most senior class of notes then outstanding to avoid an event of default with respect to the 1998 Notes and the 2000 Notes. Amounts drawn under any eligible credit facility will either be repayable at the third level in the priority of payments, as set forth in the indenture before the first collection account top-up (any such facility, a "primary eligible credit facility") or at the 11th level in the priority of payments, before the second collection account top-up (any such facility, a "secondary eligible credit facility"). The "first collection account top-up" is the amount, if positive, equal to (A) the minimum liquidity reserve amount less (B) amounts available for drawing under any primary eligible credit facilities. The "second collection account top-up" is the amount, if positive, equal to (A) the liquidity reserve amount less (B) an amount equal to cash amounts reserved at the third level in the priority of payments plus amounts available for drawing under any eligible credit facilities. The liquidity reserve amount and the minimum liquidity reserve amount have been determined largely based on an analysis of historical experience, assumptions regarding MSAF group's future experience and the frequency and cost of certain contingencies in respect of the aircraft currently owned by MSAF group, and are intended to provide liquidity for meeting the cost of maintenance obligations and non-maintenance, aircraft-related contingencies such as removing regulatory liens, complying with airworthiness directives and repossessing and re-leasing aircraft. In analyzing the future impact of these costs, assumptions have been made regarding their frequency and amount based upon historical experience. There can be no assurance, however, that historical experience will prove to be relevant in the future or that actual cash that we receive in the future will not be significantly less than that assumed. Any significant variation may materially adversely affect our ability to make payments of interest and principal on the 1998 Notes and the 2000 Notes. If at any time the aggregate outstanding principal balance of the 1998 Notes and the 2000 Notes is less than or equal to the liquidity reserve amount, the balance of funds, if any, in the collection account will be distributed in accordance with the priority of payments. ILFC FACILITY Under the ILFC facility, ILFC will hold certain security deposits with respect to the aircraft currently owned by MSAF group as custodian for the benefit of the MSAF group. ILFC will hold all cash security deposits paid with respect to the aircraft in MSAF group's portfolio except (1) amounts that ILFC determines in good faith to be no longer held on behalf of a lessee, whether upon expiry of or default under the applicable lease or otherwise (2) any cash security deposits in an amount exceeding three months' rent with respect to a single aircraft and paid by a single lessee and (3) certain security deposits that ILFC has transferred to MSAF group. ILFC will retain any interest accruing on amounts of aircraft security deposits that it holds. In addition ILFC will make loans to MSAF group which MSAF group may use for the same purposes as those for which the liquidity reserve amount may be applied as discussed above under "--Liquidity Reserve Amount," including to pay interest and minimum principal payment amounts payable under the indenture on the 1998 Notes and the 2000 Notes. ILFC's obligation to make such amounts available shall be limited to the ILFC facility commitment, which was approximately $40.8 million on February 28, 2001. The ILFC facility commitment shall be equal to (1) at any time before an early termination of the servicing agreement for a reason other than a sale of all the aircraft in MSAF group's portfolio or the repayment or defeasance of MSAF group's debt, the sum of (A) $20 million plus (B) total security deposits held by ILFC for the benefit of MSAF group at such time minus (C) all drawings that MSAF group have previously made under the ILFC facility that are required to be repaid to ILFC but not repaid at the time, and (2) after either of those events, $20 million minus all ILFC facility drawn amounts required to be repaid to ILFC but not repaid at such time. 22 The ILFC facility is a secondary eligible credit facility, so on the payment date following any drawing on the ILFC facility, MSAF group will be obligated, to the extent there are available collections remaining after payment of the minimum principal payment amount on the class D notes under the indenture, to repay amounts drawn under the ILFC facility to ILFC, together with accrued interest at 3% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months and compounded daily. ILFC's agreement to provide the ILFC facility will expire on the earliest of (1) May 1, 2025, (2) a sale of all the aircraft in MSAF group's portfolio and (3) the repayment or defeasance of all MSAF group's debt. ILFC's short-term unsecured debt is currently rated P-1 by Moody's, A-1+ by Standard & Poor's and F1+ by Fitch (as successor to DCR), so it is an eligible provider. At any time and for so long as ILFC is not an eligible provider, ILFC's obligations under the ILFC facility will be supported by an eligible credit facility satisfactory to MSAF group provided by an eligible provider at ILFC's expense. MSDW FACILITY Under the MSDW facility, MSDW will make loans to MSAF group which MSAF group may use for the same purposes as those for which the liquidity reserve amount may be applied, including to pay interest and minimum principal payment amounts on the 1998 Notes and the 2000 Notes. MSDW's obligation to make such loans shall be limited to the MSDW facility commitment, which on February 28, 2001, was equal to the sum of (1) $30 million minus (2) all drawings that MSAF group have previously made and not repaid under the MSDW facility. The MSDW facility is a secondary eligible credit facility, so on the payment date following any drawing on the MSDW facility, MSAF group will be obligated, to the extent that there are available collections remaining after payment of the minimum principal payment amount on the class D notes, to repay amounts drawn under the MSDW facility to MSDW, together with interest accrued at 3% per annum, calculated on the basis of a 360-day year consisting of twelve 30-day months and compounded daily. MSDW's agreement to provide the MSDW facility will expire on the earlier of (1) a sale of all the aircraft and (2) the repayment or defeasance of all MSAF group's debt. MSDW has been designated by the controlling trustees as an eligible provider. MSDW's short-term unsecured debt is currently rated P-1 by Moody's, A-1+ by Standard & Poor's and F1+ by Fitch. OTHER FACILITIES There are currently no primary eligible credit facilities in place. MSAF group may put in place other eligible credit facilities from time to time, each of which shall be designated by the controlling trustees as a primary eligible credit facility or a secondary eligible credit facility. In addition, MSAF group may from time to time put in place other credit or liquidity enhancement facilities which are not eligible credit facilities. Amounts drawn under any such other facilities are repayable at the 11th level in the order of priorities, before the second collection account top-up. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY MSAF group's principal market risk exposure is to changes in interest rates. This exposure arises from its notes payable and the derivative instruments used to manage interest rate risk. The terms of each subclass of the 1998 Notes and the 2000 Notes, including the outstanding principal amount and estimated fair value as of February 28, 2001 were as follows:

~~(DOLLARS~~OUTSTANDING INESTIMATED ~~THOUSANDS~~PRINCIPAL AMOUNT ANNUAL FAIR VALUE AT FEBRUARY 28, INTEREST RATE EXPECTED FINAL FINAL MATURITY AT FEBRUARY 28, SUBCLASS OF NOTE 2001 (PAYABLE MONTHLY) PAYMENT DATE DATE 2001 ---------------- ---------------- ~~Aircraft~~----------------- ~~under~~------------------ ~~operating~~-------------- ~~leases,~~--------------- ~~net~~($000'S) of($000'S) ~~accumulated~~Subclass ~~depreciation of $30,859~~A-2......... $205,253 LIBOR + 0.35% September 15, 2005 March 15, 2023 $204,836 Subclass A-3......... 580,000 LIBOR + 0.52% March 15, 2002 March 15, 2025 580,544 Subclass A-4......... 200,000 LIBOR + 0.~~.....~~54% $1March 15,~~025~~ 2003 March 15,~~267~~ ~~Cash~~2025 ~~and~~200,250 ~~other~~Subclass ~~assets~~A-5......... 348,441 LIBOR + 0.~~.............................~~58% 16June 15,~~701~~ ~~Deferred~~2008 ~~rental~~March ~~income~~15, 2025 349,202 Subclass B-1.........~~.............................~~ (883,~~638)~~474 ~~Liability~~LIBOR ~~for~~+ ~~maintenance~~0.~~..................................~~65% ~~(51~~March 15,~~730)~~ ~~Security~~2013 ~~deposits~~March 15, 2023 81,831 Subclass B-2.........~~..................................~~ (774,~~118)~~970 ~~Interest~~LIBOR ~~rate~~+ ~~swap~~1.05% ~~contracts~~March ~~(see~~15, ~~Note~~2007 9)March (315,~~922)~~ ~~----------~~2025 ~~Net~~75,040 ~~assets~~Subclass ~~acquired~~C-1......... 98,980 6.90% March 15, 2013 March 15, 2023 93,876 Subclass C-2......... 55,000 9.60% October 15, 2016 March 15, 2025 57,673 Subclass D-1......... 109,978 8.~~...........~~70% $March ~~970~~15,~~560~~ ~~==========~~2014 March 15, 2023 95,681

INTEREST RATE RISK MANAGEMENT MSAF group's policy is not to be adversely exposed to material movements in interest rates. MSAF group's leasing revenues are generated primarily from rental payments, which are currently entirely fixed but may be either fixed or floating with respect to future leases. In general, an interest rate exposure arises to the extent that MSAF group's interest obligations in respect of its notes payable do not correlate with rental payments for different rental periods, including rental payments attributable to existing and future leases. Future leases are relevant because the duration of MSAF group's obligations under its floating rate notes is significantly longer than the duration of lease income under its fixed rate leases. MSAF group currently manages this exposure by entering into interest rate swaps. In the future MSAF group may also use other derivative instruments. Currently, MSAF group's aim is to manage the exposure created by its floating interest rate obligations given that future lease rates on new leases may not be repriced at levels which fully reflect changes in market interest rates in the previous lease period. Accordingly, MSAF group's current interest rate swap portfolio tries to minimize the risk created by its longer-term floating interest rate obligations and measures that risk by reference to the duration of those obligations and the expected sensitivity of future lease rates to future market interest rates. The controlling trustees are responsible for reviewing and approving the overall interest rate management policies and transaction authority limits. MSAF group's financial advisor, Morgan Stanley & Co. Incorporated, assists MSAF group in developing and implementing its interest rate risk management policies. CURRENT SWAP PORTFOLIO As of February 28, 2001, MSAF group was a party to twelve interest rate swaps with MSCS. In ten of these swaps MSAF group paid a fixed monthly coupon and received one month LIBOR and in two 24 of these swaps MSAF group paid one month LIBOR and received a fixed monthly coupon on the notional balances as set out below:

~~NINE~~ESTIMATED ~~NINE~~FAIR ~~MONTHS~~VALUE ~~MONTHS~~NOTIONAL ~~ENDED~~FIXED ~~ENDED~~MONTHLY ~~AUG~~FIXED ~~31,~~MONTHLY ~~2000~~AT ~~AUG~~FEBRUARY 3128, ~~1999~~BALANCE EFFECTIVE DATE MATURITY DATE PAY RATE RECEIVE RATE 2001 --------------------- ----------------- ----------------- ------------- ------------- --------------- (~~DOLLARS~~$000'S) IN(%) ~~MILLIONS~~(%) ~~Total~~($000'S) ~~revenues~~200,000....... November 12, 1997 November 15, 2002 6.2250 -- (4,145) 200,000....... November 12, 1997 November 15, 2004 6.2750 -- (6,484) 150,000....... November 12, 1997 November 15, 2007 6.3600 -- (6,425) 50,000........ November 12, 1997 November 15, 2009 6.4250 -- (2,433) 150,000....... February 19, 1998 November 15, 2007 -- 5.860 2,184 50,000........ ~~$186~~February ~~$184~~19, ~~Net~~1998 ~~loss~~November 15, 2009 -- 5.905 628 100,000....... January 24, 2000 November 15, 2006 7.3365 -- (8,951) 100,000....... January 24, 2000 November 15, 2009 7.4450 -- (11,954) 100,000....... January 24, 2000 November 15, 2011 7.4600 -- (13,324) 100,000....... January 24, 2000 November 15, 2014 7.3550 -- (13,659) 100,000....... January 24, 2000 November 15, 2019 7.3690 -- (15,101) 200,000.......~~....~~ ~~$(13)~~February $25, 2000 February 15, 2002 7.1200 -- (34,278)

POLICY REVIEW MSAF group regularly reviews its hedging requirements. In the future MSAF group expects to seek to enter into further swaps or unwind part or all of the existing and any future swaps. In addition, if MSAF group acquires additional aircraft, it may rebalance its position. COUNTERPARTIES MSAF group will monitor counterparty risk on an ongoing basis. Counterparties will be subject to the prior approval of the controlling trustees. MSAF group's counterparties are currently all affiliates of MSDW. Future counterparties may consist of the affiliates of major U.S. and European financial institutions (including special-purpose derivative vehicles) which have credit ratings, or which provide collateralization arrangements, consistent with maintaining the credit ratings of MSAF group's notes payable. 25 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None. (b) Reports on Form 8-K: During the three-month period to which this report relates, MSAF filed the following Reports on Form 8-K, on the dates indicated: (i) December 14, 2000, January 12, 2001 and February 13, 2001 (each containing a monthly report to holders of the notes) and January 12, 2001 (relating to TWA filing for relief under Chapter 11 of the U.S. Bankruptcy Code). 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 12, 2001 MORGAN STANLEY AIRCRAFT FINANCE By: /s/ ALEXANDER FRANK ---------------------------- Alexander Frank SIGNATORY TRUSTEE

27 APPENDIX 1 MORGAN STANLEY AIRCRAFT FINANCE CASH ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTH PERIOD FROM DECEMBER 2000 TO FEBRUARY 2001 28 CONTENTS

~~OUTSTANDING~~PAGE ~~PRINCIPAL ESTIMATED FAIR AMOUNT ANNUAL VALUE AT AUGUST 31, INTEREST RATE EXPECTED FINAL FINAL MATURITY AT AUGUST 31, SUBCLASS OF NOTE 2000 (PAYABLE MONTHLY) PAYMENT DATE DATE 2000~~ --------~~--------------------~~ ~~-------------~~I ~~-----------------~~Background ~~------------------~~and ~~--------------~~General ~~-------------- ($000'S) ($000'S) Subclass A-2~~Information...................... ~~$218,212~~30 ~~LIBOR~~II +Comparison ~~0.35%~~of ~~September~~Actual ~~15,~~Cash ~~2005~~Flows ~~March~~versus ~~15,~~the ~~2023~~2000 ~~$217,803~~Base ~~Subclass~~Case ~~A-3~~for the Three Month Period from December 2000 to February 2001................ ~~580,000 LIBOR + 0~~.~~52% March 15, 2002 March 15, 2025 580,997 Subclass A-4~~................ ~~200,000 LIBOR + 0~~.~~54%~~........ ~~March~~31 ~~15,~~III ~~2003~~Other ~~March~~Financial ~~15, 2025 200,375 Subclass A-5~~Data................ ~~372,287 LIBOR + 0~~.~~58% June 15, 2008 March 15, 2025 373,276 Subclass B-1~~................ ~~86,892 LIBOR + 0~~.~~65%~~. ~~March~~37 ~~15,~~IV ~~2013~~Recent ~~March 15, 2023 85,480 Subclass B-2~~Developments................ ~~75,000 LIBOR + 1~~.~~05% March 15, 2007 March 15, 2025 75,152 Subclass C-1~~................ ~~99,580 6~~.~~90%~~... ~~March~~37 ~~15,~~V ~~2013 March 15, 2023 89,591 Subclass C-2~~Appendices................ ~~55,000 9~~.~~60% October 15, 2016 March 15, 2025 56,358 Subclass D-1~~................ ~~110,000 8~~.~~70%~~............ ~~March 15, 2014 March 15, 2023 88,000~~44

29 I BACKGROUND AND GENERAL INFORMATION Morgan Stanley Aircraft Finance ("MSAF"), a Delaware business trust, is a special purpose vehicle which owns aircraft subject to operating leases. Under the terms of its Indenture, MSAF may acquire additional aircraft and sell aircraft from the fleet. Any acquisition of additional aircraft will be subject to certain confirmations with respect to the Notes from rating agencies and compliance with certain operating covenants of MSAF as set out in the Indenture. INITIAL PORTFOLIO On March 3, 1998, MSAF issued $1,050 million of Notes in connection with its acquisition of 33 aircraft plus an engine with a total appraised value as of September 30, 1997 of $1,115.5 million from International Lease Finance Corporation ("ILFC"). All but one of the 33 aircraft were acquired by MSAF with an appraised value of $1,086.9 million as of September 30, 1997. NEW ISSUANCE On March 15, 2000, MSAF refinanced the A-1 subclass Notes of $400 million as part of a total issuance of $1,310 million of New Notes in five subclasses (A-3, A-4, A-5, B-2 and C-2). In addition to the refinancing of the A-1 subclass, the New Notes were issued in association with MSAF's acquisition of 29 aircraft with a total appraised value of $1,047.8 million as of November 30, 1999 from a subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). MSDW acquired two aircraft from an affiliate of GE Capital Corporation on March 19, 1999 and 27 aircraft from ILFC on August 6, 1999. COMBINED PORTFOLIO As a result of the March 2000 acquisition, the overall size of MSAF's combined aircraft fleet is now 61 aircraft plus an engine with a total appraised value of $1,911.2 million as of September 30, 2000. As of April 1, 2001, MSAF had 59 lease contracts in effect with 41 lessees based in 27 countries and three aircraft were off-lease as shown in Appendix A. MANAGEMENT DISCUSSION AND ANALYSIS The discussion and analysis that follows in Section II and III is based on the results of MSAF and its subsidiaries as a single entity (collectively the "MSAF GROUP") for the First Quarter 2001 and relates to the combined portfolio of 61 aircraft plus an engine. For the purposes of this report, the "FIRST QUARTER 2001", discussed in Section II shall comprise information from the monthly cash reports dated December 15, 2000 to February 15, 2001. The financial data in this section includes cash receipts from November 10, 2000 (first day of the Collection Period for the December 2000 Report) up to February 9, 2001 (last day of the Collection Period for the February 2001 Report). It also includes payments made by MSAF group between November 16, 2000 and up to February 15, 2001 (the Note Payment Date for the February 2001 Report). MSAF group's cash receipts and disbursements are determined, in part, by the overall economic condition of the operating leasing market. The operating leasing market, in turn, is affected by various cyclical factors including the level and volatility of interest rates, the availability of credit, fuel costs and general and regional economic conditions affecting lessee operations and trading. Other factors to consider are manufacturer production levels, passenger demand, retirement and obsolescence of aircraft models, manufacturers exiting or entering the market or ceasing to produce aircraft types or re-introduction into service of aircraft previously in storage. In addition, state regulations and air traffic control infrastructure constraints, such as limitations on the number of landing slots, can also impact the operating leasing market. 30 MSAF group's ability to compete against other lessors is determined, in part, (1) by the composition of its fleet in terms of mix, relative age and popularity of aircraft type (2) operating restrictions imposed by the Indenture and (3) the ability of other lessors, who may possess substantially greater financial resources, to offer leases on more favorable terms than MSAF group. II COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR THE THREE MONTH PERIOD FROM DECEMBER 2000 TO FEBRUARY 2001 The March 8, 2000 Offering Memorandum and the October 31, 2000 Prospectus for the New Notes contain assumptions in respect of MSAF group's future cash flows and cash expenses (the "2000 BASE CASE"). For the purpose of this report, "NET CASH COLLECTIONS" is defined as Total Cash Collections less Total Cash Expenses, Drawings from and Transfers to Expense Account, Interest Payments, Swap Payments and Exceptional Items. A discussion of the Cash Collections, Cash Expenses, Drawings from and Transfers to Expense Account, Interest Payments, Swap Payments, Exceptional Items and Principal Payments is given below and should be read in conjunction with the analysis in Appendix B. CASH COLLECTIONS "Total Cash Collections" includes Net Lease Rentals (Contracted Lease Rentals plus Movement in Current Arrears Balance less Net Stress-related Costs), Interest Earned, and Net Maintenance.

~~ESTIMATED~~ACTUAL ~~FAIR~~BASE ~~VALUE~~CASE ~~NOTIONAL~~VARIANCE ~~FIXED MONTHLY FIXED MONTHLY AT AUGUST 31, BALANCE PAY RATE RECEIVE RATE 2000 ($000'S) EFFECTIVE DATE MATURITY DATE (%) (%) ($000'S)~~ -------- ---------~~----~~ -------- ($ MM) Lease Rentals............................................... 57.4 57.4 -- --Renegotiated Leases..................................... -- --- -- --Rental Resets........................................... (0.9) --~~-----------~~ (0.9) ----~~---------~~ ----~~---------~~ ----~~----------~~ ~~300,000~~CONTRACTED ~~November~~LEASE ~~12, 1997 November 15, 2000 6~~RENTALS.~~1325 -- $ 479 200,000 November 12, 1997 November 15, 2002 6~~.~~2150~~.................................. ~~-- 2,631 200,000 November 12, 1997 November 15, 2004 6~~56.~~2650~~5 -- 57.4~~,395~~ ~~150,000~~(0.9) ~~November~~Movement ~~12,~~in ~~1997~~Current ~~November~~Arrears ~~15,~~Balance......................... ~~2007 6~~(4.~~3600~~0) -- (4~~,572 50,000 November 12, 1997 November 15, 2009 6~~.~~4250~~0) --Net ~~1,706 150,000 February 19, 1998 November 15, 2007~~ Stress--related 5Costs.~~860~~................................... (~~8,856~~1.0) ~~50,000 February 19, 1998 November 15, 2009 -- 5.905~~ (~~3,486~~2.6) ~~100,000 January 24, 2000 November 22, 2006 7~~1.~~3365~~6 ---- ~~(2,326)~~---- ~~100,000~~---- ~~January~~NET ~~24,~~LEASE ~~2000~~RENTALS........................................... ~~November~~51.5 ~~22, 2009 7~~54.~~4450~~8 -- (3~~,578~~.3) ~~100,000~~Interest ~~January~~Earned............................................. ~~24,~~1.2 ~~2000~~0.9 ~~November~~0.3 ~~22,~~Net ~~2011~~Maintenance............................................. 7(1.~~4600~~6) -- (~~4,056~~1.6) ~~100,000~~---- ~~January~~---- ~~24, 2000 November 22, 2014 7.3550~~ ---- ~~(3,596)~~TOTAL ~~100,000~~CASH ~~January~~COLLECTIONS...................................... ~~24,~~51.1 ~~2000 November 22, 2019 7~~55.~~3690~~7 -- (4~~,329~~.6) ~~200,000~~==== ~~February~~==== ~~25, 2000 February 25, 2002 7.1200 -- (776)~~====

In the First Quarter 2001, MSAF group generated approximately $51.1 million in Total Cash Collections, $4.6 million less than assumed in the 2000 Base Case. This difference is due to a combination of the factors set out below (the numbers in brackets refer to the line item number shown in Appendix B). [2] RENEGOTIATED LEASES Renegotiated Leases refers to the loss in rental revenue caused by a lessee negotiating a reduction in the lease rental. Typically, this can be a permanent reduction over the remaining lease term in exchange for other contractual concessions. No lease was renegotiated during the First Quarter 2001. [3] RENTAL RESETS Rental Resets is a measure of the loss in rental revenue when new lease rates are lower than those assumed in the 2000 Base Case. In the First Quarter 2001, one lease was signed with Region Air, a carrier in the Pacific region, for rental rates lower than the 2000 Base Case assumptions for this aircraft. The new lease terms, coupled with a lease extended on a power by hour basis in the prior 31 fiscal year, resulted in lost rental of $0.9 million for the First Quarter 2001. See "Recent Developments" for a discussion of the current re-marketing task as of April 1, 2001. [4] CONTRACTED LEASE RENTALS Contracted Lease Rentals represents the current contracted lease rental rollout which equates to the 2000 Base Case Lease Rentals less adjustments for Renegotiated Leases and Rental Resets. For the First Quarter 2001, Contracted Lease Rentals were $56.5 million, $0.9 million lower than assumed in the 2000 Base Case. [5] MOVEMENT IN CURRENT ARREARS BALANCE Current Arrears refers to the total Contracted Lease Rentals outstanding from current lessees at a given date and excludes any amounts classified as Bad Debts. Movement in Current Arrears Balance measures the difference in arrears balances between the end of the Fourth Quarter 2000 and February 15, 2001. Actual Current Arrears as of February 15, 2001 were $4.7 million, an increase of $4.0 million from the end of the Fourth Quarter 2000 (payment date November 15, 2000).

~~EXHIBIT~~CURRENT ~~NUMBER~~CURRENT MOVEMENT SECURITY ARREARS ARREARS IN CURRENT DEPOSITS AIRCRAFT TYPE COUNTRY 11/15/00 2/15/01 ARREARS HELD ------------- -------- 27-------- -------- ---------- -------- ($ MM) A321-100......................................... Turkey 0.7 1.7 ~~Financial~~1.0 ~~Data~~0.7 ~~Schedule~~B737-400......................................... Spain -- 0.3 0.3 0.5 B747-300......................................... Iceland -- 0.4 0.4 0.5 B757-200ER....................................... U.S.A. -- 1.0 1.0 0.6 B757-200ER....................................... U.S.A. -- 0.4 0.4 0.9 MD-82............................................ U.S.A. -- 0.4 0.4 0.5 MD-83............................................ U.S.A. -- 0.2 0.2 0.3 MD-83............................................ U.S.A. -- 0.3 0.3 0.3 --- --- --- --- TOTAL............................................ 0.7 4.7 4.0 4.3 === === === ===

As at February 15, 2001, five lessees were in arrears, owing $4.7 million, against which MSAF group held security deposits of $4.3 million. See "Recent Developments" for a discussion of the total current arrears as of April 1, 2001. NET STRESS-RELATED COSTS Net Stress-related Costs is a combination of all the factors which can cause actual lease rentals received to differ from the Contracted Lease Rentals. The 2000 Base Case assumes Net Stress-related Costs equal to 4.5% of the 2000 Base Case Lease Rentals.

ACTUAL BASE CASE VARIANCE ~~CASH COLLECTIONS $ MM $ MM $ MM~~ --------~~--------~~ -------- -~~--------~~ -------- ~~Lease~~($ ~~Rentals~~MM) Bad Debts............................................... 57.~~9 57~~.~~9 -- --Renegotiated Leases~~..~~...................................~~ -- --Security --Deposits ~~--Rental~~Drawn ~~Resets~~Down................................ 0.6 Restructured Arrears.......... ~~-- -- -- ---- ---- ---- CONTRACTED LEASE RENTALS~~..............................~~......~~ ~~57.9 57.9~~ -- ~~Movement in Current Arrears Balance~~AOG......................... 0.~~1 -- 0~~.~~1 Net Stress-related Costs~~..............................~~......~~ ~~3.2~~ (2.7) ~~5.9~~Other ~~----~~Leasing ~~---- ---- NET LEASE RENTALS~~Income........................................~~...~~ 611.2 ~~55.2~~Repossession 6Costs.~~0 Interest Earned~~.........................................~~....~~ ~~1.1~~ (0.~~6 0.5 Net Maintenance............................................. (3.5~~1) -- ~~(3.5)~~ ---- ---- ---- ~~TOTAL~~NET ~~CASH~~STRESS-RELATED ~~COLLECTIONS~~COSTS...................................... 58(1.80) 55(2.86) 31.06 ==== ==== ====

32 For the First Quarter 2001, Net Stress-related Costs amounted to $1.0 million, $1.6 million less than the 2000 Base Case assumptions. A detailed analysis of Net Stress-related Costs is provided below in line items [6] to [11]. [6] BAD DEBTS AND [7] SECURITY DEPOSITS DRAWN DOWN Bad Debts refers to rental arrears owed by lessees who have defaulted and which are deemed irrecoverable. These arrears are partially offset by the draw down of security deposits held and amounts subsequently recovered from the defaulted lessees. In the First Quarter 2001, the security deposit against one lessee was drawn down. In January 2000, TransAer, a lessee based in Ireland, restructured rental and maintenance arrears for two A320-200 aircraft into a note payable of $1.4 million. The terms of the restructuring agreement were that amounts totaling $1.4 million would be repaid during June, July and August 2000. None of these restructured arrears were paid. In October 2000, TransAer filed for bankruptcy, with total arrears outstanding of $1.6 million at that date. MSAF group drew down security deposits of $1.0 million against these arrears, $0.4 million in the Fourth Quarter 2000 and $0.6 million in the First Quarter 2001. [8] RESTRUCTURED ARREARS Restructured Arrears refers to current arrears that have been capitalized and restructured into a note payable, which is repaid over an agreed period. There were no losses from Restructured Arrears in the First Quarter 2001. [9] AIRCRAFT ON GROUND ("AOG") AOG is defined as the Base Case Lease Rental lost when an aircraft is off-lease and non-revenue earning. The impact of AOG downtime amounted to lost rental of $2.7 million during the First Quarter 2001. This was in respect of four aircraft: AOG ANALYSIS FOR THE FIRST QUARTER 2001

~~CURRENT CURRENT MOVEMENT SECURITY ARREARS ARREARS IN CURRENT DEPOSITS 5/15/00 8/15/00 ARREARS HELD~~ AIRCRAFT TYPE ~~COUNTRY~~OLD $LESSEE MMNEW $LESSEE MMTERMINATION $TYPE ~~MM $ MM~~ ------------- ----------- -------- -------- ---------- -------- 1 A310-300 B.R.A.~~..................................~~ ~~Brazil~~Region ~~0.7~~Air ~~0.0~~Unscheduled ~~(0.7)~~2 A320-200 TransAer Cyprus Airways Unscheduled 3 A320-200 TransAer -- Unscheduled 4 B737-300 VASP Signed LOI Unscheduled TOTAL..................................... ~~USA 0~~.~~2 0~~.~~0 (0~~.~~2) -- A320-200~~..................................... ~~Ireland 0~~.~~0 0~~.~~7 0~~.~~7 1~~.~~0 Engine~~.........................~~..............~~ ~~Netherlands~~LOST ~~0.0~~RENTAL ~~0.1 0.1 0.1~~ --- ---- ---- ($ MM) 1 0.3 2 0.8 3 0.8 4 0.8 --- TOTAL................~~........................~~ 02.97 ~~0.8 (0.1) 1.1~~ === ~~==== ==== ===~~

See "Recent Developments" for an analysis of AOG as of April 1, 2001. [10] OTHER LEASING INCOME Other Leasing Income consists of miscellaneous income received in connection with a lease other than contracted rentals, maintenance receipts and security deposits, such as early termination payments, default interest or payment for excess flight hours flown. In the First Quarter 2001, Other Leasing Income amounted to $1.2 million, mainly related to payments received in respect of excess cycles flown by five aircraft during the calendar year 2000. [11] REPOSSESSION COSTS Repossession Costs consists of legal and aircraft technical costs incurred as a result of repossessing an aircraft. In the First Quarter 2001, Repossession Costs amounted to $0.1 million, which primarily 33 related to consultancy and legal fees incurred during the repossession of the two A320-200 aircraft previously on lease to TransAer and the B737-300 previously on lease to VASP. [13] NET LEASE RENTALS Net Lease Rentals is Contracted Lease Rentals plus the Movement in Current Arrears Balance less Net Stress-related Costs. In the First Quarter 2001, Net Lease Rentals amounted to $51.5 million, $3.3 million less than assumed in the 2000 Base Case. The variance was primarily attributable to the large increase in the Current Arrears Balance, which is discussed above in line item [5]. [14] INTEREST EARNED Interest Earned relates to interest received on cash balances held in the Collection and Expense Accounts. Cash held in the Collection Account in the First Quarter 2001 consisted of the cash liquidity reserve amount of $30.0 million, lessee security deposits of $19.2 million, plus the intra-month cash balances for all the rentals and maintenance payments collected prior to the monthly payment date. The Expense Account contains cash set aside to pay for expenses which are expected to be payable over the next three months. The average interest rate for the First Quarter 2001 was 6.21%, versus the interest rate of 5.77% assumed in the 2000 Base Case. In the First Quarter 2001, Interest Earned amounted to $1.2 million, $0.3 million more than assumed in the 2000 Base Case. The difference was due primarily to a higher interest rate during the First Quarter 2001. [15] NET MAINTENANCE Net Maintenance refers to maintenance receipts less any maintenance reimbursements paid to lessees. In the First Quarter 2001, actual maintenance receipts amounted to $6.2 million while maintenance expenditure amounted to $7.8 million, generating negative Net Maintenance of $1.6 million. Maintenance expenditure included the - airframe D-check and overhaul of both engines of an A310-300 aircraft repossessed from B.R.A. costing $6.0 million - airframe C-check of a B737-300 aircraft repossessed from VASP costing $0.9 million - reimbursement from engine reserves of $0.4 million in respect of a B737-300F aircraft - preliminary payment of $0.3 million to a maintenance facility for work to be carried out on an A320-200 aircraft previously on lease to TransAer. The 2000 Base Case makes no assumptions for Net Maintenance as it assumes that, over time, maintenance receipts will equal maintenance expenditure. However, it is unlikely that in any particular Note Payment Period, maintenance receipts will exactly equal maintenance expenditure. CASH EXPENSES "Total Cash Expenses" includes Aircraft Operating Expenses and SG&A Expenses. In the First Quarter 2001, Total Cash Expenses were $3.3 million, $0.4 million greater than assumed in the 2000 Base Case, which assumes these costs to be 5.0% of the 2000 Base Case Lease Rentals.

ACTUAL BASE CASE VARIANCE ~~NET STRESS~~-~~RELATED COSTS $ MM $ MM $ MM~~ ------- ---------~~--------~~ -------- ~~---------~~($ ~~--------~~MM) ~~Bad~~Aircraft ~~Debts~~Operating Expenses.................................~~..................~~ (1.80) ~~Security Deposits Drawn Down~~(0.~~...............................~~5) (0.75) ~~Restructured~~SG&A ~~Arrears~~Expenses........................................ ~~-- AOG~~.......~~..................................................~~ (12.83) ~~Other Leasing Income~~(2.~~....................................... 6.~~4) ~~Repossession Costs.......................................... (~~0.3)1 ---- ---- ---- ~~NET~~TOTAL ~~STRESS--RELATED~~CASH ~~COSTS~~EXPENSES......................................... (3.23) (2.79) 5(0.94) ==== ==== ====

34 AIRCRAFT OPERATING EXPENSES Aircraft Operating Expenses includes all operational costs related to the leasing of an aircraft including costs of insurance, re-leasing and other overhead costs. In the First Quarter 2001, Aircraft Operating Expenses amounted to $1.0 million, $0.5 million greater than the 2000 Base Case, which assumes these costs to be 0.8% of the 2000 Base Case Lease Rentals. The variance is discussed below in line items [17] to [18]. [17] INSURANCE Insurance costs of $0.4 million were incurred in the First Quarter 2001 and related to the payment of an additional premium in respect of an A320-200 previously on lease to TransAer. [18] RE-LEASING AND OTHER OVERHEAD COSTS Re-leasing and other overhead costs consists of miscellaneous re-delivery and leasing costs associated with re-leasing events. In the First Quarter 2001 these costs amounted to $0.6 million. SG&A EXPENSES SG&A Expenses relates to fees paid to the Aircraft Servicer and to other service providers. In the First Quarter 2001, SG&A Expenses were $2.3 million, slightly less than assumed in the 2000 Base Case. The variance is described below in line items [20] and [21]. [20] AIRCRAFT SERVICER FEES Aircraft Servicer Fees is defined as amounts paid to the Aircraft Servicer, ILFC, in accordance with the terms of the Servicing Agreement. In the First Quarter 2001, the total Aircraft Servicer Fees paid was $1.8 million, $0.2 million lower than assumed in the 2000 Base Case.

~~LOST~~ACTUAL ~~RENTAL~~BASE ~~AIRCRAFT~~CASE ~~TYPE~~VARIANCE ~~OLD LESSEE NEW LESSEE $MM~~ --------~~-----~~ ---------- --------~~------~~ ($ MM) Base Fee.................................................... (0.7) (0.7) --~~---------~~ 1Rent ~~A310-300~~Collected BFee.R.A........................................ ~~Region~~(0.6) ~~Air~~(0.7) 0.91 2Rent ~~B737-300~~Contracted ~~VASP~~Fee......................................... --(0.5) (0.76) 30.1 ~~B737~~Incentive Fee 2000/2001*.................................... -~~400~~- ~~TAESA~~-- ~~Travel~~-- ~~Service~~---- ~~0.2~~---- --- ~~TOTAL~~AIRCRAFT SERVICER FEES...................................... (1.8) (2.0) 0.2 ==== ==== ===

------------------------ * For financial year ended November 30, 2001. The Base Fee is a fixed amount per month per aircraft and changes only as aircraft are acquired or sold. The Rent Contracted Fee is equal to 1% of all rentals contracted in the current calendar month. The Rent Collected Fee is equal to approximately 1.25% of all rentals received during the previous calendar month. The Incentive Fee applies to the Initial Portfolio only and is set at 10% of all cash flow received above a targeted annual amount set in the Operating Budget at the beginning of each financial year. No Incentive Fee was payable to ILFC in the First Quarter 2001 for the financial year ended November 2001. [21] OTHER SERVICER FEES Other Servicer Fees relates to fees and expenses paid to other service providers including the Administrative Agent, Financial Advisor, legal advisors, accountants and Independent Trustees. In the First Quarter 2001, Other Servicer Fees amounted to $0.5 million, $0.1 million greater than assumed in the 2000 Base Case. 35 NET CASH COLLECTIONS "Net Cash Collections" equals Total Cash Collections less Total Cash Expenses, Drawings from and Transfers to Expense Account, Interest Payments, Swap Payments and Exceptional Items.

ACTUAL BASE CASE VARIANCE ~~CASH EXPENSES $ MM $ MM $ MM~~ --------~~-----~~ -------- -~~--------~~ -------- ~~Aircraft~~($ ~~Operating~~MM) Total Cash Collections...................................... 51.1 55.7 (4.6) Total Cash Expenses......................................... (03.3) (2.9) (0.54) 0Drawings from Expense Account............................... 9.2 -- 9.2 Transfers to Expense Account................................ (7.3) ~~SG&A~~-- ~~Expenses~~(7.3) Interest Payments........................................... (232.81) (230.5) (01.6) Swap Payments............................................... (1.3) (2.6) 1.3 Exceptional Items........................................... -- -- -- ----- ----- ~~TOTAL~~---- NET CASH ~~EXPENSES~~COLLECTIONS........................................ (16.3 19.0)7 (3.04) -- ===== ===== ====

[23] TOTAL CASH COLLECTIONS As discussed in line items [2] to [15], MSAF group generated approximately $51.1 million in Total Cash Collections, $4.6 million less than assumed in the 2000 Base Case. [24] TOTAL CASH EXPENSES As discussed in line items [17] to [21], MSAF group incurred approximately $3.3 million in Total Cash Expenses, $0.4 million higher than assumed in the 2000 Base Case. [25] DRAWINGS FROM EXPENSE ACCOUNT The Expense Account contains cash set aside each month from current cash collections to pay for expenses which are expected to be payable over the next three months. The Administrative Agent determines the level of cash set aside each month. In the First Quarter 2001, $9.2 million was drawn from the Expense account to pay expenses incurred and which were payable during the period. The 2000 Base Case makes no assumption as to the level of these Drawings. [26] TRANSFERS TO EXPENSE ACCOUNT Transfers to the Expense Account represents the level of cash set aside each month to pay for expenses which are expected to be payable over the next three months. In the First Quarter 2001, $7.3 million was transferred to the Expense Account. As at February 15, 2001, the closing balance on the Expense Account was $9.0 million, which will be used to fund future cash expenses, primarily maintenance reimbursements. [27] INTEREST PAYMENTS AND [28] SWAP PAYMENTS In the First Quarter 2001, Interest Payments to Noteholders amounted to $32.1 million. This is $1.6 million higher than the 2000 Base Case, which assumes Interest Payments for the First Quarter 2001 to be $30.5 million. The higher Interest Payments are due to a higher than assumed average LIBOR. The average LIBOR for the First Quarter 2001 was 6.40% versus an assumed LIBOR of 5.97%. The higher Interest Payments were partially offset by a reduction in the amount of Swap Payments. MSAF group paid $1.3 million in Swap Payments, $1.3 million less than assumed in the 2000 Base Case. 36 [29] EXCEPTIONAL ITEMS Exceptional Items refers to cash flows that occur infrequently and are outside the normal business activities of MSAF group. There were no exceptional cash flows in the First Quarter 2001. [31] PRINCIPAL PAYMENTS In the First Quarter 2001, total Principal Payments to Noteholders amounted to $16.3 million, $3.4 million less than assumed in the 2000 Base Case, reflecting the lower Net Cash Collections available during this period. III OTHER FINANCIAL DATA Details of interest and debt coverage ratios and Loan-to-Value ratios (LTV's) as of February 15, 2001 are shown in Appendix D. CASH Cash held at February 15, 2001 was $58.2 million. This included $30.0 million representing the cash portion of the Liquidity Reserve Amount at that time. This is a source of liquidity for, among other things, maintenance obligations, operating expenses and contingent liabilities. The balance consisted of $19.2 million in lessee security deposits and $9.0 million in accrued expenses held in the Expense Account in respect of future cash expenses. In addition to the $58.2 million cash balance held at February 15, 2001, the Liquidity Reserve Amount also contained credit and liquidity facilities provided by MSDW and ILFC aggregating to $70.8 million. Neither of these facilities was drawn upon in the First Quarter 2001. AIRCRAFT VALUES Under the terms of the Indenture, MSAF group is required to obtain new appraisals of the Base Value of each aircraft from a minimum of three independent appraisers each year. The annual appraisal must be delivered to the Indenture Trustee no later than October 31 of each year. The aircraft appraisals delivered to the Indenture Trustee on October 31, 2000 are shown in Appendix A. A-D NOTE BALANCE As at February 15, 2001, the aggregate amount of Class A-D Notes outstanding was $1,756.1 million. This is $1.0 million ahead of the 2000 Base Case, which assumes the aggregate amount of Class A-D Notes outstanding to be $1,757.1 million. IV RECENT DEVELOPMENTS The following discussion refers to information pertaining to the combined portfolio of 61 aircraft plus an engine which were owned by MSAF group as of April 1, 2001. RE-MARKETING TASK FOR COMBINED PORTFOLIO As of April 1, 2001, the total near-term re-marketing task for the combined portfolio was 18 aircraft, of which 3 relate to aircraft off-lease and 15 relate to leases scheduled to expire before November 30, 2002. Of the three aircraft off-lease, two are subject to non-binding letters of intent, one A321-100 and one B737-300. The third aircraft, an A320-200, which was previously on lease to TransAer, is currently undergoing maintenance work. 37 Of the fifteen leases scheduled to expire before November 30, 2002, four are subject to non-binding letters of intent. The other leases are not yet subject to non-binding letters of intent, but the Servicer is currently negotiating lease extensions with three of the current lessees.

$SUMMARY MMNO. OF AIRCRAFT ------- --------------- ~~Base~~No. ~~Fee~~of Aircraft Assets subject to Lease Agreements.......... 59 No. of Aircraft Assets off-lease............................ 3 ---- Total No. of Aircraft Assets............ 0.~~7 Rent Collected Fee~~................... 62 ==== No. of Aircraft Assets off-lease............................ 03 No.7 ~~Rent~~of ~~Contracted~~Leases ~~Fee~~scheduled to expire before Nov 30, 2001....... 5 No. of Leases scheduled to expire in the year to Nov 30, 2002................................. 0.6 Incentive Fee 1999/2000*.................... 10 ---- Equals Total Near-term re-marketing task................ 0.0... ~~---~~18 ~~TOTAL~~==== ~~SERVICER~~Of ~~FEE~~which LOI's signed.....................................~~.....~~ ~~2.0~~6 ====

RE-MARKETING TASK: BY NUMBER OF AIRCRAFT

~~ACTUAL~~YEAR ~~BASE~~ENDING ~~CASE~~-------------------------------------------------------------------------- ~~VARIANCE~~2001 ~~NET~~2002 ~~CASH~~2003 ~~COLLECTIONS~~2004 $2005 MM>2006 $TOTAL ~~MM $ MM~~ -------- -------- -------- -------- -------- -------- -------- ~~Total Cash Collections~~A300...................................... 58.~~8 55~~.~~8 3~~.0........ ~~Total~~1 ~~Cash~~1 ~~Expenses~~2 A310......................................... (3.0)....... (2 1 3 A320.0)................................................ 2--* ~~Drawings~~2 ~~from~~1 ~~Expense~~1 ~~Account~~6 A321............................... 11.2................. 1--* ~~11.~~1 2 ~~Transfers~~A330................................................. to1 ~~Expense~~1 ~~Account~~A340................................................. ~~(10~~1 1 B737.8)................................................ 4--** ~~(10.8)~~4** ~~Interest~~5 ~~Payments~~4 2 1 20 B747........................................... ~~(33~~.~~7) (31~~..... 1) (1 2 B757.6)................................................ ~~Swap~~2 ~~Payments~~4 2 8 B767............................................... (0.2). (1 2 1 1 1 6 F50.5)................................................. 2 2 F70.................................................. 3 ~~Exceptional~~3 ~~Items~~MD82................................................. 1 1 MD83................................................. 1 1 1 1 4 Engine............................................... 1 1 -- --- -- -- ---- ---- ---- ---- ---- ~~NET CASH COLLECTIONS~~TOTAL........................................ 22.~~3 19~~.~~2 3~~.1..... 8 10 17 11 8 8 62 ===== ==== ==== ==== ==== ==== ====

------------------------ * Includes aircraft currently subject to a non-binding letter of intent. - Includes aircraft currently off-lease. 38 RE-MARKETING TASK: BY APPRAISED VALUE*

~~NO.~~YEAR OFENDING ~~AIRCRAFT~~ -------------------------------------------------------------------------- ~~No.~~2001 of2002 ~~Aircraft~~2003 ~~Assets~~2004 ~~subject~~2005 to>2006 ~~Lease~~TOTAL ~~Agreements~~-------- -------- -------- -------- -------- -------- -------- A300................................ 612.45% No2.27% of4.72% ~~Aircraft~~A310................................ ~~Assets~~2.38% ~~off-lease~~1.42% 3.80% A320................................ 3.30% 3.07% 1.53% --1.47% ~~Total~~9.37% NoA321................................ of2.04% ~~Aircraft~~2.02% ~~Assets~~4.06% A330................................ 624.05% --4.05% NoA340................................ of4.77% ~~Aircraft~~4.77% ~~Assets~~B737................................ ~~scheduled~~4.16% to4.91% ~~expire~~6.52% ~~before~~4.80% ~~Dec~~1.58% ~~31,~~1.44% ~~2000~~23.41% B747................................ 4.72% 2.24% 6.96% B757................................ 23.50% No7.30% of4.14% ~~Aircraft~~14.94% ~~Assets~~B767................................ ~~scheduled~~2.96% to3.93% ~~expire~~2.98% in3.27% ~~the~~3.32% ~~year~~16.46% toF50................................. ~~Dec~~0.60% ~~31,~~0.60% ~~2001~~F70................................. 1.95% 1.94% MD82................................ 120.94% --0.94% ~~Equals~~MD83................................ ~~Total~~0.87% ~~Near-term~~0.92% ~~re-marketing~~0.91% ~~task~~0.97% 3.67% Engine.............................. 140.31% 0.31% ------ Of------ ~~which~~------ ~~LOI~~------ ~~signed~~------ ------ ------ TOTAL............................... 10.37% 20.45% 26.44% 14.66% 13.05% 15.~~....~~03% 5100% --====== ====== ====== ====== ====== ====== ======

------------------------ * Appraised Value as of September 30, 2000. As of April 1, 2001, 54 leases, representing 84.97% of the portfolio by appraised value as of September 30, 2000, were scheduled to expire before November 30, 2005. As of April 1, 2001, the average remaining term to lease expiry date, weighted by appraised value as of September 30, 2000 was 34 months. This would extend to 38 months if the six aircraft currently subject to non-binding letters of intent progressed to signed leases. AIRCRAFT ON GROUND (AOG) As of April 1, 2001, there were three aircraft on the ground: AOG ANALYSIS APRIL 1, 2001

~~YEAR~~EXPECTED ~~ENDING~~AIRCRAFT ~~2000~~TYPE ~~2001~~OLD ~~2002~~LESSEE ~~2003~~STATUS ~~2004~~DELIVERY ~~>2005~~DATE ~~TOTAL~~ ----------- --~~------~~ -------- --~~------~~ -------- ---~~-----~~ -------- -------- ~~A300............................................... 1 1 2 A310............................................... 2 1 3~~ A320-200............................................... 1TransAer 1Available 3n/a ~~1 6~~ A321-100............................................... 1Air 1Alfa 2Signed ~~A330...............................................~~LOI 1June 12001 ~~A340............................................... 1 1~~ B737~~............................................... 2(~~-~~) 7* 2 4 3 2 20 B747~~300............................................... 1VASP 1Signed 2LOI ~~B757...............................................~~April 2*19, 1 5 8 B767............................................... 1* 1 1 1 2 6 F50................................................ 2 2 F70................................................ 1 2 3 MD82............................................... 1 1 MD83............................................... 1 1 2 4 Engine............................................. 1 1 -- -- -- -- -- -- -- TOTAL.............................................. 3 12 8 17 8 14 62 == == == == == == ==2001

The lease in respect of the A320-200 aircraft with TransAer was terminated in October 2000. TransAer had been operating this aircraft on wet lease to Libyan Arab Airlines, which detained the aircraft. MSAF group believes that Libyan Arab Airlines had no right to keep possession of the aircraft and an insurance claim for loss of the aircraft was submitted. On April 3, 2001, the aircraft was recovered and returned to MSAF group's possession by agents of the British insurers underwriting the insurance policies against which MSAF group had submitted its claim, under an arrangement to which MSAF group agreed after obtaining the U.S. Government's approval. The aircraft is currently in a maintenance facility in the United States for maintenance work necessary to re-lease it. MSAF group does not yet know how much such maintenance work will cost. MSAF group may incur further costs in 39 relation to this matter, including with respect to the pending insurance claim. In addition, MSAF group has a claim in TransAer's pending bankruptcy proceedings for the unpaid arrears, but it is unclear how much, if any, of such arrears MSAF group will be able to recover. This aircraft represents 1.7% of the portfolio by appraised value as of September 30, 2000 The A321-100 aircraft was repossessed from Air Alfa in March 2001. This aircraft, which is currently the subject of a non-binding letter of intent, represents approximately 2.0% of the portfolio by appraised value as of September 30, 2000. The B737-300 aircraft was repossessed from VASP in May 2000. The aircraft was recently deregistered from the Brazilian registry and is currently the subject of a non-binding letter of intent. This aircraft represents approximately 1.0% of the portfolio by appraised value as of September 30, 2000. LESSEE DIFFICULTIES As of April 1, 2001, five lessees were in arrears. The five aircraft on lease to these lessees represented 8.3% of the portfolio by appraised value as of September 30, 2000. The total current arrears amount with respect to these five lessees was $3.2 million, of which $2.2 million related to rental payments and $1.0 million related to maintenance reserves. MSAF group held security deposits of $3.3 million against these arrears. The current arrears amount represented 1.3% of annual lease rental payments. The weighted average number of days past due of such arrears was 64 days. The categorization of countries into the geographical regions of Developed Markets, Emerging Markets and Other is determined using Morgan Stanley Capital International, Inc. ("MSCI") designations. A regional analysis of current arrears as of April 1, 2001 is shown below.

~~YEAR~~% ~~ENDING~~APPRAISED ~~2000~~NO. ~~2001~~OF ~~2002~~NO. ~~2003~~OF ~~2004~~NO. ~~>2005~~OF ~~TOTAL~~CURRENT ~~-----------~~SECURITY REGION VALUE COUNTRIES AIRCRAFT LESSEES ARREARS DEPOSIT -------- --------- --------- -------- -------- -------- -------- ~~A300........................................~~($ ~~2.55%~~MM) 2Developed.~~31% 4~~.~~86% A310~~..........~~..............................~~ ~~2.25%~~Europe 1.382% ~~3.63%~~1 ~~A320........................................~~ 1~~.52%~~ 1~~.61%~~ 40.~~59%~~ 1~~.49%~~ 90.~~21%~~5 ~~A321~~North America.........~~...............................~~ 12.956% 1~~.98%~~ ~~3.93%~~2 ~~A330........................................~~2 41.~~00%~~6 40.~~00%~~9 ~~A340~~Pacific...............~~.........................~~ 4-- 0 0 0 0.~~58%~~0 40.~~58%~~0 ~~B737~~Emerging.............~~...........................~~ ~~2.09%~~Europe ~~7.96%~~and ~~2.53%~~Middle ~~5.13%~~East ~~3.84%~~-- ~~1.48%~~0 ~~23.03%~~0 ~~B747........................................~~0 40.~~87%~~0 20.~~45%~~0 7Asia.~~32% B757~~.................~~.......................~~ 32.933% 1~~.47%~~ ~~9.68%~~1 ~~15.08%~~1 ~~B767~~0.~~.......................................~~6 1.~~47% 2.85% 2.66%~~ 3~~.00%~~ ~~6.52%~~Latin 16America.~~50% F50~~........~~.................................~~ -- 0~~.62%~~ 0~~.62%~~ ~~F70.........................................~~ 0~~.68%~~ ~~1.45% 2.13% MD82........................................~~ 0.~~89%~~0 0.~~89%~~0 ~~MD83~~Other................~~........................~~ ~~0.95%~~Other ~~0.99%~~ 2.002% ~~3.94%~~1 ~~Engine......................................~~1 1 0.~~28%~~9 0.~~28%~~6 ---- ----- ----- -------- --- --- --- --- ---- --- TOTAL ARREARS.........~~..............................~~ 38.563% ~~18.36%~~4 ~~15.56%~~5 ~~25.93%~~5 113.~~73%~~2 243.~~86%~~3 ~~100%~~ ==== ===== ===== ======== === === === === ==== ===

As of April 1, 2001, 17 of MSAF group's aircraft were leased to 10 lessees domiciled in certain emerging market nations, including those located in Eastern Europe, Latin America and Asia. Due to the overall slowdown in the global economy it is possible that lessees in emerging markets may be adversely affected and experience payment difficulties. EUROPE (DEVELOPED) MSAF group currently leases 23.1% of the portfolio by appraised value as of September 30, 2000 in the Europe (Developed) region. One of the five lessees currently in arrears is based in this region. As of April 1, 2001, Air Europa, a lessee based in Spain, owed maintenance arrears of $0.1 million in respect of an aircraft against which MSAF group held a security deposit of $0.5 million. This aircraft, a B737-400, represents 1.2% of the portfolio by appraised value as of September 30, 2000. 40 NORTH AMERICA (DEVELOPED) MSAF group currently leases 15.4% of the portfolio by appraised value as of September 30, 2000 in the North America (Developed) region. Two of the five lessees currently in arrears are based in this region. As of April 1, 2001, TWA, a lessee based in the U.S.A., owed rental arrears of $0.2 million in respect of an MD-83 aircraft against which MSAF group held security deposits of $0.3 million. On January 10, 2001, TWA announced that it and certain of its subsidiaries had voluntarily filed petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. TWA also announced that it had reached agreement with American Airlines, Inc. ("American"), in which American would acquire substantially all the assets of TWA. MSAF group currently has 4 aircraft on lease to TWA, or approximately 5.1% of the fleet by appraised value as of September 30, 2000. The four aircraft are one B757-200ER, two MD-83s and one MD-82. American has signed an agreement affirming its intention to continue the leases on all four aircraft but at lower rental rates to reflect the credit rating of American. In exchange for this reduction in rental rates, American has agreed to extend the current lease expiration date for all four aircraft. Pursuant to the agreement which has been signed with American, TWA will assign the leases on all four aircraft to a wholly owned American subsidiary called TWA Airlines, LLC, which will operate the aircraft. As of April 1, 2001, National Airlines, a lessee based in the U.S.A., owed arrears of $1.4 million, of which $1.2 million related to rental payments and $0.2 million related to maintenance reserves. MSAF group held a security deposit of $0.6 million against these arrears. MSAF group currently leases one B757-200ER to National Airlines, which represents 1.6% of the portfolio by appraised value as of September 30, 2000. On December 6, 2000, National Airlines announced that it had voluntarily filed petitions in the U.S. District Court in Wilmington, Delaware for relief under Chapter 11 of the U.S. Bankruptcy Code. MSAF group has agreed to continue leasing this aircraft to National Airlines on a weekly basis subject to National Airlines making weekly lease rental payments. National Airlines is currently exploring all opportunities to raise financing, but it is not yet clear whether the airline will raise the necessary financing to continue operations. PACIFIC (DEVELOPED) MSAF group currently leases 13.1% of the portfolio by appraised value as of September 30, 2000 in the Pacific (Developed) region. As of April 1, 2001, none of these lessees were in arrears. EUROPE AND MIDDLE EAST (EMERGING) MSAF group currently leases 5.6% of the portfolio by appraised value as of September 30, 2000 in the Europe and Middle East (Emerging) region. As of April 1, 2001, none of these lessees were in arrears. ASIA (EMERGING) MSAF group currently leases 15.9% of the portfolio by appraised value as of September 30, 2000 in the Asia (Emerging) region. One of five lessees currently in arrears is based in this region. As of April 1, 2001, Asiana Airlines, a lessee based in South Korea, owed rental arrears of $0.6 million in respect of an aircraft against which MSAF group held a security deposit of $1.3 million. This asset, a B767-300ER, represents 2.3% of the portfolio by appraised value as of September 30, 2000. 41 LATIN AMERICA (EMERGING) MSAF group currently leases 5.0% of the portfolio in Latin America (all in Mexico) by appraised value as of September 30, 2000. As of April 1, 2001, none of these lessees were in arrears. OTHER MSAF group currently leases 17.2% of the portfolio by appraised value as of September 30, 2000 in the Other region. One of the five lessees currently in arrears is based in this region. As of April 1, 2001, Air Atlanta Icelandic, a lessee based in Iceland, owed total arrears of $0.9 million, of which $0.2 million related to rental payments and $0.7 million related to maintenance reserves. MSAF group held a security deposit of $0.6 million against these arrears. This aircraft, a B747-300, represents 2.2% of the portfolio by appraised value as of September 30, 2000. BAD DEBTS With the exception of the current arrears of $3.2 million that were discussed under Lessee Difficulties above, as of April 1, 2001 there were other arrears of $2.9 million due to be paid to the MSAF group. One of our lessees, Air Alfa, a carrier based in Turkey, defaulted on its obligations under its lease of an A321-100 and the aircraft was repossessed in March 2001. The lease was scheduled to expire in April 2003. Total arrears, associated with the lessee, at the time of repossession amounted to $2.9 million, of which $2.2 million related to rental payments and $0.7 million related to maintenance reserves. In March 2001 these arrears were re-classified from Current Arrears to Bad Debts and a security deposit of $0.7 million, held by MSAF group, was drawn down against this lessee. The Servicer has scheduled to meet with this lessee in mid-April and discuss the recovery of these arrears. This aircraft, which is currently the subject of a non-binding letter of intent, represents approximately 2.0% of the portfolio by appraised value as of September 30, 2000. RESTRUCTURED ARREARS A former Brazilian lessee, VARIG, negotiated an early termination of its lease of a B747-300 aircraft in July 1999. The total amount of rental payments and maintenance reserves due under this lease, at the date of the termination agreement, was $4.8 million against which MSAF group drew down a security deposit of $1.1 million. Under the terms of the termination agreement, VARIG is scheduled to repay $10.8 million over eight years to offset arrears of $4.8 million and approximately $6.0 million for maintenance and downtime costs. Provided no default has occurred by October 2005 under this note payable, the total remaining payments will be reduced by approximately $1.1 million on a pro-rata basis between October 2005 and October 2007, the scheduled final payment date under the note. As of April 1, 2001, VARIG had made all payments due under the note payable. This aircraft, which is currently on lease to Air Atlanta Icelandic, represents approximately 2.2% of the portfolio by appraised value as of September 30, 2000. AIRWORTHINESS DIRECTIVES The United States Federal Aviation Administration ("FAA") issued an Airworthiness Directive ("AD") in each of July and August 2000 requiring special detailed inspections to detect cracking of the main deck cargo door frames of Pemco-converted Boeing 737-200 and 737-300 freighters. The FAA issued a further AD to supersede the first two ADs, the result of which required operators to carry out modifications to the main deck cargo door frames. There are two aircraft in the portfolio subject to this AD, together representing 2.0% of the portfolio by appraised value as of September 30, 2000. It has been determined that the costs of the modification were immaterial. 42 On September 14, 2000, the FAA announced a proposal for the long-term redesign of the Boeing 737 rudder system and several short-term initiatives designed to enhance rudder safety on all Boeing 737 models. The redesign would increase the overall safety of the B737 by simplifying the rudder system and eliminating a range of both previously known and recently discovered failure possibilities. It may be some time before the FAA issues a formal AD. There are currently twenty B737s in the portfolio, together representing 23.4% of the portfolio by appraised value as of September 30, 2000. One of the twenty B737 aircraft is currently off-lease, but under the remaining nineteen leases all costs of compliance with ADs are the obligation of the lessees. 43 APPENDIX A V APPENDICES PORTFOLIO ANALYSIS AS OF APRIL 1, 2001

~~AIRCRAFT~~APPRAISED ~~TYPE~~VALUE ~~OLD~~AS OF ENGINE SERIAL DATE OF SEP. 30, % OF REGION(1) COUNTRY LESSEE ~~STATUS~~TYPE ~~EXPECTED~~CONFIGURATION ~~DELIVERY~~NUMBER ~~DATE~~MANUFACTURER 2000 FLEET REGIONAL --------- ------------ ---------------- -------------- ---------------- -------- ~~A310~~------------- --------- -------- -------- ($MM) 1 EUROPE......... France Air Liberte MD-83 PW JT8D-219 49822 Dec-88 16.71 0.9% 2 (Developed).... Europe Airpost (formerly France l'Aeropostale) B737-300QC CFM 56-3C1 23788 May-87 19.53 1.0% 3................ Ireland Aer Lingus A330-300 BCF6-80E1 54 Apr-94 77.R32 4.A0% 4................ ~~Lease~~Netherlands ~~Signed~~KLM ~~October~~Engine CF6-80C2-B6F 704279 Jul-95 5.89 0.3% 5................ Netherlands KLM Cityhopper F50 PW100-125B 20232 Oct-91 5.72 0.3% 6................ Netherlands KLM Cityhopper F50 PW100-125B 20233 Oct-91 5.71 0.3% 7................ Netherlands Transavia B737-300 CFM 56-3C1 27635 May-95 27.50 1.4% 8................ Norway Braathens B737-500 CFM 56-3B1 25165 Apr-93 18.85 1.0% 9................ Norway Braathens B737-500 CFM 56-3C1 26304 Sep-94 20.46 1.1% 10............... Spain Air Europa B737-400 CFM 56-3C1 24707 Jun-91 23.26 1.2% 11............... UK Air 2000 B757-200ER RB211-535-E4 23767 Apr-87 27.39 1.4% 12............... UK Air 2000 B767-300ER CF6-80C2-B6F 26256 Apr-93 62.50 3.3% 13............... Britannia UK Airways B757-200ER RB211-535-E4-37 26266 Jan-93 39.49 2.1% 14............... UK JMC Airlines A320-200 V2500-A1 393 Feb-93 29.17 1.5% 15............... UK JMC Airlines B757-200ER RB211-535-E4-37 24367 Feb-89 30.71 1.6% 16............... UK Monarch Airlines A320-200 CFM 56-5A3 446 Oct-93 31.20 1.6% --subtotal............................................................................................................... 23.1% 17 NORTH AMERICA...... Canada Air Canada A320-200 CFM 56-5A3 279 Feb-92 28.07 1.5% 18 (Developed)... Canada Canada 3000 A320-200 CFM 56-5A3 397 Mar-93 29.54 1.5% 19............... U.S.A. Alaska Airlines B737-400 CFM 56-3C1 25104 May-93 26.27 1.4% 20............... U.S.A. Alaska Airlines B737-400 CFM 56-3C1 25105 Jul-93 26.14 1.4% 21............... Continental U.S.A. Airlines B737-300 ~~VASP~~CFM ~~Available~~56-3B1 ~~n/a~~26309 Dec-94 25.57 1.3% 22............... National U.S.A. Airlines B757-200ER RB211-535-E4 24260 Dec-88 30.98 1.6% 23............... Southwest U.S.A. Airlines B737-300 CFM 56-3B1 23255 Jun-85 14.75 0.8% 24............... Southwest U.S.A. Airlines B737-300 CFM 56-3B2 23256 Jul-85 15.37 0.8% 25............... U.S.A. TWA B757-200ER PW 2037 28160 Jul-96 43.99 2.3% 26............... U.S.A. TWA MD-83 PW JT8D-219 49657 Apr-88 17.30 0.9% 27............... U.S.A. TWA MD-83 PW JT8D-219 49824 Mar-89 18.49 1.0% 28............... U.S.A. TWA MD-82 PW JT8D-217C 49825 Mar-89 17.97 0.9% --subtotal............................................................................................................... 15.4% 29 PACIFIC....... Australia Ansett B767-200ER CF6-80A 23807 Aug-87 31.21 1.6% 30 (Developed)... Hong Kong Cathay Pacific B747-400 RB211-525-H2-19 24955 Sep-91 90.28 4.7% 31............... New Zealand Air New Zealand B767-300ER CF6-80C2-B6 24875 Jun-91 56.57 3.0% 32............... Singapore Region Air A310-300 PW JT9D-7R4E1 409 Nov-85 22.13 1.2% 33............... Singapore Region Air A310-300 PW JT9D-7R4E1 410 Nov-85 23.36 1.2% 34............... Singapore Region Air A310-300 PW JT9D-7R4E1 437 Nov-86 27.17 1.4% --subtotal............................................................................................................... 13.1% 35 EUROPE AND.... Czech Republic Travel Service B737-400 CFM 56-3B2 24234 Oct-88 20.43 1.1% 36 MIDDLE EAST... Greece Olympic Airways B737-400 CFM 56-3C1 25371 Jan-92 24.46 1.3% 37 (Emerging).... Hungary Malev F70 TAY MK620-15 11564 Dec-95 11.88 0.6% 38............... Hungary Malev F70 TAY MK620-15 11565 Feb-96 12.65 0.7% 39............... Hungary Malev F70 TAY MK620-15 11569 Mar-96 12.65 0.7% 40............... Turkey Pegasus B737-400 CFM 56-3C1 26279 Feb-92 25.82 1.4% --subtotal............................................................................................................... 5.6%

44 V APPENDICES PORTFOLIO ANALYSIS AS OF APRIL 1, 2001

%APPRAISED ~~CURRENT~~VALUE ~~SECURITY~~AS ~~APPRAISED~~OF ~~NO.~~ENGINE OFSERIAL ~~NO.~~DATE OF NOSEP. OF30, ~~ARREARS~~% ~~DEPOSIT~~OF REGION(1) ~~VALUE~~COUNTRY ~~COUNTRIES~~LESSEE ~~AIRCRAFT~~TYPE ~~LESSEES~~CONFIGURATION $NUMBER MMMANUFACTURER $2000 MMFLEET REGIONAL --------- ------------ ---------------- -------------- ---------------- -------- ------------- ~~Developed~~--------- ~~Europe~~-------- -------- ($MM) 41 ASIA.......... China China Hainan B737-300 CFM 56-3C1 26295 Dec-93 24.34 1.3% 42 (Emerging).... South Korea Asiana Airlines B767-300ER CF6-80C2-B6F 24798 Oct-90 43.82 2.3% 43............... South Korea Asiana Airlines B767-300ER CF6-80C2-B6F 25132 Feb-92 56.99 3.10% 144............... 2South 1Korea Asiana Airlines B737-400 CFM 56-3C1 26291 Aug-93 26.27 1.4% 145.0.............. ~~North~~South ~~America~~Korea Asiana Airlines B737-400 CFM 56-3C1 26308 Oct-94 26.40 1.4% 46............... Taiwan China Airlines A300-600R PW 4158 555 Mar-90 43.33 2.3% 47............... Taiwan China Airlines A300-600R PW 4158 625 Mar-92 46.92 2.95% 148............... 3Taiwan 1F.E.A.T. 0B757-200ER PW 2037 25044 May-91 35.719 1.08% ~~Pacific~~--subtotal............................................................................................................... 15.9% 49 LATIN AMERICA...... Mexico AeroMexico B757-200ER PW 2037 26272 Mar-94 039.59 02.1% 050 0(Emerging).... Mexico AeroMexico MD-83 PW JT8D-219 53050 May-90 17.63 0.9% 51............... Mexico Mexicana B757-200ER PW 2040 24965 Mar-92 38.21 2.0% --subtotal............................................................................................................... 5.0% ~~Emerging~~52 ~~Europe~~OTHER......... ~~and~~Cyprus ~~Middle~~Cyprus ~~East~~Airways A320-200 V2500-A1 414 May-93 29.27 1.5% 53............... Fiji Air Pacific B767-300ER CF6-80C2-B6 26260 Sep-94 63.43 3.13% 254............... 2Air 2Atlanta 1Iceland Icelandic B747-300 CF6-80C2 24106 Apr-88 42.084 12.2% ~~Asia~~55............... Iceland Icelandair B737-300F CFM 56-3B2 23811 Oct-87 19.51 1.0% 56............... Lithuanian Lithuania Airlines B737--300 0CFM 056-3B2 024449 0Apr-90 19.097 01.0% ~~Latin America~~57............... Macau Air Macau A321-100 V2530-A5 557 Dec-95 38.51 2.0% 58............... Malta Air Malta B737-300 CFM 56-3B2 025161 0Feb-92 023.42 01.02% 059.0.............. ~~Other~~Mauritius ~~Other~~Air Mauritius A340-300 CFM 56-5C3G 94 Mar-95 91.10 4.8% --subtotal............................................................................................................... 217.52% 160 1AVAILABLE 1FOR 0LEASE.4....... AOG AOG B737-300 CFM 56-3B2 24299 Nov-88 19.03 1.0% 61.5.............. AOG AOG A320-200 V2500-A1 428 May-94 31.87 1.7% 62............... AOG AOG A321-100 V2530-A5 597 May-96 39.06 2.0% --subtotal............................................................................................................... 4.7% ------- ----- ---- ~~TOTAL ARREARS~~Total...................... 11.~~6% 5 8 5 3~~.5......................................................................... 31,911.72 100% 100% ==== == == == === ====

---------------------------------------- (1) Regions are defined according to the Morgan Stanley Capital International designations. Number of aircraft on lease................................. 59 Number of aircraft off-lease................................ 3 ----- Total number of aircraft.................................... 62 ===== Number of lessees........................................... 41 Number of countries......................................... 27 Total developed............................................. 51.6% Total emerging.............................................. 26.5% Total other................................................. 17.2% Total AOG................................................... 4.7% ----- 100.0% =====

45 APPENDIX B COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR THE FIRST QUARTER 2001

~~ENGINE~~ACTUAL ~~SERIAL~~BASE ~~DATE~~CASE OFVARIANCE ~~REGION(1)~~ACTUAL ~~COUNTRY~~BASE ~~LESSEE~~CASE ~~TYPE~~VARIANCE ~~CONFIGURATION NUMBER MANUFACTURER~~ --------- ---------~~-----~~ --------~~--------------~~ ------~~-----~~ ---------~~-------~~ -------- ~~-------------~~(AMOUNTS 1IN ~~Europe~~MILLIONS ~~France~~OF ~~Air~~USD) ~~Liberte~~(% ~~MD-83~~OF PW2000 ~~JT8D-219~~BASE ~~49822~~CASE) ~~20-Dec-88~~CASH 2COLLECTIONS ~~(Developed)~~[1] ~~France~~Lease ~~l'Aeropostale~~Rentals........................... ~~B737-300~~57.4 ~~CFM~~57.4 56-~~3C1 23788 29~~-~~May-87~~ 3100.0% ~~Ireland~~100.0% ~~Aer Lingus A330~~-~~300 CF6~~-~~80E1~~ 54[2] 19-~~Apr~~-94Renegotiated 4Leases................... ~~Ireland TransAer A320~~-~~200 V2500~~-A1 ~~414 18~~-~~May~~-93 ~~5 Ireland TransAer A320~~-~~200 V2500~~-A1 ~~428 04~~-~~May~~-94 ~~6 Netherlands KLM Engine CF6~~-~~80C2~~-~~B6F~~ ~~704279 01~~-~~Jul~~-95 7[3] ~~Netherlands KLM Cityhopper F50 PW100~~-~~125B 20232 01~~-~~Oct-91~~Rented 8Resets......................... ~~Netherlands~~(0.9) ~~KLM Cityhopper F50 PW100~~-~~125B 20233 01~~-~~Oct-91~~ (0.9) ~~Netherlands~~(1.6)% ~~Transavia B737~~-~~300 CFM 56~~-~~3C1~~ ~~27635~~(1.6)% 17-~~May~~-~~95 10 Norway Braathens B737~~-~~500 CFM 56~~-~~3B1 25165 23~~-~~Apr~~-~~93 11 Norway Braathens B737~~-~~500~~ ~~CFM 56~~-~~3C1 26304 15~~-~~Sep~~-~~94 12 Spain Air Europa B737~~-~~400 CFM 56~~-~~3C1 24707 01~~-~~Jun~~-91 ~~13 UK Air 2000 B757~~-~~200ER RB211~~-~~535E4 23767 01~~-~~Apr~~-~~87 14 UK Air 2000 B767~~-~~300ER~~ ~~CF6~~-~~80C2~~-~~B6F 26256 01~~-~~Apr~~-~~93 15 UK Britannia Airways B767~~-~~200~~ ~~CF6~~-~~80A 23807 25~~-~~Aug~~-~~87 16 UK Britannia Airways B757~~-~~200 RB211~~-~~535E4~~ ~~26266 13~~-~~Jan~~-~~93 17 UK JMC Airlines A320~~-~~200 V2500~~-A1- ~~393~~[4] ~~26-Feb-93~~[1]...[3] 18CONTRACTED UKLEASE ~~JMC~~RENTALS................ ~~Airlines~~56.5 ~~B757-200~~57.4 ~~RB211-535E4~~(0.9) ~~24367~~98.4% ~~01-Feb-89~~100.0% 19(1.6)% UK[5] ~~Monarch~~Movement ~~Airlines~~in ~~A320-200~~Current ~~CFM~~Arrears ~~56-5A3~~Balance... ~~446~~(4.0) 28-~~Oct~~-93 (4.0) (7.0)% --~~subtotal~~ 20(7.0)% ~~North~~less ~~America~~Net ~~Canada~~Stress-related ~~Canada~~Costs........... ~~3000~~[6] ~~A320~~-~~200 CFM 56~~-~~5A3~~Bad ~~397~~Debts 25-~~May~~-93 ~~21 (Developed) Canada Canadian Airlines A320~~-~~200 CFM 56~~-~~5A3~~ ~~279~~[7] 18-~~Feb~~-92Security 22Deposits UDrawn Down.S.A........ ~~Alaska~~0.6 ~~Airlines~~1.0% ~~B737-400~~[8] ~~CFM 56~~-~~3C1 25104 21~~-~~May-93~~Restructured ~~23 U~~Arrears.S.A................ ~~Alaska Airlines B737~~-~~400~~- ~~CFM 56~~-~~3C1~~- ~~25105~~[9] 27-~~Jul~~-93AOG 24(2.7) U(4.~~S.A.~~7)% ~~Continental~~[10] ~~Airlines B737~~-~~300 CFM 56~~-~~3B1~~Other ~~26309~~Leasing ~~05-Dec-94 25 U~~Income.S.A................ ~~National~~1.2 ~~Airlines~~2.0% ~~B757-200ER~~[11] ~~RB211~~-~~535E4 24260 20~~-~~Dec-88~~Repossession ~~26 U~~Costs.S.A.................. ~~Southwest~~(0.1) ~~Airlines~~(0.1)% ~~B737~~-~~300~~------ ~~CFM~~------- 56-~~3B1~~---- ~~23255~~----- 26-~~Jun~~-85--- 27----- U[12] [6].S.A.[11] ~~Southwest~~sub-total............................... ~~Airlines~~(1.0) ~~B737-300~~(2.6) ~~CFM~~1.6 ~~56-3B2~~(1.8)% ~~23256~~(4.5)% ~~11-Jul-85~~2.7% 28[13] U[4]+[5]+[12] NET LEASE RENTALS.S.A..................... ~~TWA~~51.5 ~~B757-200ER~~54.8 PW(3.3) ~~2037~~89.6% ~~28160~~95.5% ~~22-Jul-96~~(5.9)% 29[14] UInterest Earned.S.A....................... ~~TWA~~1.2 ~~MD-83~~0.9 PW0.3 ~~JT8D-219~~2.0% ~~49657~~1.5% ~~01-Apr-88~~0.5% 30Maintenance UReceipts.S.A.................. ~~TWA~~6.2 MD-~~83 PW JT8D~~-~~219~~ ~~49824~~6.2 3110.9% -~~Mar~~-89 3110.9% UMaintenance Payments.S.A.................. ~~TWA~~(7.8) MD-82- PW(7.8) ~~JT8D~~(13.6)% -~~217C~~- ~~49825~~(13.6)% 31-~~Mar~~-89 --~~subtotal 32 Pacific Hong Kong Cathay Pacific B747~~-~~400 RB211~~-~~525H2~~-19 ~~24955 25~~-~~Sep~~-~~91 33 (Developed) New Zealand Air New Zealand B767~~-~~300ER CF6~~-~~80C2~~-~~B6 24875 14~~-~~Jun~~-91 ~~34 Singapore Region Air A310~~-~~300 PW JT9D~~-~~7R4E1 409 21~~-~~Nov~~-~~85 35 Singapore Region Air A310~~-~~300~~ ~~PW JT9D~~-~~7R4E1 410 29~~-~~Nov~~-~~85 36 Singapore Region Air A310~~-~~300 PW JT9D~~-~~7R4E1~~ ~~437 01~~-~~Nov~~-86 --~~subtotal 37 Europe and Czech Republic Travel Service B737~~-~~400~~ ~~CFM 56~~-~~3B2 24234 15~~-~~Oct~~-~~88 38 Middle East Greece Olympic Airways B737~~-~~400~~- ~~CFM~~Net ~~56-3C1~~Maintenance ~~25371~~(1.6) 13-~~Jan~~-92 39(1.6) (~~Emerging~~2.7)% ~~Hungary Malev F~~-~~70 TAY MK620~~-15 ~~11564~~(2.7)% ~~20-Dec-95~~[16] 40[13]...[15] ~~Hungary~~TOTAL ~~Malev~~CASH ~~F-70~~COLLECTIONS.................. ~~TAY~~51.1 ~~MK620-15~~55.7 ~~11565~~(4.6) ~~14-Feb-96~~88.9% 4197.0% ~~Hungary~~(8.1)% ~~Malev~~======= ~~F-70~~======= ~~TAY~~===== ~~MK620-15~~===== ~~11569~~===== ~~08-Mar-96~~===== 42CASH ~~Turkey~~EXPENSES ~~Air~~Aircraft ~~Alfa~~Operating ~~A321-100~~Expenses ~~V2530-A5~~[17] ~~597 21~~-~~May~~-96Insurance............................. 43(0.4) ~~Turkey~~(0.6)% ~~Pegasus~~[18] ~~B737~~-~~400 CFM 56~~-~~3C1 26279 01~~Re-~~Feb-92~~leasing ~~--subtotal~~and ~~APPRAISED~~other ~~VALUE~~overheads........ AS(0.6) ~~OF NOV 30, 1999 % OF~~ (~~$MM~~1.1)% ~~FLEET REGIONAL~~ ------- ------- ----- ----- ----- ----- 1 [19] [17]+[18] sub-total.1.............................. (1.0%) 2(0.5) 19(0.25) (1.07)% ~~3 80.~~(0 4.08)% ~~4 30~~(0.~~6 1.5~~9)% 5SG&A ~~32.1~~Expenses ~~1.6%~~Aircraft 6Servicer 5Fees --Base Fee.5............................. (0.3% 7) 6(0.37) 0-- (1.3)% ~~8 6~~(1.~~2 0.~~3)% 9-- 27--Rent Collected Fee.3................... 1(0.4%6) ~~10 19~~(0.7) 1.0~~% 11 21~~.21 (1.1)% ~~12 24.7~~ (1.2)% ~~13 29~~0.7 1.5% 14--Rent ~~63.8~~Contracted 3Fee.~~2% 15 29~~.5................. 1(0.5%) ~~16 41~~(0.26) 20.1% ~~17 30~~(0.49)% (1.50)% ~~18 31~~0.7 1.6% 19--Incentive 30Fee.~~5 1~~.~~5% 27~~.4%...................... 20-- ~~30.8~~-- ~~1.5%~~-- 21-- ~~29.9~~-- ~~1.5%~~-- 22------- ~~26.6~~------- ~~1.3%~~----- 23----- 26----- ----- [20] sub-total.6.............................. (1.3%8) 24(2.0) 260.32 1(3.3)% ~~25 33~~(3.5)% 10.72% 26Other 14Servicer Fees --Cabot.4................................ (0.7%3) 27(0.2) 15(0.31) (0.85)% ~~28 47~~(0.~~8 2.~~4)% ~~29 19~~(0.6 1.0)% 30--Other ~~20.4~~Service 1Providers.~~0% 31 17~~.8............. (0.9%2) 15(0.4%2) 32-- 97(0.~~4 4.9~~3)% ~~33 57.~~(0 2.83)% 34-- ~~22.3~~------- ~~1.1%~~------- 35----- ~~22.7~~----- ~~1.1%~~----- 36----- ~~27.6~~[21] 1sub-total.~~4% 11~~.3%............................. ~~37 21~~(0.95) 1(0.1%4) ~~38 25~~(0.1) 1(0.38)% ~~39 13~~(0.7)% (0.71)% 40[22] 14[19].~~3 0~~.7%.[21] 41TOTAL ~~14.7~~CASH 0EXPENSES.7%.................... ~~42 39~~(3.73) (2.9) (0%.4) ~~43 25~~(5.78)% 1(5.30)% 7(0.8)% ======= ======= ===== ===== ===== =====

46 COMPARISON OF ACTUAL CASH FLOWS VERSUS THE 2000 BASE CASE FOR THE FIRST QUARTER 2001

47 APPENDIX C PERFORMANCE TO DATE VERSUS THE 2000 BASE CASE AS OF FEBRUARY 15, 2001

[1] [2] [3] [4] [1]...[3] [5] [6] [7] [8] [9] [10] [11] [12] [6]...[11] [13] [4]+[5]+[12] [14] [15] [16] [13]...[15] [17] [18] [19] [17]+[18] [20] [21] [22] [19]...[21] [23] [16] [24] [22] [25] [26] [27] [28] [29] [30] [23]...[29] [31] AMOUNTS IN MILLIONS OF USD % OF 2000 BASE CASE ---------------------------- --------------------------- ACTUAL BASE CASE VARIANCE ACTUAL BASE CASE VARIANCE ------- --------- -------- ------ --------- -------- CASH COLLECTIONS [1] Lease Rentals........................... 218.1 218.~~.....~~1 57-- 100.90% 57100.90% -- [2] --Renegotiated Leases...................~~.......~~ -- -- -- -- -- -- [3] --~~Rental~~Rented Resets......................... (1.0) -- (1.0) (0.4)% -- (0.~~...~~4)% ------- ------- ----- ----- ----- ----- [4] [1]...[3] CONTRACTED LEASE RENTALS................ 217.1 218.1 (1.0) 99.~~...~~6% 57100.90% 57(0.94)% -- [5] Movement in Current Arrears Balance..... (4.7) -- (4.~~.....~~7) 0(2.1)% -- 0(2.1)% less Net Stress-related Costs~~..................~~ [6] --Bad Debts.............................~~.......~~ (1.8) (0.8)% [7] --Security Deposits Drawn Down.......... 1.~~......~~7 0.7% [8] --Restructured Arrears..................~~.......~~ -- -- [9] --AOG................................... (7.~~......~~4) (13.84)% [10] --Other Leasing Income..................~~.......~~ 610.3 4.7% [11] --Repossession Costs.................... (0.~~......~~5) (0.32)% ------- ------- ----- ----- ----- ----- [12] [6]...[11] sub-total............................... 2.3 (9.8) 12.~~....~~1 31.20% (24.75)% 5.95% [13] [4]+[5]+[12] NET LEASE RENTALS....................... 214.7 208.3 6.~~....~~4 6198.25% 5595.25% 63.0% [14] Interest Earned......................... 3.9 2.6 1.~~....~~3 1.8% 1.2% 0.6% ~~0.5~~ Maintenance Receipts.................... 25.~~......~~6 -- 25.6 11.87% -- 611.87% Maintenance Payments.................... (27.6) -- (27.~~.....~~6) (1012.37)% -- (1012.37)% ------- ------- ----- ----- ----- ----- [15] Net Maintenance......................... (2.0) -- (2.~~.....~~0) (31.50)% -- (31.50)% [16] [13]...[15] TOTAL CASH COLLECTIONS.................. 216.6 210.9 5.~~....~~7 5899.83% 5596.87% 32.06% ======= ======= ===== ===== ===== ===== CASH EXPENSES Aircraft Operating Expenses [17] --Insurance............................. (0.~~......~~9) (0.14)% [18] --Re-leasing and other overheads........ (0.~~......~~9) (0.14)% ~~=====~~------- ~~=====~~------- ~~=====~~----- ----- ----- ----- [19] [17]+[18] sub-total............................... (1.~~......~~8) (01.28) -- (0.58)% (0.38)% -- SG&A Expenses Aircraft Servicer Fees --Base Fee..............................~~.......~~ (02.7) (02.7) -- (1.2)% (1.2)% -- --Rent Collected Fee.................... (2.6) (2.~~.....~~6) -- (01.72)% (01.72)% -- --Rent Contracted Fee................... (2.1) (2.2) 0.~~....~~1 (0.69)% (01.60)% --0.1% --Incentive Fee.........................~~.......~~ -- -- -- ~~=====~~-- ~~=====~~-- ~~=====~~-- ~~[20]~~------- ~~sub~~-~~total......................................~~------ ~~(2.0) (2.0)~~ ----- ~~Other Servicer Fees~~ --~~Cabot........................................~~--- ~~(0.3) (0.3)~~ ----- --~~Other~~--- ~~Service Providers...................... (0.5) (0.2) (0.3) ===== ===== =====~~ [2120] sub-total...............................~~.......~~ (07.84) (07.5) (0.3)1 ~~[22] TOTAL CASH EXPENSES............................~~ (3.03)% (3.04)% --0.1% ~~=====~~Other ~~=====~~Servicer ~~=====~~Fees ~~NET CASH COLLECTIONS [23] Total Cash Collections~~--Cabot......................... 58.~~8 55~~.~~8 3~~.~~0 [24] Total Cash Expenses~~.....~~.......................~~ (31.0) (31.0) -- ~~[25] Drawings from Expense Account~~(0.~~.................~~5)% 11(0.25)% -- ~~11.2~~--Other ~~[26]~~Service ~~Transfers to Expense Account~~Providers...............~~....~~ (101.84) -- (100.87) ~~[27] Interest Payments..............................~~ (330.7) (310.17)% (20.63)% ~~[28] Swap Payments..................................~~ (0.24)% ~~(2.5) 2.3 [29] Exceptional Items..............................~~ -- -- -- ===== ===== ===== [30] TOTAL.......................................... 22.3 19.2 3.1 ===== ===== ===== [31] PRINCIPAL PAYMENTS subclass A2.................................... 5.2 4.9 0.3 subclass A3.................................... -- -- -- ~~subclass A4....................................~~ -- -- -- ~~subclass A5.................................... 15.2 12.4 2.8 subclass B1.................................... 1.7 1.7~~ -- ~~subclass B2....................................~~ -- -- -- ~~subclass C1.................................... 0.2 0.2~~ -- ~~subclass C2....................................~~ -- -- -- ~~subclass D1....................................~~ -- -- -- ~~-----~~[21] sub-~~---- ----- TOTAL~~total...............................~~...........~~ ~~22.3 19.~~(2 3.~~1 ===== ===== ===== % OF 2000 BASE CASE ------------------------------- ACTUAL BASE CASE VARIANCE -------- --------- -------- [1] 100.0% 100.0% -- [2] -- -- -- [3] -- -- -- ----- ----- ----- [~~4]) ~~100.0% 100.0% -- [5] 0.~~(1~~% -- 1~~.4%7) ~~[6]~~ (30.17)% ~~[7]~~ (1.2)% ~~[8] -- [9]~~ (30.18)% ~~[10] 11.2% [11]~~ (0.54)% ~~----- ----- -----~~ [1222] ~~5.7% (4.5)% 10.2%~~ [1319] ~~105~~.~~8% 95~~.~~5% 10~~.3% [1421] ~~1.9%~~TOTAL ~~1.0%~~CASH 0EXPENSES.~~9% 11~~.~~8% -- 11~~.~~8% (17~~.~~8)% -- (17~~.~~8)% ----- ----- ----- [15] (6~~.~~0)% -- (6~~.~~0)% [16] 101~~.~~7% 96~~.~~5% 5~~.~~2% ===== ===== ===== [17] (0~~.~~2)% [18] (0~~.~~1)% ===== ===== ===== [19] (0~~.~~3)% (0~~.~~8)% 0~~.~~5% (1~~.~~2)% (1~~.~~2)% -- (1~~.~~2)% (1~~.~~2)% -- (1~~.~~0)% (1~~.~~0)%~~ ~~-- -- -- -- ===== ===== ===== [20]~~ (311.46)% (311.~~4)% -- (~~0.5)% (0.56)% -- (~~0.8)% (0.3)% (0.~~5~~)% ===== ===== ===== [21] (1~~.3)% (~~0.8)% (0.~~5~~)% [22] (5~~.0)% (5.0~~)% -- ===== ===== ===== [23] 101~~.~~7% 96.5% 5.2% [24] (5.0)% (5.0)% -- [25] 19.~~3~~% -- 19.3% [26] (18.7~~)% ~~-- (18.7)% [27] (58.5)% (53.8)% (4.7)% [28] (0.3)% (4.5)% 4.2% [29] -- -- --~~ ===== ==~~===~~ ===== ~~[30] 38.5% 33.2% 5.3%~~ ==~~===~~ ===== ===== ~~[31] 9.0% 8.5% 0.5% -- -- -- -- -- -- 26.3% 21.5% 4.8% 2.9% 2.9% -- -- -- -- 0.3% 0.3% -- -- -- -- -- -- -- ----- ----- ----- 38.5% 33.2% 5.3%~~ ===== ===== ~~=====~~

48 PERFORMANCE TO DATE VERSUS THE 2000 BASE CASE AS OF FEBRUARY 15, 2001

AMOUNTS IN MILLIONS OF USD % OF 2000 BASE CASE ----------------------------~~---~~ ---------------------------~~----~~ ACTUAL BASE CASE VARIANCE ACTUAL BASE CASE VARIANCE -------- --------- -------- -------- --------- -------- NET CASH COLLECTIONS [123] ~~Lease~~[16] ~~Rentals~~Total Cash Collections.................. 216.6 210.~~....~~9 ~~102~~5.47 ~~102~~99.43% ~~-- 100~~96.07% ~~100~~2.06% -- [224] ~~--Renegotiated Leases................ -- -- -- -- -- --~~ [322] ~~--Rental~~Total ~~Resets~~Cash Expenses..................... (11.6) --(11.0) --(0.6) --(5.3)% --(5.0)% --(0.3)% ~~-- ------- ------- ----- ----- ------ -----~~ [425] ~~[1]....[3]~~Drawings ~~CONTRACTED~~from ~~LEASE~~Expense ~~RENTALS~~Account............. ~~102~~31.47 ~~102.4~~ -- ~~100~~31.0%7 ~~100~~14.05% -- ~~Movement~~14.5% in[26] ~~Current~~Transfers ~~Arrears~~to ~~[5]~~Expense ~~Balance~~Account............~~..................~~ (035.80) -- (035.80) -0(16.80)% -- -0(16.10)% ~~less Net Stress-related Costs~~ [627] ~~--Bad~~Interest ~~Debts~~Payments....................... (120.2) (113..3) (16.89) -1(55.81)% ~~[7] --Security Deposits Drawn Down~~(52.~~......~~ 0.7)% 0(3.71)% [828] ~~--Restructured~~Swap ~~Arrears~~Payments............... ~~-- -- [9] --AOG~~............ (3.3) (9.4) 6.~~.................~~1 (21.5)% -(4.3)% (2.48)% [1029] ~~--Other~~Exceptional ~~Leasing Income~~Items............... 5.~~2 5~~.~~1% [11] --Repossession Costs~~......~~...........~~ ~~(0.4)~~-- -~~0.4%~~- -- -- -- -- ------- ------- ----- ----- ----- ----- [1230] [623]....[1129] ~~sub-total~~TOTAL................................... 178.2 (477.7)2 51.90 135.29% -435.54% 50.75% ~~[13]~~======= ======= ===== ===== ===== ===== [431]~~+[5]+[12]~~ ~~NET~~PRINCIPAL ~~LEASE RENTALS~~PAYMENTS.................... ~~102~~.~~8 97~~.7 ~~5.1~~subclass ~~100~~A2.~~4% 95~~.~~5% 4~~.~~9% [14] Interest Earned~~.......................... 119.74 119.03 0.7 1 8.79% 18.08% 0.71% ~~Maintenance~~subclass ~~Receipts~~A3................. 10.~~8 -- 10~~.~~8 10~~.~~6% -- 10~~.~~6% Maintenance Payments~~........~~.........~~ ~~(17.4)~~ -- ~~(17.4)~~ -~~17.0%~~ -- -~~17.0%~~ -~~------~~ --~~-----~~ --~~---~~ --~~---~~ ~~------~~subclass ~~----- [15] Net Maintenance~~A4...................... (6.6)...... -- ~~(6.6)~~-- -~~6.4%~~- -- -~~6.4%~~- ~~[16]~~-- ~~[13]~~subclass A5....~~[15] TOTAL CASH COLLECTIONS~~............... 97.9......... 9851.7 (050.8) 950.9 23.7% 9623.53% -0.84% ~~CASH~~subclass ~~EXPENSES Aircraft Operating Expenses [17] --Insurance~~B1.......................... (0.~~3) -0~~.~~3% [18] --Re-leasing and other overheads~~.~~....~~ (06.2) -06.2% --~~-----~~ ~~-------~~2.9% ~~-----~~2.9% --~~---~~ ~~------~~subclass ~~----- [19] [17]+[18] sub-total~~B2............................ (0.5) ~~(0.8)~~-- ~~0.3~~-- -~~0.5%~~- -~~0.8%~~- ~~0.3%~~-- ~~SG&A Expenses Aircraft Servicer Fees~~ --~~Base~~ ~~Fee~~subclass C1............................. (10.2)9 (10.2)9 -- -10.24% -10.24% -- ~~--Rent~~subclass ~~Collected Fee~~C2................. (1.~~2) (1~~.~~2) -- -1~~.~~2% -1~~.~~2% -- --Rent Contracted Fee~~........~~........~~ ~~(1.1)~~-- ~~(1.1)~~ -- -~~1.0%~~- -~~1.0%~~- -- --~~Incentive~~ ~~Fee~~subclass D1............................. -- -- -- -- -- -- ------- ------- ----- ----- ------ ----- ~~[20] sub-total~~TOTAL................................... (378.5)2 (377.5)2 --1.0 -335.49% -335.4% --0.5% ~~Other~~======= ~~Servicer~~======= ~~Fees~~===== ~~--Cabot~~===== ===== ===== [33] DEBT BALANCES subclass A2............................. 205.3 (0205.5)4 (0.5)1 --subclass -0A3.~~5% -0~~.~~5% -- --Other Service Providers~~............ (1.~~0) (0~~.~~3) (0~~.7)............ -1580.0% -0580.~~3% -~~0~~.7%~~ --~~-----~~ ~~-------~~subclass ~~----- ----- ------ ----- [21] sub-total~~A4............................ (1.5) (0200.~~8) (~~0~~.7)~~ -1200.~~5% -~~0~~.8%~~ -~~0.7%~~- ~~[22]~~subclass ~~[19]~~A5....~~[21] TOTAL CASH EXPENSES~~.................. (5.~~5) (5~~.~~1) (0~~.4).... -5348.4%3 -5349.0%2 -0.4%9 ~~NET~~subclass ~~CASH COLLECTIONS [23] [16] Total Cash Collections~~B1............... 97.~~9 98~~.~~7 (0~~.8)........... 9583.7%5 9683.5% -~~0.8%~~- ~~[24]~~subclass ~~[22] Total Cash Expenses~~B2.................. (5.~~5) (5~~.~~1) (0~~.~~4) -5~~.~~4% -5~~.~~0% -0~~.~~4% [25] Drawings from Expense Account~~.....~~...~~ 1675.30 ~~-- 16~~75.30 ~~15.9%~~ -- ~~15.9%~~subclass ~~[26] Transfers to Expense Account~~C1......... ~~(14~~.~~9) -- (14~~.~~9) -14~~.~~5% -- -14~~.~~5% [27] Interest Payments~~................~~....~~ ~~(54~~99.8)0 ~~(52~~99.0) ~~(2.8)~~ -~~53.6%~~ -~~50.9%~~ ~~-2.7%~~subclass ~~[28] Swap Payments~~C2........................ (1.~~7) (4~~.~~4) 2~~.~~7 -1~~.7%. -455.3%0 255.6%0 ~~[29]~~-- ~~Exceptional~~subclass ~~Items~~D1............................. --110.0 --110.0 -- -- -- -- -~~------~~ ------- ----- ~~----- ------ ----- [30] [23]~~TOTAL....~~[29] TOTAL~~................................ 371,756.31 371,757.~~2 0.~~1 361.~~4% 36.3%~~ 0~~.1%~~ ======= ======= ===== ~~===== ====== =====~~

49 APPENDIX D COVERAGE RATIOS AS OF FEBRUARY 15, 2001

~~AMOUNTS IN MILLIONS OF USD % OF~~ 2000 ACTUAL BASE CASE VARIANCE -------- ---------~~--------------~~ --------~~-----------------------~~ ~~ACTUAL~~(ALL ~~BASE~~AMOUNTS ~~CASE~~IN ~~VARIANCE~~MILLIONS ~~ACTUAL~~OF ~~BASE~~USD ~~CASE~~UNLESS ~~VARIANCE~~OTHERWISE ~~--------~~STATED) ~~---------~~SOURCE ~~--------~~OF ~~--------~~FUNDS ~~---------~~Net ~~--------~~Cash ~~[31] PRINCIPAL PAYMENTS subclass A2~~Collections..............~~............~~ 678.52 777.32 (01.8)0 ~~6.3%~~ADD ~~7.1%~~BACK -0INTEREST.~~8% subclass A3~~................ 120.2 113.3 6.~~.......~~9 --ADD --BACK --SWAP ~~-- -- -- subclass A4~~PAYMENTS............ 3.3 9.4 (6.~~...........~~1) -- --- -- --- -- -- ~~subclass~~a A5201.~~.........................~~7 27199.79 261.8 ~~0.9~~===== ~~27.1%~~===== ~~26.2%~~==== ~~0.9%~~APPLICATION ~~subclass~~OF B1FUNDS b Swap Payments.....................~~.....~~ 23.83 29.84 ~~-- 2~~(6.7%1) ~~2.7%~~c --Class ~~subclass~~A B2Interest.................. 89.3 83.1 6.~~.....~~2 --d --Class --A ~~-- -- -- subclass C1~~Minimum...................~~.......~~ 05.38 04.38 ~~-- 0~~1.3% 0~~.3%~~ --e ~~subclass~~Class C2B Interest.................. 11.0 10.3 0.~~.....~~7 --f --Class --B ~~-- -- -- subclass D1~~Minimum................... 4.0 4.~~.....~~0 -- --g --Class --C ~~-- -- ------- ------- ----- ----- ------ ----- TOTAL~~Interest..................~~..............~~ 3711.~~3 37.2 0.~~1 3611.~~4% 36.3% 0.~~1% ~~=======~~-- ~~=======~~h ~~=====~~Class ~~=====~~C ~~====== ===== [33] DEBT BALANCES subclass A2~~Minimum...................~~.......~~ ~~218.2~~-- ~~217.4~~-- ~~(0.8)~~-- ~~subclass~~i A3Class D Interest..................~~........~~ ~~580~~8.08 ~~580~~8.08 -- ~~subclass~~j A4Class D Minimum...................~~.......~~ ~~200.0~~-- ~~200.0~~-- -- ~~subclass~~k A5Class A Scheduled.................~~.........~~ ~~372~~0.38 ~~373~~0.2 0.96 ~~subclass~~l B1Class B Scheduled.................~~.........~~ 862.93 862.93 -- ~~subclass~~m B2Class C Scheduled.................~~.........~~ ~~75.~~0 75.9 0.9 -- ~~subclass~~n C1Class D Scheduled.................~~.........~~ ~~99.6~~-- ~~99.6~~-- -- ~~subclass~~o C2Permitted Aircraft Modifications..~~........................~~ ~~55.0~~-- ~~55.0~~-- -- ~~subclass~~p D1Class A Supplemental.............. 64.~~...........~~4 ~~110~~65.0 ~~110.~~(0.6) -- ---~~----~~ ------- ----- ~~TOTAL~~201.~~...............................~~7 ~~1,797~~199.09 1~~,797~~.18 ~~0.1~~ ======= ======= =====

[1] INTEREST COVERAGE RATIO Class A........................... 2.18 2.16=a/(b+c) Class B........................... 1.84 1.86=a/(b+c+d+e) Class C........................... 1.62 1.63=a/(b+c+d+e+f+g) Class D........................... 1.51 1.52=a/(b+c+d+e+f+g+h+i) [2] DEBT COVERAGE RATIO Class A........................... 1.50 1.52=a/(b+c+d+e+f+g+h+j+k) Class B........................... 1.48 1.49=a/(b+c+d+e+f+g+h+i+j+k+l) Class C........................... 1.47 1.48=a/(b+c+d+e+f+g+h+i+j+k+l+m) Class D........................... 1.47 1.48=a/(b+c+d+e+f+g+h+i+j+k+l+m+n)

50 COVERAGE RATIOS AS OF FEBRUARY 15, 2001

~~ALL~~2000 ~~AMOUNTS~~BASE INCASE ~~MILLIONS~~ACTUAL OF2000 ~~USD~~BASE ~~UNLESS~~CASE ~~OTHERWISE STATED~~ 15-MAR-00 15-FEB-01 15-FEB-01 LOAN-TO-VALUE RATIOS --------------------- ---------------------~~------------~~ ~~ACTUAL 2000 BASE CASE VARIANCE~~ ---------- -----------~~---~~ ~~----------~~(ALL ~~SOURCE~~AMOUNTS IN MILLIONS OF ~~FUNDS~~USD ~~Net~~UNLESS ~~Cash~~OTHERWISE ~~Collections.....~~STATED) ~~37.~~[3] ~~37.2~~ASSUMED ~~0.1~~PORTFOLIO ~~ADD BACK INTEREST~~VALUE........ 54.~~8 52~~.~~0 2~~.~~8 ADD BACK SWAP PAYMENTS~~... ~~1.7 4.4 (~~2,049.7)1 ~~------- ------- ---- A 93~~1,970.81 ~~93.6~~[4] ~~0.2~~ADJUSTED ~~-------~~PORTFOLIO ~~======= ==== APPLICATION OF FUNDS B Swap Payments~~VALUE............. 1,879.79 ~~4.4~~Liquidity ~~(2.7)~~Reserve ~~C Class A Interest~~Amount......... 40.~~7 38~~.~~2 2~~.5. ~~D Class A Minimum~~--Cash.......... 5.~~8 4~~.~~8 1~~.~~0 E Class B Interest~~......... 5.~~0 4~~.~~7 0~~.~~3 F Class B Minimum~~...... 30.~~...~~0 230.30 230.30 --Accrued ~~G Class C Interest~~Expenses......... 5.~~1 5~~.~~1 -- H Class C Minimum~~........ 6.0 9.0 --9.0 --Security ~~-- I Class D Interest~~Deposits......... 4.~~0 4~~.~~0 -- J Class D Minimum~~....... 7.1 19.2 19.2 ------- ------- ------- Ksubtotal ~~Class A Scheduled~~cash........ 0.~~8 0~~.~~2 0~~.~~6 L Class B Scheduled~~............. 043.51 058.52 58.2 --Letters Mof ~~Class C Scheduled~~Credit........ 0.~~3 0~~.~~3 -- N Class D Scheduled~~........ 82.1 70.8 70.8 -- -- --- ~~O Permitted Aircraft~~ -- ----- ------- ~~Modifications~~Total Liquidty Reserve............ ~~P Class A Supplemental~~..... 27125.62 29129.10 (1129.5)0 ------- ------- ---- ~~93.8 93.6 0.2~~ ---~~----~~ ~~------- ----~~ [15] ~~INTEREST~~TOTAL ~~COVERAGE~~ASSET ~~RATIO Class A~~VALUE.................... 2,174.213 2,008.209 2,099.1 ======= a======= /======= ~~(b+c)~~NOTE BALANCE Class BA.............................. 1,404.767 66.1% 1,333.807 =66.4% a1,334.7 /63.6% ~~(b+c+d+e)~~ Class CB.............................. 1164.557 173.578% =158.4 a74.3% /158.4 ~~(b+c+d+e+f+g)~~71.1% Class DC.............................. 1154.459 81.1% 154.470 =81.9% a154.0 /78.5% ~~(b+c+d+e+f+g+h+i) [2] DEBT COVERAGE RATIO~~ Class AD.................. 1.~~43 1~~.~~47 = a / (b+c+d+e+f+g+h+i+j+k) Class B~~.......... 110.0 86.3% 110.0 87.~~....~~4% 1110.420 183.467% =------- a------- /------- ~~(b+c+d+e+f+g+h+i+j+k+l) Class C~~TOTAL.................. 1.~~42 1~~.~~45 = a / (b+c+d+e+f+g+h+i+j+k+l+m) Class D~~............ 1,834.~~.....~~3 1,756.421 1,757.451 ======= a======= ~~/ (b+c+d+e+f+g+h+i+j+k+l+m+n)~~=======

------------------------------ [1] INTEREST COVERAGE RATIO is equal to Net Cash Collections, before interest and swap payments, expressed as a ratio of the swap costs and interest payable on each subclass of Notes plus the interest and minimum principal payments payable on each subclass of Notes that rank senior in priority to the relevant subclass of Notes. [2] DEBT COVERAGE RATIO is equal to Net Cash Collections before interest and swap payments, expressed as a ratio of the interest and minimum and scheduled principal payments payable on each subclass of Notes plus the interest and minimum and scheduled principal payments payable on each subclass of Notes that ranks equally with or senior to the relevant subclass of Notes in the priority of payments. [3] ASSUMED PORTFOLIO VALUE represents the Initial Appraised Value of each aircraft in the Portfolio multipled by the Depreciation Factor at Calculation date divided by the Depreciation Factor at Closing Date. [4] ADJUSTED PORTFOLIO VALUE represents the Base Value of each aircraft in the Portfolio as determined by the most recent Appraisal multiplied by the Depreciation Factor at Caluclation date divided by the Depreciation Factor at Closing date. The lower of the Assumed Portfolio Value or 105% of the Adjusted Portfolio Value is used to calculate the principal repayment amounts to Noteholders. [5] TOTAL ASSET VALUE is equal to Total Portfolio value pluls Liquidity Reserve Amount. 51

2000 2000 BASE CASE ACTUAL BASE CASE 15-AUG-00 15-AUG-00 15-MAR-00 --------- --------- --------- LOAN-TO-VALUE RATIOS [3] ASSUMED PORTFOLIO 2,000.9 1,966.3 1,966.3 VALUE.................... Liquidity Reserve Amount --Cash................... 30.0 30.0 30.0 --Accrued Expenses....... 6.0 4.1 4.1 --Security Deposits...... 7.1 18.3 18.3 ------- ------- ------- subtotal cash............ 43.1 52.4 52.4 --Letters of Credit...... 82.1 71.0 71.0 ------- ------- ------- Total Liquidity 125.2 123.4 123.4 Reserve.................. [4] TOTAL ASSET VALUE........ 2,126.1 2,089.7 2,089.7 NOTE BALANCE Class A.................. 1,404.7 66.1% 1,370.5 65.6% 1,370.6 65.6% Class B.................. 164.7 73.8% 161.9 73.3% 161.9 73.3% Class C.................. 154.9 81.1% 154.6 80.7% 154.6 80.7% Class D.................. 110.0 86.3% 110.0 86.0% 110.0 86.0% ------- ------- ------- Total.................... 1,834.3 1,797.0 1,797.1 ======= ======= =======

Filing Compare · MORGAN STANLEY AIRCRAFT FINANCE