Introduction.

Morgan Stanley (the "Company") is a global financial services firm that maintains significant market positions in each of its business segments-Institutional Securities, Global Wealth Management Group and Asset Management. The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. A summary of the activities of each of the segments follows.

Institutional Securitiesincludes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and market-making activities in equity and fixed income securities and related products, including foreign exchange and commodities; benchmark indices and risk management analytics; research; and investment activities.

Global Wealth Management Group provides brokerage and investment advisory services covering various investment alternatives; financial and wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and trust and fiduciary services.

Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge funds and fund of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party retail distribution channels, intermediaries and the Company's institutional distribution channel. Asset Management also engages in investment activities.

The Company's results of operations for the 12 months ended November 30, 2007 ("fiscal 2007"), November 30, 2006 ("fiscal 2006") and November 30, 2005 ("fiscal 2005") are discussed below.

Discontinued Operations.

On June 30, 2007, the Company completed the spin-off (the "Discover Spin-off") of Discover Financial Services ("DFS") to its shareholders. DFS' results are included within discontinued operations for all periods presented through the date of the Discover Spin-off. The results of Quilter Holdings Ltd. ("Quilter"), Global Wealth Management Group's former mass affluent business in the U.K., are reported as discontinued operations for all periods presented through its sale on February 28, 2007. The results of the Company's aircraft leasing business, which was sold on March 24, 2006, are also reported as discontinued operations through its date of sale. See Note 22 to the consolidated financial statements.

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Results of Operations.

Executive Summary.



Financial Information.



                                                                     Fiscal Year
                                                           2007          2006          2005
Net revenues (dollars in millions):
Institutional Securities                                 $ 16,149      $ 21,110      $ 15,497
Global Wealth Management Group                              6,625         5,512         5,047
Asset Management                                            5,493         3,453         3,219
Intersegment Eliminations                                    (241 )        (236 )        (238 )

Consolidated net revenues                                $ 28,026      $ 29,839      $ 23,525

Income before taxes (dollars in millions)(1):
Institutional Securities                                 $    817      $  7,721      $  4,609
Global Wealth Management Group                              1,155           508           591
Asset Management                                            1,467           851         1,030
Intersegment Eliminations                                       2            23            86

Consolidated income before taxes                         $  3,441      $  9,103      $  6,316

Consolidated net income (dollars in millions)            $  3,209      $  7,472      $  4,939

Earnings applicable to common shareholders (dollars
in millions)(2)                                          $  3,141      $  7,453      $  4,939

Earnings per basic common share:
Income from continuing operations                        $   2.49      $   6.25      $   4.32
Gain on discontinued operations                              0.64          1.13          0.33
Cumulative effect of accounting change, net                    -             -           0.05

Earnings per basic common share                          $   3.13      $   7.38      $   4.70

Earnings per diluted common share:
Income from continuing operations                        $   2.37      $   5.99      $   4.19
Gain on discontinued operations                              0.61          1.08          0.33
Cumulative effect of accounting change, net                    -             -           0.05

Earnings per diluted common share                        $   2.98      $   7.07      $   4.57

Regional net revenues (dollars in millions)(3):
Americas                                                 $ 12,150      $ 18,803      $ 15,375
Europe, Middle East and Africa                             10,008         7,762         5,711
Asia                                                        5,868         3,274         2,439

Consolidated net revenues                                $ 28,026      $ 29,839      $ 23,525


Statistical Data.

Book value per common share(4)                           $  28.56      $  32.67      $  27.59

Average common equity (dollars in billions)(5):
Institutional Securities                                 $   23.9      $   18.0      $   14.6
Global Wealth Management Group                                1.7           3.0           3.4
Asset Management                                              3.5           2.4           1.8
Unallocated capital                                           2.9           3.1           2.9

Total from continuing operations                             32.0          26.5          22.7
Discontinued operations                                       3.2           5.2           5.8

Total                                                    $   35.2      $   31.7      $   28.5

Statistical Data (Continued).                                       Fiscal Year
                                                        2007            2006           2005
Return on average common equity(5):
Consolidated                                                  9 %           23 %           17 %
Institutional Securities                                      4 %           30 %           24 %
Global Wealth Management Group                               41 %           11 %           11 %
Asset Management                                             26 %           21 %           36 %

Effective income tax rate from continuing
operations                                                 24.5 %         30.1 %         24.5 %

Worldwide employees (excluding DFS employees of
13,186 in 2006 and 13,495 in 2005)                       48,256         43,124         39,723

Consolidated assets under management or
supervision by asset class (dollars in billions):
Equity                                                $     355       $    307       $    272
Fixed income                                                127            111            105
Money market                                                108             89             83
Alternatives(6)                                             109             61             43

Subtotal                                                    699            568            503
Unit trusts                                                  15             14             12
Other(7)                                                     61             63             48

Total assets under management or supervision(8)             775            645            563
Share of minority interest assets(9)                          7              4             -

Total                                                 $     782       $    649       $    563

Institutional Securities (dollars in billions):
Mergers and acquisitions completed
transactions(10):
Global market volume                                  $ 1,280.6       $  730.5       $  522.7
Market share                                               35.4 %         25.4 %         24.3 %
Rank                                                          1              3              3
Mergers and acquisitions announced
transactions(10):
Global market volume                                  $ 1,339.4       $  973.9       $  726.0
Market share                                               31.8 %         28.9 %         29.5 %
Rank                                                          2              2              2
Global equity and equity-related issues(10):
Global market volume                                  $    64.7       $   57.2       $   45.9
Market share                                                7.4 %          8.0 %          8.7 %
Rank                                                          5              4              3
Global debt issues(10):
Global market volume                                  $   361.2       $  409.9       $  347.2
Market share                                                5.4 %          5.8 %          5.7 %
Rank                                                          6              6              5
Global initial public offerings(10):
Global market volume                                  $    24.1       $   22.6       $   14.7
Market share                                                7.8 %          8.4 %          8.9 %
Rank                                                          3              2              2
Pre-tax profit margin(11)                                     5 %           37 %           30 %

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Statistical Data (Continued).                                        Fiscal Year
                                                          2007          2006          2005

Global Wealth Management Group:
Global representatives                                     8,429         7,944         9,434
Annualized net revenue per global representative
(dollars in thousands)(12)                               $   811       $   651       $   502
Client assets by segment (dollars in billions):
$10 million or more                                      $   247       $   199       $   156
$1 million - $10 million                                     275           243           215

Subtotal $1 million or more                                  522           442           371
$100,000 - $1 million                                        179           177           177
Less than $100,000                                            23            27            32

Client assets excluding corporate and other accounts         724           646           580
Corporate and other accounts                                  34            30            29

Total client assets                                      $   758       $   676       $   609

Fee-based assets as a percentage of total client
assets(13)                                                    27 %          29 %          27 %
Client assets per global representative (dollars in
millions)(14)                                            $    90       $    85       $    65
Bank deposits (dollars in billions)(15)                  $  26.2       $  13.3       $   1.7
Pre-tax profit margin(11)                                     17 %           9 %          12 %

Asset Management:
Assets under management or supervision (dollars in
billions)(16)                                            $   597       $   496       $   443
Percent of fund assets in top half of Lipper
rankings(17)                                                  49 %          40 %          61 %
Pre-tax profit margin(11)                                     27 %          25 %          32 %

(1) Amounts represent income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net.

(2) Earnings applicable to common shareholders are used to calculate earnings per share information. Fiscal 2007 and fiscal 2006 include a preferred stock dividend of $68 million and $19 million, respectively.

(3) Reflects the regional view of the Company's consolidated net revenues, on a managed basis, based on the following methodology:

Institutional Securities: investment banking-client location, equity capital markets-client location, debt capital markets-revenue recording location, sales and trading-trading desk location. Global Wealth Management Group:
global representative location. Asset Management: client location, except for the merchant banking business, which is based on asset location.

(4) Book value per common share equals common shareholders' equity of $30,169 million at November 30, 2007, $34,264 million at November 30, 2006 and $29,182 million at November 30, 2005, divided by common shares outstanding of 1,056 million at November 30, 2007, 1,049 million at November 30, 2006 and 1,058 million at November 30, 2005.

(5) The computation of average common equity for each business segment is based upon an economic capital model that estimates the amount of equity capital required to support the businesses and their risk-generating activities through the business cycle while simultaneously satisfying regulatory, rating agency and investor minimum requirements. The economic capital model will evolve over time in response to changes in the business and regulatory environment and to improvements in modeling techniques in order to reflect the capital required to support business activities. The effective tax rates used in the computation of segment return on average common equity were determined on a separate entity basis.

(6) Amounts reported for Alternatives reflect the Company's invested equity in those funds and include a range of alternative investment products such as real estate funds, hedge funds, private equity funds, funds of hedge funds and funds of private equity funds.

(7) Amounts include assets under management or supervision associated with the Global Wealth Management Group business segment.

(8) Revenues and expenses associated with these assets are included in the Company's Asset Management, Global Wealth Management Group and Institutional Securities business segments.

(9) Amounts represent Asset Management's proportional share of assets managed by entities in which it owns a minority interest.

(10) Source: Thomson Financial, data as of January 8, 2008-The data for fiscal 2007, fiscal 2006 and fiscal 2005 are for the periods from January 1 to December 31, 2007, January 1 to December 31, 2006 and January 1 to December 31, 2005, respectively, as Thomson Financial presents these data on a calendar-year basis.

(11) Percentages represent income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net, as a percentage of net revenues.

(12) Annualized net revenue per global representative amounts equal Global Wealth Management Group's net revenues divided by the quarterly average global representative headcount for the periods presented.

(13) The decline in fee-based assets as a percent of total client assets largely reflected the termination on October 1, 2007 of the Company's fee-based (fee in lieu of commission) brokerage program pursuant to a court decision vacating a Securities and Exchange Commission ("SEC") rule that permitted fee-based brokerage. Client assets that were in the fee-based program primarily moved to commission-based brokerage accounts, or at the election of some clients, into other fee-based advisory programs, including Morgan Stanley Advisory, a new nondiscretionary account launched in August 2007.

(14) Client assets per global representative equal total period-end client assets divided by period-end global representative headcount.

(15) Bank deposits are held at certain of the Company's Federal Deposit Insurance Corporation (the "FDIC") insured depository institutions for the benefit of retail clients through their accounts.

(16) Amounts include Asset Management's proportional share of assets managed by entities in which it owns a minority interest.

(17) Source: Lipper, one-year performance excluding money market funds as of November 30, 2007, November 30, 2006 and November 30, 2005, respectively.

Fiscal 2007 Performance.

Company Results. The Company recorded net income of $3,209 million in fiscal 2007, a 57% decrease from $7,472 million in the prior year. Net revenues (total revenues less interest expense) declined 6% to $28,026 million in fiscal 2007. During the fourth quarter of fiscal 2007, the Company recorded $9.4 billion in mortgage-related writedowns resulting from an unfavorable subprime mortgage-related trading strategy and the continued deterioration and lack of market liquidity for subprime and other mortgage-related instruments. Included in the $9.4 billion were writedowns of $7.8 billion related to U.S. subprime trading positions, principally super senior derivative positions in collateralized debt obligations ("CDOs"). These derivative positions were entered into primarily by the Company's proprietary trading group. The remaining writedowns of $1.6 billion related to other mortgage-related instruments, which included $1.2 billion relating to commercial mortgage-backed securities ("CMBS"), ALT-A (a residential mortgage loan categorization that falls between prime and subprime) and other loans, conduit and non-performing loans, European non-conforming loans and an impairment charge of $437 million related to mortgage-related securities portfolios in the Company's domestic subsidiary banks. The results for fiscal 2007 also included losses of approximately $700 million that reflected mark-to-market valuations associated with loans and loan commitments largely related to acquisition financing to non-investment grade companies (see "Impact of Credit Market Events" herein).

Non-interest expenses increased 19% to $24,585 million from the prior year primarily due to higher compensation costs. Diluted earnings per share were $2.98 compared with $7.07 a year ago. Compensation and benefits expense increased 18%, primarily reflecting higher incentive-based compensation accruals due to higher net revenues in certain of the Company's businesses. Diluted earnings per share from continuing operations were $2.37 compared with $5.99 last year. The return on average common equity in fiscal 2007 was 8.9% compared with 23.5% in the prior year. The return on average common equity from continuing operations for fiscal 2007 was 7.8% compared with 23.8% last year.

Results for fiscal 2007 also included a gain of $168 million ($109 million after-tax) in discontinued operations related to the sale of Quilter on February 28, 2007. Results for fiscal 2006 included a loss of $125 million ($75 million after-tax) related to the sale of the Company's aircraft leasing business (see Note 22 to the consolidated financial statements). In addition, pre-tax results for fiscal 2007 included the $360 million reversal of the Coleman litigation reserve (see "Other Matters-Coleman Litigation" herein). Results for fiscal 2006 included non-cash incremental compensation expenses of approximately $260 million for stock-based awards granted to retirement-eligible employees (see Note 2 to the consolidated financial statements).

The Company's effective income tax rate from continuing operations was 24.5% in fiscal 2007 compared with 30.1% in fiscal 2006. The decrease primarily reflected lower earnings that increased the effect of permanent differences. Fiscal 2006's income tax provision included an income tax benefit of $242 million resulting from the resolution of a federal tax audit. Excluding the benefits from the federal tax audit, the Company's effective income tax rate from continuing operations in fiscal 2006 would have been 32.8%.

At fiscal year-end, the Company had 48,256 employees worldwide compared with 43,124 (excluding DFS employees) at the prior year-end.

Subsequent to the 2007 fiscal year-end, in December 2007, the Company sold equity units (the "Equity Units") to a wholly owned subsidiary of the China Investment Corporation Ltd. ("CIC") for approximately $5,579 million (see "Liquidity and Capital Resources-China Investment Corporation Investment" herein).

Institutional Securities. Institutional Securities recorded income from continuing operations before losses from unconsolidated investees and income taxes of $817 million, an 89% decrease from a year ago. Net revenues declined 24% to $16,149 million as record results in equity sales and trading, advisory and underwriting were more than offset by lower results in fixed income sales and trading. Non-interest expenses increased 15% to $15,332 million, reflecting higher compensation costs and non-compensation expenses. Non-compensation expenses increased 24% as higher costs associated with higher levels of business activity, business investment

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and operating expenses associated with TransMontaigne Inc. ("TransMontaigne"), the Heidmar Group of companies ("Heidmar") and Saxon Capital, Inc. ("Saxon") were partially offset by the reversal of the Coleman Litigation reserve.

Investment banking revenues rose 31% from last year to $5,538 million. Underwriting revenues rose 21% from last year to $2,997 million. Advisory fees from merger, acquisition and restructuring transactions were $2,541 million, an increase of 45% from fiscal 2006.

Fixed income sales and trading revenues were $650 million, down 93% from a year ago. The decrease was driven by significant losses in credit products and lower results in commodities, partially offset by record results in interest rate and currency products. The decline in credit product revenues primarily reflected the mortgage-related writedowns (see "Impact of Credit Market Events" herein). Commodity revenues decreased primarily due to lower trading results from oil liquids, electricity and natural gas products. Fiscal 2006 also benefited from revenue recognized on structured transactions. Interest rate and currency product revenues benefited from stronger revenues in interest rate, emerging markets and foreign exchange products.

Equity sales and trading revenues increased 38% to a record $8,658 million. Record international results contributed to record revenues from derivative products and prime brokerage and strong results in cash products.

Sales and trading revenues also benefited in fiscal 2007 from the widening of the Company's credit spreads on financial instruments that are accounted for at fair value.

In fiscal 2007, other sales and trading losses of approximately $1,242 million reflected loans and loan commitments largely related to event-driven lending to non-investment grade companies and the impairment charge related to mortgage-related securities portfolios in the Company's domestic subsidiary banks (see "Impact of Credit Market Events-Subsidiary Banks" herein).

Principal transaction net investment revenues increased 35% to $1,459 million in fiscal 2007. Fiscal 2007's results primarily related to realized and unrealized net gains associated with certain of the Company's investments and higher revenues from the Company's investments in passive limited partnership interests associated with the Company's real estate funds. The increase also reflected higher revenues primarily related to the appreciation of investments related to certain employee deferred compensation plans.

Global Wealth Management Group. Global Wealth Management Group recorded income from continuing operations before income taxes of $1,155 million, up 127% from the prior year. Net revenues were $6,625 million, a 20% increase over a year ago, primarily reflecting higher revenues from increased underwriting activity, higher asset management revenues reflecting growth in fee-based products and higher net interest revenue from growth in the bank deposit program. Total non-interest expenses were $5,470 million, a 9% increase from a year ago. Compensation and benefits expense increased 15%, primarily reflecting higher incentive-based compensation accruals due to higher net revenues. Non-compensation costs decreased 2%, primarily reflecting lower charges for legal and regulatory matters and continued cost discipline across the business. Total client assets increased to $758 billion, up 12% from the prior fiscal year-end. In addition, client assets in fee-based accounts increased 3% from a year ago to $201 billion and decreased as a percentage of total client assets to 27% from last year's 29%. The decline in fee-based assets as a percent of total client assets largely reflected the termination on October 1, 2007 of the Company's fee-based (fee in lieu of commission) brokerage program pursuant to a court decision vacating an SEC rule that permitted fee-based brokerage. At fiscal year-end, the number of global representatives was 8,429, an increase of 485 from a year ago.

Asset Management. Asset Management recorded income before income taxes of $1,467 million, a 72% increase from last year. Net revenues of $5,493 million increased 59% from the prior year, reflecting significantly higher investment revenues, primarily in the merchant banking business, which includes the real estate, private equity and infrastructure businesses. The increase primarily reflected higher revenues associated with the appreciation of investments related to employee deferred compensation and co-investment plans. The

increase was also due to higher asset management, distribution and administration fees primarily due to an increase in assets under management, a more favorable asset mix and higher performance fees due to growth in the alternatives business, including FrontPoint Partners ("FrontPoint"), which was acquired in December 2006. Principal transaction net investment gains for the year were $1,774 million compared with $669 million a year ago. Non-interest expenses increased 55% from the prior year to $4,026 million. Compensation and benefits expense increased, primarily due to expenses associated with certain deferred compensation plans, higher levels of business investment and higher incentive-based compensation accruals associated with increased net revenues. Non-compensation expenses increased primarily due to increased business activity, including activity from FrontPoint. Assets under management or supervision within Asset Management of $597 billion were up $101 billion, or 20%, from last year, primarily due to market appreciation and positive net customer inflows.

Global Market and Economic Conditions in Fiscal 2007.

In the U.S., the moderate pace of economic growth that occurred during the first half of fiscal 2007 slowed during the second half of fiscal 2007, primarily . . .