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 business segments is as follows.

Institutional Securities includes 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; 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 funds of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party distribution channels. Asset Management also engages in investment activities.

The Company's results of operations for the 12 months ended November 30, 2008 ("fiscal 2008"), November 30, 2007 ("fiscal 2007") and November 30, 2006 ("fiscal 2006") are discussed below.

Financial Holding Company.

On September 21, 2008, the Company obtained approval from the Board of Governors of the Federal Reserve System (the "Fed") to become a bank holding company upon the conversion of its wholly owned indirect subsidiary, Morgan Stanley Bank (Utah), from a Utah industrial bank to a national bank. On September 23, 2008, the Office of the Comptroller of the Currency (the "OCC") authorized Morgan Stanley Bank to commence business as a national bank, operating as Morgan Stanley Bank, N.A. Concurrent with this conversion, the Company became a financial holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). For more information about the Company's transition into a financial holding company, see "Supervision and Regulation-Financial Holding Company" in Part I, Item 1 herein.

Change in Fiscal Year End.

On December 16, 2008, the Board of Directors of the Company approved a change in the Company's fiscal year end from November 30 to December 31 of each year. This change to the calendar year reporting cycle began January 1, 2009. As a result of the change, the Company will have a December 2008 fiscal month transition period, the results of which will be separately reported in the Company's Quarterly Report on Form 10-Q for the calendar quarter ending March 31, 2009 and in the Company's Annual Report on Form 10-K for the calendar year ending December 31, 2009.

Recent Business Developments.

Morgan Stanley Smith Barney Joint Venture. On January 13, 2009, the Company and Citigroup Inc. ("Citi") announced they had reached a definitive agreement to combine the Company's Global Wealth Management Group and Citi's Smith Barney in the U.S., Quilter in the U.K., and Smith Barney Australia into a new joint venture to be called Morgan Stanley Smith Barney. The Company will own 51%, and Citi will own 49% of the joint venture, after the contribution of the respective businesses to the joint venture and the Company's payment

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of $2.7 billion to Citi. The Company will appoint four directors to the joint venture's board and Citi will appoint two directors. After year three, the Company and Citi will have various purchase and sales rights for the joint venture. The transaction is expected to close in the third quarter of 2009 and is subject to regulatory approvals and other customary closing conditions.

Discontinued Operations.

On June 30, 2007, the Company completed the spin-off (the "Discover Spin-off") of its business segment Discover Financial Services ("DFS") to its shareholders. The results of DFS are reported as discontinued operations for all periods presented through the date of the Discover Spin-off. Fiscal 2008 included costs related to a legal settlement between DFS, VISA and MasterCard. The results of Quilter Holdings Ltd., Global Wealth Management Group's former mass affluent business in the U.K., are also reported as discontinued operations for all periods presented through its sale on February 28, 2007. The results of the Company's former aircraft leasing business are also reported as discontinued operations through March 24, 2006, the date of sale. See Note 19 to the consolidated financial statements.

Executive Summary.



Financial Information.



                                                                     Fiscal Year
                                                           2008          2007          2006
Net revenues (dollars in millions):
Institutional Securities                                 $ 16,622      $ 16,102      $ 21,070
Global Wealth Management Group                              7,019         6,625         5,512
Asset Management                                            1,292         5,493         3,453
Intersegment Eliminations                                    (194 )        (241 )        (236 )

Consolidated net revenues                                $ 24,739      $ 27,979      $ 29,799

Income (loss) before income taxes (dollars in
millions)(1):
Institutional Securities                                 $  2,925      $    770      $  7,682
Global Wealth Management Group                              1,154         1,155           508
Asset Management                                           (1,807 )       1,467           851
Intersegment Eliminations                                      15             2            23

Consolidated income (loss) before income taxes           $  2,287      $  3,394      $  9,064

Consolidated net income (dollars in millions)            $  1,707      $  3,209      $  7,472

Earnings applicable to common shareholders (dollars
in millions)(2)                                          $  1,588      $  3,141      $  7,453

Earnings per basic common share:
Income from continuing operations                        $   1.64      $   2.49      $   6.25
(Loss) gain on discontinued operations                      (0.10 )        0.64          1.13

Earnings per basic common share                          $   1.54      $   3.13      $   7.38

Earnings per diluted common share:
Income from continuing operations                        $   1.54      $   2.37      $   5.99
(Loss) gain on discontinued operations                      (0.09 )        0.61          1.08

Earnings per diluted common share                        $   1.45      $   2.98      $   7.07

Regional net revenues (dollars in millions)(3):
Americas                                                 $ 13,317      $ 12,026      $ 18,577
Europe, Middle East and Africa                              8,971        10,085         7,948
Asia                                                        2,451         5,868         3,274

Consolidated net revenues                                $ 24,739      $ 27,979      $ 29,799

Statistical Data.

Book value per common share(4)                           $  30.24      $  28.56      $  32.67

Average common equity (dollars in billions)(5):
Institutional Securities                                 $   23.3      $   23.9      $   18.0
Global Wealth Management Group                                1.5           1.7           3.0
Asset Management                                              3.9           3.5           2.4
Unallocated capital                                           4.9           2.9           3.1

Total from continuing operations                             33.6          32.0          26.5
Discontinued operations                                        -            3.2           5.2

Consolidated average common equity                       $   33.6      $   35.2      $   31.7

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                                                                    Fiscal Year
Statistical Data (Continued).                           2008           2007            2006
Return on average common equity(5):
Consolidated                                                 5 %             9 %           23 %
Institutional Securities                                     9 %             4 %           30 %
Global Wealth Management Group                              48 %            41 %           11 %
Asset Management                                           N/M              26 %           21 %

Effective income tax rate from continuing
operations                                                21.0 %          24.5 %         30.1 %

Worldwide employees (excluding 13,186 DFS
employees in 2006)                                      46,964          48,746         43,124

Average liquidity (dollars in billions)(6):
Parent company liquidity                              $     69       $      49       $     36
Bank and other subsidiary liquidity                         69              36              8

Total liquidity                                       $    138       $      85       $     44

Capital ratios at November 30, 2008(7):
Total capital ratio                                       26.8 %
Tier 1 capital ratio                                      17.9 %
Tier 1 leverage ratio                                      6.6 %

Consolidated assets under management or
supervision by asset class (dollars in billions):
Equity(8)                                             $    186       $     355       $    307
Fixed income(8)                                            197             235            200
Alternatives(9)                                             48              67             41
Private equity                                               4               4              2
Infrastructure                                               4               2             -
Real estate                                                 34              36             18

Subtotal                                                   473             699            568
Unit trusts                                                  9              15             14
Other(8)                                                    39              61             63

Total assets under management or supervision(10)           521             775            645
Share of minority interest assets(11)                        6               7              4

Total                                                 $    527       $     782       $    649

Institutional Securities:
Mergers and acquisitions completed transactions
(dollars in billions)(12):
Global market volume                                  $  597.2       $ 1,330.1       $  733.5
Market share                                              23.5 %          34.9 %         25.5 %
Rank                                                         5               1              4
Mergers and acquisitions announced transactions
(dollars in billions)(12):
Global market volume                                  $  558.3       $ 1,141.3       $  984.7
Market share                                              20.5 %          29.4 %         29.3 %
Rank                                                         5               2              2
Global equity and equity-related issues (dollars
in billions)(12):
Global market volume                                  $   51.0       $    64.7       $   57.2
Market share                                               9.4 %           7.4 %          8.0 %
Rank                                                         3               5              4
Global debt issues (dollars in billions)(12):
Global market volume                                  $  182.9       $   381.2       $  410.1
Market share                                               4.3 %           5.6 %          5.8 %
Rank                                                         9               7              7
Global initial public offerings (dollars in
billions)(12):
Global market volume                                  $    5.0       $    24.0       $   22.6
Market share                                               5.9 %           7.8 %          8.4 %
Rank                                                         6               3              2
Pre-tax profit margin(13)                                   18 %             5 %           37 %

                                                                    Fiscal Year
Statistical Data (Continued).                           2008           2007           2006
Global Wealth Management Group:
Global representatives                                   8,426          8,429          7,944
Annualized net revenue per global representative
(dollars in thousands)(14)                             $   746        $   811        $   651
Client assets by segment (dollars in billions):
$10 million or more                                    $   152        $   247        $   199
$1 million to $10 million                                  197            275            243

Subtotal $1 million or more                                349            522            442
$100,000 to $1 million                                     151            179            177
Less than $100,000                                          22             23             27

Client assets excluding corporate and other
accounts                                                   522            724            646
Corporate and other accounts                                24             34             30

Total client assets                                    $   546        $   758        $   676

Fee-based assets as a percentage of total client
assets(15)                                                  25 %           27 %           29 %
Client assets per global representative (dollars
in millions)(16)                                       $    65        $    90        $    85
Bank deposits (dollars in billions)(17)                $  36.4        $  26.2        $  13.3
Pre-tax profit margin(13)                                   16 %           17 %            9 %
Asset Management:
Assets under management or supervision (dollars
in billions)(18)                                       $   399        $   597        $   496
Percent of fund assets in top half of Lipper
rankings(19)                                                39 %           49 %           40 %
Pre-tax profit margin(13)                                  N/M             27 %           25 %

N/M-Not Meaningful

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

(2) Earnings applicable to common shareholders are used to calculate earnings per share information. Fiscal 2008 includes a preferred stock dividend of $97 million as well as $15 million for the amortization of discount on the issuance of Series D Preferred Stock and an allocation of $7 million of earnings to the Equity Units. See Notes 11 and 12 to the consolidated financial statements for more information. Fiscal 2007 and fiscal 2006 include a preferred stock dividend of $68 million and $19 million, respectively.

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

Institutional Securities: advisory and equity underwriting-client location; debt underwriting-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 $31,676 million at November 30, 2008, $30,169 million at November 30, 2007 and $34,264 million at November 30, 2006, divided by common shares outstanding of 1,048 million at November 30, 2008, 1,056 million at November 30, 2007 and 1,049 million at November 30, 2006.

(5) The computation of average common equity for each business segment is based upon an economic capital framework that estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. The economic capital framework will evolve over time in response to changes in the business and regulatory environment and to incorporate enhancements in modeling techniques. The effective tax rates used in the computation of segment return on average common equity were determined on a separate entity basis.

(6) For a discussion of average liquidity, see "Liquidity and Capital Resources-Liquidity and Funding Management Policies-Liquidity Reserves" herein.

(7) For a discussion of capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.

(8) Equity and fixed income amounts include assets under management or supervision associated with the Asset Management and Global Wealth Management Group business segments. Other amounts include assets under management or supervision associated with the Global Wealth Management Group business segment.

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

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

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

(12) Source: Thomson Reuters, data as of January 5, 2009-The data for fiscal 2008, fiscal 2007 and fiscal 2006 are for the periods from January 1 to December 31, 2008, January 1 to December 31, 2007 and January 1 to December 31, 2006, respectively, as the industry standard is to view these data on a calendar-year basis.

(13) Percentages represent income from continuing operations before income taxes as a percentage of net revenues.

(14) Annualized net revenue per global representative amounts equal Global Wealth Management Group's net revenues (excluding the sale of MSWM S.V., S.A.U.) divided by the quarterly average global representative headcount for the periods presented.

(15) The decline in fee-based assets as a percentage 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 nondiscretionary account launched in August 2007.

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

(17) 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.

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

(19) Source: Lipper, one-year performance excluding money market funds as of November 30, 2008, November 30, 2007 and November 30, 2006, respectively.

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Global Market and Economic Conditions in Fiscal 2008.

During fiscal 2008, a severe downturn in the economy led to price declines and a period of unprecedented volatility across various asset classes. Losses that had previously been limited largely to the subprime mortgage sector during fiscal 2007 spread to residential and commercial mortgages during fiscal 2008 as property prices declined rapidly. The effect of the economic and market downturn also spread to other areas of the credit market, including investment grade and non-investment grade corporate debt, convertible securities, emerging market debt and equity, and leveraged loans. The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers.

In the U.S., credit conditions worsened considerably over the course of the year, and the U.S. entered into a recession (as announced by the National Bureau of Economic Research) and the credit crisis assumed global proportions. The landscape of the U.S. financial services industry changed dramatically, especially during the fourth quarter of fiscal 2008. Lehman Brothers Holdings Inc. ("Lehman Brothers") declared bankruptcy, and many major U.S. financial institutions consolidated, were forced to merge or were put into conservatorship by the U.S. Federal Government, including The Bear Stearns Companies, Inc., Wachovia Corporation, WashingtonMutual, Inc., Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae"). In addition, the U.S. Federal Government provided a loan to American International Group Inc. ("AIG") in exchange for an equity interest in AIG. In September 2008, following Lehman Brothers' bankruptcy, the Company and Goldman Sachs Group, Inc. each experienced significantly wider credit spreads on their outstanding debt and sharp declines in stock market capitalization and subsequently received approval from the Fed to become bank holding companies. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (initially introduced as the Troubled Asset Relief Program or "TARP") was enacted. On October 14, 2008, the U.S. Department of Treasury (the "U.S. Treasury") announced its intention to inject capital into nine large U.S. financial institutions, including the Company, under the TARP Capital Purchase Program (the "CPP") and since has injected capital into many other financial institutions. In November 2008, the U.S. Treasury, the Federal Deposit Insurance Corporation ("FDIC") and the Fed provided additional assistance to Citi, including an additional capital injection and a government guarantee on certain troubled assets, in exchange for preferred stock as well as other corporate governance measures.

The U.S. unemployment rate at the end of fiscal 2008 increased to 6.7% from 4.7% at the end of fiscal 2007, reaching the highest level in the last fifteen years. In the U.S., equity market indices ended the fiscal year period significantly lower. Concerns about future economic growth, the adverse developments in the credit markets, mixed views about the U.S. Federal Government's response to the economic crisis, including the CPP, lower levels of consumer spending, a high rate of unemployment and lower corporate earnings continued to challenge the U.S. economy and the equity markets. Adverse developments in the credit markets, including failed auctions for auction rate securities ("ARS"), rising default rates on residential mortgages, extremely high implied default rates on commercial mortgages and liquidity issues underlying short-term investment products, such as structured investment vehicles and money market funds, weighed heavily as well on equity markets. Oil prices also reached record levels during fiscal 2008 before declining sharply, partly due to lower demand and weaker economic conditions.

During fiscal 2008, the Fed announced a number of initiatives aimed to provide additional liquidity and stability to the financial markets, and the Fed continues to focus its efforts on mitigating the negative economic impact related to the credit markets. The Fed announced enhancements to its programs to provide additional liquidity to the asset-backed commercial paper and money markets, and the Fed has indicated that it plans to purchase from primary dealers short-term debt obligations issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Fed has established a commercial paper funding facility in order to provide additional liquidity to the short-term debt markets. The Fed continues to consult frequently with its global central bank counterparts and

during fiscal 2008, a number of coordinated benchmark interest rate reductions were announced by central banks globally. The Fed lowered both the federal funds benchmark rate and the discount rate by 3.50% during fiscal 2008, and at fiscal year end the federal funds target rate was 1.00% and the discount rate was 1.25%. Also, during fiscal 2008, the Fed lowered the primary credit rate by 0.25%. In an additional effort to unlock credit markets, the Fed, the U.S. Treasury and the FDIC announced that the FDIC will temporarily guarantee certain senior unsecured debt issued by FDIC-insured institutions and their U.S. bank holding companies, subject to certain conditions. In December 2008, the Fed lowered both the federal funds benchmark rate and the discount rate by 0.75% to 0.25% and 0.50%, respectively, and rates remained at historically low levels.

In Europe, the unemployment rate rose and economic growth continued to slow during fiscal 2008 as export demand decreased, housing prices declined, consumer spending and business investment slowed, and the disruption in the global financial markets continued. In Europe, equity market indices were lower at the end of the fiscal year. Concerns about the economic outlook and difficult conditions in the credit markets continued to challenge the European economy and the equity markets. In the first three quarters of fiscal 2008, the European Central Bank ("ECB") indicated that it remained concerned about global inflation and raised the benchmark interest rate by 0.25% to 4.25%, while the Bank of England ("BOE") decreased the benchmark interest rate by an aggregate of 0.75% to 5.00%. In September 2008, the Lehman Brothers' bankruptcy triggered additional credit disruptions, European governments intervened to support large financial institutions and financial services companies within Europe began to consolidate as lending conditions among European banks worsened. After September . . .