Introduction.

Morgan Stanley (or 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; and investment activities.

Global Wealth Management Group, which includes the Company's 51% interest in Morgan Stanley Smith Barney Holdings LLC ("MSSB"), 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 discussion of the Company's results of operations below may contain forward-looking statements. These statements, which reflect management's beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company's future results, please see "Forward-Looking Statements" immediately preceding Part I, Item 1, "Competition" and "Supervision and Regulation" in Part I, Item 1, "Risk Factors" in Part I, Item 1A and "Certain Factors Affecting Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2008 (the "Form 10-K"), "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2009 Quarterly Reports on Form 10-Q and other items throughout the Form 10-K, Forms 10-Q and the Company's 2009 Current Reports on Form 8-K.

The Company's results of operations for the quarter and six month periods ended June 30, 2009 and June 30, 2008 are discussed below.

Discontinued Operations.

MSCI. In May 2009, the Company divested all of its remaining ownership interest in MSCI Inc. ("MSCI"). The results of MSCI are reported as discontinued operations for all periods presented. The results of MSCI were formerly included in the continuing operations of the Institutional Securities business segment.

See Note 19 to the condensed consolidated financial statements for additional information on discontinued operations.

[[Image Removed: LOGO]] 79

Recent Business Developments.

Morgan Stanley Smith Barney Holdings LLC. On May 31, 2009, the Company and Citigroup Inc. ("Citi") consummated the previously announced combination of the Company's Global Wealth Management Group and the businesses of Citi's Smith Barney in the U.S., Quilter in the U.K., and Smith Barney Australia ("Smith Barney"). In addition to the Company's contribution of respective businesses to MSSB, the Company paid Citi $2,755 million in cash. The combined businesses operate as MSSB, which the Company consolidates. Pursuant to the terms of the amended contribution agreement, certain businesses of Smith Barney and Morgan Stanley will be contributed to MSSB subsequent to May 31, 2009 (the "delayed contribution businesses"). Citi will own the delayed contribution businesses until they are transferred to MSSB and gains and losses from such businesses will be allocated to the Company's and Citi's respective share of MSSB's gains and losses.

The Company owns 51% and Citi owns 49% of MSSB, with the Company appointing four directors to the MSSB board and Citi appointing two directors. As part of the acquisition, the Company has the option to acquire additional equity interests in MSSB from Citi following each of the third, fourth and fifth anniversaries of the acquisition date, with an exercise price equal to the fair market value of such equity interests. In addition, subject to the Company exercising certain of its acquisition options in MSSB, Citi has the option to sell its equity interest in MSSB to the Company following the sixth anniversary of the acquisition date with an exercise price equal to the fair market value of the equity interest. See Note 2 to the condensed consolidated financial statements for additional information.

Pursuant to the amended contribution agreement, dated as of May 29, 2009, and the Managed Futures Contribution and Interest Purchase Agreement, dated as of July 31, 2009, Citi contributed its managed futures business and certain related proprietary trading positions to MSSB on July 31, 2009, and the Company paid Citi approximately $300 million in connection with this transfer. The Company accounted for this transaction using the acquisition method of accounting. As this acquisition was recently completed, the Company is in the process of valuing the assets acquired and liabilities assumed.

As of May 31, 2009, the Company includes MSSB in its condensed consolidated financial statements. The portion of net income attributable to Citi's 49% interest in MSSB is presented as Net income (loss) applicable to non-controlling interests on the condensed consolidated statements of income, and the portion of the shareholders' equity of MSSB is presented as Non-controlling interests on the condensed consolidated statements of financial condition. Since the acquisition date, the results of MSSB have been included in the Global Wealth Management Group business segment.

See Note 2 to the condensed consolidated financial statements for additional information on the preliminary allocation of the purchase price, the condensed statement of assets and liabilities assumed and certain condensed pro forma financial information related to the MSSB transaction.

Japan Securities Joint Venture. On March 26, 2009, Mitsubishi UFJ Financial Group, Inc. ("MUFG") and the Company announced that they had signed a memorandum of understanding to form a securities joint venture between Mitsubishi UFJ Securities Co., Ltd. and Morgan Stanley Japan Securities Co., Ltd.

Both parties will work to conclude definitive agreements regarding the joint venture with a targeted closing date prior to the end of March 2010. The joint venture is subject to the execution of the definitive agreements and to regulatory approvals and other customary closing conditions.

In addition, on June 30, 2009, MUFG and the Company announced the creation of a loan marketing joint venture in the Americas starting initially in the U.S., subject to regulatory approvals and other customary closing conditions, and business referral arrangements in Asia, Europe, the Middle East and Africa. MUFG and the Company also entered into a referral agreement for commodities transactions executed outside of Japan and a transfer of personnel between MUFG and the Company for the sharing of best practices and expertise.

80 [[Image Removed: LOGO]]

Executive Summary.

Financial Information.



                                                      At or for the                  At or for the
                                                   Three Months Ended              Six Months Ended
                                                        June 30,                       June 30,
                                                 2009(1)         2008(2)        2009(1)        2008(2)
Net revenues (dollars in millions):
Institutional Securities                        $    2,964       $  3,875       $  4,564       $  8,827
Global Wealth Management Group                       1,923          1,695          3,222          4,028
Asset Management                                       575            582            647          1,156
Intersegment Eliminations                              (51 )          (41 )          (76 )          (82 )

Consolidated net revenues                       $    5,411       $  6,111       $  8,357       $ 13,929

Consolidated net income (loss) (dollars in
millions)                                       $       33       $  1,159       $   (157 )     $  2,591
Net income (loss) applicable to
non-controlling interest (dollars in
millions)                                             (116 )           16           (129 )           35

Net income (loss) applicable to Morgan
Stanley                                         $      149       $  1,143       $    (28 )     $  2,556

Income (loss) from continuing operations
applicable to Morgan Stanley (dollars in
millions):
Institutional Securities                        $     (126 )     $    651       $     32       $  1,523
Global Wealth Management Group                          76            172            149            765
Asset Management                                      (108 )         (135 )         (526 )         (207 )
Intersegment Eliminations                               (1 )            1             -               3

Income (loss) from continuing operations        $     (159 )     $    689       $   (345 )     $  2,084

Amounts applicable to Morgan Stanley:
Income (loss) from continuing operations        $     (159 )     $    689       $   (345 )     $  2,084
Gain (loss) from discontinued operations,
after tax                                              308            454            317            472

Net income (loss) applicable to Morgan
Stanley                                         $      149       $  1,143       $    (28 )     $  2,556

(Loss) earnings applicable to Morgan Stanley
common shareholders (dollars in millions)       $   (1,256 )     $  1,062       $ (1,834 )     $  2,374

Earnings per basic common share:
(Loss) income from continuing operations        $    (1.37 )     $   0.61       $  (2.00 )     $   1.86
Gain from discontinued operations(3)                  0.27           0.41           0.29           0.43

(Loss) earnings per basic common share(4)       $    (1.10 )     $   1.02       $  (1.71 )     $   2.29

Earnings per diluted common share:
(Loss) income from continuing operations        $    (1.37 )     $   0.61       $  (2.00 )     $   1.85
Gain from discontinued operations(3)                  0.27           0.41           0.29           0.43

(Loss) earnings per diluted common share(4)     $    (1.10 )     $   1.02       $  (1.71 )     $   2.28

Regional net revenues (dollars in
millions)(5):
Americas                                        $    4,719       $  3,825       $  7,345       $  6,307
Europe, Middle East and Africa                          21          1,355             88          5,481
Asia                                                   671            931            924          2,141

Consolidated net revenues                       $    5,411       $  6,111       $  8,357       $ 13,929

[[Image Removed: LOGO]] 81

Statistical Data.



                                                   At or for the                  At or for the
                                                 Three Months Ended             Six Months Ended
                                                      June 30,                      June 30,
                                               2009(1)        2008(2)        2009(1)        2008(2)
Average common equity (dollars in
billions)(6):
Institutional Securities                      $    18.2       $   22.3       $   19.2       $   23.0
Global Wealth Management Group                      3.4            1.4            2.4            1.4
Asset Management                                    3.2            3.7            3.3            3.7
Unallocated capital                                 7.9            5.5            6.1            4.0

Total from continuing operations                   32.7           32.9           31.0           32.1
Discontinued operations                             0.2            0.4            0.3            0.5

Consolidated average common equity            $    32.9       $   33.3       $   31.3       $   32.6

Return on average common equity(6):
Consolidated                                        N/M             14 %          N/M             16 %
Institutional Securities                            N/M             12 %          N/M             13 %
Global Wealth Management Group                        7 %           48 %           11 %          N/M
Asset Management                                    N/M            N/M            N/M            N/M
Book value per common share(7)                $   27.21       $  30.80       $  27.21       $  30.80
Tangible common equity(8)                     $  29,263       $ 30,582       $ 29,263       $ 30,582
Tangible common equity to risk-weighted
assets ratio(9)                                    10.6 %          N/A           10.6 %          N/A
Effective income tax rate from continuing
operations(10)                                     53.8 %         21.7 %         67.9 %         27.2 %

Worldwide employees(11)                          62,215         46,108         62,215         46,108

Average liquidity (dollars in
billions)(12):
Parent company liquidity                      $      62       $     79       $     61       $     75
Bank and other subsidiary liquidity                  95             74             90             63

Total liquidity                               $     157       $    153       $    151       $    138

Capital ratios at June 30, 2009(13):
Total capital ratio                                17.1 %          N/A           17.1 %          N/A
Tier 1 capital ratio                               15.8 %          N/A           15.8 %          N/A
Tier 1 leverage ratio                               6.5 %          N/A            6.5 %          N/A
Consolidated assets under management or
supervision by asset class (dollars in
billions):
Equity(14)                                    $     339       $    300       $    339       $    300
Fixed income(14)                                    203            258            203            258
Alternatives(15)                                     50             72             50             72
Private equity                                        4              3              4              3
Infrastructure                                        4              4              4              4
Real estate                                          17             38             17             38

Subtotal                                            617            675            617            675
Unit trusts                                          10             13             10             13
Other(14)                                            51             51             51             51

Total assets under management or
supervision(16)                                     678            739            678            739
Share of non-controlling interest
assets(17)                                            5              8              5              8

Total                                         $     683       $    747       $    683       $    747

82 [[Image Removed: LOGO]]

Statistical Data-(Continued).



                                                    At or for the                    At or for the
                                                  Three Months Ended                Six Months Ended
                                                       June 30,                         June 30,
                                               2009(1)          2008(2)         2009(1)         2008(2)
Institutional Securities:
Pre-tax profit margin(18)                            N/M              22 %           N/M              23 %

Global Wealth Management Group:
Global representatives                            18,444           8,343          18,444           8,343
Annualized net revenue per global
representative (dollars in thousands)(19)     $      671        $    809        $    661        $    788
Assets by client segment (dollars in
billions):
$10 million or more                           $      389        $    219        $    389        $    219
$1 million to $10 million                            562             263             562             263

Subtotal $1 million or more                          951             482             951             482
$100,000 to $1 million                               412             197             412             197
Less than $100,000                                    57              28              57              28

Total client assets                           $    1,420        $    707        $  1,420        $    707

Fee-based assets as a percentage of total
client assets                                         23 %            26 %            23 %            26 %
Client assets per global representative
(dollars in millions)(20)                             77              85              77              85
Bank deposits (dollars in billions)(21)       $      106        $     34        $    106        $     34
Pre-tax profit margin(18)                            N/M              16 %             2 %            30 %

Asset Management:
Assets under management or supervision
(dollars in billions)(22)                     $      361        $    579        $    361        $    579
Percent of fund assets in top half of
Lipper rankings(23)                                   57 %            36 %            57 %            36 %
Pre-tax profit margin(18)                            N/M             N/M             N/M             N/M

N/M - Not Meaningful.

N/A - Not Applicable.

(1) Information includes MSSB effective from May 31, 2009.

(2) Certain prior-period information has been reclassified to conform to the current period's presentation.

(3) Amounts include operating results and gains on secondary offerings related to MSCI.

(4) For the calculation of basic and diluted earnings per common share ("EPS"), see Note 12 to the condensed consolidated financial statements.

(5) Regional net revenues in Europe, Middle East and Africa were negatively impacted by the tightening of the Company's credit spreads resulting from the increase in fair value of certain of the Company's long-term and short-term borrowings, primarily structured notes. 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.

(6) 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.

(7) Book value per common share equals common shareholders' equity of $36,989 million as of June 30, 2009 and $34,153 million as of June 30, 2008, divided by common shares outstanding of 1,359 million as of June 30, 2009 and 1,109 million as of June 30, 2008.

(8) Tangible common equity equals common shareholders' equity less goodwill and net intangible assets excluding mortgage servicing rights. The balance for the quarter and six month period ended June 30, 2009 includes the Company's preliminary estimates of only its share of MSSB's goodwill and intangible assets.

(9) Tangible common equity to risk-weighted assets ratio equals tangible common equity divided by total risk-weighted assets of $276,750 million.

(10) The effective tax rate for the six month period ended June 30, 2009 includes a tax benefit of $331 million, resulting from the cost of anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates. Excluding this benefit, the annual effective tax rate in the six month period ended June 30, 2009 would have been 46.2%.

[[Image Removed: LOGO]] 83

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

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

(14) 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.

(15) 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.

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

(17) Amounts represent Asset Management's proportional share of assets managed by entities in which it owns a non-controlling interest.

(18) Percentages represent income before income taxes as a percentage of net revenues.

(19) Annualized net revenue per global representative for the three and six month periods ended June 30, 2009 and June 30, 2008 equals Global Wealth Management Group's net revenues (excluding the sale of Morgan Stanley Wealth Management S.V., S.A.U. for the three and six month periods ended June 30, 2008) divided by the quarterly weighted average global representative headcount for the three and six month periods ended June 30, 2009 and June 30, 2008, respectively.

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

(21) Approximately $50 billion of the bank deposit balances as of June 30, 2009 and $34 billion as of June 30, 2008 are attributable to the Company's interest in MSSB. These deposit balances 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.

(22) Amounts include Asset Management's proportional share of assets managed by entities in which it owns a non-controlling interest.

(23) Source: Lipper, one-year performance excluding money market funds as of June 30, 2009 and June 30, 2008, respectively.

Global Market and Economic Conditions.

The severe downturn in global market and economic conditions that occurred during the Fall of 2008 continued through the first quarter of 2009. During the second quarter of 2009, however, the pace of the downturn began to moderate. In the U.S., despite recent credit improvements in investment grade corporate issuers, market and economic conditions still remained challenged by the contraction of credit, which negatively impacted broader asset classes and spanned even further into global capital markets. In the second quarter, major equity market indices in the U.S. improved as better than expected corporate earnings were partially offset by the challenging conditions in the credit markets. Economic activity in the U.S. continued to be adversely impacted by a persisting downturn in the commercial and residential real estate markets and declines in consumer spending and business investment. The unemployment rate increased to 9.5% at June 30, 2009 from 7.2% at December 31, 2008. The Federal Open Market Committee (the "FOMC") kept its key interest rates at historically low levels and at June 30, 2009, the federal funds target rate was between zero and 0.25% and the discount rate was 0.50%. The FOMC in the first quarter announced a quantitative easing policy in which the FOMC would purchase securities with the objective of improving conditions within the credit markets by increasing the quantity of money. The FOMC in the second quarter purchased securities under its quantitative easing policy.

In Europe, market and economic conditions continued to be challenged by adverse economic developments, including lower exports, especially in Germany. During the first quarter, major European equity market indices were lower as the adverse market events that began in the U.S. spread globally and continued to impact European markets. In the second quarter, major European equity market indices improved. The euro area unemployment rate increased to 9.4% at June 2009 from 8.2% at December 2008. In December 2008, the European Central Bank ("ECB") lowered its benchmark interest rate by 0.75% to 2.50% and during the first quarter it lowered its benchmark interest rate by an additional 1.00% to 1.50%. In December 2008, the Bank of England ("BOE") lowered its benchmark interest rate by 1.00% to 2.00% and during the first quarter it lowered its benchmark interest rate by an additional 1.50% to 0.50%. The BOE in the first quarter also announced a quantitative easing policy in which the BOE would purchase securities, including U.K. Government Gilts, with the objective of increasing the money supply. In the second quarter of 2009, the BOE purchased securities under its quantitative easing policy. Also in the second quarter, the ECB lowered its benchmark interest rate by 0.50% to a record low 1.00%, while the BOE maintained its benchmark interest rate at 0.50%.

In Asia, economic and market conditions were also adversely impacted by the severe downturn in the global economy, the adverse developments in global credit markets and the decline in exports in both China and Japan.

84 [[Image Removed: LOGO]]

Despite lower exports, China's economy continued to benefit from domestic demand for capital projects. During the first and second quarters of 2009, equity markets in China were higher than in the beginning of the year. Japanese equity markets were lower in the first quarter of 2009, and higher in the second . . .