MORGAN STANLEY (Form: 10-Q, Received: 07/07/2006 15:31:34)

At

May 31,
2006

At

November 30,
2005

(dollars in millions)

Settlement withholdings and escrow deposits

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2006

¨	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 1-11758

Morgan Stanley

(Exact Name of Registrant as Specified in its Charter)


Delaware		36-3145972
(State of Incorporation)		(I.R.S. Employer Identification No.)

1585 Broadway New York, NY		10036
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 761-4000

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 ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer x		Accelerated Filer ¨		Non-Accelerated Filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 30, 2006, there were 1,071,959,235 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

MORGAN STANLEY

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended May 31, 2006


		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Financial Condition—May 31, 2006 and November 30, 2005.	1
	Condensed Consolidated Statements of Income—Three and Six Months Ended May 31, 2006 and 2005	3
	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended May 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended May 31, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	36
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77
Item 4.	Controls and Procedures	84

Part II—Other Information
Item 1.	Legal Proceedings	85
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 4.	Submission of Matters to a Vote of Security Holders	88
Item 6.	Exhibits	88


		i

AVAILABLE INFORMATION

Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov .

Morgan Stanley’s internet site is www.morganstanley.com . You can access Morgan Stanley’s Investor Relations webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Investor Relations.” You can also access our Investor Relations webpage directly at www.morganstanley.com/about/ir . Morgan Stanley makes available free of charge, on or through our Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Morgan Stanley also makes available, through our Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access Morgan Stanley’s Corporate Governance webpage through our internet site, www.morganstanley.com, by clicking on the “About Morgan Stanley” link to the heading “Inside the Company.” You can also access our Corporate Governance webpage directly at www.morganstanley.com/about/inside/governance . Morgan Stanley posts the following on its Corporate Governance webpage:

•

Composite Certificate of Incorporation;

•

Bylaws;

•

Charters for our Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee;

•

Corporate Governance Policies;

•

Policy Regarding Communication with the Board of Directors;

•

Policy Regarding Director Candidates Recommended by Shareholders;

•

Policy Regarding Corporate Political Contributions;

•

Policy Regarding Shareholder Rights Plan; and

•

Code of Ethics and Business Conduct.

You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.


		ii

Item 1.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)


	May 31, 2006		November 30, 2005
	(unaudited)
Assets
Cash and cash equivalents	$	14,793	$	29,414
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements (including securities at fair value of $26,979 at May 31, 2006 and $30,223 at November 30, 2005)		46,612		40,130
Financial instruments owned (approximately $104 billion and $93 billion were pledged to various parties at May 31, 2006 and November 30, 2005, respectively):
U.S. government and agency securities		33,781		31,742
Other sovereign government obligations		24,484		22,750
Corporate and other debt		128,358		105,381
Corporate equities		69,215		52,238
Derivative contracts		51,536		45,894
Physical commodities		2,797		2,610

Total financial instruments owned		310,171		260,615
Securities received as collateral		61,248		43,557
Collateralized agreements:
Securities purchased under agreements to resell		190,289		174,330
Securities borrowed		274,581		244,241
Receivables:
Consumer loans (net of allowances of $776 at May 31, 2006 and $838 at November 30, 2005)		21,965		22,916
Customers		67,878		50,979
Brokers, dealers and clearing organizations		6,785		5,030
Fees, interest and other		9,328		6,137
Office facilities, at cost (less accumulated depreciation of $3,435 at May 31, 2006 and $3,196 at November 30, 2005)		2,809		2,733
Aircraft held for sale		—		3,145
Goodwill and net intangible assets		2,932		2,500
Other assets		17,652		12,796

Total assets	$	1,027,043	$	898,523


		1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

(dollars in millions, except share data)


	May 31, 2006			November 30, 2005
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	34,028		$	31,120
Deposits		22,560			18,663
Financial instruments sold, not yet purchased:
U.S. government and agency securities		19,594			20,425
Other sovereign government obligations		29,507			25,355
Corporate and other debt		7,788			5,480
Corporate equities		52,292			45,936
Derivative contracts		48,747			44,952
Physical commodities		1,894			4,852

Total financial instruments sold, not yet purchased		159,822			147,000
Obligation to return securities received as collateral		61,248			43,557
Collateralized financings:
Securities sold under agreements to repurchase		257,250			237,274
Securities loaned		141,454			120,454
Other secured financings		28,798			23,534
Payables:
Customers		131,413			112,246
Brokers, dealers and clearing organizations		6,478			4,789
Interest and dividends		5,528			3,338
Other liabilities and accrued expenses		18,158			16,835
Long-term borrowings		127,985			110,465

		994,722			869,275

Capital Units		66			66

Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at May 31, 2006 and November 30, 2005;
Shares issued: 1,211,701,552 at May 31, 2006 and November 30, 2005;
Shares outstanding: 1,071,786,172 at May 31, 2006 and 1,057,677,994 at November 30, 2005		12			12
Paid-in capital		1,670			2,389
Retained earnings		38,125			35,185
Employee stock trust		4,726			3,060
Accumulated other comprehensive income (loss)		20			(190	)
Common stock held in treasury, at cost, $0.01 par value;
139,915,380 shares at May 31, 2006 and 154,023,558 shares at November 30, 2005		(7,572	)		(8,214	)
Common stock issued to employee trust		(4,726	)		(3,060	)

Total shareholders’ equity		32,255			29,182

Total liabilities and shareholders’ equity	$	1,027,043		$	898,523

See Notes to Condensed Consolidated Financial Statements.


		2

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(dollars in millions, except share and per share data)


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005			2006			2005
	(unaudited)						(unaudited)
Revenues:
Investment banking	$	1,132		$	814		$	2,114		$	1,635
Principal transactions:
Trading		3,735			1,794			6,802			3,640
Investments		690			226			1,004			379
Commissions		1,005			824			1,934			1,648
Fees:
Asset management, distribution and administration		1,333			1,246			2,612			2,450
Merchant, cardmember and other		277			318			566			626
Servicing and securitization income		651			423			1,247			917
Interest and dividends		10,114			6,035			20,663			11,878
Other		125			121			239			226

Total revenues		19,062			11,801			37,181			23,399
Interest expense		9,988			5,561			19,469			10,186
Provision for consumer loan losses		130			209			285			344

Net revenues		8,944			6,031			17,427			12,869

Non-interest expenses:
Compensation and benefits		3,723			2,622			7,906			5,476
Occupancy and equipment		237			232			469			564
Brokerage, clearing and exchange fees		340			276			632			536
Information processing and communications		365			349			712			691
Marketing and business development		298			298			536			555
Professional services		538			438			972			817
Other		267			422			577			992
September 11 ^th related insurance recoveries, net		—			—			—			(251	)

Total non-interest expenses		5,768			4,637			11,804			9,380

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		3,176			1,394			5,623			3,489
Losses from unconsolidated investees		103			67			172			140
Provision for income taxes		1,124			396			1,908			1,069

Income from continuing operations before cumulative effect of accounting change, net		1,949			931			3,543			2,280
Discontinued operations:
Income/(loss) from discontinued operations		14			(5	)		(42	)		2
Income tax (provision)/benefit		(6	)		2			17			(1	)

Income/(loss) on discontinued operations		8			(3	)		(25	)		1
Cumulative effect of accounting change, net		—			—			—			49

Net income	$	1,957		$	928		$	3,518		$	2,330

Earnings per basic share:
Income from continuing operations	$	1.92		$	0.88		$	3.48		$	2.15
Income/(loss) on discontinued operations		0.01			—			(0.02	)		—
Cumulative effect of accounting change, net		—			—			—			0.05

Earnings per basic share	$	1.93		$	0.88		$	3.46		$	2.20

Earnings per diluted share:
Income from continuing operations	$	1.85		$	0.86		$	3.35		$	2.10
Income/(loss) on discontinued operations		0.01			—			(0.02	)		—
Cumulative effect of accounting change, net		—			—			—			0.05

Earnings per diluted share	$	1.86		$	0.86		$	3.33		$	2.15

Average common shares outstanding:
Basic		1,013,241,715			1,053,812,487			1,016,756,096			1,061,632,036

Diluted		1,054,733,745			1,079,811,172			1,056,493,761			1,084,988,764

See Notes to Condensed Consolidated Financial Statements.


		3

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)


	Three Months Ended May 31,					Six Months Ended May 31,
	2006		2005			2006		2005
	(unaudited)					(unaudited)
Net income	$	1,957	$	928		$	3,518	$	2,330
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		97		(41	)		130		(45	)
Net change in cash flow hedges		53		(56	)		80		(50	)

Comprehensive income	$	2,107	$	831		$	3,728	$	2,235

See Notes to Condensed Consolidated Financial Statements.


		4

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)


	Six Months Ended May 31,
	2006			2005
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,518		$	2,330
Adjustments to reconcile net income to net cash used for operating activities:
Cumulative effect of accounting change, net		—			(49	)
Compensation payable in common stock and options		1,067			408
Depreciation and amortization		365			478
Provision for consumer loan losses		285			344
Lease adjustment		—			109
Insurance settlement		—			(251	)
Aircraft-related charges		125			—
Changes in assets and liabilities:
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements		(6,482	)		(12,636	)
Financial instruments owned, net of financial instruments sold, not yet purchased		(36,391	)		(11,695	)
Securities borrowed, net of securities loaned		(9,340	)		(3,245	)
Receivables and other assets		(23,664	)		8,057
Payables and other liabilities		24,899			10,386
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell		4,017			(25,023	)

Net cash used for operating activities		(41,601	)		(30,787	)

CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from (payments for):
Office facilities and aircraft under operating leases		1,990			(270	)
Purchase of Goldfish		(1,676	)		—
Purchase of PULSE, net of cash acquired		—			(279	)
Net principal disbursed on consumer loans		(6,371	)		(4,813	)
Sales of consumer loans		8,359			4,954
Sale of interest in POSIT		—			90
Insurance settlement		—			220

Net cash provided by (used for) investing activities		2,302			(98	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		2,908			3,754
Derivatives financing activities		(156	)		993
Other secured financings		5,264			9,315
Deposits		3,897			2,476
Tax benefits associated with stock-based awards		39			261
Net proceeds from:
Issuance of common stock		229			253
Issuance of long-term borrowings		25,693			15,768
Payments for:
Repayments of long-term borrowings		(11,306	)		(6,788	)
Repurchases of common stock		(1,312	)		(2,276	)
Cash dividends		(578	)		(596	)

Net cash provided by financing activities		24,678			23,160

Net decrease in cash and cash equivalents		(14,621	)		(7,725	)
Cash and cash equivalents, at beginning of period		29,414			32,811

Cash and cash equivalents, at end of period	$	14,793		$	25,086

See Notes to Condensed Consolidated Financial Statements.


		5

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Introduction and Basis of Presentation.

The Company. 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, Asset Management and Discover. The Company, through its subsidiaries and affiliates, provides its 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 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 securities and related products 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 insurance products; credit and other lending products; banking and cash management and credit solutions; retirement services; trust and fiduciary services; and engages in investment activities.

Asset Management provides global asset management products and services in equities, fixed income and alternative investment products through three principal distribution channels: a proprietary channel consisting of the Company’s representatives; a non-proprietary channel consisting of third-party broker-dealers, banks, financial planners and other intermediaries; and the Company’s institutional sales channel; and engages in investment activities.

Discover offers Discover ^® -branded credit cards and other consumer products and services, and includes the operations of Discover Network, which operates a merchant and cash access network for Discover Network branded cards, and PULSE EFT Association LP (“PULSE”), an automated teller machine/debit and electronic funds transfer network. The Discover business segment also includes consumer finance products and services in the U.K., including Morgan Stanley-branded, Goldfish-branded and various other credit cards issued on the MasterCard network.

Basis of Financial Information. The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions regarding the valuations of certain financial instruments, consumer loan loss levels, the outcome of litigation and tax matters, and other matters that affect the condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates.

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest. The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting stock unless it does not control the entity. The Company also consolidates any variable interest entities for which it is deemed to be the primary beneficiary (see Note 11). For investments in companies in which the Company has significant influence over operating and financial decisions (generally defined as owning a voting or economic interest of 20% to 50%), the Company applies the equity method of accounting.

The Company’s U.S. and international subsidiaries include Morgan Stanley & Co. Incorporated (“MS&Co.”), Morgan Stanley & Co. International Limited (“MSIL”), Morgan Stanley Japan Securities Co., Ltd. (“MSJS”), Morgan Stanley DW Inc. (“MSDWI”), Morgan Stanley Investment Advisors Inc. and NOVUS Credit Services Inc.


		6

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Certain reclassifications have been made to prior-period amounts to conform to the current period’s presentation. All material intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2005 (the “Form 10-K”). The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that 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.

Discontinued Operations. The Company’s aircraft leasing business was classified as “held for sale” prior to its sale on March 24, 2006, and associated revenues and expenses have been reported as discontinued operations for all periods presented. Prior to being reclassified as discontinued operations, the results of the Company’s aircraft leasing business were included in the Institutional Securities business segment. See Note 15 for additional information on discontinued operations.

Revenue Recognition.

Investment Banking. Underwriting revenues and fees for mergers, acquisitions and advisory assignments are recorded when services for the transactions are determined to be completed, generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction revenue. Underwriting revenues are presented net of related expenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interest expenses.

Commissions. The Company generates commissions from executing and clearing client transactions on stock, options and futures markets. Commission revenues are recorded in the accounts on trade date.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administration fees are recognized over the relevant contract period, generally quarterly or annually. In certain management fee arrangements, the Company is entitled to receive performance fees when the return on assets under management exceeds certain benchmark returns or other performance targets. Performance fee revenue is accrued quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement.

Merchant, Cardmember and Other Fees. Merchant, cardmember and other fees include revenues from fees charged to merchants on credit card sales (net of interchange fees paid to banks that issue cards on the Company’s merchant and cash access network), transaction fees on debit card transactions as well as charges to cardmembers for late payment fees, overlimit fees, balance transfer fees, credit protection fees and cash advance fees, net of cardmember rewards. Merchant, cardmember and other fees are recognized as earned. Cardmember rewards include various reward programs, including the Cashback Bonus ^® reward program, pursuant to which the Company pays certain cardmembers a percentage of their purchase amounts based upon a cardmember’s level and type of purchases. The liability for cardmember rewards, included in Other liabilities and accrued expenses, is accrued at the time that qualified cardmember transactions occur and is calculated on an individual cardmember basis. In determining the liability for cardmember rewards, the Company considers estimated forfeitures based on historical account closure, charge-off and transaction activity. The Company records the cost of its cardmember reward programs as a reduction of Merchant, cardmember and other fees.

Consumer Loans. Consumer loans, which consist primarily of general purpose credit card, mortgage and consumer installment loans, are reported at their principal amounts outstanding less applicable allowances.


		7

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Interest on consumer loans is recorded to income as earned. Interest is generally accrued on credit card loans until the date of charge-off, which generally occurs at the end of the month during which an account becomes 180 days past due, except in the case of cardmember bankruptcies, probate accounts, and fraudulent transactions. Cardmember bankruptcies and probate accounts are charged off at the end of the month 60 days following the receipt of notification of the bankruptcy or death, but not later than the 180-day contractual time frame. Fraudulent transactions are reported in consumer loans at their net realizable value upon receipt of notification of the fraud through a charge to operating expenses and are subsequently written off at the end of the month 90 days following notification, but not later than the contractual 180-day time frame. The interest portion of charged-off credit card loans is written off against interest revenue. Origination costs related to the issuance of credit cards are charged to earnings over periods not exceeding 12 months.

The Company classifies a portion of its consumer loans as held for sale. Loans held for sale include the lesser of loans eligible for securitization or sale, or loans that management intends to securitize within three months, net of amortizing securitizations. These loans are carried at the lower of aggregate cost or fair value.

Financial Instruments Used for Trading and Investment. Financial instruments owned and Financial instruments sold, not yet purchased, which include cash and derivative products, are recorded at fair value in the condensed consolidated statements of financial condition, and gains and losses are reflected net in Principal transaction trading and investment revenues in the condensed consolidated statements of income. Loans and lending commitments associated with the Company’s corporate lending activities also are primarily recorded at fair value. Fair value is the amount at which financial instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The fair value of the Company’s Financial instruments owned and Financial instruments sold, not yet purchased are generally based on observable market prices, observable market parameters or derived from such prices or parameters based on bid prices or parameters for Financial instruments owned and ask prices or parameters for Financial instruments sold, not yet purchased. In the case of financial instruments transacted on recognized exchanges, the observable prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded. Bid prices represent the highest price a buyer is willing to pay for a financial instrument at a particular time. Ask prices represent the lowest price a seller is willing to accept for a financial instrument at a particular time.

A substantial percentage of the fair value of the Company’s Financial instruments owned and Financial instruments sold, not yet purchased is based on observable market prices, observable market parameters, or is derived from such prices or parameters. The availability of observable market prices and pricing parameters can vary from product to product. Where available, observable market prices and pricing parameters in a product (or a related product) may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment. The price transparency of the particular product will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including, for example, the type of product, whether it is a new product and not yet established in the marketplace, and the characteristics particular to the transaction. Products for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency. By contrast, products that are thinly traded or not quoted will generally have reduced to no price transparency.

The fair value of over-the-counter (“OTC”) derivative contracts is derived primarily using pricing models, which may require multiple market input parameters. Where appropriate, valuation adjustments are made to account for


		8

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable market data where available. In the absence of observable market prices or parameters in an active market, observable prices or parameters of other comparable current market transactions, or other observable data supporting a fair value based on a pricing model at the inception of a contract, fair value is based on the transaction price. The Company also uses pricing models to manage the risks introduced by OTC derivatives. Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including closed-form analytic formulae, such as the Black-Scholes option pricing model, simulation models or a combination thereof, applied consistently. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. Pricing models take into account the contract terms, including the maturity, as well as market parameters such as interest rates, volatility and the creditworthiness of the counterparty.

Purchases and sales of financial instruments and related expenses are recorded in the accounts on trade date. Unrealized gains and losses arising from the Company’s dealings in OTC financial instruments, including derivative contracts related to financial instruments and commodities, are presented in the accompanying condensed consolidated statements of financial condition on a net-by-counterparty basis, when appropriate.

The Company nets cash collateral paid or received against its derivatives inventory under credit support annexes, which the Company views as conditional contracts, to legally enforceable master netting agreements.

Equity and debt securities purchased in connection with private equity and other principal investment activities initially are carried in the condensed consolidated financial statements at their original costs, which approximate fair value. The carrying value of such securities is adjusted when changes in the underlying fair values are readily ascertainable, generally as evidenced by observable market prices or transactions that directly affect the value of such securities. Downward adjustments relating to such securities are made in the event that the Company determines that the fair value is less than the carrying value. The Company’s partnership interests, including general partnership and limited partnership interests in real estate funds, are included within Other assets in the condensed consolidated statements of financial condition and are recorded at fair value based upon changes in the fair value of the underlying partnership’s net assets.

Financial Instruments Used for Asset and Liability Management. The Company enters into various derivative financial instruments for non-trading purposes. These instruments are included within Financial instruments owned—derivative contracts or Financial instruments sold, not yet purchased—derivative contracts within the condensed consolidated statements of financial condition and include interest rate swaps, foreign currency swaps, equity swaps and foreign exchange forwards. The Company uses interest rate and currency swaps and equity derivatives to manage interest rate, currency and equity price risk arising from certain liabilities. The Company also utilizes interest rate swaps to match the repricing characteristics of consumer loans with those of the borrowings that fund these loans. Certain of these derivative financial instruments are designated and qualify as fair value hedges, which hedge the changes in fair value of assets, liabilities or firm commitments and cash flow hedges, which hedge the variability of future cash flows from forecasted transactions and floating rate assets and liabilities.

The Company’s designated fair value hedges consist primarily of hedges of fixed rate borrowings, including fixed rate borrowings that fund consumer loans.

For qualifying fair value hedges, the changes in the fair value of the derivative and the gain or loss on the hedged asset or liability relating to the risk being hedged are recorded currently in earnings. These amounts are recorded in Interest expense and provide offset of one another. For qualifying cash flow hedges, the changes in the fair


		9

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

value of the derivative are recorded in Accumulated other comprehensive income (loss) in Shareholders’ equity, net of tax effects, and amounts in Accumulated other comprehensive income (loss) are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Ineffectiveness relating to fair value and cash flow hedges, if any, is recorded within Interest expense. The impact of hedge ineffectiveness on the condensed consolidated statements of income was not material for all periods presented.

In connection with the sale of the aircraft financing business (see Note 15), the Company de-designated the interest rate swaps associated with this business effective August 31, 2005 and no longer accounts for them as cash flow hedges. Amounts in Accumulated other comprehensive income (loss) related to those interest rate swaps, which were designated as hedges of the Company’s variable rate long-term borrowings, are being reclassified to earnings when the hedged forecasted transactions impact earnings, as these transactions are still probable of occurring.

The Company also utilizes foreign exchange forward contracts to manage the currency exposure relating to its net monetary investments in non-U.S. dollar functional currency operations. The gain or loss from revaluing these contracts is deferred and reported within Accumulated other comprehensive income (loss) in Shareholders’ equity, net of tax effects, with the related unrealized amounts due from or to counterparties included in Financial instruments owned or Financial instruments sold, not yet purchased. The interest elements (forward points) on these foreign exchange forward contracts are recorded in earnings.

Securitization Activities. The Company engages in securitization activities related to commercial and residential mortgage loans, corporate bonds and loans, U.S. agency collateralized mortgage obligations, credit card loans and other types of financial assets (see Notes 3 and 4). The Company may retain interests in the securitized financial assets as one or more tranches of the securitization, undivided seller’s interests, accrued interest receivable subordinate to investors’ interests (see Note 4), cash collateral accounts, servicing rights, rights to any excess cash flows remaining after payments to investors in the securitization trusts of their contractual rate of return and reimbursement of credit losses, and other retained interests. The exposure to credit losses from securitized loans is limited to the Company’s retained contingent risk, which represents the Company’s retained interest in securitized loans, including any credit enhancement provided. The gain or loss on the sale of financial assets depends in part on the previous carrying amount of the assets involved in the transfer, and each subsequent transfer in revolving structures, allocated between the assets sold and the retained interests based upon their respective fair values at the date of sale. To obtain fair values, observable market prices are used if available. However, observable market prices are generally not available for retained interests so the Company estimates fair value based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, payment rates, forward yield curves and discount rates commensurate with the risks involved. The present value of future net excess cash flows that the Company estimates it will receive over the term of the securitized loans is recognized in income as the loans are securitized. A corresponding asset also is recorded and charged to income over the term of the securitized loans, with actual net excess cash flows continuing to be recognized in income as they are earned.

Stock-Based Compensation. The Company early adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective approach as of December 1, 2004. SFAS No. 123R revised the fair value-based method of accounting for share-based payment liabilities, forfeitures and modifications of stock-based awards and clarified guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to service periods. Upon adoption, the Company recognized an $80 million gain ($49 million after-tax) as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2005 resulting from the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred. The cumulative effect gain increased both basic and diluted earnings per share by $0.05.


		10

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For stock-based awards issued prior to the adoption of SFAS No. 123R, the Company’s accounting policy for awards granted to retirement-eligible employees was to recognize compensation cost over the service period specified in the award terms. The Company accelerates any unrecognized compensation cost for such awards if and when a retirement-eligible employee leaves the Company. For stock-based awards made to retirement-eligible employees during fiscal 2005, the Company recognized compensation expense for such awards on the date of grant.

For fiscal 2005 year-end stock-based compensation awards that were granted to retirement-eligible employees in December 2005, the Company recognized the compensation cost for such awards at the date of grant instead of over the service period specified in the award terms. As a result, the Company recorded non-cash incremental compensation expenses of approximately $395 million in the first quarter of fiscal 2006 for stock-based awards granted to retirement-eligible employees as part of the fiscal 2005 year-end award process and for awards granted to retirement-eligible employees, including new hires, in the first quarter of fiscal 2006. These incremental expenses were included within Compensation and benefits expense and reduced income before taxes within the Institutional Securities ($270 million), Global Wealth Management Group ($80 million), Asset Management ($28 million) and Discover ($17 million) business segments.

Additionally, based on interpretive guidance related to SFAS No. 123R in the first quarter of fiscal 2006, the Company changed its accounting policy for expensing the cost of anticipated fiscal 2006 year-end equity awards that will be granted to retirement-eligible employees in the first quarter of fiscal 2007. Effective December 1, 2005, the Company accrues the estimated cost of these awards over the course of the current fiscal year rather than expensing the awards on the date of grant (currently scheduled to occur in December 2006). The Company believes that this method of recognition for retirement-eligible employees is preferable because it better reflects the period over which the compensation is earned.

If the Company had accrued the estimated cost of equity awards granted to retirement-eligible employees over the course of the fiscal year ended November 30, 2005 rather than expensing such awards at the grant date in December 2005, net income would have decreased for the quarter and six month period ended May 31, 2005. The approximate resulting pro forma net income would have been $860 million and $2,198 million, respectively, rather than the reported amounts of $928 million and $2,330 million, respectively. The approximate resulting impact on earnings per share for the quarter ended May 31, 2005 would have been a reduction in the reported amounts of earnings per basic share from $0.88 to $0.82 and earnings per diluted share from $0.86 to $0.80. The approximate resulting impact on earnings per share for the six month period ended May 31, 2005 would have been a reduction in the reported amounts of earnings per basic share from $2.20 to $2.07 and earnings per diluted share from $2.15 to $2.03.

2.	Goodwill and Intangible Assets.

During the first quarter of fiscal 2006, the Company completed the annual goodwill impairment test (as of December 1 in each fiscal year). The Company’s testing did not indicate any goodwill impairment.


		11

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in the carrying amount of the Company’s goodwill and intangible assets for the six month period ended May 31, 2006 were as follows:


	Institutional Securities			Global Wealth Management Group		Asset Management		Discover			Total
	(dollars in millions)
*Goodwill:*
Balance as of November 30, 2005	$	444		$	540	$	966	$	256		$	2,206
Translation adjustments		—			30		—		16			46
Goodwill acquired during the period(1)		2			—		2		232			236

Balance as of May 31, 2006	$	446		$	570	$	968	$	504		$	2,488

*Intangible assets:*
Balance as of November 30, 2005	$	227		$	—	$	—	$	67		$	294
Intangible assets acquired during the period(1)		26			—		4		128			158
Translation adjustments		—			—		—		10			10
Amortization expense		(13	)		—		—		(5	)		(18	)

Balance as of May 31, 2006	$	240		$	—	$	4	$	200		$	444

(1)	Discover activity represents goodwill and intangible assets acquired in connection with the Company’s acquisition of Goldfish (see Note 16).

3.	Collateralized and Securitization Transactions.

Securities purchased under agreements to resell (“reverse repurchase agreements”) and Securities sold under agreements to repurchase (“repurchase agreements”), principally government and agency securities, are carried at the amounts at which the securities subsequently will be resold or reacquired as specified in the respective agreements; such amounts include accrued interest. Reverse repurchase agreements and repurchase agreements are presented on a net-by-counterparty basis, when appropriate. The Company’s policy is to take possession of securities purchased under agreements to resell. Securities borrowed and Securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions. Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated variable interest entities where the Company is deemed to be the primary beneficiary and certain equity-referenced securities where in all instances these liabilities are payable solely from the cash flows of the related assets accounted for as Financial instruments owned.

The Company pledges its financial instruments owned to collateralize repurchase agreements and other securities financings. Pledged securities that can be sold or repledged by the secured party are identified as Financial instruments owned (pledged to various parties) on the condensed consolidated statements of financial condition. The carrying value and classification of securities owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or repledge the collateral were as follows:


	At May 31, 2006		At November 30, 2005
	(dollars in millions)
Financial instruments owned:
U.S. government and agency securities	$	13,519	$	12,494
Other sovereign government obligations		155		328
Corporate and other debt		35,387		21,775
Corporate equities		5,837		5,290

Total	$	54,898	$	39,887


		12

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance the Company’s inventory positions. The Company also engages in securities financing transactions for customers through margin lending. Under these agreements and transactions, the Company either receives or provides collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. The Company receives collateral in the form of securities in connection with reverse repurchase agreements, securities borrowed transactions and customer margin loans. In many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending transactions or for delivery to counterparties to cover short positions. At May 31, 2006 and November 30, 2005, the fair value of securities received as collateral where the Company is permitted to sell or repledge the securities was $909 billion and $798 billion, respectively, and the fair value of the portion that has been sold or repledged was $801 billion and $737 billion, respectively.

The Company manages credit exposure arising from reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations. The Company also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralized. Where deemed appropriate, the Company’s agreements with third parties specify its rights to request additional collateral. Customer receivables generated from margin lending activity are collateralized by customer-owned securities held by the Company. For these transactions, adherence to the Company’s collateral policies significantly limits the Company’s credit exposure in the event of customer default. The Company may request additional margin collateral from customers, if appropriate, and if necessary may sell securities that have not been paid for or purchase securities sold, but not delivered from customers.

In connection with its Institutional Securities business, the Company engages in securitization activities related to residential and commercial mortgage loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans, and other types of financial assets. These assets are carried at fair value, and any changes in fair value are recognized in the condensed consolidated statements of income. The Company may act as underwriter of the beneficial interests issued by securitization vehicles. Underwriting net revenues are recognized in connection with these transactions. The Company may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the condensed consolidated statements of financial condition at fair value. Any changes in the fair value of such retained interests are recognized in the condensed consolidated statements of income. Retained interests in securitized financial assets associated with the Institutional Securities business were approximately $3.7 billion at May 31, 2006, the majority of which were related to residential mortgage loan, U.S. agency collateralized mortgage obligation and commercial mortgage loan securitization transactions. Net gains at the time of securitization were not material in the six month period ended May 31, 2006. The assumptions that the Company used to determine the fair value of its retained interests at the time of securitization related to those transactions that occurred during the quarter and six month period ended May 31, 2006 were not materially different from the assumptions included in the table below. Additionally, as indicated in the table below, the Company’s exposure to credit losses related to these retained interests was not material to the Company’s results of operations.


		13

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents information on the Company’s residential mortgage loan, U.S. agency collateralized mortgage obligation and commercial mortgage loan securitization transactions. Key economic assumptions and the sensitivity of the current fair value of the retained interests to immediate 10% and 20% adverse changes in those assumptions at May 31, 2006 were as follows (dollars in millions):


	Residential Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Commercial Mortgage Loans
Retained interests (carrying amount/fair value)	$ 2,594		$ 865		$ 173
Weighted average life (in months)	38		113		60
Credit losses (rate per annum)	0.00-4.25	%	—		0.00-5.06	%
Impact on fair value of 10% adverse change	$ (92	)	$ —		$ (1	)
Impact on fair value of 20% adverse change	$ (174	)	$ —		$ (2	)
Weighted average discount rate (rate per annum)	9.00	%	6.26	%	8.10	%
Impact on fair value of 10% adverse change	$ (44	)	$ (29	)	$ (4	)
Impact on fair value of 20% adverse change	$ (88	)	$ (56	)	$ (7	)
Prepayment speed assumption(1)(2)	318-2833P	SA	131-242P	SA	—
Impact on fair value of 10% adverse change	$ (43	)	$ (4	)	$ —
Impact on fair value of 20% adverse change	$ (50	)	$ (7	)	$ —

(1)	Amounts for residential mortgage loans exclude positive valuation effects from immediate 10% and 20% changes.

(2)	Commercial mortgage loans typically contain provisions that either prohibit or economically penalize the borrower from prepaying the loan for a specified period of time.

The table above does not include the offsetting benefit of any financial instruments that the Company may utilize to hedge risks inherent in its retained interests. In addition, the sensitivity analysis is hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an assumption generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, the sensitivity analysis does not consider any corrective action that the Company may take to mitigate the impact of any adverse changes in the key assumptions.

In connection with its Institutional Securities business, during the six month periods ended May 31, 2006 and 2005, the Company received proceeds from new securitization transactions of $31.0 billion and $34.5 billion, respectively, and cash flows from retained interests in securitization transactions of $2,843 million and $3,655 million, respectively.

4.	Consumer Loans.

Consumer loans were as follows:


	At May 31, 2006		At November 30, 2005
	(dollars in millions)
General purpose credit card, mortgage and consumer installment	$	22,741	$	23,754
Less:
Allowance for consumer loan losses		776		838

Consumer loans, net	$	21,965	$	22,916


		14

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Activity in the allowance for consumer loan losses was as follows:


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005(1)			2006			2005(1)
	(dollars in millions)
Balance at beginning of period	$	785		$	854		$	838		$	943
Additions:
Provision for consumer loan losses		130			209			285			344
Purchase of consumer loans(2)		9			—			53			—
Deductions:
Charge-offs		(192	)		(261	)		(492	)		(521	)
Recoveries		42			40			89			76

Net charge-offs		(150	)		(221	)		(403	)		(445	)
Translation adjustments and other		2			(2	)		3			(2	)

Balance at end of period	$	776		$	840		$	776		$	840

(1)	Certain reclassifications have been made to prior-period amounts to conform to the current period’s presentation.

(2)	Amounts relate to the Company’s acquisition of Goldfish (see Note 16).

Information on net charge-offs of interest and cardmember fees was as follows:


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
	(dollars in millions)
Interest accrued on general purpose credit card loans subsequently charged off, net of recoveries (recorded as a reduction of Interest revenue)	$	44	$	50	$	82	$	106

Cardmember fees accrued on general purpose credit card loans subsequently charged off, net of recoveries (recorded as a reduction to Merchant, cardmember and other fee revenue)	$	23	$	27	$	45	$	60

At May 31, 2006, the Company had commitments to extend credit for consumer loans of approximately $273 billion. Such commitments arise primarily from agreements with customers for unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness.

At May 31, 2006 and November 30, 2005, $874 million and $4,080 million, respectively, of the Company’s consumer loans were classified as held for sale.

The Company received net proceeds from consumer loan sales of $1,349 million and $8,359 million in the quarter and six month period ended May 31, 2006 and $262 million and $4,954 million in the quarter and six month period ended May 31, 2005.

Credit Card Securitization Activities. The Company’s retained interests in credit card asset securitizations include undivided seller’s interests, accrued interest receivable on securitized credit card receivables, cash collateral accounts, servicing rights, rights to any excess cash flows (“Residual Interests”) remaining after


		15

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

payments to investors in the securitization trusts of their contractual rate of return and reimbursement of credit losses, and other retained interests. The undivided seller’s interests less an applicable allowance for loan losses is recorded in Consumer loans. The Company’s undivided seller’s interests rank pari passu with investors’ interests in the securitization trusts, and the remaining retained interests are subordinate to investors’ interests. Accrued interest receivable and certain other subordinated retained interests are recorded in Other assets at amounts that approximate fair value. The Company receives annual servicing fees of 2% of the investor principal balance outstanding. The Company does not recognize servicing assets or servicing liabilities for servicing rights since the servicing contracts provide just adequate compensation (as defined in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”) to the Company for performing the servicing. Residual Interests and cash collateral accounts are recorded in Other assets and reflected at fair value with changes in fair value recorded currently in earnings. At May 31, 2006, the Company had $10,255 million of retained interests, including $6,869 million of undivided seller’s interests, in credit card asset securitizations. The retained interests are subject to credit, payment and interest rate risks on the transferred credit card assets. The investors and the securitization trusts have no recourse to the Company’s other assets for failure of cardmembers to pay when due.

During the six month periods ended May 31, 2006 and 2005, the Company completed credit card asset securitizations of $6.6 billion and $3.4 billion, respectively, and recognized net securitization gains of $156 million and $16 million, respectively, as servicing and securitization income in the condensed consolidated statements of income. The amount for the six month period ended May 31, 2006 includes an increase in the fair value of the Company’s retained interests in securitized credit card receivables primarily resulting from a favorable impact on charge-offs following the enactment of federal bankruptcy legislation that became effective in October 2005. The uncollected balances of securitized general purpose credit card loans were $26.8 billion and $24.4 billion at May 31, 2006 and November 30, 2005, respectively.

Key economic assumptions used in measuring the Residual Interests at the date of securitization resulting from credit card asset securitizations completed during the six month periods ended May 31, 2006 and 2005 were as follows:


	Six Months Ended May 31,
	2006		2005
Weighted average life (in months)	3.7 - 4.7		5.9
Payment rate (rate per month)	19.69% - 21.34	%	18.52	%
Credit losses (rate per annum)	4.72% - 5.23	%	6.00	%
Discount rate (rate per annum)	11.00	%	12.00	%


		16

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Key economic assumptions and the sensitivity of the current fair value of the Residual Interests to immediate 10% and 20% adverse changes in those assumptions were as follows (dollars in millions):


	At May 31, 2006
Residual Interests (carrying amount/fair value)	$	338
Weighted average life (in months)		4.3
Weighted average payment rate (rate per month)		21.58	%
Impact on fair value of 10% adverse change	$	(25	)
Impact on fair value of 20% adverse change	$	(46	)
Weighted average credit losses (rate per annum)		4.46	%
Impact on fair value of 10% adverse change	$	(39	)
Impact on fair value of 20% adverse change	$	(78	)
Weighted average discount rate (rate per annum)		11.00	%
Impact on fair value of 10% adverse change	$	(1	)
Impact on fair value of 20% adverse change	$	(3	)

The sensitivity analysis in the table above is hypothetical and should be used with caution. Changes in fair value based on a 10% or 20% variation in an assumption generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the Residual Interests is calculated independent of changes in any other assumption; in practice, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower payments and increased credit losses), which might magnify or counteract the sensitivities. In addition, the sensitivity analysis does not consider any corrective action that the Company may take to mitigate the impact of any adverse changes in the key assumptions.

The table below summarizes certain cash flows received from the securitization master trusts (dollars in billions):


	Six Months Ended May 31,
	2006		2005
Proceeds from new credit card asset securitizations	$	6.6	$	3.4
Proceeds from collections reinvested in previous credit card asset securitizations	$	29.6	$	29.1
Contractual servicing fees received	$	0.3	$	0.3
Cash flows received from retained interests	$	1.1	$	1.0

The table below presents quantitative information about delinquencies, net principal credit losses and components of managed general purpose credit card loans, including securitized loans (dollars in millions):


	At May 31, 2006				Six Months Ended May 31, 2006
	Loans Outstanding		Loans Delinquent		Average Loans		Net Principal Credit Losses
Managed general purpose credit card loans	$	48,539	$	1,599	$	47,439	$	992
Less: Securitized general purpose credit card loans		26,775

Owned general purpose credit card loans	$	21,764


		17

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.	Long-Term Borrowings.

Long-term borrowings at May 31, 2006 scheduled to mature within one year aggregated $14,631 million.

During the six month period ended May 31, 2006, the Company issued senior notes aggregating $26,454 million, including non-U.S. dollar currency notes aggregating $11,530 million and $889 million of junior subordinated debentures. Maturities in the aggregate of these notes by fiscal year are as follows: 2006, $3 million; 2007, $2,501 million; 2008, $5,351 million; 2009, $3,308 million; 2010, $1,012 million; and thereafter, $14,279 million. In the six month period ended May 31, 2006, $11,306 million of senior notes were repaid.

The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately five years at May 31, 2006.

6.	Shareholders’ Equity.

Regulatory Requirements. MS&Co. and MSDWI are registered broker-dealers and registered futures commission merchants and, accordingly, are subject to the minimum net capital requirements of the Securities and Exchange Commission (the “SEC”), the New York Stock Exchange, Inc. (the “NYSE”) and the Commodity Futures Trading Commission. MS&Co. and MSDWI have consistently operated in excess of these requirements. MS&Co.’s net capital totaled $4,762 million at May 31, 2006, which exceeded the amount required by $3,721 million. MSDWI’s net capital totaled $1,210 million at May 31, 2006, which exceeded the amount required by $1,136 million. MSIL, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Authority, and MSJS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIL and MSJS have consistently operated in excess of their respective regulatory capital requirements.

Under regulatory capital requirements adopted by the Federal Deposit Insurance Corporation (the “FDIC”) and other bank regulatory agencies, FDIC-insured financial institutions must maintain (a) 3% to 5% of Tier 1 capital, as defined, to average assets (“leverage ratio”), (b) 4% of Tier 1 capital, as defined, to risk-weighted assets (“Tier 1 risk-weighted capital ratio”) and (c) 8% of total capital, as defined, to risk-weighted assets (“total risk-weighted capital ratio”). At May 31, 2006, the leverage ratio, Tier 1 risk-weighted capital ratio and total risk-weighted capital ratio of each of the Company’s FDIC-insured financial institutions exceeded these regulatory minimums.

Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of their local capital adequacy requirements. Morgan Stanley Derivative Products Inc., the Company’s triple-A rated derivative products subsidiary, maintains certain operating restrictions that have been reviewed by various rating agencies.

Effective December 1, 2005, the Company became a consolidated supervised entity (“CSE”) as defined by the SEC. As such, the Company is subject to group-wide supervision and examination by the SEC and to minimum capital requirements on a consolidated basis. As of May 31, 2006, the Company was in compliance with the CSE capital requirements.

MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of May 31, 2006, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

Treasury Shares. During the six month period ended May 31, 2006, the Company purchased approximately $1,312 million of its common stock through open market purchases at an average cost of $59.47 per share.


		18

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the six month period ended May 31, 2005, the Company purchased approximately $2,276 million of its common stock through a combination of open market purchases and employee purchases at an average cost of $55.13 per share.

7.	Earnings per Share.

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities. The following table presents the calculation of basic and diluted EPS (in millions, except for per share data):


	Three Months Ended May 31,					Six Months Ended May 31,
	2006		2005			2006			2005
Basic EPS:
Income from continuing operations before cumulative effect of accounting change, net	$	1,949	$	931		$	3,543		$	2,280
Income/(loss) on discontinued operations		8		(3	)		(25	)		1
Cumulative effect of accounting change, net		—		—			—			49

Net income applicable to common shareholders	$	1,957	$	928		$	3,518		$	2,330

Weighted average common shares outstanding		1,013		1,054			1,017			1,062

Earnings per basic share:
Income from continuing operations	$	1.92	$	0.88		$	3.48		$	2.15
Income/(loss) on discontinued operations		0.01		—			(0.02	)		—
Cumulative effect of accounting change, net		—		—			—			0.05

Earnings per basic share	$	1.93	$	0.88		$	3.46		$	2.20

Diluted EPS:
Net income applicable to common shareholders	$	1,957	$	928		$	3,518		$	2,330

Weighted average common shares outstanding		1,013		1,054			1,017			1,062
Effect of dilutive securities:
Stock options and restricted stock units		42		26			39			23

Weighted average common shares outstanding and common stock equivalents		1,055		1,080			1,056			1,085

Earnings per diluted share:
Income from continuing operations	$	1.85	$	0.86		$	3.35		$	2.10
Income/(loss) on discontinued operations		0.01		—			(0.02	)		—
Cumulative effect of accounting change, net		—		—			—			0.05

Earnings per diluted share	$	1.86	$	0.86		$	3.33		$	2.15

The following securities were considered antidilutive and therefore were excluded from the computation of diluted EPS:


	Three Months Ended May 31,		Six Months Ended May 31,
	2006	2005	2006	2005
	(shares in millions)
Number of antidilutive securities (including stock options and restricted stock units) outstanding at end of period	40	97	42	96


		19

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Cash dividends declared per common share were $0.27 and $0.54 for the quarters and six month periods ended May 31, 2006 and 2005.

8.	Commitments and Contingencies.

Letters of Credit. At May 31, 2006 and November 30, 2005, the Company had approximately $7,585 million and $6,904 million, respectively, of letters of credit outstanding to satisfy various collateral requirements.

Securities Activities. In connection with certain of its Institutional Securities business activities, the Company provides loans or lending commitments (including bridge financing) to selected clients. The borrowers may be rated investment grade or non-investment grade. These loans and commitments have varying terms, may be senior or subordinated, are generally contingent upon representations, warranties and contractual conditions applicable to the borrower, and may be syndicated or traded by the Company.

The aggregate value of the investment grade and non-investment grade lending commitments are shown below:


	At May 31, 2006		At November 30, 2005
	(dollars in millions)
Investment grade lending commitments	$	27,088	$	23,968
Non-investment grade lending commitments		8,189		13,066

Total	$	35,277	$	37,034

Financial instruments sold, not yet purchased include obligations of the Company to deliver specified financial instruments at contracted prices, thereby creating commitments to purchase the financial instruments in the market at prevailing prices. Consequently, the Company’s ultimate obligation to satisfy the sale of financial instruments sold, not yet purchased may exceed the amounts recognized in the condensed consolidated statements of financial condition.

The Company has commitments to fund other less liquid investments, including at May 31, 2006, $496 million in connection with investment activities, $13,593 million related to secured lending transactions and $8,550 million related to forward purchase contracts involving mortgage loans. Additionally, the Company has provided and will continue to provide financing, including margin lending and other extensions of credit, to clients that may subject the Company to increased credit and liquidity risks.

At May 31, 2006, the Company had commitments to enter into reverse repurchase and repurchase agreements of approximately $106 billion and $82 billion, respectively.

Legal. In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of reviews, investigations and proceedings has increased in recent years.


		20

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company contests liability and/or the amount of damages in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, and except for the pending matters described in the paragraphs below, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of the pending matters will not have a material adverse effect on the condensed consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. Legal reserves have been established in accordance with SFAS No. 5, “Accounting for Contingencies.” Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change.

Coleman Litigation . On May 8, 2003, Coleman (Parent) Holdings Inc. (“CPH”) filed a complaint against the Company in the Circuit Court of the Fifteenth Judicial Circuit for Palm Beach County. The complaint relates to the merger between The Coleman Company, Inc. (“Coleman”) and Sunbeam, Inc. (“Sunbeam”) in 1998. The complaint, as amended, alleges that CPH was induced to agree to the transaction with Sunbeam based on certain financial misrepresentations, and it asserts claims against the Company for aiding and abetting fraud, conspiracy and punitive damages. Shortly before trial, which commenced in April 2005, the trial court granted, in part, a motion for entry of a default judgment against the Company and ordered that portions of CPH’s complaint, including those setting forth CPH’s primary allegations against the Company, be read to the jury and deemed established for all purposes in the action. In May 2005, the jury returned a verdict in favor of CPH and awarded CPH $604 million in compensatory damages and $850 million in punitive damages. On June 23, 2005, the trial court issued a final judgment in favor of CPH in the amount of $1,578 million, which includes prejudgment interest and excludes certain payments received by CPH in settlement of related claims against others. On June 27, 2005, the Company filed a notice of appeal with the District Court of Appeal for the Fourth District of Florida and posted a supersedeas bond, which automatically stayed execution of the judgment pending appeal. Included in Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements in the condensed consolidated statement of financial condition is $1,863 million of commercial paper and other securities which have been pledged to obtain the bond which was posted in this matter. The Company filed its initial brief in support of its appeal on December 7, 2005. The Company’s appeal seeks to reverse the judgment of the trial court on several grounds and asks that the case be remanded for entry of a judgment in favor of the Company or, in the alternative, for a new trial. On June 28, 2006, the District Court of Appeal for the Fourth District of Florida heard oral argument on the Company’s appeal from the judgment of the trial court.

The Company believes, after consultation with outside counsel, that it is probable that the compensatory and punitive damages awards will be overturned on appeal and the case remanded for a new trial. Taking into account the advice of outside counsel, the Company is maintaining a reserve of $360 million for the Coleman litigation, which it believes to be a reasonable estimate, under SFAS No. 5, of the low end of the range of its probable exposure in the event the judgment is overturned and the case remanded for a new trial. If the compensatory and/or punitive awards are ultimately upheld on appeal, in whole or in part, the Company may incur an additional expense equal to the difference between the amount affirmed on appeal (and post-judgment interest thereon) and the amount of the reserve. While the Company cannot predict with certainty the amount of such additional expense, such additional expense could have a material adverse effect on the condensed consolidated financial condition of the Company and/or the Company’s or Institutional Securities operating results for a particular future period, and the upper end of the range could exceed $1.2 billion.


		21

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

IPO Allocation Matters. In connection with the Company’s role as either lead or co-lead underwriter in several initial public offerings (“IPO”), the Company has been exposed to both regulatory and civil proceedings. On January 25, 2005, the Company announced a settlement with the SEC regarding allegations that it violated Rule 101 of Regulation M by attempting to induce certain customers that received shares in IPOs to place purchase orders for additional shares in the aftermarket. Under the terms of the settlement, the Company agreed, without admitting or denying the allegations, to the entry of a judgment enjoining it from violating Rule 101 of Regulation M and the payment of a $40 million civil penalty. The court approved the settlement on February 4, 2005.

In addition to the above mentioned regulatory matter with the SEC, numerous purported class actions have been filed against certain issuers of IPO securities, certain individual officers of those issuers, the Company and other underwriters of those IPOs, purportedly on behalf of purchasers of stock in the IPOs or the aftermarket. These complaints allege that the Company required customers that wanted allocations of “hot” IPO securities to pay undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and to buy shares of securities offered in the IPOs after the IPOs were completed at escalating price levels higher than the IPO price (a practice plaintiffs refer to as “laddering”). Some of the complaints also allege that continuous “buy” recommendations by the defendants’ research analysts improperly increased or sustained the prices at which the securities traded after the IPOs.

Income Taxes. For information on contingencies associated with income tax examinations, see Note 17.

9.	Derivative Contracts.

In the normal course of business, the Company enters into a variety of derivative contracts related to financial instruments and commodities. The Company uses these instruments for trading and investment purposes, as well as for asset and liability management. These instruments generally represent future commitments to swap interest payment streams, exchange currencies, or purchase or sell commodities and other financial instruments on specific terms at specified future dates. Many of these products have maturities that do not extend beyond one year, although swaps, options and equity warrants typically have longer maturities. For further discussion of these matters, refer to Note 11 to the consolidated financial statements for the fiscal year ended November 30, 2005, included in the Form 10-K.

The fair value (carrying amount) of derivative instruments represents the amount at which the derivative could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale, and is further described in Note 1. Future changes in interest rates, foreign currency exchange rates or the fair values of the financial instruments, commodities or indices underlying these contracts ultimately may result in cash settlements exceeding fair value amounts recognized in the condensed consolidated statements of financial condition. The amounts in the following table represent the fair value of exchange traded and OTC options and other contracts (including interest rate, foreign exchange, and other forward contracts and swaps) for derivatives for trading and investment and for asset and liability management, net of offsetting positions in situations where netting is appropriate. The asset amounts are not reported net of non-cash collateral, which the Company obtains with respect to certain of these transactions to reduce its exposure to credit losses.

Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s exposure to credit risk at any point in time is represented by the fair value of the contracts reported as assets. The Company monitors the creditworthiness of counterparties to these transactions on an ongoing basis and requests additional collateral when deemed necessary. The Company believes the ultimate settlement of the transactions outstanding at May 31, 2006 will not have a material effect on the Company’s financial condition.


		22

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s derivatives (both listed and OTC) at May 31, 2006 and November 30, 2005 are summarized in the table below, showing the fair value of the related assets and liabilities by product:


	At May 31, 2006				At November 30, 2005
Product Type	Assets		Liabilities		Assets		Liabilities
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	18,661	$	11,838	$	17,157	$	13,212
Foreign exchange forward contracts and options		8,034		8,053		7,548		7,597
Equity securities contracts (including equity swaps, warrants and options)		10,393		15,793		7,290		11,957
Commodity forwards, options and swaps		14,448		13,063		13,899		12,186

Total	$	51,536	$	48,747	$	45,894	$	44,952

10.

Segment Information.

The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company’s management organization. The Company provides a wide range of financial products and services to its customers in each of its business segments: Institutional Securities, Global Wealth Management Group, Asset Management and Discover. For further discussion of the Company’s business segments, see Note 1. Certain reclassifications have been made to prior-period amounts to conform to the current period’s presentation.

Revenues and expenses directly associated with each respective segment are included in determining their operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, generally based on each segment’s respective net revenues, non-interest expenses or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an “Intersegment Eliminations” category to reconcile the segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations primarily represents the effect of timing differences associated with the revenue and expense recognition of commissions paid by Asset Management to the Global Wealth Management Group associated with sales of certain products and the related compensation costs paid to the Global Wealth Management Group’s global representatives.


		23

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selected financial information for the Company’s segments is presented below:


Three Months Ended May 31, 2006	Institutional Securities(1)			Global Wealth Management Group		Asset Management		Discover		Intersegment Eliminations(1)			Total
	(dollars in millions)
Net revenues excluding net interest	$	6,119		$	1,272	$	718	$	803	$	(94	)	$	8,818
Net interest		(393	)		130		5		388		(4	)		126

Net revenues	$	5,726		$	1,402	$	723	$	1,191	$	(98	)	$	8,944

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net	$	2,267		$	157	$	224	$	541	$	(13	)	$	3,176
Losses from unconsolidated investees		103			—		—		—		—			103
Provision for income taxes		786			51		89		203		(5	)		1,124

Income from continuing operations before cumulative effect of accounting change, net(2)	$	1,378		$	106	$	135	$	338	$	(8	)	$	1,949


Three Months Ended May 31, 2005(3)	Institutional Securities			Global Wealth Management Group		Asset Management		Discover		Intersegment Eliminations			Total
	(dollars in millions)
Net revenues excluding net interest	$	3,300		$	1,149	$	641	$	534	$	(67	)	$	5,557
Net interest		40			79		1		354		—			474

Net revenues	$	3,340		$	1,228	$	642	$	888	$	(67	)	$	6,031

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net	$	813		$	118	$	175	$	263	$	25		$	1,394
Losses from unconsolidated investees		67			—		—		—		—			67
Provision for income taxes		171			48		68		99		10			396

Income from continuing operations before cumulative effect of accounting change, net(2)	$	575		$	70	$	107	$	164	$	15		$	931


		24

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Six Months Ended May 31, 2006	Institutional Securities(1)		Global Wealth Management Group		Asset Management		Discover		Intersegment Eliminations(1)			Total
	(dollars in millions)
Net revenues excluding net interest	$	10,983	$	2,467	$	1,412	$	1,537	$	(166	)	$	16,233
Net interest		217		219		6		743		9			1,194

Net revenues	$	11,200	$	2,686	$	1,418	$	2,280	$	(157	)	$	17,427

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net	$	4,021	$	180	$	396	$	1,020	$	6		$	5,623
Losses from unconsolidated investees		171		—		—		1		—			172
Provision for income taxes		1,309		60		156		381		2			1,908

Income from continuing operations before cumulative effect of accounting change, net(2)	$	2,541	$	120	$	240	$	638	$	4		$	3,543


Six Months Ended May 31, 2005(3)	Institutional Securities		Global Wealth Management Group		Asset Management		Discover		Intersegment Eliminations			Total
	(dollars in millions)
Net revenues excluding net interest	$	6,463	$	2,312	$	1,336	$	1,203	$	(137	)	$	11,177
Net interest		892		154		2		644		—			1,692

Net revenues	$	7,355	$	2,466	$	1,338	$	1,847	$	(137	)	$	12,869

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net	$	1,890	$	471	$	462	$	617	$	49		$	3,489
Losses from unconsolidated investees		140		—		—		—		—			140
Provision for income taxes		455		187		175		233		19			1,069

Income from continuing operations before cumulative effect of accounting change, net(2)(4)	$	1,295	$	284	$	287	$	384	$	30		$	2,280


Total Assets(5)	Institutional Securities		Global Wealth Management Group		Asset Management		Discover		Intersegment Eliminations			Total
	(dollars in millions)
At May 31, 2006	$	977,016	$	19,706	$	3,588	$	26,846	$	(113	)	$	1,027,043

At November 30, 2005	$	848,943	$	19,290	$	3,543	$	26,866	$	(119	)	$	898,523

(1)	Net revenues for the quarter and six months ended May 31, 2006 included a $30 million advisory fee related to the Company’s sale of the aircraft leasing business that was eliminated in consolidation.

(2)	See Note 15 for a discussion of discontinued operations.

(3)	Certain reclassifications have been made to prior-period amounts to conform to the current period’s presentation.

(4)	See Note 1 for a discussion of the cumulative effect of accounting change, net.

(5)	Corporate assets have been fully allocated to the Company’s business segments.


		25

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.

Variable Interest Entities.

Financial Accounting Standards Board (“FASB”) Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable Interest Entities,” applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (“variable interest entities”). Variable interest entities (“VIE”) are required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among parties involved. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests. The Company is involved with various entities in the normal course of business that may be deemed to be VIEs and may hold interests therein, including debt securities, interest-only strip investments and derivative instruments that may be considered variable interests. Transactions associated with these entities include asset- and mortgage-backed securitizations and structured financings (including collateralized debt, bond or loan obligations and credit-linked notes). The Company engages in these transactions principally to facilitate client needs and as a means of selling financial assets. The Company consolidates entities in which it is deemed to be the primary beneficiary. For those entities deemed to be qualifying special purpose entities (as defined in SFAS No. 140), which includes the credit card asset securitization master trusts (see Note 4), the Company does not consolidate the entity.

The Company purchases and sells interests in entities that may be deemed to be VIEs in the ordinary course of its business. As a result of these activities, it is possible that such entities may be consolidated and deconsolidated at various points in time. Therefore, the Company’s variable interests described below may not be held by the Company at the end of future quarterly reporting periods.

At May 31, 2006, in connection with its Institutional Securities business, the aggregate size of VIEs, including financial asset-backed securitization, mortgage-backed securitization, collateralized debt obligation, credit-linked note, structured note, municipal bond trust, loan and bond issuing, commodities monetization, equity-linked note and exchangeable trust entities, for which the Company was the primary beneficiary of the entities was approximately $20 billion, which is the carrying amount of the consolidated assets recorded as Financial instruments owned that are collateral for the entities’ obligations. The nature and purpose of these entities that the Company consolidated were to issue a series of notes to investors that provide the investors a return based on the holdings of the entities. These transactions were executed to facilitate client investment objectives. The structured note, equity-linked note, certain credit-linked note, certain mortgage-backed securitization, certain financial asset-backed securitization and municipal bond transactions also were executed as a means of selling financial assets. The Company holds either the entire class or a majority of the class of subordinated notes or entered into a derivative instrument with the VIE, which bears the majority of the expected losses or receives a majority of the expected residual returns of the entities. The Company consolidates these entities, in accordance with its consolidation accounting policy, and as a result eliminates all intercompany transactions, including derivatives and other intercompany transactions such as fees received to underwrite the notes or to structure the transactions. The Company accounts for the assets held by the entities as Financial instruments owned and the liabilities of the entities as Other secured financings. For those liabilities that include an embedded derivative, the Company has bifurcated such derivative in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. The beneficial interests of these consolidated entities are payable solely from the cash flows of the assets held by the VIE.

At May 31, 2006, also in connection with its Institutional Securities business, the aggregate size of the entities for which the Company holds significant variable interests, which consist of subordinated and other classes of beneficial interests, derivative instruments, limited partnership investments and secondary guarantees, was approximately $34.9 billion. The Company’s variable interests associated with these entities, primarily credit-linked note, structured note, loan and bond issuing, collateralized debt and bond obligation, financial


		26

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

asset-backed securitization, mortgage-backed securitization and tax credit limited liability entities, including investments in affordable housing tax credit funds and underlying synthetic fuel production plants, were approximately $19.3 billion consisting primarily of senior beneficial interests, which represent the Company’s maximum exposure to loss at May 31, 2006. The Company may hedge the risks inherent in its variable interest holdings, thereby reducing its exposure to loss. The Company’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Company utilizes to hedge these risks.

12.

Guarantees.

The Company has certain obligations under certain guarantee arrangements, including contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an agreement as well as indirect guarantees of the indebtedness of others. The Company’s use of guarantees is disclosed below by type of guarantee:

Derivative Contracts. Certain derivative contracts meet the accounting definition of a guarantee, including certain written options, contingent forward contracts and credit default swaps. Although the Company’s derivative arrangements do not specifically identify whether the derivative counterparty retains the underlying asset, liability or equity security, the Company has disclosed information regarding all derivative contracts that could meet the accounting definition of a guarantee. The maximum potential payout for certain derivative contracts, such as written interest rate caps and written foreign currency options, cannot be estimated as increases in interest or foreign exchange rates in the future could possibly be unlimited. Therefore, in order to provide information regarding the maximum potential amount of future payments that the Company could be required to make under certain derivative contracts, the notional amount of the contracts has been disclosed.

The Company records all derivative contracts at fair value. For this reason, the Company does not monitor its risk exposure to such derivative contracts based on derivative notional amounts; rather the Company manages its risk exposure on a fair value basis. Aggregate market risk limits have been established, and market risk measures are routinely monitored against these limits. The Company also manages its exposure to these derivative contracts through a variety of risk mitigation strategies, including, but not limited to, entering into offsetting economic hedge positions. The Company believes that the notional amounts of the derivative contracts generally overstate its exposure.

Financial Guarantees to Third Parties. In connection with its corporate lending business and other corporate activities, the Company provides standby letters of credit and other financial guarantees to counterparties. Such arrangements represent obligations to make payments to third parties if the counterparty fails to fulfill its obligation under a borrowing arrangement or other contractual obligation.

Market Value Guarantees. Market value guarantees are issued to guarantee return of principal invested to fund investors associated with certain European equity funds and to guarantee timely payment of a specified return to investors in certain affordable housing tax credit funds. The guarantees associated with certain European equity funds are designed to provide for any shortfall between the market value of the underlying fund assets and invested principal and a stipulated return amount. The guarantees provided to investors in certain affordable housing tax credit funds are designed to return an investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by a fund.


		27

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Liquidity Guarantees. The Company has entered into liquidity facilities with special purpose entities and other counterparties, whereby the Company is required to make certain payments if losses or defaults occur. The Company often may have recourse to the underlying assets held by the special purpose entities in the event payments are required under such liquidity facilities.

The table below summarizes certain information regarding these guarantees at May 31, 2006:


	Maximum Potential Payout/Notional
	Years to Maturity										Carrying Amount		Collateral/ Recourse
Type of Guarantee	Less than 1		1-3		3-5		Over 5		Total		Carrying Amount		Collateral/ Recourse
	(dollars in millions)
Derivative contracts	$	584,360	$	466,007	$	924,778	$	651,927	$	2,627,072	$	24,075	$	115
Standby letters of credit and other financial guarantees		1,410		507		688		3,189		5,794		156		1,571
Market value guarantees		16		171		32		645		864		50		121
Liquidity facilities		963		496		49		100		1,608		—		—

Indemnities. In the normal course of its business, the Company provides standard indemnities to counterparties for certain contingent exposures and taxes, including U.S. and foreign withholding taxes, on interest and other payments made on derivatives, securities and stock lending transactions, certain annuity products and other financial arrangements. These indemnity payments could be required based on a change in the tax laws or change in interpretation of applicable tax rulings or a change in factual circumstances. Certain contracts contain provisions that enable the Company to terminate the agreement upon the occurrence of such events. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these indemnifications and believes that the occurrence of any events that would trigger payments under these contracts is remote.

Exchange/Clearinghouse Member Guarantees. The Company is a member of various U.S. and non-U.S. exchanges and clearinghouses that trade and clear securities and/or futures contracts. Associated with its membership, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange or the clearinghouse. While the rules governing different exchange or clearinghouse memberships vary, in general the Company’s guarantee obligations would arise only if the exchange or clearinghouse had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange or clearinghouse. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote.

General Partner Guarantees. As a general partner in certain private equity and real estate partnerships, the Company receives distributions from the partnerships according to the provisions of the partnership agreements. The Company may, from time to time, be required to return all or a portion of such distributions to the limited partners in the event the limited partners do not achieve a certain return as specified in various partnership agreements, subject to certain limitations. The maximum potential amount of future payments that the Company could be required to make under these provisions at May 31, 2006 and November 30, 2005 was $304 million and $349 million, respectively. As of May 31, 2006 and November 30, 2005, the Company’s accrued liability for distributions that the Company has determined it is probable it will be required to refund based on the applicable refund criteria specified in the various partnership agreements was $32 million and $36 million, respectively.

Securitized Asset Guarantees. As part of the Company’s Institutional Securities and Discover securitization activities, the Company provides representations and warranties that certain securitized assets conform to


		28

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

specified guidelines. The Company may be required to repurchase such assets or indemnify the purchaser against losses if the assets do not meet certain conforming guidelines. Due diligence is performed by the Company to ensure that asset guideline qualifications are met, and, to the extent the Company has acquired such assets to be securitized from other parties, the Company seeks to obtain its own representations and warranties regarding the assets. The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of all assets subject to such securitization activities. Also, in connection with originations of residential mortgage loans under the Company’s FlexSource ^® program, the Company may permit borrowers to pledge marketable securities as collateral instead of requiring cash down payments for the purchase of the underlying residential property. Upon sale of the residential mortgage loans, the Company may provide a surety bond that reimburses the purchasers for shortfalls in the borrowers’ securities accounts up to certain limits if the collateral maintained in the securities accounts (along with the associated real estate collateral) is insufficient to cover losses that purchasers experience as a result of defaults by borrowers on the underlying residential mortgage loans. The Company requires the borrowers to meet daily collateral calls to ensure the marketable securities pledged in lieu of a cash down payment are sufficient. At May 31, 2006 and November 30, 2005, the maximum potential amount of future payments the Company may be required to make under its surety bond was $137 million and $157 million, respectively. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these representations and warranties and reimbursement agreements and believes that the probability of any payments under these arrangements is remote.

Merchant Chargeback Guarantees. In connection with its Discover business, the Company issues general purpose credit cards in the U.S. and U.K. and owns and operates the Discover Network in the U.S. The Company is contingently liable for transactions processed on the Discover Network in the event of a dispute between the cardmember and a merchant. If a dispute is resolved in the cardmember’s favor, the Discover Network will credit or refund the disputed amount to the Discover Network card issuer, who in turn credits its cardmember’s account. Discover Network will then charge back the transaction to the merchant. If the Discover Network is unable to collect the amount from the merchant, it will bear the loss for the amount credited or refunded to the cardmember. In most instances, a payment requirement by the Discover Network is unlikely to arise because most products or services are delivered when purchased, and credits are issued by merchants on returned items in a timely fashion. However, where the product or service is not provided until some later date following the purchase, the likelihood of payment by the Discover Network increases. Similarly, the Company is also contingently liable for the resolution of cardmember disputes associated with its general purpose credit cards issued by its U.K. chartered bank on the MasterCard network. The maximum potential amount of future payments related to these contingent liabilities is estimated to be the total Discover Network sales transaction volume processed to date as well as the total U.K. cardmember sales transaction volume billed to date that could qualify as a valid disputed transaction under the Company’s merchant processing network, issuer and cardmember agreements; however, the Company believes that this amount is not representative of the Company’s actual potential loss exposure based on the Company’s historical experience. The actual amount of the potential exposure cannot be quantified as the Company cannot determine whether the current or cumulative transaction volumes may include or result in disputed transactions.

The table below summarizes certain information regarding merchant chargeback guarantees during the quarters and six month periods ended May 31, 2006 and 2005:


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
Losses related to merchant chargebacks (dollars in millions)	$	1.4	$	1.9	$	1.9	$	3.9
Aggregate credit card transaction volume (dollars in billions)		24.8		21.2		48.0		42.0


		29

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The amount of the liability related to the Company’s credit cardmember merchant guarantee was not material at May 31, 2006. The Company mitigates this risk by withholding settlement from merchants or obtaining escrow deposits from certain merchants that are considered higher risk due to various factors such as time delays in the delivery of products or services. The table below provides information regarding the settlement withholdings and escrow deposits:

Other. The Company may, from time to time, in its role as investment banking advisor be required to provide guarantees in connection with certain European merger and acquisition transactions. If required by the regulating authorities, the Company provides a guarantee that the acquirer in the merger and acquisition transaction has or will have sufficient funds to complete the transaction and would then be required to make the acquisition payments in the event the acquirer’s funds are insufficient at the completion date of the transaction. These arrangements generally cover the time frame from the transaction offer date to its closing date and therefore are generally short term in nature. The maximum potential amount of future payments that the Company could be required to make cannot be estimated. The Company believes the likelihood of any payment by the Company under these arrangements is remote given the level of the Company’s due diligence associated with its role as investment banking advisor.

13.

Investments in Unconsolidated Investees.

The Company invests in unconsolidated investees that own synthetic fuel production plants. The Company accounts for these investments under the equity method of accounting. The Company’s share of the operating losses generated by these investments is recorded within Losses from unconsolidated investees, and the tax credits and the tax benefits associated with these operating losses are recorded within the Company’s Provision for income taxes.

The table below provides information regarding the losses from unconsolidated investees, tax credits and tax benefits on the losses:


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
	(dollars in millions)
Losses from unconsolidated investees	$	103	$	67	$	172	$	140
Tax credits		—		67		74		145
Tax benefits on losses		40		27		67		56

Under the current tax law, synthetic fuels tax credits are granted under Section 45K of the Internal Revenue Code. Synthetic fuels tax credits are available in full only when the price of oil is less than a base price specified by the tax code, as adjusted for inflation (“Base Price”). The Base Price for each calendar year is determined by the Secretary of the Treasury by April 1 of the following year. If the annual average price of a barrel of oil in 2006 or future years exceeds the applicable Base Price, the synthetic fuels tax credits generated by the Company’s synthetic fuel facilities will be phased out, on a ratable basis, over the phase-out range. Synthetic fuels tax credits realized in prior years are not affected by this limitation. Due to the high level of crude oil prices in fiscal 2006 and continued uncertainty regarding the value of tax credits associated with synthetic fuel investments, two of the Company’s investees idled production at their synthetic fuel production facilities during


		30

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

May 2006. Additionally, based on fiscal year to date and futures prices at May 31, 2006, the Company estimates that there will be a partial phase-out of tax credits earned in fiscal 2006. The impact of this anticipated partial phase-out is included within Losses from unconsolidated investees and the Provision for income taxes for the quarter and six months ended May 31, 2006.

In fiscal 2006, the Company entered into derivative contracts designed to reduce its exposure to rising oil prices and the potential phase-out of the synthetic fuels tax credits for 2006. Changes in fair value relative to these derivative contracts are included within Principal transactions-trading revenues.

14.

Employee Benefit Plans.

The Company maintains various pension and benefit plans for eligible employees.

The components of the Company’s net periodic benefit expense for its pension and postretirement plans were as follows:


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005			2006			2005
	(dollars in millions)
Service cost, benefits earned during the period	$	35		$	33		$	70		$	66
Interest cost on projected benefit obligation		37			35			74			70
Expected return on plan assets		(34	)		(32	)		(68	)		(64	)
Net amortization and other		12			9			24			18

Net periodic benefit expense	$	50		$	45		$	100		$	90

15.

Discontinued Operations.

On August 17, 2005, the Company announced that its Board of Directors had approved management’s recommendation to sell the Company’s non-core aircraft leasing business. In connection with this action, the aircraft leasing business was classified as “held for sale” and reported as discontinued operations in the Company’s condensed consolidated financial statements.

On January 30, 2006, the Company announced that it had signed a definitive agreement under which it would sell its aircraft leasing business to Terra Firma, a European private equity group, for approximately $2.5 billion in cash and the assumption of liabilities. The sale was completed on March 24, 2006. The results for discontinued operations in the quarter ended February 28, 2006 include a loss of $125 million ($75 million after-tax) related to the impact of the finalization of the sales proceeds and balance sheet adjustments related to the closing.

The quarter and six month period of fiscal 2006 reflected net income of $8 million and a net loss of $25 million on discontinued operations, respectively. The results for the second quarter of fiscal 2006 reflected the results of operations of the aircraft leasing business through the date of sale.

Summarized financial information for the Company’s discontinued operations:

The table below provides information regarding amounts included within discontinued operations (dollars in millions):


	Three Months Ended May 31,					Six Months Ended May 31,
	2006		2005			2006			2005
Pre-tax gain/(loss) on discontinued operations	$	14	$	(5	)	$	(42	)	$	2


		31

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a summary of the assets and liabilities of the Company’s aircraft leasing business:


	At November 30, 2005
	(dollars in millions)
Assets:
Aircraft under operating leases	$	3,145
Other assets		54

Total assets	$	3,199

Liabilities:
Payable to affiliates	$	2,055
Other liabilities		690

Total liabilities	$	2,745

16.

Business Acquisitions.

Goldfish. On February 17, 2006, the Company completed the acquisition of the Goldfish credit card business in the U.K. The Company believes that the acquisition of Goldfish will add economies of scale through better utilization of the existing U.K. infrastructure and strengthen its position in the U.K. credit card market. Since the acquisition date, the results of Goldfish have been included within the Discover business segment. The acquisition price was approximately $1,676 million, which was paid in cash during February 2006. The Company recorded goodwill and other intangible assets of approximately $355 million in connection with the acquisition. The acquisition price is still subject to finalization, and the allocation of the price is preliminary and is subject to further adjustment as the valuation of certain intangible assets is still in process.

The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the acquisition.


	At February 17, 2006
	(dollars in millions)
Consumer loans	$	1,316
Goodwill		232
Amortizable intangible assets		123
Other assets		20

Total assets acquired		1,691
Total liabilities assumed		15

Net assets acquired	$	1,676

The $123 million of acquired amortizable intangible assets includes customer relationships of $54 million (15-year estimated useful life) and trademarks of $69 million (25-year estimated useful life).


		32

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17.

Income Tax Examinations .

The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the U.K., and states in which the Company has significant business operations, such as New York. The tax years under examination vary by jurisdiction; for example, the current IRS examination, which recently began, covers 1999-2004. The Company has filed an appeal with respect to unresolved issues relative to the IRS examination of years 1994-1998. The Company believes that the settlement of the IRS examination of years 1994-1998 will not have a material negative impact on the condensed consolidated statement of income of the Company. The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. The Company has established tax reserves that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts tax reserves only when more information is available or when an event occurs necessitating a change to the reserves. The Company believes that the resolution of tax matters will not have a material effect on the condensed consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s condensed consolidated statement of income for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs.

18.

Insurance Settlement.

On September 11, 2001, the U.S. experienced terrorist attacks targeted against New York City and Washington, D.C. The attacks in New York resulted in the destruction of the World Trade Center complex, where approximately 3,700 of the Company’s employees were located, and the temporary closing of the debt and equity financial markets in the U.S. Through the implementation of its business recovery plans, the Company relocated its displaced employees to other facilities.

In the first quarter of fiscal 2005, the Company settled its claim with its insurance carriers related to the events of September 11, 2001. The Company recorded a pre-tax gain of $251 million as the insurance recovery was in excess of previously recognized costs related to the terrorist attacks (primarily write-offs of leasehold improvements and destroyed technology and telecommunications equipment in the World Trade Center complex, employee relocation and certain other employee-related expenditures).

The pre-tax gain, which was recorded as a reduction to non-interest expenses, is included within the Global Wealth Management Group ($198 million), Asset Management ($43 million) and Institutional Securities ($10 million) segments. The insurance settlement was allocated to the respective segments in accordance with the relative damages sustained by each segment.

19.

Lease Adjustment.

Prior to the first quarter of fiscal 2005, the Company did not record the effects of scheduled rent increases and rent-free periods for certain real estate leases on a straight-line basis. In addition, the Company had been accounting for certain tenant improvement allowances as reductions to the related leasehold improvements instead of recording funds received as deferred rent and amortizing them as reductions to lease expense over the lease term. In the first quarter of fiscal 2005, the Company changed its method of accounting for these rent escalation clauses, rent-free periods and tenant improvement allowances to properly reflect lease expense over the lease term on a straight-line basis. The impact of this correction resulted in the Company recording $109 million of additional rent expense in the first quarter of fiscal 2005. The impact of this change was included within non-interest expenses and reduced income before taxes within the Institutional Securities ($71 million), Global Wealth Management Group ($29 million), Asset Management ($5 million) and Discover ($4 million) segments. The impact of this correction to the six month period of fiscal 2005 was not material to the pre-tax income of each of the segments or to the Company.


		33

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20.

New Accounting Developments.

In June 2005, the FASB ratified the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” Under the provisions of EITF Issue No. 04-5, a general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements regardless of the amount or extent of the general partner’s interest unless a majority of the limited partners can vote to dissolve or liquidate the partnership or otherwise remove the general partner without having to show cause or the limited partners have substantive participating rights that can overcome the presumption of control by the general partner. EITF Issue No. 04-5 was effective immediately for all newly formed limited partnerships and existing limited partnerships for which the partnership agreements have been modified. For all other existing limited partnerships for which the partnership agreements have not been modified, the Company is required to adopt EITF Issue No. 04-5 on December 1, 2006 in a manner similar to a cumulative-effect-type adjustment or by retrospective application. The Company is currently assessing the impact on these existing limited partnerships of adopting the provisions of EITF Issue No. 04-5; however, because the Company generally expects to provide limited partners in these funds with rights to remove the Company as general partner or rights to terminate the partnership, the Company does not expect the impact of EITF Issue No. 04-5 to be material.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of income. The fair value election may be applied on an instrument-by-instrument basis. SFAS No. 155 also eliminates a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. SFAS No. 155 is effective for those financial instruments acquired or issued after December 1, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument will be recognized as a cumulative-effect adjustment to beginning retained earnings. The Company is currently evaluating the potential impact of adopting SFAS No. 155.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The standard permits an entity to subsequently measure each class of servicing assets or servicing liabilities at fair value and report changes in fair value in the statement of income in the period in which the changes occur. SFAS No. 156 is effective for the Company as of December 1, 2006. The Company is currently evaluating the potential impact of adopting SFAS No. 156.

In April 2006, the FASB issued FASB Staff Position No. FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”). FSP FIN 46(R)-6 requires that the determination of the variability to be considered in applying FIN 46R be based on an analysis of the design of the entity. In evaluating whether an interest with a variable interest entity creates or absorbs variability, FSP FIN 46(R)-6 focuses on the role of a contract or arrangement in the design of an entity, regardless of its legal form or accounting classification. The Company will adopt the guidance in FSP FIN 46(R)-6 prospectively beginning September 1, 2006 to all entities that the Company first becomes involved with and to all entities previously required to be analyzed under FIN 46R when a reconsideration event has occurred under paragraph 7 of FIN 46R. The Company does not expect the adoption of FSP FIN 46(R)-6 to have a material impact on its condensed consolidated financial statements.


		34

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21.

Subsequent Events.

Office Building. In June 2006, the Company purchased a significant interest in a joint venture that indirectly owns title to 522 Fifth Avenue, a 23-floor office building in New York City (the “Building”), for approximately $420 million. Concurrently, the Company entered into an occupancy agreement with the joint venture pursuant to which the Company will occupy the office space in the Building (approximately 580,000 square feet).

TransMontaigne Inc . In June 2006, Morgan Stanley Capital Group Inc., a wholly-owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger to effect the acquisition of TransMontaigne Inc., a Denver-based company that operates pipelines, terminals and barges, and distributes and markets refined petroleum products. The Company will purchase the outstanding common shares of TransMontaigne Inc. for $11.35 per share, or an aggregate cost of approximately $610 million. The transaction is subject to customary closing conditions and is expected to be completed during the third or fourth quarter of fiscal 2006.

Preferred Stock . In July 2006, the Company issued $1 billion of Floating Rate Non-Cumulative Preferred Stock, Series A.


		35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Morgan Stanley:

We have reviewed the accompanying condensed consolidated statement of financial condition of Morgan Stanley and subsidiaries (the “Company”) as of May 31, 2006, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended May 31, 2006 and 2005, and condensed consolidated statements of cash flows for the six-month periods ended May 31, 2006 and 2005. These interim financial statements are the responsibility of the management of Morgan Stanley.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of Morgan Stanley and subsidiaries as of November 30, 2005, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for the fiscal year then ended (not presented herein) included in Morgan Stanley’s Annual Report on Form 10-K for the fiscal year ended November 30, 2005; and in our report dated February 8, 2006, which report contains an explanatory paragraph relating to the adoption in 2005 of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” and the change in classification of repurchase transactions in the consolidated statements of cash flows, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 30, 2005 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

As discussed in Note 1 to the condensed consolidated interim financial statements, effective December 1, 2005, Morgan Stanley changed its accounting policy for recognition of equity awards granted to retirement-eligible employees.

/s/ D ELOITTE & T OUCHE LLP

New York, New York

July 6, 2006

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, Asset Management and Discover. The Company, through its subsidiaries and affiliates, provides its 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:

The discussion of the Company’s results of operations below (including “Business Outlook”) 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 “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A, “Certain Factors Affecting Results of Operations” in Part II, Item 7 and other items throughout the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2005 (the “Form 10-K”), “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2006 Quarterly Reports on Form 10-Q and in other items throughout the Form 10-K, Forms 10-Q and the Company’s 2006 Current Reports on Form 8-K.

The Company’s results of operations for the quarters and six month periods ended May 31, 2006 and 2005 are discussed below. The results of the Company’s aircraft leasing business are reported as discontinued operations for all periods presented (see “Discontinued Operations” herein).


		37

Results of Operations.

Executive Summary.

Financial Information.


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005(1)			2006			2005(1)
Net revenues (dollars in millions):
Institutional Securities	$	5,726		$	3,340		$	11,200		$	7,355
Global Wealth Management Group		1,402			1,228			2,686			2,466
Asset Management		723			642			1,418			1,338
Discover		1,191			888			2,280			1,847
Intersegment Eliminations		(98	)		(67	)		(157	)		(137	)

Consolidated net revenues	$	8,944		$	6,031		$	17,427		$	12,869

Income before taxes (dollars in millions)(2):
Institutional Securities	$	2,267		$	813		$	4,021		$	1,890
Global Wealth Management Group		157			118			180			471
Asset Management		224			175			396			462
Discover		541			263			1,020			617
Intersegment Eliminations		(13	)		25			6			49

Consolidated income before taxes	$	3,176		$	1,394		$	5,623		$	3,489

Consolidated net income (dollars in millions)	$	1,957		$	928		$	3,518		$	2,330

Earnings per basic share:
Income from continuing operations	$	1.92		$	0.88		$	3.48		$	2.15
Income (loss) on discontinued operations		0.01			—			(0.02	)		—
Cumulative effect of accounting change, net		—			—			—			0.05

Earnings per basic share	$	1.93		$	0.88		$	3.46		$	2.20

Earnings per diluted share:
Income from continuing operations	$	1.85		$	0.86		$	3.35		$	2.10
Income (loss) on discontinued operations		0.01			—			(0.02	)		—
Cumulative effect of accounting change, net		—			—			—			0.05

Earnings per diluted share	$	1.86		$	0.86		$	3.33		$	2.15


*Statistical Data.*

Book value per common share(3)	$	30.09		$	26.07		$	30.09		$	26.07

Average common equity (dollars in billions)(4):
Institutional Securities		18.1			14.3			17.1			14.1
Global Wealth Management Group		3.3			3.6			3.4			3.7
Asset Management		2.1			1.7			2.0			1.7
Discover		5.0			4.2			4.8			4.3

Total from operating segments		28.5			23.8			27.3			23.8
Discontinued operations		—			1.5			—			1.5
Unallocated capital		2.7			3.1			3.1			3.1

Consolidated	$	31.2		$	28.4		$	30.4		$	28.4


		38

Statistical Data—(Continued).


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005(1)			2006			2005(1)
Return on average common equity(4):
Consolidated		25	%		13	%		23	%		16	%
Institutional Securities		30	%		16	%		30	%		18	%
Global Wealth Management Group		13	%		8	%		7	%		15	%
Asset Management		26	%		25	%		24	%		33	%
Discover		27	%		16	%		27	%		18	%

Effective income tax rate		36.6	%		29.8	%		35.0	%		32.1	%

Worldwide employees		53,163			54,142			53,163			54,142

Consolidated assets under management or supervision (dollars in billions):
Equity	$	303		$	265		$	303		$	265
Fixed income		109			106			109			106
Money market		80			84			80			84
Alternative investments		20			18			20			18
Real estate		52			33			52			33

Total assets under management		564			506			564			506
Unit investment trusts		13			11			13			11
Other(5)		48			48			48			48

Total assets under management or supervision(6)	$	625		$	565		$	625		$	565

Institutional Securities:
Mergers and acquisitions completed transactions (dollars in billions)(7):
Global market volume	$	174.4		$	95.5		$	284.2		$	124.2
Market share		31.7	%		25.4	%		30.0	%		20.5	%
Rank		2			2			2			4
Mergers and acquisitions announced transactions (dollars in billions)(7):
Global market volume	$	199.9		$	200.9		$	350.7		$	324.7
Market share		20.0	%		34.0	%		23.6	%		33.3	%
Rank		4			1			5			1
Global equity and equity-related issues (dollars in billions)(7):
Global market volume	$	18.8		$	5.7		$	23.7		$	15.5
Market share		9.7	%		6.3	%		8.7	%		9.4	%
Rank		2			6			3			4
Global debt issues (dollars in billions)(7):
Global market volume	$	99.0		$	84.1		$	173.0		$	154.3
Market share		6.2	%		5.8	%		6.4	%		6.1	%
Rank		5			5			5			4
Global initial public offerings (dollars in billions)(7):
Global market volume	$	7.5		$	2.1		$	8.9		$	4.8
Market share		11.7	%		8.6	%		10.3	%		10.9	%
Rank		2			2			2			1
Pre-tax profit margin(8)		40	%		24	%		36	%		26	%


		39

Statistical Data—(Continued).


	Three Months Ended May 31,						Six Months Ended May 31,
	2006			2005(1)			2006			2005(1)
Global Wealth Management Group:
Global representatives		8,179			10,438			8,179			10,438
Annualized net revenue per global representative (dollars in thousands)(9)	$	653		$	470		$	607		$	461
Client assets by segment (dollars in billions)
$10 million or more	$	172		$	148		$	172		$	148
$1 million – $10 million		225			211			225			211
$100,000 – $1 million		183			190			183			190
Less than $100,000		29			36			29			36

Client assets excluding corporate and other accounts		609			585			609			585
Corporate and other accounts		30			28			30			28

Total client assets	$	639		$	613		$	639		$	613

Fee-based assets as a percentage of total client assets		30	%		27	%		30	%		27	%
Bank deposit program (dollars in millions)(10)	$	9,114		$	446		$	9,114		$	446
Pre-tax profit margin(8)		11	%		10	%		7	%		19	%

Asset Management:
Assets under management or supervision (dollars in billions)	$	440		$	416		$	440		$	416
Percent of fund assets in top half of Lipper rankings(11)		48	%		76	%		48	%		76	%
Pre-tax profit margin(8)		31	%		27	%		28	%		35	%
Pre-tax profit margin(8) (excluding private equity)		25	%		29	%		25	%		34	%

Discover (dollars in millions, unless otherwise noted)(12):
Period-end credit card loans—Owned	$	21,764		$	19,385		$	21,764		$	19,385
Period-end credit card loans—Managed	$	48,539		$	46,845		$	48,539		$	46,845
Average credit card loans—Owned	$	19,664		$	18,753		$	20,808		$	18,979
Average credit card loans—Managed	$	47,307		$	47,146		$	47,439		$	48,028
Net principal charge-off rate—Owned		3.02	%		4.62	%		3.82	%		4.62	%
Net principal charge-off rate—Managed		3.30	%		4.94	%		4.18	%		5.03	%
Return on average receivables—Owned		6.83	%		3.48	%		6.15	%		4.06	%
Return on average receivables—Managed		2.84	%		1.38	%		2.70	%		1.60	%
Transaction volume (dollars in billions):
Net sales	$	24.0		$	21.1		$	46.5			41.9
Other transaction volume		4.5			4.3			8.9			9.4

Total	$	28.5		$	25.4		$	55.4		$	51.3

Payment services transaction volume (in millions):
Discover network		340			315			679			629
PULSE network		471			457			896			673

Total network transaction volume		811			772			1,575			1,302

Pre-tax profit margin(8)		45	%		30	%		45	%		33	%


		40

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

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

(3)	Book value per common share equals shareholders’ equity of $32,255 million at May 31, 2006 and $28,330 million at May 31, 2005, divided by common shares outstanding of 1,072 million at May 31, 2006 and 1,087 million at May 31, 2005, respectively.

(4)

The Company uses an economic capital model to determine the amount of equity capital needed to support the risk of its business activities and to ensure that the Company remains adequately capitalized. Economic capital is defined as the amount of capital needed to run the business through the business cycle and satisfy the requirements of regulators, rating agencies and the market. The Company’s methodology is based on an approach that assigns economic capital to each segment based on regulatory capital usage plus additional capital for stress losses, goodwill and principal investment risk. The economic capital model and allocation methodology may be enhanced over time in response to changes in the business and regulatory environment. The effective tax rates used in the computation of segment return on average common equity were determined on a separate entity basis.

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

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

(7)

Source: Thomson Financial, data as of June 7, 2006—The data for the three months ended May 31, 2006 and 2005 are for the periods from March 1 to May 31, 2006 and March 1 to May 31, 2005, respectively. The data for the six months ended May 31 are for the periods from January 1 to May 31, 2006 and January 1 to May 31, 2005, respectively, as Thomson Financial presents these data on a calendar-year basis.

(8)	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.

(9)	Amounts equal to Global Wealth Management Group’s net revenues divided by average global representative headcount for the periods represented.

(10)	Bank deposits are held at certain of the Company’s Federal Deposit Insurance Corporation insured depository institutions for the benefit of retail clients through their brokerage accounts.

(11)	Source: Lipper, one-year performance excluding money market funds as of May 31, 2006 and 2005, respectively.

(12)	Managed data include owned and securitized credit card loans. For an explanation of managed data and a reconciliation of credit card loan and asset quality data, see “Discover—Managed General Purpose Credit Card Loan Data” herein.

Second Quarter 2006 Performance.

Company Results . The Company recorded net income of $1,957 million for the quarter ended May 31, 2006, an increase of 111% from the comparable fiscal 2005 period. Net revenues (total revenues less interest expense and the provision for loan losses) increased 48% to a record $8,944 million. Non-interest expenses of $5,768 million increased 24% from the prior year period, primarily due to higher compensation costs. Diluted earnings per share were $1.86 compared with $0.86 in the second quarter of fiscal 2005. The annualized return on average common equity was 25.1% compared with 13.1% in the second quarter of last year.

For the six month period ended May 31, 2006, net income was $3,518 million, a 51% increase from $2,330 million a year ago. Net revenues rose 35% to $17,427 million and non-interest expenses increased 26% to $11,804 million. Diluted earnings per share were $3.33 compared with $2.15 a year ago. The annualized return on average common equity for the six month period was 23.1% compared with 16.4% in the prior year period.

The pre-tax results for the six month period ended May 31, 2005 included a $360 million charge related to the Coleman litigation matter, a $109 million charge for the correction in the method of accounting for certain real estate leases, and a gain of $251 million related to an insurance settlement (see “Other Items” herein). The pre-tax results for the quarter and six month period ended May 31, 2005 also included legal accruals of approximately $120 million related to the Parmalat matter.

The Company’s effective income tax rate was 36.6% and 35.0% for the quarter and six month period ended May 31, 2006 compared with 29.8% and 32.1 % in the quarter and six month period ended May 31, 2005. The increase in both periods primarily reflected lower estimated domestic tax credits and higher earnings, which reduced the effect of permanent differences. The decrease in domestic tax credits was primarily due to the anticipated partial phase-out of the benefits of synthetic fuel tax credits as a result of the high level of crude oil prices.

Institutional Securities. Institutional Securities recorded income from continuing operations of $2,267 million before losses from unconsolidated investees, income taxes and net cumulative effect of accounting change, a 179% increase from last year’s second quarter. Net revenues rose 71% to a record $5,726 million. The increases


		41

were driven by near-record fixed income and equity sales and trading revenues, along with higher investment banking revenues. Non-interest expenses increased 37% to $3,459 million, reflecting higher compensation accruals primarily resulting from higher net revenues.

Investment banking advisory revenues increased 8% from last year’s second quarter to $385 million. Underwriting revenues rose 77% from last year’s second quarter to $670 million.

Fixed income sales and trading revenues were a near-record $2,366 million, up 95% from the second quarter of fiscal 2005. The increase was driven by record results in credit products and the second best quarter ever in commodities. Credit products benefited from significantly improved performance in corporate credit trading following a weak second quarter of fiscal 2005 and continuing strong results in residential and commercial securitized products. The increase in commodities revenues primarily reflected strong revenues from electricity and natural gas products. These and related businesses continued to benefit from high market volatility and activity levels. Interest rate and currency product revenues were up slightly, benefiting from strong client flows and higher foreign exchange trading revenues. Equity sales and trading revenues were $1,724 million, an increase of 54% as compared with the prior year quarter and were the second best quarter on record. The increase was driven by higher revenues from derivatives and equity cash products, a strong performance in principal trading strategies and record results in the prime brokerage business.

Principal transaction net investment revenues increased 163% to $595 million in the quarter from the corresponding period in the prior year. The increase primarily reflected net gains from investments in the Company’s real estate funds, Grifols S.A., Wacker Chemie AG and the NYSE Group, Inc.

Global Wealth Management Group. Global Wealth Management Group recorded income of $157 million before taxes and net cumulative effect of accounting change, an increase of 33% from the second quarter of fiscal 2005. Net revenues increased 14% from last year’s second quarter to $1,402 million, driven by higher net interest revenues primarily resulting from the bank deposit program, and higher revenues from commissions and asset management, distribution and administration fees. The increase in net revenues also reflected higher investment banking and principal transaction investment revenues. Total non-interest expenses increased 12% from a year ago to $1,245 million, reflecting increased compensation due, in part, to higher revenues as well as severance-related costs. Total client assets increased to $639 billion, up 4% from last year’s second quarter. Client assets in fee-based accounts rose 15% to $190 billion at May 31, 2006 and increased to a record 30% of total client assets from 27% a year ago. At quarter-end, the number of global representatives was 8,179, a decline of 2,259 from a year ago, resulting largely from planned sales force reductions completed during the first half of fiscal 2006 and during the latter half of fiscal 2005 and attrition.

Asset Management . Asset Management recorded income of $224 million before taxes and net cumulative effect of accounting change, a 28% increase from last year’s second quarter. Net revenues of $723 million increased 13% from a year ago, largely due to higher private equity revenues. Non-interest expenses increased 7% to $499 million, primarily due to higher compensation and benefits expense associated with a higher level of net revenues, partially offset by lower non-compensation expenses. Assets under management or supervision within Asset Management of $440 billion were up $24 billion, or 6%, from the second quarter of last year, primarily due to market appreciation, partially offset by customer net outflows.

Discover . Discover had record income of $541 million before losses from unconsolidated investees, income taxes and net cumulative effect of accounting change, an increase of 106% from the second quarter of fiscal 2005. Record net revenues of $1,191 million were 34% higher than a year ago, primarily due to higher servicing and securitization income and a lower provision for consumer loan losses. Servicing and securitization income of $651 million increased 54% from a year ago due primarily to lower charge-offs associated with the securitized portfolio. The provision for consumer loan losses of $130 million declined 38% from last year reflecting lower net charge-offs, benefiting from continued improvement in underlying credit quality and lower bankruptcy filings following federal bankruptcy legislation that became effective in October 2005. Non-interest expenses of $650 million increased 4% from a year ago, primarily due to higher compensation and operating expenses associated with the acquisition of the


		42

Goldfish credit card business in the U.K. on February 17, 2006 (see “Business Acquisitions” herein). The managed credit card net principal charge-off rate decreased 164 basis points to 3.30% from the same period a year ago. The managed over-30-day delinquency rate decreased 61 basis points to 3.29% from a year ago, and the managed over-90-day delinquency rate was 30 basis points lower than a year ago at 1.53%. Managed credit card loans were $48,539 million at quarter-end, a 4% increase from a year ago, reflecting strong transaction volume and the Goldfish acquisition, partially offset by higher payment rates. Payment rates on managed credit card loans reached over 20% driven by improved credit quality and industry-wide trends.

Business Outlook.

Entering the third quarter of fiscal 2006, investment banking activity remained strong, although conditions in the global financial markets were weaker as compared with conditions that existed for the majority of the first half of fiscal 2006. Such conditions, along with the lower level of business activity in Institutional Securities and Global Wealth Management that typically occurs during the summer months, could affect the Company’s results for the second half of fiscal 2006. In addition, although consumer bankruptcy filings remain well below historical levels, the Company expects charge-offs in the Discover segment to rise from the low second quarter levels, but remain below 5% on a managed basis, as pressures on consumers continue and bankruptcies begin to return to more normalized levels in the second half of fiscal 2006. In addition, Discover’s marketing expenses are expected to increase in the second half of fiscal 2006 as compared with the six months ended May 31, 2006 in conjunction with new initiatives and typical seasonal trends. Discover remains focused on building broader acceptance of the Discover Network in the U.S., with a goal of achieving parity with the other bankcard networks by 2008.

Global Market and Economic Conditions in the Quarter and Six Month Period Ended May 31, 2006.

The U.S. economy remained generally strong during the six month period ended May 31, 2006, supported by consumer spending, business investment and productivity gains, partially offset by a softer residential real estate market. U.S. consumer bankruptcy filings remained relatively low following the bankruptcy legislation that became effective in October 2005. The U.S. unemployment rate declined to 4.6% at the end of the quarter. Conditions in the equity markets were generally favorable during the majority of the second quarter, but increasing concerns over oil prices, inflation and the Federal Reserve Board’s (the “Fed”) continued monetary policy actions resulted in a sell-off during the last month of the period. The Fed raised both the overnight lending rate and the discount rate on two separate occasions in the second quarter by an aggregate of 0.50% and on four separate occasions in the six month period by an aggregate of 1.00%. Subsequent to May 31, 2006, the Fed raised both the overnight lending rate and the discount rate by an additional 0.25%.

In Europe, economic growth was supported by exports, business investment and a recovery in Germany, while consumer spending declined. The European Central Bank (the “ECB”) raised the benchmark interest rate by 0.25% in the quarter and 0.50% in the six month period. Subsequent to May 31, 2006, the ECB raised the benchmark interest rate by an additional 0.25%. In the U.K., economic growth was modest and was supported by higher business investment, partially offset by a decline in consumer spending. During the quarter, the Bank of England left the benchmark interest rate unchanged.

The Japanese economy continued to recover steadily as business investment, corporate profitability and exports improved. The jobless rate continued to be near a seven-year low, which had a favorable impact on consumer confidence. The Japanese equity markets declined modestly in the quarter primarily due to concerns over higher global interest rates. Economic growth elsewhere in Asia continued, including in China, driven by strength in domestic spending and exports.

Business Segments.

The remainder of “Results of Operations” is presented on a business segment basis before discontinued operations. Substantially all of the operating revenues and operating expenses of the Company can be directly attributed to its business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective revenues or other relevant measures.


		43

As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category to reconcile the segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations primarily represents the effect of timing differences associated with the revenue and expense recognition of commissions paid by Asset Management to Global Wealth Management Group associated with sales of certain products and the related compensation costs paid to Global Wealth Management Group’s global representatives. (Loss) income before taxes recorded in Intersegment Eliminations was $(13) million and $25 million in the quarters ended May 31, 2006 and 2005, respectively, and $6 million and $49 million in the six month periods ended May 31, 2006 and 2005, respectively. The results for the fiscal 2006 periods also included a $30 million advisory fee related to the Company’s sale of the aircraft leasing business that was eliminated in consolidation.

Certain reclassifications have been made to prior-period segment amounts to conform to the current period’s presentation.


		44

INSTITUTIONAL SECURITIES

INCOME STATEMENT INFORMATION


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
	(dollars in millions)
Revenues:
Investment banking	$	1,055	$	735	$	1,958	$	1,477
Principal transactions:
Trading		3,617		1,684		6,562		3,411
Investments		595		226		879		317
Commissions		694		538		1,304		1,041
Asset management, distribution and administration fees		73		39		117		73
Interest and dividends		9,318		5,379		19,109		10,654
Other		85		78		163		144

Total revenues		15,437		8,679		30,092		17,117
Interest expense		9,711		5,339		18,892		9,762

Net revenues		5,726		3,340		11,200		7,355

Total non-interest expenses		3,459		2,527		7,179		5,465

Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		2,267		813		4,021		1,890
Losses from unconsolidated investees		103		67		171		140
Provision for income taxes		786		171		1,309		455

Income from continuing operations before cumulative effect of accounting change, net	$	1,378	$	575	$	2,541	$	1,295

Investment Banking . Investment banking revenues for the quarter increased 44% from the comparable period of fiscal 2005. The increase was due to higher revenues from equity and fixed income underwriting transactions and merger, acquisition and restructuring activities. Underwriting revenues were $670 million, an increase of 77% from the comparable period of fiscal 2005. Equity underwriting revenues increased 156% to $371 million, reflecting an increase in industry-wide activity and were the highest quarterly revenues since the first quarter of fiscal 2000. Fixed income underwriting revenues increased 28% to $299 million, reflecting higher revenues from investment grade and non-investment grade fixed income products. Advisory fees from merger, acquisition and restructuring transactions were $385 million, an increase of 8% from the comparable period of fiscal 2005. The increase in advisory fees reflected an increase in completed transactions. Advisory fees in the current quarter also included a $30 million fee related to the Company’s sale of the aircraft leasing business that was eliminated in consolidation.

At May 31, 2006, the backlog of merger, acquisition and restructuring transactions and equity underwriting transactions was higher as compared with the end of the second quarter of fiscal 2005. The backlog of both merger, acquisition and restructuring transactions and equity underwriting transactions is subject to the risk that transactions may not be completed due to unforeseen economic and market conditions, adverse developments regarding one of the parties to the transaction, a failure to obtain required regulatory approval or a decision on the part of the parties involved not to pursue a transaction.

Investment banking revenues in the six month period ended May 31, 2006 increased 33% from the comparable period of fiscal 2005. The increase was due to higher revenues from both equity and fixed income underwriting transactions and merger, acquisition and restructuring activities.


		45

Sales and Trading Revenues . Sales and trading revenues are composed of principal transaction trading revenues, commissions and net interest revenues (expenses). In assessing the profitability of its sales and trading activities, the Company views principal trading, commissions and net interest revenues in the aggregate. In addition, decisions relating to principal transactions are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes, among other things, an assessment of the potential gain or loss associated with a transaction, including any associated commissions, dividends, the interest income or expense associated with financing or hedging the Company’s positions and other related expenses.

Total sales and trading revenues increased 73% in the quarter ended May 31, 2006 from the comparable period of fiscal 2005, reflecting near-record fixed income and equity sales and trading revenues.

Sales and trading revenues include the following:


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005(1)		2006		2005(1)
	(dollars in millions)
Equity	$	1,724	$	1,119	$	3,378	$	2,333
Fixed income(2)		2,366		1,211		5,090		3,209

(1)	Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.

(2)	Amounts include interest rate and currency products, credit products and commodities. Amounts exclude revenues from corporate lending activities.

Equity sales and trading revenues increased 54% as compared with the prior year quarter and were the second best quarter on record. The increase was driven by higher revenues from derivatives and equity cash products, a strong performance in principal trading strategies and record results in the prime brokerage business. Increased client flows across both the derivatives and cash equity markets drove revenues higher, particularly in Europe and Asia. Favorable trading opportunities positively impacted the quarter’s results as major global equity market indices trended higher in the beginning of the quarter. The increase in prime brokerage revenues reflected record levels of customer balances. Although commission revenues increased, revenues continued to be adversely affected by intense competition particularly in the U.S. and a continued shift toward electronic trading.

Fixed income sales and trading revenues increased 95% as compared with the prior year quarter and were the second best quarter on record. The increase reflected record results in credit products and the second best quarter ever in commodities. Credit product revenues increased 161% primarily due to record revenues from corporate credit products, which benefited from significantly improved performance in corporate credit trading following a weak second quarter of fiscal 2005 and continuing strong results in residential and commercial securitized products. Commodities revenues increased 268% and were the second best quarter on record. The increase was primarily due to strong revenues from electricity and natural gas products. Energy prices were volatile during the quarter driven by geopolitical issues and weather conditions in the U.S. Interest rate and currency product revenues increased 4% primarily due to strong client flows and higher foreign exchange trading revenue.

Total sales and trading revenues increased 51% in the six month period ended May 31, 2006 from the comparable period of fiscal 2005, reflecting higher revenues from equity and fixed income products. Equity sales and trading revenues increased 45%, driven primarily by higher revenues in derivative products, principal trading strategies, equity cash products and the prime brokerage business. Increased client flows across both the derivatives and equity cash markets and favorable trading opportunities drove revenues higher. Revenues in the prime brokerage business reflected record levels of customer balances and new customer activity. Fixed income sales and trading revenues increased 59% primarily due to higher revenues in commodities and credit products. Commodities revenues increased primarily due to higher revenues from electricity and natural gas products and from oil liquids. Credit product revenues increased primarily due to strong revenues in corporate credit products


		46

and strong demand in securitized products. Interest rate and currency product revenues decreased modestly, primarily due to lower revenues from interest rate derivatives, partially offset by higher revenues from foreign exchange products.

The increase in sales and trading results for the quarter reflected generally favorable overall market conditions as well as improved risk efficiency in comparison to the quarter ended May 31, 2005. For a further discussion of the Company’s risk management policies, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

In addition to the equity and fixed income sales and trading revenues discussed above, sales and trading revenues include the net revenues from the Company’s corporate lending activities. In the quarter ended May 31, 2006, revenues from corporate lending activities increased by approximately $17 million, reflecting the impact of mark-to-market valuations associated with new loans made in the second quarter of fiscal 2006. In the six month period ended May 31, 2006, revenues from corporate lending activities were relatively unchanged from the comparable period of fiscal 2005.

Principal Transactions-Investments. Principal transaction net investment revenues increased 163% and 177% in the quarter and six month period ended May 31, 2006, respectively. The increase in both periods was primarily related to net gains associated with the Company’s investments, including both realized and unrealized gains from investments in the Company’s real estate funds, Grifols S.A., Wacker Chemie AG and the NYSE Group, Inc. The increase in the six month period also reflected a $137 million net gain from the Company’s position in IntercontinentalExchange.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administration fees increased 87% in the quarter and 60% in the six month period ended May 31, 2006 from the comparable periods of fiscal 2005. The increase in both periods was primarily related to higher fees associated with real estate fund investments.

Other. Other revenues increased 9% and 13% in the quarter and six month period ended May 31, 2006, respectively, primarily driven by higher sales of benchmark indices and risk management analytic products.

Non-Interest Expenses. Non-interest expenses increased 37% and 31% in the quarter and the six month period ended May 31, 2006, respectively. Compensation and benefits expense increased 58% and 61% in the quarter and six month period, respectively, primarily reflecting higher incentive-based compensation accruals resulting from higher net revenues. The six month period also included Institutional Securities’ share ($270 million) of incremental compensation expense related to equity awards to retirement-eligible employees (see “Stock-Based Compensation” herein). Excluding compensation and benefits expense, non-interest expenses increased 4% in the quarter and decreased 13% in the six month period. Occupancy and equipment expense decreased 22% in the six month period primarily due to a $71 million charge that was recorded in the first quarter of fiscal 2005 for the correction in the method of accounting for certain real estate leases (see “Lease Adjustment” herein). Brokerage, clearing and exchange fees increased 31% and 27% in the quarter and six month period, respectively, primarily reflecting increased fixed income and equity trading activity. Professional services expense increased 31% and 21% in the quarter and six month period, respectively, primarily due to higher legal and consulting costs, reflecting increased levels of business activity. Other expense decreased 48% and 65% in the quarter and six month period, respectively, reflecting lower charges for legal and regulatory matters. Other expense in the second quarter of fiscal 2005 included legal accruals of approximately $120 million related to the Parmalat matter and the six month period of fiscal 2005 included a $360 million charge related to the Coleman litigation (see “Legal Proceedings” in Part I, Item 3 of the Form 10-K and in Part II, Item 1 herein).


		47

GLOBAL WEALTH MANAGEMENT GROUP

INCOME STATEMENT INFORMATION


	Three Months Ended May 31,					Six Months Ended May 31,
	2006		2005			2006		2005
	(dollars in millions)
Revenues:
Investment banking	$	95	$	68		$	162	$	139
Principal transactions:
Trading		121		111			245		231
Investments		26		(2	)		26		(4	)
Commissions		312		295			631		624
Asset management, distribution and administration fees		674		632			1,323		1,239
Interest and dividends		246		149			452		284
Other		44		45			80		83

Total revenues		1,518		1,298			2,919		2,596
Interest expense		116		70			233		130

Net revenues		1,402		1,228			2,686		2,466

Total non-interest expenses		1,245		1,110			2,506		1,995

Income before taxes and cumulative effect of accounting change, net		157		118			180		471
Provision for income taxes		51		48			60		187

Income before cumulative effect of accounting change, net	$	106	$	70		$	120	$	284

Investment Banking. Investment banking revenues increased 40% and 17% in the quarter and six month period ended May 31, 2006, primarily due to higher revenues from equity underwritings, including revenues from a fund private placement, and higher revenues from unit investment trust sales. The increase in investment banking revenues in the six month period was partially offset by lower revenues from fixed income underwritings.

Principal Transactions—Trading. Principal transaction trading revenues increased 9% and 6% in the quarter and six month period ended May 31, 2006, primarily due to higher revenues from government and municipal fixed income securities as well as foreign exchange securities.

Principal Transactions—Investments. Principal transaction investment net revenues were $26 million in the quarter and six month period ended May 31, 2006 compared with net losses of $(2) million and $(4) million in the quarter and six month period ended May 31, 2005. The results in fiscal 2006 primarily reflected both realized and unrealized gains from the Company’s investment in NYSE Group, Inc.

Commissions. Commission revenues increased 6% and 1% in the quarter and six month period ended May 31, 2006 from higher equity product revenues, primarily in international markets, in the second quarter of fiscal 2006.

Net Interest. Net interest revenues increased 65% and 42% in the quarter and six month period ended May 31, 2006, primarily due to increased account balances in the bank deposit program.

Asset Management, Distribution and Administration Fees. Asset management, distribution and administration fees increased 7% in the quarter and six month period ended May 31, 2006, primarily reflecting higher client assets in fee-based accounts.


		48

Client asset balances increased to $639 billion at May 31, 2006 from $613 billion at May 31, 2005, primarily due to market appreciation. Client assets in fee-based accounts rose 15% to $190 billion at May 31, 2006 and increased to a record 30% of total client assets from 27% in the prior-year period.

Non-Interest Expenses. Non-interest expenses increased 12% and 26% in the quarter and six month period ended May 31, 2006, primarily reflecting an increase in compensation and benefits expense. The increase in the six month period was also due to a reduction in non-interest expenses in the prior year period related to Global Wealth Management Group’s share ($198 million) of the insurance settlement related to the events of September 11, 2001 (see “Insurance Settlement” herein). Compensation and benefits expense increased 17% in both the quarter and six month period ended May 31, 2006, primarily reflecting higher incentive-based compensation costs due to higher net revenues. Compensation and benefits expense for the quarter also included severance-related costs due to the sales force reduction conducted during the period. The six month period ended May 31, 2006 included Global Wealth Management Group’s share ($80 million) of the incremental compensation expense related to equity awards to retirement-eligible employees, including new hires (see “Stock-Based Compensation” herein). Excluding compensation and benefits expense and the insurance settlement, non-interest expenses increased 5% and 9% in the quarter and six month period. Occupancy and equipment expense decreased 14% in the six month period primarily due to a $29 million charge for the correction in the method of accounting for certain real estate leases that was recorded in the first quarter of fiscal 2005 (see “Lease Adjustment” herein). Professional services expense increased 25% and 30% in the quarter and six month period, largely due to higher legal fees, as well as higher sub-advisory fees associated with growth in fee-based assets. Other expenses increased 27% in the six month period, primarily resulting from higher costs associated with legal and regulatory matters. During the six month period ended May 31, 2006, the Company recorded legal and regulatory expenses of approximately $80 million related to ongoing regulatory, employment and branch litigation matters.


		49

ASSET MANAGEMENT

INCOME STATEMENT INFORMATION


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
	(dollars in millions)
Revenues:
Investment banking	$	15	$	11	$	27	$	22
Principal transactions:
Investments		69		2		99		66
Commissions		7		7		14		14
Asset management, distribution and administration fees		621		615		1,260		1,220
Interest and dividends		10		3		15		6
Other		6		6		12		14

Total revenues		728		644		1,427		1,342
Interest expense		5		2		9		4

Net revenues		723		642		1,418		1,338

Total non-interest expenses		499		467		1,022		876

Income before taxes and cumulative effect of accounting change, net		224		175		396		462
Provision for income taxes		89		68		156		175

Income before cumulative effect of accounting change, net	$	135	$	107	$	240	$	287

Investment Banking. Investment banking revenues increased 36% and 23% in the quarter and six month period ended May 31, 2006 primarily reflecting a higher volume of unit investment trust sales.

Principal Transactions-Investments. Principal transaction net investment gains aggregating $69 million and $99 million were recognized in the quarter and six month period ended May 31, 2006 as compared with net gains of $2 million and $66 million in the quarter and six month period ended May 31, 2005. The increase in both periods was primarily related to higher net gains on certain investments in the Company’s private equity portfolio, including Aventine Renewable Energy Holdings, LLC. The results for the six month period ended May 31, 2005 included a gain on Triana Energy Holdings, LLC. Asset Management continues to wind down its legacy private equity business.


		50

Asset Management, Distribution and Administration Fees. Asset Management’s period-end and average customer assets under management or supervision were as follows:


	At May 31, 2006		At May 31, 2005(1)		Average For the Three Months Ended				Average For the Six Months Ended
	At May 31, 2006		At May 31, 2005(1)		May 31, 2006		May 31, 2005(1)		May 31, 2006		May 31, 2005(1)
	(dollars in billions)
Assets under management or supervision by distribution channel:
Retail	$	190	$	199	$	191	$	201	$	195	$	202
Institutional		250		217		254		219		248		222

Total assets under management or supervision	$	440	$	416	$	445	$	420	$	443	$	424

Assets under management or supervision by asset class:
Equity	$	226	$	205	$	232	$	203	$	229	$	203
Fixed income		91		92		90		95		91		99
Money market		75		80		76		82		77		82
Alternative investments		20		18		19		19		19		19
Real estate		15		10		15		10		14		10

Total assets under management		427		405		432		409		430		413
Unit investment trusts		13		11		13		11		13		11

Total assets under management or supervision	$	440	$	416	$	445	$	420	$	443	$	424

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

Activity in Asset Management’s customer assets under management or supervision were as follows (dollars in billions):


	Three Months Ended						Six Months Ended
	May 31, 2006			May 31, 2005			May 31, 2006			May 31, 2005
	(dollars in billions)
Balance at beginning of period	$	442		$	427		$	431		$	424
Net flows excluding money markets		(1	)		(4	)		(6	)		(12	)
Net flows from money markets		(4	)		(3	)		(6	)		(2	)
Net market appreciation/(depreciation)		3			(4	)		21			6

Total net (decrease)/increase		(2	)		(11	)		9			(8	)

Balance at end of period	$	440		$	416		$	440		$	416

Net outflows (excluding money markets) in the quarter and six month period ended May 31, 2006 were primarily associated with the Company’s Morgan Stanley branded products, partially offset by positive institutional flows. Net outflows in the six month period ended May 31, 2006 also reflected distributions of assets from the private equity business. For the quarter and six month period ended May 31, 2006, net outflows from Asset Management’s money market assets were primarily associated with two retail funds impacted by Global Wealth Management Group’s bank deposit program. The net outflows in the six month period ended May 31, 2006 were partially offset by market appreciation and positive flows into institutional liquidity assets.

Asset management, distribution and administration fees increased 1% and 3% in the quarter and six month period ended May 31, 2006, as higher fund management and administration fees associated with a 6% and 4% increase


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in average assets under management in the quarter and six month period, respectively, were partly offset by lower distribution and redemption fees. The increase in the six month period was also due to higher performance fees.

Non-Interest Expenses. Non-interest expenses increased 7% and 17% in the quarter and six month period ended May 31, 2006. The increase in both periods primarily reflected an increase in compensation and benefits expense, partially offset by lower non-compensation expenses. The six month period ended May 31, 2005 included a reduction in non-interest expenses from Asset Management’s share ($43 million) of the insurance settlement related to the events of September 11, 2001 (see “Insurance Settlement” herein). Compensation and benefits expense increased 51% and 44% in the quarter and six month period, primarily reflecting higher incentive-based compensation accruals. The six month period ended May 31, 2006 also included Asset Management’s share ($28 million) of the incremental compensation expense related to equity awards to retirement-eligible employees (see “Stock Based-Compensation” herein). Excluding compensation and benefits expense and the insurance settlement, non-interest expenses decreased 18% and 8% in the quarter and six month period. Brokerage, clearing and exchange fees decreased 9% and 13% in the quarter and six month period, primarily reflecting lower amortization expense associated with certain open-ended funds. The decrease in amortization expense reflected a lower level of deferred costs in recent periods due to a decrease in sales of certain open-ended funds. Marketing and business development expense increased 12% in the six month period primarily due to higher promotional costs associated with the Company’s Van Kampen products. Professional services expense decreased 13% in the quarter primarily due to lower sub-advisory fees. Other expenses decreased 129% and 61% in the quarter and six month period, primarily due to an insurance reimbursement related to certain legal matters.


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DISCOVER

INCOME STATEMENT INFORMATION


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
	(dollars in millions)
Merchant, cardmember and other fees	$	277	$	318	$	566	$	626
Servicing and securitization income		651		423		1,247		917
Other revenue		5		2		9		4

Total non-interest revenues		933		743		1,822		1,547

Interest revenue		608		536		1,194		994
Interest expense		220		182		451		350

Net interest income		388		354		743		644
Provision for consumer loan losses		130		209		285		344

Net credit income		258		145		458		300

Net revenues		1,191		888		2,280		1,847

Total non-interest expenses		650		625		1,260		1,230

Income before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		541		263		1,020		617
Losses from unconsolidated investees		—		—		1		—
Provision for income taxes		203		99		381		233

Income before cumulative effect of accounting change, net	$	338	$	164	$	638	$	384

Merchant, Cardmember and Other Fees. Merchant, cardmember and other fees decreased 13% and 10% in the quarter and six month period ended May 31, 2006, primarily due to lower net merchant discount revenues and higher net cardmember rewards, partially offset by higher merchant and cardmember fees. The decrease in net merchant discount revenues was due to higher allocations of interchange revenue to securitization transactions, partially offset by record sales volume. For securitization transactions completed on or after November 3, 2004, the Company began allocating interchange revenue to new securitization transactions, which has the effect of decreasing Merchant, cardmember and other fees and increasing Servicing and securitization income. During the quarter and six month period ended May 31, 2006, the Company had a higher level of outstanding securitization transactions receiving interchange allocations than in the comparable fiscal 2005 periods. The increase in sales volume reflected increased cardmember usage and the acquisition of Goldfish in February 2006 (see “Business Acquisitions” herein). The increase in net cardmember rewards reflected record sales volume and the impact of promotional programs. The increase in merchant and cardmember fees primarily relates to lower fee net charge-offs and higher revenues from merchant fees.


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Servicing and Securitization Income. The table below presents the components of servicing and securitization income:


	Three Months Ended May 31,					Six Months Ended May 31,
	2006		2005			2006		2005
	(dollars in millions)
Merchant, cardmember and other fees	$	264	$	166		$	494	$	339
Other revenue		17		(16	)		156		16

Total non-interest revenues		281		150			650		355

Interest revenue		968		890			1,857		1,815
Interest expense		356		251			666		484

Net interest income		612		639			1,191		1,331
Provision for consumer loan losses		242		366			594		769

Net credit income		370		273			597		562

Servicing and securitization income	$	651	$	423		$	1,247	$	917

Servicing and securitization income increased 54% and 36% in the quarter and six month period ended May 31, 2006, primarily due to higher non-interest revenues and a lower provision for consumer loan losses. The increase in Merchant, cardmember and other fees primarily reflected a higher level of outstanding securitization transactions that received interchange revenues. The increase in Other revenue in both periods was attributable to an increase in the fair value of the Company’s retained interests in securitized receivables, primarily resulting from a favorable impact on charge-offs following the enactment of federal bankruptcy legislation that became effective in October 2005. The increase in Other revenue in the six month period also reflected higher levels of general purpose credit card securitization transactions. The lower provision for consumer loan losses in both periods was primarily attributable to a lower level of average securitized general purpose credit card loans and a lower rate of net principal charge-offs on the securitized general purpose credit card loan portfolio. The increase in Servicing and securitization income in the six month period was partially offset by a decrease in net interest cash flows primarily attributable to a lower level of average securitized general purpose credit card loans.

The net proceeds received from general purpose credit card asset securitizations in the six month periods ended May 31, 2006 and 2005 were $6,613 million and $3,419 million, respectively. The credit card asset securitization transactions completed in the six month period ended May 31, 2006 have expected maturities ranging from approximately three to seven years from the date of issuance.

Net Interest Income. Net interest income increased 10% and 15% in the quarter and six month period ended May 31, 2006 due to an increase in interest revenue, partially offset by an increase in interest expense. The increase in interest revenue in both periods was due to an increase in average owned general purpose credit card loans as well as a higher interest yield. The increase in average owned general purpose credit card loans was due to the acquisition of Goldfish (see “Business Acquisitions” herein) and a lower level of outstanding securitizations. The increase in interest expense in both periods was primarily due to an increase in the Company’s average cost of borrowings and a higher level of average interest bearing liabilities, primarily to support the increase in average owned general purpose credit card loans.


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The following tables present analyses of Discover’s average balance sheets and interest rates for the quarters and six months ended May 31, 2006 and 2005 and changes in net interest income during those periods:

Average Balance Sheet Analysis.


	Three Months Ended May 31,
	2006								2005
	Average Balance			Rate		Interest			Average Balance			Rate		Interest
	(dollars in millions)
ASSETS
Interest earning assets:
General purpose credit card loans	$	19,664		11.01	%	$	546		$	18,753		10.56	%	$	499
Other consumer loans		214		7.43			4			404		7.53			8
Investment securities		59		3.97			1			52		1.78			—
Other		4,265		5.32			57			3,294		3.46			29

Total interest earning assets		24,202		9.95			608			22,503		9.45			536
Allowance for loan losses		(785	)							(848	)
Non-interest earning assets		2,682								2,475

Total assets	$	26,099							$	24,130

LIABILITIES AND SHAREHOLDER’S EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings	$	1,579		4.54	%	$	18		$	656		2.57	%	$	4
Brokered		10,931		4.55			125			9,933		4.37			109
Other time		1,759		4.49			20			2,374		3.63			22

Total interest bearing deposits		14,269		4.54			163			12,963		4.15			135
Other borrowings		4,689		4.80			57			4,689		3.93			47

Total interest bearing liabilities		18,958		4.60			220			17,652		4.09			182
Shareholder’s equity/other liabilities		7,141								6,478

Total liabilities and shareholder’s equity	$	26,099							$	24,130

Net interest income						$	388							$	354

Net interest margin(1)							6.35	%							6.24	%
Interest rate spread(2)				5.35	%							5.36	%

(1)	Net interest margin represents net interest income as a percentage of total interest earning assets.

(2)	Interest rate spread represents the difference between the rate on total interest earning assets and the rate on total interest bearing liabilities.


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Average Balance Sheet Analysis.


	Six Months Ended May 31,
	2006								2005
	Average Balance			Rate		Interest			Average Balance			Rate		Interest
	(dollars in millions)
ASSETS
Interest earning assets:
General purpose credit card loans	$	20,808		10.41	%	$	1,080		$	18,979		9.81	%	$	929
Other consumer loans		260		7.48			10			403		7.65			15
Investment securities		49		3.86			1			54		1.66			1
Other		4,149		5.00			103			2,920		3.37			49

Total interest earning assets		25,266		9.48			1,194			22,356		8.91			994
Allowance for loan losses		(811	)							(893	)
Non-interest earning assets		2,423								2,599

Total assets	$	26,878							$	24,062

LIABILITIES AND SHAREHOLDER’S EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings	$	1,203		4.31	%	$	26		$	651		2.33	%	$	8
Brokered		11,655		4.50			262			9,382		4.45			208
Other time		1,771		4.45			39			2,742		3.38			46

Total interest bearing deposits		14,629		4.48			327			12,775		4.11			262
Other borrowings		5,338		4.67			124			4,731		3.72			88

Total interest bearing liabilities		19,967		4.53			451			17,506		4.01			350
Shareholder’s equity/other liabilities		6,911								6,556

Total liabilities and shareholder’s equity	$	26,878							$	24,062

Net interest income						$	743							$	644

Net interest margin(1)							5.90	%							5.78	%
Interest rate spread(2)				4.95	%							4.90	%

(1)	Net interest margin represents net interest income as a percentage of total interest earning assets.

(2)	Interest rate spread represents the difference between the rate on total interest earning assets and the rate on total interest bearing liabilities.


		56

Rate/Volume Analysis.


	Three Months Ended May 31, 2006 vs. 2005								Six Months Ended May 31, 2006 vs. 2005
Increase/(Decrease) due to Changes in:	Volume			Rate		Total			Volume			Rate		Total
	(dollars in millions)
Interest Revenue
General purpose credit card loans	$	25		$	22	$	47		$	91		$	60	$	151
Other consumer loans		(4	)		—		(4	)		(5	)		—		(5	)
Investment securities		1			—		1			—			—		—
Other		8			20		28			21			33		54

Total interest revenue		41			31		72			131			69		200

Interest Expense
Interest bearing deposits:
Savings		6			8		14			6			12		18
Brokered		11			5		16			51			3		54
Other time		(6	)		4		(2	)		(16	)		9		(7	)

Total interest bearing deposits		14			14		28			39			26		65
Other borrowings		—			10		10			11			25		36

Total interest expense		13			25		38			49			52		101

Net interest income	$	28		$	6	$	34		$	82		$	17	$	99

Provision for Consumer Loan Losses. The provision for consumer loan losses decreased 38% and 17% in the quarter and six month period ended May 31, 2006. The decrease in both periods reflected lower net charge-offs primarily related to a decline in bankruptcy filings following the federal bankruptcy legislation that became effective in October 2005 and improved portfolio credit quality resulting in a higher net release of reserves as compared with the prior year periods. The net reduction in reserves was $21 million and $118 million in the quarter and six month period ended May 31, 2006, respectively, as compared with $11 million and $101 million in the comparable prior year periods, respectively.

Delinquencies and Charge-offs. Delinquency rates in both the over 30- and over 90-day categories and net principal charge-off rates were lower for both the owned and managed portfolios, reflecting improvements in portfolio credit quality and the favorable impact following the enactment of federal bankruptcy legislation (see “Managed General Purpose Credit Card Loan Data” herein). While pressure on the consumer continues from higher interest rates, inflation and the increased minimum payment requirements discussed below, there have been no meaningful signs of this pressure in the Company’s U.S. portfolio performance. In addition, although consumer bankruptcy filings remain well below historical levels, the Company expects charge-offs in the Discover segment to rise from the low second quarter levels, but remain below 5% on a managed basis, as pressures on consumers continue and bankruptcies begin to return to more normalized levels in the second half of fiscal 2006.

In response to industry-wide regulatory guidance, the Company has increased minimum payment requirements on certain general purpose credit card loans. The Company believes that these increases in minimum payment requirements will negatively impact future levels of general purpose credit card loans and related interest and fee revenue and charge-offs. Bank regulators have discretion to interpret the guidance or its application, and changes in such guidance or its application by the regulators could impact minimum payment requirements.

The Company’s future charge-off rates and credit quality are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. Factors that influence the provision for consumer loan losses include the level and direction of general purpose credit card loan delinquencies and charge-offs, changes in consumer spending and payment behaviors, bankruptcy trends, the seasoning of the Company’s general purpose credit card loan portfolio, interest rate movements and their impact on consumer behavior, and the rate and magnitude of changes in the Company’s general purpose credit card loan portfolio, including the overall mix of accounts, products and loan balances within the portfolio.


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Non-Interest Expenses. Non-interest expenses increased 4% and 2% in the quarter and six month period ended May 31, 2006. Compensation and benefits expense increased 7% and 10% in the quarter and six month period, primarily reflecting higher incentive-based compensation accruals. The six month period ended May 31, 2006 included Discover’s share ($17 million) of the incremental compensation expense related to equity awards to retirement-eligible employees (see “Stock Based-Compensation” herein). Excluding compensation and benefits expense, non-interest expenses increased 2% in the quarter and decreased 2% in the six month period. Marketing and business development expenses decreased 8% and 13% in the quarter and six month period due to lower marketing and advertising costs. Professional services expenses increased 26% and 11% in the quarter and six month period primarily due to an increase in legal and consulting fees associated with the acquisition of Goldfish.

Managed General Purpose Credit Card Loan Data. The Company analyzes its financial performance on both a “managed” loan basis and as reported under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) (“owned” loan basis). Managed loan data assume that the Company’s securitized loan receivables have not been sold and present the results of the securitized loan receivables in the same manner as the Company’s owned loans. The Company operates its Discover business and analyzes its financial performance on a managed basis. Accordingly, underwriting and servicing standards are comparable for both owned and securitized loans. The Company believes that managed loan information is useful to investors because it provides information regarding the quality of loan origination and credit performance of the entire managed portfolio and allows investors to understand the related credit risks inherent in owned loans and retained interests in securitizations. In addition, investors often request information on a managed basis, which provides a more meaningful comparison with industry competitors.

The following table provides a reconciliation of owned and managed average loan balances, returns on receivables, interest yields and interest rate spreads for the periods indicated:

Reconciliation of General Purpose Credit Card Loan Data (dollars in millions)


	Three Months Ended May 31,
	2006					2005
	Average Balance		Return on Receivables(1)	Interest Yield	Interest Rate Spread	Average Balance		Return on Receivables(1)	Interest Yield	Interest Rate Spread
General Purpose Credit Card Loans:
Owned	$	19,664	6.83%	11.01%	6.41%	$	18,753	3.48%	10.56%	6.47%
Securitized		27,643	4.86%	13.89%	8.76%		28,393	2.30%	12.43%	8.92%

Managed	$	47,307	2.84%	12.69%	7.78%	$	47,146	1.38%	11.69%	7.96%


	Six Months Ended May 31,
	2006					2005
	Average Balance		Return on Receivables(1)	Interest Yield	Interest Rate Spread	Average Balance		Return on Receivables(1)	Interest Yield	Interest Rate Spread
General Purpose Credit Card Loans:
Owned	$	20,808	6.15%	10.41%	5.89%	$	18,979	4.06%	9.81%	5.80%
Securitized		26,631	4.80%	13.98%	8.97%		29,049	2.65%	12.53%	9.20%

Managed	$	47,439	2.70%	12.42%	7.61%	$	48,028	1.60%	11.46%	7.87%

(1)	Return on receivables is equal to Discover annualized income divided by average owned, securitized or managed credit card receivables, as applicable.


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The following tables present a reconciliation of owned and managed general purpose credit card loans and delinquency and net charge-off rates:

Reconciliation of General Purpose Credit Card Loan Asset Quality Data (dollars in millions)


	At May 31,
	2006						2005
	Period End Loans		Delinquency Rates				Period End Loans		Delinquency Rates
	Period End Loans		Over 30 Days		Over 90 Days		Period End Loans		Over 30 Days		Over 90 Days
General Purpose Credit Card Loans:
Owned	$	21,764	2.97	%	1.38	%	$	19,385	3.48	%	1.64	%
Securitized		26,775	3.56	%	1.65	%		27,460	4.19	%	1.97	%

Managed	$	48,539	3.29	%	1.53	%	$	46,845	3.90	%	1.83	%


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
Net Principal Charge-offs
Owned	3.02	%	4.62	%	3.82	%	4.62	%
Securitized	3.50	%	5.15	%	4.46	%	5.30	%
Managed	3.30	%	4.94	%	4.18	%	5.03	%

Net Total Charge-offs (inclusive of interest and fees)
Owned	4.38	%	6.26	%	5.05	%	6.37	%
Securitized	5.02	%	7.36	%	6.38	%	7.58	%
Managed	4.75	%	6.92	%	5.80	%	7.10	%


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Other Items.

Stock-Based Compensation.

The Company early adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective approach as of December 1, 2004. SFAS No. 123R revised the fair value-based method of accounting for share-based payment liabilities, forfeitures and modifications of stock-based awards and clarified guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to service periods. Upon adoption, the Company recognized an $80 million gain ($49 million after-tax) as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2005 resulting from the requirement to estimate forfeitures at the date of grant instead of recognizing them as incurred. The cumulative effect gain increased both basic and diluted earnings per share by $0.05.

Discontinued Operations.

Business Acquisitions.

On February 17, 2006, the Company completed the acquisition of the Goldfish credit card business in the U.K. The Company believes that the acquisition of Goldfish will add economies of scale through better utilization of the existing U.K. infrastructure and strengthen its position in the U.K. credit card market. Since the acquisition


		60

date, the results of Goldfish have been included within the Discover business segment. The acquisition price was approximately $1,676 million, which was paid in cash during February 2006. The Company recorded goodwill and other intangible assets of approximately $355 million in connection with the acquisition. The acquisition price is still subject to finalization, and the allocation of the price is preliminary and is subject to further adjustment as the valuation of certain intangible assets is still in process (see Note 16 to the condensed consolidated financial statements).

Coleman Litigation.

In the first quarter of fiscal 2005, the Company recorded a $360 million charge related to the Coleman litigation matter (See Note 8 to the condensed consolidated financial statements). For further information, refer to “Legal Proceedings” in Part I, Item 3 of the Form 10-K, “Legal Proceedings” in Part II, Item 1 herein, and “Financial Statements and Supplementary Data—Note 9” in Part II, Item 8 of the Form 10-K.

Insurance Settlement.

The pre-tax gain was recorded as a reduction to non-interest expenses and is included within Global Wealth Management Group ($198 million), Asset Management ($43 million) and Institutional Securities ($10 million) segments. The insurance settlement was allocated to the respective segments in accordance with the relative damages sustained by each segment.

Lease Adjustment.

Income Tax Examinations.


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business operations, such as New York. The tax years under examination vary by jurisdiction; for example, the current IRS examination, which recently began, covers 1999-2004. The Company has filed an appeal with respect to unresolved issues relative to the IRS examination of years 1994-1998. The Company believes that the settlement of the IRS examination of years 1994-1998 will not have a material negative impact on the condensed consolidated statement of income of the Company. The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. The Company has established tax reserves that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts tax reserves only when more information is available or when an event occurs necessitating a change to the reserves. The Company believes that the resolution of tax matters will not have a material effect on the condensed consolidated financial condition of the Company, although a resolution could have a material impact on the Company’s condensed consolidated statement of income for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs.

Accounting Developments.

Limited Partnerships.

In June 2005, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” Under the provisions of EITF Issue No. 04-5, a general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements regardless of the amount or extent of the general partner’s interest unless a majority of the limited partners can vote to dissolve or liquidate the partnership or otherwise remove the general partner without having to show cause or the limited partners have substantive participating rights that can overcome the presumption of control by the general partner. EITF Issue No. 04-5 was effective immediately for all newly formed limited partnerships and existing limited partnerships for which the partnership agreements have been modified. For all other existing limited partnerships for which the partnership agreements have not been modified, the Company is required to adopt EITF Issue No. 04-5 on December 1, 2006 in a manner similar to a cumulative-effect-type adjustment or by retrospective application. The Company is currently assessing the impact on these existing limited partnerships of adopting the provisions of EITF Issue No. 04-5; however, because the Company generally expects to provide limited partners in these funds with rights to remove the Company as general partner or rights to terminate the partnership, the Company does not expect the impact of EITF Issue No. 04-5 to be material.

Accounting for Certain Hybrid Financial Instruments.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of income. The fair value election may be applied on an instrument-by-instrument basis. SFAS No. 155 also eliminates a restriction on the passive derivative instruments that a qualifying special purpose entity may hold. For the Company, SFAS No. 155 is effective for those financial instruments acquired or issued after December 1, 2006. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument will be recognized as a cumulative-effect adjustment to beginning retained earnings. The Company is currently evaluating the potential impact of adopting SFAS No. 155.

Accounting for Servicing of Financial Assets.


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liabilities to be initially measured at fair value, if practicable. The standard permits an entity to subsequently measure each class of servicing assets or servicing liabilities at fair value and report changes in fair value in the statement of income in the period in which the changes occur. SFAS No. 156 is effective for the Company as of December 1, 2006. The Company is currently evaluating the potential impact of adopting SFAS No. 156.

Determining the Variability in Variable Interest Entities.

In April 2006, the FASB issued FASB Staff Position No. FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP FIN 46(R)-6”). FSP FIN 46(R)-6 requires that the determination of the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), be based on an analysis of the design of the entity. In evaluating whether an interest with a variable interest entity creates or absorbs variability, FSP FIN 46(R)-6 focuses on the role of a contract or arrangement in the design of an entity, regardless of its legal form or accounting classification. The Company will adopt the guidance in FSP FIN 46(R)-6 prospectively beginning September 1, 2006 to all entities that the Company first becomes involved with and to all entities previously required to be analyzed under FIN 46R when a reconsideration event has occurred under paragraph 7 of FIN 46R. The Company does not expect the adoption of FSP FIN 46(R)-6 to have a material impact on its condensed consolidated financial statements.

Subsequent Events.

Office Building. In June 2006, the Company purchased a significant interest in a joint venture that indirectly owns title to 522 Fifth Avenue, a 23-floor office building in New York City (the “Building”), for approximately $420 million. Concurrently, the Company entered into an occupancy agreement with the joint venture pursuant to which the Company will occupy the office space in the Building (approximately 580,000 square feet).

TransMontaigne Inc . In June 2006, Morgan Stanley Capital Group Inc., a wholly-owned subsidiary of the Company, entered into a definitive Agreement and Plan of Merger to effect the acquisition of TransMontaigne Inc., a Denver-based company that operates pipelines, terminals and barges, and distributes and markets refined petroleum products. The Company will purchase the outstanding common shares of TransMontaigne Inc. for $11.35 per share, or an aggregate cost of approximately $610 million. The transaction is subject to customary closing conditions and is expected to be completed during the third or fourth quarter of fiscal 2006.

Preferred Stock . In July 2006, the Company issued $1 billion of Floating Rate Non-Cumulative Preferred Stock, Series A.


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Critical Accounting Policies.

The condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the Company to make estimates and assumptions (see Note 1 to the condensed consolidated financial statements). The Company believes that of its accounting policies (see Note 2 to the consolidated financial statements for the fiscal year ended November 30, 2005 included in the Form 10-K), the following involve a higher degree of judgment and complexity.

Financial Instruments Used For Trading and Investment.

Financial instruments owned and Financial instruments sold, not yet purchased, which include cash and derivative products, are recorded at fair value in the condensed consolidated statements of financial condition, and gains and losses are reflected in Principal trading and investment revenues in the condensed consolidated statements of income. Fair value is the amount at which financial instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The price transparency of the particular product will determine the degree of judgment involved in determining the fair value of the Company’s financial instruments. Price transparency is affected by a wide variety of factors, including, for example, the type of product, whether it is a new product and not yet established in the marketplace, and the characteristics particular to the transaction. Products for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters will generally have a higher degree of price transparency. By contrast, products that are thinly traded or not quoted will generally have reduced to no price transparency. Even in normally active markets, the price transparency for actively quoted instruments may be reduced for periods of time during periods of market dislocation. Alternatively, in thinly quoted markets, the participation of market-makers willing to purchase and sell a product provides a source of transparency for products that otherwise are not actively quoted or during periods of market dislocation.

The Company’s cash products include securities issued by the U.S. government and its agencies, other sovereign debt obligations, corporate and other debt securities, corporate equity securities, exchange traded funds and physical commodities. The fair value of these products is based principally on observable market prices or is derived using observable market parameters. These products generally do not entail a significant degree of judgment in determining fair value. Examples of products for which actively quoted prices or pricing parameters are available or for which fair value is derived from actively quoted prices or pricing parameters include securities issued by the U.S. government and its agencies, exchange traded corporate equity securities, most municipal debt securities, most corporate debt securities, most high-yield debt securities, physical commodities, certain tradable loan products and most mortgage-backed securities.


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In certain circumstances, principally involving loan products and other financial instruments held for securitization transactions, the Company determines fair value from within the range of bid and ask prices such that fair value indicates the value likely to be realized in a current market transaction. Bid prices reflect the price that the Company and others pay, or stand ready to pay, to originators of such assets. Ask prices represent the prices that the Company and others require to sell such assets to the entities that acquire the financial instruments for purposes of completing the securitization transactions. Generally, the fair value of such acquired assets is based upon the bid price in the market for the instrument or similar instruments. In general, the loans and similar assets are valued at bid pricing levels until structuring of the related securitization is substantially complete and such that the value likely to be realized in a current transaction is consistent with the price that a securitization entity will pay to acquire the financial instruments. Factors affecting securitized value and investor demand relating specifically to loan products include, but are not limited to, loan type, underlying property type and geographic location, loan interest rate, loan to value ratios, debt service coverage ratio, investor demand and credit enhancement levels.

In addition, some cash products exhibit little or no price transparency, and the determination of fair value requires more judgment. Examples of cash products with little or no price transparency include certain high-yield debt, certain collateralized mortgage obligations, certain tradable loan products, distressed debt securities (i.e., securities of issuers encountering financial difficulties, including bankruptcy or insolvency) and equity securities that are not publicly traded. Generally, the fair value of these types of cash products is determined using one of several valuation techniques appropriate for the product, which can include cash flow analysis, revenue or net income analysis, default recovery analysis (i.e., analysis of the likelihood of default and the potential for recovery) and other analyses applied consistently.

The following table presents the valuation of the Company’s cash products included within Financial instruments owned and Financial instruments sold, not yet purchased by level of price transparency (dollars in millions):


	At May 31, 2006				At November 30, 2005
	Assets		Liabilities		Assets		Liabilities
Observable market prices, parameters or derived from observable prices or parameters	$	238,640	$	110,669	$	203,590	$	101,972
Reduced or no price transparency		19,995		406		11,131		76

Total	$	258,635	$	111,075	$	214,721	$	102,048

The Company’s derivative products include exchange traded and OTC derivatives. Exchange traded derivatives have valuation attributes similar to the cash products valued using observable market prices or market parameters described above. OTC derivatives, whose fair value is derived using pricing models, include a wide variety of instruments, such as interest rate swap and option contracts, foreign currency option contracts, credit and equity swap and option contracts, and commodity swap and option contracts.

The following table presents the fair value of the Company’s exchange traded and OTC derivatives included within Financial instruments owned and Financial instruments sold, not yet purchased (dollars in millions):


	At May 31, 2006				At November 30, 2005
	Assets		Liabilities		Assets		Liabilities
Exchange traded	$	6,715	$	10,213	$	4,491	$	8,151
OTC		44,821		38,534		41,403		36,801

Total	$	51,536	$	48,747	$	45,894	$	44,952

The fair value of OTC derivative contracts is derived primarily using pricing models, which may require multiple market input parameters. Where appropriate, valuation adjustments are made to account for credit quality and market liquidity. These adjustments are applied on a consistent basis and are based upon observable market data


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where available. In the absence of observable market prices or parameters in an active market, observable prices or parameters of other comparable current market transactions, or other observable data supporting a fair value based on a pricing model at the inception of a contract, fair value is based on the transaction price. The Company also uses pricing models to manage the risks introduced by OTC derivatives. Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be modeled using a series of techniques, including closed form analytic formulae, such as the Black-Scholes option pricing model, simulation models or a combination thereof, applied consistently. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. Pricing models take into account the contract terms, including the maturity, as well as market parameters such as interest rates, volatility and the creditworthiness of the counterparty.

Many pricing models do not entail material subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swap and option contracts. A substantial majority of OTC derivative products valued by the Company using pricing models fall into this category. Other derivative products, typically the newest and most complex products, will require more judgment in the implementation of the modeling technique applied due to the complexity of the modeling assumptions and the reduced price transparency surrounding the model’s market parameters. The Company manages its market exposure for OTC derivative products primarily by entering into offsetting derivative contracts or other related financial instruments. The Company’s trading divisions, the Financial Control Department and the Market Risk Department continuously monitor the price changes of the OTC derivatives in relation to the offsetting positions. For a further discussion of the price transparency of the Company’s OTC derivative products, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management—Credit Risk” in Part II, Item 7A of the Form 10-K.

The Company employs control processes to validate the fair value of its financial instruments, including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable market prices or market-based parameters wherever possible. In the event that market prices or parameters are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by Company personnel with relevant expertise who are independent from the trading desks. Additionally, groups independent from the trading divisions within the Financial Control and Market Risk Departments participate in the review and validation of the fair values generated from pricing models, as appropriate. Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model. Consistent with market practice, the Company has individually negotiated agreements with certain counterparties to exchange collateral (“margining”) based on the level of fair values of the derivative contracts they have executed. Through this margining process, one party or both parties to a derivative contract provides the other party with information about the fair value of the derivative contract to calculate the amount of collateral required. This sharing of fair value information provides additional support of the Company’s recorded fair value for the relevant OTC derivative products. For certain OTC derivative products, the Company, along with other market participants, contributes derivative pricing information to aggregation services that synthesize the data and make it accessible to subscribers. This


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information is then used to evaluate the fair value of these OTC derivative products. For more information regarding the Company’s risk management practices, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

Allowance for Consumer Loan Losses.

The allowance for consumer loan losses in the Company’s Discover business is established through a charge to the provision for consumer loan losses. Provisions are made to reserve for estimated losses in outstanding loan balances. The allowance for consumer loan losses is a significant estimate that represents management’s estimate of probable losses inherent in the consumer loan portfolio. The allowance for consumer loan losses is primarily applicable to the owned homogeneous consumer credit card loan portfolio and is evaluated quarterly for adequacy.

In calculating the allowance for consumer loan losses, the Company uses a systematic and consistently applied approach. This process starts with a migration analysis (a technique used to estimate the likelihood that a consumer loan will progress through the various stages of delinquency and ultimately charge off) of delinquent and current consumer credit card accounts in order to determine the appropriate level of the allowance for consumer loan losses. The migration analysis considers uncollectible principal, interest and fees reflected in consumer loans. In evaluating the adequacy of the allowance for consumer loan losses, management also considers factors that may impact future credit loss experience, including current economic conditions, recent trends in delinquencies and bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts, payment rates and forecasting uncertainties. A provision for consumer loan losses is charged against earnings to maintain the allowance for consumer loan losses at an appropriate level. The use of different estimates or assumptions could produce different provisions for consumer loan losses (see “Discover—Provision for Consumer Loan Losses” herein).

Legal, Regulatory and Tax Contingencies.

In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress. The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of these reviews, investigations and proceedings has increased in recent years with regard to many firms in the financial services industry, including the Company.

Reserves for litigation and regulatory proceedings are generally determined on a case-by-case basis and represent an estimate of probable losses after considering, among other factors, the progress of each case, prior experience and the experience of others in similar cases, and the opinions and views of internal and external legal counsel. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be.

The Company is subject to the income tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company has significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The Company must


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make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The Company regularly assesses the likelihood of assessments in each of the taxing jurisdictions resulting from current and subsequent years’ examinations, and tax reserves are established as appropriate.

The Company establishes reserves for potential losses that may arise out of litigation, regulatory proceedings and tax audits to the extent that such losses are probable and can be estimated in accordance with SFAS No. 5, “Accounting for Contingencies.” Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of a legal claim, tax assessment or regulatory fine/penalty may ultimately be materially different from the recorded reserves, if any.

See Notes 8 and 17 to the condensed consolidated financial statements for additional information on legal proceedings and income tax examinations.


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Liquidity and Capital Resources.

The Company’s senior management establishes the overall liquidity and capital policies of the Company. Through various risk and control committees, the Company’s senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate and currency sensitivity of the Company’s asset and liability position. These committees, along with the Company’s Treasury Department and other control groups, also assist in evaluating, monitoring and controlling the impact that the Company’s business activities have on its condensed consolidated balance sheet, liquidity and capital structure, thereby helping to ensure that its business activities are integrated with the Company’s liquidity and capital policies.

The Company’s liquidity and funding risk management policies are designed to mitigate the potential risk that the Company may be unable to access adequate financing to service its financial obligations when they come due without material, adverse franchise or business impact. The key objectives of the liquidity and funding risk management framework are to support the successful execution of the Company’s business strategies while ensuring ongoing and sufficient liquidity through the business cycle and during periods of financial distress. The principal elements of the Company’s liquidity framework are the cash capital policy, the liquidity reserve and stress testing through the contingency funding plan. Comprehensive financing guidelines (collateralized funding, long-term funding strategy, surplus capacity, diversification, staggered maturities and committed credit facilities) support the Company’s target liquidity profile.

For a more detailed summary of the Company’s Liquidity and Capital Policies and funding sources, including committed credit facilities and off-balance sheet funding, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Part II, Item 7 of the Form 10-K.

The Balance Sheet.

The Company monitors and evaluates the composition and size of its balance sheet. Given the nature of the Company’s market-making and customer financing activities, the overall size of the balance sheet fluctuates from time to time. A substantial portion of the Company’s total assets consists of highly liquid marketable securities and short-term receivables arising principally from its Institutional Securities sales and trading activities. The highly liquid nature of these assets provides the Company with flexibility in financing and managing its business.

The Company’s total assets increased to $1,027.0 billion at May 31, 2006 from $898.5 billion at November 30, 2005. The increase was primarily due to increases in financial instruments owned (largely driven by increases in corporate and other debt and corporate equities), receivables from customers, securities borrowed and securities received as collateral. The increase was also due to an increase in securities purchased under agreements to resell, partially offset by a decrease in cash and cash equivalents. The increases were largely the result of higher market volatility globally and an increase in client business opportunities.

Balance sheet leverage ratios are one indicator of capital adequacy when viewed in the context of a company’s overall liquidity and capital policies. The Company views the adjusted leverage ratio as a more relevant measure of financial risk when comparing financial services firms and evaluating leverage trends. The Company has adopted a definition of adjusted assets that excludes certain self-funded assets considered to have minimal market, credit and/or liquidity risk. These low-risk assets generally are attributable to the Company’s matched book and securities lending businesses. Adjusted assets are calculated by reducing gross assets by aggregate resale agreements and securities borrowed less non-derivative short positions and assets recorded under certain provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities—a replacement of FASB Statement No. 125,” and FIN 46R. The adjusted leverage ratio reflects the deduction from shareholders’ equity of the amount of equity used to support goodwill and intangible assets (as the Company does not view this amount of equity as available to support its risk capital needs). In addition, the Company views junior subordinated debt issued to capital trusts as a component of its capital base given the


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inherent characteristics of the securities. These characteristics include the long-dated nature (e.g., some have final maturity at issuance of 30 years extendible at the Company’s option by a further 19 years, others have a 40 year final maturity at issuance), the Company’s ability to defer coupon interest for up to 20 consecutive quarters and the subordinated nature of the obligations in the capital structure. The Company also receives rating agency equity credit for these securities.

The following table sets forth the Company’s total assets, adjusted assets and leverage ratios as of May 31, 2006 and November 30, 2005 and for the average month-end balances during the quarter and six month period ended May 31, 2006:


	Balance at						Average Month-End Balance
	May 31, 2006			November 30, 2005			For the Quarter Ended May 31, 2006			For the Six Month Period Ended May 31, 2006
	(dollars in millions, except ratio data)
Total assets	$	1,027,043		$	898,523		$	1,002,868		$	977,807
Less: Securities purchased under agreements to resell		(190,289	)		(174,330	)		(184,035	)		(185,924	)
Securities borrowed		(274,581	)		(244,241	)		(265,446	)		(260,558	)
Add: Financial instruments sold, not yet purchased		159,822			147,000			155,342			151,227
Less: Derivative contracts sold, not yet purchased		(48,747	)		(44,952	)		(46,366	)		(45,474	)

Subtotal		673,248			582,000			662,363			637,078
Less: Segregated customer cash and securities balances		(31,685	)		(30,540	)		(28,195	)		(28,889	)
Assets recorded under certain provisions of SFAS No. 140 and FIN 46R		(90,046	)		(67,091	)		(83,284	)		(77,800	)
Goodwill and net intangible assets		(2,932	)		(2,500	)		(2,899	)		(2,731	)

Adjusted assets	$	548,585		$	481,869		$	547,985		$	527,658

Shareholders’ equity	$	32,255		$	29,182		$	31,182		$	30,412
Junior subordinated debt issued to capital trusts		3,473			2,764			3,538			3,336

Subtotal		35,728			31,946			34,720			33,748
Less: Goodwill and net intangible assets		(2,932	)		(2,500	)		(2,898	)		(2,731	)

Tangible shareholders’ equity	$	32,796		$	29,446		$	31,822		$	31,017

Leverage ratio(1)		31.3x			30.5 x			31.5x			31.5x

Adjusted leverage ratio(2)		16.7x			16.4 x			17.2x			17.0x

(1)	Leverage ratio equals total assets divided by tangible shareholders’ equity.

(2)	Adjusted leverage ratio equals adjusted assets divided by tangible shareholders’ equity.

Activity in the Six Month Period Ended May 31, 2006.

The Company’s total capital consists of shareholders’ equity, long-term borrowings (debt obligations scheduled to mature in more than 12 months), junior subordinated debt issued to capital trusts, and Capital Units. At May 31, 2006, total capital was $145.7 billion, an increase of $19.8 billion from November 30, 2005.

During the six month period ended May 31, 2006, the Company issued senior notes aggregating $26.5 billion, including non-U.S. dollar currency notes aggregating $11.5 billion and $889 million of junior subordinated debentures. At May 31, 2006, the aggregate outstanding principal amount of the Company’s Senior Indebtedness (as defined in the Company’s debt indentures) was approximately $149 billion (including guaranteed obligations of the indebtedness of subsidiaries). The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately five years at May 31, 2006.


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During the six month period ended May 31, 2006, the Company purchased approximately $1,312 million of its common stock (approximately 22 million shares) through open market purchases at an average cost of $59.47 (see also “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II, Item 2). During fiscal 2006, the Company currently anticipates that repurchases of its common stock pursuant to its equity antidilution program will be approximately $2 billion or less.

Subsequent to quarter-end, on July 6, 2006, the Company issued $1 billion of Floating Rate Non-Cumulative Preferred Stock, Series A.

Economic Capital.

The Company uses an economic capital model to determine the amount of equity capital needed to support the risk of its business activities and to ensure that the Company remains adequately capitalized. The Company calculates economic capital on a going concern basis, which is defined as the amount of capital needed to run the business through the business cycle and satisfy the requirements of regulators, rating agencies and the market. Business unit economic capital allocations are evaluated by benchmarking to similarly rated peer firms by business segment. The Company believes this methodology provides an indication of the appropriate level of capital for each business segment as if each were an independent operating entity.

Economic capital requirements are allocated to each business segment and are sub-allocated to product lines as appropriate. This process is intended to align equity capital with the risks in each business, provide business managers with tools for measuring and managing risk, and allow senior management to evaluate risk-adjusted returns (such as return on economic capital and shareholder value added) to facilitate resource allocation decisions.

The Company’s methodology is based on an approach that assigns economic capital to each business unit based on regulatory capital usage plus additional capital for stress losses. Regulatory capital, including additional capital assigned for goodwill, intangible assets and principal investment risk, is a minimum requirement to ensure funding access and customer credibility. The Company believes it must be able to sustain stress losses and maintain capital substantially above regulatory minimums while supporting ongoing business activities. Aggregate economic capital requirements represent the minimum amount of book equity capital required under the going concern approach. The difference between the Company’s consolidated common equity and aggregate economic capital denotes the Company’s unallocated capital position, which is not currently allocated to the business segments or reflected in business segment performance metrics.

The Company assesses stress loss capital across various dimensions of market, credit, business and operational risks. Stress losses are defined at the 90% to 95% confidence interval in order to capture worst potential losses in 10 to 20 years. Stress loss calculations are tangible and transparent and avoid reliance on extreme loss statistical models.

Market risk scenarios capture systematic, idiosyncratic and random market risk through the use of internal market stress data. Credit risk is included in the form of idiosyncratic counterparty default events. Business risk incorporates earnings volatility due to variability in revenue flows, with estimates on the mix of fixed versus variable expenses at various points in the business cycle. Operational stress losses primarily reflect legal risk across the Company.

The Company may enhance the economic capital model and allocation methodology over time in response to changes in the business and regulatory environment to ensure that the model continues to reflect the risks inherent in the Company’s business activities and to reflect changes in the drivers of the level and cost of required capital.


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The following table presents the Company’s allocated average common equity (economic capital) during the quarters and six month periods ended May 31, 2006 and 2005:


	Three Months Ended May 31,				Six Months Ended May 31,
	2006		2005		2006		2005
Average common equity (dollars in billions):
Institutional Securities	$	18.1	$	14.3	$	17.1	$	14.1
Global Wealth Management Group		3.3		3.6		3.4		3.7
Asset Management		2.1		1.7		2.0		1.7
Discover		5.0		4.2		4.8		4.3

Total from operating segments		28.5		23.8		27.3		23.8
Discontinued operations		—		1.5		—		1.5
Unallocated capital		2.7		3.1		3.1		3.1

Consolidated	$	31.2	$	28.4	$	30.4	$	28.4

Liquidity Management Policies.

The primary goal of the Company’s liquidity and funding activities is to ensure adequate financing over a wide range of potential credit ratings and market environments. Given the highly liquid nature of the Company’s balance sheet, day-to-day funding requirements are largely fulfilled through the use of stable collateralized financing. The Company has centralized management of credit-sensitive unsecured funding sources in the Treasury Department. In order to meet target liquidity requirements and withstand an unforeseen contraction in credit availability, the Company has designed a liquidity management framework.


Liquidity Management Framework:		Designed to:
Contingency Funding Plan		Ascertain the Company’s ability to manage a prolonged liquidity contraction and provide a course of action over a one-year time period to ensure orderly functioning of the businesses. The contingency funding plan sets forth the process and the internal and external communication flows necessary to ensure effective management of the contingency event. Analytical processes exist to periodically evaluate and report the liquidity risk exposures of the organization under management-defined scenarios.
Cash Capital		Ensure that the Company can fund its balance sheet while repaying its financial obligations maturing within one year without issuing new unsecured debt. The Company attempts to achieve this by maintaining sufficient cash capital (long-term debt and equity capital) to finance illiquid assets and the portion of its securities inventory that is not expected to be financed on a secured basis in a credit-stressed environment.
Liquidity Reserve		Maintain, at all times, a liquidity reserve composed of immediately available cash and cash equivalents and a pool of unencumbered securities that can be sold or pledged to provide same-day liquidity to the Company. The reserve is periodically assessed and determined based on day-to-day funding requirements and strategic liquidity targets. The liquidity reserve averaged approximately $42 billion for the six month period ended May 31, 2006, of which approximately $36 billion on average was held at the parent company.


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Liquidity Reserve.

The Company seeks to maintain a target liquidity reserve that is sized to cover daily funding needs and to meet strategic liquidity targets, including coverage of a significant portion of expected cash outflows over a short-term horizon in a potential liquidity crisis. This liquidity reserve is held in the form of cash deposits with banks and a pool of unencumbered securities. The Company manages the pool of unencumbered securities, against which funding can be raised, on a global basis, and securities for the pool are chosen accordingly. The U.S. and non-U.S. components, held in the form of a reverse repurchase agreement at the parent company, consist primarily of U.S. and European government bonds and other high quality collateral and at May 31, 2006 were approximately $28 billion and averaged approximately $23 billion during the six month period ended May 31, 2006. The parent company cash component of the liquidity reserve at May 31, 2006 was approximately $5 billion and averaged approximately $13 billion for the six month period ended May 31, 2006. The Company believes that diversifying the form in which its liquidity reserve (cash and securities) is maintained enhances its ability to quickly and efficiently source funding in a stressed environment. The Company’s funding requirements and target liquidity reserve may vary based on changes in the level and composition of its balance sheet, timing of specific transactions, client financing activity, market conditions and seasonal factors.

Committed Credit Facilities.

The maintenance of committed credit facilities serves to further diversify the Company’s funding sources. The Company values committed credit as a secondary component of its liquidity management framework. The committed credit facilities include a diversification of lenders to the Company covering geographic regions, including North America, Europe and Asia.

During the quarter ended May 31, 2006, the Company restructured the Morgan Stanley and Morgan Stanley Japan Securities Co., Ltd. (“MSJS”, as successor to the business of Morgan Stanley Japan Limited) Committed Revolving Credit Facility (the “MS-MSJS Facility”). The MS-MSJS Facility consists of three separate tranches: a U.S. dollar tranche with the Company as borrower; a Japanese yen tranche with MSJS as borrower and the Company as borrower and guarantor for MSJS borrowings; and a multicurrency tranche available in both euro and sterling with the Company as borrower. Under the MS-MSJS Facility, a group of banks is committed to provide up to $7.5 billion under the U.S. dollar tranche; 80 billion Japanese yen under the Japanese yen tranche and $3.25 billion under the multicurrency tranche. Concurrent with these changes, the Company terminated Morgan Stanley & Co. Incorporated’s $1.8 billion secured committed credit facility and Morgan Stanley & Co. International Limited’s $1.5 billion committed revolving credit facility. At May 31, 2006, the Company had a $13.3 billion consolidated stockholders’ equity surplus as compared with the MS-MSJS Facility’s covenant requirement.

The Company anticipates that it may utilize the MS-MSJS Facility for short-term funding from time to time. The Company does not believe that any of the covenant requirements in the MS-MSJS Facility will impair its ability to obtain funding under the MS-MSJS Facility, to pay its current level of dividends, or to obtain loan arrangements, letters of credit or other financial accommodations. At May 31, 2006, no borrowings were outstanding under the MS-MSJS Facility.

Credit Ratings.

The Company’s reliance on external sources to finance a significant portion of its day-to-day operations makes access to global sources of financing important. The cost and availability of unsecured financing generally are dependent on the Company’s short-term and long-term credit ratings. Factors that are significant to the determination of the Company’s credit ratings or that otherwise affect its ability to raise short-term and long-term financing include the Company’s level and volatility of earnings, relative positions in the markets in which it operates, geographic and product diversification, retention of key personnel, risk management policies, cash liquidity, capital structure, corporate lending credit risk, and legal and regulatory developments. In addition, continuing consolidation in the credit card industry presents Discover with stronger competitors that may


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challenge future growth. A deterioration in any of the previously mentioned factors or combination of these factors may lead rating agencies to downgrade the credit ratings of the Company, thereby increasing the cost to the Company in obtaining unsecured funding. In addition, the Company’s debt ratings can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical, such as OTC derivative transactions, including credit derivatives and interest rate swaps.

In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business, the Company would be required to provide additional collateral to certain counterparties in the event of a downgrade by either Moody’s Investors Service or Standard & Poor’s. At May 31, 2006, the amount of additional collateral that would be required in the event of a one-notch downgrade of the Company’s senior debt credit rating was approximately $1,369 million. Of this amount, $474 million relates to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded party must deliver incremental collateral to the other. These bilateral downgrade arrangements are a risk management tool used extensively by the Company as credit exposures are reduced if counterparties are downgraded.

As of June 30, 2006, the Company’s credit ratings were as follows:


	Commercial Paper	Senior Debt
Dominion Bond Rating Service Limited	R-1 (middle)	AA (low)
Fitch Ratings	F1+	AA-
Moody’s Investors Service	P-1	Aa3
Rating and Investment Information, Inc.	a-1+	AA
Standard & Poor’s	A-1	A+

Commitments.

The Company’s commitments associated with outstanding letters of credit, investment activities, and corporate lending and financing commitments as of May 31, 2006 are summarized below by period of expiration. Since commitments associated with letters of credit and lending and financing arrangements may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:


	Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)
Letters of credit(1)	$	7,579	$	6	$	—	$	—	$	7,585
Investment activities		88		82		9		317		496
Investment grade corporate lending commitments(2)		4,764		5,132		14,636		2,556		27,088
Non-investment grade lending corporate commitments(2)		2,903		896		2,037		2,353		8,189
Commitments for secured lending transactions(3)		10,256		3,145		92		100		13,593
Commitments to purchase mortgage loans(4)		8,550		—		—		—		8,550

Total(5)	$	34,140	$	9,261	$	16,774	$	5,326	$	65,501

(1)	This amount represents the Company’s outstanding letters of credit, which are primarily used to satisfy various collateral requirements.

(2)

The Company’s investment grade and non-investment grade lending commitments are made in connection with its corporate lending activities. Credit ratings are determined by the Company’s Institutional Credit Department using methodologies generally consistent with those employed by external rating agencies. Credit ratings of BB+ or lower are considered non-investment grade.

(3)	This amount represents lending commitments extended by the Company to companies that are secured by assets of the borrower. Loans made under these arrangements typically are at variable rates and generally provide for over-collateralization based upon the creditworthiness of the borrower.

(4)	This amount represents the Company’s forward purchase contracts involving mortgage loans.

(5)	See Note 8 to the condensed consolidated financial statements.


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The table above does not include commitments to extend credit for consumer loans of approximately $273 billion. Such commitments arise primarily from agreements with customers for unused lines of credit on certain credit cards, provided there is no violation of conditions established in the related agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage and customer creditworthiness (see Note 4 to the condensed consolidated financial statements). In addition, in the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the Company’s condensed consolidated financial statements.

At May 31, 2006, the Company had commitments to enter into reverse repurchase and repurchase agreements of approximately $106 billion and $82 billion, respectively.

Investments.

The table below includes investments made by the Company that represent business facilitation or principal investing activities at May 31, 2006 and November 30, 2005 and are included within Other assets on the condensed consolidated statement of financial condition. Business facilitation investments are strategic investments undertaken by the Company to facilitate core business activities. Principal investing activities are capital investments in private companies, generally for proprietary purposes, to maximize total returns to the Company. The Company has committed to increasing its principal investing activity. The Company intends to make additional investments over time to bring the level of principal investments to approximately $2.5 billion.


	At May 31, 2006
	Institutional Securities		Global Wealth Management Group		Asset Management		Discover		Total
	(dollars in millions)
Business facilitation:
Private equity funds	$	26	$	—	$	200	$	—	$	226
Real estate funds		378		—		—		—		378
Asset management seed capital		—		—		446		—		446
Industry utilities(1)		545		7		—		—		552
Other		186		38		12		10		246

Total business facilitation		1,135		45		658		10		1,848
Principal investments(2)		1,225		—		—		—		1,225

Total investments	$	2,360	$	45	$	658	$	10	$	3,073


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	At November 30, 2005(3)
	Institutional Securities		Global Wealth Management Group		Asset Management		Discover		Total
	(dollars in millions)
Business facilitation:
Private equity funds	$	14	$	—	$	185	$	—	$	199
Real estate funds		359		—		—		—		359
Asset management seed capital		—		—		236		—		236
Industry utilities(1)		371		—		—		—		371
Other		182		37		12		9		240

Total business facilitation		926		37		433		9		1,405
Principal investments		1,195		—		—		—		1,195

Total investments	$	2,121	$	37	$	433	$	9	$	2,600

(1)	Any investment made to participate in an industry consortium or an industry service with the intention to support core business activities and advance business growth.

(2)	Investment, dividend and net interest revenues associated with principal investments was $239 million and $273 million for the quarter and six month period ended May 31, 2006, respectively.

(3)	Certain reclassifications have been made to prior-period amounts to conform to the current period’s presentation.

Regulatory Requirements.

Effective December 1, 2005, the Company became a consolidated supervised entity (“CSE”) as defined by the Securities and Exchange Commission (“SEC”). As such, the Company is subject to group-wide supervision and examination by the SEC and to minimum capital requirements on a consolidated basis. As of May 31, 2006, the Company was in compliance with the CSE capital requirements.


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Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Market Risk.

The Company uses 99%/One-Day Value-at-Risk (“VaR”) as one of a range of risk management tools. VaR values should be interpreted in light of the method’s strengths and limitations. A small proportion of risk generated by trading positions is not included in VaR, and the modeling of the risk characteristics of some positions relies upon approximations that, under certain circumstances, could produce significantly different VaR results from those produced using more precise measures. For a further discussion of the Company’s VaR methodology and its limitations, and the Company’s risk management policies and control structure, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

The tables below present the following: the Company’s quarter-end Aggregate (Trading and Non-trading), Trading, and Non-trading VaR (see Table 1 below); the Company’s quarterly average, high, and low Trading VaR (see Table 2 below); and the VaR statistics that would result if the Company were to adopt alternative parameters for its VaR calculations, such as the reported confidence level (99% vs. 95%) for the VaR statistic or a shorter historical time series (four years vs. one year) of market data upon which it bases its simulations (see Table 3 below). Aggregate trading and non-trading VaR incorporates certain non-trading positions which are not included in Trading VaR; these include (a) the funding liabilities related to institutional trading positions and (b) public-company equity positions recorded as investments by the Company. Investments made by the Company that are not publicly traded are not reflected in the VaR results below. As of May 31, 2006, the aggregate carrying value of such investments was approximately $2.3 billion.

The table below presents VaR for each of the Company’s primary risk exposures and on an aggregate basis at May 31, 2006, February 28, 2006 and November 30, 2005:


	Aggregate (Trading and Non-trading)						Trading						Non-trading
Table 1: 99% Total VaR	99%/One-Day VaR at						99%/One-Day VaR at						99%/One-Day VaR at
Primary Market Risk Category	May 31, 2006		February 28, 2006		November 30, 2005		May 31, 2006		February 28, 2006		November 30, 2005		May 31, 2006		February 28, 2006		November 30, 2005
	(dollars in millions)
Interest rate and credit spread	$	57	$	79	$	56	$	54	$	70	$	51	$	18	$	28	$	35
Equity price		47		49		41		40		43		36		23		20		10
Foreign exchange rate		12		15		10		12		15		10		—		—		—
Commodity price		47		42		50		47		42		50		—		—		—

Subtotal		163		185		157		153		170		147		41		48		45
Less diversification benefit(1)		75		70		64		70		65		65		12		14		7

Total VaR	$	88	$	115	$	93	$	83	$	105	$	82	$	29	$	34	$	38

(1)

Diversification benefit equals the difference between Total VaR and the sum of the VaRs for the four risk categories. This benefit arises because the simulated one-day losses for each of the four primary market risk categories occur on different days; similar diversification benefits also are taken into account within each category.

The Company’s Aggregate VaR and Trading VaR at May 31, 2006 were $88 million and $83 million, respectively, compared with $115 million and $105 million, respectively, at February 28, 2006. At the end of the quarter ended May 31, 2006, in response to increased realized market volatility, the Company reduced its risk exposure, as measured by VaR, to a level below that which was maintained earlier in the quarter. As a result, quarter-end VaR was significantly below average Trading VaR during the quarter. The Company will continue to monitor and adjust its risk profile in consideration of future market conditions.


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The Company views average Trading VaR as more representative of trends in the business over a period than VaR at any single point in time. Table 2 below, which presents the high, low and average 99%/one-day Trading VaR during the quarters ended May 31, 2006, February 28, 2006 and November 30, 2005, represents substantially all of the Company’s trading activities. Certain market risks included in the Aggregate VaR discussed above are excluded from these measures (e.g., equity price risk in public company equity positions recorded as investments by the Company and certain funding liabilities related to trading positions).

Average Trading VaR for the quarter ended May 31, 2006 increased to $96 million from $84 million for the quarter ended February 28, 2006, reflecting increases in interest rate and credit spread VaR and equity price VaR. The increase in interest rate and credit spread VaR was driven primarily by increased exposure to credit-sensitive fixed income instruments. The increase in equity price VaR was predominantly driven by increased directional exposure to equity products.


Table 2: 99% High/Low/Average Trading VaR	Daily 99%/One-Day VaR for the Quarter Ended May 31, 2006						Daily 99%/One-Day VaR for the Quarter Ended February 28, 2006						Daily 99%/One-Day VaR for the Quarter Ended November 30, 2005
Primary Market Risk Category	High		Low		Average		High		Low		Average		High		Low		Average
	(dollars in millions)
Interest rate and credit spread	$	82	$	52	$	66	$	70	$	46	$	53	$	60	$	47	$	53
Equity price		57		37		43		48		30		36		41		28		34
Foreign exchange rate		20		8		12		22		9		14		16		10		12
Commodity price		52		36		44		56		41		49		53		39		46
Trading VaR	$	120	$	83	$	96	$	105	$	73	$	84	$	93	$	72	$	81

VaR Statistics for Comparisons with Other Global Financial Services Firms.

VaR statistics are not readily comparable across firms because of differences in the breadth of products included in the VaR model, in the statistical assumptions made when simulating changes in market factors, and in the methods used to approximate portfolio revaluations under the simulated market conditions. These differences can result in materially different VaR estimates for similar portfolios. As a result, VaR statistics are more reliable and relevant when used as indicators of trends in risk taking within a firm rather than as a basis for inferring differences in risk taking across firms. Table 3 below presents the VaR statistics that would result if the Company were to adopt alternative parameters for its calculations, such as the reported confidence level (99% versus 95%) for the VaR statistic or a shorter historical time series (four years versus one year), for market data upon which it bases its simulations:


Table 3: Average 99% and 95% Trading VaR with Four-Year/One-Year Historical Time Series	Average 99%/One-Day VaR for the Quarter Ended May 31, 2006				Average 95%/One-Day VaR for the Quarter Ended May 31, 2006
Primary Market Risk Category	Four-Year Factor History		One-Year Factor History		Four-Year Factor History		One-Year Factor History
	(dollars in millions)
Interest rate and credit spread	$	66	$	48	$	39	$	32
Equity price		43		39		29		27
Foreign exchange rate		12		12		9		8
Commodity price		44		64		28		32
Trading VaR	$	96	$	88	$	63	$	58

In addition, if the Company were to report Trading VaR (using a four-year historical time series) with respect to a 10-day holding period, the Company’s 99% and 95% Average Trading VaR for the quarter ended May 31, 2006 would have been $305 million and $200 million, respectively.


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Distribution of VaR Statistics and Net Revenues for the quarter ended May 31, 2006.

As shown in Table 2 above, the Company’s average 99%/one-day Trading VaR for the quarter ended May 31, 2006 was $96 million. The histogram below presents the distribution of the Company’s daily 99%/one-day Trading VaR for the quarter ended May 31, 2006. The most frequently occurring value was between $90 million and $95 million.

LOGO


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One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’s potential volatility of net revenue is to compare the VaR with actual trading revenue. Assuming no intra-day trading, for a 99%/one-day VaR, the expected number of times that trading losses should exceed VaR during the fiscal year is three, and, in general, if trading losses were to exceed VaR more than five times in a year, the accuracy of the VaR model could be questioned. Accordingly, the Company evaluates the reasonableness of its VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results. The histogram below shows the distribution of daily net revenue during the quarter ended May 31, 2006 for the Company’s trading businesses (including net interest and commissions but excluding primary and prime brokerage revenue credited to the trading businesses). There were no days during the quarter ended May 31, 2006 in which the Company incurred daily trading losses in excess of the 99%/one-day Trading VaR for that given day. Additionally, there were no days during the quarter where the largest one-day loss exceeded the lowest 99%/ one-day Trading VaR.

LOGO

As of May 31, 2006, interest rate risk exposure associated with the Company’s consumer lending activities, included within Discover, as measured by the reduction in pre-tax income resulting from a hypothetical, immediate 100 basis point increase in interest rates, had not changed significantly from November 30, 2005.


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Credit Risk.

For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risks—Credit Risk” in Part II, Item 7A of the Form 10-K.

Credit Exposure-Corporate Lending . At May 31, 2006 and November 30, 2005, the aggregate value of investment grade loans and financial accommodations was $6.2 billion and $5.0 billion, respectively, and the aggregate value of non-investment grade loans and positions was $2.9 billion and $2.3 billion, respectively. At May 31, 2006 and November 30, 2005, the aggregate value of lending commitments outstanding was $35.3 billion and $37.0 billion, respectively. In connection with these business activities (which include funded corporate loans and lending commitments), the Company had hedges with a notional amount of $23.8 billion and $17.8 billion at May 31, 2006 and November 30, 2005, respectively, including both internal and external hedges utilized by the lending business. The table below shows the Company’s credit exposure from its corporate lending positions and commitments as of May 31, 2006:

Corporate Lending Commitments and Funded Loans


	Years to Maturity								Total Corporate Lending Exposure(2)		Funded Corporate Loans
Credit Rating(1)	Less than 1		1-3		3-5		Over 5		Total Corporate Lending Exposure(2)		Funded Corporate Loans
	(dollars in millions)
AAA	$	287	$	115	$	268	$	—	$	670	$	—
AA		2,806		1,747		2,381		552		7,486		2,783
A		1,285		2,624		4,520		1,393		9,822		453
BBB		2,805		2,489		8,771		1,216		15,281		2,935
Non-investment grade		3,789		1,296		2,849		3,205		11,139		2,950

Total	$	10,972	$	8,271	$	18,789	$	6,366	$	44,398	$	9,121

Notional amount of hedges owned									$	23,822

(1)	Obligor credit ratings are determined by Institutional Credit using methodologies generally consistent with those employed by external rating agencies.

(2)	Total corporate lending exposure includes both lending commitments and funded loans.

Credit Exposure-Derivatives . The table below presents a summary by counterparty credit rating and remaining contract maturity of the fair value of OTC derivatives in a gain position at May 31, 2006. Fair value represents the risk reduction arising from master netting agreements, where applicable, and, in the final column, net of collateral received (principally cash and U.S. government and agency securities):

OTC Derivative Products—Financial Instruments Owned(1)


	Years to Maturity								Cross-Maturity and Cash Collateral Netting(3)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Credit Rating(2)	Less than 1		1-3		3-5		Over 5					Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
	(dollars in millions)
AAA	$	1,723	$	1,309	$	1,306	$	1,893	$	(1,768	)	$	4,463	$	4,225
AA		7,895		4,630		5,342		10,813		(15,157	)		13,523		12,841
A		3,943		2,581		2,583		6,861		(6,729	)		9,239		8,002
BBB		4,177		3,286		3,144		3,031		(4,743	)		8,895		6,711
Non-investment grade		3,489		2,029		2,519		2,104		(3,643	)		6,498		3,632
Unrated(4)		1,365		624		169		346		(301	)		2,203		217

Total	$	22,592	$	14,459	$	15,063	$	25,048	$	(32,341	)	$	44,821	$	35,628

(1)

Fair values shown present the Company’s exposure to counterparties related to the Company’s OTC derivative products. The table does not include the effect of any related hedges utilized by the Company. The table also excludes fair values corresponding to other credit exposures, such as those arising from the Company’s lending activities.


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(2)	Obligor credit ratings are determined by Institutional Credit using methodologies generally consistent with those employed by external rating agencies.

(3)

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

(4)

In lieu of making an individual assessment of the creditworthiness of unrated companies, the Company makes a determination that the collateral held with respect to such obligations is sufficient to cover a substantial portion of its exposure. In making this determination, the Company takes into account various factors, including legal uncertainties and market volatility.

The following tables summarize the fair values of the Company’s OTC derivative products recorded in Financial instruments owned and Financial instruments sold, not yet purchased by product category and maturity at May 31, 2006, including on a net basis, where applicable, reflecting the fair value of related non-cash collateral for financial instruments owned:

OTC Derivative Products—Financial Instruments Owned


	Years to Maturity								Cross-Maturity and Cash Collateral Netting(1)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Product Type	Less than 1		1-3		3-5		Over 5					Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	4,030	$	5,897	$	9,454	$	22,404	$	(23,274	)	$	18,511	$	15,739
Foreign exchange forward contracts and options		7,971		605		127		18		(690	)		8,031		6,493
Equity securities contracts (including equity swaps, warrants and options)		2,795		2,031		906		256		(1,586	)		4,402		2,337
Commodity forwards, options and swaps		7,796		5,926		4,576		2,370		(6,791	)		13,877		11,059

Total	$	22,592	$	14,459	$	15,063	$	25,048	$	(32,341	)	$	44,821	$	35,628

(1)

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

OTC Derivative Products—Financial Instruments Sold, Not Yet Purchased(1)


	Years to Maturity								Cross-Maturity and Cash Collateral Netting(2)			Total
Product Type	Less than 1		1-3		3-5		Over 5					Total
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	3,829	$	6,382	$	6,191	$	14,429	$	(19,067	)	$	11,764
Foreign exchange forward contracts and options		8,332		501		83		37		(901	)		8,052
Equity securities contracts (including equity swaps, warrants and options)		3,284		2,214		1,093		717		(956	)		6,352
Commodity forwards, options and swaps		8,644		7,082		2,559		1,660		(7,579	)		12,366

Total	$	24,089	$	16,179	$	9,926	$	16,843	$	(28,503	)	$	38,534

(1)	Since these amounts are liabilities of the Company, they do not result in credit exposures.

(2)

Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral paid is netted on a counterparty basis, provided legal right of offset exists.


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The Company’s derivatives (both listed and OTC) at May 31, 2006 and November 30, 2005 are summarized in the table below, showing the fair value of the related assets and liabilities by product:


	At May 31, 2006				At November 30, 2005
Product Type	Assets		Liabilities		Assets		Liabilities
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	18,661	$	11,838	$	17,157	$	13,212
Foreign exchange forward contracts and options		8,034		8,053		7,548		7,597
Equity securities contracts (including equity swaps, warrants and options)		10,393		15,793		7,290		11,957
Commodity forwards, options and swaps		14,448		13,063		13,899		12,186

Total	$	51,536	$	48,747	$	45,894	$	44,952

Each category of OTC derivative products in the above tables includes a variety of instruments, which can differ substantially in their characteristics. Instruments in each category can be denominated in U.S. dollars or in one or more non-U.S. currencies.

The fair values recorded in the above tables are determined by the Company using various pricing models. For a discussion of fair value as it affects the condensed consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Critical Accounting Policies” in Part I, Item 2 and Note 1 to the condensed consolidated financial statements. As discussed under “Critical Accounting Policies,” the structure of the transaction, including its maturity, is one of several important factors that may impact the price transparency. The impact of maturity on price transparency can differ significantly among product categories. For example, single currency and multi-currency interest rate derivative products involving highly standardized terms and the major currencies (e.g., the U.S. dollar or the euro) will generally have greater price transparency from published external sources even in maturity ranges beyond 20 years. Credit derivatives with highly standardized terms and liquid underlying reference instruments can have price transparency from published external sources in a maturity ranging up to 10 years, while equity and foreign exchange derivative products with standardized terms in major currencies can have price transparency from published external sources within a two-year maturity range. Commodity derivatives with standardized terms and delivery locations can have price transparency from published external sources within various maturity ranges up to 10 years, depending on the commodity. In most instances of limited price transparency based on published external sources, dealers in these markets, in their capacities as market-makers and liquidity providers, provide price transparency beyond the above maturity ranges.

Country Exposure. The Company monitors its credit exposure and risk to individual countries. Credit exposure to a country arises from the Company’s lending activities and derivatives activities in a country. At May 31, 2006, less than 6% of the Company’s total credit exposure (including corporate loans, lending commitments and derivative contracts) was to emerging markets, and no one emerging market country accounted for more than 1% of the Company’s total credit exposure. Country credit ratings are derived using methodologies generally consistent with those employed by external rating agencies.

Industry Exposure. The Company also monitors its credit exposure and risk to individual industries. At May 31, 2006, the Company’s material credit exposure (including corporate loans, lending commitments and derivative contracts) was to entities engaged in the following industries: financial institutions, utilities, sovereign-related entities, consumer-related, forest/metals, and energy.


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Item 4.

Controls and Procedures

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) occurred during the period covered by this report that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Part II OTHER INFORMATION

Item 1.

Legal Proceedings

In addition to the matters described in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2005 (the “Form 10-K”), the Company’s Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2006 (the “First Quarter Form 10-Q”) and those described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of these reviews, investigations and proceedings has increased in recent years with regard to many firms in the financial services industry, including the Company.

The Company contests liability and/or the amount of damages in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, and except for the pending matters described in Note 8 in “Notes to Condensed Consolidated Financial Statements” in Part I, Item 1, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of the pending matters will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period.

(a) The following is a new matter reported by the Company.

General American Litigation.

On April 24, 2006, a Second Amended Petition captioned Finke, et al. v. Morgan Stanley & Co. Incorporated, et al. , was filed in the Missouri Circuit Court, Twenty-Second Judicial Circuit (St. Louis City), by the Director of the Department of Insurance for the State of Missouri and the Special Deputy Liquidator for General American Mutual Holding Company against Morgan Stanley & Co. Incorporated, the Company and a former officer of General American. The amended petition, which updated a petition first filed on or about July 28, 2004, asserts several causes of action against the Morgan Stanley defendants, including claims for fraud, breach of fiduciary duty, and negligent misrepresentation. The case arises out of the firm’s investment banking work in connection with a potential demutualization and initial public offering of General American in 1998-1999. Fact discovery in the case is ongoing. Plaintiffs seek compensatory damages of over $1 billion and punitive damages of over $3 billion.

(b) The following developments have occurred with respect to certain matters previously reported in the Form 10-K and the First Quarter Form 10-Q.

Coleman Litigation.

On June 28, 2006, the District Court of Appeal for the Fourth District of Florida heard oral argument on the Company’s appeal from the judgment of the trial court.


		85

IPO Fee Litigation.

On April 18, 2006, in In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation , the U.S. District Court for the Southern District of New York (the “SDNY”) denied plaintiffs’ motion for class certification. On May 1, 2006, plaintiffs filed a petition pursuant to Federal Rule of Civil Procedure 23(f) for leave to appeal the denial of class certification with the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”).

IPO Allocation Matters.

On June 6, 2006, in In re Initial Public Offering Securities Litigation , the Second Circuit heard oral argument on defendants’ appeal of the SDNY’s grant of class certification in certain of these matters.

Mutual Fund Sales Practices.

On April 14, 2006, in In re Morgan Stanley and Van Kampen Mutual Funds Securities Litigation, the SDNY granted defendants’ motion to dismiss the consolidated amended complaint in its entirety and denied plaintiffs’ motion for leave to file a supplemental pleading. The time to notice an appeal of the Court’s rulings has expired.

AOL Time Warner Litigation.

In the Alaska action, the Company’s renewed motion to dismiss the plaintiffs’ amended claims under the Alaska Securities Act was granted on June 8, 2006. The only claim that remains against the Company in the Alaska action is one for negligent misrepresentation.

The numerous opt-out individual actions filed in various federal courts were transferred to the SDNY and consolidated. Plaintiffs have been filing amended complaints in these actions. On June 30, 2006, defendants filed motions to dismiss the claims common to all complaints.

LVMH Litigation.

On June 30, 2006, the Paris Court of Appeal (the “Appeal Court”) handed down its judgment. The Appeal Court overturned the Commercial Court’s findings in relation to the content of the Company’s research, including the finding of denigration, and overturned the Commercial Court’s award of €30 million. The Appeal Court upheld the Commercial Court’s decision on two issues, namely findings of errors in some of the Company’s disclosures and in one press interview, and appointed an expert to prepare a report on material damage suffered by LVMH Moet Hennessey Louis Vuitton as a result of those errors.

Indonesian Litigation.

On May 3, 2006, in the suit relating to the 1994 bond issue instituted in January 2005, the Indonesian District Court issued its judgment, declaring the bond issue to be null and void, holding that defendants (including the Company) had committed unspecified tortious acts, but awarding no damages. Defendants have appealed those decisions to the Indonesian High Court.

Email Matters.

On May 12, 2006, the U.S. District Court for the District of Columbia (the “D.C. District Court”) entered Final Judgment effecting a settlement the Company had reached with the SEC, the New York Stock Exchange, Inc. (“NYSE”) and the National Association of Securities Dealers, Inc. (the “NASD”) relating to Morgan Stanley & Co. Incorporated’s (“MS&Co.’s”) production of email in the research analyst and IPO investigations from December 2000 through at least July 2005. The complaint, filed by the SEC in the District Court on May 10, 2006, alleges that MS&Co. did not timely produce emails in response to requests in those matters because it did not diligently search for back-up tapes containing responsive emails until 2005, and because it over-wrote back-up tapes potentially containing responsive email until at least December 2002. Without admitting or denying the allegations of the complaint, MS&Co. consented to (1) a permanent injunction barring future violations of §17(b) of the Exchange Act (which requires, among other things, that the Company respond promptly to SEC subpoenas and requests) and the relevant regulations promulgated thereunder and (2) the payment of a $15 million civil penalty, $5 million of which will be paid to the NASD and the NYSE.


		86

Global Wealth Management Employment Matters.

In Garett v. Morgan Stanley & Co., Inc., and Morgan Stanley DW Inc ., the U.S. District Court for the Southern District of California granted preliminary approval of the parties’ settlement.

Additional complaints raising wage and hour allegations against the Company have also been filed in Connecticut and New Jersey. On May 22, 2006, a purported class action, captioned Janemarie Lenihan v. Morgan Stanley & Co., Inc. and Morgan Stanley DW Inc. , was filed in the U.S. District Court for the District of Connecticut. On May 22, 2006, a second matter, captioned Robert Adler et al. v. Morgan Stanley & Co., Inc. and Morgan Stanley DW Inc. , was filed in the Superior Court of New Jersey, Law Division, Bergen County.

The Company has also been named in two purported class actions alleging gender discrimination under state and federal law. On June 22, 2006, a purported class action, captioned Joanne Augst-Johnson et al. v. Morgan Stanley DW Inc. , was filed in the D.C. District Court. On June 22, 2006, a second purported class action captioned Daisy Jaffe v. Morgan Stanley DW Inc. , was filed in the U.S. District Court for the Northern District of California. Plaintiffs seek damages in law and in equity.

Item 1A.

Risk Factors

See “Risk Factors” in Part I, Item 1A of the Form 10-K.


		87

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of the Company of the Company’s common stock during the quarterly period ended May 31, 2006.

Issuer Purchases of Equity Securities

(dollars in millions, except per share amounts)


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (C)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
Month #1 (March 1, 2006 – March 31, 2006)
Equity Anti-dilution Program (A)	—	$	—	—		(A	)
Capital Management Program (B)	—		N/A	—	$	600
Employee Transactions (D)	291,541	$	61.98	N/A		N/A

Month #2 (April 1, 2006 – April 30, 2006)
Equity Anti-dilution Program (A)	285,900	$	63.98	285,900		(A	)
Capital Management Program (B)	—		N/A	—	$	600
Employee Transactions (D)	159,671	$	64.32	N/A		N/A

Month #3 (May 1, 2006 – May 31, 2006)
Equity Anti-dilution Program (A)	1,480,598	$	63.95	1,480,598		(A	)
Capital Management Program (B)	—		N/A	—	$	600
Employee Transactions (D)	311,536	$	59.12	N/A		N/A

Total
Equity Anti-dilution Program (A)	1,766,498	$	63.96	1,766,498		(A	)
Capital Management Program (B)	—		N/A	—	$	600
Employee Transactions (D)	762,748	$	61.31	N/A		N/A

(A)

The Company’s board of directors authorized this program to purchase common stock to offset the dilutive impact of grants and exercises of awards under the Company’s equity-based compensation and benefit plans. The program was publicly announced on January 7, 1999 and has no set expiration or termination date. There is no maximum amount of shares that may be purchased under the program.

(B)

The Company’s board of directors authorized this program to purchase common stock for capital management purposes. The program was publicly announced on February 12, 1998 at which time up to $3 billion of stock was authorized to be purchased. The program was subsequently increased by $1 billion on December 18, 1998, $1 billion on December 20, 1999 and $1.5 billion on June 20, 2000. This program has a remaining capacity of $600 million at May 31, 2006 and has no set expiration or termination date.

(C)	Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems appropriate.

(D)

Includes: (1) shares delivered or attested to in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options (granted under employee stock compensation plans) who exercised options; (2) restricted shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares; and (3) shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units. The Company’s employee stock compensation plans provide that the value of the shares delivered or attested, or withheld, shall be the average of the high and low price of the Company’s common stock on the date the relevant transaction occurs.

Item 4. Submission of Matters to a Vote of Security Holders

Information regarding the submission of matters to a vote of security holders under Item 8.01 of the Company’s Current Report on Form 8-K filed on April 4, 2006 is incorporated by reference herein.

Item 6. Exhibits

An exhibit index has been filed as part of this Report on Page E-1.


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SIGNATURE

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.


MORGAN STANLEY
(Registrant)

By:		/s/ D AVID H. S IDWELL
		David H. Sidwell, Chief Financial Officer

By:		/s/ P AUL C. W IRTH
		Paul C. Wirth, Controller and Principal Accounting Officer

Date: July 7, 2006


		89

EXHIBIT INDEX

MORGAN STANLEY

Quarter Ended May 31, 2006


Exhibit No.		Description

3.1 and 4.1		Certificate of Designation (Exhibit 3.1 and 4.1 to the Company’s Current Report on Form 8-K dated July 5, 2006).

3.2		Amended and Restated Bylaws, as amended to date (Exhibit 3 to the Company’s Current Report on Form 8-K dated June 20, 2006).

4.2		Certificate representing the Series A Preferred Stock.

4.3		Deposit Agreement dated as of July 6, 2006 among the Company, JPMorgan Chase Bank, N.A. and the holders from time to time of the depositary receipts described therein.

4.4		Depositary Receipt for Depositary Shares, representing Floating Rate Non-Cumulative Preferred Stock, Series A (included in Exhibit 4.3 hereto).

10.1		Tax Deferred Equity Participation Plan, amended and restated as of June 20, 2006.

10.2		Morgan Stanley Financial Advisor Productivity Compensation Plan, amended and restated as of June 20, 2006.

10.3		Morgan Stanley Performance Formula and Provisions.

10.4		Morgan Stanley Schedule of Non-Employee Directors Retainers, effective July 6, 2006 (Exhibit 10 to the Company’s Current Report on Form 8-K dated June 20, 2006).

11		Statement Re: Computation of Earnings Per Common Share (The calculation of per share earnings is in Part I, Item 1, Note 7 to the Condensed Consolidated Financial Statements (Earnings per Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).

12		Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.

15		Letter of awareness from Deloitte & Touche LLP, dated July 6, 2006, concerning unaudited interim financial information.

31.1		Rule 13a-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer.

32.2		Section 1350 Certification of Chief Financial Officer.


		E-1

LOGO

EXHIBIT 4.2

FLOATING RATE NON-CUMULATIVE PREFERRED STOCK, SERIES A

($25,000 LIQUIDATION PREFERENCE)


NUMBER				SHARES
1				40,000

CUSIP 61747S603

MORGAN STANLEY

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

THIS CERTIFICATE IS TRANSFERABLE

IN THE CITY OF NEW YORK, NEW YORK

This is to certify that JPMORGAN CHASE BANK, N.A., as Depositary under the Deposit Agreement, dated as of July 6, 2006 among Morgan Stanley (the “Corporation”), JPMorgan Chase Bank, N.A., and the holders from time to time of the Depositary Receipts issued thereunder, is the owner of FORTY THOUSAND fully paid and non-assessable shares of Floating Rate Non-Cumulative Preferred Stock, Series A, $0.01 par value, liquidation preference $25,000 per share, of the Corporation (the “Stock”), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed.

This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated: July 6, 2006

[SEAL]




/s/ JACQUELINE T. BRODY				/s/ DAVID H. SIDWELL
Jacqueline Brody Assistant Treasurer				David Sidwell Chief Financial Officer


				Countersigned and Registered JPMORGAN CHASE BANK, N.A. Transfer Agent, Dividend Disbursement Agent and Registrar

		By:		/s/ DAVID STURMAN
				Vice President Authorized Signature

MORGAN STANLEY

MORGAN STANLEY (the “Corporation”) will furnish, without charge to each stockholder who so requests, a copy of the certificate of designation establishing the powers, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights applicable to each class of stock of the Corporation or series thereof. Such information may be obtained by a request in writing to the Secretary of the Corporation at its principal place of business.

This certificate and the share or shares represented hereby are issued and shall be held subject to all of the provisions of the Corporation’s Amended and Restated Certificate of Incorporation, as amended, and the Certificate of Designation of Preferences and Rights of the Floating Rate Non-Cumulative Preferred Stock, Series A (Liquidation Preference $25,000 per share) (copies of which are on file with the Transfer Agent), to all of which the holder, by acceptance hereof, assents.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full to applicable laws or regulations:


TEN COM	-	as tenants in common	UNIF GIFT MIN ACT- Custodian
TEN ENT	-	as tenants by the entireties	(Minor) (Cust)
JT TEN	-	as joint tenants with right of survivorship and not as tenants in common	under Uniform Gifts to Minors Act _____________________________________ (State)

Additional abbreviations may also be used though not in the above list.

For value received, hereby sell(s), assign(s) and transfer(s) unto


PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE

____________________________________________________________________________________________________ shares

of the capital stock represented by the within certificate, and do(es) hereby irrevocably constitute and appoint , Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated_____________




		Signature

	NOTICE:	The signature to this assignment must correspond with the name as written upon the face of this certificate in every particular, without alteration or enlargement or any change whatever.

SIGNATURE GUARANTEED


NOTICE: The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations, and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.

EXHIBIT 4.3

MORGAN STANLEY,

JPMORGAN CHASE BANK, N.A.

AND

THE HOLDERS FROM TIME TO TIME OF

THE DEPOSITARY RECEIPTS DESCRIBED HEREIN

DEPOSIT AGREEMENT

Dated as of July 6, 2006

TABLE OF CONTENTS


		P AGE

ARTICLE 1
D EFINITIONS

Section 1.01. Definitions		1

ARTICLE 2
F ORM OF R ECEIPTS , D EPOSIT OF S TOCK , E XECUTION AND D ELIVERY , T RANSFER , S URRENDER AND R EDEMPTION OF R ECEIPTS

Section 2.01. Form and Transfer of Receipts		3
Section 2.02. Deposit of Stock; Execution and Delivery of Receipts in Respect Thereof		4
Section 2.03. Registration of Transfer of Receipts		5
Section 2.04. Split-ups and Combinations of Receipts; Surrender of Receipts and Withdrawal of Stock		5
Section 2.05. Limitations on Execution and Delivery, Transfers, Surrender and Exchange of Receipts		6
Section 2.06. Lost Receipts, Etc .		7
Section 2.07. Optional Redemption of Stock		7
Section 2.08. Cancellation and Destruction of Surrendered Receipts		9
Section 2.09. Receipts Issuable in Global Registered Form		9

ARTICLE 3
C ERTAIN O BLIGATIONS OF H OLDERS OF R ECEIPTS AND THE C OMPANY

Section 3.01. Filing Proofs, Certificates and Other Information		10
Section 3.02. Payment of Taxes or Other Governmental Charges		10
Section 3.03. Warranty as To Stock		11

ARTICLE 4
T HE D EPOSITED S ECURITIES ; N OTICES

Section 4.01. Cash Distributions		11
Section 4.02. Distributions Other Than Cash, Rights, Preferences or Privileges		11
Section 4.03. Subscription Rights, Preferences or Privileges		12
Section 4.04. Notice of Dividends, Etc.; Fixing Record Date for Holders of Receipts		13
Section 4.05. Voting Rights		13


Section 4.06. Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, Etc .		14
Section 4.07. Delivery of Reports		15
Section 4.08. Lists of Receipt Holders		15

ARTICLE 5
T HE D EPOSITARY , THE D EPOSITARY ’ S A GENTS , THE R EGISTRAR AND THE C OMPANY

Section 5.01. Maintenance of Offices, Agencies and Transfer Books by the Depositary; Registrar		15
Section 5.02. Prevention of or Delay in Performance by the Depositary or the Company		16
Section 5.03. Obligation of the Depositary and the Company		16
Section 5.04. Resignation and Removal of the Depositary; Appointment of Successor Depositary		18
Section 5.05. Corporate Notices and Reports		19
Section 5.06. Indemnification		19
Section 5.07. Charges and Expenses		19

ARTICLE 6
A MENDMENT AND T ERMINATION

Section 6.01. Amendment		20
Section 6.02. Termination		20

ARTICLE 7
M ISCELLANEOUS

Section 7.01. Counterparts		21
Section 7.02. Exclusive Benefit of Parties		21
Section 7.03. Invalidity of Provisions		22
Section 7.04. Notices		22
Section 7.05. Depositary’s Agents		23
Section 7.06. Appointment of Registrar and Transfer Agent in respect of the Depositary Shares and Receipts		23
Section 7.07. Appointment of Registrar and Transfer Agent in respect of the Stock		23
Section 7.08. Appointment of Calculation Agent		23
Section 7.09. Holders of Receipts Are Parties		24
Section 7.10. Governing Law		24
Section 7.11. Inspection of Deposit Agreement		24
Section 7.12. Headings		24
EXHIBIT A – Form of Receipt
EXHIBIT B

DEPOSIT AGREEMENT dated as of July 6, 2006, among MORGAN STANLEY, a Delaware corporation, JPMORGAN CHASE BANK, N.A., a national association organized pursuant to the laws of the United States, and the holders from time to time of the Receipts described herein.

WHEREAS, it is desired to provide as hereinafter set forth in this Deposit Agreement, for the deposit from time to time of shares of Floating Rate Non-Cumulative Preferred Stock, Series A (the “ Stock ”), par value $0.01 per share, liquidation preference $25,000 per share, of Morgan Stanley with the Depositary for the purposes set forth in this Deposit Agreement and for the issuance hereunder of Receipts evidencing Depositary Shares in respect of the Stock so deposited; and

WHEREAS, the Receipts are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement;

NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows:

ARTICLE 1

D EFINITIONS

Section 1.01 . Definitions. The following definitions shall for all purposes, unless otherwise indicated, apply to the respective terms used in this Deposit Agreement:

“ Certificate ” shall mean the Certificate of Designation of Preferences and Rights filed or to be filed with the Secretary of State of the State of Delaware establishing the Stock as a series of preferred stock of the Company.

“ Company ” shall mean Morgan Stanley, a Delaware corporation, and its successors.

“ Deposit Agreement ” shall mean this Deposit Agreement, as amended or supplemented from time to time in accordance with the terms hereof.

“ Depositary ” shall mean JPMorgan Chase Bank, N.A., or any successor as Depositary hereunder.

“ Depositary Shares ” shall mean the depositary shares, each representing 1/1,000 ^th of a share of Stock and evidenced by a Receipt.

“ Depositary’s Agent ” shall mean an agent appointed by the Depositary pursuant to Section 7.05.

“ Depositary’s Office ” shall mean the principal corporate trust office of the Depositary in New York City, at which at any particular time its depositary receipt business shall be administered.

“ Exchange Event ” means with respect to the Global Registered Receipt: (A) the Global Receipt Depository which is the holder of such Global Registered Receipt or Receipts notifies the Company that it is no longer willing or able to properly discharge its responsibilities under the Letter of Representations or that it is no longer eligible or in good standing under the Securities Exchange Act of 1934, as amended, and (B) the Company has not appointed a qualified successor Global Receipt Depository within ninety (90) calendar days after the Company received such notice.

“ Global Receipt Depository ” means, with respect to any Receipt issued hereunder, The Depository Trust Company (“ DTC ”) or such other successor entity designated as Global Receipt Depository by the Company in or pursuant to this Deposit Agreement, which Person must be, to the extent required by any applicable law or regulation, a clearing agency registered under the Securities Exchange Act of 1934, as amended.

“ Global Registered Receipt ” means, with respect to the Depositary Shares, a global registered Receipt registered in the name of a nominee of the Global Receipt Depository.

“ Letter of Representations ” means the applicable agreement among the Company and a Global Receipt Depository with respect to such Global Receipt Depository’s rights and obligations with respect to the Global Registered Receipts, as the same may be amended, supplemented, restated or otherwise modified from time to time and any successor agreement thereto.

“ Holder, ” “ holder ” or “ record holder, ” as applied to a Receipt shall mean the person in whose name a Receipt is registered on the books of the Depositary maintained for such purpose.

“ Receipt ” shall mean one of the depositary receipts, substantially in the form set forth as Exhibit A hereto, issued hereunder, whether in definitive or temporary form and evidencing the number of Depositary Shares held of record by the holder of such Depositary Shares.

“ Redemption Date ” has the meaning set forth in Section 2.07.

“ Registrar ” shall mean the Depositary or such other successor bank or trust company that shall be appointed by the Company to register ownership and transfers of Receipts as herein provided, and if a Registrar shall be so appointed,

references herein to “the books” of or maintained by the Depositary shall be deemed, as applicable, to refer as well to the register maintained by such Registrar for such purpose.

“ Securities Act ” shall mean the Securities Act of 1933, as amended.

“ Stock ” shall mean shares of the Company’s Floating Rate Non-Cumulative Preferred Stock, Series A, par value $0.01 per share, liquidation preference $25,000 per share.

ARTICLE 2

F ORM OF R ECEIPTS , D EPOSIT OF S TOCK , E XECUTION AND D ELIVERY , T RANSFER ,

S URRENDER AND R EDEMPTION OF R ECEIPTS

Section 2.01 . Form and Transfer of Receipts. Definitive Receipts shall be engraved or printed or lithographed on steel-engraved borders, with appropriate insertions, modifications and omissions, as hereinafter provided. Pending the preparation of definitive Receipts, the Depositary, upon the written order of the Company delivered in compliance with Section 2.02, shall execute and deliver temporary Receipts that are printed, lithographed, typewritten, mimeographed or otherwise substantially of the tenor of the definitive Receipts in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the persons executing such Receipts may determine, as evidenced by their execution of such Receipts. If temporary Receipts are issued, the Company will cause definitive Receipts to be prepared without unreasonable delay. After the preparation of definitive Receipts, the temporary Receipts shall be exchangeable for definitive Receipts upon surrender of the temporary Receipts at an office described in the penultimate paragraph of Section 2.02, without charge to the holder. Upon surrender for cancellation of any one or more temporary Receipts, the Depositary shall execute and deliver in exchange therefor definitive Receipts representing the same number of Depositary Shares as are represented by the surrendered temporary Receipt or Receipts. Such exchange shall be made at the Company’s expense and without any charge therefor. Until so exchanged, the temporary Receipts shall in all respects be entitled to the same benefits under this Deposit Agreement, and with respect to the Stock, as definitive Receipts.

Receipts shall be executed by the Depositary by the manual or facsimile signature of a duly authorized officer of the Depositary and, if a Registrar for the Receipts shall have been appointed, countersigned by a duly authorized officer of the Registrar; provided that no Receipt shall be entitled to any benefits under this Deposit Agreement or be valid or obligatory for any purpose unless it shall have been executed manually by a duly authorized officer of the Depositary or, if a Registrar for the Receipts shall have been appointed, by manual or facsimile signature of a duly authorized officer of the Depositary and countersigned by a duly authorized officer of such Registrar. The Depositary shall record on its books each Receipt so signed and delivered as hereinafter provided.

Receipts shall be in denominations of any number of whole Depositary Shares.

Receipts may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Deposit Agreement as may be required by the Depositary or required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange upon which the Stock, the Depositary Shares or the Receipts may be listed or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Receipts are subject.

Title to Depositary Shares evidenced by a Receipt that is properly endorsed or accompanied by a properly executed instrument of transfer shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until transfer of a Receipt shall be registered on the books of the Depositary as provided in Section 2.03, the Depositary may, notwithstanding any notice to the contrary, treat the holder of record at such time as the absolute owner thereof for the purpose of determining the person entitled to distributions of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all other purposes.

Section 2.02 . Deposit of Stock; Execution and Delivery of Receipts in Respect Thereof. Subject to the terms and conditions of this Deposit Agreement, the Company may from time to time deposit shares of Stock under this Deposit Agreement by delivery to the Depositary of a certificate or certificates for the Stock to be deposited, properly endorsed or accompanied, if required by the Depositary, by a duly executed instrument of transfer or endorsement, in form satisfactory to the Depositary, together with all such certifications as may be required by the Depositary in accordance with the provisions of this Deposit Agreement, and together with a written order of the Company directing the Depositary to execute and deliver to, or upon the written order of, the person or persons stated in such order a Receipt or Receipts for the number of Depositary Shares representing such deposited Stock.

Deposited Stock shall be held by the Depositary at the Depositary’s Office or at such other place or places as the Depositary shall determine.

Upon receipt by the Depositary of a certificate or certificates for Stock deposited in accordance with the provisions of this Section, together with the other documents required as above specified, and upon recordation of the Stock on the books of the Company (or its duly appointed transfer agent) in the name of the Depositary or its nominee, the Depositary, subject to the terms and conditions of this Deposit Agreement, shall execute and deliver, to or upon the order of the person or persons named in the written order delivered to the Depositary referred to in the first paragraph of this Section, a Receipt or Receipts for the number of Depositary Shares representing the Stock so deposited and registered in such

name or names as may be requested by such person or persons. The Depositary shall execute and deliver such Receipt or Receipts at the Depositary’s Office or such other offices, if any, as the Depositary may designate. Delivery at other offices shall be at the risk and expense of the person requesting such delivery.

Notwithstanding the foregoing, pending preparation by the Company of definitive certificates for the Stock to be deposited, the Company may deliver temporary certificates for Stock that are printed, lithographed, typewritten, mimeographed or otherwise substantially of the tenor of the definitive certificates for Stock in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Company may determine. If temporary certificates for Stock are delivered, the Company will cause definitive certificates for Stock to be prepared without unreasonable delay. After the preparation of definitive certificates for Stock, the temporary certificates for Stock shall be exchangeable for definitive certificates for Stock upon surrender of the temporary certificates for Stock at the Depositary’s Office, without charge to the Depositary.

Section 2.03 . Registration of Transfer of Receipts. Subject to the terms and conditions of this Deposit Agreement, including payment of the fees of the Depositary as provided in Section 5.07, the Depositary shall register on its books from time to time transfers of Receipts upon any surrender thereof by the holder in person or by duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer. Thereupon the Depositary shall execute a new Receipt or Receipts evidencing the same aggregate number of Depositary Shares as those evidenced by the Receipt or Receipts surrendered and deliver such new Receipt or Receipts to or upon the order of the person entitled thereto.

The Depositary shall not be required (a) to issue, transfer or exchange any Receipts for a period beginning at the opening of business fifteen days next preceding any selection of Depositary Shares and Stock to be redeemed and ending at the close of business on the day of the mailing of notice of redemption, or (b) to transfer or exchange for another Receipt any Receipt called or being called for redemption in whole or in part except as provided in Section 2.07.

Section 2.04 . Split-ups and Combinations of Receipts; Surrender of Receipts and Withdrawal of Stock. Upon surrender of a Receipt or Receipts at the Depositary’s Office or at such other offices as it may designate for the purpose of effecting a split-up or combination of such Receipt or Receipts, and subject to the terms and conditions of this Deposit Agreement, the Depositary shall execute and deliver a new Receipt or Receipts in the authorized denomination or denominations requested, evidencing the aggregate number of Depositary Shares evidenced by the Receipt or Receipts surrendered.

Any holder of a Receipt or Receipts representing any number of whole shares of Stock may withdraw the Stock and all money and other property, if any, represented thereby by surrendering such Receipt or Receipts at the Depositary’s

Office or at such other offices as the Depositary may designate for such withdrawals. Upon payment of the fees of the Depositary for the withdrawal of Stock as provided in Section 5.07 and payment of all taxes and without unreasonable delay, the Depositary shall deliver to such holder or to the person or persons designated by such holder as hereinafter provided, the number of whole shares of Stock and all money and other property, if any, represented by the Depositary Shares evidenced by the Receipt or Receipts so surrendered for withdrawal, but holders of such whole shares of Stock will not thereafter be entitled to deposit such Stock hereunder or to receive Depositary Shares therefor or a Receipt evidencing such Depositary Shares. If a Receipt delivered by the holder to the Depositary in connection with such withdrawal shall evidence a number of Depositary Shares in excess of the number of Depositary Shares representing the number of whole shares of Stock to be so withdrawn, the Depositary shall at the same time, in addition to such number of whole shares of Stock and such money and other property, if any, to be so withdrawn, deliver to such holder, or pursuant to his order, upon payment of the fees of the Depositary for the withdrawal of Stock as provided in Section 5.07 and payment of all taxes, a new Receipt evidencing such excess number of Depositary Shares. Delivery of the Stock and money and other property, if any, being withdrawn may be made by the delivery of such certificates, documents of title and other instruments as the Depositary may deem appropriate.

If the Stock and the money and other property, if any, being withdrawn are to be delivered to a person or persons other than the holder of the Receipt or Receipts being surrendered for withdrawal of Stock, such holder shall execute and deliver to the Depositary a written order so directing the Depositary and the Depositary may require that the Receipt or Receipts surrendered by such holder for the withdrawal of such shares of Stock be properly endorsed in blank or accompanied by a properly executed instrument of transfer in blank.

Delivery of the Stock and the money and other property, if any, represented by Receipts surrendered for withdrawal shall be made by the Depositary at the Depositary’s Office, except that, at the request, risk and expense of the holder surrendering such Receipt or Receipts and for the account of the holder thereof, such delivery may be made at such other place as may be designated by such holder.

Section 2.05 . Limitations on Execution and Delivery, Transfers, Surrender and Exchange of Receipts. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination, surrender or exchange of any Receipt, the Depositary, any of the Depositary’s Agents or the Company may require payment to it of a sum sufficient for the payment (or, in the event that the Depositary or the Company shall have made such payment, the reimbursement to it) of any charges or expenses payable by the holder of a Receipt pursuant to Section 5.07, may require the production of evidence satisfactory to it as to the identity and genuineness of any signature and may also require compliance with

such regulations, if any, as the Depositary or the Company may establish consistent with the provisions of this Deposit Agreement and/or applicable law.

The deposit of Stock may be refused, the delivery of Receipts against Stock may be suspended, the registration of transfer of Receipts may be refused and the registration of transfer, surrender or exchange of outstanding Receipts may be suspended (i) during any period when the register of stockholders of the Company is closed or (ii) if any such action is deemed necessary or advisable by the Depositary, any of the Depositary’s Agents or the Company at any time or from time to time because of any requirement of law or of any government or governmental body or commission or under any provision of this Deposit Agreement.

Section 2.06 . Lost Receipts, Etc. In case any Receipt shall be mutilated, destroyed, lost or stolen, the Depositary in its discretion may execute and deliver a Receipt of like form and tenor in exchange and substitution for such mutilated Receipt upon cancellation thereof, or in lieu of and in substitution for such destroyed, lost or stolen Receipt. Before the Depositary shall execute and deliver a new Receipt in substitution for a destroyed, lost or stolen Receipt, the holder thereof shall have (i) delivered to the Depositary (a) a request for such execution and delivery prior to the Depositary having received notice that the Receipt has been acquired by a bona fide purchaser, (b) evidence satisfactory to the Depositary of such destruction, loss or theft of such Receipt and of ownership thereof and (c) indemnification satisfactory to the Depositary and (ii) satisfied any other reasonable requirements imposed by the Depositary.

Section 2.07 . Optional Redemption of Stock. If the Company shall elect to redeem shares of Stock pursuant to the Certificate, it shall (unless otherwise agreed to in writing with the Depositary) give the Depositary not less than 30 days’ notice of the date of such proposed redemption of Stock, the number of shares of Stock held by the Depositary to be redeemed and the redemption price per share of Stock. The Depositary shall be fully protected and shall incur no liability in its reliance on the information contained in such notice and delivery of such notice to the Depositary shall be conclusive evidence of the permissibility and compliance of such redemption under the Certificate. On the date of such redemption, provided that the Company shall then have paid or caused to be paid in full to the Depositary the redemption price (determined pursuant to the Certificate) of the Stock deposited with the Depositary to be redeemed, the Depositary shall redeem (using the proceeds of such redemption) the Depositary Shares relating to such Stock. The Depositary shall mail, first class postage prepaid, notice of the Company’s redemption of Stock and the proposed simultaneous redemption of the Depositary Shares relating to the Stock to be redeemed, not less than 15 days and not more than 60 days prior to the date fixed for redemption of such Stock and Depositary Shares (the “ Redemption Date ”), to the holders on the record date fixed for such redemption pursuant to Section 4.04 of the Receipts evidencing the Depositary Shares to be so redeemed, at the addresses of such holders as the same appear on the records of the Depositary; but

neither failure to mail any such notice to one or more such holders nor any defect in any notice shall affect the sufficiency of the proceedings for redemption as to the other holders. The Company shall provide the Depositary with such notice, and each such notice shall state: (i) the Redemption Date; (ii) the number of Depositary Shares to be redeemed and, if fewer than all the Depositary Shares held by any holder are to be redeemed, the number of Depositary Shares held by such holder to be so redeemed; (iii) the redemption price and (iv) the place or places where Receipts evidencing Depositary Shares to be redeemed are to be surrendered for payment of the redemption price. In case fewer than all the outstanding Depositary Shares are to be redeemed, the Depositary Shares to be redeemed shall be selected pro rata (as nearly as may be), or by any other method as determined by the Company to be fair and equitable in its sole discretion.

Notice having been mailed by the Depositary as aforesaid, from and after the Redemption Date (unless the Company shall have failed to redeem the shares of Stock to be redeemed by it as set forth in the Company’s notice provided for in the preceding paragraph) all dividends in respect of the shares of Stock called for redemption shall cease to accrue, the Depositary Shares called for redemption shall be deemed no longer to be outstanding and all rights of the holders of Receipts evidencing such Depositary Shares (except the right to receive the redemption price) shall, to the extent of such Depositary Shares, cease and terminate. Upon surrender in accordance with said notice of the Receipts evidencing such Depositary Shares (properly endorsed or assigned for transfer, if the Depositary shall so require), such Depositary Shares shall be redeemed at a redemption price per Depositary Share equal to one-one thousandth of the redemption price per share paid in respect of shares of Stock pursuant to the Certificate plus all money and other property, if any, represented by such Depositary Shares, including all amounts paid by the Company in respect of dividends that on the Redemption Date have accrued on the shares of Stock to be so redeemed and that have not theretofore been paid. The foregoing shall be subject further to the terms and conditions of the Certificate.

If fewer than all of the Depositary Shares evidenced by a Receipt are called for redemption, the Depositary will deliver to the holder of such Receipt upon its surrender to the Depositary, together with payment of the redemption price for the Depositary Shares called for redemption, a new Receipt evidencing the Depositary Shares evidenced by such prior Receipt and not called for redemption.

Except as provided in the preceding paragraph of this Section 2.07, the Depositary shall not be required to transfer or exchange for another Receipt any Receipt evidencing Depositary Shares called or being called for redemption in whole or in part.

The Depositary shall remit to the Company any funds deposited by or for the account of the Company for the purpose of redeeming any Depositary Shares

that the holders thereof have failed to redeem after two years from the date of such deposit, without further action necessary on the part of the Company.

Section 2.08 . Cancellation and Destruction of Surrendered Receipts. All Receipts surrendered to the Depositary or any Depositary’s Agent shall be cancelled by the Depositary. Except as prohibited by applicable law or regulation, the Depositary is authorized to destroy all Receipts so cancelled.

Section 2.09 . Receipts Issuable in Global Registered Form. If the Company shall determine in a writing delivered to the Depositary that the Receipts are to be issued in whole or in part in the form of one or more Global Registered Receipts, then the Depositary shall, in accordance with the other provisions of this Deposit Agreement, execute and deliver one or more Global Registered Receipts evidencing the Receipts, which (i) shall represent, and shall be denominated in an amount equal to the aggregate liquidation preference of, the Receipts to be represented by such Global Registered Receipt or Receipts, and (ii) shall be registered in the name of the Global Receipt Depository therefor or its nominee.

Notwithstanding any other provision of this Deposit Agreement to the contrary, unless otherwise provided in a Global Registered Receipt, such Global Registered Receipt may only be transferred in whole and only by the Global Receipt Depository to its nominee, or by such nominee to the Global Receipt Depository or to another nominee of the Global Receipt Depository, or by the Global Receipt Depository or any nominee thereof to a successor Global Receipt Depository for the Global Registered Receipt selected or approved by the Company or to a nominee of the Global Receipt Depository. Except as provided below, owners solely of beneficial interests in a Global Registered Receipt shall not be entitled to receive physical delivery of the Receipts represented by such Global Registered Receipt. Neither any such beneficial owner nor any direct or indirect participant of a Global Receipt Depository shall have any rights under this Deposit Agreement with respect to any Global Registered Receipt held on their behalf by a Global Receipt Depository and such Global Receipt Depository may be treated by the Company, the Depositary and any director, officer, employee or agent of the Company or the Depositary as the holder of such Global Registered Receipt for all purposes whatsoever. Unless and until definitive Receipts are delivered to the owners of the beneficial interests in a Global Registered Receipt, (1) the Global Receipt Depository will make book-entry transfers among its participants and receive and transmit all payments and distributions in respect of Global Registered Receipts to such participants, in each case, in accordance with its applicable procedures and arrangements, and (2) whenever any notice, payment or other communication to the holders of Global Registered Receipts is required under this Deposit Agreement, the Company and the Depositary shall give all such notices, payments and communications specified herein to be given to such holders to the Global Receipt Depository.

If an Exchange Event has occurred with respect to any Global Registered Receipt, then, in any such event, the Depositary shall, upon receipt of a written order from the Company for the execution and delivery of individual definitive registered Receipts in exchange for such Global Registered Receipt, execute and deliver, individual definitive registered Receipts, in authorized denominations and of like tenor and terms in an aggregate liquidation preference equal to the liquidation preference of the Global Registered Receipt in exchange for such Global Registered Receipt.

Definitive registered Receipts issued in exchange for a Global Registered Receipt pursuant to this Section shall be registered in such names and in such authorized denominations as the Global Receipt Depository, pursuant to instructions from its participants, shall instruct the Depositary in writing. The Depositary shall deliver such Receipts to the persons in whose names such Receipts are so registered.

Notwithstanding anything to the contrary in this Deposit Agreement, should the Company determine that the Receipts should be issued as a Global Registered Receipt, or that a Global Registered Receipt should be issued in exchange for definitive registered Receipts, the parties hereto shall comply with the terms of the Letter of Representations.

ARTICLE 3

C ERTAIN O BLIGATIONS OF H OLDERS OF R ECEIPTS AND THE C OMPANY

Section 3.01 . Filing Proofs, Certificates and Other Information. Any holder of a Receipt may be required from time to time to file such proof of residence, or other matters or other information, to execute such certificates and to make such representations and warranties as the Depositary or the Company may reasonably deem necessary or proper. The Depositary or the Company may withhold the delivery, or delay the registration of transfer, redemption or exchange, of any Receipt or the withdrawal of the Stock represented by the Depositary Shares evidenced by any Receipt or the distribution of any dividend or other distribution or the sale of any property or rights or of the proceeds thereof until such proof or other information is filed or such certificates are executed or such representations and warranties are made.

Section 3.02 . Payment of Taxes or Other Governmental Charges. Holders of Receipts shall be obligated to make payments to the Depositary of certain charges and expenses, as provided in Section 5.07. Registration of transfer of any Receipt or any withdrawal of Stock and all money or other property, if any, represented by the Depositary Shares evidenced by such Receipt may be refused until any such payment due is made, and any dividends, interest payments or other distributions may be withheld or any part of or all the Stock or other property represented by the Depositary Shares evidenced by such Receipt and not theretofore sold may be sold for the account of the holder thereof (after

attempting by reasonable means to notify such holder prior to such sale), and such dividends, interest payments or other distributions or the proceeds of any such sale may be applied to any payment of such charges or expenses, the holder of such Receipt remaining liable for any deficiency.

Section 3.03 . Warranty as To Stock. The Company hereby represents and warrants that the Stock, when issued, will be duly authorized, validly issued, fully paid and nonassessable. Such representation and warranty shall survive the deposit of the Stock and the issuance of Receipts.

ARTICLE 4

T HE D EPOSITED S ECURITIES ; N OTICES

Section 4.01 . Cash Distributions . Whenever the Depositary shall receive any cash dividend or other cash distribution on Stock, the Depositary shall, subject to Sections 3.01 and 3.02, distribute to holders of Receipts on the record date fixed pursuant to Section 4.04 (net of the fees of the Depositary as provided in Section 5.07 hereof) such amounts of such dividend or distribution as are, as nearly as practicable, in proportion to the respective numbers of Depositary Shares evidenced by the Receipts held by such holders; provided, however , that in case the Company or the Depositary shall be required to withhold and shall withhold from any cash dividend or other cash distribution in respect of the Stock an amount on account of taxes, the amount made available for distribution or distributed in respect of Depositary Shares shall be reduced accordingly. The Depositary shall distribute or make available for distribution, as the case may be, only such amount, however, as can be distributed without attributing to any holder of Depositary Shares a fraction of one cent, and any balance not so distributable shall be held by the Depositary (without liability for interest thereon) and shall be added to and be treated as part of the next sum received by the Depositary for distribution to holders of Receipts then outstanding. In the event that definitive registered Receipts are issued, each holder of such a definitive registered Receipt shall provide the Depositary with a properly completed Form W-8 or W-9 (such Form W-9 shall contain the holder’s certified tax identification number, if required), as may be applicable. Each holder of a Receipt acknowledges that the Depositary may withhold such amounts as are required by law from any of the distributions to be made hereunder .

Section 4.02 . Distributions Other Than Cash, Rights, Preferences or Privileges. Whenever the Depositary shall receive any distribution other than cash, rights, preferences or privileges upon Stock, the Depositary shall, subject to Sections 3.01 and 3.02, distribute to holders of Receipts on the record date fixed pursuant to Section 4.04 such amounts of the securities or property received by it as are, as nearly as practicable, in proportion to the respective numbers of Depositary Shares evidenced by the Receipts held by such holders, in any manner that the Depositary may deem equitable and practicable for accomplishing such

distribution. If in the opinion of the Depositary such distribution cannot be made proportionately among such holders, or if for any other reason (including any requirement that the Company or the Depositary withhold an amount on account of taxes or governmental charges) the Depositary deems, after consultation with the Company, such distribution not to be feasible, the Depositary may, with the approval of the Company, adopt such method as it deems equitable and practicable for the purpose of effecting such distribution, including the sale (at public or private sale) of the securities or property thus received, or any part thereof, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall, subject to Sections 3.01 and 3.02, be distributed or made available for distribution, as the case may be, by the Depositary to such holders of Receipts as provided by Section 4.01 in the case of a distribution received in cash. The Company shall not make any distribution of such securities unless the Company shall have provided an opinion of counsel stating that such securities have been registered under the Securities Act or do not need to be so registered.

Section 4.03 . Subscription Rights, Preferences or Privileges. If the Company shall at any time offer or cause to be offered to the persons in whose names Stock is recorded on the books of the Company any rights, preferences or privileges to subscribe for or to purchase any securities or any rights, preferences or privileges of any other nature, such rights, preferences or privileges shall in each such instance be made available by the Depositary to the holders of Receipts in such manner as the Depositary may determine, either by the issue to such holders of warrants representing such rights, preferences or privileges or by such other method as may be determined by the Depositary with the approval of the Company; provided, however, that (i) if at the time of issue or offer of any such rights, preferences or privileges the Depositary determines that it is not lawful or (after consultation with the Company) not feasible to make such rights, preferences or privileges available to holders of Receipts by the issue of warrants or otherwise, or (ii) if and to the extent so instructed by holders of Receipts who do not desire to exercise such rights, preferences or privileges, then the Depositary may (with approval of the Company in any case where the Depositary has determined that it is not feasible to make such rights, preferences or privileges available), if applicable laws or the terms of such rights, preferences or privileges permit such transfer, sell such rights, preferences or privileges at public or private sale, at such place or places and upon such terms as it may deem proper. The net proceeds of any such sale shall, subject to Sections 3.01 and 3.02, be distributed by the Depositary to the holders of Receipts entitled thereto as provided by Section 4.01 in the case of a distribution received in cash.

If registration under the Securities Act of the securities to which any rights, preferences or privileges relate is required in order for holders of Receipts to be offered or sold the securities to which such rights, preferences or privileges relate, the Company agrees with the Depositary that it will promptly notify the Depositary of such requirement and will file promptly a registration statement

pursuant to such Act with respect to such rights, preferences or privileges and securities and use its reasonable best efforts and take all steps available to it to cause such registration statement to become effective sufficiently in advance of the expiration of such rights, preferences or privileges to enable such holders to exercise such rights, preferences or privileges. In no event shall the Depositary make available to the holders of Receipts any right, preference or privilege to subscribe for or to purchase any securities unless and until such registration statement shall have become effective, or unless the offering and sale of such securities to such holders are exempt from registration under the provisions of the Securities Act and the Company shall have provided to the Depositary an opinion of counsel to such effect.

If any other action under the laws of any jurisdiction or any governmental or administrative authorization, consent or permit is required in order for such rights, preferences or privileges to be made available to holders of Receipts, the Company agrees with the Depositary that it will promptly notify the Depositary of such requirements and that the Company will use its reasonable best efforts to take such action or obtain such authorization, consent or permit sufficiently in advance of the expiration of such rights, preferences or privileges to enable such holders to exercise such rights, preferences or privileges.

The Depositary will not be deemed to have any knowledge of any item for which it is supposed to receive notification under any Section of this Deposit Agreement unless and until it has received such notification.

Section 4.04 . Notice of Dividends, Etc.; Fixing Record Date for Holders of Receipts. Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or if rights, preferences or privileges shall at any time be offered with respect to Stock, or whenever the Depositary shall receive notice of (i) any meeting at which holders of Stock are entitled to vote or of which holders of Stock are entitled to notice or (ii) any election on the part of the Company to redeem any shares of Stock, or whenever the Depositary and the Company shall decide it is appropriate, the Depositary shall in each such instance fix a record date (which shall be the same date as the record date fixed by the Company with respect to or otherwise in accordance with the terms of the Stock) for the determination of the holders of Receipts who shall be entitled to receive such dividend, distribution, rights, preferences or privileges or the net proceeds of the sale thereof, or to give instructions for the exercise of voting rights at any such meeting, or who shall be entitled to notice of such meeting, or whose Depositary Shares are to be redeemed or for any other appropriate reasons.

Section 4.05 . Voting Rights. Upon receipt of notice of any meeting at which the holders of Stock are entitled to vote, the Depositary shall, as soon as practicable thereafter, mail to the holders of Receipts entitled thereto a notice that shall contain (i) such information as is contained in such notice of meeting and (ii) a statement that such holders may, subject to any applicable restrictions, instruct

the Depositary as to the exercise of the voting rights pertaining to the amount of Stock represented by their respective Depositary Shares (including an express indication that instructions may be given to the Depositary to give a discretionary proxy to a person designated by the Company) and a brief statement as to the manner in which such instructions may be given. Upon the written request of the holders of Receipts on the relevant record date, the Depositary shall endeavor insofar as practicable to vote or cause to be voted, in accordance with the instructions set forth in such requests, the maximum number of whole shares of Stock represented by the Depositary Shares evidenced by all Receipts as to which any particular voting instructions are received, provided that the Depositary receives such instructions sufficiently in advance of such voting to enable it to so vote or cause such Stock to be voted. The Company hereby agrees to take all reasonable action that may be deemed necessary by the Depositary in order to enable the Depositary to vote such Stock or cause such Stock to be voted. In the absence of specific instructions from the holder of a Receipt, the Depositary will abstain from voting (but, in its discretion, not from appearing at any meeting with respect to such Stock unless directed to the contrary by the holders of all the Receipts) to the extent of the Stock represented by the Depositary Shares evidenced by such Receipt.

Section 4.06 . Changes Affecting Deposited Securities and Reclassifications, Recapitalizations, Etc. Upon any change in par value or liquidation preference, split-up, combination or any other reclassification of the Stock, or upon any recapitalization, reorganization, merger, amalgamation or consolidation affecting the Company or to which it is a party, the Depositary may in its discretion with the approval of, and shall upon the instructions of, the Company, and (in either case) in such manner as the Depositary may deem equitable, (i) make such adjustments as are certified by the Company in the fraction of an interest represented by one Depositary Share in one share of Stock as may be necessary fully to reflect the effects of such change in par value or liquidation preference, split-up, combination or other reclassification of Stock, or of such recapitalization, reorganization, merger, amalgamation or consolidation and (ii) treat any securities that shall be received by the Depositary in exchange for or upon conversion of or in respect of the Stock as new deposited securities so received in exchange for or upon conversion or in respect of such Stock. In any such case the Depositary may in its discretion, with the approval of the Company, execute and deliver additional Receipts or may call for the surrender of all outstanding Receipts to be exchanged for new Receipts specifically describing such new deposited securities. Anything to the contrary herein notwithstanding, holders of Receipts shall have the right from and after the effective date of any such change in par value or liquidation preference, split-up, combination or other reclassification of the Stock or any such recapitalization, reorganization, merger, amalgamation or consolidation to surrender such Receipts to the Depositary with instructions to convert, exchange or surrender the Stock represented thereby only into or for, as the case may be, the kind and amount of shares of stock and other securities and property and cash into which the Stock represented by such

Receipts might have been converted or for which such Stock might have been exchanged or surrendered immediately prior to the effective date of such transaction.

Section 4.07 . Delivery of Reports. The Depositary shall furnish to holders of Receipts any reports and communications received from the Company that are received by the Depositary as the holder of Stock.

Section 4.08 . Lists of Receipt Holders. Promptly upon request from time to time by the Company, but in no event more frequently than quarterly, the Depositary shall furnish to it a list, as of a recent date, of the names, addresses and holdings of all holders of Receipts.

ARTICLE 5

T HE D EPOSITARY , THE D EPOSITARY ’ S A GENTS , THE R EGISTRAR AND THE C OMPANY

Section 5.01 . Maintenance of Offices, Agencies and Transfer Books by the Depositary; Registrar . Upon execution of this Deposit Agreement, the Depositary shall maintain at the Depositary’s Office, facilities for the execution and delivery, registration and registration of transfer, surrender and exchange, split-up, combination and redemption of Receipts and deposit and withdrawal of Stock, and at the offices of the Depositary’s Agents, if any, facilities for the delivery, registration of transfer, surrender and exchange, split-up, combination and redemption of Receipts and deposit and withdrawal of Stock, all in accordance with the provisions of this Deposit Agreement.

The Depositary shall keep books at the Depositary’s Office for the registration and registration of transfer of Receipts, which books at all reasonable times shall be open for inspection by the holders of Receipts; provided that any such holder requesting to exercise such right shall certify to the Depositary that such inspection shall be for a proper purpose reasonably related to such person’s interest as an owner of Depositary Shares evidenced by the Receipts.

The Depositary may close such books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties hereunder.

The Depositary may, with the approval of the Company, appoint a Registrar for registration of the Receipts or the Depositary Shares evidenced thereby. If the Receipts or the Depositary Shares evidenced thereby or the Stock represented by such Depositary Shares shall be listed on the New York Stock Exchange, the Depositary will appoint a Registrar (acceptable to the Company) for registration of such Receipts or Depositary Shares in accordance with any requirements of such Exchange. Such Registrar (which may be the Depositary if so permitted by the requirements of such Exchange) may be removed and a

substitute registrar appointed by the Depositary upon the request or with the approval of the Company. If the Receipts, such Depositary Shares or such Stock are listed on one or more other stock exchanges, the Depositary will, at the request of the Company, arrange such facilities for the delivery, registration, registration of transfer, surrender and exchange of such Receipts, such Depositary Shares or such Stock as may be required by law or applicable stock exchange regulation.

Section 5.02 . Prevention of or Delay in Performance by the Depositary or the Company. None of the Depositary, the Depositary’s Agents, the Registrar or the Company shall incur any liability to any holder of any Receipt if by reason of any provision of any present or future law, or regulation thereunder, of the United States of America or of any other governmental authority or by reason of any provision, present or future, of the Company’s Amended and Restated Certificate of Incorporation, as amended (including the Certificate) or of the Depositary Shares or by reason of any act of God or war or other circumstance beyond the control of the relevant party, the Depositary, the Depositary’s Agents, the Registrar or the Company shall be prevented or forbidden from, delayed in, or subjected to any penalty on account of, doing or performing any act or thing which the terms of this Deposit Agreement provide shall be done or performed; nor shall the Depositary, the Depositary’s Agents, the Registrar, or the Company incur liability to any holder of a Receipt (i) by reason of any nonperformance or delay, caused as aforesaid, in the performance of any act or thing which the terms of this Deposit Agreement shall provide shall or may be done or performed, or (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement except, in the case of any such exercise or failure to exercise discretion not caused as aforesaid, if caused by the negligence or willful misconduct of the party charged with such exercise or failure to exercise.

Where, by the terms of a distribution pursuant to Sections 4.01 or 4.01 of this Deposit Agreement, or an offering or distribution pursuant to Section 4.03 of this Deposit Agreement, or for any other reason, such distribution or offering may not be made available to holders of Receipts, and it is impractical or unreasonable for the Depositary to dispose of such distribution or offering on behalf of such holders and make the net proceeds available to such holders, then the Depositary shall not make such distribution or offering, and shall allow any rights, if applicable, to lapse.

Section 5.03 . Obligation of the Depositary and the Company. None of the Depositary, the Depositary’s Agents, the Registrar or the Company assumes any obligation or shall be subject to any liability under this Deposit Agreement to holders of Receipts other than for its negligence or willful misconduct. Notwithstanding anything in this Agreement to the contrary, neither the Depositary, nor the Depositary’s Agent nor any Registrar nor the Company shall be liable in any event for special, punitive, incidental, indirect or consequential losses or damages of any kind whatsoever (including but not limited to lost profits).

None of the Depositary, the Depositary’s Agents, the Registrar or the Company shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of the Stock, the Depositary Shares or the Receipts that in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability shall be furnished as often as may be required.

None of the Depositary, the Depositary’s Agents, the Registrar or the Company shall be liable for any action or any failure to act by it in reliance upon the advice of legal counsel or accountants, or information from any person presenting Stock for deposit, any holder of a Receipt or any other person believed by it to be competent to give such advice or information. The Depositary, the Depositary’s Agents, the Registrar and the Company may each rely and shall each be protected in acting upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.

The Depositary shall not be responsible for any failure to carry out any instruction to vote any of the shares of Stock or for the manner or effect of any such vote made, as long as any such action or non-action is in good faith. The Depositary undertakes to perform such duties and only such duties as are specifically set forth in this Deposit Agreement, and no implied covenants or obligations shall be read into this Deposit Agreement against the Depositary or any Registrar. The Depositary, the Depositary’s Agents and any Registrar may own and deal in any class of securities of the Company and its affiliates and in Receipts. The Depositary may also act as transfer agent or registrar of any of the securities of the Company and its affiliates.

The Depositary shall not be obligated to segregate such monies from other monies held by it, except as required by law. The Depositary shall not be responsible for advancing funds on behalf of the Company and shall have no duty or obligation to make any payments if it has not timely received sufficient funds to make timely payments.

In the event the Depositary believes any ambiguity or uncertainty exists hereunder or in any notice, instruction, direction, request or other communication, paper or document received by the Depositary hereunder, or in the administration of any of the provisions of this Agreement, the Depositary shall deem it necessary or desirable that a matter be proved or established prior to taking, omitting or suffering to take any action hereunder, the Depositary may, in its sole discretion upon written notice to the Company, refrain from taking any action and shall be fully protected and shall not be liable in any way to the Company, any holders of Receipts or any other person or entity for refraining from taking such action, unless the Depositary receives written instructions or a certificate signed by the Company which eliminates such ambiguity or uncertainty to the satisfaction of the Depositary or which proves or establishes the applicable matter to the satisfaction of the Depositary.

The Depositary undertakes not to issue any Receipt other than to evidence the Depositary Shares that have been delivered to and are then on deposit with the Depositary. The Depositary also undertakes not to sell (except as provided herein), pledge or lend Depositary Shares held by it as Depositary.

No disclaimer of liability by the Company under the Securities Act is intended by any provision of this Deposit Agreement.

Section 5.04 . Resignation and Removal of the Depositary; Appointment of Successor Depositary. The Depositary may at any time resign as Depositary hereunder by delivering written notice of its election to do so to the Company, such resignation to take effect upon the appointment of a successor Depositary and its acceptance of such appointment as hereinafter provided.

The Depositary may at any time be removed by the Company by notice of such removal delivered to the Depositary, such removal to take effect upon the appointment of a successor Depositary hereunder and its acceptance of such appointment as hereinafter provided.

In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall, within 60 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor Depositary, which shall be a bank or trust company having its principal office in the United States of America and having a combined capital and surplus of at least $50,000,000. If no successor Depositary shall have been so appointed and have accepted appointment within 60 days after delivery of such notice, the resigning or removed Depositary may petition any court of competent jurisdiction for the appointment of a successor Depositary. Every successor Depositary shall execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor Depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor and for all purposes shall be the Depositary under this Deposit Agreement, and such predecessor, upon payment of all sums due it and upon the written request of the Company, shall execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all right, title and interest in the Stock and any moneys or property held hereunder to such successor, and shall deliver to such successor a list of the holders of all outstanding Receipts and such records, books and other information in its possession relating thereto. Any successor Depositary shall promptly mail notice of its appointment to the holders of Receipts.

Any entity into or with which the Depositary may be merged, consolidated or converted shall be the successor of such Depositary without the execution or filing of any document or any further act, and notice thereof shall not be required hereunder. Such successor Depositary may authenticate the Receipts in the name of the predecessor Depositary or in the name of the successor Depositary.

Section 5.05 . Corporate Notices and Reports. The Company agrees that it will transmit to the holders of Receipts, in each case at the addresses furnished to it pursuant to Section 4.08, all notices and reports (including without limitation financial statements) required by law or by the rules of any national securities exchange upon which the Stock, the Depositary Shares or the Receipts are listed, to be furnished to the holders of Receipts. Such transmission will be at the Company’s expense.

Section 5.06 . Indemnification. Notwithstanding anything in Section 5.03 to the contrary, the Company shall indemnify the Depositary, any Depositary’s Agent and any Registrar (including each of their officers, directors, agents and employees) against, and hold each of them harmless from, any loss, damage, cost, penalty, liability or expense (including the reasonable costs and expenses of defending itself) which may arise out of acts performed, suffered or omitted to be taken in connection with this Agreement and the Receipts by the Depositary, any Registrar or any of their respective agents (including any Depositary’s Agent) and any transactions or documents contemplated hereby, except for any liability arising out of negligence, willful misconduct or bad faith on the respective parts of any such person or persons. The obligations of the Company set forth in this Section 5.06 shall survive any succession of any Depositary, Registrar or Depositary’s Agent.

Any person seeking indemnification hereunder (an “indemnified person”) shall notify the person from whom it is seeking indemnification in writing (the “indemnifying person”) of the commencement of any action or claim in respect of which indemnification may be sought promptly after such indemnified person becomes aware of such commencement ( provided that the failure to make such notification shall not affect such indemnified person’s rights under this Section 5.06) and shall consult in good faith with the indemnifying person as to the conduct of the defense of such action or claim, which shall be reasonable in the circumstances. No indemnified person shall compromise or settle any such action or claim without the consent of the indemnifying person.

Section 5.07 . Charges and Expenses. The Company shall pay all transfer and other taxes and governmental charges arising solely from the existence of the depositary arrangements. The Company shall pay all charges of the Depositary in connection with the initial deposit of the Stock and the initial issuance of the Depositary Shares, all withdrawals of shares of the Stock by owners of Depositary Shares and the registration of transfer of title to any Depositary Shares. All other transfer and other taxes and governmental charges shall be at the expense of holders of Depositary Shares. If, at the request of a holder of Receipts, the Depositary incurs charges or expenses for which it or the Company is not otherwise liable hereunder, such holder will be liable for such charges and expenses. All other charges and expenses of the Depositary and any Depositary’s Agent hereunder and of any Registrar (including, in each case, fees and expenses of counsel) incident to the performance of their respective obligations hereunder will be paid by the Company upon consultation and agreement between the

Depositary and the Company as to the amount and nature of such charges and expenses. The Depositary shall present its statement for charges and expenses to the Company once every three months or at such other intervals as the Company and the Depositary may agree.

ARTICLE 6

A MENDMENT AND T ERMINATION

Section 6.01 . Amendment. The form of the Receipts and any provisions of this Deposit Agreement may at any time and from time to time be amended by agreement between the Company and the Depositary in any respect which they may deem necessary or desirable; provided, however, that no such amendment which shall materially and adversely alter the rights of the holders of Receipts shall be effective unless such amendment shall have been approved by the holders of at least a majority of the Depositary Shares then outstanding. Notwithstanding the foregoing, in no event may any amendment impair the right of any holder of any Receipts, upon surrender of such Receipts and subject to any conditions specified in this Deposit Agreement, to receive shares of Stock and any money or other property represented thereby, except in order to comply with mandatory provisions of applicable law. Every holder of an outstanding Receipt at the time any such amendment becomes effective in accordance with its terms shall be deemed, by continuing to hold such Receipt, to consent and agree to such amendment and to be bound by the Deposit Agreement as amended thereby.

Section 6.02 . Termination. This Deposit Agreement may be terminated by the Company at any time upon not less than 60 days’ prior written notice to the Depositary, in which case, upon a date that is not later than 30 days after the date of such notice, the Depositary shall deliver or make available for delivery to holders of Receipts, upon surrender of the Receipt or Receipts held by such holder, and upon payment of any applicable taxes or governmental charges, such number of whole shares of Stock represented by such Receipt or Receipts. The Depositary may likewise terminate this Deposit Agreement by mailing notice of such termination to the Company and the holders of all Receipts then outstanding if at any time 60 days shall have expired after the Depositary shall have delivered to the Company a written notice of its election to resign and a successor Depositary shall not have been appointed and accepted its appointment as provided in Section 5.04. If the holder of any Receipt or Receipts shall not have surrendered such Receipt or Receipts in exchange for whole shares of Stock on or prior to the effective date of termination of this Deposit Agreement, such holder shall for all purposes, including the payment of dividends, be deemed to be a holder of the appropriate number of whole shares of Stock previously represented by such Receipt or Receipts and shall thereafter surrender to the Company such Receipt or Receipts in exchange for whole shares of Stock.

If any Receipts shall remain outstanding after the date of termination, the Depositary thereafter shall discontinue the registration of transfers of Receipts, shall suspend the distribution of dividends to the holders thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to the Stock, shall sell rights as provided in this Deposit Agreement, and shall continue to deliver such Stock, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the holder of such Receipt in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges). At any time after the expiration of one year from the date of termination, the Depositary may sell such Stock then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, without liability for interest, for the pro rata benefit of the holders which have not theretofore surrendered their Receipts. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary for the surrender of a Receipt, any expenses for the account of the holder of such Receipt in accordance with the terms and conditions of this Deposit Agreement, and any applicable taxes or governmental charges).

This Deposit Agreement shall automatically terminate after there shall have been made a final distribution in respect of the Stock in connection with any liquidation, dissolution or winding up of the Company and such distribution shall have been distributed to the holders of Receipts pursuant to Sections 4.01 or 4.01, as applicable.

Upon the termination of this Deposit Agreement, the Company shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary and any Depositary’s Agent and any Registrar under Sections 5.06 and 5.07.

ARTICLE 7

M ISCELLANEOUS

Section 7.01 . Counterparts. This Deposit Agreement may be executed in any number of counterparts, and by each of the parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument.

Section 7.02 . Exclusive Benefit of Parties. This Deposit Agreement is for the exclusive benefit of the parties hereto, and their respective successors

hereunder, and shall not be deemed to give any legal or equitable right, remedy or claim to any other person whatsoever.

Section 7.03 . Invalidity of Provisions. In case any one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby.

Section 7.04 . Notices. Any and all notices to be given to the Company hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to the Company at

750 Seventh Avenue

New York, New York 10019

Attention: Corporate Treasury

Telephone No.: (212) 761-4000

Facsimile No.: (212) 762-0339

or at any other address of which the Company shall have notified the Depositary in writing.

Any and all notices to be given to the Depositary hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to the Depositary at the Depositary’s Office at

4 New York Plaza, 15 ^th Floor

New York, New York 10004

Attention: David Sturman

Telephone No.: (212) 623-9065

Facsimile No.: (212) 623-6274

or at any other address of which the Depositary shall have notified the Company in writing.

Any and all notices to be given to any holder of a Receipt hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or facsimile transmission confirmed by letter, addressed to such holder at the address of such holder as it appears on the books of the Depositary, or if such holder shall have timely filed with the Depositary a written request that notices intended for such holder be mailed to some other address, at the address designated in such request.

Delivery of a notice sent by mail or by telegram or facsimile transmission shall be deemed to be effected at the time when a duly addressed letter containing

the same (or a confirmation thereof in the case of a telegram or facsimile transmission) is deposited, first class postage prepaid, in a post office letter box. The Depositary or the Company may, however, without liability, act upon any telegram or facsimile transmission received by it from the other or from any holder of a Receipt, notwithstanding that such telegram or facsimile transmission shall not subsequently be confirmed by letter or as aforesaid.

Section 7.05 . Depositary’s Agents. The Depositary may from time to time appoint Depositary’s Agents to act in any respect for the Depositary for the purposes of this Deposit Agreement and may at any time appoint additional Depositary’s Agents and vary or terminate the appointment of such Depositary’s Agents. The Depositary will notify the Company of any such action and shall remain responsible for the performance of its obligations hereunder as if no Depositary Agent were appointed.

Section 7.06 . Appointment of Registrar and Transfer Agent in respect of the Depositary Shares and Receipts . The Company hereby appoints the Depositary as Registrar, transfer agent, dividend disbursing agent and redemption agent in respect of the Depositary Shares and the related Receipts and the Depositary hereby accepts such appointments.

Section 7.07 . Appointment of Registrar and Transfer Agent in respect of the Stock . The Company hereby appoints JPMorgan Chase Bank, N.A. as transfer agent, registrar, dividend disbursing agent and redemption agent in respect of the Stock, and JPMorgan Chase Bank, N.A. hereby accepts such appointments. With respect to the appointments of JPMorgan Chase Bank, N.A. as transfer agent, registrar, dividend disbursing agent and redemption agent in respect of the Stock, JPMorgan Chase Bank, N.A. shall be entitled to the same rights, indemnities, immunities and benefits as Depositary hereunder as if explicitly named in each such provision.

Section 7.08 . Appointment of Calculation Agent. The Company hereby appoints JPMorgan Chase Bank, N.A. as calculation agent solely with respect to calculating the amount of dividends to be paid with respect to the Stock, including determining the LIBOR rate, if applicable, in the manner and at the times provided in Exhibit B annexed hereto, and JPMorgan Chase Bank, N.A. hereby accepts such appointment. JPMorgan Chase Bank, N.A., in such capacity, shall communicate in writing such determination and its calculation of the amount of such dividends on the LIBOR determination date, as described in Exhibit B annexed hereto, to the Company in the manner set forth in Section 7.04 hereof or, alternately, to the Company via electronic mail (at an electronic mail address provided to the Depositary by the Company), followed by a telephonic confirmation. With respect to the appointment of JPMorgan Chase Bank, N.A., as calculation agent, JPMorgan Chase Bank, N.A., in its capacity under such appointment, shall be entitled to the same rights, indemnities and benefits as the Depositary hereunder, as if explicitly named in each such provision.

Section 7.09 . Holders of Receipts Are Parties. The holders of Receipts from time to time shall be parties to this Deposit Agreement and shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance of delivery thereof.

Section 7.10 . Governing Law. This Deposit Agreement and the Receipts and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, and construed in accordance with, the laws of the State of New York.

Section 7.11 . Inspection of Deposit Agreement. Copies of this Deposit Agreement shall be filed with the Depositary and the Depositary’s Agents and shall be open to inspection during business hours at the Depositary’s Office and the respective offices of the Depositary’s Agents, if any, by any holder of a Receipt.

Section 7.12 . Headings. The headings of articles and sections in this Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto have been inserted for convenience only and are not to be regarded as a part of this Deposit Agreement or the Receipts or to have any bearing upon the meaning or interpretation of any provision contained herein or in the Receipts.

IN WITNESS WHEREOF, the Company and the Depositary have duly executed this Agreement as of the day and year first above set forth, and all holders of Receipts shall become parties hereto by and upon acceptance by them of delivery of Receipts issued in accordance with the terms hereof.


MORGAN STANLEY

By:	/s/ JACQUELINE T. BRODY
	Name:	Jacqueline T. Brody
	Title:	Assistant Treasurer

JPMORGAN CHASE BANK, N.A., as Depositary

By:	/s/ DAVID STURMAN
	Name:	David Sturman
	Title:	Vice President

EXHIBIT A

[FORM OF FACE OF RECEIPT]


NUMBER		DEPOSITARY SHARES

DEPOSITARY RECEIPT FOR DEPOSITARY SHARES,

REPRESENTING FLOATING RATE NON-CUMULATIVE

PREFERRED STOCK, SERIES A, OF MORGAN STANLEY.

CUSIP:

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE. SEE REVERSE FOR CERTAIN DEFINITIONS

JPMORGAN CHASE BANK, N.A., as Depositary (the “ Depositary ”), hereby certifies that is the registered owner of DEPOSITARY SHARES (“ Depositary Shares ”), each Depositary Share representing 1/1,000 ^th of a share of Floating Rate Non-Cumulative Preferred Stock, Series A, par value $0.01, liquidation preference $25,000 per share (the “ Stock ”), of Morgan Stanley, a Delaware corporation (the “ Corporation ”), on deposit with the Depositary, subject to the terms and entitled to the benefits of the Deposit Agreement dated as of , 20 (the “ Deposit Agreement ”), among the Corporation, the Depositary and the holders from time to time of the Depositary Receipts issued thereunder. By accepting this Depositary Receipt the holder hereof becomes a party to and agrees to be bound by all the terms and conditions of the Deposit Agreement. This Depositary Receipt shall not be valid or obligatory for any purpose or entitled to any benefits under the Deposit Agreement unless it shall have been executed by the Depositary by the manual signature of a duly authorized officer or, if executed in facsimile by the Depositary, countersigned by a Registrar in respect of the Depositary Receipts by the manual signature of a duly authorized signatory thereof.


Countersigned and Registered:

JPMORGAN CHASE BANK, N.A. Registrar		JPMORGAN CHASE BANK, N.A. Depositary

By:		By:
	Name:		Name:
	Title:		Title:

[FORM OF REVERSE OF RECEIPT]

MORGAN STANLEY

THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH RECEIPTHOLDER WHO SO REQUESTS A COPY OF THE DEPOSIT AGREEMENT AND A COPY OR SUMMARY OF THE CERTIFICATE OF THE DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER RIGHTS, AND OF THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF, OF THE STOCK OF THE CORPORATION. ANY SUCH REQUEST IS TO BE ADDRESSED TO THE DEPOSITARY NAMED ON THE FACE OF THIS RECEIPT.

The following abbreviations, when used in the instructions on the face of this receipt, shall be construed as though they were written out in full according to applicable laws or regulations.


TEN COM	- as tenants in common	UNIF GIFT MIN ACT - _____ Custodian ______
TEN ENT	- as tenants by the entireties	(minor) (Cust)
JT TEN	- as joint tenants with right of survivorship and not as tenants in common	Under Uniform Gifts to Minors Act ________________________ (State)

Additional abbreviations may also be used though not in the above list.

A-2

For value received, hereby sell(s), assign(s) and transfer(s) unto

PLEASE INSERT SOCIAL SECURITY OR OTHER

IDENTIFYING NUMBER OF ASSIGNEE

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE

Depositary Shares represented by the within Receipt, and do(es) hereby irrevocably constitute and appoint Attorney to transfer the said Depositary Shares on the books of the within named Depositary with full power of substitution in the premises.

Dated

Signature

NOTICE: The signature to the assignment must correspond with the name as written upon the face of this Receipt in every particular, without alteration or enlargement or any change whatsoever

SIGNATURE GUARANTEED

NOTICE: The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations, and credit unions with membership in an approved signature guarantee medallion program), pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.

A-3

EXHIBIT B

Holders of Stock will be entitled to receive, when, as and if declared by the Company’s Board of Directors or a duly authorized committee of the Board, out of funds legally available for the payment of dividends under Delaware law, non-cumulative cash dividends from the original issue date (in the case of the initial dividend period only, as described below) or the immediately preceding dividend payment date, quarterly in arrears on the 15 ^th day of January, April, July and October of each year (each, a “dividend payment date”), commencing on October 15, 2006. These dividends will accrue, with respect to each dividend period, on the liquidation preference amount of $25,000 per share (equivalent to $25 per Depositary Share) at a rate per annum equal to the greater of (1) three-month U.S. Dollar LIBOR (as described below) on the related dividend determination date plus .70% or (2) 4%. In the event that the Company issues additional shares of Stock after the original issue date, dividends on such shares may accrue from the original issue date or any other date the Company specifies at the time such additional shares are issued.

Dividends will be payable to holders of record of the Stock as they appear on the Company’s books on the applicable record date, which shall be the 15 ^th calendar day before that dividend payment date or such other record date fixed by the Company’s Board of Directors (or a duly authorized committee of the Board) that is not more than 60 nor less than 10 days prior to such dividend payment date (each, a “dividend record date”). These dividend record dates will apply regardless of whether a particular dividend record date is a business day (as defined below). The corresponding record dates for the Depositary Shares will be the same as the record dates for the Stock.

A dividend period is the period from and including a dividend payment date to but excluding the next dividend payment date or any earlier redemption date, except that the initial dividend period will commence on and include the original issue date of the Stock and will end on and exclude the October 15, 2006 dividend payment date. Dividends payable on the Stock will be computed on the basis of a 360-day year and the actual number of days elapsed in the dividend period. Dividends for the initial period will be calculated from the original issue date. If any date on which dividends would otherwise be payable is not a business day, then the dividend payment date will be the next succeeding business day unless such day falls in the next calendar month, in which case the dividend payment date will be the immediately preceding day that is a business day.

For any dividend period, LIBOR (the London interbank offered rate) shall be determined by the calculation agent on the second London business day immediately preceding the first day of such dividend period (each, a “dividend determination date”), in the following manner:

•

LIBOR will be the rate for deposits in U.S. dollars for a period of three months, commencing on the first day of such dividend period, that appears on Page 3750, or any successor page, on Moneyline Telerate Inc., or any successor service, at approximately 11:00 a.m., London time, on that dividend determination date.

B-1

•

If no such rate appears, then the calculation agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the calculation agent after consultation with the Company, to provide the calculation agent with its offered quotation for deposits in U.S. dollars for a period of three months, commencing on the first day of such dividend period, to prime banks in the London interbank market at approximately 11:00 a.m., London time, on that dividend determination date and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time. If at least two quotations are provided, LIBOR determined on that dividend determination date will be the arithmetic mean of those quotations. If fewer than two quotations are provided, LIBOR will be determined for the first day of such dividend period as the arithmetic mean of the rates quoted at approximately 11:00 a.m., New York time, on that dividend determination date, by three major banks in New York City, as selected by the calculation agent after consultation with the Company, for loans in U.S. dollars to leading European banks, for a period of three months, commencing on the first day of such dividend period, and in a principal amount that is representative of a single transaction in U.S. dollars in that market at that time. If the banks so selected by the calculation agent are not quoting as set forth above, LIBOR for that dividend determination date will be the same as LIBOR for the immediately preceding dividend period, or, if there was no dividend period, the dividend payable will be based on the initial dividend rate.

The calculation agent’s determination of any dividend rate, and its calculation of the amount of dividends for any dividend period, will be on file at the Company’s principal offices, will be made available to any stockholder upon request and will be final and binding in the absence of manifest error.

For the purposes of this Exhibit B:

•

The term “business day” means a day that is a Monday, Tuesday, Wednesday, Thursday or Friday and is not a day on which banking institutions in New York City generally are authorized or obligated by law or executive order to close.

•

The term “London business day” means a day that is a Monday, Tuesday, Wednesday, Thursday or Friday and is a day on which dealings in U.S. dollars are transacted in the London interbank market.

B-2

EXHIBIT 10.1

MORGAN STANLEY

TAX DEFERRED EQUITY PARTICIPATION PLAN

Amended and Restated as of June 20, 2006

TABLE OF CONTENTS


SECTION		PAGE
Purposes of the Plan		1

Definitions		1

Election by a Company to Participate in the Plan		5

Stock Subject to the Plan		6

Administration of the Plan		6

Eligibility		7

Awards under the Plan		7

Funding of the Plan		8

Maintenance of Accounts		8

Payments under the Plan		9

Securities Matters		9

Adjustment in Certain Events		10

No Special Employment Rights		10

Payroll and Withholding Taxes		10

Termination and Amendment		11

Shareholder Approval Required		12

Effect of Revocation Event		12

Miscellaneous		12

MORGAN STANLEY

TAX DEFERRED EQUITY PARTICIPATION PLAN

(Amended and Restated as of June 20, 2006)

1.	Purposes of the Plan.

The primary purpose of the Morgan Stanley Tax Deferred Equity Participation Plan is to promote the long-term growth and financial success of Morgan Stanley, a Delaware corporation (“ Morgan Stanley ”), by attracting and retaining employees of outstanding ability and assisting Morgan Stanley in promoting a greater identity of interest between Participants and Morgan Stanley’s shareholders.

2.	Definitions.

Unless determined otherwise by the Committee and set forth in the applicable Award Certificate, capitalized terms used herein without definition have the meanings set forth below.

(a) “ Account ” means a book account maintained by Morgan Stanley reflecting, with respect to each Award, the number of shares of Stock to be distributed to each Participant upon a Realization Event.

(b) “ Administrator ” means the individual or individuals to whom the Committee delegates authority under the Plan in accordance with Section 5.

(c) “ Affiliate ” means any corporation which is a member of a “controlled group of corporations” (as defined in Code section 414(b)) of which Morgan Stanley is a member and any trade or business (whether or not incorporated) under “common control” (as defined in Code section 414(c)) with Morgan Stanley.

(d) “ Award ” means an award granted to a Participant by the Committee pursuant to Section 7.

(e) “ Award Certificate ” means a written certificate (including in electronic form) issued by the Company and signed on behalf of the Company (which signature may be in facsimile) and sets forth the terms and conditions of the Award.

(f) “ Board ” means the Board of Directors of Morgan Stanley.

(g) “ Change in Control ”:

(A) In respect of each Award having an effective date on or before December 31, 1997, “ Change in Control ” means:

(i) The acquisition by any person (including a group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than (I) any employee plan established by a Company or (II) any of Morgan Stanley’s affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), without the prior approval of the Board, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of Stock or

the combined voting power of Morgan Stanley’s then outstanding voting securities in a transaction or series of transactions not approved by a majority of the Directors as of the Effective Date; or

(ii) A change in the composition of the Board such that individuals who, as of the Effective Date, constitute the Board cease for any reason to constitute at least a majority thereof, provided that any person who becomes a Director subsequent to the Effective Date and whose nomination for election is approved by at least a majority of the Directors as of the Effective Date, (other than a nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of Morgan Stanley, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be deemed a Director as of the Effective Date.

(B) In respect of each Award having an effective date on or after January 1, 1998, “ Change in Control ” shall have the meaning ascribed to such term by the Committee in respect of such Award and set forth in the applicable Award Certificate.

(h) “ Change in Ownership ” shall have the meaning ascribed to such term by the Committee and set forth in the applicable Award Certificate.

(i) “ Code ” means the Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder and any successor thereto.

(j) “ Committee ” means such committee of two or more persons as the Board shall appoint from time to time to administer the Plan. It is intended that the members of the Committee shall be “non-employee directors” within the meaning of Rule 16b-3 and “outside directors” within the meaning of Section 162(m); however , the mere fact that a Committee member shall fail to qualify under either of these requirements shall not invalidate any Award made by the Committee that is otherwise valid.

(k) “ Company ” means each of Morgan Stanley, its Affiliates and any Subsidiary the employees of which participate in the Plan pursuant to Section 3(a).

(l) “ Compensation ” for a year means the annual rate of salary payable to the Participant for such year (disregarding any salary reduction agreements under any deferred compensation plan, including plans described in Code section 125 or 401(k)) plus the annual incentive bonus payable to such Participant for such year. Compensation shall not include the amount of any contribution payable under the Plan.

(m) “ Disability ”:

(i) In respect of each Award having an effective date prior to June 20, 2006, “ Disability ” means any physical or mental condition that would qualify a Participant for a disability benefit under any long-term disability plan maintained by any Company and applicable to the Participant.

(ii) In respect of each Award having an effective date on or after June 20, 2006, “ Disability ” has the meaning determined by the Committee and set forth in the applicable Award Certificate.

(n) “ Dividend Equivalent ” has the meaning set forth in Section 9(b).

(o) “ Effective Date ” means January 1, 1994.

(p) “ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the applicable rules and regulations thereunder and any successor thereto.

(q) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and any successor thereto.

(r) “ Fair Market Value ”:

(i) In respect of each Award having an effective date before June 20, 2006, “ Fair Market Value ” means:

(a) for purposes of determining the number of shares of Stock to be allocated to an Award made pursuant to Section 7 and to a Participant’s Account pursuant to Section 9(a), the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee; and

(b) for purposes of crediting a Participant’s Account with shares of Stock based upon cash dividends paid or deemed to be paid on shares of Stock credited to the Participant’s Account pursuant to Section 9(b), the average of the high and low sales prices, regular way, of a share of Stock as reported on the New York Stock Exchange Composite Tape (the “High/Low Price”) on the relevant dividend payment date, or, if Stock is not traded on public markets on the relevant dividend payment date, the first preceding date on which Stock is traded on public markets; provided , however , that in the event a “Fair Market Value” cannot be determined pursuant to the foregoing, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee; and

(c) for purposes of distributing cash, either in lieu of a fractional share following a Realization Event pursuant to Section 10, in lieu of Stock pursuant to Section 11(b) or in lieu of Stock following a Revocation Event pursuant to Section 20, the High/Low Price on the date of the Realization Event or the Revocation Event, as applicable, or, if Stock is not traded on public markets on the date of the Realization Event or the Revocation Event, the first preceding date on which Stock is traded on public markets; provided , however , that in the event a “Fair Market Value” cannot be determined pursuant to the foregoing, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee.

(ii) In respect of each Award having an effective date on or after June 20, 2006, “ Fair Market Value ” means, with respect to a share of Stock, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee.

(s) “ Investment Period ”, with respect to an Award, means: (A) in respect of each Award having an effective date on or before December 31, 1997, the five-year period beginning on the date as of which such Award is granted; and (B) in respect of each Award having an effective date on or after January 1, 1998, the period beginning on the date as of which the Award is granted and concluding on the date specified by the Committee as the conclusion of the Investment Period in respect of such Award.

(t) “ Minimum Eligible Compensation ” means $100,000 with respect to the calendar year ending December 31, 1997, and with respect to each fiscal year of the Company beginning on or after December 1, 1997, $100,000 or such greater amount as the Committee shall determine.

(u) “ Participant ” means a key employee of any Company who is determined by the Committee to be eligible to participate in the Plan and who is designated as a Participant pursuant to Section 6.

(v) “ Plan ” means the Morgan Stanley Tax Deferred Equity Participation Plan.

(w) “ Realization Event ”:

(i) In respect of each Award having an effective date on or before December 31, 1997, “ Realization Event ” means the first to occur of (i) the expiration of the Investment Period with respect to such Award, (ii) the occurrence of a Change in Control, (iii) the termination of the Plan pursuant to Section 17, or (iv) the Participant’s death;

(ii) In respect of each Award having an effective date on or after January 1, 1998 and prior to June 20, 2006, “ Realization Event ” means the first to occur of (i) the expiration of the Investment Period with respect to such Award, (ii) the occurrence of a Change in Ownership, (iii) the termination of the Plan pursuant to Section 17, or (iv) the Participant’s death; provided , however , that if a Realization Event as so defined would occur at a time when the Participant is considered by the Company to be one of its “covered employees” within the meaning of Section 162(m), then, unless the Committee shall determine otherwise in its sole discretion, the Realization Event shall automatically be deferred until the first date after the Participant has ceased to be considered such a “covered employee”; and

(iii) In respect of each Award having an effective date on or after June 20, 2006, “ Realization Event ” shall have the meaning ascribed to such term by the Committee in respect of such Award and set forth in the applicable Award Certificate.

(x) “ Retirement ”:

(i) In respect of each Award having an effective date prior to June 20, 2006, “ Retirement ” means a Participant’s termination of employment with all Companies on or after: (i) the date (the “Pension Retirement Date”) on which the Participant would first be eligible to retire under any tax-qualified defined benefit pension plan maintained by a Company in which the Participant participates; or (ii) in respect of any Award as the Committee determines, such date preceding the Pension Retirement Date as the Committee may determine; and

(ii) In respect of each Award having an effective date on or after June 20, 2006, “ Retirement ” means a Participant’s termination of employment under the circumstances determined by the Committee and set forth in the applicable Award Certificate.

(y) “ Revocation Event ” means a determination by the Board in its sole discretion that any of the following has occurred or is likely to occur:

(i) A determination by the Department of Labor or a court of competent jurisdiction that the assets of the Trust are subject to Part 4 of Subtitle B of Title I of ERISA or that the Plan is a “pension plan” (within the meaning of ERISA section 3(2)) subject to Parts 2, 3 and 4 of Subtitle B of Title I of ERISA;

(ii) A determination by the Internal Revenue Service or a court of competent jurisdiction that any amount deposited in the Trust is taxable to any Participant or beneficiary prior to the distribution of such amount; or

(iii) A determination by the Company’s independent public accountants that the accounting expense to the Companies of maintaining the Trust under the Plan is based on a value of the shares of Stock other than such value on the date shares of Stock are (A) acquired by the Trust or (B) credited to a Participant’s Account.

(z) “ Rule 16b-3 ” means Rule 16b-3 promulgated under Section 16 of the Exchange Act.

(aa) “ Section 162(m) ” means Section 162(m) of the Code (or any successor provisions thereto).

(ab) “ Section 409A ” means Section 409A of the Code (or any successor provisions thereto).

(ac) “ Securities Act ” means the Securities Act of 1933, as amended, and any successor thereto.

(ad) “ Stock ” means the common stock, par value $.01 per share, of Morgan Stanley, or the common stock of any successor thereto.

(ae) “ Subsidiary ” means (i) a corporation or other entity with respect to which Morgan Stanley, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Morgan Stanley, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Plan.

(af) “ Trust ” means any trust established or maintained by the Company in connection with an employee benefit plan of the Company (including the Plan) under which current or former employees of the Company constitute the principal beneficiaries.

(ag) “ Trustee ” means the trustee of the Trust.

3.	Participation in the Plan by a Subsidiary’s Employees.

(a) Subject to the approval of the Committee, the employees of any Subsidiary may be eligible to participate in the Plan.

(b) No Subsidiary or Affiliate shall have any power with respect to the Plan except as specifically provided in the Plan.

(c) Morgan Stanley may require each Company (other than Morgan Stanley), as a condition of its employees’ participation in the Plan, to enter into an agreement obligating such Company to pay to Morgan Stanley, in cash, the appropriate value, as determined by the Board, of any Stock that Morgan Stanley contributes to the Trust in respect of Participants employed by such Company and/or to reimburse Morgan Stanley for any other amounts paid by Morgan Stanley hereunder, directly or indirectly, in respect of Participants employed by such Company.

4.	Stock Subject to the Plan.

Subject to adjustment as provided in Section 13, the Committee may grant Awards under the Plan with respect to a number of shares of Stock that, in the aggregate, does not exceed 3,500,000 ¹ shares. In the event that any Award is forfeited for any reason, the number of shares of Stock making up such forfeited Award (other than shares of Stock credited to such Participant’s Account solely as a result of earnings on such Award) shall again be available for grant under the Plan.

5.	Administration of the Plan.

(a) The Plan shall be administered by the Committee. The Committee may, but need not, from time to time delegate some or all of its authority under the Plan to an Administrator consisting of one or more members of the Committee or one or more directors or officers of the Company; provided , however , that the Committee may not delegate its authority (i) to make Awards to any key employee (A) who is subject as of the effective date of the Award to the reporting rules under Section 16(a) of the Exchange Act or (B) who is, as of the effective date of the Award, one of Morgan Stanley’s “covered employees” within the meaning of Section 162(m), (ii) to construe and interpret the Plan or (iii) under Section 17(a) of the Plan. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation or thereafter. Nothing in the Plan shall be construed as obligating the Committee to delegate authority to an Administrator, and the Committee may at any time rescind or modify the authority delegated to an Administrator hereunder or appoint a new Administrator. At all times, the Administrator appointed hereunder shall serve in such capacity at the pleasure of the Committee. Any action undertaken by the Administrator in accordance with the Committee’s delegation of authority shall have the same force and effect as if undertaken directly by the Committee, and any reference to the Committee in the Plan shall, to the extent consistent with the terms and limitations of such delegation, be deemed to include a reference to the Administrator.

(b) The Committee shall have full authority, consistent with the Plan, to administer the Plan, including authority to interpret and construe any Plan provision and to adopt such rules and regulations and such forms of elections as it may deem necessary or appropriate. Decisions of the Committee shall be final and binding on all parties. In the event of a disagreement between the Committee and the Administrator, the Committee’s determination on such matter shall be final and binding on all parties, including the Administrator. Subject to Section 3(d), all expenses of the Plan shall be paid by Morgan Stanley.

This number represents the maximum number of shares of Stock available for Awards under the Plan that was initially approved by the Board and the stockholders of Dean Witter, Discover & Co. (the predecessor of Morgan Stanley) and does not reflect adjustments to such maximum number made in accordance with Section 4 or Section 13 after the Effective Date.

(c) No member of the Committee or any Administrator shall be liable for any action, omission or determination relating to the Plan, and the Companies shall indemnify and hold harmless each member of the Committee, each Administrator and each other director or employee of the Companies to whom any duty or power relating to the Plan has been delegated, against any cost, expense (including counsel fees, which fees shall be paid as incurred) or liability (including any sum paid in settlement of a claim) arising out of any action, omission or determination relating to the Plan, if made in good faith in a manner reasonably believed to be in or not opposed to the best interests of the Companies, and with respect to any criminal action or proceeding, if made with reasonable cause to believe that such conduct was lawful.

(d) The members of the Committee shall be appointed by, and serve at the pleasure of, the Board. Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case, the term Committee as used herein shall be deemed to refer to the Board.

6.	Eligibility.

The persons eligible to participate in the Plan shall be key employees of the Companies, as determined by the Committee. The Committee shall grant Awards to such Participants as it shall, in its sole discretion, determine, provided that no Award shall be made in any fiscal year to any eligible employee whose annualized Compensation with respect to such fiscal year is not at least equal to the Minimum Eligible Compensation. The Committee may from time to time add to or exclude from participation one or more eligible employees. Each eligible employee shall become a Participant effective on the date as of which the employee is designated as a Participant or members of a class of employees including the employee are designated as Participants.

7.	Awards under the Plan.

(a) Awards .

(i) The Committee shall have full authority to grant Awards to Participants. Awards under the Plan may, in the discretion of the Committee, be made in substitution in whole or in part for cash or other compensation payable to a Participant. Awards shall be denominated in a number of shares of Stock determined under Section 9. In respect of each Award having an effective date on or after January 1, 1998, (A) the Award shall be subject to any terms and conditions as may be established by the Committee in connection with the Award and specified in the applicable Award Certificate and (B) the terms, conditions and other provisions of the Award shall be set forth in the Award Certificate. The Company may, in its sole discretion, require a Participant to execute and return a copy of the Award Certificate to the Company as a condition to receiving or retaining an Award or payment in respect of an Award.

(ii) Unless otherwise determined by the Committee, no Award with respect to a fiscal year shall be granted to a Participant whose employment with the Companies and Affiliates terminates prior to the end of such fiscal year.

(b) Vesting .

(i) In respect of each Award having an effective date on or before December 31, 1997, a Participant shall have a vested interest in the Award upon the first to occur of: (A) completion of two years of service for the Companies and the Affiliates following the grant of such

Award; (B) the Participant’s termination of employment with all Companies and the Affiliates as a result of Disability or Retirement; (C) the Participant’s termination of employment with all Companies and the Affiliates which is initiated by a Company by reason of the Company’s decision to close permanently a branch office or other facility, or to reduce permanently the number of employees which it employs due to substantial change in economic conditions; or (D) the Participant’s death while employed by a Company or one of the Affiliates; provided , however , that any vested Award shall be canceled if a Participant’s employment with any Company is terminated for cause, the Participant resigns for cause or the Committee determines that the Participant has committed an act or omission upon which a Company would have terminated the Participant’s employment for cause.

(ii) In respect of each Award having an effective date on or after January 1, 1998, (A) a Participant shall have a vested interest in the Award upon the satisfaction of such terms and conditions as the Committee may determine applicable to such Award and (B) the Committee may provide that such Award shall be subject to forfeiture, cancellation or termination on such terms and conditions as the Committee may determine.

8.	Funding of the Plan.

The Plan shall be unfunded. Benefits under the Plan shall be paid from the general assets of Morgan Stanley. Morgan Stanley may establish or contribute to the Trust to assist Morgan Stanley in meeting its obligations hereunder, but shall not be obligated to do so.

9.	Maintenance of Accounts.

With respect to each Participant, the Committee shall maintain an Account as follows:

(a) In respect of each Award having an effective date on or before December 31, 1997, such Participant’s Account shall be credited as of the date of each Award with a number of shares of Stock equal to: (I) the dollar amount of such Participant’s Award divided by (II) the product of the Fair Market Value of a share of Stock multiplied by .80. In respect of each Award having an effective date on or after January 1, 1998, each such Participant’s Account shall be credited as of the date of each Award with a number of shares of Stock equal to: (I) the dollar amount of such Participant’s Award divided by (II) the product of the Fair Market Value of a share of Stock multiplied by a fraction determined by the Committee to reflect the various restrictions, conditions and limitations applicable to such Award.

(b) In respect of each Award having an effective date on or before December 31, 1997, such Participant’s Account shall be credited as soon as practicable following the payment date of cash dividends on Stock with a number of shares of Stock, the Fair Market Value of which equals the dollar amount of dividends that would have been paid with respect to Stock credited to such Participant’s Account had the Participant held such Stock as of the record date applicable to such dividends. In respect of each Award having an effective date on or after January 1, 1998, the Committee may, in its sole discretion, (I) provide that each Participant’s Account shall be credited as soon as practicable following the payment date of cash dividends on Stock with a number of shares of Stock, the Fair Market Value of which equals the dollar amount of dividends that would have been paid with respect to Stock credited to such Participant’s Account had the Participant held such Stock as of the record date applicable to such dividends, (II) determine, in lieu of so crediting a Participant’s Account, to make cash payments to the Participant equal to the dollar amount of dividends that would have been paid with respect to Stock credited to such Participant’s Account had the Participant held such Stock as of the record

date applicable to such dividends (“ Dividend Equivalents ”) or (III) allow a Participant to elect between having Morgan Stanley so credit the Participant’s Account and receiving Dividend Equivalents, all on such terms and conditions as the Committee may determine.

(c) Each Participant’s Account shall be reduced by the number of shares of Stock distributed to the Participant in respect of such Account, whether such shares are distributed from the Trust or directly from Morgan Stanley.

10.

Payments under the Plan.

(a) Within 30 days after the occurrence of a Realization Event with respect to an Award having an effective date prior to June 20, 2006, Morgan Stanley shall deliver or cause to be delivered to the Participant the number of whole shares of Stock credited to such Participant’s Account as of the date of the Realization Event as a result of such Award (including shares reflecting the reinvestment of dividends paid thereon), and cash with respect to any fractional shares of Stock credited to such Participant’s Account in an amount equal to the Fair Market Value of such fractional shares as of the date of the Realization Event. Notwithstanding the fact that Morgan Stanley may establish or contribute to the Trust for the purpose of assisting it in meeting its obligations under the Plan, Morgan Stanley shall remain obligated to pay the amounts credited to Participants’ Accounts. Nothing shall relieve Morgan Stanley of its liabilities under the Plan except to the extent amounts are paid from Trust assets or otherwise. Payment in respect of each Award having an effective date on or after June 20, 2006 shall be made in accordance with terms and conditions determined by the Committee and set forth in the applicable Award Certificate.

(b) In order to accomplish the purposes of the Plan, amounts allocated to Participants’ Accounts generally must track the performance of the Stock until the occurrence of the Realization Event with respect to such amounts. Accordingly, if a court of competent jurisdiction determines by a final adjudication that Morgan Stanley is obligated to distribute to any person shares of Stock credited to a Participant’s Account prior to the occurrence of a Realization Event with respect to such shares, the Stock so distributed shall be restricted as to transferability until the date that a Realization Event would have occurred with respect to such shares had they not been distributed and remained subject to the Plan, and if certificated shall bear any legend determined appropriate by the Committee and the following legend:

“The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture and restrictions against transfer) contained in the Morgan Stanley Tax Deferred Equity Participation Plan. A copy of the Plan is on file in the office of the Secretary of Morgan Stanley, 1585 Broadway, New York, New York 10036.”

11.

Securities Matters.

Subject to Section 10, Morgan Stanley shall use its best efforts to assure that any securities distributed to Participants hereunder are freely transferable at the time of distribution, including, to the extent required under applicable law, effecting the registration pursuant to the Securities Act of any shares of Stock to be distributed hereunder or effecting similar compliance under any state laws; provided, however , that with respect to any Award having an effective date on or after January 1, 1998, securities distributed to Participants hereunder may be subject to such restrictions on transfer as the Committee may determine. Notwithstanding anything herein to the contrary, Morgan Stanley shall not be obligated to cause to be issued or delivered any shares of Stock pursuant to the

Plan unless and until Morgan Stanley is advised by its counsel that the issuance and delivery of such shares complies with all applicable laws, regulations of governmental authorities and the requirements of any securities exchange on which Stock is listed. The Committee may require, as a condition of the issuance and delivery of shares of Stock pursuant to the terms hereof, the recipient of such shares to make such covenants, agreements and representations, and that if certificated, the certificates representing such shares bear such legends, as the Committee, in its sole discretion, deems necessary or desirable.

12.

[Intentionally Omitted]

13.

Adjustments in Certain Events.

(a) Unless the Committee otherwise determines, a Participant’s Account shall be adjusted to reflect the amount of any securities, cash and other property that would have been received with respect to shares of Stock credited to such Participant’s Account if such Stock were held by the Participant as a result of any stock dividend or split, recapitalization, extraordinary dividend, merger, spinoff, consolidation, combination or exchange of shares or similar corporate change or any other event that the Committee, in its sole discretion, deems appropriate.

(b) In the event of any change in the number of shares of Stock outstanding by reason of any stock dividend or split, recapitalization, extraordinary dividend, merger, spinoff, consolidation, combination or exchange of shares or similar corporate change or any other event that the Committee, in its sole discretion, deems appropriate, the maximum aggregate number of shares of Stock subject to the Plan shall be appropriately adjusted by the Committee. In the event of any change in the number of shares of Stock outstanding by reason of any other event or transaction, the Committee may, but need not, make such adjustments in the number and class of shares of Stock subject to the Plan as the Committee may deem appropriate.

(c) Except as expressly provided in this Section, a Participant shall have no rights as a result of any stock dividend or split, recapitalization, extraordinary dividend, merger, spinoff, consolidation, combination or exchange of shares or similar corporate change.

14.

[Intentionally Omitted]

15.

No Special Employment Rights.

Nothing in the Plan shall confer upon any Participant any right to continue in the service of any Company or affect any right that any Company may have to terminate the service of the Participant. Nothing in the Plan shall be deemed to give any employee of any Company any right to participate in the Plan.

16.

Payroll and Withholding Taxes; Other Obligations.

As a condition to the making or retention of any Award, the vesting or payment of any Award or the lapse of any restrictions pertaining thereto, the Company may require a Participant to pay such sum to the Company as may be necessary to discharge the Company’s obligations with respect to any taxes, assessments or other governmental charges (including FICA tax) imposed on property or income received by a Participant pursuant to the Plan or to satisfy any obligation that the Participant owes to the Company. In accordance with rules and procedures authorized by the Committee and, in the discretion of the Committee, such payment

may be in the form of cash or other property. In accordance with rules and procedures authorized by the Committee, in satisfaction of such taxes, assessments or other governmental charges or of other obligations that a Participant owes to the Company, the Company may, in the discretion of the Committee, make available for delivery a lesser number of shares of Stock in payment of an Award or permit a Participant to tender previously owned shares of Stock to satisfy such withholding obligation. At the discretion of the Committee, the Company may deduct or withhold from any payment or distribution to a Participant whether or not pursuant to the Plan.

17.

Termination and Amendment.

(a) The Plan may be terminated in whole or in part with respect to any or all Participants at any time by the Committee. Subject to Section 20, upon such termination, the assets related to the Plan, if any, in the Trust shall be distributed to each affected Participant with respect to whom the Plan has been terminated in order to meet the benefit obligations under the Plan with respect to each such Participant, provided that the Committee shall not have any right to make such distribution to an affected Participant to the extent such distribution is prohibited by Section 409A or the existence of such right would result in the Participant incurring interest or additional tax under Section 409A. In the event the entire Plan is terminated, the remaining assets related to the Plan, if any, in the Trust after the payment of such benefits shall be paid to Morgan Stanley. The Plan may be amended by the Committee from time to time in any respect; provided , however , that if and to the extent required by Rule 16b-3 or by any comparable or successor exemption under which the Committee believes it is appropriate for the Plan to qualify, no amendment shall be effective without the approval of the shareholders of Morgan Stanley, which (a) except as provided in Section 13, increases the number of shares of Stock that may be distributed under the Plan, (b) materially increases the benefits accruing to individuals under the Plan or (c) materially modifies the requirements as to eligibility for participation in the Plan. No amendment or termination shall be made that would materially impair the rights of any Participant in any Award theretofore granted or made, or any earnings with respect thereto, without such Participant’s prior written consent; provided , however , that Morgan Stanley may amend the Plan and the Trust from time to time in such a manner as may be necessary to avoid having the trust agreement pursuant to which the Trust is created, the Plan or the Trust being subject to ERISA and to avoid the current taxation of the assets held in the Trust to Participants; and provided , further , that Morgan Stanley may amend or modify the Plan in any manner that it considers necessary or advisable to comply with any law, regulation, regulatory guidance, ruling, judicial decision or accounting standards. Neither a Participant’s incurring any income tax liability nor the loss of an investment opportunity as a result of the termination of the Plan shall be considered an impairment of the rights of a Participant.

(b) Subject to the terms and conditions of the Plan, the Committee may amend outstanding Awards, including, without limitation, by any amendment which would accelerate the time or times at which the Award may vest or become payable and by any other amendment to any other term or condition of the Award; provided , however , that the Committee shall not have any such right to the extent it is prohibited by Section 409A or the existence of such right would result in a Participant being required to recognize income for United States federal income tax purposes prior to the time of payment of an Award or would result in a Participant incurring interest or additional tax under Section 409A. No amendment shall be made that would materially impair the rights of any Participant in any outstanding Award, or any earnings with respect thereto, without the prior written consent of such Participant; provided , however , that Morgan Stanley may amend or modify any Award under the Plan in any manner that it considers necessary or advisable to comply with any law, regulation, regulatory guidance, ruling, judicial decision or accounting

standards. Neither a Participant’s incurring any income tax liability nor the loss of an investment opportunity as a result of an amendment to an Award shall be considered an impairment of the rights of a Participant in the Award.

18.

[Intentionally Omitted]

19.

Shareholder Approval.

The Plan was approved by the shareholders of Dean Witter, Discover & Co. (the predecessor of Morgan Stanley) on May 20, 1994.

20.

Effect of Revocation Event.

Upon the occurrence of a Revocation Event, the Committee may, in its sole discretion, elect to terminate the Plan and/or the Trust in whole or in part. In the event that the Committee elects to so terminate the Plan, the Trust or any Participant’s Account as a result of a Revocation Event, in consideration of and as soon as practicable after Morgan Stanley’s providing the Trustee with a written undertaking to pay to Participants the amount to be paid under this Section, all amounts related to the Plan held in the Trust (or if the entire Trust is not terminated, any terminated Accounts) shall be distributed to Morgan Stanley. Morgan Stanley shall, in its sole discretion, (a) pay to each Participant whose Account is terminated, as soon as practicable after the date of such termination, a lump sum in cash equal to the Fair Market Value multiplied by the number of shares of Stock reflected in each Participant’s Account as of the date of such termination, (b) distribute to each Participant whose Account is terminated, as soon as practicable after the date of such termination, that number of shares of Stock that would have been distributable to such Participant under the Plan or (c) distribute to each Participant whose Account is terminated that number of shares of Stock that would have been distributable to such Participant at such time as shares would have been distributable to such Participant under the Plan, had the Plan continued, provided that Morgan Stanley shall not have any right to make any such payment or distribution to a Participant whose Account is terminated to the extent such payment or distribution is prohibited by Section 409A or the existence of such right would result in the Participant incurring interest or additional tax under Section 409A. If it is determined by a final adjudication in a proceeding, which Morgan Stanley either controls or was offered the right to control and declines, that the Participant’s interest in the Trust was taxable to the Participant notwithstanding any termination of such Participant’s Account in the Trust, Morgan Stanley shall pay or distribute the Participant’s interest (whether or not the Committee has previously elected to terminate the Plan, the Trust or the Participant’s Account) in accordance with either (a) or (b) of the preceding sentence.

21.

Miscellaneous.

(a) Stockholder Rights . Unless the Committee determines otherwise, prior to the payment of Stock pursuant to any Award, the Participant shall not have any rights as a stockholder with respect to any shares of Stock subject to such Award.

(b) Transferability . Unless the Committee determines otherwise, no Award granted under the Plan shall be transferable other than by will or by the laws of descent and distribution.

(c) Non-Uniform Determinations . The Committee’s determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). Without

limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Award Certificates, as to the persons receiving Awards under the Plan, and the terms and provisions of Awards under the Plan.

(d) Headings . The headings of sections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan.

(e) Governing Law . The Plan and all rights hereunder shall be subject to and interpreted in accordance with the laws of the State of Delaware without reference to the principles of conflicts of law.

EXHIBIT 10.2

MORGAN STANLEY

FINANCIAL ADVISOR PRODUCTIVITY COMPENSATION PLAN

(Amended and Restated as of June 20, 2006)

SECTION I

INTRODUCTION

(a)	The name of this plan is the Morgan Stanley Financial Advisor Productivity Compensation Plan (the “ *Plan* ”).

(b)

The Plan was initially adopted to be effective for Awards granted for Fiscal Years commencing with 1984; was amended and restated December 23, 1985 retroactive to Fiscal Year 1984; was amended effective December 24, 1990; was amended effective July 15, 1991; was restated for Fiscal Years beginning with 1992; was amended and restated effective October 1, 1993; was amended effective January 1, 1994; was amended and restated effective January 1, 1994; was amended and restated effective October 21, 1994; was amended effective June 18, 1997; was amended effective September 25, 1998; was amended effective September 21, 1999; was amended effective March 26, 2001; was amended and restated effective December 11, 2001; was amended effective September 20, 2005; and was amended and restated effective June 20, 2006.

SECTION II

PURPOSE OF PLAN

(a)	The purposes of the Plan are to retain and recruit key Financial Advisors to Morgan Stanley DW Inc. by enabling them to accumulate significant net worth.

SECTION III

DEFINITIONS

Unless determined otherwise by the Committee and set forth in the applicable Award Certificate, capitalized terms used herein without definition have the meanings set forth below.

(a)	“ *Account* ” means a bookkeeping account maintained in a confidential ledger by MSDW pursuant to Section VI of the Plan for each Participant granted a cash Award under the Plan.

(b)	“ *Award* ” means any award of cash, Stock or Stock Units made pursuant to Section V of the Plan.

(c)	“ *Award Certificate* ” means a written document (including in electronic form) that sets forth the terms and conditions of an Award. Award Certificates shall be authorized by the Committee and signed by an officer on behalf of Morgan Stanley (which signature may be in facsimile).

(d)	“ *Board* ” means the Board of Directors of Morgan Stanley.

(e)	“ *Committee* ” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(f)	“ *Company* ” means Morgan Stanley and its subsidiaries.

(g)

In respect of each award granted prior to June 20, 2006, “ Disability ” means termination of employment from MSDW due to a medically determinable physical or mental incapacity which is reasonably expected to be of long-term duration or result in death, and the determination of MSDW shall be conclusive on all parties as to whether a Participant is Disabled. In respect of each award granted on or after June 20, 2006, “ Disability ” shall have the meaning determined by the Committee and set forth in the applicable Award Certificate.

(h)	“ *Employee* ” means an employee of MSDW.

(i)	In respect of each award granted prior to June 20, 2006, “ *Fair Market Value* ” means:

(1) for purposes of determining the number of shares of Stock to be allocated pursuant to Section VII(a) to an award made pursuant to Section V, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Board or the Committee; and

(2) for purposes of crediting a Participant pursuant to Section VII(d) with shares of Stock based upon cash dividends paid or deemed to be paid on shares of Stock credited to the Participant as of the record date for such dividends, the average of the high and low sales prices, regular way, of a share of Stock as reported on the New York Stock Exchange Composite Tape (the “High/Low Price”) on the relevant dividend payment date, or, if Stock is not traded on public markets on the relevant dividend payment date, the first preceding date on which Stock is traded on public markets; provided , however , that in the event a “Fair Market Value” cannot be determined pursuant to the foregoing, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee; and

(3) for purposes of distributing cash in lieu of a fractional share pursuant to Section VII(b), the High/Low Price on the date of the distribution, or, if Stock is not traded on public markets on the date of the distribution, the first preceding date on which Stock is traded on public markets; provided , however , that in the event a “Fair Market Value” cannot be determined pursuant to the foregoing, the fair market value thereof as

of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee; and

(4) for such other purposes as may arise in connection with the Plan, the fair market value of a share of Stock as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee;

In respect of each Award granted on or after June 20, 2006, “ Fair Market Value ” means, with respect to a share of Stock, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee.

(j)	“ *Financial Advisor* ” means an Employee performing the functions of a retail Financial Advisor, as defined by MSDW.

(k)	“ *Fiscal Year* ” means the fiscal year of Morgan Stanley.

(l)	“ *Gross Revenue* ” means the gross production generated by a Financial Advisor during a stated period.

(m)	“ *Morgan Stanley* ” means Morgan Stanley, a Delaware corporation, or any successor thereto.

(n)	“ *MSDW* ” means Morgan Stanley DW Inc., a Delaware corporation, or any successor thereto (including, without limitation, any successor by merger).

(o)	“ *Participant* ” means an employee of the Company to whom an Award has been made pursuant to Section V.

(p)

In respect of each award granted prior to June 20, 2006, “ Related Employment ” means the employment of a Participant by an employer other than MSDW, provided that: (1) such employment is undertaken by the individual at the request or with the consent of MSDW; (2) immediately prior to undertaking such employment, the individual was an Employee or was engaged in Related Employment as defined herein; and (3) such employment is recognized by MSDW, in its discretion, as Related Employment. In respect of each award granted on or after June 20, 2006, “ Related Employment ” shall have the meaning determined by the Committee and set forth in the applicable Award Certificate.

(q)

In respect of each award granted prior to June 20, 2006, “ Retirement ” means termination of employment from MSDW (i) after attaining age 65; (ii) as defined in the Morgan Stanley DW Inc. Pension Plan whether or not the individual is a participant therein; or (iii) as otherwise specified by written agreement between MSDW and a Financial Advisor. In respect of each award granted on or after June 20, 2006, “ Retirement ” shall have the meaning determined by the Committee and set forth in the applicable Award Certificate.

(r)	“ *Section 409A* ” means Section 409A of the Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder (or any successor provisions thereto).

(s)	“ *Stock* ” means the common stock of Morgan Stanley, par value $.01 per share.

(t)	“ *Stock Unit* ” means a general, unsecured obligation of Morgan Stanley to deliver one share of Stock (or the value thereof) to a Participant pursuant to an Award recorded by the Company as a bookkeeping entry, subject to conditions determined by the Committee pursuant to Section V.

SECTION IV

ELIGIBILITY

(a)	Financial Advisors who produce Gross Revenue within a Fiscal Year which is equal to or exceeds criteria established from time to time by the Committee, or who meet or exceed any other criteria established from time to time by the Committee, shall be eligible to participate in the Plan.

(b)	Any Financial Advisor who is eligible to participate in the Plan pursuant to Section IV(a) shall be eligible to participate in the Plan only with respect to the Fiscal Year for which he or she meets the criteria specified pursuant to Section V of the Plan.

(c)	Individuals selected to receive Awards pursuant to Section V(d) of the Plan shall be eligible to participate in the Plan in connection with, and subject to the terms of, their Awards.

SECTION V

AWARDS

(a)

The Company may establish Gross Revenue criteria which will entitle a Financial Advisor to receive an Award under the Plan for a Fiscal Year. Such Award may be expressed as a percentage of each Financial Advisor’s Gross Revenue for the Fiscal Year for which such Award is being made. Awards granted under this Section V(a) shall be payable in accordance with Section VII.

(b)

The Committee may establish any other criteria which will entitle a Financial Advisor to receive an Award under the Plan for a given Fiscal Year. A Financial Advisor who achieves such other criteria shall receive an Award for that Fiscal Year based on such criteria. Awards granted under this Section V(b) shall be payable in accordance with Section VII.

(c)	Any Participant who terminates as an Employee during the Fiscal Year, for whatever reason, shall not be eligible for any Award pursuant to Section V(a) or (b) for such Fiscal Year.

(d)

The Committee may, in its discretion from time to time, make to an individual, in consideration of such individual becoming a Financial Advisor, remaining a Financial Advisor, or such other consideration as the Committee may determine, an Award on such terms and conditions as the Committee may determine, which terms and conditions need not be uniform with the terms and conditions of Section VI, VII or VIII hereof.

(e)

Awards granted under this Section V on or after June 20, 2006 shall be subject to such terms and conditions, including, without limitation, vesting requirements, cancellation provisions and transfer restrictions, established by the Committee, in its sole discretion, in connection with the Award. The Committee shall also have full authority to determine and specify in the applicable Award Certificate the effect, if any, that a Participant’s termination of employment for any reason will have on the vesting, payment or lapse of restrictions applicable to an Award granted on or after June 20, 2006. The terms and conditions of each Award granted on or after June 20, 2006 shall be set forth in an Award Certificate delivered or made available by Morgan Stanley to the Participant following the date of grant of the Award.

(f)

The total number of shares of Stock that may be issued pursuant to Awards granted under the Plan is 6,500,000 ¹ . Shares delivered under the Plan may be authorized but unissued shares or treasury shares that Morgan Stanley acquires in the open market, in private transactions or otherwise. The Committee, in its discretion, may adjust the number and kind of shares authorized for delivery under the Plan in the event of a stock split, stock dividend, extraordinary cash dividend, merger, acquisition, reorganization, spinoff or similar transaction. In connection with any of the foregoing events, the Committee may, in its discretion, adjust outstanding Awards, including by adjusting the number and kind of shares subject to any outstanding Award. The Committee shall make all such adjustments, and its determination as to what adjustments shall be made, and the extent thereof, shall be final.

SECTION VI

ACCOUNTS-ESCROW AGENT

(a)

A separate Account shall be maintained by MSDW in a confidential ledger for each Participant granted a cash Award by the Company for each Fiscal Year. Each such Account shall be credited with the amount of cash Awards not paid to the Participant pursuant to Section VII of the Plan and increased from time to time by any additional cash Awards not paid to each Participant. Each Account shall be decreased by any cash amounts paid to or on behalf of a Participant or forfeited pursuant to Section VII of the Plan.

Such number represents the maximum number of shares of Stock available for Awards under the Plan that was initially approved by the Board of Directors of Dean Witter, Discover & Co. (the predecessor of Morgan Stanley) and does not reflect adjustments to such maximum number that were made in accordance with Section V(f) prior to June 20, 2006.

(b)

As a condition to participation in the Plan, each eligible Employee shall be required to hold Stock corresponding to Awards of Stock granted under the Plan in an escrow account and such Employee’s participation in the Plan shall constitute the appointment of such custodian as the Company shall designate (the “ Custodian ”) as the custodial agent for the purpose of holding such Stock. Such escrow account will be governed by and subject to the terms and conditions of a written agreement with the Custodian.

SECTION VII

AWARD PAYMENTS

(a)

Awards under Section V(a) for the 1994 Fiscal Year were made, at the Participant’s election prior to the date the Award is made, in the form of (i) cash, payable four years and six months following the close of the Fiscal Year for which the Award was made, or (ii) shares of Stock valued at 100% of the Fair Market Value of Stock as of the date the Award is made, granted as soon as practicable following the close of the Fiscal Year for which the Award was made. Awards under Section V(a) for Fiscal Years commencing with the 1995 Fiscal Year granted prior to June 20, 2006, were made entirely in the form of Stock valued at 100% of the Fair Market Value of Stock as of the date the Award was made, granted as soon as practicable following the close of the Fiscal Year for which the Award was made. Awards granted under Section V(b) prior to June 20, 2006 may be made in cash or Stock, as determined by the Committee. Awards granted under Section V(a) or Section V(b) on or after June 20, 2006 may be made in cash, Stock, Stock Units or a combination thereof, as determined by the Committee.

(b)	The following payment provisions shall apply to Awards granted under Section V(a) or Section V(b) of the Plan prior to June 20, 2006:

(1) the number of shares of Stock payable with respect to an Award shall be calculated by reference to the amount of the Award determined under Section V, discounted by an appropriate interest rate factor as the Company shall establish from time to time so that the value of the Award payable under this Section VII is equal to the present value of the amount determined pursuant to Section V and payable four years and six months following the close of the Fiscal Year for which the Award was made;

(2) a Participant on a leave of absence approved by MSDW or who is absent due to Disability on the date an Award payment is made shall not be entitled to payment of such Award until the Participant returns to MSDW following completion of such leave of absence or Disability;

(3) the commencement of Related Employment by a Participant shall not be treated for purposes of the Plan and any such Award as a termination of employment;

(4) Stock Awards shall vest and cash Awards shall be paid, four years and six months following the close of the Fiscal Year with respect to which awarded, provided that the Participant’s status as an Employee has not been terminated prior to such date;

(5) upon the Participant’s termination of employment with MSDW, all unvested Stock Awards and unpaid cash Awards shall be forfeited;

(6) notwithstanding anything in this Plan to the contrary, if a Participant terminates employment with MSDW due to Disability or Retirement, or upon a Participant’s death, all of the Participant’s Awards shall vest immediately and be paid as promptly as practicable;

(7) the Retirement, Disability or death of an individual during a period of Related Employment shall be treated for purposes of the Plan and any such Award as if such event had occurred while the individual was an Employee;

(8) payments to Participants of any fractional share shall be paid in cash.

(c)

The number of shares of Stock payable with respect to an Award granted pursuant to Section V(a) or V(b) on or after June 20, 2006 shall be determined in accordance with a valuation methodology approved by the Committee and such Awards shall be subject to the conditions to payment determined by the Committee and set forth in the applicable Award Certificate.

(d)

A Participant may vote and receive dividends on any Award of Stock granted to such Participant under Section VII(a), or credited under this Section VII(d), prior to June 20, 2006. With respect to Awards of Stock granted prior to June 20, 2006, all dividends on such Stock (other than dividends payable in Stock) shall be reinvested in shares of Stock at 100% of the Fair Market Value of Stock which shares shall be credited to the Participant and held by the Custodian. Unless the applicable Award Certificate otherwise provides, all shares of Stock received as a distribution with respect to an Award of Stock or purchased with reinvested dividends under this Section VII(d) shall be subject to the same restrictions as the Award of Stock on which the distribution or dividend is awarded.

(e)

With respect to Awards granted on or after June 20, 2006, if Morgan Stanley pays any dividend or makes any distribution to holders of Stock, the Committee may in its discretion authorize payments (which may be in cash, Stock (including restricted Stock) or Stock Units or a combination thereof) with respect to the shares corresponding to an Award, or may authorize appropriate adjustments to outstanding Awards, to reflect such dividend or distribution. The Committee may make any such payments subject to vesting, deferral or restrictions on transfer.

(f)

In accordance with the provisions of Appendix A to the Plan, if MSDW must recover a Payment Obligation that was made subject to Appendix A and was previously paid to a Participant pursuant to this Section VII, a Participant shall be required to repay the amount of cash or the number of shares of Stock received or underlying Stock Units granted (or an amount in cash equal to the fair market value of such Stock as of the date of such repayment, as determined by MSDW). If any such amount is not repaid, MSDW reserves the right to withhold from a Participant’s compensation the amount of any Payment Obligation which a Participant fails to repay as required herein.

(g)

The Committee reserves the right to accelerate the vesting of any Award of cash, Stock or Stock Units awarded pursuant to Section V of the Plan, provided that, if the Award of such cash, Stock or Stock Units was made subject to Appendix A hereof, then vesting of such cash, Stock or Stock Units shall be subject to Appendix A hereof. Notwithstanding the preceding sentence, the Company and the Committee shall not have any right to accelerate the vesting or payment of any cash, Stock or Stock Units awarded pursuant to the Plan to the extent such right is prohibited by Section 409A, or the existence of such right would result in a Participant being required to recognize income for United States federal income tax purposes prior to the time of payment or settlement of an Award or would result in a Participant incurring interest or additional tax under Section 409A.

(h)

As a condition to the vesting or payment of any Award or the lapse of any restrictions pertaining thereto, the Company may require a Participant to pay such sum as may be necessary to discharge the Company’s obligations with respect to any taxes, assessments or other governmental charges (including FICA tax) imposed on property or income received by a Participant pursuant to the Plan or to satisfy any obligation that the Participant owes to the Company. In accordance with rules and procedures authorized by the Company and, in the discretion of the Company, such payment may be in the form of cash or other property. In accordance with rules and procedures authorized by the Company, in satisfaction of such taxes, assessments or other governmental charges or of other obligations that a Participant owes to the Company, the Company may, in the discretion of the Company, make available for delivery a lesser number of shares of Stock in payment or settlement of an Award or permit a Participant to tender previously owned shares of Stock to satisfy such payment obligation. The Company may, in its discretion, deduct or withhold such amounts from any payment or distribution to a Participant whether or not pursuant to the Plan.

SECTION VIII

SUBORDINATION OF AWARDS

(a)

MSDW may require, as a condition of participation in the Plan, that a Financial Advisor execute and deliver a written agreement (the “ Agreement ”) within forty-five (45) days after notice of eligibility to Participate that such Financial Advisor’s right to payment hereunder (the “ Payment Obligation ”), is subordinate to the prior payment or provision for payment in full of all claims of all present and future creditors of MSDW arising out of any matter occurring prior to the date on which the related Payment Obligation matures consistent with all applicable statutes, regulations and rules, except for claims which are the subject of subordination agreements which rank on the same priority (which claims shall be paid pari passu) or are junior to the Payment Obligation under the Agreement. The Agreement shall also provide that the Participant’s right to payment hereunder shall be subordinate to claims which are now or hereafter expressly stated in the instruments creating such claims to be senior in right of payment to the claims of the class of claims created hereunder which arise out of any matter occurring prior to the maturity date of any payment under the Payment Obligation.

(b)

The form of the Agreement shall be determined by MSDW. In the event that MSDW elects to treat Payment Obligations as subordinated liabilities for purposes of determining net capital under Rule 15c3-1 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 and similar regulations promulgated under the Commodities Exchange Act, the form of the Agreement shall be subject to approval of the Examining Authority as defined by the Agreement. A copy of the Agreement is annexed hereto as Appendix A , and incorporated by reference as fully as if set forth herein at length.

(c)

Any amount credited to a Participant’s Account shall not be segregated but shall remain a part of the general corporate funds of MSDW subject to the claims of general, unsecured creditors of MSDW to which claims the rights of the Participant to receive payment of the amount credited to the Participant’s Account shall be subordinated pursuant to the terms of an Agreement.

(d)	If a Participant is required by MSDW to execute and deliver an Agreement within the forty-five (45) day period described in (a) above and does not do so, such Participant shall cease to have any rights whatsoever hereunder.

SECTION IX

ADMINISTRATION

(a)

The Committee shall have full power and authority to exercise all powers granted to it under the Plan and to construe, interpret and administer the Plan. Its decisions shall be final, conclusive and binding upon all persons interested herein, including Participants and their beneficiaries and personal representatives.

(b)

The members of the Committee shall be appointed by, and serve at the pleasure of, the Board. Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case, the term Committee as used herein shall be deemed to refer to the Board. To the extent not prohibited by applicable laws or rules of the New York Stock Exchange, the Committee or the Board may from time to time delegate some or all of the Committee’s authority under the Plan to an administrator consisting of one or more members of the Committee as a subcommittee or subcommittees thereof or of one or more members of the Board who are not members of the Committee or one or more officers of the Company (or of any combination of such persons) (the “ Administrator ”). Any such delegation shall be subject to the restrictions and limits specified at the time of such delegation or thereafter. The Committee or the Board may at any time rescind all or part of the authority delegated to an Administrator or appoint a new Administrator. At all times, the Administrator shall serve in such capacity at the pleasure of the Board. Any action undertaken by the Administrator in accordance with the delegation of the Committee’s authority shall have the same force and effect as if undertaken directly by the Committee, and any reference in the Plan to the Committee shall, to the extent consistent with the terms and limitations of such delegation, be deemed to include a reference to the Administrator.

(c)	The Plan shall be effective for all Awards accrued for the Fiscal Year beginning in 1984 and each Fiscal Year thereafter, as amended from time to time until suspended or discontinued by the Company.

(d)	The expenses of administering the Plan shall be borne by the Company.

(e)

The interest and property rights of any person in the Plan or in any distribution to be made under the Plan shall not be subject to option nor be assignable, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor’s process and any act in violation hereof shall be void.

(f)	Nothing herein shall be construed to require the Company to segregate or set aside any funds or any property for the purpose of making Award payments hereunder.

(g)

The Company’s and the Committee’s determinations under the Plan need not be uniform and may be made selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Award Certificates, as to (1) the person to receive Awards under the Plan, (2) the terms and provisions of Awards under the Plan, (3) the exercise by the Committee of its discretion in respect of the terms of the Plan and (4) any adjustments made pursuant to Section V(f) of the Plan.

SECTION X

MISCELLANEOUS

(a)

The establishment of the Plan, the granting of benefits or any action by the Company, the Committee or any other person shall not be held or construed to confer upon any person any right to be continued as an employee of the Company nor, upon termination of employment with the Company, to confer any right or interest other than as provided herein. No provision of the Plan shall restrict the right of the Company to terminate any employee’s employment for any reason, with or without cause.

(b)	If, in the opinion of the Company, any person becomes unable to handle properly any amount payable to such person under the Plan, the Company may make any reasonable arrangement for payment on such person’s behalf as it deems appropriate.

(c)	Where appropriate, the use of masculine terms within the Plan shall mean the feminine, the use of singular terms shall mean the plural, and vice versa.

(d)	Except as otherwise provided in Section VII(d) or in the applicable Award Certificate, no Participant shall have any of the rights of a stockholder of Morgan Stanley with respect to shares of Stock corresponding to an Award until the issuance of such Stock to the Participant.

SECTION XI

AMENDMENT, SUSPENSION AND DISCONTINUANCE

(a)	The Committee shall have the authority to amend the Plan, in whole or in part, or to suspend or discontinue the Plan, in whole or in part, at any time.

(b)	The Plan shall continue in effect as amended from time to time, until suspended or discontinued by the Committee.

(c)

Notwithstanding any amendment, suspension or discontinuance of the Plan, Awards previously granted shall be paid pursuant to the appropriate provisions of the Plan. Notwithstanding the foregoing, in the event of the discontinuance or termination of the Plan, the Company reserves the right to accelerate payment of a Participant’s Award to any date prior to the vesting periods applicable to such Award, subject to provisions of Appendix A to the Plan, provided that the Company shall not have any such right to accelerate payment of a Participant’s Award to the extent such right is prohibited by Section 409A, or the existence of such right would result in a Participant being required to recognize income for United States federal income tax purposes prior to the time of payment or settlement of an Award or would result in a Participant incurring interest or additional tax under Section 409A.

(d)	If any part of this Plan, including Appendix A hereto, fails to receive any required approval of the appropriate regulatory and governing bodies or is otherwise declared void and of no effect, the rest of the Plan shall continue in full force.

(e)

Any discretionary authority or obligation that the Committee or the Company may have pursuant to the Plan (including Appendix A hereto) shall not be applicable to an Award that is subject to Section 409A to the extent such discretionary authority or obligation is prohibited by Section 409A, or would result in a Participant being required to recognize income for United States federal income tax purposes prior to the time of payment, settlement or exercise of an Award or would result in a Participant incurring interest or additional tax under Section 409A.

APPENDIX A

MORGAN STANLEY

FINANCIAL ADVISOR PRODUCTIVITY COMPENSATION PLAN

For purposes of this Appendix A , a Financial Advisor who is designated in writing by Morgan Stanley DW Inc. as a participant under the Plan shall be known as a “ Participant ”, Morgan Stanley DW Inc. shall be known as “ MSDW ”, and MSDW’s “ Payment Obligation ” shall be as defined below.

1.	Payment Obligation

(a) Payment Obligations shall consist of any deferred payments of deferred bonuses owed from time to time to a Participant by MSDW pursuant to the Plan.

(b) Payment Obligations, including the dates payments are due, shall be determined in accordance with the provisions of the Plan as in effect on the date hereof, or as hereafter amended. As provided in Sections 4 and 5 of this Appendix A , payment of any amount of a Payment Obligation may be made sooner than five years following the year for which such Payment Obligation is accrued by MSDW. If any provision of the Plan as now in effect or as hereafter amended shall be inconsistent with this Appendix A , this Appendix A shall govern.

2.	Subordination of Right of Payment

(a) Payment Obligations are and shall be subordinated in right of payment and subject to prior payment or provision for payment in full of all claims of other present and future creditors of MSDW whose claims are not similarly subordinated (claims hereunder shall rank pari passu with claims similarly subordinated) and to claims which are now or hereafter expressly stated in the instruments creating such claims to be senior in right of payment to the claims or the class of claims hereunder which arise out of any matter occurring prior to the maturity date of any payment under the Payment Obligation.

(b) In the event of the appointment of a receiver or trustee for MSDW or in the event of its insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 (“ SIPA ”), or otherwise, its bankruptcy, assignment for the benefit of creditors, reorganization, whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of MSDW, Participants shall not be entitled to participate or share, ratably or otherwise, in the distribution of the assets of MSDW until all claims of all other present and future creditors of MSDW whose claims are senior to claims hereunder have been fully satisfied or provision has been made therefor.

(c) Notwithstanding the maturing of the Payment Obligation under any provision of the Plan or this Appendix A , the right of a Participant to receive payment of any Payment Obligation is and shall remain subordinate as provided in this Section 2.

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3.	Suspension of Maturity During Net Capital Stringency

(a) MSDW’s Payment Obligations shall be suspended and not mature for any period of time during which, after giving effect to such Payment Obligations (together with the payment of any other subordinated obligation of MSDW payable at or prior to such payment of the Payment Obligations),

(i) if MSDW is not operating pursuant to the alternative net capital requirements provided for in paragraph (f) of Rule 15c3-1 (the “ Rule ”) under the Securities Exchange Act of 1934 (the “Act”), the aggregate indebtedness of MSDW would exceed 1,200 percentum of its net capital, as those terms are defined in the Rule, as in effect at the time such payment is to be made, or such percentum as may be made applicable to MSDW from time to time by the Examining Authority (as defined in paragraph 7(f) hereof) plus an amount equal to the guaranty deposits with clearing organizations other than the Chicago Board of Trade (“ CBOT ”), which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s,” to the extent such deposits cannot be used for margin purposes, or

(ii) if MSDW is operating pursuant to the alternative net capital requirements provided for in paragraph (f) of the Rule, its net capital would be less than five (5) percentum of aggregate debit items (or such other percentum as may be made applicable to MSDW by the Examining Authority) computed in accordance with Exhibit A to Rule 15c3-3 under the Act or any successor rule as in effect at the time such payment is to be made, plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(iii) if MSDW is registered as a futures commission merchant under the Commodity Exchange Act (the “ CEA ”), the net capital of MSDW would be less than the greatest of (A) six (6) percentum of the funds required to be segregated pursuant to the CEA and Commodities Futures Trading Commission (“ CFTC ”) Regulations and the foreign futures or foreign options secured amount exclusive of the market value of commodity options purchased by option customers of MSDW on or subject to the rules of a contract market or a foreign board of trade, provided the deduction for each option customer shall be limited to the amount of customer funds in each option customer’s account(s), and foreign futures and foreign options secured amounts plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, (B) such amount as may be made applicable to MSDW at the time of such payment by an Examining Authority under Rule 15c3-1(b)(7), or (C) $2,000,000 (or such other amount as required by the CEA and CFTC Regulations), or

(iv) if MSDW’s net capital, as defined in the Rule or any successor rule as in effect at the time such payment is to be made would be less than 120 percentum (or such other percentum as may be made applicable to MSDW at the time of such payment by the Examining Authority) of the minimum dollar amount required by the Rule as in effect at such time or such dollar amount as may be made applicable to MSDW by the Examining Authority, plus an

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amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(v) if MSDW is registered as a futures commission merchant under the CEA and if its net capital, as defined in the CEA or CFTC Regulations as in effect at the time of such payment, would be less than 120 percentum (or such other percentum as may be made applicable to MSDW by the Examining Authority) of the minimum dollar amount required by the CEA or the regulations thereunder as in effect at such time (or such other dollar amount as may be made applicable to MSDW by the Examining Authority at the time of such payment), plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(vi) if MSDW is subject to the provisions of paragraph (a)(6)(v) or (a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, its net capital would be less than the amount required to satisfy the 1,000 percentum test (or such other percentum test as may be made applicable to MSDW by the Examining Authority at the time of such payment) stated in such applicable paragraph, plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes.

The net capital required by (i)-(vi) above is hereinafter referred to as the “Applicable Minimum Capital”. During any such suspension, MSDW shall, as promptly as consistent with the protection of its customers, reduce its business to a condition whereby payment due under Payment Obligations could be made (together with the payment of any other subordinated obligation of MSDW payable at or prior to such payment) without MSDW’s net capital being below the Applicable Minimum Capital, at which time MSDW shall make payment due under Payment Obligations on not less than five (5) days prior written notice to the Examining Authority.

(b) If immediately after any payment of a Payment Obligation MSDW’s net capital is less than the Applicable Minimum Capital, whether or not the Participant had any knowledge or notice of such fact at the time of any such payment, a Participant must repay to MSDW, its successors or assigns, any sum so paid, to be held by MSDW pursuant to the provisions of the Plan as if such payment had never been made; provided , however , that any suit for the recovery of any such payment must be commenced within two years of the date of such payment. MSDW reserves the right to withhold from the Participant’s compensation the amount of any Payment Obligation which a Participant fails to repay as required herein.

(c) If, pursuant to the terms hereof, payment of MSDW’s Payment Obligations are suspended, MSDW may be summarily suspended by the Examining Authority.

4.	Permissive Prepayment

With the prior written permission of the Examining Authority, MSDW may, at its option and to the extent permitted by the Plan, pay all or any portion of the Payment Obligation to the Participant (such payment hereinafter referred to as a “ Prepayment ”) at any time subsequent to

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one year from the date subordinated funds became subject to this Appendix A. No Prepayment shall be made, however, if after giving effect thereto (and to all other payments of any other subordinated obligation of MSDW payable within six months of such Prepayment) without reference to any projected profit or loss of MSDW,

(i) in the event that MSDW is not operating pursuant to the alternative net capital requirement provided for in paragraph (f) of the Rule, the aggregate indebtedness of MSDW would exceed 1,000 percentum of its net capital as those terms are defined in the Rule or any successor rule as in effect at the time such Prepayment is to be made (or such other percentum as may be made applicable at such time to MSDW by the Examining Authority), plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(ii) in the event that MSDW is operating pursuant to such alternative net capital requirement, the net capital of MSDW would be less than 5 percentum (or such other percentum as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority) of aggregate debit items computed in accordance with Exhibit A to Rule 15c3-3 under the Act or any successor rule as in effect at such time, plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(iii) in the event that MSDW is registered as a futures commission merchant under the CEA, the net capital of MSDW (as defined in the CEA or CFTC Regulations as in effect at the time of such Prepayment) would be less than the greatest of (A) 7 percentum (or such other percentum as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority) of the funds required to be segregated pursuant to the CEA and CFTC Regulations and the foreign futures or foreign options secured amount, exclusive of the market value of commodity options purchased by option customers on or subject to the rules of a contract market or a foreign board of trade (provided the deduction for each option customer shall be limited to the amount of customer funds in each option customer’s account(s) and foreign futures and foreign options secured amounts), plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, (B) such amount as may be made applicable to MSDW by an Examining Authority under Rule 15c3-1(b)(7), or (C) $2,000,000 (or such other amount as required by the CEA or CFTC Regulations), or

(iv) MSDW’s net capital, as defined in the Rule or any successor rule as in effect at the time of such Prepayment, would be less than 120 percentum (or such other percentum as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority) of the minimum dollar amount required by the Rule as in effect at such time (or such other dollar amount as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority), plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section

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211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(v) in the event that MSDW is registered as a futures commission merchant under the CEA, its net capital, as defined in the CEA or the regulations thereunder, as in effect at the time of such Prepayment would be less than 120 percentum (or such other percentum as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority) of the minimum dollar amount required by the CEA or the regulations thereunder as in effect as such time or such other dollar amount as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority, plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, or

(vi) in the event that MSDW is subject to the provisions of paragraph (a)(6)(v) or (a)(7)(iv) or (c)(2)(x)(B)(1) of the Rule, the net capital of MSDW would be less than the amount required to satisfy the 1000 percentum test (or such other percentum test as may be made applicable to MSDW at the time of such Prepayment by the Examining Authority) stated in such applicable paragraph, plus an amount equal to the guaranty deposits with clearing organizations other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirements for Member FCM’s”, to the extent such deposits cannot be used for margin purposes.

If Prepayment is made of all or any part of the Payment Obligation before the date payment is due and if MSDW’s net capital is less than the amount required to permit such Prepayment pursuant to the foregoing provisions of this paragraph, the Participant agrees irrevocably (whether or not such Participant had any knowledge or notice of such fact at the time of such Prepayment) to repay MSDW, its successors or assigns, the sum so paid to be held by MSDW pursuant to the provisions hereof as if such Prepayment had never been made; provided , however , that any suit for the recovery of any such Prepayment must be commenced within two years of the date of such Prepayment. MSDW reserves the right to withhold from the Participant’s compensation the amount of any Payment Obligation which a Participant fails to repay as required herein.

5.	Special Prepayment

MSDW, at its option and as permitted by the Plan, but not at the option of the Participant, may make a payment of all or any portion of the Payment Obligation hereunder sooner than one year from the date on which such amount became subject to this agreement (a “ Special Prepayment ”), if the written consent of the appropriate regulatory authority is first obtained. If MSDW shall be a futures commission merchant, as that term is defined in the CEA and CFTC Regulations, no such prepayment shall be made if:

(i) after giving effect thereto (and to all payments of payment obligations under any other Subordination Agreements then outstanding, the maturities or accelerated maturities of which are scheduled to fall due within six months after the date such Special Prepayment is to occur pursuant to this provision or on or prior to the date on which the Payment

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Obligation in respect to such Special Prepayment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of MSDW, the net capital of MSDW is less than the greatest of (A) 10 percentum of the funds required to be segregated pursuant to the CEA and CFTC Regulations and the foreign futures or foreign options secured amount, exclusive of the market value of commodity options purchased by option customers of MSDW on or subject to the rules of a contract market or a foreign board of trade (provided the deduction for each option customer shall be limited to the amount of customer funds in such option customer’s account(s) and foreign futures and foreign options secured amount), plus an amount equal to the guaranty deposits with clearing organizations, other than the CBOT, which were included in current assets under Section 211 of the CBOT “Capital Requirement for Member FCM’s”, to the extent such deposits cannot be used for margin purposes, (B) if MSDW is a securities broker or dealer, the amount of net capital specified in Rule 15c3-1(c)(5)(ii) of the regulations of the Securities and Exchange Commission (17 CFR 240.l5c3-1d(c)5(ii), or (C) $2,000,000 (or such other amount as required by the CEA or CFTC Regulations), or

(ii) Pretax losses during the latest three month period were greater than 15% of current excess adjusted net capital.

6.	Maturity Upon Certain Events

Notwithstanding the provisions of Section 3 hereof, the Payment Obligation shall (to the extent not already matured) forthwith mature, together with all other Subordination Agreements then outstanding in the event of any receivership, insolvency, liquidation pursuant to SIPA or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshaling of the assets and liabilities of MSDW.

7.	Miscellaneous Provisions

(a) Participants may not rely upon any commodity exchange or securities exchange to provide any information concerning or relating to MSDW Such exchanges have no responsibility to disclose to the Participant any information concerning or relating to MSDW which they may have now or at any future time. The Participant agrees that the New York Stock Exchange (the “ NYSE ”), its Special Trust Fund or any director, officer, trustee or employee of the NYSE or said Trust Fund or any other exchange or director, officer, trustee or employee thereof shall not be liable to the Participant with respect to the Plan or any distribution pursuant thereto.

(b) The funds represented by the Payment Obligation shall be dealt with in all respects as capital of MSDW, shall be subject to the risks of the business and may be deposited in an account or accounts in MSDW’s name in any bank or trust company.

(c) Payment Obligations under the Plan may not be transferred, sold, assigned, pledged or otherwise encumbered or disposed of and no lien, charge or other encumbrance may be created or permitted to be created hereon, without the prior written consent of the Examining Authority.

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(d) If MSDW is a futures commission merchant as that term is defined in the CEA, MSDW agrees, consistent with the requirements of Section l.17(h) of CFTC Regulations that whenever prior written notice by MSDW to the Examining Authority is required pursuant to the provisions of this agreement the same prior written notice shall be given by MSDW to (1) the CFTC at its principal office in Washington, D.C., Attention: Chief Accountant of Division of Trading and Markets, and/or (2) the commodity exchanges of which MSDW is a member and which are then designated by the CFTC as MSDW’s designated self-regulatory organizations as defined in Section 1.3(ff) of the CFTC Regulations (the “ DSROs ”).

(e) “ Subordination Agreement ” as used herein shall include any subordinated loan agreement and any secured demand note agreement constituting a satisfactory subordination agreement under the Rule under which MSDW is the borrower or the pledgee of collateral, and reference herein to the payment of a subordinated obligation of MSDW shall be deemed to include the return to the maker-pledgor of any secured demand note and the collateral therefore held by MSDW

(f) The term “ Examining Authority ” shall refer to the regulatory body, specified in paragraph (c)(12) of the Rule, responsible for inspecting or examining MSDW for compliance with financial responsibility requirements. If MSDW is and continues to be a member of the NYSE, the references herein to the Examining Authority shall be deemed to refer to the NYSE. If MSDW is and continues to be a futures commission merchant as that term is defined in the CEA and regulations thereunder, references to the Examining Authority shall also be deemed to refer to the CFTC and MSDW’s DSROs.

(g) The provisions of this Appendix A shall be binding upon and inure to the benefit of MSDW, its successors and assigns, and the Participant and the Participant’s heirs, executors and administrators.

(h) Any controversy arising out of or relating to this Plan shall be submitted to and settled by arbitration pursuant to the Constitution and Rules of the NYSE. MSDW and Participant shall be conclusively bound by such arbitration.

(i) MSDW shall not modify, amend or cancel this Appendix or any provision of the Plan governing the Payment Obligations that are the subject of this Appendix without the prior approval of the Examining Authority.

(j) This agreement shall be deemed to have been made under and shall be governed by the laws of the State of New York.

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EXHIBIT 10.3

MORGAN STANLEY

PERFORMANCE FORMULA AND PROVISIONS

The following sets forth the performance formula (the “ Performance Formula ”) that was approved by the shareholders of Morgan Stanley at the annual meeting of shareholders on March 22, 2001. The Performance Formula governs annual bonuses for certain executive officers of the Company under Section 162(m) of the Code. The Performance Formula was originally set forth in the Morgan Stanley 1995 Equity Incentive Compensation Plan (the “ EICP ”). No awards may be made under the EICP after May 10, 2006; however , the Performance Formula continues to be effective as a valid shareholder-approved performance formula for annual bonus awards paid other than under the EICP. Accordingly, the Performance Formula and related provisions (the “ Performance Formula and Provisions ”) are set forth below as a stand-alone document for ease of administration.

1.	Definitions

As used herein, the following capitalized words shall have the meanings set forth below:

“ Award ” means an award, including without limitation, an award of restricted stock, stock units, stock options, or stock appreciation rights or another equity-based or equity-related award, granted under a Company equity compensation plan and subject to the terms and provisions of such plan.

“ Board ” means the Board of Directors of Morgan Stanley.

“ Code ” means the Internal Revenue Code of 1986, as amended, and the applicable rulings and regulations thereunder.

“ Committee ” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto, or any subcommittee thereof consisting solely of at least two “outside directors” as defined under Section 162(m) of the Code.

“ Company ” means Morgan Stanley and all of its Subsidiaries.

“ Date of the Award ” means the effective date of an Award as specified by the Committee.

“ Fair Market Value ” means, with respect to a Share, the fair market value thereof as of the relevant date of determination, as determined in accordance with a valuation methodology approved by the Committee.

“ Maximum Annual Bonus ” has the meaning set forth in Section 2.

“ Morgan Stanley ” means Morgan Stanley, a Delaware corporation.

“ Pre-Tax Earnings ” means Morgan Stanley’s income before income taxes as reported in its consolidated financial statements adjusted to eliminate: (1) the cumulative effect of changes in accounting policy (which include changes in generally accepted accounting principles) adopted by Morgan Stanley, for the relevant fiscal year; (2) expenses classified as “Provisions for Restructuring”; (3) expenses related to “Goodwill Amortization”; (4) gains and/or losses classified as “Discontinued Operations”; and (5) gains or losses classified as “Extraordinary Items,” which may include: (A) profits or losses on disposal of assets or segments of the previously separate companies of a business combination within two years of the date of such combination; (B) gains on restructuring payables; (C) gains or losses on the extinguishment of debt; (D) gains or losses from the expropriation of property; (E) gains or losses that are the direct result of a major casualty; (F) losses resulting from a newly enacted law or regulation; and (G) other expenses or losses or income or gains that are unusual in nature or infrequent in occurrence. In each instance, the above-referenced adjustment to Pre-Tax Earnings must be in accordance with generally accepted accounting principles and appear on the face of Morgan Stanley’s Consolidated Statements of Income contained in Morgan Stanley’s Consolidated Financial Statements for such fiscal year.

“ Section 162(m) Participant ” means, for a given fiscal year of Morgan Stanley, any individual designated by the Committee by not later than 90 days following the start of such year (or such other time as may be required or permitted by Section 162(m) of the Code) as an individual whose compensation for such fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code.

“ Share ” means a share of common stock, par value $0.01 per share, of Morgan Stanley.

“ Subsidiary ” means (i) a corporation or other entity with respect to which Morgan Stanley, directly or indirectly, has the power, whether through the ownership of voting securities, by contract or otherwise, to elect at least a majority of the members of such corporation’s board of directors or analogous governing body, or (ii) any other corporation or other entity in which Morgan Stanley, directly or indirectly, has an equity or similar interest and which the Committee designates as a Subsidiary for purposes of the Performance Formula and Provisions.

2.	Annual Bonus

Commencing with the fiscal year of Morgan Stanley beginning December 1, 2000 and for each fiscal year of Morgan Stanley thereafter, each Section 162(m) Participant will be eligible to earn under the Performance Formula and Provisions an annual bonus for each fiscal year in a maximum amount equal to 0.5% of Morgan Stanley’s Pre-Tax Earnings for that fiscal year (the “ Maximum Annual Bonus ”). In determining the annual bonus amounts payable under the Performance Formula and Provisions, the Committee may not pay a Section 162(m) Participant more than the Maximum Annual Bonus, but the Committee shall have the right to reduce the bonus amount payable to such Section 162(m) Participant to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the year.

Following the completion of each fiscal year, the Committee shall certify in writing the Maximum Annual Bonus and the bonus amounts, if any, payable to Section 162(m) Participants

for such fiscal year. The bonus amounts payable to a Section 162(m) Participant will be paid annually following the end of the applicable fiscal year after such certification by the Committee in the form of (i) cash, (ii) Awards with a value as of the Date of the Award, determined in accordance with Section 3 below, equal to the value of the annual bonus amount earned by the Section 162(m) Participant for such fiscal year, or (iii) a combination of cash and such Awards.

3.	Valuation

If the Committee determines that all or a portion of an annual bonus awarded to a Section 162(m) Participant for a given fiscal year is paid in whole or in part in the form of Awards, then for purposes of determining the number of Shares subject to such Awards, the Committee may value the Shares at a discount to Fair Market Value to reflect the various restrictions, conditions and limitations applicable to the Shares, but such discount shall not exceed 50% of the Fair Market Value as of the Date of the Award. Notwithstanding the foregoing, the Fair Market Value of any Awards plus any cash paid as an annual bonus pursuant to the Performance Formula and Provisions shall not exceed the Maximum Annual Bonus.

4.	Repeal of Section 162(m) of the Code

Without further action by the Board, the Performance Formula and Provisions shall cease to apply on the effective date of the repeal of Section 162(m) of the Code (and any successor provision thereto).

Exhibit 12

Morgan Stanley

Ratio of Earnings to Fixed Charges and

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

(dollars in millions)


	Three Months Ended				Six Months Ended				Fiscal Year
	May 31, 2006		May 31, 2005(1)		May 31, 2006		May 31, 2005(1)		2005		2004		2003		2002		2001

Ratio of Earnings to Fixed Charges

Earnings:
Income before income taxes(2)	$	3,007	$	1,394	$	5,381	$	3,489	$	7,361	$	6,818	$	6,160	$	4,859	$	5,809
Add: Fixed charges, net		10,030		5,607		19,555		10,314		24,637		14,871		12,856		12,688		20,654

Income before income taxes and fixed charges, net	$	13,037	$	7,001	$	24,936	$	13,803	$	31,998	$	21,689	$	19,016	$	17,547	$	26,463


Fixed Charges:
Total interest expense	$	9,988	$	5,561	$	19,469	$	10,186	$	24,425	$	14,707	$	12,693	$	12,515	$	20,517
Interest factor in rents		42		46		86		128		212		164		163		173		162
Dividends on preferred securities subject to mandatory redemption		—		—		—		—		—		45		154		87		50

Total fixed charges	$	10,030	$	5,607	$	19,555	$	10,314	$	24,637	$	14,916	$	13,010	$	12,775	$	20,729

Ratio of earnings to fixed charges		1.3		1.2		1.3		1.3		1.3		1.5		1.5		1.4		1.3

Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

Earnings:
Income before income taxes(2)	$	3,007	$	1,394	$	5,381	$	3,489	$	7,361	$	6,818	$	6,160	$	4,859	$	5,809
Add: Fixed charges, net		10,030		5,607		19,555		10,314		24,637		14,871		12,856		12,688		20,654

Income before income taxes and fixed charges, net	$	13,037	$	7,001	$	24,936	$	13,803	$	31,998	$	21,689	$	19,016	$	17,547	$	26,463


Fixed Charges:
Total interest expense	$	9,988	$	5,561	$	19,469	$	10,186	$	24,425	$	14,707	$	12,693	$	12,515	$	20,517
Interest factor in rents		42		46		86		128		212		164		163		173		162
Dividends on preferred securities subject to mandatory redemption		—		—		—		—		—		45		154		87		50
Preferred stock dividends		—		—		—		—		—		—		—		—		50

Total fixed charges and preferred stock dividends	$	10,030	$	5,607	$	19,555	$	10,314	$	24,637	$	14,916	$	13,010	$	12,775	$	20,779

Ratio of earnings to fixed charges and preferred stock dividends		1.3		1.2		1.3		1.3		1.3		1.5		1.5		1.4		1.3

(1)	Certain prior-period information has been reclassified to conform to the current year’s presentation.

(2)

Income before income taxes does not include losses from unconsolidated investees, dividends on preferred securities subject to mandatory redemption, (loss)/gain on discontinued operations, cumulative effect of accounting change (net) and income (loss) from investments accounted for under the equity method of accounting.

“Fixed charges” consist of interest cost, including interest on deposit, dividends on preferred securities subject to mandatory redemption, and that portion of rent expense estimated to be representative of the interest factor.

The preferred stock dividend amounts represent pre-tax earnings required to cover dividends on preferred stock.

Exhibit 15

To the Board of Directors and Shareholders of Morgan Stanley:

We have made a review, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of the unaudited interim condensed consolidated financial information of Morgan Stanley and subsidiaries as of May 31, 2006 and for the six-month periods ended May 31, 2006 and 2005, and have issued our report dated July 6, 2006 (which report included an explanatory paragraph regarding Morgan Stanley’s change in accounting policy for recognition of equity awards granted to retirement-eligible employees). As indicated in such report, because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended May 31, 2006, is incorporated by reference in the following Registration Statements of Morgan Stanley:

Filed on Form S-3:

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

Registration Statement No. 333-129243

Registration Statement No. 333-131266

Filed on Form S-4:

Registration Statement No. 333-25003

Filed on Form S-8:

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ DELOITTE & TOUCHE LLP

New York, New York

July 6, 2006

EXHIBIT 31.1

Certification

I, John J. Mack, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Morgan Stanley (the “registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 7, 2006

/s/ JOHN J. MACK

John J. Mack

Chairman of the Board and Chief Executive Officer

EXHIBIT 31.2

Certification

I, David H. Sidwell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Morgan Stanley (the “registrant”);

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 7, 2006

/s/ DAVID H. SIDWELL

David H. Sidwell

Executive Vice President and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarterly period ended May 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), I, John J. Mack, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ JOHN J. MACK

John J. Mack

Chairman of the Board and

Chief Executive Officer

Dated: July 7, 2006

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarterly period ended May 31, 2006, as filed with the Securities and Exchange Commission (the “Report”), I, David H. Sidwell, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DAVID H. SIDWELL

David H. Sidwell

Executive Vice President and

Chief Financial Officer

Dated: July 7, 2006