# Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

# Annual	Report	Pursuant	to	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934

# For	the	fiscal	year	ended	November	30,	2007

# Commission	File	Number	1-11758

(Exact	name	of	Registrant	as	specified	in	its	charter)

# Delaware

(State	or	other	jurisdiction	of	incorporation	or	organization)

(Address	of	principal	executive

offices,	including	zip	code)

(I.R.S.	Employer	Identification	No.)

# Title	of	each	class

# Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Common	Stock,	$0.01	par	value

Depositary	Shares,	each	representing	1/1,000th	interest	in	a	share	of	Floating	Rate	Non-Cumulative	Preferred	Stock,	Series	A,	$0.01	par	value

6¼%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	III	(and	Registrant's	guaranty	with	respect	thereto)

6¼%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	IV	(and	Registrant's	guaranty	with	respect	thereto)

5¾%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	V	(and	Registrant's	guaranty	with	respect	thereto)

6.60%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	VI	(and	Registrant's	guaranty	with	respect	thereto)

6.60%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	VII	(and	Registrant's	guaranty	with	respect	thereto)

6.45%	Capital	Securities	of	Morgan	Stanley	Capital	Trust	VIII	(and	Registrant's	guaranty	with	respect	thereto)

Exchangeable	Notes	due	December	30,	2008;	Exchangeable	Notes	due	December	30,	2010;	Exchangeable	Notes	due	June	30,	2011

Callable	Index-Linked	Notes	due	December	30,	2008

(Registrant's	telephone	number, including	area	code)

Name	of	exchange	on

which	registered

New	York	Stock	Exchange

American	Stock	Exchange

Capital	Protected	Notes	due	June	30,	2008;	Capital	Protected	Notes	due	September	30,	2008;	Capital	Protected	Notes	due	December	30,	2008;	Capital	Protected	Notes	due

Capital	Protected	Notes	due	October	30,	2010;	Capital	Protected	Notes	due	January	30,	2011;	Capital	Protected	Notes	due	February	20,	2011;	Capital	Protected	Notes	due March	30,	2011	(2	issuances);	Capital	Protected	Notes	due	June	30,	2011;	Capital	Protected	Notes	due	August	20,	2011;	Capital	Protected	Notes	due	October	30,	2011	(2

issuances);	Capital	Protected	Notes	due	December	30,	2011;	Capital	Protected	Notes	due	September	30,	2012

Capital	Protected	Notes	due	September	1,	2010

Stock	Participation	Notes	due	September	15,	2010;	Stock	Participation	Notes	due	December	30,	2010

Outperformance	PLUS	due	December	20,	2008

Protected	Absolute	Return	Barrier	Notes	due	December	20,	2008;	Protected	Absolute	Return	Barrier	Notes	due	July	20,	2008;	Protected	Absolute	Return	Barrier	Notes

due	September	20,	2008;	Protected	Absolute	Return	Barrier	Notes	due	October	20,	2008;	Protected	Absolute	Return	Barrier	Notes	due	June	20,	2009	(2	issuances);

Protected	Absolute	Return	Barrier	Notes	due	July	20,	2009

Strategic	Total	Return	Securities	due	December	17,	2009;	Strategic	Total	Return	Securities	due	March	30,	2010;	Strategic	Total	Return	Securities	due	July	30,	2011(2

issuances);	Strategic	Total	Return	Securities	due	January	15,	2012

Strategic	Total	Return	Securities	due	October	30,	2011

# Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

Targeted	Income	Strategic	Total	Return	Securities	due	October	30,	2011

The	NASDAQ	Stock	Market	LLC

Philadelphia	Stock	Exchange

MPS^	SM due	March	30,	2009 The	NASDAQ	Stock	Market	LLC

Indicate	by	check	mark	if	Registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.	YES	 x	NO	¨

Indicate	by	check	mark	if	Registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	15(d)	of	the	Act.	YES	 ¨	NO	x

Indicate	by	check	mark	whether	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 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	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	Registrant's	knowledge,	in	definitive	proxy	or	information statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.	x

Indicate	by	check	mark	whether	Registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer.	See	definition	of	"accelerated	filer"	and	"large	accelerated	filer"	in	Exchange	Act	Rule	12b-2.	Large accelerated	filer	x	Accelerated	filer	¨	Non-accelerated	filer	¨

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

As	of	May	31,	2007,	the	aggregate	market	value	of	the	common	stock	of	Registrant	held	by	non-affiliates	of	Registrant	was	approximately	$88,843,773,992.03.	This	calculation	does	not	reflect	a	determination	that persons	are	affiliates	for	any	other	purposes.

Documents	Incorporated	By	Reference: 	Portions	of	Registrant's	definitive	proxy	statement	for	its	annual	stockholders'	meeting	to	be	held	on	April	8,	2008	are	incorporated	by	reference	in	Part	III	of	this	Form	10-K.

# ANNUAL	REPORT	ON	FORM	10-K

| Table	of	Contents | Table	of	Contents | Page |
| :--- | :--- | :--- |
| Part\tI |  |  |
| Item\t1. | \t Business | 1 |
|  | Overview | 1 |
|  | Available\tInformation | 1 |
|  | Business\tSegments | 2 |
|  | Institutional\tSecurities | 2 |
|  | Global\tWealth\tManagement\tGroup | 5 |
|  | Asset\tManagement | 6 |
|  | Competition | 7 |
|  | Regulation | 8 |
|  | Executive\tOfficers\tof\tMorgan\tStanley | 12 |
| Item\t1A. | \t Risk\tFactors | 13 |
| Item\t1B. | \t Unresolved\tStaff\tComments | 20 |
| Item\t2. | Properties | 21 |
| Item\t3. | Legal\tProceedings | 22 |
| Item\t4. | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 24 |
| Part\tII |  |  |
| Item\t5. | \t Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 25 |
| Item\t6. | Selected\tFinancial\tData | 28 |
| Item\t7. | \t Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 30 |
|  | Introduction | 30 |
|  | Results\tof\tOperations | 31 |
|  | Impact\tof\tCredit\tMarket\tEvents | 51 |
|  | Other\tMatters | 56 |
|  | Critical\tAccounting\tPolicies | 60 |
|  | Certain\tFactors\tAffecting\tResults\tof\tOperations | 66 |
|  | Liquidity\tand\tCapital\tResources | 67 |
| Item\t7A. | \t Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 83 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 100 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 100 |
|  | Consolidated\tStatements\tof\tFinancial\tCondition | 101 |
|  | Consolidated\tStatements\tof\tIncome | 103 |
|  | Consolidated\tStatements\tof\tComprehensive\tIncome | 104 |
|  | Consolidated\tStatements\tof\tCash\tFlows | 105 |

|  | Page |
| :--- | :--- |
| Consolidated\tStatements\tof\tChanges\tin\tShareholders'\tEquity | 106 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 107 |
| Note\t1.\t\t\t\t\t\tIntroduction\tand\tBasis\tof\tPresentation | 107 |
| Note\t2.\t\t\t\t\t\tSummary\tof\tSignificant\tAccounting\tPolicies | 109 |
| Note\t3.\t\t\t\t\t\tFair\tValue\tDisclosures | 122 |
| Note\t4.\t\t\t\t\t\tCollateralized\tTransactions | 127 |
| Note\t5.\t\t\t\t\t\tSecuritization\tActivities\tand\tVariable\tInterest\tEntities | 128 |
| Note\t6.\t\t\t\t\t\tSales\tand\tTrading\tActivities | 132 |
| Note\t7.\t\t\t\t\t\tConsumer\tLoans | 136 |
| Note\t8.\t\t\t\t\t\tOther\tInvestments | 137 |
| Note\t9.\t\t\t\t\t\tInvestments\tin\tUnconsolidated\tInvestees | 137 |
| Note\t10.\t\t\t\tGoodwill\tand\tNet\tIntangible\tAssets | 138 |
| Note\t11.\t\t\t\tDeposits | 140 |
| Note\t12.\t\t\t\tCommercial\tPaper\tand\tOther\tShort-Term\tBorrowings | 141 |
| Note\t13.\t\t\t\tLong-Term\tBorrowings | 142 |
| Note\t14.\t\t\t\tCapital\tUnits | 144 |
| Note\t15.\t\t\t\tCommitments,\tGuarantees\tand\tContingencies | 144 |
| Note\t16.\t\t\t\tShareholders'\tEquity | 150 |
| Note\t17.\t\t\t\tEarnings\tper\tCommon\tShare | 152 |
| Note\t18.\t\t\t\tEmployee\tStock-Based\tCompensation\tPlans | 153 |
| Note\t19.\t\t\t\tEmployee\tBenefit\tPlans | 157 |
| Note\t20.\t\t\t\tIncome\tTaxes | 164 |
| Note\t21.\t\t\t\tSegment\tand\tGeographic\tInformation | 167 |
| Note\t22.\t\t\t\tDiscontinued\tOperations | 170 |
| Note\t23.\t\t\t\tBusiness\tand\tOther\tAcquisitions\tand\tDispositions\tand\tSale\tof\tMinority\tInterest | 172 |
| Note\t24.\t\t\t\tStaff\tAccounting\tBulletin\tNo.\t108 | 174 |
| Note\t25.\t\t\t\tInsurance\tSettlement | 176 |
| Note\t26.\t\t\t\tLease\tAdjustment | 177 |
| Note\t27.\t\t\t\tQuarterly\tResults\t(unaudited) | 178 |
| Note\t28.\t\t\t\tSubsequent\tEvent | 178 |
| \t Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 182 |
| \t Controls\tand\tProcedures | 182 |
| \t Other\tInformation | 185 |

# Forward-Looking	Statements

We	have	included	or	incorporated	by	reference	into	this	report,	and	from	time	to	time	may	make	in	our	public	filings,	press	releases	or	other	public	statements,	certain statements,	including	(without	limitation)	those	under	"Legal	Proceedings"	in	Part	I,	Item	3,	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results of	Operations"	in	Part	II,	Item	7	and	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk"	in	Part	II,	Item	7A,	that	may	constitute	"forward-looking	statements" within	the	meaning	of	the	safe	harbor	provisions	of	the	Private	Securities	Litigation	Reform	Act	of	1995.	In	addition,	our	management	may	make	forward-looking statements	to	analysts,	investors,	representatives	of	the	media	and	others.	These	forward-looking	statements	are	not	historical	facts	and	represent	only	Morgan	Stanley's beliefs	regarding	future	events,	many	of	which,	by	their	nature,	are	inherently	uncertain	and	beyond	our	control.

The	nature	of	Morgan	Stanley's	business	makes	predicting	the	future	trends	of	our	revenues,	expenses	and	net	income	difficult.	The	risks	and	uncertainties	involved	in our	businesses	could	affect	the	matters	referred	to	in	such	statements	and	it	is	possible	that	our	actual	results	may	differ	from	the	anticipated	results	indicated	in	these forward	looking	statements.	Important	factors	that	could	cause	actual	results	to	differ	from	those	in	the	forward-looking	statements	include	(without	limitation):

•the	credit	ratings	assigned	to	Morgan	Stanley;

•the	effect	of	political	and	economic	conditions	and	geopolitical	events;

•the	effect	of	market	conditions,	including	in	the	global	equity	and	credit	markets	and	with	respect	to	corporate,	commercial	and	residential	lending;

•the	availability	and	cost	of	capital;

•the	level	and	volatility	of	equity	prices,	commodity	prices	and	interest	rates,	currency	values	and	other	market	indices;

•the	actions	and	initiatives	of	current	and	potential	competitors;

•the	impact	of	current,	pending	and	future	legislation,	regulation	and	regulatory	and	legal	actions	in	the	U.S.	and	worldwide;

•	 our	reputation;

•investor	sentiment;

•the	potential	effects	of	technological	changes;	and

•	 other	risks	and	uncertainties	detailed	under	"Competition"	and	"Regulation"	in	Part	I,	Item	1,	"Risk	Factors"	in	Part	I,	Item	1A,	and	elsewhere	throughout	this report.

Accordingly,	you	are	cautioned	not	to	place	undue	reliance	on	forward-looking	statements,	which	speak	only	as	of	the	date	on	which	they	are	made.	Morgan	Stanley undertakes	no	obligation	to	update	publicly	or	revise	any	forward-looking	statements	to	reflect	the	impact	of	circumstances	or	events	that	arise	after	the	dates	they	are made,	whether	as	a	result	of	new	information,	future	events	or	otherwise	except	as	required	by	applicable	law.	You	should,	however,	consult	further	disclosures	Morgan Stanley	may	make	in	future	filings	of	its	Annual	Reports	on	Form	10-K,	Quarterly	Reports	on	Form	10-Q	and	Current	Reports	on	Form	8-K	and	any	amendments thereto	or	in	future	press	releases	or	other	public	statements.

# Part	I

# Overview.

Morgan	Stanley	is	a	global	financial	services	firm	that,	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.	Morgan	Stanley	was	originally	incorporated	under	the	laws	of	the State	of	Delaware	in	1981,	and	its	predecessor	companies	date	back	to	1924.	Morgan	Stanley	conducts	its	business	from	its	headquarters	in	and	around	New	York	City, its	regional	offices	and	branches	throughout	the	U.S.	and	its	principal	offices	in	London,	Tokyo,	Hong	Kong	and	other	world	financial	centers.	At	November	30,	2007, Morgan	Stanley	had	48,256	employees	worldwide.	Unless	the	context	otherwise	requires,	the	terms	"Morgan	Stanley,"	the	"Company,"	"we,"	"us"	and	"our"	mean Morgan	Stanley	and	its	consolidated	subsidiaries.

Financial	information	concerning	Morgan	Stanley,	our	business	segments	and	geographic	regions	for	each	of	the	fiscal	years	ended	November	30,	2007,	November	30, 2006	and	November	30,	2005	is	included	in	the	consolidated	financial	statements	and	the	notes	thereto	in	"Financial	Statements	and	Supplementary	Data"	in	Part	II, Item	8.

# 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	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	its 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	information	about	Morgan	Stanley's	corporate	governance	at

www.morganstanley.com/about/company/governance.	Morgan	Stanley	posts	the	following	on	its	Corporate	Governance	webpage:

•	 Composite	Certificate	of	Incorporation;

•	 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;

•	 Code	of	Ethics	and	Business	Conduct;	and

•Integrity	Hotline.

Morgan	Stanley's	Code	of	Ethics	and	Business	Conduct	applies	to	all	directors,	officers	and	employees,	including	its	Chief	Executive	Officer,	its	Chief	Financial	Officer and	its	Controller	and	Principal	Accounting	Officer.	Morgan	Stanley	will	post	any	amendments	to	the	Code	of	Ethics	and	Business	Conduct	and	any	waivers	that	are required	to	be	disclosed	by	the	rules	of	either	the	SEC	or	the	New	York	Stock	Exchange,	Inc.	("NYSE")	on	its	internet	site.	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.

# Business	Segments.

Morgan	Stanley	is	a	global	financial	services	firm	that	maintains	significant	market	positions	in	each	of	its	business	segments—Institutional	Securities,	Global	Wealth Management	Group	and	Asset	Management.	A	summary	of	the	activities	of	each	of	the	business	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	and	fixed	income	securities	and	related	products,	including	foreign	exchange	and commodities;	benchmark	indices	and	risk	management	analytics;	research;	and	investment	activities.

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

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

On	June	30,	2007,	the	Company	completed	the	spin-off	of	Discover	Financial	Services	(the	"Discover	Spin-off").

# Institutional	Securities.

Morgan	Stanley	provides	financial	advisory	and	capital-raising	services	to	a	diverse	group	of	corporate	and	other	institutional	clients	globally,	primarily	through	wholly owned	subsidiaries	that	include	Morgan	Stanley	&	Co.	Incorporated	("MS&Co."),	Morgan	Stanley	&	Co.	International	plc,	Morgan	Stanley	Japan	Securities	Co.,	Ltd. and	Morgan	Stanley	Asia	Limited.	These	and	other	subsidiaries	also	conduct	sales	and	trading	activities	worldwide,	as	principal	and	agent,	and	provide	related	financing services	on	behalf	of	institutional	investors.

# Investment	Banking.

Capital	Raising.				Morgan	Stanley	manages	and	participates	in	public	offerings	and	private	placements	of	debt,	equity	and	other	securities	worldwide.	Morgan	Stanley is	a	leading	underwriter	of	common	stock,	preferred	stock	and	other	equity-related	securities,	including	convertible	securities	and	American	Depositary	Receipts ("ADRs").

Morgan	Stanley	is	a	leading	underwriter	of	fixed	income	securities,	including	investment	grade	debt,	non-investment	grade	instruments,	mortgage-related	and	other asset-backed	securities,	tax-exempt	securities	and	commercial	paper	and	other	short-term	securities.

Financial	Advisory	Services.				Morgan	Stanley	provides	corporate	and	other	institutional	clients	globally	with	advisory	services	on	key	strategic	matters,	such	as mergers	and	acquisitions,	divestitures,	corporate	defense	strategies,	joint	ventures,	privatizations,	recapitalizations,	spin-offs,	corporate	restructurings,	shareholder relations,	tender	offers,	exchange	offers	and	leveraged	buyouts.	Morgan	Stanley	also	provides	advice	concerning	rights	offerings,	dividend	policy,	valuations,	foreign exchange	exposure,	financial	risk	management	strategies	and	financial	planning.	In	addition,	Morgan	Stanley	furnishes	advice	and	services	regarding	project	financings and	provides	advisory	services	in	connection	with	the	purchase,	sale,	leasing	and	financing	of	real	estate.

Corporate	Lending.				Morgan	Stanley	provides	to	selected	corporate	clients	through	subsidiaries	(including	Morgan	Stanley	Bank)	loans	or	lending	commitments, including	bridge	financing.	These	loans	and	commitments	have	varying	terms,	may	be	senior	or	subordinated	and/or	secured	or	unsecured,	are	generally	contingent	upon representations,	warranties	and	contractual	conditions	applicable	to	the	borrower	and	may	be	syndicated,	hedged	or	traded	by	Morgan	Stanley.*	The	borrowers	may	be rated	investment	grade	or	non-investment	grade.

# Sales	and	Trading	Activities.**

Morgan	Stanley	conducts	sales,	trading,	financing	and	market-making	activities	on	securities	and	futures	exchanges	and	in	over-the-counter	("OTC")	markets	around	the world.	Morgan	Stanley's	Institutional	Securities	business	includes	Equity	and	Proprietary	Trading;	Interest	Rates,	Credit	and	Currencies;	Commodities	and	Clients	and Services.

Equity	and	Proprietary	Trading.				Morgan	Stanley	acts	as	principal	(including	as	a	market	maker)	and	agent	in	executing	transactions	globally	in	equity	and	equity- related	products,	including	common	stock,	ADRs,	global	depositary	receipts	and	exchange-traded	funds.

Morgan	Stanley's	equity	derivatives	sales,	trading	and	market-making	activities	cover	equity-related	products	globally,	including	equity	swaps,	options,	warrants	and futures	overlying	individual	securities,	indices	and	baskets	of	securities	and	other	equity-related	products.	Morgan	Stanley	also	issues	and	makes	a	principal	market	in equity-linked	products	to	institutional	and	individual	investors,	including	principal-protected	securities.

Morgan	Stanley	has	several	dedicated	trading	groups	which	engage	in	proprietary	trading	and	investing	activities	utilizing	multiple	strategies	across	various	cash	and derivative	asset	classes	including,	among	others,	equity	securities,	quantitative	and	program	driven	strategies,	commodities,	currencies,	interest	rates,	emerging	markets, bonds,	loans,	corporate	credit,	as	well	as	mortgage-related	and	other	asset-backed	securities.

Interest	Rates,	Credit	and	Currencies.				Morgan	Stanley	trades,	makes	markets	and	takes	long	and	short	proprietary	positions	in	fixed	income	securities	and	related products	globally,	including,	among	other	products,	investment	and	non-investment	grade	corporate	debt,	distressed	debt,	bank	loans,	U.S.	and	other	sovereign securities,	emerging	market	bonds	and	loans,	convertible	bonds,	collateralized	debt	obligations	and	securities	issued	by	structured	investment	vehicles,	mortgage-related and	other	asset-backed	securities	and	real	estate	loan	products,	municipal	securities,	preferred	stock	and	commercial	paper,	money	market	and	other	short-term securities.	Morgan	Stanley	is	a	primary	dealer	of	U.S.	government	securities	and	a	member	of	the	selling	groups

* Revenues	and	expenses	associated	with	the	trading	of	syndicated	loans	are	included	in	"Sales	and	Trading	Activities."

** The	description	set	forth	under	"Sales	and	Trading	Activities"	reflects	organizational	changes	implemented	since	December	2007.	See	also	"Risk	Management"	in	Part	II,	Item	7A	for	a	description	of	Morgan Stanley's	trading	risk	management	structure,	policies	and	procedures.

that	distribute	various	U.S.	agency	and	other	debt	securities.	Morgan	Stanley	is	a	primary	dealer	or	market-maker	of	government	securities	in	numerous	European,	Asian and	emerging	market	countries.

Morgan	Stanley	trades,	makes	markets	and	takes	long	and	short	proprietary	positions	in	listed	futures	and	OTC	swaps,	forwards,	options	and	other	derivatives referencing,	among	other	things,	interest	rates,	currencies,	investment	grade	and	non-investment	grade	corporate	credits,	loans,	bonds,	U.S.	and	other	sovereign securities,	emerging	market	bonds	and	loans,	credit	indexes,	asset-backed	security	indexes,	property	indexes,	mortgage-related	and	other	asset-backed	securities	and	real estate	loan	products.

Morgan	Stanley	is	a	market-maker	in	foreign	currencies.	Most	of	Morgan	Stanley's	foreign	exchange	business	relates	to	major	foreign	currencies	such	as	Yen,	Euro, Sterling,	Swiss	francs	and	Canadian	dollars.	Morgan	Stanley	trades	on	a	principal	basis	in	the	spot,	forward,	option	and	futures	markets	and	takes	proprietary	positions	in such	currencies.

Through	the	use	of	repurchase	and	reverse	repurchase	agreements,	Morgan	Stanley	acts	as	an	intermediary	between	borrowers	and	lenders	of	short-term	funds	and provides	funding	for	various	inventory	positions.	Morgan	Stanley	also	provides	financing	to	customers	for	commercial	and	residential	real	estate	loan	products	and	other securitizable	asset	classes.

Morgan	Stanley	advises	on	investment	and	liability	strategies	and	assists	corporations	in	their	debt	repurchases	and	tax	planning.	Morgan	Stanley	structures	debt securities	and	derivatives	with	risk/return	factors	designed	to	suit	client	objectives,	including	using	repackaged	asset	and	other	structured	vehicles	through	which	clients can	restructure	asset	portfolios	to	provide	liquidity	or	reconfigure	risk	profiles.

Commodities.				Morgan	Stanley	trades	as	principal	and	maintains	long	and	short	proprietary	trading	positions	in	the	spot,	forward	and	futures	markets	in	several commodities,	including	metals	(base	and	precious),	agricultural	products,	crude	oil,	oil	products,	natural	gas,	electric	power,	emission	credits,	coal,	freight,	liquefied natural	gas	("LNG")	and	related	products	and	indices.	Morgan	Stanley	is	a	market-maker	in	exchange-traded	options	and	futures	and	OTC	options	and	swaps	on commodities,	and	offers	counterparties	hedging	programs	relating	to	production,	consumption,	reserve/inventory	management	and	structured	transactions,	including energy-contract	securitizations.	Morgan	Stanley	is	an	electricity	power	marketer	in	the	U.S.	and	owns	five	electricity	generating	facilities	in	the	U.S.	and	Europe.

Morgan	Stanley	owns	TransMontaigne	Inc.	and	its	subsidiaries,	a	group	of	companies	operating	in	the	refined	petroleum	products	marketing	and	distribution	business, and	the	Heidmar	Group	of	companies,	which	provide	international	marine	transportation	and	U.S.	marine	logistics	services.

Clients	and	Services.				Morgan	Stanley	provides	financing	services,	including	prime	brokerage,	which	offers,	among	other	services,	consolidated	clearance,	settlement, custody,	financing	and	portfolio	reporting	services	to	clients	trading	multiple	asset	classes.	Morgan	Stanley	also	engages	in	principal	securities	lending	with	clients, institutional	lenders	and	other	broker-dealers.	In	addition,	Morgan	Stanley's	institutional	distribution	and	sales	activities	are	overseen	and	coordinated	through	Clients and	Services.

# Other	Activities.

Benchmark	Indices	and	Risk	Management	Analytics.				As	of	November	30,	2007,	Morgan	Stanley's	majority-owned	subsidiary,	MSCI	Inc.	("MSCI®"),	calculates	and distributes	over	100,000	international	and	U.S.	equity	benchmark	indices	(including	the	MSCI	World	and	EAFE®	Indices)	covering	56	countries,	and	has	a	historical database	spanning	over	35	years	that	includes	fundamental	and	valuation	data	on	thousands	of	equity	securities	in	developed	and	emerging	market	countries.	MSCI	also calculates	and	distributes	over	200	hedge	fund	indices.	MSCI's	subsidiary,	Barra,	Inc.,	is	a	leading	provider	of	risk	analytic	tools	and	services	to	investors	to	help	them

analyze,	measure	and	manage	portfolio	and	firm-wide	investment	risk.	The	initial	public	offering	of	shares	of	MSCI	began	trading	on	the	New	York	Stock	Exchange	on November	15,	2007.	After	this	offering,	Morgan	Stanley	continues	to	own	in	excess	of	80	percent	of	MSCI.

Research.				Morgan	Stanley's	global	research	department	("Research")	consists	of	economists,	strategists	and	industry	analysts.	Research	engages	in	equity	and	fixed income	research	activities	and	produces	reports	and	studies	on	the	U.S.	and	global	economy,	financial	markets,	portfolio	strategy,	technical	market	analyses,	individual companies	and	industry	developments.	Research	examines	worldwide	trends	covering	numerous	industries	and	individual	companies,	the	majority	of	which	are	located outside	of	the	U.S.	Research	provides	analysis	and	forecasts	relating	to	economic	and	monetary	developments	that	affect	matters	such	as	interest	rates,	foreign currencies,	securities,	derivatives	and	economic	trends.	Research	provides	analytical	support	and	publishes	reports	on	asset-backed	securities	and	the	markets	in	which such	securities	are	traded.	Research	reports	and	data	are	disseminated	to	investors	through	third	party	distributors,	proprietary	internet	sites	such	as	Client	Link	and Morgan	Stanley's	sales	forces.

Investments.				Morgan	Stanley	from	time	to	time	makes	investments	that	represent	business	facilitation	or	principal	investing	activities.	Business	facilitation	investments are	strategic	investments	undertaken	by	Morgan	Stanley	to	facilitate	core	business	activities.	Principal	investing	activities	are	capital	commitments	provided	to	public and	private	companies,	funds	and	other	entities	generally	for	proprietary	purposes	to	maximize	total	returns	to	Morgan	Stanley.	Morgan	Stanley	expects	to	make additional	principal	investments	over	time.	These	principal	investment	activities	are	conducted	within	the	investment	banking	and	sales	and	trading	areas	in	Institutional Securities.

Morgan	Stanley	sponsors	and	manages	investment	vehicles	and	separate	accounts	for	clients	seeking	exposure	to	private	equity,	real	estate-related	and	other	alternative investments.	Morgan	Stanley	may	also	invest	in	and	provide	capital	to	such	investment	vehicles.	See	also	"Asset	Management."

# Operations	and	Information	Technology.

Morgan	Stanley's	Operations	and	Information	Technology	departments	provide	the	process	and	technology	platform	that	supports	Institutional	Securities	sales	and trading	activity,	including	post-execution	trade	processing	and	related	internal	controls	over	activity	from	trade	entry	through	settlement	and	custody,	such	as	asset servicing.	This	is	done	for	proprietary	and	customer	transactions	in	listed	and	OTC	transactions	in	commodities,	equity	and	fixed	income	securities,	including	both primary	and	secondary	trading,	as	well	as	listed,	OTC	and	structured	derivatives	in	markets	around	the	world.	This	activity	is	undertaken	through	Morgan	Stanley's	own facilities,	through	membership	in	various	clearing	and	settlement	organizations,	and	through	agreements	with	unaffiliated	third	parties.

# Global	Wealth	Management	Group.

Morgan	Stanley's	Global	Wealth	Management	Group	provides	comprehensive	financial	services	to	clients	through	a	network	of	approximately	8,400	global representatives	in	approximately	500	locations	globally,	including	over	450	U.S.	locations	at	fiscal	year	end.	As	of	November	30,	2007,	Morgan	Stanley	had	$758	billion in	client	assets.	On	April	1,	2007,	Morgan	Stanley	merged	its	primary	broker-dealer	for	Global	Wealth	Management	Group,	Morgan	Stanley	DW	Inc.,	into	MS&Co. Upon	completion	of	the	merger,	MS&Co.	became	Morgan	Stanley's	principal	U.S.	broker-dealer.

# Clients.

Global	Wealth	Management	Group	professionals	serve	individual	investors	and	small-to-medium	size	businesses	and	institutions	with	an	emphasis	on	ultra	high	net worth,	high	net	worth	and	affluent	investors.	In	the	U.S.,	products	and	services	are	delivered	through	three	principal	channels.	Specialized	private	wealth	management

investment	representative	teams	located	in	dedicated	offices	provide	sophisticated	investment	solutions	and	services	for	ultra	high	net	worth	individuals,	families	and foundations.	Financial	advisors	located	in	branches	across	the	U.S.	provide	solutions	designed	to	accommodate	individual	investment	objectives,	risk	tolerance	and liquidity	needs	for	ultra	high	net	worth,	high	net	worth	and	affluent	investors.	Call	centers	are	available	to	meet	the	needs	of	emerging	affluent	clients.	Outside	the	U.S., Morgan	Stanley	offers	financial	services	to	clients	in	Europe,	the	Middle	East,	Asia	and	Latin	America.

# Products	and	Services.

Morgan	Stanley's	Global	Wealth	Management	Group	provides	clients	with	a	comprehensive	array	of	financial	solutions,	including	Morgan	Stanley's	products	and services,	and	products	and	services	from	third	party	providers,	such	as	insurance	companies	and	mutual	fund	families.	Morgan	Stanley	offers	brokerage	and	investment advisory	services	covering	various	investment	alternatives,	including	equities,	options,	futures,	foreign	currencies,	precious	metals,	fixed	income	securities,	mutual funds,	structured	products,	alternative	investments,	unit	investment	trusts,	managed	futures,	separately	managed	accounts	and	mutual	fund	asset	allocation	programs. Morgan	Stanley	also	offers	financial	and	wealth	planning	services,	including	education	savings	programs,	as	well	as	annuity	and	other	insurance	products.	In	addition, Morgan	Stanley	offers	several	cash	management	services,	including	cash	sweeps,	debit	cards	and	checkwriting,	as	well	as	lending	products,	including	securities	based lending	and	a	mortgage	referral	program,	which	provides	residential	mortgages	and	home	equity	lines	of	credit	originated	through	Morgan	Stanley's	affiliated	entities.

Morgan	Stanley's	BusinesScape SM 	program	offers	cash	management	and	commercial	credit	solutions	to	qualified	small	and	medium	businesses	in	the	U.S.	Morgan Stanley	provides	individual	and	corporate	retirement	solutions,	including	IRAs	and	401(k)	plans	and	U.S.	stock	plan	services	to	corporate	executives	and	businesses. Morgan	Stanley	also	offers	trust	and	fiduciary	services	to	individual	and	corporate	clients.

Morgan	Stanley's	Global	Wealth	Management	Group	offers	its	clients	a	variety	of	ways	to	establish	a	relationship	and	conduct	business,	including	brokerage	accounts with	transaction-based	pricing	and	investment	advisory	accounts	with	asset-based	fee	pricing.	The	Active	Assets	Account®	offers	clients	brokerage	and	cash management	services	in	one	account.	Clients	can	also	choose	a	fee-based,	separately	managed	account	managed	by	affiliated	or	unaffiliated	professional	asset	managers.

Morgan	Stanley's	Operations	and	Information	Technology	departments	provide	the	process	and	technology	platform	that	supports	the	activities	of	Morgan	Stanley's Global	Wealth	Management	Group	from	trade	capture	through	clearance,	settlement	and	custody,	including	asset	servicing	as	well	as	bank	deposit	and	loan	processing through	Morgan	Stanley's	affiliated	banks.	These	activities	are	undertaken	through	Morgan	Stanley's	own	facilities,	through	memberships	in	various	clearing	and settlement	organizations,	and	through	agreements	with	unaffiliated	third	parties.

# Asset	Management.

Morgan	Stanley	Investment	Management	is	one	of	the	largest	global	asset	management	organizations	of	any	full-service	securities	firm	and	offers	individual	and institutional	clients	a	diverse	array	of	equity,	fixed	income	and	alternative	investments	and	merchant	banking	strategies.	Morgan	Stanley	had	$597	billion	of	assets	under management	or	supervision	as	of	November	30,	2007.	Morgan	Stanley's	asset	management	activities	are	principally	conducted	under	the	Morgan	Stanley	and	Van Kampen	brands.	Portfolio	managers	located	in	the	U.S.,	Europe,	Japan,	Singapore	and	India	manage	investment	products	ranging	from	money	market	funds	to	equity, taxable	and	tax-exempt	fixed	income	funds	and	alternative	investment	and	merchant	banking	products	in	developed	and	emerging	markets.	Morgan	Stanley	offers clients	various	investment	styles,	such	as	value,	growth,	core,	fixed	income	and	asset	allocation;	global	investments;	active	and	passive	management;	and	diversified	and concentrated	portfolios.

Morgan	Stanley	offers	a	range	of	alternative	investment	and	merchant	banking	products	for	institutional	investors	and	high	net	worth	individuals.	Morgan	Stanley's alternative	investments	platform	includes	hedge	funds,	funds	of	hedge	funds,	funds	of	private	equity	funds	and	portable	alpha	overlays,	including	FrontPoint	Partners LLC,	a	leading	provider	of	absolute	return	strategies	with	approximately	$8.5	billion	in	assets	under	management,	and	minority	stakes	in	Lansdowne	Partners	and Avenue	Capital	Group.	Morgan	Stanley's	Merchant	Banking	Division,	formed	in	2007,	includes	Morgan	Stanley's	real	estate	investing	business,	private	equity	funds and	infrastructure	investing	group.	Morgan	Stanley	typically	acts	as	general	partner	of,	and	investment	adviser	to,	its	alternative	investment	and	merchant	banking	funds and	typically	commits	to	invest	a	minority	of	the	capital	of	such	funds	with	subscribing	investors	contributing	the	majority.

# Institutional	Investors.

Morgan	Stanley	provides	asset	management	products	and	services	to	institutional	investors	worldwide,	including	pension	plans,	corporations,	private	funds,	non-profit organizations,	foundations,	endowments,	governmental	agencies,	insurance	companies	and	banks.	Products	and	services	are	available	to	institutional	investors	primarily through	separate	accounts,	U.S.	mutual	funds	and	other	pooled	vehicles.	Morgan	Stanley	Investment	Management	also	sub-advises	funds	for	various	unaffiliated financial	institutions	and	intermediaries.	A	global	sales	force	and	a	team	dedicated	to	covering	the	investment	consultant	industry	serve	institutional	investors.

# Individual	Investors.

Morgan	Stanley	offers	open-end	and	alternative	investment	funds	and	separately	managed	accounts	to	individual	investors	through	affiliated	and	unaffiliated	broker- dealers,	banks,	insurance	companies	and	financial	planners.	Closed-end	funds	managed	by	Morgan	Stanley	or	Van	Kampen	are	available	to	individual	investors	through affiliated	and	unaffiliated	broker-dealers.	A	small	number	of	unaffiliated	broker-dealers	account	for	a	substantial	portion	of	Van	Kampen	open-end	fund	sales.	Morgan Stanley	also	sells	Van	Kampen	funds	through	numerous	retirement	plan	platforms.	Internationally,	Morgan	Stanley	distributes	traditional	investment	products	to individuals	outside	the	U.S.	through	non-proprietary	distributors,	and	alternative	investment	products	are	distributed	through	affiliated	broker-dealers.

Morgan	Stanley's	Operations	and	Information	Technology	departments	provide	or	oversee	the	process	and	technology	platform	required	to	support	its	asset	management business.	Support	activities	include	transfer	agency,	mutual	fund	accounting	and	administration,	transaction	processing	and	certain	fiduciary	services,	on	behalf	of institutional,	retail	and	intermediary	clients.	These	activities	are	undertaken	through	Morgan	Stanley's	own	facilities,	through	membership	in	various	clearing	and settlement	organizations,	and	through	agreements	with	unaffiliated	third	parties.

# Competition.

All	aspects	of	Morgan	Stanley's	businesses	are	highly	competitive	and	Morgan	Stanley	expects	them	to	remain	so.	Morgan	Stanley	competes	in	the	U.S.	and	globally	for clients,	market	share	and	human	talent	in	all	aspects	of	its	business	segments.	Morgan	Stanley's	competitive	position	depends	on	its	reputation	and	the	quality	of	its products,	services	and	advice.	Morgan	Stanley's	ability	to	sustain	or	improve	its	competitive	position	also	depends	substantially	on	its	ability	to	continue	to	attract	and retain	qualified	employees	while	managing	compensation	and	other	costs.	Morgan	Stanley	competes	with	commercial	banks,	insurance	companies,	sponsors	of	mutual funds,	hedge	funds,	energy	companies	and	other	companies	offering	financial	services	in	the	U.S.,	globally	and	through	the	internet.

# Institutional	Securities	and	Global	Wealth	Management	Group.

Morgan	Stanley's	competitive	position	depends	on	innovation,	execution	capability	and	relative	pricing.	Morgan	Stanley	competes	directly	in	the	U.S.	and	globally	with other	securities	and	financial	services	firms	and	broker-dealers,	and	with	others	on	a	regional	or	product	basis.

Morgan	Stanley's	ability	to	access	capital	at	competitive	rates	(which	is	generally	dependent	on	Morgan	Stanley's	credit	ratings)	and	to	commit	capital	efficiently, particularly	in	its	capital-intensive	underwriting	and	sales,	trading,	financing	and	market-making	activities,	also	affects	its	competitive	position.	Corporate	clients continue	to	request	that	Morgan	Stanley	provide	loans	or	lending	commitments	in	connection	with	certain	investment	banking	activities.

Over	time,	certain	sectors	of	the	financial	services	industry	have	become	more	concentrated,	as	financial	institutions	involved	in	a	broad	range	of	financial	services industries	have	been	acquired	by	or	merged	into	other	firms.	This	convergence	could	result	in	Morgan	Stanley's	competitors	gaining	greater	capital	and	other	resources, such	as	the	ability	to	offer	a	broader	range	of	products	and	services	and	geographic	diversity.	It	is	possible	that	competition	may	become	even	more	intense	as	Morgan Stanley	continues	to	compete	with	financial	institutions	that	may	be	larger,	or	better	capitalized,	or	may	have	a	stronger	local	presence	and	longer	operating	history	in certain	areas.	Many	of	these	firms	have	greater	capital	than	Morgan	Stanley	and	have	the	ability	to	offer	a	wide	range	of	products	and	services	that	may	enhance	their competitive	position	and	could	result	in	pricing	pressure	in	our	businesses.	The	complementary	trends	in	the	financial	services	industry	of	consolidation	and globalization	present,	among	other	things,	technological,	risk	management,	regulatory	and	other	infrastructure	challenges	that	require	effective	resource	allocation	in order	for	Morgan	Stanley	to	remain	competitive.

Morgan	Stanley	has	experienced	intense	price	competition	in	some	of	its	businesses	in	recent	years.	In	particular,	the	ability	to	execute	securities	trades	electronically	on exchanges	and	through	other	automated	trading	markets	has	increased	the	pressure	on	trading	commissions.	The	trend	toward	direct	access	to	automated,	electronic	stock markets	will	likely	continue.	It	is	possible	that	Morgan	Stanley	will	experience	competitive	pressures	in	these	and	other	areas	in	the	future	as	some	of	its	competitors may	seek	to	obtain	market	share	by	reducing	prices.

Competition	in	the	asset	management	industry	is	affected	by	several	factors,	including	Morgan	Stanley's	reputation,	investment	objectives,	quality	of	investment professionals,	performance	of	investment	products	relative	to	peers	and	an	appropriate	benchmark	index,	advertising	and	sales	promotion	efforts,	fee	levels,	the effectiveness	of	and	access	to	distribution	channels,	and	the	types	and	quality	of	products	offered.	Morgan	Stanley's	alternative	investment	products,	such	as	private equity	funds,	real	estate	and	hedge	funds,	compete	with	similar	products	offered	by	both	alternative	and	traditional	asset	managers.

# Regulation.

Most	aspects	of	Morgan	Stanley's	business	are	subject	to	stringent	regulation	by	U.S.	federal	and	state	regulatory	agencies	and	securities	exchanges	and	by	non-U.S. government	agencies	or	regulatory	bodies	and	securities	exchanges.	Aspects	of	Morgan	Stanley's	public	disclosure,	corporate	governance	principles,	internal	control environment	and	the	roles	of	auditors	and	counsel	are	subject	to	the	Sarbanes-Oxley	Act	of	2002	and	related	regulations	and	rules	of	the	SEC	and	the	NYSE.

New	laws	or	regulations	or	changes	to	existing	laws	and	regulations	(including	changes	in	the	interpretation	or	enforcement	thereof)	either	in	the	U.S.	or	elsewhere	could materially	adversely	affect	Morgan	Stanley's	financial	condition	or	results	of	operations.	As	a	global	financial	institution,	to	the	extent	that	different	regulatory	regimes impose	inconsistent	or	iterative	requirements	on	the	conduct	of	its	business,	Morgan	Stanley	faces	complexity	and	additional	costs	in	its	compliance	efforts.

# Consolidated	Supervision	and	Revised	Capital	Standards.

Effective	December	1,	2005,	Morgan	Stanley	became	a	consolidated	supervised	entity	("CSE")	as	defined	by	the	SEC.	As	such,	Morgan	Stanley	is	subject	to	group-wide supervision	and	examination	by	the	SEC	and	to	minimum	capital	requirements	on	a	consolidated	basis.	Morgan	Stanley's	European	regulated	entities	implemented	Basel II	capital	standards	on	January	1,	2008.	Morgan	Stanley	continues	to	work	with	its	regulators	on	the	implementation	of	the	CSE	rules	and	Basel	II	capital	standards.

# Anti-Money	Laundering.

Morgan	Stanley's	Anti-Money	Laundering	("AML")	program	is	coordinated	on	an	enterprise-wide	basis.	In	the	U.S.,	for	example,	the	USA	PATRIOT	Act	of	2001	(the "USA	PATRIOT	Act")	imposes	significant	obligations	on	financial	institutions	to	detect	and	deter	money	laundering	and	terrorist	financing	activity,	including	requiring banks,	broker-dealers	and	mutual	funds	to	identify	and	verify	customers	that	maintain	accounts.	The	USA	PATRIOT	Act	also	mandates	that	certain	types	of	financial institutions	monitor	and	report	suspicious	activity	to	appropriate	law	enforcement	or	regulatory	authorities.	An	institution	subject	to	the	USA	PATRIOT	Act	also	must designate	an	AML	compliance	officer,	provide	employees	with	training	on	money	laundering	prevention,	and	undergo	an	annual,	independent	audit	to	assess	the effectiveness	of	its	AML	program.	Outside	the	U.S.,	applicable	laws	and	regulations	similarly	subject	designated	types	of	financial	institutions	to	AML	requirements. Morgan	Stanley	has	implemented	policies,	procedures	and	internal	controls	that	are	designed	to	comply	with	these	AML	requirements.

# Protection	of	Client	Information.

Many	aspects	of	Morgan	Stanley's	business	are	subject	to	increasingly	comprehensive	legal	requirements	concerning	the	use	and	protection	of	certain	client information,	including	those	adopted	pursuant	to	the	Gramm-Leach-Bliley	Act	of	1999	and	the	Fair	and	Accurate	Credit	Transactions	Act	of	2003	in	the	U.S.,	the European	Union	Data	Protection	Directive	in	the	EU	and	various	laws	in	Asia,	including	the	Japanese	Personal	Information	(Protection)	Law,	the	Hong	Kong	Personal Data	(Protection)	Ordinance	and	the	Australian	Privacy	Act.	Morgan	Stanley	has	adopted	measures	in	response	to	such	requirements.

Broker-Dealer	Regulation.				MS&Co.	is	registered	as	a	broker-dealer	with	the	SEC	and	in	all	50	states,	the	District	of	Columbia,	Puerto	Rico	and	the	U.S.	Virgin Islands,	and	is	a	member	of	self-regulatory	organizations,	including	the	Financial	Industry	Regulatory	Authority	("FINRA")	and	securities	exchanges,	including	the NYSE.	Broker-dealers	are	subject	to	laws	and	regulations	covering	all	aspects	of	the	securities	business,	including	sales	and	trading	practices,	securities	offerings, publication	of	research	reports,	use	of	customers'	funds	and	securities,	capital	structure,	record-keeping	and	retention	and	the	conduct	of	their	directors,	officers, representatives	and	other	associated	persons.	Broker-dealers	are	also	regulated	by	securities	administrators	in	those	states	where	they	do	business.	Violations	of	the	laws and	regulations	governing	a	broker-dealer's	actions	could	result	in	censures,	fines,	the	issuance	of	cease-and-desist	orders,	revocation	of	licenses	or	registrations,	the suspension	or	expulsion	from	the	securities	industry	of	such	broker-dealer	or	its	officers	or	employees,	or	other	similar	consequences	by	both	federal	and	state	securities administrators.

Margin	lending	by	broker-dealers	is	regulated	by	the	Federal	Reserve	Board's	restrictions	on	lending	in	connection	with	customer	and	proprietary	purchases	and	short sales	of	securities,	as	well	as	securities	borrowing	and	lending	activities.	Broker-dealers	are	also	required	by	the	National	Association	of	Securities	Dealers,	Inc.	and NYSE	rules	to	impose	maintenance	requirements	on	the	value	of	securities	contained	in	margin	accounts.	In	many	cases,	Morgan	Stanley's	broker-dealer	subsidiaries' margin	policies	are	more	stringent	than	these	rules.

Morgan	Stanley	conducts	some	of	its	government	securities	activities	through	Morgan	Stanley	Market	Products	Inc.,	a	FINRA	member	registered	as	a	government securities	broker-dealer	with	the	SEC	and	in	certain	states.	The	Department	of	Treasury	has	promulgated	regulations	concerning,	among	other	things,	capital	adequacy, custody	and	use	of	government	securities	and	transfers	and	control	of	government	securities	subject	to	repurchase	transactions.	The	rules	of	the	Municipal	Securities Rulemaking	Board,	which	are	enforced	by	FINRA,	govern	the	municipal	securities	activities	of	Morgan	Stanley.

As	registered	U.S.	broker-dealers,	certain	subsidiaries	of	Morgan	Stanley,	including	MS&Co.,	are	subject	to	the	SEC's	net	capital	rule	and	the	net	capital	requirements	of various	securities	exchanges.	Many	non-U.S.	securities	exchanges	and	regulatory	authorities	either	have	imposed	or	are	proposing	rules	relating	to	capital	requirements

applicable	to	Morgan	Stanley's	non-U.S.	broker-dealer	subsidiaries.	These	rules,	which	specify	minimum	capital	requirements,	are	generally	designed	to	measure general	financial	integrity	and	liquidity	and	require	that	at	least	a	minimum	amount	of	net	assets	be	kept	in	relatively	liquid	form.	See	also	"Consolidated	Supervision and	Revised	Capital	Standards"	above	and	Note	16	in	"Notes	to	Consolidated	Financial	Statements"	in	Part	II,	Item	8.	Rules	of	FINRA	and	other	self-regulatory organizations	also	impose	limitations	and	requirements	on	the	transfer	of	member	organizations'	assets.

Compliance	with	the	capital	requirements	may	limit	Morgan	Stanley's	operations	requiring	the	intensive	use	of	capital.	Such	requirements	restrict	Morgan	Stanley's ability	to	withdraw	capital	from	its	broker-dealer	subsidiaries,	which	in	turn	may	limit	its	ability	to	pay	dividends,	repay	debt	or	redeem	or	purchase	shares	of	its	own outstanding	stock.	Any	change	in	such	rules	or	the	imposition	of	new	rules	affecting	the	scope,	coverage,	calculation	or	amount	of	capital	requirements,	or	a	significant operating	loss	or	any	unusually	large	charge	against	capital,	could	adversely	affect	Morgan	Stanley's	ability	to	pay	dividends	or	to	expand	or	maintain	present	business levels.	In	addition,	such	rules	may	require	Morgan	Stanley	to	make	substantial	capital	infusions	into	one	or	more	of	its	broker-dealer	subsidiaries	in	order	for	such subsidiaries	to	comply	with	such	rules,	either	in	the	form	of	cash	or	subordinated	loans	made	in	accordance	with	the	requirements	of	the	SEC's	net	capital	rule.

Regulation	of	Certain	Commodities	Activities.				The	commodities	activities	in	the	Institutional	Securities	business	segment	are	subject	to	extensive	and	evolving energy,	commodities,	environmental,	health	and	safety,	and	other	governmental	laws	and	regulations	in	the	U.S.	and	abroad.	Intensified	scrutiny	of	certain	energy markets	by	U.S.	federal,	state	and	local	authorities	in	the	U.S.	and	abroad	and	the	public	has	resulted	in	increased	regulatory	and	legal	enforcement	and	remedial proceedings	involving	energy	companies,	including	those	engaged	in	power	generation	and	liquid	hydrocarbons	trading.	The	EU	has	increased	its	focus	on	the	energy markets,	which	has	resulted	in	increased	regulation	of	companies	participating	in	the	energy	markets,	including	those	engaged	in	power	generation	and	liquid hydrocarbons	trading.

Terminal	facilities	and	other	assets	relating	to	Morgan	Stanley's	commodities	activities	are	also	subject	to	environmental	laws	both	in	the	U.S.	and	abroad.	In	addition, pipeline,	transport	and	terminal	operations	are	subject	to	state	laws	in	connection	with	the	cleanup	of	hazardous	substances	that	may	have	been	released	at	properties currently	or	previously	owned	or	operated	by	us	or	locations	to	which	we	have	sent	wastes	for	disposal.

Additional	Regulation	of	U.S.	Entities.				As	a	registered	futures	commission	merchant,	MS&Co.	is	subject	to	the	net	capital	requirements	of,	and	its	activities	are regulated	by,	the	Commodity	Futures	Trading	Commission	(the	"CFTC")	and	various	commodity	exchanges.	Certain	subsidiaries	of	Morgan	Stanley	are	registered	with the	CFTC	as	commodity	trading	advisors	and/or	commodity	pool	operators.	Morgan	Stanley's	futures	and	options-on-futures	businesses	are	also	regulated	by	the National	Futures	Association	(the	"NFA"),	a	registered	futures	association,	of	which	MS&Co.	and	certain	of	its	affiliates	are	members.	Violations	of	the	rules	of	the CFTC,	the	NFA	or	the	commodity	exchanges	could	result	in	remedial	actions	including	fines,	registration	restrictions	or	terminations,	trading	prohibitions	or	revocations of	commodity	exchange	memberships.

Morgan	Stanley	Bank,	through	which	Morgan	Stanley	conducts	certain	financing	and	lending	activities,	is	an	industrial	bank	chartered	under	the	laws	of	the	State	of Utah.	It	has	deposits	that	are	eligible	for	insurance	by	the	Federal	Deposit	Insurance	Corporation	("FDIC")	in	accordance	with	FDIC	rules	and	is	subject	to comprehensive	regulation	and	periodic	examination	by	the	Utah	Department	of	Financial	Institutions	and	the	FDIC.	Morgan	Stanley	Bank	is	not	considered	a	"bank" under	the	Bank	Holding	Company	Act	of	1956,	as	amended	(the	"BHCA").

Morgan	Stanley	Trust	National	Association,	a	wholly	owned	subsidiary,	is	a	federally	chartered	national	bank	whose	activities	are	limited	to	fiduciary	activities, primarily	personal	trust	services.	It	is	subject	to	comprehensive	regulation	and	periodic	examination	by	the	Office	of	the	Comptroller	of	the	Currency.	Morgan	Stanley Trust	National	Association	is	not	FDIC-insured	and	is	not	considered	a	"bank"	for	purposes	of	the	BHCA.

Morgan	Stanley	Trust,	a	wholly	owned	subsidiary	which	conducts	certain	transfer	agency,	sub-accounting	and	other	activities,	is	a	federally	chartered	savings	bank whose	activities	are	subject	to	comprehensive	regulation	and	periodic	examination	by	the	Office	of	Thrift	Supervision	("OTS").	As	a	result	of	its	ownership	of	Morgan Stanley	Trust,	Morgan	Stanley	is	registered	with	the	OTS	as	a	unitary	savings	and	loan	holding	company	("SLHC")	and	subject	to	regulation	and	examination	by	the OTS	as	a	SLHC.	Subsidiaries	of	Morgan	Stanley,	including	Morgan	Stanley	Trust,	are	registered	transfer	agents	subject	to	regulation	and	examination	by	the	SEC. Morgan	Stanley	Trust	has	deposits	that	are	eligible	for	insurance	by	the	FDIC.

Non-U.S.	Regulation.				Morgan	Stanley's	businesses	are	also	regulated	extensively	by	non-U.S.	regulators,	including	governments,	securities	exchanges,	commodity exchanges,	self-regulatory	organizations,	central	banks	and	regulatory	bodies,	especially	in	those	jurisdictions	in	which	Morgan	Stanley	maintains	an	office.	As	Morgan Stanley	continues	to	expand	its	business	internationally,	including	in	Europe,	Latin	America,	Asia	and	the	Middle	East,	it	will	become	subject	to	regulation	in	the jurisdictions	in	which	it	conducts	business.	Certain	Morgan	Stanley	subsidiaries	are	regulated	as	broker-dealers	under	the	laws	of	the	jurisdictions	in	which	they	operate. Subsidiaries	engaged	in	banking	and	trust	activities	outside	the	U.S.	are	regulated	by	various	government	agencies	in	the	particular	jurisdiction	where	they	are	chartered, incorporated	and/or	conduct	their	business	activity.	For	instance,	the	Financial	Services	Authority	and	several	U.K.	securities	and	futures	exchanges,	including	the London	Stock	Exchange	and	Euronext.liffe	regulate	the	Company's	activities	in	the	U.K.;	the	Deutsche	Borse	AG	and	the	Bundesanstalt	für Finanzdienstleistungsaufsicht	(the	Federal	Financial	Supervisory	Authority)	regulate	its	activities	in	the	Federal	Republic	of	Germany;	the	Swiss	Federal	Banking Commission	regulates	its	activities	in	Switzerland;	the	Comisión	Nacional	del	Mercado	del	Valores	(C.N.M.V.)	regulates	its	activities	in	Spain;	the	Financial	Services Agency,	the	Bank	of	Japan,	the	Japanese	Securities	Dealers	Association	and	several	Japanese	securities	and	futures	exchanges,	including	the	Tokyo	Stock	Exchange,	the Osaka	Securities	Exchange	and	the	Tokyo	International	Financial	Futures	Exchange,	regulate	its	activities	in	Japan;	the	Hong	Kong	Securities	and	Futures	Commission, the	Hong	Kong	Exchanges	and	Clearing	Limited	regulate	its	operations	in	Hong	Kong;	and	the	Monetary	Authority	of	Singapore	and	the	Singapore	Exchange	Limited regulate	its	business	in	Singapore.

Research.				Both	U.S.	and	non-U.S.	regulators	continue	to	focus	on	research	conflicts	of	interest.	Research-related	regulations	have	been	implemented	in	many jurisdictions	and	are	proposed	or	under	consideration	in	other	jurisdictions.	New	and	revised	requirements	resulting	from	these	regulations	and	the	global	research settlement	with	U.S.	Federal	and	state	regulators	(to	which	Morgan	Stanley	is	a	party)	have	necessitated	the	development	or	enhancement	of	corresponding	policies	and procedures.

The	majority	of	subsidiaries	related	to	Morgan	Stanley's	asset	management	activities	and	others,	including	MS&Co.,	are	registered	as	investment	advisers	with	the	SEC, and,	in	certain	states,	some	employees	or	representatives	of	subsidiaries	are	registered	as	investment	adviser	representatives.	Many	aspects	of	Morgan	Stanley's	asset management	activities	are	subject	to	federal	and	state	laws	and	regulations	primarily	intended	to	benefit	the	investor	or	client.	These	laws	and	regulations	generally	grant supervisory	agencies	and	bodies	broad	administrative	powers,	including	the	power	to	limit	or	restrict	Morgan	Stanley	from	carrying	on	its	asset	management	activities	in the	event	that	it	fails	to	comply	with	such	laws	and	regulations.	Sanctions	that	may	be	imposed	for	such	failure	include	the	suspension	of	individual	employees, limitations	on	Morgan	Stanley	engaging	in	various	asset	management	activities	for	specified	periods	of	time,	the	revocation	of	registrations,	other	censures	and	fines.

Morgan	Stanley's	Asset	Management	business	is	also	regulated	outside	the	U.S.	For	example,	the	Financial	Services	Authority	regulates	Morgan	Stanley's	business	in the	U.K.;	the	Financial	Services	Agency	regulates	Morgan	Stanley's	business	in	Japan;	the	Securities	and	Exchange	Board	of	India	regulates	Morgan	Stanley's	business in	India;	and	the	Monetary	Authority	of	Singapore	regulates	Morgan	Stanley's	business	in	Singapore.

# Executive	Officers	of	Morgan	Stanley.

The	executive	officers	of	Morgan	Stanley	and	their	ages	and	titles	as	of	January	28,	2008	are	set	forth	below.	Business	experience	for	the	past	five	years	is	provided	in accordance	with	SEC	rules.

John	J.	Mack	(63).					Chairman	of	the	Board	of	Directors	and	Chief	Executive	Officer	(since	June	2005).	Chairman	of	Pequot	Capital	Management	(June	2005).	Co- Chief	Executive	Officer	of	Credit	Suisse	Group	(January	2003	to	June	2004).	President,	Chief	Executive	Officer	and	Director	of	Credit	Suisse	First	Boston	(July	2001	to June	2004).	President	and	Chief	Operating	Officer	of	Morgan	Stanley	(May	1997	to	March	2001).

Walid	Chammah	(53).					Co-President	(since	December	2007).	Chairman	and	Chief	Executive	Officer	of	Morgan	Stanley	International	(since	July	2007).	Head	of Investment	Banking	(August	2005	to	July	2007)	and	Head	of	Global	Capital	Markets	(July	2002	to	August	2005).

James	Gorman	(49).					Co-President	(since	December	2007).	Co-Head	of	Strategic	Planning	(since	October	2007)	and	President	and	Chief	Operating	Officer	of	the Global	Wealth	Management	Group	(since	February	2006).	Head	of	Corporate	Acquisitions	Strategy	&	Research	at	Merrill	Lynch	&	Co.,	Inc.	("Merrill	Lynch")	(July 2005	to	August	2005)	and	President	of	the	Global	Private	Client	business	at	Merrill	Lynch	(December	2002	to	July	2005).

Colm	Kelleher	(50).					Executive	Vice	President	and	Chief	Financial	Officer	and	Co-Head	of	Strategic	Planning	(since	October	2007).	Head	of	Global	Capital	Markets (February	2006	to	October	2007).	Co-Head	of	Fixed	Income	Europe	(May	2004	to	February	2006).	Head	of	Fixed	Income	Sales	Europe	(December	2000	to	May	2004).

Gary	G.	Lynch	(57).					Executive	Vice	President	and	Chief	Legal	Officer	(since	October	2005).	Global	General	Counsel	(October	2001	to	October	2005)	of	Credit Suisse	First	Boston.	Executive	Vice	Chairman	(July	2004	to	October	2005)	and	Vice	Chairman	(December	2002	to	July	2004)	of	Credit	Suisse	First	Boston	and	member of	the	Executive	Board	(July	2004	to	July	2005)	of	Credit	Suisse	Group.	Partner	at	the	law	firm	of	Davis	Polk	&	Wardwell	(September	1989	to	October	2001).

Thomas	R.	Nides	(46).					Executive	Vice	President,	Chief	Administrative	Officer	and	Secretary	(since	September	2005).	Worldwide	President	and	Chief	Executive Officer	of	Burson-Marsteller	(November	2004	to	August	2005).	Chief	Administrative	Officer	of	Credit	Suisse	First	Boston	(June	2001	to	June	2004).

# Liquidity	Risk.

Liquidity	and	funding	risk	refers	to	the	risk	that	Morgan	Stanley	will	be	unable	to	finance	its	operations	due	to	a	loss	of	access	to	the	capital	markets	or	difficulty	in liquidating	its	assets.	Liquidity	and	funding	risk	also	encompasses	the	ability	of	Morgan	Stanley	to	meet	its	financial	obligations	without	experiencing	significant business	disruption	or	reputational	damage	that	may	threaten	its	viability	as	a	going	concern.	For	more	information	on	how	we	monitor	and	manage	liquidity	and funding	risk,	see	"Management's	Discussion	and	Analysis	of	Results	of	Operations—Liquidity	and	Capital	Resources"	in	Part	II,	Item	7	below.

# Liquidity	is	essential	to	our	businesses	and	we	rely	on	external	sources	to	finance	a	significant	portion	of	our	operations.

Liquidity	is	essential	to	our	businesses.	Our	liquidity	could	be	substantially	negatively	affected	by	an	inability	to	raise	funding	in	the	long-term	or	short-term	debt	capital markets	or	the	equity	capital	markets	or	an	inability	to	access	the	secured	lending	markets.	Factors	that	we	cannot	control,	such	as	disruption	of	the	financial	markets	or negative	views	about	the	financial	services	industry	generally,	could	impair	our	ability	to	raise	funding.	In	addition,	our	ability	to	raise	funding	could	be	impaired	if lenders	develop	a	negative	perception	of	our	long-term	or	short-term	financial	prospects.	Such	negative	perceptions	could	be	developed	if	we	incur	large	trading	losses, we	are	downgraded	or	put	on	negative	watch	by	the	rating	agencies,	we	suffer	a	decline	in	the	level	of	our	business	activity,	regulatory	authorities	take	significant	action against	us,	or	we	discover	serious	employee	misconduct	or	illegal	activity,	among	other	reasons.	If	we	are	unable	to	raise	funding	using	the	methods	described	above,	we would	likely	need	to	liquidate	unencumbered	assets,	such	as	our	investment	and	trading	portfolios,	to	meet	maturing	liabilities.	We	may	be	unable	to	sell	some	of	our assets,	or	we	may	have	to	sell	assets	at	a	discount	from	market	value,	either	of	which	could	adversely	affect	our	results	of	operations.

# Our	borrowing	costs	and	access	to	the	debt	capital	markets	depend	significantly	on	our	credit	ratings.

The	cost	and	availability	of	unsecured	financing	generally	are	dependent	on	our	short-term	and	long-term	credit	ratings.	Factors	that	are	significant	to	the	determination of	our	credit	ratings	or	otherwise	affect	our	ability	to	raise	short-term	and	long-term	financing	include	the	level	and	volatility	of	our	earnings;	our	relative	competitive position	in	the	markets	in	which	we	operate;	our	geographic	and	product	diversification;	our	ability	to	retain	key	personnel;	our	risk	profile;	our	risk	management policies;	our	cash	liquidity;	our	capital	adequacy;	our	corporate	lending	credit	risk;	and	legal	and	regulatory	developments.	A	deterioration	in	any	of	these	factors	or combination	of	these	factors	may	lead	rating	agencies	to	downgrade	our	credit	ratings,	thereby	increasing	our	cost	of	obtaining	unsecured	funding.

Our	debt	ratings	also	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	segment,	we	may	be	required	to	provide	additional	collateral	to	certain	counterparties	in	the	event	of	a credit	ratings	downgrade.

# We	are	a	holding	company	and	depend	on	payments	from	our	subsidiaries.

We	depend	on	dividends,	distributions	and	other	payments	from	our	subsidiaries	to	fund	dividend	payments	and	to	fund	all	payments	on	our	obligations,	including	debt obligations.	Regulatory	and	other	legal	restrictions	may	limit	our	ability	to	transfer	funds	freely,	either	to	or	from	our	subsidiaries.	In	particular,	many	of	our subsidiaries,	including	our	broker-dealer	subsidiaries,	are	subject	to	laws	and	regulations	that	authorize	regulatory	bodies	to	block	or	reduce	the	flow	of	funds	to	the parent	holding	company,	or	that	prohibit	such	transfers	altogether	in	certain	circumstances.	These	laws	and	regulations	may	hinder	our	ability	to	access	funds	that	we may	need	to	make	payments	on	our	obligations.

# If	our	liquidity	and	funding	policies	are	not	adequate,	we	may	be	unable	to	access	sufficient	financing.

Our	liquidity	and	funding	policies	have	been	designed	to	ensure	that	we	maintain	sufficient	liquid	financial	resources	to	continue	to	conduct	our	business	for	an	extended period	in	a	stressed	liquidity	environment.	If	our	liquidity	and	funding	policies	are	not	adequate	or	we	do	not	adhere	to	the	policies,	we	may	be	unable	to	access	sufficient financing	to	service	our	financial	obligations	when	they	come	due,	which	could	have	a	material	adverse	franchise	or	business	impact.

# Market	Risk.

Market	risk	refers	to	the	risk	that	a	change	in	the	level	of	one	or	more	market	prices	of	commodities	or	securities,	rates,	indices,	implied	volatilities	(the	price	volatility	of the	underlying	instrument	imputed	from	option	prices),	correlations	or	other	market	factors,	such	as	liquidity,	will	result	in	losses	for	a	position	or	portfolio.	For	more information	on	how	we	monitor	and	manage	market	risk,	see	"Market	Risk"	in	Part	II,	Item	7A	herein.

# Our	results	of	operations	may	be	materially	affected	by	market	fluctuations	and	by	economic	and	other	factors.

The	amount,	duration	and	range	of	our	market	risk	exposures	have	been	increasing	over	the	past	several	years,	and	may	continue	to	do	so.	Our	results	of	operations	may be	materially	affected	by	market	fluctuations	due	to	economic	and	other	factors.	Results	of	operations	in	the	past	have	been,	and	in	the	future	may	continue	to	be, materially	affected	by	many	factors	of	a	global	nature,	including	political,	economic	and	market	conditions;	the	availability	and	cost	of	capital;	the	liquidity	of	global markets;	the	level	and	volatility	of	equity	prices,	commodity	prices	and	interest	rates;	currency	values	and	other	market	indices;	technological	changes	and	events;	the availability	and	cost	of	credit;	inflation;	natural	disasters;	acts	of	war	or	terrorism;	investor	sentiment	and	confidence	in	the	financial	markets;	or	a	combination	of	these or	other	factors.	In	addition,	legislative,	legal	and	regulatory	developments	related	to	our	businesses	potentially	could	increase	costs,	thereby	affecting	results	of operations.	These	factors	also	may	have	an	impact	on	our	ability	to	achieve	our	strategic	objectives.

The	results	of	our	Institutional	Securities	business	segment,	particularly	results	relating	to	our	involvement	in	primary	and	secondary	markets	for	all	types	of	financial products,	are	subject	to	substantial	fluctuations	due	to	a	variety	of	factors,	such	as	those	enumerated	above	that	we	cannot	control	or	predict	with	great	certainty.	These fluctuations	impact	results	by	causing	variations	in	new	business	flows	and	in	the	fair	value	of	securities	and	other	financial	products.	Fluctuations	also	occur	due	to	the level	of	global	market	activity,	which,	among	other	things,	affects	the	size,	number	and	timing	of	investment	banking	client	assignments	and	transactions	and	the realization	of	returns	from	our	principal	investments.	During	periods	of	unfavorable	market	or	economic	conditions,	the	level	of	individual	investor	participation	in	the global	markets	may	also	decrease,	which	would	negatively	impact	the	results	of	our	Global	Wealth	Management	Group	business	segment.	In	addition,	fluctuations	in global	market	activity	could	impact	the	flow	of	investment	capital	into	or	from	assets	under	management	or	supervision	and	the	way	customers	allocate	capital	among money	market,	equity,	fixed	income	or	other	investment	alternatives,	which	could	negatively	impact	our	Asset	Management	business	segment.

# We	may	experience	further	writedowns	of	our	financial	instruments	and	other	losses	related	to	volatile	and	illiquid	market	conditions.

The	Company	recorded	$9.4	billion	in	mortgage-related	writedowns	in	the	fourth	quarter	of	fiscal	2007,	including	$7.8	billion	relating	to	our	U.S.	subprime	trading positions	and	$1.6	billion	relating	to	other	mortgage-related	products,	such	as	commercial	mortgage-backed	securities,	ALT-A	and	other	loans,	conduit	and	non- performing	loans	and	European	non-conforming	loans,	and	an	impairment	charge	related	to	mortgage-related	securities	portfolios	in	our	domestic	subsidiary	banks.	We continue	to	have	exposure	to	these	markets	and	products	and	as	market	conditions	continue	to	evolve	the	fair	value	of	these	mortgage-related	instruments	could	further deteriorate.	In	addition,	recent	market	volatility	has	made	it	extremely	difficult	to	value	certain	of	our

securities.	Subsequent	valuations,	in	light	of	factors	then	prevailing,	may	result	in	significant	changes	in	the	values	of	these	securities	in	future	periods.	In	addition,	at	the time	of	any	sales	and	settlements	of	these	securities,	the	price	we	ultimately	realize	will	depend	on	the	demand	and	liquidity	in	the	market	at	that	time	and	may	be materially	lower	than	their	current	fair	value.	Any	of	these	factors	could	require	us	to	take	further	writedowns	in	the	value	of	our	securities	portfolio,	which	may	have	an adverse	effect	on	our	results	of	operations	in	future	periods.

The	results	for	fiscal	2007	included	other	losses	primarily	related	to	the	illiquid	market	conditions	that	existed	during	the	second	half	of	fiscal	2007.	These	included losses	reflecting	mark-to-market	valuations	associated	with	loans	and	loan	commitments	largely	related	to	acquisition	financing	to	non-investment	grade	companies.	The Company's	leveraged	finance	business	originates	and	distributes	loans	and	commitments,	and	intends	to	distribute	its	current	positions;	however,	this	may	take	longer than	in	the	past	and	is	dependent	on	liquidity	reentering	the	market	and	additional	writedowns	of	these	loans	and	commitments	may	occur.	The	valuation	of	these commitments	could	change	in	future	periods	depending	on,	among	other	things,	the	extent	that	they	are	renegotiated	or	repriced	or	the	associated	acquisition	transaction does	not	occur.

Other	areas	of	our	business	which	to	date	have	not	been	adversely	affected	by	the	illiquidity	in	our	mortgage	and	lending	businesses	could	be	adversely	affected	if	the current	conditions	in	the	credit	market	spread	to	other	sectors.

# Holding	large	and	concentrated	positions	may	expose	us	to	losses.

Concentration	of	risk	may	reduce	revenues	or	result	in	losses	in	our	market-making,	proprietary	trading,	investing,	block	trading,	underwriting	and	lending	businesses	in the	event	of	unfavorable	market	movements.	We	commit	substantial	amounts	of	capital	to	these	businesses,	which	often	results	in	us	taking	large	positions	in	the securities	of,	or	make	large	loans	to,	a	particular	issuer	or	issuers	in	a	particular	industry,	country	or	region.	Moreover,	the	trend	in	all	major	capital	markets	is	towards larger	and	more	frequent	commitments	of	capital	in	many	of	these	activities,	and	we	expect	this	trend	to	continue.

# Markets	may	experience	periods	of	high	volatility	accompanied	by	reduced	liquidity.

Financial	markets	are	susceptible	to	severe	events	evidenced	by	rapid	depreciation	in	asset	values	accompanied	by	a	reduction	in	asset	liquidity,	such	as	the	asset	price deterioration	in	the	U.S.	subprime	residential	mortgage	market.	Under	these	extreme	conditions,	hedging	and	other	risk	management	strategies	may	not	be	as	effective	at mitigating	trading	losses	as	they	would	be	under	more	normal	market	conditions.	Moreover,	under	these	conditions	market	participants	are	particularly	exposed	to trading	strategies	employed	by	many	market	participants	simultaneously	and	on	a	large	scale,	such	as	crowded	trades.	Morgan	Stanley's	risk	management	and monitoring	processes	seek	to	quantify	and	mitigate	risk	to	more	extreme	market	moves.	Severe	market	events	have	historically	been	difficult	to	predict,	however,	and Morgan	Stanley	could	realize	significant	losses	if	unprecedented	extreme	market	events	were	to	occur,	as	illustrated	by	recent	results	in	our	subprime	mortgage-related proprietary	trading.

# We	may	incur	significant	losses	in	the	real	estate	sector.

We	finance	and	acquire	principal	positions	in	a	number	of	real	estate	and	real	estate-related	products	for	our	own	account,	for	investment	vehicles	managed	by	affiliates in	which	we	also	may	have	a	significant	investment,	for	separate	accounts	managed	by	affiliates	and	for	major	participants	in	the	commercial	and	residential	real	estate markets,	and	originate	loans	secured	by	commercial	and	residential	properties.	We	also	securitize	and	trade	in	a	wide	range	of	commercial	and	residential	real	estate	and real	estate-related	whole	loans,	mortgages	and	other	real	estate	and	commercial	assets	and	products,	including	residential	and	commercial	mortgage-backed	securities. These	businesses	could	be	adversely	affected	by	a	downturn	in	the	real	estate	sector.

# Credit	Risk.

Credit	risk	refers	to	the	risk	of	loss	arising	from	borrower	or	counterparty	default	when	a	borrower,	counterparty	or	obligor	does	not	meet	its	obligations.	For	more information	on	how	we	monitor	and	manage	credit	risk,	see	"Credit	Risk"	in	Part	II,	Item	7A	herein.

# We	are	exposed	to	the	risk	that	third	parties	that	are	indebted	to	us	will	not	perform	their	obligations.

We	incur	significant,	"single-name"	credit	risk	exposure	through	the	Institutional	Securities	business	segment.	This	risk	may	arise,	for	example,	from	entering	into	swap or	other	derivative	contracts	under	which	counterparties	have	long-term	obligations	to	make	payments	to	us	and	by	extending	credit	to	our	clients	through	various	credit arrangements.	We	incur	"individual	consumer"	credit	risk	in	the	Global	Wealth	Management	Group	business	segment	through	margin	and	non-purpose	loans	to individual	investors,	which	are	collateralized	by	securities.

The	amount,	duration	and	range	of	our	credit	exposures	have	been	increasing	over	the	past	several	years,	and	may	continue	to	do	so.	In	recent	years,	we	have significantly	expanded	our	use	of	swaps	and	other	derivatives	and	we	may	continue	to	do	so.	Corporate	clients	are	increasingly	seeking	loans	or	lending	commitments from	us	in	connection	with	investment	banking	and	other	assignments.	In	addition,	we	have	experienced,	due	to	competitive	factors,	increased	pressure	to	assume	longer- term	credit	risk,	to	provide	swaps	and	lending	commitments	to	counterparties	and	borrowers	with	lower	credit	quality,	to	extend	credit	against	less	liquid	collateral	and to	price	derivatives	instruments	more	aggressively	based	on	the	credit	risks	that	we	take.	As	a	clearing	member	firm,	we	finance	our	customer	positions	and	we	could	be held	responsible	for	the	defaults	or	misconduct	of	our	customers.	Although	we	regularly	review	our	credit	exposures,	default	risk	may	arise	from	events	or	circumstances that	are	difficult	to	detect	or	foresee.

# Defaults	by	another	larger	financial	institution	could	adversely	affect	financial	markets	generally.

The	commercial	soundness	of	many	financial	institutions	may	be	closely	interrelated	as	a	result	of	credit,	trading,	clearing	or	other	relationships	between	the	institutions. As	a	result,	concerns	about,	or	a	default	or	threatened	default	by,	one	institution	could	lead	to	significant	market-wide	liquidity	problems,	losses	or	defaults	by	other institutions.	This	is	sometimes	referred	to	as	"systemic	risk"	and	may	adversely	affect	financial	intermediaries,	such	as	clearing	agencies,	clearing	houses,	banks, securities	firms	and	exchanges,	with	which	we	interact	on	a	daily	basis,	and	therefore	could	adversely	affect	Morgan	Stanley.

# Operational	Risk.

Operational	risk	refers	to	the	risk	of	financial	or	other	loss,	or	potential	damage	to	a	firm's	reputation,	arising	from	inadequate	or	failed	internal	processes,	people, resources,	systems	or	from	external	events	(e.g.,	external	or	internal	fraud,	legal	and	compliance	risks,	damage	to	physical	assets,	etc.).	Morgan	Stanley	may	incur operational	risk	across	its	full	scope	of	business	activities,	including	revenue-generating	activities	(e.g.,	sales	and	trading)	and	support	functions	(e.g.,	information technology	and	facilities	management).	As	such,	Morgan	Stanley	may	incur	operational	risk	in	each	of	its	businesses,	as	well	as	within	the	control	groups.	For	more information	on	how	we	monitor	and	manage	operational	risk,	see	"Operational	Risk"	in	Part	II,	Item	7A	herein.

# We	are	subject	to	operational	risk	and	an	operational	event	could	adversely	affect	our	businesses.

Our	businesses	are	highly	dependent	on	our	ability	to	process,	on	a	daily	basis,	a	large	number	of	transactions	across	numerous	and	diverse	markets	in	many	currencies. In	general,	the	transactions	we	process	are	increasingly	complex.	We	perform	the	functions	required	to	operate	our	different	businesses	either	by	ourselves	or	through agreements	with	third	parties.	We	rely	on	the	ability	of	our	employees,	our	internal	systems	and	systems	at	technology	centers	operated	by	third	parties	to	process	a	high volume	of	transactions.	We	also	face	the	risk	of	operational	failure	or	termination	of	any	of	the	clearing	agents,	exchanges,	clearing	houses	or	other	financial

intermediaries	we	use	to	facilitate	our	securities	transactions.	In	the	event	of	a	breakdown	or	improper	operation	of	our	or	third	party's	systems	or	improper	action	by third	parties	or	employees,	we	could	suffer	financial	loss,	an	impairment	to	our	liquidity,	a	disruption	of	our	businesses,	regulatory	sanctions	or	damage	to	our reputation.

Despite	the	business	contingency	plans	we	have	in	place,	our	ability	to	conduct	business	may	be	adversely	affected	by	a	disruption	in	the	infrastructure	that	supports	our business	and	the	communities	where	we	are	located.	This	may	include	a	disruption	involving	physical	site	access,	terrorist	activities,	disease	pandemics,	electrical, communications	or	other	services	used	by	Morgan	Stanley,	its	employees	or	third	parties	with	whom	we	conduct	business.

# Legal	Risk.

Legal	risk	refers	to	the	risk	of	non-compliance	with	applicable	legal	and	regulatory	requirements	and	standards.	Legal	risk	also	includes	contractual	and	commercial	risk such	as	the	risk	that	a	counterparty's	performance	obligations	will	be	unenforceable.	For	more	information	on	how	we	monitor	and	manage	legal	risk,	see	"Legal	Risk" in	Part	II,	Item	7A	herein.

# The	financial	services	industry	faces	substantial	litigation	and	regulatory	risks,	and	we	may	face	damage	to	our	reputation	and	legal	liability.

We	have	been	named,	from	time	to	time,	as	a	defendant	in	various	legal	actions,	including	arbitrations,	class	actions,	and	other	litigation,	arising	in	connection	with	our 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.

We	are	also	involved,	from	time	to	time,	in	other	reviews,	investigations	and	proceedings	(both	formal	and	informal)	by	governmental	and	self-regulatory	agencies regarding	our	business,	including,	among	other	things,	accounting	and	operational	matters,	certain	of	which	may	result	in	adverse	judgments,	settlements,	fines, penalties,	injunctions	or	other	relief.	The	number	of	these	investigations	and	proceedings	has	increased	in	recent	years	with	regard	to	many	firms	in	the	financial	services industry,	including	us.	Like	any	large	corporation,	we	are	also	subject	to	risk	from	potential	employee	misconduct,	including	non-compliance	with	policies	and	improper use	or	disclosure	of	confidential	information.	Substantial	legal	liability	or	significant	regulatory	action	against	us	could	materially	adversely	affect	our	business, financial	condition	or	results	of	operations	or	cause	us	significant	reputational	harm,	which	could	seriously	harm	our	business.	For	more	information	regarding	legal proceedings	in	which	we	are	involved	see	"Legal	Proceedings"	in	Part	I,	Item	3	herein.

# We	are	subject	to	extensive	regulation	in	the	jurisdictions	in	which	we	conduct	our	businesses.

We	are	subject	to	extensive	regulation	globally	and	face	the	risk	of	significant	intervention	by	regulatory	authorities	in	the	jurisdictions	in	which	we	conduct	our businesses.	Among	other	things,	we	could	be	fined,	prohibited	from	engaging	in	some	of	our	business	activities	or	subject	to	limitations	or	conditions	on	our	business activities.	Significant	regulatory	action	against	us	could	have	material	adverse	financial	effects,	cause	significant	reputational	harm	to	us,	or	harm	our	business	prospects. New	laws	or	regulations	or	changes	in	the	enforcement	of	existing	laws	or	regulations	applicable	to	our	clients	may	also	adversely	affect	our	business.	For	more information	regarding	the	regulatory	environment	in	which	we	operate,	see	"Regulation"	in	Part	I,	Item	1	herein.

# Our	commodities	activities	subject	us	to	extensive	regulation,	potential	catastrophic	events	and	environmental	risks	and	regulation	that	may	expose	us	to	significant costs	and	liabilities.

In	connection	with	the	commodities	activities	in	our	Institutional	Securities	business	segment,	we	engage	in	the	production,	storage,	transportation,	marketing	and trading	of	several	commodities,	including	metals	(base	and	precious),	agricultural	products,	crude	oil,	oil	products,	natural	gas,	electric	power,	emission	credits,	coal, freight,

LNG	and	related	products	and	indices.	In	addition,	we	own	five	electricity	generating	facilities	in	the	U.S.	and	Europe;	TransMontaigne	Inc.	and	its	subsidiaries,	a	group of	companies	operating	in	the	refined	petroleum	products	marketing	and	distribution	business;	and	the	Heidmar	Group	of	companies,	which	provide	international	marine transportation	and	U.S.	marine	logistics	services.	As	a	result	of	these	activities,	we	are	subject	to	extensive	and	evolving	energy,	commodities,	environmental,	health	and safety,	and	other	governmental	laws	and	regulations.	For	example,	liability	may	be	incurred	without	regard	to	fault	under	certain	environmental	laws	and	regulations	for the	remediation	of	contaminated	areas.	Our	commodities	business	also	exposes	us	to	the	risk	of	unforeseen	and	catastrophic	events,	including	natural	disasters,	leaks, spills,	explosions,	release	of	toxic	substances,	fires,	accidents	on	land	and	at	sea,	wars,	and	terrorist	attacks	that	could	result	in	personal	injuries,	loss	of	life,	property damage,	and	suspension	of	operations.

Although	we	have	attempted	to	mitigate	our	pollution	and	other	environmental	risks	by,	among	other	measures,	adopting	appropriate	policies	and	procedures	for	power plant	operations,	monitoring	the	quality	of	petroleum	storage	facilities	and	transport	vessels	and	implementing	emergency	response	programs,	these	actions	may	not prove	adequate	to	address	every	contingency.	In	addition,	insurance	covering	some	of	these	risks	may	not	be	available,	and	the	proceeds,	if	any,	from	insurance	recovery may	not	be	adequate	to	cover	liabilities	with	respect	to	particular	incidents.	As	a	result,	our	financial	condition	and	results	of	operations	may	be	adversely	affected	by these	events.

We	also	expect	the	other	laws	and	regulations	affecting	our	commodities	business	to	increase	in	both	scope	and	complexity.	During	the	past	several	years,	intensified scrutiny	of	certain	energy	markets	by	federal,	state	and	local	authorities	in	the	U.S.	and	abroad	and	the	public	has	resulted	in	increased	regulatory	and	legal	enforcement, litigation	and	remedial	proceedings	involving	companies	engaged	in	the	activities	in	which	we	are	engaged.	For	example,	the	EU	has	increased	its	focus	on	the	energy markets	which	has	resulted	in	increased	regulation	of	companies	participating	in	the	energy	markets,	including	those	engaged	in	power	generation	and	liquid hydrocarbons	trading.	We	may	incur	substantial	costs	in	complying	with	current	or	future	laws	and	regulations	and	our	overall	businesses	and	reputation	may	be adversely	affected	by	the	current	legal	environment.	In	addition,	failure	to	comply	with	these	laws	and	regulations	may	result	in	substantial	civil	and	criminal	fines	and penalties.

# Potential	conflicts	of	interest	are	increasing	and	a	failure	to	appropriately	deal	with	conflicts	of	interest	could	adversely	affect	our	businesses.

Our	reputation	is	one	of	our	most	important	assets.	As	we	have	expanded	the	scope	of	our	businesses	and	our	client	base,	we	increasingly	have	to	address	potential conflicts	of	interest,	including	those	relating	to	our	proprietary	activities.	For	example,	conflicts	may	arise	between	our	position	as	a	financial	advisor	in	a	merger transaction	and	a	principal	investment	we	hold	in	one	of	the	parties	to	the	transaction.	In	addition,	hedge	funds	and	private	equity	funds	are	an	increasingly	important portion	of	our	client	base,	and	also	compete	with	us	in	a	number	of	our	businesses.	We	have	procedures	and	controls	that	are	designed	to	address	various	conflicts	of interest.	However,	identifying	and	managing	potential	conflicts	of	interest	can	be	complex	and	difficult	and	our	reputation	could	be	damaged	if	we	fail,	or	appear	to	fail, to	deal	appropriately	with	conflicts	of	interest.	In	addition,	the	SEC	and	other	federal	and	state	regulators	have	increased	their	scrutiny	of	potential	conflicts	of	interest.	It is	possible	that	potential	or	perceived	conflicts	could	give	rise	to	litigation	or	enforcement	actions,	which	may	lead	to	our	clients	being	less	willing	to	enter	into transactions	in	which	such	a	conflict	may	occur,	which	will	adversely	affect	our	businesses.

# Competitive	Environment.

# We	face	strong	competition	from	other	financial	services	firms,	which	could	lead	to	pricing	pressures	that	could	materially	adversely	affect	our	revenue	and profitability.

The	financial	services	industry	and	all	of	our	businesses	are	intensely	competitive,	and	we	expect	them	to	remain	so.	We	compete	with	commercial	banks,	insurance companies,	sponsors	of	mutual	funds,	hedge	funds,	energy	companies	and	other	companies	offering	financial	services	in	the	U.S.,	globally	and	through	the	internet.	We 18

compete	on	the	basis	of	several	factors,	including	transaction	execution,	capital	or	access	to	capital,	products	and	services,	innovation,	reputation	and	price.	Over	time, certain	sectors	of	the	financial	services	industry	have	become	considerably	more	concentrated,	as	financial	institutions	involved	in	a	broad	range	of	financial	services have	been	acquired	by	or	merged	into	other	firms.	This	convergence	could	result	in	our	competitors	gaining	greater	capital	and	other	resources,	such	as	a	broader	range of	products	and	services	and	geographic	diversity.	We	may	experience	pricing	pressures	as	a	result	of	these	factors	and	as	some	of	our	competitors	seek	to	increase market	share	by	reducing	prices.	For	more	information	regarding	the	competitive	environment	in	which	we	operate,	see	"Competition"	in	Part	I,	Item	1	herein.

# Our	ability	to	retain	and	attract	qualified	employees	is	critical	to	the	success	of	our	business	and	the	failure	to	do	so	may	materially	adversely	affect	our performance.

Our	people	are	our	most	important	resource	and	competition	for	qualified	employees	is	intense.	In	order	to	attract	and	retain	qualified	employees,	we	must	compensate such	employees	at	market	levels.	Typically,	those	levels	have	caused	employee	compensation	to	be	our	greatest	expense	as	compensation	is	highly	variable	and	changes with	performance.	If	we	are	unable	to	continue	to	attract	and	retain	qualified	employees,	or	do	so	at	rates	necessary	to	maintain	our	competitive	position,	or	if compensation	costs	required	to	attract	and	retain	employees	become	more	expensive,	our	performance,	including	our	competitive	position,	could	be	materially	adversely affected.

# Automated	trading	markets	may	adversely	affect	our	business	and	may	increase	competition.

We	have	experienced	intense	price	competition	in	some	of	our	businesses	in	recent	years.	In	particular,	the	ability	to	execute	securities	trades	electronically	on	exchanges and	through	other	automated	trading	markets	has	increased	the	pressure	on	trading	commissions.	The	trend	toward	direct	access	to	automated,	electronic	stock	markets will	likely	continue.	It	is	possible	that	we	will	experience	competitive	pressures	in	these	and	other	areas	in	the	future	as	some	of	our	competitors	may	seek	to	obtain market	share	by	reducing	prices.

# International	Risk.

# We	are	subject	to	numerous	political,	economic,	legal,	operational,	franchise	and	other	risks	as	a	result	of	our	international	operations	which	could	adversely impact	our	businesses	in	many	ways.

We	are	subject	to	political,	economic,	legal,	operational,	franchise	and	other	risks	that	are	inherent	in	operating	in	many	countries,	including	risks	of	possible nationalization,	expropriation,	price	controls,	capital	controls,	exchange	controls	and	other	restrictive	governmental	actions,	as	well	as	the	outbreak	of	hostilities	or political	and	governmental	instability.	In	many	countries,	the	laws	and	regulations	applicable	to	the	securities	and	financial	services	industries	are	uncertain	and evolving,	and	it	may	be	difficult	for	us	to	determine	the	exact	requirements	of	local	laws	in	every	market.	Our	inability	to	remain	in	compliance	with	local	laws	in	a particular	market	could	have	a	significant	and	negative	effect	not	only	on	our	business	in	that	market	but	also	on	our	reputation	generally.	We	are	also	subject	to	the enhanced	risk	that	transactions	we	structure	might	not	be	legally	enforceable	in	all	cases.

We	have	expanded,	and	continue	to	look	at	opportunities	to	expand,	in	the	emerging	markets.	Various	emerging	market	countries	have	experienced	severe	economic	and financial	disruptions,	including	significant	devaluations	of	their	currencies,	capital	and	currency	exchange	controls,	high	rates	of	inflation	and	low	or	negative	growth rates	in	their	economies.	Crime	and	corruption,	as	well	as	issues	of	security	and	personal	safety,	also	exist	in	certain	of	these	countries.	These	conditions	could	adversely impact	our	businesses	and	increase	volatility	in	financial	markets	generally.

The	emergence	of	a	pandemic	or	other	widespread	health	emergency,	or	concerns	over	the	possibility	of	such	an	emergency,	could	create	economic	and	financial disruptions	in	emerging	markets	and	other	areas	throughout	the	world,	and	could	lead	to	operational	difficulties	(including	travel	limitations)	that	could	impair	our ability	to	manage	our	businesses	around	the	world.

# Acquisition	Risk.

# We	may	be	unable	to	fully	capture	the	expected	value	from	acquisitions,	joint	ventures	and	minority	stakes.

We	expect	to	grow	in	part	through	acquisitions,	joint	ventures	and	minority	stakes.	To	the	extent	we	make	acquisitions	or	enter	into	combinations	or	joint	ventures,	we face	numerous	risks	and	uncertainties	combining	or	integrating	the	relevant	businesses	and	systems,	including	the	need	to	combine	accounting	and	data	processing systems	and	management	controls	and	to	integrate	relationships	with	clients	and	business	partners.	In	the	case	of	joint	ventures	and	minority	stakes,	we	are	subject	to additional	risks	and	uncertainties	in	that	we	may	be	dependent	upon,	and	subject	to	liability,	losses	or	reputational	damage	relating	to,	systems,	controls	and	personnel that	are	not	under	our	control.	In	addition,	conflicts	or	disagreements	between	us	and	our	joint	venture	partners	may	negatively	impact	the	benefits	to	be	achieved	by	the joint	venture.	There	is	no	assurance	that	our	recent	acquisitions	or	any	business	we	acquire	in	the	future	will	be	successfully	integrated	and	result	in	all	of	the	positive benefits	anticipated.	If	we	are	not	able	to	integrate	successfully	our	past	and	future	acquisitions,	there	is	a	risk	that	our	results	of	operations	may	be	materially	and adversely	affected.

# Risk	Management.

# Our	hedging	strategies	and	other	risk	management	techniques	may	not	be	fully	effective	in	mitigating	our	risk	exposure	in	all	market	environments	or	against	all types	of	risk.

We	have	devoted	significant	resources	to	develop	our	risk	management	policies	and	procedures	and	expect	to	continue	to	do	so	in	the	future.	Nonetheless,	our	hedging strategies	and	other	risk	management	techniques	may	not	be	fully	effective	in	mitigating	our	risk	exposure	in	all	market	environments	or	against	all	types	of	risk, including	risks	that	are	unidentified	or	unanticipated.	Some	of	our	methods	of	managing	risk	are	based	upon	our	use	of	observed	historical	market	behavior.	As	a	result, these	methods	may	not	predict	future	risk	exposures,	which	could	be	significantly	greater	than	the	historical	measures	indicate	(e.g.,	recent	events	in	the	U.S.	subprime residential	mortgage	market).	Management	of	operational,	legal	and	regulatory	risks	requires,	among	other	things,	policies	and	procedures	to	record	properly	and	verify a	large	number	of	transactions	and	events,	and	these	policies	and	procedures	may	not	be	fully	effective.	For	more	information	on	how	we	monitor	and	manage	market and	certain	other	risks,	see	"Risk	Management—Market	Risk"	in	Part	II,	Item	7A	herein.

# Item	1B.				Unresolved	Staff	Comments.

Morgan	Stanley,	like	other	well-known	seasoned	issuers,	from	time	to	time	receives	written	comments	from	the	staff	of	the	SEC	regarding	its	periodic	or	current	reports under	the	Exchange	Act.	There	are	no	comments	that	remain	unresolved	that	Morgan	Stanley	received	not	less	than	180	days	before	the	end	of	its	fiscal	year	to	which this	report	relates	that	Morgan	Stanley	believes	are	material.

Morgan	Stanley	has	offices,	operations	and	processing	centers	and	warehouse	facilities	located	throughout	the	U.S.,	and	certain	subsidiaries	maintain	offices	and	other facilities	in	international	locations.	Morgan	Stanley's	properties	that	are	not	owned	are	leased	on	terms	and	for	durations	that	are	reflective	of	commercial	standards	in the	communities	where	these	properties	are	located.	Morgan	Stanley	believes	the	facilities	it	owns	or	occupies	are	adequate	for	the	purposes	for	which	they	are	currently used	and	are	well	maintained.	Our	principal	offices	consist	of	the	following	properties:

* The	indicated	total	aggregate	square	footage	leased	does	not	include	space	occupied	by	Morgan	Stanley	securities	branch	offices.

** Morgan	Stanley	holds	the	freehold	interest	in	the	land	and	building.

# Item	3.				Legal	Proceedings.

In	addition	to	the	matters	described	below,	in	the	normal	course	of	business,	Morgan	Stanley	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.

Morgan	Stanley	is	also	involved,	from	time	to	time,	in	other	reviews,	investigations	and	proceedings	(both	formal	and	informal)	by	governmental	and	self-regulatory agencies	regarding	Morgan	Stanley'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.

Morgan	Stanley	contests	liability	and/or	the	amount	of	damages	as	appropriate	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,	Morgan Stanley	cannot	predict	with	certainty	the	loss	or	range	of	loss,	if	any,	related	to	such	matters,	how	or	if	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,	Morgan	Stanley	believes,	based	on	current	knowledge and	after	consultation	with	counsel,	that	the	outcome	of	such	pending	matters	will	not	have	a	material	adverse	effect	on	the	consolidated	financial	condition	of	Morgan Stanley,	although	the	outcome	of	such	matters	could	be	material	to	Morgan	Stanley's	operating	results	and	cash	flows	for	a	particular	future	period,	depending	on, among	other	things,	the	level	of	Morgan	Stanley's	revenues	or	income	for	such	period.

# Coleman	Litigation.

In	May	2003,	Coleman	(Parent)	Holdings	Inc.	("CPH")	filed	a	complaint	against	Morgan	Stanley	in	the	Circuit	Court	of	the	Fifteenth	Judicial	Circuit	for	Palm	Beach County,	Florida	relating	to	the	1998	merger	between	The	Coleman	Company,	Inc.	and	Sunbeam,	Inc.	("Sunbeam").	The	complaint,	as	amended,	alleged	that	CPH	was induced	to	agree	to	the	transaction	with	Sunbeam	based	on	certain	financial	misrepresentations,	and	it	asserted	claims	against	Morgan	Stanley	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	Morgan	Stanley	and	ordered	that	portions	of	CPH's	complaint,	including	those	setting	forth	CPH's	primary	allegations	against	Morgan	Stanley,	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.	In	June	2005,	the	trial	court	issued	a	final	judgment	in	favor	of	CPH	in	the	amount	of	$1,578	million,	which	included prejudgment	interest	and	excluded	certain	payments	received	by	CPH	in	settlement	of	related	claims	against	others.

In	March	2007,	the	District	Court	of	Appeal	for	the	Fourth	District	of	Florida	(the	"Court	of	Appeal")	issued	an	opinion	reversing	the	trial	court's	award	for compensatory	and	punitive	damages	and	remanding	the	matter	to	the	trial	court	for	entry	of	judgment	for	Morgan	Stanley.	In	June	2007,	the	Court	of	Appeal's	opinion became	final	when	the	Court	of	Appeal	issued	an	order	denying	CPH's	motions	for	rehearing,	rehearing	en	banc	and	for	certification	of	certain	questions	for	review	by the	Florida	Supreme	Court	("the	Supreme	Court").	On	December	12,	2007,	the	Supreme	Court	denied	CPH's	request	for	review	of	the	Court	of	Appeal's	decision, directing	judgment	in	favor	of	Morgan	Stanley.

# IPO	Fee	Litigation.

Starting	in	late	1998,	purported	class	actions,	later	captioned	In	re	Public	Offering	Fee	Antitrust	Litigation	(the	"purchaser	actions")	and	In	re	Issuer	Plaintiff	Initial Public	Offering	Fee	Antitrust	Litigation	(the	"issuer	actions"),	were	initiated	in	the	U.S.	District	Court	for	the	Southern	District	of	New	York	(the	"SDNY")	against

Morgan	Stanley	and	numerous	other	underwriters.	The	consolidated	proceedings,	one	on	behalf	of	purchasers	and	the	other	on	behalf	of	issuers	of	certain	shares	in initial	public	offerings	("IPOs"),	allege	that	defendants	conspired	to	fix	the	underwriters'	spread	at	7%	in	IPOs	of	U.S.	companies	in	the	$20	million	to	$80	million	range in	violation	of	Section	1	of	the	Sherman	Act.	The	complaints	seek	treble	damages	and	injunctive	relief.	Plaintiffs'	claims	for	damages	in	the	purchaser	actions	have	been dismissed,	but	the	claims	for	injunctive	relief	remain	and	plaintiffs'	claims	in	the	issuer	actions	for	damages	and	injunctive	relief	remain.	Plaintiffs	moved	for	class certification	in	both	actions,	and	defendants	opposed	that	motion	in	May	2005.	In	October	2005,	plaintiffs	moved	for	summary	judgment,	which	defendants	opposed.	In May	2006,	plaintiffs	filed	a	petition	pursuant	to	Federal	Rule	of	Civil	Procedure	23(f)	for	leave	to	appeal	the	SDNY's	denial	of	class	certification	and	in	September	2007, the	U.S.	Court	of	Appeals	for	the	Second	Circuit	(the	"Second	Circuit")	reversed	the	SDNY's	decision	and	remanded	the	case	back	to	the	district	court	for	further consideration	of	class	certification	issues.	On	remand,	plaintiffs	filed	a	motion	for	class	certification	on	October	17,	2007.

# IPO	Allocation	Matters.

Beginning	in	March	2001,	numerous	purported	class	actions,	now	captioned	In	re	Initial	Public	Offering	Securities	Litigation,	were	filed	in	the	SDNY	against	certain issuers	of	IPO	securities,	certain	individual	officers	of	those	issuers,	Morgan	Stanley	and	other	underwriters	of	those	IPOs,	purportedly	on	behalf	of	purchasers	of	stock in	the	IPOs	or	the	aftermarket.	These	complaints	allege	that	defendants	required	customers	who	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"),	and	claim	violations	of	the	federal	securities	laws,	including	Sections	11 and	12(a)(2)	of	the	Securities	Act	of	1933	(the	"Securities	Act")	and	Section	10(b)	of	the	Exchange	Act.	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.	In	February	2003,	the underwriter	defendants'	joint	motion	to	dismiss	was	denied,	except	as	to	certain	specified	offerings.	In	December	2006,	the	Second	Circuit	reversed	the	SDNY's	grant	of class	certification,	and	ruled	that	these	cases	could	not	be	certified	for	class	treatment.	In	August	2007,	plaintiffs	filed	second	consolidated	amended	class	action complaints,	which	purport	to	amend	the	allegations	in	light	of	the	Second	Circuit's	reversal	of	the	SDNY's	decision	approving	the	cases	to	proceed	as	class	actions. Plaintiffs	again	seek	certification	of	classes.

In	October	2007,	numerous	derivative	actions,	purportedly	brought	on	behalf	of	certain	issuers	of	IPO	securities,	were	filed	in	the	U.S.	District	Court	for	the	Western District	of	Washington	against	Morgan	Stanley	and	other	underwriters	of	those	IPOs.	The	actions	seek	to	recover	"short	swing"	profits	allegedly	generated	in	violation	of Section	16(b)	of	the	Exchange	Act.

# Late	Trading	and	Market	Timing.

Starting	in	July	2003,	Morgan	Stanley	received	subpoenas	and	requests	for	information	from	various	regulatory	and	governmental	agencies,	including	the	SEC,	the NYSE	and	various	states,	in	connection	with	industry-wide	investigations	of	broker-dealers	and	mutual	fund	complexes	relating	to	possible	late	trading	and	market timing	of	mutual	funds.	In	December	2007,	Morgan	Stanley	settled	all	claims	with	the	SEC	concerning	late	trading	and	market	timing	of	mutual	funds	in	the	retail system	over	the	period	from	January	2002	to	August	2003.	Under	the	terms	of	the	settlement,	Morgan	Stanley	will,	among	other	things,	be	censured	and	pay	a	monetary fine.

# Subprime-related	Matters.

Morgan	Stanley	is	responding	to	subpoenas	and	requests	for	information	from	certain	regulatory	and	governmental	entities	concerning	the	origination,	purchase, securitization	and	servicing	of	subprime	and	non-subprime	residential	mortgages	and	related	issues.	Morgan	Stanley	has	also	been	named	as	a	defendant	in	various	civil litigation	matters	related	to	the	subprime	and	non-subprime	residential	mortgage	business,	including

purported	class	actions	related	to	Morgan	Stanley's	role	as	an	underwriter	of	certain	preferred	stock	offerings	for	New	Century	Financial	Corp.	and	Countrywide Financial	Corp.	and	certain	offerings	of	mortgage	pass	through	certificates	for	a	subsidiary	of	Countrywide	Financial	Corp.,	and	other	related	matters.

A	shareholder	derivative	lawsuit	was	filed	in	the	SDNY	during	November	2007	asserting	claims	related	in	large	part	to	losses	caused	by	certain	subprime-related	trading positions	and	related	matters,	but	no	complaint	has	been	served.	In	December	2007,	several	purported	class	action	complaints	were	filed	in	SDNY	asserting	claims	on behalf	of	participants	in	Morgan	Stanley's	401(k)	plan	and	employee	stock	ownership	plan	against	Morgan	Stanley	and	other	parties,	including	certain	present	and former	directors	and	officers,	under	the	Employee	Retirement	Income	Security	Act	of	1974.	The	complaints	relate	in	large	part	to	subprime-related	losses,	and	allege, among	other	things,	that	Morgan	Stanley	stock	was	not	a	prudent	investment	and	that	risks	associated	with	Morgan	Stanley	stock	and	Morgan	Stanley's	financial condition	were	not	adequately	disclosed.

The	following	matters	were	terminated	during	the	quarter	ended	November	30,	2007:

# Global	Wealth	Management	Group	Employment	Matters.

Wage	and	Hour	Matters.					Complaints	raising	allegations	of	unpaid	overtime	and	unlawful	wage	deductions	were	filed	against	Morgan	Stanley	in	New	Jersey,	New York,	Connecticut,	Texas,	Florida,	Illinois,	California	and	Ohio	seeking	damages	on	behalf	of	certain	current	and	former	employees.	In	October	2006,	Morgan	Stanley reached	agreement	to	resolve	these	claims	on	behalf	of	the	individual	claimants	as	well	as	other	potential	class	members	nationwide.	In	November	2006,	for	purposes	of executing	the	settlement,	a	consolidated	amended	complaint	captioned	Steinberg,	et	al.	v.	Morgan	Stanley	was	filed	in	the	U.S.	District	Court	for	the	Southern	District	of California	("SDC").	In	December	2006,	the	Judicial	Panel	on	Multi-District	Litigation	issued	an	order	centralizing	the	various	matters	pending	across	the	country	in	the SDC.

Gender	Matters.					In	June	2006,	Morgan	Stanley	was	named	in	two	purported	class	actions	alleging	gender	discrimination	under	state	and	federal	law.	On	October	24, 2007,	the	U.S.	District	Court	for	the	District	of	Columbia	granted	final	approval	to	the	settlement	reached	in	Joanne	Augst-Johnson	v.	Morgan	Stanley.	The	approved settlement	resolved	all	of	the	class-wide	and	individual	plaintiffs'	claims	and	included,	among	other	things,	a	payment	to	the	settlement	fund	and	certain	programmatic relief.	All	similar	class	wide	claims	raised	in	the	second	purported	gender	class	action	captioned	Daisy	Jaffe	et	al.	v.	Morgan	Stanley	were	subsumed	by	the	Augst- Johnson	settlement.

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

There	were	no	matters	submitted	to	a	vote	of	security	holders	during	the	fourth	quarter	of	our	fiscal	year	ended	November	30,	2007.

# Part	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities.

Morgan	Stanley's	common	stock	trades	on	the	NYSE	under	the	symbol	"MS."	At	January	23,	2008,	Morgan	Stanley	had	approximately	94,469	holders	of	record; however,	Morgan	Stanley	believes	the	number	of	beneficial	owners	of	common	stock	exceeds	this	number.

The	table	below	sets	forth,	for	each	of	the	last	eight	fiscal	quarters,	the	low	and	high	sales	prices	per	share	of	Morgan	Stanley's	common	stock	as	reported	by	Bloomberg Financial	Markets	and	the	amount	of	any	cash	dividends	declared	per	share	of	Morgan	Stanley's	common	stock.

|  | Low<br>Sale	Price | High<br>Sale	Price | Dividends |
| :--- | :--- | :--- | :--- |
| Fiscal\t2007: |  |  |  |
| Fourth\tQuarter | $47.56 | $69.87 | $0.27 |
| Third\tQuarter* | $54.90 | $90.95 | $0.27 |
| Second\tQuarter | $70.30 | $87.44 | $0.27 |
| First\tQuarter | $73.04 | $84.66 | $0.27 |
| Fiscal\t2006: |  |  |  |
| Fourth\tQuarter | $65.26 | $80.00 | $0.27 |
| Third\tQuarter | $54.52 | $69.50 | $0.27 |
| Second\tQuarter | $57.58 | $66.00 | $0.27 |
| First\tQuarter | $55.89 | $62.15 | $0.27 |

* On	June	30,	2007,	Morgan	Stanley	completed	the	Discover	Spin-off.	Prior	to	the	Discover	Spin-off,	the	Low	Sale	Price	and	the	High	Sale	Price	for	the	Third	Quarter	were	$82.73	and	$90.95,	respectively.

The	table	below	sets	forth	the	information	with	respect	to	purchases	made	by	or	on	behalf	of	Morgan	Stanley	of	its	common	stock	during	the	fourth	quarter	of	our	fiscal year	ended	November	30,	2007.

# Issuer	Purchases	of	Equity	Securities

(dollars	in	millions,	except	per	share	amounts)

| Period | Total<br>Number	of<br>Shares<br>Purchased | Average<br>Price<br>Paid	Per<br>Share | Total	Number	of<br>Shares	Purchased<br>As	Part	of	Publicly<br>Announced	Plans<br>or	Programs	(C) | Value	of	Shares<br>that	May	Yet	Be<br>Purchased	Under<br>the	Plans	or<br>Programs |
| :--- | :--- | :--- | :--- | :--- |
| Month\t#1\t(September\t1,\t2007—September\t30,\t2007) |  |  |  |  |
| Share\tRepurchase\tProgram\t(A) | — | N/A | — | $2,787 |
| Employee\tTransactions\t(B) | 2,348,230 | $62.89 | N/A | N/A |
| Month\t#2\t(October\t1,\t2007—October\t31,\t2007) |  |  |  |  |
| Share\tRepurchase\tProgram\t(A) | 2,830,092 | $63.32 | 2,830,092 | $2,608 |
| Employee\tTransactions\t(B) | 29,705 | $66.34 | N/A | N/A |
| Month\t#3\t(November\t1,\t2007—November\t30,\t2007) |  |  |  |  |
| Share\tRepurchase\tProgram\t(A) | 6,364,081 | $52.93 | 6,364,081 | $2,271 |
| Employee\tTransactions\t(B) | 98,592 | $53.65 | N/A | N/A |
| Total |  |  |  |  |
| Share\tRepurchase\tProgram\t(A) | 9,194,173 | $56.13 | 9,194,173 | $2,271 |
| Employee\tTransactions\t(B) | 2,476,527 | $62.56 | N/A | N/A |

(A) On	December	19,	2006,	Morgan	Stanley	announced	that	its	Board	of	Directors	authorized	the	repurchase	of	up	to	$6	billion	of	Morgan	Stanley's	outstanding	stock	under	a	new	share	repurchase	program	(the "Share	Repurchase	Program").	The	Share	Repurchase	Program	is	a	program	for	capital	management	purposes	that	considers,	among	other	things,	business	segment	capital	needs,	as	well	as	equity-based compensation	and	benefit	plan	requirements.	The	Share	Repurchase	Program	has	no	set	expiration	or	termination	date.

(B) 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.	Morgan	Stanley's	employee	stock	compensation	plans	provide	that	the	value	of	the	shares	delivered	or	attested,	or	withheld,	shall	be	valued	using	the	fair	market	value	of	Morgan	Stanley	common	stock	on the	date	the	relevant	transaction	occurs,	using	a	valuation	methodology	established	by	Morgan	Stanley.

(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	Morgan	Stanley	deems	appropriate.

Stock	performance	graph.					The	following	graph	compares	the	cumulative	total	shareholder	return	(rounded	to	the	nearest	whole	dollar)	of	our	common	stock,	the S&P	500	Stock	Index	("S&P	500")	and	the	S&P	500	Diversified	Financials	Index	("S5DIVF")	for	our	last	five	fiscal	years.	The	graph	assumes	a	$100	investment	at	the closing	price	on	November	30,	2002	and	reinvestment	of	dividends	on	the	respective	dividend	payment	dates	without	commissions.	Historical	prices	are	adjusted	to reflect	the	Discover	Spin-off	completed	on	June	30,	2007.	This	graph	does	not	forecast	future	performance	of	our	common	stock.

# Item	6. Selected	Financial	Data.

# MORGAN	STANLEY

# SELECTED	FINANCIAL	DATA

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

|  |  |  | 2007 | 2006 | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Income\tStatement\tData: |  |  |  |  |  |  |  |
| Revenues: |  |  |  |  |  |  |  |
| Investment\tbanking | Investment\tbanking | Investment\tbanking | $6,368 | $4,755 | $3,843 | $3,341 | $2,440 |
| Principal\ttransactions: |  |  |  |  |  |  |  |
| Trading | Trading | Trading | 3,206 | \t 11,805 | 7,377 | 5,512 | 6,262 |
| Investments | Investments |  | 3,262 | 1,807 | 1,128 | 721 | 170 |
| Commissions | Commissions | Commissions | 4,682 | 3,770 | 3,331 | 3,235 | 2,861 |
| Asset\tmanagement,\tdistribution\tand\tadministration\tfees | Asset\tmanagement,\tdistribution\tand\tadministration\tfees | Asset\tmanagement,\tdistribution\tand\tadministration\tfees | 6,519 | 5,238 | 4,915 | 4,436 | 3,784 |
| Interest\tand\tdividends | Interest\tand\tdividends | Interest\tand\tdividends | \t 60,083 | \t 42,776 | \t 25,987 | \t 16,719 | \t 13,685 |
| Other |  |  | 1,208 | 585 | 496 | 332 | 245 |
| Total\trevenues | Total\trevenues | Total\trevenues | \t 85,328 | \t 70,736 | \t 47,077 | \t 34,296 | \t 29,447 |
| Interest\texpense | Interest\texpense | Interest\texpense | \t 57,302 | \t 40,897 | \t 23,552 | \t 13,977 | \t 11,826 |
| Net\trevenues | Net\trevenues | Net\trevenues | \t 28,026 | \t 29,839 | \t 23,525 | \t 20,319 | \t 17,621 |
| Non-interest\texpenses: |  |  |  |  |  |  |  |
| Compensation\tand\tbenefits | Compensation\tand\tbenefits | Compensation\tand\tbenefits | \t 16,552 | \t 13,986 | \t 10,749 | 9,320 | 7,892 |
| Other |  |  | 8,033 | 6,750 | 6,711 | 5,482 | 4,659 |
| September\t11 | th | \trelated\tinsurance\trecoveries,\tnet | — | — | (251) | — | — |
| Total\tnon-interest\texpenses | Total\tnon-interest\texpenses | Total\tnon-interest\texpenses | \t 24,585 | \t 20,736 | \t 17,209 | \t 14,802 | \t 12,551 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated\tinvestees,\tincome\ttaxes, |  |  |  |  |  |  |  |
| dividends\ton\tpreferred\tsecurities\tsubject\tto\tmandatory\tredemption\tand\tcumulative\teffect\tof |  |  |  |  |  |  |  |
| accounting\tchange,\tnet | accounting\tchange,\tnet |  | 3,441 | 9,103 | 6,316 | 5,517 | 5,070 |
| Losses\tfrom\tunconsolidated\tinvestees | Losses\tfrom\tunconsolidated\tinvestees | Losses\tfrom\tunconsolidated\tinvestees | 47 | 40 | 311 | 328 | 279 |
| Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | 831 | 2,728 | 1,473 | 1,384 | 1,305 |
| Dividends\ton\tpreferred\tsecurities\tsubject\tto\tmandatory\tredemption | Dividends\ton\tpreferred\tsecurities\tsubject\tto\tmandatory\tredemption | Dividends\ton\tpreferred\tsecurities\tsubject\tto\tmandatory\tredemption | — | — | — | 45 | 154 |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | 2,563 | 6,335 | 4,532 | 3,760 | 3,332 |
| Discontinued\toperations: |  |  |  |  |  |  |  |
| Net\tgain\tfrom\tdiscontinued\toperations | Net\tgain\tfrom\tdiscontinued\toperations | Net\tgain\tfrom\tdiscontinued\toperations | 1,024 | 1,666 | 559 | 1,129 | 696 |
| Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | 378 | 529 | 201 | 403 | 241 |
| Net\tgain\ton\tdiscontinued\toperations | Net\tgain\ton\tdiscontinued\toperations | Net\tgain\ton\tdiscontinued\toperations | 646 | 1,137 | 358 | 726 | 455 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 49 | — | — |
| Net\tincome | Net\tincome | Net\tincome | $3,209 | $7,472 | $4,939 | $4,486 | $3,787 |
| Preferred\tstock\tdividend\trequirements | Preferred\tstock\tdividend\trequirements | Preferred\tstock\tdividend\trequirements | $68 | $19 | $— | $— | $— |
| Earnings\tapplicable\tto\tcommon\tshareholders(1) | Earnings\tapplicable\tto\tcommon\tshareholders(1) | Earnings\tapplicable\tto\tcommon\tshareholders(1) | $3,141 | $7,453 | $4,939 | $4,486 | $3,787 |

|  | 2007 | 2006 | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Per\tShare\tData: |  |  |  |  |  |
| Earnings\tper\tbasic\tcommon\tshare: |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.49 | $6.25 | $4.32 | $3.48 | $3.10 |
| Gain\ton\tdiscontinued\toperations | 0.64 | 1.13 | 0.33 | 0.67 | 0.42 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 | — | — |
| Earnings\tper\tbasic\tcommon\tshare | $3.13 | $7.38 | $4.70 | $4.15 | $3.52 |
| Earnings\tper\tdiluted\tcommon\tshare: |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.37 | $5.99 | $4.19 | $3.40 | $3.04 |
| Gain\ton\tdiscontinued\toperations | 0.61 | 1.08 | 0.33 | 0.66 | 0.41 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 | — | — |
| Earnings\tper\tdiluted\tcommon\tshare | $2.98 | $7.07 | $4.57 | $4.06 | $3.45 |
| Book\tvalue\tper\tcommon\tshare | $28.56 | $32.67 | $27.59 | $25.95 | $22.93 |
| Dividends\tper\tcommon\tshare | $1.08 | $1.08 | $1.08 | $1.00 | $0.92 |
| Balance\tSheet\tand\tOther\tOperating\tData: |  |  |  |  |  |
| Total\tassets | $1,045,409 | $1,121,192 | $898,835 | $747,578 | $603,022 |
| Consumer\tloans,\tnet | — | 22,915 | 21,966 | 19,166 | 18,362 |
| Total\tcapital(2) | 191,085 | 162,134 | 125,891 | 110,793 | 82,769 |
| Long-term\tborrowings(2) | 159,816 | 126,770 | 96,709 | 82,587 | 57,902 |
| Shareholders'\tequity | 31,269 | 35,364 | 29,182 | 28,206 | 24,867 |
| Return\ton\taverage\tcommon\tshareholders'\tequity | 8.9% | 23.5% | 17.3% | 16.8% | 16.5% |
| Average\tcommon\tand\tequivalent\tshares(1) | \t 1,001,878,651 | \t 1,010,254,255 | \t 1,049,896,047 | \t 1,080,121,708 | \t 1,076,754,740 |

(1) Amounts	shown	are	used	to	calculate	earnings	per	basic	common	share.

(2) These	amounts	exclude	the	current	portion	of	long-term	borrowings	and	include	Capital	Units	and	junior	subordinated	debt	issued	to	capital	trusts.

# Item	7. 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	and	Asset	Management.	The	Company,	through	its	subsidiaries	and	affiliates,	provides	a	wide	variety	of	products	and	services	to	a large	and	diversified	group	of	clients	and	customers,	including	corporations,	governments,	financial	institutions	and	individuals.	A	summary	of	the	activities	of	each	of the	segments	follows.

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

# Discontinued	Operations.

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

# Results	of	Operations.

# Executive	Summary.

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\trevenues\t(dollars\tin\tmillions): |  |  |  |
| Institutional\tSecurities | $16,149 | $21,110 | $15,497 |
| Global\tWealth\tManagement\tGroup | 6,625 | 5,512 | 5,047 |
| Asset\tManagement | 5,493 | 3,453 | 3,219 |
| Intersegment\tEliminations | (241) | (236) | (238) |
| Consolidated\tnet\trevenues | $28,026 | $29,839 | $23,525 |
| Income\tbefore\ttaxes\t(dollars\tin\tmillions)(1): |  |  |  |
| Institutional\tSecurities | $817 | $7,721 | $4,609 |
| Global\tWealth\tManagement\tGroup | 1,155 | 508 | 591 |
| Asset\tManagement | 1,467 | 851 | 1,030 |
| Intersegment\tEliminations | 2 | 23 | 86 |
| Consolidated\tincome\tbefore\ttaxes | $3,441 | $9,103 | $6,316 |
| Consolidated\tnet\tincome\t(dollars\tin\tmillions) | $3,209 | $7,472 | $4,939 |
| Earnings\tapplicable\tto\tcommon\tshareholders\t(dollars\tin\tmillions)(2) | $3,141 | $7,453 | $4,939 |
| Earnings\tper\tbasic\tcommon\tshare: |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.49 | $6.25 | $4.32 |
| Gain\ton\tdiscontinued\toperations | 0.64 | 1.13 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tbasic\tcommon\tshare | $3.13 | $7.38 | $4.70 |
| Earnings\tper\tdiluted\tcommon\tshare: |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.37 | $5.99 | $4.19 |
| Gain\ton\tdiscontinued\toperations | 0.61 | 1.08 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tdiluted\tcommon\tshare | $2.98 | $7.07 | $4.57 |
| Regional\tnet\trevenues\t(dollars\tin\tmillions)(3): |  |  |  |
| Americas | $12,150 | $18,803 | $15,375 |
| Europe,\tMiddle\tEast\tand\tAfrica | \t 10,008 | 7,762 | 5,711 |
| Asia | 5,868 | 3,274 | 2,439 |
| Consolidated\tnet\trevenues | $28,026 | $29,839 | $23,525 |
| Statistical\tData. |  |  |  |
| Book\tvalue\tper\tcommon\tshare(4) | $28.56 | $32.67 | $27.59 |
| Average\tcommon\tequity\t(dollars\tin\tbillions)(5): |  |  |  |
| Institutional\tSecurities | $23.9 | $18.0 | $14.6 |
| Global\tWealth\tManagement\tGroup | 1.7 | 3.0 | 3.4 |
| Asset\tManagement | 3.5 | 2.4 | 1.8 |
| Unallocated\tcapital | 2.9 | 3.1 | 2.9 |
| Total\tfrom\tcontinuing\toperations | 32.0 | 26.5 | 22.7 |
| Discontinued\toperations | 3.2 | 5.2 | 5.8 |
| Total | $35.2 | $31.7 | $28.5 |

| Statistical	Data	(Continued). | Fiscal	Year | Fiscal	Year | Fiscal	Year |
| :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 |
| Return\ton\taverage\tcommon\tequity(5): |  |  |  |
| Consolidated | 9% | 23% | 17% |
| Institutional\tSecurities | 4% | 30% | 24% |
| Global\tWealth\tManagement\tGroup | 41% | 11% | 11% |
| Asset\tManagement | 26% | 21% | 36% |
| Effective\tincome\ttax\trate\tfrom\tcontinuing\toperations | 24.5% | 30.1% | 24.5% |
| Worldwide\temployees\t(excluding\tDFS\temployees\tof\t13,186\tin\t2006\tand\t13,495\tin\t2005) | 48,256 | \t 43,124 | \t 39,723 |
| Consolidated\tassets\tunder\tmanagement\tor\tsupervision\tby\tasset\tclass\t(dollars\tin\tbillions): |  |  |  |
| Equity | $355 | $307 | $272 |
| Fixed\tincome | 127 | 111 | 105 |
| Money\tmarket | 108 | 89 | 83 |
| Alternatives(6) | 109 | 61 | 43 |
| Subtotal | 699 | 568 | 503 |
| Unit\ttrusts | 15 | 14 | 12 |
| Other(7) | 61 | 63 | 48 |
| Total\tassets\tunder\tmanagement\tor\tsupervision(8) | 775 | 645 | 563 |
| Share\tof\tminority\tinterest\tassets(9) | 7 | 4 | — |
| Total | $782 | $649 | $563 |
| Institutional\tSecurities\t(dollars\tin\tbillions): |  |  |  |
| Mergers\tand\tacquisitions\tcompleted\ttransactions(10): |  |  |  |
| Global\tmarket\tvolume | $1,280.6 | $730.5 | $522.7 |
| Market\tshare | 35.4% | 25.4% | 24.3% |
| Rank | 1 | 3 | 3 |
| Mergers\tand\tacquisitions\tannounced\ttransactions(10): |  |  |  |
| Global\tmarket\tvolume | $1,339.4 | $973.9 | $726.0 |
| Market\tshare | 31.8% | 28.9% | 29.5% |
| Rank | 2 | 2 | 2 |
| Global\tequity\tand\tequity-related\tissues(10): |  |  |  |
| Global\tmarket\tvolume | $64.7 | $57.2 | $45.9 |
| Market\tshare | 7.4% | 8.0% | 8.7% |
| Rank | 5 | 4 | 3 |
| Global\tdebt\tissues(10): |  |  |  |
| Global\tmarket\tvolume | $361.2 | $409.9 | $347.2 |
| Market\tshare | 5.4% | 5.8% | 5.7% |
| Rank | 6 | 6 | 5 |
| Global\tinitial\tpublic\tofferings(10): |  |  |  |
| Global\tmarket\tvolume | $24.1 | $22.6 | $14.7 |
| Market\tshare | 7.8% | 8.4% | 8.9% |
| Rank | 3 | 2 | 2 |
| Pre-tax\tprofit\tmargin(11) | 5% | 37% | 30% |

| Statistical	Data	(Continued). | Fiscal	Year | Fiscal	Year | Fiscal	Year |
| :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 |
| Global\tWealth\tManagement\tGroup: |  |  |  |
| Global\trepresentatives | \t 8,429 | \t 7,944 | \t 9,434 |
| Annualized\tnet\trevenue\tper\tglobal\trepresentative\t(dollars\tin\tthousands)(12) | $811 | $651 | $502 |
| Client\tassets\tby\tsegment\t(dollars\tin\tbillions): |  |  |  |
| $10\tmillion\tor\tmore | $247 | $199 | $156 |
| $1\tmillion\t–\t$10\tmillion | 275 | 243 | 215 |
| Subtotal\t$1\tmillion\tor\tmore | 522 | 442 | 371 |
| $100,000\t–\t$1\tmillion | 179 | 177 | 177 |
| Less\tthan\t$100,000 | 23 | 27 | 32 |
| Client\tassets\texcluding\tcorporate\tand\tother\taccounts | 724 | 646 | 580 |
| Corporate\tand\tother\taccounts | 34 | 30 | 29 |
| Total\tclient\tassets | $758 | $676 | $609 |
| Fee-based\tassets\tas\ta\tpercentage\tof\ttotal\tclient\tassets(13) | 27% | 29% | 27% |
| Client\tassets\tper\tglobal\trepresentative\t(dollars\tin\tmillions)(14) | $90 | $85 | $65 |
| Bank\tdeposits\t(dollars\tin\tbillions)(15) | $26.2 | $13.3 | $1.7 |
| Pre-tax\tprofit\tmargin(11) | 17% | 9% | 12% |
| Asset\tManagement: |  |  |  |
| Assets\tunder\tmanagement\tor\tsupervision\t(dollars\tin\tbillions)(16) | $597 | $496 | $443 |
| Percent\tof\tfund\tassets\tin\ttop\thalf\tof\tLipper\trankings(17) | 49% | 40% | 61% |
| Pre-tax\tprofit\tmargin(11) | 27% | 25% | 32% |

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Fiscal	2007	Performance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Global	Market	and	Economic	Conditions	in	Fiscal	2007.

In	the	U.S.,	the	moderate	pace	of	economic	growth	that	occurred	during	the	first	half	of	fiscal	2007	slowed	during	the	second	half	of	fiscal	2007,	primarily	reflecting	the significant	and	broad-based	illiquidity	in	the	residential	real	estate	and	credit	markets.	Concerns	about	the	impact	of	subprime	loans	caused	the	subprime-related	and broader	credit	markets	to	deteriorate	considerably	over	the	course	of	the	third	and	fourth	quarters	of	fiscal	2007,	with	increased	volatility,	significant	spread	widening and	lower	levels	of	liquidity	and	price	transparency	for	certain	products.	The	U.S.	unemployment	rate	at	the	end	of	fiscal	2007	increased	to	4.7%	from	4.5%	at	the	end	of fiscal	2006.	Conditions	in	the	U.S.	equity	markets	were	also	volatile,	and	major	equity	market	indices	rose	during	the	first	half	of	fiscal	2007	while	declining	during	the second	half	of	fiscal	2007,	primarily	as	a	result	of	mixed	corporate	earnings	and	the	developments	in	the	credit	markets.	The	Federal	Reserve	Board	(the	"Fed")	left	rates unchanged	during	the	first	half	of	the	year.	In	the	third	quarter,	the	Fed	lowered	the	discount	rate	by	0.50%,	and	in	the	fourth	quarter,	the	Fed	lowered	both	the benchmark	interest	rate	and	discount	rate	by	an	aggregate	of	0.75%.	The	Fed	acted	in	order	to	provide	additional	liquidity	and	stability	to	the	financial	markets	and	to contain	the	negative	economic	impact	related	to	the	residential	real	estate	and	credit	markets.	The	Fed	had	not	changed	the	benchmark	interest	rate	since	June	2006.	In December	2007,	the	Fed	lowered	both	the	benchmark	interest	rate	and	the	discount	rate	by	0.25%	and	the	U.S.	unemployment	rate	increased	to	5.0%.	In	January,	the	Fed lowered	both	the	benchmark	interest	rate	and	the	discount	rate	by	0.75%.

In	Europe,	economic	growth	continued	to	be	strong,	reflecting	momentum	in	domestic	demand	and	exports.	Corporate	business	surveys	indicated,	however,	that	growth in	Europe	may	be	slowing.	Major	equity	market	indices	in	Europe	increased	during	fiscal	2007,	primarily	due	to	strong	corporate	earnings,	merger	and	acquisition activity	and	generally	favorable	economic	conditions,	which	more	than	offset	the	difficult	conditions	in	the	credit	markets	in	the	second	half	of	fiscal	2007.	The European	Central	Bank	raised	the	benchmark	interest	rate	by	an	aggregate	of	0.75%	in	fiscal	2007.	The	Bank	of	England	raised	the	benchmark	interest	rate	by	an aggregate	of	0.75%	in	fiscal	2007	but	subsequently	reduced	the	benchmark	interest	rate	by	0.25%	in	December	2007.

In	Japan,	moderate	economic	growth	continued	to	be	driven	by	exports	and	domestic	demand.	The	level	of	unemployment	also	remained	relatively	low.	Japanese	equity market	indices	decreased	during	fiscal	2007	primarily	due	to	tighter	global	credit	conditions.	The	Bank	of	Japan	raised	the	benchmark	interest	rate	from	0.25%	to	0.50% during	fiscal	2007.	Economies	elsewhere	in	Asia	expanded,	particularly	in	China,	which	benefited	from	strength	in	exports,	domestic	demand	for	capital	projects	and continued	globalization.	In	China,	equity	market	indices	rose	during	fiscal	2007.	The	People's	Bank	of	China	raised	the	benchmark	lending	rate	by	an	aggregate	of 1.17%	in	fiscal	2007.

The	remainder	of	"Results	of	Operations"	is	presented	on	a	business	segment	basis	before	discontinued	operations.	Substantially	all	of	the	Company's	operating revenues	and	operating	expenses	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.

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	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.	Income	before	income	taxes	recorded	in	Intersegment	Eliminations	was $2	million,	$23	million	and	$86	million	in	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.	Included	in	the	results	of	Intersegment	Eliminations	for	fiscal	2007	is	a $25	million	advisory	fee	related	to	the	Discover	Spin-off	that	was	eliminated	in	consolidation.	In	addition,	the	results	in	Institutional	Securities	for	fiscal	2006	included	a $30	million	advisory	fee	related	to	the	Company's	sale	of	the	aircraft	leasing	business	that	was	eliminated	in	consolidation.

# INCOME	STATEMENT	INFORMATION

| Investment	banking | $5,538 | $4,228 | $3,394 |
| :--- | :--- | :--- | :--- |
| Principal\ttransactions: |  |  |  |
| Trading | 2,740 | \t 11,326 | 6,915 |
| Investments | 1,459 | 1,081 | 593 |
| Commissions | 3,262 | 2,606 | 2,160 |
| Asset\tmanagement,\tdistribution\tand\tadministration\tfees | 103 | 73 | 20 |
| Interest\tand\tdividends | \t 59,131 | \t 42,106 | \t 25,439 |
| Other | 983 | 444 | 334 |
| Total\trevenues | \t 73,216 | \t 61,864 | \t 38,855 |
| Interest\texpense | \t 57,067 | \t 40,754 | \t 23,358 |
| Net\trevenues | \t 16,149 | \t 21,110 | \t 15,497 |
| Total\tnon-interest\texpenses | \t 15,332 | \t 13,389 | \t 10,888 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated\tinvestees,\tincome\ttaxes\tand\tcumulative\teffect\tof |  |  |  |
| accounting\tchange,\tnet | 817 | 7,721 | 4,609 |
| Losses\tfrom\tunconsolidated\tinvestees | 47 | 40 | 311 |
| Income\ttax\t(benefit)\tprovision | (170) | 2,212 | 852 |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | $940 | $5,469 | $3,446 |

Investment	Banking.				Investment	banking	revenues	are	derived	from	the	underwriting	of	securities	offerings	and	fees	from	advisory	services.	Investment	banking revenues	were	as	follows:

| Advisory	fees	from	merger,	acquisition	and	restructuring	transactions | $2,541 | $1,753 | $1,395 |
| :--- | :--- | :--- | :--- |
| Equity\tunderwriting\trevenues | \t 1,570 | \t 1,059 | 905 |
| Fixed\tincome\tunderwriting\trevenues | \t 1,427 | \t 1,416 | \t 1,094 |
| Total\tinvestment\tbanking\trevenues | $5,538 | $4,228 | $3,394 |

Investment	banking	revenues	increased	31%	in	fiscal	2007	and	reached	record	levels.	The	increase	was	due	to	higher	revenues	from	merger,	acquisition	and	restructuring activities	and	equity	underwriting	transactions.	In	fiscal	2006,	investment	banking	revenues	increased	25%,	primarily	reflecting	higher	revenues	from	merger,	acquisition and	restructuring	activities	and	fixed	income	and	equity	underwriting	transactions.

In	fiscal	2007,	advisory	fees	from	merger,	acquisition	and	restructuring	transactions	increased	45%	to	a	record	$2,541	million.	Advisory	fees	in	fiscal	2007	reflected	a strong	volume	of	transaction	activity,	particularly	during	the	first	half	of	fiscal	2007.	In	fiscal	2006,	advisory	fees	from	merger,	acquisition	and	restructuring	transactions increased	26%	to	$1,753	million,	primarily	reflecting	a	strong	volume	of	transaction	activity.

Equity	underwriting	revenues	increased	48%	to	a	record	$1,570	million	in	fiscal	2007.	Equity	underwriting	revenues	increased	17%	to	$1,059	million	in	fiscal	2006. Both	periods	reflected	higher	global	industry-wide	equity	and	equity-related	activity.	Fiscal	2006	reflected	a	strong	volume	of	initial	public	offerings.

Fixed	income	underwriting	revenues	increased	1%	to	$1,427	in	fiscal	2007	and	increased	29%	to	$1,416	million	in	fiscal	2006.	Fiscal	2007	revenues	reflected	strong revenues	from	underwriting	investment	grade	corporate	products,	as	corporate	issuers	sought	longer-term	financings	due	to	market	turmoil	in	the	fixed	income	credit markets.	The	increase	in	fiscal	2006	was	primarily	due	to	an	increase	in	underwriting	revenues	from	non-investment	grade	and	investment	grade	products	as	the	level	of issuer	refinancings	rose	due	to	record	levels	of	maturing	debt.	Acquisition-related	financing	resulting	from	a	strong	market	for	merger	and	acquisition	activity contributed	to	the	increase	in	both	fiscal	2007	and	fiscal	2006.

At	the	end	of	fiscal	2007,	the	backlog	of	merger,	acquisition	and	restructuring	transactions	and	equity	underwriting	transactions	remained	relatively	strong	despite current	market	conditions.	The	backlog	of	fixed	income	underwriting	transactions	was	lower	for	non-investment	grade	products	while	the	backlog	of	fixed	income underwriting	transactions	was	higher	for	investment-grade	products,	as	compared	with	the	end	of	fiscal	2006.	The	backlog	of	merger,	acquisition	and	restructuring transactions	and	equity	and	fixed	income	underwriting	transactions	is	subject	to	the	risk	that	transactions	may	not	be	completed	due	to	challenging	or	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.

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.

The	components	of	the	Company's	sales	and	trading	revenues	are	described	below:

Principal	Transactions–Trading.				Principal	transaction	trading	revenues	include	revenues	from	customers'	purchases	and	sales	of	financial	instruments	in	which	the Company	acts	as	principal	and	gains	and	losses	on	the	Company's	positions.	The	Company	also	engages	in	proprietary	trading	activities	for	its	own	account.

Commissions.				Commission	revenues	primarily	arise	from	agency	transactions	in	listed	and	over-the-counter	("OTC")	equity	securities	and	options.

Net	Interest.				Interest	and	dividend	revenues	and	interest	expense	are	a	function	of	the	level	and	mix	of	total	assets	and	liabilities,	including	financial	instruments	owned and	financial	instruments	sold,	not	yet	purchased,	reverse	repurchase	and	repurchase	agreements,	trading	strategies,	customer	activity	in	the	Company's	prime	brokerage business,	and	the	prevailing	level,	term	structure	and	volatility	of	interest	rates.	Reverse	repurchase	and	repurchase	agreements	and	securities	borrowed	and	securities loaned	transactions	may	be	entered	into	with	different	customers	using	the	same	underlying	securities,	thereby	generating	a	spread	between	the	interest	revenue	on	the reverse	repurchase	agreements	or	securities	borrowed	transactions	and	the	interest	expense	on	the	repurchase	agreements	or	securities	loaned	transactions.

Total	sales	and	trading	revenues	decreased	47%	in	fiscal	2007	and	increased	37%	in	fiscal	2006.	The	decrease	in	fiscal	2007	reflected	lower	fixed	income	revenues	and other	sales	and	trading	losses,	partially	offset	by	higher	equity	sales	and	trading	revenues.	Sales	and	trading	revenues	were	adversely	affected	by	the	difficult	market conditions	that	existed	during	the	second	half	of	fiscal	2007.	The	credit	markets	deteriorated	considerably	over	the	course	of	the	latter	half	of	the	year	with	increased volatility,	significant	spread	widening,	lower	levels	of	liquidity	and	reduced	price	transparency.	These	factors	affected	the	subprime	mortgage	markets,	including the	market	for	collateralized	debt	obligations,	and	other	structured	credit	product	markets,	leveraged	lending

markets	and	the	effectiveness	of	hedging	strategies.	This	credit	environment	adversely	impacted	the	Company's	credit	sales	and	trading	and	corporate	lending	activities. In	addition,	such	conditions	contributed	to	increased	volatility	and	systematic	risk	reduction	in	the	equity	markets,	which	adversely	affected	the	Company's	quantitative trading	strategies.

Sales	and	trading	revenues	included	the	following:

|  | Fiscal | Fiscal | Fiscal |
| :--- | :--- | :--- | :--- |
|  | 2007(1) | 2006(1) | 2005(1) |
|  |  | (dollars\tin\tmillions) |  |
| Equity | $8,658 | $6,281 | $4,810 |
| Fixed\tincome | 650 | 9,291 | 6,571 |
| Other | (1,242) | (288) | (225) |
| Total\tsales\tand\ttrading\trevenues | $8,066 | $15,284 | $11,156 |

(1) Amounts	include	Principal	transactions-trading,	Commissions	and	Net	interest	revenues.	Equity	and	fixed	income	sales	and	trading	revenues	include	certain	funding	costs	that	were	not	previously	allocated	to those	businesses.	Other	sales	and	trading	net	revenues	primarily	include	net	losses	from	loans	and	closed	pipeline	commitments	related	to	investment	banking,	corporate	lending	and	other	corporate	activities.	All prior-year	amounts	have	been	reclassified	to	conform	to	the	current	year's	presentation.

Equity	sales	and	trading	revenues	increased	38%	to	a	record	$8,658	million	in	fiscal	2007,	benefiting	from	record	international	revenues.	The	increase	was	driven	by record	revenues	from	derivative	products	and	prime	brokerage	and	higher	revenues	from	equity	cash	and	financing	products,	partially	offset	by	trading	losses	in quantitative	strategies	resulting	from	unfavorable	positioning.	Revenues	from	derivative	products	benefited	from	strong	customer	flows.	Prime	brokerage	generated record	revenues,	reflecting	continued	growth	in	global	client	asset	balances.	Higher	revenues	from	financing	products	were	primarily	due	to	higher	commission	revenues driven	by	strong	market	volumes.	Equity	sales	and	trading	revenues	also	benefited	from	the	widening	of	the	Company's	credit	spreads	on	financial	instruments	that	are accounted	for	at	fair	value,	including,	but	not	limited	to,	those	for	which	the	fair	value	option	was	elected	pursuant	to	the	Statement	of	Financial	Accounting	Standards ("SFAS")	No.	159,	"The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities"	("SFAS	No.	159")	on	December	1,	2006	(see	Note	3	to	the	consolidated financial	statements).	Revenues	increased	by	approximately	$390	million	due	to	the	widening	of	the	Company's	credit	spreads	during	the	year	resulting	from	the decrease	in	the	fair	value	of	certain	of	the	Company's	long-term	and	short-term	borrowings,	such	as	structured	notes,	for	which	the	fair	value	option	was	elected.

Equity	sales	and	trading	revenues	increased	31%	to	a	then	record	$6,281	million	in	fiscal	2006.	The	increase	was	broad	based	and	included	higher	revenues	from derivatives	and	equity	cash	products,	financing	products,	prime	brokerage	and	principal	trading	strategies.	Derivative	revenues	increased	due	to	strong	customer	flows, although	volatility	in	the	global	equity	markets	continued	to	be	generally	low.	Revenues	from	equity	cash	products	reflected	higher	market	volumes,	particularly	in Europe	and	Asia.	Financing	product	revenues	also	benefited	from	increased	client	activity.	Prime	brokerage	generated	record	revenues,	reflecting	continued	growth	in global	client	asset	balances.	Global	equity	markets	generally	trended	higher	and	created	favorable	opportunities	for	principal	trading	strategies.	Although	commission revenues	increased,	revenues	continued	to	be	affected	by	intense	competition,	particularly	in	the	U.S.,	and	a	continued	shift	toward	electronic	trading.

Fixed	income	sales	and	trading	revenues	decreased	93%	to	$650	million	in	fiscal	2007.	Fiscal	2007	results	reflected	significant	losses	in	credit	products	and	lower	results in	commodities,	partially	offset	by	record	results	in	interest	rate	and	currency	products.	Credit	product	revenues	decreased	$9.4	billion,	primarily	reflecting	mortgage- related	writedowns	of	$7.8	billion,	reflecting	the	deterioration	in	value	of	U.S.	subprime	trading	positions,	principally	super	senior	derivative	positions	in	CDOs	entered into	primarily	by	the	Company's	proprietary	trading	group.	Spread	widening,	lower	liquidity	and	higher	volatility	resulted	in	lower	origination,	securitization	and	trading results	across	most	credit	product	groups	and	also	adversely	affected	the	performance

of	the	Company's	hedging	strategies.	The	Company's	residential	and	commercial	mortgage	loan	activities	contributed	to	the	significant	decline	in	credit	product revenues,	reflecting	the	difficult	market	conditions	referred	to	above,	as	well	as	continued	concerns	in	the	subprime	mortgage	loan	sector.	See	"Impact	of	Credit	Market Events"	herein,	detailing	the	Company's	direct	U.S.	subprime	mortgage-related	exposures	at	November	30,	2007.

Interest	rate	and	currency	product	revenues	increased	63%	in	fiscal	2007,	reflecting	higher	revenues	from	interest	rate,	emerging	markets	and	foreign	exchange	products. Commodity	revenues	decreased	33%,	primarily	due	to	lower	trading	results	from	oil	liquids,	electricity	and	natural	gas	products	and	lower	revenues	recognized	on structured	transactions.	Fixed	income	sales	and	trading	revenues	also	benefited	from	the	widening	of	the	Company's	credit	spreads	on	financial	instruments	that	are accounted	for	at	fair	value,	including,	but	not	limited	to,	those	for	which	the	fair	value	option	was	elected	(see	Note	3	to	the	consolidated	financial	statements).	The decrease	in	the	fair	value	of	certain	of	the	Company's	long-term	and	short-term	borrowings,	such	as	structured	notes,	for	which	the	fair	value	option	was	elected,	which was	attributable	to	the	widening	of	the	Company's	credit	spreads	during	the	year,	increased	revenues	by	approximately	$450	million	(see	Note	3	to	the	consolidated financial	statements).	Fixed	income	sales	and	trading	revenues	also	benefited	from	gains	on	interest	rate	derivatives.

Fixed	income	sales	and	trading	revenues	increased	41%	to	a	record	$9,291	million	in	fiscal	2006.	The	increase	was	driven	by	record	results	from	commodities,	credit products,	and	interest	rate	and	currency	products.	Commodities	revenues	increased	112%	due	to	strong	results	from	electricity,	natural	gas	products	and	oil	liquids. Credit	product	revenues	increased	52%,	primarily	due	to	significantly	improved	corporate	credit	trading	and	strength	in	residential	and	commercial	securitized	products. Interest	rate	and	currency	products	decreased	1%.	Both	commodity	and	interest	rate	and	currency	products	benefited	from	revenues	recognized	on	structured transactions	as	a	result	of	increased	observability	of	market	value	in	accordance	with	Emerging	Issues	Task	Force	("EITF")	Issue	No.	02-3,	"Issues	Involved	in Accounting	for	Derivative	Contracts	Held	for	Trading	Purposes	and	Contracts	Involved	in	Energy	Trading	and	Risk	Management	Activities"	("EITF	Issue	No.	02-3"). With	the	adoption	of	SFAS	No.	157,	"Fair	Value	Measurements"	("SFAS	No.	157")	on	December	1,	2006,	the	Company	no	longer	applies	the	revenue	recognition criteria	of	EITF	Issue	No.	02-3	(see	Note	2	to	the	consolidated	financial	statements).

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	fiscal	2007,	other	sales	and	trading	losses	of	approximately	$1.2	billion	primarily	reflected	approximately	$700	million	of	mark-to-market valuations	associated	with	loans	and	commitments	largely	related	to	acquisition	financing	to	non-investment	grade	companies	and	the	impairment	charge	related	to securities	in	the	Company's	domestic	subsidiary	banks	(see	"Impact	of	Credit	Market	Events—Subsidiary	Banks"	herein).	The	losses	included	markdowns	of	leveraged loan	commitments	associated	with	acquisition	financing	transactions	that	were	accepted	by	the	borrower	but	not	yet	closed.	These	losses	were	primarily	related	to	the illiquid	market	conditions	that	existed	during	third	quarter	of	fiscal	2007.	The	valuation	of	these	commitments	could	change	in	future	periods	depending	on,	among	other things,	the	extent	that	they	are	renegotiated	or	repriced	or	if	the	associated	acquisition	transaction	does	not	occur.	In	addition,	the	Company's	leveraged	finance	business originates	and	distributes	loans	and	commitments	and	intends	to	distribute	its	current	positions;	however,	this	could	take	longer	than	in	the	past	and	is	dependent	on liquidity	re-entering	the	market.	Subsequent	to	November	30,	2007,	there	has	been	further	widening	in	credit	spreads	for	non-investment	grade	loans	that,	if	sustained, will	result	in	additional	writedowns	for	these	loans	and	commitments.	The	fair	value	measurement	of	loan	commitments	takes	into	account	certain	fee	income	that	is attributable	to	the	contingent	commitment	contract.	For	further	information	about	the	Company's	corporate	lending	activities,	see	Item	7A,	"Quantitative	and	Qualitative Disclosures	about	Market	Risk—Credit	Risk."	In	fiscal	2006,	revenues	from	corporate	lending	activities	decreased	by	approximately	$50	million	from	fiscal	2005, reflecting	the	impact	of	mark-to-market	valuations	on	a	higher	level	of	new	loans	made	during	the	year.

Principal	Transactions-Investments.				The	Company's	investments	generally	are	held	for	appreciation	and	to	facilitate	other	business	activities.	It	is	not	possible	to determine	when	the	Company	will	realize	the	value	of	such

investments	since,	among	other	factors,	such	investments	generally	are	subject	to	significant	sales	restrictions.	Moreover,	estimates	of	the	fair	value	of	the	investments may	involve	significant	judgment	and	may	fluctuate	significantly	over	time	in	light	of	business,	market,	economic	and	financial	conditions	generally	or	in	relation	to specific	transactions.

Principal	transaction	net	investment	revenues	aggregating	$1,459	million	were	recognized	in	fiscal	2007	as	compared	with	$1,081	million	in	fiscal	2006	and	$593	million in	fiscal	2005.	The	increase	in	fiscal	2007	was	primarily	related	to	realized	and	unrealized	net	gains	associated	with	certain	of	the	Company's	investments,	including Grifols	S.A.	and	Bovespa	Holdings	S.A.,	and	higher	revenues	from	the	Company's	investments	in	passive	limited	partnership	interests	associated	with	the	Company's real	estate	funds.	The	increase	in	fiscal	2007	also	reflected	higher	revenues	primarily	due	to	the	appreciation	of	investments	related	to	certain	employee	deferred compensation	plans.	The	increase	in	fiscal	2006	was	primarily	related	to	net	gains	associated	with	the	Company's	investments.

Other.				Other	revenues	consist	primarily	of	revenues	from	providing	benchmark	indices	and	risk	management	analytics	associated	with	MSCI	Inc.	(see	Note	23	to	the consolidated	financial	statements).	Other	revenues	also	include	revenues	related	to	the	operation	of	pipelines,	terminals	and	barges	and	the	distribution	of	refined petroleum	products	associated	with	TransMontaigne,	the	marine	transportation	and	logistics	services	associated	with	Heidmar,	revenues	associated	with	Saxon,	a servicer	and	originator	of	residential	mortgages	(see	Note	23	to	the	consolidated	financial	statements)	and	a	commodities-related	strategic	investment.

Other	revenues	increased	121%	in	fiscal	2007	and	33%	in	fiscal	2006.	The	increase	in	both	fiscal	2007	and	fiscal	2006	was	primarily	attributable	to	revenues	related	to the	operation	of	pipelines,	terminals	and	barges	and	the	distribution	of	refined	petroleum	products	associated	with	TransMontaigne	and	higher	sales	of	benchmark indices	and	risk	management	analytic	products.	The	increase	in	fiscal	2007	was	also	due	to	higher	revenues	associated	with	Saxon	and	from	the	sale	of	a	commodities- related	strategic	investment.

Non-Interest	Expenses.				Non-interest	expenses	increased	15%	in	fiscal	2007.	Compensation	and	benefits	expense	increased	10%,	primarily	reflecting	higher	incentive- based	compensation	accruals	for	certain	businesses.	The	increase	also	reflected	higher	costs	associated	with	certain	employee	deferred	compensation	plans,	partially offset	by	Institutional	Securities'	share	($190	million)	of	the	incremental	compensation	expense	related	to	equity	awards	to	retirement-eligible	employees	in	the	first quarter	of	fiscal	2006	(see	Note	2	to	the	consolidated	financial	statements).	Excluding	compensation	and	benefits	expense,	non-interest	expenses	increased	24%, reflecting	increased	levels	of	business	activity	and	expenses	associated	with	acquired	businesses.	Occupancy	and	equipment	expense	increased	33%,	primarily	due	to higher	rent	and	occupancy	costs	in	Europe,	Asia	and	the	U.S.	Brokerage,	clearing	and	exchange	fees	increased	30%,	primarily	reflecting	substantially	increased	equity and	fixed	income	trading	activity.	Marketing	and	business	development	expense	increased	27%,	primarily	due	to	a	higher	level	of	business	activity.	Professional	services expense	increased	6%,	primarily	due	to	higher	legal	and	consulting	costs	related	to	increased	business	activity.	Other	expenses	increased	50%,	reflecting	costs	associated with	TransMontaigne,	Heidmar	and	Saxon,	partially	offset	by	lower	net	litigation	accruals.	Fiscal	2007	results	included	a	reversal	of	the	$360	million	legal	accrual related	to	the	Company's	favorable	outcome	from	the	Coleman	litigation.	Fiscal	2006	included	legal	accruals	related	to	the	pending	settlement	of	General	American litigation,	which	was	partially	offset	by	a	favorable	outcome	related	to	the	LVMH	litigation.

Non-interest	expenses	increased	23%	in	fiscal	2006.	Compensation	and	benefits	expense	increased	36%,	primarily	reflecting	higher	incentive-based	compensation	costs resulting	from	higher	net	revenues.	Fiscal	2006	also	included	Institutional	Securities'	share	($190	million)	of	incremental	compensation	expense	related	to	equity	awards to	retirement-eligible	employees	while	fiscal	2005	included	Institutional	Securities'	share	($193	million)	of	the	costs	associated	with	senior	management	changes	(see "Other	Matters—Senior	Management	Compensation	Charges"	herein).	Excluding	compensation	and	benefits	expense,	non-interest	expenses	remained	relatively unchanged.	Occupancy	and	equipment	expense	decreased	6%,	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	Note	26	to	the	consolidated	financial	statements).	Brokerage,	clearing	and	exchange	fees	increased	32%,	primarily	reflecting	increased	equity	and	fixed income	trading	activity.	Professional	services	expense	increased	18%,	primarily	due	to	higher	legal	and	consulting	costs,	reflecting	increased	levels	of	business	activity. Other	expenses	decreased	48%	due	to	lower	charges	for	legal	and	regulatory	matters.	Fiscal	2006	reflected	a	net	reduction	in	legal	accruals	of	approximately	$40	million related	to	the	IPO	Allocation	Matters	litigation,	the	LVMH	litigation	and	the	settlement	of	the	General	American	litigation.	Other	expenses	in	fiscal	2005	included	legal accruals	of	$360	million	related	to	the	Coleman	litigation	and	approximately	$170	million	related	to	the	Parmalat	settlement	and	the	IPO	Allocation	Matters	litigation.

| Investment	banking | $625 | $428 | $320 |
| :--- | :--- | :--- | :--- |
| Principal\ttransactions: |  |  |  |
| Trading | 598 | 487 | 467 |
| Investments | 29 | 57 | 2 |
| Commissions | \t 1,433 | \t 1,168 | \t 1,196 |
| Asset\tmanagement,\tdistribution\tand\tadministration\tfees | \t 3,067 | \t 2,757 | \t 2,601 |
| Interest\tand\tdividends | \t 1,221 | \t 1,004 | 650 |
| Other | 163 | 130 | 143 |
| Total\trevenues | \t 7,136 | \t 6,031 | \t 5,379 |
| Interest\texpense | 511 | 519 | 332 |
| Net\trevenues | \t 6,625 | \t 5,512 | \t 5,047 |
| Total\tnon-interest\texpenses | \t 5,470 | \t 5,004 | \t 4,456 |
| Income\tfrom\tcontinuing\toperations\tbefore\tincome\ttaxes\tand\tcumulative\teffect\tof\taccounting\tchange,\tnet | \t 1,155 | 508 | 591 |
| Provision\tfor\tincome\ttaxes | 459 | 167 | 199 |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | $696 | $341 | $392 |

Investment	Banking.				Global	Wealth	Management	Group	investment	banking	includes	revenues	from	the	distribution	of	equity	and	fixed	income	securities,	including initial	public	offerings,	secondary	offerings,	closed-end	funds	and	unit	trusts.	Revenues	also	include	fees	earned	from	offerings	underwritten	by	the	Institutional Securities	business	segment.	Investment	banking	revenues	increased	46%	and	34%	in	fiscal	2007	and	fiscal	2006,	respectively.	The	increase	in	fiscal	2007	was	driven	by strong	underwriting	activity	across	equity,	fixed	income	and	unit	trust	products.	The	increase	in	fiscal	2006	was	primarily	due	to	higher	revenues	from	equity-related offerings	and	unit	trust	products.

Principal	Transactions–Trading.				Principal	transactions	include	revenues	from	customers'	purchases	and	sales	of	financial	instruments	in	which	the	Company	acts	as principal	and	gains	and	losses	on	the	Company's	inventory	positions	held,	primarily	to	facilitate	customer	transactions.	Principal	transaction	trading	revenues	increased 23%	in	fiscal	2007	primarily	due	to	higher	revenues	from	derivative	products,	municipal	and	corporate	fixed	income	securities	and	foreign	exchange	products.	The increase	was	also	due	to	higher	revenues	primarily	associated	with	the	appreciation	of	investments	related	to	certain	employee	deferred	compensation	plans.	In	fiscal 2006,	principal	transaction	trading	revenues	increased	4%,	primarily	reflecting	higher	revenue	from	foreign	exchange	products,	equity	linked	notes	and	municipal	fixed income	securities,	partially	offset	by	lower	revenues	from	corporate	and	government	fixed	income	products	and	other	securities.

Principal	Transactions–Investments.				Principal	transaction	net	investment	revenues	were	$29	million	in	fiscal	2007	compared	with	$57	million	in	fiscal	2006	and	$2 million	in	fiscal	2005.	The	results	in	fiscal	2007	reflected	lower	net	gains	from	certain	of	the	Company's	investments	in	exchanges	and	memberships.	The	results	in fiscal	2006	were	primarily	related	to	realized	and	unrealized	gains	on	the	Company's	investments	in	Bolsas	y	Mercados	Españoles	and	the	New	York	Stock	Exchange.

Commissions.				Commission	revenues	primarily	arise	from	agency	transactions	in	listed	and	OTC	equity	securities	and	sales	of	mutual	funds,	futures,	insurance products	and	options.	Commission	revenues	increased

23%	in	fiscal	2007	and	decreased	2%	in	fiscal	2006.	The	increase	in	fiscal	2007	reflected	higher	levels	of	client	activity.	The	decrease	in	fiscal	2006	largely	reflected lower	revenues	from	equity	products,	which	was	related	to	lower	agency	activity	with	customers	due,	in	part,	to	growth	in	other	product	areas,	including	investment banking	and	asset	management.

Asset	Management,	Distribution	and	Administration	Fees.				Asset	management,	distribution	and	administration	fees	include	revenues	from	individual	investors electing	a	fee-based	pricing	arrangement	and	fees	for	investment	management,	account	services	and	administration.	The	Company	also	receives	shareholder	servicing fees	and	fees	for	services	it	provides	in	distributing	certain	open-ended	mutual	funds	and	other	products.	Mutual	fund	distribution	fees	are	based	on	either	the	average daily	fund	net	asset	balances	or	average	daily	aggregate	net	fund	sales	and	are	affected	by	changes	in	the	overall	level	and	mix	of	assets	under	management	or supervision.

Asset	management,	distribution	and	administration	fees	increased	11%	in	fiscal	2007	and	6%	in	fiscal	2006.	In	both	fiscal	years,	the	increase	was	driven	by	higher	client asset	balances	in	fee-based	accounts.	Client	assets	in	fee-based	accounts	rose	3%	to	$201	billion	at	November	30,	2007	and	represented	27%	of	total	client	assets	versus 29%	at	November	30,	2006.	The	decline	in	fee-based	assets	as	a	percent	of	total	client	assets	largely	reflected	the	termination	on	October	1,	2007	of	the	Company's	fee- based	(fee	in	lieu	of	commission)	brokerage	program	pursuant	to	a	court	decision	vacating	an	SEC	rule	that	permitted	fee-based	brokerage.	Client	assets	that	were	in	the fee-based	program	primarily	moved	to	commission-based	brokerage	accounts,	or,	at	the	election	of	some	clients,	into	other	fee-based	advisory	programs,	including Morgan	Stanley	Advisory,	a	new	nondiscretionary	account	launched	in	August	2007.	Client	assets	in	fee-based	accounts	rose	18%	to	$195	billion	at	November	30,	2006 and	increased	as	a	percentage	of	total	client	assets	to	29%	of	total	client	assets	from	27%	at	November	30,	2005.

Total	client	asset	balances	increased	to	$758	billion	at	November	30,	2007	from	$676	billion	at	November	30,	2006	primarily	due	to	higher	client	inflows	and	market appreciation.	Client	asset	balances	in	households	greater	than	$1	million	increased	to	$522	billion	at	November	30,	2007	from	$442	billion	at	November	30,	2006	and $371	billion	at	November	30,	2005.

Net	Interest.				Interest	and	dividend	revenues	and	interest	expense	are	a	function	of	the	level	and	mix	of	total	assets	and	liabilities,	including	customer	bank	deposits	and margin	loans	and	securities	borrowed	and	securities	loaned	transactions.	Net	interest	revenues	increased	46%	and	53%	in	fiscal	2007	and	fiscal	2006,	respectively.	The increase	in	both	periods	was	primarily	due	to	increased	customer	account	balances	in	the	bank	deposit	program	that	was	launched	in	November	2005.	Balances	in	the bank	deposit	program	rose	to	$26.2	billion	at	November	30,	2007	from	$13.3	billion	at	November	30,	2006.

Other.				Other	revenues	primarily	include	customer	account	service	fees	and	other	miscellaneous	revenues.	Other	revenues	increased	25%	in	fiscal	2007	and	decreased 9%	in	fiscal	2006.	In	fiscal	2007,	the	increase	primarily	reflected	higher	service	fees	and	higher	other	miscellaneous	revenues.	In	fiscal	2006,	the	decrease	primarily reflected	lower	service	fees.

Non-Interest	Expenses.				Non-interest	expenses	increased	9%	in	fiscal	2007,	primarily	reflecting	an	increase	in	compensation	and	benefits	expense,	partially	offset	by lower	non-compensation	expenses	primarily	due	to	lower	charges	for	legal	and	regulatory	matters	and	continued	cost	discipline	across	the	business.	Compensation	and benefits	expense	increased	15%,	primarily	reflecting	higher	incentive-based	compensation	accruals	due	to	higher	net	revenues	and	investments	in	the	business,	partially offset	by	Global	Wealth	Management	Group's	share	($50	million)	of	the	incremental	compensation	expense	related	to	equity	awards	to	retirement-eligible	employees	in the	first	quarter	of	fiscal	2006	(see	Note	2	to	the	consolidated	financial	statements).	Excluding	compensation	and	benefits	expense,	non-interest	expenses	decreased	2%. Occupancy	and	equipment	expense	increased	6%	primarily	due	to	leasehold	improvements	and	higher	rental	costs.	Information	processing	and	communications	expense decreased	8%	primarily	due	to	lower	computing	costs.	Marketing	and	business	development	expense	increased	39%	primarily	due	to	costs	associated	with	the Company's	advertising	campaign.	Other	expenses

decreased	20%,	primarily	resulting	from	a	reduction	in	costs	associated	with	legal	and	regulatory	matters,	which	included	an	insurance	reimbursement	related	to	a litigation	matter.

Non-interest	expenses	increased	12%	in	fiscal	2006.	Fiscal	2005	included	a	reduction	in	non-interest	expenses	related	to	Global	Wealth	Management	Group's	share ($198	million)	of	the	insurance	settlement	related	to	the	events	of	September	11,	2001	(see	Note	25	to	the	consolidated	financial	statements).	Compensation	and	benefits expense	increased	15%,	primarily	reflecting	higher	incentive-based	compensation	costs.	In	addition,	fiscal	2006	expenses	included	Global	Wealth	Management	Group's share	($50	million)	of	the	incremental	compensation	expense	related	to	equity	awards	to	retirement-eligible	employees,	including	new	hires	(see	Note	2	to	the consolidated	financial	statements),	while	fiscal	2005	included	Global	Wealth	Management	Group's	share	($48	million)	of	the	costs	associated	with	senior	management changes	(see	"Other	Matters—Senior	Management	Compensation	Charges"	herein).	Excluding	compensation	and	benefits	expense	and	the	insurance	settlement,	non- interest	expenses	decreased	4%.	Occupancy	and	equipment	expense	decreased	6%	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	Note	26	to	the	consolidated	financial	statements).	Professional	services	expense increased	15%,	largely	due	to	higher	sub-advisory	fees	associated	with	growth	in	fee-based	assets	and	higher	costs	for	outside	legal	counsel.	Other	expenses	decreased 20%,	primarily	resulting	from	lower	costs	associated	with	legal	and	regulatory	matters.	During	fiscal	2006	and	fiscal	2005,	the	Company	recorded	legal	and	regulatory expenses	of	approximately	$105	million	and	$170	million,	respectively,	related	to	ongoing	regulatory,	employment	and	branch	litigation	matters.

| Investment	banking | $264 | $138 | $133 |
| :--- | :--- | :--- | :--- |
| Principal\ttransactions: |  |  |  |
| Trading | (129) | — | — |
| Investments | \t 1,774 | 669 | 533 |
| Commissions | 23 | 25 | 29 |
| Asset\tmanagement,\tdistribution\tand\tadministration\tfees | \t 3,524 | \t 2,574 | \t 2,462 |
| Interest\tand\tdividends | 74 | 48 | 87 |
| Other | 75 | 26 | 26 |
| Total\trevenues | \t 5,605 | \t 3,480 | \t 3,270 |
| Interest\texpense | 112 | 27 | 51 |
| Net\trevenues | \t 5,493 | \t 3,453 | \t 3,219 |
| Total\tnon-interest\texpenses | \t 4,026 | \t 2,602 | \t 2,189 |
| Income\tbefore\tincome\ttaxes\tand\tcumulative\teffect\tof\taccounting\tchange,\tnet | \t 1,467 | 851 | \t 1,030 |
| Provision\tfor\tincome\ttaxes | 541 | 340 | 391 |
| Income\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | $926 | $511 | $639 |

Investment	Banking.				Asset	Management	generates	investment	banking	revenues	primarily	from	the	acquisition	of	investments	in	real	estate	funds	and	the underwriting	of	unit	trust	products.	Investment	banking	revenues	increased	91%	in	fiscal	2007	and	4%	in	fiscal	2006.	The	increase	in	fiscal	2007	primarily	reflected higher	revenues	from	certain	real	estate	products.	The	increase	in	fiscal	2006	primarily	reflected	higher	revenues	from	real	estate	products	and	higher	equity	unit	trust sales,	partially	offset	by	a	lower	volume	of	fixed	income	unit	trust	sales.

Principal	Transactions-Trading.				In	fiscal	2007,	the	Company	recognized	losses	of	$129	million	related	to	structured	investment	vehicles.	See	"Impact	of	Credit Market	Events—Structured	Investment	Vehicles"	herein	for	further	discussion.

Principal	Transactions-Investments.				Asset	Management	principal	transaction	investment	revenues	consist	primarily	of	gains	and	losses	on	the	Company's investments	in	alternative	investment	products.

Principal	transaction	net	investment	gains	aggregating	$1,774	million	were	recognized	in	fiscal	2007	as	compared	with	$669	million	in	fiscal	2006.	The	results	in	both fiscal	years	were	primarily	related	to	investments	associated	with	the	Company's	real	estate	products	and	private	equity	portfolio,	including	employee	deferred compensation	plans	and	co-investment	plans.

Real	estate	and	private	equity	investments	generally	are	held	for	appreciation.	It	is	not	possible	to	determine	when	the	Company	will	realize	the	value	of	such investments	since,	among	other	factors,	such	investments	generally	are	subject	to	significant	sales	restrictions.	Moreover,	estimates	of	the	fair	value	of	the	investments involve	significant	judgment	and	may	fluctuate	significantly	over	time	in	light	of	business,	market,	economic	and	financial	conditions	generally	or	in	relation	to	specific transactions.

Asset	Management,	Distribution	and	Administration	Fees.				Asset	Management,	distribution	and	administration	fees	include	revenues	generated	from	the	management and	supervision	of	assets,	performance-

based	fees	relating	to	certain	funds,	and	separately	managed	accounts	and	fees	relating	to	the	distribution	of	certain	open-ended	mutual	funds.	Asset	Management	fees arise	from	investment	management	services	the	Company	provides	to	investment	vehicles	pursuant	to	various	contractual	arrangements.	The	Company	receives	fees primarily	based	upon	mutual	fund	daily	average	net	assets	or	based	on	monthly	or	quarterly	invested	equity	for	other	vehicles.	Performance-based	fees	are	earned	on certain	funds	as	a	percentage	of	appreciation	earned	by	those	funds	and,	in	certain	cases,	are	based	upon	the	achievement	of	performance	criteria.	These	fees	are normally	earned	annually	and	are	recognized	on	a	monthly	or	quarterly	basis.

Asset	management,	distribution	and	administration	fees	increased	37%	in	fiscal	2007	and	5%	in	fiscal	2006.	The	increase	in	fiscal	2007	was	primarily	due	to	higher	fund management	and	administration	fees	resulting	from	an	increase	in	assets	and	a	more	favorable	asset	mix.	The	increase	was	also	due	to	higher	performance	fees	from	the alternatives	business,	including	those	associated	with	FrontPoint,	which	the	Company	acquired	in	December	2006	(see	Note	23	to	the	consolidated	financial	statements). The	increase	in	fiscal	2006	was	due	to	higher	fund	management	and	administration	fees,	partially	offset	by	lower	distribution	fees.	The	higher	management	and administration	fees	in	fiscal	2007	and	fiscal	2006	were	associated	with	increases	in	average	assets	under	management	of	20%	and	6%,	respectively.

Asset	Management's	year-end	and	average	assets	under	management	or	supervision	were	as	follows:

|  | At	November	30, | At	November	30, | At	November	30, | Average	for | Average	for | Average	for |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 | Fiscal\n2007 | Fiscal\n2006 | Fiscal\n2005 |
|  |  |  | (dollars\tin\tbillions) | (dollars\tin\tbillions) |  |  |
| Assets\tunder\tmanagement\tor\tsupervision\tby\tdistribution\tchannel: |  |  |  |  |  |  |
| Americas\tRetail\tMorgan\tStanley\tbrand | $64 | $63 | $63 | $64 | $64 | $64 |
| Americas\tRetail\tVan\tKampen\tbrand | 99 | 94 | 88 | 99 | 90 | 84 |
| Americas\tIntermediary(1) | 68 | 58 | 48 | 65 | 51 | 45 |
| U.S.\tInstitutional | \t 128 | \t 100 | 96 | \t 116 | 97 | 97 |
| Non-U.S. | \t 132 | 93 | 69 | \t 111 | 80 | 64 |
| Total\tlong-term\tassets\tunder\tmanagement\tor\tsupervision | \t 491 | \t 408 | \t 364 | \t 455 | \t 382 | \t 354 |
| Institutional\tmoney\tmarkets/liquidity | 68 | 49 | 33 | 57 | 39 | 33 |
| Retail\tmoney\tmarkets | 31 | 35 | 46 | 33 | 40 | 49 |
| Total\tmoney\tmarkets | 99 | 84 | 79 | 90 | 79 | 82 |
| Total\tassets\tunder\tmanagement\tor\tsupervision | \t 590 | \t 492 | \t 443 | \t 545 | \t 461 | \t 436 |
| Share\tof\tminority\tinterest\tassets(2) | 7 | 4 | \t — | 6 | \t — | \t — |
| Total | $597 | $496 | $443 | $551 | $461 | $436 |
| Assets\tunder\tmanagement\tor\tsupervision\tby\tasset\tclass: |  |  |  |  |  |  |
| Equity | $265 | $239 | $218 | $256 | $228 | $207 |
| Fixed\tincome | \t 102 | 94 | 91 | 97 | 91 | 96 |
| Money\tmarket | 99 | 84 | 79 | 90 | 79 | 82 |
| Alternatives(3) | \t 109 | 61 | 43 | 87 | 50 | 40 |
| Subtotal | \t 575 | \t 478 | \t 431 | \t 530 | \t 448 | \t 425 |
| Unit\ttrusts | 15 | 14 | 12 | 15 | 13 | 11 |
| Total\tassets\tunder\tmanagement\tor\tsupervision | \t 590 | \t 492 | \t 443 | \t 545 | \t 461 | \t 436 |
| Share\tof\tminority\tinterest\tassets(2) | 7 | 4 | \t — | 6 | \t — | \t — |
| Total | $597 | $496 | $443 | $551 | $461 | $436 |

(1) Americas	Intermediary	channel	primarily	represents	client	flows	through	defined	contribution,	insurance	and	bank	trust	platforms.

(3) The	alternatives	asset	class	includes	a	range	of	investment	products,	such	as	real	estate	funds,	hedge	funds,	private	equity	funds,	funds	of	hedge	funds	and	funds	of	private	equity	funds.

Activity	in	Asset	Management's	assets	under	management	or	supervision	during	fiscal	2007	and	fiscal	2006	were	as	follows:

| Balance	at	beginning	of	period | $496 | $443 |
| :--- | :--- | :--- |
| Net\tflows\tby\tdistribution\tchannel: |  |  |
| Americas\tRetail\tMorgan\tStanley\tbrand | (4) | (9) |
| Americas\tRetail\tVan\tKampen\tbrand | — | (2) |
| Americas\tIntermediary(1) | 4 | 8 |
| U.S.\tInstitutional | 3 | (13) |
| Non-U.S. | 22 | 6 |
| Net\tinflows/(outflows)\texcluding\tmoney\tmarkets | 25 | (10) |
| Money\tmarket\tnet\tflows: |  |  |
| Institutional | 15 | 13 |
| Retail | (5) | (12) |
| Total\tmoney\tmarket\tnet\tflows | 10 | 1 |
| Market\tappreciation/other | 56 | 58 |
| Total\tnet\tincrease | 91 | 49 |
| Acquisitions | 7 | — |
| Net\tincrease\tin\tshare\tof\tminority\tinterest\tassets(2) | 3 | 4 |
| Balance\tat\tend\tof\tperiod | $597 | $496 |

(2) Amount	represents	Asset	Management's	proportional	share	of	assets	managed	by	entities	in	which	it	owns	a	minority	interest.

Net	inflows	(excluding	money	markets)	in	fiscal	2007	were	primarily	associated	with	positive	flows	from	non-U.S.	clients.	Money	market	net	flows	for	fiscal	2007	were primarily	associated	with	positive	flows	into	institutional	liquidity	assets,	partially	offset	by	outflows	from	certain	money	market	funds	that	were	impacted	by	the	growth of	Global	Wealth	Management	Group's	bank	deposit	program.

Other.				Other	revenues	increased	188%	in	fiscal	2007	primarily	due	to	revenues	associated	with	Lansdowne	Partners	("Lansdowne"),	a	London-based	investment manager,	and	Avenue	Capital	Group	("Avenue"),	a	New	York-based	investment	manager,	which	the	Company	acquired	minority	stakes	in	the	fourth	quarter	of	fiscal 2006	(see	Note	23	to	the	consolidated	financial	statements).	Other	revenues	remained	flat	in	fiscal	2006.

Non-Interest	Expenses.				Non-interest	expenses	increased	55%	in	fiscal	2007,	primarily	reflecting	an	increase	in	compensation	and	benefits	expense.	Compensation	and benefits	expense	increased	81%	in	fiscal	2007,	primarily	reflecting	higher	incentive-based	compensation	accruals	due	to	higher	net	revenues.	The	increase	in	fiscal	2007 was	also	due	to	expenses	associated	with	certain	employee	deferred	compensation	plans,	partially	offset	by	Asset	Management's	share	($20	million)	of	the	incremental compensation	expense	related	to	equity	awards	to	retirement-eligible	employees	that	was	recorded	in	the	first	quarter	of	fiscal	2006	(see	Note	2	to	the	consolidated financial	statements).	Excluding	compensation	and	benefits	expense,	non-interest	expenses	increased	24%.	Occupancy	and	equipment	expenses	increased	29%	primarily due	to	higher	rental	costs	associated	with	business	growth.	Brokerage,	clearing	and	exchange	fees	increased	10%	primarily	due	to	increased	fee	sharing,	increased	assets under	management	and	higher	commission	expenses	associated	with	the	launching	of	new	products.	These	increases	were	offset	by	a	decrease	in	the	deferred commission	amortization.	Information	processing	and	communications	expense	increased	21%	primarily	due	to	higher	licensing	fees	associated	with	the	acquisition	of FrontPoint.	Professional	services	expense	increased	47%	primarily	due	to	higher	sub-advisory	fees	related	to	the	acquisition	of	FrontPoint.	Other	expenses	increased 47%	primarily	due	to	an	insurance	reimbursement	received	in	fiscal	2006	related	to	certain	legal	matters	and	an	increase	in	other	miscellaneous	expenses.

Non-interest	expenses	increased	19%	in	fiscal	2006.	Fiscal	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	Note	25	to	the	consolidated	financial	statements).	Compensation	and	benefits	expense	increased 37%	in	fiscal	2006,	primarily	reflecting	higher	incentive-based	compensation	costs	as	well	as	the	impact	of	new	hires.	In	addition,	fiscal	2006	included	Asset Management's	share	($20	million)	of	the	incremental	compensation	expense	related	to	equity	awards	to	retirement-eligible	employees	(see	Note	2	to	the	consolidated financial	statements),	while	fiscal	2005	included	Asset	Management's	share	($41	million)	of	the	costs	associated	with	senior	management	changes	(see	"Other	Matters— Senior	Management	Compensation	Charges"	herein).	Excluding	compensation	and	benefits	expense	and	the	insurance	settlement,	non-interest	expenses	were unchanged.	Brokerage,	clearing	and	exchange	fees	decreased	14%,	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	11%	primarily	due	to	higher	advertising	and	marketing	costs.

# Impact	of	Credit	Market	Events.

The	Company	recorded	$9.4	billion	in	mortgage-related	writedowns	in	the	fourth	quarter	of	fiscal	2007	resulting	from	an	unfavorable	subprime	mortgage-related	trading strategy	and	the	continued	deterioration	and	lack	of	market	liquidity	for	subprime	and	other	mortgage-related	instruments.	Included	in	the	$9.4	billion	were	writedowns of	$7.8	billion	related	to	U.S.	subprime	trading	positions,	principally	super	senior	derivative	positions	in	CDOs.	These	derivative	positions	were	entered	into	primarily	by the	Company's	proprietary	trading	group	(see	"U.S.	ABS	CDO	Exposures").	As	the	credit	markets	in	general,	and	the	mortgage	markets	in	particular,	declined dramatically	in	the	fourth	quarter,	increases	in	the	implied	cumulative	losses	in	the	subprime	mortgage	market,	coupled	with	the	illiquid	nature	of	the	Company's	trading positions,	led	to	a	significant	deterioration	in	value	in	its	subprime-related	trading	positions.	A	summary	of	the	Company's	U.S.	subprime	trading	positions,	writedowns and	remaining	net	exposures	is	further	detailed	in	the	table	on	page	53	and	is	discussed	in	"U.S.	Subprime	Mortgage-Related	Exposures"	herein.

The	$9.4	billion	of	fourth	quarter	writedowns	also	included	an	impairment	charge	of	$437	million	related	to	mortgage-related	securities	portfolios	in	the	Company's domestic	subsidiary	banks	(see	"Subsidiary	Banks"	herein)	and	$1.2	billion	related	to	CMBS,	ALT-A	(a	residential	mortgage	loan	categorization	that	falls	between prime	and	subprime)	and	other	loans,	conduit	and	non-performing	loans	and	European	non-conforming	loans.	The	Company	continues	to	have	exposure	to	these	markets and	instruments,	and,	as	market	conditions	continue	to	evolve,	the	fair	value	of	these	other	mortgage-related	instruments	could	further	deteriorate.

The	valuation	methodology	used	for	these	instruments	incorporated	a	variety	of	inputs,	including	prices	observed	from	the	execution	of	a	limited	number	of	trades	in	the marketplace;	ABX	and	similar	indices	that	track	the	performance	of	a	series	of	credit	default	swaps	based	on	subprime	mortgages;	and	other	market	information, including	data	on	remittances	received	and	updated	cumulative	loss	data	on	the	underlying	mortgages.	For	a	further	discussion	of	the	Company's	risk	management policies	and	procedures	see	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk—Risk	Management"	in	Part	II,	Item	7A.

For	further	discussion	regarding	the	Company's	involvement	with	other	U.S.	subprime-related	activities,	see	"Special	Purpose	Entities	and	Variable	Interest	Entities" and	"Other	Exposures	to	Subprime	Lenders."

The	results	for	fiscal	2007	also	included	losses	of	approximately	$700	million	primarily	recorded	in	the	third	quarter	of	fiscal	2007	that	reflected	mark-to-market valuations	associated	with	loans	and	loan	commitments	largely	related	to	acquisition	financing	to	non-investment	grade	companies.	The	losses	included	markdowns	of leveraged	loan	commitments	associated	with	acquisition	financing	transactions	that	were	accepted	by	the	borrower	but	not	yet	closed.	These	losses	were	primarily related	to	the	illiquid	market	conditions	that	existed	during	the	second	half	of	fiscal	2007.	The	valuation	of	these	commitments	could	change	in	future	periods	depending on,	among	other	things,	the	extent	that	they	are	renegotiated	or	repriced	or	the	associated	acquisition	transaction	does	not	occur.	In	addition,	the	Company's	leveraged finance	business	originates	and	distributes	loans	and	commitments,	and	intends	to	distribute	its	current	positions;	however,	this	could	take	longer	than	in	the	past	and	is dependent	on	liquidity	re-entering	the	market.	Subsequent	to	November	30,	2007,	there	has	been	further	widening	in	credit	spreads	for	non-investment	grade	loans	that, if	sustained,	will	result	in	additional	writedowns	for	these	loans	and	commitments.	For	further	information	about	the	Company's	corporate	lending	activities,	see Item	7A,	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk—Credit	Risk."

The	Company	also	recognized	losses	of	$129	million	in	the	fourth	quarter	of	fiscal	2007	related	to	structured	investment	vehicles	(see	"Structured	Investment	Vehicles" herein).

# U.S.	Subprime	Mortgage-Related	Exposures.

The	Company's	U.S.	subprime	mortgage-related	trading	positions	consist	of	those	related	to	U.S.	ABS	CDOs	and	other	mortgage-related	exposures	arising	from investments	in	subprime	loans,	from	asset-backed	securities

that,	in	whole	or	in	part,	are	backed	by	subprime	mortgage	loans,	and	from	derivatives	referencing	subprime	mortgages	or	subprime	mortgage-backed	securities.

Subprime	mortgages	are	loans	secured	by	real	property	made	to	a	borrower	(or	borrowers)	with	a	diminished	or	impaired	credit	rating	or	with	a	limited	credit	history.	A borrower's	credit	history	is	reflected	in	his	credit	report	and	routinely	converted	into	a	numerical	credit	score	often	referred	to	as	a	Fair	Isaac	Corporation	(or	"FICO") score.	Generally,	a	loan	made	to	a	borrower	with	a	low	FICO	score	or	other	credit	score	has	historically	been	considered	as	subprime.	Loans	to	borrowers	with	higher FICO	scores	may	be	subprime	if	the	loan	exhibits	other	high-risk	factors.	Such	risk	factors	may	include	loans	where:	(a)	the	loan	has	a	high	loan-to-value	ratio	or combined	loan-to-value	ratios;	(b)	the	borrower	has	reduced	or	limited	income	documentation;	(c)	the	borrower	has	a	high	debt-to-income	ratio;	(d)	the	occupancy	type for	the	loan	is	other	than	the	borrower's	primary	residence.	There	are	many	other	risk	factors,	including	borrowers	who	have	purchased	multiple	properties	or	have	taken previous	equity	withdrawal	(cash	out)	refinancings	within	the	last	12	to	24	month	period,	non-arm's	length	purchase	transactions	and	unsupported	or	high-risk	collateral properties,	among	others.	Subprime	mortgage-related	securities	are	those	securities	that	derive	a	significant	portion	of	their	value	from	subprime	loans.

# U.S.	ABS	CDO	Exposures.

The	Company	purchases	interests	in	and	enters	into	derivatives	with	ABS	CDOs.	CDOs	provide	credit	risk	exposure	to	a	portfolio	of	asset-backed	securities	("cash CDOs")	or	a	reference	portfolio	of	securities	("synthetic	CDOs").	The	underlying	or	reference	portfolios	consist	primarily	of	residential	mortgage-backed	securities.	The CDOs	to	which	the	Company	has	exposure	are	primarily	structured	and	underwritten	by	third	parties,	although	the	Company	also	structures	and	underwrites	CDOs,	for which	it	receives	structuring	and/or	distribution	fees,	and	does	from	time	to	time	retain	interests	in	such	CDOs.

The	Company's	primary	exposure	to	ABS	CDOs	is	to	synthetic	CDOs	that	hold	or	are	referenced	to	collateral	with	ratings	of	BBB+,	BBB	or	BBB-	("mezzanine CDOs").	The	majority	of	the	Company's	writedowns	in	the	fourth	quarter	related	to	super	senior	credit	default	swaps	referencing	such	mezzanine	CDOs	that	were entered	into	primarily	by	the	Company's	proprietary	trading	group.	Under	these	credit	default	swap	arrangements,	the	Company	can	be	required	to	make	payments	in	the event	that	securities	in	the	referenced	portfolios	default	or	experience	other	credit	events	such	as	rating	agency	downgrades.	(The	characterization	of	these	credit	default swaps	as	"super	senior"	derives	from	their	seniority	in	the	capital	structure	of	the	synthetic	CDO.)	The	Company	also	has	exposure	to	ABS	CDOs	via	other	types	of credit	default	swaps,	direct	investments	in	CDO	securities,	and	retained	interests	in	CDOs	that	the	Company	has	underwritten.	In	determining	the	fair	value	of	the Company's	ABS	CDO-related	instruments	the	Company	took	into	consideration	prices	observed	from	the	execution	of	a	limited	number	of	transactions	and	data	for relevant	benchmark	instruments	in	synthetic	subprime	markets.	Despite	the	fact	that	actual	defaults	on	swap	obligations	have	not	yet	been	realized,	the	fair	value	of	such positions	has	experienced	significant	declines,	as	a	result	of	a	deterioration	of	value	in	the	benchmark	instruments	as	well	as	market	developments.	These	losses,	as	well as	the	Company's	net	CDO	exposures,	are	quantified	in	the	U.S.	subprime-related	exposures	table	below.

# Other	U.S.	Subprime	Mortgage-Related	Exposures.

The	Company	also	has	exposure	to	the	U.S.	subprime	mortgage	market	via	investments	in	subprime	mortgage	loans	and	ABS	that	are	backed	in	whole	or	in	part	by subprime	mortgage	loans	and	via	derivatives	referencing	subprime	mortgages	or	subprime	mortgage-backed	securities.	With	respect	to	whole	loans,	the	Company purchases	pools	of	mortgage	loans	from	third-party	originators	and	also	originates	mortgage	loans	through	its	retail,	wholesale	and	conduit	channels	and	typically disposes	of	such	loans	by	securitizing	them.	The	Company	typically	retains	certain	lower-rated	securities	of	such	securitizations,	often	referred	to	as	residual	tranche securities.	The	Company's	other	subprime	mortgage-related	trading	exposures	are	quantified	in	the	table	below.

The	Company's	interests	in	U.S.	subprime-related	exposures	are	carried	at	fair	value	with	changes	recognized	in	earnings.

The	following	table	provides	a	summary	of	the	Company's	direct	U.S.	subprime	trading	exposures	(excluding	amounts	related	to	mortgage-related	securities	portfolios in	the	Company's	domestic	subsidiary	banks	(see	"Subsidiary	Banks"	herein))	as	of	and	for	the	fiscal	year	ended	November	30,	2007.	The	Company	utilizes	various methods	of	evaluating	risk	in	its	trading	and	other	portfolios,	including	monitoring	Net	Exposure.	Net	Exposure	is	defined	as	potential	loss	to	the	Company	over	a	period of	time	in	an	event	of	100%	default	of	the	referenced	loan,	assuming	zero	recovery.	The	value	of	these	positions	remains	subject	to	mark-to-market	volatility.	Positive	net exposure	amounts	indicate	potential	loss	(long	position)	in	a	default	scenario.	Negative	net	exposure	amounts	indicate	potential	gain	(short	position)	in	a	default	scenario. Net	Exposure	does	not	take	into	consideration	the	risk	of	counterparty	default.	See	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk—Credit	Risk"	in	Part	II, Item	7A	for	a	further	description	of	how	credit	risk	is	monitored.	Actual	losses	could	exceed	the	amount	of	Net	Exposure.

|  |  | Profit |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Statement | and |  |  |
|  | of | (Loss) | Profit\tand |  |
|  | Financial\nCondition\n11/30/07(1) | Three\nMonths\nEnded | (Loss)\n12\tMonths\nEnded | Net\nExposure\n11/30/07 |
|  |  | (dollars\tin\tbillions) |  |  |
| Super\tSenior\tDerivative\tExposure: |  |  |  |  |
| Mezzanine | $(8.7) | $(7.1) | $(9.3) | $3.9 |
| CDO\tsquared(3) | (0.1) | (0.1) | (0.1) | 0.1 |
| Total\tABS\tCDO\tsuper\tsenior\tderivative\texposure | $(8.8) | $(7.2) | $(9.4) | $4.0 |
| Other\tCDO\tExposure: |  |  |  |  |
| ABS\tCDO\tCDS | $2.7 | $1.3 | $2.3 | $(1.5) |
| ABS\tCDO\tbonds | 1.1 | (0.5) | (0.8) | 1.1 |
| Total\tother\tCDO\texposure | $3.8 | 0.8 | 1.5 | (0.4) |
| Subtotal\tABS\tCDO-related\texposure(2) | $(5.0) | $(6.4) | $(7.9) | $3.6 |
| U.S.\tSubprime\tMortgage-Related\tExposure: |  |  |  |  |
| Loans | $0.6 | $(0.1) | $(0.2) | $0.6 |
| Total\trate-of-return\tswaps | — | — | 0.1 | — |
| ABS\tbonds | 2.7 | (2.9) | (3.8) | 2.7 |
| ABS\tCDS | 7.8 | 1.6 | 5.0 | (5.1) |
| Subtotal\tU.S.\tsubprime\tmortgage-related\texposure | $11.1 | $(1.4) | $1.1 | $(1.8) |
| Total\tU.S.\tsubprime\ttrading\texposure | $6.1 | $(7.8) | $(6.8) | $1.8 |

(1) Statement	of	financial	condition	amounts	are	presented	on	a	net	asset/liability	basis	and	do	not	take	into	account	any	netting	of	cash	collateral	against	these	positions.	In	addition,	these	amounts	reflect	counterparty netting	to	the	extent	that	there	are	positions	with	the	same	counterparty	that	are	subprime-related;	they	do	not	reflect	any	counterparty	netting	to	the	extent	that	there	are	positions	with	the	same	counterparty	that	are not	subprime	related.	The	$6.1	billion	is	reflected	in	the	Company's	consolidated	statement	of	financial	condition	as	follows:	Financial	instruments	owned	of	$15.3	billion	and	Financial	instruments	sold,	not	yet purchased	of	$9.2	billion.

(2) In	determining	the	fair	value	of	the	Company's	ABS	super	senior	CDO-related	exposures	the	Company	took	into	consideration	prices	observed	from	the	execution	of	a	limited	number	of	transactions	and	data	for relevant	benchmark	instruments	in	synthetic	subprime	markets.	Deterioration	of	value	in	the	benchmark	instruments	as	well	as	market	developments	have	led	to	significant	declines	in	the	estimates	of	fair	value. These	declines	reflected	increased	implied	losses	across	this	portfolio.	These	implied	loss	levels	are	consistent	with	losses	in	the	range	between	13%	–	20%	implied	by	the	ABX	indices.	These	cumulative	loss levels,	at	a	severity	rate	of	50%,	imply	defaults	in	the	range	of	43%	–	50%	for	2005	and	2006	outstanding	mortgages.

(3) Refers	to	CDOs	where	the	collateral	is	comprised	entirely	of	another	CDO	security.

# Subsidiary	Banks.

The	securities	portfolios	of	Morgan	Stanley	Bank	(Utah)	and	Morgan	Stanley	Trust	FSB	(collectively,	the	"subsidiary	banks")	include	certain	subprime-related securities.	The	portfolios	contain	no	subprime	whole	loans,	subprime	residuals	or	CDOs.

At	November	30,	2007,	the	securities	portfolios	totaled	$9.9	billion	consisting	primarily	of	AAA-rated	ABS	and	residential	mortgage-backed	securities.	Of	the	total amount,	$5.5	billion	were	subprime	mortgage-related	securities.

The	securities	in	the	subsidiary	domestic	banks'	portfolios	were	previously	classified	as	securities	available	for	sale	in	accordance	with	SFAS	No.	115,	"Accounting	for Certain	Investments	in	Debt	and	Equity	Securities"	("SFAS	No.	115").	In	the	fourth	quarter	of	fiscal	2007,	the	Company	determined	that	it	no	longer	intends	to	hold these	securities	until	the	fair	value	of	the	securities	recovers	to	a	level	that	exceeds	their	initial	cost.	Accordingly,	the	Company	recorded	an	other-than-temporary impairment	charge	of	$437	million	in	Principal	transactions-trading	revenues	in	the	consolidated	statement	of	income	on	its	portfolio	of	securities	available	for	sale	in the	fourth	quarter	of	fiscal	2007	and	reclassified	the	portfolios	to	Financial	instruments	owned	in	the	consolidated	statement	of	financial	condition	effective November	30,	2007.

# Special	Purpose	Entities	and	Variable	Interest	Entities.

The	Company's	involvement	with	special	purpose	entities	("SPEs")	and	variable	interest	entities	("VIEs")	is	discussed	in	Note	5	to	the	consolidated	financial	statements and	"Critical	Accounting	Policies—Special	Purpose	Entities"	herein.	In	relation	to	subprime	loans	and	subprime-backed	securities,	the	Company's	involvement	with SPEs/VIEs	consists	primarily	of	the	following:

•	 Engaging	in	securitization	activities	related	to	subprime	loans	and	subprime-backed	securities;

•	 Acting	as	an	underwriter	of	beneficial	interests	issued	by	securitization	vehicles;

•	 Transferring	whole	loans	into	SPEs/VIEs;

•	 Holding	one	or	more	classes	of	securities	issued	by	such	securitization	vehicles	(including	residual	tranche	securities)	and	possibly	entering	into	derivative agreements	with	such	securitization	vehicles;

•	 Purchasing	and	selling	(in	both	a	market-making	and	a	proprietary-trading	capacity)	subprime-backed	securities	issued	by	SPEs/VIEs,	whether	such	vehicles are	sponsored	by	the	Company	or	not;

•	 Entering	into	derivative	transactions	with	SPEs/VIEs	(not	sponsored	by	the	Company)	that	hold	subprime-related	assets;

•	 Providing	warehouse	financing	to	CDOs	and	collateralized	loan	obligations	("CLOs");

•	 Entering	into	derivative	agreements	with	non-SPE/VIEs,	whose	value	is	derived	from	securities	issued	by	SPEs/VIEs;

•	 Servicing	assets	held	by	SPEs/VIEs	or	holding	servicing	rights	related	to	assets	held	by	SPEs/VIEs	that	are	serviced	by	others	under	subservicing arrangements;

•	 Serving	as	an	asset	manager	to	various	investment	funds	that	may	invest	in	securities	that	are	backed,	in	whole	or	in	part,	by	subprime	loans.

# Other	Exposures	to	Subprime	Lenders.

The	Company	provides	warehouse	financing	to	entities	collateralized	by	residential	mortgage	loans.	Under	these	lines	of	credit	arrangements,	the	Company	requires those	entities	to	provide	collateral	in	excess	of	the	monies	advanced.	The	Company	values	the	collateral	on	a	regular	basis	to	ensure	that	the	value	of	the	collateral exceeds	the	value	of	the	monies	advanced	in	accordance	with	the	collateral	agreements.	The	Company	does	not	carry	amounts	lent	under	such	arrangements	at	fair	value but	instead	carries	such	amounts	at	amortized	cost.	In

addition,	the	Company	does	not	fair	value	its	commitments	under	such	arrangements.	The	Company	evaluates	its	exposure	and	any	potential	impairment	under	such arrangements,	whether	funded	or	committed,	in	accordance	with	SFAS	No.	5,	"Accounting	for	Contingencies"	("SFAS	No.	5").

In	addition,	the	Company	had	entered	into	derivative	and	lending	arrangements	with	a	third-party-sponsored	commercial	paper	conduit	that	provides	warehouse financing	to	subprime	lenders,	where	such	derivative	and	lending	arrangements	are	linked	to	the	performance	of	the	conduit's	loans	to	the	subprime	lenders.	At November	30,	2007,	exposure	related	to	these	arrangements	was	approximately	$300	million.	These	arrangements	were	satisfactorily	settled	and	terminated	in	December 2007.	The	Company	had	no	further	subprime-related	commitments	to	the	third-party-sponsored	commercial	paper	conduit	as	of	November	30,	2007.	The	Company	does not	sponsor	any	commercial	paper	conduits.

# Structured	Investment	Vehicles.

Structured	investment	vehicles	("SIVs")	are	unconsolidated	entities	that	issue	various	capital	notes	and	debt	instruments	to	fund	the	purchase	of	assets.	While	the Company	does	not	sponsor	or	serve	as	asset	manager	to	any	unconsolidated	SIVs,	the	Company	does	serve	as	investment	advisor	to	certain	unconsolidated	money market	funds	("the	Funds")	that	have	investments	in	securities	issued	by	SIVs.	In	2007,	widespread	illiquidity	in	the	commercial	paper	market	led	to	market	value declines	and	rating	agency	downgrades	of	many	securities	issued	by	SIVs,	some	of	which	were	held	by	the	Funds.	As	a	result,	the	Company	purchased	approximately $900	million	of	such	securities	from	the	Funds	during	the	year	at	amortized	cost,	which	resulted	in	losses	to	the	Company	of	$129	million.	The	carrying	value	of	the purchased	securities	still	held	by	the	Company	as	of	November	30,	2007	was	$543	million.	Such	positions	are	reflected	at	fair	value,	and	presented	in	Financial instruments	owned—Corporate	and	other	debt	in	the	consolidated	statement	of	financial	condition.	Subsequent	to	November	30,	2007,	the	Company	purchased approximately	$160	million	of	additional	securities	from	the	Funds	and	recorded	losses	of	approximately	$40	million	on	these	securities.	The	Company	was	not obligated	to	purchase	any	of	these	securities	and	has	no	obligation	to	purchase	any	additional	securities	from	the	Funds	in	the	future.	The	Funds	continue	to	have investment	in	securities	issued	by	SIVs,	with	an	aggregate	face	value	of	$8.2	billion	as	of	November	30,	2007	($5.4	billion	as	of	January	18,	2008.)	These	securities	have been	issued	by	SIVs	that	are	predominately	bank-sponsored,	and	meet	the	requirements	and	investment	criteria	to	continue	to	be	held	by	the	Funds.

# Monoline	Insurers.

Monoline	insurers	("Monolines")	provide	credit	enhancement	to	capital	markets	transactions.	The	current	credit	environment	severely	affected	the	capacity	of	such financial	guarantors.	The	Company's	exposure	to	Monolines	is	limited	to	bonds	that	are	insured	by	Monolines	and	as	counterparties	to	derivative	contracts.	The aggregate	direct	exposure	to	Monolines	at	November	30,	2007	was	$3.7	billion	primarily	including	ABS	bonds	of	$1.5	billion	in	the	Subsidiary	Banks'	portfolio	(see "Subsidiary	Banks")	that	are	collateralized	by	first	and	second	lien	subprime	mortgages	enhanced	by	financial	guarantees,	$1.3	billion	in	insurance	municipal	bond securities	and	$800	million	in	net	counterparty	exposure.

# Other	Matters.

The	following	matters	are	discussed	in	the	Company's	notes	to	the	consolidated	financial	statements.	For	further	information	on	these	matters,	please	see	the	applicable note:

# Stock-Based	Compensation.

The	Company	early	adopted	SFAS	No.	123R,	"Share-Based	Payment"	("SFAS	No.	123R")	using	the	modified	prospective	approach	as	of	December	1,	2004.	For	further information	on	SFAS	No.	123R,	see	Note	2	to	the	consolidated	financial	statements.

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	were	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.

As	a	result,	fiscal	2006	stock-based	compensation	expense	primarily	included	the	following	costs:

•amortization	of	fiscal	2003	year-end	awards;

•amortization	of	fiscal	2005	year-end	awards	to	non-retirement	eligible	employees;

•the	full	cost	of	fiscal	2005	year-end	awards	to	retirement	eligible	employees	(made	in	December	2005);	and

•the	full	cost	of	fiscal	2006	year-end	awards	to	retirement	eligible	employees	(made	in	December	2006).

Fiscal	2007	stock-based	compensation	expense	primarily	included	the	following	costs:

•amortization	of	fiscal	2006	year-end	awards	to	non-retirement	eligible	employees;	and

Fiscal	2003	and	fiscal	2004	year-end	awards	are	generally	amortized	over	three	and	four	years,	while	fiscal	2005	and	fiscal	2006	year-end	awards	are	generally amortized	over	two	and	three	years.

# Senior	Management	Compensation	Charges.

Compensation	and	benefits	expense	in	fiscal	2005	included	charges	for	certain	members	of	senior	management	related	to	severance	and	new	hires,	which	increased	non- interest	expenses	by	approximately	$282	million.	These	compensation	charges	were	allocated	to	the	Company's	business	segments	as	follows:	Institutional	Securities ($193	million),	Global	Wealth	Management	Group	($48	million)	and	Asset	Management	($41	million).

In	May	2003,	Coleman	(Parent)	Holdings	Inc.	("CPH")	filed	a	complaint	against	Morgan	Stanley	in	the	Circuit	Court	of	the	Fifteenth	Judicial	Circuit	for	Palm	Beach County,	Florida	relating	to	the	1998	merger	between	The	Coleman	Company,	Inc.	and	Sunbeam,	Inc.	In	June	2005,	the	trial	court	issued	a	final	judgment	in	favor	of CPH	in	the	amount	of	$1,578	million,	which	included	prejudgment	interest	and	excluded	certain	payments	received	by	CPH	in	settlement	of	related	claims	against others.	In	June	2005,	Morgan	Stanley	filed	a	notice	of	appeal	with	the	District	Court	of	Appeal	for	the	Fourth	District	of	Florida	(the	"Court	of	Appeal")	and	posted	a supersedeas	bond,	which	automatically	stayed	execution	of	the	judgment	pending	appeal.

In	March	2007,	the	Court	of	Appeal	issued	an	opinion	reversing	the	trial	court's	award	for	compensatory	and	punitive	damages	and	remanding	the	matter	to	the	trial court	for	entry	of	judgment	for	Morgan	Stanley.	In	June	2007,	the	Court	of	Appeal's	opinion	became	final	when	the	Court	of	Appeal	issued	an	order	denying	CPH's motions	for	rehearing,	rehearing	en	banc	and	for	certification	of	certain	questions	for	review	by	the	Florida	Supreme	Court	(the	"Supreme	Court").	In	June	2007,	the	trial court	issued	an	order	cancelling	the	supersedeas	bond	that	Morgan	Stanley	had	posted.	In	July	2007,	CPH	filed	a	petition	with	the	Supreme	Court	asking	that	court	to review	the	Court	of	Appeal's	decision	("Petition	for	Review").	On	December	12,	2007,	the	Supreme	Court	issued	an	order	denying	CPH's	Petition	for	Review.

The	Company	believes,	after	consultation	with	outside	counsel,	that	the	Supreme	Court's	decision	to	deny	the	Petition	for	Review	has	effectively	ended	CPH's	civil claim	against	the	Company.	Effective	November	30,	2007,	the	Company	reversed	the	$360	million	reserve	previously	established	for	the	Coleman	litigation	under	SFAS No.	5.

# Defined	Benefit	Pension	and	Other	Postretirement	Plans.

Contributions.				The	Company	made	contributions	of	$131	million	and	$84	million	(excluding	$30	million	in	fiscal	2006	relating	to	DFS	and	Quilter)	to	its	U.S.	and non-U.S.	defined	benefit	pension	plans	in	fiscal	2007	and	fiscal	2006,	respectively.	These	contributions	were	funded	with	cash	from	operations.

The	Company	determines	the	amount	of	its	pension	contributions	to	its	funded	plans	by	considering	several	factors	including	the	level	of	plan	assets	relative	to	plan liabilities,	expected	plan	liquidity	needs	and	expected	future	contribution	requirements.	The	Company's	policy	is	to	fund	at	least	the	amounts	sufficient	to	meet minimum	funding	requirements	under	applicable	employee	benefit	and	tax	regulations	(for	example	in	the	U.S.,	the	minimum	required	contribution	under	the	Employee Retirement	Income	Security	Act	of	1974,	or	"ERISA").	At	November	30,	2007,	there	were	no	minimum	required	ERISA	contributions	for	the	Company's	U.S.	pension plan	that	is	qualified	under	Section	401(a)	of	the	Internal	Revenue	Code	(the	"U.S.	Qualified	Plan").	Liabilities	for	benefits	payable	under	certain	postretirement	and unfunded	supplementary	plans	are	accrued	by	the	Company	and	are	funded	when	paid	to	the	beneficiaries.

Expense.				In	accordance	with	U.S.	GAAP,	the	Company	recognizes	the	compensation	cost	of	an	employee's	pension	benefits	(including	prior-service	cost)	over	the employee's	estimated	service	period.	This	process	involves	making	certain	estimates	and	assumptions,	including	the	discount	rate	and	the	expected	long-term	rate	of return	on	plan	assets.

The	assumed	discount	rate,	which	is	intended	to	reflect	the	rates	at	which	pension	benefits	could	be	effectively	settled,	is	used	to	measure	the	projected	and	accumulated benefit	obligations	and	to	calculate	the	service	cost	and	interest	cost.	For	fiscal	2007,	the	assumed	discount	rate	for	all	U.S.	plans	was	selected	by	the	Company,	in consultation	with	its	independent	actuaries,	using	a	pension	discount	yield	curve	based	on	the	characteristics	of	the	U.S.	Qualified	Plan	liabilities.	The	pension	discount yield	curve	represents	spot	discount	yields	based	on	duration	implicit	in	a	representative	broad	based	Aa	corporate	bond	universe	of	high-quality	fixed	income investments.	It	includes	only	bonds	of	reasonable	issue	size	and	excludes	certain	types	of	bonds,	such	as	callable	bonds.	As	of	November	30,	2007,	the	Company's	U.S. Qualified	Plan	represented	82%	of	the	total	liabilities	of	its	U.S.	pension	and	postretirement	plans	combined.	The	assumed	discount	rate	for	the	defined	benefit	portion	of its	U.K.	pension	plan	was	selected	by	the	Company	using	a	pension	discount	yield	curve	based	on	the	characteristics	of	the	U.K.	defined	benefit	pension	liabilities.	As	of November	30,	2007,	the	defined	benefit	portion	of	the	Company's	U.K.	pension	plan	represented	59%	of	the	total	liabilities	of	its	non-U.S.	pension	plans	combined.	For all	other	non-U.S.	pension	plans,	the	Company	set	the	assumed	discount	rates	based	on	the	nature	of	liabilities,	local	economic	environments	and	available	bond	indices.

The	expected	long-term	rate	of	return	on	assets	represents	the	Company's	best	estimate	of	the	long-term	return	on	plan	assets	and	generally	was	estimated	by	adjusting the	previous	year's	rate	by	the	difference	in	the	weighted	average	return	of	the	underlying	long-term	expected	returns	on	the	different	asset	classes,	based	on	the	target asset	allocations,	taking	into	consideration	estimated	expenses	and	the	benefits	of	diversification	and	rebalancing	the	portfolio.	This	rate	is	expected	to	remain	the	same from	one	year	to	the	next	unless	there	is	a	significant	change	in	the	target	asset	allocation,	the	fees	and	expenses	paid	by	the	plan	or	market	conditions.

As	of	November	30,	2007,	the	Company's	U.S.	Qualified	Plan	represented	90%	of	the	total	assets	of	its	U.S.	and	non-U.S.	pension	plans	combined.	The	Company,	in consultation	with	its	independent	investment	consultants	and	actuaries,	determined	the	expected	long-term	rate	of	return	on	its	U.S.	Qualified	Plan	assets	would	remain at	6.75%	for	fiscal	2007	(see	Note	19	to	the	consolidated	financial	statements).	There	was	no	significant	change	in	the	fees	paid	by	the	plan	or	the	underlying	market outlook	since	September	2006.	To	better	align	the	duration	of	plan	assets	with	the	duration	of	plan	liabilities,	in	May	2007,	the	U.S.	Qualified	Plan's	target	asset allocation	policy	was	changed	from	45%/55%	equity/fixed	income	to	30%/70%	equity/fixed	income.	The	effects	of	this	change	will	be	reflected	in	fiscal	2008,	and	the impact	is	not	expected	to	be	material	to	the	Company's	consolidated	results	of	operations.	The	preliminary	expected	long-term	rate	of	return	on	U.S.	Qualified	Plan assets	is	6.50%	for	fiscal	2008.

The	Company's	expected	long-term	rate	of	return	on	assets	for	its	U.S.	Qualified	Plan	was	based	on	the	following	target	asset	allocation:

|  | Target	Investment<br>Mix | Expected	Annual<br>Return(1) |
| :--- | :--- | :--- |
| Domestic\tequity: |  |  |
| Large\tcapitalization | 12% | 8.1% |
| Small\tcapitalization | 3% | 8.4% |
| International\tequity | 15% | 8.4% |
| Fixed\tincome: |  |  |
| Long-term\tgovernment/corporate | 70% | 5.4% |

(1) These	returns	do	not	include	the	impact	of	diversification	on	the	overall	expected	portfolio	return.

Each	year,	the	Company	compares	its	initial	estimate	of	the	expected	long-term	rate	of	return	on	assets	for	the	U.S.	Qualified	Plan	(and	adjusts,	if	necessary)	with	a portfolio	return	calculator	model	(the	"Portfolio	Model")	that	produces	a	range	of	expected	returns	for	the	portfolio.	Return	assumptions	used	are	forward-looking	gross returns	that	are	not	developed	solely	by	an	examination	of	historical	returns.	The	Portfolio	Model	begins	with	the	current	U.S.	Treasury	yield	curve,	recognizing	that expected	returns	on	bonds	are	heavily	influenced	by	the	current	level	of	yields.	Corporate	bond	spreads	and	equity	risk	premiums,	based	on	current	market	conditions, are

then	added	to	develop	the	return	expectations	for	each	asset	class.	The	resulting	expected	portfolio	investment	is	then	adjusted	downward	to	reflect	an	assumed	load	for expenses,	which	include	investment	and	transaction	fees	that	typically	are	paid	from	plan	assets,	added	to	the	cost	basis	or	subtracted	from	sale	proceeds,	as	well	as administrative	expenses	paid	from	plan	assets.

The	Company	uses	the	expected	long-term	rate	of	return	on	plan	assets	to	compute	the	expected	return	on	assets	component	of	pension	expense.	For	the	U.S.	Qualified Plan,	expected	returns	are	computed	based	on	a	market-related	value	of	assets.	The	market-related	value	of	assets	is	a	smoothed	actuarial	value	of	assets	equal	to	a moving	average	of	market	values	in	which	investment	income	is	recognized	over	a	five-year	period.	The	market-related	value	of	assets	must	be	no	greater	than	120% and	no	less	than	80%	of	the	market	value	of	assets.	Investment	income	equal	to	the	expected	return	on	the	plan's	assets	as	calculated	for	the	prior	year's	expense	is recognized	immediately.	Any	difference	between	the	actual	investment	income	(on	a	market-value	basis)	and	the	expected	return	is	recognized	over	a	five-year	period	in accordance	with	SFAS	No.	87,	"Employers'	Accounting	for	Pensions"	("SFAS	No.	87").

Other	assumptions,	including	mortality	rates,	long-term	salary	growth	and	employee	turnover	rates,	are	set	by	the	Company	in	consultation	with	its	independent actuaries.	These	assumptions	are	tested	every	year	by	monitoring	gains	and	losses,	performing	assumption	studies	as	needed,	and	monitoring	Company	objectives	and actuarial	trends.	These	assumptions	are	adjusted	whenever	necessary.

The	Company	amortizes	(as	a	component	of	pension	expense)	unrecognized	net	gains	and	losses	over	the	average	future	service	of	active	participants	(5	to	20	years depending	upon	the	plan)	to	the	extent	that	the	gain/loss	exceeds	10%	of	the	greater	of	the	projected	benefit	obligation	or	the	market-related	value	of	plan	assets.	The	loss amortization	component	for	the	U.S.	and	the	non-U.S.	pension	plans	was	$41	million	for	fiscal	2007	(28%	of	pension	expense)	and	$51	million	for	fiscal	2006	(32%	of pension	expense).

Impact	of	SFAS	No.	158.				In	September	2006,	the	Financial	Accounting	Standards	Board	("FASB")	issued	SFAS	No.	158,	"Employers'	Accounting	for	Defined Benefit	Pension	and	Other	Postretirement	Plans,	an	amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)"	("SFAS	No.	158").	Among	other	items,	SFAS No.	158	required	recognition	of	the	overfunded	or	underfunded	status	of	the	Company's	defined	benefit	and	postretirement	plans	as	an	asset	or	liability	in	the consolidated	financial	statements	for	the	fiscal	year	ending	November	30,	2007.	The	Company	recorded	an	after-tax	charge	of	$208	million	($347	million	pre-tax)	to Shareholders'	equity	upon	the	adoption	of	this	requirement.	SFAS	No.	158	also	requires	the	measurement	of	defined	benefit	and	postretirement	plan	assets	and obligations	as	of	the	end	of	the	fiscal	year.	SFAS	No.	158's	requirement	to	use	the	fiscal	year-end	date	as	the	measurement	date	is	effective	for	fiscal	years	ending	after December	15,	2008.	The	Company	expects	to	early	adopt	a	fiscal	year-end	measurement	date	for	its	fiscal	year	ending	November	30,	2008	and	currently	expects	to record	an	after-tax	charge	of	approximately	$15	million	to	Shareholders'	equity	upon	adoption.

# Critical	Accounting	Policies.

The	Company's	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	consolidated	financial	statements).	The	Company	believes	that	of	its	accounting	policies	(see	Note	2	to	the	consolidated	financial	statements),	the following	may	involve	a	higher	degree	of	judgment	and	complexity.

# Fair	Value.

Financial	Instruments	Measured	at	Fair	Value.				A	significant	number	of	the	Company's	financial	instruments	are	carried	at	fair	value	with	changes	in	fair	value recognized	in	earnings	each	period.	The	Company	makes	estimates	regarding	valuation	of	assets	and	liabilities	measured	at	fair	value	in	preparing	the	consolidated financial	statements.	These	assets	and	liabilities	include:

•	 Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased;

•	 Securities	received	as	collateral	and	Obligation	to	return	securities	received	as	collateral;

•	 Certain	Commercial	paper	and	other	short-term	borrowings,	primarily	structured	notes;

•	 Certain	Deposits;

•	 Other	secured	financings;	and

•	 Certain	Long-term	borrowings,	primarily	structured	debt.

Fair	Value	Measurement—Definition	and	Hierarchy.				The	Company	adopted	the	provisions	of	SFAS	No.	157,	effective	December	1,	2006.	SFAS	No.	157	defines	fair value	as	the	price	that	would	be	received	to	sell	an	asset	or	paid	to	transfer	a	liability	(i.e.,	the	"exit	price")	in	an	orderly	transaction	between	market	participants	at	the measurement	date.

In	determining	fair	value,	the	Company	uses	various	valuation	approaches,	including	market,	income	and/or	cost	approaches.	SFAS	No.	157	establishes	a	hierarchy	for inputs	used	in	measuring	fair	value	that	maximizes	the	use	of	observable	inputs	and	minimizes	the	use	of	unobservable	inputs	by	requiring	that	the	observable	inputs	be used	when	available.	Observable	inputs	are	inputs	that	market	participants	would	use	in	pricing	the	asset	or	liability	developed	based	on	market	data	obtained	from sources	independent	of	the	Company.	Unobservable	inputs	are	inputs	that	reflect	the	Company's	assumptions	about	the	assumptions	market	participants	would	use	in pricing	the	asset	or	liability	developed	based	on	the	best	information	available	in	the	circumstances.	The	hierarchy	is	broken	down	into	three	levels	based	on	the reliability	of	inputs	as	follows:

•	 Level	1—Valuations	based	on	quoted	prices	in	active	markets	for	identical	assets	or	liabilities	that	the	Company	has	the	ability	to	access.	Valuation adjustments	and	block	discounts	are	not	applied	to	Level	1	instruments.	Since	valuations	are	based	on	quoted	prices	that	are	readily	and	regularly	available	in an	active	market,	valuation	of	these	products	does	not	entail	a	significant	degree	of	judgment.

Assets	and	liabilities	utilizing	Level	1	inputs	include	exchange-traded	equity	securities	and	listed	derivatives	that	are	actively	traded,	most	U.S.	Government securities	and	certain	other	sovereign	government	obligations.

•	 Level	2—Valuations	based	on	quoted	prices	in	markets	that	are	not	active	or	for	which	all	significant	inputs	are	observable,	directly	or	indirectly.

Assets	and	liabilities	utilizing	Level	2	inputs	include:	exchange-traded	equity	securities	and	listed	derivatives	that	are	not	actively	traded;	most	OTC derivatives;	restricted	stock;	corporate	and	municipal	bonds;	certain	corporate	loans	and	loan	commitments;	certain	high-yield	debt;	certain	residential	and commercial	mortgage	loans;	certain	mortgage-backed	securities	("MBS"),	asset-backed	securities	("ABS"),	and	CDO	securities;	retained	interests	in	certain securitization	transactions;	structured	notes;	physical	commodities;	and	mortgage	servicing	rights.

•	 Level	3—Valuations	based	on	inputs	that	are	unobservable	and	significant	to	the	overall	fair	value	measurement.

Assets	and	liabilities	utilizing	Level	3	inputs	include:	certain	corporate	loans	and	loan	commitments;	certain	commercial	whole	loans;	certain	mortgage	loans; certain	high-yield	debt;	distressed	debt	(i.e.,	securities	of	issuers	encountering	financial	difficulties,	including	bankruptcy	or	insolvency);	certain	MBS,	ABS and	CDO	securities;	retained	interests	in	certain	securitization	transactions;	investments	in	real	estate	funds;	private	equity	investments;	and	complex	over-the- counter	derivatives	(including	certain	foreign	currency	options;	long-dated	commodity	options	and	swaps;	certain	mortgage-related	credit	default	swaps; derivative	interests	in	mortgage-related	CDOs;	and	basket	credit	default	swaps).

The	availability	of	observable	inputs	can	vary	from	product	to	product	and	is	affected	by	a	wide	variety	of	factors,	including,	for	example,	the	type	of	product,	whether the	product	is	new	and	not	yet	established	in	the	marketplace,	and	other	characteristics	particular	to	the	transaction.	To	the	extent	that	valuation	is	based	on	models	or inputs	that	are	less	observable	or	unobservable	in	the	market,	the	determination	of	fair	value	requires	more	judgment.	Accordingly,	the	degree	of	judgment	exercised	by the	Company	in	determining	fair	value	is	greatest	for	instruments	categorized	in	Level	3.	In	certain	cases,	the	inputs	used	to	measure	fair	value	may	fall	into	different levels	of	the	fair	value	hierarchy.	In	such	cases,	for	disclosure	purposes	the	level	in	the	fair	value	hierarchy	within	which	the	fair	value	measurement	in	its	entirety	falls	is determined	based	on	the	lowest	level	input	that	is	significant	to	the	fair	value	measurement	in	its	entirety.

Fair	value	is	a	market-based	measure	considered	from	the	perspective	of	a	market	participant	who	holds	the	asset	or	owes	the	liability	rather	than	an	entity-specific measure.	Therefore,	even	when	market	assumptions	are	not	readily	available,	the	Company's	own	assumptions	are	set	to	reflect	those	that	market	participants	would	use in	pricing	the	asset	or	liability	at	the	measurement	date.	The	Company	uses	prices	and	inputs	that	are	current	as	of	the	measurement	date,	including	during	periods	of market	dislocation.	In	periods	of	market	dislocation,	the	observability	of	prices	and	inputs	may	be	reduced	for	many	instruments.	This	condition	could	cause	an instrument	to	be	reclassified	from	Level	1	to	Level	2	or	Level	2	to	Level	3.	See	Note	3	to	the	consolidated	financial	statements	for	further	information	about	the Company's	financial	assets	and	liabilities	that	are	accounted	for	at	fair	value.

Valuation	Techniques.				Many	cash	and	OTC	contracts	have	bid	and	ask	prices	that	can	be	observed	in	the	marketplace.	Bid	prices	reflect	the	highest	price	that	the Company	and	others	are	willing	to	pay	for	an	asset.	Ask	prices	represent	the	lowest	price	that	the	Company	and	others	are	willing	to	accept	for	an	asset.	For	financial instruments	whose	inputs	are	based	on	bid-ask	prices,	the	Company	does	not	require	that	fair	value	always	be	a	predetermined	point	in	the	bid-ask	range.	The	Company's policy	is	to	allow	for	mid-market	pricing	and	adjusting	to	the	point	within	the	bid-ask	range	that	meets	the	Company's	best	estimate	of	fair	value.	For	offsetting	positions in	the	same	financial	instrument,	the	same	price	within	the	bid-ask	spread	is	used	to	measure	both	the	long	and	short	positions.

Fair	value	for	many	cash	and	OTC	contracts	is	derived	using	pricing	models.	Pricing	models	take	into	account	the	contract	terms	(including	maturity)	as	well	as	multiple inputs,	including,	where	applicable,	commodity	prices,	equity	prices,	interest	rate	yield	curves,	credit	curves,	creditworthiness	of	the	counterparty,	option	volatility	and currency	rates.	In	accordance	with	SFAS	No.	157,	the	impact	of	the	Company's	own	credit	spreads	are	also	considered	when	measuring	the	fair	value	of	liabilities, including	OTC	derivative	contracts.	Where	appropriate,	valuation	adjustments	are	made	to	account	for	various	factors,	including	bid-ask	spreads,	credit	quality	and market	liquidity.	These	adjustments	are	applied	on	a	consistent	basis	and	are	based	upon	observable	inputs	where	available.

OTC	Derivative	Contracts.					OTC	derivative	contracts	include	forward,	swap	and	option	contracts	related	to	interest	rates,	foreign	currencies,	credit	standing	of reference	entities,	equity	prices	or	commodity	prices.

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,	and	simulation	models	or	a	combination	thereof.	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.	In the	case	of	more	established	derivative	products,	the	pricing	models	used	by	the	Company	are	widely	accepted	by	the	financial	services	industry.	A	substantial	majority of	OTC	derivative	products	valued	by	the	Company	using	pricing	models	fall	into	this	category	and	are	categorized	within	Level	2	of	the	fair	value	hierarchy.

Other	derivative	products,	typically	the	newest	and	most	complex	products,	will	require	more	judgment	in	the	implementation	of	the	valuation	technique	applied	due	to the	complexity	of	the	valuation	assumptions	and	the	reduced	observability	of	inputs.	This	includes	certain	credit	default	swaps	where	direct	trading	activity	or	quotes	are unobservable.	Derivative	interests	in	mortgage-related	CDOs,	for	which	observability	of	external	price	data	is	extremely	limited,	are	valued	based	on	an	evaluation	of the	market	for	similar	positions	as	indicated	by	secondary	and	primary	market	activity	in	the	cash	CDO	and	synthetic	CDO	market.	Each	position	is	evaluated independently	taking	into	consideration	the	underlying	collateral	performance	and	pricing,	behavior	of	the	tranche	under	various	cumulative	loss	and	prepayment scenarios,	deal	structures	(e.g.,	non-amortizing	reference	obligations,	call	features)	and	liquidity.	While	these	factors	may	be	supported	by	historical	and	actual	external observations,	the	determination	of	their	value	as	it	relates	to	specific	positions	nevertheless	requires	significant	judgment.	Mortgage-related	credit	default	swaps	are valued	based	on	data	from	comparable	credit	instruments	in	the	cash	market	and	trades	in	comparable	swaps	as	benchmarks,	as	prices	and	spreads	for	the	specific	credits subject	to	valuation	tend	to	be	of	limited	observability.	For	basket	credit	default	swaps	and	CDO-squared	positions,	the	correlation	between	reference	credits	is	often	a significant	input	into	the	pricing	model,	in	addition	to	several	other	more	observable	inputs	such	as	credit	spread,	interest	and	recovery	rates.	As	the	correlation	input	is unobservable	for	each	specific	swap,	it	is	benchmarked	to	standardized	proxy	baskets	for	which	external	data	are	available.	These	instruments	involve	significant unobservable	inputs	and	are	categorized	in	Level	3	of	the	fair	value	hierarchy.

The	Company	trades	various	derivative	structures	with	commodity	underlyings.	Depending	on	the	type	of	structure,	the	model	inputs	generally	include	interest	rate	yield curves,	commodity	underlier	spread	curves,	volatility	of	the	underlying	commodities	and,	in	some	cases,	the	correlation	between	these	inputs.	The	fair	value	of	these products	is	estimated	using	executed	trades	and	broker	and	consensus	data	to	provide	values	for	the	aforementioned	inputs.	Where	these	inputs	are	unobservable, relationships	to	observable	commodities	and	data	points,	based	on	historic	and/or	implied	observations,	are	employed	as	a	technique	to	estimate	the	model	input	values. Commodity	derivatives	are	generally	categorized	in	Level	2	of	the	fair	value	hierarchy;	in	instances	where	significant	inputs	are	unobservable,	they	are	categorized	in Level	3	of	the	fair	value	hierarchy.

Prior	to	the	adoption	of	SFAS	No.	157,	the	Company	followed	the	provisions	of	EITF	Issue	No.	02-3.	Under	EITF	Issue	No.	02-3,	recognition	of	day	one	profit	at inception	of	an	OTC	derivative	contract	was	prohibited	unless	the	fair	value	of	the	contact	was	based	on	a	valuation	technique	incorporating	observable	market	data. With	the	adoption	of	SFAS	No.	157,	the	Company	is	no	longer	applying	the	revenue	recognition	criteria	of	EITF	Issue	No.	02-3.

Other	Sovereign	Government	Obligations.				The	fair	value	of	foreign	sovereign	government	obligations	is	generally	based	on	quoted	prices	in	active	markets.	When quoted	prices	are	not	available,	fair	value	is	determined	based	on	a	valuation	model	that	has	as	inputs	interest	rate	yield	curves,	cross-currency	basis	index	spreads,	and country	credit	spreads	for	structures	similar	to	the	bond	in	terms	of	issuer,	maturity	and	seniority.	These	bonds	are	generally	categorized	in	Levels	1	or	2	of	the	fair	value hierarchy.

Municipal	Bonds.				The	fair	value	of	municipal	bonds	is	estimated	using	recently	executed	transactions,	market	price	quotations	and	pricing	models	that	factor	in,	where applicable,	interest	rates,	bond	or	credit	default	swap	spreads	and	volatility.	These	bonds	are	generally	categorized	in	Level	2	of	the	fair	value	hierarchy.

Corporate	Bonds.				The	fair	value	of	corporate	bonds	is	estimated	using	recently	executed	transactions,	market	price	quotations	(where	observable),	bond	spreads	or credit	default	swap	spreads.	The	spread	data	used	are	for

the	same	maturity	as	the	bond.	If	the	spread	data	do	not	reference	the	issuer,	then	data	that	reference	a	comparable	issuer	is	used.	When	observable	price	quotations	are not	available,	fair	value	is	determined	based	on	cash	flow	models	with	yield	curves,	bond	or	single	name	credit	default	swap	spreads	and	recovery	rates	based	on collateral	values	as	key	inputs.	Corporate	bonds	are	generally	categorized	in	Level	2	of	the	fair	value	hierarchy;	in	instances	where	significant	inputs	are	unobservable, they	are	categorized	in	Level	3	of	the	hierarchy.

Corporate	Loans	and	Loan	Commitments.				The	fair	value	of	corporate	loans	is	estimated	using	recently	executed	transactions,	market	price	quotations	(where observable)	and	market	observable	credit	default	swap	levels	along	with	proprietary	valuation	models	and	default	recovery	analysis	where	such	transactions	and quotations	are	unobservable.	The	fair	value	of	contingent	corporate	loan	commitments	is	estimated	by	using	executed	transactions	on	comparable	loans	and	the anticipated	market	price	based	on	pricing	indications	from	syndicate	banks	and	customers.	The	valuation	of	these	commitments	also	takes	into	account	certain	fee income.	While	certain	corporate	loans,	closed	loan	commitments	and	revolving	loans	are	Level	2	instruments,	certain	other	corporate	loans	and	contingent	corporate loan	commitments	are	categorized	in	Level	3	of	the	fair	value	hierarchy.

Mortgage	Loans.				The	valuation	of	mortgage	loans	depends	upon	the	exit	market	for	the	loan.	Loans	not	intended	for	securitization	are	valued	based	on	the	analysis	of the	underlying	collateral	performance,	capital	structure	and	market	spreads	for	comparable	positions	as	prices	and/or	spreads	for	specific	credits	tend	to	be	unobservable. Where	comparables	do	not	exist,	such	loans	are	valued	based	on	origination	price	and	collateral	performance	(credit	events)	since	origination.	These	loans	are	classified in	Levels	2	or	3	of	the	fair	value	hierarchy.

The	Company	also	holds	certain	loan	products	and	mortgage	products	with	the	intent	to	securitize	them.	When	structuring	of	the	related	securitization	is	substantially complete,	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	these	products,	the Company	marks	them	to	the	expected	securitized	value.	Factors	affecting	the	value	of	loan	and	mortgage	products	intended	to	be	securitized	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,	updated	cumulative	loan	loss	data, prepayment	rates,	yields,	investor	demand,	any	significant	market	volatility	since	the	last	securitization,	and	credit	enhancement.	While	these	valuation	factors	may	be supported	by	historical	and	actual	external	observations,	the	determination	of	their	value	as	it	relates	to	specific	positions	may	require	significant	judgment.	These instruments	are	classified	in	Levels	2	or	3	of	the	fair	value	hierarchy.

U.S.	Agency	Securities.				U.S.	agency	securities	include	To-be-announced	("TBA")	securities	and	mortgage	pass-through	certificates.	TBA	securities	are	liquid	and have	quoted	market	prices.	Fair	value	of	mortgage	pass-through	certificates	is	determined	via	a	simulation	model,	which	considers	different	rate	scenarios	and	historical activity	to	calculate	a	spread	to	the	comparable	TBA	security.	U.S.	agency	securities	are	categorized	in	Level	2	of	the	fair	value	hierarchy.

Commercial	Mortgage-Backed	Securities	and	Asset-Backed	Securities	("ABS").				CMBS	and	ABS	may	be	valued	based	on	external	price/spread	data.	When	position- specific	external	price	data	are	not	observable,	the	valuation	is	based	on	prices	of	comparable	bonds.	Included	in	this	category	are	certain	interest-only	securities,	which, in	the	absence	of	market	prices,	are	valued	as	a	function	of	observable	whole	bond	prices	and	cash	flow	values	of	principal-only	bonds	using	current	market	assumptions at	the	measurement	date.	CMBS	and	ABS	are	categorized	in	Level	3	if	external	prices	are	unobservable;	otherwise	they	are	categorized	in	Level	2	of	the	fair	value hierarchy.

Retained	Interests	in	Securitization	Transactions.				The	Company	engages	in	securitization	activities	related	to	various	types	of	loans	and	bonds.	The	Company	may retain	interests	in	securitized	financial	assets	as	one	or	more	tranches	of	the	securitization.	To	determine	fair	values,	observable	inputs	are	used	if	available.	Observable inputs,	however,	may	not	be	available	for	certain	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,	prepayment	rates,	forward	yield	curves	and	discount	rates	commensurate	with	the	risks

involved.	When	there	are	no	significant	unobservable	inputs,	retained	interests	are	categorized	in	Level	2	of	the	fair	value	hierarchy.	When	unobservable	inputs	are significant	to	the	fair	value	measurement,	albeit	generally	supportable	by	historical	and	actual	benchmark	data,	retained	interests	are	categorized	in	Level	3	of	the	fair value	hierarchy.

Investments	in	Private	Equity	and	Real	Estate.				The	Company's	investments	in	private	equity	and	real	estate	take	the	form	of	direct	private	equity	investments	and investment	in	private	equity	and	real	estate	funds.	The	transaction	price	is	used	as	the	best	estimate	of	fair	value	at	inception.	When	evidence	supports	a	change	to	the carrying	value	from	the	transaction	price,	adjustments	are	made	to	reflect	expected	exit	values.	Ongoing	reviews	by	Company	management	are	based	on	an	assessment of	each	underlying	investment,	incorporating	valuations	that	consider	the	evaluation	of	financing	and	sale	transactions	with	third	parties,	expected	cash	flows	and market-based	information,	including	comparable	company	transactions,	performance	multiples	and	changes	in	market	outlook,	among	other	factors.	These	nonpublic investments	are	included	in	Level	3	of	the	fair	value	hierarchy	because	they	trade	infrequently,	and,	therefore,	the	fair	value	is	unobservable.

Physical	Commodities.				The	Company	trades	various	physical	commodities,	including	crude	oil	and	refined	products,	metals	and	agricultural	products.	Fair	value	for physical	commodities	is	determined	using	observable	inputs,	including	broker	quotations	and	published	indices.	Physical	commodities	are	categorized	in	Level	2	of	the fair	value	hierarchy.

Deposits.				The	fair	value	of	certificates	of	deposit	is	estimated	using	third-party	quotations.	These	deposits	are	categorized	in	Level	2	of	the	fair	value	hierarchy.

Structured	Notes.				The	Company	issues	structured	notes	that	have	coupons	or	repayment	terms	linked	to	the	performance	of	debt	or	equity	securities,	indices, currencies	or	commodities.	Fair	value	of	structured	notes	is	estimated	using	valuation	models	described	in	this	section	for	the	derivative	and	debt	features	of	the	notes. These	models	incorporate	observable	inputs,	including	prices	that	the	notes	are	linked	to,	interest	rate	yield	curves,	option	volatility	and	currency	rates.	The	impact	of	the Company's	own	credit	spreads	also	is	included	based	on	the	Company's	observed	secondary	bond	market	spreads.	Most	structured	notes	are	categorized	in	Level	2	of the	fair	value	hierarchy.

Reclasses	from	Level	2	to	Level	3.				During	the	fourth	quarter	of	fiscal	2007,	the	Company	reclassified	approximately	$7.0	billion	of	funded	assets	and	$279	million	of net	derivative	contracts	from	Level	2	to	Level	3	because	certain	significant	inputs	for	the	fair	value	measurement	became	unobservable.	These	reclasses	were	primarily related	to	the	continued	market	and	liquidity	deterioration	in	the	mortgage	markets.	The	most	material	transfers	to	Level	3	were	in	commercial	whole	loans,	residuals from	residential	securitizations,	interest-only	commercial	mortgage	and	agency	bonds	as	well	as	commercial	and	residential	credit	default	swaps.

Fair	Value	Control	Processes.				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	inputs	wherever	possible.	In	the	event	that observable	inputs	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,	Market	Risk and	Credit	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	information	is	then	used	to	evaluate	the	fair	value	of	these	OTC derivative	products.

# 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.

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.	Given	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	and	indirect	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	make	judgments	and	interpretations	about	the	application	of	these	inherently	complex	tax	laws	when	determining	the	provision	for	income	taxes	and	the expense	for	indirect	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.	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	2,	15	and	20	to	the	consolidated	financial	statements	for	additional	information	on	legal	proceedings	and	tax	examinations.

# Special	Purpose	Entities.

The	Company	enters	into	a	variety	of	transactions	with	special	purpose	entities,	primarily	in	connection	with	securitization	activities.	The	Company	engages	in securitization	activities	related	to	commercial	and	residential	mortgage	loans,	U.S.	agency	collateralized	mortgage	obligations,	corporate	bonds	and	loans,	municipal bonds

and	other	types	of	financial	instruments.	In	most	cases,	these	SPEs	are	deemed	to	be	variable	interest	entities.	Unless	a	VIE	is	determined	to	be	a	qualifying	special purpose	entity	("QSPE"),	the	Company	is	required	under	accounting	guidance	to	perform	an	analysis	of	each	VIE	at	the	date	upon	which	the	Company	becomes involved	with	it	to	determine	whether	the	Company	is	the	primary	beneficiary	of	the	VIE,	in	which	case	the	Company	must	consolidate	the	VIE.	QSPEs	are	not consolidated.

In	accordance	with	accounting	guidance,	the	Company	reassesses	whether	it	is	the	primary	beneficiary	of	a	VIE	upon	the	occurrence	of	certain	reconsideration	events.	If the	Company's	initial	assessment	results	in	a	determination	that	it	is	not	the	primary	beneficiary	of	a	VIE,	then	the	Company	reassesses	this	determination	upon	the occurrence	of:

•	 Changes	to	the	VIE's	governing	documents	or	contractual	arrangements	in	a	manner	that	reallocates	the	obligation	to	absorb	the	expected	losses	or	the	right	to receive	the	expected	residual	returns	of	the	VIE	between	the	current	primary	beneficiary	and	the	other	variable	interest	holders,	including	the	Company.

•	 Acquisition	by	the	Company	of	additional	variable	interests	in	the	VIE.

If	the	Company's	initial	assessment	results	in	a	determination	that	it	is	the	primary	beneficiary,	then	the	Company	reassesses	this	determination	upon	the	occurrence	of:

•	 A	sale	or	disposition	by	the	Company	of	all	or	part	of	its	variable	interests	in	the	VIE	to	unrelated	parties.

•	 The	issuance	of	new	variable	interests	by	the	VIE	to	parties	unrelated	to	the	Company.

The	determination	of	whether	an	SPE	meets	the	accounting	requirements	of	a	QSPE	requires	significant	judgment,	particularly	in	evaluating	whether	the	permitted activities	of	the	SPE	are	significantly	limited	and	in	determining	whether	derivatives	held	by	the	SPE	are	passive	and	nonexcessive.	In	addition,	the	analysis	involved	in determining	whether	an	entity	is	a	VIE,	and	in	determining	the	primary	beneficiary	of	a	VIE,	requires	significant	judgment	(see	Note	5	to	the	consolidated	financial statements).

# Certain	Factors	Affecting	Results	of	Operations.

The	Company's	results	of	operations	may	be	materially	affected	by	market	fluctuations	and	by	economic	factors.	In	addition,	results	of	operations	in	the	past	have	been, and	in	the	future	may	continue	to	be,	materially	affected	by	many	factors	of	a	global	nature,	including	political,	economic	and	market	conditions;	the	availability	and cost	of	capital;	the	level	and	volatility	of	equity	prices,	commodity	prices	and	interest	rates;	currency	values	and	other	market	indices;	technological	changes	and	events; the	availability	and	cost	of	credit;	inflation;	and	investor	sentiment	and	confidence	in	the	financial	markets.	In	addition,	there	continues	to	be	a	heightened	level	of legislative,	legal	and	regulatory	developments	related	to	the	financial	services	industry	that	potentially	could	increase	costs,	thereby	affecting	future	results	of	operations. Such	factors	also	may	have	an	impact	on	the	Company's	ability	to	achieve	its	strategic	objectives	on	a	global	basis.	For	a	further	discussion	of	these	and	other	important factors	that	could	affect	the	Company's	business,	see	"Risk	Factors"	in	Part	I,	Item	1A.

# 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	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.	For	a	description	of	the	Company's other	principal	risks	and	how	they	are	monitored	and	managed,	see	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk—Risk	Management"	in	Part	II, Item	7A.

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	management	framework	are	the	Contingency	Funding	Plan, the	Liquidity	Reserve	and	the	Cash	Capital	Policy.	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.

# 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	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	decreased	to	$1,045,409	million	at	November	30,	2007	from	$1,121,192	million	at	November	30,	2006.	The	decrease	was	primarily	due	to decreases	in	securities	borrowed,	securities	purchased	under	agreements	to	resell	and	the	completion	of	the	Discover	Spin-off	(see	Note	22	to	the	consolidated	financial statements),	partially	offset	by	an	increase	in	cash	and	securities	deposited	with	clearing	organizations	and	securities	received	as	collateral.

Within	the	sales	and	trading	related	assets	and	liabilities,	there	are	transactions	attributable	to	securities	financing	activities.	Securities	financing	assets	and	liabilities	as of	November	30,	2007	were	$587	billion	and	$559	billion,	respectively.	Securities	financing	transactions	include	repurchase	and	resale	agreements,	securities	borrowed and	loaned	transactions,	securities	received	as	collateral	and	obligation	to	return	securities	received,	customer	receivables/payables	and	related	segregated	customer cash.

Securities	financing	assets	and	liabilities	include	matched	book	transactions	with	minimal	market,	credit	and/or	liquidity	risk.	These	matched	book	transactions	are	to accommodate	customers,	as	well	as	to	obtain	securities	for	the	settlement	and	finance	of	inventory	positions.	The	customer	receivable/payable	portion	of	the	securities financing	transactions	includes	customer	margin	loans,	collateralized	by	customer	owned	securities,	and	customer	cash,	which	is	segregated	in	order	to	satisfy	regulatory requirements.	The	Company's	exposure	on	these	transactions	is	limited	by	collateral	maintenance	policies,	which	in	turn	limits	the	Company's	credit	exposure	to customers.	Included	within	securities	financing	assets	was	$82	billion	that,	in	accordance	with	SFAS	No.	140,	"Accounting	for	Transfers	and	Servicing	of	Financial Assets	and	Extinguishments	of	Liabilities	("SFAS	No.	140")	represented	equal	and	offsetting	assets	and	liabilities	for	fully	collateralized	non-cash	loan	transactions.

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	and	FASB	Interpretation	No.	46	(revised	December	2003)	"Consolidation	of	Variable	Interest Entities	("FIN	46R").	Gross	assets	are	also	reduced	by	the	full	amount	of	cash	and	securities	deposited	with	clearing	organizations	or	segregated	under	federal	and	other regulations	or	requirements.	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	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	60-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.	Excluding	the	$82	billion	of	assets	and	liabilities	recorded	in	accordance	with	SFAS	No.	140	would	reduce	the leverage	ratio	from	32.6x	to	30.0x.

The	following	table	sets	forth	the	Company's	total	assets,	adjusted	assets	and	leverage	ratios	as	of	November	30,	2007	and	November	30,	2006	and	for	the	average month-end	balances	during	fiscal	2007	and	fiscal	2006:

|  | Balance	at | Balance	at | Average	Month-End	Balance | Average	Month-End	Balance |
| :--- | :--- | :--- | :--- | :--- |
|  | November\t30, | November\t30, |  |  |
|  | 2007 | 2006 | Fiscal\t2007(1) | Fiscal\t2006(2) |
|  |  | (dollars\tin\tmillions,\texcept\tratio\tdata) | (dollars\tin\tmillions,\texcept\tratio\tdata) |  |
| Total\tassets | $1,045,409 | $1,121,192 | $1,202,065 | $1,022,269 |
| Less:\tSecurities\tpurchased\tunder\tagreements\tto\tresell | (126,887) | (175,787) | (176,973) | (183,490) |
| Securities\tborrowed | (239,994) | (299,631) | (279,729) | (274,807) |
| Add:\tFinancial\tinstruments\tsold,\tnot\tyet\tpurchased | 134,341 | 183,119 | 172,075 | 157,678 |
| Less:\tDerivative\tcontracts\tsold,\tnot\tyet\tpurchased | (71,604) | (57,491) | (59,869) | (47,176) |
| Subtotal | 741,265 | 771,402 | 857,569 | 674,474 |
| Less:\tCash\tand\tsecurities\tdeposited\twith\tclearing\torganizations\tor\tsegregated\tunder\tfederal |  |  |  |  |
| and\tother\tregulations\tor\trequirements(3) | (61,608) | (29,565) | (41,357) | (41,644) |
|  | (110,001) | (100,236) | (132,141) | (82,992) |
| Goodwill\tand\tnet\tintangible\tassets(4) | (4,071) | (3,443) | (3,924) | (2,894) |
| Adjusted\tassets | $565,585 | $638,158 | $680,147 | $546,944 |
| Common\tequity | $30,169 | $34,264 | $35,235 | $31,740 |
| Preferred\tequity | 1,100 | 1,100 | 1,100 | 423 |
| Shareholders'\tequity | 31,269 | 35,364 | 36,335 | 32,163 |
| Junior\tsubordinated\tdebt\tissued\tto\tcapital\ttrusts | 4,876 | 4,884 | 4,878 | 3,875 |
| Subtotal | 36,145 | 40,248 | 41,213 | 36,038 |
| Less:\tGoodwill\tand\tnet\tintangible\tassets(4) | (4,071) | (3,443) | (3,924) | (2,894) |
| Tangible\tshareholders'\tequity | $32,074 | $36,805 | $37,289 | $33,144 |
| Leverage\tratio(5) | 32.6x | 30.5x | 32.2x | 30.8x |
| Adjusted\tleverage\tratio(6) | 17.6x | 17.3x | 18.2x | 16.5x |

(1) Average	balances	for	fiscal	2007	were	calculated	based	upon	month-end	balances	from	November	2006	through	November	2007.	Average	common	equity	was	adjusted	for	the	Discover	Spin-off.

(2) The	results	for	the	Company	and	for	the	Institutional	Securities	business	segment	for	the	first	two	quarters	of	fiscal	2006	were	adjusted	(see	Note	24	to	the	consolidated	financial	statements).

(3) In	the	second	quarter	of	fiscal	2007,	the	adjusted	assets	calculation	was	revised	in	order	to	reduce	gross	assets	by	the	full	amount	of	cash	and	securities	deposited	with	clearing	organizations	or	segregated	under federal	and	other	regulations	or	requirements.	All	prior	periods	have	been	restated	to	conform	with	the	current	presentation.

(4) Effective	December	1,	2006,	mortgage	servicing	rights	have	been	included	in	net	intangible	assets.	Amounts	as	of	November	30,	2006	have	been	reclassified	to	conform	with	the	current	presentation.

(5) Leverage	ratio	equals	total	assets	divided	by	tangible	shareholders'	equity.

(6) Adjusted	leverage	ratio	equals	adjusted	assets	divided	by	tangible	shareholders'	equity.

# Activity	in	Fiscal	2007.

The	Company's	total	capital	consists	of	shareholders'	equity,	long-term	borrowings	(debt	obligations	scheduled	to	mature	in	more	than	12	months)	and	junior subordinated	debt	issued	to	capital	trusts.	At	November	30,	2007,	total	capital	was	$191,085	million,	an	increase	of	$28,951	million	from	November	30,	2006.	The Company	redeemed	all	$66	million	of	its	outstanding	Capital	Units	on	February	28,	2007.

During	the	12	months	ended	November	30,	2007,	the	Company	issued	senior	notes	with	a	carrying	value	aggregating	$76.1	billion,	including	non-U.S.	dollar	currency notes	aggregating	$35.2	billion.	In	connection	with	the	note	issuances,	the	Company	has	entered	into	certain	transactions	to	obtain	floating	interest	rates	based	primarily on	short-term	London	Interbank	Offered	Rates	("LIBOR")	trading	levels.	At	November	30,	2007,	the	aggregate	outstanding	principal	amount	of	the	Company's	Senior Indebtedness	(as	defined	in	the	Company's	senior	debt	indentures)	was	approximately	$207	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	5.5	years	at	November	30,	2007. Subsequent	to	fiscal	year-end	and	through	December	31,	2007,	the	Company's	long-term	borrowings	(net	of	repayments)	increased	by	approximately	$10	billion.	In addition,	in	December	2007,	the	Company	sold	Equity	Units	to	a	wholly	owned	subsidiary	of	CIC	for	approximately	$5,579	million.	See	"China	Investment	Corporation Investment"	herein.

# China	Investment	Corporation	Investment.

In	December	2007,	the	Company	sold	Equity	Units	which	include	contracts	to	purchase	Company	common	stock	(see	"Stock	Purchase	Contracts"	herein)	to	a	wholly owned	subsidiary	of	CIC	for	approximately	$5,579	million.	CIC's	ownership	in	the	Company's	common	stock,	including	the	maximum	number	of	shares	of	common stock	to	be	received	by	CIC	upon	settlement	of	the	stock	purchase	contracts,	will	be	9.9%	or	less	of	the	Company's	total	shares	outstanding	based	on	the	total	shares outstanding	on	November	30,	2007.	CIC	will	be	a	passive	financial	investor	and	will	have	no	special	rights	of	ownership	nor	a	role	in	the	management	of	the	Company. A	substantial	portion	of	the	investment	proceeds	will	be	treated	as	Tier	1	capital	for	regulatory	capital	purposes.

Each	stock	purchase	contract	mandatorily	settles	in	Company	common	stock	at	prices	between	$48.0700	and	$57.6840.	The	maximum	number	of	shares	to	be	issued upon	settlement	of	the	stock	purchase	contracts	included	in	the	Equity	Units	is	approximately	116,063,000.	The	stock	purchase	contracts	settle	for	Company	common stock	on	August	17,	2010,	subject	to	adjustment.	Each	Equity	Unit	will	pay	a	fixed	annual	payment	rate	of	9%	payable	quarterly.

As	described	below,	the	Equity	Units	consist	of	interests	in	trust	preferred	securities	issued	by	Morgan	Stanley	Capital	Trust	A	("Series	A	Trust"),	Morgan	Stanley Capital	Trust	B	("Series	B	Trust")	or	Morgan	Stanley	Capital	Trust	C	("Series	C	Trust")	(each	a	"Morgan	Stanley	Trust"	and,	collectively,	the	"Trusts")	and	stock purchase	contracts	issued	by	the	Company.	The	only	assets	held	by	the	Series	A	Trust,	Series	B	Trust	and	Series	C	Trust	are	junior	subordinated	debentures	issued	by the	Company.

# Equity	Units.

Each	Equity	Unit	has	a	stated	amount	of	$1,000	per	unit	consisting	of:

(i) an	undivided	beneficial	ownership	interest	in	a	trust	preferred	security	of	Series	A	Trust,	Series	B	Trust	or	Series	C	Trust	with	an	initial	liquidation	amount	of $1,000;	and

(ii) a	stock	purchase	contract	relating	to	the	common	stock,	par	value	of	$0.01	per	share,	of	the	Company.

# Junior	Subordinated	Debentures	Issued	to	Support	Trust	Common	and	Trust	Preferred	Securities.

In	the	first	quarter	of	fiscal	2008,	the	Company	issued	junior	subordinated	debt	securities	due	no	later	than	February	17,	2042	for	a	total	of	$5,579,173,000	in	exchange for	$5,579,143,000	in	aggregate	proceeds	from	the	sale	of	the	trust	preferred	securities	by	the	Trusts	and	$30,000	in	trust	common	securities	issued	equally	by	the	Trusts. The	Company	elected	to	fair	value	the	junior	subordinated	debentures	pursuant	to	SFAS	No.	159.	The	common	and	trust	preferred	securities	of	the	Trusts,	totaling approximately	$5,579	million,	represent	undivided	beneficial	ownership	interests	in	the	assets	of	the	Trusts,	have	no	stated	maturity	and	must	be	redeemed	upon	the redemption	or	maturity	of	the	corresponding	series	of	junior	subordinated	debt	securities—the	sole	assets	of	the	respective	Trusts.	The	Series	A	Trust,	Series	B	Trust	and Series	C	Trust	will	make	quarterly	distributions	on	the	trust	common	and	trust	preferred	securities	at	an	annual	rate	of	6%.

The	trust	common	securities,	which	are	held	by	the	Company,	represent	an	interest	in	the	Trusts	and	are	recorded	as	an	equity	method	investment	in	the	Company's consolidated	statement	of	financial	condition.	The	Trusts	are	VIEs	in	accordance	with	FIN	46R	and	the	Company	does	not	consolidate	its	interests	in	the	Trusts	as	it	is not	the	primary	beneficiary	of	any	of	the	Trusts.

The	Company	has	directly	guaranteed	the	repayment	of	the	trust	preferred	securities	to	the	holders	thereof	to	the	extent	that	there	are	funds	available	in	the	Trusts.	If	the Company	does	not	make	payments	on	the	junior	subordinated	debentures	owned	by	a	Morgan	Stanley	Trust,	such	Morgan	Stanley	Trust	will	not	be	able	to	pay	any amounts	payable	in	respect	of	the	trust	preferred	securities	issued	by	it	and	will	not	have	funds	legally	available	for	that	purpose.	In	that	event,	holders	of	such	series	of trust	preferred	securities	would	not	be	able	to

rely	upon	the	guarantee	for	payment	of	those	amounts.	The	guarantee	will	remain	in	place	until	the	redemption	price	of	all	of	the	trust	preferred	securities	is	paid,	the amounts	payable	with	respect	to	the	trust	preferred	securities	upon	liquidation	of	the	Morgan	Stanley	Trusts	are	paid	or	the	junior	subordinated	debentures	are	distributed to	the	holders	of	all	the	trust	preferred	securities.	The	trust	preferred	securities	held	by	the	Equity	Unit	holders	are	pledged	to	the	Company	to	collateralize	the obligations	of	the	Equity	Unit	holders	under	the	related	stock	purchase	contracts.	The	Equity	Unit	holders	may	substitute	certain	zero-coupon	treasury	securities	in	place of	the	trust	preferred	securities	as	collateral	under	the	stock	purchase	contracts.

# Stock	Purchase	Contracts.

Each	stock	purchase	contract	requires	the	holder	to	purchase,	and	the	Company	to	sell,	on	the	stock	purchase	date	a	number	of	newly	issued	or	treasury	shares	of	the Company's	common	stock,	par	value	$0.01	per	share,	equal	to	the	settlement	rate.	The	settlement	rate	at	the	respective	stock	purchase	date	will	be	calculated	based	on the	arithmetic	average	of	the	volume-weighted	average	prices	of	the	common	stock	during	a	specified	20-day	period	ending	three	days	immediately	preceding	the applicable	stock	purchase	date	("applicable	market	value").	If	the	applicable	market	value	of	the	Company's	common	stock	is	less	than	the	threshold	appreciation	price of	$57.6840	but	greater	than	$48.0700,	the	reference	price,	the	settlement	rate	will	be	a	number	of	shares	of	the	Company's	common	stock	equal	to	$1,000	divided	by the	applicable	market	value.	If	the	applicable	market	value	is	less	than	or	equal	to	the	reference	price,	the	settlement	rate	will	be	the	number	of	shares	of	the	Company's common	stock	equal	to	$1,000	divided	by	the	reference	price.	If	the	applicable	market	value	is	greater	than	or	equal	to	the	threshold	appreciation	price,	the	settlement rate	will	be	the	number	of	shares	of	the	Company's	common	stock	equal	to	$1,000	divided	by	the	threshold	appreciation	price.	Accordingly,	upon	settlement	in	the aggregate,	the	Company	will	receive	proceeds	of	approximately	$5,579	million	and	issue	up	to	approximately	116,063,000	shares	of	its	common	stock.	The	stock purchase	contract	may	be	settled	early	at	the	option	of	the	holder	at	any	time	prior	to	the	second	business	day	immediately	preceding	the	beginning	of	the	first remarketing	period.	However,	upon	early	settlement,	the	holder	will	receive	the	minimum	settlement	rate,	subject	to	adjustment.

The	initial	quarterly	distributions	on	the	Series	A,	Series	B	and	Series	C	trust	preferred	securities	of	6%,	combined	with	the	contract	adjustment	payments	on	the	stock purchase	contracts	of	3%,	result	in	the	9%	yield	on	the	Equity	Units.

If	the	Company	defers	any	of	the	contract	adjustment	payments	on	the	stock	purchase	contracts,	then	it	will	accrue	additional	amounts	on	the	deferred	amounts	at	the annual	rate	of	9%	until	paid,	to	the	extent	permitted	by	law.

The	present	value	of	the	future	contract	adjustment	payments	due	under	the	stock	purchase	contracts	was	approximately	$400	million	and	was	recorded	in	Other liabilities	and	accrued	expenses	with	a	corresponding	decrease	recorded	in	Shareholders'	equity	in	the	Company's	consolidated	statement	of	financial	condition	in	the first	quarter	of	fiscal	2008.	The	other	liability	balance	related	to	the	stock	purchase	contracts	will	accrete	over	the	term	of	the	stock	purchase	contract	using	the	effective yield	method	with	a	corresponding	charge	to	Interest	expense.	When	the	contract	adjustment	payments	are	made	under	the	stock	purchase	contracts,	they	will	reduce	the other	liability	balance.

# Calculation	of	Impact	on	Average	Diluted	Common	Shares	Outstanding	Prior	to	Settlement	of	Stock	Purchase	Contract.

Prior	to	the	issuance	of	common	stock	upon	settlement	of	the	stock	purchase	contract,	the	impact	of	the	Equity	Units	will	be	reflected	in	the	Company's	earnings	per diluted	common	share	using	the	treasury	stock	method,	as	defined	by	SFAS	No.	128,	"Earnings	Per	Share."	Under	the	treasury	stock	method,	the	number	of	shares	of common	stock	included	in	the	calculation	of	earnings	per	diluted	common	share	will	be	calculated	as	the	excess,	if	any,	of	the	number	of	shares	expected	to	be	issued upon	settlement	of	the	stock	purchase	contract	based	on	the

average	market	price	for	the	last	20	days	of	the	reporting	period,	less	the	number	of	shares	that	could	be	purchased	by	the	Company	with	the	proceeds	to	be	received upon	settlement	of	the	contract	at	the	average	closing	price	for	the	reporting	period.

Dilution	of	net	income	per	share	will	occur	(i)	in	reporting	periods	when	the	average	closing	price	of	common	shares	is	over	$57.6840	per	share	or	(ii)	in	reporting periods	when	the	average	closing	price	of	common	shares	for	a	reporting	period	is	between	$48.0700	and	$57.6840	and	is	greater	than	the	average	market	price	for	the last	20	days	ending	three	days	prior	to	the	end	of	such	reporting	period.

Upon	settlement	of	the	Stock	Purchase	Contract,	the	amount	of	common	shares	issued	in	settlement	of	the	contract	will	be	included	in	the	basic	and	diluted	earnings	per share	calculation	of	weighted	average	common	shares	outstanding	for	the	reporting	period.

# Economic	Capital.

The	Company's	economic	capital	model	estimates	the	amount	of	equity	capital	required	to	support	the	businesses	and	their	risk-generating	activities	through	the business	cycle	while	simultaneously	satisfying	regulatory,	rating	agency	and	investor	minimum	requirements.	The	economic	capital	model	will	evolve	over	time	in response	to	changes	in	the	business	and	regulatory	environment	and	to	incorporate	improvements	in	modeling	techniques	in	order	to	reflect	the	capital	required	to support	business	activities.

Economic	capital	requirements	are	allocated	to	each	business	segment	and	are	sub-allocated	to	product	lines	as	appropriate.	Each	business	segment	is	capitalized	as	if each	were	an	independent	operating	entity.	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	associated	cost	of	required	capital,	and	allow	senior	management	to	evaluate	risk-adjusted	returns	(such	as	return	on	equity	and shareholder	value	added)	to	facilitate	resource	allocation	decisions.

The	Company's	methodology	is	based	on	a	going-concern	approach	that	assigns	equity	to	each	business	based	on	regulatory	capital	usage	plus	additional	capital	for stress	losses,	including	principal	investment	risk.	Regulatory	capital,	including	additional	capital	assigned	for	certain	goodwill,	intangible	assets	and	net	deferred	tax assets,	is	a	minimum	requirement	to	ensure	the	Company's	access	to	funding	and	credibility	in	the	market.	The	Company	believes	it	must	be	able	to	sustain	stress	losses and	maintain	capital	substantially	above	regulatory	minimums	while	supporting	ongoing	business	activities.	The	difference	between	the	Company's	consolidated	book equity	and	aggregate	equity	requirements	denotes	the	Company's	unallocated	capital	position,	which	is	not	currently	reflected	in	business	segment	performance	metrics.

The	Company	assesses	stress	loss	capital	across	various	dimensions	of	market,	credit,	business	and	operational	risks.	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.

Beginning	in	fiscal	2007,	economic	capital	requirements	are	met	by	regulatory	Tier	1	equity	(including	common	shareholders'	equity,	certain	preferred	stock,	eligible hybrid	capital	instruments	and	deductions	of	certain	goodwill,	intangible	assets	and	net	deferred	tax	assets),	subject	to	regulatory	limits.

The	following	table	presents	the	Company's	allocated	average	Tier	1	equity	("economic	capital")	for	fiscal	2007	and	average	common	equity	for	fiscal	2007	and	fiscal 2006:

|  | 2007 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
|  | Average\nTier\t1\nEquity | Average\nCommon\nEquity | Average\nCommon\nEquity |
|  |  | (dollars\tin\tbillions) |  |
| Institutional\tSecurities | $24.6 | $23.9 | $18.0 |
| Global\tWealth\tManagement\tGroup | 1.5 | 1.7 | 3.0 |
| Asset\tManagement | 2.7 | 3.5 | 2.4 |
| Unallocated\tcapital | 2.9 | 2.9 | 3.1 |
| Total\tfrom\tcontinuing\toperations | 31.7 | 32.0 | 26.5 |
| Discontinued\toperations | 2.7 | 3.2 | 5.2 |
| Total | $34.4 | $35.2 | $31.7 |

The	increase	in	capital	allocated	to	Institutional	Securities	from	the	prior-year	period	reflects	the	increased	market	and	credit	risk	profile	as	well	as	capital	required	for new	acquisitions	and	investments.	The	Company	expects	to	continue	deploying	capital,	provided	market	opportunities	continue	to	warrant	such	investments.	The decrease	in	the	economic	capital	allocated	to	the	Global	Wealth	Management	Group	was	due	to	the	Company's	reassessment	of	the	amount	of	capital	required	to	support the	market	risks	and	credit	risks	in	this	business	segment.	The	incremental	equity	capital	allocated	to	Asset	Management	primarily	represents	capital	required	for acquisitions	and	investments	in	asset	management	products.

The	Company's	unallocated	economic	capital	was	$(2.7)	billion	at	November	30,	2007	due	to	the	loss	recorded	in	the	fourth	quarter	of	fiscal	2007	and	increased	capital assigned	to	the	Institutional	Securities	business	segment.	In	December	2007,	the	Company	entered	into	an	agreement	with	CIC	as	a	long-term	financial	investor	and issued	new	capital	of	approximately	$5,579	million	through	Equity	Units.	These	Equity	Units	will	help	to	further	bolster	the	Company's	capital	position	and	enhance growth	opportunities	globally	while	also	building	on	the	Company's	deep	historic	ties	and	market	leadership	in	China	(see	"China	Investment	Corporation	Investment" herein).

The	Company	continues	to	believe	that	it	is	adequately	capitalized.	The	Company	generally	uses	available	unallocated	capital	for	organic	growth,	additional acquisitions,	and	other	capital	needs	including	repurchases	of	common	stock	while	maintaining	adequate	internal	capital	ratios.

During	fiscal	2007,	the	Company's	shareholders'	equity	has	been	affected	by	the	adoption	of	SFAS	No.	158	(see	Note	19	to	the	consolidated	financial	statements), SFAS	No.	157	and	SFAS	No.	159	(see	Notes	2	and	3	to	the	consolidated	financial	statements),	and	the	Discover	Spin-off	(see	Note	22	to	the	consolidated	financial statements).

Equity	Capital	Management	Policies.				The	Company's	senior	management	views	equity	capital	as	an	important	source	of	financial	strength	and,	therefore,	pursues	a strategy	of	ensuring	that	the	Company's	equity	capital	base	adequately	reflects	and	provides	protection	from	the	economic	risks	inherent	in	its	businesses.	Capital	is required	for,	among	other	things,	the	Company's	inventories,	underwritings,	principal	investments,	bridge	loans	and	other	financings,	investments	in	fixed	assets	and	for future	uses.	Capital	for	future	uses	will	be	included	within	unallocated	capital	until	required	by	the	business	segments.	The	Company	also	considers	return	on	common equity	to	be	an	important	measure	of	its	performance,	in	the	context	of	both	the	particular	business	environment	in	which	the	Company	is	operating	and	its	peer	group's results.	In	this	regard,	the	Company	actively	manages	its	consolidated	equity	capital	position	based	upon,	among	other	things,	business	opportunities,	capital	availability and	rates	of	return	together	with	internal	capital	policies,	regulatory	requirements	and	rating	agency	guidelines

and,	therefore,	in	the	future	may	expand	or	contract	its	equity	capital	base	to	address	the	changing	needs	of	its	businesses.	The	Company	attempts	to	maintain	total equity,	on	a	consolidated	basis,	at	least	equal	to	the	sum	of	its	operating	subsidiaries'	equity.

At	November	30,	2007,	the	Company's	equity	capital	(which	includes	shareholders'	equity	and	junior	subordinated	debt	issued	to	capital	trusts)	was	$36,145	million,	a decrease	of	$4,103	million	from	November	30,	2006,	primarily	due	to	the	Discover	Spin-off.	The	Company	returns	internally	generated	equity	capital	that	is	in	excess	of the	needs	of	its	businesses	to	its	shareholders	through	common	stock	repurchases	and	dividends.	During	fiscal	2007,	the	Company	purchased	approximately	$3.8	billion of	its	common	stock	(approximately	52	million	shares)	through	open	market	purchases	at	an	average	cost	of	$72.65	(see	also	"Market	for	Registrant's	Common	Equity, Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities"	in	Part	II,	Item	5).

In	December	2006,	the	Company	announced	that	its	Board	of	Directors	had	authorized	the	repurchase	of	up	to	$6	billion	of	the	Company's	outstanding	common	stock. This	share	repurchase	authorization	replaced	the	Company's	previous	repurchase	authorizations	with	one	repurchase	program	for	capital	management	purposes	that	will consider,	among	other	things,	business	segment	capital	needs,	as	well	as	equity-based	compensation	and	benefit	plan	requirements.	As	of	November	30,	2007,	the Company	had	approximately	$2.3	billion	remaining	under	its	current	share	repurchase	authorization.

The	Board	of	Directors	determines	the	declaration	and	payment	of	dividends	on	a	quarterly	basis.	In	December	2007,	the	Company	announced	that	its	Board	of Directors	declared	a	quarterly	dividend	per	common	share	of	$0.27.	The	Company	also	announced	that	its	Board	of	Directors	declared	a	quarterly	dividend	of	$379.66 per	share	of	Series	A	Floating	Rate	Non-Cumulative	Preferred	Stock	(represented	by	depositary	shares,	each	representing	1/1,000th	interest	in	a	share	of	preferred	stock and	each	having	a	dividend	of	$0.37966).

# Liquidity	Management	Policies.

The	primary	goal	of	the	Company's	liquidity	management	and	financing	activities	is	to	ensure	adequate	funding	over	a	wide	range	of	market	environments.	Given	the highly	liquid	nature	of	the	Company's	balance	sheet,	funding	requirements	are	largely	fulfilled	through	the	use	of	collateralized	financing.	The	Company	has	centralized management	of	credit-sensitive	unsecured	funding	sources	in	the	Treasury	Department.	The	Company	maintains	a	liquidity	management	framework	in	order	to	meet target	liquidity	requirements	and	withstand	a	contraction	in	credit	availability.	The	framework	components	include	the	Contingency	Funding	Plan	("CFP"),	Liquidity Reserve	and	Cash	Capital.

Contingency	Funding	Plan.				The	Company	maintains	a	CFP	to	manage	a	potential	prolonged	liquidity	contraction	over	a	one-year	time	period	and	to	provide	the ability	to	conduct	business	in	an	orderly	manner.	The	CFP	is	produced	on	a	parent,	bank	subsidiary	and	non-bank	subsidiary	level.	The	CFP	sets	forth	a	course	of	action to	ensure	effective	management	of	a	liquidity	event.	Liquidity	risk	exposures	are	regularly	evaluated	and	reported	to	the	Firm	Risk	Committee	and	appropriate	business segment	risk	committees.

The	Company's	CFP	model	incorporates	a	wide	range	of	potential	cash	outflows	during	a	liquidity	stress	event,	including,	but	not	limited	to,	the	following: (i)	repayment	of	all	unsecured	debt	maturing	within	one	year;	(ii)	maturity	roll-off	of	outstanding	letters	of	credit	with	no	further	issuance	and	replacement	with	cash collateral;	(iii)	return	of	unsecured	securities	borrowed	and	any	cash	raised	against	these	securities;	(iv)	additional	collateral	that	would	be	required	by	counterparties	in the	event	of	a	ratings	downgrade;	(v)	higher	haircuts	on	or	lower	availability	of	secured	funding;	(vi)	client	cash	withdrawals;	(vii)	drawdowns	on	unfunded commitments	provided	to	third	parties;	and	(viii)	discretionary	unsecured	debt	buybacks.

The	Company's	CFP	is	developed	at	the	legal	entity	level	in	order	to	capture	specific	cash	requirements	and	availability	for	the	parent	company	and	each	of	its	major operating	subsidiaries.	The	CFP	assumes	that	the	parent	company	does	not	have	access	to	cash	that	may	be	trapped	at	subsidiaries	due	to	regulatory,	legal	or	tax constraints.	In	addition,	the	CFP	assumes	that	the	parent	company	does	not	draw	down	on	its	committed	credit	facilities.

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	as	outlined in	the	CFP.	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,	consists	of	U.S.	and	European	government	bonds	and	other	high-quality	collateral.	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.

The	table	below	summarizes	the	Company's	liquidity	reserves	on	a	parent,	bank	subsidiary	and	non-bank	subsidiary	level.	The	liquidity	held	on	the	bank	and	non-bank subsidiary	level	is	generally	not	available	to	the	parent.

|  | At | For	the	Quarter	Ended | For	the	Fiscal	Year	Ended |
| :--- | :--- | :--- | :--- |
| Liquidity\tReserve | November\t30,\t2007 | November\t30,\t2007 | November\t30,\t2007 |
|  |  | (dollars\tin\tbillions) |  |
| Parent | $62 | $64 | $49 |
| Bank\tsubsidiaries | 22 | 22 | 16 |
| Non-bank\tsubsidiaries | 34 | 34 | 20 |
| Total | $118 | $120 | $85 |

Cash	Capital.				The	Company	maintains	a	cash	capital	model	that	measures	long-term	funding	sources	against	requirements.	Sources	of	cash	capital	include	the	parent company's	equity	and	the	non-current	portion	of	certain	long-term	borrowings.	Uses	of	cash	capital	include	the	following:	(i)	illiquid	assets	such	as	buildings, equipment,	goodwill,	net	intangible	assets,	exchange	memberships,	deferred	tax	assets	and	principal	investments;	(ii)	a	portion	of	securities	inventory	that	is	not expected	to	be	financed	on	a	secured	basis	in	a	credit-stressed	environment	(i.e.,	stressed	haircuts);	and	(iii)	expected	drawdowns	on	unfunded	commitments.

The	Company	seeks	to	maintain	a	surplus	cash	capital	position.	The	Company's	equity	capital	of	$36,145	million	(including	junior	subordinated	debt	issued	to	capital trusts	of	$4,876	million)	and	long-term	borrowings	(debt	obligations	scheduled	to	mature	in	more	than	12	months)	of	$154,940	million	comprised	the	Company's	total capital	of	$191,085	million	as	of	November	30,	2007,	which	substantially	exceeded	cash	capital	requirements.

# 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.

The	Company	maintains	a	senior	revolving	credit	agreement	with	a	group	of	banks	to	support	general	liquidity	needs,	including	the	issuance	of	commercial	paper,	which consists	of	three	separate	tranches:	a	U.S.	dollar

tranche;	a	Japanese	yen	tranche;	and	a	multicurrency	tranche	available	in	both	euro	and	British	pound,	all	of	which	exist	with	the	Company	as	the	sole	borrower.	Under this	combined	facility	(the	"Credit	Facility"),	the	banks	are	committed	to	provide	up	to	$7.6	billion	under	the	U.S.	dollar	tranche,	80	billion	Japanese	yen	under	the Japanese	yen	tranche	and	$3.25	billion	under	the	multicurrency	tranche.	The	Credit	Facility	expires	on	April	16,	2008	and	includes	a	term-out	feature	that	allows	the Company,	at	its	option,	to	extend	borrowings	under	the	Credit	Facility	for	an	additional	one	year	beyond	the	expiration	date.	At	November	30,	2007,	the	Company	had	a $13.8	billion	consolidated	stockholders'	equity	surplus	as	compared	with	the	Credit	Facility's	covenant	requirement.

The	Company	anticipates	that	it	may	utilize	the	Credit	Facility	for	short-term	funding	from	time	to	time.	The	Company	does	not	believe	that	any	of	the	covenant requirements	in	its	Credit	Facility	will	impair	its	ability	to	obtain	funding	under	the	Credit	Facility,	pay	its	current	level	of	dividends	or	obtain	loan	arrangements,	letters of	credit	and	other	financial	guarantees	or	other	financial	accommodations.	At	November	30,	2007,	no	borrowings	were	outstanding	under	the	Credit	Facility.

The	Company	also	maintains	a	committed	bilateral	credit	facility	to	support	general	liquidity	needs.	This	facility	is	expected	to	be	drawn	from	time	to	time	to	cover short-term	funding	needs.

# Capital	Covenants.

In	October	2006	and	April	2007,	the	Company	executed	a	replacement	capital	covenant	in	connection	with	offerings	by	Morgan	Stanley	Capital	Trust	VII	and	Morgan Stanley	Capital	Trust	VIII	(the	"Capital	Securities").	Under	the	terms	of	the	replacement	capital	covenant,	the	Company	has	agreed,	for	the	benefit	of	certain	specified holders	of	debt,	to	limitations	on	its	ability	to	redeem	or	repurchase	any	of	the	Capital	Securities	for	specified	periods	of	time.	For	a	complete	description	of	the	Capital Securities	and	the	terms	of	the	replacement	capital	covenant,	see	the	Company's	Current	Reports	on	Form	8-K	dated	October	12,	2006	and	April	26,	2007.

# Funding	Management	Policies.

The	Company	funds	its	balance	sheet	on	a	global	basis	through	diverse	sources.	These	sources	include	the	Company's	equity	capital;	long-term	debt;	repurchase agreements;	U.S.,	Canadian,	European,	Japanese	and	Australian	commercial	paper;	asset-backed	securitizations;	letters	of	credit;	unsecured	bond	borrowings;	securities lending;	buy/sell	agreements;	municipal	reinvestments;	promissory	notes;	master	notes;	and	committed	and	uncommitted	lines	of	credit.	Repurchase	agreement transactions,	securities	lending	and	a	portion	of	the	Company's	bank	borrowings	are	made	on	a	collateralized	basis	and,	therefore,	provide	a	more	stable	source	of funding	than	short-term	unsecured	borrowings.	The	Company	has	active	financing	programs	for	both	standard	and	structured	products	in	the	U.S.,	European	and	Asian markets,	targeting	global	investors	and	currencies	such	as	the	U.S.	dollar,	euro,	British	pound,	Australian	dollar	and	Japanese	yen.

The	Company's	bank	subsidiaries	solicit	deposits	from	consumers,	purchase	Federal	Funds,	issue	short-term	institutional	certificates	of	deposits	and	issue	bank	notes. Interest	bearing	deposits	are	classified	by	type	as	savings,	brokered	and	other	time	deposits.	Savings	deposits	consist	primarily	of	money	market	deposit	accounts	sold nationally	and	savings	deposits	obtained	from	individual	securities	clients.	Brokered	deposits	consist	primarily	of	certificates	of	deposit	issued	by	the	Company's	bank subsidiaries.	Other	time	deposits	include	individual	and	institutional	certificates	of	deposit.

The	Company's	funding	management	policies	are	designed	to	provide	for	financings	that	are	executed	in	a	manner	that	reduces	the	risk	of	disruption	to	the	Company's operations	that	would	result	from	an	interruption	in	the	availability	of	the	Company's	funding	sources.	The	Company	pursues	a	strategy	of	diversification	of	funding sources	(by	product,	by	investor	and	by	region)	and	attempts	to	ensure	that	the	tenor	of	the	Company's	liabilities	equals	or	exceeds	the	expected	holding	period	of	the assets	being	financed.	Maturities	of	financings	are	designed

to	manage	exposure	to	refinancing	risk	in	any	one	period.	The	Company	maintains	a	surplus	of	unused	short-term	funding	sources	at	all	times	to	withstand	any unforeseen	contraction	in	credit	capacity.	In	addition,	the	Company	attempts	to	maintain	cash	and	unhypothecated	marketable	securities	equal	to	at	least	110%	of	its outstanding	short-term	unsecured	borrowings.	The	Company	also	maintains	committed	credit	facilities	(described	above)	to	support	its	ongoing	borrowing	programs.

Secured	Financing.				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	these	assets	with stable	collateralized	borrowings.

The	Company's	goal	is	to	encourage	funding	through	collateralized	borrowings	in	order	to	achieve	an	optimal	mix	of	secured	and	unsecured	financing.	The	Institutional Securities	business	emphasizes	the	use	of	collateralized	short-term	borrowings	to	limit	the	growth	of	short-term	unsecured	funding,	which	is	more	typically	subject	to disruption	during	periods	of	financial	stress.	As	part	of	this	effort,	the	Institutional	Securities	business	segment	continually	seeks	to	expand	its	global	secured	borrowing capacity.

In	addition,	the	Company,	through	several	of	its	subsidiaries,	maintains	funded	and	unfunded	committed	credit	facilities	to	support	various	businesses,	including	the collateralized	commercial	and	residential	mortgage	whole	loan,	derivative	contracts,	warehouse	lending,	emerging	market	loan,	structured	product,	corporate	loan, investment	banking	and	prime	brokerage	businesses.

Unsecured	Financing.				The	Company	views	long-term	debt	as	a	stable	source	of	funding	for	core	inventories	and	illiquid	assets.	In	general,	securities	inventories	not financed	by	secured	funding	sources	and	the	majority	of	current	assets	are	financed	with	a	combination	of	short-term	funding,	floating	rate	long-term	debt	or	fixed	rate long-term	debt	swapped	to	a	floating	rate.	The	Company	uses	derivative	products	(primarily	interest	rate,	currency	and	equity	swaps)	to	assist	in	asset	and	liability management,	reduce	borrowing	costs	and	hedge	interest	rate	risk	(see	Note	13	to	the	consolidated	financial	statements).

The	Company	issues	long-term	debt	in	excess	of	the	amount	necessary	to	meet	the	needs	of	its	securities	inventory	and	less	liquid	assets	as	determined	by	its	Cash Capital	Policy.	In	addition	to	these	needs,	long-term	debt	funding	is	employed	to	enhance	the	Company's	liquidity	position	by	reducing	reliance	on	short-term	credit sensitive	instruments	(e.g.,	commercial	paper	and	other	unsecured	short-term	borrowings).	Availability	and	cost	of	financing	to	the	Company	can	vary	depending	on market	conditions,	the	volume	of	certain	trading	and	lending	activities,	the	Company's	credit	ratings	and	the	overall	availability	of	credit.

The	Company	has	a	portfolio	approach	for	managing	the	unsecured	debt	issued	by	the	parent	company.	This	approach	gives	the	Company	flexibility	to	manage	the unsecured	debt	portfolio	across	maturities,	currencies,	investors	and	regions,	taking	into	account	market	capacity	and	pricing.	Down-lending	to	subsidiaries	is	managed to	ensure	that	intercompany	borrowings	mature	before	those	of	the	parent	company.	Liquidity	and	funding	policies	recognize	potential	constraints	on	the	Company's ability	to	transfer	funds	between	regulated	entities	and	the	parent	company.

During	fiscal	2007,	the	Company's	long-term	financing	strategy	was	driven,	in	part,	by	its	continued	focus	on	improving	its	balance	sheet	strength	(evaluated	through enhanced	capital	and	liquidity	positions),	a	significant	factor	in	the	maintenance	of	strong	credit	ratings.	As	a	result,	for	fiscal	2007,	a	principal	amount	of	$53	billion	of unsecured	debt	was	issued	(of	which	$22	billion	of	equity-linked	and	credit-linked	notes	were	not	considered	to	be	a	component	of	the	Company's	cash	capital). Financing	transactions	were	structured	to	ensure	staggered	maturities,	thereby	mitigating	refinancing	risk,	and	a	diversified	investor	base	was	targeted	through	sales	to domestic	as	well	as	international	institutional	and	retail	clients.	Unsecured	debt	issuance	activity	resulted	in	a	net	increase	in	the	long-term	debt	component	of	the	cash capital	portfolio	of	approximately	$30	billion.

# 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	profile,	risk	management policies,	cash	liquidity,	capital	structure,	corporate	lending	credit	risk,	and	legal	and	regulatory	developments.	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	may	be	required	to provide	additional	collateral	to	certain	counterparties	in	the	event	of	a	credit	ratings	downgrade.	At	November	30,	2007,	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	$746	million.	Of	this	amount,	$677	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	January	22,	2008,	the	Company's	credit	ratings	were	as	follows:

|  | Commercial<br>Paper | Senior<br>Debt |
| :--- | :--- | :--- |
| Dominion\tBond\tRating\tService\tLimited | R-1\t(middle) | AA\t(low) |
| Fitch\tRatings(1) | F1+ | AA- |
| Moody's\tInvestors\tService(2) | P-1 | Aa3 |
| Rating\tand\tInvestment\tInformation,\tInc.(3) | a-1+ | AA |
| Standard\t&amp;\tPoor's(4) | A-1+ | AA- |

(1) On	December	19,	2006,	Fitch	Ratings	changed	the	outlook	on	the	Company's	senior	debt	ratings	from	Stable	to	Negative.

(2) On	November	8,	2007,	Moody's	Investors	Service	changed	the	outlook	on	the	Company's	senior	debt	ratings	from	Stable	to	Negative.

(3) On	December	20,	2007,	Rating	and	Investment	Information,	Inc.	changed	the	outlook	on	the	Company's	senior	debt	from	Stable	to	Negative.

(4) On	July	30,	2007,	Standard	&	Poor's	upgraded	the	Company's	commercial	paper	rating	from	A-1	to	A-1+	and	upgraded	the	Company's	senior	debt	rating	from	A+	to	AA-.	On	November	8,	2007,	Standard	&

Poor's	changed	the	outlook	on	the	Company's	commercial	paper	and	senior	debt	ratings	from	Stable	to	Negative.	On	December	19,	2007,	Standard	&	Poor's	placed	the	Company's	commercial	paper	and	senior debt	ratings	on	CreditWatch	with	Negative	implications.

# Off-Balance	Sheet	Arrangements	with	Unconsolidated	Entities.

The	Company	enters	into	various	arrangements	with	unconsolidated	entities,	including	variable	interest	entities,	primarily	in	connection	with	its	Institutional	Securities businesses.

Institutional	Securities	Activities.				The	Company	utilizes	SPEs	primarily	in	connection	with	securitization	activities.	The	Company	engages	in	securitization	activities related	to	commercial	and	residential	mortgage	loans,	U.S.	agency	collateralized	mortgage	obligations,	corporate	bonds	and	loans,	municipal	bonds	and	other	types	of financial	assets.	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	consolidated	statements	of	financial	condition	at	fair	value.	Any	changes	in	the	fair	value	of	such	retained	interests	are	recognized	in	the	consolidated

statements	of	income.	Retained	interests	in	securitized	financial	assets	were	approximately	$5.3	billion	at	November	30,	2007,	the	majority	of	which	were	related	to residential	mortgage	loan,	commercial	mortgage	loan	and	U.S.	agency	collateralized	mortgage	obligation	securitization	transactions.	For	further	information	about	the Company's	securitization	activities,	see	Notes	2	and	5	to	the	consolidated	financial	statements	as	well	as	"Impact	of	Credit	Market	Events"	herein.

The	Company	has	entered	into	liquidity	facilities	with	SPEs	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	SPEs	in	the	event	payments	are	required	under	such	liquidity	facilities	(see	Note	15	to the	consolidated	financial	statements).

Guarantees.				FASB	Interpretation	No.	45,	"Guarantor's	Accounting	and	Disclosure	Requirements	for	Guarantees,	Including	Indirect	Guarantees	of	Indebtedness	of Others"	("FIN	45"),	requires	the	Company	to	disclose	information	about	its	obligations	under	certain	guarantee	arrangements.	FIN	45	defines	guarantees	as	contracts and	indemnification	agreements	that	contingently	require	a	guarantor	to	make	payments	to	the	guaranteed	party	based	on	changes	in	an	underlying	measure	(such	as	an interest	or	foreign	exchange	rate,	a	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.	FIN	45	also	defines	guarantees	as	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	table	below	summarizes	certain	information	regarding	derivative	contracts,	financial	guarantees	to	third	parties,	market	value	guarantees	and	liquidity	facilities	at November	30,	2007:

|  | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity |  | Carrying | Collateral/ |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Type\tof\tGuarantee | Less\tthan\t1 | 1-3 | 3-5 | Over\t5 | Total | Amount | Recourse |
|  |  |  |  | (dollars\tin\tmillions) |  |  |  |
| Notional\tamount\tof\tderivative\tcontracts | $999,552 | $1,004,069 | $2,546,374 | $2,570,385 | $7,120,380 | $131,678 | $59 |
| Standby\tletters\tof\tcredit\tand\tother\tfinancial |  |  |  |  |  |  |  |
| guarantees(1) | 5,133 | 1,824 | 1,107 | 6,712 | 14,776 | 802 | 2,396 |
| Market\tvalue\tguarantees | 97 | 106 | — | 655 | 858 | 44 | 145 |
| Liquidity\tfacilities | 18,043 | 1,026 | 444 | 1,652 | 21,165 | — | 20,281 |

(1) Approximately	$14	billion	of	standby	letters	of	credit	are	also	reflected	in	the	"Commitments	and	Contractual	Obligations"	table	below	in	the	investment	grade	and	non-investment	grade	primary	and	secondary lending	commitments	and	in	the	letters	of	credit	issued	by	subsidiaries	that	are	guaranteed	by	the	Company.

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	consolidated	financial	statements.

See	Note	15	to	the	consolidated	financial	statements	for	information	on	trust	preferred	securities,	indemnities,	exchange/clearinghouse	member	guarantees,	general partner	guarantees,	securitized	asset	guarantees	and	other	guarantees.

# Commitments	and	Contractual	Obligations.

The	Company's	commitments	associated	with	outstanding	letters	of	credit,	other	financial	guarantees,	investment	activities,	and	corporate	lending	and	financing arrangements	as	of	November	30,	2007	are	summarized	below	by	period	of	expiration.	Since	commitments	associated	with	letters	of	credit,	other	financial	guarantees, and	lending	and	financing	arrangements	may	expire	unused,	the	amounts	shown	do	not	necessarily	reflect	the	actual	future	cash	funding	requirements:

|  | Less |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | than\t1 | 1-3 | 3-5 | Over\t5 | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Letters\tof\tcredit\tand\tother\tfinancial\tguarantees(1) | $ 10,790 | $4 | $4 | $— | $10,798 |
| Letters\tof\tcredit\tissued\tby\tsubsidiaries\tthat\tare\tguaranteed\tby\tthe\tCompany | 197 | 1,186 | 194 | 3,674 | 5,251 |
| Investment\tactivities(2) | 318 | 238 | 108 | 647 | 1,311 |
| Investment\tgrade\tprimary\tlending\tcommitments(3)(4) | 19,656 | 5,791 | 23,323 | 1,421 | 50,191 |
| Non-investment\tgrade\tprimary\tlending\tcommitments(3)(4) | 789 | 1,072 | 3,931 | 14,220 | 20,012 |
| Investment\tgrade\tsecondary\tlending\tcommitments(4)(5) | — | — | — | 1,406 | 1,406 |
| Non-investment\tgrade\tsecondary\tlending\tcommitments(4)(5) | 81 | 27 | 151 | 2,090 | 2,349 |
| Commitments\tfor\tsecured\tlending\ttransactions(6) | 3,824 | 4,095 | 1,073 | 2,628 | 11,620 |
| Commercial\tand\tresidential\tmortgage-related\tcommitments(7) | 5,680 | — | — | — | 5,680 |
| Other\tcommitments(8) | 964 | 19 | 5 | — | 988 |
| Total | $ 42,299 | $ 12,432 | $ 28,789 | $26,086 | $109,606 |

(1) This	amount	primarily	represents	the	Company's	outstanding	letters	of	credit	and	other	financial	guarantees	issued	by	third-party	banks	to	certain	of	the	Company's	counterparties.	The	Company	is	contingently liable	for	these	letters	of	credit	and	other	financial	guarantees,	which	are	primarily	used	to	satisfy	various	collateral	and	margin	requirements.

(2) This	amount	represents	commitments	associated	with	the	Company's	real	estate,	private	equity	and	principal	investment	activities,	which	include	alternative	products.

(3) The	Company's	investment	grade	and	non-investment	grade	primary	lending	commitments	are	made	in	connection	with	corporate	lending	and	other	business	activities.	Credit	ratings	for	commitments	are determined	by	the	Company's	Institutional	Credit	Department	using	methodologies	generally	consistent	with	those	employed	by	external	rating	agencies.	Obligor	credit	ratings	of	BB+	or	lower	are	considered non-investment	grade.

(4) The	Company	records	these	commitments	at	fair	value	within	Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased	in	the	consolidated	statement	of	financial	condition	(see	Note	3	to	the consolidated	financial	statements).

(5) This	amount	represents	commitments	associated	with	the	Company's	Institutional	Securities	sales	and	trading	activities.

(6) This	amount	represents	lending	commitments	extended	by	the	Company	to	companies	that	are	secured	by	real	estate	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.	This	amount	also	includes	commitments	to	asset-backed	commercial	paper	conduits	of	$1,246	million,	which	have maturities	of	less	than	four	years.

(7) These	amounts	represent	the	Company's	forward	purchase	contracts	involving	mortgage	loans,	residential	mortgage	loan	commitments	to	individuals	and	residential	home	equity	lines	of	credit.

(8) This	amount	includes	commercial	loan	commitments	to	small	businesses	and	commitments	related	to	securities-based	lending	activities	in	connection	with	the	Company's	Global	Wealth	Management	Group business.

At	November	30,	2007,	the	Company	had	commitments	to	enter	into	reverse	repurchase	and	repurchase	agreements	of	approximately	$107	billion	and	$26	billion, respectively.

In	the	normal	course	of	business,	the	Company	enters	into	various	contractual	obligations	that	may	require	future	cash	payments.	Contractual	obligations	at November	30,	2007	include	long-term	borrowings,	operating	leases	and	purchase	obligations.	The	Company's	future	cash	payments	associated	with	its	contractual obligations	as	of	November	30,	2007	are	summarized	below:

|  | Fiscal | Fiscal | Fiscal |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2008 | 2009-2010 | 2011-2012 | Thereafter | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Long-term\tborrowings(1) | $30,808 | $43,081 | $ 39,701 | $77,034 | $190,624 |
| Operating\tleases\t–\toffice\tfacilities(2) | 549 | 907 | 676 | 2,732 | 4,864 |
| Operating\tleases\t–\tequipment(2) | 650 | 569 | 210 | 123 | 1,552 |
| Purchase\tobligations(3) | 268 | 107 | 8 | — | 383 |
| Total | $32,275 | $44,664 | $ 40,595 | $79,889 | $197,423 |

(1) See	Note	13	to	the	consolidated	financial	statements.

(3) Purchase	obligations	for	goods	and	services	include	payments	for,	among	other	things,	consulting,	outsourcing,	advertising,	sponsorship,	and	computer	and	telecommunications	maintenance	agreements.	Purchase obligations	at	November	30,	2007	reflect	the	minimum	contractual	obligation	under	legally	enforceable	contracts	with	contract	terms	that	are	both	fixed	and	determinable.	These	amounts	exclude	obligations	for goods	and	services	that	already	have	been	incurred	and	are	reflected	on	the	Company's	consolidated	statement	of	financial	condition.

# Regulatory	Requirements.

On	April	1,	2007,	the	Company	merged	Morgan	Stanley	DW	Inc.	("MSDWI")	into	Morgan	Stanley	&	Co.	Incorporated	("MS&Co").	Upon	completion	of	the	merger, the	surviving	entity,	MS&Co.,	became	the	Company's	principal	U.S.	broker-dealer.	MS&Co.	is	a	registered	broker-dealer	and	registered	futures	commission	merchant and,	accordingly,	is	subject	to	the	minimum	net	capital	requirements	of	the	SEC,	the	Financial	Industry	Regulatory	Authority	and	the	Commodity	Futures	Trading Commission.	MS&Co.	has	consistently	operated	in	excess	of	these	requirements.	MS&Co.'s	net	capital	totaled	$6,673	million	at	November	30,	2007,	which	exceeded the	amount	required	by	$4,950	million.	Morgan	Stanley	&	Co.	International	plc	("MSIP"),	a	London-based	broker-dealer	subsidiary,	is	subject	to	the	capital requirements	of	the	Financial	Services	Authority,	and	Morgan	Stanley	Japan	Securities	Co.,	Ltd.	("MSJS"),	a	Tokyo-based	broker-dealer	subsidiary,	is	subject	to	the capital	requirements	of	the	Financial	Services	Agency.	MSIP	and	MSJS	consistently	operated	in	excess	of	their	respective	regulatory	capital	requirements.

Under	regulatory	capital	requirements	adopted	by	the	FDIC	and	other	bank	regulatory	agencies,	FDIC-insured	financial	institutions	must	maintain	(a)	3%	to	4%	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	November	30,	2007,	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.	("MSDP")	and	Cournot	Financial	Products	LLC	("Cournot"),	which	are	triple-A	rated	derivative	products	subsidiaries, maintain	certain	operating	restrictions	that	have	been	reviewed	by	various	rating	agencies.	Both	entities	are	operated	such	that	creditors	of	the	Company	should	not expect	to	have

any	claims	on	either	the	assets	of	Cournot	or	the	assets	of	MSDP,	unless	and	until	the	obligations	of	such	entity	to	its	own	creditors	are	satisfied	in	full.	Creditors	of Cournot	or	MSDP,	respectively,	should	not	expect	to	have	any	claims	on	the	assets	of	the	Company	or	any	of	its	affiliates,	other	than	the	respective	assets	of	Cournot	or MSDP.

The	Company	is	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.	During	fiscal	2007,	the	Company	was	in	compliance	with	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	November	30,	2007, MS&Co.	had	tentative	net	capital	in	excess	of	the	minimum	and	the	notification	requirements.

# Effects	of	Inflation	and	Changes	in	Foreign	Exchange	Rates.

The	Company's	assets	to	a	large	extent	are	liquid	in	nature	and,	therefore,	are	not	significantly	affected	by	inflation,	although	inflation	may	result	in	increases	in	the Company's	expenses,	which	may	not	be	readily	recoverable	in	the	price	of	services	offered.	To	the	extent	inflation	results	in	rising	interest	rates	and	has	other	adverse effects	upon	the	securities	markets	and	upon	the	value	of	financial	instruments,	it	may	adversely	affect	the	Company's	financial	position	and	profitability.

A	significant	portion	of	the	Company's	business	is	conducted	in	currencies	other	than	the	U.S.	dollar,	and	changes	in	foreign	exchange	rates	relative	to	the	U.S.	dollar can	therefore	affect	the	value	of	non-U.S.	dollar	net	assets,	revenues	and	expenses.	Potential	exposures	as	a	result	of	these	fluctuations	in	currencies	are	closely monitored,	and,	where	cost-justified,	strategies	are	adopted	that	are	designed	to	reduce	the	impact	of	these	fluctuations	on	the	Company's	financial	performance.	These strategies	may	include	the	financing	of	non-U.S.	dollar	assets	with	direct	or	swap-based	borrowings	in	the	same	currency	and	the	use	of	currency	forward	contracts	or the	spot	market	in	various	hedging	transactions	related	to	net	assets,	revenues,	expenses	or	cash	flows.

# Item	7A.				Quantitative	and	Qualitative	Disclosures	about	Market	Risk.

# Risk	Management	Policy	and	Control	Structure.

Risk	is	an	inherent	part	of	the	Company's	business	and	activities.	The	Company's	ability	to	properly	and	effectively	identify,	assess,	monitor	and	manage	each	of	the various	types	of	risk	involved	in	its	activities	is	critical	to	its	soundness	and	profitability.	The	Company's	broad-based	portfolio	of	business	activities	helps	reduce	the impact	that	volatility	in	any	particular	area	or	related	areas	may	have	on	its	net	revenues	as	a	whole.	The	Company	seeks	to	identify,	assess,	monitor	and	manage,	in accordance	with	defined	policies	and	procedures,	the	following	principal	risks	involved	in	the	Company's	business	activities:	market,	credit,	operational,	legal,	and liquidity	and	funding	risk.	Liquidity	and	funding	risk	is	discussed	in	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations— Liquidity	and	Capital	Resources"	in	Part	II,	Item	7.	The	Company's	currency	exposure	relating	to	its	net	monetary	investments	in	non-U.S.	dollar	functional	currency subsidiaries	is	discussed	in	Note	16	to	the	consolidated	financial	statements.

The	cornerstone	of	the	Company's	risk	management	philosophy	is	protection	of	the	Company's	franchise,	reputation	and	financial	standing.	The	Company's	risk management	philosophy	is	based	on	the	following	principles:	comprehensiveness,	independence,	accountability,	defined	risk	tolerance	and	transparency.	Given	the importance	of	effective	risk	management	to	the	Company's	reputation,	senior	management	requires	thorough	and	frequent	communication	and	appropriate	escalation	of risk	matters.

Risk	management	at	the	Company	requires	independent	Company-level	oversight,	accountability	of	the	Company's	business	segments,	constant	communication, judgment,	and	knowledge	of	specialized	products	and	markets.	The	Company's	senior	management	takes	an	active	role	in	the	identification,	assessment	and management	of	various	risks	at	both	the	Company	and	business	segment	level.	In	recognition	of	the	increasingly	varied	and	complex	nature	of	the	global	financial services	business,	the	Company's	risk	management	philosophy,	with	its	attendant	policies,	procedures	and	methodologies,	is	evolutionary	in	nature	and	subject	to ongoing	review	and	modification.

The	nature	of	the	Company's	risks,	coupled	with	this	risk	management	philosophy,	informs	the	Company's	risk	governance	structure.	The	Company's	risk	governance structure	includes	the	Firm	Risk	Committee,	the	Capital	Structure	and	Strategic	Transactions	Committee,	the	Chief	Risk	Officer,	the	Internal	Audit	Department, independent	control	groups,	and	various	other	risk	control	managers,	committees	and	groups	located	within	and	across	business	segments.

The	Firm	Risk	Committee,	composed	of	the	Company's	most	senior	officers,	oversees	the	Company's	risk	management	structure.	The	Firm	Risk	Committee's responsibilities	include	oversight	of	the	Company's	risk	management	principles,	procedures	and	limits,	and	the	monitoring	of	material	financial,	operational	and franchise	risks.	The	Firm	Risk	Committee	is	overseen	by	the	Audit	Committee	of	the	Board	of	Directors	(the	"Audit	Committee").	The	Capital	Structure	and	Strategic Transactions	Committee	(the	"Capital	Committee")	reviews	strategic	transactions	for	the	Company	and	significant	changes	to	the	Company's	capital	structure.	The Capital	Committee's	responsibilities	include	reviewing	measures	of	capital	and	evaluating	capital	resources	relative	to	the	Company's	risk	profile	and	strategy.

The	Chief	Risk	Officer,	a	member	of	the	Firm	Risk	Committee,	oversees	compliance	with	Company	risk	limits;	approves	certain	excessions	of	Company	risk	limits; reviews	material	market,	credit	and	operational	risks;	and	reviews	results	of	risk	management	processes	with	the	Audit	Committee.

The	Internal	Audit	Department	provides	independent	risk	and	control	assessment	and	reports	to	the	Audit	Committee	and	administratively	to	the	Chief	Legal	Officer. The	Internal	Audit	Department	examines	the	Company's	operational	and	control	environment	and	conducts	audits	designed	to	cover	all	major	risk	categories.

The	Market	Risk,	Credit	Risk,	Operational	Risk,	Financial	Control,	Treasury,	and	Legal	and	Compliance	Departments	(collectively,	the	"Company	Control	Groups"), which	are	all	independent	of	the	Company's	business	units,	assist	senior	management	and	the	Firm	Risk	Committee	in	monitoring	and	controlling	the	Company's	risk through	a	number	of	control	processes.	The	Company	is	committed	to	employing	qualified	personnel	with	appropriate	expertise	in	each	of	its	various	administrative	and business	areas	to	implement	effectively	the	Company's	risk	management	and	monitoring	systems	and	processes.

Each	business	segment	has	a	risk	committee	that	is	responsible	for	ensuring	that	the	business	segment,	as	applicable,	adheres	to	established	limits	for	market,	credit, operational	and	other	risks;	implements	risk	measurement,	monitoring,	and	management	policies	and	procedures	that	are	consistent	with	the	risk	framework	established by	the	Firm	Risk	Committee;	and	reviews,	on	a	periodic	basis,	its	aggregate	risk	exposures,	risk	exception	experience,	and	the	efficacy	of	its	risk	identification, measurement,	monitoring	and	management	policies	and	procedures,	and	related	controls.

Each	of	the	Company's	business	segments	also	has	designated	operations	officers,	committees	and	groups,	including	operations	and	information	technology	groups (collectively,	"Segment	Control	Groups"	and,	together	with	the	Company	Control	Groups,	the	"Control	Groups")	to	manage	and	monitor	specific	risks	and	report	to	the business	segment	risk	committee.	The	Control	Groups	work	together	to	review	the	risk	monitoring	and	risk	management	policies	and	procedures	relating	to,	among other	things,	the	business	segment's	market,	credit	and	operational	risk	profile,	sales	practices,	reputation,	legal	enforceability,	and	operational	and	technological	risks. Participation	by	the	senior	officers	of	the	Control	Groups	helps	ensure	that	risk	policies	and	procedures,	exceptions	to	risk	limits,	new	products	and	business	ventures, and	transactions	with	risk	elements	undergo	a	thorough	review.

The	following	is	a	discussion	of	the	Company's	risk	management	policies	and	procedures	for	its	principal	risks	(other	than	funding	and	liquidity	risk).	The	discussion focuses	on	the	Company's	securities	activities	(primarily	its	institutional	trading	activities)	and	corporate	lending	and	related	activities.	The	Company	believes	that	these activities	generate	a	substantial	portion	of	its	principal	risks.	This	discussion	and	the	estimated	amounts	of	the	Company's	market	risk	exposure	generated	by	the Company's	statistical	analyses	are	forward-looking	statements.	However,	the	analyses	used	to	assess	such	risks	are	not	predictions	of	future	events,	and	actual	results may	vary	significantly	from	such	analyses	due	to	events	in	the	markets	in	which	the	Company	operates	and	certain	other	factors	described	below.

Market	risk	refers	to	the	risk	that	a	change	in	the	level	of	one	or	more	market	prices,	rates,	indices,	implied	volatilities	(the	price	volatility	of	the	underlying	instrument imputed	from	option	prices),	correlations	or	other	market	factors,	such	as	market	liquidity,	will	result	in	losses	for	a	position	or	portfolio.	Generally,	the	Company	incurs market	risk	as	a	result	of	trading	and	client	facilitation	activities,	principally	within	the	Institutional	Securities	business	where	the	substantial	majority	of	the	Company's Value-at-Risk	("VaR")	for	market	risk	exposures	is	generated.	In	addition,	the	Company	incurs	trading-related	market	risk	within	the	Global	Wealth	Management Group.	Asset	Management	incurs	non-trading	market	risk	primarily	from	capital	investments	in	funds	and	investments	in	private	equity	vehicles.

Sound	market	risk	management	is	an	integral	part	of	the	Company's	culture.	The	various	business	units	and	trading	desks	are	responsible	for	ensuring	that	market	risk exposures	are	well-managed	and	prudent.	The	Control	Groups	help	ensure	that	these	risks	are	measured	and	closely	monitored	and	are	made	transparent	to	senior management.	The	Market	Risk	Department	is	responsible	for	ensuring	transparency	of	material	market	risks,	monitoring	compliance	with	established	limits,	and escalating	risk	concentrations	to	appropriate	senior	management.	To	execute	these	responsibilities,	the	Market	Risk	Department	monitors	the	Company's	risk	against limits	on	aggregate	risk	exposures,	performs	a	variety	of	risk	analyses,	routinely	reports	risk	summaries,	and	maintains	the	Company's	VaR	system.	A	variety	of	limits is	designed	to	control	price	and	market	liquidity

risk.	Market	risk	is	monitored	through	various	measures:	statistically	(using	VaR	and	related	analytical	measures);	by	measures	of	position	sensitivity;	and	through routine	stress	testing	and	scenario	analyses	conducted	by	the	Market	Risk	Department	in	collaboration	with	the	business	units.	The	material	risks	identified	by	these processes	are	summarized	in	reports	produced	by	the	Market	Risk	Department	that	are	circulated	to	and	discussed	with	senior	management.

# Subprime	and	Related	Risks.

During	2007,	asset-backed	products	referencing	subprime	consumer	mortgages	experienced	a	significant	increase	in	expected	default	rates,	resulting	in	a	dramatic reduction	in	asset	prices	and	market	liquidity.	Although	other	markets	have	also	experienced	periods	of	significant	illiquidity	in	the	past,	the	combined	magnitude	and velocity	of	price	depreciation,	as	well	as	the	continuing	nature	of	the	event,	place	it	among	the	most	significant	market	shocks	ever	realized.	While	such	events	may recur	in	the	future,	the	timing	and	magnitude	of	recurrence	are	difficult	to	predict.

Events	of	this	magnitude	are	outside	of	the	loss	estimates	forecast	by	VaR	models	and	are	more	commonly	measured	by	alternative	risk	measures	such	as	stress	tests	and scenario	analyses.	However,	the	market	moves	associated	with	the	subprime	events	of	2007	were	significantly	greater	than	those	included	in	the	Company's	stress	tests and	scenario	analyses	at	that	time.	The	Company	has	since	enhanced	its	stress	test	and	scenario	analyses	to	better	incorporate	the	levels	of	price	volatility	realized	during the	second	half	of	fiscal	2007.	Stress	tests	and	scenario	analyses	represent	estimates	of	future	significant	events.	Actual	market	moves	may	continue	to	be	more	dramatic than	the	estimates	included	in	the	Company's	VaR,	stress	tests	and	scenario	analyses.	Limitations	to	VaR	models	are	discussed	further	in	"VaR	Methodology, Assumptions	and	Limitations"	below.

# Sales	and	Trading	and	Related	Activities.

Primary	Market	Risk	Exposures	and	Market	Risk	Management.				During	fiscal	2007,	the	Company	had	exposures	to	a	wide	range	of	interest	rates,	equity	prices, foreign	exchange	rates	and	commodity	prices—and	the	associated	implied	volatilities	and	spreads—related	to	the	global	markets	in	which	it	conducts	its	trading activities.

The	Company	is	exposed	to	interest	rate	and	credit	spread	risk	as	a	result	of	its	market-making	activities	and	proprietary	trading	in	interest	rate	sensitive	financial instruments	(e.g.,	risk	arising	from	changes	in	the	level	or	implied	volatility	of	interest	rates,	the	timing	of	mortgage	prepayments,	the	shape	of	the	yield	curve	and	credit spreads).	The	activities	from	which	those	exposures	arise	and	the	markets	in	which	the	Company	is	active	include,	but	are	not	limited	to,	the	following:	emerging	market corporate	and	government	debt,	non-investment	grade	and	distressed	corporate	debt,	investment	grade	corporate	debt	and	asset-backed	debt	(including	mortgage-related securities).

The	Company	is	exposed	to	equity	price	and	implied	volatility	risk	as	a	result	of	making	markets	in	equity	securities	and	derivatives	and	maintaining	proprietary positions	(including	positions	in	non-public	entities).	Positions	in	non-public	entities	may	include,	but	are	not	limited	to,	exposures	to	private	equity,	venture	capital, private	partnerships,	real	estate	funds	and	other	funds.	Such	positions	are	less	liquid,	have	longer	investment	horizons	and	are	more	difficult	to	hedge	than	listed	equities.

The	Company	is	exposed	to	foreign	exchange	rate	and	implied	volatility	risk	as	a	result	of	making	markets	in	foreign	currencies	and	foreign	currency	derivatives,	from maintaining	foreign	exchange	positions	and	from	holding	non	U.S.	dollar-denominated	financial	instruments.	The	Company	is	exposed	to	commodity	price	and	implied volatility	risk	as	a	result	of	market-making	activities	and	maintaining	positions	in	physical	commodities	(such	as	crude	and	refined	oil	products,	natural	gas,	electricity, and	precious	and	base	metals)	and	related	derivatives.	Commodity	exposures	are	subject	to	periods	of	high	price	volatility	as	a	result	of	changes	in	supply	and	demand. These	changes	can	be	caused	by	weather	conditions;	physical	production,	transportation	and	storage	issues;	or	geopolitical	and	other	events	that	affect	the	available supply	and	level	of	demand	for	these	commodities.

The	Company	manages	its	trading	positions	by	employing	a	variety	of	risk	mitigation	strategies.	These	strategies	include	diversification	of	risk	exposures	and	hedging. Hedging	activities	consist	of	the	purchase	or	sale	of	positions	in	related	securities	and	financial	instruments,	including	a	variety	of	derivative	products	(e.g.,	futures, forwards,	swaps	and	options).	Hedging	activities	may	not	always	provide	effective	mitigation	against	trading	losses	due	to	differences	in	the	terms,	specific characteristics	or	other	basis	risks	that	may	exist	between	the	hedge	instrument	and	the	risk	exposure	that	is	being	hedged.	The	Company	manages	the	market	risk associated	with	its	trading	activities	on	a	Company-wide	basis,	on	a	worldwide	trading	division	level	and	on	an	individual	product	basis.	The	Company	manages	and monitors	its	market	risk	exposures	in	such	a	way	as	to	maintain	a	portfolio	that	the	Company	believes	is	well-diversified	in	the	aggregate	with	respect	to	market	risk factors	and	that	reflects	the	Company's	aggregate	risk	tolerance	as	established	by	the	Company's	senior	management.

Aggregate	market	risk	limits	have	been	approved	for	the	Company	and	for	its	major	trading	divisions	worldwide	(equity	and	fixed	income,	which	includes	interest	rate products,	credit	products,	foreign	exchange	and	commodities).	Additional	market	risk	limits	are	assigned	to	trading	desks	and,	as	appropriate,	products	and	regions. Trading	division	risk	managers,	desk	risk	managers,	traders	and	the	Market	Risk	Department	monitor	market	risk	measures	against	limits	in	accordance	with	policies	set by	senior	management.

The	Market	Risk	Department	independently	reviews	the	Company's	trading	portfolios	on	a	regular	basis	from	a	market	risk	perspective	utilizing	VaR	and	other quantitative	and	qualitative	risk	measures	and	analyses.	The	Company's	trading	businesses	and	the	Market	Risk	Department	also	use,	as	appropriate,	measures	such	as sensitivity	to	changes	in	interest	rates,	prices,	implied	volatilities	and	time	decay	to	monitor	and	report	market	risk	exposures.

Net	exposure,	defined	as	the	potential	loss	to	the	Company	over	a	period	of	time	in	the	event	of	default	of	a	referenced	asset,	assuming	zero	recovery,	is	one	key	risk measure	the	Company	employs	to	standardize	the	aggregation	of	market	risk	exposures	across	cash	and	derivative	products.	Stress	testing,	which	measures	the	impact	on the	value	of	existing	portfolios	of	specified	changes	in	market	factors	for	certain	products,	is	performed	periodically	and	is	reviewed	by	trading	division	risk	managers, desk	risk	managers	and	the	Market	Risk	Department.	The	Market	Risk	Department	also	conducts	scenario	analyses,	which	estimate	the	Company's	revenue	sensitivity to	a	set	of	specific,	predefined	market	and	geopolitical	events.

Value-at-Risk	(VaR).				The	Company	uses	the	statistical	technique	known	as	VaR	as	one	of	the	tools	used	to	measure,	monitor	and	review	the	market	risk	exposures	of its	trading	portfolios.	The	Market	Risk	Department	calculates	and	distributes	daily	VaR-based	risk	measures	to	various	levels	of	management.

VaR	Methodology,	Assumptions	and	Limitations.				The	Company	estimates	VaR	using	a	model	based	on	historical	simulation	for	major	market	risk	factors	and	Monte Carlo	simulation	for	name-specific	risk	in	certain	equity	and	fixed	income	exposures.	Historical	simulation	involves	constructing	a	distribution	of	hypothetical	daily changes	in	the	value	of	trading	portfolios	based	on	two	sets	of	inputs:	historical	observation	of	daily	changes	in	key	market	indices	or	other	market	factors	("market	risk factors");	and	information	on	the	sensitivity	of	the	portfolio	values	to	these	market	risk	factor	changes.	The	Company's	VaR	model	uses	approximately	four	years	of historical	data	to	characterize	potential	changes	in	market	risk	factors.	The	Company's	95%/one-day	VaR	corresponds	to	the	unrealized	loss	in	portfolio	value	that,	based on	historically	observed	market	risk	factor	movements,	would	have	been	exceeded	with	a	frequency	of	5%,	or	five	times	in	every	100	trading	days,	if	the	portfolio	were held	constant	for	one	day.

The	Company's	VaR	model	generally	takes	into	account	linear	and	non-linear	exposures	to	price	risk,	interest	rate	risk	and	credit	spread	risk	and	linear	exposures	to implied	volatility	risks.	Market	risks	that	are	incorporated	in	the	VaR	model	include	equity	and	commodity	prices,	interest	rates,	credit	spreads,	foreign	exchange	rates and	associated	implied	volatilities.	The	VaR	model	also	captures	certain	correlation	risks	associated	with	portfolio	credit	derivatives,	as	well	as	certain	basis	risks between	corporate	debt	and	related	credit	derivatives.	As	a	supplement	to	the	use	of	historical	simulation	for	major	market	risk	factors,	the	Company's	VaR	model	uses 86

Monte	Carlo	simulation	to	capture	name-specific	risk	in	equities	and	credit	products	(i.e.,	corporate	bonds,	loans,	and	credit	derivatives).

The	Company's	VaR	models	evolve	over	time	in	response	to	changes	in	the	composition	of	trading	portfolios	and	to	improvements	in	modeling	techniques	and	systems capabilities.	The	Company	is	committed	to	continuous	review	and	enhancement	of	VaR	methodologies	and	assumptions	in	order	to	capture	evolving	risks	associated with	changes	in	market	structure	and	dynamics.	As	part	of	regular	process	improvement,	additional	systematic	and	name-specific	risk	factors	may	be	added	to	improve the	VaR	model's	ability	to	more	accurately	estimate	risks	to	specific	asset	classes	or	industry	sectors.	In	response	to	increased	levels	of	market	volatility	realized	during the	second	half	of	fiscal	2007,	the	Company	has	reviewed	the	appropriateness	of	the	implementation	of	its	VaR	models	and	has	made	certain	changes	to	more	accurately capture	risks	generated	by	certain	fixed	income	products.	These	changes	include	additional	historical	time	series	that	provide	broader	product	coverage	of	subprime consumer	mortgage	products	as	well	as	updated	mappings	of	risk	exposures	to	historical	price	time	series.

Among	their	benefits,	VaR	models	permit	estimation	of	a	portfolio's	aggregate	market	risk	exposure,	incorporating	a	range	of	varied	market	risks;	reflect	risk	reduction due	to	portfolio	diversification	or	hedging	activities;	and	can	cover	a	wide	range	of	portfolio	assets.	However,	VaR	risk	measures	should	be	interpreted	carefully	in	light of	the	methodology's	limitations,	which	include	the	following:	past	changes	in	market	risk	factors	may	not	always	yield	accurate	predictions	of	the	distributions	and correlations	of	future	market	movements;	changes	in	portfolio	value	in	response	to	market	movements	(especially	for	complex	derivative	portfolios)	may	differ	from	the responses	calculated	by	a	VaR	model;	VaR	using	a	one-day	time	horizon	does	not	fully	capture	the	market	risk	of	positions	that	cannot	be	liquidated	or	hedged	within one	day;	the	historical	market	risk	factor	data	used	for	VaR	estimation	may	provide	only	limited	insight	into	losses	that	could	be	incurred	under	market	conditions	that are	unusual	relative	to	the	historical	period	used	in	estimating	the	VaR;	and	published	VaR	results	reflect	past	trading	positions	while	future	risk	depends	on	future positions.	VaR	is	most	appropriate	as	a	risk	measure	for	trading	positions	in	liquid	financial	markets	and	will	understate	the	risk	associated	with	severe	events,	such	as periods	of	extreme	illiquidity.	The	Company	is	aware	of	these	and	other	limitations	and,	therefore,	uses	VaR	as	only	one	component	in	its	risk	management	oversight process.	As	explained	above,	this	process	also	incorporates	stress	testing	and	scenario	analyses	and	extensive	risk	monitoring,	analysis,	and	control	at	the	trading	desk, division	and	Company	levels.

VaR	for	Fiscal	2007.				The	table	below	presents	the	Company's	Aggregate	(Trading	and	Non-trading),	Trading	and	Non-trading	VaR	for	each	of	the	Company's primary	market	risk	exposures	at	November	30,	2007	and	November	30,	2006,	incorporating	substantially	all	financial	instruments	generating	market	risk	that	are managed	by	the	Company's	trading	businesses.	This	measure	of	VaR	incorporates	most	of	the	Company's	trading-related	market	risks.	However,	a	small	proportion	of trading	positions	generating	market	risk	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	example,	risks	associated	with	residential mortgage-backed	securities	have	been	approximated	as	it	is	difficult	to	capture	precisely	the	relevant	microeconomic	factors	that	affect	mortgage	prices	within	a	VaR context.

Aggregate	Trading	and	Non-trading	VaR	also	incorporates	(a)	the	interest	rate	risk	generated	by	funding	liabilities	related	to	institutional	trading	positions,	(b)	public company	equity	positions	recorded	as	investments	by	the	Company	and	(c)	corporate	loan	exposures	that	are	awaiting	distribution	to	the	market.	Investments	made	by the	Company	that	are	not	publicly	traded	are	not	reflected	in	the	VaR	results	reported	below.	Aggregate	Trading	and	Non-trading	VaR	also	excludes	certain	funding liabilities	primarily	related	to	fixed	and	other	non-trading	assets	as	well	as	the	credit	spread	risk	generated	by	the	Company's	funding	liabilities.	As	of	November	30, 2007,	the	notional	amount	of	funding	liabilities	related	to	non-trading	assets	(including	premises,	equipment	and	software,	goodwill,	deferred	tax	assets	and	intangible assets)	was	approximately	$7.8	billion,	with	a	duration	of	approximately	10	years.	The	credit	spread	risk	sensitivity	generated	by	the	Company's	funding

liabilities	(i.e.,	those	funding	both	trading	and	non-trading	assets)	corresponded	to	an	increase	in	value	of	approximately	$78	million	for	each	+1	basis	point	(or	1/100 th of	a	percentage	point)	widening	in	the	Company's	credit	spread	level	as	of	November	30,	2007.

Since	the	VaR	statistics	reported	below	are	estimates	based	on	historical	position	and	market	data,	VaR	should	not	be	viewed	as	predictive	of	the	Company's	future revenues	or	financial	performance	or	of	its	ability	to	monitor	and	manage	risk.	There	can	be	no	assurance	that	the	Company's	actual	losses	on	a	particular	day	will	not exceed	the	VaR	amounts	indicated	below	or	that	such	losses	will	not	occur	more	than	five	times	in	100	trading	days.	VaR	does	not	predict	the	magnitude	of	losses	which, should	they	occur,	may	be	significantly	greater	than	the	VaR	amount.

The	table	below	presents	95%/one-day	VaR	for	each	of	the	Company's	primary	risk	exposures	and	on	an	aggregate	basis	at	November	30,	2007	and	November	30, 2006.

|  | (Trading	and	Non-trading) | (Trading	and	Non-trading) | Trading |  | Non-trading | Non-trading |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 95%/One-Day\tVaR | 95%/One-Day\tVaR | 95%/One-Day\tVaR | 95%/One-Day\tVaR | 95%/One-Day\tVaR | 95%/One-Day\tVaR |
| Table\t1:\t95%\tTotal\tVaR | at\tNovember\t30, | at\tNovember\t30, | at\tNovember\t30, | at\tNovember\t30, | at\tNovember\t30, | at\tNovember\t30, |
| Primary\tMarket\tRisk\tCategory | 2007 | 2006 | \t\t\t\t2007 | \t\t\t\t2006 | \t\t\t\t2007 | \t\t\t\t2006 |
|  |  |  | (dollars\tin\tmillions) |  |  |  |
| Interest\trate\tand\tcredit\tspread | $52 | $41 | $45 | $38 | $33 | $13 |
| Equity\tprice | 40 | 58 | 39 | 55 | 4 | 5 |
| Foreign\texchange\trate | 24 | 9 | 25 | 9 | 1 | — |
| Commodity\tprice | 34 | 31 | 34 | 31 | — | — |
| Subtotal | 150 | 139 | 143 | 133 | 38 | 18 |
| Less\tdiversification\tbenefit(1) | 67 | 50 | 65 | 48 | 5 | 3 |
| Total\tVaR | $83 | $89 | $78 | $85 | $33 | $15 |

(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	at	November	30,	2007	was	$83	million	compared	with	$89	million	at	November	30,	2006.	The	decrease	in	Aggregate	VaR	and	Trading VaR	at	year-end	was	driven	primarily	by	a	decrease	in	equity	exposures	toward	the	end	of	the	fiscal	year.

The	Company's	Trading	VaR	at	November	30,	2007	was	$78	million	compared	with	$85	million	at	November	30,	2006.	The	decrease	in	Trading	VaR	at	year-end	was driven	primarily	by	a	decrease	in	equity	price	VaR,	partially	mitigated	by	increases	in	foreign	exchange	rate	VaR	and	interest	rate	and	credit	spread	VaR.	The	increase	in foreign	exchange	rate	VaR	was	driven	by	increased	exposure	to	foreign	currencies.	The	increase	in	interest	rate	and	credit	spread	VaR	was	driven	primarily	by	two factors.	First,	at	November	30,	2007	the	Company	reclassified	the	investment	portfolio	of	its	bank	subsidiaries	from	securities	available	for	sale	to	Financial	instruments owned	in	the	consolidated	statement	of	financial	condition.	(The	total	notional	amount	of	reclassified	assets	at	November	30,	2007	was	$8.1	billion,	consisting	entirely of	ABS	and	residential	mortgage-backed	securities).	Second,	during	fiscal	2007,	the	U.S.	subprime	market	experienced	a	significant	increase	in	price	volatility.	This increase	in	volatility	drove	an	increase	in	VaR	with	respect	to	the	Company's	exposure	to	securities	that	reference	subprime	mortgage	pools	and	related	financial instruments,	whose	change	in	value	is	modeled	as	a	function	of	the	underlying	securities.

Non-trading	VaR	at	November	30,	2007	increased	to	$33	million	from	$15	million	at	November	30,	2006	primarily	due	to	an	increase	in	interest	rate	and	credit	spread non-trading	VaR	resulting	from	an	increase	in	non-trading	loan	assets.

The	Company	views	average	Trading	VaR	over	the	fiscal	year	as	more	representative	of	trends	in	the	business	than	VaR	at	any	single	point	in	time.	Table	2	below, which	presents	the	high,	low	and	average	95%/one-day	Trading	VaR	during	fiscal	2007	and	fiscal	2006,	represents	substantially	all	of	the	Company's	trading	activities. Certain	market	risks	included	in	the	year-end	Aggregate	VaR	discussed	above	are	excluded	from	these	measures	(e.g.,	equity	price	risk	in	public	company	equity positions	recorded	as	principal	investments	by	the	Company	and	certain	funding	liabilities	related	to	trading	positions).

Average	Trading	VaR	for	fiscal	2007	increased	to	$87	million	from	$60	million	in	fiscal	2006,	driven	by	increases	across	all	four	primary	market	risk	categories. Average	Total	VaR	for	fiscal	2007	increased	to	$92	million	from	$67	million	in	fiscal	2006,	which	was	also	driven	by	increases	across	all	four	primary	market	risk categories.	The	increase	in	interest	rate	and	credit	spread	VaR	was	predominately	driven	by	increased	volatility	in	securitized	product	and	corporate	credit	markets, which	resulted	in	a	higher	VaR	despite	a	reduction	in	risk	exposures	during	the	fiscal	year.	The	increase	in	equity	price	VaR	was	primarily	driven	by	increased	equity exposures.	The	increase	in	foreign	exchange	rate	VaR	was	driven	by	increased	exposure	to	foreign	currencies.	The	increase	in	commodity	price	VaR	was	predominately driven	by	increased	exposure	to	electricity	and	natural	gas	products.

|  |  | Daily	95%/One-Day	VaR |  |  | Daily	95%/One-Day	VaR |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Table\t2:\t95%\tHigh/Low/Average\tTrading\tVaR | for\tFiscal\t2007 | for\tFiscal\t2007 | for\tFiscal\t2007 | for\tFiscal\t2006 | for\tFiscal\t2006 | for\tFiscal\t2006 |
| Primary\tMarket\tRisk\tCategory | \t\tHigh | \t\tLow | Average | \t\tHigh | \t\tLow | Average |
|  |  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |  |
| Interest\trate\tand\tcredit\tspread | $88 | $34 | $46 | $48 | $29 | $35 |
| Equity\tprice | 61 | 29 | 43 | 55 | 21 | 28 |
| Foreign\texchange\trate | 33 | 10 | 18 | 23 | 5 | 9 |
| Commodity\tprice | 48 | 28 | 37 | 43 | 23 | 30 |
| Trading\tVaR | 108 | 69 | 87 | 85 | 49 | 60 |
| Non-trading\tVaR | 61 | 11 | 22 | 37 | 10 | 22 |
| Total\tVaR | $123 | $70 | $92 | $91 | $54 | $67 |

# VaR	Statistics	under	Varying	Assumptions.

VaR	statistics	are	not	readily	comparable	across	firms	because	of	differences	in	the	breadth	of	products	included	in	each	firm's	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	(95%	versus	99%)	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	95%	and	99%	Trading	VaR | Average	95%/One-Day	VaR |  | Average	99%/One-Day	VaR | Average	99%/One-Day	VaR |
| :--- | :--- | :--- | :--- | :--- |
| with\tFour-Year/One-Year\tHistorical\tTime\tSeries | for\tFiscal\t2007 |  | for\tFiscal\t2007 | for\tFiscal\t2007 |
| Primary\tMarket\tRisk\tCategory | Four-Year\nFactor\tHistory | One-Year\nFactor\tHistory | Four-Year\nFactor\tHistory | One-Year\nFactor\tHistory |
|  |  | (dollars\tin\tmillions) |  |  |
| Interest\trate\tand\tcredit\tspread | $46 | $46 | $74 | $72 |
| Equity\tprice | 43 | 49 | 65 | 81 |
| Foreign\texchange\trate | 18 | 18 | 26 | 28 |
| Commodity\tprice | 37 | 37 | 57 | 52 |
| Trading\tVaR | $87 | $90 | $127 | $132 |

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	95%	and	99% Average	Trading	VaR	for	fiscal	2007	would	have	been	$274	million	and	$402	million,	respectively.

# Distribution	of	VaR	Statistics	and	Net	Revenues	for	Fiscal	2007.

As	shown	in	Table	2	above,	the	Company's	average	95%/one-day	Trading	VaR	for	fiscal	2007	was	$87	million.	The	histogram	below	presents	the	distribution	of	the Company's	daily	95%/one-day	Trading	VaR	for	fiscal	2007.	The	most	frequently	occurring	value	was	between	$86	million	and	$89	million,	while	for	approximately 90%	of	trading	days	during	the	fiscal	year,	VaR	ranged	between	$71	million	and	$98	million.

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	95%/one-day	VaR,	the	expected	number	of	times	that	trading	losses	should	exceed	VaR	during	the fiscal	year	is	13,	and,	in	general,	if	trading	losses	were	to	exceed	VaR	more	than	21	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.	For days	where	losses	exceed	the	95%	or	99%	VaR	statistic,	the	Company	examines	the	drivers	of	trading	losses	to	evaluate	the	VaR	model's	accuracy	relative	to	realized trading	results.

The	Company	incurred	daily	trading	losses	in	excess	of	the	95%/one-day	Trading	VaR	on	15	days	during	fiscal	2007.	These	losses	were	incurred	during	a	period	of exceptionally	high	volatility	across	equity,	corporate	credit	and	securitized	product	markets.	Since	the	Company	bases	its	VaR	calculations	on	four	years	of	equally weighted	historical	data,	clustering	of	VaR	exceptions	should	occur	during	periods	of	exceptionally	high	market	turbulence.	An	examination	of	the	15	outliers	incurred during	the	fiscal	year	revealed	that	these	losses	occurred	on	days	when	markets	experienced	unusually	high	price	volatility.

Over	the	longer	term,	trading	losses	are	expected	to	exceed	VaR	an	average	of	three	times	per	quarter	at	the	95%	confidence	level.	The	Company	bases	its	VaR calculations	on	the	long-term	(or	unconditional)	distribution	and,	therefore,	evaluates	its	risk	from	a	longer	term	perspective,	which	avoids	understating	risk	during periods	of	relatively	lower	volatility	in	the	market.

The	histogram	below	shows	the	distribution	of	daily	net	trading	revenue	during	fiscal	2007	for	the	Company's	trading	businesses	(including	net	interest	and	non-agency commissions	but	excluding	certain	non-trading	revenues	such	as	primary,	fee-based	and	prime	brokerage	revenue	credited	to	the	trading	businesses).	During	fiscal	2007, the	Company	experienced	net	trading	losses	on	34	days.	These	loss	days	were	driven	predominately	by	increased	market	volatility	realized	during	the	second	half	of	the fiscal	year.

Credit	risk	refers	to	the	risk	of	loss	arising	from	borrower	or	counterparty	default	when	a	borrower,	counterparty	or	obligor	does	not	meet	its	financial	obligations.	The Company	is	exposed	to	two	distinct	types	of	credit	risk	in	its	businesses.	The	Company	incurs	significant,	"single-name"	credit	risk	exposure	through	the	Institutional Securities	business	and	to	a	lesser	extent	through	its	commercial	lending	activity	in	its	Global	Wealth	Management	Group.	This	type	of	risk	requires	credit	analysis	of specific	counterparties,	both	initially	and	on	an	ongoing	basis.	The	Company	also	incurs	"individual	consumer"	credit	risk	in	the	Global	Wealth	Management	Group business	through	margin	and	non-purpose	loans	to	individual	investors,	which	are	collateralized	by	securities.

The	Company	has	structured	its	credit	risk	management	framework	to	reflect	that	each	of	these	businesses	generates	unique	credit	risks	that	are	appropriately	managed discretely.	The	Institutional	Credit	Department	("Institutional	Credit")	evaluates	and	monitors	credit	risk	exposure	for	the	Institutional	Securities	business.	Institutional Credit	is	responsible	for	ensuring	transparency	of	material	credit	risks,	ensuring	compliance	with	established	limits,	approving	material	extensions	of	credit,	and escalating	risk	concentrations	to	appropriate	senior	management.	Credit	risk	exposure	in	the	Global	Wealth	Management	Group	business	segment	is	managed	through various	credit	risk	committees,	whose	membership	includes	Institutional	Credit.	The	Global	Wealth	Management	Group	Risk	Management	Department	is	responsible	for monitoring,	measuring	and	analyzing	credit	risk	exposures,	including	margin	loans	and	credit	sensitive,	higher	risk	transactions.

# Institutional	Securities	Activities.

Corporate	Lending.				In	connection	with	certain	of	its	Institutional	Securities	business	activities,	the	Company	provides	loans	or	lending	commitments	(including	bridge financing)	to	selected	clients.	Such	loans	and	commitments	can	generally	be	classified	as	either	"event-driven"	or	"relationship-driven."

"Event-driven"	loans	and	commitments	refer	to	activities	associated	with	a	particular	event	or	transaction,	such	as	to	support	client	merger,	acquisition	or	recapitalization transactions.	The	commitments	associated	with	these	"event-driven"	activities	may	not	be	indicative	of	the	Company's	actual	funding	requirements	since	funding	is contingent	upon	a	proposed	transaction	being	completed.	In	addition,	the	borrower	may	not	fully	utilize	the	commitment	or	the	Company's	portion	of	the	commitment may	be	reduced	through	the	syndication	process.	The	borrower's	ability	to	draw	on	the	commitment	is	also	subject	to	certain	terms	and	conditions,	among	other	factors. The	borrowers	of	"event-driven"	lending	transactions	may	be	investment	grade	or	non-investment	grade.	The	Company	risk	manages	its	exposures	in	connection	with "event-driven"	transactions	through	various	means,	including	syndication,	distribution	and/or	hedging.

"Relationship-driven"	loans	and	commitments	are	generally	made	to	expand	business	relationships	with	select	clients.	The	commitments	associated	with	"relationship- driven"	activities	may	not	be	indicative	of	the	Company's	actual	funding	requirements,	as	the	commitment	may	expire	unused	or	the	borrower	may	not	fully	utilize	the commitment.	The	borrowers	of	"relationship-driven"	lending	transactions	may	be	investment	grade	or	non-investment	grade.	The	Company	may	hedge	its	exposures	in connection	with	"relationship-driven"	transactions.

Securitized	Products.				The	Company	also	extends	loans	and	lending	commitments	to	clients	that	are	secured	by	assets	of	the	borrower	and	generally	provide	for	over- collateralization,	including	commercial	real	estate,	loans	secured	by	loan	pools,	corporate	and	operating	company	loans,	and	secured	lines	of	revolving	credit.	Credit	risk with	respect	to	these	loans	and	lending	commitments	arises	from	the	failure	of	a	borrower	to	perform	according	to	the	terms	of	the	loan	agreement	and	a	decline	in collateral	value.

Other.				In	addition	to	the	activities	performed	by	Institutional	Credit,	there	are	credit	risks	managed	by	various	business	areas	within	Institutional	Securities.	For example,	certain	businesses	with	heightened	settlement	risk	monitor	compliance	with	established	settlement	risk	limits.	Certain	risk	management	activities	as	they pertain	to	establishing	appropriate	collateral	amounts	for	the	Company's	prime	brokerage	and	securitized	product	businesses	are	primarily	monitored	within	those	areas in	that	they	determine	the	appropriate	collateral	level	for	each	strategy	or	position.	In	addition,	a	collateral	management	group	monitors	collateral	levels	against requirements	and	oversees	the	administration	of	the	collateral	function.

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.

The	Company	incurs	credit	risk	as	a	dealer	in	OTC	derivatives.	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	derivative	contracts	reported	as assets.	The	fair	value	of	derivatives	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	2	to	the	consolidated	financial	statements.	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	consolidated	statements	of	financial	condition.

Analyzing	Credit	Risk.				Credit	risk	management	takes	place	at	the	transaction,	counterparty	and	portfolio	levels.	In	order	to	help	protect	the	Company	from	losses resulting	from	these	activities,	Institutional	Credit	analyzes	all	material	lending	and	derivative	transactions	and	ensures	that	the	creditworthiness	of	the	Company's counterparties	and	borrowers	is	reviewed	regularly	and	that	credit	exposure	is	actively	monitored	and	managed.	Institutional	Credit	assigns	obligor	credit	ratings	to	the Company's	counterparties	and	borrowers.	These	credit	ratings	are	intended	to	assess	a	counterparty's	probability	of	default	and	are	derived	using	methodologies generally	consistent	with	those	employed	by	external	rating	agencies.	Credit	ratings	of	"BB+"	or	below	are	considered	non-investment	grade.	Additionally,	for	lending transactions,	Institutional	Credit	evaluates	the	relative	position	of	the	Company's	particular	obligation	in	the	borrower's	capital	structure	and	relative	recovery	prospects, as	well	as	collateral	(if	applicable)	and	other	structural	elements	of	the	particular	transaction.	The	Company	has	credit	guidelines	that	limit	potential	credit	exposure	to any	one	borrower	or	counterparty	and	to	aggregates	of	borrowers	or	counterparties.	Institutional	Credit	administers	these	limits	and	monitors	and	reports	credit	exposure relative	to	limits.

Risk	Mitigation.				The	Company	may	seek	to	mitigate	credit	risk	from	its	lending	and	derivatives	transactions	in	multiple	ways.	At	the	transaction	level,	the	Company seeks	to	mitigate	risk	through	management	of	key	risk	elements	such	as	size,	tenor,	seniority	and	collateral.	The	Company	actively	hedges	its	lending	and	derivatives exposure	through	various	financial	instruments	which	may	include	single	name,	portfolio	and	structured	credit	derivatives.	Additionally,	the	Company	may	sell,	assign or	sub-participate	funded	loans	and	lending	commitments	to	other	financial	institutions	in	the	primary	and	secondary	loan	market.	In	connection	with	its	derivatives trading	activities,	the	Company	may	enter	into	master	netting	agreements	and	collateral	arrangements	with	counterparties.	These	agreements	may	provide	the	Company with	the	ability	to	offset	a	counterparty's	rights	and	obligations,	request	additional	collateral	when	necessary	or	liquidate	the	collateral	in	the	event	of	counterparty default.

Credit	Exposure-Corporate	Lending.				The	following	table	presents	information	about	the	Company's	corporate	loans	and	commitments	as	of	November	30,	2007.	The "total	corporate	lending	exposure"	column	includes	both	lending	commitments	and	funded	loans.	Funded	loans	represent	loans	that	have	been	drawn	by	the	borrower and	that	were	outstanding	as	of	November	30,	2007.	Lending	commitments	represent	legally	binding	obligations	to	provide	funding	to	clients	as	of	November	30,	2007 for	both	"relationship-driven"	and	"event-driven"	transactions.	As	discussed	above,	these	loans	and	commitments	have	varying	terms,	may	be	senior	or	subordinated, may	be	secured	or	unsecured,	are	generally	contingent	upon	representations,	warranties	and	contractual	conditions	applicable	to	the	borrower,	and	may	be	syndicated, traded	or	hedged	by	the	Company.

At	November	30,	2007	and	November	30,	2006,	the	aggregate	amount	of	investment	grade	loans	was	$13.0	billion	and	$6.4	billion,	respectively,	and	the	aggregate amount	of	non-investment	grade	loans	was	$10.9	billion	and	$3.4	billion,	respectively.	At	November	30,	2007	and	November	30,	2006,	the	aggregate	amount	of	lending commitments	outstanding	was	$70.2	billion	and	$53.5	billion,	respectively.	In	connection	with	these	business	activities	(which	include	corporate	funded	loans	and lending	commitments),	the	Company	had	hedges	with	a	notional	amount	of	$37.6	billion	and	$26.5	billion	at	November	30,	2007	and	November	30,	2006,	respectively. The	table	below	shows	the	Company's	credit	exposure	from	its	corporate	lending	positions	and	commitments	as	of	November	30,	2007.	Since	commitments	associated with	these	business	activities	may	expire	unused,	they	do	not	necessarily	reflect	the	actual	future	cash	funding	requirements:

# Corporate	Lending	Commitments	and	Funded	Loans

|  | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity |  |  | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | Total\tCorporate | Corporate | Corporate |
|  |  |  |  |  | Lending | Funded | Lending |
| Credit\tRating(1) | Less\tthan\t1 | 1-3 | 3-5 | Over\t5 | Exposure(2)(3) | Loans | Commitments |
|  |  |  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |  |
| AAA | $701 | $462 | $1,253 | $— | $2,416 | $380 | $2,036 |
| AA | 8,016 | 457 | 3,615 | 369 | 12,457 | 1,941 | 10,516 |
| A | 7,695 | 3,451 | 8,617 | 419 | 20,182 | 3,120 | 17,062 |
| BBB | 10,010 | 3,954 | 13,058 | 1,124 | 28,146 | 7,569 | 20,577 |
| Investment\tgrade | 26,422 | 8,324 | 26,543 | 1,912 | 63,201 | 13,010 | 50,191 |
| Non-investment\tgrade | 2,862 | 2,387 | 4,777 | 20,883 | 30,909 | 10,897 | 20,012 |
| Total | $29,284 | $10,711 | $31,320 | $22,795 | $94,110 | $23,907 | $70,203 |

(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.	Amounts	exclude	approximately	$38	billion	of	notional	amount	of	hedges.

(3) Total	corporate	lending	exposure	includes	"event-driven"	funded	loans	of	$10.8	billion	and	"event-driven"	lending	commitments	of	$24.5	billion.	Included	in	the	$24.5	billion	of	"event-driven"	loan	commitments were	$12.2	billion	of	commitments	to	non-investment	grade	borrowers	that	were	accepted	by	the	borrower	but	not	yet	closed.

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	November	30,	2007.	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 | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Cross-Maturity |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | and | Net\tExposure | Net\tExposure |
|  |  |  |  | Cash\tCollateral | Cash\tCollateral | Post-Cash | Post- |
| Credit\tRating(2) | Less\tthan\t1 | 1-3 | 3-5 | Over\t5 | Netting(3) | Collateral | Collateral |
|  |  |  |  | (dollars\tin\tmillions) |  |  |  |
| AAA | $1,625 | $1,572 | $2,142 | $8,219 | $(4,057) | $9,501 | $9,287 |
| AA | 11,560 | 9,686 | 6,649 | 23,231 | (29,925) | 21,201 | 18,011 |
| A | 4,196 | 3,212 | 3,675 | 8,234 | (8,454) | 10,863 | 10,203 |
| BBB | 3,245 | 3,444 | 2,879 | 2,566 | (3,484) | 8,650 | 6,387 |
| Non-investment\tgrade | 6,299 | 3,954 | 2,753 | 3,016 | (5,007) | 11,015 | 6,505 |
| Unrated(4) | 2,005 | 664 | 190 | 691 | (368) | 3,182 | 710 |
| Total | $28,930 | $22,532 | $18,288 | $45,957 | $(51,295) | $64,412 | $51,103 |

(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.

(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.

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	November	30,	2007,	including	on	a	net	basis,	where	applicable,	reflecting	the	fair	value	of	related	non-cash	collateral for	financial	instruments	owned:

|  | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Cross-Maturity |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | and | Net\tExposure | Net\tExposure |
|  |  |  |  | Cash\tCollateral | Cash\tCollateral | Post-Cash | Post- |
| Product\tType | Less\tthan\t1 | 1-3 | 3-5 | Over\t5 | Netting(1) | Collateral | Collateral |
|  |  |  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |  |
| Interest\trate\tand\tcurrency\tswaps,\tinterest\trate\toptions,\tcredit\tderivatives |  |  |  |  |  |  |  |
| and\tother\tfixed\tincome\tsecurities\tcontracts | $5,236 | $10,704 | $11,752 | $42,911 | $(37,028) | $33,575 | $29,877 |
| Foreign\texchange\tforward\tcontracts\tand\toptions | 10,449 | 1,133 | 142 | 67 | (4,043) | 7,748 | 6,327 |
| Equity\tsecurities\tcontracts\t(including\tequity\tswaps,\twarrants\tand |  |  |  |  |  |  |  |
| options) | 6,875 | 3,157 | 872 | 764 | (3,493) | 8,175 | 2,832 |
| Commodity\tforwards,\toptions\tand\tswaps | 6,370 | 7,538 | 5,522 | 2,215 | (6,731) | 14,914 | 12,067 |
| Total | $28,930 | $22,532 | $18,288 | $45,957 | $(51,295) | $64,412 | $51,103 |

(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)

| Product	Type | Less	than	1 | 1-3 | 3-5 | Over	5 | Netting(2) | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |  |
| Interest\trate\tand\tcurrency\tswaps,\tinterest\trate\toptions,\tcredit\tderivatives\tand\tother |  |  |  |  |  |  |
| fixed\tincome\tsecurities\tcontracts | $6,573 | $8,749 | $11,154 | $29,487 | $(37,138) | $18,825 |
| Foreign\texchange\tforward\tcontracts\tand\toptions | 10,868 | 1,043 | 117 | 380 | (3,038) | 9,370 |
| Equity\tsecurities\tcontracts\t(including\tequity\tswaps,\twarrants\tand\toptions) | 6,375 | 4,952 | 2,129 | 1,746 | (3,453) | 11,749 |
| Commodity\tforwards,\toptions\tand\tswaps | 7,762 | 7,821 | 2,273 | 1,743 | (5,946) | 13,653 |
| Total | $31,578 | $22,565 | $15,673 | $33,356 | $(49,575) | $53,597 |

(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.

The	Company's	derivatives	(both	listed	and	OTC)	at	November	30,	2007	and	November	30,	2006	are	summarized	in	the	table	below,	showing	the	fair	value	of	the related	assets	and	liabilities	by	product:

|  | At	November	30,	2007 | At	November	30,	2007 | At	November	30,	2006 | At	November	30,	2006 |
| :--- | :--- | :--- | :--- | :--- |
| Product\tType | Assets | Liabilities | Assets | Liabilities |
|  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |
| Interest\trate\tand\tcurrency\tswaps,\tinterest\trate\toptions,\tcredit\tderivatives\tand\tother\tfixed\tincome\tsecurities |  |  |  |  |
| contracts | $33,804 | $ 19,515 | $19,444 | $15,688 |
| Foreign\texchange\tforward\tcontracts\tand\toptions | 7,755 | 9,372 | 7,325 | 7,725 |
| Equity\tsecurities\tcontracts\t(including\tequity\tswaps,\twarrants\tand\toptions) | 19,913 | 27,887 | 16,705 | 23,155 |
| Commodity\tforwards,\toptions\tand\tswaps | 15,531 | 14,830 | 11,969 | 10,923 |
| Total | $77,003 | $ 71,604 | $55,443 | $57,491 |

Each	category	of	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	Company	determines	the	fair	values	recorded	in	the	above	tables	using	various	pricing	models.	For	a	discussion	of	fair	value	as	it	affects	the	consolidated	financial statements,	see	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations—Critical	Accounting	Policies"	in	Part	I,	Item	2	and	Note	2	to the	consolidated	financial	statements.

Country	Exposure.				The	Company	monitors	its	credit	exposure	to	individual	countries.	Credit	exposure	to	a	country	arises	from	the	Company's	primary	lending activities	and	derivatives	activities	in	a	country.	At	November	30,	2007,	based	on	the	domicile	of	the	counterparty,	approximately	7%	of	the	Company's	credit	exposure (for	credit	exposure	arising	from	corporate	loans	and	lending	commitments	as	discussed	above	and	current	exposure	arising	from	the	Company's	OTC	derivatives contracts)	was	to	emerging	markets,	and	no	one	emerging	market	country	accounted	for	more	than	2%	of	the	Company's	credit	exposure.	The	Company	defines emerging	markets	to	include	generally	all	countries	that	are	not	members	of	the	Organization	for	Economic	Co-operation	and	Development	and	includes	as	well	the Czech	Republic,	Hungary,	Korea,	Mexico,	Poland,	the	Slovak	Republic	and	Turkey	but	excludes	countries	rated	AA	and	Aa2	or	above	by	Standard	&	Poor's	and Moody's	Investors	Service,	respectively.

Industry	Exposure.				The	Company	also	monitors	its	credit	exposure	to	individual	industries.	At	November	30,	2007,	the	Company's	material	credit	exposure	(for credit	exposure	arising	from	corporate	loans	and	lending	commitments	as	discussed	above	and	current	exposure	arising	from	the	Company's	OTC	derivatives	contracts) was	to	entities	engaged	in	the	following	industries:	utilities,	financial	institutions,	consumer-related	entities,	banks,	telecommunications,	sovereign	and	energy-related entities.

# Global	Wealth	Management	Group	Activities.

Margin	Lending.				Customer	margin	accounts,	the	primary	source	of	retail	credit	exposure,	are	collateralized	in	accordance	with	internal	and	regulatory	guidelines.	The Company	monitors	required	margin	levels	and	established	credit	limits	daily	and,	pursuant	to	such	guidelines,	requires	customers	to	deposit	additional	collateral,	or reduce	positions,	when	necessary.	Factors	considered	in	the	review	of	margin	loans	are	the	amount	of	the	loan,	the	intended	purpose,	the	degree	of	leverage	being employed	in	the	account,	and	overall	evaluation	of	the	portfolio	to	ensure	proper	diversification	or,	in	the	case	of	concentrated	positions,	possible	hedging	strategies. Additionally,	transactions	relating	to	concentrated	or	restricted	positions	require	a	review	of	any	legal	impediments	to	liquidation	of	the	underlying	collateral. Underlying	collateral	for	margin	loans	is	reviewed	with	respect	to	the	liquidity	of	the	proposed	collateral	positions,	valuation	of	securities,	historic	trading	range, volatility	analysis	and	an	evaluation	of	industry	concentrations.	At	November	30,	2007,	there	were	approximately	$7.3	billion	of	customer	margin	loans	outstanding.

Non-purpose	Securities-Based	Lending:				Non-purpose	securities-based	lending	allows	clients	to	borrow	money	against	the	value	of	qualifying	securities	for	any suitable	purpose	other	than	purchasing,	trading,	or	carrying	marketable	securities	or	refinancing	margin	debt.	The	Company	establishes	approved	lines	and	advance	rates against	qualifying	securities	and	monitors	limits	daily	and,	pursuant	to	such	guidelines,	requires	customers	to	deposit	additional	collateral,	or	reduce	debt	positions,	when necessary.	Factors	considered	in	the	review	of	non-purpose	securities-based	lending	are	amount	of	the	loan,	the	degree	of	concentrated	or	restricted	positions,	and	the overall	evaluation	of	the	portfolio	to	ensure	proper	diversification	or,	in	the	case	of	concentrated	positions,	possible	hedging	strategies.	Underlying	collateral	for	non- purpose	securities-based	loans	is	reviewed	with	respect	to	the	liquidity	of	the	proposed	collateral	positions,	historic	trading	range,	volatility	analysis	and	an	evaluation	of industry	concentrations.

Commercial	Lending.				Global	Wealth	Management	Group	provides	structured	credit	facilities	to	high	net	worth	individuals	and	their	small	and	medium-size	domestic businesses	through	Morgan	Stanley	Commercial	Financial	Services,	Inc.	("CFS").	CFS'	suite	of	products	includes	working	capital	lines	of	credit,	revolving	lines	of credit,	standby	letters	of	credit,	term	loans	and	commercial	real	estate	mortgages.	Clients	are	required	to	submit	a	credit	application	and	financial	statements	to	CFS' centralized	credit	processing	platform.	CFS'	underwriting	professionals	recommend	a	lending	structure	following	an	analysis	of	the	borrower,	the	guarantor,	the collateral,	cash	flow,	liquidity,	leverage	and	credit	history.	For	standard	transactions,	credit	requests	are	approved	via	signature	of	independent	credit	officers,	and	where transactions	are	of	size	and	higher	complexity,	approval	is	secured	through	a	formal	loan	committee	chaired	by	independent	credit	professionals.	The	facility	is	risk	rated and	upon	credit	approval	is	moved	to	the	general	portfolio	where	it	is	monitored	periodically	through	account	management,	covenants	compliance	certificates,	and	spot and	cycle	audits.

# Consumer	Lending	Activities.

With	respect	to	first	mortgages	and	second	mortgages	within	the	Company's	Institutional	Securities	business	segment,	including	home	equity	lines	of	credit	("mortgage lending"),	a	loan	evaluation	process	is	adopted	within	a	framework	of	credit	underwriting	policies	and	collateral	valuation.	The	Company's	underwriting	policy	is designed	to	ensure	that	all	borrowers	pass	an	assessment	of	capacity	and	willingness	to	pay,	which	includes	an	analysis	of	applicable	industry	standard	credit	scoring models	(e.g.,	FICO	scores),	debt	ratios	and	reserves	of	the	borrower.	Loan-to-collateral	value	ratios	are	determined	based	on	independent	third-party	property appraisal/valuations,	and	security	lien	position	is	established	through	title/ownership	reports.	As	part	of	the	mortgage

lending	business	strategy,	almost	all	loans	are	sold	in	the	secondary	market	through	securitizations	and	whole	loan	sales,	while	almost	all	servicing	rights	are	retained.

These	sales	and	securitizations	pass	the	risk	of	credit	loss	onto	the	purchaser/investor.

Operational	risk	refers	to	the	risk	of	financial	or	other	loss,	or	potential	damage	to	a	firm's	reputation,	resulting	from	inadequate	or	failed	internal	processes,	people, systems	or	from	external	events	(e.g.,	external	or	internal	fraud,	legal	and	compliance	risks,	damage	to	physical	assets,	etc.).	The	Company	may	incur	operational	risk across	the	full	scope	of	its	business	activities,	including	revenue	generating	activities	(e.g.,	sales	and	trading)	and	support	functions	(e.g.,	information	technology	and facilities	management).	Legal	and	compliance	risk	is	included	in	the	scope	of	operational	risk	and	is	discussed	below	under	"Legal	Risk."

The	goal	of	the	Company's	operational	risk	management	framework	is	to	establish	firm-wide	operational	risk	standards	related	to	risk	measurement,	monitoring	and management.	Operational	risk	policies	are	designed	to	reduce	the	likelihood	and/or	impact	of	operational	incidents	as	well	as	to	mitigate	legal,	regulatory	and reputational	risks.	As	a	foundation	for	the	Basel	II	Advanced	Measurement	Approach,	an	enhanced	risk-based	capital	model	has	been	developed	for	the	calculation	of capital	related	to	operational	risk.	This	model	encompasses	both	quantitative	and	qualitative	elements,	including	internal	and	external	operational	incidents,	metrics,	risk and	control	self-assessments	and	scenario	analysis.	The	Company	will	seek	to	obtain	approval	from	the	SEC	to	implement	the	Advanced	Measurement	Approach	for Operational	Risk	Capital	requirements	in	2008.

The	Company's	Operational	Risk	Manager	("ORM")	oversees,	monitors,	measures,	analyzes	and	reports	on	operational	risk	across	the	Company.	The	ORM	is independent	of	the	business	segments	and	is	supported	by	the	Firm-wide	Operational	Risk	Department	("ORD").	The	ORM	is	also	responsible	for	facilitating, designing,	implementing	and	monitoring	the	Firm-wide	operational	risk	program.	The	ORD	works	with	the	business	segments	and	Control	Groups	to	help	ensure	a transparent,	consistent	and	comprehensive	framework	for	managing	operational	risk	within	each	area	and	across	the	Company,	globally.

Primary	responsibility	for	the	management	of	operational	risk	is	with	the	business	segments,	the	Control	Groups,	and	the	business	managers	therein.	The	business managers,	generally,	maintain	processes	and	controls	designed	to	identify,	assess,	manage,	mitigate	and	report	operational	risk.	As	new	products	and	business	activities are	developed	and	processes	are	designed	and	modified,	operational	risks	are	considered.	Each	business	segment	has	a	designated	operational	risk	coordinator.	In addition,	business	segment	risk	committees	review	operational	risk	matters	and/or	reports	on	a	regular	basis.	Each	Control	Group	also	has	a	designated	operational	risk coordinator,	or	equivalent,	and	a	forum	for	discussing	operational	risk	matters	and/or	reports	with	senior	management.	Oversight	of	business	segment	operational	risk	is provided	by	business	segment	risk	committees,	a	Firm-wide	operational	risk	committee	and,	ultimately,	senior	management	through	the	Firm	Risk	Committee.

Business	Continuity	Management	is	an	ongoing	program	of	analysis	and	planning	that	ensures	a	recovery	strategy	and	required	resources	for	the	resumption	of	critical business	functions	following	a	disaster	or	other	business	interruption.	Disaster	recovery	plans	are	in	place	for	critical	facilities	and	resources	on	a	Company-wide	basis, and	redundancies	are	built	into	the	systems	as	deemed	appropriate.	The	key	components	of	the	Company's	disaster	recovery	plans	include:	crisis	management;	business segment	recovery	plans;	applications/data	recovery;	work	area	recovery;	and	other	elements	addressing	management,	analysis,	training	and	testing.

The	Company	maintains	an	information	security	program	that	coordinates	the	management	of	information	security	risks	and	satisfies	regulatory	requirements. Information	security	procedures	are	designed	to	protect	the	Company's	information	assets	against	unauthorized	disclosure,	modification	or	misuse.	These	procedures cover	a	broad	range	of	areas,	including:	application	system	entitlement;	data	protection;	internet	and	intranet	access,	communications	and	usage;	and	mobile	and	portable information	usage.	The	Company	has	also	established	policies,	procedures	and	technologies	to	protect	its	computer	and	other	assets	from	unauthorized	access.

The	Company	utilizes	the	services	of	external	vendors	in	connection	with	the	Company's	ongoing	operations.	These	may	include,	for	example,	outsourced	processing and	support	functions	and	consulting	and	other	professional	services.	The	Company	manages	its	exposures	to	the	quality	of	these	services	through	a	variety	of	means, including	service	level	and	other	contractual	agreements,	service	and	quality	reviews,	and	ongoing	monitoring	of	the	vendors'	performance.	It	is	anticipated	that	the	use of	these	services	will	continue	and	possibly	increase	in	the	future.

Legal	risk	includes	the	risk	of	non-compliance	with	applicable	legal	and	regulatory	requirements	and	standards.	Legal	risk	also	includes	contractual	and	commercial risk	such	as	the	risk	that	a	counterparty's	performance	obligations	will	be	unenforceable.	The	Company	is	generally	subject	to	extensive	regulation	in	the	different jurisdictions	in	which	it	conducts	its	business	(see	"Business—Regulation"	in	Part	I,	Item	1).	The	Company	has	established	procedures	based	on	legal	and	regulatory requirements	on	a	worldwide	basis	that	are	designed	to	foster	compliance	with	applicable	statutory	and	regulatory	requirements.	The	Company,	principally	through	the Legal	and	Compliance	Division,	also	has	established	procedures	that	are	designed	to	require	that	the	Company's	policies	relating	to	conduct,	ethics	and	business practices	are	followed	globally.	In	connection	with	its	businesses,	the	Company	has	and	continuously	develops	various	procedures	addressing	issues	such	as	regulatory capital	requirements,	sales	and	trading	practices,	new	products,	potential	conflicts	of	interest,	structured	transactions,	use	and	safekeeping	of	customer	funds	and securities,	credit	granting,	money	laundering,	privacy	and	recordkeeping.	In	addition,	the	Company	has	established	procedures	to	mitigate	the	risk	that	a	counterparty's performance	obligations	will	be	unenforceable,	including	consideration	of	counterparty	legal	authority	and	capacity,	adequacy	of	legal	documentation,	the	permissibility of	a	transaction	under	applicable	law	and	whether	applicable	bankruptcy	or	insolvency	laws	limit	or	alter	contractual	remedies.	The	legal	and	regulatory	focus	on	the financial	services	industry	presents	a	continuing	business	challenge	for	the	Company.

# Item	8. Financial	Statements	and	Supplementary	Data.

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

To	the	Board	of	Directors	and	Shareholders	of	Morgan	Stanley:

We	have	audited	the	accompanying	consolidated	statements	of	financial	condition	of	Morgan	Stanley	and	subsidiaries	(the	"Company")	as	of	November	30,	2007	and 2006,	and	the	related	consolidated	statements	of	income,	comprehensive	income,	cash	flows	and	changes	in	shareholders'	equity	for	each	of	the	three	years	in	the	period ended	November	30,	2007.	These	consolidated	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on these	consolidated	financial	statements	based	on	our	audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a	test	basis, evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant	estimates made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	such	consolidated	financial	statements	present	fairly,	in	all	material	respects,	the	financial	position	of	Morgan	Stanley	and	subsidiaries	as	of	November 30,	2007	and	2006,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	November	30,	2007,	in	conformity	with accounting	principles	generally	accepted	in	the	United	States	of	America.

As	discussed	in	Note	2	and	Note	18	to	the	consolidated	financial	statements,	in	fiscal	2005,	the	Company	adopted	Statement	of	Financial	Accounting	Standards	No. 123(R),	"Share-Based	Payment",	and	effective	December	1,	2005,	Morgan	Stanley	changed	its	accounting	policy	for	recognition	of	equity	awards	granted	to	retirement- eligible	employees.

As	discussed	in	Note	24	to	the	consolidated	financial	statements,	effective	August	31,	2006,	Morgan	Stanley	elected	application	of	Staff	Accounting	Bulletin	No.	108, "Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements	in	Current	Year	Financial	Statements".

As	discussed	in	Note	2	and	Note	3	to	the	consolidated	financial	statements,	effective	December	1,	2006,	the	Company	adopted	Statement	of	Financial	Accounting Standards	No.	157,	"Fair	Value	Measurement"	and	Statement	of	Financial	Accounting	Standards	No.	159,	"The	Fair	Value	Option	for	Financial	Assets	and	Financial Liabilities—Including	an	amendment	of	FASB	Statement	No.	115".

Also,	as	discussed	in	Note	2	and	Note	19	to	the	consolidated	financial	statements,	the	Company	adopted	Statement	Financial	Accounting	Standards	No.	158, "Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans,	an	amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)".

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	Company's	internal	control	over financial	reporting	as	of	November	30,	2007,	based	on	the	criteria	established	in	"Internal	Control—Integrated	Framework"	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	and	our	report	dated	January	28,	2008,	expressed	an	unqualified	opinion	on	the	Company's	internal	control	over	financial reporting.

# Consolidated	Statements	of	Financial	Condition

# (dollars	in	millions,	except	share	data)

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
| Assets |  |  |
| Cash\tand\tcash\tequivalents | $25,598 | $20,606 |
| Cash\tand\tsecurities\tdeposited\twith\tclearing\torganizations\tor\tsegregated\tunder\tfederal\tand\tother\tregulations\tor\trequirements |  |  |
| (including\tsecurities\tat\tfair\tvalue\tof\t$31,354\tin\t2007\tand\t$8,648\tin\t2006) | 61,608 | 29,565 |
| Financial\tinstruments\towned,\tat\tfair\tvalue\t(approximately\t$131\tbillion\tin\t2007\tand\t$125\tbillion\tin\t2006\twere\tpledged\tto\tvarious |  |  |
| parties): |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | 23,887 | 39,352 |
| Other\tsovereign\tgovernment\tobligations | 21,606 | 27,305 |
| Corporate\tand\tother\tdebt | 147,724 | 158,864 |
| Corporate\tequities | 87,377 | 86,058 |
| Derivative\tcontracts | 77,003 | 55,443 |
| Investments | 14,270 | 4,725 |
| Physical\tcommodities | 3,096 | 3,031 |
| Total\tfinancial\tinstruments\towned | 374,963 | 374,778 |
| Securities\treceived\tas\tcollateral,\tat\tfair\tvalue | 82,229 | 64,588 |
| Collateralized\tagreements: |  |  |
| Securities\tpurchased\tunder\tagreements\tto\tresell | 126,887 | 175,787 |
| Securities\tborrowed | 239,994 | 299,631 |
| Receivables: |  |  |
| Consumer\tloans\t(net\tof\tallowances\tof\t$831\tin\t2006) | — | 22,915 |
| Customers | 76,352 | 82,923 |
| Brokers,\tdealers\tand\tclearing\torganizations | 16,011 | 7,633 |
| Other\tloans | 11,629 | 11,908 |
| Fees,\tinterest\tand\tother | 8,320 | 8,937 |
| Other\tinvestments | 4,524 | 3,232 |
| Premises,\tequipment\tand\tsoftware\tcosts,\tat\tcost\t(net\tof\taccumulated\tdepreciation\tof\t$3,449\tin\t2007\tand\t$3,645\tin\t2006) | 4,372 | 4,086 |
| Goodwill | 3,024 | 2,792 |
| Intangible\tassets\t(net\tof\taccumulated\tamortization\tof\t$175\tin\t2007\tand\t$109\tin\t2006)\t(includes\t$428\tat\tfair\tvalue\tin\t2007) | 1,047 | 651 |
| Other\tassets | 8,851 | 11,160 |
| Total\tassets | $1,045,409 | $1,121,192 |

See	Notes	to	Consolidated	Financial	Statements.

# Consolidated	Statements	of	Financial	Condition—(Continued)

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
| Liabilities\tand\tShareholders'\tEquity |  |  |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings\t(includes\t$3,068\tat\tfair\tvalue\tin\t2007) | $34,495 | $29,092 |
| Deposits\t(includes\t$3,769\tat\tfair\tvalue\tin\t2007) | 31,179 | 28,343 |
| Financial\tinstruments\tsold,\tnot\tyet\tpurchased,\tat\tfair\tvalue: |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | 8,221 | 26,168 |
| Other\tsovereign\tgovernment\tobligations | 15,627 | 28,961 |
| Corporate\tand\tother\tdebt | 7,592 | 10,336 |
| Corporate\tequities | 30,899 | 59,399 |
| Derivative\tcontracts | 71,604 | 57,491 |
| Physical\tcommodities | 398 | 764 |
| Total\tfinancial\tinstruments\tsold,\tnot\tyet\tpurchased | 134,341 | 183,119 |
| Obligation\tto\treturn\tsecurities\treceived\tas\tcollateral,\tat\tfair\tvalue | 82,229 | 64,588 |
| Collateralized\tfinancings: |  |  |
| Securities\tsold\tunder\tagreements\tto\trepurchase | 162,840 | 267,566 |
| Securities\tloaned | 110,423 | 150,257 |
| Other\tsecured\tfinancings,\tat\tfair\tvalue | 27,772 | 45,556 |
| Payables: |  |  |
| Customers | 203,453 | 134,907 |
| Brokers,\tdealers\tand\tclearing\torganizations | 10,454 | 7,635 |
| Interest\tand\tdividends | 1,724 | 4,746 |
| Other\tliabilities\tand\taccrued\texpenses | 24,606 | 24,975 |
| Long-term\tborrowings\t(includes\t$38,392\tat\tfair\tvalue\tin\t2007) | 190,624 | 144,978 |
|  | 1,014,140 | 1,085,762 |
| Capital\tUnits | — | 66 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Preferred\tstock | 1,100 | 1,100 |
| Common\tstock,\t$0.01\tpar\tvalue; |  |  |
| Shares\tauthorized:\t3,500,000,000\tin\t2007\tand\t2006; |  |  |
| Shares\tissued:\t1,211,701,552\tin\t2007\tand\t2006; |  |  |
| Shares\toutstanding:\t1,056,289,659\tin\t2007\tand\t1,048,877,006\tin\t2006 | 12 | 12 |
| Paid-in\tcapital | 1,902 | 2,213 |
| Retained\tearnings | 38,045 | 41,422 |
| Employee\tstock\ttrust | 5,569 | 4,315 |
| Accumulated\tother\tcomprehensive\tloss | (199) | (35) |
|  | (9,591) | (9,348) |
| Common\tstock\tissued\tto\temployee\ttrust | (5,569) | (4,315) |
| Total\tshareholders'\tequity | 31,269 | 35,364 |
| Total\tliabilities\tand\tshareholders'\tequity | $1,045,409 | $1,121,192 |

# Consolidated	Statements	of	Income

|  |  |  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenues: |  |  |  |  |  |
| Investment\tbanking | Investment\tbanking |  | $6,368 | $4,755 | $3,843 |
| Principal\ttransactions: |  |  |  |  |  |
| Trading | Trading | Trading | 3,206 | 11,805 | 7,377 |
| Investments | Investments | Investments | 3,262 | 1,807 | 1,128 |
| Commissions | Commissions | Commissions | 4,682 | 3,770 | 3,331 |
| Asset\tmanagement,\tdistribution\tand\tadministration\tfees | Asset\tmanagement,\tdistribution\tand\tadministration\tfees | Asset\tmanagement,\tdistribution\tand\tadministration\tfees | 6,519 | 5,238 | 4,915 |
| Interest\tand\tdividends | Interest\tand\tdividends | Interest\tand\tdividends | 60,083 | 42,776 | 25,987 |
| Other | Other | Other | 1,208 | 585 | 496 |
| Total\trevenues | Total\trevenues | Total\trevenues | 85,328 | 70,736 | 47,077 |
| Interest\texpense | Interest\texpense | Interest\texpense | 57,302 | 40,897 | 23,552 |
| Net\trevenues | Net\trevenues | Net\trevenues | 28,026 | 29,839 | 23,525 |
| Non-interest\texpenses: |  |  |  |  |  |
| Compensation\tand\tbenefits | Compensation\tand\tbenefits | Compensation\tand\tbenefits | 16,552 | 13,986 | 10,749 |
| Occupancy\tand\tequipment | Occupancy\tand\tequipment | Occupancy\tand\tequipment | 1,130 | 912 | 957 |
| Brokerage,\tclearing\tand\texchange\tfees | Brokerage,\tclearing\tand\texchange\tfees | Brokerage,\tclearing\tand\texchange\tfees | 1,656 | 1,305 | 1,069 |
| Information\tprocessing\tand\tcommunications | Information\tprocessing\tand\tcommunications | Information\tprocessing\tand\tcommunications | 1,193 | 1,089 | 1,056 |
| Marketing\tand\tbusiness\tdevelopment | Marketing\tand\tbusiness\tdevelopment | Marketing\tand\tbusiness\tdevelopment | 813 | 643 | 576 |
| Professional\tservices | Professional\tservices | Professional\tservices | 2,112 | 1,889 | 1,622 |
| Other |  |  | 1,129 | 912 | 1,431 |
| September\t11 | th | \trelated\tinsurance\trecoveries,\tnet | — | — | (251) |
| Total\tnon-interest\texpenses | Total\tnon-interest\texpenses | Total\tnon-interest\texpenses | 24,585 | 20,736 | 17,209 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated\tinvestees,\tincome\ttaxes\tand\tcumulative\teffect\tof |  |  |  |  |  |
| accounting\tchange,\tnet | accounting\tchange,\tnet |  | 3,441 | 9,103 | 6,316 |
| Losses\tfrom\tunconsolidated\tinvestees | Losses\tfrom\tunconsolidated\tinvestees | Losses\tfrom\tunconsolidated\tinvestees | 47 | 40 | 311 |
| Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | 831 | 2,728 | 1,473 |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | 2,563 | 6,335 | 4,532 |
| Discontinued\toperations: |  |  |  |  |  |
| Net\tgain\tfrom\tdiscontinued\toperations | Net\tgain\tfrom\tdiscontinued\toperations | Net\tgain\tfrom\tdiscontinued\toperations | 1,024 | 1,666 | 559 |
| Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | Provision\tfor\tincome\ttaxes | 378 | 529 | 201 |
| Net\tgain\ton\tdiscontinued\toperations | Net\tgain\ton\tdiscontinued\toperations | Net\tgain\ton\tdiscontinued\toperations | 646 | 1,137 | 358 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 49 |
| Net\tincome |  |  | $3,209 | $7,472 | $4,939 |
| Preferred\tstock\tdividend\trequirements | Preferred\tstock\tdividend\trequirements | Preferred\tstock\tdividend\trequirements | $68 | $19 | $— |
| Earnings\tapplicable\tto\tcommon\tshareholders | Earnings\tapplicable\tto\tcommon\tshareholders | Earnings\tapplicable\tto\tcommon\tshareholders | $3,141 | $7,453 | $4,939 |
| Earnings\tper\tbasic\tcommon\tshare: |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | Income\tfrom\tcontinuing\toperations | Income\tfrom\tcontinuing\toperations | $2.49 | $6.25 | $4.32 |
| Gain\ton\tdiscontinued\toperations | Gain\ton\tdiscontinued\toperations | Gain\ton\tdiscontinued\toperations | 0.64 | 1.13 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tbasic\tcommon\tshare | Earnings\tper\tbasic\tcommon\tshare | Earnings\tper\tbasic\tcommon\tshare | $3.13 | $7.38 | $4.70 |
| Earnings\tper\tdiluted\tcommon\tshare: |  |  |  |  |  |
| Income\tfrom\tcontinuing\toperations | Income\tfrom\tcontinuing\toperations | Income\tfrom\tcontinuing\toperations | $2.37 | $5.99 | $4.19 |
| Gain\ton\tdiscontinued\toperations | Gain\ton\tdiscontinued\toperations | Gain\ton\tdiscontinued\toperations | 0.61 | 1.08 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tdiluted\tcommon\tshare | Earnings\tper\tdiluted\tcommon\tshare | Earnings\tper\tdiluted\tcommon\tshare | $2.98 | $7.07 | $4.57 |
| Average\tcommon\tshares\toutstanding:\nBasic | Average\tcommon\tshares\toutstanding:\nBasic | Average\tcommon\tshares\toutstanding:\nBasic | \t 1,001,878,651 | \t 1,010,254,255 | \t 1,049,896,047 |
| Diluted | Diluted | Diluted | \t 1,054,240,169 | \t 1,054,796,062 | \t 1,079,936,315 |

# Consolidated	Statements	of	Comprehensive	Income

# (dollars	in	millions)

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $3,209 | $7,472 | $4,939 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustments(1) | 65 | 104 | (89) |
| Net\tchange\tin\tcash\tflow\thedges(2) | 19 | 53 | (70) |
| Minimum\tpension\tliability\tadjustment(3) | (40) | (2) | 25 |
| Comprehensive\tincome | $3,253 | $7,627 | $4,805 |

(1) Amounts	are	net	of	provision	for	(benefit	from)	income	taxes	of	$35	million,	$56	million	and	$(48)	million	for	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.

(2) Amounts	are	net	of	provision	for	(benefit	from)	income	taxes	of	$10	million,	$29	million	and	$(38)	million	for	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.

# Consolidated	Statements	of	Cash	Flows

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| CASH\tFLOWS\tFROM\tOPERATING\tACTIVITIES |  |  |  |
| Net\tincome | $3,209 | $7,472 | $4,939 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tused\tfor\toperating\tactivities: |  |  |  |
| Losses\tfrom\tunconsolidated\tinvestees | 47 | 40 | 311 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | (49) |
| Deferred\tincome\ttaxes | (2,046) | 111 | (999) |
| Compensation\tpayable\tin\tcommon\tstock\tand\toptions | 1,941 | 1,923 | 820 |
| Depreciation\tand\tamortization | 475 | 876 | 815 |
| Provision\tfor\tconsumer\tloan\tlosses | 478 | 756 | 878 |
| Lease\tadjustment | — | — | 109 |
| Insurance\tsettlement | (38) | — | (251) |
| Gain\ton\tsale\tof\tQuilter\tHoldings\tLtd. | (168) | — | — |
| Aircraft-related\tcharges | — | 125 | 509 |
| Other-than-temporary\timpairment\tcharge | 437 | — | — |
| Changes\tin\tassets\tand\tliabilities: |  |  |  |
| Cash\tand\tsecurities\tdeposited\twith\tclearing\torganizations\tor\tsegregated\tunder\tfederal\tand\tother\tregulations\tor\trequirements | (32,040) | 10,592 | (3,388) |
| Financial\tinstruments\towned,\tnet\tof\tfinancial\tinstruments\tsold,\tnot\tyet\tpurchased | (30,573) | (78,370) | (24,521) |
| Securities\tborrowed | 59,637 | (55,390) | (35,892) |
| Securities\tloaned | (39,834) | 29,803 | 23,308 |
| Receivables\tand\tother\tassets | 1,786 | (41,929) | (1,598) |
| Payables\tand\tother\tliabilities | 71,057 | 33,971 | (815) |
| Securities\tpurchased\tunder\tagreements\tto\tresell | 48,900 | (1,075) | (51,204) |
| Securities\tsold\tunder\tagreements\tto\trepurchase | (105,361) | 30,292 | 55,676 |
| Net\tcash\tused\tfor\toperating\tactivities | (22,093) | (60,803) | (31,352) |
| CASH\tFLOWS\tFROM\tINVESTING\tACTIVITIES |  |  |  |
| Net\t(payments\tfor)\tproceeds\tfrom: |  |  |  |
| Office\tfacilities\tand\taircraft\tunder\toperating\tleases | (1,469) | 993 | (540) |
| Business\tacquisitions,\tnet\tof\tcash\tacquired | (1,169) | (2,706) | (323) |
| Sale\tof\tQuilter\tHoldings\tLtd. | 476 | — | — |
| Net\tprincipal\tdisbursed\ton\tconsumer\tloans | (4,776) | (12,164) | (14,093) |
| Sales\tof\tconsumer\tloans | 5,301 | 11,532 | 10,525 |
| Sale\tof\tinterest\tin\tPOSIT | — | — | 90 |
| Insurance\tsettlement | — | — | 220 |
| Purchases\tof\tsecurities\tavailable\tfor\tsale | (14,073) | — | — |
| Sales\tof\tsecurities\tavailable\tfor\tsale | 4,272 | — | — |
| Net\tcash\tused\tfor\tinvesting\tactivities | (11,438) | (2,345) | (4,121) |
| CASH\tFLOWS\tFROM\tFINANCING\tACTIVITIES |  |  |  |
| Net\tproceeds\tfrom\t(payments\tfor): |  |  |  |
| Short-term\tborrowings | 8,274 | (2,422) | (5,183) |
| MSCI\tInc.\tinitial\tpublic\toffering | 265 | — | — |
| Derivatives\tfinancing\tactivities | (859) | 546 | 1,044 |
| Other\tsecured\tfinancings | (24,231) | 22,022 | 16,487 |
| Deposits | 23,099 | 9,647 | 4,886 |
| Tax\tbenefits\tassociated\twith\tstock-based\tawards | 281 | 144 | 355 |
| Net\tproceeds\tfrom: |  |  |  |
| Issuance\tof\tpreferred\tstock | — | 1,097 | — |
| Issuance\tof\tcommon\tstock | 927 | 643 | 327 |
| Issuance\tof\tlong-term\tborrowings | 74,540 | 47,849 | 35,768 |
| Payments\tfor: |  |  |  |
| Repayments\tof\tlong-term\tborrowings | (33,120) | (20,643) | (16,735) |
| Redemption\tof\tCapital\tUnits | (66) | — | — |
| Repurchases\tof\tcommon\tstock | (3,753) | (3,376) | (3,693) |
| Cash\tdistribution\tin\tconnection\twith\tthe\tDiscover\tSpin-off | (5,615) | — | — |
| Cash\tdividends | (1,219) | (1,167) | (1,180) |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 38,523 | 54,340 | 32,076 |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | 4,992 | (8,808) | (3,397) |
| Cash\tand\tcash\tequivalents,\tat\tbeginning\tof\tperiod | 20,606 | 29,414 | 32,811 |
| Cash\tand\tcash\tequivalents,\tat\tend\tof\tperiod | $25,598 | $ 20,606 | $ 29,414 |

# SUPPLEMENTAL	DISCLOSURE	OF	CASH	FLOW	INFORMATION

# Consolidated	Statements	of	Changes	in	Shareholders'	Equity

|  | Preferred<br>Stock | Common<br>Stock | Paid-in<br>Capital | Retained<br>Earnings | Employee<br>Stock<br>Trust | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) | Common<br>Stock<br>Held	in<br>Treasury<br>at	Cost | Common<br>Stock<br>Issued	to<br>Employee<br>Trust | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| BALANCE\tAT |  |  |  |  |  |  |  |  |  |
| NOVEMBER\t30,\t2004 | $— | $12 | $2,088 | $31,426 | $3,824 | $(56) | $(6,614) | $(2,474) | $28,206 |
| Net\tincome | — | — | — | 4,939 | — | — | — | — | 4,939 |
| Dividends | — | — | — | (1,180) | — | — | — | — | (1,180) |
| Issuance\tof\tcommon\tstock | — | — | (780) | — | — | — | 1,107 | — | 327 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | — | (3,693) | — | (3,693) |
| Compensation\tpayable\tin\tcommon\tstock\tand\toptions | — | — | 669 | — | (764) | — | 1,437 | (586) | 756 |
| Tax\tbenefits\tassociated\twith\tstock-based\tawards | — | — | 317 | — | — | — | — | — | 317 |
| Employee\ttax\twithholdings\tand\tother | — | — | 95 | — | — | — | (451) | — | (356) |
| Net\tchange\tin\tcash\tflow\thedges | — | — | — | — | — | (70) | — | — | (70) |
| Minimum\tpension\tliability\tadjustment | — | — | — | — | — | 25 | — | — | 25 |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | — | — | (89) | — | — | (89) |
| BALANCE\tAT |  |  |  |  |  |  |  |  |  |
| NOVEMBER\t30,\t2005 | — | 12 | 2,389 | 35,185 | 3,060 | (190) | (8,214) | (3,060) | \t 29,182 |
| Adjustment\tto\topening\tshareholders'\tequity | — | — | 34 | (68) | — | — | — | — | (34) |
| Net\tincome | — | — | — | 7,472 | — | — | — | — | 7,472 |
| Dividends | — | — | — | (1,167) | — | — | — | — | (1,167) |
| Issuance\tof\tpreferred\tstock | 1,100 | — | — | — | — | — | — | — | 1,100 |
| Issuance\tof\tcommon\tstock | — | — | (1,949) | — | — | — | 2,592 | — | 643 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | — | (3,376) | — | (3,376) |
| Compensation\tpayable\tin\tcommon\tstock\tand\toptions | — | — | 1,486 | — | 1,255 | — | 5 | (1,255) | 1,491 |
| Tax\tbenefits\tassociated\twith\tstock-based\tawards | — | — | 72 | — | — | — | — | — | 72 |
| Employee\ttax\twithholdings\tand\tother | — | — | 181 | — | — | — | (355) | — | (174) |
| Net\tchange\tin\tcash\tflow\thedges | — | — | — | — | — | 53 | — | — | 53 |
| Minimum\tpension\tliability\tadjustment | — | — | — | — | — | (2) | — | — | (2) |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | — | — | 104 | — | — | 104 |
| BALANCE\tAT |  |  |  |  |  |  |  |  |  |
| NOVEMBER\t30,\t2006 | 1,100 | 12 | 2,213 | 41,422 | 4,315 | (35) | (9,348) | (4,315) | \t 35,364 |
| Fair\tvalue\tadjustment | — | — | — | 186 | — | — | — | — | 186 |
| Net\tincome | — | — | — | 3,209 | — | — | — | — | 3,209 |
| Dividends | — | — | — | (1,219) | — | — | — | — | (1,219) |
| Issuance\tof\tcommon\tstock | — | — | (1,555) | — | — | — | 2,482 | — | 927 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | — | (3,753) | — | (3,753) |
| Compensation\tpayable\tin\tcommon\tstock\tand\toptions | — | — | 1,710 | 5 | 1,254 | — | 376 | (1,254) | 2,091 |
| Tax\tbenefits\tassociated\twith\tstock-based\tawards | — | — | 280 | — | — | — | — | — | 280 |
| Employee\ttax\twithholdings\tand\tother | — | — | (15) | — | — | — | (318) | — | (333) |
| Net\tchange\tin\tcash\tflow\thedges | — | — | — | — | — | 19 | — | — | 19 |
| Minimum\tpension\tliability\tadjustment | — | — | — | — | — | (40) | — | — | (40) |
| SFAS\tNo.\t158\tpension\tadjustment | — | — | — | — | — | (208) | — | — | (208) |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | — | — | 65 | — | — | 65 |
| MSCI\tInc.\tinitial\tpublic\toffering | — | — | 239 | — | — | — | — | — | 239 |
| Discover\tSpin-off | — | — | (970) | (5,558) | — | — | 970 | — | (5,558) |
| BALANCE\tAT |  |  |  |  |  |  |  |  |  |
| NOVEMBER\t30,\t2007 | $1,100 | $12 | $1,902 | $38,045 | $5,569 | $(199) | $(9,591) | $(5,569) | $31,269 |

# NOTES	TO	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	and	Asset	Management.

A	summary	of	the	activities	of	each	of	the	Company's	business	segments	is	as	follows:

Discover.				On	June	30,	2007,	the	Company	completed	the	spin-off	(the	"Discover	Spin-off")	of	its	business	segment	Discover	Financial	Services	("DFS").	The	results of	DFS	prior	to	the	Discover	Spin-off	are	reported	as	discontinued	operations	for	all	periods	presented.

Quilter	Holdings	Ltd.				The	results	of	Quilter	Holdings	Ltd.	("Quilter")	are	reported	as	discontinued	operations	for	all	periods	presented	through	its	sale	on	February	28, 2007.	The	results	of	Quilter	were	formerly	included	in	the	Global	Wealth	Management	Group	business	segment.

Aircraft	Leasing.				The	results	of	the	Company's	aircraft	leasing	business	are	reported	as	discontinued	operations	for	all	periods	presented	through	its	sale	on	March	24, 2006.	The	results	of	the	Company's	aircraft	leasing	business	were	formerly	included	in	the	Institutional	Securities	business	segment.

See	Note	22	for	additional	information	on	discontinued	operations.

Basis	of	Financial	Information.				The	consolidated	financial	statements	for	the	12	months	ended	November	30,	2007	("fiscal	2007"),	November	30,	2006	("fiscal 2006")	and	November	30,	2005	("fiscal	2005")	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,	the	outcome	of	litigation,	tax	and	other	matters	that	affect	the	consolidated financial	statements	and	related	disclosures.	The	Company	believes	that	the	estimates	utilized	in	the	preparation	of	the	consolidated	financial	statements	are	prudent	and reasonable.	Actual	results	could	differ	materially	from	these	estimates.

The	Company,	in	accordance	with	Staff	Accounting	Bulletin	No.	108,	"Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements	in	Current Year	Financial	Statements"	("SAB	108"),	adjusted	its	opening	retained	earnings	for	fiscal	2006	and	financial	results	for	the	first	two	quarters	of	fiscal	2006	to	reflect	a 107

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued)

change	in	its	hedge	accounting	for	certain	securities	under	Statement	of	Financial	Accounting	Standards	("SFAS")	No.	133,	"Accounting	for	Derivatives	Instruments and	Hedging	Activities,"	as	amended	("SFAS	No.	133").	The	same	periods	also	reflect	the	adjustments	of	two	compensation	and	benefit	accruals.	See	Note	24	for additional	information	on	SAB	108.

All	material	intercompany	balances	and	transactions	have	been	eliminated.

Consolidation.				The	consolidated	financial	statements	include	the	accounts	of	the	Company,	its	wholly	owned	subsidiaries,	other	entities	in	which	the	Company	has	a controlling	financial	interest	and	certain	variable	interest	entities	("VIE").

For	entities	where	(1)	the	total	equity	investment	at	risk	is	sufficient	to	enable	the	entity	to	finance	its	activities	independently	and	(2)	the	equity	holders	bear	the economic	residual	risks	of	the	entity	and	have	the	right	to	make	decisions	about	the	entity's	activities,	the	Company	consolidates	those	entities	it	controls	through	a majority	voting	interest	or	otherwise.	For	entities	that	do	not	meet	these	criteria,	commonly	known	as	variable	interest	entities,	the	Company	consolidates	those	entities where	the	Company	is	deemed	to	be	the	primary	beneficiary	when	it	absorbs	a	majority	of	the	expected	losses	or	a	majority	of	the	expected	residual	returns,	or	both,	of such	entities.

Notwithstanding	the	above,	certain	securitization	vehicles,	commonly	known	as	qualifying	special	purpose	entities,	are	generally	not	consolidated	by	the	Company	if they	meet	certain	criteria	regarding	the	types	of	assets	and	derivatives	they	may	hold,	the	types	of	sales	they	may	engage	in	and	the	range	of	discretion	they	may exercise	in	connection	with	the	assets	they	hold.

For	investments	in	entities	in	which	the	Company	does	not	have	a	controlling	financial	interest	but	has	significant	influence	over	operating	and	financial	decisions,	the Company	generally	applies	the	equity	method	of	accounting,	except	in	instances	where	the	Company	has	elected	to	fair	value	certain	eligible	investments	(see	Note	3).

Equity	and	partnership	interests	held	by	entities	qualifying	for	accounting	purposes	as	investment	companies	are	carried	at	fair	value.

The	Company's	U.S.	and	international	subsidiaries	include	Morgan	Stanley	&	Co.	Incorporated	("MS&Co."),	Morgan	Stanley	&	Co.	International	plc	("MSIP"), Morgan	Stanley	Japan	Securities	Co.,	Ltd.	("MSJS")	and	Morgan	Stanley	Investment	Advisors	Inc.	On	April	1,	2007,	the	Company	merged	Morgan	Stanley	DW	Inc. ("MSDWI")	into	MS&Co.	Upon	completion	of	the	merger,	the	surviving	entity,	MS&Co.,	became	the	Company's	principal	U.S.	broker-dealer.

Income	Statement	Presentation.				The	Company,	through	its	subsidiaries	and	affiliates,	provides	a	wide	variety	of	products	and	services	to	a	large	and	diversified	group of	clients	and	customers,	including	corporations,	governments,	financial	institutions	and	individuals.	In	connection	with	the	delivery	of	the	various	products	and	services to	clients,	the	Company	manages	its	revenues	and	related	expenses	in	the	aggregate.	As	such,	when	assessing	the	performance	of	its	businesses,	the	Company	considers its	principal	trading,	investment	banking,	commissions,	and	interest	and	dividend	income,	along	with	the	associated	interest	expense,	as	one	integrated	activity	for	each	of the	Company's	separate	businesses.

The	Company's	cost	infrastructure	supporting	its	businesses	varies	by	activity.	In	some	cases,	these	costs	are	directly	attributable	to	one	line	of	business,	and,	in	other cases,	such	costs	relate	to	multiple	businesses.	As	such,	when	assessing	the	performance	of	its	businesses,	the	Company	does	not	consider	these	costs	separately	but rather	assesses	performance	in	the	aggregate	along	with	the	related	revenues.

Therefore,	the	Company's	pricing	structure	considers	various	items,	including	the	level	of	expenses	incurred	directly	and	indirectly	to	support	the	cost	infrastructure,	the risk	it	incurs	in	connection	with	a	transaction,	the	overall	client	relationship	and	the	availability	in	the	market	for	the	particular	product	and/or	service.	Accordingly,	the Company	does	not	manage	or	capture	the	costs	associated	with	the	products	or	services	sold	or	its	general	and	administrative	costs	by	revenue	line,	in	total	or	by	product.

# 2.				Summary	of	Significant	Accounting	Policies.

# Revenue	Recognition.

Investment	Banking.				Underwriting	revenues	and	fees	from	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	customer	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-based	fees	(also	referred	to	as	incentive	fees) when	the	return	on	assets	under	management	exceeds	certain	benchmark	returns	or	other	performance	targets.	In	such	arrangements,	performance	fee	revenue	is	accrued (or	reversed)	quarterly	based	on	measuring	account/fund	performance	to	date	versus	the	performance	benchmark	stated	in	the	investment	management	agreement.

# Financial	Instruments	and	Fair	Value.

A	significant	portion	of	the	Company's	financial	instruments	is	carried	at	fair	value	with	changes	in	fair	value	recognized	in	earnings	each	period.	A	description	of	the Company's	policies	regarding	fair	value	measurement	and	its	application	to	these	financial	instruments	follows.

Financial	Instruments	Measured	at	Fair	Value.				All	of	the	instruments	within	Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased,	are measured	at	fair	value,	either	through	the	fair	value	option	election	(discussed	below)	or	as	required	by	other	accounting	pronouncements.	These	instruments	primarily represent	the	Company's	trading	and	investment	activities	and	include	both	cash	and	derivative	products.	In	addition,	Securities	received	as	collateral	and	Obligation	to return	securities	received	as	collateral	are	measured	at	fair	value	as	required	by	other	accounting	pronouncements.	Additionally,	certain	Commercial	paper	and	other short-term	borrowings	(primarily	structured	notes),	certain	Deposits,	Other	secured	financings	and	certain	Long-term	borrowings	(primarily	structured	debt)	are measured	at	fair	value	through	the	fair	value	option	election.	Gains	and	losses	on	all	of	these	instruments	carried	at	fair	value	are	reflected	in	Principal	transactions— trading	revenues	or	Principal	transactions—investment	revenues	in	the	consolidated	statements	of	income.	Interest	income	and	expense	and	dividend	income	are recorded	within	the	consolidated	statements	of	income	depending	on	the	nature	of	the	instrument	and	related	market	conventions.	When	interest	and	dividends	are included	as	a	component	of	the	instruments'	fair	value,	interest	and	dividends	are	included	within	Principal	transactions—trading	revenues.	Otherwise,	they	are	included within	Interest	and	dividend	income	or	Interest	expense.

Fair	Value	Option.				The	Company	adopted	the	provisions	of	SFAS	No.	159,	"The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities"	("SFAS	No.	159"), effective	December	1,	2006.	SFAS	No.	159	provides	entities	the	option	to	measure	certain	financial	assets	and	financial	liabilities	at	fair	value	with	changes

in	fair	value	recognized	in	earnings	each	period.	SFAS	No.	159	permits	the	fair	value	option	election	on	an	instrument-by-instrument	basis	at	initial	recognition	of	an asset	or	liability	or	upon	an	event	that	gives	rise	to	a	new	basis	of	accounting	for	that	instrument.	The	Company	applies	the	fair	value	option	for	certain	eligible instruments,	including	certain	loans	and	loan	commitments,	certain	equity	method	investments,	certain	structured	notes,	certain	certificates	of	deposits	and	other	secured financings.	See	"Accounting	Developments"	herein	for	additional	information	regarding	the	Company's	adoption	of	SFAS	No.	159.

Fair	Value	Measurement—Definition	and	Hierarchy.				The	Company	adopted	the	provisions	of	SFAS	No.	157,	"Fair	Value	Measurements"	("SFAS	No.	157"),	effective December	1,	2006.	See	"Accounting	Developments"	herein	for	additional	information	regarding	the	Company's	adoption	of	SFAS	No.	157.	Under	this	standard,	fair value	is	defined	as	the	price	that	would	be	received	to	sell	an	asset	or	paid	to	transfer	a	liability	(i.e.,	the	"exit	price")	in	an	orderly	transaction	between	market participants	at	the	measurement	date.

In	determining	fair	value,	the	Company	uses	various	valuation	approaches,	including	market,	income	and/or	cost	approaches.	SFAS	No.	157	establishes	a	hierarchy	for inputs	used	in	measuring	fair	value	that	maximizes	the	use	of	observable	inputs	and	minimizes	the	use	of	unobservable	inputs	by	requiring	that	the	most	observable inputs	be	used	when	available.	Observable	inputs	are	inputs	that	market	participants	would	use	in	pricing	the	asset	or	liability	developed	based	on	market	data	obtained from	sources	independent	of	the	Company.	Unobservable	inputs	are	inputs	that	reflect	the	Company's	assumptions	about	the	assumptions	market	participants	would	use in	pricing	the	asset	or	liability	developed	based	on	the	best	information	available	in	the	circumstances.	The	hierarchy	is	broken	down	into	three	levels	based	on	the reliability	of	inputs	as	follows:

•	 Level	2—Valuations	based	on	quoted	prices	in	markets	that	are	not	active	or	for	which	all	significant	inputs	are	observable,	either	directly	or	indirectly.

Assets	and	liabilities	utilizing	Level	2	inputs	include:	exchange-traded	equity	securities	and	listed	derivatives	that	are	not	actively	traded;	most	over-the- counter	("OTC")	derivatives;	restricted	stock;	corporate	and	municipal	bonds;	certain	corporate	loans	and	loan	commitments;	certain	high-yield	debt;	certain residential	and	commercial	mortgage	loans;	certain	mortgage-backed	securities	("MBS"),	asset-backed	securities	("ABS"),	and	collateralized	debt	obligation ("CDO")	securities;	retained	interests	in	certain	securitization	transactions;	structured	notes;	physical	commodities;	and	mortgage	servicing	rights.

Fair	value	is	a	market-based	measure	considered	from	the	perspective	of	a	market	participant	who	holds	the	asset	or	owes	the	liability	rather	than	an	entity-specific measure.	Therefore,	even	when	market	assumptions	are	not	readily	available,	the	Company's	own	assumptions	are	set	to	reflect	those	that	market	participants	would	use in	pricing	the	asset	or	liability	at	the	measurement	date.	The	Company	uses	prices	and	inputs	that	are	current	as	of	the	measurement	date,	including	during	periods	of market	dislocation.	In	periods	of	market	dislocation,	the	observability	of	prices	and	inputs	may	be	reduced	for	many	instruments.	This	condition	could	cause	an instrument	to	be	reclassified	from	Level	1	to	Level	2	or	Level	2	to	Level	3	(see	Note	3).

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,	and	simulation	models	or	a	combination	thereof.	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.	In	the	case	of	more	established	derivative	products,	the	pricing	models	used	by	the	Company	are	widely	accepted by	the	financial	services	industry.	A	substantial	majority	of	OTC	derivative	products	valued	by	the	Company	using	pricing	models	fall	into	this	category	and	are categorized	within	Level	2	of	the	fair	value	hierarchy.

Other	derivative	products,	typically	the	newest	and	most	complex	products,	will	require	more	judgment	in	the	implementation	of	the	valuation	technique	applied	due	to the	complexity	of	the	valuation	assumptions	and	the	reduced

observability	of	inputs.	This	includes	certain	credit	default	swaps	where	direct	trading	activity	or	quotes	are	unobservable.	Derivative	interests	in	mortgage-related CDOs,	for	which	observability	of	external	price	data	is	extremely	limited,	are	valued	based	on	an	evaluation	of	the	market	for	similar	positions	as	indicated	by	primary and	secondary	market	activity	in	the	cash	CDO	and	synthetic	CDO	market.	Each	position	is	evaluated	independently	taking	into	consideration	the	underlying	collateral performance	and	pricing,	behavior	of	the	tranche	under	various	cumulative	loss	and	prepayment	scenarios,	deal	structures	(e.g.,	non-amortizing	reference	obligations, call	features)	and	liquidity.	While	these	factors	may	be	supported	by	historical	and	actual	external	observations,	the	determination	of	their	value	as	it	relates	to	specific positions	nevertheless	requires	significant	judgment.	Mortgage-related	credit	default	swaps	are	valued	based	on	data	from	comparable	credit	instruments	in	the	cash market	and	trades	in	comparable	swaps	as	benchmarks,	as	prices	and	spreads	for	the	specific	credits	subject	to	valuation	tend	to	be	of	limited	observability.	For	basket credit	default	swaps	and	CDO-squared	positions,	the	correlation	between	reference	credits	is	often	a	significant	input	into	the	pricing	model,	in	addition	to	several	other more	observable	inputs	such	as	credit	spread,	interest	and	recovery	rates.	As	the	correlation	input	is	unobservable	for	each	specific	swap,	it	is	benchmarked	to standardized	proxy	baskets	for	which	external	data	are	available.	These	instruments	involve	significant	unobservable	inputs	and	are	categorized	in	Level	3	of	the	fair value	hierarchy.

Corporate	Bonds.				The	fair	value	of	corporate	bonds	is	estimated	using	recently	executed	transactions,	market	price	quotations	(where	observable),	bond	spreads	or credit	default	swap	spreads.	The	spread	data	used	are	for	the	same	maturity	as	the	bond.	If	the	spread	data	do	not	reference	the	issuer,	then	data	that	reference	a comparable	issuer	is	used.	When	observable	price	quotations	are	not	available,	fair	value	is	determined	based	on	cash	flow	models	with	yield	curves,	bond	or	single name	credit	default	swap	spreads	and	recovery	rates	based	on	collateral	values	as	key	inputs.	Corporate	bonds	are	generally	categorized	in	Level	2	of	the	fair	value hierarchy;	in	instances	where	significant	inputs	are	unobservable,	they	are	categorized	in	Level	3	of	the	hierarchy.

Corporate	Loans	and	Loan	Commitments.				The	fair	value	of	corporate	loans	is	estimated	using	recently	executed	transactions,	market	price	quotations	(where observable)	and	market	observable	credit	default	swap	levels	along	with	proprietary	valuation	models	and	default	recovery	analysis	where	such	transactions	and quotations	are	unobservable.	The	fair	value	of	contingent	corporate	loan	commitments	is	estimated	by	using	executed	transactions	on	comparable	loans	and	the anticipated	market	price	based	on	pricing	indications	from	syndicate	banks	and	customers.	The	valuation	of	these	commitments	also	takes	into	account	certain	fee income.

While	certain	corporate	loans,	closed	loan	commitments	and	revolving	loans	are	Level	2	instruments,	certain	other	corporate	loans	and	contingent	corporate	loan commitments	are	categorized	in	Level	3	of	the	fair	value	hierarchy.

Commercial	Mortgage-Backed	Securities	("CMBS")	and	Asset-Backed	Securities	("ABS").				CMBS	and	ABS	may	be	valued	based	on	external	price/spread	data. When	position-specific	external	price	data	are	not	observable,	the	valuation	is	based	on	prices	of	comparable	bonds.	Included	in	this	category	are	certain	interest-only securities,	which,	in	the	absence	of	market	prices,	are	valued	as	a	function	of	observable	whole	bond	prices	and	cash	flow	values	of	principal-only	bonds	using	current market	assumptions	at	the	measurement	date.	CMBS	and	ABS	are	categorized	in	Level	3	if	external	prices	are	unobservable;	otherwise	they	are	categorized	in	Level	2 of	the	fair	value	hierarchy.

Retained	Interests	in	Securitization	Transactions.				The	Company	engages	in	securitization	activities	related	to	various	types	of	loans	and	bonds.	The	Company	may retain	interests	in	securitized	financial	assets	as	one	or	more	tranches	of	the	securitization.	To	determine	fair	values,	observable	inputs	are	used	if	available.	Observable inputs,	however,	may	not	be	available	for	certain	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,	prepayment	rates,	forward	yield	curves	and	discount	rates	commensurate	with	the	risks involved.	When	there	are	no	significant	unobservable	inputs,	retained	interests	are	categorized	in	Level	2	of	the	fair	value	hierarchy.	When	unobservable	inputs	are significant	to	the	fair	value	measurement,	albeit	generally	supportable	by	historical	and	actual	benchmark	data,	retained	interests	are	categorized	in	Level	3	of	the	fair value	hierarchy.

Investments	in	Private	Equity	and	Real	Estate.				The	Company's	investments	in	private	equity	and	real	estate	take	the	form	of	direct	private	equity	investments	and investment	in	private	equity	and	real	estate	funds.	The	transaction	price	is	used	as	the	best	estimate	of	fair	value	at	inception.	When	evidence	supports	a	change	to	the

carrying	value	from	the	transaction	price,	adjustments	are	made	to	reflect	expected	exit	values.	Ongoing	reviews	by	Company	management	are	based	on	an	assessment of	each	underlying	investment,	incorporating	valuations	that	consider	the	evaluation	of	financing	and	sale	transactions	with	third	parties,	expected	cash	flows	and market-based	information,	including	comparable	company	transactions,	performance	multiples	and	changes	in	market	outlook,	among	other	factors.	These	nonpublic investments	are	included	in	Level	3	of	the	fair	value	hierarchy	because	they	trade	infrequently,	and,	therefore,	the	fair	value	is	unobservable.

# Fair	Value	Measurement—Other.

Prior	to	the	adoption	of	SFAS	No.	157,	the	Company	followed	the	provisions	of	Emerging	Issues	Task	Force	("EITF")	Issue	No.	02-3,	"Issues	Involved	in	Accounting for	Derivative	Contracts	Held	for	Trading	Purposes	and	Contracts	Involved	in	Energy	Trading	and	Risk	Management	Activities"	("EITF	Issue	No.	02-3").	Under	EITF Issue	No.	02-3,	recognition	of	day	one	profit	at	inception	of	an	OTC	derivative	contract	was	prohibited	unless	the	fair	value	of	the	contract	was	based	on	a	valuation technique	incorporating	observable	market	data.	With	the	adoption	of	SFAS	No.	157,	the	Company	is	no	longer	applying	the	revenue	recognition	criteria	of	EITF	Issue No.	02-3.

The	fair	value	of	OTC	financial	instruments,	including	derivative	contracts	related	to	financial	instruments	and	commodities,	is	presented	in	the	accompanying consolidated	statements	of	financial	condition	on	a	net-by-counterparty	basis,	when	appropriate.	Additionally,	the	Company	nets	fair	value	of	cash	collateral	paid	or received	against	its	derivatives	inventory	under	credit	support	annexes,	which	the	Company	views	as	conditional	contracts,	pursuant	to	legally	enforceable	master netting	agreements.

# Hedge	Accounting.

The	Company	applies	hedge	accounting	for	hedges	involving	various	derivative	financial	instruments	and	non-U.S.	dollar-denominated	debt	used	to	hedge	interest	rate, foreign	exchange	and	credit	risk	arising	from	assets	and	liabilities	not	held	at	fair	value.	These	derivative	financial	instruments	are	included	within	Financial	instruments owned—Derivative	contracts	or	Financial	instruments	sold,	not	yet	purchased—Derivative	contracts	in	the	consolidated	statements	of	financial	condition.

The	Company's	hedges	are	designated	and	qualify	for	accounting	purposes	as	one	of	the	following	types	of	hedges:	hedges	of	changes	in	fair	value	of	assets	and liabilities	due	to	the	risk	being	hedged	(fair	value	hedges),	hedges	of	the	variability	of	future	cash	flows	from	floating	rate	assets	and	liabilities	due	to	the	risk	being hedged	(cash	flow	hedges)	and	hedges	of	net	investments	in	foreign	operations	whose	functional	currency	is	different	from	the	reporting	currency	of	the	parent	company (net	investment	hedges).

For	all	hedges	where	hedge	accounting	is	being	applied,	effectiveness	testing	and	other	procedures	to	ensure	the	ongoing	validity	of	the	hedges	are	performed	at	least monthly.	The	impact	of	hedge	ineffectiveness	on	the	consolidated	statements	of	income,	primarily	related	to	fair	value	hedges,	was	a	gain	of	$132	million	during	fiscal 2007.	The	amount	excluded	from	the	assessment	of	hedge	effectiveness	was	immaterial.	If	a	derivative	is	de-designated	as	a	hedge,	it	is	thereafter	accounted	for	as	a financial	instrument	used	for	trading.

Fair	Value	Hedges—Interest	Rate	Risk.	In	the	first	quarter	of	fiscal	2007,	the	Company	began	using	regression	analysis	to	perform	an	ongoing	prospective	and retrospective	assessment	of	the	effectiveness	of	these	hedging	relationships	(i.e.,	the	Company	applied	the	"long-haul"	method	of	hedge	accounting).	A	hedging relationship	is	deemed	effective	if	the	fair	values	of	the	hedging	instrument	(derivative)	and	the	hedged	item	(debt	liability)	change	inversely	within	a	range	of	80%	to 125%.

Previously,	the	Company's	designated	fair	value	hedges	consisted	primarily	of	interest	rate	swaps	designated	as	fair	value	hedges	of	changes	in	the	benchmark	interest rate	of	fixed	rate	borrowings,	including	both	certificates	of	deposit	and	senior	long-term	borrowings.	For	these	hedges,	the	Company	ensured	that	the	terms	of	the hedging	instruments	and	hedged	items	matched	and	that	other	accounting	criteria	were	met	so	that	the	hedges	were	assumed	to	have	no	ineffectiveness	(i.e.,	the Company	applied	the	"shortcut"	method	of	hedge	accounting).	The	Company	also	used	interest	rate	swaps	as	fair	value	hedges	of	the	benchmark	interest	rate	risk	of	host contracts	of	equity-linked	notes	that	contained	embedded	derivatives.	For	these	hedging	relationships,	regression	analysis	was	used	for	the	prospective	and	retrospective assessments	of	hedge	effectiveness.

For	qualifying	fair	value	hedges	of	benchmark	interest	rates,	the	changes	in	the	fair	value	of	the	derivative	and	the	changes	in	the	fair	value	of	the	hedged	liability	provide offset	of	one	another	and,	together	with	any	resulting	ineffectiveness,	are	recorded	in	Interest	expense.	When	a	derivative	is	de-designated	as	a	hedge,	any	basis adjustment	remaining	on	the	hedged	liability	is	amortized	to	Interest	expense	over	the	remaining	life	of	the	liability	using	the	effective	interest	method.

Fair	Value	Hedges—Credit	Risk.	Until	the	fourth	quarter	of	2007,	the	Company	had	designated	a	portion	of	a	credit	derivative	embedded	in	a	non-recourse	structured note	liability	as	a	fair	value	hedge	of	the	credit	risk	arising	from	a	loan	receivable	to	which	the	structured	note	liability	was	specifically	linked.	Regression	analysis	was used	to	perform	prospective	and	retrospective	assessments	of	hedge	effectiveness	for	this	hedge	relationship.	The	changes	in	the	fair	value	of	the	derivative	and	the changes	in	the	fair	value	of	the	hedged	item	provided	offset	of	one	another	and,	together	with	any	resulting	ineffectiveness,	were	recorded	in	Principal	transactions— trading	revenues.	This	hedge	was	terminated	in	the	fourth	quarter	of	2007	upon	derecognition	of	both	the	hedging	instrument	and	the	hedged	item.

Cash	Flow	Hedges.				Before	the	sale	of	the	aircraft	leasing	business	(see	Note	22),	the	Company	applied	hedge	accounting	to	interest	rate	swaps	used	to	hedge	variable rate	long-term	borrowings	associated	with	this	business.	Changes	in	the	fair	value	of	the	swaps	were	recorded	in	Accumulated	other	comprehensive	income	(loss)	in Shareholders'	equity,	net	of	tax	effects,	and	then	reclassified	to	Interest	expense	as	interest	on	the	hedged	borrowings	was	recognized.

In	connection	with	the	sale	of	the	aircraft	leasing	business,	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	continue	to	be reclassified	to	Interest	expense	since	the	related	borrowings	remain	outstanding.	The	Company	estimates	that	approximately	$22	million	of	the	unrealized	loss recognized	in	Accumulated	other	comprehensive	income	(loss)	as	of	November	30,	2007	will	be	reclassified	into	earnings	within	the	next	12	months.

Net	Investment	Hedges.				The	Company	utilizes	forward	foreign	exchange	contracts	and	non-U.S.	dollar-denominated	debt	to	manage	the	currency	exposure	relating	to its	net	investments	in	non-U.S.	dollar	functional	currency	operations.	No	hedge	ineffectiveness	is	recognized	in	earnings	since	the	notional	amounts	of	the	hedging instruments	equal	the	portion	of	the	investments	being	hedged,	and,	where	forward	contracts	are	used,	the	currencies	being	exchanged	are	the	functional	currencies	of	the parent	and	investee;	where	debt	instruments	are	used	as	hedges,	they	are	denominated	in	the	functional	currency	of	the	investee.	The	gain	or	loss	from	revaluing	hedges of	net	investments	in	foreign	operations	at	the	spot	rate	is	deferred	and	reported	within	Accumulated	other	comprehensive	income	(loss)	in	Shareholders'	equity,	net	of tax	effects.	The	forward	points	on	the	hedging	instruments	are	recorded	in	Interest	and	dividend	revenues	or	expense.

For	purposes	of	these	statements,	cash	and	cash	equivalents	consist	of	cash	and	highly	liquid	investments	not	held	for	resale	with	maturities,	when	purchased,	of	three months	or	less.	In	connection	with	business	acquisitions,	the	Company	assumed	liabilities	of	$7,704	million,	$1,377	million	and	$58	million	in	fiscal	2007,	fiscal	2006 and	fiscal	2005,	respectively.	In	connection	with	the	Discover	Spin-off,	net	assets	of	approximately	$5,558	million	were	distributed	to	shareholders	(see	Note	22).	At November	30,	2007,	$8,086	million	of	securities	were	transferred	from	Securities	available	for	sale	to	Financial	instruments	owned	(see	Note	8).

# 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	and	other	types	of	financial	assets	(see	Note	5).	Generally,	such	transfers	of	financial	assets	are	accounted	for	as	sales	when	the	Company	has	relinquished control	over	the	transferred	assets.	The	gain	or	loss	on	sale	of	such	financial	assets	depends,	in	part,	on	the	previous	carrying	amount	of	the	assets	involved	in	the	transfer allocated	between	the	assets	sold	and	the	retained	interests	based	upon	their	respective	fair	values	at	the	date	of	sale.	Transfers	that	are	not	accounted	for	as	sales	are accounted	for	as	secured	borrowings.

# Premises,	Equipment	and	Software	Costs.

Premises	and	equipment	consist	of	buildings,	leasehold	improvements,	furniture,	fixtures,	computer	and	communications	equipment,	power	plants,	tugs,	barges, terminals,	pipelines	and	software	(externally	purchased	and	developed	for	internal	use).	Premises	and	equipment	are	stated	at	cost	less	accumulated	depreciation	and amortization.	Depreciation	and	amortization	are	provided	by	the	straight-line	method	over	the	estimated	useful	life	of	the	asset.	Estimated	useful	lives	are	generally	as follows:	buildings—39	years;	furniture	and	fixtures—7	years,	computer	and	communications	equipment—3	to	8	years;	power	plants—15	years;	tugs	and	barges—15 years;	and	terminals	and	pipelines—3	to	25	years.	Estimated	useful	lives	for	software	costs	are	generally	3	to	5	years.

Leasehold	improvements	are	amortized	over	the	lesser	of	the	estimated	useful	life	of	the	asset	or,	where	applicable,	the	remaining	term	of	the	lease,	but	generally	not exceeding:	25	years	for	building	structural	improvements	and	15	years	for	other	improvements.

Certain	costs	incurred	in	connection	with	internal-use	software	projects	are	capitalized	and	amortized	over	the	expected	useful	life	of	the	asset,	generally	3	to	5	years.

# Income	Taxes.

Income	tax	expense	is	provided	for	using	the	asset	and	liability	method,	under	which	deferred	tax	assets	and	liabilities	are	determined	based	upon	the	temporary differences	between	the	financial	statement	and	income	tax	bases	of	assets	and	liabilities	using	currently	enacted	tax	rates.

# Earnings	per	Common	Share.

Basic	earnings	per	common	share	("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	Company	early	adopted	SFAS	No.	123R,	"Share-Based	Payment"	("SFAS	No.	123R"),	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	in	fiscal	2005	by	$0.05.

SFAS	No.	123R	requires	measurement	of	compensation	cost	for	equity-based	awards	at	fair	value	and	recognition	of	compensation	cost	over	the	service	period,	net	of estimated	forfeitures.	The	Company	determines	the	fair	value	of	restricted	stock	units	based	on	the	number	of	units	granted	and	the	grant	date	fair	value	of	the Company's	common	stock,	measured	as	the	volume-weighted	average	price	on	the	date	of	grant.	The	fair	value	of	stock	options	is	determined	using	the	Black-Scholes valuation	model	and	the	single	grant	life	method.	Under	the	single	grant	life	method,	option	awards	with	graded	vesting	are	valued	using	a	single	weighted-average expected	option	life.	Compensation	expense	for	all	stock-based	payment	awards	is	recognized	using	the	graded	vesting	attribution	method.	The	Employee	Stock Purchase	Plan	(the	"ESPP")	allows	employees	to	purchase	shares	of	the	Company's	common	stock	at	a	15%	discount	from	market	value.	The	Company	expenses	the 15%	discount	associated	with	the	ESPP.

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	is	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	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	$260	million	in	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	fiscal	2006.	These	incremental	expenses	were	included within	Compensation	and	benefits	expense	and	reduced	income	before	taxes	within	the	Institutional	Securities	($190	million),	Global	Wealth	Management	Group	($50 million)	and	Asset	Management	($20	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	are	granted	to	retirement-eligible	employees	in	the	first	quarter	of	the	following	year.	Effective	December	1, 2005,	the	Company	accrues	the	estimated	cost	of	these	awards	over	the	course	of	the	current	fiscal	year.	As	such,	the	Company	accrued	the	estimated	cost	of	fiscal	2007 year-end	awards	granted	to	retirement-eligible	employees	over	the	2007	fiscal	year	rather	than	expensing	the	awards	on	the	date	of	grant	(which	occurred	in	December 2007).	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	during	fiscal	2005.	The	approximate	resulting	pro	forma	net income	would	have	been	$4,684	million	rather	than	the	reported	amount	of	$4,939	million.	The	approximate	resulting	impact	on	earnings	per	share	for	fiscal	2005 would	have	been	a	reduction	in	the	reported	amounts	of	earnings	per	basic	share	from	$4.70	to	$4.46	and	earnings	per	diluted	share	from	$4.57	to	$4.34.

Translation	of	Foreign	Currencies.				Assets	and	liabilities	of	operations	having	non-U.S.	dollar	functional	currencies	are	translated	at	year-end	rates	of	exchange,	and income	statement	accounts	are	translated	at	weighted	average	rates	of	exchange	for	the	year.	Gains	or	losses	resulting	from	translating	foreign	currency	financial statements,	net	of	hedge	gains	or	losses	and	related	tax	effects,	are	reflected	in	Accumulated	other	comprehensive	income	(loss),	a	separate	component	of	Shareholders' equity.	Gains	or	losses	resulting	from	remeasurement	of	foreign	currency	transactions	are	included	in	net	income.

Goodwill	and	Intangible	Assets.				Goodwill	and	indefinite-lived	assets	are	not	amortized	and	are	reviewed	annually	(or	more	frequently	under	certain	conditions)	for impairment.	Other	intangible	assets	are	amortized	over	their	useful	lives.

Investments	in	Unconsolidated	Investees.				The	Company	invests	in	unconsolidated	investees	that	own	synthetic	fuel	production	plants	and	in	certain	structured transactions	not	integral	to	the	operations	of	the	Company.	The	Company	accounts	for	these	investments	under	the	equity	method.	The	Company's	share	of	the	(losses) generated	by	these	investments	is	recorded	within	(Losses)	gains	from	unconsolidated	investees,	and	the	applicable	tax	credits	and	the	tax	benefits	associated	with	these operating	losses	are	recorded	within	the	Provision	for	income	taxes.

Deferred	Compensation	Arrangements.				The	Company	maintains	trusts,	commonly	referred	to	as	rabbi	trusts,	in	connection	with	certain	deferred	compensation	plans. Assets	of	rabbi	trusts	are	consolidated,	and	the	value	of	the	Company's	stock	held	in	rabbi	trusts	is	classified	in	Shareholders'	equity	and	generally	accounted	for	in	a manner	similar	to	treasury	stock.	The	Company	has	included	its	obligations	under	certain	deferred	compensation	plans	in	Employee	stock	trust.	Shares	that	the Company	has	issued	to	its	rabbi	trusts	are	recorded	in	Common	stock	issued	to	employee	trust.	Both	Employee	stock	trust	and	Common	stock	issued	to	employee	trust are	components	of	Shareholders'	equity.	The	Company	recognizes	the	original	amount	of	deferred	compensation	(fair	value	of	the	deferred	stock	award	at	the	date	of grant—see	Note	18)	as	the	basis	for	recognition	in	Employee	stock	trust	and	Common	stock	issued	to	employee	trust.	Changes	in	the	fair	value	of	amounts	owed	to employees	are	not	recognized	as	the	Company's	deferred	compensation	plans	do	not	permit	diversification	and	must	be	settled	by	the	delivery	of	a	fixed	number	of shares	of	the	Company's	common	stock.

# Accounting	Developments.

Limited	Partnerships.				In	June	2005,	the	Financial	Accounting	Standards	Board	(the	"FASB")	ratified	the	consensus	reached	in	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" ("EITF	Issue	No.	04-5").	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 simple	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	adopted	EITF	Issue	No.	04-5 on	December	1,	2006.	The	adoption	of	EITF	Issue	No.	04-5	on	December	1,	2006	did	not	have	a	material	impact	on	the	Company's	consolidated	financial	statements.

Accounting	for	Certain	Hybrid	Financial	Instruments.				In	February	2006,	the	FASB	issued	SFAS	No.	155,	"Accounting	for	Certain	Hybrid	Financial	Instruments" ("SFAS	No.	155"),	which	amends	SFAS	No.	133,	"Accounting	for	Derivatives	Instruments	and	Hedging	Activities,"	as	amended	("SFAS	No.	133"),	and	SFAS	No.	140, "Accounting	for	Transfers	and	Servicing	of	Financial	Assets	and	Extinguishments	of	Liabilities"	("SFAS	No.	140"),	and	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.	The	Company	adopted	SFAS	No.	155	on	December	1,	2006.	Since	SFAS	No.	159	incorporates	accounting and	disclosure	requirements	that	are	similar	to	SFAS	No.	155,	the	Company	decided	to	apply	SFAS	No.	159,	rather	than	SFAS	No.	155,	to	its	fair	value	elections	for hybrid	financial	instruments.

Accounting	for	Servicing	of	Financial	Assets.				In	March	2006,	the	FASB	issued	SFAS	No.	156,	"Accounting	for	Servicing	of	Financial	Assets"	("SFAS	No.	156"), which	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.	The	Company	adopted	SFAS	No.	156	on	December	1,	2006	and	elected	to	fair	value	mortgage	servicing	rights	("MSRs")	held	as	of	the	date	of adoption.	This	election	did	not	have	a	material	impact	on	the	Company's	opening	balance	of	Retained	earnings	as	of	December	1,	2006.	The	Company	also	elected	to fair	value	MSRs	acquired	after	December	1,	2006.

Accounting	for	Uncertainty	in	Income	Taxes.				In	July	2006,	the	FASB	issued	FASB	Interpretation	No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes,	an interpretation	of	FASB	Statement	No.	109"	("FIN	48").	FIN	48	clarifies	the	accounting	for	uncertainty	in	income	taxes	recognized	in	a	company's	financial	statements and	prescribes	a	recognition	threshold	and	measurement	attribute	for	the	financial	statement	recognition	and	measurement	of	a	tax	position	taken	or	expected	to	be	taken in	an	income	tax	return.	FIN	48	also	provides	guidance	on	derecognition,	classification,	interest	and	penalties,	accounting	in	interim	periods,	disclosure	and	transition. The	adoption	of	FIN	48	on	December	1,	2007	did	not	have	a	material	impact	on	the	Company's	consolidated	financial	statements.

Fair	Value	Measurements.				In	September	2006,	the	FASB	issued	SFAS	No.	157,	which	defines	fair	value,	establishes	a	framework	for	measuring	fair	value	and enhances	disclosures	requirements	for	fair	value	measurements.	In	addition,	SFAS	No.	157	disallows	the	use	of	block	discounts	when	measuring	financial	instruments that	trade	with	quoted	prices	in	an	active	market.	It	also	nullifies	select	guidance	provided	by	EITF	Issue	No.	02-3,	which	prohibited	the	recognition	of	trading	gains	or losses	at	the	inception	of	a	derivative	contract,	unless	the	fair	value	of	such	derivative	is	based	on	a	valuation	technique	that	incorporates	observable	market	data.	SFAS No.	157	also	requires	the	Company	to	consider	its	own	credit	spreads	when	measuring	the	fair	value	of	liabilities,	including	derivatives.	Effective	December	1,	2006,	the Company	elected	early	adoption	of	SFAS	No.	157.	In	accordance	with	the	provisions	of	SFAS	No.	157	related	to	block	discounts	and	EITF	Issue	No.	02-3,	the Company	recorded	a	cumulative	effect	adjustment	of	approximately	$84	million	after-tax	as	an	increase	to	the	opening	balance	of	Retained	earnings	as	of	December	1, 2006,	which	was	primarily	associated	with	EITF	Issue	No.	02-3.	The	impact	of	considering	the	Company's	own	credit	spreads	when	measuring	the	fair	value	of liabilities,	including	derivatives,	did	not	have	a	material	impact	on	fair	value	measurements	at	the	date	of	adoption.	With	the	adoption	of	SFAS	No.	157,	the	Company no	longer	applies	the	revenue	recognition	criteria	of	EITF	Issue	No.	02-3.

Employee	Benefit	Plans.				In	September	2006,	the	FASB	issued	SFAS	No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans, an	amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)"	("SFAS	No.	158").	Among	other	items,	SFAS	No.	158	required	recognition	of	the	overfunded	or underfunded	status	of	the	Company's	defined	benefit	and	postretirement	plans	as	an	asset	or	liability	in	the	consolidated	financial	statements	for	the	fiscal	year	ending November	30,	2007.	The	Company	recorded	an	after-tax	charge	of	$208	million	to	Shareholders'	equity	upon	the	adoption	of	this	requirement.	SFAS	No.	158	also requires	the	measurement	of	defined	benefit	and	postretirement	plan	assets	and	obligations	as	of	the	end	of	the	fiscal	year.	SFAS	No.	158's	requirement	to	use	the	fiscal year-end	date	as	the	measurement	date	is	effective	for	fiscal	years	ending	after	December	15,	2008.	The	Company	expects	to	early	adopt	a	fiscal	year-end	measurement date	for	its	fiscal	year	ending	November	30,	2008	and	currently	expects	to	record	an	after-tax	charge	of	approximately	$15	million	to	Shareholders'	equity	upon adoption.

Fair	Value	Option.				In	February	2007,	the	FASB	issued	SFAS	No.	159,	which	provides	entities	the	option	to	measure	certain	financial	assets	and	financial	liabilities	at fair	value	with	changes	in	fair	value	recognized	in	earnings	each	period.	SFAS	No.	159	permits	the	fair	value	option	election	on	an	instrument-by-instrument	basis	at initial	recognition	of	an	asset	or	liability	or	upon	an	event	that	gives	rise	to	a	new	basis	of	accounting	for	that	instrument.	Effective	December	1,	2006,	the	Company elected	early	adoption	of	SFAS	No.	159	for	certain	eligible	instruments,	including	certain	equity	method	investments,	certain	loans	and	loan	commitments,	certain certificates	of	deposits	and	certain	structured	notes.	Such	instruments	included	loans	and	other	financial	instruments	held	by	subsidiaries	that	are	not	registered	broker- dealers	as	defined	in	the	American	Institute	of	Certified	Public	Accountants	("AICPA")	Audit	and	Accounting	Guide,	Brokers	and	Dealers	in	Securities,	or	that	are	not held	by	investment	companies	as	defined	in	the	AICPA	Audit	and	Accounting	Guide,	Investment	Companies.	A	substantial	portion	of	these	positions,	as	well	as	the financial	instruments	included	within	Other	secured	financings,	had	been	accounted	for	by	the	Company	at	fair	value	prior	to	the	adoption	of	SFAS	No.	159.	Financial instruments	under	the	fair	value	option	election	are	primarily	reflected	within	Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased	in	the consolidated	statement	of	financial	condition.	As	a	result	of	the	adoption	of	SFAS	No.	159,	the	Company	recorded	a	cumulative	effect	adjustment	of	approximately $102	million	after-tax	as	an	increase	to	the	opening	balance	of	Retained	earnings	as	of	December	1,	2006.

Offsetting	of	Amounts	Related	to	Certain	Contracts.				In	April	2007,	the	FASB	issued	FASB	Staff	Position	("FSP")	No.	FIN	39-1,	"Amendment	of	FASB	Interpretation No.	39",	("FSP	FIN	39-1").	FSP	FIN	39-1	amends	certain	provisions	of	FIN	39,	"Offsetting	of	Amounts	Related	to	Certain	Contracts,"	and	permits	companies	to	offset fair	value	amounts	recognized	for	cash	collateral	receivables	or	payables	against	fair	value	amounts	recognized	for	net	derivative	positions	executed	with	the	same counterparty	under	the	same	master	netting	arrangement.	FSP	FIN	39-1	is	effective	for	fiscal	years	beginning	after	November	15,	2007,	with	early	application	permitted. The	adoption	of	FSP	FIN	39-1	on	December	1,	2007	did	not	have	a	material	impact	on	the	Company's	consolidated	financial	statements.

Investment	Company	Accounting.				In	June	2007,	the	AICPA	issued	Statement	of	Position	("SOP")	07–1,	"Clarification	of	the	Scope	of	the	Audit	and	Accounting Guide	Investment	Companies	and	Accounting	by	Parent	Companies	and	Equity	Method	Investors	for	Investments	in	Investment	Companies"	("SOP	07-1").	SOP	07-1 provides	guidance	for	determining	whether	an	entity	is	within	the	scope	of	the	AICPA	"Audit	and	Accounting	Guide	Investment	Companies"	(the	"Guide").	SOP	07-1 addresses	whether	the	specialized	industry	accounting	principles	of	the	Guide	should	be	retained	by	a	parent	company	in	consolidation.	In	addition,	SOP	07-1	includes certain	disclosure	requirements	for	parent	companies	and	equity	method	investors	in	investment	companies	that	retain	investment	company	accounting	in	the	parent company's	consolidated	financial	statements	or	the	financial	statements	of	an	equity	method	investor.	SOP	07-1,	as	originally	issued,	was	to	be	effective	for	the Company	as

of	December	1,	2008.	In	May	2007,	the	FASB	issued	FSP	FIN	46R-7,	"Application	of	FIN	46R	to	Investment	Companies,"	("FSP	FIN	46R-7")	which	amends	FASB Interpretation	No.	46	(revised	December	2003),	"Consolidation	of	Variable	Interest	Entities	("FIN	46R")	to	make	permanent	the	temporary	deferral	of	the	application	of FIN	46R	to	entities	within	the	scope	of	the	revised	audit	guide	under	SOP	07-1.	FSP	FIN	46R-7	is	effective	upon	adoption	of	SOP	07-1.	The	Company	is	currently evaluating	the	potential	impact	of	adopting	SOP	07-1	and	FSP	FIN	46R-7.	In	November	2007,	the	FASB	issued	a	proposed	FSP	SOP	07-1-a	to	delay	indefinitely	the effective	date	of	SOP	07-1.

Dividends	on	Share-Based	Payment	Awards.				In	June	2007,	the	EITF	reached	consensus	on	Issue	No.	06-11,	"Accounting	for	Income	Tax	Benefits	of	Dividends	on Share-Based	Payment	Awards"	("EITF	Issue	No.	06-11").	EITF	Issue	No.	06-11	requires	that	the	tax	benefit	related	to	dividend	equivalents	paid	on	restricted	stock units	that	are	expected	to	vest	be	recorded	as	an	increase	to	additional	paid-in	capital.	The	Company	currently	accounts	for	this	tax	benefit	as	a	reduction	to	its	income tax	provision.	EITF	Issue	No.	06-11	is	to	be	applied	prospectively	for	tax	benefits	on	dividends	declared	in	fiscal	years	beginning	after	December	15,	2007.	The Company	is	currently	evaluating	the	potential	impact	of	adopting	EITF	Issue	No.	06-11.

Business	Combinations.				In	December	2007,	the	FASB	issued	SFAS	No.	141(R),	"Business	Combinations"	("SFAS	No.	141(R)").	SFAS	141(R)	requires	the	acquiring entity	in	a	business	combination	to	recognize	the	full	fair	value	of	assets	acquired	and	liabilities	assumed	in	the	transaction	(whether	a	full	or	partial	acquisition); establishes	the	acquisition-date	fair	value	as	the	measurement	objective	for	all	assets	acquired	and	liabilities	assumed;	requires	expensing	of	most	transaction	and restructuring	costs;	and	requires	the	acquirer	to	disclose	to	investors	and	other	users	all	of	the	information	needed	to	evaluate	and	understand	the	nature	and	financial effect	of	the	business	combination.	SFAS	No.	141(R)	applies	to	all	transactions	or	other	events	in	which	the	Company	obtains	control	of	one	or	more	businesses, including	those	sometimes	referred	to	as	"true	mergers"	or	"mergers	of	equals"	and	combinations	achieved	without	the	transfer	of	consideration,	for	example,	by contract	alone	or	through	the	lapse	of	minority	veto	rights.	SFAS	No.	141(R)	applies	prospectively	to	business	combinations	for	which	the	acquisition	date	is	on	or	after December	1,	2009.

Noncontrolling	Interests.				In	December	2007,	the	FASB	issued	SFAS	No.	160,	"Noncontrolling	Interests	in	Consolidated	Financial	Statements—an	amendment	of Accounting	Research	Bulletin	No.	51"	("SFAS	No.	160").	SFAS	No.	160	requires	reporting	entities	to	present	noncontrolling	(minority)	interests	as	equity	(as	opposed to	as	a	liability	or	mezzanine	equity)	and	provides	guidance	on	the	accounting	for	transactions	between	an	entity	and	noncontrolling	interests.	SFAS	No.	160	applies prospectively	as	of	December	1,	2009,	except	for	the	presentation	and	disclosure	requirements	which	will	be	applied	retrospectively	for	all	periods	presented.

# 3.				Fair	Value	Disclosures.

# Fair	Value	Measurements.

The	Company's	assets	and	liabilities	recorded	at	fair	value	have	been	categorized	based	upon	a	fair	value	hierarchy	in	accordance	with	SFAS	No.	157.	See	Note	2	for	a discussion	of	the	Company's	policies	regarding	this	hierarchy.

The	following	fair	value	hierarchy	tables	present	information	about	the	Company's	assets	and	liabilities	measured	at	fair	value	on	a	recurring	basis	as	of	November	30, 2007:

# Assets	and	Liabilities	Measured	at	Fair	Value	on	a	Recurring	Basis	as	of	November	30,	2007

|  | Quoted	Prices	in<br>Active	Markets<br>for<br>Identical	Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Counterparty<br>and	Cash<br>Collateral<br>Netting | Balance<br>as	of<br>November	30,<br>2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Assets |  |  |  |  |  |
| Cash\tand\tsecurities\tdeposited\twith\tclearing\torganizations\tor\tsegregated\tunder\tfederal |  |  |  |  |  |
| and\tother\tregulations\tor\trequirements | $31,354 | $— | $— | $— | $31,354 |
| Financial\tinstruments\towned: |  |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | 11,038 | 12,189 | 660 | — | 23,887 |
| Other\tsovereign\tgovernment\tobligations | 15,834 | 5,743 | 29 | — | 21,606 |
| Corporate\tand\tother\tdebt | 223 | 110,443 | 37,058 | — | 147,724 |
| Corporate\tequities | 82,592 | 3,549 | 1,236 | — | 87,377 |
| Derivative\tcontracts(1) | 4,526 | 90,654 | 21,601 | (39,778) | 77,003 |
| Investments | 953 | 249 | 13,068 | — | 14,270 |
| Physical\tcommodities | — | 3,096 | — | — | 3,096 |
| Total\tfinancial\tinstruments\towned | 115,166 | 225,923 | 73,652 | (39,778) | 374,963 |
| Securities\treceived\tas\tcollateral | 68,031 | 14,191 | 7 | — | 82,229 |
| Intangible\tassets(2) | — | 428 | — | — | 428 |
| Liabilities |  |  |  |  |  |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings | $— | $3,068 | $— | $— | $3,068 |
| Deposits | — | 3,769 | — | — | 3,769 |
| Financial\tinstruments\tsold,\tnot\tyet\tpurchased: |  |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | 8,208 | 13 | — | — | 8,221 |
| Other\tsovereign\tgovernment\tobligations | 9,633 | 5,994 | — | — | 15,627 |
| Corporate\tand\tother\tdebt | 16 | 6,454 | 1,122 | — | 7,592 |
| Corporate\tequities | 29,948 | 935 | 16 | — | 30,899 |
| Derivative\tcontracts(1) | 7,031 | 86,968 | 15,663 | (38,058) | 71,604 |
| Physical\tcommodities | — | 398 | — | — | 398 |
| Total\tfinancial\tinstruments\tsold,\tnot\tyet\tpurchased | 54,836 | 100,762 | 16,801 | (38,058) | 134,341 |
| Obligation\tto\treturn\tsecurities\treceived\tas\tcollateral | 68,031 | 14,191 | 7 | — | 82,229 |
| Other\tsecured\tfinancings | — | 25,451 | 2,321 | — | 27,772 |
| Long-term\tborrowings | — | 37,994 | 398 | — | 38,392 |

(1) Amounts	represent	the	impact	of	counterparty	netting	across	the	levels	of	the	fair	value	hierarchy.	Netting	among	positions	classified	within	the	same	level	is	included	within	that	level.

(2) Amount	represents	MSRs	accounted	for	at	fair	value	(see	Note	5).

The	following	table	presents	additional	information	about	Level	3	assets	and	liabilities	measured	at	fair	value	on	a	recurring	basis.	Level	3	instruments	may	be	hedged with	instruments	classified	in	Level	1	and	Level	2.	As	a	result,	the	realized	and	unrealized	gains	and	losses	for	assets	and	liabilities	within	the	Level	3	category	presented in	the	tables	below	do	not	reflect	the	related	realized	or	unrealized	gains	and	losses	on	hedging	instruments	that	have	been	classified	by	the	Company	within	the	Level	1 and/or	Level	2	categories.	Additionally,	both	observable	and	unobservable	inputs	may	be	used	to	determine	the	fair	value	of	positions	that	the	Company	has classified	within	the	Level	3	category.	As	a	result,	the	unrealized	gains	and	losses	for	assets	and	liabilities	within	the	Level	3	category	presented	in	the	tables	below	may include	changes	in	fair	value	that	were	attributable	to	both	observable	(e.g.,	changes	in	market	interest	rates)	and	unobservable	(e.g.,	changes	in	unobservable	long-dated volatilities)	inputs.

# Changes	in	Level	3	Assets	and	Liabilities	Measured	at	Fair	Value	on	a	Recurring	Basis	for	the	Fiscal	Year	Ended	November	30,	2007

|  |  | Total	Realized	and	Unrealized	Gains | Total	Realized	and	Unrealized	Gains |  |  | Purchases, |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | or\t(Losses)\tIncluded\tin\tIncome | or\t(Losses)\tIncluded\tin\tIncome | or\t(Losses)\tIncluded\tin\tIncome | Total | Sales, |  |  |
|  |  |  |  |  | Realized | Other | Net |  |
|  |  |  |  |  | and | Settlements | Transfers |  |
|  |  | Principal | Principal |  | Unrealized | and | In\tand/or |  |
|  | Beginning\nBalance | Transactions:\nTrading | Transactions:\nInvestments | Other\nRevenues | Gains\tor\n(Losses) | Issuances,\nnet | (Out)\tof\nLevel\t3 | Ending\nBalance |
|  |  |  |  | (dollars\tin\tmillions) |  |  |  |  |
| Assets |  |  |  |  |  |  |  |  |
| Financial\tinstruments\towned: |  |  |  |  |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | $2 | $134 | $— | $\t\t— | $134 | $524 | $— | $660 |
| Other\tsovereign\tgovernment\tobligations | 162 | 10 | — | — | 10 | (143) | — | 29 |
| Corporate\tand\tother\tdebt(1) | \t 33,941 | (5,999) | — | — | (5,999) | 3,664 | 5,452 | \t 37,058 |
| Corporate\tequities | 1,040 | 62 | — | — | 62 | (260) | 394 | 1,236 |
| Net\tderivative\tcontracts(1)(2) | 30 | 4,152 | — | — | 4,152 | 913 | 843 | 5,938 |
| Investments(3) | 3,879 | — | 2,538 | — | 2,538 | 6,651 | — | \t 13,068 |
| Securities\treceived\tas\tcollateral | 40 | — | — | — | — | (33) | — | 7 |
| Other\tassets(4) | 2,154 | — | — | 32 | 32 | (2,186) | — | — |
| Liabilities |  |  |  |  |  |  |  |  |
| Financial\tinstruments\tsold,\tnot\tyet\tpurchased: |  |  |  |  |  |  |  |  |
| Corporate\tand\tother\tdebt(1) | $185 | $(1,242) | $— | $— | $(1,242) | $(439) | $134 | $1,122 |
| Corporate\tequities | 9 | (58) | — | — | (58) | (55) | 4 | 16 |
| Obligation\tto\treturn\tsecurities\treceived\tas |  |  |  |  |  |  |  |  |
| collateral | 40 | — | — | — | — | (33) | — | 7 |
| Other\tsecured\tfinancings | 4,724 | — | — | — | — | (2,403) | — | 2,321 |
| Long-term\tborrowings | 464 | (114) | — | — | (114) | (185) | 5 | 398 |

(1) The	net	gains	from	Net	derivative	contracts	and	the	net	losses	from	Corporate	and	other	debt	resulted	from	market	movements	primarily	associated	with	credit	products	and	various	credit	linked	instruments, respectively.	The	net	gains	in	Level	3	Net	derivative	contracts	were	primarily	driven	by	certain	credit	default	swaps	and	other	instruments	associated	with	the	Company's	credit	products	and	securitized	products activities.	The	net	losses	in	Level	3	Corporate	and	other	debt	were	primarily	driven	by	certain	asset-backed	securities,	including	residential	and	commercial	mortgage	loans,	and	by	corporate	loans	and	loan commitments.

These	results	are	only	a	component	of	the	overall	trading	strategies	of	these	businesses	and	do	not	take	into	consideration	any	related	financial	instruments	that	have	been	classified	by	the	Company	within	the Level	1	and/or	Level	2	categories.	For	example,	the	Company	recorded	offsetting	net	losses	in	Level	2	Net	derivative	contracts,	which	were	primarily	associated	with	the	Company's	credit	products	and	securitized products	activities.

The	Company	reclassified	certain	Corporate	and	other	debt	and	Net	derivative	contracts	from	Level	2	to	Level	3	because	certain	significant	inputs	for	the	fair	value	measurement	became	unobservable.	These reclassifications	included	transfers	in	the	fourth	quarter	primarily	related	to	the	continued	market	and	liquidity	deterioration	in	the	mortgage	markets.	The	most	material	transfers	into	Level	3	were	in	commercial whole	loans,	residuals	from	residential	securitizations,	and	interest-only	commercial	mortgage	and	agency	bonds	as	well	as	commercial	and	residential	credit	default	swaps.

(2) Amounts	represent	Financial	instruments	owned—derivative	contracts	net	of	Financial	instruments	sold,	not	yet	purchased—derivative	contracts.

(3) The	net	gains	from	Financial	instruments	owned—investments	were	primarily	related	to	investments	associated	with	the	Company's	real	estate	products	and	private	equity	portfolio.

(4) These	assets	were	disposed	of	in	connection	with	the	Discover	Spin-off.

The	following	table	presents	the	amounts	of	unrealized	gains	or	(losses)	for	the	fiscal	year	ended	November	30,	2007	relating	to	those	assets	and	liabilities	for	which	the Company	utilized	significant	Level	3	inputs	to	determine	fair	value	and	that	were	still	held	by	the	Company	at	November	30,	2007:

# Fiscal	2007	Unrealized	Gains	(Losses)	for	Level	3	Assets	and	Liabilities	Still	Held	at	November	30,	2007

# Fair	Value	Option.

The	following	table	presents	information	about	the	eligible	instruments	for	which	the	Company	elected	the	fair	value	option	and	for	which	a	transition	adjustment	was recorded	as	of	December	1,	2006:

|  |  | Transition | Carrying	Value	of |
| :--- | :--- | :--- | :--- |
|  |  | Adjustment | Instrument |
|  | Carrying\tValue\tof | to\tRetained | at\tDecember\t1,\t2006 |
|  | Instrument | Earnings | (after\tAdoption\tof |
|  | at\tDecember\t1,\t2006 | Gain/(Loss) | SFAS\tNo.\t159) |
|  |  | (dollars\tin\tmillions) |  |
| Financial\tinstruments\towned: |  |  |  |
| Corporate\tlending(1) | $8,587 | $16 | $8,603 |
| Mortgage\tlending(2) | 1,258 | 7 | 1,265 |
| Investments(3) | 1,305 | 13 | 1,318 |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings(4) | 946 | (1) | 947 |
| Deposits(5) | 3,143 | 1 | 3,142 |
| Long-term\tborrowings(4) | 14,354 | 130 | 14,224 |
| Pre-tax\tcumulative\teffect\tof\tadoption\tof\tthe\tfair\tvalue\toption |  | 166 |  |
| Deferred\ttaxes |  | 64 |  |
| Cumulative\teffect\tof\tadoption\tof\tthe\tfair\tvalue\toption |  | $102 |  |

The	transition	adjustments	were	primarily	related	to	the	following:

(1) Loans	and	loan	commitments	made	in	connection	with	Institutional	Securities'	corporate	lending	activities.	The	fair	value	option	was	elected	for	these	positions	as	they	are	generally	risk	managed	on	a	fair	value basis.

(2) Certain	mortgage	lending	products	which	are	risk	managed	by	the	Institutional	Securities	business	segment	on	a	fair	value	basis.	The	Company	did	not	elect	the	fair	value	option	for	other	eligible	mortgage	lending products	that	were	managed	by	the	Discover	business	segment	prior	to	the	Discover	Spin-off.

(3) Certain	investments	that	had	been	previously	accounted	for	under	the	equity	method,	as	well	as	certain	interests	in	clearinghouses.	The	fair	value	option	was	elected	only	for	positions	that	are	risk	managed	on	a	fair value	basis.

(4) Structured	notes	and	other	hybrid	long-term	debt	instruments.	The	fair	value	option	was	elected	for	these	positions	as	they	are	risk	managed	on	a	fair	value	basis.	The	fair	value	option	was	elected	for	all	such instruments	issued	after	December	1,	2006	and	a	portion	of	the	portfolio	of	instruments	outstanding	as	of	December	1,	2006.	The	fair	value	option	was	not	elected	for	the	remaining	portion	of	the	portfolio	that existed	as	of	December	1,	2006	due	to	cost-benefit	considerations,	including	the	operational	effort	involved.

(5) Brokered	and	callable	certificates	of	deposit	issued	by	certain	of	the	Company's	bank	subsidiaries.	The	fair	value	option	was	elected	for	these	positions	as	they	are	risk-managed	on	a	fair	value	basis.	The	Company did	not	elect	the	fair	value	option	for	other	eligible	instruments	within	Deposits	that	were	managed	by	the	Discover	business	segment	prior	to	the	Discover	Spin-off.

The	following	table	presents	gains	and	(losses)	due	to	changes	in	fair	value	for	items	measured	at	fair	value	pursuant	to	the	fair	value	option	election	for	fiscal	year	ended November	30,	2007:

|  | Principal | Net | the	Year	Ended |
| :--- | :--- | :--- | :--- |
|  | Transactions: | Interest | November\t30, |
| Fiscal\tyear\tended\tNovember\t30,\t2007 | Trading | Revenue | 2007(1) |
|  |  | (dollars\tin\tmillions) |  |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings | $(326) | $(5) | $(331) |
| Deposits | (5) | — | (5) |
| Long-term\tborrowings | (481) | (366) | (847) |

(1) In	addition	to	these	amounts,	as	discussed	in	Note	2,	all	of	the	instruments	within	Financial	instruments	owned	or	Financial	instruments	sold,	not	yet	purchased	are	measured	at	fair	value,	either	through	the	election of	SFAS	No.	159	or	as	required	by	other	accounting	pronouncements.	Changes	in	the	fair	value	of	these	instruments	are	recorded	in	Principal	transactions—trading	and	Principal	transactions—investment revenues.

As	of	November	30,	2007,	the	aggregate	contractual	principal	amount	of	loans	for	which	the	fair	value	option	was	elected	exceeded	the	fair	value	of	such	loans	by approximately	$28,880	million.	The	aggregate	fair	value	of	loans	that	were	90	or	more	days	past	due	as	of	November	30,	2007	was	$6,588	million.	The	aggregate contractual	principal	amount	of	such	loans	90	or	more	days	past	due	exceeded	their	fair	value	by	approximately	$23,501	million.	This	difference	in	amount	primarily emanates	from	the	Company's	distressed	debt	trading	business,	which	purchases	distressed	debt	at	amounts	well	below	par.

For	the	fiscal	year	ended	November	30,	2007,	changes	in	the	fair	value	of	loans	for	which	the	fair	value	option	was	elected	that	were	attributable	to	changes	in instrument-specific	credit	spreads	were	losses	of	$2,258	million.	Instrument-specific	credit	losses	were	determined	by	excluding	the	non-credit	components	of	gains	and losses,	such	as	those	due	to	changes	in	interest	rates.

For	the	fiscal	year	ended	November	30,	2007,	the	estimated	changes	in	the	fair	value	of	the	Company's	short-term	and	long-term	borrowings,	including	structured	notes, for	which	the	fair	value	option	was	elected	that	were	attributable	to	changes	in	instrument-specific	credit	spreads	were	gains	of	approximately	$840	million.	This	gain was	attributable	to	the	widening	of	the	Company's	credit	spreads	and	was	determined	based	upon	observations	of	the	Company's	secondary	bond	market	spreads.	As	of November	30,	2007,	the	aggregate	contractual	principal	amount	of	long-term	debt	instruments	for	which	the	fair	value	option	was	elected	exceeded	the	fair	value	of	such instruments	by	approximately	$1,572	million.

The	estimated	change	in	the	fair	value	of	other	liabilities	for	which	the	fair	value	option	was	elected	that	was	attributable	to	changes	in	instrument-specific	credit	spreads was	a	loss	of	approximately	$291	million	in	the	fiscal	year	ended	November	30,	2007.	This	loss	was	primarily	related	to	leveraged	loan	contingent	commitments	and was	attributable	to	the	illiquid	market	conditions	that	existed	late	in	the	year.	It	was	generally	determined	based	on	the	differential	between	estimated	expected	client yields	at	November	30,	2007	and	contractual	yields.

# Financial	Instruments	Not	Measured	at	Fair	Value.

Some	of	the	Company's	financial	instruments	are	not	measured	at	fair	value	on	a	recurring	basis	but	nevertheless	are	recorded	at	amounts	that	approximate	fair	value due	to	their	liquid	or	short-term	nature.	Such	financial	assets	and	financial	liabilities	include:	Cash	and	cash	equivalents,	the	cash	component	of	Cash	and	securities deposited	with	clearing	organizations	or	segregated	under	federal	and	other	regulations	or	requirements,	Securities	purchased	under	agreements	to	resell,	Securities borrowed,	Securities	sold	under	agreements	to	repurchase,	Securities	loaned,	Receivables—customers,	Receivables—brokers,	dealers	and	clearing	organizations, Payables—customers,	Payables—brokers,	dealers	and	clearing	organizations,	certain	Commercial	paper	and	other	short-term	borrowings,	and	certain	Deposits.

The	Company's	long-term	borrowings	are	recorded	at	historical	amounts	unless	elected	under	the	SFAS	No.	159	fair	value	election	or	designated	as	a	hedged	item	in	a fair	value	hedge	under	SFAS	No.	133.	The	fair	value	of	the	Company's	long-term	borrowings	was	estimated	using	either	quoted	market	prices	or	discounted	cash	flow analyses	based	on	the	Company's	current	borrowing	rates	for	similar	types	of	borrowing	arrangements.	At	November	30,	2007,	the	carrying	value	of	the	Company's long-term	borrowings	was	approximately	$3.3	billion	higher	than	fair	value.	At	November	30,	2006,	the	carrying	value	of	the	Company's	long-term	borrowings	was approximately	$1.8	billion	less	than	fair	value.

# 4.				Collateralized	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	and	loans	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)	in	the	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<br>November	30,<br>2007 | At<br>November	30,<br>2006 |
| :--- | :--- | :--- |
|  | (dollars\tin\tmillions) |  |
| Financial\tinstruments\towned: |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | $7,134 | $12,111 |
| Other\tsovereign\tgovernment\tobligations | 333 | 893 |
| Corporate\tand\tother\tdebt | 32,530 | 44,237 |
| Corporate\tequities | 1,133 | 6,662 |
| Total | $41,130 | $63,903 |

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	and	derivative	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	and	derivative	transactions	or	for	delivery	to	counterparties	to	cover	short	positions.	At	November	30,	2007	and	November	30,	2006,	the	fair value	of	securities	received	as	collateral	where	the	Company	is	permitted	to	sell	or	repledge	the	securities	was	$948	billion	and	$942	billion,	respectively,	and	the	fair value	of	the	portion	that	had	been	sold	or	repledged	was	$708	billion	and	$780	billion,	respectively.

The	Company	additionally	receives	securities	as	collateral	in	connection	with	certain	securities	for	securities	transactions	in	which	the	Company	is	the	lender.	In instances	where	the	Company	is	permitted	to	sell	or	repledge	these	securities,	the	Company	reports	the	fair	value	of	the	collateral	received	and	the	related	obligation	to return	the	collateral	in	the	consolidated	statement	of	financial	condition.	At	November	30,	2007	and	November	30,

2006,	$82	billion	and	$65	billion,	respectively,	were	reported	as	Securities	received	as	collateral	and	an	Obligation	to	return	securities	received	as	collateral	in	the consolidated	statements	of	financial	condition.	Collateral	received	in	connection	with	these	transactions	that	was	subsequently	repledged	was	approximately	$72	billion and	$45	billion	at	November	30,	2007	and	November	30,	2006,	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.

# 5.				Securitization	Activities	and	Variable	Interest	Entities.

Securitization	Activities.				The	Company	engages	in	securitization	activities	related	to	commercial	and	residential	mortgage	loans,	U.S.	agency	collateralized	mortgage obligations,	corporate	bonds	and	loans,	municipal	bonds	and	other	types	of	financial	assets.	Special	purpose	entities	("SPEs"),	also	known	as	variable	interest	entities ("VIEs")	are	typically	used	in	such	securitization	transactions.	Transferred	assets	are	carried	at	fair	value	prior	to	securitization,	and	any	changes	in	fair	value	are recognized	in	the	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	consolidated	statements	of	financial	condition	at	fair	value.	Any	changes	in	the	fair	value	of	such	retained interests	are	recognized	in	the	consolidated	statements	of	income.	Retained	interests	in	securitized	financial	assets	were	approximately	$5.3	billion	at	November	30, 2007,	the	majority	of	which	were	related	to	residential	mortgage	loan,	commercial	mortgage	loan	and	U.S.	agency	collateralized	mortgage	obligation	securitization transactions.	Net	gains	at	the	time	of	securitization	were	not	material	in	fiscal	2007.

The	following	table	presents	information	on	the	Company's	residential	mortgage	loan,	commercial	mortgage	loan	and	U.S.	agency	collateralized	mortgage	obligation 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	November	30,	2007	were	as	follows	(dollars	in	millions):

|  | Residential<br>Mortgage<br>Loans | Commercial<br>Mortgage<br>Loans | U.S.	Agency<br>Collateralized<br>Mortgage<br>Obligations |
| :--- | :--- | :--- | :--- |
| Investment\tgrade\tretained\tinterests | $2,048 | $678 | $826 |
| Non-investment\tgrade\tretained\tinterests | 1,167 | 406 | — |
| Total\tretained\tinterests\t(carrying\tamount/fair\tvalue) | $3,215 | $1,084 | $826 |
| Weighted\taverage\tlife\t(in\tmonths) | 49 | 57 | 51 |
| Range | 1-322 | 0.5-139 | 1-271 |
| Weighted\taverage\tdiscount\trate\t(per\tannum) | 12.55% | 8.48% | 6.04% |
| Range | 1.12-74.10% | \t 3.00-16.83% | 0.75-18.12% |
| Impact\ton\tfair\tvalue\tof\t10%\tadverse\tchange | $(114) | $(14) | $(16) |
| Impact\ton\tfair\tvalue\tof\t20%\tadverse\tchange | $(218) | $(28) | $(31) |
| Weighted\taverage\tcredit\tlosses\t(rate\tper\tannum) | 4.52% | 3.24% | 0.00% |
| Range | 0.00-12.00% | \t 0.00-13.69% | 0.00-0.00% |
| Impact\ton\tfair\tvalue\tof\t10%\tadverse\tchange | $(215) | $(5) | $— |
| Impact\ton\tfair\tvalue\tof\t20%\tadverse\tchange | $(371) | $(10) | $— |
| Weighted\taverage\tprepayment\tspeed\tassumption\t("PSA")(1)(2) | 1,173 | — | 301 |
| Range | \t 188-2,250PSA | — | \t 167-718PSA |
| Impact\ton\tfair\tvalue\tof\t10%\tadverse\tchange | $(118) | $— | $(7) |
| Impact\ton\tfair\tvalue\tof\t20%\tadverse\tchange | $(194) | $— | $(19) |

(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	weighted	average	assumptions	and	parameters	used	initially	to	value	retained	interests	in	relation	to	securitizations	that	were	still	held	by	the	Company	as	of November	30,	2007	were	as	follows:

|  | Residential<br>Mortgage<br>Loans | Commercial<br>Mortgage<br>Loans | U.S.	Agency<br>Collateralized<br>Mortgage<br>Obligations |
| :--- | :--- | :--- | :--- |
| Weighted\taverage\tlife\t(in\tmonths) | 45 | 64 | 72 |
| Weighted\taverage\tdiscount\trate\t(rate\tper\tannum) | 9.51% | 6.87% | 5.79% |
| Weighted\taverage\tcredit\tlosses\t(rate\tper\tannum) | 2.23% | 1.54% | — |
| Weighted\taverage\tprepayment\tspeed\tassumptions | 1,842 | — | 258 |

The	tables	above	do	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.

During	fiscal	2007,	fiscal	2006	and	fiscal	2005,	the	Company	received	proceeds	from	new	securitization	transactions	of	$64	billion,	$68	billion	and	$65	billion, respectively,	and	cash	flows	from	retained	interests	in	securitization	transactions	of	$6.0	billion,	$6.0	billion	and	$7.1	billion,	respectively.

Mortgage	Servicing	Rights.				The	Company	may	retain	servicing	rights	to	certain	mortgage	loans	that	are	sold	through	its	securitization	activities.	These	transactions create	an	asset	referred	to	as	MSRs,	which	are	included	within	Intangible	assets	in	the	consolidated	statements	of	financial	condition.

The	following	table	presents	information	about	the	Company's	MSRs,	which	relate	to	its	mortgage	loan	business	activities	(dollars	in	millions):

(1) Amount	includes	MSRs	obtained	in	connection	with	the	Company's	acquisition	of	Saxon	Capital,	Inc.	(see	Note	23).

(2) These	amounts	are	recorded	within	Other	revenues	in	the	Company's	consolidated	statements	of	income.

The	Company	generally	utilizes	information	provided	by	third	parties	in	order	to	determine	the	fair	value	of	its	MSRs.	The	valuation	of	MSRs	consist of	projecting	servicing	cash	flows	and	discounting	such	cash	flows	using	an	appropriate	risk-adjusted	discount	rate.	These	valuations	require	estimation	of	various assumptions,	including	future	servicing	fees,	credit	losses	and	other	related	costs,	discount	rates	and	mortgage	prepayment	speeds.	The	Company	also	compares	the estimated	fair	values	of	the	MSRs	from	the	valuations	with	observable	trades	of	similar	instruments	or	portfolios.	Due	to	subsequent	changes	in	economic	and	market conditions,	the	actual	rates	of	prepayments,	credit	losses	and	the	value	of	collateral	may	differ	significantly	from	the	Company's	original	estimates.	Such	differences could	be	material.	If	actual	prepayment	rates	and	credit	losses	were	higher	than	those	assumed,	the	value	of	the	Company's	MSRs	could	be	adversely	affected.	The Company	may	hedge	a	portion	of	its	MSRs	through	the	use	of	financial	instruments,	including	certain	derivative	contracts.

Variable	Interest	Entities.				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.	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	consolidates	entities	in	which	it	is	the	primary	beneficiary.	For	those	entities	deemed	to	be	qualifying	special purpose	entities	(as	defined	in	SFAS	No.	140),	the	Company	does	not	consolidate	the	entity.	See	Note	1	regarding	the	characteristics	of	qualifying	special	purpose entities.

The	Company	is	involved	with	various	entities	in	the	normal	course	of	business	that	may	be	deemed	to	be	VIEs.	The	Company's	variable	interests	in	VIEs	include	debt and	equity	interests,	commitments,	guarantees	and	derivative	instruments.	The	Company's	involvement	with	VIEs	arises	primarily	from:

•	 Purchased,	sold	and	retained	interests	in	connection	with	market	making	and	securitization	activities.

•	 Guarantees	issued	and	residual	interests	retained	in	connection	with	municipal	bond	securitizations.

•	 Loans	and	investments	made	to	VIEs	that	hold	debt,	equity,	real	estate	or	other	assets.

•	 Derivatives	entered	into	with	variable	interest	entities.

•	 Structuring	of	credit	linked	notes	or	other	asset-repackaged	notes	designed	to	meet	the	investment	objectives	of	clients.

•	 Other	structured	transactions	designed	to	provide	enhanced,	tax-efficient	yields	to	the	Company	or	its	clients.

The	following	table	sets	forth	the	Company's	total	assets	and	maximum	exposure	to	loss	associated	with	VIEs	that	the	Company	consolidated	at	November	30,	2007. The	Company	accounts	for	the	assets	held	by	the	entities	as	Financial	instruments	owned	and	the	liabilities	of	the	entities	as	Other	secured	financings	in	the	consolidated statement	of	financial	condition	(dollars	in	millions):

|  | VIE	Assets | Maximum	Exposure	to	Loss	in	Consolidated	VIEs(1) | Maximum	Exposure	to	Loss	in	Consolidated	VIEs(1) | Maximum	Exposure	to	Loss	in	Consolidated	VIEs(1) | Maximum	Exposure	to	Loss	in	Consolidated	VIEs(1) |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | That\tthe | Debt\tand |  | Commitments |  |
|  | Company | Equity |  | and |  |
|  | Consolidates | Interests | Derivatives | Guarantees | Total |
| Mortgage\tand\tasset-backed\tsecuritizations | $5,916 | $1,746 | $4 | $\t— | $1,750 |
| Municipal\tbond\ttrusts | 828 | 1 | — | 827 | 828 |
| Credit\tand\treal\testate(2) | 5,130 | 2,515 | 3,320 | — | 5,835 |
| Commodities\tfinancing | 1,170 | — | 328 | — | 328 |
| Other\tstructured\ttransactions | 9,403 | 8,868 | — | 9 | 8,877 |
|  | $22,447 | $13,130 | $3,652 | $836 | $17,618 |

(1) The	Company's	maximum	exposure	to	loss	often	differs	from	the	carrying	value	of	the	VIE's	assets.	The	maximum	exposure	to	loss	is	dependent	on	the	nature	of	the	Company's	variable	interest	in	the	VIEs	and is	limited	to	the	notional	amounts	of	certain	liquidity	facilities,	other	credit	support,	total	return	swaps,	written	put	options,	and	the	fair	value	of	certain	other	derivatives	and	investments	the	Company	has	made	in the	VIEs.	Where	notional	amounts	are	utilized	in	quantifying	maximum	exposure	related	to	derivatives,	such	amounts	do	not	reflect	writedowns	already	recorded	by	the	Company.	The	Company's	maximum exposure	to	loss	does	not	include	the	offsetting	benefit	of	any	financial	instruments	that	the	Company	may	utilize	to	hedge	these	risks	associated	with	the	Company's	variable	interests.

(2) The	Company's	maximum	exposure	to	loss	associated	with	Credit	and	real	estate	VIEs	exceeds	the	consolidated	assets	of	these	entities.	This	is	due	to	the	inclusion	in	this	category	of	certain	VIEs	that	typically hold	a	limited	amount	of	non-derivative	security	positions	and	instead	obtain	market	exposure	through	the	use	of	derivatives.	Given	the	use	of	such	derivatives,	the	risk	of	loss	associated	with	such	entities typically	exceeds	the	carrying	value	of	their	assets.	The	Company's	maximum	exposure	to	loss	associated	with	such	consolidated	variable	interest	entities	is	generally	limited	to	the	notional	amount	of	the Company's	derivatives	entered	into	with	the	VIE	and	the	fair	value	of	any	non-derivative	security	positions	held	by	the	Company.

The	following	table	sets	forth	the	Company's	total	assets	and	maximum	exposure	to	loss	associated	with	non-consolidated	VIEs	in	which	the	Company	had	significant variable	interests	at	November	30,	2007	(dollars	in	millions):

|  | VIE	Assets |  | As	of	November	30,	2007 | As	of	November	30,	2007 |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | That\tthe | Maximum\tExposure\tto\tLoss\tin\tNon-consolidated\tVIEs\t(1) | Maximum\tExposure\tto\tLoss\tin\tNon-consolidated\tVIEs\t(1) | Maximum\tExposure\tto\tLoss\tin\tNon-consolidated\tVIEs\t(1) | Maximum\tExposure\tto\tLoss\tin\tNon-consolidated\tVIEs\t(1) |
|  | Company | Debt\tand | Commitments | Commitments |  |
|  | Does\tnot | Equity | and | and |  |
|  | Consolidate | Interests | Derivatives | Guarantees | Total |
| Mortgage\tand\tasset-backed\tsecuritizations | $7,234 | $155 | $125 | $\t— | $280 |
| Credit\tand\treal\testate | 20,265 | \t 12,987 | 200 | 68 | \t 13,255 |
| Other\tstructured\ttransactions | 10,218 | 1,967 | — | 474 | 2,441 |
|  | $37,717 | $15,109 | $325 | $542 | $15,976 |

At	November	30,	2006,	in	connection	with	its	Institutional	Securities	business,	the	aggregate	size	of	VIEs	for	which	the	Company	was	the	primary	beneficiary	of	the entities	was	approximately	$20.4	billion,	which	is	the	carrying	amount	of	the	consolidated	assets	recorded	as	Financial	instruments	owned	that	are	collateral	for	the entities'	obligations.	At	November	30,	2006,	also	in	connection	with	its	Institutional	Securities	business,	the	aggregate	size	of	the	entities	for	which	the	Company	holds significant	variable	interests	was	approximately	$34.7	billion.

The	Company's	institutional	sales	and	trading	activities	are	conducted	through	the	integrated	management	of	its	client-driven	and	proprietary	transactions	along	with	the hedging	and	financing	of	these	positions.	Sales	and	trading	activities	include	revenues	from	customer	purchases	and	sales	of	financial	instruments	in	which	the	Company acts	as	principal	and	gains	and	losses	on	the	Company's	positions.	The	Company	also	engages	in	proprietary	trading	activities	for	its	own	account.	Revenues	from	sales and	trading	activities	are	reflected	in	Principal	transactions—trading,	Commissions,	Interest	and	dividends,	and	Interest	expense	in	the	consolidated	statement	of	income.

The	Company's	trading	portfolios	are	managed	with	a	view	toward	the	risk	and	profitability	of	the	portfolios.	The	following	discussions	of	risk	management,	market risk,	credit	risk,	concentration	risk	and	customer	activities	relate	to	the	Company's	sales	and	trading	activities.

Risk	Management.				The	cornerstone	of	the	Company's	risk	management	philosophy	is	protection	of	the	Company's	franchise,	reputation	and	financial	standing.	The Company's	risk	management	philosophy	is	based	on	the	following	principles:	comprehensiveness,	independence,	accountability,	defined	risk	tolerance	and transparency.	Given	the	importance	of	effective	risk	management	to	the	Company's	reputation,	senior	management	requires	thorough	and	frequent	communication	and appropriate	escalation	of	risk	matters.

The	nature	of	the	Company's	risks,	coupled	with	this	risk	management	philosophy,	informs	the	Company's	risk	governance	structure.	The	Company's	risk	governance structure	includes	the	Firm	Risk	Committee,	the	Capital	Structure	and	Strategic	Transactions	Committee,	the	Chief	Risk	Officer,	the	Internal	Audit	Department, independent	control	groups,	and	various	risk	control	managers,	committees	and	groups	located	within	and	across	the	business	segments.

The	Internal	Audit	Department	provides	independent	risk	and	control	assessment	and	reports	to	the	Audit	Committee	and	administratively	to	the	Chief	Legal	Officer. The	Internal	Audit	Department	periodically	examines	the	Company's	operational	and	control	environment	and	conducts	audits	designed	to	cover	all	major	risk categories.

Each	of	the	Company's	business	segments	also	has	designated	operations	officers,	committees	and	groups,	including	operations	and	information	technology	groups (collectively,	"Segment	Control	Groups"	and,	together

with	the	Company	Control	Groups,	the	"Control	Groups")	to	manage	and	monitor	specific	risks	and	report	to	the	business	segment	risk	committee.	The	Control	Groups work	together	to	review	the	risk	monitoring	and	risk	management	policies	and	procedures	relating	to,	among	other	things,	the	business	segment's	market,	credit	and operational	risk	profile,	sales	practices,	reputation,	legal	enforceability,	and	operational	and	technological	risks.	Participation	by	the	senior	officers	of	the	Control Groups	helps	ensure	that	risk	policies	and	procedures,	exceptions	to	risk	limits,	new	products	and	business	ventures,	and	transactions	with	risk	elements	undergo	a thorough	review.

Market	Risk.				Market	risk	refers	to	the	risk	that	a	change	in	the	level	of	one	or	more	market	prices,	rates,	indices,	implied	volatilities	(the	price	volatility	of	the underlying	instrument	imputed	from	option	prices),	correlations	or	other	market	factors,	such	as	liquidity,	will	result	in	losses	for	a	position	or	portfolio.

The	Company	manages	the	market	risk	associated	with	its	trading	activities	on	a	Company-wide	basis,	on	a	worldwide	trading	division	level	and	on	an	individual product	basis.	Aggregate	market	risk	limits	have	been	approved	for	the	Company	and	for	its	major	trading	divisions	worldwide	(equity	and	fixed	income,	which includes	interest	rate	products,	credit	products,	foreign	exchange	and	commodities).	Additional	market	risk	limits	are	assigned	to	trading	desks	and,	as	appropriate, products	and	regions.	Trading	division	risk	managers,	desk	risk	managers,	traders	and	the	Market	Risk	Department	monitor	market	risk	measures	against	limits	in accordance	with	policies	set	by	senior	management.

The	Market	Risk	Department	independently	reviews	the	Company's	trading	portfolios	on	a	regular	basis	from	a	market	risk	perspective	utilizing	Value-at-Risk	and other	quantitative	and	qualitative	risk	measures	and	analyses.	The	Company's	trading	businesses	and	the	Market	Risk	Department	also	use,	as	appropriate,	measures such	as	sensitivity	to	changes	in	interest	rates,	prices,	implied	volatilities	and	time	decay	to	monitor	and	report	market	risk	exposures.	Stress	testing,	which	measures	the impact	on	the	value	of	existing	portfolios	of	specified	changes	in	market	factors	for	certain	products,	is	performed	periodically	and	is	reviewed	by	trading	division	risk managers,	desk	risk	managers	and	the	Market	Risk	Department.	The	Market	Risk	Department	also	conducts	scenario	analyses,	which	estimate	the	Company's	revenue sensitivity	to	a	set	of	specific,	predefined	market	and	geopolitical	events.

Credit	Risk.				Credit	risk	refers	to	the	risk	of	loss	arising	from	borrower	or	counterparty	default	when	a	borrower,	counterparty	or	obligor	does	not	meet	its	financial obligations.	The	Company	incurs	significant,	"single	name"	credit	risk	exposure	through	the	Institutional	Securities	business.	This	type	of	risk	requires	credit	analysis	of specific	counterparties,	both	initially	and	on	an	ongoing	basis.

The	Institutional	Credit	Department	("Institutional	Credit")	manages	credit	risk	exposure	for	the	Institutional	Securities	business.	Institutional	Credit	is	responsible	for ensuring	transparency	of	material	credit	risks,	ensuring	compliance	with	established	limits,	approving	material	extensions	of	credit,	and	escalating	risk	concentrations	to appropriate	senior	management.

Concentration	Risk.				The	Company	is	subject	to	concentration	risk	by	holding	large	positions	in	certain	types	of	securities,	loans	or	commitments	to	purchase	securities of	a	single	issuer,	including	sovereign	governments	and	other	entities,	issuers	located	in	a	particular	country	or	geographic	area,	public	and	private	issuers	involving developing	countries,	or	issuers	engaged	in	a	particular	industry.	Financial	instruments	owned	by	the	Company	include	U.S.	government	and	agency	securities	and securities	issued	by	other	sovereign	governments	(principally	Japan,	United	Kingdom,	Germany	and	Brazil),	which,	in	the	aggregate,	represented	approximately	4%	of the	Company's	total	assets	at	November	30,	2007.	In	addition,	substantially	all	of	the	collateral	held	by	the	Company	for	resale	agreements	or	bonds	borrowed,	which together	represented	approximately	19%	of	the	Company's	total	assets	at	November	30,	2007,	consist	of	securities	issued	by	the	U.S.	government,	federal	agencies	or other

sovereign	government	obligations.	Positions	taken	and	commitments	made	by	the	Company,	including	positions	taken	and	underwriting	and	financing	commitments made	in	connection	with	its	private	equity,	principal	investment	and	lending	activities,	often	involve	substantial	amounts	and	significant	exposure	to	individual	issuers and	businesses,	including	non-investment	grade	issuers.	In	addition,	the	Company	may	originate	or	purchase	certain	residential	and	commercial	mortgage	loans	that could	contain	certain	terms	and	features	that	may	result	in	additional	credit	risk	as	compared	with	more	traditional	types	of	mortgages.	Such	terms	and	features	may include	loans	made	to	borrowers	subject	to	payment	increases	or	loans	with	high	loan-to-value	ratios.	The	Company	seeks	to	limit	concentration	risk	through	the	use	of the	systems	and	procedures	described	in	the	preceding	discussions	of	risk	management,	market	risk	and	credit	risk.

Customer	Activities.				The	Company's	customer	activities	involve	the	execution,	settlement	and	financing	of	various	securities	and	commodities	transactions	on	behalf of	customers.	Customer	securities	activities	are	transacted	on	either	a	cash	or	margin	basis.	Customer	commodities	activities,	which	include	the	execution	of	customer transactions	in	commodity	futures	transactions	(including	options	on	futures),	are	transacted	on	a	margin	basis.

The	Company's	customer	activities	may	expose	it	to	off-balance	sheet	credit	risk.	The	Company	may	have	to	purchase	or	sell	financial	instruments	at	prevailing	market prices	in	the	event	of	the	failure	of	a	customer	to	settle	a	trade	on	its	original	terms	or	in	the	event	cash	and	securities	in	customer	margin	accounts	are	not	sufficient	to fully	cover	customer	losses.	The	Company	seeks	to	control	the	risks	associated	with	customer	activities	by	requiring	customers	to	maintain	margin	collateral	in compliance	with	various	regulations	and	Company	policies.

Derivative	Contracts.				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).	Derivatives	included	are	held	for	trading	and	investment,	as	well	as	for	asset	and	liability	management. Derivatives	are	disclosed	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's	derivatives	(both	listed	and	OTC),	net	of	cash	collateral,	at	November	30,	2007	and	November	30,	2006	are	summarized	in	the	table	below,	showing	the fair	value	of	the	related	assets	and	liabilities	by	product:

|  | At	November	30,	2007 | At	November	30,	2007 | At	November	30,	2006 | At	November	30,	2006 |
| :--- | :--- | :--- | :--- | :--- |
| Product\tType | Assets | Liabilities | Assets | Liabilities |
|  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |
| Interest\trate\tand\tcurrency\tswaps,\tinterest\trate\toptions,\tcredit\tderivatives\tand\tother\tfixed\tincome\tsecurities |  |  |  |  |
| contracts | $33,804 | $19,515 | $19,444 | $15,688 |
| Foreign\texchange\tforward\tcontracts\tand\toptions | 7,755 | 9,372 | 7,325 | 7,725 |
| Equity\tsecurities\tcontracts\t(including\tequity\tswaps,\twarrants\tand\toptions) | 19,913 | 27,887 | 16,705 | 23,155 |
| Commodity\tforwards,\toptions\tand\tswaps | 15,531 | 14,830 | 11,969 | 10,923 |
| Total | $77,003 | $71,604 | $55,443 | $57,491 |

Consumer	loans,	which	primarily	related	to	general	purpose	credit	card	and	consumer	installment	loans	of	DFS,	were	as	follows:

|  | At<br>November	30,<br>2006 |
| :--- | :--- |
|  | (dollars\tin\tmillions) |
| General\tpurpose\tcredit\tcard\tand\tconsumer\tinstallment | $23,746 |
| Less: |  |
| Allowance\tfor\tconsumer\tloan\tlosses | 831 |
| Consumer\tloans,\tnet | $22,915 |

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

| Balance	at	beginning	of	period | $838 | $943 |
| :--- | :--- | :--- |
| Additions: |  |  |
| Provision\tfor\tconsumer\tloan\tlosses(1) | 756 | 878 |
| Purchase\tof\tconsumer\tloans(2) | 55 | — |
| Deductions: |  |  |
| Charge-offs | (1,001) | (1,145) |
| Recoveries(1) | 174 | 167 |
| Net\tcharge-offs | (827) | (978) |
| Translation\tadjustments\tand\tother | 9 | (5) |
| Balance\tat\tend\tof\tperiod | $831 | $838 |

(1) Amounts	included	in	discontinued	operations.

(2) Amounts	relate	to	the	Company's	acquisition	of	Goldfish	(see	Note	23)	and	other	acquisitions.

At	November	30,	2006,	$5,570	million	of	the	Company's	consumer	loans	had	minimum	contractual	maturities	of	less	than	one	year.	Because	of	the	uncertainty regarding	consumer	loan	repayment	patterns,	which	historically	had	been	higher	than	contractually	required	minimum	payments,	this	amount	may	not	have	necessarily been	indicative	of	the	Company's	actual	consumer	loan	repayments.

The	Company	received	net	proceeds	from	consumer	loan	sales	of	$5,301	million	in	fiscal	2007	through	the	date	of	the	Discover	Spin-off.	The	Company	received	net proceeds	from	consumer	loan	sales	of	$11,532	million	and	$10,525	million	in	fiscal	2006	and	fiscal	2005,	respectively.

The	Company's	U.S.	consumer	loan	portfolio	as	of	November	30,	2006,	including	securitized	loans,	was	geographically	diverse,	with	a	distribution	approximating	that of	the	population	of	the	U.S.

At	November	30,	2006,	$2.3	billion	of	the	Company's	consumer	loans	were	classified	as	held	for	sale.	On	June	30,	2007,	the	Company	completed	the	Discover	Spin-off (see	Note	22	for	further	information).

Credit	Card	Securitization	Activities.				The	Company's	retained	interests	in	Discover's	credit	card	asset	securitizations	included	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	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	were	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	were	subordinate	to	investors'	interests.	Accrued	interest	receivable	and	certain	other	subordinated	retained	interests	were	recorded	in	Other assets	at	amounts	that	approximated	fair	value.	The	Company	received	annual	servicing	fees	of	2%	of	the	investor	principal	balance	outstanding.	The	Company	did	not recognize	servicing	assets	or	servicing	liabilities	for	servicing	rights	as	the	servicing	contracts	provided	just	adequate	compensation,	as	defined	in	SFAS	No.	140	to	the Company	for	performing	the	servicing.	Residual	Interests	and	cash	collateral	accounts	were	recorded	in	Other	assets	and	reflected	at	fair	value.	The	retained	interests were	subject	to	credit,	payment	and	interest	rate	risks	on	the	transferred	credit	card	assets.	The	investors	and	the	securitization	trusts	had	no	recourse	to	the	Company's other	assets	for	failure	of	cardmembers	to	pay	when	due.

The	uncollected	balances	of	securitized	general	purpose	credit	card	loans	were	$26.7	billion	at	November	30,	2006.

The	Company	no	longer	has	retained	interests	in	Discover's	credit	card	asset	securitizations	after	the	completion	of	the	Discover	Spin-off	on	June	30,	2007.

# 8.				Other	Investments.

Other	investments	of	$4,524	million	and	$3,232	million	as	of	November	30,	2007	and	November	30,	2006,	respectively,	primarily	include	investments	in unconsolidated	investees	that	are	accounted	for	under	the	equity	method	of	accounting	(see	Note	9).

Beginning	in	the	second	quarter	of	fiscal	2007,	the	Company	purchased	certain	debt	securities	that	were	classified	as	"securities	available	for	sale"	in	accordance	with SFAS	No.	115,	"Accounting	for	Certain	Investments	in	Debt	and	Equity	Securities"	("SFAS	No.	115").	During	fiscal	2007,	$4.3	billion	of	securities	available	for	sale were	sold	for	a	loss	of	$74	million.	In	the	fourth	quarter	of	fiscal	2007,	the	Company	determined	that	it	no	longer	intends	to	hold	the	remaining	securities	in	this	portfolio until	the	fair	value	of	the	securities	recover	to	a	level	that	exceeds	their	initial	cost.	Accordingly,	the	Company	recorded	an	other-than-temporary	impairment	charge	of $437	million	in	Principal	transactions-trading	revenues	in	the	consolidated	statement	of	income	on	these	securities	in	the	fourth	quarter	of	fiscal	2007	and	reclassified $8.1	billion	to	Financial	instruments	owned	in	the	consolidated	statement	of	financial	condition	effective	November	30,	2007.	This	other-than-temporary	impairment charge	represented	all	unrealized	losses	for	these	securities.

# 9.				Investments	in	Unconsolidated	Investees.

The	Company	invests	in	unconsolidated	investees	that	own	synthetic	fuel	production	plants	and	in	certain	structured	transactions	not	integral	to	the	operations	of	the Company.	The	Company	accounts	for	these	investments	under	the	equity	method	of	accounting.

Losses	from	these	investments	were	$47	million,	$40	million	and	$311	million	in	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.

Synthetic	Fuel	Production	Plants.				The	Company's	share	of	the	operating	losses	generated	by	these	investments	is	recorded	within	(Losses)	gains	from	unconsolidated investees,	and	the	tax	credits	and	the	tax	benefits	associated	with	these	operating	losses	are	recorded	within	the	Provision	for	income	taxes.

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

| Losses	from	unconsolidated	investees | $140 | $225 | $311 |
| :--- | :--- | :--- | :--- |
| Tax\tcredits | \t 113 | \t 156 | \t 336 |
| Tax\tbenefits\ton\tlosses | 55 | 89 | \t 124 |

Synthetic	fuels	tax	credits	were	granted	under	Section	45K	of	the	Internal	Revenue	Code.	Synthetic	fuels	tax	credits	were	available	in	full	only	when	the	price	of	oil	was 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	2007	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.	Based	on	fiscal	year	to	date	and	futures	prices	at	November	30,	2007,	the	Company	estimates	that	there	will	be	a	partial	phase-out	of	tax credits	earned	in	fiscal	2007.	The	impact	of	this	anticipated	partial	phase-out	is	included	within	(Losses)	gains	from	unconsolidated	investees	and	the	Provision	for income	taxes	for	the	fiscal	year	ended	November	30,	2007.	Under	current	tax	law,	the	Section	45K	synthetic	fuels	tax	credits	expired	on	December	31,	2007.

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

Structured	Transactions.				Gains	from	unconsolidated	investees	associated	with	investments	in	certain	structured	investments	were	$93	million	in	fiscal	2007	and	$185 million	in	fiscal	2006.

# 10.				Goodwill	and	Net	Intangible	Assets.

The	Company	completed	its	annual	goodwill	impairment	testing,	in	accordance	with	SFAS	No.	142,	"Goodwill	and	Other	Intangible	Assets"	("SFAS	No.	142"),	as	of December	1,	2006	and	December	1,	2005.	During	the	quarter	ended	August	31,	2007,	the	Company	changed	the	date	of	its	annual	goodwill	impairment	testing	to	June	1 in	order	to	move	the	impairment	testing	outside	of	the	Company's	normal	year-end	reporting	process	to	a	date	when	resources	are	less	constrained.	The	Company believes	that	the	resulting	change	in	accounting	principle	related	to	the	annual	testing	date	will	not	delay,	accelerate	or	avoid	an	impairment	charge.	Goodwill impairment	tests	performed	as	of	June	1,	2007	and	December	1,	2006	and	December	1,	2005	concluded	that	no	impairment	charges	were	required	as	of	those	dates.	The Company	determined	that	the	change	in	accounting	principle	related	to	the	annual	testing	date	is	preferable	under	the	circumstances	and	does	not	result	in	adjustments	to the	Company's	financial	statements	when	applied	retrospectively.	Additionally,	due	to	the	deterioration	in	the	Company's	subprime-related	activities,	the	Company performed	an	interim	impairment	test	of	goodwill	subsequent	to	its	annual	testing	date	of	June	1,	which	did	not	result	in	an	impairment.

Changes	in	the	carrying	amount	of	the	Company's	goodwill	and	intangible	assets	for	fiscal	2007	and	fiscal	2006	were	as	follows:

|  |  | Wealth |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Institutional | Management | Asset |  |  |
|  | Securities | Group | Management | Discover | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Goodwill: |  |  |  |  |  |
| Balance\tas\tof\tNovember\t30,\t2005 | $444 | $540 | $966 | $256 | $2,206 |
| Foreign\tcurrency\ttranslation\tadjustments | — | 49 | — | 31 | 80 |
| Goodwill\tacquired\tduring\tthe\tyear(1) | 257 | — | 2 | 247 | 506 |
| Balance\tas\tof\tNovember\t30,\t2006 | 701 | 589 | 968 | 534 | \t 2,792 |
| Foreign\tcurrency\ttranslation\tadjustments | — | 18 | — | 2 | 20 |
| Goodwill\tacquired\tduring\tthe\tyear(2) | 862 | 3 | 207 | — | \t 1,072 |
| Goodwill\tdisposed\tof\tduring\tthe\tyear(3) | (8) | (313) | (3) | (536) | (860) |
| Balance\tas\tof\tNovember\t30,\t2007 | $1,555 | $297 | $1,172 | $— | $3,024 |
| Intangible\tassets: |  |  |  |  |  |
| Balance\tas\tof\tNovember\t30,\t2005 | $227 | $— | $— | $67 | $294 |
| Intangible\tassets\tacquired\tduring\tthe\tyear\tand\tother(1)(4) | 253 | — | 4 | 130 | 387 |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | 16 | 16 |
| Amortization\texpense(5) | (33) | — | (1) | (12) | (46) |
| Balance\tas\tof\tNovember\t30,\t2006 | 447 | — | 3 | 201 | 651 |
| Intangible\tassets\tacquired\tduring\tthe\tyear(2) | 473 | — | 242 | 5 | 720 |
| Intangible\tassets\tdisposed\tof\tduring\tthe\tyear(3) | (49) | — | (3) | (200) | (252) |
| Amortization\texpense(5) | (57) | — | (9) | (6) | (72) |
| Balance\tas\tof\tNovember\t30,\t2007 | $814 | $— | $233 | $— | $1,047 |

(1) Institutional	Securities	activity	primarily	represents	goodwill	and	intangible	assets	acquired	in	connection	with	the	Company's	acquisition	of	TransMontaigne	Inc.,	Heidmar	Group	and	Morgan	Stanley	Bank International	(China)	Limited	(formerly	Nan	Tung	Bank	Ltd.	Zhuhai).	Discover	activity	represents	goodwill	and	intangible	assets	acquired	in	connection	with	the	Company's	acquisition	of	Goldfish	and	other acquisitions	(see	Note	23).

(2) Institutional	Securities	activity	primarily	represents	goodwill	and	intangible	assets	acquired	in	connection	with	the	Company's	joint	venture	with	JM	Financial	and	the	Company's	acquisitions	of	Saxon	Capital,	Inc. and	CityMortgage	Bank.	Asset	Management	activity	primarily	represents	goodwill	and	intangible	assets	acquired	in	connection	with	the	Company's	acquisition	of	FrontPoint	Partners	(see	Note	23).

(3) Global	Wealth	Management	Group	activity	primarily	represents	goodwill	disposed	of	in	connection	with	the	Company's	sale	of	Quilter.	Discover	activity	represents	goodwill	and	intangible	assets	disposed	of	in connection	with	the	Discover	Spin-off	(see	Note	22).

(4) Effective	December	1,	2006,	mortgage	servicing	rights	have	been	included	in	net	intangible	assets.	During	fiscal	2006	amounts	were	reclassified	to	conform	with	the	current	presentation.	See	Note	5	for	further information	on	the	Company's	mortgage	servicing	rights.

(5) Amortization	expense	for	Discover	is	included	in	discontinued	operations.

# Amortizable	intangible	assets	were	as	follows:

|  | At	November	30,	2007 |  | At	November	30,	2006 | At	November	30,	2006 |
| :--- | :--- | :--- | :--- | :--- |
|  | Gross\tCarrying\nAmount | Accumulated\nAmortization | Gross\tCarrying\nAmount | Accumulated\nAmortization |
|  |  | (dollars\tin\tmillions) |  |  |
| Amortizable\tintangible\tassets: |  |  |  |  |
| Trademarks | $129 | $22 | $193 | $15 |
| Technology-related | 151 | 75 | 153 | 55 |
| Customer\trelationships | 140 | 22 | 214 | 25 |
| Management\tcontracts | 220 | 8 | — | — |
| Other | 154 | 48 | 107 | 14 |
| Total\tamortizable\tintangible\tassets | $794 | $175 | $667 | $109 |

Amortization	expense	associated	with	intangible	assets	is	estimated	to	be	approximately	$49	million	per	year	over	the	next	five	fiscal	years.

Deposits	were	as	follows:

(1) Certain	consumer	certificate	accounts	are	carried	at	fair	value	under	the	fair	value	option	(see	Note	3).

The	weighted	average	interest	rates	of	interest-bearing	deposits	outstanding	during	fiscal	2007	and	fiscal	2006	were	3.6%	and	4.4%,	respectively.

At	November	30,	2007,	interest-bearing	deposits	maturing	over	the	next	five	years	were	as	follows:

| Fiscal	Year | (dollars	in	millions) |
| :--- | :--- |
| 2008 | $30,992 |
| 2009 | — |
| 2010 | 10 |
| 2011 | 76 |
| 2012 | 10 |

# 12.				Commercial	Paper	and	Other	Short-Term	Borrowings.

The	table	below	summarizes	certain	information	regarding	commercial	paper	and	other	short-term	borrowings	for	fiscal	2007	and	fiscal	2006:

| Balance	at	year-end | $22,596 | $22,433 |
| :--- | :--- | :--- |
| Average\tamount\toutstanding | $25,362 | $23,962 |
| Weighted\taverage\tinterest\trate\ton\tyear-end\tbalance | 4.8% | 4.6% |
| Other\tshort-term\tborrowings(1)(2): |  |  |
| Balance\tat\tyear-end | $11,899 | $6,659 |
| Average\tamount\toutstanding | $8,947 | $7,773 |

(1) These	borrowings	included	bank	loans,	Federal	Funds	and	bank	notes.

(2) Certain	structured	short-term	borrowings	are	carried	at	fair	value	under	the	fair	value	option.	See	Note	3	for	additional	information.

The	Company	maintains	a	senior	revolving	credit	agreement	with	a	group	of	banks	to	support	general	liquidity	needs,	including	the	issuance	of	commercial	paper,	which consists	of	three	separate	tranches:	a	U.S.	dollar	tranche;	a	Japanese	yen	tranche;	and	a	multicurrency	tranche	available	in	both	euro	and	British	pound,	all	of	which	exist with	the	Company	as	the	sole	borrower.	Under	this	combined	facility	(the	"Credit	Facility"),	the	banks	are	committed	to	provide	up	to	$7.6	billion	under	the	U.S.	dollar tranche,	80	billion	Japanese	yen	under	the	Japanese	yen	tranche	and	$3.25	billion	under	the	multicurrency	tranche.	The	Credit	Facility	expires	on	April	16, 2008	and	includes	a	term-out	feature	that	allows	the	Company,	at	its	option,	to	extend	borrowings	under	the	Credit	Facility	for	an	additional	one	year	beyond	the expiration	date.	At	November	30,	2007,	the	Company	had	a	$13.8	billion	consolidated	stockholders'	equity	surplus	as	compared	with	the	Credit	Facility's	covenant requirement.

The	Company	anticipates	that	it	may	utilize	the	Credit	Facility	for	short-term	funding	from	time	to	time.	The	Company	does	not	believe	that	any	of	the	covenant requirements	in	its	Credit	Facility	will	impair	the	ability	to	obtain	funding	under	the	Credit	Facility,	pay	its	current	level	of	dividends,	or	obtain	loan	arrangements, letters	of	credit	and	other	financial	guarantees	or	other	financial	accommodations.	At	November	30,	2007,	no	borrowings	were	outstanding	under	the	Credit	Facility.

In	addition,	the	Company,	through	several	of	its	subsidiaries,	maintains	several	funded	committed	credit	facilities	to	support	various	businesses,	including	the collateralized	commercial	and	residential	mortgage	whole	loan,	derivative	contracts,	warehouse	lending,	emerging	market	loan,	structured	product,	corporate	loan, investment	banking	and	prime	brokerage	businesses.

Maturities	and	Terms.				Long-term	borrowings	at	fiscal	year-end	consisted	of	the	following:

|  | U.S.	Dollar | U.S.	Dollar | U.S.	Dollar | Non-U.S.	Dollar(1) | Non-U.S.	Dollar(1) | Non-U.S.	Dollar(1) | At	November	30, | At	November	30, |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fixed\nRate | Floating\nRate(2) | Index\nLinked(3) | Fixed\nRate | Floating\nRate(2) | Index\nLinked(3) | 2007\nTotal(4) | 2006\nTotal(4) |
|  |  |  |  | (dollars\tin\tmillions) |  |  |  |  |
| Due\tin\tfiscal\t2007 | $— | $— | $—\t\t\t $— | $—\t\t\t $— | $— | $—\t\t\t $— | $—\t\t\t $— | $18,274 |
| Due\tin\tfiscal\t2008 | 1,592 | \t 17,679 | 5,305 | 1,339 | 4,136 | 757 | 30,808 | 33,758 |
| Due\tin\tfiscal\t2009 | 1,993 | \t 11,717 | 2,923 | 3,134 | 1,041 | 2,735 | 23,543 | 11,907 |
| Due\tin\tfiscal\t2010 | 3,709 | 5,499 | 3,204 | 2,309 | 1,538 | 3,279 | 19,538 | 11,597 |
| Due\tin\tfiscal\t2011 | 5,786 | 1,795 | 1,119 | 1,930 | 728 | 1,696 | 13,054 | 11,123 |
| Due\tin\tfiscal\t2012 | 6,958 | 2,600 | 1,658 | 5,118 | 6,262 | 4,051 | 26,647 | 13,660 |
| Thereafter | \t 24,337 | 6,001 | 3,227 | \t 14,467 | \t 17,024 | \t 11,978 | 77,034 | 44,659 |
| Total | $44,375 | $45,291 | $17,436 | $28,297 | $30,729 | $24,496 | $190,624 | $144,978 |
| Weighted\taverage\tcoupon\tat\tfiscal\tyear-end | 5.6% | 5.2% | n/a | 4.3% | 4.8% | n/a | 5.0% | 5.0% |

(1) Weighted	average	coupon	was	calculated	utilizing	non-U.S.	dollar	interest	rates.

(2) U.S.	dollar	contractual	floating	rate	borrowings	bear	interest	based	on	a	variety	of	money	market	indices,	including	London	Interbank	Offered	Rates	("LIBOR")	and	Federal	Funds	rates.	Non-U.S.	dollar contractual	floating	rate	borrowings	bear	interest	based	primarily	on	Euribor	floating	rates.

(3) Amounts	include	borrowings	that	are	equity-linked,	credit-linked,	commodity-linked	or	linked	to	some	other	index.

(4) Amounts	include	an	increase	of	approximately	$164	million	at	November	30,	2007	and	a	decrease	of	approximately	$326	million	at	November	30,	2006	to	the	carrying	amount	of	certain	of	the	Company's	long- term	borrowings	associated	with	fair	value	hedges	under	SFAS	No.	133.

The	Company's	long-term	borrowings	included	the	following	components:

| Senior	debt | $181,733 | $136,213 |
| :--- | :--- | :--- |
| Subordinated\tdebt | 4,015 | 3,881 |
| Junior\tsubordinated\tdebentures | 4,876 | 4,884 |
| Total | $190,624 | $144,978 |

Senior	debt	securities	often	are	denominated	in	various	non-U.S.	dollar	currencies	and	may	be	structured	to	provide	a	return	that	is	equity-linked,	credit-linked, commodity-linked	or	linked	to	some	other	index	(e.g.,	the	consumer	price	index).	Senior	debt	also	may	be	structured	to	be	callable	by	the	Company	or	extendible	at	the option	of	holders	of	the	senior	debt	securities.	Debt	containing	provisions	that	effectively	allow	the	holders	to	put	or	extend	the	notes	aggregated	$6,736	million	at November	30,	2007	and	$16,016	million	at	November	30,	2006.	Subordinated	debt	and	junior	subordinated	debentures	typically	are	issued	to	meet	the	capital requirements	of	the	Company	or	its	regulated	subsidiaries	and	primarily	are	U.S.	dollar	denominated.

Senior	Debt—Structured	Borrowings.				The	Company's	index-linked,	equity-linked	or	credit-linked	borrowings	include	various	structured	instruments	whose	payments and	redemption	values	are	linked	to	the	performance	of	a	specific	index	(e.g.,	Standard	&	Poor's	500),	a	basket	of	stocks,	a	specific	equity	security,	a	credit	exposure	or basket	of	credit	exposures.	To	minimize	the	exposure	resulting	from	movements	in	the	underlying	index,	equity,

credit	or	other	position,	the	Company	has	entered	into	various	swap	contracts	and	purchased	options	that	effectively	convert	the	borrowing	costs	into	floating	rates	based upon	LIBOR.	These	instruments	are	included	in	the	preceding	table	at	their	redemption	values	based	on	the	performance	of	the	underlying	indices,	baskets	of	stocks,	or specific	equity	securities,	credit	or	other	position	or	index.	The	Company	accounts	for	these	structured	borrowings	containing	embedded	derivatives	which,	prior	to	the adoption	of	SFAS	No.	159,	were	bifurcated	from	the	hybrid	notes	and	accounted	for	at	fair	value.	Effective	December	1,	2006,	the	Company	applied	the	fair	value election	in	certain	cases	to	these	hybrid	notes.	The	swaps	and	purchased	options	used	to	economically	hedge	the	embedded	features	are	derivatives,	and	also	are	carried at	fair	value.	Changes	in	fair	value	related	to	the	notes	and	economic	hedges	are	reported	in	Principal	transactions	trading	revenues.

Subordinated	Debt	and	Junior	Subordinated	Debentures.				Included	in	the	Company's	long-term	borrowings	are	subordinated	notes	(including	the	Series	F	notes issued	by	MS&Co.	discussed	below)	of	$4,015	million	having	a	contractual	weighted	average	coupon	of	4.77%	at	November	30,	2007	and	$3,881	million	having	a weighted	average	coupon	of	4.77%	at	November	30,	2006.	Junior	subordinated	debentures	outstanding	by	the	Company	were	$4,876	million	at	November	30,	2007	and $4,884	million	at	November	30,	2006	having	a	contractual	weighted	average	coupon	of	6.37%	at	November	30,	2007	and	6.51%	at	November	30,	2006.	Maturities	of the	subordinated	and	junior	subordinated	notes	range	from	fiscal	2011	to	fiscal	2046.	Maturities	of	certain	junior	subordinated	debentures	can	be	extended	to	2067	at	the Company's	option.

At	November	30,	2007,	MS&Co.	had	a	$25	million	7.82%	fixed	rate	subordinated	Series	F	note	outstanding.	The	note	matures	in	fiscal	2016.	The	terms	of	the	note contain	restrictive	covenants	that	require,	among	other	things,	MS&Co.	to	maintain	specified	levels	of	Consolidated	Tangible	Net	Worth	and	Net	Capital,	each	as defined	therein.	As	of	November	30,	2007,	MS&Co.	was	in	compliance	with	these	restrictive	covenants.

Asset	and	Liability	Management.				In	general,	securities	inventories	not	financed	by	secured	funding	sources	and	the	majority	of	current	assets	are	financed	with	a combination	of	short-term	funding,	floating	rate	long-term	debt	or	fixed	rate	long-term	debt	swapped	to	a	floating	rate.	Fixed	assets	are	financed	with	fixed	rate	long- term	debt.	The	Company	uses	interest	rate	swaps	to	more	closely	match	these	borrowings	to	the	duration,	holding	period	and	interest	rate	characteristics	of	the	assets being	funded	and	to	manage	interest	rate	risk.	These	swaps	effectively	convert	certain	of	the	Company's	fixed	rate	borrowings	into	floating	rate	obligations.	In	addition, for	non-U.S.	dollar	currency	borrowings	that	are	not	used	to	fund	assets	in	the	same	currency,	the	Company	has	entered	into	currency	swaps	that	effectively	convert	the borrowings	into	U.S.	dollar	obligations.	The	Company's	use	of	swaps	for	asset	and	liability	management	affected	its	effective	average	borrowing	rate	as	follows:

|  | Fiscal | Fiscal | Fiscal |
| :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 |
| Weighted\taverage\tcoupon\tof\tlong-term\tborrowings\tat\tfiscal\tyear-end(1) | 5.0% | 5.0% | 4.6% |
| Effective\taverage\tborrowing\trate\tfor\tlong-term\tborrowings\tafter\tswaps\tat\tfiscal\nyear-end(1) | 5.1% | 5.0% | 4.1% |

(1) Included	in	the	weighted	average	and	effective	average	calculations	are	non-U.S.	dollar	interest	rates.

Subsequent	to	fiscal	year-end	and	through	December	31,	2007,	the	Company's	long-term	borrowings	(net	of	repayments)	increased	by	approximately	$10	billion.	In addition,	the	Company	sold	Equity	Units	to	a	wholly-owned	subsidiary	of	China	Investment	Corporation	Ltd.	("CIC")	for	approximately	$5,579	million.

The	Company	had	Capital	Units	outstanding	that	were	issued	by	the	Company	and	Morgan	Stanley	Finance	plc	("MSF"),	a	U.K.	subsidiary.	A	Capital	Unit	consisted	of (a)	a	Subordinated	Debenture	of	MSF	guaranteed	by	the	Company	and	maturing	in	2017	and	(b)	a	related	Purchase	Contract	issued	by	the	Company,	which	may	have been	accelerated	by	the	Company,	requiring	the	holder	to	purchase	one	Depositary	Share	representing	shares	of	the	Company's	Cumulative	Preferred	Stock.	The aggregate	amount	of	Capital	Units	outstanding	was	$66	million	at	November	30,	2006.

The	Company	redeemed	all	$66	million	of	the	outstanding	Capital	Units	on	February	28,	2007.

# 15.				Commitments,	Guarantees	and	Contingencies.

# Commitments.

The	Company's	commitments	as	of	November	30,	2007	are	summarized	below	by	period	of	expiration.	Since	commitments	may	expire	unused,	the	amounts	shown	do not	necessarily	reflect	the	actual	future	cash	funding	requirements:

|  | Less |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | than\t1 | 1-3 | 3-5 | Over\t5 | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Letters\tof\tcredit\tand\tother\tfinancial\tguarantees(1) | $ 10,790 | $4 | $4 | $— | $10,798 |
| Letters\tof\tcredit\tissued\tby\tsubsidiaries\tthat\tare\tguaranteed\tby\tthe\tCompany | 197 | 1,186 | 194 | 3,674 | 5,251 |
| Investment\tactivities(2) | 318 | 238 | 108 | 647 | 1,311 |
| Investment\tgrade\tprimary\tlending\tcommitments(3)(4) | 19,656 | 5,791 | 23,323 | 1,421 | 50,191 |
| Non-investment\tgrade\tprimary\tlending\tcommitments(3)(4) | 789 | 1,072 | 3,931 | 14,220 | 20,012 |
| Investment\tgrade\tsecondary\tlending\tcommitments(4)(5) | — | — | — | 1,406 | 1,406 |
| Non-investment\tgrade\tsecondary\tlending\tcommitments(4)(5) | 81 | 27 | 151 | 2,090 | 2,349 |
| Commitments\tfor\tsecured\tlending\ttransactions(6) | 3,824 | 4,095 | 1,073 | 2,628 | 11,620 |
| Commercial\tand\tresidential\tmortgage-related\tcommitments(7) | 5,680 | — | — | — | 5,680 |
| Other\tcommitments(8) | 964 | 19 | 5 | — | 988 |
| Total | $ 42,299 | $ 12,432 | $ 28,789 | $26,086 | $109,606 |

(4) The	Company	records	these	commitments	at	fair	value	within	Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased	in	the	consolidated	statement	of	financial	condition	(see	Note	3).

Premises	and	Equipment.				The	Company	has	non-cancelable	operating	leases	covering	premises	and	equipment.	At	November	30,	2007,	future	minimum	rental commitments	under	such	leases	(net	of	subleases,	principally	on	office	rentals)	were	as	follows	(dollars	in	millions):

| Fiscal	Year |  |
| :--- | :--- |
| 2008 | $549 |
| 2009 | 504 |
| 2010 | 403 |
| 2011 | 348 |
| 2012 | 328 |
| Thereafter | \t 2,732 |

The	total	of	minimum	rentals	to	be	received	in	the	future	under	non-cancelable	subleases	as	of	November	30,	2007	was	$96	million.

Occupancy	lease	agreements,	in	addition	to	base	rentals,	generally	provide	for	rent	and	operating	expense	escalations	resulting	from	increased	assessments	for	real	estate taxes	and	other	charges.	Total	rent	expense,	net	of	sublease	rental	income,	was	$604	million,	$470	million	and	$571	million	in	fiscal	2007,	fiscal	2006	and	fiscal	2005, respectively.	The	net	rent	expense	for	fiscal	2005	included	$105	million	related	to	the	lease	adjustment	charge	recorded	in	the	first	quarter	of	fiscal	2005	(see	Note	26).

In	connection	with	its	commodities	business,	the	Company	enters	into	operating	leases	for	both	crude	oil	and	refined	products	storage	and	for	vessel	charters.	These operating	leases	are	integral	parts	of	the	Company's	commodities	risk	management	business.	At	November	30,	2007,	future	minimum	rental	commitments	under	such leases	were	as	follows	(dollars	in	millions):

| 2008 | $650 |
| :--- | :--- |
| 2009 | \t 357 |
| 2010 | \t 212 |
| 2011 | \t 117 |
| 2012 | 93 |
| Thereafter | \t 123 |

# 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	measure	(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	described	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.

Standby	Letters	of	Credit	and	other	Financial	Guarantees.				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.

Liquidity	Facilities.	The	Company	has	entered	into	liquidity	facilities	with	SPEs	and	other	counterparties,	whereby	the	Company	is	required	to	make	certain	payments	if losses	or	defaults	occur.	Primarily,	the	Company	acts	as	liquidity	provider	to	municipal	bond	securitization	SPEs	and	for	standalone	municipal	bonds	in	which	the holders	of	beneficial	interests	issued	by	these	SPEs	or	the	holders	of	the	individual	bonds	have	the	right	to	tender	their	interests	for	purchase	by	the	Company	on specified	dates	at	a	specified	price.	The	Company	often	may	have	recourse	to	the	underlying	assets	held	by	the	SPEs	in	the	event	payments	are	required	under	such liquidity	facilities	as	well	as	make-whole	or	recourse	provisions	with	the	trust	sponsors.

The	table	below	summarizes	certain	information	regarding	these	guarantees	at	November	30,	2007:

|  | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity | Years	to	Maturity |  | Carrying | Collateral/ |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Type\tof\tGuarantee | Less\tthan\t1 | 1-3 | 3-5 | Over\t5 | Total | Amount | Recourse |
|  |  |  |  | (dollars\tin\tmillions) |  |  |  |
| Notional\tamount\tof\tderivative\tcontracts | $999,552 | $1,004,069 | $2,546,374 | $2,570,385 | $7,120,380 | $131,678 | $59 |
| Standby\tletters\tof\tcredit\tand\tother\tfinancial |  |  |  |  |  |  |  |
| guarantees(1) | 5,133 | 1,824 | 1,107 | 6,712 | 14,776 | 802 | 2,396 |
| Market\tvalue\tguarantees | 97 | 106 | — | 655 | 858 | 44 | 145 |
| Liquidity\tfacilities | 18,043 | 1,026 | 444 | 1,652 | 21,165 | — | 20,281 |

(1) Approximately	$14	billion	of	standby	letters	of	credit	are	also	reflected	in	the	"Commitments"	table	above	in	the	investment	grade	and	non-investment	grade	primary	and	secondary	lending	commitments	and	in the	letters	of	credit	issued	by	subsidiaries	that	are	guaranteed	by	the	Company.

Trust	Preferred	Securities.				The	Company	has	established	Morgan	Stanley	Trusts	for	the	limited	purpose	of	issuing	trust	preferred	securities	to	third	parties	and	lending the	proceeds	to	the	Company	in	exchange	for	junior	subordinated	debentures.	The	Company	has	directly	guaranteed	the	repayment	of	the	trust	preferred	securities	to	the holders	thereof	to	the	extent	that	the	Company	has	made	payments	to	a	Morgan	Stanley	Trust	on	the	junior	subordinated	debentures.	In	the	event	that	the	Company	does not	make	payments	to	a	Morgan	Stanley	Trust,	holders	of	such	series	of	trust	preferred	securities	would	not	be	able	to	rely	upon	the	guarantee	for	payment	of	those amounts.	The	Company	has	not	recorded	any	liability	in	the	consolidated	financial	statements	for	these	guarantees	and	believes	that	the	occurrence	of	any	events	(i.e., nonperformance	on	the	part	of	the	paying	agent)	that	would	trigger	payments	under	these	contracts	is	remote.	See	Note	13	for	details	on	the	Company's	junior subordinated	debentures.

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	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	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	November	30,	2007	and	November	30,	2006	was $472	million	and	$320	million,	respectively.	As	of	November	30,	2007	and	November	30,	2006,	the	Company's	accrued	liability	for	distributions	that	the	Company	has determined	is	probable	it	will	be	required	to	refund	based	on	the	applicable	refund	criteria	specified	in	the	various	partnership	agreements	was	$20	million	and	$25 million,	respectively.

Securitized	Asset	Guarantees.				As	part	of	the	Company's	Institutional	Securities	securitization	activities,	the	Company	provides	representations	and	warranties	that certain	securitized	assets	conform	to	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	November	30,	2007	and	November	30,	2006,	the	maximum	potential	amount	of	future	payments	the Company	may	be	required	to	make	under	its	surety	bond	was	$122	million	and	$121	million,	respectively.	The	Company	has	not	recorded	any	contingent	liability	in	the consolidated	financial	statements	for	these	representations	and	warranties	and	reimbursement	agreements	and	believes	that	the	probability	of	any	payments	under	these arrangements	is	remote.

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.

# Contingencies.

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	contests	liability	and/or	the	amount	of	damages	as	appropriate	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	or	if	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,	the	Company	believes,	based	on	current	knowledge	and	after consultation	with	counsel,	that	the	outcome	of	such	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	and	cash	flows	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"	("SFAS	No.	5").	Once	established,	reserves	are	adjusted	when	there	is	more	information	available	or	when	an	event	occurs	requiring	a	change.

Coleman	Litigation.				In	May	2003,	Coleman	(Parent)	Holdings	Inc.	("CPH")	filed	a	complaint	against	Morgan	Stanley	in	the	Circuit	Court	of	the	Fifteenth	Judicial Circuit	for	Palm	Beach	County,	Florida	relating	to	the	1998	merger	between	The	Coleman	Company,	Inc.	and	Sunbeam,	Inc.	In	June	2005,	the	trial	court	issued	a	final judgment	in	favor	of	CPH	in	the	amount	of	$1,578	million,	which	included	prejudgment	interest	and	excluded	certain	payments	received	by	CPH	in	settlement	of	related claims	against	others.	In	June	2005,	Morgan	Stanley	filed	a	notice	of	appeal	with	the	District	Court	of	Appeal	for	the	Fourth	District	of	Florida	(the	"Court	of	Appeal") and	posted	a	supersedeas	bond,	which	automatically	stayed	execution	of	the	judgment	pending	appeal.

In	March	2007,	the	Court	of	Appeal	issued	an	opinion	reversing	the	trial	court's	award	for	compensatory	and	punitive	damages	and	remanding	the	matter	to	the	trial court	for	entry	of	judgment	for	Morgan	Stanley.	In	June	2007,	the	Court	of	Appeal's	opinion	became	final	when	the	Court	of	Appeal	issued	an	order	denying	CPH's motions	for	rehearing,	rehearing	en	banc	and	for	certification	of	certain	questions	for	review	by	the	Florida	Supreme	Court	(the	"Supreme	Court").	In	June	2007,	the	trial court	issued	an	order	cancelling	the	supersedeas	bond	that	Morgan	Stanley	had	posted.	In	July	2007,	CPH	filed	a	petition	with	the	Supreme	Court	asking	that	court	to review	the	Court	of	Appeal's	decision	("Petition	for	Review").	On	December	12,	2007,	the	Supreme	Court	issued	an	order	denying	CPH's	Petition	for	Review. The	Company	believes,	after	consultation	with	outside	counsel,	that	the	Supreme	Court's	decision	to	deny	the	Petition	for	Review	has	effectively	ended	CPH's	civil claim	against	the	Company.	Effective	November	30,	2007,	the	Company	reversed	the	$360	million	reserve	previously	established	for	the	Coleman	litigation	under	SFAS No.	5.

Common	Stock.				Changes	in	shares	of	common	stock	outstanding	for	fiscal	2007	and	fiscal	2006	were	as	follows	(share	data	in	millions):

|  | Fiscal<br>2007 | Fiscal<br>2006 |
| :--- | :--- | :--- |
| Shares\toutstanding\tat\tbeginning\tof\tperiod | 1,049 | 1,058 |
| Net\timpact\tof\tstock\toption\texercises\tand\tother\tshare\tissuances | 59 | 43 |
| Treasury\tstock\tpurchases | (52) | (52) |
| Shares\toutstanding\tat\tend\tof\tperiod | 1,056 | 1,049 |

Treasury	Shares.				During	fiscal	2007,	the	Company	purchased	$3.8	billion	of	its	common	stock	through	open	market	purchases	at	an	average	cost	of	$72.65	per	share. During	fiscal	2006,	the	Company	purchased	$3.4	billion	of	its	common	stock	through	open	market	purchases	at	an	average	cost	of	$65.43	per	share.	In	December	2006, the	Company	announced	that	its	Board	of	Directors	had	authorized	the	repurchase	of	up	to	$6	billion	of	the	Company's	outstanding	common	stock.	This	share repurchase	authorization	considers,	among	other	things,	business	segment	capital	needs,	as	well	as	equity-based	compensation	and	benefit	plan	requirements.	As	of November	30,	2007,	the	Company	had	approximately	$2.3	billion	remaining	under	its	current	share	repurchase	authorization.

Rabbi	Trusts.				The	Company	has	established	rabbi	trusts	(the	"Rabbi	Trusts")	to	provide	common	stock	voting	rights	to	certain	employees	who	hold	outstanding restricted	stock	units.	The	number	of	shares	of	common	stock	outstanding	in	the	Rabbi	Trusts	was	approximately	107	million	at	November	30,	2007	and	approximately 81	million	at	November	30,	2006.	The	assets	of	the	Rabbi	Trusts	are	consolidated	with	those	of	the	Company,	and	the	value	of	the	Company's	stock	held	in	the	Rabbi Trusts	is	classified	in	Shareholders'	equity	and	generally	accounted	for	in	a	manner	similar	to	treasury	stock.

Preferred	Stock.				In	July	2006,	the	Company	issued	44,000,000	Depositary	Shares,	in	an	aggregate	of	$1,100	million.	Each	Depositary	Share	represents	1/1,000th	of	a Share	of	Floating	Rate	Non-Cumulative	Preferred	Stock,	Series	A,	$0.01	par	value	("Series	A	Preferred	Stock").	The	Series	A	Preferred	Stock	is	redeemable	at	the Company's	option,	in	whole	or	in	part,	on	or	after	July	15,	2011	at	a	redemption	price	of	$25,000	per	share	(equivalent	to	$25	per	Depositary	Share).	The	Series	A Preferred	Stock	also	has	a	preference	over	the	Company's	common	stock	upon	liquidation.	Subsequent	to	fiscal	year-end,	the	Company	declared	a	quarterly	dividend	of $379.66	per	share	of	Series	A	Preferred	Stock	that	was	paid	on	January	15,	2008	to	preferred	shareholders	of	record	on	December	31,	2007.

Regulatory	Requirements.				On	April	1,	2007,	the	Company	merged	MSDWI	into	MS&Co.	Upon	completion	of	the	merger,	the	surviving	entity,	MS&Co.,	became	the Company's	principal	U.S.	broker-dealer.	MS&Co.	is	a	registered	broker-dealer	and	registered	futures	commission	merchant	and,	accordingly,	is	subject	to	the	minimum net	capital	requirements	of	the	Securities	and	Exchange	Commission	(the	"SEC"),	the	Financial	Industry	Regulatory	Authority	and	the	Commodity	Futures	Trading Commission.	MS&Co.	has	consistently	operated	in	excess	of	these	requirements.	MS&Co.'s	net	capital	totaled	$6,673	million	at	November	30,	2007,	which	exceeded the	amount	required	by	$4,950	million.	MSIP,	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.	MSIP	and	MSJS	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	4%	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	November	30,	2007,	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.

Morgan	Stanley	Derivative	Products	Inc.	("MSDP")	and	Cournot	Financial	Products	LLC	("Cournot"),	which	are	triple-A	rated	derivative	products	subsidiaries, maintain	certain	operating	restrictions	that	have	been	reviewed	by	various	rating	agencies.	Both	entities	are	operated	such	that	creditors	of	the	Company	should	not expect	to	have	any	claims	on	either	the	assets	of	Cournot	or	the	assets	of	MSDP,	unless	and	until	the	obligations	of	such	entity	to	its	own	creditors	are	satisfied	in	full. Creditors	of	Cournot	or	MSDP,	respectively,	should	not	expect	to	have	any	claims	on	the	assets	of	the	Company	or	any	of	its	affiliates,	other	than	the	respective	assets of	Cournot	or	MSDP.

The	Company	is	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	November	2007,	the	Company	was	in	compliance	with	the	CSE	capital	requirements.

The	regulatory	capital	requirements	referred	to	above,	and	certain	covenants	contained	in	various	agreements	governing	indebtedness	of	the	Company,	may	restrict	the Company's	ability	to	withdraw	capital	from	its	subsidiaries.	At	November	30,	2007,	approximately	$14.2	billion	of	net	assets	of	consolidated	subsidiaries	may	be restricted	as	to	the	payment	of	cash	dividends	and	advances	to	the	Company.

Accumulated	Other	Comprehensive	Income	(Loss).				As	of	November	30,	2007,	the	components	of	the	Company's	Accumulated	other	comprehensive	loss	are	as follows:

|  | At<br>November	30,<br>2007 | At<br>November	30,<br>2006 |
| :--- | :--- | :--- |
|  | (dollars\tin\tmillions) |  |
| Foreign\tcurrency\ttranslation\tadjustments,\tnet\tof\ttax | $114 | $49 |
| Net\tchange\tin\tcash\tflow\thedges,\tnet\tof\ttax | (58) | (77) |
| Minimum\tpension\tliability\tadjustment,\tnet\tof\ttax | (47) | (7) |
| SFAS\tNo.\t158\tpension\tadjustment,\tnet\tof\ttax | (208) | — |
| Accumulated\tother\tcomprehensive\tloss,\tnet\tof\ttax | $(199) | $(35) |

Cumulative	Foreign	Currency	Translation	Adjustments.				Cumulative	foreign	currency	translation	adjustments	include	gains	or	losses	resulting	from	translating	foreign currency	financial	statements	from	their	respective

functional	currencies	to	U.S.	dollars,	net	of	hedge	gains	or	losses	and	related	tax	effects.	The	Company	uses	foreign	currency	contracts	and	designates	certain	non-U.S. dollar	currency	debt	as	hedges	to	manage	the	currency	exposure	relating	to	its	net	monetary	investments	in	non-U.S.	dollar	functional	currency	subsidiaries.	Increases	or decreases	in	the	value	of	the	Company's	net	foreign	investments	generally	are	tax	deferred	for	U.S.	purposes,	but	the	related	hedge	gains	and	losses	are	taxable	currently. The	Company	attempts	to	protect	its	net	book	value	from	the	effects	of	fluctuations	in	currency	exchange	rates	on	its	net	monetary	investments	in	non-U.S.	dollar subsidiaries	by	selling	the	appropriate	non-U.S.	dollar	currency	in	the	forward	market.	However,	under	some	circumstances,	the	Company	may	elect	not	to	hedge	its	net monetary	investments	in	certain	foreign	operations	due	to	market	conditions,	including	the	availability	of	various	currency	contracts	at	acceptable	costs.	Information relating	to	the	hedging	of	the	Company's	net	monetary	investments	in	non-U.S.	dollar	functional	currency	subsidiaries	and	their	effects	on	cumulative	foreign	currency translation	adjustments	is	summarized	below:

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):

|  | Fiscal	2007 | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
| Basic\tEPS: |  |  |  |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\taccounting\tchange,\tnet | $2,563 | $6,335 | $4,532 |
| Gain\ton\tdiscontinued\toperations,\tnet | 646 | 1,137 | 358 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 49 |
| Preferred\tstock\tdividend\trequirements | (68) | (19) | — |
| Net\tincome\tapplicable\tto\tcommon\tshareholders | $3,141 | $7,453 | $4,939 |
| Weighted\taverage\tcommon\tshares\toutstanding | 1,002 | 1,010 | 1,050 |
| Earnings\tper\tbasic\tcommon\tshare: |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.49 | $6.25 | $4.32 |
| Gain\ton\tdiscontinued\toperations | 0.64 | 1.13 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tbasic\tcommon\tshare | $3.13 | $7.38 | $4.70 |

|  | Fiscal	2007 | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
| Diluted\tEPS: |  |  |  |
| Net\tincome\tapplicable\tto\tcommon\tshareholders | $3,141 | $7,453 | $4,939 |
| Weighted\taverage\tcommon\tshares\toutstanding | 1,002 | 1,010 | 1,050 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Stock\toptions\tand\trestricted\tstock\tunits | 52 | 45 | 30 |
| Weighted\taverage\tcommon\tshares\toutstanding\tand\tcommon\tstock\tequivalents | 1,054 | 1,055 | 1,080 |
| Earnings\tper\tdiluted\tcommon\tshare: |  |  |  |
| Income\tfrom\tcontinuing\toperations | $2.37 | $5.99 | $4.19 |
| Gain\ton\tdiscontinued\toperations | 0.61 | 1.08 | 0.33 |
| Cumulative\teffect\tof\taccounting\tchange,\tnet | — | — | 0.05 |
| Earnings\tper\tdiluted\tcommon\tshare | $2.98 | $7.07 | $4.57 |

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

# 18.				Employee	Stock-Based	Compensation	Plans.

As	of	December	1,	2004,	the	Company	early	adopted	SFAS	No.	123R	using	the	modified	prospective	method.	SFAS	No.	123R	requires	measurement	of	compensation cost	for	equity-based	awards	at	fair	value	and	recognition	of	compensation	cost	over	the	service	period,	net	of	estimated	forfeitures.

The	components	of	the	Company's	stock-based	compensation	expense	(net	of	cancellations	and	a	cumulative	effect	of	a	change	in	accounting	principle	in	fiscal	2005 associated	with	the	adoption	of	SFAS	No.	123R)	are	presented	below:

|  | Fiscal	2007(1) | Fiscal	2006(1) | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions) |  |
| Deferred\tstock | $1,592 | $1,763 | $589 |
| Stock\toptions | 241 | 152 | 143 |
| Employee\tStock\tPurchase\tPlan | 9 | 8 | 8 |
| Total | $1,842 | $1,923 | $740 |

(1) Amounts	for	fiscal	2007	and	fiscal	2006	include	$345	million	and	$457	million,	respectively,	of	accrued	stock-based	compensation	expense	primarily	related	to	fiscal	2007	and	fiscal	2006	year-end	equity	awards granted	in	December	2007	and	December	2006,	respectively,	to	employees	who	are	retirement-eligible	under	the	plan	terms.

The	table	above	excludes	stock-based	compensation	expense	included	in	discontinued	operations,	which	was	approximately	$17	million,	$32	million	and	$16	million, for	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.

The	tax	benefit	for	stock-based	compensation	expense	related	to	deferred	stock	and	stock	options	was	$722	million,	$737	million	and	$255	million	for	fiscal	2007,	fiscal 2006	and	fiscal	2005,	respectively.	The	tax	benefit	for	stock-based	compensation	expense	included	in	discontinued	operations	in	fiscal	2007,	fiscal	2006	and	fiscal	2005 was	approximately	$6	million,	$11	million	and	$5	million,	respectively.

At	November	30,	2007,	the	Company	had	approximately	$1,376	million	of	compensation	cost	related	to	unvested	stock-based	awards	not	yet	recognized	(excluding fiscal	2007	year-end	awards	granted	in	December	2007	to	nonretirement-eligible	employees,	which	will	begin	to	be	amortized	in	fiscal	2008).	The	unrecognized compensation	cost	relating	to	unvested	stock-based	awards	expected	to	vest	will	primarily	be	recognized	over	the	next	two	years.

In	connection	with	awards	under	its	equity-based	compensation	and	benefit	plans,	the	Company	is	authorized	to	issue	shares	of	its	common	stock	held	in	treasury	or newly	issued	shares.	At	November	30,	2007,	approximately	166	million	shares	were	available	for	future	grant	under	these	plans.

The	Company	generally	uses	treasury	shares	to	deliver	shares	to	employees	and	has	an	ongoing	repurchase	authorization	that	includes	repurchases	in	connection	with awards	granted	under	its	equity-based	compensation	plans.

As	a	result	of	the	Discover	Spin-off	effective	June	30,	2007,	all	outstanding	options	to	purchase	the	Company's	common	stock	held	by	employees	of	Discover	were canceled	and	replaced	with	options	to	purchase	Discover	common	stock.	Outstanding	options	to	purchase	Morgan	Stanley	common	stock	held	by	directors	and employees	who	remained	with	the	Company	after	the	Discover	Spin-off	were	adjusted	to	preserve	the	intrinsic	value	of	the	award	immediately	prior	to	the	spin-off	using an	adjustment	ratio	based	on	the	Morgan	Stanley	closing	market	stock	price	immediately	prior	to	the	spin-off	date	and	the	beginning	market	stock	price	at	the	date	of	the spin-off.	Additional	compensation	cost	recognized	as	a	result	of	this	modification	was	not	material.

Similarly,	restricted	stock	units	awarded	pursuant	to	equity	incentive	plans	and	held	by	employees	of	Discover	were	canceled	and	replaced	with	restricted	units	of Discover	stock.	Outstanding	deferred	shares	held	by	Morgan	Stanley	directors	and	employees	who	remained	with	the	Company	after	the	Discover	Spin-off	were adjusted	by	multiplying	the	number	of	shares	by	an	adjustment	ratio	in	order	to	account	for	the	impact	of	the	spin-off	on	the	value	of	the	Company's	shares	at	the	time the	spin-off	was	completed.	No	additional	compensation	cost	was	recognized	as	a	result	of	this	modification.	Cash	paid	to	the	holders	of	deferred	shares	in	lieu	of fractional	shares	was	not	material.

Deferred	Stock	Awards.				The	Company	has	made	deferred	stock	awards	pursuant	to	several	equity-based	compensation	plans.	The	plans	provide	for	the	deferral	of	a portion	of	certain	key	employees'	discretionary	compensation	with	awards	made	in	the	form	of	restricted	common	stock	or	in	the	right	to	receive	unrestricted	shares	of common	stock	in	the	future	("restricted	stock	units").	Awards	under	these	plans	are	generally	subject	to	vesting	over	time	contingent	upon	continued	employment	and	to restrictions	on	sale,	transfer	or	assignment	until	the	end	of	a	specified	period,	generally	two	to	five	years	from	date	of	grant.	All	or	a	portion	of	an	award	may	be canceled	if	employment	is	terminated	before	the	end	of	the	relevant	restriction	period.	All	or	a	portion	of	a	vested	award	also	may	be	canceled	in	certain	limited situations,	including	termination	for	cause	during	the	relevant	restriction	period.	Recipients	of	deferred	stock	awards	generally	receive	dividend	equivalents	that	are	not subject	to	vesting	and	have	voting	rights.

The	following	table	sets	forth	activity	relating	to	the	Company's	vested	and	unvested	restricted	stock	units	(share	data	in	millions):

|  | Fiscal	2007(1) | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
| Restricted\tstock\tunits\tat\tbeginning\tof\tyear | 95 | 60 | 78 |
| Granted | 31 | 38 | 4 |
| Conversions\tto\tcommon\tstock | (12) | (12) | (18) |
| Canceled(2) | (6) | (5) | (4) |
| Restricted\tstock\tunits\tat\tend\tof\tyear(3) | 108 | 81 | 60 |

(1) For	fiscal	2007,	the	number	of	restricted	stock	units	was	adjusted	to	reflect	the	impact	of	the	Discover	Spin-off.

(2) Amount	includes	approximately	1	million	awards	held	by	Discover	employees	that	were	canceled	as	a	result	of	the	Discover	Spin-off.

(3) Approximately	104	million	awards	were	vested	or	expected	to	vest	at	the	end	of	fiscal	2007.

The	weighted	average	price	of	restricted	stock	units	at	the	beginning	and	end	of	fiscal	2007	was	$45.59	(as	adjusted	to	reflect	the	impact	of	the	Discover	Spin-off)	and $51.95,	respectively.	During	fiscal	2007,	the	weighted	average	price	for	granted,	converted	and	canceled	restricted	stock	units	was	$66.68,	$40.22	and	$52.24,

respectively	(adjusted	to	reflect	the	impact	of	the	Discover	Spin-off).	The	weighted	average	price	for	restricted	stock	units	granted	during	fiscal	2006	and	fiscal	2005	was $57.86	and	$53.10,	respectively	(unadjusted	for	the	Discover	Spin-off).

The	total	fair	value	of	restricted	stock	units	converted	to	common	stock	during	fiscal	2007,	fiscal	2006	and	fiscal	2005	was	$817	million,	$768	million	and	$986	million, respectively.

The	following	table	sets	forth	activity	relating	to	the	Company's	unvested	restricted	stock	units	(share	data	in	millions):

|  |  | Weighted |
| :--- | :--- | :--- |
|  | Number | Average |
|  | of | Grant\tDate |
|  | Shares(1) | Fair\tValue(1) |
| Unvested\trestricted\tstock\tunits\tat\tbeginning\tof\tperiod | 60 | $46.55 |
| Granted | 31 | 66.68 |
| Vested | (27) | 51.33 |
| Canceled(2) | (5) | 54.21 |
| Unvested\trestricted\tstock\tunits\tat\tend\tof\tperiod(3) | 59 | $54.29 |

(1) The	number	of	shares	and	weighted	average	grant	date	fair	value	have	been	adjusted	to	reflect	the	impact	of	the	Discover	Spin-off	based	on	the	adjustment	ratio	discussed	above.

(2) Amount	includes	approximately	1	million	awards	held	by	Discover	employees	that	were	canceled	due	to	the	Discover	Spin-off.

(3) Unvested	restricted	stock	units	represent	awards	where	recipients	have	yet	to	satisfy	either	the	explicit	vesting	terms	or	retirement-eligible	requirements.	Approximately	56	million	unvested	restricted	stock	units, with	a	weighted	average	grant	date	fair	value	of	$53.81,	were	expected	to	vest	at	the	end	of	fiscal	2007.

Stock	Option	Awards.				The	Company	has	granted	stock	option	awards	pursuant	to	several	equity-based	compensation	plans.	The	plans	provide	for	the	deferral	of	a portion	of	certain	key	employees'	discretionary	compensation	with	awards	made	in	the	form	of	stock	options	generally	having	an	exercise	price	not	less	than	the	fair value	of	the	Company's	common	stock	on	the	date	of	grant.	Such	stock	option	awards	generally	become	exercisable	over	a	three-year	period	and	expire	10	years	from the	date	of	grant,	subject	to	accelerated	expiration	upon	termination	of	employment.	Stock	option	awards	have	vesting,	restriction	and	cancellation	provisions	that	are generally	similar	to	those	in	deferred	stock	awards.

The	weighted	average	fair	values	of	the	Company's	options	granted	during	fiscal	2007,	fiscal	2006	and	fiscal	2005	were	$18.55	(as	adjusted	to	reflect	the	impact	of	the Discover	Spin-off),	$14.15	and	$12.77	(unadjusted	for	the	Discover	Spin-off),	respectively,	utilizing	the	following	weighted	average	assumptions:

|  | Fiscal	2007 | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
| Risk-free\tinterest\trate | 4.4% | 4.8% | 3.7% |
| Expected\toption\tlife\tin\tyears | 6.0 | 3.3 | 3.1 |
| Expected\tstock\tprice\tvolatility | 23.8% | 28.6% | 34.3% |
| Expected\tdividend\tyield | 1.4% | 1.7% | 2.0% |

The	Company's	expected	option	life	has	been	determined	based	upon	historical	experience.	Beginning	on	December	1,	2006,	the	expected	stock	price	volatility assumption	was	determined	using	the	implied	volatility	of	exchange-traded	options,	consistent	with	the	guidance	in	Staff	Accounting	Bulletin	("SAB")	No.	107,	"Share- Based	Payment"	("SAB	107").	Prior	to	December	1,	2006,	the	expected	stock	price	volatility	was	determined	based	upon	the	Company's	historical	stock	price	data	over a	time	period	similar	to	the	expected	option	life.	The	Company	believes	that	implied	volatility	is	more	reflective	of	market	conditions	and	a	better	indicator	of	expected volatility	than	historical	volatility	or	a	combined	method	of	determining	volatility.

The	following	table	sets	forth	activity	relating	to	the	Company's	stock	options	(share	data	in	millions):

|  | Fiscal	2007 | Fiscal	2007 | Fiscal	2006 | Fiscal	2006 | Fiscal	2005 | Fiscal	2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Weighted |  | Weighted |  | Weighted |
|  | Number | Average | Number | Average | Number | Average |
|  | of | Exercise | of | Exercise | of | Exercise |
|  | Options(1) | Price(1) | Options | Price | Options | Price |
| Options\toutstanding\tat\tbeginning\tof\tperiod | 128.6 | $44.15 | 125.8 | $51.01 | 152.2 | $47.09 |
| Granted | 18.9 | 66.90 | 2.1 | 64.05 | 0.9 | 54.73 |
| Exercised | (24.7) | 39.86 | (14.5) | 44.60 | (19.5) | 18.13 |
| Canceled(2) | (4.7) | 55.19 | (4.0) | 57.41 | (7.8) | 57.01 |
| Options\toutstanding\tat\tend\tof\tperiod(3) | 118.1 | $48.22 | 109.4 | $51.88 | 125.8 | $51.01 |
| Options\texercisable\tat\tend\tof\tperiod | 96.7 | $45.22 | 92.6 | $51.65 | 95.4 | $50.10 |

(1) For	fiscal	2007,	the	number	and	weighted	average	exercise	price	have	been	adjusted	to	reflect	the	impact	of	the	Discover	Spin-off	based	on	the	adjustment	ratio	discussed	above.

(2) Includes	approximately	2	million	awards	held	by	DFS	employees	that	were	canceled	due	to	the	Discover	Spin-off.

(3) 116.8	million	awards,	with	a	weighted	average	exercise	price	of	$48.01,	were	vested	or	expected	to	vest	at	the	end	of	fiscal	2007.

The	total	intrinsic	value	of	stock	options	exercised	during	fiscal	2007,	fiscal	2006	and	fiscal	2005	was	$707	million,	$326	million	and	$722	million,	respectively.

As	of	November	30,	2007,	the	intrinsic	value	of	in-the-money	exercisable	stock	options	was	$826	million.

The	following	table	presents	information	relating	to	the	Company's	stock	options	outstanding	at	November	30,	2007	(number	of	options	outstanding	data	in	millions):

|  | Options	Outstanding | Options	Outstanding | Options	Outstanding | Options	Exercisable | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Average |  |  | Average |
|  | Number | Weighted\tAverage | Remaining | Number | Weighted\tAverage | Remaining |
| Range\tof\tExercise\tPrices | Outstanding | Exercise\tPrice(1) | Life\t(Years) | Exercisable | Exercise\tPrice(1) | Life\t(Years) |
| $22.00\t–\t$29.99 | 5.3 | $22.91 | 0.1 | 5.3 | $22.91 | 0.1 |
| $30.00\t–\t$39.99 | 23.6 | 34.20 | 3.5 | 23.6 | 34.20 | 3.5 |
| $40.00\t–\t$49.99 | 44.3 | 47.14 | 5.1 | 39.3 | 47.32 | 5.0 |
| $50.00\t–\t$59.99 | 24.9 | 53.66 | 2.7 | 24.8 | 53.66 | 2.7 |
| $60.00\t–\t$69.99 | 18.9 | 66.56 | 8.1 | 2.7 | 65.57 | 2.5 |
| $70.00\t–\t$79.99 | 0.7 | 72.89 | 3.2 | 0.6 | 73.12 | 1.9 |
| $80.00\t–\t$91.99 | 0.4 | 87.45 | 1.6 | 0.4 | 87.45 | 1.6 |
| Total | 118.1 |  |  | 96.7 |  |  |

(1) The	weighted	average	exercise	price	has	been	adjusted	to	reflect	the	impact	of	the	Discover	Spin-off	based	on	the	adjustment	ratio	discussed	above.

In	November	2007,	in	connection	with	its	initial	public	offering,	MSCI	Inc.,	a	majority-owned	subsidiary	of	Morgan	Stanley,	made	a	founders'	grant	in	the	form of	restricted	stock	units	(representing	shares	of	MSCI	Inc.	common	stock)	and	options	to	purchase	MSCI	Inc.	common	stock	(such	awards	are	not	reflected	in	the	above disclosures).	The	aggregate	value	of	the	founders'	grant	was	$68	million	of	restricted	stock	units	and	options,	subject	to	two-	to	four-year	vesting	periods.

# 19.				Employee	Benefit	Plans.

The	Company	sponsors	various	pension	plans	for	the	majority	of	its	U.S.	and	non-U.S.	employees.	The	Company	provides	certain	other	postretirement	benefits, primarily	health	care	and	life	insurance,	to	eligible	U.S.	employees.	The	Company	also	provides	certain	postemployment	benefits	other	than	pension	and	postretirement benefits	to	certain	former	employees	or	inactive	employees	prior	to	retirement.

The	Company's	defined	benefit	pension,	postretirement	and	postemployment	plans	are	accounted	for	in	accordance	with	SFAS	Nos.	87,	88,	106	and	112.	The	Company adopted	the	provision	of	SFAS	No.	158	to	recognize	the	overfunded	or	underfunded	status	of	the	Company's	defined	benefit	and	postretirement	plans	as	an	asset	or liability	in	the	consolidated	statement	of	financial	condition	at	November	30,	2007.	Accordingly,	the	Company	recorded	a	charge	of	$347	million	($208	million	after- tax)	to	Accumulated	other	comprehensive	income	(loss),	a	component	of	Shareholders'	equity	(see	Note	2).

Prior	to	its	adoption	of	SFAS	No.	158,	but	after	taking	into	account	the	effects	of	the	Discover	Spin-off,	the	Company	recognized	a	final	net	minimum	pension	liability of	$68	million	($47	million	after-tax)	at	November	30,	2007	and	$13	million	($7	million	after-tax	with	recognition	of	a	$1	million	intangible	asset)	at	November	30, 2006	for	defined	benefit	pension	plans	whose	accumulated	benefit	obligations	exceeded	plan	assets.

The	following	table	illustrates	the	incremental	effect	of	the	application	of	SFAS	No.	158:

|  | Before |  | After |
| :--- | :--- | :--- | :--- |
|  | Application\tof | SFAS\tNo.\t158 | Application\tof |
|  | SFAS\tNo.\t158 | Adjustments | SFAS\tNo.\t158 |
|  |  | (dollars\tin\tmillions) |  |
| Other\tassets | $9,153 | $(302) | $8,851 |
| Other\tliabilities\tand\taccrued\texpenses | 24,561 | 45 | 24,606 |
| Net\tdeferred\ttax\tassets | 5,454 | 139 | 5,593 |
| Accumulated\tother\tcomprehensive\tincome\t(loss) | 9 | (208) | (199) |
| Total\tshareholders'\tequity | 31,477 | (208) | 31,269 |

The	Accumulated	other	comprehensive	loss	of	$415	million	pre-tax	was	composed	of	$(74)	million	in	prior-year	service	credits	and	$489	million	in	net	actuarial	losses. The	estimated	net	loss	for	the	defined	benefit	pension	plans	that	will	be	amortized	from	Accumulated	other	comprehensive	loss	into	net	periodic	benefit	cost	over	fiscal 2008	is	approximately	$32	million.	The	estimated	prior-service	credit	that	will	be	amortized	from	Accumulated	other	comprehensive	loss	into	net	periodic	benefit	cost over	fiscal	2008	is	approximately	$(8)	million	for	defined	benefit	pension	plans	and	$(2)	million	for	postretirement	plans.

Pension	and	Other	Postretirement	Plans.				Substantially	all	of	the	U.S.	employees	of	the	Company	hired	before	July	1,	2007	and	its	U.S.	affiliates	are	covered	by	a non-contributory,	defined	benefit	pension	plan	that	is	qualified	under	Section	401(a)	of	the	Internal	Revenue	Code	(the	"Qualified	Plan").	Unfunded	supplementary plans	(the	"Supplemental	Plans")	cover	certain	executives.	In	addition,	certain	of	the	Company's	non-U.S.	subsidiaries	also	have	pension	plans	covering	substantially	all of	their	employees.	These	pension	plans	generally	provide	pension	benefits	that	are	based	on	each	employee's	years	of	credited	service	and	on	compensation	levels specified	in	the	plans.	The	Company's	policy	is	to	fund	at	least	the	amounts	sufficient	to	meet	minimum	funding	requirements	under	applicable	employee	benefit	and	tax regulations.	Liabilities	for	benefits	payable	under	its	Supplemental	Plans	are	accrued	by	the	Company	and	are	funded	when	paid	to	the	beneficiaries.	The	Company's U.S.	Qualified	Plan	was	closed	to	new	participants	effective	July	1,	2007.	In	lieu	of	a	defined	benefit	pension	plan,	eligible	employees	who	were	first	hired,	rehired	or transferred	to	a	U.S.	benefits	eligible	position	will	receive	a	retirement	contribution	into	their	401(k)	plan.	The	amount	of	the	retirement	contribution	is	included	in	the Company's	401(k)	cost	and	will	be	equal	to	between	2%	to	5%	of	eligible	pay	based	on	years	of	service	as	of	December	31.

The	Company	also	has	unfunded	postretirement	benefit	plans	that	provide	medical	and	life	insurance	for	eligible	U.S.	retirees	and	their	dependents.

The	Company	uses	a	measurement	date	of	September	30	to	calculate	obligations	under	its	pension	and	postretirement	plans.	The	Company	expects	to	early	adopt	a	fiscal year-end	measurement	date	for	the	fiscal	year	ending	November	30,	2008.

In	connection	with	the	Discover	Spin-off,	the	Company	transferred	assets	and	liabilities	relating	to	certain	current	and	former	DFS	employees	to	a	new	defined	benefit pension	plan	established	by	DFS.	The	Company	remeasured	the	assets	and	projected	benefit	obligation	of	the	separated	pension	plans	as	of	December	31,	2006.	The impact	of	the	remeasurement	results	on	continuing	operations	for	fiscal	2007	was	not	material.

The	following	tables	present	information	for	the	Company's	pension	and	postretirement	plans	on	an	aggregate	basis:

# Net	Periodic	Benefit	Expense.

The	following	table	presents	the	components	of	the	net	periodic	benefit	expense:

|  | Pension | Pension |  | Postretirement | Postretirement | Postretirement |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fiscal\t2007 | Fiscal\t2006 | Fiscal\t2005 | Fiscal\t2007 | Fiscal\t2006 | Fiscal\t2005 |
|  |  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |  |
| Service\tcost,\tbenefits\tearned\tduring\tthe\tyear | $109 | $111 | $101 | $7 | $8 | $7 |
| Interest\tcost\ton\tprojected\tbenefit\tobligation | 125 | 119 | 110 | 8 | 10 | 9 |
| Expected\treturn\ton\tplan\tassets | (124) | (116) | (107) | — | — | — |
| Net\tamortization—prior-service\tcost | (8) | (7) | (8) | (1) | (2) | (1) |
| Net\tamortization—actuarial\tloss | 41 | 51 | 41 | — | 2 | 2 |
| Special\ttermination\tbenefits | 2 | 2 | — | — | — | — |
| Net\tperiodic\tbenefit\texpense | $145 | $160 | $137 | $14 | $18 | $17 |

# Benefit	Obligations	and	Funded	Status.

The	following	table	provides	a	reconciliation	of	the	changes	in	the	benefit	obligation	and	fair	value	of	plan	assets	for	fiscal	2007	and	fiscal	2006	as	well	as	a	summary	of the	funded	status	at	November	30,	2007	and	November	30,	2006:

|  | Pension | Pension | Postretirement | Postretirement |
| :--- | :--- | :--- | :--- | :--- |
|  | Fiscal\t2007 | Fiscal\t2006 | Fiscal\t2007 | Fiscal\t2006 |
|  |  | (dollars\tin\tmillions) |  |  |
| Reconciliation\tof\tbenefit\tobligation: |  |  |  |  |
| Benefit\tobligation\tat\tbeginning\tof\tyear | $2,563 | $2,524 | $168 | $196 |
| Service\tcost(1) | 109 | 133 | 7 | 10 |
| Interest\tcost(2) | 125 | 139 | 8 | 11 |
| Plan\tamendments | (9) | 2 | (4) | — |
| Actuarial\t(gain)\tloss | (46) | (88) | 14 | (40) |
| Benefits\tpaid | (102) | (169) | (8) | (9) |
| Plan\tsettlements | (1) | (21) | — | — |
| Special\ttermination\tbenefits | 2 | 2 | — | — |
| Transfers/divestitures(3) | (400) | — | (23) | — |
| Other,\tincluding\tforeign\tcurrency\texchange\trate\tchanges | 22 | 41 | — | — |
| Benefit\tobligation\tat\tend\tof\tyear | $2,263 | $2,563 | $162 | $168 |
| Reconciliation\tof\tfair\tvalue\tof\tplan\tassets: |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $2,312 | $2,217 | $— | $— |
| Actual\treturn\ton\tplan\tassets | 161 | 144 | — | — |
| Employer\tcontributions | 131 | 114 | 8 | 9 |
| Benefits\tpaid | (102) | (169) | (8) | (9) |
| Plan\tsettlements | (1) | (21) | — | — |
| Transfers/divestitures(3) | (405) | — | — | — |
| Other,\tincluding\tforeign\tcurrency\texchange\trate\tchanges | 17 | 27 | — | — |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $2,113 | $2,312 | $— | $— |
| Funded\tstatus: |  |  |  |  |
| Unfunded\tstatus | $(150) | $(251) | $(162) | $(168) |
| Amount\tcontributed\tto\tplan\tafter\tmeasurement\tdate | 24 | 4 | — | — |
| Unrecognized\tprior-service\tcost | — | (113) | — | (6) |
| Unrecognized\tloss | — | 708 | — | 9 |
| Net\tamount\trecognized | $(126) | $348 | $(162) | $(165) |
| Amounts\trecognized\tin\tthe\tconsolidated\tstatements\tof\tfinancial\tcondition\tconsist\tof: |  |  |  |  |
| Assets | $162 | $598 | $— | $— |
| Liabilities | (288) | (263) | (162) | (165) |
| Intangible\tasset | — | 1 | — | — |
| Accumulated\tother\tcomprehensive\tincome | — | 12 | — | — |
| Net\tamount\trecognized | $(126) | $348 | $(162) | $(165) |

(1) The	pension	amount	related	to	the	Discover	Spin-off	and	the	sale	of	Quilter	was	$22	million	during	fiscal	2006.	The	postretirement	amount	related	to	the	Discover	Spin-off	was	$2	million	during	fiscal	2006. These	amounts	are	included	in	discontinued	operations	(see	Note	22).

(2) The	pension	amount	related	to	the	Discover	Spin-off	and	the	sale	of	Quilter	was	$20	million	during	fiscal	2006.	The	postretirement	amount	related	to	DFS	was	$1	million	during	fiscal	2006.	These	amounts	are included	in	discontinued	operations	(see	Note	22).

(3) Transfers	and	divestitures	primarily	relate	to	the	impact	of	the	Discover	Spin-off	and	non-U.S.	subsidiary	plans.

The	accumulated	benefit	obligation	for	all	defined	benefit	pension	plans	was	$2,147	million	and	$2,385	million	at	November	30,	2007	and	November	30,	2006, respectively.

The	following	table	contains	information	for	pension	plans	with	projected	benefit	obligations	in	excess	of	the	fair	value	of	plan	assets	as	of	fiscal	year-end:

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
|  | (dollars\tin\tmillions) |  |
| Projected\tbenefit\tobligation | $511 | $338 |
| Fair\tvalue\tof\tplan\tassets | 216 | 36 |

The	following	table	contains	information	for	pension	plans	with	accumulated	benefit	obligations	in	excess	of	the	fair	value	of	plan	assets	as	of	fiscal	year-end:

The	following	table	presents	the	weighted	average	assumptions	used	to	determine	net	periodic	benefit	costs	for	fiscal	2007,	fiscal	2006	and	fiscal	2005:

|  | Pension | Pension | Pension | Postretirement | Postretirement | Postretirement |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fiscal\t2007 | Fiscal\t2006 | Fiscal\t2005 | Fiscal\t2007 | Fiscal\t2006 | Fiscal\t2005 |
| Discount\trate | 5.79% | 5.60% | 5.90% | 5.97% | 5.75% | 6.05% |
| Expected\tlong-term\trate\tof\treturn\ton\tplan\tassets | 6.65 | 6.65 | 6.95 | n/a | n/a | n/a |
| Rate\tof\tfuture\tcompensation\tincreases | 4.40 | 4.35 | 4.45 | n/a | n/a | n/a |

The	expected	long-term	rate	of	return	on	assets	represents	the	Company's	best	estimate	of	the	long-term	return	on	plan	assets	and	generally	was	estimated	by	computing a	weighted	average	return	of	the	underlying	long-term	expected	returns	on	the	different	asset	classes,	based	on	the	target	asset	allocations.	For	plans	where	there	is	no established	target	asset	allocation,	actual	asset	allocations	were	used.	The	expected	long-term	return	on	assets	is	a	long-term	assumption	that	generally	is	expected	to remain	the	same	from	one	year	to	the	next	unless	there	is	a	significant	change	in	the	target	asset	allocation,	the	fees	and	expenses	paid	by	the	plan	or	market	conditions.

The	following	table	presents	assumed	health	care	cost	trend	rates	used	to	determine	the	postretirement	benefit	obligations	at	fiscal	year-end:

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
| Health\tcare\tcost\ttrend\trate\tassumed\tfor\tnext\tyear: |  |  |
| Medical | 8.33-8.61% | 9.00-9.33% |
| Prescription | 11.11% | 12.33% |
| Rate\tto\twhich\tthe\tcost\ttrend\trate\tis\tassumed\tto\tdecline\t(ultimate\ttrend\trate) | 5.00% | 5.00% |
| Year\tthat\tthe\trate\treaches\tthe\tultimate\ttrend\trate | 2012 | 2012 |

Assumed	health	care	cost	trend	rates	can	have	a	significant	effect	on	the	amounts	reported	for	the	Company's	postretirement	benefit	plans.	A	one-percentage	point change	in	assumed	health	care	cost	trend	rates	would	have	the	following	effects:

| change	in	assumed	health	care	cost	trend	rates	would	have	the	following	effects: |  |  |  |
| :--- | :--- | :--- | :--- |
|  | One-\nPercentage\nPoint\nIncrease |  | One-Percentage\nPoint\t(Decrease) |
|  |  | (dollars\tin\tmillions) |  |
| Effect\ton\ttotal\tpostretirement\tservice\tand\tinterest\tcost | $3 |  | $(2) |
| Effect\ton\tpostretirement\tbenefit\tobligation | 26 |  | (21) |

The	Medicare	Prescription	Drug,	Improvement	and	Modernization	Act	of	2003	(the	"Act")	was	enacted	in	December	2003.	For	2008,	Morgan	Stanley	elected	not	to apply	for	the	Medicare	Retiree	Drug	Subsidy	or	take	any	other	action	related	to	the	Act	since	Medicare	prescription	drug	coverage	was	deemed	to	have	no	material	effect on	the	Company's	retiree	medical	program.	No	impact	of	the	Act	has	been	reflected	in	the	Company's	results.

# U.S.	Qualified	Plan	Assets.

The	U.S.	Qualified	Plan	assets	represent	90%	of	the	Company's	total	pension	plan	assets.	The	weighted	average	asset	allocations	for	the	U.S.	Qualified	Plan	at November	30,	2007	and	November	30,	2006	and	the	targeted	asset	allocation	for	fiscal	2008	by	asset	class	were	as	follows:

|  | Fiscal	2008<br>Targeted | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- | :--- |
| Equity\tsecurities | 30% | 31% | 44% |
| Fixed\tincome\tsecurities | 70 | 68 | 51 |
| Other—primarily\tcash | — | 1 | 5 |
| Total | 100% | 100% | 100% |

U.S.	Qualified	Pension	Plan	Asset	Allocation.				The	Company,	in	consultation	with	its	independent	investment	consultants	and	actuaries,	determined	the	asset	allocation targets	for	its	U.S.	Qualified	Plan	based	on	its	assessment	of	business	and	financial	conditions,	demographic	and	actuarial	data,	funding	characteristics	and	related	risk factors.	Other	relevant	factors,	including	industry	practices	and	long-term	historical	and	prospective	capital	market	returns,	were	considered	as	well.	The	expected	long- term	rate	of	return	on	U.S.	Qualified	Plan	assets	is	6.75%	for	fiscal	2007.

The	U.S.	Qualified	Plan	return	objectives	provide	long-term	measures	for	monitoring	the	investment	performance	against	growth	in	the	pension	obligations.	The	overall allocation	is	expected	to	help	protect	the	plan's	funded	status	while	generating	sufficiently	stable	real	returns	(net	of	inflation)	to	help	cover	current	and	future	benefit payments.	Total	U.S.	Qualified	Plan	portfolio	performance	is	assessed	by	comparing	actual	returns	with	relevant	benchmarks,	such	as	the	S&P	500	Index,	the	Russell 2000	Index,	the	MSCI	EAFE	Index	and,	in	the	case	of	the	fixed	income	portfolio,	the	U.S.	Qualified	Plan's	liability	profile.

Both	the	equity	and	fixed	income	portions	of	the	asset	allocation	use	a	combination	of	active	and	passive	investment	strategies	and	different	investment	styles.	The	fixed income	asset	allocation	consists	of	longer	duration	fixed	income	securities	in	order	to	help	reduce	plan	exposure	to	interest	rate	variation	and	to	better	correlate	assets with	obligations.	The	longer	duration	fixed	income	allocation	is	expected	to	help	maintain	the	stability	of	plan	contributions	over	the	long	run.

The	asset	mix	of	the	Company's	U.S.	Qualified	Plan	is	reviewed	by	the	Morgan	Stanley	Retirement	Plan	Investment	Committee	on	a	regular	basis.	When	asset	class exposure	reaches	a	minimum	or	maximum	level,	an	asset	allocation	review	process	is	initiated,	and	the	portfolio	is	automatically	rebalanced	back	to	target	allocation levels	unless	the	Investment	Committee	determines	otherwise.

Under	the	current	Investment	Committee	policy,	no	more	than	10%	of	the	U.S.	Qualified	Plan	assets	can	be	allocated	to	non-traditional	"alternative"	asset	classes	and only	to	the	extent	that	those	alternatives	provide	attractive	diversification	benefits,	absolute	return	enhancement	and/or	other	potential	benefit	to	the	plan.	Allocations	to alternative	asset	classes	will	be	made	based	upon	an	evaluation	of	particular	attributes	and	relevant	considerations	of	each	asset	class.

Derivative	instruments	are	permitted	in	the	U.S.	Qualified	Plan's	portfolio	only	to	the	extent	that	they	comply	with	all	of	the	plan's	policy	guidelines	and	are	consistent with	the	plan's	risk	and	return	objectives.	In	addition,	any	investment	in	derivatives	must	meet	the	following	conditions:

•	 Derivatives	may	be	used	only	if	the	vehicle	is	deemed	by	the	investment	manager	to	be	more	attractive	than	a	similar	direct	investment	in	the	underlying	cash market	or	if	the	vehicle	is	being	used	to	manage	risk	of	the	portfolio.

•	 Derivatives	may	not	be	used	in	a	speculative	manner	or	to	leverage	the	portfolio	under	any	circumstances.

•	 Derivatives	may	not	be	used	as	short-term	trading	vehicles.	The	investment	philosophy	of	the	U.S.	Qualified	Plan	is	that	investment	activity	is	undertaken	for long-term	investment	rather	than	short-term	trading.

•	 Derivatives	may	only	be	used	in	the	management	of	the	U.S.	Qualified	Plan's	portfolio	when	their	possible	effects	can	be	quantified,	shown	to	enhance	the risk-return	profile	of	the	portfolio,	and	reported	in	a	meaningful	and	understandable	manner.

As	a	fundamental	operating	principle,	any	restrictions	on	the	underlying	assets	apply	to	a	respective	derivative	product.	This	includes	percentage	allocations	and	credit quality.	Derivatives	will	be	used	solely	for	the	purpose	of	enhancing	investment	in	the	underlying	assets	and	not	to	circumvent	portfolio	restrictions.

# Cash	Flows.

The	Company	expects	to	contribute	approximately	$115	million	to	its	pension	and	postretirement	benefit	plans	(U.S.	and	non-U.S.)	in	fiscal	2008	based	upon	their current	funded	status	and	expected	asset	return	assumptions	for	fiscal	2008,	as	applicable.

Expected	benefit	payments	associated	with	the	Company's	pension	and	postretirement	benefit	plans	for	the	next	five	fiscal	years	and	in	aggregate	for	the	five	fiscal	years thereafter	are	as	follows:

Morgan	Stanley	401(k)	and	Profit	Sharing	Awards.				Eligible	U.S.	employees	receive	401(k)	matching	contributions	that	are	invested	in	the	Company's	common stock.	The	retirement	contribution	granted	in	lieu	of	a	defined	benefit	pension	plan	is	included	in	the	Company's	401(k)	expense.	The	Company	also	provides discretionary	profit	sharing	to	certain	Non-U.S.	employees.	The	pre-tax	expense	associated	with	the	401(k)	match	and	profit	sharing	for	fiscal	2007	was	$128	million and	$117	million	for	both	fiscal	2006	and	fiscal	2005.	The	impact	of	the	Discover	Spin-off	and	Quilter	disposal	on	pre-tax	401(k)	match	and	profit	sharing	expense	in fiscal	2007,	fiscal	2006	and	fiscal	2005	was	approximately	$8	million,	$15	million	and	$15	million,	respectively.	The	impact	was	reflected	in	discontinued	operations (see	Note	22).

# Defined	Contribution	Pension	Plans.

The	Company	maintains	separate	defined	contribution	pension	plans	that	cover	substantially	all	employees	of	certain	non-U.S.	subsidiaries.	Under	such	plans,	benefits are	determined	based	on	a	fixed	rate	of	base	salary	with	certain	vesting	requirements.	In	fiscal	2007,	fiscal	2006	and	fiscal	2005,	the	Company's	expense	related	to	these plans	was	$115	million,	$87	million	and	$71	million,	respectively.

Other	Postemployment	Benefits.				Postemployment	benefits	include,	but	are	not	limited	to,	salary	continuation,	severance	benefits,	disability-related	benefits,	and continuation	of	health	care	and	life	insurance	coverage	provided	to	former	employees	or	inactive	employees	after	employment	but	before	retirement.	The postemployment	benefit	obligations	were	not	material	as	of	November	30,	2007	and	November	30,	2006.

The	provision	for	(benefit	from)	income	taxes	from	continuing	operations	consisted	of:

|  | Fiscal	2007 | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions) |  |
| Current: |  |  |  |
| U.S.\tfederal | $302 | $1,084 | $1,252 |
| U.S.\tstate\tand\tlocal | 147 | 254 | 198 |
| Non-U.S. | 2,428 | 1,279 | 1,022 |
|  | 2,877 | 2,617 | 2,472 |
| Deferred: |  |  |  |
| U.S.\tfederal | (1,861) | 126 | (873) |
| U.S.\tstate\tand\tlocal | (69) | (20) | (68) |
| Non-U.S. | (116) | 5 | (58) |
|  | (2,046) | 111 | (999) |
| Provision\tfor\tincome\ttaxes\tfrom\tcontinuing\toperations | $831 | $2,728 | $1,473 |
| Provision\tfor\tincome\ttaxes\tfrom\tdiscontinued\toperations | $378 | $529 | $201 |

The	following	table	reconciles	the	provision	for	(benefit	from)	income	taxes	to	the	U.S.	federal	statutory	income	tax	rate:

|  | Fiscal	2007 | Fiscal	2006 | Fiscal	2005 |
| :--- | :--- | :--- | :--- |
| U.S.\tfederal\tstatutory\tincome\ttax\trate | 35.0% | 35.0% | 35.0% |
|  | 1.5 | 1.6 | 1.4 |
| Lower\ttax\trates\tapplicable\tto\tnon-U.S.\tearnings | (2.0) | (2.4) | (5.5) |
| Domestic\ttax\tcredits | (6.0) | (2.3) | (6.4) |
| Tax\texempt\tincome | (3.3) | (0.9) | (0.8) |
| Other | (0.7) | (0.9) | 0.8 |
| Effective\tincome\ttax\trate(1) | 24.5% | 30.1% | 24.5% |

(1) The	fiscal	2006	effective	tax	rate	includes	the	impact	of	a	$242	million	income	tax	benefit,	or	$0.23	per	diluted	share,	related	to	the	resolution	of	the	Internal	Revenue	Service	(the	"IRS")	examination	of	years 1994-1998.	The	fiscal	2005	effective	tax	rate	includes	the	impact	of	a	$309	million	income	tax	benefit	resulting	from	repatriation	of	foreign	earnings	under	the	provisions	of	the	American	Jobs	Creation	Act	of 2004.

As	of	November	30,	2007,	the	Company	had	approximately	$5.8	billion	of	earnings	attributable	to	foreign	subsidiaries	for	which	no	provisions	have	been	recorded	for income	tax	that	could	occur	upon	repatriation.	Except	to	the	extent	such	earnings	can	be	repatriated	tax	efficiently,	they	are	permanently	invested	abroad.	It	is	not practicable	to	determine	the	amount	of	income	taxes	payable	in	the	event	all	such	foreign	earnings	are	repatriated.

The	American	Jobs	Creation	Act,	adopted	on	October	22,	2004,	provided	for	a	special	one-time	tax	deduction,	or	dividend	received	deduction,	of	85%	of	qualifying foreign	earnings	that	are	repatriated	in	either	a	company's	last	tax	year	that	began	before	the	enactment	date	or	the	first	tax	year	that	begins	during	the	one-year	period beginning	on	the	enactment	date.	In	the	fourth	quarter	of	fiscal	2005,	the	Company	recorded	an	income	tax	benefit	of	$309	million,	or	$0.29	per	diluted	share,	resulting from	the	Company's	repatriation	of	approximately	$4.0	billion	of	qualifying	foreign	earnings	under	the	provisions	of	the	American	Jobs	Creation	Act.	The	$309	million tax	benefit	resulted	from	the	reversal	of	net	deferred	tax	liabilities	previously	provided	under	SFAS	No.	109,	"Accounting	for	Income	Taxes"	("SFAS	No.	109"),	net	of additional	taxes	associated	with	these	qualifying	earnings.

Deferred	income	taxes	reflect	the	net	tax	effects	of	temporary	differences	between	the	financial	reporting	and	tax	bases	of	assets	and	liabilities	and	are	measured	using the	enacted	tax	rates	and	laws	that	will	be	in	effect	when	such	differences	are	expected	to	reverse.	Significant	components	of	the	Company's	deferred	tax	assets	and liabilities	at	November	30,	2007	and	November	30,	2006	were	as	follows:

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
|  | (dollars\tin\tmillions) |  |
| Deferred\ttax\tassets: |  |  |
| Employee\tcompensation\tand\tbenefit\tplans | $4,789 | $2,965 |
| Loan\tloss\tallowance | — | 321 |
| Valuation\tand\tliability\tallowances | 498 | 553 |
| Deferred\texpenses | 38 | 26 |
| Tax\tcredit\tand\tloss\tcarryforward | 1,729 | — |
| Other | 851 | 806 |
| Total\tdeferred\ttax\tassets | 7,905 | 4,671 |
| Valuation\tallowance(1) | 19 | — |
| Deferred\ttax\tassets\tafter\tvaluation\tallowance | 7,886 | 4,671 |
| Deferred\ttax\tliabilities: |  |  |
| Valuation\tof\tinventory,\tinvestments\tand\treceivables | 787 | 20 |
| Prepaid\tcommissions | 52 | 91 |
| Fixed\tassets | 283 | 368 |
| Other | 1,171 | 1,076 |
| Total\tdeferred\ttax\tliabilities | 2,293 | 1,555 |
| Net\tdeferred\ttax\tassets | $5,593 | $3,116 |

(1) The	valuation	allowance	reduces	the	benefit	of	certain	state	net	operating	loss	carryforwards	to	the	amount	that	will	more	likely	than	not	be	realized.

During	fiscal	2007,	the	valuation	allowance	was	increased	by	$19	million	related	to	the	ability	to	utilize	state	net	operating	losses.

The	Company	had	federal	and	state	net	operating	loss	carryforwards	for	which	a	deferred	tax	asset	of	$724	million	and	zero	was	recorded	as	of	November	30,	2007	and November	30,	2006,	respectively.	These	carryforwards	are	subject	to	annual	limitations	and	will	expire	in	2027.

The	Company	had	tax	credit	carryforwards	for	which	a	related	deferred	tax	asset	of	$1,005	million	and	zero	was	recorded	as	of	November	30,	2007	and	November	30, 2006,	respectively.	These	carryforwards	are	subject	to	annual	limitations	on	utilization	and	will	expire	in	2017.

The	Company	believes	that	the	realization	of	the	recognized	net	deferred	tax	asset	of	$5,593	million	(after	valuation	allowance)	is	more	likely	than	not	based	on expectations	as	to	future	taxable	income	in	the	jurisdictions	in	which	it	operates.

The	Company	recorded	income	tax	benefits	to	Paid-in	capital	of	$280	million,	$72	million	and	$317	million	related	to	employee	stock	compensation	transactions	in fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.	Such	benefits	were	credited	to	Paid-in	capital.

Cash	paid	for	income	taxes	was	$3,404	million,	$3,115	million	and	$1,536	million	in	fiscal	2007,	fiscal	2006	and	fiscal	2005,	respectively.	The	Company	has	requested a	refund	of	$1,200	million	for	estimated	taxes	paid	during	fiscal	2007.

Income	Tax	Examinations.				The	Company	is	under	continuous	examination	by	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	covers	1999-2005.	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	consolidated	financial	condition	of	the	Company,	although	a resolution	could	have	a	material	impact	on	the	Company's	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.

# 21.				Segment	and	Geographic	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	and	Asset	Management.	For	further	discussion	of	the	Company's	business	segments,	see	Note	1.

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	business	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.

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

| Fiscal	2007 | Institutional<br>Securities | Management<br>Group | Asset<br>Management | Intersegment<br>Eliminations(1) | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Net\trevenues\texcluding\tnet\tinterest | $14,085 | $5,915 | $5,531 | $(286) | $25,245 |
| Net\tinterest | 2,064 | 710 | (38) | 45 | 2,781 |
| Net\trevenues | $16,149 | $6,625 | $5,493 | $(241) | $28,026 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated |  |  |  |  |  |
| investees\tand\tincome\ttaxes | $817 | $1,155 | $1,467 | $2 | $3,441 |
| Losses\tfrom\tunconsolidated\tinvestees | 47 | — | — | — | 47 |
| Income\ttax\t(benefit)\tprovision | (170) | 459 | 541 | 1 | 831 |
| Income\tfrom\tcontinuing\toperations(2) | $940 | $696 | $926 | $1 | $2,563 |

|  |  | Global	Wealth |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Fiscal\t2006(3) | Institutional\nSecurities(2) | Management\nGroup | Asset\nManagement | Intersegment\nEliminations(1) | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Net\trevenues\texcluding\tnet\tinterest | $19,758 | $5,027 | $3,432 | $(257) | $27,960 |
| Net\tinterest | 1,352 | 485 | 21 | 21 | 1,879 |
| Net\trevenues | $21,110 | $5,512 | $3,453 | $(236) | $29,839 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated |  |  |  |  |  |
| investees\tand\tincome\ttaxes | $7,721 | $508 | $851 | $23 | $9,103 |
| Losses\tfrom\tunconsolidated\tinvestees | 40 | — | — | — | 40 |
| Provision\tfor\tincome\ttaxes | 2,212 | 167 | 340 | 9 | 2,728 |
| Income\tfrom\tcontinuing\toperations(2) | $5,469 | $341 | $511 | $14 | $6,335 |

|  |  | Global	Wealth |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Fiscal\t2005(3) | Institutional\nSecurities | Management\nGroup | Asset\nManagement | Intersegment\nEliminations | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Net\trevenues\texcluding\tnet\tinterest | $13,416 | $4,729 | $3,183 | $(238) | $21,090 |
| Net\tinterest | 2,081 | 318 | 36 | — | 2,435 |
| Net\trevenues | $15,497 | $5,047 | $3,219 | $(238) | $23,525 |
| Income\tfrom\tcontinuing\toperations\tbefore\tlosses\tfrom\tunconsolidated |  |  |  |  |  |
| investees,\tincome\ttaxes\tand\tcumulative\teffect\tof\taccounting |  |  |  |  |  |
| change,\tnet | $4,609 | $591 | $1,030 | $86 | $6,316 |
| Losses\tfrom\tunconsolidated\tinvestees | 311 | — | — | — | 311 |
| Provision\tfor\tincome\ttaxes | 852 | 199 | 391 | 31 | 1,473 |
| Income\tfrom\tcontinuing\toperations\tbefore\tcumulative\teffect\tof\naccounting\tchange,\tnet(2)(4) | $3,446 | $392 | $639 | $55 | $4,532 |

|  |  | Wealth |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tInterest | Institutional\nSecurities | Management\nGroup | Asset\nManagement | Intersegment\nEliminations(1) | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| Fiscal\t2007 |  |  |  |  |  |
| Interest\tand\tdividends | $59,131 | $1,221 | $74 | $(343) | $60,083 |
| Interest\texpense | 57,067 | 511 | 112 | (388) | \t 57,302 |
| Net\tinterest | $2,064 | $710 | $(38) | $45 | $2,781 |
| Fiscal\t2006(3) |  |  |  |  |  |
| Interest\tand\tdividends | $42,106 | $1,004 | $48 | $(382) | $42,776 |
| Interest\texpense | 40,754 | 519 | 27 | (403) | \t 40,897 |
| Net\tinterest | $1,352 | $485 | $21 | $21 | $1,879 |
| Fiscal\t2005(3) |  |  |  |  |  |
| Interest\tand\tdividends | $25,439 | $650 | $87 | $(189) | $25,987 |
| Interest\texpense | 23,358 | 332 | 51 | (189) | \t 23,552 |
| Net\tinterest | $2,081 | $318 | $36 | $— | $2,435 |

|  |  | Global	Wealth |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Institutional | Management | Asset |  |  |
| Total\tAssets(5) | Securities | Group | Management | Discover | Total |
|  |  |  | (dollars\tin\tmillions) |  |  |
| At\tNovember\t30,\t2007 | $1,005,452 | $27,518 | $12,439 | $— | $1,045,409 |
| At\tNovember\t30,\t2006(3) | $1,063,985 | $21,232 | $6,908 | $29,067 | $1,121,192 |
| At\tNovember\t30,\t2005(3) | $848,555 | $19,290 | $4,046 | $26,944 | $898,835 |

(1) The	results	of	the	Institutional	Securities	business	segment	for	fiscal	2007	included	a	$25	million	advisory	fee	related	to	the	Discover	Spin-off	that	was	eliminated	in	consolidation.	The	results	of	the	Institutional Securities	business	segment	for	fiscal	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	22	for	a	discussion	of	discontinued	operations.

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

(4) See	Note	2	for	a	discussion	of	the	cumulative	effect	of	accounting	change,	net.

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

The	Company	operates	in	both	U.S.	and	non-U.S.	markets.	The	Company's	non-U.S.	business	activities	are	principally	conducted	through	European	and	Asian locations.	The	following	table	presents	selected	income	statement	information	and	the	total	assets	of	the	Company's	operations	by	geographic	area.	The	net	revenues	and total	assets	disclosed	in	the	following	table	reflect	the	regional	view	of	the	Company's	consolidated	net	revenues	and	total	assets,	on	a	managed	basis,	based	on	the following	methodology:

•Institutional	Securities:	investment	banking—client	location,	equity	capital	markets—client	location,	debt	capital	markets—revenue	recording	location,	sales	& trading—trading	desk	location.

•	 Global	Wealth	Management	Group:	global	representative	coverage	location.

•	 Asset	Management:	client	location,	except	for	merchant	banking	business,	which	is	based	on	asset	location.

| Net	Revenues | Americas | Africa | Asia | Total |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (dollars\tin\tmillions) | (dollars\tin\tmillions) |  |
| Fiscal\t2007 | $12,150 | $10,008 | $5,868 | $28,026 |
| Fiscal\t2006(1) | \t 18,803 | 7,762 | 3,274 | 29,839 |
| Fiscal\t2005(1) | \t 15,375 | 5,711 | 2,439 | 23,525 |

| Total	Assets | Americas | Africa | Asia | Eliminations | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (dollars\tin\tmillions) |  |  |
| At\tNovember\t30,\t2007 | $705,728 | $269,753 | $83,328 | $(13,400) | $1,045,409 |
| At\tNovember\t30,\t2006(1) | 708,129 | 347,379 | 83,315 | (17,631) | 1,121,192 |
| At\tNovember\t30,\t2005(1) | 613,361 | 240,467 | 66,527 | (21,520) | 898,835 |

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

Discover.				On	June	30,	2007,	the	Company	completed	the	Discover	Spin-off.	The	Company	distributed	all	of	the	outstanding	shares	of	DFS	common	stock,	par	value $0.01	per	share,	to	the	Company's	stockholders	of	record	as	of	June	18,	2007.	The	Company's	stockholders	received	one	share	of	DFS	common	stock	for	every	two shares	of	the	Company's	common	stock.	Stockholders	received	cash	in	lieu	of	fractional	shares	for	amounts	less	than	one	full	DFS	share.	The	Company	received	a	tax ruling	from	the	IRS	that,	based	on	customary	representations	and	qualifications,	the	distribution	was	tax-free	to	the	Company's	stockholders	for	U.S.	federal	income	tax purposes.

The	Discover	Spin-off	allows	the	Company	to	focus	its	efforts	on	more	closely	aligned	firm-wide	strategic	priorities	within	its	Institutional	Securities,	Global	Wealth Management	Group	and	Asset	Management	business	segments.

The	results	of	DFS	prior	to	the	Discover	Spin-off	are	included	within	discontinued	operations	for	all	periods	presented.

The	following	is	a	summary	of	the	assets	and	liabilities	associated	with	DFS	as	of	November	30,	2006	(dollars	in	millions):

| Assets |  |
| :--- | :--- |
| Cash\tand\tcash\tequivalents | $869 |
| Financial\tinstruments\towned—U.S.\tgovernment\tand\tagency\tsecurities | 65 |
| Financial\tinstruments\towned—Derivative\tcontracts | 33 |
| Consumer\tloans | 22,915 |
| Fees,\tinterest\tand\tother | 166 |
| Office\tfacilities\tand\tother\tequipment,\tat\tcost,\tnet | 661 |
| Goodwill\tand\tnet\tintangible\tassets | 735 |
| Other\tassets | 3,623 |
| Total | $29,067 |
| Liabilities\tand\tShareholders'\tEquity |  |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings | $3,100 |
| Deposits | 13,277 |
| Financial\tinstruments\tsold,\tnot\tyet\tpurchased—Derivative\tcontracts | 28 |
| Interest\tand\tdividends\tpayables | 129 |
| Other\tliabilities\tand\taccrued\texpenses | 6,508 |
| Long-term\tborrowings | 250 |
| Total | 23,292 |
| Net\tassets | $5,775 |

The	net	assets	that	were	distributed	to	shareholders	on	the	date	of	the	Discover	Spin-off	were	$5,558	million,	which	was	recorded	as	a	reduction	to	the	Company's retained	earnings.

Net	revenues	included	in	discontinued	operations	related	to	DFS	were	$2,392	million,	$4,290	million	and	$3,452	million	in	fiscal	2007,	fiscal	2006	and	fiscal	2005, respectively.

The	results	of	discontinued	operations	include	interest	expense	that	was	allocated	based	upon	borrowings	that	were	specifically	attributable	to	DFS'	operations	through intercompany	transactions	existing	prior	to	the	Discover	Spin-off.	For	fiscal	2007,	fiscal	2006	and	fiscal	2005,	the	amount	of	interest	expense	reclassified	to	discontinued operations	was	approximately	$159	million,	$247	million	and	$145	million,	respectively.

Quilter.				On	February	28,	2007,	the	Company	sold	Quilter,	its	standalone	U.K.	mass	affluent	business,	which	was	formerly	included	within	the	Global	Wealth Management	Group	business	segment.	The	results	of	Quilter	are	included	within	discontinued	operations	for	all	periods	presented.	The	results	for	discontinued operations	in	fiscal	2007	also	included	a	pre-tax	gain	of	$168	million	($109	million	after-tax)	on	disposition.

Aircraft	Leasing.				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	consolidated	financial	statements.	In	addition,	in	the	third	quarter	of	fiscal	2005,	the	Company	recognized	a	charge	of	approximately	$1.7	billion	($1.0 billion	after-tax)	to	reflect	the	writedown	of	the	aircraft

leasing	business	to	its	estimated	fair	value	of	approximately	$2.0	billion.	In	determining	the	charge	that	was	recorded	in	the	third	quarter	of	fiscal	2005,	the	Company estimated	the	value	to	be	realized	in	selling	the	aircraft	leasing	business	as	a	whole.	The	estimated	value	of	the	business	was	based	on	the	appraised	values	of	the	aircraft portfolio,	an	evaluation	of	then	current	market	conditions,	recent	transactions	involving	the	sales	of	similar	aircraft	leasing	businesses,	a	detailed	assessment	of	the portfolio	and	additional	valuation	analyses.

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.	Based	on	the	terms	of	the	agreement	and	in	accordance	with	SFAS	No.	144, "Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets"	("SFAS	No.	144"),	the	Company	revised	its	estimate	of	the	fair	value	(less	selling	costs)	of	the aircraft	leasing	business	and,	as	a	result,	in	the	fourth	quarter,	reduced	the	pre-tax	charge	recorded	in	the	third	quarter	of	fiscal	2005	by	approximately	$1.1	billion.	Full year	results	for	fiscal	2005	reflected	a	charge	of	$509	million	($316	million	after-tax).

The	sale	was	completed	on	March	24,	2006.	The	results	for	discontinued	operations	in	fiscal	2006	included	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.	Gross	revenues	from	the	aircraft	leasing	business	included	in discontinued	operations	was	$137	million	and	$417	million	in	fiscal	2006	and	fiscal	2005,	respectively.

# Summarized	financial	information	for	the	Company's	discontinued	operations	for	fiscal	2007,	fiscal	2006	and	fiscal	2005:

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

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Pre-tax\tgain\t(loss)\ton\tdiscontinued\toperations |  |  |  |
| DFS | $850 | $1,681 | $1,025 |
| Quilter | 174 | 27 | 20 |
| Aircraft\tleasing | — | (42) | (486) |
|  | $1,024 | $1,666 | $559 |

# 23.				Business	and	Other	Acquisitions	and	Dispositions	and	Sale	of	Minority	Interest.

# Subsequent	to	Fiscal	2007.

Morgan	Stanley	Wealth	Management	S.V.,	S.A.U.				On	January	28,	2008,	the	Company	announced	that	it	had	reached	an	agreement	to	sell	Morgan	Stanley	Wealth Management	S.V.,	S.A.U.	("MSWM"),	its	Spanish	onshore	mass	affluent	wealth	management	business.	The	transaction	is	expected	to	close	during	the	first	half	of	fiscal 2008	subject	to	customary	closing	conditions,	including	regulatory	approvals.	The	results	of	MSWM	have	been	included	within	the	Global	Wealth	Management	Group business	segment.

MSCI.				On	July	31,	2007,	the	Company	announced	that	it	would	sell	a	minority	interest	in	its	subsidiary,	MSCI	Inc.	("MSCI")	in	an	initial	public	offering	("IPO"). MSCI	is	a	provider	of	investment	decision	support	tools	to	investment	institutions	worldwide.	MSCI	is	included	within	the	Institutional	Securities	business	segment.	In November	2007,	MSCI	completed	its	IPO	of	16.1	million	shares	and	received	net	proceeds	of	approximately	$265	million,	net	of	underwriting	discounts,	commissions and	offering	expenses.	As	the	IPO	was	part	of	a

broader	corporate	reorganization,	contemplated	by	the	Company	at	the	IPO	date,	the	increase	in	the	carrying	amount	of	the	Company's	investment	in	MSCI	was recorded	in	Paid-in	capital	in	the	Company's	consolidated	statement	of	financial	condition	and	the	Company's	consolidated	statement	of	changes	in	shareholders'	equity at	November	30,	2007.	Subsequent	to	the	IPO,	the	Company	maintains	approximately	81%	ownership	of	MSCI	and	consolidates	MSCI	for	financial	reporting	purposes.

JM	Financial.				In	October	2007,	the	Company	dissolved	its	India	joint	ventures	with	JM	Financial.	The	Company	purchased	the	joint	venture's	institutional	equities sales,	trading	and	research	platform	by	acquiring	JM	Financial's	49%	interest	and	sold	the	Company's	49%	interest	in	the	joint	venture's	investment	banking,	fixed income	and	retail	operation	to	JM	Financial.

CityMortgage	Bank.				On	December	21,	2006,	the	Company	acquired	CityMortgage	Bank	("CityMortgage"),	a	Moscow-based	mortgage	bank	that	specializes	in originating,	servicing	and	securitizing	residential	mortgage	loans	in	the	Russian	Federation.	Since	the	acquisition	date,	the	results	of	CityMortgage	have	been	included within	the	Institutional	Securities	business	segment.

Olco	Petroleum	Group	Inc.				On	December	15,	2006,	the	Company	acquired	a	60%	equity	stake	in	Olco	Petroleum	Group	Inc.	("Olco"),	a	petroleum	products	marketer and	distributor	based	in	eastern	Canada.	Since	the	acquisition	date,	the	results	of	Olco	have	been	included	within	the	Institutional	Securities	business	segment.

Saxon	Capital,	Inc.				On	December	4,	2006,	the	Company	acquired	Saxon	Capital,	Inc.	("Saxon"),	a	servicer	and	originator	of	residential	mortgages.	Since	the acquisition	date,	the	results	of	Saxon	have	been	included	within	the	Institutional	Securities	business	segment.

FrontPoint	Partners.				On	December	4,	2006,	the	Company	acquired	FrontPoint	Partners	("FrontPoint"),	a	provider	of	absolute	return	investment	strategies.	Since	the acquisition	date,	the	results	of	FrontPoint	have	been	included	within	the	Asset	Management	business	segment.

Goldfish.				On	February	17,	2006,	the	Company	acquired	the	Goldfish	credit	card	business	in	the	U.K.	As	a	result	of	the	Discover	Spin-off,	the	results	of	Goldfish	have been	included	within	discontinued	operations	(see	Note	22).	The	acquisition	price	was	$1,676	million,	which	was	paid	in	cash	in	February	2006.	The	Company	recorded goodwill	and	other	intangible	assets	of	approximately	$370	million	in	connection	with	the	acquisition.

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\tin\tmillions) |
| Consumer\tloans | $1,316 |
| Goodwill | 247 |
| Amortizable\tintangible\tassets | 123 |
| Other\tassets | 20 |
| Total\tassets\tacquired | 1,706 |
| Total\tliabilities\tassumed | 30 |
| Net\tassets\tacquired | $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).

Lansdowne	Partners.				On	November	1,	2006,	the	Company	acquired	a	19%	stake	in	Lansdowne	Partners	("Lansdowne"),	a	London-based	investment	manager.	The investment	in	Lansdowne	is	accounted	for	under	the	equity	method	of	accounting	within	the	Asset	Management	business	segment.

Avenue	Capital	Group.				On	October	30,	2006,	the	Company	formed	a	strategic	alliance	with	Avenue	Capital	Group	("Avenue"),	a	New	York-based	investment manager	with	approximately	$12	billion	in	assets	under	management.	The	Company	acquired	a	minority	interest	in	Avenue.	The	investment	in	Avenue	is	accounted	for under	the	equity	method	of	accounting	within	the	Asset	Management	business	segment.

Morgan	Stanley	Bank	International	(China)	Limited.				On	September	29,	2006,	the	Company	acquired	Morgan	Stanley	Bank	International	(China)	Limited	("China Bank")	(formerly	Nan	Tung	Bank	Ltd.	Zhuhai),	a	bank	in	the	People's	Republic	of	China.	The	acquisition	enabled	the	Company	to	strengthen	its	platform	in	China. Since	the	acquisition	date,	the	results	of	China	Bank	have	been	included	within	the	Institutional	Securities	business	segment.

TransMontaigne	Inc.				On	September	1,	2006,	the	Company	acquired	TransMontaigne	Inc.	and	its	subsidiaries	("TransMontaigne"),	a	group	of	companies	operating	in the	refined	petroleum	products	marketing	and	distribution	business.	The	acquisition	enabled	the	Company	to	expand	its	supply	and	distribution	of	oil	and	refined	oil products	across	a	broader	range	of	clients	and	regions	across	the	U.S.,	as	well	as	increase	its	oil	storage	capacity	across	the	U.S.	Since	the	acquisition	date,	the	results	of TransMontaigne	and	its	subsidiaries	have	been	included	within	the	Institutional	Securities	business	segment.

Heidmar	Group.				On	September	1,	2006,	the	Company	acquired	the	Heidmar	Group	of	companies	that	provides	international	shipping	and	U.S.	marine	logistics services.	The	acquisition	enabled	the	Company	to	expand	its	physical	freight	business	across	multiple	vessel	classes	and	geographies	and	provided	an	opportunity	to expand	into	international	shipping	and	services.	Since	the	acquisition	date,	the	results	of	the	Heidmar	Group	of	companies	have	been	included	within	the	Institutional Securities	business	segment.

Office	Building.				On	June	19,	2006,	the	Company	purchased	a	majority	interest	in	a	joint	venture	that	indirectly	owned	title	to	522	Fifth	Avenue,	a	23-floor	office building	in	New	York	City	(the	"Building"),	for	approximately	$420	million.	On	July	10,	2007,	the	Company	purchased	the	balance	of	the	interest	in	the	joint	venture for	approximately	$37	million.

The	pro	forma	impact	of	each	of	the	above	business	acquisitions	individually	and	in	the	aggregate	was	not	material	to	the	consolidated	financial	statements.

In	September	2006,	the	SEC	released	SAB	108.	SAB	108	permits	the	Company	to	adjust	for	the	cumulative	effect	of	errors	relating	to	prior	years	in	the	carrying	amount of	assets	and	liabilities	as	of	the	beginning	of	the	2006	fiscal	year,	with	an	offsetting	adjustment	to	the	opening	balance	of	retained	earnings	in	the	year	of	adoption.	SAB 108	also	requires	the	adjustment	of	any	prior	quarterly	financial	statements	within	the	fiscal	year	of	adoption	for	the	effects	of	such	errors	on	the	quarters	when	the information	is	next	presented.	Such	adjustments	do	not	require	previously	filed	reports	with	the	SEC	to	be	amended.	Effective	August	31,	2006,	the	Company	elected early	application	of	SAB	108.	In	accordance	with	SAB	108,	the	Company	adjusted	its	opening	retained	earnings	for	fiscal	2006	and	its	financial	results	for	the	first	two quarters	of	fiscal	2006	for	the	items	described	below.	The	Company	considers	these	adjustments	to	be	immaterial	to	prior	annual	periods.

Trust	Preferred	Securities.				The	Company	adjusted	its	opening	retained	earnings	for	fiscal	2006	and	its	financial	results	for	the	first	two	quarters	of	fiscal	2006	to reflect	a	change	in	its	hedge	accounting	under	SFAS	No.	133.	The	change	is	being	made	following	a	clarification	by	the	SEC	of	its	interpretation	of	SFAS	No.	133 related	to	the	accounting	for	fair	value	hedges	of	fixed-rate	trust	preferred	securities.

Since	January	2005,	the	Company	entered	into	various	interest	rate	swaps	to	hedge	the	interest	rate	risk	inherent	in	its	trust	preferred	securities.	The	terms	of	the	interest rate	swaps	and	the	corresponding	trust	preferred	securities	mirrored	one	another,	and	the	Company	determined	in	the	past	that	the	changes	in	the	fair	value	of	the	swaps and	hedged	instruments	were	the	same.	The	Company	applied	the	commonly	used	"short-cut	method"	in	accounting	for	these	fair	value	hedges	and,	therefore,	did	not reflect	any	gains	or	losses	during	the	relevant	periods.	Based	upon	the	SEC's	clarification	of	SFAS	No.	133,	the	Company	determined	that	since	it	has	the	ability	at	its election	to	defer	interest	payments	on	its	trust	preferred	securities,	these	swaps	did	not	qualify	for	the	short-cut	method.	These	swaps	performed	as	expected	as	effective economic	hedges	of	interest	rate	risk.	The	Company	ended	hedging	of	the	interest	rate	risk	on	these	trust	preferred	securities	effective	August	2006	and	adjusted	its financial	results	as	if	hedge	accounting	was	never	applied.	The	Company	currently	manages	the	interest	rate	risk	on	these	securities	as	part	of	its	overall	asset	liability management.

Compensation	and	Benefits.				The	Company	also	adjusted	its	opening	retained	earnings	for	fiscal	2006	and	its	financial	results	for	the	first	two	quarters	of	fiscal	2006 for	two	compensation	and	benefits	accruals.	Such	accruals	are	related	to	(i)	the	overaccrual	of	certain	payroll	taxes	in	certain	non-U.S.	locations,	primarily	in	the	U.K., which	arose	in	fiscal	2000	through	fiscal	2006	and	(ii)	an	adjustment	to	the	amortization	expense	associated	with	stock-based	compensation	awards,	which	arose	in	fiscal 2003	and	fiscal	2004.

Impact	of	Adjustments.				The	impact	of	each	of	the	items	noted	above	on	fiscal	2006	opening	Shareholders'	equity	and	Retained	earnings	and	on	Net	income	for	the first	and	second	quarters	of	fiscal	2006	is	presented	below	(dollars	in	millions):

|  |  | Non- | of	Stock- |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Trust | U.S. | Based |  |
|  | Preferred | Payroll | Compensation |  |
|  | Securities | Taxes | Awards | Total |
| Cumulative\teffect\ton\tShareholders'\tequity\tas\tof\tDecember\t1,\t2005 | $(84) | $38 | $12 | $(34) |
| Cumulative\teffect\ton\tRetained\tearnings\tas\tof\tDecember\t1,\t2005 | $(84) | $38 | $(22) | $(68) |
| Effect\ton: |  |  |  |  |
| Net\tincome\tfor\tthe\tthree\tmonths\tended\tFebruary\t28,\t2006 | $(1) | $14 | $\t— | $13 |
| Net\tincome\tfor\tthe\tthree\tmonths\tended\tMay\t31,\t2006 | $(116) | $\t— | $— | $(116) |
| Net\tincome\tfor\tthe\tsix\tmonths\tended\tMay\t31,\t2006 | $(117) | $14 | $— | $(103) |

The	aggregate	impact	of	these	adjustments	is	summarized	below	(dollars	in	millions,	except	per	share	data):

|  | Previously |  | As |
| :--- | :--- | :--- | :--- |
| As\tof\tand\tfor\tthe\tThree\tMonths\tEnded\tFebruary\t28,\t2006 | Reported | Adjustment | Adjusted |
| Other\tassets | $15,988 | $12 | $16,000 |
| Other\tliabilities | $14,984 | $(98) | $14,886 |
| Long-term\tborrowings | $121,395 | $131 | $ 121,526 |
| Shareholders'\tequity | $30,124 | $(21) | $30,103 |
| Principal\ttransactions\ttrading\trevenue | $3,073 | $13 | $3,086 |
| Compensation\tand\tbenefits\texpense | $4,032 | $(22) | $4,010 |
| Interest\texpense | $9,216 | $15 | $9,231 |
| Net\tincome | $1,561 | $13 | $1,574 |
| Diluted\tEPS | $1.47 | $0.01 | $1.48 |

|  | Previously |  | As |
| :--- | :--- | :--- | :--- |
| As\tof\tand\tfor\tthe\tThree\tMonths\tEnded\tMay\t31,\t2006 | Reported | Adjustment | Adjusted |
| Other\tassets | $17,651 | $12 | $17,663 |
| Other\tliabilities | $18,159 | $(162) | $17,997 |
| Long-term\tborrowings | $127,985 | $311 | $ 128,296 |
| Shareholders'\tequity | $32,255 | $(137) | $32,118 |
| Principal\ttransactions\ttrading\trevenue | $3,729 | $(170) | $3,559 |
| Compensation\tand\tbenefits\texpense | $3,587 | $— | $3,587 |
| Interest\texpense | $9,735 | $9 | $9,744 |
| Net\tincome | $1,957 | $(116) | $1,841 |
| Diluted\tEPS | $1.86 | $(0.11) | $1.75 |

|  | Previously |  | As |
| :--- | :--- | :--- | :--- |
| For\tthe\tSix\tMonths\tEnded\tMay\t31,\t2006 | Reported | Adjustment | Adjusted |
| Principal\ttransactions\ttrading\trevenue | $6,802 | $(157) | $6,645 |
| Compensation\tand\tbenefits\texpense | $7,619 | $(22) | $7,597 |
| Interest\texpense | $18,951 | $24 | $18,975 |
| Net\tincome | $3,518 | $(103) | $3,415 |
| Diluted\tEPS | $3.33 | $(0.10) | $3.23 |

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

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	$105	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)	and	Asset	Management	($5	million)	business	segments.	The	impact	of	this	correction	was	not	material	to	the	pre-tax	income	of	each of	the	segments	or	to	the	Company.

# 27.				Quarterly	Results	(unaudited).

|  | 2007	Fiscal	Quarter | 2007	Fiscal	Quarter | 2007	Fiscal	Quarter | 2007	Fiscal	Quarter | 2006	Fiscal	Quarter | 2006	Fiscal	Quarter | 2006	Fiscal	Quarter | 2006	Fiscal	Quarter |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | First | Second | Third | Fourth(1) | First(2) | Second(2) | Third | Fourth |
|  |  |  |  | (dollars\tin\tmillions,\texcept\tper\tshare\tdata) | (dollars\tin\tmillions,\texcept\tper\tshare\tdata) | (dollars\tin\tmillions,\texcept\tper\tshare\tdata) |  |  |
| Total\trevenues | $23,192 | $26,195 | $21,230 | $14,711 | $16,644 | $17,257 | $18,613 | $18,222 |
| Interest\texpense | 13,198 | 15,671 | 13,272 | 15,161 | 9,231 | 9,744 | 11,549 | 10,373 |
| Net\trevenues | 9,994 | 10,524 | 7,958 | (450) | 7,413 | 7,513 | 7,064 | 7,849 |
| Total\tnon-interest\texpenses | 6,538 | 7,000 | 5,693 | 5,354 | 5,503 | 5,212 | 4,820 | 5,201 |
| Income\t(losses)\tfrom\tcontinuing\toperations\tbefore\t(losses)\tgains\tfrom\tunconsolidated\tinvestees |  |  |  |  |  |  |  |  |
| and\tincome\ttaxes | 3,456 | 3,524 | 2,265 | (5,804) | 1,910 | 2,301 | 2,244 | 2,648 |
| (Losses)\tgains\tfrom\tunconsolidated\tinvestees | (26) | (20) | (19) | 18 | (19) | 24 | 20 | (65) |
| Provision\tfor\t(benefit\tfrom)\tincome\ttaxes | 1,116 | 1,141 | 772 | (2,198) | 603 | 848 | 676 | 601 |
| Income\t(losses)\tfrom\tcontinuing\toperations | 2,314 | 2,363 | 1,474 | (3,588) | 1,288 | 1,477 | 1,588 | 1,982 |
| Discontinued\toperations(3): |  |  |  |  |  |  |  |  |
| Gain\tfrom\tdiscontinued\toperations | 564 | 349 | 111 | — | 453 | 583 | 399 | 231 |
| Provision\tfor\tincome\ttaxes | (206) | (130) | (42) | — | (167) | (219) | (136) | (7) |
| Gain\ton\tdiscontinued\toperations | 358 | 219 | 69 | — | 286 | 364 | 263 | 224 |
| Net\tincome | $2,672 | $2,582 | $1,543 | $(3,588) | $1,574 | $1,841 | $1,851 | $2,206 |
| Preferred\tstock\tdividend\trequirements | $17 | $17 | $17 | $17 | $— | $— | $— | $19 |
| Earnings\tapplicable\tto\tcommon\tshareholders | $2,655 | $2,565 | $1,526 | $(3,605) | $1,574 | $1,841 | $1,851 | $2,187 |
| Earnings\tper\tbasic\tcommon\tshare(4): |  |  |  |  |  |  |  |  |
| Income\t(losses)\tfrom\tcontinuing\toperations | $2.28 | $2.35 | $1.45 | $(3.61) | $1.26 | $1.46 | $1.57 | $1.97 |
| Gain\ton\tdiscontinued\toperations | 0.35 | 0.22 | 0.07 | — | 0.28 | 0.36 | 0.26 | 0.22 |
| Earnings\tper\tbasic\tcommon\tshare | $2.63 | $2.57 | $1.52 | $(3.61) | $1.54 | $1.82 | $1.83 | $2.19 |
| Earnings\tper\tdiluted\tcommon\tshare(4): |  |  |  |  |  |  |  |  |
| Income\t(losses)\tfrom\tcontinuing\toperations | $2.17 | $2.24 | $1.38 | $(3.61) | $1.21 | $1.40 | $1.50 | $1.87 |
| Gain\ton\tdiscontinued\toperations | 0.34 | 0.21 | 0.06 | — | 0.27 | 0.35 | 0.25 | 0.21 |
| Earnings\tper\tdiluted\tcommon\tshare | $2.51 | $2.45 | $1.44 | $(3.61) | $1.48 | $1.75 | $1.75 | $2.08 |
| Dividends\tto\tcommon\tshareholders | $0.27 | $0.27 | $0.27 | $0.27 | $0.27 | $0.27 | $0.27 | $0.27 |
| Book\tvalue | $34.71 | $36.52 | $32.14 | $28.56 | $28.12 | $29.97 | $31.24 | $32.67 |

(1) Results	for	the	Company	in	the	fourth	quarter	of	fiscal	2007	included	$9.4	billion	in	mortgage-related	writedowns.

(2) Results	for	the	Company	for	the	first	two	quarters	of	fiscal	2006	were	adjusted	(see	Note	24).

(4) Summation	of	the	quarters'	earnings	per	common	share	may	not	equal	the	annual	amounts	due	to	the	averaging	effect	of	the	number	of	shares	and	share	equivalents	throughout	the	year.

In	December	2007,	the	Company	sold	Equity	Units	which	include	contracts	to	purchase	Company	common	stock	(see	"Stock	Purchase	Contracts"	herein)	to	a	wholly owned	subsidiary	of	the	CIC	for	approximately	$5,579	million.	CIC's	ownership	in	the	Company's	common	stock,	including	the	maximum	number	of	shares	of common	stock	to	be	received	by	CIC	upon	settlement	of	the	stock	purchase	contracts,	will	be	9.9%	or	less	of	the	Company's	total	shares	outstanding	based	on	the	total shares	outstanding	on	November	30,	2007.	CIC	will	be	a

passive	financial	investor	and	will	have	no	special	rights	of	ownership	nor	a	role	in	the	management	of	the	Company.	A	substantial	portion	of	the	investment	proceeds will	be	treated	as	Tier	1	capital	for	regulatory	capital	purposes.

The	Company	has	directly	guaranteed	the	repayment	of	the	trust	preferred	securities	to	the	holders	thereof	to	the	extent	that	there	are	funds	available	in	the	Trusts.	If	the Company	does	not	make	payments	on	the	junior	subordinated	debentures	owned	by	a	Morgan	Stanley	Trust,	such	Morgan	Stanley	Trust	will	not	be	able	to	pay	any amounts	payable	in	respect	of	the	trust	preferred	securities	issued	by	it	and	will	not	have	funds	legally	available	for	that	purpose.	In	that	event,	holders	of	such	series	of trust	preferred	securities	would	not	be	able	to	rely	upon	the	guarantee	for	payment	of	those	amounts.	The	guarantee	will	remain	in	place	until	the	redemption	price	of	all of	the	trust	preferred	securities	is	paid,	the	amounts	payable	with	respect	to	the	trust	preferred

securities	upon	liquidation	of	the	Morgan	Stanley	Trusts	are	paid	or	the	junior	subordinated	debentures	are	distributed	to	the	holders	of	all	the	trust	preferred	securities. The	trust	preferred	securities	held	by	the	Equity	Unit	holders	are	pledged	to	the	Company	to	collateralize	the	obligations	of	the	Equity	Unit	holders	under	the	related stock	purchase	contracts.	The	Equity	Unit	holders	may	substitute	certain	zero-coupon	treasury	securities	in	place	of	the	trust	preferred	securities	as	collateral	under	the stock	purchase	contracts.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure.

None.

# Item	9A. Controls	and	Procedures.

# Conclusion	Regarding	the	Effectiveness	of	Disclosure	Controls	and	Procedures.

Under	the	supervision	and	with	the	participation	of	our	management,	including	our	Chief	Executive	Officer	and	our	Chief	Financial	Officer,	we	conducted	an	evaluation of	our	disclosure	controls	and	procedures,	as	such	term	is	defined	under	Exchange	Act	Rule	13a-15(e).	Based	on	this	evaluation,	our	Chief	Executive	Officer	and	our Chief	Financial	Officer	concluded	that	our	disclosure	controls	and	procedures	were	effective	as	of	the	end	of	the	period	covered	by	this	annual	report.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting.

Our	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Morgan	Stanley's	internal	control	over	financial reporting	is	designed	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.

Our	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that:

•	 Pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	Morgan	Stanley;

•	 Provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted accounting	principles,	and	that	our	receipts	and	expenditures	are	being	made	only	in	accordance	with	authorizations	of	Morgan	Stanley's	management	and directors;	and

•	 Provide	reasonable	assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use	or	disposition	of	our	assets	that	could	have	a	material effect	on	our	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of	effectiveness to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the	policies	or procedures	may	deteriorate.

Management	assessed	the	effectiveness	of	Morgan	Stanley's	internal	control	over	financial	reporting	as	of	November	30,	2007.	In	making	this	assessment,	management used	the	criteria	set	forth	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO)	in	Internal	Control-Integrated	Framework.	Based	on management's	assessment	and	those	criteria,	management	believes	that	Morgan	Stanley	maintained	effective	internal	control	over	financial	reporting	as	of November	30,	2007.

Morgan	Stanley's	independent	registered	public	accounting	firm	has	audited	and	issued	a	report	on	Morgan	Stanley's	internal	control	over	financial	reporting,	which appears	below.

We	have	audited	the	internal	control	over	financial	reporting	of	Morgan	Stanley	and	subsidiaries	(the	"Company")	as	of	November	30,	2007,	based	on	criteria established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	The	Company's management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion	on	the Company's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We	believe that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal	financial officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	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.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding	prevention	or timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of	controls, material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the	internal control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	November	30,	2007,	based	on	the	criteria established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	statement	of	financial condition	of	the	Company	as	of	November	30,	2007	and	the	related	consolidated	statement	of	income,	comprehensive	income,	cash	flows	and	changes	in	shareholders' equity	for	the	year	ended	November	30,	2007	and	our	report	dated	January	28,	2008	expressed	an	unqualified	opinion	on	those	financial	statements	and	includes	an explanatory	paragraph,	in	fiscal	2007,	concerning	the	adoption	of	Statement	of	Financial	Accounting	Standards	No.	157,	"Fair	Value	Measurement"	and	Statement	of Financial	Accounting	Standards	No.	159,	"The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities—Including	an	amendment	of	FASB	Statement	No.	115" and,	an	explanatory	paragraph,	in	fiscal

2007,	concerning	the	adoption	of	Statement	of	Financial	Accounting	Standards,	No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement Plans,	an	amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)."

/s/	Deloitte	&	Touche	LLP

New	York,	New	York

# Changes	in	Internal	Control	Over	Financial	Reporting.

No	change	in	Morgan	Stanley's	internal	control	over	financial	reporting	(as	such	term	is	defined	in	Exchange	Act	Rule	13a-15(f))	occurred	during	the	fiscal	quarter ended	November	30,	2007	that	materially	affected,	or	is	reasonably	likely	to	materially	affect,	Morgan	Stanley's	internal	control	over	financial	reporting.

# Item	9B.				OtherInformation.

Not	applicable.

# Part	III

# Item	10. Directors,	Executive	Officers	and	Corporate	Governance.

Information	relating	to	Morgan	Stanley's	directors	and	nominees	under	the	following	captions	in	Morgan	Stanley's	Proxy	Statement	is	incorporated	by	reference	herein. •"Item	1—Election	of	Directors"

•"Item	1—Election	of	Directors—Board	Meetings	and	Committees"

Information	relating	to	Morgan	Stanley's	executive	officers	is	contained	in	Part	I,	Item	1	of	this	report	under	"Executive	Officers	of	Morgan	Stanley."

Morgan	Stanley's	Code	of	Ethics	and	Business	Conduct	applies	to	all	directors,	officers	and	employees,	including	its	Chief	Executive	Officer,	its	Chief	Financial	Officer and	its	Controller	and	Principal	Accounting	Officer.	You	can	find	our	Code	of	Ethics	and	Business	Conduct	on	our	internet	site,	www.morganstanley.com.	We	will	post any	amendments	to	the	Code	of	Ethics	and	Business	Conduct,	and	any	waivers	that	are	required	to	be	disclosed	by	the	rules	of	either	the	SEC	or	the	NYSE,	on	our internet	site.

Because	Morgan	Stanley's	common	stock	is	listed	on	the	NYSE,	its	Chief	Executive	Officer	made	his	annual	certification	to	the	NYSE	on	May	4,	2007	stating	that	he was	not	aware	of	any	violation	by	Morgan	Stanley	of	the	NYSE's	corporate	governance	listing	standards.	In	addition,	Morgan	Stanley	has	filed,	as	exhibits	to	this Annual	Report	on	Form	10-K,	the	certifications	of	its	Chief	Executive	Officer	and	Chief	Financial	Officer	required	under	Section	302	of	the	Sarbanes-Oxley	Act	of 2002	to	be	filed	with	the	SEC	regarding	the	quality	of	Morgan	Stanley's	public	disclosure.

# Item	11. Executive	Compensation.

Information	relating	to	director	and	executive	officer	compensation	under	the	following	captions	in	Morgan	Stanley's	Proxy	Statement	is	incorporated	by	reference herein.

•"Item	1—Election	of	Directors—Director	Compensation"

•"Executive	Compensation"

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters.

# Equity	Compensation	Plan	Information.

The	following	table	provides	information	about	stock	options	outstanding	and	shares	of	common	stock	available	for	future	awards	under	all	of	Morgan	Stanley's equity	compensation	plans	as	of	November	30,	2007.	Morgan	Stanley	has	not	made	any	grants	of	common	stock	outside	of	its	equity	compensation	plans.

| Plan	Category | Number	of	securities	to	be	issued<br>upon	exercise	of<br>outstanding	options,	warrants<br>and	rights | Weighted-average	exercise<br>price	of	outstanding	options,<br>warrants	and	rights | future	issuance	under<br>equity	compensation<br>plans	(excluding	securities<br>reflected	in	column	(a))(1) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby |  |  |  |
| security\tholders | 118,130,600 | $48.2201 | 149,206,247(2) |
| Equity\tcompensation\tplans\tnot |  |  |  |
| approved\tby\tsecurity\tholders | — | — | 4,993,329(3) |
| Total | 118,130,600 | $48.2201 | 154,199,576 |

(2) Includes	the	following:

•42,582,283	shares	available	under	the	Employee	Stock	Purchase	Plan	(ESPP).	Pursuant	to	this	plan,	which	is	qualified	under	Section	423	of	the	Internal	Revenue	Code,	eligible	employees	may	purchase shares	of	common	stock	at	a	discount	to	market	price	through	regular	payroll	deduction.

•100,000,000	shares	available	under	the	2007	Equity	Incentive	Compensation	Plan	(EICP).	Awards	may	consist	of	stock	options,	stock	appreciation	rights,	restricted	stock,	restricted	stock	units	to	be settled	by	the	delivery	of	shares	of	common	stock	(or	the	value	thereof),	other	awards	that	are	valued	by	reference	to	or	otherwise	based	on	the	fair	market	value	of	common	stock,	and	other	equity-based or	equity-related	awards	approved	by	the	Compensation,	Management	Development	and	Succession	Committee.

•5,621,592	shares	available	under	the	Employee	Equity	Accumulation	Plan	(EEAP).	Awards	may	consist	of	stock	options,	stock	appreciation	rights,	restricted	stock,	restricted	stock	units	to	be	settled	by the	delivery	of	shares	of	common	stock	(or	the	value	thereof),	other	awards	that	are	valued	by	reference	to	or	otherwise	based	on	the	fair	market	value	of	common	stock,	and	other	equity-based	or	equity- related	awards	approved	by	the	Compensation,	Management	Development	and	Succession	Committee.

•415,716	shares	available	under	the	Tax	Deferred	Equity	Participation	Plan	(TDEPP).	Awards	consist	of	restricted	stock	units	which	are	settled	by	the	delivery	of	shares	of	common	stock.

•586,656	shares	available	under	the	Directors'	Equity	Capital	Accumulation	Plan	(DECAP).	This	plan	provides	for	periodic	awards	of	shares	of	common	stock	and	stock	units	to	non-employee	directors	and also	allows	non-employee	directors	to	defer	the	fees	they	earn	from	services	as	a	director	in	the	form	of	stock	units.

(3) 22,957	shares	available	under	the	Branch	Manager	Compensation	Plan	(BMCP)	and	4,970,372	shares	available	under	the	Financial	Advisor	and	Investment	Representative	Compensation	Plan	(FAIRCP).	The material	features	of	these	plans	are	described	below.

The	material	features	of	Morgan	Stanley's	equity	compensation	plans	that	have	not	been	approved	by	shareholders	under	SEC	rules	(BMCP	and	FAIRCP)	are	described below.	The	following	descriptions	do	not	purport	to	be	complete	and	are	qualified	in	their	entirety	by	reference	to	the	plan	documents.	All	plans	through	which	awards may	currently	be	granted	are	included	as	exhibits	to	this	report.

BMCP.				Branch	managers	are	eligible	to	receive	awards	under	BMCP.	Awards	under	BMCP	may	consist	of	cash	awards,	restricted	stock	and	restricted	stock	units	to be	settled	by	the	delivery	of	shares	of	common	stock.

FAIRCP.				Financial	advisors	and	investment	representatives	are	eligible	to	receive	awards	under	FAIRCP.	Awards	under	FAIRCP	may	consist	of	cash	awards, restricted	stock	and	restricted	stock	units	to	be	settled	by	the	delivery	of	shares	of	common	stock.

Other	information	relating	to	security	ownership	of	certain	beneficial	owners	and	management	is	set	forth	under	the	caption	"Beneficial	Ownership	of	Company Common	Stock"	in	Morgan	Stanley's	Proxy	Statement	and	such	information	is	incorporated	by	reference	herein.

# Item	13. Certain	Relationships	and	Related	Transactions,	and	Director	Independence.

Information	regarding	certain	relationships	and	related	transactions	under	the	following	caption	in	Morgan	Stanley's	Proxy	Statement	is	incorporated	by	reference herein.

•"Other	Matters—Certain	Transactions"

# Item	14. Principal	Accountant	Fees	and	Services.

Information	regarding	principal	accountant	fees	and	services	under	the	following	caption	in	Morgan	Stanley's	Proxy	Statement	is	incorporated	by	reference	herein. •"Item	2—Ratification	of	Appointment	of	Morgan	Stanley's	Independent	Auditor"	(excluding	the	information	under	the	subheading	"Audit	Committee Report")

# Part	IV

# Item	15. Exhibits	and	Financial	Statement	Schedules.

# Documents	filed	as	part	of	this	report.

•	 The	financial	statements	required	to	be	filed	hereunder	are	listed	on	page	S-1.

•	 The	financial	statement	schedules	required	to	be	filed	hereunder	are	listed	on	page	S-1.

•	 An	exhibit	index	has	been	filed	as	part	of	this	report	beginning	on	page	E-1	and	is	incorporated	herein	by	reference.

# Signatures

Pursuant	to	the	requirements	of	Section	13	or	15(d)	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,	on	January	28,	2008.

(REGISTRANT)

Chairman	of	the	Board	and

Chief	Executive	Officer

# Power	of	Attorney

We,	the	undersigned,	hereby	severally	constitute	Colm	Kelleher,	Gary	G.	Lynch,	and	Martin	M.	Cohen,	and	each	of	them	singly,	our	true	and	lawful	attorneys	with	full power	to	them	and	each	of	them	to	sign	for	us,	and	in	our	names	in	the	capacities	indicated	below,	any	and	all	amendments	to	the	Annual	Report	on	Form	10-K	filed	with the	Securities	and	Exchange	Commission,	hereby	ratifying	and	confirming	our	signatures	as	they	may	be	signed	by	our	said	attorneys	to	any	and	all	amendments	to	said Annual	Report	on	Form	10-K.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Registrant	and	in	the capacities	indicated	on	the	28th	day	of	January,	2008.

# /s/				COLM	KELLEHER

(Colm	Kelleher)

(Paul	C.	Wirth)

Executive	Vice	President	and	Chief	Financial	Officer (Principal	Financial	Officer)

Controller	and	Principal	Accounting	Officer (Principal	Accounting	Officer)

# INDEX	TO	FINANCIAL	STATEMENTS	AND

# FINANCIAL	STATEMENT	SCHEDULES

# SCHEDULE	I

# (Parent	Company	Only)

# Condensed	Statements	of	Financial	Condition

|  | November	30,<br>2007 | November	30,<br>2006 |
| :--- | :--- | :--- |
| Assets: |  |  |
| Cash\tand\tcash\tequivalents | $10,224 | $6,879 |
| Financial\tinstruments\towned | 8,551 | 14,823 |
| Securities\tpurchased\tunder\tagreement\tto\tresell\twith\taffiliate | 54,137 | 40,353 |
| Advances\tto\tsubsidiaries | 156,446 | 145,550 |
| Investment\tin\tsubsidiaries,\tat\tequity | 34,946 | 36,966 |
| Other\tassets | 4,149 | 4,629 |
| Total\tassets | $268,453 | $249,200 |
| Liabilities\tand\tShareholders'\tEquity: |  |  |
| Commercial\tpaper\tand\tother\tshort-term\tborrowings | $20,615 | $14,255 |
| Financial\tinstruments\tsold,\tnot\tyet\tpurchased | 253 | 9,359 |
| Payables\tto\tsubsidiaries | 32,523 | 48,105 |
| Other\tliabilities\tand\taccrued\texpenses | 1,037 | 2,969 |
| Long-term\tborrowings | 182,756 | 139,148 |
|  | 237,184 | 213,836 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity: |  |  |
| Preferred\tstock | 1,100 | 1,100 |
| Common\tstock,\t$0.01\tpar\tvalue; |  |  |
| Shares\tauthorized:\t3,500,000,000\tin\t2007\tand\t2006; |  |  |
| Shares\tissued:\t1,211,701,522\tin\t2007\tand\t2006; |  |  |
| Shares\toutstanding:\t1,056,289,659\tin\t2007\tand\t1,048,877,006\tin\t2006 | 12 | 12 |
| Paid-in\tcapital | 1,902 | 2,213 |
| Retained\tearnings | 38,045 | 41,422 |
| Employee\tstock\ttrust | 5,569 | 4,315 |
| Accumulated\tother\tcomprehensive\tloss | (199) | (35) |
|  | (9,591) | (9,348) |
| Common\tstock\tissued\tto\temployee\ttrust | (5,569) | (4,315) |
| Total\tshareholders'\tequity | 31,269 | 35,364 |
| Total\tliabilities\tand\tshareholders'\tequity | $268,453 | $249,200 |

See	Notes	to	Condensed	Financial	Statements.

# Condensed	Statements	of	Income	and	Comprehensive	Income

|  | Fiscal<br>2007 | Fiscal<br>2006 | Fiscal<br>2005 |
| :--- | :--- | :--- | :--- |
| Revenues: |  |  |  |
| Interest\tand\tdividends | $9,211 | $6,036 | $3,698 |
| Principal\ttransactions | 613 | (156) | 159 |
| Other | (2) | 3 | 6 |
| Total\trevenues | 9,822 | 5,883 | \t 3,863 |
| Expenses: |  |  |  |
| Interest\texpense | 9,834 | 6,744 | \t 3,126 |
| Non-interest\texpenses | 427 | 146 | 106 |
| Total\texpenses | \t 10,261 | 6,890 | \t 3,232 |
| (Loss)\tincome\tbefore\tincome\ttax\tbenefit\t(provision)\tand\tequity\tin\tearnings\tof\tsubsidiaries | (439) | (1,007) | 631 |
| Income\ttax\tbenefit\t(provision) | 173 | 296 | (143) |
| (Loss)\tincome\tbefore\tequity\tin\tearnings\tof\tsubsidiaries | (266) | (711) | 488 |
| Equity\tin\tearnings\tof\tsubsidiaries,\tnet\tof\ttax\t(including\ta\tcumulative\teffect\tof\taccounting\tchange\tof\t$49\tin\tfiscal\t2005) | 3,475 | 8,183 | \t 4,451 |
| Net\tincome | $3,209 | $7,472 | $4,939 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Foreign\tcurrency\ttranslation\tadjustment | 65 | 104 | (89) |
| Net\tchange\tin\tcash\tflow\thedges | 19 | 53 | (70) |
| Minimum\tpension\tliability\tadjustment | (40) | (2) | 25 |
| Comprehensive\tincome | $3,253 | $7,627 | $4,805 |
| Net\tincome | $3,209 | $7,472 | $4,939 |
| Preferred\tstock\tdividend\trequirements | $68 | $19 | $— |
| Earnings\tapplicable\tto\tcommon\tshareholders | $3,141 | $7,453 | $4,939 |

# Condensed	Statements	of	Cash	Flows

# NOTES	TO	CONDENSED	FINANCIAL	STATEMENTS

Basis	of	Financial	Information.	The	accompanying	condensed	financial	statements	(the	"Parent	Company	Financial	Statements"),	including	the	notes	thereto,	should be	read	in	conjunction	with	the	consolidated	financial	statements	of	Morgan	Stanley	(the	"Company")	and	the	notes	thereto	found	on	pages	101	to	181	in	this	Form	10-

The	Parent	Company	Financial	Statements	for	the	12	months	ended	November	30,	2007	("fiscal	2007"),	November	30,	2006	("fiscal	2006")	and	November	30,	2005 ("fiscal	2005")	are	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	U.S.,	which	require	the	Company	to	make	estimates	and	assumptions regarding	valuations	of	certain	financial	instruments,	the	potential	outcome	of	litigation	and	other	matters	that	affect	the	Parent	Company	Financial	Statements	and related	disclosures.	The	Company	believes	that	the	estimates	utilized	in	the	preparation	of	the	Parent	Company	Financial	Statements	are	prudent	and	reasonable.	Actual results	could	differ	materially	from	these	estimates.

# 2.				Transactions	with	Subsidiaries.

The	Company	has	transactions	with	its	consolidated	subsidiaries	determined	on	an	agreed-upon	basis	and	has	guaranteed	certain	unsecured	lines	of	credit	and contractual	obligations	of	certain	of	its	consolidated	subsidiaries.

The	Company	received	cash	dividends	from	its	consolidated	subsidiaries	totaling	$6,975	million,	$1,838	million	and	$5,720	million	in	fiscal	2007,	fiscal	2006	and	fiscal 2005,	respectively.

In	the	normal	course	of	its	business,	the	Company	guarantees	certain	of	its	subsidiaries'	obligations	under	derivative	and	other	financial	arrangements.	The	Company records	all	derivative	contracts	and	Financial	instruments	owned	and	Financial	instruments	sold,	not	yet	purchased	at	fair	value	on	its	consolidated	statements	of financial	condition.	For	a	discussion	of	the	Company's	risk	management	activities,	see	Note	6	to	the	Company's	consolidated	financial	statements.

The	Company	also,	in	the	normal	course	of	its	business,	provides	standard	indemnities	to	counterparties	on	behalf	of	its	subsidiaries	for	taxes,	including	U.S.	and	foreign withholding	taxes,	on	interest	and	other	payments	made	on	derivatives,	securities	and	stock	lending	transactions	and	certain	annuity	products.	These	indemnity	payments could	be	required	based	on	a	change	in	the	tax	laws	or	change	in	interpretation	of	applicable	tax	rulings.	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	financial	statements	for	these	indemnifications	and believes	that	the	occurrence	of	any	events	that	would	trigger	payments	under	these	contracts	is	remote.

The	Company	has	issued	guarantees	on	behalf	of	its	subsidiaries	to	various	U.S.	and	non-U.S.	exchanges	and	clearinghouses	that	trade	and	clear	securities	and/or	futures contracts.	Under	these	guarantee	arrangements,	the	Company	may	be	required	to	pay	the	financial	obligations	of	its	subsidiaries	related	to	business	transacted	on	or	with the	exchanges	and	clearinghouses	in	the	event	of	a	subsidiary's	default	on	its	obligations	to	the	exchange	or	the	clearinghouse.	The	Company	has	not	recorded	any contingent	liability	in	the	condensed	financial	statements	for	these	arrangements	and	believes	that	any	potential	requirements	to	make	payments	under	these arrangements	is	remote.

The	Company	guarantees	certain	debt	instruments	and	warrants	issued	by	subsidiaries.	The	debt	instruments	totaled	$11.8	billion	and	the	warrants	totaled	$0.1	billion	at November	30,	2007.	In	connection	with	subsidiary	lease	obligations,	the	Company	has	issued	guarantees	to	various	lessors.	At	November	30,	2007,	the	Company	had $2.2	billion	outstanding	under	subsidiary	lease	obligations,	primarily	in	the	United	Kingdom.

# 4.				Commitments	and	Contingencies.

For	a	discussion	of	the	Company's	commitments	and	contingencies,	see	Note	15	to	the	Company's	consolidated	financial	statements.

We	have	audited	the	consolidated	financial	statements	of	Morgan	Stanley	and	subsidiaries	(the	"Company")	as	of	November	30,	2007	and	2006,	and	for	each	of	the three	years	in	the	period	ended	November	30,	2007	and	the	effectiveness	of	the	Company's	internal	control	over	financial	reporting	as	of	November	30,	2007,	and	have issued	our	reports	thereon	dated	January	28,	2008	(such	report	on	the	consolidated	financial	statements	expresses	an	unqualified	opinion	and	includes	an	explanatory paragraph,	in	fiscal	2005,	concerning	the	adoption	of	Statement	of	Financial	Accounting	Standards	No.	123(R),	"Share-Based	Payment"	("SFAS	No.	123(R)")	and, effective	December	1,	2005,	the	change	in	accounting	policy	for	recognition	of	equity	awards	granted	to	retirement-eligible	employees	and,	an	explanatory	paragraph,	in fiscal	2006,	concerning	the	application	of	Staff	Accounting	Bulletin	No.	108	"Considering	the	Effects	of	Prior	Year	Misstatements	when	Quantifying	Misstatements	in the	Current	Year	Financial	Statements"	("SAB	No.	108")	and,	an	explanatory	paragraph,	in	fiscal	2007,	concerning	the	adoption	of	Statement	of	Financial	Accounting Standards	No.	157,	"Fair	Value	Measurement"	("SFAS	No.	157")	and	Statement	of	Financial	Accounting	Standards	No.	159,	"The	Fair	Value	Option	for	Financial Assets	and	Financial	Liabilities–Including	an	amendment	of	FASB	Statement	No.	115"	("SFAS	No.	159")	and,	an	explanatory	paragraph,	in	fiscal	2007,	concerning	the adoption	of	Statement	of	Financial	Accounting	Standards	No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans,	an	amendment of	FASB	Statements	No.	87,	88,	106,	and	132(R)");	such	consolidated	financial	statements	and	reports	are	included	in	this	2007	Annual	Report	on	Form	10-K.	Our audits	also	included	Schedule	I	listed	in	the	Index	to	Financial	Statements	and	Financial	Statement	Schedules.	This	financial	statement	schedule	is	the	responsibility	of the	Company's	management.	Our	responsibility	is	to	express	an	opinion	based	on	our	audits.	In	our	opinion,	such	financial	statement	schedule,	when	considered	in relation	to	the	basic	consolidated	financial	statements	taken	as	a	whole,	presents	fairly,	in	all	material	respects,	the	information	set	forth	therein.

In	fiscal	2006,	the	Company	changed	its	accounting	policy	for	recognition	of	equity	awards	granted	to	retirement	eligible	employees	and	the	Company	elected application	of	SAB	No.	108.

# SECURITIES	AND	EXCHANGE	COMMISSION

# EXHIBITS	TO	FORM	10-K

# Exhibit	Index

Certain	of	the	following	exhibits,	as	indicated	parenthetically,	were	previously	filed	as	exhibits	to	registration	statements	filed	by	Morgan	Stanley	or	its	predecessor companies	under	the	Securities	Act	or	to	reports	or	registration	statements	filed	by	Morgan	Stanley	or	its	predecessor	companies	under	the	Exchange	Act,	respectively, and	are	hereby	incorporated	by	reference	to	such	statements	or	reports.	Morgan	Stanley's	Exchange	Act	file	number	is	1-11758.	The	Exchange	Act	file	number	of Morgan	Stanley	Group	Inc.,	a	predecessor	company	("MSG"),	was	1-9085. 1

(1) For	purposes	of	this	Exhibit	Index,	references	to	"The	Bank	of	New	York"	mean	in	some	instances	the	entity	successor	to	JPMorgan	Chase	Bank,	N.A.	or	J.P. Morgan	Trust	Company,	National	Association;	references	to	"JPMorgan	Chase	Bank,	N.A."	mean	the	entity	formerly	known	as	The	Chase	Manhattan	Bank,	in some	instances	as	the	successor	to	Chemical	Bank;	references	to	"J.P.	Morgan	Trust	Company,	N.A."	mean	the	entity	formerly	known	as	Bank	One	Trust Company,	N.A.,	as	successor	to	The	First	National	Bank	of	Chicago.

10.1 Amended	and	Restated	Trust	Agreement	dated	as	of	November	30,	2000	between	Morgan	Stanley	and	State	Street	Bank	and	Trust	Company	(Exhibit	T	to Amendment	No.	5	to	the	Schedule	13D	dated	as	of	November	30,	2000	filed	by	certain	senior	officers	of	Morgan	Stanley)	as	amended	by	Amendment No.	1	dated	as	of	November	30,	2000	between	Morgan	Stanley	and	State	Street	Bank	and	Trust	Company,	effective	January	1,	2002	(Exhibit	10.10	to Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2001),	Amendment	No.	2	dated	as	of	November	30,	2000 between	Morgan	Stanley	and	State

Street	Bank	and	Trust	Company,	effective	January	1,	2003	(Exhibit	10.12	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	2002),	Amendment	No.	3	dated	as	of	November	30,	2000	between	Morgan	Stanley	and	State	Street	Bank	and	Trust	Company,	effective September	15,	2003	(Exhibit	10.11	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2003),	Amendment	No.	4 dated	as	of	March	21,	2006	between	Morgan	Stanley	and	State	Street	Bank	and	Trust	Company	(Exhibit	10.1	to	Morgan	Stanley's	Quarterly	Report	on	Form 10-Q	for	the	quarter	ended	February	28,	2006)	and	Amendment	No.	5	dated	as	of	June	25,	2007	between	Morgan	Stanley	and	State	Street	Bank	and	Trust Company	(Exhibit	10.1	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31,	2007).

10.3 Securities	Purchase	Agreement	dated	as	of	December	19,	2007	between	Morgan	Stanley	and	Best	Investment	Corporation,	a	wholly	owned	subsidiary	of China	Investment	Corporation	(Exhibit	10.1	to	Morgan	Stanley's	Current	Report	on	Form	8-K	dated	December	19,	2007).

10.4† Omnibus	Equity	Incentive	Plan	(Exhibit	4.1	to	Morgan	Stanley's	Registration	Statement	on	Form	S-8	(No.	33-63024)).

10.5† Morgan	Stanley	401(k)	Plan	(f/k/a	the	Morgan	Stanley	DPSP/START	Plan)	amended	and	restated	effective	as	of	October	1,	2002	(Exhibit	10.17	to	Morgan Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2002)	as	amended	by	Amendment	(Exhibit	10.18	to	Morgan	Stanley's Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2002),	Amendment	(Exhibit	10.18	to	Morgan	Stanley's	Annual	Report	on	Form	10-K for	the	fiscal	year	ended	November	30,	2003),	Amendment	(Exhibit	10.19	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	2003),	Amendment	(Exhibit	10	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	May	31,	2004),	Amendment (Exhibit	10.16	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2004),	Amendment	(Exhibit	10.1	to	Morgan Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	February	28,	2005),	Amendment	(Exhibit	10.2	to	Morgan	Stanley's	Quarterly	Report	on Form	10-Q	for	the	quarter	ended	February	28,	2005),	Amendment	(Exhibit	10.1	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended May	31,	2005),	Amendment	(Exhibit	10.8	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2005),	Amendment (Exhibit	10	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	February	28,	2007)	and	Amendment	(Exhibit	10.2	to	Morgan Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31,	2007).

10.7† 1993	Stock	Plan	for	Non-Employee	Directors	(Exhibit	4.3	to	Morgan	Stanley's	Registration	Statement	on	Form	S-8	(No.	33-63024))	as	amended	by Amendment	(Exhibit	10.37	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	December	31,	1993)	and	Amendment	(Exhibit	10.4 to	Morgan	Stanley	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	May	31,	2007).

10.8† 1994	Omnibus	Equity	Plan	as	amended	and	restated	(Exhibit	10.23	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November 30,	2003)	as	amended	by	Amendment	(Exhibit	10.11	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2006).

10.9†* Tax	Deferred	Equity	Participation	Plan	as	amended	and	restated	as	of	November	26,	2007.

10.10† Directors'	Equity	Capital	Accumulation	Plan	as	amended	through	March	19,	2007	(Exhibit	10.2	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the quarter	ended	May	31,	2007).

10.11† Select	Employees'	Capital	Accumulation	Program	(Exhibit	10.2	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	February	29, 2004).

10.12†* Employees'	Equity	Accumulation	Plan	as	amended	and	restated	as	of	November	26,	2007.

10.13† Employee	Stock	Purchase	Plan	amended	as	of	November	27,	2006	(Exhibit	10.16	to	Morgan	Stanley's	Current	Report	on	Form	10-K	for	the	fiscal	year ended	November	30,	2006)	as	amended	by	Amendment	(Exhibit	10.3	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31, 2007).

10.14† Form	of	Agreement	under	the	Morgan	Stanley	&	Co.	Incorporated	Owners'	and	Select	Earners'	Plan	(Exhibit	10.1	to	MSG's	Annual	Report	on	Form	10-K for	the	fiscal	year	ended	January	31,	1993).

10.15† Form	of	Agreement	under	the	Officers'	and	Select	Earners'	Plan	(Exhibit	10.2	to	MSG's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	January	31, 1993).

10.16† Morgan	Stanley	&	Co.	Incorporated	Excess	Benefit	Plan	(Exhibit	10.31	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	1998)	as	amended	by	Amendment	(Exhibit	10.32	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30, 2000),	Amendment	(Exhibit	10.2	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31,	2002),	Amendment	(Exhibit	10.32 to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2002),	Amendment	(Exhibit	10.34	to	Morgan	Stanley's	Annual Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2003),	Amendment	(Exhibit	10.33	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the fiscal	year	ended	November	30,	2004)	and	Amendment	(Exhibit	10.20	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	2005).

10.17†* Amendment	to	Morgan	Stanley	&	Co.	Incorporated	Excess	Benefit	Plan,	dated	as	of	November	20,	2007.

10.18† Supplemental	Executive	Retirement	Plan	(Exhibit	10.32	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	1998)	as amended	by	Amendment	(Exhibit	10.37	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	1999),	Amendment (Exhibit	10.35	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2000),	Amendment	(Exhibit	10.3	to	Morgan Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31,	2002),	Amendment	(Exhibit	10.37	to	Morgan	Stanley's	Annual	Report	on	Form 10-K	for	the	fiscal	year	ended	November	30,	2002),	Amendment	(Exhibit	10.40	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	2003)	and	Amendment	(Exhibit	10.22	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2005).

10.19†* Amendment	to	Supplemental	Executive	Retirement	Plan,	dated	as	of	November	20,	2007.

10.20† 1988	Equity	Incentive	Compensation	Plan	as	amended	(Exhibit	10.12	to	MSG's	Annual	Report	on	Form	10-K	for	fiscal	year	ended	January	31,	1993)	as amended	by	Amendment	(Exhibit	10.22	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2006).

10.21† 1995	Equity	Incentive	Compensation	Plan	(Annex	A	to	MSG's	Proxy	Statement	for	its	1996	Annual	Meeting	of	Stockholders)	as	amended	by	Amendment (Exhibit	10.39	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2000),	Amendment	(Exhibit	10.5	to	Morgan Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	August	31,	2005),	Amendment	(Exhibit	10.3	to	Morgan	Stanley's	Quarterly	Report	on	Form 10-Q	for	the	quarter	ended	February	28,	2006)	and	Amendment	(Exhibit	10.24	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended November	30,	2006).

10.23† Form	of	Equity	Incentive	Compensation	Plan	Award	Certificate	(Exhibit	10.1	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended August	31,	2004).

# Exhibit No. Description

10.25† Form	of	Chief	Executive	Officer	Equity	Award	Certificate	for	Discretionary	Retention	Award	of	Stock	Units	under	the	EICP	(Exhibit	10.2	to	Morgan Stanley's	Current	Report	on	Form	8-K	dated	December	12,	2005).

10.26† Form	of	Chief	Executive	Officer	Equity	Award	Certificate	for	Discretionary	Retention	Award	of	Stock	Units	and	Stock	Options	(Exhibit	10.28	to	Morgan Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2006).

10.27† Form	of	Management	Committee	Award	Certificate	for	Discretionary	Retention	Award	of	Stock	Units	under	the	EICP	(Exhibit	10.3	to	Morgan	Stanley's Current	Report	on	Form	8-K	dated	December	12,	2005).

10.28† Form	of	Management	Committee	Equity	Award	Certificate	for	Discretionary	Retention	Award	of	Stock	Units	and	Stock	Options	(Exhibit	10.30	to	Morgan Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30,	2006).

10.30† Form	of	Deferred	Compensation	Agreement	under	the	Pre-Tax	Incentive	Program	(Exhibit	10.12	to	MSG's	Annual	Report	on	Form	10-K	for	the	fiscal	year ended	January	31,	1994).

10.31† Form	of	Deferred	Compensation	Agreement	under	the	Pre-Tax	Incentive	Program	2	(Exhibit	10.12	to	MSG's	Annual	Report	for	the	fiscal	year	ended November	30,	1996).

10.32† Key	Employee	Private	Equity	Recognition	Plan	(Exhibit	10.43	to	Morgan	Stanley's	Annual	Report	on	Form	10-K	for	the	fiscal	year	ended	November	30, 2000).

10.33†* Morgan	Stanley	Branch	Manager	Compensation	Plan	as	amended	and	restated	as	of	November	26,	2007.

10.34†* Morgan	Stanley	Financial	Advisor	and	Investment	Representative	Compensation	Plan	as	amended	and	restated	as	of	November	26,	2007.

10.35† Morgan	Stanley	UK	Share	Ownership	Plan	(Exhibit	4.1	to	Morgan	Stanley's	Registration	Statement	on	Form	S-8	(No.	333-146954)).

10.36† Amended	and	Restated	Employment	Agreement	dated	as	of	September	20,	2005	between	Morgan	Stanley	and	Mr.	John	J.	Mack	(Exhibit	10	to	Morgan Stanley's	Current	Report	on	Form	8-K	dated	September	19,	2005)	as	amended	by	Amendment	dated	December	13,	2005	(Exhibit	10.1	to	Morgan	Stanley's Current	Report	on	Form	8-K	dated	December	12,	2005)	and	Amendment	dated	February	14,	2006	(Exhibit	10.4	to	Morgan	Stanley's	Quarterly	Report	on Form	10-Q	for	the	quarter	ended	February	28,	2006).

10.37† Form	of	Restrictive	Covenant	Agreement	(Exhibit	10	to	Morgan	Stanley's	Current	Report	on	Form	8-K	dated	November	22,	2005).

10.38† Morgan	Stanley	Performance	Formula	and	Provisions	(Exhibit	10.3	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	May	31, 2006).

10.39†* 2007	Equity	Incentive	Compensation	Plan	as	amended	and	restated	as	of	November	26,	2007.

10.40† Morgan	Stanley	2007	Notional	Leveraged	Co-Investment	Plan	(Exhibit	10.1	to	Morgan	Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	May 31,	2007).

10.41†* Governmental	Service	Amendment	to	Outstanding	Stock	Option	and	Stock	Unit	Awards	(replacing	and	superseding	in	its	entirety	Exhibit	10.3	to	Morgan Stanley's	Quarterly	Report	on	Form	10-Q	for	the	quarter	ended	May	31,	2007).

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

21* Subsidiaries	of	Morgan	Stanley.

23.1* Consent	of	Deloitte	&	Touche	LLP.

24 Powers	of	Attorney	(included	on	signature	page).

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.

* Filed	herewith.

** Furnished	herewith.

† Management	contract	or	compensatory	plan	or	arrangement	required	to	be	filed	as	an	exhibit	to	this	Form	10-K	pursuant	to	Item	15(b).



Question: what percentage of the net assets acquired is goodwill?
Answer: 15%