<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
 
                         COMMISSION FILE NUMBER 1-9085
                           MORGAN STANLEY GROUP INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                    DELAWARE
                        (STATE OR OTHER JURISDICTION OF
                         INCORPORATION OR ORGANIZATION)
                                 1585 BROADWAY
                                 NEW YORK, N.Y.
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   13-2838811
                                (I.R.S. EMPLOYER
                              IDENTIFICATION NO.)
                                     10036
                                   (ZIP CODE)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (212) 761-4000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                                                           NAME OF EACH EXCHANGE
                                  TITLE OF EACH CLASS                                       ON WHICH REGISTERED
                                                                                      -------------------------------
    <S>                                                                               <C>
    Common Stock, $1 par value                                                        New York Stock Exchange
                                                                                      Boston Stock Exchange
                                                                                      Chicago Stock Exchange
                                                                                      Pacific Stock Exchange
    9.36% Cumulative Preferred Stock, $25 stated value                                New York Stock Exchange
    Depositary Shares, each representing  1/8 of a share of 8.88%                     New York Stock Exchange
      Cumulative Preferred Stock, $200 stated value
    Depositary Shares, each representing  1/8 of a share of 8 3/4%                    New York Stock Exchange
      Cumulative Preferred Stock, $200 stated value
    Depositary Shares, each representing  1/8 of a share of 7 3/8%                    New York Stock Exchange
      Cumulative Preferred Stock, $200 stated value
    7.82% Capital Units; 7.80% Capital Units; 9.00% Capital Units;                    New York Stock Exchange
      8.40% Capital Units; 8.20% Capital Units*
    AMEX Hong Kong 30 IndexSM Call Warrants Expiring November 4, 1996;                American Stock Exchange
      AMEX Hong Kong 30 IndexSM Call Warrants Expiring October 3, 1997+
    Japan IndexSM Call Warrants Expiring May 28, 1996+                                American Stock Exchange
    Nikkei 225 Index Call Warrants Expiring August 15, 1997                           American Stock Exchange
    6 1/2% PERQSSM Due July 1, 1997; 6% PERQSSM Due October 1, 1997;                  American Stock Exchange
      7% PERQSSM Due November 15, 1997; 6% PERQSSM Due February 16, 1999++
    Exchangeable Notes Due September 30, 2000; Exchangeable                           New York Stock Exchange
      Notes Due December 31, 2001+++
</TABLE>
 
---------------
 
*   Each Capital Unit consists of (a) a $25 principal amount Subordinated
    Debenture (of the same rate) of Morgan Stanley Finance plc guaranteed by the
    Registrant and (b) a related purchase contract of the Registrant requiring
    the holder to purchase one Depositary Share representing 1/8 of a share of
    the Registrant's Cumulative Preferred Stock (of the same rate), $200 stated
    value. The Capital Units and the Depositary Shares are registered on the New
    York Stock Exchange.
 
+   The "AMEX Hong Kong 30 Index" and the "Japan Index" are service marks of the
    American Stock Exchange.
 
++  "PERQS" and "Performance Equity-linked Redemption Quarterly-pay Securities"
    are service marks of the Registrant. The issue price and amount payable at
    maturity with respect to the PERQS are based on the share price of certain
    non-affiliated companies.
 
+++ Notes which are exchangeable on a defined date for equity securities of
    certain non-affiliated companies.
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:  NONE
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.    YES  /X/.    NO  / /
 
    Indicate by check mark 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/
 
    Aggregate market value of the voting stock held by non-affiliates of the
Registrant at February 7, 1996 was approximately $5,409,071,114. For purposes of
this information, the outstanding shares of common stock owned by certain
Managing Directors and Principals of certain wholly-owned subsidiaries of the
Registrant, and subject to certain restrictions on voting and disposition, were
deemed to be shares of common stock held by affiliates.
 
    Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
 
    As of February 7, 1996, there were 154,087,313 shares of Common Stock, $1
par value, outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     (1) Morgan Stanley Group Inc. 1995 Annual Report to
         Stockholders -- Incorporated in part in Form 10-K, Parts I, II and IV.
 
     (2) Morgan Stanley Group Inc. Proxy Statement for its 1996 Annual Meeting
         of Stockholders -- Incorporated in part in Form 10-K, Parts I and III.
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<PAGE>   2
                                     PART I

ITEM 1.          BUSINESS

                 Morgan Stanley Group Inc. (the "Company"*) is a holding
company that, through its subsidiaries, provides a wide range of financial
services on a global basis.  Its businesses include securities underwriting,
distribution and trading; merger, acquisition, restructuring, real estate,
project finance and other corporate finance advisory activities; merchant
banking and other principal investment activities; brokerage and research
services; asset management; the trading of foreign exchange and commodities as
well as derivatives on a broad range of asset categories, rates and indices;
and global custody, securities clearance services and securities lending.
These services are provided to a large and diversified group of clients and
customers, including corporations, governments, financial institutions and
individual investors.  The Company, which was formed in 1935, conducts business
from its head office in New York City, international offices in Beijing,
Bombay, Frankfurt, Geneva, Hong Kong, Johannesburg, London, Luxembourg, Madrid,
Melbourne, Milan, Montreal, Moscow, Osaka, Paris, Seoul, Shanghai, Singapore,
Sydney, Taipei, Tokyo, Toronto and Zurich, and United States ("U.S.") regional
offices in Chicago, Philadelphia, Los Angeles and San Francisco.  At November
30, 1995, the Company employed 9,238 people.

                 The Company conducts its broker-dealer business principally in
the U.S. through Morgan Stanley & Co. Incorporated ("MS&Co."), in Europe
through Morgan Stanley & Co. International Limited ("MSIL"), in Japan through
Morgan Stanley Japan Limited ("MS Japan") and in the rest of Asia through
Morgan Stanley Asia Limited ("MS Asia").  Because of the increasing integration
of the international financial markets, the Company manages its principal
operating subsidiaries, including MS&Co., MSIL, MS Japan and MS Asia, on a
coordinated global basis with a view to the profitability of the enterprise as
a whole.

                 The Company's business activities are highly integrated and
constitute a single industry segment.  Financial information concerning the
Company for each of the three periods ended November 30, 1995,**  January 31,
1995 and January 31, 1994, including the amount of total revenue contributed by
classes of similar products or services that accounted for 10% or more of the
Company's consolidated revenue in any one of those periods and information with
respect to the Company's operations by geographic area, is set forth in the
Consolidated Financial Statements and the Notes thereto in the 1995 Annual 
Report to Stockholders and is incorporated herein by reference.


__________________________________
*        Unless the context otherwise requires, the term "Company" means Morgan
         Stanley Group Inc. and includes the consolidated subsidiaries of Morgan
         Stanley Group Inc. Please note that in the 1995 Annual Report to
         Stockholders, which is incorporated by reference in part in this Form
         10-K, the term "Morgan Stanley" is generally used to refer to the
         Company. Except for the historical information contained in this Form
         10-K, certain items herein, including (without limitation) certain
         matters discussed under Part I, Item 3, "Legal Proceedings" and under
         Part II, Item 7, "Management's Discussion and Analysis of Financial
         Condition and Results of Operations" (incorporated herein by reference)
         ("MD&A"), are forward-looking statements. The matters referred to in
         such statements could be affected by the risks and uncertainties
         involved in the Company's business, including (without limitation) the
         effect of economic and market conditions, the level and volatility of
         interest rates and currency values, the impact of current or pending
         legislation and regulation and the other risks and uncertainties
         detailed in Part I, Item I, "Competition and Regulation" and "Risk
         Management" and in the MD&A.

**       The Company changed its fiscal year-end from January 31 to November 30
         effective for November 30, 1995.
<PAGE>   3

INVESTMENT BANKING ACTIVITIES

                 The Company is a leading global investment banking firm which
provides advice to, and raises capital worldwide for, a broad group of domestic
and international clients. The Company manages and participates in public
offerings and private placements of debt, equity and other securities
denominated in U.S. dollars and other currencies in the U.S. and international
capital markets.  The Company is a leading underwriter of common stock,
preferred stock, Preferred Equity Redemption Cumulative Stock ("PERCS(R)"),
Performance Equity-linked Redemption Quarterly-pay Securities ("PERQS(SM)"),
other equity-related securities, including American Depositary Receipts
("ADRs"), and taxable fixed income securities.  The Company also underwrites
tax exempt securities.  The Company underwrites mortgage-related securities,
including private pass-throughs and collateralized mortgage obligations
("CMOs"), and other asset-backed securities.  The Company is active as an
underwriter and distributor of commercial paper and other short-term and
medium-term securities.  The Company is also involved in tender offers,
repurchase programs, consent solicitations, rights offerings and exchange
offers on behalf of clients.

                 The Company provides domestic and international corporate and
institutional clients with a wide range of advisory services on key strategic
matters such as mergers, acquisitions, joint ventures, privatizations,
defenses, divestitures, spin-offs, restructurings, proxy mechanisms and
leveraged buyouts as well as long-range financial planning.  Other such
services provided to clients include advice with respect to recapitalizations,
dividend policy, valuations, foreign exchange exposures and financial risk
management strategies.  In addition, the Company provides advice and other
services relating to project financings, lease transactions and the purchase,
sale and financing of real estate.  The Company may, from time to time, also
provide financing or financing commitments to companies in connection with its
investment banking activities.  See also "Asset Management Activities --
Merchant Banking and Other Principal Investing."

SALES, TRADING AND MARKET-MAKING ACTIVITIES

                 SALES AND TRADING

                 The Company provides a broad range of sales and trading
services to investors worldwide and is an active dealer in fixed income,
equity, foreign exchange and commodity products, including derivatives.  In the
U.S., the Company ranks as one of the largest dealers in equity and fixed
income securities.  As a member of the major U.S. securities and commodities
exchanges, as well as the major foreign exchanges, including the London and
Tokyo Stock Exchanges, the Company conducts its sales and trading activities
both as principal and as agent on behalf of a wide range of domestic and
international institutional and, primarily through its Private Client Services
Department, certain individual investors.  The Company trades for its own
account in equity and fixed income securities and instruments, foreign
currencies, commodities and associated derivative products.  The Company also
provides financing to clients, including margin lending and other extensions of
credit.

                 The Company's equity sales, trading and market-making
activities cover domestic and foreign equity and equity-related securities
(both exchange traded and over-the-counter 

                                       2
<PAGE>   4
("OTC")), including ADRs, Optimised Portfolios as Listed Securities (OPALS(SM))
and restricted/control stock; convertible debt and preferred securities,
including PERCS(R), PERQS(SM) and warrants; equity index products and equity
swaps; and international index arbitrage, equity repurchases and program and
block trade execution.  The Company borrows and lends equity securities.  The
Company also engages in the risk arbitrage business, which involves investing
for the Company's own account in securities of companies involved in publicly
announced corporate transactions in which the Company is not at the time of
investment acting as adviser or agent.

                 The Company distributes and trades domestic and international
debt securities, particularly corporate debt instruments and preferred stock,
and offers investment strategies to institutional accounts, develops swap
strategies for customers and assists corporations in their repurchase of debt.
In addition, the Company trades a full range of money market instruments,
including certificates of deposit, domestic and foreign bankers' acceptances,
floating-rate certificates of deposit and floating-rate notes.  The Company is
an active dealer and market-maker in a broad range of long-term and short-term
tax exempt securities.  The Company is also involved in structuring debt
securities with multiple risk/return factors designed to suit investor
objectives and repackaged asset vehicles (RAVs) through which investors can
restructure asset portfolios to provide liquidity or recharacterize risk
profiles.

                 The Company is one of 37 primary dealers of U.S. government
securities currently recognized by the Federal Reserve Bank of New York.  As
such, it is among the firms with which the Federal Reserve conducts its open
market operations and is required to submit bids in Treasury auctions, make
secondary markets in U.S. government securities, provide the Federal Reserve
Bank of New York with market information and maintain certain capital
standards. The Company is also a member of a number of selling groups
responsible for the distribution of various issues of U.S. agency and other
debt securities.  As such, it is required to make secondary markets in these
securities and to provide market information to the U.S. agency and
instrumentality issuers.  The Company is also a member of the primary syndicate
that issues German government bonds, a member of the Japanese government bond
syndicate and a primary dealer in Canadian, French and Italian government
bonds.  The Company also makes secondary markets in various foreign government
bonds and other foreign currency denominated bonds issued in the Eurobond
market and in the U.S.

                 The Company's daily trading inventory positions in government,
agency and instrumentality securities are financed substantially through the
use of repurchase agreements.  The Company also borrows and lends fixed income
securities.  In addition, the Company acts as an intermediary between borrowers
and lenders of short-term funds utilizing repurchase and reverse repurchase
agreements.  At any given point in time, the Company may hold large positions
in certain types of securities or commitments to purchase securities of a
single issuer, 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.  For example,
financial instruments owned by the Company include U.S. government and agency
securities and securities issued by non-U.S. governments (principally France,
Germany, Italy and Japan) which, in the aggregate, represented 18% of the
Company's total assets at November 30, 1995.  In addition, a vast majority of
all of the collateral held by the Company for resale agreements or bonds
borrowed, which together represents 37% of the Company's total assets at
November 30, 

                                       3
<PAGE>   5
1995, consists of securities issued by the U.S. government, federal agencies or
non-U.S. governments.

                 The Company trades and distributes asset-backed securities.
The Company makes markets and trades in Government National Mortgage
Association ("GNMA") securities, Federal Home Loan Mortgage Corp. ("FHLMC")
participation certificates and Federal National Mortgage Association ("FNMA")
obligations.  The Company enters into significant commitments, such as forward
contracts, standby arrangements and OTC options contracts, for GNMA, FHLMC and
FNMA securities.  The Company also acts as an underwriter of and market-maker
in mortgage-backed securities, CMOs and related instruments, and a market-maker
in commercial, residential and real estate loan products.  In this capacity,
the Company takes positions in market segments where liquidity can vary greatly
from time to time; the carrying value of such financial instruments currently
experiencing lower levels of liquidity approximated $1,169 million at November
30, 1995.

                 The Company also underwrites, trades, invests and makes
markets in high-yield debt securities and emerging market loans and securitized
instruments. "High-yield" refers to companies or sovereigns whose debt is rated
as non-investment grade.  High-yield debt securities, emerging market loans and
securitized instruments held for sale by the Company are carried in the
Company's Consolidated Statement of Financial Condition at their fair values.
Trading gains and losses (inclusive of unrealized gains and losses) on
high-yield debt securities and emerging market loans and securitized instruments
are included as principal transaction revenues in the Company's Consolidated
Statement of Income.  At November 30, 1995, the aggregate net market value of
high-yield debt securities and emerging market loans and securitized instruments
held in inventory, including the securities of issuers in which the Company has
made equity investments in connection with its merchant banking and other
principal investment activities (see "Asset Management Activities -- Merchant
Banking and Other Principal Investing"),  was $1,264 million (a substantial
portion of which was subordinated debt), with not more than 7%, 12% and 9% of
all such securities, loans and instruments attributable to any one issuer,
industry or geographic region, respectively.  For a discussion of the various
risks associated with the Company's high-yield debt and emerging market loan
activities and the Company's policies and procedures with respect to the
management and monitoring of these risks, see "Risk Management."

                 The Company also actively trades a number of foreign
currencies on a spot and forward basis with its customers, for its own account
and to hedge its securities positions or liabilities.  In connection with its
market-making activities, the Company takes open positions in the foreign
exchange market for its own account.  The Company, on a more limited basis,
enters into forward currency transactions as agent and principal for periods of
up to seven years.  The Company is a leading participant in currency futures
trading at the International Monetary Market division of the Chicago Mercantile
Exchange and is a leading dealer in OTC and exchange traded currency options on
a worldwide basis.  The Company also trades as principal in the spot, forward
and futures markets in a variety of commodities, including precious metals,
base metals, crude oil, oil products, natural gas and related energy products.
The Company is an active market-maker in swaps and OTC options on commodities
such as metals, crude oil, oil products, natural gas and electricity, and
offers a range of hedging programs relating to production, consumption and
reserve/inventory management.  The Company is also an electricity power
marketer in the U.S.


                                       4
<PAGE>   6
                 The Company actively offers to clients and trades for its own
account a variety of financial instruments described as "derivative products"
or "derivatives."  These products, some of which may be complex in structure,
generally take the form of futures, forwards, options, swaps, caps, collars,
floors, swap options and similar instruments which derive their value from
underlying interest rates, foreign exchange rates or commodity or equity
instruments and indices.*  All of the Company's trading related business units
use derivative products as an integral part of their respective trading
strategies, and such products are used extensively to manage the market
exposure that results from proprietary trading activities.  In addition, as a
dealer in certain derivative products, most notably interest rate and currency
swaps, the Company enters into derivative contracts to meet a variety of risk
management and other financial needs of its clients.  Through the Company's
triple-A rated subsidiary (Morgan Stanley Derivative Products Inc.), the
Company also enters into swap and related derivative transactions with certain
clients seeking a triple-A rated counterparty.  For a detailed discussion of
the Company's use of derivatives, see 1995 Annual Report to Stockholders,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Derivative Financial Instruments" and "Notes to Consolidated
Financial Statements, Note 5."**

                 Derivatives used in the Company's trading or dealing
activities are recorded in its Consolidated Statement of Financial Condition at
fair value (based on listed market prices or, if listed market prices are not
available, based on other relevant factors, including dealer price quotations,
time value and yield curve or volatility factors underlying the positions and
price quotations for similar instruments traded in different markets),
representing the cost of replacing these instruments.  Gains or losses
(realized and unrealized) on derivatives are generally included on a net basis
as principal transaction revenues in the Company's Consolidated Statement of
Income.  The total notional value of derivative contracts outstanding as of
November 30, 1995 was $985 billion, which is an indication of the Company's
degree of use of derivatives for trading purposes but is not representative of
any market or credit exposure and may be more indicative of customer
utilization of derivatives.  The Company's exposure to market risk relates to
changes in interest rates, foreign currency exchange rates, or the fair value
of the underlying financial instruments or commodities which may ultimately
result in cash settlements which differ from the amounts currently recognized in
the Company's Consolidated Statement of Financial  Condition. The Company's
credit exposure at any point in time is represented by the fair value of such
instruments reported as assets, which at November 30, 1995 was $8.0 billion.
For a discussion of the various risks associated with the Company's derivative
activities and the Company's policies and procedures with respect to the
management and monitoring of these risks, see "Risk Management."

__________________________________

*        The  Company  does  not include  mortgage-backed  securities  in this
         category  in  accordance with  Statement  of Financial Accounting
         Standards No. 119, "Disclosure about Derivative Financial Instruments
         and Fair Value of Financial Instruments."

**       In addition,  the Company also uses derivative products (primarily
         interest rate and currency swaps) to  assist in asset and liability
         management  and to reduce  borrowing costs.   Net revenues  from
         derivatives used  in the  Company's own asset  and liability
         management are recognized ratably over  the term of the contract as
         an adjustment to  interest expense.  See 1995 Annual Report to
         Stockholders,   "Notes to Consolidated Financial Statements, Note 3."


                                       5
<PAGE>   7
                 From time to time, the Company has organized, advised and
managed certain funds that invest and trade in particular equity or debt
securities, foreign currencies or commodities and may continue to do so in the
future.  In connection with such activities, the Company has made and may
continue to make investments for its own account in one or more of such funds.

                 RESEARCH

                 The Company is engaged in a wide range of research activities.
The Company analyzes worldwide economic trends covering a broad range of
industries and companies in the U.S. and internationally and produces
publications and studies on the economy, financial markets, portfolio strategy,
technical market analyses, industry developments and individual companies. The
Company also provides analyses and forecasts relating to economic and monetary
developments affecting matters such as interest rates, Federal Reserve open
market operations, foreign currencies and securities and economic trends.
Support for the sales and trading of fixed income securities is also provided
in the form of quantitative and credit analyses and the development of research
products that are distributed to the Company's clients.  In addition, the
Company provides analytical support and publishes reports on mortgage-related
securities and the markets in which they are traded and does original research
on valuation techniques.

ASSET MANAGEMENT ACTIVITIES

                 ASSET MANAGEMENT

                 Through Morgan Stanley Asset Management ("MSAM"), the Company
provides global portfolio management to taxable and non-taxable institutions,
domestic and foreign governments, pension funds, international organizations,
mutual funds and individuals investing in domestic and international equities
and fixed income securities (including in emerging markets) and sponsors open-
and closed-end mutual funds.  The Company also performs a broad range of
fiduciary and named fiduciary services for pension funds and trusts.  Through
MSAM the Company had approximately $55 billion in assets under management at
November 30, 1995.

                 On January 3, 1996, a wholly owned subsidiary of Morgan
Stanley Asset Management Inc. ("MSAM Inc."), together with two of its
affiliates, completed the acquisition of Miller Anderson & Sherrerd, LLP
("MAS"), an institutional investment manager, for approximately $350 million,
payable in a combination of cash, stock of the Company and notes. On a pro
forma basis, the combination of MAS with MSAM will increase the Company's
assets under management at November 30, 1995 to approximately $90 billion.  
MAS's activities have been included in the Company's consolidated results since
January 1996.

                 GLOBAL SECURITIES SERVICES

                 Through Morgan Stanley Services ("MS Services"), the Company
provides a full range of securities services and information, including global
custody, clearance, lending and settlement operations, foreign exchange,
valuation services, cash management and margin lending. The Company's
securities services operations support mutual funds, investment limited
partnerships, investment managers, investment funds, insurance companies,
banks, foundations, endowments, family trusts, government agencies, public and
private pension funds and broker-

                                       6
<PAGE>   8
dealers.  The Company acts as principal and agent in stock borrow and stock loan
transactions in support of the Company's domestic and international trading and
brokerage, asset management and clearing activities and as an intermediary
between broker-dealers.  Through MS Services, the Company maintains a network of
agent banks in 64 countries.  Morgan Stanley Capital International (MSCI(R)),
the Company's global equity index and company data business, provides the global
investment community with benchmark indices (including The World, EAFE(R) and
Emerging Market Indices), a 25-year historical database and price and
fundamental data covering 4,200 companies in 46 developed and emerging countries
through a variety of print, electronic and software vendor-supported products.
Through MS Services, the Company had approximately $111 billion in global assets
under custody at November 30, 1995.

                 MERCHANT BANKING AND OTHER PRINCIPAL INVESTING

                 The Company also uses its capital and capital from funds under
its management in a variety of activities that have been broadly described as
merchant banking.  Such activities include, among other things, making
commitments to purchase, and making investments in, equity and debt securities
in merger, acquisition, restructuring, private investment and leveraged capital
transactions.  Such activities also include investments in real estate assets,
portfolios and operating companies.  The Company is generally the general
partner of, and an investor in, the funds which it sponsors.

                 In the merchant banking area, Morgan Stanley Capital Partners
III, L.P. ("MSCP III") was formed in 1994 with $1.9 billion in capital
commitments to invest primarily in private equity or equity-related securities
of companies.  As of November 30, 1995, MSCP III had invested $545 million in
15 companies in the U.S., Europe and Asia.  The Morgan Stanley Leveraged Equity
Fund II, L.P. was formed in 1987 to invest in and provide financing for
leveraged transactions and companies and invested $1.9 billion in the equity of
31 companies of which 19 companies representing $1.3 billion of cost basis
remain in its portfolio at November 30, 1995; this fund is no longer making new
investments, but is actively managing its existing investment portfolio.  As of
November 30, 1995, the merchant banking portfolio consisted of 41 companies in
a wide range of industries.

                 In the venture capital area, Morgan Stanley Venture Capital
Fund II, L.P. ("MSVCF II") was formed in 1993 with $126 million in capital
commitments to invest primarily in private equity or equity-related securities
of U.S. emerging growth companies, principally in the healthcare and
information technology sectors.  As of November 30, 1995, MSVCF II had invested
$86 million in 16 companies.  Morgan Stanley Venture Capital Fund L.P. was
formed in 1986 and invested $84 million in the equity of 38 companies of which
12 companies representing $32 million of cost basis remain in its portfolio at
November 30, 1995; this fund is no longer making new investments, but is
actively managing its existing investment portfolio.

                 Princes Gate Investors, L.P. ("Princes Gate") was formed in
1992 with $300 million (subsequently increased to $750 million) in aggregate
investment capacity to invest in special situation opportunities.Princes Gate
generally makes minority equity and equity-related investments which are short-
to medium-term in duration and which arise out of the Company's worldwide
investment banking activities.  As of November 30, 1995, Princes Gate had
invested 

                                       7
<PAGE>   9
$269 million in eight companies.  Subsequent to November 30, 1995, Princes Gate
Investors II, L.P. was formed with $600 million in aggregate investment
capacity (including $50 million available from the Company) to continue the
investment strategy of Princes Gate.  Princes Gate is no longer making new
investments, but is actively managing its existing investment portfolio. 

                 In the real estate area, The Morgan Stanley Real Estate Fund
II, L.P. ("MSREF II") was formed in 1994 with approximately $1 billion in
capital commitments to invest in real estate assets.  As of November 30, 1995,
MSREF II had invested or committed to invest $220 million in real estate
totaling $900 million (including third party financing) relating to four real
estate transactions.  The Morgan Stanley Real Estate Fund, L.P. was formed in
1991 and has invested $490 million in real estate totaling $2.8 billion
(including third party financing) relating to 19 real estate transactions of
which 18 investments representing $1.5 billion of real estate (including third
party financing) remain in its portfolio at November 30, 1995; this fund is no
longer making new investments, but is actively managing its existing investment
portfolio.

                 From time to time the Company may sponsor additional funds and
commit to invest in such funds.

                 Equity securities purchased in merchant banking and principal
investment transactions ("investments") generally are held for appreciation,
are not readily marketable and do not provide dividend income.  As of November
30, 1995, the aggregate carrying value of the Company's investments (directly
and indirectly through the above-referenced funds) in 79 privately held
companies was $156 million and in 18 publicly held companies was $242 million.
At November 30, 1995, the Company had aggregate commitments of approximately
$209 million to make future investments in connection with its merchant banking
and other principal investment activities.  The Company's future commitments
extend until January 1999.

                 Investments made in connection with merchant banking and other
principal investment transactions initially are carried in the Company's
Consolidated Statement of Financial Condition at their original cost.  The
carrying value of such equity securities is adjusted upward only when changes
in the underlying market values are readily ascertainable, generally as
evidenced by listed market prices or transactions which directly affect the
value of such equity securities. Downward adjustments in such equity securities
are made in the event that the Company determines that the eventual realizable
value is less than the carrying value.

                 It is not possible to determine whether or when the Company
will realize the value of the investments, including any appreciation,
dividends or other distributions thereon, since, among other things, such
investments are generally subject to restrictions on such realization relating
to the circumstances of particular transactions.  Moreover, estimates of the
eventual realizable value of the investments fluctuate significantly over time
in light of business, market, economic and financial conditions generally or in
relation to specific transactions or other factors, including the financial
leverage involved in the underlying transactions.  For a discussion of the
various risks associated with the Company's merchant banking and other
principal investment activities and the Company's policies and procedures with
respect to the management and monitoring of these risks, see "Risk Management."


                                       8
<PAGE>   10
                 For purposes of financial statement classification, merchant
banking and other principal investment advice, underwriting, origination and
commitment fees are included as investment banking revenues in the Company's
Consolidated Statement of Income.  Fees for funds under management by the
Company are included in asset management and administration revenues.
Investment gains and losses relating to, and distributions from, equity
investments are included in principal transactions/investment revenues.

                 The Company may also underwrite, trade, invest and make
markets, and publish research with respect to, the securities of issuers in
which the Company or the funds have an investment.  Such securities may include
equity and high-yield debt securities of such issuers.  In addition, the
Company may provide financial advisory services to, and have securities and
commodity trading relationships with, these issuers.

                 From time to time, the Company provides loans, financing
commitments or other extensions of credit, including on a subordinated and
interim basis, to companies (which may otherwise be leveraged) associated with
its merchant banking and other principal investment activities.  Loans made in
connection with such activities are carried at unpaid principal balances plus
accrued interest less reserves, if deemed necessary, for estimated losses.

                 Subsequent to November 30, 1995, the Company formed Morgan
Stanley Bridge Fund, L.L.C. ("MSBF"), a bridge facility with $600 million in
aggregate investment capacity (including $150 million available from the
Company) that will provide financing consisting primarily of subordinated loans
or debt financing to clients that require commitments on a timely basis,
generally in connection with strategic and financial acquisitions, leveraged
buyouts, recapitalizations and other special situations.  Such financing will
generally be provided in connection with the Company's investment banking and
merchant banking activities.  MSBF will have an investment period ending in
January 1999 (subject to earlier termination in certain instances), which may
be extended for an additional year by agreement of the members.

                 The Company also has plans to become active in the senior
syndicated lending area in connection with its investment banking activities.

FINANCE, ADMINISTRATION AND OPERATIONS

                 The Company's finance, administration and operations
departments include Controllers, Credit, Corporate Services, Corporate
Treasury, Facilities, General Services, Information Technology, Internal Audit,
Market Risk, Legal and Compliance, Tax, Office of Development, Operations and
Security.  These departments support the Company's diverse global businesses
through the processing of securities, foreign exchange and commodities
transactions; receipt and delivery of funds and securities; safeguarding of
customers' securities; internal financial controls, including management of
global expenses, capital structure and funding; and ensuring compliance with
regulatory and legal requirements.  In addition, the Company has integrated
recruitment, staffing, compensation and benefits, and career development and
training initiatives to ensure that its human resources are aligned with
strategic objectives.  Certain of these areas also assist in the management and
monitoring of the risks associated with the Company's business activities (see
"Risk Management").

                                       9
<PAGE>   11
COMPETITION AND REGULATION

                 The Company encounters intense competition in all aspects of
the financial services business and competes worldwide directly with other
firms, both domestic and international, a significant number of which have
greater capital and other resources.  Among the principal competitive factors
affecting the Company's business are the Company's general reputation, the
overall quality of its professionals, its ability to maintain existing client
relationships and develop new ones and its capability in originating and
marketing innovative products and services. Moreover, the Company's ability to
commit capital is an important competitive factor in relation to not only
generating potentially higher sales and trading revenues but also attracting
business opportunities involving the facilitation of major transactions by
clients.  In addition to competition from firms traditionally engaged in the
securities business, there has been increased competition from other sources,
such as commercial banks, insurance companies and other companies offering
financial services.  As a result of pending legislative and regulatory
initiatives in the U.S. to remove or relieve certain restrictions on commercial
banks, it is anticipated that competition in some markets currently dominated
by investment banks may increase in the near future.  Such competition, among
other things, affects the Company's ability to attract and retain highly
skilled individuals.  In addition, the two complementary trends in the
financial services industry of consolidation and globalization present, among
other things, technological and other infrastructure challenges that will
require effective resource allocation in order for the Company to remain
competitive.

                 The Company's business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation in
the U.S. at both the Federal and state levels and internationally.  Various
regulatory bodies are charged with safeguarding the integrity of the securities
and other financial markets and with protecting the interests of customers
participating in those markets.  MS&Co. is registered as a broker-dealer with
the Securities and Exchange Commission ("SEC") and in all 50 states, the
District of Columbia and Puerto Rico and is a member of the National Association
of Securities Dealers, Inc. ("NASD") and the New York Stock Exchange, Inc.
("NYSE").  The Company and certain other subsidiaries, including MS&Co. and MSAM
Inc., are registered as investment advisers with the SEC and in certain states.
Broker-dealers are subject to regulation by state securities administrators in
those states in which they conduct business.  Broker-dealers are also subject to
regulations that cover all aspects of the securities business, including sales
and trading practices, use and safekeeping of customers' funds and securities,
capital structure, record-keeping and the conduct of directors, officers and
employees. The SEC, other governmental regulatory authorities, including state
securities commissions, and self-regulatory organizations may institute
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders, the suspension or expulsion of a broker-dealer or
member, its officers or employees or other similar consequences.  Additional
legislation and regulations, including those relating to the activities of
affiliates of broker-dealers, changes in rules promulgated by the SEC or other
governmental regulatory and self-regulatory authorities (such as changes to the
U.S. Internal Revenue Code and related regulations or rules promulgated by the
Financial Accounting Standards Board) or changes in the interpretation or


                                       10
<PAGE>   12
enforcement of existing laws and rules may directly affect the manner of
operation and profitability of the Company.*

                 As a futures commission merchant, MS&Co. is registered with
the Commodity Futures Trading Commission ("CFTC") and its activities in the
futures and options-on-futures markets are subject to regulation by the CFTC
and various domestic boards of trade and other commodity exchanges.  Certain
subsidiaries of the Company are registered as commodity trading advisers and/or
commodity pool operators with the CFTC.  The Company's futures and
options-on-futures business is also regulated by the National Futures
Association ("NFA"), a not-for-profit membership corporation, which has been
designated a registered futures association by the CFTC and of which MS&Co. is
a member.

                 As a broker-dealer, MS&Co. is subject to the SEC's temporary
risk assessment rules which require, among other things, that a broker-dealer
maintain and preserve certain information, describe risk management policies
and procedures and report on the financial condition of certain affiliates
whose financial and securities activities are reasonably likely to have a
material impact on the financial and operational condition of the
broker-dealer.  As a futures commission merchant, MS&Co. is also subject to the
CFTC's risk assessment rules which have certain requirements similar to the 
SEC's rules and also require the reporting of certain "trigger events" when net
capital is reduced by substantial amounts.

                 With respect to OTC derivatives, the Company is an active
member of the International Swaps and Derivatives Association (ISDA), the Group
of 30 and the Derivatives Policy Group, a group of securities firms formed at
the request of the SEC and CFTC to address concerns regarding the OTC
derivatives activities of U.S. broker-dealer affiliates not subject to
direct regulatory oversight.  In March 1995, the Derivatives Policy Group
agreed to adhere to a voluntary oversight framework relating to reporting,
capital, management controls and counterparty relationships.

                 Margin lending by certain subsidiaries of the Company is
subject to the margin rules of the Board of Governors of the Federal Reserve
System and the NYSE.  Morgan Stanley Trust Company, the Company's principal
subsidiary that engages in custodial activities, is subject to regulation by
the New York State Banking Department.

                 Certain of the Company's government securities activities are
conducted through Morgan Stanley Market Products Inc.  which is a member of the
NASD and is registered as a government securities broker-dealer with the SEC
and in certain states.  The Department of the 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 the NASD, govern the municipal
securities activities of the Company.


__________________________________

*        For a discussion of two recent accounting proposals that could have a
         material impact on the Company's future financial condition, see 1995
         Annual Report to Stockholders, "Management's Discussion and Analysis of
         Financial Condition and Results of Operations -- Potential Impact of
         Financial Accounting Standards Board Exposure Drafts on the Company's
         Financial Statements."


                                       11
<PAGE>   13
                 Companies in the merchant banking portfolio that are in
certain regulated industries (e.g., insurance, public utilities or
broadcasting) could subject the Company to additional regulation by virtue of
the Company's affiliation with the funds that own equity interests in such
companies or otherwise.  For example, one merchant banking portfolio company
owns several insurance companies which subjects the Company to certain state
insurance holding company regulations that require the Company, among other
things, to register with certain state regulatory authorities. These state
insurance regulations also generally prohibit the acquisition of a controlling
interest in the Company (which may be deemed to occur upon the acquisition of
10% or more of the outstanding voting stock of the Company) without the prior
approval of the relevant state commissioners of insurance.

                 The Company's business is also subject to extensive regulation
by various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in those jurisdictions in which the Company
maintains an office.  For example, the Company's business in the United Kingdom
is regulated by The Securities and Futures Authority Limited, the Bank of
England and the Investment Management Regulatory Organisation, and a number of
exchanges, including the London Stock Exchange and the London International
Financial Futures and Options Exchange.  The Bundesbank, the Bundesaufsichtsamt
fur das Kreditwesen (the Federal German Banking Authority), the
Bundesaufsichtsamt fur das Wertpapierhandel (the Federal German Securities
Agency), the Frankfurt Stock Exchange and the Deutsche Terminboerse (the German
Futures Exchange) regulate the Company's activities in the Federal Republic of
Germany.  The Company's business in Japan is subject to Japanese law applicable
to foreign securities firms and related regulations of the Japanese Ministry of
Finance and to the rules of the Bank of Japan and several Japanese securities
and futures exchanges, including the Tokyo Stock Exchange, the Osaka Securities
Exchange and the Tokyo International Financial Futures Exchange.  The Monetary
Authority of Singapore and the Singapore International Monetary Exchange
regulate the Company's business in Singapore; and the Company's operations in
Hong Kong are regulated by the Securities and Futures Commission of Hong Kong,
the Stock Exchange of Hong Kong Ltd., the Hong Kong Futures Exchange and the
Hong Kong Monetary Authority.

                 As registered broker-dealers and member firms of the NYSE,
certain subsidiaries of the Company, including MS&Co., are subject to the SEC's
net capital rule, and as a futures commission merchant MS&Co. is subject to the
net capital requirements of the CFTC and various commodity exchanges.  Many
non-U.S. securities exchanges and regulatory authorities also either have
imposed or are considering imposing rules relating to capital requirements that
apply to subsidiaries of the Company (such as rules that have been or will be
promulgated in connection with the European Union Capital Adequacy Directive),
including certain European subsidiaries that are considered banking
organizations under local law.  These rules, which specify minimum capital
requirements, are designed to measure general financial integrity and liquidity
and require that at least a minimum amount of assets be kept in relatively
liquid form.  Compliance with the capital requirements may limit those
operations of the Company that require the intensive use of capital, such as
underwriting, merchant banking and trading activities, and the financing of
customer account balances, and also restricts the Company's ability to withdraw
capital from its subsidiaries, which in turn may limit the Company's ability to
pay dividends, repay debt or redeem or purchase shares of its outstanding
capital stock.  A change in such rules, or the imposition of new rules,
affecting the scope, coverage, calculation or amount of capital requirements,
or a significant 

                                       12
<PAGE>   14
operating loss or any unusually large charge against capital would adversely
affect the ability of the Company to pay dividends or to expand or even maintain
present levels of business.

RISK MANAGEMENT *

                 Risk is an inherent part of the Company's businesses and
activities.  The financial services business and its profitability are affected
by many factors of a national and international nature, including economic and
market conditions, broad trends in business and finance, legislation and
regulation affecting the national and international financial communities,
inflation, the availability of capital, the availability of credit and the
level and volatility of interest rates and currency values. The extent to which
the Company properly and effectively identifies, assesses, monitors and manages
each of the various types of risks 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.  From an
operational perspective, the Company seeks to identify, assess, monitor and
manage, in accordance with defined policies and procedures, the following
principal risks involved in each area of business activity: market risk, credit
risk, operational risk and legal risk.

                 Risk management at the Company is an integrated process with
independent oversight which requires constant communication, judgment and
knowledge of specialized products and markets. The Company's senior management
takes an active role in the risk management process and has developed policies
and procedures that require specific administrative and business functions to
assist in the identification, assessment and control of various risks.  The
Company has developed a control infrastructure to manage and monitor each type
of risk on a global basis throughout the Company. In addition, the Company has
developed particular risk management policies and procedures for certain
business activities, including merchant banking and other principal investment
activities, high-yield securities and derivative products.  In recognition of
the increasingly varied and complex nature of the financial services business,
the Company's risk management policies and procedures are evolutionary in nature
and are subject to ongoing review, modification and revision.

                 The Company has developed a multi-tiered approach for
monitoring and managing its risks. The Finance and Risk Committee, authorized
by the Company's Board of Directors, is chaired by the Company's Chief
Financial Officer and composed of senior officers with familiarity and
expertise in dealing with risk management principles.  It establishes the
overall risk management policies of the Company, reviews the Company's
performance relative to these policies, allocates capital among business
activities of the Company, monitors the availability of sources of financing,
reviews the foreign exchange risk of the Company, and oversees liquidity and
interest rate sensitivity of the Company's asset and liability position.  The
Firm Risk Manager heads the Firm Risk Management Group (described below) and
assists senior management and the Finance and Risk Committee in establishing,
monitoring and controlling the Company's overall 

__________________________________

*        For a further discussion of the Company's risk management policies and
         procedures, see 1995 Annual Report to Stockholders, "Management's
         Discussion and Analysis of Financial Condition and Results of
         Operations -- Risk Management" and "Notes to Consolidated Financial
         Statements, Note 5."


                                       13
<PAGE>   15
risk profile. With respect to the Company's major trading divisions (fixed
income, equity, commodities and foreign exchange), division risk managers manage
and monitor positions and set the overall division risk profile on a worldwide
basis within established market risk limits, review major trading positions and
strategies, and report unusual market and position events.  Desk risk managers
perform similar functions with respect to a product area or particular product
at the business unit and trading desk level.

                 The Firm Risk Management Group has operational responsibility
for identifying, monitoring and reporting to senior management on the Company's
exposure to risk.  The Firm Risk Management Group consists of three departments
that are all independent of the Company's business areas: the Market Risk
Department monitors the Company's market risk profile on a worldwide basis,
which includes all divisional, geographic and product-line market risks; the
Credit Department manages and monitors counterparty exposure limits on a
worldwide basis; and the Internal Audit Department, which also reports to the
Audit Committee of the Board of Directors, assesses the Company's operations
and control environment through periodic examinations of business and
operational areas. Other departments within the Company, which are independent
of the Company's business areas, that are also actively involved in monitoring
the Company's risk profile include: Controllers, Corporate Treasury,
Information Technology, Legal and Compliance, Tax and Operations.  In addition,
the Company has certain commitment committees, composed of a cross-section of
the Company's senior officers from various disciplines, that are involved in
managing and monitoring the risks associated with the Company's diverse
businesses. The High-Yield Commitment Committee and Equity Commitment Committee
determine whether the Company should participate in a transaction involving the
underwriting or placement of high-yield or equity securities, respectively,
where the Company's capital and reputation may be at risk, and evaluate the
potential revenues and risks involved with respect to a particular transaction.
The Company's control structure and various control mechanisms are subject to
periodic review in connection with examinations by the Company's external
auditors, as well as interactions with various regulatory authorities.  The
Company continues to be 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.

                 Market risk refers to the risk that a change in the level of
one or more market prices, rates, indices, volatilities, correlations or other
market factors, such as liquidity, will result in losses for a specified
position or portfolio.  The Company manages the market risk associated with its
trading activities Company-wide, on a divisional level worldwide and on an
individual product basis.  Specific market risk guidelines and limits have been
approved for the Company and each trading division of the Company worldwide by
the Finance and Risk Committee.  Discrete market risk limits are assigned to
business units and trading desks within trading areas which are compatible with
the trading division limits.  Division risk managers, desk risk managers and
the Market Risk Department all monitor market risk measures against limits.
The Company may use measures, such as rate sensitivity, convexity, volatility
and time decay measurements, to estimate market risk and to assess the
sensitivity of positions to changes in market conditions. Trading divisions
generally make use of valuation and risk models.  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 reviewed by
division risk managers and the Market Risk 

                                       14
<PAGE>   16
Department.  The Company also regularly uses a variety of measures to help
reduce and control the market risk associated with its market-making and
proprietary trading activities.

                  The Company's exposure to credit risk arises from the
possibility that a counterparty to a transaction might fail to perform under its
contractual commitment, resulting in the Company incurring losses.  The Finance
and Risk Committee has approved Company-wide credit guidelines which limit the
Company's credit exposure to any one counterparty.  Specific credit risk limits
based on the credit guidelines have also been approved by the Finance and Risk
Committee for each type of counterparty (by rating category) as well as certain
inventories of high-yield and emerging market debt.  In addition, the Finance
and Risk Committee has approved separate settlement risk limits.  The Credit
Department administers the credit limits among trading divisions on a worldwide
basis. The Credit Department also has procedures to monitor credit exposures,
and all counterparties of the Company are reviewed periodically to assess
financial soundness.  In addition to monitoring credit limits, the Company
manages the credit exposure relating to its trading activities by entering into
master netting agreements and collateral arrangements with counterparties in
appropriate circumstances, and limiting the duration of exposure.  In certain
cases, the Company may also close out transactions or assign them to other
counterparties to mitigate credit risk.

                 Operational risk refers to the risk of human error and
malfeasance or deficiencies in the Company's operating systems.  There is
considerable fluctuation within each year and from year to year in the volume
of business that the Company must process, clear and settle with the trend
toward increased transaction volume.  The Company is exposed to operational
risk from processing and settlement problems which may be especially acute in
some non-U.S. markets, particularly emerging markets, and during periods of
heavy trading volume in certain U.S. markets. The Company has developed and
continues to enhance specific policies and procedures that are designed to
provide, among other things, that: (1) all transactions are accurately recorded
and properly reflected in the Company's books and records and confirmed on a
timely basis; (2) cash disbursements/deliveries and receipts/deliveries of
securities are authorized, controlled and reconciled; (3) position valuations
are subject to periodic independent review procedures; (4) profit and loss
information reported to management, reflected in the Company's books and
records, and reported to tax authorities incorporates all activity; (5)
collateral and adequate documentation (e.g., master agreements) are obtained
from counterparties in appropriate circumstances; (6) valuation and risk models
are periodically reviewed as appropriate; and (7) information systems function
as intended and are utilized appropriately by authorized personnel.

                 Legal risk includes the  risk of non-compliance with
applicable legal and regulatory requirements and 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 "Competition and Regulation").  The Company has
established legal standards and procedures on a worldwide basis that are
designed to ensure compliance with all applicable statutory and regulatory
requirements.  The Company, principally through the Legal and Compliance
Department, has also established procedures, such as the Company's Code of
Conduct, that are designed to ensure that senior management's policies relating
to conduct, ethics and business practices are followed globally.  The Company
also conducts on a regular basis education and training programs that emphasize
protection of client interests and maintenance of the 

                                       15
<PAGE>   17
Company's reputation and global business franchise.  In connection with its
business, the Company has various procedures addressing a variety of issues,
such as regulatory capital requirements, sales and trading practices, new
products, use and safekeeping of customer funds and securities, money-laundering
and record-keeping.  The Company has also established certain procedures to
mitigate the risk that a counterparty's performance obligations will be
unenforceable.  In particular, the Company has adopted procedures, which are
generally product-specific and vary in accordance with risk profile and market
practice, to consider counterparty legal authority and capacity, adequacy of
legal documentation, the permissibility of the transaction under local law and
whether applicable bankruptcy or insolvency laws limit or alter contractual
remedies.

                 Positions and commitments taken by the Company in connection
with its merchant banking and other principal investment activities often may
involve substantial amounts of capital and subject the Company to, among other
things, risk due to significant exposure to one issuer, industry or business.
Additionally, the equity securities owned by the Company and the funds
sponsored by the Company in connection with the Company's principal investment
activities are generally not highly liquid.  All proposed investments made by
the Company and the funds sponsored by the Company are reviewed and approved by
senior professionals in the departments of the Company responsible for
identifying and making such investments, and any proposed loans, financing
commitments or other extensions of credit made by the Company in connection
with its merchant banking and investment banking activities are reviewed and
approved by senior management.  The Company analyzes projected cash flows and
returns of the prospective investment and sensitivities to changes in economic
assumptions, and reviews, among other things, the prospective portfolio 
company's industry and its relative position in such industry as well as its
future prospects.  The Company, which is generally the general partner of the
investment funds which it sponsors, in the case of equity investments negotiates
with the portfolio company's other equity holders certain rights related to the
strategic direction of the business, significant portfolio company transactions
and exit strategy.  With respect to any loans, financing commitments or other
extensions of credit, the Company carefully reviews the creditworthiness of the
counterparty, the availability to the counterparty of financing generally, the
likely overall financial return and the Company's available capital and funding
sources.  After any investment or loan, financing commitment or other extension
of credit is made, the Company regularly monitors the investment or counterparty
by, among other things, reviewing related business plans, financial performance
and industry trends.

                 The Company's trading and underwriting of high-yield debt
securities and emerging market loans and securitized instruments also subject
the Company to market and credit risks.  For example, securities held by the
Company in connection with its high-yield trading activities typically rank
subordinate to bank debt of the issuer and may rank subordinate to other debt
of the issuer.  The market for these securities has been, and may in the future
be, characterized by periods of illiquidity.  The liquidity of any particular
issue may be significantly better or worse than the overall liquidity of the
high-yield market at any time, depending on the quality of the issuer, and
during certain periods market quotations may not represent firm bids of dealers
or prices of actual sales.  In addition, the Company through its market-making
and trading activities may be the sole or principal source of liquidity in
certain issues and, as a result, may substantially affect the prices at which
such issues trade. To mitigate the potential impact on the Company's operating
results of the greater risk inherent in high-yield debt securities and emerging
market loans and securitized 

                                       16
<PAGE>   18
instruments, the Company has policies to control total inventory positions in
these securities and instruments.  Additionally, as indicated above, the Company
has credit policies to control exposures to individual high-yield issuers and
emerging market counterparties.

                 Derivatives facilitate risk transfer and enhance liquidity in
the marketplace, and the origination and trading of derivatives have expanded
significantly over the past decade.  Derivative instruments have been utilized
as efficient and cost effective tools that enable users to adjust risk
profiles, such as interest rate or currency risk,  or to take proprietary
trading positions.  Widespread acceptance of derivatives has contributed to the
development of more complex OTC products structured for particular clients to
address specific financing and risk management needs.* Derivative transactions
may have both on- and off-balance sheet implications, depending on the nature
of the contract, and the Company's use of derivative products may subject the
Company to various risks.**  In times of market stress, liquidity in certain
derivatives positions, as well as in underlying cash instruments, may be
reduced. Credit risk in the context of OTC derivative transactions relates to
the potential for a counterparty to default on its contract and is represented
by the replacement cost of all contracts in a gain position (after considering
the effects of master netting agreements where applicable) rather than by the
gross notional or contractual values.  The risks associated with derivative
products, including credit and market risks, are managed in a manner consistent
with the Company's overall risk management policies.  The Company's exposure to
changes in interest rates, foreign currencies and other factors is managed on
an individual product basis, generally by entering into offsetting or other
positions in a variety of financial instruments and derivative products.  The
Company manages its credit exposure to derivative products by entering into
master netting agreements when feasible, monitoring the creditworthiness
of counterparties on an ongoing basis and requesting initial and/or additional
collateral when deemed necessary, diversifying and limiting exposure to
individual counterparties, and limiting the duration of exposure.  In addition,
with respect to certain exchange-listed derivatives, the Company has agreements
with customers that permit the Company to close out positions or require
additional collateral (and in many cases require excess collateral) if certain
events occur.  In certain instances, the Company may also limit the types of
derivative products that may be traded in a particular account.


__________________________________

*        As previously indicated,  the Company also uses  derivative products
         (primarily interest  rate and currency swaps) to  assist in asset and
         liability management and to  reduce borrowing costs.  The risks
         associated with derivatives activities in  this context are managed in
         a manner consistent with the Company's overall risk management
         policies.

**       It should be  noted, however, that in many  cases derivatives serve to
         reduce,  rather than increase, the Company's  exposure to losses from
         market, credit and other risks.


                                       17
<PAGE>   19
ITEM 2.          PROPERTIES

                 The Company's executive offices are located at 1585 Broadway,
New York, New York, where the Company occupies approximately 980,500 square
feet as its New York headquarters. The Company also occupies approximately
342,000 square feet at 750 Seventh Avenue, New York, New York.  Both the 1585
Broadway and 750 Seventh Avenue buildings are owned by the Company.*   The
Company also leases space at various other locations in Manhattan under leases
expiring between 1996 and 2002 and aggregating approximately 974,680 square
feet. In addition, the Company leases space in Brooklyn, New York aggregating
approximately 383,112 square feet under a lease expiring in 2013.

                 The Company's London headquarters are located at 25 Cabot
Square, Canary Wharf (approximately three miles east of the City of London)
and occupy approximately 475,000 square feet of a 500,000 square foot building
(the "Building") constructed by the Company.  The Company owns the ground lease
obligation and the freehold interest in the land and the Building. The Company
also leases approximately 350,000 square feet at 20 Cabot Square, Canary Wharf,
under a lease arrangement expiring in 2020.

                 During fiscal 1995 the Company entered into a lease
arrangement covering approximately 121,000 square feet in the Yebisu GPT,
Ebisu, Shibuya-ku, Tokyo expiring in 1998, but renewable at the Company's
option in two year increments.  The Company will relocate its Tokyo office to
this leased space during the first quarter of fiscal 1996.

                 Most of the Company's other offices are located in leased
premises, the leases for which expire at various dates through 2011.
Facilities owned or occupied by the Company and its subsidiaries are believed
to be adequate for the purposes for which they are currently used and are well
maintained.

ITEM 3.          LEGAL PROCEEDINGS

                 (a)   The Company is involved in the following litigation
matters.

I.               State of West Virginia v. Morgan Stanley & Co. Incorporated.
On October 24, 1989, the State of West Virginia (the "State") commenced an
action in the Circuit Court of Kanawha County, West Virginia against MS&Co.,
County NatWest Government Securities, Inc., County NatWest, Inc., Salomon
Brothers Inc, Greenwich Capital Markets, Inc. and Goldman, Sachs & Co.,
alleging that the defendants had induced the State, through its Board of
Investments and the office of the State Treasurer, to engage in unsuitable and
speculative investment activity in the State's Consolidated Fund.  The
complaint alleged that, as a result of this activity, the


__________________________________

*        For a discussion of the charge taken  in fiscal 1994 in connection with
         the Company's move to its New York  facilities and to its new leased
         office space  in Tokyo, see 1995 Annual Report to Stockholders,  "Notes
         to Consolidated Financial Statements, Note 4." At  November 30,  1995
         the Company had  commitments of  an estimated $80 million  in the
         aggregate for fit-out and  related costs associated with its buildings
         in New York City and leased space in Tokyo. 


                                       18
<PAGE>   20
Consolidated Fund  suffered significant losses.  As against MS&Co., the
complaint alleged damages  in excess of $79 million.  All of the other
defendants settled with the State.

                 On March 15, 1992, the court orally granted partial summary
judgment for the State on certain of its claims.  The trial began on March 30,
1992 and concluded on May 8, 1992.  On May 6, 1992, the court directed a
verdict of approximately $32.6 million against MS&Co. on the State's ultra
vires claim.  On May 8, 1992, the jury awarded approximately $4.9 million in
damages against MS&Co. on the State's constructive fraud claim, but found that
MS&Co. had not engaged in actual fraud.  On October 13, 1993, the court entered
a judgment in the action awarding the State the total amount of $56.8 million,
inclusive of pre-judgment interest, and ordering that post-judgment interest
accrue on that sum at the statutory rate of 10% per annum until the judgment is
paid.  On January 12, 1994, the court denied MS&Co.'s motion for judgment
notwithstanding the verdict or, alternatively, for a new trial.  On June 5,
1995, the Supreme Court of Appeals of West Virginia reversed the judgment and
remanded the matter for a new trial.  On August 21, 1995, MS&Co. filed a motion
to recuse the Circuit Court judge who had theretofore presided over the
litigation.  On September 6, 1995, the Supreme Court of Appeals, having been
advised that the judge would not voluntarily recuse himself, ordered that the
motion be heard by a designated judge in a different judicial district.  The
motion to recuse is pending.

II.              Lundy, et al. v. Morgan Stanley & Co. Inc.  On September 28,
1990, a purported class action complaint was filed in the United States
District Court for the Northern District of California, purportedly on behalf
of all persons who purchased 12.40% Debentures due 1997 (the "Debentures") of
Imperial Corporation of America ("ICA") between January 9, 1987 and July 1,
1990.  MS&Co.  and Drexel Burnham Lambert Incorporated ("Drexel") were the
underwriters for the initial offering of $100 million of the Debentures.  On
February 28, 1990, ICA filed for protection under Chapter 11 of the Federal
Bankruptcy Code, and on July 1, 1990 defaulted on the payment of interest on
the Debentures.  The complaint alleged that the Debentures were issued in order
to facilitate ICA's continuing investment in high yield junk bonds through
Drexel, and that, with MS&Co.'s knowledge, the prospectus issued in connection
with the Debentures was materially false and omitted to state material
information.  The complaint asserted claims under section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and rule 10b-5
promulgated thereunder, and for fraud, negligence, negligent misrepresentation
and false advertising, and sought rescission, compensatory and punitive damages
in unspecified amounts, disgorgement of profits and compensation, costs and
attorneys' fees. On February 25, 1991, the court certified the plaintiff class.
On January 25, 1993, MS&Co. filed a motion for summary judgment.  On October 21,
1993, the court entered a preliminary order approving an agreement, subject to
certain contingencies, to settle the action.

III.             Atwood, et al. v. Burlington Industries Equity, Inc., et al.
On June 3, 1992, a purported class action complaint was filed against
Burlington Industries Equity, Inc. ("Burlington"), the Company, and seven
officers and/or directors of Burlington, two of whom are MS&Co. employees.
NationsBank Trust Company was subsequently added as a defendant.  The plaintiff
class purportedly consists of all participants in and beneficiaries of
Burlington's Employee Stock Ownership Plan ("ESOP").  The complaint alleged
that defendants violated the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and breached various fiduciary duties purportedly owed to
plaintiffs in connection with the ESOP's August 1989 purchase of certain
Burlington voting stock at $37.80 per share.  The complaint alleged that
defendants 

                                       19
<PAGE>   21
thereafter caused Burlington to engage in a series of transactions which
decreased significantly the value of the ESOP's investment in Burlington stock. 
The complaint sought compensatory and punitive damages in unspecified amounts,
rescission of the ESOP's August 1989 purchase of  Burlington stock, removal of
all defendants as ESOP fiduciaries under the ERISA statute, pre- and
post-judgment interest, costs and attorneys' fees.  The action is pending in
the United States District Court for the Middle District of North Carolina.  On
August 3, 1994, the court granted in part and denied in part defendants' motion
to dismiss the action.  On February 13, 1995, the court granted plaintiffs'
motion for class certification.  On December 15, 1995, defendants filed motions
for summary judgment.

IV.              Hedged-Investments Litigation.  On August 6, 1993, a purported
class action complaint captioned Bruce W. Higley, D.D.S., M.S., P.A. Defined
Benefit Annuity Plan v. Donahue, et al. was filed in the District Court for the
City and County of Denver, Colorado purportedly on behalf of all persons and
entities who invested, directly or indirectly, in certain investment
partnerships or entities organized and/or managed by James D. Donahue
("Donahue"). Donahue was the founder and president of Hedged-Investments
Associates, Inc. ("HIA"), through which Donahue conducted the options trading
at issue in the action.  HIA, in turn, was allegedly the general partner of
several limited partnerships.  The trading at issue occurred through accounts
held at MS&Co., Kidder, Peabody & Co. Incorporated ("Kidder"), and Prudential
Securities Incorporated ("Prudential").  The action was brought against
Donahue, MS&Co., Kidder, Prudential, and individual employees at each of those
firms.  The complaint alleged that despite representations made to investors
that the trading would be based on a "scientific" approach, would be fully
hedged, and would yield a predictable return, Donahue, in conspiracy with and
aided and abetted by the other defendants, in reality engaged in risky trading
strategies while operating a "Ponzi scheme," which caused investors to suffer
substantial losses.  As against the brokerage firms, the complaint asserted
state law causes of action for violating and aiding and abetting violations of
state securities laws, fraud and aiding and abetting fraud, aiding and abetting
Donahue's breach of fiduciary duty, theft by deception, civil conspiracy, and
aiding and abetting conversion. The complaint also asserted causes of action
under the Colorado Organized Crime Control Act. The complaint sought rescissory
and compensatory damages in unspecified amounts, treble damages, costs and
attorneys' fees.

                  Related litigation against MS&Co. and the other defendants was
filed in the same court. That litigation included an action by the bankruptcy
trustee for HIA and certain related partnerships and a competing class action
brought on behalf of essentially the same class of investors alleged to be
represented in Higley. On March 10, 1994, the court certified a plaintiff class
in Higley and the competing class action. The court denied various motions to
dismiss.

                  An agreement was thereafter reached to settle Higley and the
competing class action. Following a fairness hearing on April 28, 1995, the
court entered a final order and judgment approving a settlement of Higley and
the competing class action. On June 5, 1995, the court denied a request made by
one class member to intervene for purposes of appealing both a court-approved
plan for allocation of the settlement proceeds and the final order and judgment.
On June 12, 1995, the class member filed a notice of appeal to the Colorado
Court of Appeals, appealing the plan of allocation, the final order and
judgment, and the order denying intervention. Oral argument on the motion was
heard on January 30, 1996.


                                       20
<PAGE>   22
                  The action filed by the bankruptcy trustee for HIA and certain
related partnerships is captioned Sender v. Kidder, Peabody & Co. Incorporated,
et al. On November 1, 1995, the court in  Sender granted defendants' motion for
summary judgment. On December 11, 1995, final judgment was entered in favor of
defendants. The bankruptcy trustee has appealed.

V.                The National Commercial Bank v. Morgan Stanley Asset 
Management Inc., et al. On May 2, 1994, a complaint was filed in the United
States District Court for the Southern District of New York by The National
Commercial Bank ("NCB") against MSAM Inc. and three present and former MSAM Inc.
employees. The complaint alleged that NCB established a managed account at MSAM
Inc. in or about February 1993 to trade United States Treasury securities and
that in August 1993 that account suffered substantial losses. The complaint
alleged violations of sections 10(b) and 20(a) of the Exchange Act and rule
10b-5 promulgated thereunder, common law fraud, common law constructive fraud,
breach of fiduciary duty, breach of contract, negligence and negligent
misrepresentation, and sought compensatory damages in excess of $39 million,
punitive damages in an unspecified amount, costs, attorneys' fees and interest.
On June 28, 1994, defendants filed answers to the complaint. On July 11, 1994,
defendants filed third-party complaints against two employees of NCB, asserting
claims over and for contribution and indemnity in the event defendants are
determined to be liable to NCB. The complaint, answers and third-party
complaints were thereafter amended. The claims against MSAM Inc.'s two present
employees have been dismissed without prejudice as have their claims against the
two employees of NCB. Discovery is proceeding.

VI.               NASDAQ Antitrust Litigation. On December 16, 1994, a 
consolidated amended complaint was filed in the United States District Court 
for the Southern District of New York against a total of 33 defendants,
including MS&Co. The consolidated amended complaint alleged that MS&Co. and
other participants and market makers on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") engaged in a conspiracy to fix the
"spread" between bid and asked prices for securities traded on the NASDAQ in
violation of Section 1 of the Sherman Act. The plaintiff class was alleged to
include persons throughout the United States who are customers of the defendants
or their affiliates and who purchased or sold securities on the NASDAQ during
the period from May 1, 1989 through May 27, 1994. Plaintiffs were alleged to
have been damaged in that they paid more for securities purchased on the NASDAQ,
or received less for securities sold, than they would have but for the alleged
conspiracy. The consolidated amended complaint sought compensatory damages,
treble damages, declaratory and injunctive relief, attorneys' fees and costs.
Judgment against each of the defendants was sought on a joint and several basis.
On February 2, 1995, MS&Co. and the other named defendants filed a motion to
dismiss, which was granted on August 10, 1995 with leave to replead. On August
22, 1995, plaintiffs filed a Refiled Consolidated Complaint which is identical
in substance to the dismissed pleading except that it lists by name the stocks
that plaintiffs contend were the subject of the alleged conspiracy. On December
18, 1995, MS&Co. filed its answer. Discovery is proceeding.

VII.               MGN Pension Trustees Ltd., et al. v. Morgan Stanley Trust
Company. On October 20, 1995, a complaint was filed against Morgan Stanley Trust
Company ("MSTC") in the United States District Court for the Eastern District of
New York by MGN Pension Trustees Ltd. (as trustee of the Mirror Group Pension
Scheme) and The Law Debenture Trust Corporation plc (as trustee of the Maxwell
Communication Pension Plan). The complaint alleges that MSTC breached a variety
of duties purportedly owed to certain pension plans whose assets were 
                                       21
<PAGE>   23
managed by an entity controlled by the late Robert Maxwell. The complaint
asserts claims for breach of contract, breach of fiduciary duty, aiding and
abetting a breach of fiduciary duty,participation in a breach of fiduciary
duty, fraud and aiding and abetting a fraud, and seeks between $21.5 million
and $142.3 million in compensatory damages, punitive damages in an unspecified
amount, return of commissions, interest, costs and attorneys' fees. On December
18, 1995, MSTC filed a motion to dismiss the action.

VIII.              Global Opportunity Fund Litigation. On December 19, 1995,
20 investors in a Cayman Islands investment fund named The Global Opportunity
Fund (the "Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A.
("MSBL") in Luxembourg Commercial Court seeking damages in the amount of $44
million and costs. The apparent core of plaintiffs' complaint is that MSBL was
responsible for providing certain net asset valuations to the Fund and performed
that function in a negligent manner.

IX.                Other. In addition to the matters described above, the 
Company, including MS&Co., has been named from time to time as a defendant in
various legal actions, including arbitrations, arising in connection with its
activities as a global diversified financial services institution, certain of
which include large claims for punitive damages. The Company, including MS&Co.,
is also involved, from time to time, in investigations and proceedings by
governmental and self-regulatory agencies.

                  In view of the inherent difficulty of predicting the outcome
of such matters, particularly in cases such as some of those described above in
which substantial damages are sought, the Company cannot state what the eventual
outcome of pending matters will be. The Company is contesting the allegations
made in each pending matter and believes, based on current knowledge and after
consultation with counsel, that the outcome of such matters will not have a
material adverse effect on the Company's Consolidated Financial Statements
incorporated by reference herein.

                  (b) The following litigation matters were terminated during
the quarter ended November 30, 1995.

I.                Taxable Municipal Bond Litigation. Between April and 
October 1990, 16 purported class action complaints were filed in various federal
and state courts alleging claims relating to eight offerings of taxable
municipal bonds by eight different issuers in 1986. On November 27, 1990, the
federal Judicial Panel on Multidistrict Litigation transferred all of the
actions to the United States District Court for the Eastern District of
Louisiana for consolidated pretrial proceedings.

                  On May 3, 1991, eight amended and consolidated complaints (the
"Amended and Consolidated Complaints") were filed in connection with the
proceedings arising out of eight different bond offerings (the "Eight
Offerings"). In addition, a single Racketeer Influenced and Corrupt
Organizations Act ("RICO") complaint was filed on May 3, 1991, which addressed
all of the Eight Offerings. The Amended and Consolidated Complaints and the RICO
complaint, like the previously filed complaints, alleged that the defendants
fraudulently informed investors that the proceeds of the Eight Offerings would
be used to fund low cost, public interest loans. According to the Amended and
Consolidated Complaints, the money was instead invested in guaranteed  
                                       22
<PAGE>   24
investment contracts ("GICs") issued by Executive Life Insurance Company
("Executive Life") as part of a purported scheme on the part of Drexel and
Executive Life to use the underwriting ofmunicipal bonds to permit Executive
Life to invest in high risk junk bonds through Drexel. (Due to its bankruptcy
filing, Drexel was not named as a defendant in any of the Amended and
Consolidated Complaints.) Following the deterioration of the high yield bond
market, the ratings of Executive Life and the GIC-backed bonds were downgraded,
and the resulting decline in the value of the bonds was alleged to have caused
losses to the members of the purported plaintiff classes. The plaintiff class
in each of the actions purportedly consisted of all persons who purchased the
bonds at issue prior to and including April 9, 1990. The Amended and
Consolidated Complaints generally alleged violations of section 10(b) of the
Exchange Act and rule 10b-5 promulgated thereunder, section 80a of the
Investment Company Act of 1940 (the "Investment Company Act"), section 80b-3 of
the Investment Advisers Act of 1940 (the "Advisers Act") and common law and/or
statutory fraud, and sought actual and punitive damages in unspecified amounts,
rescission, declaratory relief, interest, costs and attorneys' fees. The RICO
complaint alleged violations of section 1962(c) and (d) of Title 18 and sought
compensatory and treble damages in unspecified amounts, injunctive relief,
disgorgement, interest, costs, and attorneys' fees. MS&Co. was named as a
defendant in seven of the eight Amended and Consolidated Complaints and in the
RICO complaint. The master caption of the multi-district proceeding is In re
Taxable Municipal Bond Securities Litigation. The seven actions naming MS&Co.
as a defendant are: Farm Bureau Federation, et al. v. The Board of County
Commissioners of Adams County, Colorado, et al.; Washington National Life
Insurance Company of New York, et al. v. Morgan Stanley & Co. Incorporated, et
al.; First National Bank, et al. v. Louisiana Housing Finance Agency, et al.;
Associated Kellogg Bank, et al. v. Louisiana Agricultural Finance Authority, et
al.; Bloomfield State Bank, et al. v. Louisiana Agricultural Finance Authority,
et al.; Virgin, et al. v. Health, Educational and Housing Facility Board of the
City of Memphis, Tennessee, et al.; and Farm Bureau Town & Country Insurance
Company of Missouri, et al. v. El Paso Housing Finance Corporation, et al.

                  On June 3, 1992, the court dismissed plaintiffs' claims under
the Investment Company Act and the Advisers Act. On November 1, 1993, certain of
the defendants in the various actions filed cross-claims to preserve their
various claims for contribution, credit or offset. In connection with the RICO
action, all of the plaintiffs except Washington National Life Insurance Company
and Washington National Life Insurance Company of New York withdrew their RICO
claims without prejudice. Thereafter, on December 13, 1993, the court granted
defendants' motion for summary judgment on the Washington National plaintiffs'
RICO claims, and denied the Washington National plaintiffs' motion for leave to
file an amended RICO complaint. On February 2, 1994, the court entered an order
imposing sanctions on counsel for the Washington National plaintiffs.

                  The parties thereafter agreed to settle the various actions in
which MS&Co. was named as a defendant (excluding the Washington National
action), and the settlement was preliminarily approved by the court on February
1, 1995. Following a fairness hearing on July 31, 1995, the magistrate filed a
report which recommended approval of the settlement. On October 10, 1995, the
settlement received final court approval. On November 1, 1995, the court entered
an order suggesting that the Washington National action be transferred back to
the United States District Court in Nebraska; subsequently, the court
reconsidered its decision and entered another order suggesting remand of the
case to New York.


                                       23
<PAGE>   25
II.               Katell, et al. v. Morgan Stanley Group Inc., et al. On 
November 6, 1991, a complaint was filed in the Court of Chancery of the State of
Delaware for New Castle County against the Company, MS&Co., two MS&Co.
employees, Morgan Stanley Leveraged Capital Fund, Inc., Morgan Stanley Leveraged
Equity Fund, L.P. ("MSLEF"), CIGNA Corp., CIGNA Capital Advisors, Inc., CIGNA
Leveraged Capital Fund, Inc., SIBV/MS Holdings, Inc., Jefferson Smurfit Corp.,
Container Corporation of America ("CCA"), Silgan Holdings Inc. and Silgan
Corporation ("Silgan"). The complaint, filed on behalf of two limited partners
in MSLEF, alleged breaches of fiduciary duties, willful misconduct, gross
negligence and breach of contract in connection with the purchase and sale of
MSLEF's interests in CCA and Silgan. The complaint alleged damages in excess of
$32.9 million and sought compensatory damages in an unspecified amount, together
with interest. On February 17, 1992, plaintiffs filed an amended complaint,
adding derivative claims and seeking an accounting. On January 14, 1993, the
court dismissed plaintiffs' individual claims, co-investor claims, right of
first refusal claims and aiding and abetting claims, but did not dismiss
plaintiffs' derivative claims regarding the CCA and Silgan sale prices. On
September 27, 1993, the court granted defendants' motion to stay the action
pending a report by a special litigation committee. On April 15, 1994, the
special litigation committee filed its report together with a motion to dismiss
the action. On June 15, 1995, the court granted the special litigation
committee's motion to dismiss the action. On August 15, 1995, a notice of appeal
was filed on behalf of one of the two plaintiffs. The parties thereafter agreed
to settle the action.

                  A related action, captioned Desert Equities, Inc. v. Morgan
Stanley Leveraged Equity Fund II, L.P., et al., was commenced on February 18,
1992 in the Court of Chancery of the State of Delaware for New Castle County
against Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), Morgan
Stanley Leveraged Equity Fund II, Inc. and the Company. The complaint alleged
that plaintiff, a limited partner in MSLEF II, was improperly excluded from
MSLEF II investment opportunities in retaliation for its participation in the
Katell litigation described above. The complaint asserted claims for breach of
fiduciary duty, breach of the MSLEF II Partnership Agreement and breach of an
implied covenant of good faith and fair dealing. The complaint sought damages in
an unspecified amount, interest, injunctive relief, specific performance of the
Partnership Agreement and an accounting. On July 28, 1992, the court granted
defendants' motion for judgment on the pleadings. On June 1, 1993, the Delaware
Supreme Court reversed and remanded the action for further proceedings. The
parties thereafter agreed to settle the action.

III.              First Tokyo Index Trust Limited v. Morgan Stanley Trust 
Company and Morgan Stanley International. On September 30, 1993, First Tokyo
Index Trust Limited ("First Tokyo") commenced an action in the High Court of
Justice, Chancery Division, London, against MSTC and Morgan Stanley
International ("MSI"). MSTC was the custodian for First Tokyo's assets, and MSI
engaged in certain transactions concerning those assets. First Tokyo asserted
claims for breach of contract, negligence, breach of trust, breach of fiduciary
duty, conversion and constructive trust, and sought the return of certain assets
remaining in the First Tokyo custodial account with MSTC, compensatory damages
in an unspecified amount, interest, costs and an accounting.

                  On December 31, 1993, MSTC and MSI filed their defenses, as
well as claims for contribution and/or indemnity against various individuals and
entities. The parties subsequently amended their respective pleadings. On May
12, 1994, the court granted in part and denied in part plaintiff's motion to
strike certain of the defenses asserted by the defendants. On November 10, 

                                       24
<PAGE>   26
1994, the court granted MSTC and MSI's application to add Coopers & Lybrand as
a third-party defendant, and to assert claims for contribution and/or indemnity
against Coopers & Lybrand. First Tokyo thereafter amended its Statement of
Claim to assert various claims against Coopers & Lybrand. On July 3, 1995, the
court directed that this action be consolidated with a related action filed by
Swiss Bank Corporation against Coopers & Lybrand. The parties thereafter agreed
to settle the action.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  There were no matters submitted to a vote of security holders
during the quarter ended November 30, 1995.

EXECUTIVE OFFICERS OF THE REGISTRANT

                  The following table provides certain information about each of
the Registrant's executive officers on November 30, 1995:

<TABLE>
<CAPTION>
Name                                             Age                           Position
----                                             ---                           --------

<S>                                               <C>            <C>                                    
Richard B. Fisher                                 59              Chairman of the Board of Directors,
                                                                  Managing Director and director of the
                                                                  Registrant and MS&Co.

John J. Mack                                      51              President, Managing Director and
                                                                  director of the Registrant and MS&Co.

Barton M. Biggs                                   63              Managing Director and director of the
                                                                  Registrant and MS&Co.

Peter F. Karches                                  44              Managing Director and director of the
                                                                  Registrant and MS&Co.

Sir David A. Walker                               56              Managing Director and director of the
                                                                  Registrant and MS&Co. and director
                                                                  and Executive Chairman of Morgan
                                                                  Stanley Group (Europe) Plc

Jonathan M. Clark                                 58              General Counsel and Secretary of the
                                                                  Registrant and MS&Co. and Managing
                                                                  Director and director of MS&Co.

Philip N. Duff                                    38              Chief Financial Officer and Managing
                                                                  Director of the Registrant and MS&Co.
                                                                  and director of MS&Co.

Charles B. Hintz                                  46              Treasurer of the Registrant and MS&Co.
                                                                  and Managing Director of MS&Co.
</TABLE>

                                       25
<PAGE>   27
              All directors hold office until the next annual meeting of
stockholders and until their respective successors have been duly elected and
qualified. Officers serve at the discretion of the Board of Directors. There are
no family relationships among any directors or executive officers.

              Mr. Fisher has served as Chairman of the Board of Directors of the
Registrant and MS&Co. from January 1991. From January 1984 through December
1990, he served as President of the Registrant and MS&Co. He has been a director
and a Managing Director of the Registrant from July 1975 and a director and a
Managing Director of MS&Co. from July 1970. He has also been a member of the
Registrant's Executive Committee from March 1986 and its Chairman from May
1991. He was a partner of Morgan Stanley & Co. from July 1970 through June 1975.

              Mr. Mack has been President of the Registrant and MS&Co. from June
1993. He has been a director and a Managing Director of the Registrant from
December 1987 and was a director and a Managing Director of the Registrant from
January 1979 until March 1986. Mr. Mack has been a director and a Managing
Director of MS&Co. from January 1979. He has also been a member of the
Registrant's Executive Committee from December 1987.

              Mr. Biggs has been a director and a Managing Director of the
Registrant from May 1991 and a director and Managing Director of MS&Co. from
July 1973. He was a director and a Managing Director of the Registrant from July
1975 to March 1986. He has also been a member of the Registrant's Executive
Committee from May 1991. He was a partner of Morgan Stanley & Co. from June 1973
through June 1975.

              Mr. Karches has been a director and a Managing Director of the
Registrant from February 1994 and a director and a Managing Director of MS&Co.
from January 1985. He has also been a member of the Registrant's Executive
Committee from February 1994.

              Sir David Walker has been a director of the Registrant from
November 1994, a Managing Director of the Registrant from May 1995, a director
of MS&Co. from February 1995 and a Managing Director of MS&Co. from November
1994. He has been a director and the Executive Chairman of Morgan Stanley Group
(Europe) Plc from December 1994. He has also been a member of the Registrant's
Executive Committee from November 1994. Before joining the Company, Sir David
was a Deputy Chairman of Lloyds Bank in England. From 1988 to 1992 he was
Chairman of the Securities and Investments Board, the British authority that
regulates the securities markets.

              Mr. Clark has been the General Counsel and Secretary of the
Registrant and MS&Co. from February 1993. From February 1993 he has been a
director and a Managing Director of MS&Co. Before joining the Company, Mr. Clark
was a partner of Davis Polk & Wardwell, a New York law firm.

              Mr. Duff has been the Chief Financial Officer of the Registrant
and MS&Co. from February 1994 and a Managing Director of the Registrant from
November 1995. He has been a director of MS&Co. from November 1995 and a
Managing Director of MS&Co. from February 1993. From January 1991 to February
1993 he was a Principal of MS&Co. and from January 1989 to January 1991 he was a
Vice President of MS&Co.

                                       26
<PAGE>   28
              Mr. Hintz has been the Treasurer of the Registrant and MS&Co. from
January 1992. He has been a Managing Director of MS&Co. from February 1993. From
January 1989 to February 1993 he was a Principal of MS&Co. and from October 1986
to January 1989 he was a Vice President of MS&Co.

                                     PART II

ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS

              Information relating to the principal market in which the
Registrant's Common Stock is traded, the high and low sales prices per share for
each full quarterly period within the two most recent fiscal years, the
approximate number of holders of record of Common Stock and the frequency and
amount of any cash dividends declared for the two most recent fiscal years is
set forth under the caption "Quarterly Results" on page 76 of the Registrant's
1995 Annual Report to Stockholders and such information is hereby incorporated
herein by reference.

ITEM 6.       SELECTED FINANCIAL DATA

              Selected Financial Data for the Registrant and its subsidiaries
for each of the last five fiscal years is set forth under the same caption on
the inner cover of the 1995 Annual Report to Stockholders. Such information
(other than the information contained in the column entitled "Fiscal Period
Ended November 30, 1995 Annualized (Unaudited)") is hereby incorporated herein
by reference and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 44 to 76 of such Annual
Report.

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
              RESULTS OF OPERATIONS

              Management's Discussion and Analysis of Financial Condition and
Results of Operations is set forth under the same caption on pages 26 to 42 of
the 1995 Annual Report to Stockholders. Such information is hereby incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 44 to 76 of such
Annual Report.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

              The consolidated financial statements of the Registrant and its
subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the 1995 Annual Report to Stockholders on
pages 43 to 76, and such information is hereby incorporated herein by reference,
including the information appearing under the caption "Quarterly Results" on
page 76 of such Annual Report.

              The Statement of Financial Condition at December 31, 1995 and 1994
for the Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the
Statement of Changes in Plan Equity 


                                       27
<PAGE>   29
for the Years Ended December 31, 1995, 1994 and 1993 together with the Notes
thereon and the Report of Independent Chartered Accountants appear as Exhibit
99.   

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND 
              FINANCIAL DISCLOSURE

              NOT APPLICABLE.

                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

              Information relating to Directors and Nominees of the Registrant
is set forth under the caption "Election of Directors" on pages 3 and 4 of the
Proxy Statement of the Registrant for its 1996 Annual Meeting of Stockholders
and such information is hereby incorporated herein by reference.

ITEM 11.      EXECUTIVE COMPENSATION

              Information relating to executive compensation is set forth under
the captions "Board of Directors Meetings, Committees and Fees" on page 5,
"Compensation of Executive Officers" on pages 10 to 13 and "Compensation
Committee Interlocks and Insider Participation" on page 18 of the Proxy
Statement of the Registrant for its 1996 Annual Meeting of Stockholders and such
information is hereby incorporated herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

              Information relating to security ownership of management and
certain beneficial owners is set forth under the captions "Stock Ownership of
Management" and "Principal Stockholders" on pages 6 and 7, respectively, of the
Proxy Statement of the Registrant for its 1996 Annual Meeting of Stockholders
and such information is hereby incorporated herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              Information regarding certain relationships and related
transactions is set forth under the caption "Interest of Management in Certain
Transactions" on page 9 of the Proxy Statement of the Registrant for its 1996
Annual Meeting of Stockholders and such information is hereby incorporated
herein by reference.

                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)           Documents filed as part of this Report:

     1        Financial Statements

                                       28
<PAGE>   30

              The financial statements required to be filed hereunder are listed
on page F-1 hereof.

     2        Financial Statement Schedules

              The financial statement schedules required to be filed hereunder
              are listed on page F-1 hereof.

     3        Exhibits

              Certain of the following exhibits, as indicated parenthetically,
              were previously filed as exhibits to registration statements filed
              by the Registrant under the Securities Act of 1933 or to reports
              or registration statements filed by the Registrant under the
              Exchange Act, respectively, and are hereby incorporated by
              reference to such statements or reports.

                     3.1*   Restated Certificate of Incorporation of the
                            Company, as amended to date.

                     3.2    By-Laws of the Company, as amended to date (Annual
                            Report on Form 10-k for the fiscal year ended 
                            January 31, 1995).

                     4.1    Restated Certificate of Incorporation of the
                            Company, as amended to date (see Exhibit 3.1).

                     4.2    Stockholders' Agreement dated February 14, 1986, as
                            amended to date (Annual Report on Form 10-K for the
                            fiscal year ended January 31, 1993).

                     4.3*   Form of Consent and Amendment dated as of January
                            31, 1996 between the Company and certain signatories
                            to the Stockholders' Agreement referred to in 
                            Exhibit 4.2.

                     4.4    Subordinated Indenture dated as of April 15, 1989
                            between the Company and The First National Bank of
                            Chicago, as trustee (Annual Report on Form 10-K for
                            the fiscal year ended January 31, 1993).

                     4.5    First Supplemental Subordinated Indenture dated as
                            of May 15, 1991 between the Company and The First
                            National Bank of Chicago, as trustee (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).


-----------------------
*    Filed herewith.
                                       29
<PAGE>   31
                     4.6    Senior Indenture dated as of April 15, 1989 between
                            the Company and Chemical Bank, as trustee (Annual
                            Report on Form 10-K for the fiscal year ended
                            January 31, 1993).

                     4.7    First Supplemental Senior Indenture dated as of May
                            15, 1991 between the Company and Chemical Bank, as
                            trustee (Annual Report on Form 10-K for the fiscal
                            year ended January 31, 1993).

                     4.8    Subordinated Indenture dated as of November 15, 1993
                            among Morgan Stanley Finance plc, the Company, as
                            guarantor, and 

                            Chemical Bank, as trustee (Current
                            Report on Form 8-K dated December 1, 1993).

                     4.9    Voting Agreement dated March 5, 1991 among the
                            Company, State Street Bank and Trust Company and
                            Other Persons Signing Similar Voting Agreements
                            (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                     4.10   Instruments defining the Rights of Security Holders,
                            Including Indentures - In addition to Exhibits 4.1
                            through 4.9 herein, pursuant to paragraph
                            (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
                            Registrant hereby undertakes to furnish to the
                            Securities and Exchange Commission upon request
                            copies of the instruments defining the rights of
                            holders of long-term debt securities of the
                            Registrant and its subsidiaries, none of which
                            instruments authorizes the issuance of an amount of
                            securities that exceeds 10% of the total assets of
                            the Registrant and its subsidiaries on a
                            consolidated basis.

                     10.1+  Form of Agreement under the Morgan Stanley & Co.
                            Incorporated Owners' and Select Earners' Plan
                            (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                     10.2+  Form of Agreement under the Morgan Stanley Group
                            Inc. Officers' and Select Earners' Plan (Annual
                            Report on Form 10-K for the fiscal year ended
                            January 31, 1993).

                     10.3+  Morgan Stanley & Co. Incorporated Excess Benefit
                            Plan, as amended and restated to date (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).

                     10.4+  Morgan Stanley & Co. Incorporated Supplemental
                            Executive Retirement Plan, as amended (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).



------------------------------------
       +      Management Contract or compensatory plan or arrangement required
              to be filed as an exhibit to this Form 10-K pursuant to Item
              14(c).

                                       30
<PAGE>   32
                     10.5+  Morgan Stanley Group Inc. 1986 Stock Option Plan, as
                            amended and restated to date (Annual Report on Form
                            10-K for the fiscal year ended January 31, 1993).

                     10.6+  Morgan Stanley Group Inc. Performance Unit Plan, as
                            amended and restated to date (Annual Report on Form
                            10-K for the fiscal year ended January 31, 1993).

                     10.7+  Morgan Stanley Group Inc. Deferred Compensation Plan
                            for Outside Directors, as amended to date (Annual
                            Report on Form 10-K for the fiscal year ended
                            January 31, 1993).

                     10.8+  Morgan Stanley Group Inc. 1988 Equity Incentive
                            Compensation Plan, as amended to date (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).

                     10.9+  Morgan Stanley Group Inc. 1988 Capital Accumulation
                            Plan, as amended to date (Annual Report on Form 10-K
                            for the fiscal year ended January 31, 1993).

                     10.10+ Form of Deferred Compensation Agreement under the
                            Pre- Tax Incentive Program (Annual Report on Form
                            10-K for the fiscal year ended January 31, 1994).

                     10.11  Trust Agreement dated March 5, 1991 between the
                            Company and State Street Bank and Trust Company
                            (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                     10.12  Agreement of Lease dated May 13, 1986 between Morgan
                            Stanley & Co. Incorporated and Forest City
                            Pierrepont Associates, as amended (Annual Report on
                            Form 10-K for the fiscal year ended January 31,
                            1993).

                     10.13  Agreement of Sublease between McGraw Hill, Inc. and
                            Morgan Stanley & Co. Incorporated, as amended to
                            date (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                     10.14  Lease dated January 22, 1993 between Rock-McGraw,
                            Inc. and Morgan Stanley & Co. Incorporated (Annual
                            Report on Form 10-K for the fiscal year ended
                            January 31, 1993).


----------------------------
+      Management Contract or compensatory plan or arrangement required to be
       filed as an exhibit to this Form 10-K pursuant to Item 14(c).

*      Filed herewith.


                                       31
<PAGE>   33
                     10.15  Agreement of Lease dated February 10, 1995 among
                            Canary Wharf Limited, Morgan Stanley UK Group and
                            the Company (Annual Report on Form 10-K for the
                            fiscal year ended January 31, 1995).

                     11*    Statement Re: Computation of Earnings Per Share.

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

                     13*    The following portions of the Company's 1995 Annual
                            Report to Stockholders, which are incorporated by
                            reference in this Annual Report on Form 10-K, are
                            filed as an Exhibit:

                            13.1   "Quarterly Results" (page 76).

                            13.2   "Selected Financial Data" (other than the
                                   information contained in the column entitled
                                   "Fiscal Period Ended November 30, 1995
                                   Annualized (Unaudited)") (Inner Cover).

                            13.3   "Management's Discussion and Analysis of
                                   Financial Condition and Results of
                                   Operations" (pages 26 to 42).

                            13.4   Consolidated Financial Statements of the
                                   Company and its subsidiaries, together with
                                   the Notes thereto and the Report of
                                   Independent Auditors thereon (pages 43 to
                                   76).

                     21*    Subsidiaries of the Company.

                     23.1*  Consent of Ernst & Young.

                     23.2*  Consent of Ernst & Young with respect to the
                            Financial Statements for the fiscal year ended
                            December 31, 1995 for the Morgan Stanley U.K. Group
                            Profit Sharing Scheme.

                     24     Powers of Attorney (included on signature page).

                     27*    Financial Data Schedule.

                     99*    Financial Statements for the fiscal year ended
                            December 31, 1995 for the Morgan Stanley U.K. Group
                            Profit Sharing Scheme.




--------------------
*     Filed herewith.

                                       32
<PAGE>   34

(b)           A Current Report on 8-K, dated September 26, 1995, was filed with
              the Securities and Exchange Commission in connection with the
              announcement of the Company's financial results for the period
              ended August 31, 1995 and the declaration of a quarterly cash
              dividend.

              A Current Report on 8-K, dated October 18, 1995, was filed with
              the Securities and Exchange Commission to file a Capital Unit
              Agreement dated October 18, 1995 among the Company, Morgan Stanley
              Finance Plc ("MS Plc") and Chemical Bank as Agent and Book Entry
              Unit Depositary, and the holders from time to time of the 8.20%
              Capital Units, each consisting of (i) an 8.20% Subordinated
              Debenture of MS Plc due November 30, 2015 in the principal amount
              of $25.00 guaranteed by the Company and (ii) a related Purchase
              Contract issued by the Company requiring the holder, at the
              Company's option after November 30, 1996, to purchase one
              Depositary Share representing ownership of 1/8 interest in a share
              of the Company's 8.20% Cumulative Preferred Stock, stated value
              $200 per share.



                                       33
<PAGE>   35
                                   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 February 26, 1996.

                                        MORGAN STANLEY GROUP INC.

                                        By/s/ Richard B. Fisher
                                          --------------------------------------
                                              Richard B. Fisher
                                              Chairman of the Board of Directors

                                POWER OF ATTORNEY

     We, the undersigned directors and executive officers of Morgan Stanley
Group Inc., hereby severally constitute Jonathan M. Clark, Philip N. Duff and
Ralph L. Pellecchio, 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 26th of February, 1996.

     Signature                                           Title
     ---------                                           -----

/s/ Richard B. Fisher                          Chairman, Managing Director
----------------------------                   and Director
(Richard B. Fisher)                           

/s/ John J. Mack                               President, Managing Director
----------------------------                   and Director
(John J. Mack)                                

/s/ Barton M. Biggs                            Managing Director and Director
----------------------------
(Barton M. Biggs)

/s/ Peter F. Karches                           Managing Director and Director
----------------------------
(Peter F. Karches)

/s/ Sir David A. Walker                        Managing Director and Director
----------------------------
(Sir David A. Walker)


                                       34

<PAGE>   36
     Signature                                         Title
     ---------                                         -----

/s/ Philip N. Duff                             Chief Financial Officer and
----------------------------                   Managing Director
(Philip N. Duff)                               

/s/ Eileen K. Murray                           Chief Accounting Officer
----------------------------                   and Controller
(Eileen K. Murray)                           

/s/ Daniel B. Burke                            Director
----------------------------
(Daniel B. Burke)

/s/ S. Parker Gilbert                          Director
----------------------------
(S. Parker Gilbert)

/s/ Allen E. Murray                            Director
----------------------------
(Allen E. Murray)

/s/ Paul J. Rizzo                              Director
----------------------------
(Paul J. Rizzo)

                                       35
<PAGE>   37



                            MORGAN STANLEY GROUP INC.
                          INDEX TO FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES
                         ITEMS (14)(a)(1) AND (14)(a)(2)

<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
FINANCIAL STATEMENTS                                                          FORM 10-K                     ANNUAL REPORT
--------------------                                                          ---------                     -------------
<S>                                                                           <C>                                    <C>
Report of Independent Auditors                                                                                       43

Consolidated Statement of Financial                                                                                  44
  Condition at November 30, 1995
  and January 31, 1995

Consolidated Statement of Income for                                                                                 46
  the Fiscal Period Ended November 30, 1995
  and the Fiscal Years Ended January 31, 1995
  and January 31, 1994

Consolidated Statement of Cash Flows                                                                                 47
  for the Fiscal Period Ended November 30, 1995
  and the Fiscal Years Ended January 31, 1995
  and January 31, 1994

Consolidated Statement of Changes                                                                                    48
  in Stockholders' Equity for the
  Fiscal Period Ended November 30, 1995 
  and the Fiscal Years Ended January 31,
  1995 and January 31, 1994

Notes to Consolidated Financial                                                                                      50
  Statements

FINANCIAL STATEMENT SCHEDULES

Schedule I - Condensed Financial                                                 F-2 - F-5
  Information of Registrant Morgan
  Stanley Group Inc. (Parent Company
  Only) - Condensed Financial Statements
  for the Fiscal Period Ended November 30, 1995
  and the Fiscal Years Ended January 31, 1995
  and January 31, 1994
</TABLE>



                                       F-1
<PAGE>   38
                                                                    SCHEDULE I

                            MORGAN STANLEY GROUP INC.
                              (PARENT COMPANY ONLY)

                   CONDENSED STATEMENT OF FINANCIAL CONDITION
                     NOVEMBER 30, 1995 AND JANUARY 31, 1995

                   (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                  November 30,            January 31,
                                                                                          1995                   1995
                                                                                  ------------           ------------
<S>                                                                               <C>                    <C>
ASSETS:
Cash and interest-bearing equivalents                                              $    57,994           $    78,304
Financial instruments owned                                                            543,073               587,906
Advances to subsidiaries                                                            26,201,837            19,090,690
Investment in subsidiaries, at equity                                                4,871,122             4,310,812
Other assets                                                                           589,155               232,372
                                                                                   ------------          -----------
Total assets                                                                       $32,263,181           $24,300,084
                                                                                   ============          ===========
                                                                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY:                                                                 
Short-term borrowings                                                              $10,173,519           $ 7,298,237
Payables to subsidiaries                                                             8,037,076             4,517,882
Other liabilities and accrued expenses                                                 590,534               316,281
Long-term borrowings                                                                 8,287,688             7,612,838
                                                                                   ------------          ------------
                                                                                    27,088,817            19,745,238
                                                                                   ------------          -----------
                                                                                                      
Commitments and contingencies                                                                         
Stockholders' equity:                                                                                 
   Preferred stock                                                                     817,523               818,667
   Common stock, $1.00 par value; authorized 300,000,000 shares;                                      
     issued 162,838,920 shares at November 30, 1995 and                                               
     159,548,556 shares at January 31, 1995*                                           162,839               159,548
   Paid-in capital*                                                                    730,356               626,712
   Retained earnings                                                                 3,815,224             3,338,028
   Cumulative translation adjustments                                                   (8,984)              (10,099)
                                                                                   ------------          ------------
        Subtotal                                                                     5,516,958             4,932,856
                                                                                                      
   Less:                                                                                              
        Note receivable related to sale of preferred stock to ESOP                      88,559                99,624
        Common stock held in treasury, at cost                                                        
           (7,635,174 shares at November 30, 1995                                                     
           and 8,954,990 shares at January 31, 1995)*                                  254,035               278,386
                                                                                   ------------          -----------
         Total stockholders' equity                                                  5,174,364             4,554,846
                                                                                   ------------          -----------
Total liabilities and stockholders' equity                                         $32,263,181           $24,300,084
                                                                                   ============          ===========
</TABLE>


*  All amounts have been retroactively adjusted to give effect for a 
   two-for-one stock split, effected in the form of a 100% stock dividend, 
   which became effective on January 26, 1996.

See Notes to Condensed Financial Statements.



                                      F-2
<PAGE>   39
                                                                    SCHEDULE I

                            MORGAN STANLEY GROUP INC.
                              (PARENT COMPANY ONLY)

                          CONDENSED STATEMENT OF INCOME
    FOR THE FISCAL PERIOD ENDED NOVEMBER 30, 1995, AND THE FISCAL YEARS ENDED
                      JANUARY 31, 1995 AND JANUARY 31, 1994

                  (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                        Fiscal Period Ended    Fiscal Year Ended    Fiscal Year Ended
REVENUES:                                                      November 30,          January 31,          January 31,
                                                                       1995                 1995                 1994
                                                        -------------------    -----------------    -----------------
<S>                                                     <C>                    <C>                  <C>
Interest and dividends                                       $    1,490,239      $     1,312,628      $       773,222
Principal transactions                                               22,090               11,875              (47,274)
Fiduciary fees                                                       15,137               12,683               15,105
Other                                                                   370                  (93)                 242
                                                             --------------      ---------------      ---------------
    Total revenues                                                1,527,836            1,337,093              741,295
                                                                                                   
Interest expense                                                  1,540,677            1,263,495              761,543
                                                                                                   
Expenses excluding interest                                           8,231               10,312               17,064
                                                             --------------      ---------------      ---------------
                                                                                                   
(Loss) income before income tax (benefit) provision                                                
    and equity in earnings of subsidiaries                          (21,072)              63,286              (37,312)

Income tax (benefit) provision                                      (17,544)              29,296              (14,056)
                                                             --------------      ---------------      ---------------
(Loss) income before equity in earnings of subsidiaries              (3,528)              33,990              (23,256)
Equity in earnings of subsidiaries, net of tax                      603,665              360,884              809,308
                                                             --------------      ---------------      ---------------
                                                                                                   
Net income                                                   $      600,137      $       394,874      $       786,052
                                                             ==============      ===============      ===============
                                                                                                   
Preferred stock dividend requirements                        $       54,155      $        64,723      $        55,489
                                                             ==============      ===============      ===============
                                                                                                   
Earnings applicable to common shares (1)                     $      545,982      $       330,151      $       730,563
                                                             ==============      ===============      ===============
                                                                                                   
Average common and common equivalent                                                               
    shares outstanding (1) (2)                                  156,912,678          157,793,216          152,416,576
                                                             ==============      ===============      ===============
                                                                                                   
Primary earnings per share (2)                               $         3.48      $          2.09      $          4.80
                                                             ==============      ===============      ===============
                                                                                                   
Fully diluted earnings per share (2)                         $         3.33      $          2.02      $          4.58
                                                             ==============      ===============      ===============
</TABLE>
                                                                              
                                                                          
(1) Amounts shown are used to calculate primary earnings per share.

(2) All amounts have been retroactively adjusted to give effect for a
    two-for-one stock split, effected in the form of a 100% stock dividend,
    which became effective on January 26, 1996.

See Notes to Condensed Financial Statements.


                                      F-3
<PAGE>   40
                                                                    SCHEDULE I

                          MORGAN STANLEY GROUP INC.
                            (PARENT COMPANY ONLY)
                                      
                      CONDENSED STATEMENT OF CASH FLOWS
  FOR THE FISCAL PERIOD ENDED NOVEMBER 30, 1995, AND THE FISCAL YEARS ENDED
                    JANUARY 31, 1995 AND JANUARY 31, 1994
                                      
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                        Fiscal Period Ended   Fiscal Year Ended  Fiscal Year Ended
                                                                               November 30,         January 31,        January 31,
                                                                                       1995                1995               1994
                                                                        -------------------   -----------------  -----------------
<S>                                                                     <C>                   <C>                <C>
Cash flows from operating activities:                                                                            
   Net income                                                                $      600,137      $      394,874     $      786,052
   Adjustments to reconcile net income to net cash 
      used for operating activities:                                                                           
        Non-cash charges (credits) included in net income:                                                       
           Deferred income taxes                                                     (9,966)             19,747             (7,902)
           Compensation payable in common or preferred stock                        165,420             116,481            407,573
           Equity in subsidiaries' earnings, net of dividends                       818,544              79,878           (514,019)
        (Increase) decrease in assets:                                                                           
           Financial instruments owned                                               44,833              48,955            244,359
           Investment in and advances to subsidiaries, at equity                 (8,490,001)         (5,700,470)        (5,755,573)
           Other assets                                                            (380,582)           (110,979)           (59,855)
        Increase (decrease) in liabilities:                                                                      
           Payables to subsidiaries                                               3,519,194           3,885,791            137,174
           Other liabilities and accrued expenses, net of deferred
             taxes                                                                  280,467            (139,983)            42,551
                                                                             --------------      --------------     --------------
                                                                                                                 
   Net cash used for operating activities                                        (3,451,954)         (1,405,706)        (4,719,640)

   Cash flows from financing activities:                                                                         
      Net proceeds from short-term borrowings                                     2,875,282             822,433          2,143,962
      Proceeds from:                                                                                             
        Issuance of preferred stock                                                       -                   -            194,436
        Issuance of common stock                                                     78,513              20,477             27,196
        Issuance of long-term borrowings                                          1,899,417           2,153,858          3,444,793
      Payments for:                                                                                              
        Repurchase of common stock                                                 (103,126)           (287,123)          (245,444)
        Repayments of long-term borrowings                                       (1,195,501)         (1,201,955)          (636,160)
        Cash dividends                                                             (122,941)           (151,297)          (133,974)
                                                                             --------------      --------------     --------------
                                                                                                                 
   Net cash provided by financing activities                                      3,431,644           1,356,393          4,794,809
                                                                             --------------      --------------     --------------
                                                                                                                 
   Net (decrease) increase in cash and interest-bearing equivalents                 (20,310)            (49,313)            75,169
                                                                                                                 
   Cash and interest-bearing equivalents, at beginning of year                       78,304             127,617             52,448
                                                                             --------------      --------------     --------------
   Cash and interest-bearing equivalents, at end of year                     $       57,994      $       78,304     $      127,617
                                                                             ==============      ==============     ==============
</TABLE>
                                                                
                                                                       
See Notes to Condensed Financial Statements.                 


                                      F-4
<PAGE>   41
                                                                   SCHEDULE I

                            MORGAN STANLEY GROUP INC.
                              (PARENT COMPANY ONLY)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

1.   General

     The condensed financial statements of Morgan Stanley Group Inc. (the
     "Company") should be read in conjunction with the consolidated financial
     statements of Morgan Stanley Group Inc. and Subsidiaries and the notes
     thereto. Certain amounts in the condensed financial statements for prior
     years have been reclassified to conform with fiscal 1995 presentation.

2.   Transactions with subsidiaries

     The Company has transactions with its subsidiaries determined on an
     agreed-upon basis and has guaranteed certain unsecured lines of credit and
     contractual obligations of its subsidiaries.

3.   Change in Fiscal Year-End

     On February 28, 1995, the Board of Directors approved a change in the
     Company's fiscal year-end from January 31 to November 30. This change
     became effective for the fiscal period ended November 30, 1995, and
     accordingly this report includes the results for the 10-month period from
     February 1, 1995 through November 30, 1995 ("fiscal 1995"), as well as
     those for the fiscal years ended January 31, 1995 and January 31, 1994
     ("fiscal 1994" and "fiscal 1993", respectively).


                                       F-5
<PAGE>   42
                                     

                                EXHIBIT INDEX
                                -------------
                   

                   EXHIBIT
                     NO.                     DESCRIPTION
                   -------                   -----------
                   
                     3.1*   Restated Certificate of Incorporation of the
                            Company, as amended to date.

                     3.2    By-Laws of the Company, as amended to date (Annual
                            Report on Form 10-k for the fiscal year ended 
                            January 31, 1995).

                     4.1    Restated Certificate of Incorporation of the
                            Company, as amended to date (see Exhibit 3.1).

                     4.2    Stockholders' Agreement dated February 14, 1986, as
                            amended to date (Annual Report on Form 10-K for the
                            fiscal year ended January 31, 1993).

                     4.3*   Form of Consent and Amendment dated as of January
                            31, 1996 between the Company and certain signatories
                            to the Stockholders' Agreement referred to in 
                            Exhibit 4.2.

                     4.4    Subordinated Indenture dated as of April 15, 1989
                            between the Company and The First National Bank of
                            Chicago, as trustee (Annual Report on Form 10-K for
                            the fiscal year ended January 31, 1993).

                     4.5    First Supplemental Subordinated Indenture dated as
                            of May 15, 1991 between the Company and The First
                            National Bank of Chicago, as trustee (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).

                     4.6    Senior Indenture dated as of April 15, 1989 between
                            the Company and Chemical Bank, as trustee (Annual
                            Report on Form 10-K for the fiscal year ended
                            January 31, 1993).

                     4.7    First Supplemental Senior Indenture dated as of May
                            15, 1991 between the Company and Chemical Bank, as
                            trustee (Annual Report on Form 10-K for the fiscal
                            year ended January 31, 1993).

                     4.8    Subordinated Indenture dated as of November 15, 1993
                            among Morgan Stanley Finance plc, the Company, as
                            guarantor, and 

-----------------------
*    Filed herewith.
                                                            
                   
<PAGE>   43

                                EXHIBIT INDEX
                                -------------

                   EXHIBIT
                      NO.                        DESCRIPTION  
                   -------                       -----------

                     4.9    Voting Agreement dated March 5, 1991 among the
                            Company, State Street Bank and Trust Company and
                            Other Persons Signing Similar Voting Agreements
                            (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                     4.10   Instruments defining the Rights of Security Holders,
                            Including Indentures - In addition to Exhibits 4.1
                            through 4.9 herein, pursuant to paragraph
                            (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
                            Registrant hereby undertakes to furnish to the
                            Securities and Exchange Commission upon request
                            copies of the instruments defining the rights of
                            holders of long-term debt securities of the
                            Registrant and its subsidiaries, none of which
                            instruments authorizes the issuance of an amount of
                            securities that exceeds 10% of the total assets of
                            the Registrant and its subsidiaries on a
                            consolidated basis.

                    10.1+   Form of Agreement under the Morgan Stanley & Co.
                            Incorporated Owners' and Select Earners' Plan
                            (Annual Report on Form 10-K for the fiscal year
                            ended January 31, 1993).

                    10.2+   Form of Agreement under the Morgan Stanley Group
                            Inc. Officers' and Select Earners' Plan (Annual on
                            Form 10-K for the fiscal year ended January 31,
                            1993).

                    10.3+   Morgan Stanley & Co. Incorporated Excess Benefit
                            Plan, as amended and restated to date (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).

                    10.4+   Morgan Stanley & Co. Incorporated Supplemental
                            Executive Retirement Plan, as amended (Annual Report
                            on Form 10-K for the fiscal year ended January 31,
                            1993).

                    10.5+   Morgan Stanley Group Inc. 1986 Stock Option Plan, as
                            amended and restated to date (Annual Report on Form
                            10-K for the fiscal year ended January 31, 1993).
 
                    10.6+   Morgan Stanley Group Inc. Performance Unit Plan, as
                            amended and restated to date (Annual Report on Form
                            10-K for the fiscal year ended January 31, 1993).


------------------------------------
+   Management Contract or compensatory plan or arrangement required to be filed
    as an exhibit to this Form 10-K pursuant to Item 14(c).

<PAGE>   44

                                EXHIBIT INDEX
                                -------------

EXHIBIT 
  NO.                               DESCRIPTION
-------                             -----------

 10.7+          Morgan Stanley Group Inc. Deferred Compensation Plan
                for Outside Directors, as amended to date (Annual
                Report on Form 10-K for the fiscal year ended
                January 31, 1993).

 10.8+          Morgan Stanley Group Inc. 1988 Equity Incentive
                Compensation Plan, as amended to date (Annual Report
                on Form 10-K for the fiscal year ended January 31,
                1993).

 10.9+          Morgan Stanley Group Inc. 1988 Capital Accumulation
                Plan, as amended to date (Annual Report on Form 10-K
                for the fiscal year ended January 31, 1993).

 10.10+         Form of Deferred Compensation Agreement under the
                Pre- Tax Incentive Program (Annual Report on Form
                10-K for the fiscal year ended January 31, 1994).

 10.11          Trust Agreement dated March 5, 1991 between the
                Company and State Street Bank and Trust Company
                (Annual Report on Form 10-K for the fiscal year
                ended January 31, 1993).

 10.12          Agreement of Lease dated May 13, 1986 between Morgan
                Stanley & Co. Incorporated and Forest City
                Pierrepont Associates, as amended (Annual Report on
                Form 10-K for the fiscal year ended January 31,
                1993).

 10.13          Agreement of Sublease between McGraw Hill, Inc. and
                Morgan Stanley & Co. Incorporated, as amended to
                date (Annual Report on Form 10-K for the fiscal year
                ended January 31, 1993).

 10.14          Lease dated January 22, 1993 between Rock-McGraw,
                Inc. and Morgan Stanley & Co. Incorporated (Annual
                Report on Form 10-K for the fiscal year ended
                January 31, 1993).

 10.15          Agreement of Lease dated February 10, 1995 among
                Canary Wharf Limited, Morgan Stanley UK Group and
                the Company (Annual Report on Form 10-K for the
                fiscal year ended January 31, 1995).

 11*            Statement Re: Computation of Earnings Per Share.

----------------------------
+      Management Contract or compensatory plan or arrangement required to be
       filed as an exhibit to this Form 10-K pursuant to Item 14(c).

*      Filed herewith.

<PAGE>   45

                                EXHIBIT INDEX
                                -------------

EXHIBIT
  NO.                                DESCRIPTION
-------                              -----------

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

  13*           The following portions of the Company's 1995 Annual
                Report to Stockholders, which are incorporated by
                reference in this Annual Report on Form 10-K, are
                filed as an Exhibit:

  13.1          "Quarterly Results" (page 76).

  13.2          "Selected Financial Data" (other than the
                information contained in the column entitled
                "Fiscal Period Ended November 30, 1995
                Annualized (Unaudited)") (Inner Cover).

  13.3          "Management's Discussion and Analysis of
                Financial Condition and Results of
                Operations" (pages 26 to 42).

  13.4          Consolidated Financial Statements of the
                Company and its subsidiaries, together with
                the Notes thereto and the Report of
                Independent Auditors thereon (pages 43 to
                76).

  21*           Subsidiaries of the Company.

  23.1*         Consent of Ernst & Young.

  23.2*         Consent of Ernst & Young with respect to the
                Financial Statements for the fiscal year ended
                December 31, 1995 for the Morgan Stanley U.K. Group
                Profit Sharing Scheme.

  24            Powers of Attorney (included on signature page).

  27*           Financial Data Schedule.

  99*           Financial Statements for the fiscal year ended
                December 31, 1995 for the Morgan Stanley U.K. Group
                Profit Sharing Scheme.

--------------------
*     Filed herewith.