<PAGE>   1
Page 26
                                                                    Exhibit 13.3

--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS*

RESULTS OF OPERATIONS

The Company's business, particularly its involvement in primary and secondary
markets for all types of financial products, including derivatives, is subject
to substantial positive and negative fluctuations due to a variety of factors
that cannot be predicted with great certainty, including variations in the fair
value of securities and other financial products, the volatility and liquidity
of trading markets, and the level of market activity. As a result, net income
and revenues in any particular period may not be representative of full-year
results and may vary significantly from year to year and from quarter to
quarter. In addition, results of operations in the past have been and in the
future may continue to be materially affected by many factors of a national and
international nature, including economic and market conditions; the availability
of capital; the level and volatility of interest rates; currency values and
other market indices; the availability of credit; inflation; and legislative and
regulatory developments, as well as the size, number and timing of transactions
or assignments (including realization of returns from the Company's principal
and merchant banking investments). In addition, such factors also may have an
impact on the Company's ability to achieve its strategic objectives, including
(without limitation) profitable global expansion. The Company's results of
operations also may be materially affected by competitive factors, including new
entrants into the Company's traditional business activities and its ability to
attract and retain highly skilled individuals and by the ability to
cost-effectively develop and maintain the technology necessary to support its
trading, clearing and risk management systems.

      After experiencing a difficult year in 1994, characterized by a
significant decline in client activity, including decreased levels of worldwide
debt and equity underwriting, the global securities industry benefited from
improved market conditions in 1995. Slower economic growth, lower interest
rates, improvements in productivity and expanding corporate profit margins
propelled the U.S. equity markets to record levels. Additionally, low inflation,
coupled with slower economic growth, sent bond prices surging and bond yields to
their lowest point in nearly two years. Favorable conditions created by rising
stock prices and falling interest rates continued through most of 1995,
resulting in improved investment banking conditions.

      In addition, the Company benefited from a number of strategic investments
in its businesses made in 1994, including investments in human and technological
resources. The Company's expansion internationally continued to be productive,
evidenced by the fact that approximately 50% of the Company's fiscal 1995 income
before taxes was derived from non-U.S. locations. The Company's continued focus
on cost-containment initiatives also contributed to its positive 1995 results as
business development, professional service expenses and other expenses were
reduced by approximately 9%, on an annualized basis. The Company's return on
equity for fiscal 1995 (16.2% on an annualized basis) reflects, in part, returns
on strategic investments as well as some progress with cost-containment
initiatives.

      As the financial services industry continues to consolidate on a global
basis, the Company continues to be committed to a long-term strategy of
expanding and enhancing its franchise and presence. In January 1996, the Company
completed its purchase of Miller Anderson & Sherrerd, LLP ("MAS"), a premier
Philadelphia-based institutional investment management firm, to support the
Company's long-term strategic goal of expanding recurring fee-based businesses.

      Although the Company's 1995 results recovered from the depressed levels of
1994, maintaining business activity in areas such as mergers and acquisitions
and product profit margins as well as cost control, the results of risk
management and effective resource allocation will continue to affect the overall
financial results of the Company.

      For a description of the Company's business, including its trading in cash
instruments and derivative products, its merchant banking and other principal
investment activities, and its high-yield underwriting and trading policies, and
their respective risks, see Part I, Item I, of the Company's Annual Report on
Form 10-K for the fiscal period ended November 30, 1995 ("Form 10-K").

--------------------------------------------------------------------------------
* Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that discuss the risks and uncertainties
involved in the Company's business, including (without limitation) the risks and
uncertainties set forth herein.
<PAGE>   2
Page 27

--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT

      In February 1995, the Board of Directors approved a change in the
Company's fiscal year-end from January 31 to November 30, effective for the
current fiscal period. The discussion which follows compares the results of
operations for fiscal 1995 (the ten-month period from February 1, 1995 to
November 30, 1995) with those for fiscal 1994 (the twelve-month period from
February 1, 1994 to January 31, 1995). Since fiscal 1995 consists of a ten-month
reporting period, results of operations for this period are not directly
comparable with the financial results of prior fiscal years.

FISCAL 1995 COMPARED WITH FISCAL 1994

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------

REVENUES AND EARNINGS
---------------------------------------------------------------------------------------
                                                          FISCAL 1995       Fiscal 1994
                                                           (10 MONTHS        (12 Months
                                                                ENDED             Ended
 (Dollars in Millions)                                  NOV. 30, 1995)    Jan. 31, 1995)
                                                        -------------------------------
<S>                                                     <C>               <C>
 Total revenues                                                $9,124            $9,376
                                                                              
 Net revenues (total revenues less interest expense)           $3,623            $3,501
                                                                              
 Total expenses excluding interest                             $2,740            $2,907
                                                                              
 Income before taxes                                           $  883            $  594
                                                                              
 Net income                                                    $  600            $  395
---------------------------------------------------------------------------------------
</TABLE>
                                                    

      The Company's fiscal 1995 revenues and earnings reflect a strong global
market for mergers and acquisitions, improved sales and trading results
primarily driven by increased customer trading volume, and a reduction in
business development and professional services expenses resulting from the
Company's cost-control initiatives. These results were partially offset by
increased costs for incentive-based compensation and occupancy and equipment
expenses related to the Company's relocation to its New York headquarters at
1585 Broadway.

      The Company's fiscal 1995 effective income tax rate of 32% was below its
fiscal 1994 and fiscal 1993 rates of 33.5% and 34.5%, respectively, reflecting,
in part, a more favorable mix of earnings in lower tax rate jurisdictions.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------

INVESTMENT BANKING REVENUES
------------------------------------------------------------------------------
                                                FISCAL 1995        Fiscal 1994
                                                 (10 MONTHS         (12 Months
                                                      ENDED              Ended
 (Dollars in Millions)                        NOV. 30, 1995)     Jan. 31, 1995)
                                              --------------------------------
<S>                                           <C>                <C> 
 Debt underwriting revenues                          $  364               $176

 Equity underwriting revenues                           371                364

 Advisory fees from merger, acquisition
    and restructuring transactions                      476                379
                                              --------------------------------

 Total investment banking revenues                   $1,211               $919
------------------------------------------------------------------------------
</TABLE>


      Investment banking revenues increased due to significantly higher levels
of merger and acquisition revenues and increased debt and equity underwriting
revenues, reflecting a higher level of debt and equity financing activity as
well as a stronger market share resulting from strategic investments made in
personnel during 1994 to strengthen client service capabilities.
<PAGE>   3
Page 28
--------------------------------------------------------------------------------


FISCAL 1995 COMPARED WITH FISCAL 1994 
(CONTINUED)

      Financial advisory fees from merger, acquisition and restructuring
transactions, areas in which the Company maintains a strong global franchise,
benefited from an active worldwide market. The increase in advisory revenues was
due in part to the broad range of strategic advisory services provided to
clients in many of the year's most active industry sectors, including banking
and other financial services, media, telecommunications, health care and
technology.

      Equity financing activity was positively affected by favorable market
conditions in both the U.S. and Europe, which included continued strong demand
for initial public offerings, increased corporate restructurings, diminished
concerns about inflation and lower interest rates. The Company increased its
market share for worldwide equity underwriting and lead-managed a number of
innovative and notable transactions.

      The increase in debt financing activity reflected favorable market
conditions and a more stable interest rate environment as the Federal Reserve
Board held short-term interest rates constant in the first half of the year and
subsequently reduced short-term interest rates in July as economic growth and
inflation remained stable. Debt underwriting generated primary revenues from
fixed income derivative products of $101 million as compared with $61 million in
fiscal 1994, resulting from increased financing activity by corporations and
sovereign governments, coupled with increased investor demand for structured
investments.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------

 SECONDARY REVENUES
--------------------------------------------------------------------------
                                          FISCAL 1995          Fiscal 1994
                                           (10 MONTHS           (12 Months
                                                ENDED                Ended
 (Dollars in Millions)                  NOV. 30, 1995)       Jan. 31, 1995)
                                        ----------------------------------
<S>                                     <C>                  <C>   
 Principal trading revenues:

    Equities                                   $  409               $  510

    Fixed income                                  489                  347

    Foreign exchange                              156                  148

    Commodities                                    68                   99
                                        ----------------------------------

 Total principal trading revenues               1,122                1,104

 Commissions revenues                             419                  414

 Net interest revenues                            396                  368
                                        ----------------------------------

 Total secondary revenues                      $1,937               $1,886
--------------------------------------------------------------------------
</TABLE>


      Secondary revenues (combined principal trading and trading-related
commissions and net interest revenues) and principal trading revenues, including
from derivatives, both improved. The increase in secondary revenues primarily
reflected improved revenues from trading in equity and fixed income products.
For a discussion of the Company's derivative trading activities, see "Derivative
Financial Instruments" herein.

      Equity trading revenues, which reached record levels in fiscal 1994,
remained strong, reflecting increased customer-driven activity as most major
global equity markets rallied, positively impacting revenues from virtually all
types of cash and derivative products. Options and futures benefited from
relatively higher volatilities and increased trading volumes.

      Fixed income trading revenues were positively affected by increased
trading volumes as investors returned to the fixed income markets after 1994's
difficult trading environment. The Company's global corporate, emerging market
and high-yield activities produced substantially higher revenue levels as
conditions stabilized globally, including Mexico and the emerging markets.

      Revenues from foreign exchange trading improved, primarily attributable to
periods of increased volatility in the first half of 1995, most notably in U.S.
dollar/deutsche 
<PAGE>   4
Page 29
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT


mark and U.S. dollar/yen, as well as the subsequent strengthening of the U.S.
dollar versus the yen and the deutsche mark during the latter half of 1995.

      Revenues from commodities trading declined, resulting from difficult
market conditions in most energy-related products.

      Principal transaction investment revenues aggregating $102 million were
recognized in fiscal 1995 as compared with $139 million in fiscal 1994,
including revenues related to the increase in the carrying value of the
Company's merchant banking investment in Southern Pacific Rail Corporation and
several real estate investments.

      Commission revenues strengthened, primarily reflecting higher levels of
activity throughout the ten-month period as market participation by investors
increased. Additionally, increased primary equity activity contributed toward
higher volumes in secondary markets.

      Interest and dividend revenues and expense are a function of the level and
mix of total assets, including financial instruments owned and resale and
repurchase agreements, and the prevailing level, term structure and volatility
of interest rates. In fiscal 1995, the continuing effect of a flat yield curve
in the U.S. had a negative impact on the Company's net interest and dividend
revenues. Interest and dividend revenues and expense should be viewed in the
broader context of principal trading results. Decisions relating to principal
transactions in securities are based on an overall review of aggregate revenues
and costs associated with each transaction or series of transactions. This
review includes an assessment of the potential gain or loss associated with a
trade, the interest income or expense associated with financing or hedging the
Company's positions, and potential underwriting, commission or other revenues
associated with related primary or secondary market sales.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------

 ASSET MANAGEMENT AND ADMINISTRATION
------------------------------------------------------------------------------------------------
                                                                  FISCAL 1995        Fiscal 1994
                                                                   (10 MONTHS         (12 Months
                                                                        ENDED              Ended
 (Dollars in Millions)                                          NOV. 30, 1995)     Jan. 31, 1995)
                                                                --------------------------------
<S>                                                             <C>                <C> 
 Asset management and administration revenues                            $310               $350
------------------------------------------------------------------------------------------------

 (Dollars in Billions)

 Customer assets under management (at fiscal year-ends)                  $ 55               $ 49
                                                                --------------------------------

 Customer assets under administration (at fiscal year-ends)              $111               $ 90
------------------------------------------------------------------------------------------------
</TABLE>

      Asset management and administration revenues, which include fees for asset
management and non-interest revenues earned from correspondent clearing and
custody services, reflected growth in both asset management activities and
global clearing and custody services resulting from the Company's continuing
strategic emphasis on these businesses. Customer assets under management
increased, reflecting appreciation in the value of customer portfolios,
particularly in equity funds, as well as continued growth in international and
emerging market funds. Customer assets under administration increased, primarily
reflecting additional assets placed under custody with the Company, as well as
appreciation in the value of customer portfolios.

      Subsequent to November 30, 1995, the Company completed its purchase of
MAS, an institutional investment manager with a domestic focus. The purchase
price was approximately $350 million, payable in a combination of cash, notes
and stock of the Company. On a pro forma basis, the combination of MAS with the
Company's asset management business would have increased the Company's assets
under management at November 30, 1995 to approximately $90 billion.
<PAGE>   5
Page 30
--------------------------------------------------------------------------------



FISCAL 1995 COMPARED WITH FISCAL 1994 
(CONTINUED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 Expenses Excluding Interest

-----------------------------------------------------------------------------------------------------------------
                                               (Dollars in Millions)                   (Dollars in Thousands)
-----------------------------------------------------------------------------   ---------------------------------
                                                                                   FISCAL 1995        Fiscal 1994
                                           FISCAL 1995          Fiscal 1994         (10 MONTHS         (12 Months
                                            (10 MONTHS           (12 Months              ENDED              Ended
                                                 ENDED                Ended      NOV. 30, 1995)     Jan. 31, 1995)
                                                                                 --------------------------------
                                         NOV. 30, 1995)       Jan. 31, 1995)      PER EMPLOYEE       Per Employee
                                         ------------------------------------------------------------------------
<S>                                      <C>                  <C>                 <C>                <C>
 Compensation and benefits                      $1,795               $1,733               $194               $179

 Occupancy and equipment                           276                  303                 30                 31

 Brokerage, clearing and

    exchange fees                                  211                  230                 23                 24

 Communications                                    108                  122                 12                 13

 Business development                              110                  165                 12                 17

 Professional services                             131                  164                 14                 17

 Other                                             109                  131                 12                 14

 Relocation charge                                --                     59                --                   5
                                         ------------------------------------------------------------------------
 Total expenses excluding interest              $2,740               $2,907               $297               $300
-----------------------------------------------------------------------------------------------------------------
</TABLE>


      Fiscal 1995's total non-interest expenses decreased from prior-year
levels, primarily due to the Company's change in fiscal year-end, resulting in a
ten-month fiscal period. For a more meaningful comparison with non-interest
expense of prior fiscal years, fiscal 1995 non-interest expenses are discussed
below on an annualized basis. Total non-interest expenses increased in fiscal
1995 on an annualized basis. Within that category, employee compensation and
benefits expense increased, reflecting increased levels of incentive
compensation based on higher revenues and earnings, as well as the annualized
impact of salaries and benefits relating to additional personnel hired during
1994. Excluding fiscal 1994's non-recurring relocation charge discussed below,
other non-interest expenses increased marginally on an annualized basis.
Occupancy and equipment expenses increased $28 million on an annualized basis,
principally reflecting costs associated with the Company's New York relocation.
Brokerage, clearing and exchange fees increased $23 million on an annualized
basis, reflecting increased trade volumes, both domestically and in Europe,
business mix changes and the continued growth in the international component of
the Company's sales and trading activities. These increases in non-interest
expenses on an annualized basis were substantially offset, however, as business
development and professional service expenses decreased $40 million on an
annualized basis, reflecting significantly lower recruiting and travel costs
directly related to the Company's cost-containment initiatives.

      Fourth quarter fiscal 1994 expenses include a pre-tax relocation charge of
$59 million relating to the Company's decision to vacate much of its New York
City office space at 1251 Avenue of the Americas and to relocate staff formerly
occupying that space to a new headquarters building at 1585 Broadway. The charge
includes both the remaining post-move lease commitment (expiring in 1998) and
the write-off of the remaining net book value of improvements at the old site.
The relocation charge also includes similar charges relating to the Company's
move of its Tokyo office to newly leased space in 1996; the Tokyo-related
provision consists largely of the write-off of improvements and restoration
costs for the space being vacated. As of November 30, 1995, approximately $33
million of costs relating to the relocation charge have yet to be expended.
<PAGE>   6
Page 31
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT


FISCAL 1994 COMPARED WITH FISCAL 1993

The Company's fiscal 1994 revenues and earnings reflect an industry-wide decline
in client activity, particularly in fixed income products, driven by rising
interest rates and inflation concerns. Amounts for fiscal 1993 are given in
parentheses.

      Revenues net of interest expense (net revenues) declined 16% to $3,501
million ($4,156 million), and net income totaled $395 million ($786 million), a
decline of 50%, reflecting non-interest expenses which generally remained at
prior-year levels despite the decline in revenues.

      Investment banking revenues decreased 26% to $919 million ($1,238
million), reflecting significantly reduced revenues from debt financing
activity, which were partially offset by increased revenues from merger,
acquisition and restructuring assignments.

      The decline in debt financing activity reflected a significant change in
fixed income market conditions in 1994. Higher interest rates, started by the
Federal Reserve Board's early 1994 decision to raise short-term interest rates
in an attempt to curb U.S. inflation and moderate economic growth, discouraged
clients from raising additional capital in the debt market throughout 1994. As
the volume of new issues fell, the market for debt underwriting became
increasingly competitive. Aggregate revenues from debt underwriting fell 69% to
$176 million ($560 million). Within this category, primary revenues generated
from fixed income derivative products decreased to $61 million ($193 million),
resulting from the overall lower level of debt underwriting volume (which
typically is an integral component of primary structured product activity),
coupled with a decrease in investor interest.

      Although equity financing activity also was negatively impacted by
difficult market conditions, the Company increased its market share for
worldwide equity underwriting and lead-managed a number of the year's largest
transactions for U.S. issuers. Therefore, despite significant deterioration in
the markets for new equity issues, the Company's revenues from equity
underwriting fell only modestly to $364 million ($380 million).

      Financial advisory fees from merger, acquisition and restructuring
transactions benefited from a significant industry-wide increase in corporate
restructuring activity. The Company maintained its strong market position in
this activity as revenues from advisory assignments rose 27% to $379 million
($298 million).

      Secondary revenues (combined principal trading, commissions and net
interest revenues) decreased 16% to $2,084 million ($2,492 million). Principal
transaction revenues from trading activities, including derivatives, fell 24% to
$1,104 million ($1,459 million), reflecting substantially lower revenues from
trading in fixed income products.

      Equity trading revenues rose 25% to $510 million ($407 million),
reflecting strong client-driven revenues arising from a wide range of cash and
structured equity products in the international markets in which the Company
operates.

      Fixed income trading revenues, which declined 56% to $347 million ($788
million), were adversely affected by reduced client activity driven by the
difficult market conditions discussed above. Uncertainty over the direction of
interest rates and a reduced flow of new issues into the secondary markets
coupled with downward pressure on prices discouraged client-driven sales and
trading activity. In December 1994 and January 1995, the devaluation of the
Mexican peso and concerns over Russia's economy created very difficult
conditions in emerging markets. This resulted in lower revenue levels in the
Company's global corporate, emerging market and high-yield activities. U.S.
government debt, foreign sovereign debt, and interest rate and currency
swap-trading activities were not as adversely impacted and therefore comprised a
more significant percentage of fixed income trading revenues in 1994.

      Revenues from foreign exchange trading declined 28% to $148 million ($205
million), largely due to reduced client activity and lower market volatility, as
well as a weakening in the U.S. dollar relative to other major currencies.

      Revenues from commodities trading rose 68% to $99 million ($59 million),
benefiting from a favorable trading environment in precious metals, energy and
agricultural products during the first half of 1994.

      Principal transaction investment revenues aggregating $139 million were
recognized in fiscal 1994 ($158 million), including revenues related to sales of
the Company's investments in equity securities of Agricultural Minerals and
Chemicals Inc. and Coltec Industries.
<PAGE>   7
Page 32
--------------------------------------------------------------------------------



FISCAL 1994 COMPARED WITH FISCAL 1993
(CONTINUED)

      Commission revenues increased 14% to $449 million ($393 million),
principally reflecting increased customer activity in the global markets for
equity securities as well as customer activity in new markets, such as Latin
America and Southeast Asia. Note that customer activity results in principal
trading and interest revenues as well as commissions.

      Net interest and dividend revenues decreased 17% to $531 million ($640
million), primarily resulting from a substantial flattening of the U.S. yield
curve as short-term rates rose faster than long-term rates throughout much of
1994. The resulting decline in interest rate spreads adversely affected the
profitability of the Company's spread-sensitive businesses, and the flatter
yield curve substantially reduced the savings from the Company's use of swaps to
effectively convert much of its fixed rate debt to floating rate debt (see Note
3 to the Consolidated Financial Statements). Interest and dividend revenues rose
13% to $6,406 million ($5,660 million), and interest expense increased 17% to
$5,875 million ($5,020 million), principally reflecting growth in
interest-bearing assets and liabilities. As noted above in the comparison of
fiscal 1995 with fiscal 1994, interest and dividend revenues and expense reflect
principal trading strategies and should be viewed in the broader context of
principal trading and investment banking results.

      Asset management and administration revenues increased 36% to $350 million
($258 million), reflecting growth in both asset management activities and global
clearing and custody services resulting from the Company's strategic emphasis on
these businesses. Customer assets under management increased 4% to $49 billion
($47 billion), reflecting continued growth in international and emerging market
funds. Customer assets under administration increased 25% to $90 billion ($72
billion), primarily reflecting additional assets placed under custody with the
Company.

      Despite a 17% year-over-year strategically planned increase in the number
of employees (from 8,273 at January 31, 1994 to 9,685 at January 31, 1995),
total non-interest expenses fell marginally, to $2,907 million ($2,956 million).
Within that total, employee compensation and benefits expense decreased 15% to
$1,733 million ($2,049 million), due in part to reduced levels of incentive
compensation based on lower revenues and earnings. Other non-interest expenses,
excluding the $59 million non-recurring relocation charge, increased 23% to
$1,115 million ($907 million). Business development and professional service
expenses increased $75 million, reflecting significantly increased recruiting
and travel costs directly related to the strategic growth of the Company's
business in existing markets and global expansion into new markets. Occupancy
and equipment expenses increased $55 million, reflecting incremental space costs
related to growth in the number of employees and global expansion, as well as
significantly greater spending for technology equipment. Brokerage, clearing and
exchange fees increased $34 million, reflecting increased trade volumes,
business mix changes and the growing international component of the Company's
sales and trading activities.

LIQUIDITY AND CAPITAL RESOURCES

THE BALANCE SHEET

The Company's total assets increased from $116.7 billion at January 31, 1995 to
$143.8 billion at November 30, 1995, primarily reflecting growth in financial
instruments owned, resale and repurchase agreements, and securities borrowed.
The growth is primarily attributable to the Company's fixed income activities,
most notably U.S. government securities and reverse repurchase agreements used
in both financing activities and in the Company's matched book activities.
Corporate equities inventory increased due to continued client demand for such
securities. Securities borrowed also rose during 1995, reflecting an increase in
collateralized lending to facilitate customer activity. A substantial portion of
the Company's total assets consists of highly liquid marketable securities and
short-term receivables arising principally from securities transactions. The
highly liquid nature of these assets provides the Company with flexibility in
financing and managing its business. Balance sheet leverage ratios are often
<PAGE>   8
Page 33
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT


reviewed by counterparties and creditors in order to evaluate a securities
firm's overall financial risk. Details of ending assets, month-end average
assets and leverage ratios for fiscal 1995 and fiscal 1994 are as follows:


                      [One Pie Chart--See EDGAR Appendix]


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------
                                               Fiscal 1995                          Fiscal 1994
                                    ------------------------------       -----------------------------
                                       Assets at           Average         Assets at           Average
                                    November 30,        Assets for       January 31,        Assets for
 (Dollars in Millions)                      1995       Fiscal 1995              1995       Fiscal 1994
                                    ------------------------------------------------------------------
<S>                                 <C>                <C>               <C>               <C>
 Cash, deposits and receivables         $ 10,286          $ 12,690          $ 12,104          $ 14,299

 Financial instruments owned              58,600            52,387            47,109            49,236

 Securities purchased under
    agreements to resell and
    securities borrowed                   72,955            66,539            55,955            64,921

 Property, equipment and
    leasehold improvements
    and other assets                       1,912             1,725             1,526             1,626
                                    ------------------------------------------------------------------

 Total assets                           $143,753          $133,341          $116,694          $130,082
                                    ------------------------------------------------------------------

 Leverage ratios:

 Total assets/equity                       27.8x             27.8x             25.6x             29.0x

 Net assets(1)/equity                      18.9x             18.6x             17.7x             19.4x
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Net assets represent total assets less the lower of securities purchased
    under agreements to resell or securities sold under agreements to
    repurchase.

FUNDING AND CAPITAL POLICIES

The Company's Finance and Risk Committee, which includes senior officers from
each of the major capital commitment areas, among other things, establishes the
overall funding and capital 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 the liquidity and
interest rate sensitivity of the Company's asset and liability position. See
also "Risk Management" herein. The primary goal of the Company's funding and
liquidity
<PAGE>   9
Page 34
--------------------------------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)

activities is to ensure the stability of the Company's funding base and provide
adequate financing sources over a wide range of potential credit ratings and
market environments.

      Many of the Company's businesses are capital-intensive. Capital is
required to finance, among other things, the Company's securities inventories,
underwriting, principal investments, merchant banking activities and investments
in fixed assets. As a policy, the Company attempts to maintain sufficient
capital and funding sources in order to have the capacity to finance itself on a
fully collateralized basis at all times, including periods of financial stress.
Currently, the Company believes that it has sufficient capital to meet its
needs. In addition, the Company attempts to maintain total equity, on a
consolidated basis, at least equal to the sum of all its subsidiaries' equity.
Subsidiary equity capital requirements are determined by regulatory
requirements, asset mix, leverage considerations and earnings volatility.

      The Company actively manages its consolidated capital position based upon,
among other things, business opportunities, capital availability and rates of
return together with internal capital policies, regulatory requirements and
rating agency guidelines and therefore may, in the future, expand or contract
its capital base to address the changing needs of its businesses. The Company
returns internally generated equity capital which is in excess of the needs of
its businesses through common stock repurchases and dividends.

      The Company funds its balance sheet on a global basis. The Company's
funding needs are satisfied from capital, including equity and long-term debt;
medium-term notes; internally generated funds; repurchase agreements; U.S.,
Canadian, French and Euro commercial paper; letters of credit; unsecured bond
borrows; German Schuldschein loans; securities lending; buy/sell agreements;
municipal reinvestments; master notes; deposits; and committed and uncommitted
lines of credit. All repurchase transactions and a portion of the Company's bank
borrowings and securities lending are made on a collateralized basis.

      The Company practices a funding strategy which is designed to ensure that
the tenor of the Company's liabilities equals or exceeds the expected holding
period of the assets being financed. Short-term funding generally is obtained at
rates related to U.S., Euro or Asian money market rates for the currency
borrowed. Repurchase transactions are effected at negotiated rates. Other
borrowing costs are negotiated depending upon prevailing market conditions (see
Note 2 to the Consolidated Financial Statements).

      The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in a
variety of currencies. The volume of the Company's borrowings generally
fluctuates in response to changes in the amount of resale transactions
outstanding, the level of the Company's securities inventories and overall
market conditions. Availability and cost of financing to the Company can vary
depending upon market conditions, the volume of certain trading activities, the
Company's credit ratings and overall availability of credit to the securities
industry. Pursuant to its liquidity policy, the Company attempts to maintain
cash and unhypothecated marketable securities equal to at least 110% of its
outstanding short-term unsecured borrowings. In addition, the Company has in
place a contingency funding strategy which provides a comprehensive one-year
action plan in the event of a severe funding disruption; the plan is updated
annually.

      The Company continually seeks to expand its global secured borrowing
capacity. In support of this strategy, Morgan Stanley & Co. Incorporated
("MS&Co."), the Company's U.S. broker-dealer subsidiary, maintains a master
collateral facility. This facility enables MS&Co. to pledge certain collateral
to secure loan arrangements, letters of credit and other financial
accommodations. Morgan Stanley & Co. International Limited ("MSIL"), the
Company's U.K. broker-dealer subsidiary, can secure committed funding from a
syndicate of banks by providing a broad range of collateral under repurchase
agreements.

      The Company views long-term debt as a stable source of funding for core
inventories and illiquid assets and therefore maintains a long-term
debt-to-capitalization ratio of at least 60% based upon the current composition
of its balance sheet. In general, fixed assets are financed with fixed rate
long-term debt, and inventories and all current assets are financed with a
combination of short-term funding, floating rate long-term debt, or fixed rate
debt swapped to a floating basis. The Company uses derivative products
(primarily interest rate and currency swaps) to assist in asset
<PAGE>   10
Page 35

--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT



and liability management and to reduce borrowing costs (see Note 3 to the
Consolidated Financial Statements).

      The Company's reliance on external sources to finance a significant
portion of its day-to-day operations makes access to global sources of financing
important. The cost and availability of financing is generally dependent on the
Company's short-term and long-term debt ratings. In addition, the Company's debt
ratings can have a significant impact on certain trading revenues, particularly
in those businesses where longer term counterparty performance is critical, such
as over-the-counter derivative transactions. The Company's short-term and
long-term senior debt ratings as of January 31, 1996 are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                                    Short-Term         Long-Term
Agency                                                  Rating            Rating
--------------------------------------------------------------------------------
<S>                                                 <C>                <C>
Moody's Investor's Services                                 P1                A1
                                                 
Standard & Poor's                                           A1+               A+
                                                 
IBCA                                                        A1+              AA-
                                                 
Thomson BankWatch                                         TBW1                AA
                                                 
Dominion Bond Rating Service (1)                    R1 (Middle)              n/a
--------------------------------------------------------------------------------
</TABLE>
                                               
(1)  Dominion Bond Rating Service rates the Company's Canadian commercial paper
     program.

      On November 13, 1995, Standard & Poor's Corporation ("S&P") affirmed the
short- and long-term ratings of the Company. In addition, noting the improved
conditions in the securities industry, the Company's diversified lines of
business, global market position and ability to control expenses, S&P revised
the long-term rating outlook for the Company from negative to stable.

      As the Company continues its global expansion and as revenues are
increasingly derived from various currencies, foreign currency management is a
key element of the Company's financial policies. The Company benefits from
operating in a number of different currencies because weakness in any particular
currency is often offset by strength in another currency. The Company closely
monitors its exposure to fluctuations in currencies and, where cost-justified,
adopts strategies to reduce the impact of these fluctuations on the Company's
financial performance. These strategies include engaging in various hedging
activities to manage income and cash flows denominated in foreign currencies and
using foreign currency borrowings, when appropriate, to finance investments
outside the U.S.

FISCAL 1995 AND SUBSEQUENT ACTIVITY

During the fiscal year ended November 30, 1995, the Company took several steps
to extend the maturity of its liabilities, reduce its reliance on unsecured
short-term funding and increase its capital. These steps resulted in a net
increase in capital of $2,288 million to $14,345 million at November 30, 1995.
The additions to capital included net issuances of senior notes and subordinated
debt aggregating $1,720 million (including the Notes described below). As of
November 30, 1995, the aggregate outstanding principal amount of the Company's
Senior Indebtedness (as defined in the Company's public debt shelf registration
statements) was approximately $18.5 billion. The Company filed a shelf
registration statement which became effective in March 1995 for up to $4 billion
of additional debt securities, warrants to purchase debt securities, preferred
stock and depositary shares.

      In fiscal 1995, MS&Co. issued approximately $263 million of Series C, $96
million of Series D, $82 million of Series E and $25 million of Series F
subordinated notes due in 2001, 2003, 2006 and 2016, respectively (collectively,
the "Notes"), to a group of institutional investors. The Notes have been
structured to qualify as regulatory capital for purposes of the net capital rule
of the Securities and Exchange Commission. In December 1995, an additional $50
million of Series C notes was issued.

      In fiscal 1995, the Company and Morgan Stanley Finance plc, a U.K.
subsidiary ("MS plc"), issued 9.00%, 8.40% and 8.20% Capital Units in an
aggregate amount of approximately $513 million. Each Capital Unit consists of
(a) a Subordinated Debenture of MS plc guaranteed by the Company, and (b) a
related Purchase Contract 
<PAGE>   11
Page 36
--------------------------------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)

issued by the Company requiring the holder to purchase one Depositary Share
representing ownership of a 1/8 interest in a share of the Company's 9.00%,
8.40% and 8.20% Cumulative Preferred Stock, respectively.

      Between November 30, 1995 and January 31, 1996, additional debt
obligations (all of which were senior notes) aggregating approximately $524
million were issued. These notes have a weighted average coupon rate of 5.8% and
maturities from 1997 to 2011.

      The Company maintains a senior revolving credit agreement with a group of
banks. Under the terms of the credit agreement, the banks are committed to
provide up to $2.5 billion for up to 364 days. Any loans outstanding on the
commitment termination date will mature on the first anniversary of the
commitment termination date.

      The Company also maintains a master collateral facility that enables
MS&Co. to pledge certain collateral to secure loan arrangements, letters of
credit and other financial accommodations. As part of this facility, MS&Co. also
maintains a secured committed credit agreement with a group of banks that are
parties to the master collateral facility under which such banks are committed
to provide up to $1 billion for up to 364 days. Any loans outstanding on the
commitment termination date will mature on the first anniversary of the
commitment termination date. Subsequent to November 30, 1995, the credit
agreement was renewed with the commitment increased to $1.25 billion.

      Subsequent to November 30, 1995, the Company established a revolving
committed financing facility that enables MSIL to secure committed funding from
a syndicate of banks by providing a broad range of collateral under repurchase
agreements. Such banks are committed to provide up to an aggregate of $1.25
billion available in twelve major currencies for up to 364 days. Any amounts
outstanding on the commitment termination date may, at MSIL's option, be
extended to mature on or before the first anniversary of the commitment
termination date.

      There were no borrowings outstanding under any of the foregoing credit,
collateral or committed financing facilities at November 30, 1995; however, the
Company anticipates utilizing these facilities for short-term funding from time
to time (see Note 2 to the Consolidated Financial Statements).

      During the fiscal year ended November 30, 1995, the Company repurchased
shares of its common stock at an aggregate cost of $103 million. On January 4,
1996, the Board of Directors authorized the purchase, in the open market or
otherwise, subject to market conditions and certain other factors, of an
additional $400 million of the Company's common stock. Common stock repurchases
between November 30, 1995 and January 31, 1996 aggregated $303 million; the
unused portion of its stock repurchase authorization at such date was
approximately $310 million. The Company also issued shares of common stock
pursuant to employee compensation plans (see Note 8 to the Consolidated
Financial Statements).

      Certain assets of the Company, such as real property, equipment, leasehold
improvements, certain equity investments made in connection with the Company's
merchant banking and other principal investment activities, high-yield debt
securities, emerging market debt, and certain collateralized mortgage
obligations and mortgage-related loan products, are not highly liquid. In
connection with its merchant banking and other principal investment activities,
the Company has equity investments (directly or indirectly through funds managed
by the Company) in privately and publicly held companies. As of November 30,
1995, the aggregate carrying value of the Company's equity investments in
privately held companies (including direct investments and partnership
interests) was $156 million, and its aggregate investment in publicly held
companies was $242 million.

      In its capacity as an underwriter of and as a market-maker in
mortgage-backed securities, collateralized mortgage obligations and related
instruments, and as a market-maker in commercial, residential and real estate
loan products, the Company takes positions in market segments where liquidity
can vary greatly from time to time. The carrying value of such financial
instruments traded in markets currently experiencing lower levels of liquidity
approximated $1,169 million at November 30, 1995.

      In addition, at November 30, 1995, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was 
<PAGE>   12
Page 37
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT



$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.
Non-investment grade securities generally involve greater risk than investment
grade securities due to the lower credit ratings of the issuers, which typically
have relatively high levels of indebtedness and are, therefore, more sensitive
to adverse economic conditions. In addition, the market for non-investment grade
securities and emerging market loans and securitized instruments has been, and
may in the future be, characterized by periods of volatility and illiquidity.
The Company has in place credit and other risk policies and procedures to
control total inventory positions and risk concentrations for non-investment
grade securities and emerging market loans and securitized instruments.

      The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1995 approximately $209
million in connection with its merchant banking and other principal investment
activities, and an estimated $80 million for fit-out and related costs
associated with its buildings located in New York City and Tokyo. Additionally,
the Company has provided and will continue to provide financing, including
margin lending and other extensions of credit to clients (including subordinated
loans on an interim basis to leveraged companies associated with its merchant
banking and other principal investment activities), that may subject the Company
to increased credit and liquidity risks.

      Subsequent to November 30, 1995, the Company formed Morgan Stanley Bridge
Fund, LLC ("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.

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

      The gross notional and fair value amounts of derivatives used by the
Company for asset and liability management and as part of its trading activities
are summarized in Notes 3 and 5, respectively, to the Consolidated Financial
Statements. See also "Derivative Financial Instruments" herein.

REGULATORY CAPITAL REQUIREMENTS

MS&Co. is a registered broker-dealer and a registered futures commission
merchant and, accordingly, is subject to the minimum net capital requirements of
the Securities and Exchange Commission and the Commodity Futures Trading
Commission. MSIL, a London-based broker-dealer subsidiary, is regulated by the
Securities and Futures Authority ("SFA") in the United Kingdom and, accordingly,
is subject to the Financial Resources Requirements of the SFA. Morgan Stanley
Japan Limited ("MSJL"), a Tokyo-based broker-dealer, is regulated by the
Japanese Ministry of Finance. MS&Co., MSIL and MSJL have consistently operated
in excess of their respective regulatory requirements (see Note 7 to the
Consolidated Financial Statements).

      Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their applicable local capital adequacy requirements. In addition,
Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through
which the Company conducts some of its derivatives activities, has established
certain operating restrictions which have been reviewed by various rating
agencies.

EFFECTS OF INFLATION AND CHANGES IN FOREIGN EXCHANGE RATES

Because the Company's assets are, to a large extent, liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses, which may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other adverse effects upon the securities markets and on the value
of financial instruments, it may adversely affect the Company's financial
position and profitability.
<PAGE>   13
Page 38
--------------------------------------------------------------------------------


LIQUIDITY AND CAPITAL RESOURCES
(CONTINUED)

      A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar. Non-U.S. dollar assets typically are financed by
direct borrowing or swap-based funding in the same currency. Changes in foreign
exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar
expenses. Those foreign exchange exposures that arise and are not hedged by an
offsetting foreign currency exposure are actively managed by the Company to
minimize risk of loss due to currency fluctuations.

DERIVATIVE FINANCIAL INSTRUMENTS

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 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 a variety of proprietary trading activities (see Note 5 to the
Consolidated Financial Statements). 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. Given the highly integrated nature of derivative
products and related cash instruments in the determination of overall business
unit profitability and the context in which the Company manages its trading
areas, it is not meaningful to allocate trading revenues between the derivative
and underlying cash instrument components. Moreover, the risks associated with
the Company's derivative activities, including market and credit risks, are
managed on an integrated basis with associated cash instruments in a manner
consistent with the Company's overall risk management policies and procedures
(see "Risk Management" herein). It should be noted that while particular risks
may be associated with the use of derivatives, in many cases derivatives serve
to reduce, rather than increase, the Company's exposure to losses from market,
credit and other risks.


                      [One Pie Chart--See EDGAR Appendix]


      The total notional value of derivative trading contracts outstanding as of
November 30, 1995 was $985 billion (as compared with $835 billion as of January
31, 1995). While these amounts are an indication of the Company's degree of use
of derivatives for trading purposes, they do not represent the Company's
exposure to 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 
<PAGE>   14
Page 39
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT


commodities. The Company's exposure to credit risk at any point in time is
represented by the fair value of such contracts reported as assets. Total fair
value outstanding as of November 30, 1995 was $8.0 billion. Approximately 79% of
that credit risk exposure was with counterparties rated single-A or better, and
another 3% was fully collateralized (see Note 5 to the Consolidated Financial
Statements).

      The Company also uses derivative products (primarily interest rate and
currency swaps) to assist in asset and liability management and to reduce
borrowing costs (see Note 3 to the Consolidated Financial Statements).

      The Company believes that derivatives are valuable tools that can provide
cost-effective solutions to complex financial problems and remains committed to
providing its clients with innovative financial products. In 1994, the Company
established Morgan Stanley Derivative Products Inc., a triple-A rated
subsidiary, to offer derivative products to clients who will enter into
derivative transactions only with triple-A rated counterparties. In addition,
the Company, through its continuing involvement with regulatory, self-regulatory
and industry activities such as the International Swaps and Derivatives
Association Inc. (ISDA), the Group of 30 and the U.S. securities firms'
Derivatives Policy Group, provides leadership in the development of derivative
policies and practices in order to maintain confidence in the markets for
derivative products, which is critical to the Company's ability to assist
clients in meeting their overall financial needs.

RISK MANAGEMENT

Risk is an inherent part of the Company's businesses and activities, and 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 seeks to
maintain a broad-based portfolio of business activities to help 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 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. 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 risk. 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 and reviews the Company's performance relative to these policies
(see also "Liquidity and Capital Resources - Funding and Capital Policies"). 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 risk profile. With respect to
the Company's major trading businesses, division risk managers monitor and
manage positions, 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, which has operational responsibility for
identifying, monitoring and reporting to senior management on the Company's
exposure to risk, 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

<PAGE>   15
Page 40
--------------------------------------------------------------------------------



RISK MANAGEMENT
(CONTINUED)

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 that also are independent of the
Company's business areas and are actively involved in monitoring the Company's
risk profile include: Controllers, Corporate Treasury, Information Technology,
Legal and Compliance, Tax and Operations. The Company continues to be committed
to employing qualified personnel with appropriate expertise in each of the
various administrative and business areas to implement effectively the Company's
risk management and monitoring systems and processes.

      The Company also 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 manages the various risks associated with its activities on a
Company-wide basis, 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 and discrete market limits are assigned to business units and
trading desks within trading areas which are compatible with the trading
division 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. 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 Finance and Risk Committee has also approved Company-wide credit
guidelines which limit the Company's credit exposure to any one counterparty.
Specific credit 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.
The Company manages the credit exposure relating to its trading activities by
monitoring the creditworthiness of counterparties and credit limits on an
ongoing basis; entering into master netting agreements and collateral
arrangements with counterparties in appropriate circumstances; and limiting the
duration of exposure.

      In addition, the Company's Controllers and Operations Departments monitor
position, profit/loss and balance sheet information through reconciliation
procedures, and business unit profitability, position market prices and aged
positions are analyzed. The Company also has established legal standards and
procedures on a worldwide basis that are designed to ensure compliance with all
applicable statutory and regulatory requirements.

      For a detailed discussion of the Company's risk management policies and
procedures, see Item I, Part I, of the Form 10-K.

      The Company's division risk managers and the Market Risk Department
evaluate the impact of historical changes in market conditions on the value of
the Company's financial instrument portfolios in order to determine the
potential gains or losses that would arise from normal and abnormal movements in
interest rates, foreign exchange rates, equity prices and commodity prices. This
quantification of potential gains and losses under varying scenarios and
situations is an integral component of the Company's risk management procedures.
The hypothetical results of these analyses, however, are not necessarily
indicative of future results.

      Historical results, while also not indicative of future results, provide a
more meaningful measure of the Company's effectiveness in managing the risks
inherent in its various businesses, including market risks related to its global
portfolios of financial instruments. The diversification of the Company's
activities within and across business lines and prudent risk management have
helped the Company reduce volatility in net revenues. The Company's under-
<PAGE>   16
Page 41
--------------------------------------------------------------------------------
                                               MORGAN STANLEY 1995 ANNUAL REPORT



writing and sales and trading businesses (which include fixed income, equity,
commodities and foreign exchange) historically have been more volatile than its
fee-based businesses (which include investment banking advisory services,
securities services and asset management).

      The Company's performance in mitigating volatility is demonstrated by the
following weekly distribution of its underwriting and sales and trading net
revenues for fiscal 1995 and fiscal 1994.


                      [One Bar Chart--See EDGAR Appendix]


      The bars represent the number of weeks in which net revenues from each
activity fell within a particular range.

      The Company's management of the volatility in revenues from its
underwriting and sales and trading activities is complemented by its continuing
strategic emphasis on more stable fee-based businesses. The Company's recent
record of lower volatilities and continuing growth in these fee-based businesses
is presented in the charts below, which provide a weekly distribution of
fee-based net revenues for fiscal 1995 and fiscal 1994 and a three-year summary
of fee-based and underwriting and sales and trading net revenues.


                      [One Bar Chart--See EDGAR Appendix]
<PAGE>   17
Page 42
--------------------------------------------------------------------------------


                      [One Bar Chart--See EDGAR Appendix]


POTENTIAL IMPACT OF FINANCIAL ACCOUNTING STANDARDS BOARD EXPOSURE DRAFTS ON THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS

In October 1995, the Financial Accounting Standards Board ("FASB") released an
exposure draft entitled "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (the "Securitization ED"). The
Securitization ED, among other issues, addresses the accounting for repurchase
and reverse repurchase agreements. The Securitization ED would require that
repurchase transactions with an original maturity of 90 days or longer be
accounted for as a sale of the underlying loan collateral, rather than a
financing transaction. It would also require that an entity record on its
balance sheet the collateral obtained in certain reverse repurchase, securities
borrowed, margin and other collateralized transactions to the extent that such
collateral could be used by the entity to deliver against short sales or as
collateral in financing transactions of its own. A corresponding liability to
return such assets to their actual owners would also be required to be recorded.

      The Company does not believe that the accounting proposed in the
Securitization ED reflects the underlying substance of collateralized financing
transactions and has expressed its concerns in a comment letter to the FASB. As
currently proposed, the Company would be required to adopt the Securitization ED
for its fiscal year ended November 30, 1997. The Company believes that if
adopted in its current form, the Securitization ED would not have a material
effect on its results of operations. It would, however, likely have a material
effect on the Consolidated Statement of Financial Condition of the Company and
other companies in the securities industry, but the effect has not been
quantified at this time.

      In October 1995, the FASB also released an exposure draft entitled
"Consolidated Financial Statements: Policies and Procedures" (the "Consolidation
ED"). The Consolidation ED, among other things, would significantly change
current consolidation practices with respect to determining which entities are
to be included in a set of consolidated financial statements. The Consolidation
ED could potentially require the Company to consolidate certain of its merchant
banking investments, which, as part of the Company's trading and investment
activities, are currently carried in its consolidated financial statements at
fair value.

      The Company believes that application of the Consolidation ED would result
in a confusing and inappropriate financial statement presentation. Compliance
with the proposal would also involve significant incremental resources and
costs. The Company has expressed these concerns in a comment letter to the FASB.
As currently proposed, the Company would be required to adopt the Consolidation
ED for its fiscal year ended November 30, 1998. The Company believes that, if
adopted in its current form, the Consolidation ED would have a material effect
on both its results of operations as well as its financial condition. These
effects, however, have not been quantified at this time.

      The Company intends to follow both proposals closely in 1996.
<PAGE>   18
                             GRAPHICS APPENDIX LIST

                                 EDGAR VERSION
                                ---------------

Form 10-K for the fiscal year ended November 30, 1995, Exhibit 13.3-
   (Selected Portions of Morgan Stanley's 1995 Annual Report to Stockholders)

Page 33 -- One pie chart omitted
Page 38 -- One pie chart omitted
Page 41 -- Two bar charts omitted
Page 42 -- One bar chart omitted

                                TYPESET VERSION
                                ---------------

Form 10-K for the fiscal year ended November 30, 1995, Exhibit 13.3-
   (Selected Portions of Morgan Stanley's 1995 Annual Report to Stockholders)

Page 33 -- A pie chart representing the composition of Financial Instruments
Owned on a percentage basis as of November 30, 1995 as follows:

<TABLE>
<S>                                            <C>
Derivative contracts.........................  13.7%
Physical commodities.........................   0.7%
U.S. government and agency securities........  21.3%
Other sovereign government obligations.......  23.5%
Corporate and other debt.....................  18.3%
Corporate equities...........................  22.5%
</TABLE>

Page 38 -- A pie chart representing the composition of Derivative Financial
Instruments Owned--Net Replacement Cost on a percentage basis as of November 30,
1995 as follows:

<TABLE>
<S>                                            <C>
Foreign exchange forward contracts
 and options.................................  23.2%
Mortgage-backed securities, forward
 contracts, swaps and options................   1.5%
Interest rate and currency swaps 
 and options.................................  47.7%
Other fixed income securities
 contracts...................................   1.7%
Commodity forwards, options and swaps........   8.2%
Equity securities contracts..................  17.7%
</TABLE>

Page 41 -- A bar chart depicting Distribution of Underwriting and Sales and
Trading Net Revenues (including principal trading, commissions, net interest
revenues and underwriting revenues) for fiscal 1995 (which represents the
ten-month period ended November 30, 1995) and fiscal 
<PAGE>   19
1994. The bars in the chart illustrate the number of weeks that such net 
revenues fell within the specified dollar ranges for each area presented 
below. All dollar amounts are expressed in millions.

<TABLE>
<CAPTION>
              $(5) - 0  $0 - 10  $10 - 20  $20 - 40  $40 - 60   More than $60
<S>              <C>      <C>       <C>       <C>       <C>         <C> 

Equity                     3        19        67         7 

Fixed Income      5       12        23        45         8           3

Commodities      20       76       

Foreign
Exchange          1       93         2
</TABLE>

Page 41 -- A bar chart depicting Distribution of Fee-Based Net Revenues for
fiscal 1995 (which represents the ten-month period ended November 30, 1995) and
fiscal 1994. The bars in the chart depicting Distribution of Fee-Based Net
Revenues illustrate the number of weeks that such net revenues fell within
specified dollar ranges for each area presented below. All dollar amounts are
expressed in millions.

<TABLE>
<CAPTION>
                       $0 - 10             $10 - 20             More than $20
<S>                      <C>                  <C>                   <C>

Investment Banking       
Advisory Services        65                    19                    12 

Securities Services      96

Asset Management         96
</TABLE>

Page 42 -- A bar chart depicting Net Revenues (excluding merchant banking net
revenues) for fiscal 1993, fiscal 1994 and fiscal 1995 (Fiscal 1995 represents
the ten-month period ended November 30, 1995, annualized). The bars in the chart
depicting Net Revenues illustrate a three-year summary of Fee-Based and
Underwriting and Sales and Trading Net Revenues as follows:
Fee-based net revenues were $.7 billion, $1 billion and $1.2 billion for fiscal
1993, fiscal 1994 and fiscal 1995, respectively. Underwriting and sales and
trading net revenues were $3.4 billion, $2.4 billion and $3 billion for fiscal
1993, fiscal 1994 and fiscal 1995, respectively.