Document:

FIXED RATE SENIOR NOTE

REGISTERED                                                      REGISTERED
No. FXR                                                         U.S.$
                                                                CUSIP:

     Unless this certificate is presented by an authorized representative of The
Depository Trust Company (55 Water Street, New York, New York) to the issuer or
its agent for registration of transfer, exchange or payment, and any certificate
issued is registered in the name of Cede & Co. or such other name as requested
by an authorized representative of The Depository Trust Company and any payment
is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof,
Cede & Co., has an interest herein.

<PAGE>

                                 MORGAN STANLEY
                    SENIOR GLOBAL MEDIUM-TERM NOTE, SERIES C
                                  (Fixed Rate)

                      MARKET PARTICIPATION SECURITIES WITH
                     MINIMUM RETURN PROTECTION ("MPS(SM)")

                             MPS DUE MARCH 30, 2012
            LINKED TO THE DOW JONES HIGH YIELD SELECT 10 INDEX(SM)

<TABLE>
<S>                           <C>                          <C>                          <C>
ORIGINAL ISSUE DATE:          INITIAL REDEMPTION           INTEREST RATE:   % per       MATURITY DATE:
                                 DATE:  N/A                   annum (equivalent            See "Maturity Date"
                                                              to $     per annum per       below.
                                                              MPS)

INTEREST ACCRUAL              INITIAL REDEMPTION           INTEREST PAYMENT             OPTIONAL
   DATE:                         PERCENTAGE: N/A              DATE(S): See "Interest       REPAYMENT
                                                              Payment Dates" below.        DATE(S):  N/A

SPECIFIED CURRENCY:           ANNUAL REDEMPTION            INTEREST PAYMENT             APPLICABILITY OF
   U.S. dollars                  PERCENTAGE                   PERIOD: Semiannually         MODIFIED
                                 REDUCTION: N/A                                            PAYMENT UPON
                                                                                           ACCELERATION OR
                                                                                           REDEMPTION: See
                                                                                           "Alternate Exchange
                                                                                           Calculation in Case of
                                                                                           an Event of Default"
                                                                                           below.

IF SPECIFIED                  REDEMPTION NOTICE            APPLICABILITY OF             If yes, state Issue Price:
   CURRENCY OTHER                PERIOD:  N/A                 ANNUAL INTEREST              N/A
   THAN U.S. DOLLARS,                                         PAYMENTS: N/A
   OPTION TO ELECT
   PAYMENT IN U.S.
   DOLLARS: N/A

EXCHANGE RATE                 TAX REDEMPTION AND           PRICE APPLICABLE             ORIGINAL YIELD TO
   AGENT: N/A                    PAYMENT OF                UPON OPTIONAL                   MATURITY: N/A
                                 ADDITIONAL                REPAYMENT: N/A
                                 AMOUNTS: N/A

OTHER PROVISIONS:             IF YES, STATE INITIAL
   See below.                 OFFERING DATE: N/A
</TABLE>

For the purposes of this note, paragraph number 10 of Section 2.08 of the
Amended and Restated Indenture, dated as of May 1, 1999, between the Issuer and
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) as Trustee,
shall not apply.

                                       A-2

<PAGE>

Maturity Date................March 30, 2012, subject to extension in the event
                             of a Market Disruption Event on the final Period
                             Valuation Date for calculating the Index-linked
                             Performance Amount.

                             If, due to a Market Disruption Event or otherwise,
                             the final Period Valuation Date is postponed so
                             that it falls less than two scheduled Trading Days
                             prior to the scheduled Maturity Date, the Maturity
                             Date shall be the second scheduled Trading Day
                             following that final Period Valuation Date as
                             postponed. See "Period Valuation Dates" below.

                             In the event that the final Period Valuation Date
                             is postponed due to a Market Disruption Event or
                             otherwise, the Issuer shall give notice of such
                             postponement as promptly as possible, and in no
                             case later than one Business Day following the
                             scheduled final Period Valuation Date, (i) to the
                             holder of this MPS by mailing notice of such
                             postponement by first class mail, postage prepaid,
                             to the holder's last address as it shall appear
                             upon the registry books, (ii) to the Trustee by
                             telephone or facsimile confirmed by mailing such
                             notice to the Trustee by first class mail, postage
                             prepaid, at its New York office and (iii) to The
                             Depository Trust Company (the "Depositary") by
                             telephone or facsimile confirmed by mailing such
                             notice to the Depositary by first class mail,
                             postage prepaid. Any notice that is mailed in the
                             manner herein provided shall be conclusively
                             presumed to have been duly given, whether or not
                             the holder of this MPS receives the notice.

Interest Payment Dates....   Each March 30 and September 30, commencing
                             September 30, 2004 and to and including the
                             Maturity Date.

                             If the scheduled Maturity Date is postponed due to
                             a Market Disruption Event or otherwise, the Issuer
                             shall pay interest on the Maturity Date as
                             postponed, but no interest will accrue on this MPS
                             or on such payment during the period from or after
                             the scheduled Maturity Date.

Record Date...............   Notwithstanding the definition of "Record Date" on
                             page 11 hereof, the Record Date for each Interest
                             Payment Date, including the Interest Payment Date
                             scheduled to

                                       A-3

<PAGE>

                             occur on the Maturity Date, shall be the date 15
                             calendar days prior to such scheduled Interest
                             Payment Date, whether or not that date is a
                             Business Day.

Minimum Denominations.....   $25

Issue Price...............   $25

Maturity Redemption
Amount....................   At maturity, the holder of this MPS shall receive
                             for each $25 principal amount of this MPS the
                             Maturity Redemption Amount, as determined by the
                             Calculation Agent, equal to the $25 principal
                             amount of this MPS plus the Supplemental Redemption
                             Amount, if any.

                             The Issuer shall, or shall cause the Calculation
                             Agent to, (i) provide written notice to the Trustee
                             at its New York office, on which notice the Trustee
                             may conclusively rely, and to the Depositary of the
                             Maturity Redemption Amount, on or prior to 10:30
                             a.m. on the Trading Day preceding the Maturity Date
                             (but if such Trading Day is not a Business Day,
                             prior to the close of business on the Business Day
                             preceding the Maturity Date) and (ii) deliver the
                             aggregate cash amount due with respect to this MPS
                             to the Trustee for delivery to the holder of this
                             MPS on the Maturity Date. See "Discontinuance of
                             the Dow Jones High Yield Select 10 Index;
                             Alteration of Method of Calculation" below.

Index-linked Performance
Amount....................   The Index-linked Performance Amount is equal to (i)
                             $25 times (ii) the product of the Quarterly
                             Performance Amounts for each Quarterly Valuation
                             Period over the term of the MPS.

Supplemental Redemption
Amount....................   The Supplemental Redemption Amount is equal to the
                             amount by which (i) the Index-linked Performance
                             Amount exceeds (ii) $       , which is the $25
                             principal amount of this MPS plus the total amount
                             of interest payments that the holder of this MPS
                             receives over the term of the MPS, including on
                             the Maturity Date.

Quarterly Performance
Amount....................   With respect to any Quarterly Valuation Period, the
                             Quarterly Performance Amount shall be equal to the
                             lesser of (i) 1.10 and (ii) a fraction, the
                             numerator of which shall be the Index Value on the
                             Period Valuation

                                       A-4

<PAGE>

                             Date at the end of such Quarterly Valuation Period
                             and the denominator of which shall be the Index
                             Value on the Period Valuation Date at the beginning
                             of such Quarterly Valuation Period, provided that
                             for the first Quarterly Valuation Period, the
                             denominator shall be          .

Quarterly Valuation
Periods...................   Each period from and including a Period Valuation
                             Date to and including the immediately subsequent
                             Period Valuation Date; provided that the first
                             Quarterly Valuation Period shall begin      , 2004.

Period Valuation Dates....   The Period Valuation Dates shall be (i) the 30th of
                             each March, June, September and December, beginning
                             September 30, 2004 to and including December 30,
                             2011, and (ii) March 28, 2012, in each such case
                             subject to adjustment if such date is not a Trading
                             Day or if a Market Disruption Event occurs on such
                             date as described in the two following paragraphs.

                             If any scheduled Period Valuation Date occurring
                             from and including September 30, 2004 to and
                             including December 30, 2011 is not a Trading Day or
                             if a Market Disruption Event occurs on any such
                             date, such Period Valuation Date shall be the
                             immediately succeeding Trading Day during which no
                             Market Disruption Event shall have occurred;
                             provided that if a Market Disruption Event occurs
                             on any of the scheduled Period Valuation Dates
                             occurring from and including September 30, 2004 to
                             and including December 30, 2011 and on each of the
                             five Trading Days immediately succeeding that
                             scheduled Period Valuation Date, then (i) such
                             fifth succeeding Trading Day shall be deemed to be
                             the relevant Period Valuation Date, notwithstanding
                             the occurrence of a Market Disruption Event on such
                             day, and (ii) with respect to any such fifth
                             Trading Day on which a Market Disruption Event
                             occurs, the Calculation Agent shall determine the
                             value of the Dow Jones High Yield Select 10 Index
                             on such fifth Trading Day in accordance with the
                             formula for calculating the value of the Dow Jones
                             High Yield Select 10 Index last in effect prior to
                             the commencement of the Market Disruption Event,
                             using the closing price (or, if trading in the
                             relevant securities has been materially suspended
                             or materially limited, its good faith estimate of
                             the closing price that would have prevailed but for
                             such suspension or limitation) on such

                                       A-5

<PAGE>

                             Trading Day of each security most recently
                             comprising the Dow Jones High Yield Select 10
                             Index.

                             If March 28, 2012 (the final Period Valuation Date)
                             is not a Trading Day or if there is a Market
                             Disruption Event on such day, the final Period
                             Valuation Date shall be the immediately succeeding
                             Trading Day during which no Market Disruption Event
                             shall have occurred.

Dow Jones High Yield
  Select 10 Index.........   The Dow Jones High Yield Select 10 Index is
                             published by Dow Jones & Company, Inc. ("Dow
                             Jones").

Index Value...............   The Index Value on any Trading Day shall equal the
                             closing value of the Dow Jones High Yield Select 10
                             Index or any Successor Index (as defined under
                             "Discontinuance of the Dow Jones High Yield Select
                             10 Index; Alteration of Method of Calculation"
                             below) published at the regular official weekday
                             close of trading on that Trading Day. In certain
                             circumstances, the Index Value shall be based on
                             the alternate calculation of the Dow Jones High
                             Yield Select 10 Index described under
                             "Discontinuance of the Dow Jones High Yield Select
                             10 Index; Alteration of Method of Calculation."

                             In this MPS, references to the Dow Jones High Yield
                             Select 10 Index shall include any Successor Index,
                             unless the context requires otherwise.

Trading Day...............   A day, as determined by the Calculation Agent, on
                             which trading is generally conducted on the New
                             York Stock Exchange, Inc. ("NYSE"), the American
                             Stock Exchange LLC ("AMEX"), the Nasdaq National
                             Market System, the Chicago Mercantile Exchange and
                             the Chicago Board of Options Exchange and in the
                             over-the-counter market for equity securities in
                             the United States.

Market Disruption Event...   "Market Disruption Event" means, with respect to
                             the Dow Jones High Yield Select 10 Index, the
                             occurrence or existence of a suspension, absence or
                             material limitation of trading of stocks then
                             constituting 20% or more of the level of the Dow
                             Jones High Yield Select 10 Index (or the Successor
                             Index) on the Relevant Exchanges for such
                             securities for the same period of trading longer
                             than two hours or during the one-half hour period
                             preceding the close of the principal trading
                             session on such Relevant

                                       A-6

<PAGE>

                             Exchange; or a breakdown or failure in the price
                             and trade reporting systems of any Relevant
                             Exchange as a result of which the reported trading
                             prices for stocks then constituting 20% or more of
                             the level of the Dow Jones High Yield Select 10
                             Index (or the Successor Index) during the last
                             one-half hour preceding the close of the principal
                             trading session on such Relevant Exchange are
                             materially inaccurate; or the suspension, material
                             limitation or absence of trading on any major U.S.
                             securities market for trading in futures or options
                             contracts or exchange traded funds related to the
                             Dow Jones High Yield Select 10 Index (or the
                             Successor Index) for more than two hours of trading
                             or during the one-half hour period preceding the
                             close of the principal trading session on such
                             market, in each case as determined by the
                             Calculation Agent in its sole discretion.

                             For the purpose of determining whether a Market
                             Disruption Event exists at any time, if trading in
                             a security included in the Dow Jones High Yield
                             Select 10 Index is materially suspended or
                             materially limited at that time, then the relevant
                             percentage contribution of that security to the
                             level of the Dow Jones High Yield Select 10 Index
                             shall be based on a comparison of (x) the portion
                             of the level of the Dow Jones High Yield Select 10
                             Index attributable to that security relative to (y)
                             the overall level of the Dow Jones High Yield
                             Select 10 Index, in each case immediately before
                             that suspension or limitation.

                             For purposes of determining whether a Market
                             Disruption Event has occurred: (1) a limitation on
                             the hours or number of days of trading shall not
                             constitute a Market Disruption Event if it results
                             from an announced change in the regular business
                             hours of the relevant exchange or market, (2) a
                             decision to permanently discontinue trading in the
                             relevant futures or options contract or exchange
                             traded fund shall not constitute a Market
                             Disruption Event, (3) limitations pursuant to the
                             rules of any Relevant Exchange similar to NYSE Rule
                             80A (or any applicable rule or regulation enacted
                             or promulgated by any other self-regulatory
                             organization or any government agency of scope
                             similar to NYSE Rule 80A as determined by the
                             Calculation Agent) on trading during significant
                             market fluctuations shall constitute a suspension,
                             absence or material limitation of trading, (4) a
                             suspension of trading in futures or options
                             contracts on the Dow Jones

                                       A-7

<PAGE>

                             High Yield Select 10 Index by the primary
                             securities market trading in such contracts by
                             reason of (a) a price change exceeding limits set
                             by such exchange or market, (b) an imbalance of
                             orders relating to such contracts or (c) a
                             disparity in bid and ask quotes relating to such
                             contracts shall constitute a suspension, absence or
                             material limitation of trading in futures or
                             options contracts related to the Dow Jones High
                             Yield Select 10 Index and (5) a "suspension,
                             absence or material limitation of trading" on any
                             Relevant Exchange or on the primary market on which
                             futures or options contracts related to the Dow
                             Jones High Yield Select 10 Index are traded shall
                             not include any time when such market is itself
                             closed for trading under ordinary circumstances.

Relevant Exchange.........   "Relevant Exchange" means the primary organized
                             exchange or market of trading for any security then
                             included in the Dow Jones High Yield Select 10
                             Index or any Successor Index.

Alternate Exchange
Calculation in Case of
an Event of Default.......   In case an event of default with respect to the MPS
                             shall have occurred and be continuing, the amount
                             declared due and payable for each MPS upon any
                             acceleration of the MPS shall be equal to (i)
                             accrued but unpaid interest to but excluding the
                             date of acceleration plus (ii) the Maturity
                             Redemption Amount determined as though (A) the
                             Index Value for any Period Valuation Date scheduled
                             to occur on or after such date of acceleration were
                             the Index Value on the date of acceleration and (B)
                             the amount of interest to be subtracted from the
                             Index-linked Performance Amount to derive the
                             Supplemental Redemption Amount were equal to the
                             total amount of interest accrued from the Original
                             Issue Date to but excluding the date of
                             acceleration. Therefore, the Quarterly Performance
                             Amount for the then current Quarterly Valuation
                             Period would be equal to the Index Value on the
                             date of acceleration divided by the Index Value on
                             the Period Valuation Date at the beginning of such
                             Quarterly Valuation Period, and the Quarterly
                             Performance Amount for each remaining Quarterly
                             Valuation Period would be equal to 1.

                             If the maturity of the MPS is accelerated because
                             of an event of default as described above, the
                             Issuer shall, or shall cause the Calculation Agent
                             to, provide written

                                       A-8

<PAGE>

                             notice to the Trustee at its New York office, on
                             which notice the Trustee may conclusively rely, and
                             to the Depositary of the Maturity Redemption Amount
                             and the aggregate cash amount due with respect to
                             this MPS as promptly as possible and in no event
                             later than two Business Days after the date of
                             acceleration.

Calculation Agent.........   Morgan Stanley & Co. Incorporated and its
                             successors ("MS & Co.")

                             All determinations made by the Calculation Agent
                             shall be at the sole discretion of the Calculation
                             Agent and shall, in the absence of manifest error,
                             be conclusive for all purposes and binding on the
                             holder of this MPS and on the Issuer.

                             All calculations with respect to the Index-linked
                             Performance Amount and the Quarterly Performance
                             Amount will be rounded to the nearest one hundred-
                             thousandth, with five one-millionths rounded upward
                             (e.g., .876545 would be rounded to .87655); all
                             dollar amounts related to determination of the
                             Supplemental Redemption Amount and the Maturity
                             Redemption Amount payable per MPS will be rounded
                             to the nearest ten-thousandth, with five one
                             hundred-thousandths rounded upward (e.g., .76545
                             would be rounded up to .7655); and all dollar
                             amounts paid on the aggregate number of MPS will be
                             rounded to the nearest cent, with one-half cent
                             rounded upward.

Discontinuance of the
Dow Jones High Yield
Select 10 Index;
Alteration of Method
of Calculation............   If Dow Jones discontinues publication of the Dow
                             Jones High Yield Select 10 Index and Dow Jones or
                             another entity publishes a successor or substitute
                             index that MS & Co., as the Calculation Agent,
                             determines, in its sole discretion, to be
                             comparable to the discontinued Dow Jones High Yield
                             Select 10 Index (such index being referred to
                             herein as a "Successor Index"), then any subsequent
                             Index Value shall be determined by reference to the
                             value of such Successor Index at the regular
                             official weekday close of the principal trading
                             session of or the relevant exchange or market for
                             the Successor Index on the date that any Index
                             Value is to be determined.

                                       A-9

<PAGE>

                             Upon any selection by the Calculation Agent of a
                             Successor Index, the Calculation Agent shall cause
                             written notice thereof to be furnished to the
                             Trustee, to the Issuer and to DTC, as holder of
                             this MPS, within three Trading Days of such
                             selection.

                             If Dow Jones discontinues publication of the Dow
                             Jones High Yield Select 10 Index prior to, and such
                             discontinuance is continuing on, any Period
                             Valuation Date and MS & Co., as Calculation Agent,
                             determines, in its sole discretion, that no
                             Successor Index is available at such time, then the
                             Calculation Agent shall determine the Index Value
                             for such date. The Index Value shall be computed by
                             the Calculation Agent in accordance with the
                             formula for calculating the Dow Jones High Yield
                             Select 10 Index last in effect prior to such
                             discontinuance, using the closing price (or, if
                             trading in the relevant securities has been
                             materially suspended or materially limited, its
                             good faith estimate of the closing price that would
                             have prevailed but for such suspension or
                             limitation) at the close of the principal trading
                             session of the Relevant Exchange on such date of
                             each security most recently comprising the Dow
                             Jones High Yield Select 10 Index without any
                             rebalancing or substitution of such securities
                             following such discontinuance.

                             If at any time the method of calculating the Dow
                             Jones High Yield Select 10 Index or a Successor
                             Index, or the value thereof, is changed in a
                             material respect, or if the Dow Jones High Yield
                             Select 10 Index or a Successor Index is in any
                             other way modified so that such index does not, in
                             the opinion of MS & Co., as the Calculation Agent,
                             fairly represent the value of the Dow Jones High
                             Yield Select 10 Index or such Successor Index had
                             such changes or modifications not been made, then,
                             from and after such time, the Calculation Agent
                             shall, at the close of business in New York City on
                             each date on which the Index Value is to be
                             determined, make such calculations and adjustments
                             as, in the good faith judgment of the Calculation
                             Agent, may be necessary in order to arrive at a
                             value of a stock index comparable to the Dow Jones
                             High Yield Select 10 Index or such Successor Index,
                             as the case may be, as if such changes or
                             modifications had not been made, and the
                             Calculation Agent shall calculate the Index Value
                             and Index-linked Performance Amount with reference
                             to the Dow Jones High Yield Select 10

                                      A-10

<PAGE>

                             Index or such Successor Index, as adjusted.
                             Accordingly, if the method of calculating the Dow
                             Jones High Yield Select 10 Index or a Successor
                             Index is modified so that the value of such index
                             is a fraction of what it would have been if it had
                             not been modified (e.g., due to a split in the
                             index), then the Calculation Agent shall adjust
                             such index in order to arrive at a value of the Dow
                             Jones High Yield Select 10 Index or such Successor
                             Index as if it had not been modified (e.g., as if
                             such split had not occurred).

                                      A-11

<PAGE>

     Morgan Stanley, a Delaware corporation (together with its successors and
assigns, the "Issuer"), for value received, hereby promises to pay to CEDE &
CO., or registered assignees, the amount of cash, as determined in accordance
with the provisions set forth under "Maturity Redemption Amount" above, due with
respect to the principal sum of U.S.$         (UNITED STATES DOLLARS          ),
on the Maturity Date specified above (except to the extent redeemed or repaid
prior to maturity) and to pay interest thereon at the Interest Rate per annum
specified above, from and including the Interest Accrual Date specified above
until the principal hereof is paid or duly made available for payment weekly,
monthly, quarterly, semiannually or annually in arrears as specified above as
the Interest Payment Period on each Interest Payment Date (as specified above),
commencing on the Interest Payment Date next succeeding the Interest Accrual
Date specified above, and at maturity (or on any redemption or repayment date);
provided, however, that if the Interest Accrual Date occurs between a Record
Date, as defined below, and the next succeeding Interest Payment Date, interest
payments will commence on the second Interest Payment Date succeeding the
Interest Accrual Date to the registered holder of this Note on the Record Date
with respect to such second Interest Payment Date; and provided, further, that
if this Note is subject to "Annual Interest Payments," interest payments shall
be made annually in arrears and the term "Interest Payment Date" shall be deemed
to mean the first day of March in each year.

     Interest on this Note will accrue from and including the most recent date
to which interest has been paid or duly provided for, or, if no interest has
been paid or duly provided for, from and including the Interest Accrual Date,
until but excluding the date the principal hereof has been paid or duly made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain exceptions
described herein, be paid to the person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on the date 15
calendar days prior to such Interest Payment Date (whether or not a Business Day
(as defined below)) (each such date, a "Record Date"); provided, however, that
interest payable at maturity (or any redemption or repayment date) will be
payable to the person to whom the principal hereof shall be payable. As used
herein, "Business Day" means any day, other than a Saturday or Sunday, (a) that
is neither a legal holiday nor a day on which banking institutions are
authorized or required by law or regulation to close (x) in The City of New York
or (y) if this Note is denominated in a Specified Currency other than U.S.
dollars, euro or Australian dollars, in the principal financial center of the
country of the Specified Currency, or (z) if this Note is denominated in
Australian dollars, in Sydney and (b) if this Note is denominated in euro, that
is also a day on which the Trans-European Automated Real-time Gross Settlement
Express Transfer System ("TARGET") is operating (a "TARGET Settlement Day").

     Payment of the principal of this Note, any premium and the interest due at
maturity (or any redemption or repayment date), unless this Note is denominated
in a Specified Currency other than U.S. dollars and is to be paid in whole or in
part in such Specified Currency, will be made in immediately available funds
upon surrender of this Note at the office or agency of the Paying Agent, as
defined on the reverse hereof, maintained for that purpose in the Borough of
Manhattan, The City of New York, or at such other paying agency as the Issuer
may determine, in U.S. dollars. U.S. dollar payments of interest, other than
interest due at maturity or on any date of redemption or repayment, will be made
by U.S. dollar check mailed to the address of the person entitled thereto as
such address shall appear in the Note register. A holder of U.S. $10,000,000 (or
the equivalent in

                                      A-12

<PAGE>

a Specified Currency) or more in aggregate principal amount of Notes having the
same Interest Payment Date, the interest on which is payable in U.S. dollars,
shall be entitled to receive payments of interest, other than interest due at
maturity or on any date of redemption or repayment, by wire transfer of
immediately available funds if appropriate wire transfer instructions have been
received by the Paying Agent in writing not less than 15 calendar days prior to
the applicable Interest Payment Date.

     If this Note is denominated in a Specified Currency other than U.S.
dollars, and the holder does not elect (in whole or in part) to receive payment
in U.S. dollars pursuant to the next succeeding paragraph, payments of interest,
principal or any premium with regard to this Note will be made by wire transfer
of immediately available funds to an account maintained by the holder hereof
with a bank located outside the United States if appropriate wire transfer
instructions have been received by the Paying Agent in writing, with respect to
payments of interest, on or prior to the fifth Business Day after the applicable
Record Date and, with respect to payments of principal or any premium, at least
ten Business Days prior to the Maturity Date or any redemption or repayment
date, as the case may be; provided that, if payment of interest, principal or
any premium with regard to this Note is payable in euro, the account must be a
euro account in a country for which the euro is the lawful currency, provided,
further, that if such wire transfer instructions are not received, such payments
will be made by check payable in such Specified Currency mailed to the address
of the person entitled thereto as such address shall appear in the Note
register; and provided, further, that payment of the principal of this Note, any
premium and the interest due at maturity (or on any redemption or repayment
date) will be made upon surrender of this Note at the office or agency referred
to in the preceding paragraph.

     If so indicated on the face hereof, the holder of this Note, if denominated
in a Specified Currency other than U.S. dollars, may elect to receive all or a
portion of payments on this Note in U.S. dollars by transmitting a written
request to the Paying Agent, on or prior to the fifth Business Day after such
Record Date or at least ten Business Days prior to the Maturity Date or any
redemption or repayment date, as the case may be. Such election shall remain in
effect unless such request is revoked by written notice to the Paying Agent as
to all or a portion of payments on this Note at least five Business Days prior
to such Record Date, for payments of interest, or at least ten calendar days
prior to the Maturity Date or any redemption or repayment date, for payments of
principal, as the case may be.

     If the holder elects to receive all or a portion of payments of principal
of, premium, if any, and interest on this Note, if denominated in a Specified
Currency other than U.S. dollars, in U.S. dollars, the Exchange Rate Agent (as
defined on the reverse hereof) will convert such payments into U.S. dollars. In
the event of such an election, payment in respect of this Note will be based
upon the exchange rate as determined by the Exchange Rate Agent based on the
highest bid quotation in The City of New York received by such Exchange Rate
Agent at approximately 11:00 a.m., New York City time, on the second Business
Day preceding the applicable payment date from three recognized foreign exchange
dealers (one of which may be the Exchange Rate Agent unless such Exchange Rate
Agent is an affiliate of the Issuer) for the purchase by the quoting dealer of
the Specified Currency for U.S. dollars for settlement on such payment date in
the amount of the Specified Currency payable in the absence of such an election
to such holder and at which the applicable dealer commits to execute a contract.
If such bid quotations are not available, such payment will be made in the

                                      A-13

<PAGE>

Specified Currency. All currency exchange costs will be borne by the holder of
this Note by deductions from such payments.

     Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.

     Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Senior Indenture, as defined on the
reverse hereof, or be valid or obligatory for any purpose.

                                      A-14

<PAGE>

     IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed.

DATED:                                 MORGAN STANLEY

                                       By:
                                           -------------------------------------

                                             Name:
                                             Title:

TRUSTEE'S CERTIFICATE
      OF AUTHENTICATION

This is one of the Notes referred
     to in the within-mentioned
     Senior Indenture.

JPMORGAN CHASE BANK,
      as Trustee

By:
   --------------------------------
   Authorized Officer

                                      A-15

<PAGE>

                              REVERSE OF SECURITY

     This Note is one of a duly authorized issue of Senior Global Medium-Term
Notes, Series C, having maturities more than nine months from the date of issue
(the "Notes") of the Issuer. The Notes are issuable under an Amended and
Restated Senior Indenture, dated as of May 1, 1999, between the Issuer and
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee
(the "Trustee," which term includes any successor trustee under the Senior
Indenture) (as may be amended or supplemented from time to time, the "Senior
Indenture"), to which Senior Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties and immunities of the Issuer, the Trustee and holders of the
Notes and the terms upon which the Notes are, and are to be, authenticated and
delivered. The Issuer has appointed JPMorgan Chase Bank at its corporate trust
office in The City of New York as the paying agent (the "Paying Agent," which
term includes any additional or successor Paying Agent appointed by the Issuer)
with respect to the Notes. The terms of individual Notes may vary with respect
to interest rates, interest rate formulas, issue dates, maturity dates, or
otherwise, all as provided in the Senior Indenture. To the extent not
inconsistent herewith, the terms of the Senior Indenture are hereby
incorporated by reference herein.

     Unless otherwise indicated on the face hereof, this Note will not be
subject to any sinking fund and, unless otherwise provided on the face hereof
in accordance with the provisions of the following two paragraphs, will not be
redeemable or subject to repayment at the option of the holder prior to
maturity.

     If so indicated on the face hereof, this Note may be redeemed in whole or
in part at the option of the Issuer on or after the Initial Redemption Date
specified on the face hereof on the terms set forth on the face hereof,
together with interest accrued and unpaid hereon to the date of redemption. If
this Note is subject to "Annual Redemption Percentage Reduction," the Initial
Redemption Percentage indicated on the face hereof will be reduced on each
anniversary of the Initial Redemption Date by the Annual Redemption Percentage
Reduction specified on the face hereof until the redemption price of this Note
is 100% of the principal amount hereof, together with interest accrued and
unpaid hereon to the date of redemption. Notice of redemption shall be mailed
to the registered holders of the Notes designated for redemption at their
addresses as the same shall appear on the Note register not less than 30 nor
more than 60 calendar days prior to the date fixed for redemption or within the
Redemption Notice Period specified on the face hereof, subject to all the
conditions and provisions of the Senior Indenture. In the event of redemption
of this Note in part only, a new Note or Notes for the amount of the unredeemed
portion hereof shall be issued in the name of the holder hereof upon the
cancellation hereof.

     If so indicated on the face of this Note, this Note will be subject to
repayment at the option of the holder on the Optional Repayment Date or Dates
specified on the face hereof on the terms set forth herein. On any Optional
Repayment Date, this Note will be repayable in whole or in part in increments
of $1,000 or, if this Note is denominated in a Specified Currency other than
U.S. dollars, in increments of 1,000 units of such Specified Currency (provided
that any remaining principal amount hereof shall not be less than the minimum
authorized denomination hereof) at the option of the holder hereof at a price
equal to 100% of the principal amount to be repaid, together with interest
accrued and unpaid hereon to the date of repayment, provided that if this Note
is issued with original

                                      A-16

<PAGE>

issue discount, this Note will be repayable on the applicable Optional
Repayment Date or Dates at the price(s) specified on the face hereof. For this
Note to be repaid at the option of the holder hereof, the Paying Agent must
receive at its corporate trust office in the Borough of Manhattan, The City of
New York, at least 15 but not more than 30 calendar days prior to the date of
repayment, (i) this Note with the form entitled "Option to Elect Repayment"
below duly completed or (ii) a telegram, telex, facsimile transmission or a
letter from a member of a national securities exchange or the National
Association of Securities Dealers, Inc. or a commercial bank or a trust company
in the United States setting forth the name of the holder of this Note, the
principal amount hereof, the certificate number of this Note or a description
of this Note's tenor and terms, the principal amount hereof to be repaid, a
statement that the option to elect repayment is being exercised thereby and a
guarantee that this Note, together with the form entitled "Option to Elect
Repayment" duly completed, will be received by the Paying Agent not later than
the fifth Business Day after the date of such telegram, telex, facsimile
transmission or letter; provided, that such telegram, telex, facsimile
transmission or letter shall only be effective if this Note and form duly
completed are received by the Paying Agent by such fifth Business Day. Exercise
of such repayment option by the holder hereof shall be irrevocable. In the
event of repayment of this Note in part only, a new Note or Notes for the
amount of the unpaid portion hereof shall be issued in the name of the holder
hereof upon the cancellation hereof.

     Interest payments on this Note will include interest accrued to but
excluding the Interest Payment Dates or the Maturity Date (or any earlier
redemption or repayment date), as the case may be. Unless otherwise provided on
the face hereof, interest payments for this Note will be computed and paid on
the basis of a 360-day year of twelve 30-day months.

     In the case where the Interest Payment Date or the Maturity Date (or any
redemption or repayment date) does not fall on a Business Day, payment of
interest, premium, if any, or principal otherwise payable on such date need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date or on the
Maturity Date (or any redemption or repayment date), and no interest on such
payment shall accrue for the period from and after the Interest Payment Date or
the Maturity Date (or any redemption or repayment date) to such next succeeding
Business Day.

     This Note and all the obligations of the Issuer hereunder are direct,
unsecured obligations of the Issuer and rank without preference or priority
among themselves and pari passu with all other existing and future unsecured
and unsubordinated indebtedness of the Issuer, subject to certain statutory
exceptions in the event of liquidation upon insolvency.

     This Note, and any Note or Notes issued upon transfer or exchange hereof,
is issuable only in fully registered form, without coupons, and, if denominated
in U.S. dollars, unless otherwise stated above, is issuable only in
denominations of U.S. $1,000 and any integral multiple of U.S. $1,000 in excess
thereof. If this Note is denominated in a Specified Currency other than U.S.
dollars, then, unless a higher minimum denomination is required by applicable
law, it is issuable only in denominations of the equivalent of U.S. $1,000
(rounded to an integral multiple of 1,000 units of such Specified Currency), or
any amount in excess thereof which is an integral multiple of 1,000 units of
such Specified Currency, as determined by reference to the noon dollar buying
rate in The City of New York for cable transfers of such Specified Currency
published by the Federal Reserve

                                      A-17

<PAGE>

Bank of New York (the "Market Exchange Rate") on the Business Day immediately
preceding the date of issuance.

     The Trustee has been appointed registrar for the Notes, and the Trustee
will maintain at its office in The City of New York a register for the
registration and transfer of Notes. This Note may be transferred at the
aforesaid office of the Trustee by surrendering this Note for cancellation,
accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Trustee and duly executed by the registered holder hereof in
person or by the holder's attorney duly authorized in writing, and thereupon
the Trustee shall issue in the name of the transferee or transferees, in
exchange herefor, a new Note or Notes having identical terms and provisions and
having a like aggregate principal amount in authorized denominations, subject
to the terms and conditions set forth herein; provided, however, that the
Trustee will not be required (i) to register the transfer of or exchange any
Note that has been called for redemption in whole or in part, except the
unredeemed portion of Notes being redeemed in part, (ii) to register the
transfer of or exchange any Note if the holder thereof has exercised his right,
if any, to require the Issuer to repurchase such Note in whole or in part,
except the portion of such Note not required to be repurchased, or (iii) to
register the transfer of or exchange Notes to the extent and during the period
so provided in the Senior Indenture with respect to the redemption of Notes.
Notes are exchangeable at said office for other Notes of other authorized
denominations of equal aggregate principal amount having identical terms and
provisions. All such exchanges and transfers of Notes will be free of charge,
but the Issuer may require payment of a sum sufficient to cover any tax or
other governmental charge in connection therewith. All Notes surrendered for
exchange shall be accompanied by a written instrument of transfer in form
satisfactory to the Issuer and the Trustee and executed by the registered
holder in person or by the holder's attorney duly authorized in writing. The
date of registration of any Note delivered upon any exchange or transfer of
Notes shall be such that no gain or loss of interest results from such exchange
or transfer.

     In case this Note shall at any time become mutilated, defaced or be
destroyed, lost or stolen and this Note or evidence of the loss, theft or
destruction thereof (together with the indemnity hereinafter referred to and
such other documents or proof as may be required in the premises) shall be
delivered to the Trustee, the Issuer in its discretion may execute a new Note
of like tenor in exchange for this Note, but, if this Note is destroyed, lost
or stolen, only upon receipt of evidence satisfactory to the Trustee and the
Issuer that this Note was destroyed or lost or stolen and, if required, upon
receipt also of indemnity satisfactory to each of them. All expenses and
reasonable charges associated with procuring such indemnity and with the
preparation, authentication and delivery of a new Note shall be borne by the
owner of the Note mutilated, defaced, destroyed, lost or stolen.

     The Senior Indenture provides that (a) if an Event of Default (as defined
in the Senior Indenture) due to the default in payment of principal of,
premium, if any, or interest on, any series of debt securities issued under the
Senior Indenture, including the series of Senior Medium-Term Notes of which
this Note forms a part, or due to the default in the performance or breach of
any other covenant or warranty of the Issuer applicable to the debt securities
of such series but not applicable to all outstanding debt securities issued
under the Senior Indenture shall have occurred and be continuing, either the
Trustee or the holders of not less than 25% in aggregate principal amount of
the outstanding debt securities of each affected series, voting as one class,
by notice in writing to the

                                      A-18

<PAGE>

Issuer and to the Trustee, if given by the securityholders, may then declare
the principal of all debt securities of all such series and interest accrued
thereon to be due and payable immediately and (b) if an Event of Default due to
a default in the performance of any other of the covenants or agreements in the
Senior Indenture applicable to all outstanding debt securities issued
thereunder, including this Note, or due to certain events of bankruptcy,
insolvency or reorganization of the Issuer, shall have occurred and be
continuing, either the Trustee or the holders of not less than 25% in aggregate
principal amount of all outstanding debt securities issued under the Senior
Indenture, voting as one class, by notice in writing to the Issuer and to the
Trustee, if given by the securityholders, may declare the principal of all such
debt securities and interest accrued thereon to be due and payable immediately,
but upon certain conditions such declarations may be annulled and past defaults
may be waived (except a continuing default in payment of principal or premium,
if any, or interest on such debt securities) by the holders of a majority in
aggregate principal amount of the debt securities of all affected series then
outstanding.

     If the face hereof indicates that this Note is subject to "Modified
Payment upon Acceleration or Redemption," then (i) if the principal hereof is
declared to be due and payable as described in the preceding paragraph, the
amount of principal due and payable with respect to this Note shall be limited
to the aggregate principal amount hereof multiplied by the sum of the Issue
Price specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount amortized from the Interest
Accrual Date to the date of declaration, which amortization shall be calculated
using the "interest method" (computed in accordance with generally accepted
accounting principles in effect on the date of declaration), (ii) for the
purpose of any vote of securityholders taken pursuant to the Senior Indenture
prior to the acceleration of payment of this Note, the principal amount hereof
shall equal the amount that would be due and payable hereon, calculated as set
forth in clause (i) above, if this Note were declared to be due and payable on
the date of any such vote and (iii) for the purpose of any vote of
securityholders taken pursuant to the Senior Indenture following the
acceleration of payment of this Note, the principal amount hereof shall equal
the amount of principal due and payable with respect to this Note, calculated
as set forth in clause (i) above.

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," this Note may be redeemed, as a whole, at
the option of the Issuer at any time prior to maturity, upon the giving of a
notice of redemption as described below, at a redemption price equal to 100% of
the principal amount hereof, together with accrued interest to the date fixed
for redemption (except that if this Note is subject to "Modified Payment upon
Acceleration or Redemption," such redemption price would be limited to the
aggregate principal amount hereof multiplied by the sum of the Issue Price
specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount amortized from the Interest
Accrual Date to the date of redemption, which amortization shall be calculated
using the "interest method" (computed in accordance with generally accepted
accounting principles in effect on the date of redemption) (the "Amortized
Amount")), if the Issuer determines that, as a result of any change in or
amendment to the laws, or any regulations or rulings promulgated thereunder, of
the United States or of any political subdivision or taxing authority thereof
or therein affecting taxation, or any change in official position regarding the
application or interpretation of such laws, regulations or rulings, which
change or amendment becomes effective on or after the Initial Offering Date
hereof, the Issuer has or will become obligated to pay Additional Amounts, as
defined below, with respect to this Note

                                      A-19

<PAGE>

as described below. Prior to the giving of any notice of redemption pursuant to
this paragraph, the Issuer shall deliver to the Trustee (i) a certificate
stating that the Issuer is entitled to effect such redemption and setting forth
a statement of facts showing that the conditions precedent to the right of the
Issuer to so redeem have occurred, and (ii) an opinion of independent legal
counsel satisfactory to the Trustee to such effect based on such statement of
facts; provided that no such notice of redemption shall be given earlier than
60 calendar days prior to the earliest date on which the Issuer would be
obligated to pay such Additional Amounts if a payment in respect of this Note
were then due.

     Notice of redemption will be given not less than 30 nor more than 60
calendar days prior to the date fixed for redemption or within the Redemption
Notice Period specified on the face hereof, which date and the applicable
redemption price will be specified in the notice.

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," the Issuer will, subject to certain
exceptions and limitations set forth below, pay such additional amounts (the
"Additional Amounts") to the holder of this Note who is a United States Alien
as may be necessary in order that every net payment of the principal of and
interest on this Note and any other amounts payable on this Note, after
withholding or deduction for or on account of any present or future tax,
assessment or governmental charge imposed upon or as a result of such payment
by the United States, or any political subdivision or taxing authority thereof
or therein, will not be less than the amount provided for in this Note to be
then due and payable. The Issuer will not, however, make any payment of
Additional Amounts to any such holder who is a United States Alien for or on
account of:

          (a) any present or future tax, assessment or other governmental
     charge that would not have been so imposed but for (i) the existence of
     any present or former connection between such holder, or between a
     fiduciary, settlor, beneficiary, member or shareholder of such holder, if
     such holder is an estate, a trust, a partnership or a corporation for
     United States federal income tax purposes, and the United States,
     including, without limitation, such holder, or such fiduciary, settlor,
     beneficiary, member or shareholder, being or having been a citizen or
     resident thereof or being or having been engaged in a trade or business or
     present therein or having, or having had, a permanent establishment
     therein or (ii) the presentation by or on behalf of the holder of this
     Note for payment on a date more than 15 calendar days after the date on
     which such payment became due and payable or the date on which payment
     thereof is duly provided for, whichever occurs later;

          (b) any estate, inheritance, gift, sales, transfer, excise or
     personal property tax or any similar tax, assessment or governmental
     charge;

          (c) any tax, assessment or other governmental charge imposed by
     reason of such holder's past or present status as a personal holding
     company or foreign personal holding company or controlled foreign
     corporation or passive foreign investment company with respect to the
     United States or as a corporation which accumulates earnings to avoid
     United States federal income tax or as a private foundation or other
     tax-exempt organization or a bank receiving interest under Section
     881(c)(3)(A) of the Internal Revenue Code of 1986, as amended;

                                      A-20

<PAGE>

          (d) any tax, assessment or other governmental charge that is payable
     otherwise than by withholding or deduction from payments on or in respect
     of this Note;

          (e) any tax, assessment or other governmental charge required to be
     withheld by any Paying Agent from any payment of principal of, or interest
     on, this Note, if such payment can be made without such withholding by any
     other Paying Agent in a city in Western Europe;

          (f) any tax, assessment or other governmental charge that would not
     have been imposed but for the failure to comply with certification,
     information or other reporting requirements concerning the nationality,
     residence or identity of the holder or beneficial owner of this Note, if
     such compliance is required by statute or by regulation of the United
     States or of any political subdivision or taxing authority thereof or
     therein as a precondition to relief or exemption from such tax, assessment
     or other governmental charge;

          (g) any tax, assessment or other governmental charge imposed by
     reason of such holder's past or present status as the actual or
     constructive owner of 10% or more of the total combined voting power of
     all classes of stock entitled to vote of the Issuer or as a direct or
     indirect subsidiary of the Issuer; or

          (h) any combination of items (a), (b), (c), (d), (e), (f) or (g).

In addition, the Issuer shall not be required to make any payment of Additional
Amounts (i) to any such holder where such withholding or deduction is imposed
on a payment to an individual and is required to be made pursuant to any law
implementing or complying with, or introduced in order to conform to, any
European Union Directive on the taxation of savings; or (ii) by or on behalf of
a holder who would have been able to avoid such withholding or deduction by
presenting this Note or the relevant coupon to another Paying Agent in a member
state of the European Union. Nor shall the Issuer pay Additional Amounts with
respect to any payment on this Note to a United States Alien who is a fiduciary
or partnership or other than the sole beneficial owner of such payment to the
extent such payment would be required by the laws of the United States (or any
political subdivision thereof) to be included in the income, for tax purposes,
of a beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner who would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the holder of this Note.

     The Senior Indenture permits the Issuer and the Trustee, with the consent
of the holders of not less than a majority in aggregate principal amount of the
debt securities of all series issued under the Senior Indenture then
outstanding and affected (voting as one class), to execute supplemental
indentures adding any provisions to or changing in any manner the rights of the
holders of each series so affected; provided that the Issuer and the Trustee
may not, without the consent of the holder of each outstanding debt security
affected thereby, (a) extend the final maturity of any such debt security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any amount payable on redemption
thereof, or change the currency of payment thereof, or modify or amend the
provisions for conversion of any currency into any other

                                      A-21

<PAGE>

currency, or modify or amend the provisions for conversion or exchange of the
debt security for securities of the Issuer or other entities or for other
property or the cash value of the property (other than as provided in the
antidilution provisions or other similar adjustment provisions of the debt
securities or otherwise in accordance with the terms thereof), or impair or
affect the rights of any holder to institute suit for the payment thereof or
(b) reduce the aforesaid percentage in principal amount of debt securities the
consent of the holders of which is required for any such supplemental
indenture.

     Except as set forth below, if the principal of, premium, if any, or
interest on this Note is payable in a Specified Currency other than U.S.
dollars and such Specified Currency is not available to the Issuer for making
payments hereon due to the imposition of exchange controls or other
circumstances beyond the control of the Issuer or is no longer used by the
government of the country issuing such currency or for the settlement of
transactions by public institutions within the international banking community,
then the Issuer will be entitled to satisfy its obligations to the holder of
this Note by making such payments in U.S. dollars on the basis of the Market
Exchange Rate on the date of such payment or, if the Market Exchange Rate is
not available on such date, as of the most recent practicable date; provided,
however, that if the euro has been substituted for such Specified Currency, the
Issuer may at its option (or shall, if so required by applicable law) without
the consent of the holder of this Note effect the payment of principal of,
premium, if any, or interest on, any Note denominated in such Specified
Currency in euro in lieu of such Specified Currency in conformity with legally
applicable measures taken pursuant to, or by virtue of, the Treaty establishing
the European Community, as amended. Any payment made under such circumstances
in U.S. dollars or euro where the required payment is in an unavailable
Specified Currency will not constitute an Event of Default. If such Market
Exchange Rate is not then available to the Issuer or is not published for a
particular Specified Currency, the Market Exchange Rate will be based on the
highest bid quotation in The City of New York received by the Exchange Rate
Agent at approximately 11:00 a.m., New York City time, on the second Business
Day preceding the date of such payment from three recognized foreign exchange
dealers (the "Exchange Dealers") for the purchase by the quoting Exchange
Dealer of the Specified Currency for U.S. dollars for settlement on the payment
date, in the aggregate amount of the Specified Currency payable to those
holders or beneficial owners of Notes and at which the applicable Exchange
Dealer commits to execute a contract. One of the Exchange Dealers providing
quotations may be the Exchange Rate Agent unless the Exchange Rate Agent is an
affiliate of the Issuer. If those bid quotations are not available, the
Exchange Rate Agent shall determine the market exchange rate at its sole
discretion.

     The "Exchange Rate Agent" shall be Morgan Stanley & Co. Incorporated,
unless otherwise indicated on the face hereof.

     All determinations referred to above made by, or on behalf of, the Issuer
or by, or on behalf of, the Exchange Rate Agent shall be at such entity's sole
discretion and shall, in the absence of manifest error, be conclusive for all
purposes and binding on holders of Notes and coupons.

     So long as this Note shall be outstanding, the Issuer will cause to be
maintained an office or agency for the payment of the principal of and premium,
if any, and interest on this Note as herein provided in the Borough of
Manhattan, The City of New York, and an office or agency in said Borough of
Manhattan for the registration, transfer and exchange as aforesaid of the
Notes. The

                                      A-22

<PAGE>

Issuer may designate other agencies for the payment of said principal, premium
and interest at such place or places (subject to applicable laws and
regulations) as the Issuer may decide. So long as there shall be such an
agency, the Issuer shall keep the Trustee advised of the names and locations of
such agencies, if any are so designated. If any European Union Directive on the
taxation of savings comes into force, the Issuer will, to the extent possible
as a matter of law, maintain a Paying Agent in a member state of the European
Union that will not be obligated to withhold or deduct tax pursuant to any such
Directive or any law implementing or complying with, or introduced in order to
conform to, such Directive.

     With respect to moneys paid by the Issuer and held by the Trustee or any
Paying Agent for payment of the principal of or interest or premium, if any, on
any Notes that remain unclaimed at the end of two years after such principal,
interest or premium shall have become due and payable (whether at maturity or
upon call for redemption or otherwise), (i) the Trustee or such Paying Agent
shall notify the holders of such Notes that such moneys shall be repaid to the
Issuer and any person claiming such moneys shall thereafter look only to the
Issuer for payment thereof and (ii) such moneys shall be so repaid to the
Issuer. Upon such repayment all liability of the Trustee or such Paying Agent
with respect to such moneys shall thereupon cease, without, however, limiting
in any way any obligation that the Issuer may have to pay the principal of or
interest or premium, if any, on this Note as the same shall become due.

     No provision of this Note or of the Senior Indenture shall alter or impair
the obligation of the Issuer, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Note at the time, place,
and rate, and in the coin or currency, herein prescribed unless otherwise
agreed between the Issuer and the registered holder of this Note.

     Prior to due presentment of this Note for registration of transfer, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and none of the Issuer, the
Trustee or any such agent shall be affected by notice to the contrary.

     No recourse shall be had for the payment of the principal of, premium, if
any, or the interest on this Note, for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Senior Indenture or any
indenture supplemental thereto, against any incorporator, shareholder, officer
or director, as such, past, present or future, of the Issuer or of any
successor corporation, either directly or through the Issuer or any successor
corporation, whether by virtue of any constitution, statute or rule of law or
by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.

     This Note shall for all purposes be governed by, and construed in
accordance with, the laws of the State of New York.

     As used herein, the term "United States Alien" means any person who is,
for United States federal income tax purposes, (i) a nonresident alien
individual, (ii) a foreign corporation, (iii) a nonresident alien fiduciary of
a foreign estate or trust or (iv) a foreign partnership one or more of the

                                      A-23

<PAGE>

members of which is, for United States federal income tax purposes, a
nonresident alien individual, a foreign corporation or a nonresident alien
fiduciary of a foreign estate or trust.

     All terms used in this Note which are defined in the Senior Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Senior Indenture.

                                      A-24

<PAGE>

                                 ABBREVIATIONS

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

   TEN COM  -  as tenants in common
   TEN ENT  -  as tenants by the entireties
   JT TEN   -  as joint tenants with right of survivorship and not as tenants in
               common

      UNIF GIFT MIN ACT -                      Custodian
                         ---------------------          -----------------------
                                (Minor)                          (Cust)

      Under Uniform Gifts to Minors Act
                                        -------------------------
                                                 (State)

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

                              -------------------

                                      A-25

<PAGE>

     FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto

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[PLEASE INSERT SOCIAL SECURITY OR OTHER
    IDENTIFYING NUMBER OF ASSIGNEE]

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
[PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE]

the within Note and all rights thereunder, hereby irrevocably constituting and
appointing such person attorney to transfer such note on the books of the
Issuer, with full power of substitution in the premises.

Dated:
      -------------------

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

                                      A-26

<PAGE>

                           OPTION TO ELECT REPAYMENT

     The undersigned hereby irrevocably requests and instructs the Issuer to
repay the within Note (or portion thereof specified below) pursuant to its
terms at a price equal to the principal amount thereof, together with interest
to the Optional Repayment Date, to the undersigned at

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
       (Please print or typewrite name and address of the undersigned)

     If less than the entire principal amount of the within Note is to be
repaid, specify the portion thereof which the holder elects to have repaid:
_________________; and specify the denomination or denominations (which shall
not be less than the minimum authorized denomination) of the Notes to be issued
to the holder for the portion of the within Note not being repaid (in the
absence of any such specification, one such Note will be issued for the portion
not being repaid): ________________.

Dated:
       ----------------------------       --------------------------------------
                                          NOTICE: The signature on this
                                          Option to Elect Repayment must
                                          correspond with the name as written
                                          upon the face of the within
                                          instrument in every particular
                                          without alteration or enlargement.

                                      A-27<PAGE>

                                                                    EXHIBIT 10.3

                                   ALLOY, INC.

                                       AND

                               MATTHEW C. DIAMOND

                              EMPLOYMENT AGREEMENT

         This Agreement (the "AGREEMENT"), by and between Alloy, Inc. (the
"COMPANY") and Matthew C. Diamond ("EXECUTIVE") is effective as of February 1,
2004 (the "EFFECTIVE DATE"). In consideration of the mutual promises and
covenants contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby mutually
acknowledged, the Company and Executive hereby agree as follows:

         1.       Employment. Subject to the terms and conditions of this
Agreement, the Company will employ Executive, and Executive agrees to serve the
Company, as Chief Executive Officer reporting to the Board of Directors of the
Company (the "BOARD"). Executive shall have the responsibilities, duty and
authority commensurate with the position of Chief Executive Officer customarily
exercised by a person holding such positions in a company of the size and nature
of the Company. The principal location at which Executive will perform such
services will be the Company's corporate headquarters in New York, New York.
Executive shall also be nominated for appointment as a director during each
election held during the Term (as defined below) for directors of the class of
which Executive is a member and shall, upon election, be appointed as Chairman
of the Board.

         2.       Term of Employment. Subject to the terms of this Agreement,
Executive's employment will begin on February 1, 2004 (the "COMMENCEMENT DATE")
and will continue until the third anniversary date of the Commencement Date (the
"INITIAL TERM"), provided that on the third anniversary of the Commencement Date
and each subsequent anniversary of the Commencement Date, the term of
Executive's employment hereunder will be automatically extended for an
additional period of one year (each a "SUBSEQUENT TERM") unless either Executive
or the Company has given written notice at least 120 days prior to the effective
date of such automatic extension that such automatic extension will not occur (a
"NON-RENEWAL NOTICE"). The Initial Term and any Subsequent Term are referred to
herein as the "TERM."

         3.       Compensation.

                  (a)      Base Salary. While Executive is employed hereunder,
the Company will pay Executive a base salary at the annual rate of $400,000 (the
"BASE SALARY"). The Base Salary shall be reviewed by the Compensation Committee
of the Board of the Company (the "COMMITTEE") as soon as practicable after the
end of each fiscal year during the Term, beginning with the fiscal year ending
on January 31, 2005. Based upon such reviews, the Committee annually may
increase, but shall not decrease, the Base Salary by an amount not to exceed ten
percent (10%) of the Base Salary then in effect. Any increase in Base Salary
shall not serve to limit or reduce any other obligation to Executive under this
Agreement. The Base Salary will be payable in substantially equal installments
in accordance with the Company's payroll practices as in effect from time to
time. The Company shall deduct from each such installment all

<PAGE>

amounts required to be deducted or withheld under applicable law or under any
Executive benefit plan in which Executive participate.

                  (b)      Annual Cash Bonus. Beginning with the Company's
fiscal year ending on January 31, 2005, as soon as practicable after the end of
each fiscal year of the Company, the Committee shall review Executive's
performance under this Agreement as part of the Committee's annual review of
Executive's performance in order to determine the appropriate cash bonus
Executive should receive for such year. Executive's annual cash bonus shall be
at a target of no less than fifty percent (50%) of his then current Base Salary
(the "TARGET AMOUNT"), with a maximum annual cash bonus of one hundred percent
(100%) of his then current Base Salary. The actual amount of Executive's annual
bonus, if any, shall be based on the degree to which the Company met its annual
performance objectives (the "PERFORMANCE OBJECTIVES") in the prior fiscal year,
which Performance Objectives shall be established annually by the Committee in
consultation with Executive and the other senior executives of the Company
promptly after the Company's annual budget has been established by the Board;
provided, that such Performance Objectives may thereafter be adjusted to reflect
the actual or contemplated results of any significant corporate events occurring
during such fiscal year. It is the expectation of the Company and Executive that
Executive (i) shall be entitled to receive the Target Amount if the Company
meets the Performance Objectives within an acceptable range as determined by the
Committee, (ii) may receive less than the Target Amount if such Performance
Objectives are not met and (iii) may receive up to the maximum bonus if such
Performance Objectives are exceeded substantially. Executive shall be paid his
annual bonus no later than other senior executives of the Company are paid their
annual bonuses, and in any event not later than thirty (30) days after the
completion of the audit for such fiscal year.

                  (c)      Additional Compensation. Beginning with the Company's
fiscal year ending on January 31, 2005, Executive shall be eligible to receive a
long-term incentive award equal in value to one hundred fifty percent (150%) of
his then current Base Salary (the "LTI TARGET AMOUNT"), with a maximum award
equal in value to two hundred percent (200%) of his then current base salary, in
any event, in annual equity grant value under the appropriate bonus plan of the
Company then in effect, any such award to be made by the Committee within thirty
(30) days after the completion of the audit for the prior fiscal year. All such
awards shall, unless the Executive and Committee otherwise agree, be made so
that two-thirds (-2/3) in value of such grant is made in the form of restricted
stock awards with a three (3) year cliff vesting and one-third (-1/3) in value
shall be made in the form of stock options that shall vest in three equal
installments on each anniversary date of the grant thereof. The Executive shall
be granted awards in the LTI Target Amount at the start of each fiscal year of
the Term, with the actual amount of the long-term incentive awards granted to
Executive to be based on the degree to which the Company met the Performance
Objectives in such fiscal year. It is the expectation of the Company and
Executive that Executive (i) shall be entitled to receive the LTI Target Amount
if the Company meets the Performance Objectives within an acceptable range as
determined by the Committee, (ii) may receive less than the LTI Target Amount if
such Performance Objectives are not met and (iii) may receive up to the maximum
long-term incentive award if such Performance Objectives are exceeded
substantially. Provision shall be made in the restricted stock grants and option
agreements to require Executive to return to the Company the shares of
restricted stock in excess of the number of shares actually awarded and that the
options in excess of the number of options actually awarded shall be cancelled
if the Committee determines that

                                       2
<PAGE>

Executive has not earned the full LTI Target Amount. In making such equity
grants, the value thereof shall be determined by the Committee in good faith in
accordance with such methodology or methodologies as may be used by it to
determine the equity grants to be made to its senior executives generally;
provided, that the stock price used in making such determination shall be equal
to the greater of (i) the Fair Market Value per share of common stock of the
Company (as such term is defined in the option or incentive plan(s) under which
such award is made) and (ii) the average of the closing sales prices for the
common stock of the Company on its primary trading market in the twenty (20)
trading days prior to the effective date of such equity grant. The remaining
terms of such equity grants, if any, shall be determined by the Committee in
accordance with the terms of the option or incentive plan(s) under which such
grants are made and on a basis consistent with the restricted stock grants
previously awarded to Executive.

                  (d)      General Provisions. All shares of common stock or
other equity securities awarded to Executive pursuant to the preceding
provisions shall be registered on Form S-3, S-8 or any successor from or other
applicable form under the Securities Act of 1933, and the Company shall, subject
to the provisions of the appropriate equity plan or plans under which they are
granted, seek to keep such registration effective at all required times. All
unvested shares and options, if any, granted pursuant to the preceding
subsections shall vest automatically, and the Company's repurchase rights, if
any, shall, unless Executive and the Company otherwise shall agree as of the
date of the grant or award thereof, terminate automatically with respect to, and
without any action on the part of Executive or the Company on the date of a
Change of Control (as defined below).

                  (e)      Change of Control. For purposes of this Agreement, a
"CHANGE OF CONTROL" means that any of the following events has occurred:

                           (A) Any person (as such term is used in Section 13(d)
                  of the Securities Exchange Act of 1934 (the "EXCHANGE ACT"),
                  other than the Company, any Executive benefit plan of the
                  Company or any entity organized, appointed or established by
                  the Company for or pursuant to the terms of any such plan,
                  together with all "affiliates" and "associates" (as such terms
                  are defined in Rule 12b-2 under the Exchange Act) becomes the
                  beneficial owner or owners (as defined in Rule I 3d-3 and
                  13d-5 promulgated under the Exchange Act), directly or
                  indirectly, of more than 50% of the outstanding equity
                  securities of the Company, or otherwise becomes entitled,
                  directly or indirectly, to vote more than 50% of the voting
                  power entitled to be cast at elections for directors ("VOTING
                  POWER") of the Company;

                           (B) A consolidation or merger (in one transaction or
                  a series of related transactions) of the Company pursuant to
                  which the holders of the Company's equity securities
                  immediately prior to such transaction or series of related
                  transactions would not be the holders, directly or indirectly,
                  immediately after such transaction or series of related
                  transactions of more than 50% of the Voting Power of the
                  entity surviving such transaction or series of related
                  transactions;

                                       3
<PAGE>

                           (C) The sale, lease, exchange or other transfer (in
                  one transaction or a series of related transactions) of all or
                  substantially all of the assets of the Company; or

                           (D) The liquidation or dissolution of the Company or
                  the Company ceasing to do business.

                  (f)      Vacation. Executive will be entitled to paid vacation
in each fiscal year and paid holidays and personal days in accordance with the
Company's policies for its senior executives as in effect from time to time, but
not less than 28 days paid vacation in each calendar year. Accrued unused
vacation may be carried over from year to year, but will be deemed forfeited if
not used within the first fiscal quarter of the succeeding year.

                  (g)      Fringe Benefits. Executive will be entitled to
participate in the same manner as other senior executives of the Company in any
Executive benefit plans which the Company provides or may establish for the
benefit of its senior executives generally (including, without limitation, group
life, disability, medical, dental and other insurance, tax benefit and planning
services, 401(k), retirement, pension, profit-sharing and similar plans)
(collectively, the "FRINGE BENEFITS"), provided that the Fringe Benefits will
not include any stock option or similar plans relating to the grant of equity
securities of the Company.

                  (h)      Reimbursement of Expenses. The Company will reimburse
Executive for all ordinary and reasonable out-of-pocket business expenses that
are incurred by Executive in furtherance of the Company's business in accordance
with the Company's policies with respect thereto as in effect from time to time.

                  (i)      Indemnification. The Company shall indemnify
Executive to the fullest extent permitted by its charter and by-laws and by
applicable law against all costs, charges and expenses, including, without
limitation, attorneys' fees, incurred or sustained by Executive in connection
with any action, suit or proceeding to which Executive may be made a party by
reason of being an officer, director or Executive of the Company. In connection
with the foregoing, Executive shall be covered under all liability insurance
policies that protect other officers of the Company.

                  (j)      Payment Of Professional Fees. The Company shall pay
on Executive's behalf all statements rendered to Executive by Executive's
attorneys, accountants and other advisors for reasonable fees and expenses, up
to a maximum of $10,000, in connection with the negotiation and preparation of
this Agreement. The Company shall pay Executive, on or prior to such date as
Executive shall be required to pay federal, state or local taxes with respect to
the Company's payment of such professional fees, an additional payment (the
"GROSS-UP PAYMENT") in an amount sufficient to fully reimburse Executive with
respect to all federal, state and local taxes with respect to the Company's
payment of such professional fees and with respect to receipt of the Gross-Up
Payment.

                                       4
<PAGE>

         4.       Termination.

                  (a)      Death Or Disability. This Agreement and the Term
shall terminate automatically upon Executive's death. If the Company determines
in good faith that the Disability of Executive has occurred (pursuant to the
definition of "Disability" set forth below), it may give to Executive written
notice of its intention to terminate Executive's employment. In such event,
Executive's employment with the Company shall terminate effective on the
thirtieth day after receipt by Executive of such notice given at any time after
a period of one hundred twenty (120) consecutive days of Disability or a period
of one hundred eighty (180) days of Disability within any twelve (12)
consecutive months, and, in either case, while such Disability is continuing
("DISABILITY EFFECTIVE DATE"); within the thirty (30) days after such receipt,
Executive shall not have returned to full-time performance of Executive's
duties. For purposes of this Agreement, "DISABILITY" means Executive's inability
to substantially perform his duties hereunder, with reasonable accommodation, as
evidenced by a certificate signed either by a physician mutually acceptable to
the Company and Executive or, if the Company and Executive cannot agree upon a
physician, by a physician selected by agreement of a physician designated by the
Company and a physician designated by Executive; provided, however, that if such
physicians cannot agree upon a third physician within thirty (30) days, such
third physician shall be designated by the American Arbitration Association.
Until the Disability Effective Date, Executive shall be entitled to all
compensation provided for under Section 3 hereof. It is understood that nothing
in this Section 4 shall serve to limit the Company's obligation sunder Section 5
hereof.

                  (b)      By The Company For Cause. The Company may terminate
Executive's employment at any time during the Term immediately for "Cause." For
purposes of this Agreement, "CAUSE" shall mean (i) Executive's conviction of a
felony, either in connection with the performance of his obligations to the
Company or which otherwise materially and adversely affects his ability to
perform such obligations or materially and adversely affects the business
activities, reputation, goodwill or image of the Company, (ii) the willful gross
neglect or malfeasance by Executive in the performance of his duties hereunder
or (iii) Executive's breach in any material respect of any applicable
non-competition and confidentiality agreement between the Company and Executive,
which breach is not cured within any applicable cure period; provided, however,
that for the purposes of determining whether conduct constitutes willful gross
neglect or malfeasance, no act on Executive's part shall be considered "willful"
unless it is done by Executive in bad faith and without reasonable belief that
Executive's action was in the best interests of the Company. Notwithstanding the
foregoing, the Company may not terminate Executive's employment for Cause unless
(i) a determination that Cause exists is made and approved by a majority of the
Board, (ii) Executive is given at least thirty (30) days written notice of the
Board meeting called to make such determination, and (iii) Executive and his
legal counsel are given the opportunity to address such meeting.

                  (c)      By Executive For Good Reason. During the Period of
Employment, Executive's employment hereunder may be terminated by Executive for
Good Reason upon fifteen (15) days' written notice. For purposes of this
Agreement, "GOOD REASON" shall mean the occurrence of any of the following,
without Executive's prior written consent:

                                       5
<PAGE>

                           (i)      Assignment to Executive of any duties
inconsistent in any material respect with Executive's position (including
status, offices, titles and reporting relationships), authority, duties or
responsibilities as contemplated by Section 1 of this Agreement, or any other
action by the Company which results in a significant diminution in such
position, authority, duties or responsibilities, excluding any isolated and
inadvertent action not taken in bad faith and which is remedied by the Company
within ten (10) days after receipt of notice thereof given by Executive;
provided, that Executive's duties, authority or responsibilities shall not be
deemed to have been reduced solely as a result of the sale, closure or spin-off
by the Company of one or more of its operating divisions or lines of business.

                           (ii)     Any failure by the Company to comply in any
material respect with any of the provisions of Section 3 of this Agreement other
than an isolated and inadvertent failure not committed in bad faith and which is
remedied by the Company within ten (10) days after receipt of notice thereof
given by Executive;

                           (iii)    Executive being required to relocate to a
principal place of employment more than fifty (50) miles from his principal
place of employment with the Company in New York, New York;

                           (iv)     Delivery by the Company of a Non-Renewal
Notice discontinuing the automatic extension provision of Section 2 of this
Agreement;

                           (v)      Failure by the Company to elect Executive to
the position(s), including Board membership, set forth in Section 1, in
compliance with the terms of Section 1;

                           (vi)     Any purported termination by the Company of
Executive's employment otherwise than as expressly permitted by this Agreement;
or

                           (vii)    Failure by the Company to obtain the
assumption of this Agreement by any successor to the Company or any entity that
acquires all or substantially all of the assets of the Company.

                  (d)      Other Than For Cause Or Good Reason. Executive or the
Company may terminate this Agreement for any reason other than for Good Reason
or Cause, respectively, upon thirty (30) days written Notice of Termination (as
defined below) to the Company or Executive, as the case may be. If Executive
terminates the Agreement for any reason, he shall have no liability to the
Company or its subsidiaries or affiliates as a result thereof. If the Company
terminates the Agreement, or if the Agreement terminates because of the death of
Executive, the obligations of the Company shall be as set forth in Section 5
hereof.

                  (e)      Notice Of Termination. Any termination by the Company
or by Executive shall be communicated by a Notice of Termination to the other
party hereto given in accordance with this Agreement. For purposes of this
Agreement, a "NOTICE OF TERMINATION" means a written notice which (i) indicates
the specific termination provision in this Agreement relied upon, (ii) sets
forth in reasonable detail, if necessary, the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated, and (iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice,

                                       6
<PAGE>

specifies the termination date. The failure by Executive or Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of the basis for termination shall not waive any right of such party
hereunder or preclude such party from asserting such fact or circumstance in
enforcing his or its rights hereunder.

                  (f)      Date Of Termination. "DATE OF TERMINATION" means the
date specified in the Notice of Termination; provided, however, that if
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date of death of Executive or the Disability
Effective Date, as the case may be.

         5.       Severance Compensation.

                  (a)      Definition of Accrued Obligations. For purposes of
this Agreement, "ACCRUED OBLIGATIONS" means (i) the portion of Executive's Base
Salary as has accrued prior to the Date of Termination and that has not yet been
paid, (ii) an amount equal to the value of Executive's accrued unused vacation
days (calculated at the Base Salary), (iii) the amount of any bonus earned and
accrued but not paid as of the Date of Termination, which amount shall include a
pro rata portion of any bonus which would have been earned if such termination
had not occurred and (iv) the amount of any expenses properly incurred by
Executive on behalf of the Company prior to the Date of Termination and not yet
reimbursed.

                  (b)      Death or Disability. If Executive's employment
hereunder is terminated as a result of Executive's death or Disability:

                           (i)      The Company will pay the Accrued Obligations
                  to Executive (or Executive's estate) promptly following such
                  termination.

                           (ii)     The Company will continue to pay Executive
                  (or Executive's estate) an amount equal to the Base Salary at
                  the rate in effect at the date of such termination in
                  accordance with Section 3(a) of this Agreement for the period
                  commencing on the date of such termination and ending three
                  (3) months from the date of termination.

                           (iii)    The Company will continue to provide
                  Executive or Executive's covered beneficiaries with the Fringe
                  Benefits for so long as it is obligated to continue payments
                  equal to the Base Salary pursuant to Section 5(b)(ii) above,
                  limited by and subject to applicable law and the terms of the
                  respective plans or policies.

                  (c)      Termination for Cause or in the Absence of a Good
Reason. If Executive's employment hereunder is terminated either by the Company
for Cause or by Executive in the absence of a Good Reason the Company will pay
the Accrued Obligations to Executive promptly following the Date of Termination.

                  (d)      Termination Without Cause or for a Good Reason. If
Executive's employment hereunder is terminated (1) by the Company without Cause,
(2) by Executive for a Good Reason, (3) by reason of a Non-Renewal Notice by the
Company for reasons that would

                                       7
<PAGE>

not constitute Cause or (4) by reason of a Non-Renewal Notice by Executive for
reasons that would constitute Good Reason:

                           (i)      The Company will pay the Accrued Obligations
                  to Executive promptly following the Date of Termination.

                           (ii)     The Company will continue to pay Executive
                  an amount equal to the Base Salary at the rate in effect at
                  such Date of Termination in accordance with Section 3(a) of
                  this Agreement for the period commencing on the date of such
                  termination and ending on the later of (A) the first
                  anniversary of the Date of Termination and (B) the date of the
                  end of the then current Term.

                           (iii)    The Company will continue to provide
                  Executive with the Fringe Benefits for so long as it is
                  obligated to continue payments equal to the Base Salary
                  pursuant to Section 4(d)(ii) above, limited by and subject to
                  applicable law and the terms of the respective plans and
                  policies.

                           (iv)     The Company will pay to Executive a cash
                  bonus equal to the prior year's annual cash bonus pursuant to
                  Section 3(b) above.

                           (v)      All options and other equity awards granted
                  or awarded to Executive hereunder or under any other agreement
                  or understanding between Executive and the Company or any
                  affiliate thereof, if any, will immediately vest, and all
                  repurchase rights granted hereunder or thereunder, immediately
                  will lapse.

                           (vi)     If Executive is subject to any excise tax
                  ("EXCISE TAX") on Executive's compensation by the Company
                  whether as a result of payment of any sum or provision of any
                  benefit hereunder or under any agreement between Executive and
                  the Company, the terms of any option agreement, restricted
                  stock grant or other equity compensation agreement or
                  otherwise (including but not limited to excise taxes imposed
                  under Section 4999 of the Code), the Company will then
                  "gross-up" Executive's compensation by making an additional
                  payment to Executive in an amount which, after reduction for
                  any income or excise taxes payable as a result of receiving
                  such additional payment, is equal to the Excise Tax.

                  (e)      No Duty to Mitigate. Notwithstanding any other
provision of this Agreement, (i) Executive will have no obligation to mitigate
Executive's damages for any breach of this Agreement by the Company or for any
termination of this Agreement, whether by seeking employment or otherwise and
(ii) the amount of any benefit due to Executive after the date of such
termination pursuant to this Agreement will not be reduced or offset by any
payment or benefit that Executive may receive from any other source.

                  (f)      Cobra Rights. It is understood that Executive's
rights under this Section 5 are in lieu of all other rights which Executive may
otherwise have had upon termination of employment under this Agreement;
provided, however, that no provision of this Agreement is intended to adversely
affect Executive's rights under the Consolidated Omnibus Budget

                                       8
<PAGE>

Reconciliation Act of 1985 or any successor thereto or any similar state or
local law, rule or regulation.

         6.       Records. Upon termination of Executive's employment hereunder
for any reason or for no reason, Executive will deliver to the Company any
property of the Company which may be in Executive's possession, including
products, materials, memoranda, notes, records, reports or other documents or
photocopies of the same.

         7.       Insurance. The Company, in its sole discretion, may apply for
and purchase key man life insurance on Executive's life in an amount determined
by the Company with the Company as beneficiary. Executive will submit to any
medical or other examinations and to execute and deliver any applications or
other instruments in writing that are reasonably necessary to effectuate such
insurance.

         8.       Confidentiality and Noncompetition Agreement. Executive
acknowledges and agrees that he has, as a condition of his employment by the
Company, previously executed and delivered to the Company a Confidentiality and
Noncompetition Agreement and further agrees that nothing contained in this
Agreement shall be deemed to modify or affect in any manner any of Executive's
duties or obligations set forth therein.

         9.       General.

                  (a)      Notices. All notices, requests, consents and other
communications hereunder will be in writing, will be addressed to the receiving
party's address set forth below or to such other address as a party may
designate by notice hereunder, and will be either (i) delivered by hand, (ii)
sent by overnight courier, or (iii) sent by registered or certified mail, return
receipt requested, postage prepaid. All notices, requests, consents and other
communications hereunder will be deemed to have been given either (i) if by
hand, at the time of the delivery thereof to the receiving party at the address
of such party set forth above, (ii) if sent by overnight courier, on the next
business day following the day such notice is delivered to the courier service,
or (iii) if sent by registered or certified mail, on the fifth business day
following the day such mailing is made;

         (A)   if to the Company, to:

                           Alloy, Inc.
                           151 West 26th Street, 11th Floor
                           New York, NY 10001
                           Attention:  General Counsel
                           Facsimile:  (212) 244-4311

         (B)   if to Executive, to the address set forth below his name on the
               signature page hereof.

                  (b)      Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersedes all prior oral or written agreements and
understandings relating to the subject matter hereof. No

                                       9
<PAGE>

statement, representation, warranty, covenant or agreement of any kind not
expressly set forth in this Agreement will affect, or be used to interpret,
change or restrict, the express terms and provisions of this Agreement.

                  (c)      Modifications and Amendments. The terms and
provisions of this Agreement may be modified or amended only by written
agreement executed by the parties hereto.

                  (d)      Waivers and Consents. The terms and provisions of
this Agreement may be waived, or consent for the departure therefrom granted,
only by written document executed by the party entitled to the benefits of such
terms or provisions. No such waiver or consent will be deemed to be or will
constitute a waiver or consent with respect to any other terms or provisions of
this Agreement, whether or not similar. Each such waiver or consent will be
effective only in the specific instance and for the purpose for which it was
given, and will not constitute a continuing waiver or consent.

                  (e)      Assignment. The Company may assign its rights and
obligations hereunder to any person or entity that succeeds to all or
substantially all of the Company's business or that aspect of the Company's
business in which Executive is principally involved. Executive may not assign
Executive's rights and obligations under this Agreement without the prior
written consent of the Company.

                  (f)      Benefit. All statements, representations, warranties,
covenants and agreements in this Agreement will be binding on the parties hereto
and will inure to the benefit of the respective successors and permitted assigns
of each party hereto. Nothing in this Agreement will be construed to create any
rights or obligations except among the parties hereto, and no person or entity
will be regarded as a third-party beneficiary of this Agreement.

                  (g)      Governing Law. This Agreement and the rights and
obligations of the parties hereunder will be construed in accordance with and
governed by the law of the State of New York, without giving effect to the
conflict of law principles thereof.

                  (h)      Jurisdiction, Venue and Service of Process. Any legal
action or proceeding with respect to this Agreement that is not subject to
arbitration pursuant to Section 10(i) below will be brought in the courts of New
York State located in New York County, New York or of the United States of
America for the Southern District of New York. By execution and delivery of this
Agreement, each of the parties hereto accepts for itself and in respect of its
property, generally and unconditionally, the exclusive jurisdiction of the
aforesaid courts.

                  (i)      Arbitration. Any controversy, dispute or claim
arising out of or in connection with this Agreement will be settled by final and
binding arbitration to be conducted in New York, New York pursuant to the
national rules for the resolution of employment disputes of the American
Arbitration Association then in effect. The decision or award in any such
arbitration will be final and binding upon the parties and judgment upon such
decision or award may be entered in any court of competent jurisdiction or
application may be made to any such court for judicial acceptance of such
decision or award and an order of enforcement. If any procedural matter is not
covered by the aforesaid rules, the procedural law of the State of New York will
govern.

                                       10
<PAGE>

                  (j)      Reimbursement Of Legal Expenses. If Executive is
successful, whether in arbitration or litigation, in pursuing any claim or
dispute involving Executive's employment with the Company, including any claim
or dispute relating to (a) this Agreement, (b) termination of Executive's
employment with the Company or (c) the failure or refusal of the Company to
perform fully in accordance with the terms hereof, the Company shall promptly
reimburse Executive for all costs and expenses (including, without limitation,
attorneys' fees) relating solely, or allocable, to such successful claim. In any
other case, Executive and the Company shall each bear all their own respective
costs and attorneys' fees.

                  (k)      Severability. The parties intend this Agreement to be
enforced as written. However, (i) if any portion or provision of this Agreement
is to any extent be declared illegal or unenforceable by a duly authorized court
having jurisdiction, then the remainder of this Agreement, or the application of
such portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, will not be affected thereby, and each
portion and provision of this Agreement will be valid arid enforceable to the
fullest extent permitted by law and (ii) if any provision, or part thereof, is
held to be unenforceable because of the duration of such provision, the
geographic area covered thereby, or other aspect of the scope of such provision,
the court making such determination will have the power to reduce the duration,
geographic area of such provision, or other aspect of the scope of such
provision, and/or to delete specific words and phrases ("blue-penciling"), and
in its reduced or blue-penciled form, such provision will then be enforceable
and will be enforced.

                  (l)      Headings and Captions. The headings and captions of
the various subdivisions of this Agreement are for convenience of reference only
and will in no way modify or affect the meaning or construction of any of the
terms or provisions hereof

                  (m)      No Waiver of Rights, Powers and Remedies. No failure
or delay by a party hereto in exercising any right, power or remedy under this
Agreement, and no course of dealing between the parties hereto, will operate as
a waiver of any such right, power or remedy of the party. No single or partial
exercise of any right, power or remedy under this Agreement by a party hereto,
nor any abandonment or discontinuance of steps to enforce any such right, power
or remedy, will preclude such party from any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The election of
any remedy by a party hereto will not constitute a waiver of the right of such
party to pursue other available remedies. No notice to or demand on a party not
expressly required under this Agreement will entitle the party receiving such
notice or demand to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the party giving such
notice or demand to any other or further action in any circumstances without
such notice or demand.

                  (n)      Counterparts. This Agreement may be executed in two
or more counterparts, and by different parties hereto on separate counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.

                   REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

                                       11
<PAGE>

         IN WITNESS THEREOF, Executive has hereunto set his hand and the Company
has caused these presents to be executed in its name and on its behalf as of the
day and year first above written.

                                           Alloy, Inc.

                                           By:      /s/ Peter Graham
                                              ----------------------------------
                                                 Peter Graham
                                                 Director

                                           Executive

                                                    /s/ Matthew C. Diamond
                                           -------------------------------------
                                           Matthew C. Diamond
                                           Address:-----------------------------
                                           -------------------------------------
                                           -------------------------------------

                                       12

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