424B3 1 aug2605_ps65final.txt PROSPECTUS Dated November 10, 2004 Pricing Supplement No. 65 to PROSPECTUS SUPPLEMENT Registration Statement No. 333-117752 Dated November 10, 2004 Dated August 24, 2005 Rule 424(b)(3) $43,500,000 Morgan Stanley GLOBAL MEDIUM-TERM NOTES, SERIES F Senior Notes -------------- Capital Protected Bear Notes due August 30, 2010 Based on the Decline in the Value of the PHLX Housing Sector(SM) Index Unlike ordinary debt securities, the notes do not pay interest. Instead, the notes will pay at maturity the principal amount of $10, plus a supplemental redemption amount, if any, based on the decline, if any, in the closing value of the PHLX Housing Sector(SM) Index, as determined on three specified determination dates over the term of the notes, as described in this pricing supplement. In no event, however, will the payment at maturity be less than the principal amount of $10. o The principal amount and issue price of each note is $10. o We will not pay interest on the notes. o At maturity, you will receive the principal amount of $10 per note plus a supplemental redemption amount, if any, equal to $10 times the percentage, if any, by which the final average index value is less than the initial index value. You will only receive a supplemental redemption amount if the final average index value is less than the initial index value. o The initial index value is 528.67, the closing value of the PHLX Housing Sector Index on August 24, 2005, the day we priced the notes for initial sale to the public. o The final average index value will equal the arithmetic average of the closing values of the PHLX Housing Sector Index on August 30, 2008, August 30, 2009 and August 26, 2010, which we refer to as the determination dates. o If the final average index value of the PHLX Housing Sector Index is greater than or equal to the initial index value, you will receive only the principal amount of $10 and will not receive any supplemental redemption amount. o Investing in the notes is not equivalent to investing in or taking a short position with respect to the PHLX Housing Sector Index or its component stocks. o The notes have been approved for listing on the American Stock Exchange LLC, subject to official notice of issuance. The AMEX listing symbol for the notes is "HPB." o The CUSIP number for the notes is 61746Y155. You should read the more detailed description of the notes in this pricing supplement. In particular, you should review and understand the descriptions in "Summary of Pricing Supplement" and "Description of Notes." The notes involve risks not associated with an investment in conventional debt securities. See "Risk Factors" beginning on PS-8. ------------------ PRICE $10 PER NOTE ------------------ Price to Agent's Proceeds to Public Commissions(1) Company ----------- -------------- ----------- Per note......................... $10.00 $.25 $9.75 Total............................ $43,500,000 $1,087,500 $42,412,500 (1) For additional information, see "Supplemental Information Concerning Plan of Distribution" in this pricing supplement. MORGAN STANLEY For a description of certain restrictions on offers, sales and deliveries of the notes and on the distribution of this pricing supplement and the accompanying prospectus supplement and prospectus relating to the notes, see the section of this pricing supplement called "Description of Notes--Supplemental Information Concerning Plan of Distribution." No action has been or will be taken by us, the Agent or any dealer that would permit a public offering of the notes or possession or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Neither this pricing supplement nor the accompanying prospectus supplement and prospectus may be used for the purpose of an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. The notes may not be offered or sold to the public in Brazil. Accordingly, the offering of the notes has not been submitted to the Comissao de Valores Mobiliarios for approval. Documents relating to such offering, as well as the information contained herein and therein, may not be supplied to the public as a public offering in Brazil or be used in connection with any offer for subscription or sale to the public in Brazil. The notes have not been registered with the Superintendencia de Valores y Seguros in Chile and may not be offered or sold publicly in Chile. No offer, sales or deliveries of the notes, or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus, may be made in or from Chile except in circumstances which will result in compliance with any applicable Chilean laws and regulations. The notes may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. The Agent has not issued and will not issue any advertisement, invitation or document relating to the notes, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to notes which are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder. The notes have not been registered with the National Registry of Securities maintained by the Mexican National Banking and Securities Commission and may not be offered or sold publicly in Mexico. This pricing supplement and the accompanying prospectus supplement and prospectus may not be publicly distributed in Mexico. This pricing supplement and the accompanying prospectus supplement and prospectus have not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this pricing supplement and the accompanying prospectus supplement and prospectus used in connection with the offer or sale, or invitation for subscription or purchase, of the notes may not be circulated or distributed, nor may the notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than under circumstances in which such offer, sale or invitation does not constitute an offer or sale, or invitation for subscription or purchase, of the notes to the public in Singapore. PS-2 SUMMARY OF PRICING SUPPLEMENT The following summary describes the notes we are offering to you in general terms only. You should read the summary together with the more detailed information that is contained in the rest of this pricing supplement and in the accompanying prospectus and prospectus supplement. You should carefully consider, among other things, the matters set forth in "Risk Factors." The notes offered are medium-term debt securities of Morgan Stanley. The return on the notes is based on the performance of the PHLX Housing Sector Index. These notes combine features of debt and a short position in equity by offering at maturity 100% protection of the issue price with the opportunity to earn a supplemental redemption amount based on the decline, if any, of the PHLX Housing Sector Index. The notes have been designed for investors who are willing to forgo market floating interest rates on the notes in exchange for a supplemental amount based on the percentage decrease, if any, of the final average index value below the initial index value. "PHLX Housing Sector(SM)" and "HGX(SM)" are service marks of the Philadelphia Stock Exchange, Inc. (the "PHLX") and have been licensed for use by Morgan Stanley. Each note costs $10 We, Morgan Stanley, are offering you Capital Protected Notes due August 30, 2010 Based on the Decline in the Value of the PHLX Housing Sector(SM) Index, which we refer to as the notes. The principal amount and issue price of each note is $10. The original issue price of the notes includes the agent's commissions paid with respect to the notes and the cost of hedging our obligations under the notes. The cost of hedging includes the projected profit that our subsidiaries may realize in consideration for assuming the risks inherent in managing the hedging transactions. The fact that the original issue price of the notes reflects these commissions and hedging costs is expected to adversely affect the secondary market prices of the notes. See "Risk Factors--The inclusion of commissions and projected profit from hedging in the original issue price is likely to adversely affect secondary market prices" and "Description of Notes--Use of Proceeds and Hedging." Payment at maturity Unlike ordinary debt securities, the notes do not pay interest. Instead, at maturity, for each note you hold, you will receive the principal amount of $10 per note plus a supplemental redemption amount if the final average index value of the PHLX Housing Sector Index is less than the initial index value. You will only receive a supplemental redemption amount if the final average index value is less than the initial index value. The initial index value is 528.67, the closing value of the PHLX Housing Sector Index on August 24, 2005, the day we priced the notes for initial sale to the public. The final average index value will be the arithmetic average of the closing values on August 30, 2008, August 30, 2009 and August 26, 2010, which we refer to as the determination dates. If the final scheduled determination date is not a trading day or if a market disruption event occurs on that day, the maturity date of the notes will be postponed until the second scheduled trading day following the final determination date as postponed. In no event, however, will the payment at maturity be less than the principal amount of $10. 100% Principal Protection At maturity, we will pay you at least $10, plus the supplemental redemption amount, if any. The Supplemental Redemption Amount Based on the Decline in the PHLX Housing Sector Index The supplemental redemption amount will be equal to $10 times the percentage, if any, by which the final average index value is less than the initial index value. If the PS-3 final average index value is less than the initial index value, the supplemental redemption amount will be calculated as follows: supplemental (initial index value - final average index value) redemption = $10 x ------------------------------------------------- amount initial index value
where initial index = 528.67, the closing value of the value PHLX Housing Sector Index on August 24, 2005, the day we priced the notes for initial sale to the public final average = the arithmetic average of the index value closing values of the PHLX Housing Sector Index on each of the three determination dates, as calculated by the calculation agent on the final determination date If the final average index value is greater than or equal to the initial index value, the supplemental redemption amount will be zero. In that case, you will receive only the principal amount of $10 for each note that you hold and will not receive any supplemental redemption amount. You can review the historical values of the PHLX Housing Sector Index in the section of this pricing supplement called "Description of Notes--Historical Information." The payment of dividends on the stocks that underlie the PHLX Housing Sector Index is not reflected in the level of the PHLX Housing Sector Index and, therefore, has no effect on the calculation of the payment at maturity. MS & Co. will be the We have appointed our affiliate, Morgan Stanley & calculation agent Co. Incorporated, which we refer to as MS & Co., to act as calculation agent for JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank), the trustee for our senior notes. As calculation agent, MS & Co. will determine the initial index value, the final average index value, the percentage change in the PHLX Housing Sector Index and the supplemental redemption amount, if any, you will receive at maturity. The notes will be treated The notes will be treated as "contingent payment as contingent payment debt debt instruments" for U.S. federal income tax instruments for U.S. purposes, as described in the section of this federal income tax pricing supplement called "Description of purposes Notes--United States Federal Income Taxation." Under this treatment, if you are a U.S. taxable investor, you will generally be subject to annual income tax based on the comparable yield (as defined in this pricing supplement) of the notes even though you will not receive any stated interest payments on the notes. In addition, any gain recognized by U.S. taxable investors on the sale or exchange, or at maturity, of the notes generally will be treated as ordinary income. Please read carefully the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation" and the sections called "United States Federal Taxation--Notes--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices" and "United States Federal Taxation--Backup Withholding" in the accompanying prospectus supplement. If you are a non-U.S. investor, please read the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation--Non-U.S. Holders." You are urged to consult your own tax advisor regarding all aspects of the U.S. federal income tax consequences of investing in the notes as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. PS-4 Where you can find more The notes are senior notes issued as part of our information on the notes Series F medium-term note program. You can find a general description of our Series F medium-term note program in the accompanying prospectus supplement dated November 10, 2004. We describe the basic features of this type of note in the sections of the prospectus supplement called "Description of Notes--Senior Notes" and "--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices." Because this is a summary, it does not contain all the information that may be important to you. For a detailed description of the terms of the notes, you should read the "Description of Notes" section in this pricing supplement. You should also read about some of the risks involved in investing in notes in the section called "Risk Factors." The tax treatment of investments in index-linked notes such as these differs from that of investments in ordinary debt securities. See the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation." We urge you to consult with your investment, legal, tax, accounting and other advisors with regard to any proposed or actual investment in the notes. How to reach us You may contact your local Morgan Stanley branch office or our principal executive offices at 1585 Broadway, New York, New York 10036 (telephone number (212) 761-4000). PS-5 HYPOTHETICAL PAYOUTS ON THE NOTES At maturity, if the final average index value is less than the initial index value, for each $10 principal amount of notes that you hold, you will receive a supplemental redemption amount in addition to the principal amount of $10. The supplemental redemption amount will be calculated on the final determination date and is equal to $10 times the percentage, if any, by which the final average index value is less than the initial index value. Presented below is a hypothetical example showing how the payout on the notes, including the supplemental redemption amount, is calculated. Example: The final average index value is 20% less than the initial index value. Initial Index Value: 525 Final Average Index Value: 420 Supplemental Redemption 525 - 420 Amount per note = $10 x --------- = $2 525 In the example above, the total payout at maturity per note will equal $12, which is the sum of the principal amount of $10 and a supplemental redemption amount of $2. The supplemental redemption amount is based on the final average index value, which equals the arithmetic average of the index closing values on three determination dates over the term of the notes. Because the index closing values may be subject to significant fluctuations over the term of the notes, it is not possible to present a chart or table illustrating the complete range of possible payouts at maturity. The examples of the hypothetical payout calculations that follow are intended to illustrate the effect of general trends in the index closing values on the three determination dates on the amount payable to you at maturity. However, the index closing values may not increase or decrease over the three determination dates in accordance with any of the trends depicted by the hypothetical examples below. The following four examples illustrate the payout at maturity on the notes for a range of hypothetical index closing values on each of the three determination dates and demonstrate the impact of basing the calculation of the supplemental redemption amount for the notes on the final average index value, rounded to the nearest one-hundredth. These examples are based on a hypothetical initial index value of 525 and an issue price per note of $10.00. ----------------------------------------------------------------- Example 1 Example 2 Example 3 Example 4 ----------------------------------------------------------------- Index Closing Index Closing Index Closing Index Closing ----------------------------------------------------------------- Value Value Value Value ----------------------------------------------------------------- 1st Determination Date 550 500 550 475 ----------------------------------------------------------------- 2nd Determination Date 575 475 575 425 ----------------------------------------------------------------- Final Determination Date 600 450 500 500 ----------------------------------------------------------------- Final Average Index Value: 575 475 541.67 466.67 ---------------------------------------------------------------------------------------------------------- Supplemental Redemption Amount: $0 $.95 $0 $1.11 ---------------------------------------------------------------------------------------------------------- Payout at maturity on a $10 investment $10.00 $10.95 $10.00 $11.11 ----------------------------------------------------------------------------------------------------------
o In Example 1, the index closing value increases on each determination date. Because the final average index value is greater than the initial index value, there is no supplemental redemption amount. o In Example 2, the index closing value decreases on each determination date and, due to the averaging of the index values over the determination dates, the final average index value of 475 is higher than the index closing PS-6 value of 450 on the final determination date. At maturity, for each note the investor receives $10.95, the sum of the principal amount of $10 and the supplemental redemption amount of $.95. The return on the notes at maturity represents a 9.5% increase above the issue price, which is less than if the return on the notes had been measured by the simple index return of negative 14.29% over the term of the notes. o In Example 3, the index closing value reaches a high of 575 on the second determination date and declines on the final determination date. At maturity, the final average index value of 541.67 is higher than the index closing value of 500 on the final determination date. Because the final average index value is greater than the initial index value, there is no supplemental redemption amount, even though the index had declined below the initial index value on the final determination date. At maturity, the investor receives only the principal amount of $10.00 for each note. o In Example 4, the index closing value declines on the first two determination dates to a low of 425 and increases on the final determination date. At maturity, the final average index value of 466.67 is less than the index closing value of 500 on the final determination date. At maturity, for each note the investor receives $11.11, the sum of the principal amount of $10.00 and the supplemental redemption amount of $1.11. The return on the notes represents a 11.1% increase above the issue price, even though the simple index return decreased 4.76% over the term of the notes. You can review the historical values of the index for the period from January 1, 2000 through August 24, 2005 in the section of this pricing supplement called "Description of Notes--Historical Information." You cannot predict the future performance of the PHLX Housing Sector Index based on its historical performance. PS-7 RISK FACTORS The notes are not secured debt and, unlike ordinary debt securities, the notes do not pay interest. Investing in the notes is not equivalent to investing directly in the PHLX Housing Sector Index or taking a short position with respect to the PHLX Housing Sector Index. This section describes the most significant risks relating to the notes. You should carefully consider whether the notes are suited to your particular circumstances before you decide to purchase them. The notes will not pay more If the final average index value is greater than than the principal amount or equal to the initial index value, you will at maturity unless the final receive only the principal amount of $10 for each average index value is less note you hold at maturity. than the initial index value. Unlike ordinary senior The terms of the notes differ from those of notes, the notes do not pay ordinary debt securities in that we will not pay interest interest on the notes. Because the supplemental redemption amount due at maturity may equal zero, the return on your investment in the notes (the effective yield to maturity) may be less than the amount that would be paid on an ordinary debt security. The return of only the principal amount at maturity will not compensate you for the effects of inflation and other factors relating to the value of money over time. The notes have been designed for investors who are willing to forgo market floating interest rates on the notes in exchange for a supplemental amount based on the percentage decrease, if any, of the final average index value below the initial index value. Secondary trading may be There may be little or no secondary market for limited the notes. Although the notes have been approved for listing on the American Stock Exchange LLC, it is not possible to predict whether the notes will trade in the secondary market. Even if there is a secondary market, it may not provide significant liquidity. MS & Co. currently intends to act as a market maker for the notes but is not required to do so. If at any time MS & Co. were to cease acting as a market maker, it is likely that there would be significantly less liquidity in the secondary market, in which case the price at which you would be able to sell your notes would likely be lower than if an active market existed. If at any time the notes were not listed on any securities exchange and MS & Co. were to cease acting as a market maker, it is likely that there would be little or no secondary market for the notes. Market price of the notes Several factors, many of which are beyond our influenced by many control, will influence the value of the notes in unpredictable factors the secondary market and the price at which MS & Co. may be willing to purchase or sell the notes in the secondary market, including: o the value of the PHLX Housing Sector Index at any time and on specific determination dates o the volatility (frequency and magnitude of changes in value) of the PHLX Housing Sector Index o interest and yield rates in the market o geopolitical conditions and economic, financial, political and regulatory or judicial events that affect the securities underlying the PHLX Housing Sector Index or stock markets generally and that may affect the final average index value o the time remaining to the maturity of the notes o the dividend rate on the stocks underlying the PHLX Housing Sector Index o our creditworthiness PS-8 Some or all of these factors will influence the price that you will receive if you sell your notes prior to maturity. For example, you may have to sell your notes at a substantial discount from the principal amount if at the time of sale or on earlier determination dates the PHLX Housing Sector Index is at, above or not sufficiently below the initial index value or if market interest rates rise. You cannot predict the future performance of the PHLX Housing Sector Index based on its historical performance. We cannot guarantee that the final average index value will be lower than the initial index value so that you will receive at maturity an amount in excess of the principal amount of the notes. The inclusion of Assuming no change in market conditions or any commissions and projected other relevant factors, the price, if any, at profit from hedging in the which MS & Co. is willing to purchase notes in original issue price is secondary market transactions will likely be likely to adversely affect lower than the original issue price, since the secondary market prices original issue price included, and secondary market prices are likely to exclude, commissions paid with respect to the notes, as well as the projected profit included in the cost of hedging our obligations under the notes. In addition, any such prices may differ from values determined by pricing models used by MS & Co., as a result of dealer discounts, mark-ups or other transaction costs. Investing in the notes is Investing in the notes is not equivalent to not equivalent to taking a taking a short position in the PHLX Housing short position in the PHLX Sector Index or its component stocks. The payout Housing Sector Index you receive at maturity on the notes will be based on the closing value of the PHLX Housing Sector Index on the three determination dates. It is possible for the final average index value to be higher than the initial index value even if the value of the PHLX Housing Sector Index at maturity is lower than the initial index value. An increase in the value of the PHLX Housing Sector Index on any one determination date could more than offset the decreases in the value of the PHLX Housing Sector Index on the other determination dates. If the final average index value is higher than the initial index value, you will not receive any supplemental redemption amount at maturity and will only receive the principal amount of the notes. Adjustments to the PHLX PHLX is responsible for calculating and Housing Sector Index could maintaining the PHLX Housing Sector Index. PHLX adversely affect the value can add, delete or substitute the stocks of the notes underlying the PHLX Housing Sector Index or make other methodological changes that could change the value of the PHLX Housing Sector Index. PHLX may discontinue or suspend calculation or dissemination of the PHLX Housing Sector Index. Any of these actions could adversely affect the value of the notes. In addition, PHLX may delete certain stocks underlying the PHLX Housing Sector Index, because of significant negative corporate events, such as insolvency, and substitute some or all of those stocks with better performing stocks. Such a deletion or substitution may have an adverse effect on the value of the notes. PHLX may discontinue or suspend calculation or publication of the PHLX Housing Sector Index at any time. In these circumstances, MS & Co., as the calculation agent, will have the sole discretion to substitute a successor index that is comparable to the discontinued PHLX Housing Sector Index. MS & Co. could have an economic interest that is different than that of investors in the notes insofar as, for example, MS & Co. is not precluded from considering indices that are calculated and published by MS & Co. or any of its affiliates. If MS & Co. determines that there is no appropriate successor index, at maturity the payout on the notes will be an amount based on the closing prices of the stocks underlying the PHLX Housing Sector Index at the time of such discontinuance, without rebalancing or substitution, computed by the calculation agent in accordance with the formula for calculating the PHLX Housing Sector Index last in effect prior to discontinuance of the PHLX Housing Sector Index. PS-9 You have no shareholder As an investor in the notes, you will not have rights voting rights or the right to receive dividends or other distributions or any other rights with respect to the stocks that underlie the PHLX Housing Sector Index. The economic interests of The economic interests of the calculation agent the calculation agent and and other of our affiliates are potentially other of our affiliates are adverse to your interests as an investor in the potentially adverse to your notes. interests As calculation agent, MS & Co. will determine the initial index value and the final average index value, and calculate the supplemental redemption amount, if any, you will receive at maturity. Determinations made by MS & Co., in its capacity as calculation agent, including with respect to the occurrence or non-occurrence of market disruption events and the selection of a successor index or calculation of any index closing value in the event of a discontinuance of the PHLX Housing Sector Index, may affect the payout to you at maturity. See the sections of this pricing supplement called "Description of Notes--Market Disruption Event" and "--Discontinuance of the PHLX Housing Sector Index; Alteration of Method of Calculation." The original issue price of the notes includes the agent's commissions and certain costs of hedging our obligations under the notes. The subsidiaries through which we hedge our obligations under the notes expect to make a profit. Since hedging our obligations entails risk and may be influenced by market forces beyond our or our subsidiaries' control, such hedging may result in a profit that is more or less than initially projected. Hedging and trading MS & Co. and other affiliates of ours have activity by the carried out, and will continue to carry out, calculation agent and hedging activities related to the notes (and its affiliates could possibly to other instruments linked to the PHLX potentially adversely Housing Sector Index or its component stocks), affect the value of the including trading in the stocks underlying the PHLX Housing Sector Index PHLX Housing Sector Index as well as in other instruments related to the PHLX Housing Sector Index. MS & Co. and some of our other subsidiaries also trade the stocks underlying the PHLX Housing Sector Index and other financial instruments related to the PHLX Housing Sector Index on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or trading activities as of the date of this pricing supplement could potentially have decreased the initial index value and, as a result, made it less likely that the PHLX Housing Sector Index will close below the initial index value on the determination dates such that you will receive a payment at maturity that exceeds the principal amount on the notes. Additionally, such hedging or trading activities during the term of the notes could potentially affect the value of the PHLX Housing Sector Index on the determination dates and, accordingly, the amount of cash you will receive at maturity. The notes will be treated You should also consider the tax consequences of as contingent payment debt investing in the notes. The notes will be treated instruments for U.S. as "contingent payment debt instruments" for U.S. federal income tax purposes federal income tax purposes, as described in the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation." Under this treatment, if you are a U.S. taxable investor, you will generally be subject to annual income tax based on the comparable yield (as defined in this pricing supplement) of the notes even though you will not receive any stated interest on the notes. In addition, any gain recognized by U.S. taxable investors on the sale or exchange, or at maturity, of the notes generally will be treated as ordinary income. Please read carefully the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation" and the sections called "United States Federal Taxation--Notes--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices" and "United States Federal Taxation--Backup Withholding" in the accompanying prospectus supplement. PS-10 If you are a non-U.S. investor, please also read the section of this pricing supplement called "Description of Notes--United States Federal Income Taxation--Non-U.S. Holders." You are urged to consult your own tax advisor regarding all aspects of the U.S. federal income tax consequences of investing in the notes as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. PS-11 DESCRIPTION OF NOTES Terms not defined herein have the meanings given to such terms in the accompanying prospectus supplement. The term "Notes" refers to each $10 principal amount of any of our Capital Protected Notes Due August 30, 2010 Based on the Decline in the Value of the PHLX Housing Sector(SM) Index. In this pricing supplement, the terms "we," "us" and "our" refer to Morgan Stanley. Aggregate Principal Amount... $43,500,000 Original Issue Date (Settlement Date)............ August 29, 2005 Maturity Date................ August 30, 2010, subject to extension in the event of a Market Disruption Event on the final Determination Date for calculating the Final Average Index Value. If, due to a Market Disruption Event or otherwise, the final Determination Date is postponed so that it falls less than two scheduled Trading Days prior to the scheduled Maturity Date, the Maturity Date will be the second scheduled Trading Day following the final Determination Date as postponed. See "--Determination Dates" below. Interest Rate................ None Specified Currency........... U.S. dollars CUSIP Number................. 61746Y155 Minimum Denominations........ $10 Issue Price.................. $10 (100%) Maturity Redemption Amount... At maturity, upon delivery of the Notes to the Trustee, we will pay with respect to the $10 principal amount of each Note an amount in cash equal to $10 plus the Supplemental Redemption Amount, if any, as determined by the Calculation Agent. We shall, or shall cause the Calculation Agent to (i) provide written notice to the Trustee and to The Depository Trust Company, which we refer to as DTC, of the amount of cash to be delivered with respect to the $10 principal amount of each Note, 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 the Notes to the Trustee for delivery to DTC, as holder of the Notes, on the Maturity Date. We expect such amount of cash will be distributed to investors on the Maturity Date in accordance with the standard rules and procedures of DTC and its direct and indirect participants. See "--Book-Entry Note or Certificated Note" below, and see "The Depositary" in the accompanying prospectus supplement. Supplemental Redemption Amount....................... The Supplemental Redemption Amount will be equal to $10 times the Index Percent Change; provided that the Supplemental Redemption Amount will not be less than zero. The Calculation Agent will calculate the Supplemental Redemption Amount on the final Determination Date. Index Percent Change......... The Index Percent Change is a fraction, the numerator of which will be the Initial Index Value minus the Final Average Index Value and the denominator of which will be the Initial Index PS-12 Value. The Index Percent Change is described by the following formula: (Initial Index Value - Final Average Index Value) ------------------------------------------------- Initial Index Value Initial Index Value.......... 528.67, the Index Closing Value on August 24, 2005, the day we priced the Notes for initial sale to the public. Final Average Index Value.... The arithmetic average of the Index Closing Values on the three Determination Dates, as calculated by the Calculation Agent on the final Determination Date. Index Closing Value.......... The Index Closing Value on any Trading Day will equal the closing value of the PHLX Housing Sector Index or any Successor Index (as defined under "--Discontinuance of the PHLX Housing Sector Index; Alteration of Method of Calculation" below) published at the regular weekday close of trading on that Trading Day. In certain circumstances, the Index Closing Value will be based on the alternate calculation of the PHLX Housing Sector Index described under "--Discontinuance of the PHLX Housing Sector Index; Alteration of Method of Calculation." In this "Description of Notes," references to the PHLX Housing Sector Index will include any Successor Index, unless the context requires otherwise. Determination Dates.......... The Determination Dates will be August 30, 2008, August 30, 2009 and August 26, 2010, in each case subject to adjustment for non-Trading Days or Market Disruption Events as described in the following two paragraphs. If either of the first two scheduled Determination Dates is not a Trading Day or if a Market Disruption Event occurs on any such date, such Determination Date will be the immediately succeeding Trading Day during which no Market Disruption Event shall have occurred; provided that if a Market Disruption Event has occurred on each of the five Trading Days immediately succeeding any of the first two scheduled Determination Dates, the Calculation Agent will determine the applicable Index Closing Value on such fifth succeeding Trading Day in accordance with the formula for calculating the value of the PHLX Housing Sector Index last in effect prior to the commencement of the Market Disruption Event, without rebalancing or substitution, 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 fifth succeeding Trading Day of each security most recently constituting the PHLX Housing Sector Index. If August 26, 2010 (the final scheduled Determination Date) is not a Trading Day or if there is a Market Disruption Event on such day, the final Determination Date will be the immediately succeeding Trading Day during which no Market Disruption Event shall have occurred. PS-13 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, the Chicago Mercantile Exchange, the Philadelphia Stock Exchange and the Chicago Board of Options Exchange and in the over-the-counter market for equity securities in the United States. Book Entry Note or Certificated Note............ Book Entry. The Notes will be issued in the form of one or more fully registered global securities which will be deposited with, or on behalf of, DTC and will be registered in the name of a nominee of DTC. DTC's nominee will be the only registered holder of the Notes. Your beneficial interest in the Notes will be evidenced solely by entries on the books of the securities intermediary acting on your behalf as a direct or indirect participant in DTC. In this pricing supplement, all references to payments or notices to you will mean payments or notices to DTC, as the registered holder of the Notes, for distribution to participants in accordance with DTC's procedures. For more information regarding DTC and book entry notes, please read "The Depositary" in the accompanying prospectus supplement and "Form of Securities--Global Securities--Registered Global Securities" in the accompanying prospectus. Senior Note or Subordinated Note............ Senior Trustee...................... JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank) Agent........................ Morgan Stanley & Co. Incorporated and its successors ("MS & Co.") Market Disruption Event...... Market Disruption Event means, with respect to the PHLX Housing Sector Index: (i) the occurrence or existence of a suspension, absence or material limitation of trading of stocks then constituting 20 percent or more of the level of the PHLX Housing Sector Index (or the Successor Index) on the Relevant Exchanges for such securities for more than two hours of trading or during the one-half hour period preceding the close of the principal trading session on such Relevant 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 percent or more of the level of the PHLX Housing Sector 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 PHLX Housing Sector 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; and PS-14 (ii) a determination by the Calculation Agent in its sole discretion that any event described in clause (i) above materially interfered with our ability or the ability of any of our affiliates to unwind or adjust all or a material portion of the hedge with respect to the Notes. For the purpose of determining whether a Market Disruption Event exists at any time, if trading in a security included in the PHLX Housing Sector Index is materially suspended or materially limited at that time, then the relevant percentage contribution of that security to the level of the PHLX Housing Sector Index shall be based on a comparison of (x) the portion of the value of the PHLX Housing Sector Index attributable to that security relative to (y) the overall value of the PHLX Housing Sector Index, in each case immediately before that suspension or limitation. For the purpose of determining whether a Market Disruption Event has occurred: (1) a limitation on the hours or number of days of trading will 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 will 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 will constitute a suspension, absence or material limitation of trading, (4) a suspension of trading in futures or options contracts on the PHLX Housing Sector Index by the primary securities market trading in such contracts by reason of (a) a price change exceeding limits set by such securities 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 will constitute a suspension, absence or material limitation of trading in futures or options contracts related to the PHLX Housing Sector 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 PHLX Housing Sector Index are traded will not include any time when such securities market is itself closed for trading under ordinary circumstances. Relevant Exchange............ Relevant Exchange means the primary exchange or market of trading for any security then included in the PHLX Housing Sector 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 Notes shall have occurred and be continuing, the amount declared due and payable for each Note upon any acceleration of the Notes (the "Acceleration Amount") will be equal to the $10 principal amount per Note plus the Supplemental Redemption Amount, if any, determined as though the Index Closing Value for any Determination Date scheduled to occur on or after such date of PS-15 acceleration were the Index Closing Value on the date of acceleration. If the maturity of the Notes is accelerated because of an event of default as described above, we shall, or shall cause the Calculation Agent to, provide written notice to the Trustee at its New York office, on which notice the Trustee may conclusively rely, and to DTC of the Acceleration Amount and the aggregate cash amount due with respect to the Notes as promptly as possible and in no event later than two Business Days after the date of such acceleration. Calculation Agent............ MS & Co. All determinations made by the Calculation Agent will be at the sole discretion of the Calculation Agent and will, in the absence of manifest error, be conclusive for all purposes and binding on you, the Trustee and us. All calculations with respect to the Final Average Index Value and the Supplemental Redemption Amount, if any, will be made by the Calculation Agent and 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 amount of cash payable per Note 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 Notes will be rounded to the nearest cent, with one-half cent rounded upward. Because the Calculation Agent is our affiliate, the economic interests of the Calculation Agent and its affiliates may be adverse to your interests as an investor in the Notes, including with respect to certain determinations and judgments that the Calculation Agent must make in determining any Index Closing Value, the Initial Index Value, the Final Average Index Value, the Index Percent Change, the Supplemental Redemption Amount or whether a Market Disruption Event has occurred. See "--Market Disruption Event" above and "--Discontinuance of the PHLX Housing Sector Index; Alteration of Method of Calculation" below. MS & Co. is obligated to carry out its duties and functions as Calculation Agent in good faith and using its reasonable judgment. The PHLX Housing Sector Index........................ We have derived all information contained in this pricing supplement regarding the PHLX Housing Sector Index (the "Index"), including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by the PHLX. The Index was developed by PHLX and is calculated, maintained and published by PHLX. We make no representation or warranty as to the accuracy or completeness of such information. The Index is a modified capitalization weighted index composed of twenty-one companies whose primary lines of business are PS-16 directly associated with the United States housing construction market (the "Index Stocks"). The Index composition encompasses residential builders, suppliers of aggregate, lumber and other construction materials, manufactured housing and mortgage insurers. The Index was set to an initial value of 250 on January 2, 2002. Options commenced trading on the Index on July 17, 2002. Modified capitalization weighting is intended to maintain as closely as possible the proportional capitalization distribution of the portfolio of Index Stocks, while limiting the maximum weight of a single stock or group of stocks to a predetermined maximum (normally 25% for a single stock, and 50% to 60% for the top five or an aggregation of all stocks weighing 5% or more). This rebalancing is accomplished by occasionally artificially reducing the capitalization of higher weighted stocks and redistributing the weight to lower weighted stocks without changing the total capitalization of the portfolio. The net result is a weight distribution that is less skewed toward the larger stocks, but still does not approach equal weighting. The following is a list of companies currently included in the Index and their trading symbols: American Standard Companies Inc. ASD Beazer Homes USA, Inc. BZH Champion Enterprises, Inc. CHB Centex Corporation CTX D.R. Horton, Inc. DHI Hovnanian Enterprises, Inc. HOV KB Home KBH Lennar Corporation LEN Masco Corporation MAS M.D.C. Holdings, Inc. MDC OfficeMax Incorporated OMX Pulte Homes, Inc. PHM The PMI Group, Inc. PMI Radian Group Inc. RDN The Ryland Group, Inc. RYL Standard Pacific Corp. SPF Temple-Inland, Inc. TIN Toll Brothers, Inc. TOL USG Corporation USG Vulcan Materials Company VMC Weyerhaeuser Company WY Methodology for inclusion in the Index: Index securities are first defined as small stocks (current market capitalization less than or equal to 50% of the average market capitalization of all component securities), medium stocks PS-17 (current market capitalization greater than 50% and less than 150% of the average market capitalization of all component securities), or large stocks (current market capitalization greater than or equal to 150% of the average market capitalization of all component securities). A determination is then made, based on the current (true) market capitalization if: 1. Any single component security represents 25% or more of the current market capitalization of the basket; and/or 2. All component securities that individually represent 5% or more of the total current market capitalization of the basket in aggregate represent 50% or more of the total current market capitalization of the basket. If 1 is true, then: 3. The weight of all qualifying component securities is set to 22.5%; 4. The weight that represents the aggregate difference between the original weight and the new weight of 22.5% for each qualifying component is redistributed as follows: a) The weight of any component security that represents less than 1% of the total current market capitalization of the basket is increased to exactly 1%, beginning with the highest weighted, sub 1% component security and continuing until either all component securities are equal to or above 1% or until no excess weight remains to be distributed; b) Beginning with the largest small stock, its weight is increased to the nearest whole percentage weight, and in one half percentage increments thereafter until the last iteration causes its weight to exceed the weight of the second largest small stock by 100%, and continuing until no excess weight remains to be distributed, except that: i. If the next iteration would cause the subject stock to have a higher weight than the stock ranked immediately above it, the larger stock's weight is increased to the nearest whole percentage weight and in one half percents increments thereafter until the paused iteration would no longer cause the original subject stock to have a higher weight than the stock ranked immediately above it, until no excess PS-18 weight remains to be distributed, or until the larger stock's weight exceeds the stock ranked immediately above it, in which case the step is repeated for the next higher weighted stock. If 2 is true after steps 3 and 4, then: 5. The weight of each qualifying component is proportionally reduced such that the aggregate weight of the qualifying components is exactly 45%, as follows: a) For qualifying components 1 through n, (a) the difference between 45% and the aggregate weight of all the qualifying components prior to this reduction and (b) the percent of the total capitalization of the qualifying components that each qualifying component represents, is calculated. The weight of each qualifying component is reduced by an amount that equals a *b(1-n), except that the proportional reduction shall not cause any component to have a lesser weight than the component security ranked immediately beneath it. If such a situation should occur, then the next largest component security or securities that would not have otherwise qualified for inclusion in the proportional reduction shall then be included. 6. The weight that represents the difference between the original aggregate weight and the new weight of 45% for the group of qualifying components is redistributed as follows: a) Beginning with the largest small stock, its weight is increased to the nearest whole percentage weight, and in one half percentage increments thereafter until the last iteration causes its weight to exceed the weight of the second largest small stock by 100%, and continuing until no excess weight remains to be distributed, except that: i. If the next iteration would cause the subject stock to have a higher weight than the stock ranked immediately above it, the larger stock's weight is increased to the nearest one half percentage weight and in half percent increments thereafter until the paused iteration would no longer cause the original subject stock to have a higher weight than the stock ranked immediately above it, until no excess weight remains to be distributed, or until the larger stock's weight exceeds PS-20 the stock ranked immediately above it, in which case this step is repeated for the next higher weighted stock; and ii. Excess weight distributed to the smallest stock will increase its weight to no more than that of the adjusted weight of the second smallest stock; and iii. If the smallest stock has been increased to the level of the second smallest stock and excess weight remains to be distributed, then beginning with the largest small stock and continuing downward, the weight of each component is increased by half percentage increments until no excess weight remains, subject to the conditions and remedies of (i) above, except that if insufficient excess weight remains to solve the conditions and remedies of paragraph (i) above, than paragraph (iii) is started with the smallest stock whose weight exceeds the next smallest stock by at least one half percent. New share values will be assigned to each component security by calculating the dollar value of each component security's new percent weight of the original total current market capitalization of the basket, divided by the last sale price of each respective component security. This process will be repeated at least semi-annually for implementation at the end of the January and July option expiration if the modified capitalization of a single component or group of components exceed the concentration thresholds stated above as of the last trading day of the previous month, and such rebalancing will be based on actual market capitalizations of the component stocks as determined by actual share amounts and closing prices on the last trading day of the previous month. Adjustments for corporate actions: Stock splits - modified share amounts will be adjusted proportionally to the stock price adjustment using the announced split ratio on the effective date of the split. No divisor change should be necessary except for rounding. Share changes greater than 5% - due to mergers, acquisitions, or stock repurchase, modified share amounts will be adjusted in proportion to the announced share change. Divisor changes will be necessary. Adjustments for stock addition or removal: Stock removal - no adjustments to the remaining component modified shares made. Divisor changes will be necessary. Stock addition - the modified share weight of a stock addition will be determined in a 4 step process: o Determine the relative weight rank of the new component's true capitalization compared to the true capitalization of the current component list (e.g., 14th out of 25); o Assign a modified capitalization to the new component that is midway between the modified capitalization of the two current components that ranked immediately above and below the new component (e.g., midway between the modified cap of numbers 13 and 14); o Determine a number of modified shares required to achieve the modified capitalization based on the closing price of the new component on the day immediately prior to its addition. o Divisor changes will necessary. In this pricing supplement, unless the context requires otherwise, references to the PHLX Housing Sector Index will include any Successor Index and references to PHLX will include any successor to PHLX. Discontinuance of the PHLX Housing Sector Index; Alteration of Method of Calculation............... If PHLX discontinues publication of the PHLX Housing Sector Index and PHLX 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 PHLX Housing Sector Index (such index being referred to herein as a "Successor Index"), then any subsequent Index Closing Value will be determined by reference to the value of such Successor Index at the regular weekday close of trading on the Trading Day that any Index Closing Value is to be determined. Upon any selection by the Calculation Agent of a Successor Index, the Calculation Agent will cause written notice thereof to be furnished to the Trustee, to Morgan Stanley and to DTC, as holder of the Notes, within three business days of such selection. We expect that such notice will be passed on to you, as a beneficial owner of the Notes, in accordance with the standard rules and procedures of DTC and its direct and indirect participants. If PHLX discontinues publication of the PHLX Housing Sector Index prior to, and such discontinuance is continuing on, the date that any Index Closing Value is to be determined and MS & Co., as the Calculation Agent, determines, in its sole discretion, that no Successor Index is available at such time, then the Calculation Agent will determine the Index Closing Value for such date. The PS-21 Index Closing Value will be computed by the Calculation Agent in accordance with the formula for calculating the PHLX Housing Sector 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 constituting the PHLX Housing Sector Index without any rebalancing or substitution of such securities following such discontinuance. Notwithstanding these alternative arrangements, discontinuance of the publication of the PHLX Housing Sector Index may adversely affect the value of the Notes. If at any time the method of calculating the PHLX Housing Sector Index or a Successor Index, or the value thereof, is changed in a material respect, or if the PHLX Housing Sector 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 PHLX Housing Sector Index or such Successor Index had such changes or modifications not been made, then, from and after such time, the Calculation Agent will, at the close of business in New York City on each date on which the Index Closing 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 PHLX Housing Sector Index or such Successor Index, as the case may be, as if such changes or modifications had not been made, and the Calculation Agent will calculate the Final Average Index Value with reference to the PHLX Housing Sector Index or such Successor Index, as adjusted. Accordingly, if the method of calculating the PHLX Housing Sector 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 will adjust such index in order to arrive at a value of the PHLX Housing Sector Index or such Successor Index as if it had not been modified (e.g., as if such split had not occurred). Historical Information....... The following table sets forth the published high and low Index Closing Values, as well as end-of-quarter Index Closing Values, of the PHLX Housing Sector Index for each quarter in the period from July 1, 2002 through August 24, 2005. The Index Closing Value on August 24, 2005 was 528.67. We obtained the information in the table below from Bloomberg Financial Markets, without independent verification. The historical values of the PHLX Housing Sector Index should not be taken as an indication of future performance, and no assurance can be given as to the level of the PHLX Housing Sector Index on the Determination Dates. We cannot give you any assurance that the Final Average Index Value will be lower than the Initial Index Value so that you will receive a payment in excess of the $10 principal amount per Note at maturity. PS-22 PHLX Housing Sector Index High Low Period End ------ ------ ---------- 2002 Third Quarter........... 281.63 210.79 211.47 Fourth Quarter.......... 233.44 185.83 224.77 2003 First Quarter 235.66 200.55 214.95 Second Quarter ......... 298.69 218.24 280.84 Third Quarter........... 312.49 276.03 305.46 Fourth Quarter.......... 371.27 318.39 366.37 2004 First Quarter........... 405.87 349.31 400.65 Second Quarter.......... 402.51 344.58 381.29 Third Quarter........... 407.98 356.24 407.98 Fourth Quarter ......... 469.32 371.98 469.32 2005 First Quarter........... 518.20 447.10 478.54 Second Quarter.......... 544.04 452.77 532.08 Third Quarter (through August 24, 2005)...... 586.06 524.16 528.67
Use of Proceeds and Hedging ..................... The net proceeds we receive from the sale of the Notes will be used for general corporate purposes and, in part, in connection with hedging our obligations under the Notes through one or more of our subsidiaries. The original issue price of the Notes includes the Agent's Commissions (as shown on the cover page of this pricing supplement) paid with respect to the Notes and the cost of hedging our obligations under the Notes. The cost of hedging includes the projected profit that our subsidiaries expect to realize in consideration for assuming the risks inherent in managing the hedging transactions. Since hedging our obligations entails risk and may be influenced by market forces beyond our or our subsidiaries' control, such hedging may result in a profit that is more or less than initially projected, or could result in a loss. See also "Use of Proceeds" in the accompanying prospectus. On the date of this pricing supplement, we, through our subsidiaries or others, hedged our anticipated exposure in connection with the Notes by taking short positions in the stocks underlying the PHLX Housing Sector Index and in futures and options contracts on the stocks underlying the PHLX Housing Sector Index listed on major securities markets. Such purchase or sale activity could potentially have decreased the value of the PHLX Housing Sector Index, and therefore decreased the level of the PHLX Housing Sector Index that must prevail on the Determination Dates in order for you to receive at maturity a PS-23 payment that exceeds the principal amount of the Notes. In addition, through our subsidiaries, we are likely to modify our hedge position throughout the life of the Notes, including on the Determination Dates, by purchasing and selling the stocks underlying the PHLX Housing Sector Index, futures or options contracts or exchange traded funds, if any, on the PHLX Housing Sector Index or its component stocks listed on major securities markets or positions in any other available securities or instruments that we may wish to use in connection with such hedging activities, including by purchasing any such securities or instruments on the Determination Dates. We cannot give any assurance that our hedging activity will not affect the value of the PHLX Housing Sector Index, and, therefore, adversely affect the value of the Notes or the payment that you will receive at maturity. Supplemental Information Concerning Plan of Distribution............... Under the terms and subject to the conditions contained in the U.S. distribution agreement referred to in the prospectus supplement under "Plan of Distribution," the Agent, acting as principal for its own account, has agreed to purchase, and we have agreed to sell, the principal amount of Notes set forth on the cover of this pricing supplement. The Agent proposes initially to offer the Notes directly to the public at the public offering price set forth on the cover page of this pricing supplement. The Agent may allow a concession not in excess of $.25 per Note to other dealers, which may include Morgan Stanley & Co. International Limited and Bank Morgan Stanley AG. We expect to deliver the Notes against payment therefor in New York, New York on August 29, 2005. After the initial offering, the Agent may vary the offering price and other selling terms from time to time. In order to facilitate the offering of the Notes, the Agent may engage in transactions that stabilize, maintain or otherwise affect the price of the Notes. Specifically, the Agent may sell more Notes than it is obligated to purchase in connection with the offering, creating a naked short position in the Notes for its own account. The Agent must close out any naked short position by purchasing the Notes in the open market. A naked short position is more likely to be created if the Agent is concerned that there may be downward pressure on the price of the Notes in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the Agent may bid for, and purchase, Notes or the individual stocks underlying the PHLX Housing Sector Index in the open market to stabilize the price of the Notes. Any of these activities may raise or maintain the market price of the Notes above independent market levels or prevent or retard a decline in the market price of the Notes. The Agent is not required to engage in these activities, and may end any of these activities at any time. An affiliate of the Agent has entered into a hedging transaction with us in connection with this offering of Notes. See "--Use of Proceeds and Hedging" above. PS-24 General No action has been or will be taken by us, the Agent or any dealer that would permit a public offering of the Notes or possession or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus in any jurisdiction, other than the United States, where action for that purpose is required. No offers, sales or deliveries of the Notes, or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus or any other offering material relating to the Notes, may be made in or from any jurisdiction except in circumstances which will result in compliance with any applicable laws and regulations and will not impose any obligations on us, the Agent or any dealer. The Agent has represented and agreed, and each dealer through which we may offer the Notes has represented and agreed, that it (i) will comply with all applicable laws and regulations in force in each non-U.S. jurisdiction in which it purchases, offers, sells or delivers the Notes or possesses or distributes this pricing supplement and the accompanying prospectus supplement and prospectus and (ii) will obtain any consent, approval or permission required by it for the purchase, offer or sale by it of the Notes under the laws and regulations in force in each non-U.S. jurisdiction to which it is subject or in which it makes purchases, offers or sales of the Notes. We shall not have responsibility for the Agent's or any dealer's compliance with the applicable laws and regulations or obtaining any required consent, approval or permission. Brazil The Notes may not be offered or sold to the public in Brazil. Accordingly, the offering of the Notes has not been submitted to the Comissao de Valores Mobiliarios for approval. Documents relating to this offering, as well as the information contained herein and therein, may not be supplied to the public as a public offering in Brazil or be used in connection with any offer for subscription or sale to the public in Brazil. Chile The Notes have not been registered with the Superintendencia de Valores y Seguros in Chile and may not be offered or sold publicly in Chile. No offer, sales or deliveries of the Notes, or distribution of this pricing supplement or the accompanying prospectus supplement or prospectus, may be made in or from Chile except in circumstances which will result in compliance with any applicable Chilean laws and regulations. Hong Kong The Notes may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. The Agent has not issued and will not issue any advertisement, invitation or document relating to the Notes, PS-25 whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Notes which are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder. Mexico The Notes have not been registered with the National Registry of Securities maintained by the Mexican National Banking and Securities Commission and may not be offered or sold publicly in Mexico. This pricing supplement and the accompanying prospectus supplement and prospectus may not be publicly distributed in Mexico. Singapore This pricing supplement and the accompanying prospectus supplement and prospectus have not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this pricing supplement and the accompanying prospectus supplement and prospectus used in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than under circumstances in which such offer, sale or invitation does not constitute an offer or sale, or invitation for subscription or purchase, of the Notes to the public in Singapore. License Agreement between PHLX and MS & Co.................... PHLX and MS & Co. have entered into a non-exclusive license agreement providing license to MS & Co., and certain of its affiliated and subsidiary companies, in exchange for a fee, of the right to use the PHLX Housing Sector Index, which is owned and published by PHLX, in connection with securities, including the Notes. The license agreement between PHLX and MS & Co. provides that the following language must be set forth in this pricing supplement: The PHLX Housing Sector(SM) Index (HGX) ("Index") is not sponsored, endorsed, sold or promoted by the PHLX. The PHLX makes no representation or warranty, express or implied, to the owners of the Index or any member of the public regarding the advisability of investing in securities generally or in the Index particularly or the ability of the Index to track market performance. The PHLX's only relationship to Licensee is the licensing of certain names and marks and of the Index, which is determined, composed and calculated without regard to the Licensee. The PHLX has no obligation to take the needs of the Licensee or the owners of the Index into consideration in determining, composing or calculating the Index. The PHLX is PS-26 not responsible for and has not participated in any determination or calculation made with respect to the issuance or redemption of the Index. The PHLX has no obligation or liability in connection with the administration, purchase, sale, marketing, promotion or trading of the Index. "PHLX Housing Sector(SM)" and "HGX(SM)" are service marks of the Philadelphia Stock Exchange, Inc. and have been licensed for use by Morgan Stanley & Co. Incorporated. ERISA Matters for Pension Plans and Insurance Companies.................. Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the context of the Plan's particular circumstances before authorizing an investment in the Notes. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the Plan. In addition, we and certain of our subsidiaries and affiliates, including MS & Co. and Morgan Stanley DW Inc. (formerly Dean Witter Reynolds Inc.) ("MSDWI"), may each be considered a "party in interest" within the meaning of ERISA, or a "disqualified person" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to many Plans, as well as many individual retirement accounts and Keogh plans (also "Plans"). Prohibited transactions within the meaning of ERISA or the Code would likely arise, for example, if the Notes are acquired by or with the assets of a Plan with respect to which MS & Co., MSDWI or any of their affiliates is a service provider or other party in interest, unless the Notes are acquired pursuant to an exemption from the "prohibited transaction" rules. A violation of these prohibited transaction rules could result in an excise tax or other liabilities under ERISA and/or Section 4975 of the Code for such persons, unless exemptive relief is available under an applicable statutory or administrative exemption. The U.S. Department of Labor has issued five prohibited transaction class exemptions ("PTCEs") that may provide exemptive relief for direct or indirect prohibited transactions resulting from the purchase or holding of the Notes. Those class exemptions are PTCE 96-23 (for certain transactions determined by in-house asset managers), PTCE 95-60 (for certain transactions involving insurance company general accounts), PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts), and PTCE 84-14 (for certain transactions determined by independent qualified asset managers). Because we may be considered a party in interest with respect to many Plans, the Notes may not be purchased, held or disposed of by any Plan, any entity whose underlying assets include "plan assets" by reason of any Plan's investment in the entity (a "Plan Asset Entity") or any person investing "plan assets" of any Plan, PS-27 unless such purchase, holding or disposition is eligible for exemptive relief, including relief available under PTCE 96-23, 95-60, 91-38, 90-1, or 84-14 or such purchase, holding or disposition is otherwise not prohibited. Any purchaser, including any fiduciary purchasing on behalf of a Plan, transferee or holder of the Notes will be deemed to have represented, in its corporate and its fiduciary capacity, by its purchase and holding of the Notes that either (a) it is not a Plan or a Plan Asset Entity, is not purchasing such securities on behalf of or with "plan assets" of any Plan, or with any assets of a governmental or church plan that is subject to any federal, state or local law that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code or (b) its purchase, holding and disposition are eligible for exemptive relief or such purchase, holding and disposition are not prohibited by ERISA or Section 4975 of the Code (or in the case of a governmental or church plan, any substantially similar federal, state or local law). Under ERISA, assets of a Plan may include assets held in the general account of an insurance company which has issued an insurance policy to such plan or assets of an entity in which the Plan has invested. Accordingly, insurance company general accounts that include assets of a Plan must ensure that one of the foregoing exemptions is available. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing the Notes on behalf of or with "plan assets" of any Plan consult with their counsel regarding the availability of exemptive relief under PTCEs 96-23, 95-60, 91-38, 90-1 or 84-14. Purchasers of the Notes have exclusive responsibility for ensuring that their purchase, holding and disposition of the Notes do not violate the prohibited transaction or other rules of ERISA or the Code or similar regulations applicable to governmental or church plans, as described above. United States Federal Income Taxation............ The following summary is based on the opinion of Davis Polk & Wardwell, our special tax counsel, and is a general discussion of the principal U.S. federal income tax consequences to initial investors in the Notes that (i) purchase the Notes at their Issue Price and (ii) will hold the Notes as capital assets within the meaning of Section 1221 of the Code. Unless otherwise specifically indicated, this summary is based on the Code, administrative pronouncements, judicial decisions and currently effective and proposed Treasury regulations, changes to any of which subsequent to the date of this pricing supplement may affect the tax consequences described herein. This summary does not address all aspects of U.S. federal income taxation that may be relevant to a particular investor in light of the investor's individual circumstances or to certain types of investors subject to special treatment under the U.S. federal income tax laws, such as: o certain financial institutions; o tax-exempt organizations; PS-28 o dealers and certain traders in securities or foreign currencies; o investors holding a Note as part of a hedging transaction, straddle, conversion or other integrated transaction; o U.S. Holders, as defined below, whose functional currency is not the U.S. dollar; o partnerships; o nonresident alien individuals who have lost their United States citizenship or who have ceased to be taxed as United States resident aliens; o corporations that are treated as controlled foreign corporations or passive foreign investment companies; o Non-U.S. Holders, as defined below, that are owned or controlled by persons subject to U.S. federal income tax; o Non-U.S. Holders for whom income or gain in respect of a Note is effectively connected with a trade or business in the United States; and o Non-U.S. Holders who are individuals having a "tax home" (as defined in Section 911(d)(3) of the Code) in the United States. If you are considering purchasing the Notes, you are urged to consult your own tax advisor with regard to the application of the U.S. federal income tax laws to your particular situation as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction. U.S. Holders This section applies to you only if you are a U.S. Holder and is only a brief summary of the U.S. federal income tax consequences of the ownership and disposition of the Notes. As used herein, the term "U.S. Holder" means a beneficial owner of a Note that is for U.S. federal income tax purposes: o a citizen or resident of the United States; o a corporation created or organized in or under the laws of the United States or of any political subdivision thereof; or o an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. The Notes will be treated as "contingent payment debt instruments" for U.S. federal income tax purposes. U.S. Holders should refer to the discussions under "United States Federal Taxation--Notes--Notes Linked to Commodity Prices, Single Securities, Baskets of Securities or Indices" and "United States Federal Taxation--Backup Withholding" in the accompanying prospectus supplement for a full description of the U.S. federal income tax and withholding consequences of ownership and disposition of a contingent payment debt instrument. In summary, U.S. Holders will, regardless of their method of accounting for U.S. federal income tax purposes, be required to accrue original issue discount ("OID") as interest income on the PS-29 Notes on a constant yield basis in each year that they hold the Notes, despite the fact that no stated interest will actually be paid on the Notes. As a result, U.S. Holders will be required to pay taxes annually on the amount of accrued OID, even though no cash will be paid on the Notes from which to pay such taxes. In addition, any gain recognized by U.S. Holders on the sale or exchange, or at maturity, of the Notes will generally be treated as ordinary income. The rate of accrual of OID on the Notes is the yield at which we would issue a fixed rate noncontingent debt instrument with terms otherwise similar to those of the Notes or the applicable federal rate, whichever is greater (our "comparable yield") and is determined at the time of the issuance of the Notes. We have determined that the "comparable yield" is a rate of 4.6355% compounded annually. Based on our determination of the comparable yield, the "projected payment schedule" for a Note (assuming an issue price of $10) consists of a projected amount equal to $12.5501 due at maturity. The following table states the amount of OID that will be deemed to have accrued with respect to a Note for each calendar period (assuming a day count convention of 30 days per month and 360 days per year), based upon our determination of the comparable yield and the projected payment schedule (as described below): OID TOTAL OID DEEMED DEEMED TO TO HAVE ACCRUED ACCRUE DURING FROM ORIGINAL CALENDAR ISSUE DATE (PER PERIOD (PER NOTE) AS OF END CALENDAR PERIOD NOTE) OF CALENDAR PERIOD ------------------------------ ------------- ------------------ Original Issue Date through December 31, 2005.......... $0.1558 $0.1558 January 1, 2006 through December 31, 2006.......... $0.4708 $0.6266 January 1, 2007 through December 31, 2007.......... $0.4926 $1.1192 January 1, 2008 through December 31, 2008.......... $0.5154 $1.6346 January 1, 2009 through December 31, 2009.......... $0.5393 $2.1739 January 1, 2010 through August 30, 2010............ $0.3762 $2.5501
The comparable yield and the projected payment schedule are not provided for any purpose other than the determination of U.S. Holders' OID accruals and adjustments in respect of the Notes, and we make no representation regarding the actual amounts of payments that will be made on a Note. PS-30 Non-U.S. Holders This section applies to you only if you are a Non-U.S. Holder. As used herein, the term "Non-U.S. Holder" means a beneficial owner of a Note that is for U.S. federal income tax purposes: o a nonresident alien individual; o a foreign corporation; or o a foreign trust or estate. Tax Treatment upon Maturity, Sale, Exchange or Disposition of a Note. Subject to the discussion below concerning backup withholding, payments on a Note by us or a paying agent to a Non-U.S. Holder and gain realized by a Non-U.S. Holder on the sale, exchange or other disposition of a Note will not be subject to U.S. federal income or withholding tax; provided that: o such Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined voting power of all classes of stock of Morgan Stanley entitled to vote and is not a bank receiving interest described in Section 881(c)(3)(A) of the Code; and o the certification required by Section 871(h) or Section 881(c) of the Code has been provided with respect to the Non-U.S. Holder, as discussed below. Certification Requirements. Sections 871(h) and 881(c) of the Code require that, in order to obtain an exemption from withholding tax in respect of payments on the Notes that are, for U.S. federal income tax purposes, treated as interest, the beneficial owner of a Note certifies on Internal Revenue Service Form W-8BEN, under penalties of perjury, that it is not a "United States person" within the meaning of Section 7701(a)(30) of the Code. If you are a prospective investor, you are urged to consult your own tax advisor regarding these certification requirements. Estate Tax. Individual Non-U.S. Holders and entities the property of which is potentially includible in such an individual's gross estate for U.S. federal estate tax purposes (for example, a trust funded by such an individual and with respect to which the individual has retained certain interests or powers), should note that, absent an applicable treaty benefit, a Note will be treated as U.S. situs property subject to U.S. federal estate tax if payments on the Note, if received by the decedent at the time of death, would have been subject to United States federal withholding tax (even if the W-8BEN certification requirement described above were satisfied). If you are considering purchasing the Notes, you are urged to consult your own tax advisor regarding the U.S. federal estate tax consequences of investing in the Notes. Information Reporting and Backup Withholding. Information returns may be filed with the U.S. Internal Revenue Service (the "IRS") in connection with the payments on the Notes at maturity as well as in connection with the proceeds from a sale, exchange PS-31 or other disposition. A Non-U.S. Holder may be subject to U.S. backup withholding on such payments or proceeds, unless the Non-U.S. Holder complies with certification requirements to establish that it is not a United States person, as described above. The certification requirements of Sections 871(h) and 881(c) of the Code, described above, will satisfy the certification requirements necessary to avoid backup withholding as well. The amount of any backup withholding from a payment to a Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder's U.S. federal income tax liability and may entitle the Non-U.S. Holder to a refund, provided that the required information is furnished to the IRS. PS-31