10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission File Number 1-11758

(Exact Name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 1585 Broadway
New York, NY 10036 (Address of principal executive
offices, including zip code) 36-3145972
(I.R.S. Employer Identification No.) (212) 761-4000
(Registrant’s telephone number,
including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x	Accelerated Filer  ¨
Non-Accelerated Filer  ¨	Smaller reporting company  ¨
(Do not check if a smaller reporting company)

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

As of April 30, 2010, there were 1,397,819,191 shares of the Registrant’s Common Stock, par value $0.01 per share, outstanding.

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2010

Table of Contents		Page
Part I—Financial Information
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Statements of Financial Condition—March 31, 2010 and December 31, 2009	1
	Condensed Consolidated Statements of Income—Three Months Ended March 31, 2010 and 2009	3
	Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2010 and 2009	4
	Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2010 and 2009	5
	Condensed Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2010 and 2009	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Note 1.       Basis of Presentation and Summary of Significant Accounting Policies	8
	Note 2.      Morgan Stanley Smith Barney Holdings LLC	16
	Note 3.      Fair Value Disclosures	18
	Note 4.      Securities Available for Sale	36
	Note 5.      Collateralized Transactions	36
	Note 6.      Variable Interest Entities and Securitization Activities	38
	Note 7.      Goodwill and Net Intangible Assets	48
	Note 8.      Long-Term Borrowings	49
	Note 9.      Derivative Instruments and Hedging Activities	50
	Note 10.    Commitments, Guarantees and Contingencies	57
	Note 11.    Regulatory Requirements	62
	Note 12.    Total Equity	64
	Note 13.    Earnings per Common Share	65
	Note 14.    Interest Income and Interest Expense	66
	Note 15.    Employee Benefit Plans	67
	Note 16.    Income Taxes	67
	Note 17.    Segment and Geographic Information	68
	Note 18.    Discontinued Operations	70
	Note 19.    Subsequent Events	71
	Report of Independent Registered Public Accounting Firm	72
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	73
	Introduction	73
	Executive Summary	75
	Certain Factors Affecting Results of Operations	82
	Business Segments	85
	Accounting Developments	95
	Other Matters	96
	Critical Accounting Policies	98
	Liquidity and Capital Resources	103
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	114
	Financial Data Supplement (Unaudited)	125

i

		Page
Part II—Other Information
Item 1.	Legal Proceedings	128
Item 1A.	Risk Factors	128
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	129
Item 6.	Exhibits	129

ii

AVAILABLE INFORMATION

Morgan Stanley files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Morgan Stanley) file electronically with the SEC. Morgan Stanley’s electronic SEC filings are available to the public at the SEC’s internet site, www.sec.gov.

Morgan Stanley’s internet site is www.morganstanley.com. You can access Morgan Stanley’s Investor Relations webpage at www.morganstanley.com/about/ir. Morgan Stanley makes available free of charge, on or through its Investor Relations webpage, its proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Morgan Stanley also makes available, through its Investor Relations webpage, via a link to the SEC’s internet site, statements of beneficial ownership of Morgan Stanley’s equity securities filed by its directors, officers, 10% or greater shareholders and others under Section 16 of the Exchange Act.

Morgan Stanley has a Corporate Governance webpage. You can access information about Morgan Stanley’s corporate governance at www.morganstanley.com/about/company/governance. Morgan Stanley posts the following on its Corporate Governance webpage:

• Amended and Restated Certificate of Incorporation;

• Amended and Restated Bylaws;

• Charters for its Audit Committee; Internal Audit Subcommittee; Compensation, Management Development and Succession Committee; Nominating and Governance Committee; and Risk Committee;

• Corporate Governance Policies;

• Policy Regarding Communication with the Board of Directors;

• Policy Regarding Director Candidates Recommended by Shareholders;

• Policy Regarding Corporate Political Contributions;

• Policy Regarding Shareholder Rights Plan;

• Code of Ethics and Business Conduct;

• Code of Conduct; and

• Integrity Hotline information.

Morgan Stanley’s Code of Ethics and Business Conduct applies to all directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer and Finance Director and Controller. Morgan Stanley will post any amendments to the Code of Ethics and Business Conduct and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange LLC (“NYSE”) on its internet site. You can request a copy of these documents, excluding exhibits, at no cost, by contacting Investor Relations, 1585 Broadway, New York, NY 10036 (212-761-4000). The information on Morgan Stanley’s internet site is not incorporated by reference into this report.

iii

Part I—Financial Information.

Item 1. Financial Statements.

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in millions, except share data)

(unaudited)

	March 31, 2010		December 31, 2009
Assets
Cash and due from banks	$	5,979	$	6,988
Interest bearing deposits with banks		29,499		25,003
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		22,367		23,712
Financial instruments owned, at fair value (approximately $128 billion at March 31, 2010 and $101 billion at December 31, 2009 were pledged to various parties):
U.S. government and agency securities		69,274		62,215
Other sovereign government obligations		31,341		25,445
Corporate and other debt ($5,809 at March 31, 2010 related to consolidated variable interest entities, generally not available to the Company)		90,192		90,454
Corporate equities		67,591		57,968
Derivative and other contracts		47,906		49,081
Investments ($1,102 at March 31, 2010 related to consolidated variable interest entities, generally not available to the Company)		9,482		9,286
Physical commodities		4,898		5,329
Total financial instruments owned, at fair value		320,684		299,778
Securities available for sale		18,637		—
Securities received as collateral, at fair value		16,891		13,656
Federal funds sold and securities purchased under agreements to resell		138,633		143,208
Securities borrowed		181,055		167,501
Receivables:
Customers		25,949		27,594
Brokers, dealers and clearing organizations		6,575		5,719
Fees, interest and other		9,768		11,164
Loans		7,484		7,259
Other investments		3,901		3,752
Premises, equipment and software costs (net of accumulated depreciation of $3,915 at March 31, 2010 and $3,734 at December 31, 2009) ($388 at March 31, 2010 related to consolidated variable interest entities, generally not available to the Company)		6,047		7,067
Goodwill		7,169		7,162
Intangible assets (net of accumulated amortization of $365 at March 31, 2010 and $275 at December 31, 2009) (includes $175 and $137 at fair value at March 31, 2010 and December 31, 2009, respectively)		4,998		5,054
Other assets ($398 at March 31, 2010 related to consolidated variable interest entities, generally not available to the Company)		14,083		16,845
Total assets	$	819,719	$	771,462

See Notes to Condensed Consolidated Financial Statements.

1

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(CONTINUED)

(dollars in millions, except share data)

(unaudited)

	March 31, 2010			December 31, 2009
Liabilities and Equity
Commercial paper and other short-term borrowings (includes $1,520 and $791 at fair value at March 31, 2010 and December 31, 2009, respectively)	$	3,323		$	2,378
Deposits (includes $4,789 and $4,967 at fair value at March 31, 2010 and December 31, 2009, respectively)		63,926			62,215
Financial instruments sold, not yet purchased, at fair value:
U.S. government and agency securities		26,220			20,503
Other sovereign government obligations		22,754			18,244
Corporate and other debt		9,643			7,826
Corporate equities		29,409			22,601
Derivative and other contracts		37,777			38,209
Physical commodities		39			—
Total financial instruments sold, not yet purchased, at fair value		125,842			107,383
Obligation to return securities received as collateral, at fair value		16,891			13,656
Securities sold under agreements to repurchase		174,591			159,401
Securities loaned		31,372			26,246
Other secured financings, at fair value ($4,883 at March 31, 2010 related to consolidated variable interest entities and are non-recourse to the Company)		9,560			8,102
Payables:
Customers		121,025			117,058
Brokers, dealers and clearing organizations		12,121			5,423
Interest		2,729			2,597
Other liabilities and accrued expenses		13,957			20,849
Long-term borrowings (includes $38,373 and $37,610 at fair value at March 31, 2010 and December 31, 2009, respectively)		189,203			193,374
		764,540			718,682
Commitments and contingencies
Equity
Morgan Stanley shareholders’ equity:
Preferred stock		9,597			9,597
Common stock, $0.01 par value;
Shares authorized: 3,500,000,000 at March 31, 2010 and December 31, 2009;
Shares issued: 1,487,850,163 at March 31, 2010 and December 31, 2009;
Shares outstanding: 1,398,469,576 at March 31, 2010 and 1,360,595,214 at December 31, 2009		15			15
Paid-in capital		6,750			8,619
Retained earnings		36,539			35,056
Employee stock trust		3,772			4,064
Accumulated other comprehensive loss		(559	)		(560	)
Common stock held in treasury, at cost, $0.01 par value; 89,380,587 shares at March 31, 2010 and 127,254,949 shares at December 31, 2009		(4,078	)		(6,039	)
Common stock issued to employee trust		(3,772	)		(4,064	)
Total Morgan Stanley shareholders’ equity		48,264			46,688
Non-controlling interests		6,915			6,092
Total equity		55,179			52,780
Total liabilities and equity	$	819,719		$	771,462

See Notes to Condensed Consolidated Financial Statements.

2

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

(unaudited)

	Three Months Ended March 31,
	2010			2009
Revenues:
Investment banking	$	1,060		$	873
Principal transactions:
Trading		3,751			1,355
Investments		369			(1,150	)
Commissions		1,261			770
Asset management, distribution and administration fees		1,963			866
Other		293			247
Total non-interest revenues		8,697			2,961
Interest income		1,748			2,245
Interest expense		1,367			2,309
Net interest		381			(64	)
Net revenues		9,078			2,897
Non-interest expenses:
Compensation and benefits		4,418			1,978
Occupancy and equipment		392			337
Brokerage, clearing and exchange fees		348			248
Information processing and communications		395			282
Marketing and business development		134			110
Professional services		395			303
Other		480			269
Total non-interest expenses		6,562			3,527
Income (loss) from continuing operations before income taxes		2,516			(630	)
Provision for (benefit from) income taxes		436			(595	)
Income (loss) from continuing operations		2,080			(35	)
Discontinued operations:
Loss from discontinued operations		(100	)		(255	)
Benefit from income taxes		(31	)		(100	)
Net loss from discontinued operations		(69	)		(155	)
Net income (loss)	$	2,011		$	(190	)
Net income (loss) applicable to non-controlling interests		235			(13	)
Net income (loss) applicable to Morgan Stanley	$	1,776		$	(177	)
Earnings (loss) applicable to Morgan Stanley common shareholders	$	1,411		$	(578	)
Amounts applicable to Morgan Stanley:
Income (loss) from continuing operations	$	1,845		$	(17	)
Net loss from discontinued operations		(69	)		(160	)
Net income (loss) applicable to Morgan Stanley	$	1,776		$	(177	)
Earnings (loss) per basic common share:
Income (loss) from continuing operations	$	1.12		$	(0.41	)
Net loss from discontinued operations		(0.05	)		(0.16	)
Earnings (loss) per basic common share	$	1.07		$	(0.57	)
Earnings (loss) diluted common share:
Income (loss) from continuing operations	$	1.03		$	(0.41	)
Net loss from discontinued operations		(0.04	)		(0.16	)
Earnings (loss) per diluted common share	$	0.99		$	(0.57	)
Average common shares outstanding:
Basic		1,314,608,020			1,011,741,210
Diluted		1,626,207,327			1,011,741,210

See Notes to Condensed Consolidated Financial Statements.

3

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

	Three Months Ended March 31,
	2010			2009
	(unaudited)
Net income (loss)	$	2,011		$	(190	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)		14			(59	)
Amortization of cash flow hedges(2)		3			3
Net unrealized gains (losses) on Securities available for sale(3)		(20	)		—
Pension and postretirement related adjustments(4)		4			5
Comprehensive income (loss)	$	2,012		$	(241	)
Net income (loss) applicable to non-controlling interests		235			(13	)
Other comprehensive (loss) income applicable to non-controlling interests		(12	)		—
Comprehensive income (loss) applicable to Morgan Stanley	$	1,789		$	(228	)

(1) Amounts are net of provision for income taxes of $89 million and $31 million for the quarters ended March 31, 2010 and 2009, respectively.

(2) Amounts are net of provision for income taxes of $2 million for the quarters ended March 31, 2010 and 2009, respectively.

(3) Amount is net of benefit from income taxes of $14 million for the quarter ended March 31, 2010.

(4) Amounts are net of provision for income taxes of $2 million and $3 million for quarters ended March 31, 2010 and 2009, respectively.

See Notes to Condensed Consolidated Financial Statements.

4

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

	Three Months Ended March 31,
	2010			2009
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	2,011		$	(190	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Compensation payable in common stock and options		370			204
Depreciation and amortization		154			155
Loss on business dispositions		932			19
Gain on repurchase of long-term debt		—			(233	)
Impairment charges and other-than-temporary impairment charges		10			278
Changes in assets and liabilities:
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements		1,345			945
Financial instruments owned, net of financial instruments sold, not yet purchased		(5,073	)		1,711
Securities borrowed		(13,554	)		(4,537	)
Securities loaned		5,126			4,526
Receivables, loans and other assets		4,521			2,771
Payables and other liabilities		5,487			(17,767	)
Federal funds sold and securities purchased under agreements to resell		4,575			2,169
Securities sold under agreements to repurchase		15,190			(22,572	)
Net cash provided by (used for) operating activities		21,094			(32,521	)
CASH FLOWS FROM INVESTING ACTIVITIES
Net (payments for) proceeds from:
Premises, equipment and software costs		(138	)		(1,127	)
Business dispositions, net of cash disposed		—			(8	)
Purchases of securities available for sale		(18,674	)		—
Net cash used for investing activities		(18,812	)		(1,135	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for):
Short-term borrowings		945			(6,691	)
Derivatives financing activities		(39	)		(53	)
Other secured financings		1,458			(2,024	)
Deposits		1,711			8,567
Excess tax benefits associated with stock-based awards		2			10
Net proceeds from:
Issuance of common stock		1			19
Issuance of long-term borrowings		7,755			19,433
Payments for:
Long-term borrowings		(9,693	)		(14,414	)
Repurchases of common stock for employee tax withholding		(262	)		(14	)
Cash dividends		(293	)		(645	)
Net cash provided by financing activities		1,585			4,188
Effect of exchange rate changes on cash and cash equivalents		(380	)		(661	)
Net increase (decrease) in cash and cash equivalents		3,487			(30,129	)
Cash and cash equivalents, at beginning of period		31,991			78,670
Cash and cash equivalents, at end of period	$	35,478		$	48,541
Cash and cash equivalents include:
Cash and due from banks	$	5,979		$	8,019
Interest bearing deposits with banks		29,499			40,522
Cash and cash equivalents, at end of period	$	35,478		$	48,541

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments for interest were $1,178 million and $2,856 million for the quarters ended March 31, 2010 and 2009, respectively.

Cash payments for income taxes were $169 million and $97 million for the quarters ended March 31, 2010 and 2009, respectively.

See Notes to Condensed Consolidated Financial Statements.

5

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

Three Months Ended March 31, 2010

(dollars in millions)

(unaudited)

	Preferred Stock		Common Stock		Paid-in Capital			Retained Earnings			Employee Stock Trust			Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Trust			Non- controlling Interests			Total Equity
BALANCE AT DECEMBER 31, 2009	$	9,597	$	15	$	8,619		$	35,056		$	4,064		$	(560	)	$	(6,039	)	$	(4,064	)	$	6,092		$	52,780
Net income		—		—		—			1,776			—			—			—			—			235			2,011
Dividends		—		—		—			(293	)		—			—			—			—			—			(293	)
Shares issued under employee plans and related tax effects		—		—		(1,869	)		—			(292	)		—			2,223			292			—			354
Repurchases of common stock		—		—		—			—			—			—			(262	)		—			—			(262	)
Net change in cash flow hedges		—		—		—			—			—			3			—			—			—			3
Pension and postretirement adjustments		—		—		—			—			—			4			—			—			—			4
Foreign currency translation adjustments		—		—		—			—			—			14			—			—			(12	)		2
Change in net unrealized gains (losses) on securities available for sale		—		—		—			—			—			(20	)		—			—			—			(20	)
Increases for issuances of shares by a subsidiary of the Company		—		—		—			—			—			—			—			—			51			51
Increases for the sale of a subsidiary’s shares by the Company		—		—		—			—			—			—			—			—			25			25
Increase in non-controlling interests related to the consolidation of certain real estate partnerships sponsored by the Company		—		—		—			—			—			—			—			—			468			468
Decrease in non-controlling interests related to dividends of non-controlling interests		—		—		—			—			—			—			—			—			(7	)		(7	)
Other increases in non-controlling interests		—		—		—			—			—			—			—			—			63			63
BALANCE AT MARCH 31, 2010	$	9,597	$	15	$	6,750		$	36,539		$	3,772		$	(559	)	$	(4,078	)	$	(3,772	)	$	6,915		$	55,179

See Notes to Condensed Consolidated Financial Statements.

6

MORGAN STANLEY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY—(Continued)

Three Months Ended March 31, 2009

(dollars in millions)

(unaudited)

	Preferred Stock		Common Stock		Paid-in Capital			Retained Earnings			Employee Stock Trust			Accumulated Other Comprehensive Income (Loss)			Common Stock Held in Treasury at Cost			Common Stock Issued to Employee Trust			Non- controlling Interest			Total Equity
BALANCE AT DECEMBER 31, 2008	$	19,168	$	12	$	459		$	36,154		$	4,312		$	(420	)	$	(6,620	)	$	(4,312	)	$	703		$	49,456
Net loss		—		—		—			(177	)		—			—			—			—			(13	)		(190	)
Dividends		—		—		—			(360	)		—			—			—			—			(5	)		(365	)
Shares issued under employee plans and related tax effects		—		—		(30	)		—			(145	)		—			401			145			—			371
Repurchases of common stock		—		—		—			—			—			—			(14	)		—			—			(14	)
Preferred stock accretion		40		—					(40	)		—			—			—			—			—			—
Net change in cash flow hedges		—		—		—			—			—			3			—			—			—			3
Pension and postretirement adjustments		—		—		—			—			—			5			—			—			—			5
Foreign currency translation adjustments		—		—		—			—			—			(59	)		—			—			—			(59	)
BALANCE AT MARCH 31, 2009	$	19,208	$	12	$	429		$	35,577		$	4,167		$	(471	)	$	(6,233	)	$	(4,167	)	$	685		$	49,207

See Notes to Condensed Consolidated Financial Statements.

7

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies.

The Company.    Morgan Stanley (or the “Company”), a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Global Wealth Management Group and Asset Management.

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

Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and market-making activities in equity and fixed income securities and related products, including foreign exchange and commodities; and investment activities.

Global Wealth Management Group, which includes the Company’s 51% interest in Morgan Stanley Smith Barney Holdings LLC (“MSSB”) (see Note 2), provides brokerage and investment advisory services to individual investors and small-to-medium sized businesses and institutions covering various investment alternatives; financial and wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and trust and fiduciary services.

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

Discontinued Operations.

Revel Entertainment Group, LLC.    On March 31, 2010, the Board of Directors authorized a plan of disposal by sale for Revel Entertainment Group, LLC (“Revel”), a development stage enterprise and subsidiary of the Company that is primarily associated with a development property in Atlantic City, New Jersey. Total assets of Revel included in the Company’s condensed consolidated statement of financial condition at March 31, 2010 approximated $240 million. The results of Revel are reported as discontinued operations for all periods presented and were formerly included within the Institutional Securities business segment. The quarter ended March 31, 2010 includes a loss of approximately $932 million in connection with such planned disposition.

Retail Asset Management Business.    On October 19, 2009, as part of a restructuring of its Asset Management business segment, the Company entered into a definitive agreement to sell substantially all of its retail asset management business (“Retail Asset Management”), including Van Kampen Investments, Inc. (“Van Kampen”), to Invesco Ltd. (“Invesco”). This transaction allows the Company’s Asset Management business segment to focus on its institutional client base, including corporations, pension plans, large intermediaries, foundations and endowments, sovereign wealth funds and central banks, among others.

Under the terms of the definitive agreement, Invesco will purchase substantially all of Retail Asset Management, operating under both the Morgan Stanley and Van Kampen brands, in a stock and cash transaction. The Company will receive a 9.4% minority interest in Invesco. The transaction, which has been approved by the Boards of Directors of both companies, is expected to close in mid-2010, subject to customary regulatory, client and fund shareholder approvals. Total assets of Retail Asset Management included in the Company’s condensed consolidated statement of financial condition at March 31, 2010 approximated $950 million. The results of Retail Asset Management are reported as discontinued operations for all periods presented.

MSCI Inc.    In May 2009, the Company divested all of its remaining ownership interest in MSCI Inc. (“MSCI”). The results of MSCI are reported as discontinued operations through the date of sale and were formerly included within the Institutional Securities business segment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Crescent.    Discontinued operations for the quarter ended March 31, 2009 include operating results related to Crescent Real Estate Equities Limited Partnership (“Crescent”), a former real estate subsidiary of the Company. The Company completed the disposition of Crescent in the fourth quarter of 2009, whereby the Company transferred its ownership interest in Crescent to Crescent’s primary creditor in exchange for full release of liability on the related loans. The results of Crescent were formerly included in the Asset Management business segment.

Discover.    On June 30, 2007, the Company completed the spin-off of its business segment Discover Financial Services (“DFS”) to its shareholders. On February 11, 2010, DFS paid the Company $775 million in complete satisfaction of its obligations to the Company regarding the sharing of proceeds from the lawsuit against Visa and MasterCard. The payment was recorded as a gain in discontinued operations for the quarter ended March 31, 2010.

See Note 18 for additional information on discontinued operations.

Basis of Financial Information.    The condensed consolidated financial statements for the quarters ended March 31, 2010 and 2009 are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions regarding the valuations of certain financial instruments, the valuation of goodwill, tax matters and other matters that affect the condensed consolidated financial statements and related disclosures. The Company believes that the estimates utilized in the preparation of the condensed consolidated financial statements are prudent and reasonable. Actual results could differ materially from these estimates.

All material intercompany balances and transactions have been eliminated.

The condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Consolidation.    The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest, including certain variable interest entities (“VIEs”) (see Note 6). The Company adopted accounting guidance for non-controlling interests on January 1, 2009. Accordingly, for consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as non-controlling interests. The portion of net income attributable to non-controlling interests for such subsidiaries is presented as Net income (loss) applicable to non-controlling interests on the condensed consolidated statements of income, and the portion of the shareholders’ equity of such subsidiaries is presented as Non-controlling interests in the condensed consolidated statements of financial condition and condensed consolidated statements of changes in total equity.

For entities where (1) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (2) the equity holders bear the economic residual risks of the entity and have the right to make decisions about the entity’s activities, the Company consolidates those entities it controls through a majority voting interest or otherwise. For entities that do not meet these criteria, commonly known as VIEs, the Company consolidates those entities where the Company is deemed to be the primary beneficiary when it has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits, in either case that could potentially be significant to the VIE, except for certain VIEs that are investment companies or are entities qualifying for accounting purposes as an investment company. For such entities, the Company consolidates those entities when it absorbs a majority of the expected losses or a majority of the expected residual returns, or both, of the entities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Notwithstanding the above, under accounting guidance prior to January 1, 2010, certain securitization vehicles, commonly known as qualifying special purpose entities (“QSPEs”), were not consolidated by the Company if they met certain criteria regarding the types of assets and derivatives they could hold and the range of discretion they could exercise in connection with the assets they held. These entities are now subject to the consolidation requirements for VIEs.

For investments in entities in which the Company does not have a controlling financial interest but has significant influence over operating and financial decisions, the Company generally applies the equity method of accounting with net gains and losses recorded within Other revenues. Where the Company has elected to measure certain eligible investments at fair value in accordance with the fair value option, net gains and losses are recorded within Principal transactions—Investments (see Note 3).

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

The Company’s significant regulated U.S. and international subsidiaries include Morgan Stanley & Co. Incorporated (“MS&Co.”), Morgan Stanley Smith Barney LLC, Morgan Stanley & Co. International plc (“MSIP”), Morgan Stanley Japan Securities Co., Ltd. (“MSJS”), Morgan Stanley Bank, N.A. and Morgan Stanley Investment Advisors Inc.

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

Effective January 1, 2010, the Company reclassified dividend income associated with trading and investing activities to Principal transactions—Trading or Principal transactions—Investments depending upon the business activity. Previously, these amounts were included in Interest and dividends on the condensed consolidated statements of income. These reclassifications were made in connection with the Company’s conversion to a financial holding company. Prior periods have been adjusted to conform to the current presentation.

Revenue Recognition.

Investment Banking.    Underwriting revenues and advisory fees from mergers, acquisitions and restructuring transactions are recorded when services for the transactions are determined to be substantially completed, generally as set forth under the terms of the engagement. Transaction-related expenses, primarily consisting of legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related investment banking transaction revenue. Underwriting revenues are presented net of related expenses. Non-reimbursed expenses associated with advisory transactions are recorded within Non-interest expenses.

Commissions.    The Company generates commissions from executing and clearing customer transactions on stock, options and futures markets. Commission revenues are recognized in the accounts on trade date.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Asset Management, Distribution and Administration Fees.    Asset management, distribution and administration fees are recognized over the relevant contract period. Sales commissions paid by the Company in connection with the sale of certain classes of shares of its open-end mutual fund products are accounted for as deferred commission assets. The Company periodically tests the deferred commission assets for recoverability based on cash flows expected to be received in future periods. In certain management fee arrangements, the Company is entitled to receive performance-based fees (also referred to as incentive fees) when the return on assets under management exceeds certain benchmark returns or other performance targets. In such arrangements, performance fee revenue is accrued (or reversed) quarterly based on measuring account/fund performance to date versus the performance benchmark stated in the investment management agreement. Performance-based fees are recorded within Principal transactions—investment revenues or Asset management, distribution and administration fees depending on the nature of the arrangement.

Principal Transactions.    See “Financial Instruments and Fair Value” below for principal transactions revenue recognition discussions.

Financial Instruments and Fair Value.

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

Financial Instruments Measured at Fair Value.    All of the instruments within Financial instruments owned and Financial instruments sold, not yet purchased, are measured at fair value, either through the fair value option election (discussed below) or as required by other accounting guidance. These financial instruments primarily represent the Company’s trading and investment activities and include both cash and derivative products. In addition, certain debt securities classified as Securities available for sale are measured at fair value in accordance with accounting guidance for certain investments in debt and equity securities. Furthermore, Securities received as collateral and Obligation to return securities received as collateral are measured at fair value as required by other accounting guidance. Additionally, certain Commercial paper and other short-term borrowings (primarily structured notes), certain Deposits, Other secured financings and certain Long-term borrowings (primarily structured notes and certain junior subordinated debentures) are measured at fair value through the fair value option election.

Gains and losses on all of these instruments carried at fair value are reflected in Principal transactions—Trading revenues, Principal transactions—Investment revenues or Investment banking revenues in the condensed consolidated statements of income, except for Securities available for sale (see “Securities Available for Sale” section herein and Note 4) and derivatives accounted for as hedges (see “Hedge Accounting” section herein and Note 9). Interest income and expense are recorded within the condensed consolidated statements of income depending on the nature of the instrument and related market conventions. When interest is included as a component of the instruments’ fair value, interest is included within Principal transactions—Trading or Principal transactions—Investments. Otherwise, it is included within Interest income or Interest expense. Dividend income is recorded in Principal transactions—Trading or Principal transactions—Investments depending on the business activity. The fair value of over-the-counter (“OTC”) financial instruments, including derivative contracts related to financial instruments and commodities, is presented in the accompanying condensed consolidated statements of financial condition on a net-by-counterparty basis, when appropriate. Additionally, the Company nets fair value of cash collateral paid or received against fair value amounts recognized for net derivative positions executed with the same counterparty under the same master netting arrangement.

Fair Value Option.    The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

new basis of accounting for that instrument. The Company applies the fair value option for eligible instruments, including certain loans and lending commitments, certain equity method investments, certain structured notes, certain junior subordinated debentures, certain time deposits and certain other secured financings.

Fair Value Measurement—Definition and Hierarchy.    Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions other market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

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

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

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

The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3.

The Company considers prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 (see Note 3). In addition, a downturn in market conditions could lead to further declines in the valuation of many instruments.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Valuation Techniques.    Many cash and OTC contracts have bid and ask prices that can be observed in the marketplace. Bid prices reflect the highest price that a party is willing to pay for an asset. Ask prices represent the lowest price that a party is willing to accept for an asset. For financial instruments whose inputs are based on bid-ask prices, the Company does not require that the fair value estimate always be a predetermined point in the bid-ask range. The Company’s policy is to allow for mid-market pricing and adjusting to the point within the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

bid-ask range that meets the Company’s best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

Fair value for many cash and OTC contracts is derived using pricing models. Pricing models take into account the contract terms (including maturity) as well as multiple inputs, including, where applicable, commodity prices, equity prices, interest rate yield curves, credit curves, correlation, creditworthiness of the counterparty, option volatility and currency rates. Where appropriate, valuation adjustments are made to account for various factors such as liquidity risk (bid-ask adjustments), credit quality and model uncertainty. Adjustments for liquidity risk adjust model derived mid-market levels of Level 2 and Level 3 financial instruments for the bid-mid or mid-ask spread required to properly reflect the exit price of a risk position. Bid-mid and mid-ask spreads are marked to levels observed in trade activity, broker quotes or other external third-party data. Where these spreads are unobservable for the particular position in question, spreads are derived from observable levels of similar positions. The Company applies credit-related valuation adjustments to its short-term and long-term borrowings (including structured notes and junior subordinated debentures) for which the fair value option was elected and to OTC derivatives. The Company considers the impact of changes in its own credit spreads based upon observations of the Company’s secondary bond market spreads when measuring fair value for short-term and long-term borrowings. For OTC derivatives, the impact of changes in both the Company’s and the counterparty’s credit standing is considered when measuring fair value. In determining the expected exposure, the Company simulates the distribution of the future exposure to a counterparty, then applies market-based default probabilities to the future exposure, leveraging external third-party credit default swap (“CDS”) spread data. Where CDS spread data is unavailable for a specific counterparty, bond market spreads, CDS spread data based on the counterparty’s credit rating or CDS spread data that references a comparable counterparty may be utilized. The Company also considers collateral held and legally enforceable master netting agreements that mitigate the Company’s exposure to each counterparty. Adjustments for model uncertainty are taken for positions whose underlying models are reliant on significant inputs that are neither directly nor indirectly observable, hence requiring reliance on established theoretical concepts in their derivation. These adjustments are derived by making assessments of the possible degree of variability using statistical approaches and market-based information where possible. The Company generally subjects all valuations and models to a review process initially and on a periodic basis thereafter.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.

See Note 3 for a description of valuation techniques applied to the major categories of financial instruments measured at fair value.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis.    Certain of the Company’s assets are measured at fair value on a non-recurring basis. The Company incurs losses or gains for any adjustments of these assets to fair value. A downturn in market conditions could result in impairment charges in future periods.

For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using various valuation approaches. The same hierarchy as described above, which maximizes the use of observable inputs and minimizes the use of unobservable inputs, by generally requiring that the observable inputs be used when available, is used in measuring fair value for these items.

For further information on financial assets and liabilities that are measured at fair value on a recurring and non-recurring basis, see Note 3.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Hedge Accounting.

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

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

For further information on derivative instruments and hedging activities, see Note 9.

Condensed Consolidated Statements of Cash Flows.

For purposes of the condensed consolidated statements of cash flows, cash and cash equivalents consist of Cash and due from banks and Interest bearing deposits with banks, which are highly liquid investments with original maturities of three months or less and readily convertible to known amounts of cash.

Repurchase and Securities Lending Transactions

Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are generally treated as collateralized financings. Securities purchased under agreements to resell (“reverse repurchase agreements”) and Securities sold under agreements to repurchase (“repurchase agreements”) are carried on the condensed consolidated statements of financial condition at the amounts at which the securities will be subsequently sold or repurchased, plus accrued interest. Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Where appropriate, transactions with the same counterparty are reported on a net basis.

Securitization Activities.

The Company engages in securitization activities related to commercial and residential mortgage loans, corporate bonds and loans, U.S. agency collateralized mortgage obligations and other types of financial assets (see Note 6). Generally, such transfers of financial assets are accounted for as sales when the Company has relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests based upon their respective fair values at the date of sale. Transfers that are not accounted for as sales are treated as secured financings (“failed sales”).

Earnings per Common Share.

Basic earnings per common share (“EPS”) is computed by dividing income available to Morgan Stanley common shareholders by the weighted average number of common shares outstanding for the period. Income available to Morgan Stanley common shareholders represents net income applicable to Morgan Stanley reduced by preferred stock dividends, amortization and the acceleration of discounts on preferred stock issued and allocations of earnings to participating securities. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement eligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive securities.

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MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effective October 13, 2008, as a result of an adjustment to Equity Units sold to a wholly owned subsidiary of China Investment Corporation Ltd. (“CIC”), the Company calculates EPS in accordance with the accounting guidance for determining EPS for participating securities. The accounting guidance for participating securities and the two-class method of calculating EPS addresses the computation of EPS by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company along with common shareholders according to a predetermined formula. The two-class method requires the Company to present EPS as if all of the earnings for the period are distributed to Morgan Stanley common shareholders and any participating securities, regardless of whether any actual dividends or distributions are made. The amount allocated to the participating securities is based upon the contractual terms of their respective contract and is reflected as a reduction to “Net income applicable to Morgan Stanley common shareholders” for both the Company’s basic and diluted EPS calculations (see Note 13). The two-class method does not impact the Company’s actual net income applicable to Morgan Stanley or other financial results. Unless contractually required by the terms of the participating securities, no losses are allocated to participating securities for purposes of the EPS calculation under the two-class method.

Under current accounting guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. Share-based payment awards that pay dividend equivalents subject to vesting are not deemed participating securities and are included in diluted shares outstanding (if dilutive) under the treasury stock method.

Goodwill and Intangible Assets.

Goodwill and indefinite-lived intangible assets are not amortized and are reviewed annually (or more frequently when certain events or circumstances exist) for impairment. Other intangible assets are amortized over their estimated useful lives and reviewed for impairment.

Deferred Compensation Arrangements.

Deferred Compensation Plans.    The Company maintains various deferred compensation plans for the benefit of certain employees that provide a return to the participating employees based upon the performance of various referenced investments. The Company often invests directly, as a principal, in such referenced investments related to its obligations to perform under the deferred compensation plans. Changes in value of such investments made by the Company are recorded primarily in Principal transactions—Investments. Expenses associated with the related deferred compensation plans are recorded in Compensation and benefits.

Employee Loans.

At March 31, 2010 and December 31, 2009, the Company had $5.8 billion and $3.5 billion, respectively, of loans outstanding primarily to certain MSSB employees that are included in Receivables—Fees, interest and other on the condensed consolidated statement of financial condition. These loans are full-recourse, require periodic payments and have repayment terms ranging from 4 to 12 years.

Securities Available for Sale.

In the first quarter of 2010, the Company established a portfolio of debt securities that are classified as securities available for sale (“AFS”). AFS securities are reported at fair value in the condensed consolidated statement of financial condition with unrealized gains and losses reported in Accumulated other comprehensive income (loss), (net of tax). Interest income, including amortization of premiums and accretion of discounts, is included in

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

interest income in the condensed consolidated statement of income. Realized gains and losses on AFS securities sale are reported in earnings (see Note 4). The Company utilizes the “first-in, first-out” method as the basis for determining the cost of AFS securities.

Other-than-temporary impairment.    The Company evaluates and accounts for impairment of securities in accordance with accounting guidance for investments in debt and equity securities. AFS securities in unrealized loss positions, resulting from the current fair value of a security being less than amortized cost, are analyzed as part of the Company’s ongoing assessment of other-than-temporary impairment (“OTTI”). OTTI is recognized in earnings if the Company has the intent to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis as of the reporting date. For those securities the Company does not expect to sell or expect to be required to sell, the Company must evaluate whether it expects to recover the entire amortized cost basis of the security. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. Unrealized losses relating to factors other than credit are recorded in Accumulated other comprehensive income (loss), net of tax.

Accounting Developments.

Transfers of Financial Assets and Extinguishments of Liabilities and Consolidation of Variable Interest Entities.    In June 2009, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance which changed the way entities account for securitizations and special-purpose entities. The accounting guidance amended the accounting for transfers of financial assets and requires additional disclosures about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminated the concept of a QSPE and changed the requirements for derecognizing financial assets.

The accounting guidance also amended the accounting for consolidation and changed how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. In February 2010, the FASB finalized a deferral of these accounting changes, effective January 1, 2010, for certain interests in investment companies or in entities qualifying for accounting purposes as investment companies (the “Deferral”). The Company will continue to analyze consolidation under other existing authoritative guidance for entities subject to the Deferral. The adoption of the accounting guidance on January 1, 2010 did not have a material impact on the Company’s condensed consolidated statement of financial condition.

2. Morgan Stanley Smith Barney Holdings LLC.

Smith Barney.    On May 31, 2009, the Company and Citigroup Inc. (“Citi”) consummated the combination of the Company’s Global Wealth Management Group and the businesses of Citi’s Smith Barney in the U.S., Quilter Holdings Ltd (“Quilter”) in the U.K., and Smith Barney Australia (“Smith Barney”). In addition to the Company’s contribution of respective businesses to MSSB, the Company paid Citi $2,755 million in cash. The combined businesses operate as Morgan Stanley Smith Barney. Pursuant to the terms of the amended contribution agreement, dated at May 29, 2009, certain businesses of Smith Barney and Morgan Stanley will be contributed to MSSB subsequent to May 31, 2009 (the “delayed contribution businesses”). Morgan Stanley and contribution businesses until they are transferred to MSSB and gains and losses from such businesses will be allocated to the Company’s and Citi’s respective share of MSSB’s gains and losses. The Company owns 51% and Citi owns 49% of MSSB.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At May 31, 2009, the Company included MSSB in its condensed consolidated financial statements. The results of MSSB are included within the Global Wealth Management Group business segment. See Note 3 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K for further information on Smith Barney.

Citi Managed Futures.    Citi contributed its managed futures business and certain related proprietary trading positions to MSSB on July 31, 2009 (“Citi Managed Futures”). The Company paid Citi approximately $300 million in cash in connection with this transfer. At July 31, 2009, Citi Managed Futures was wholly-owned and consolidated by MSSB, of which the Company owns 51% and Citi owns 49%.

See Note 3 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K for further information on Citi Managed Futures.

Pro forma condensed combined financial information (unaudited).

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company as they may have appeared if the closing of MSSB and Citi Managed Futures had been completed on January 1, 2009 (dollars in millions, except share data).

	Three Months Ended March  31, 2009
	(unaudited)
Net revenues	$	4,560
Total non-interest expenses		5,076
Loss from continuing operations before income taxes		(516	)
Benefit from income taxes		(574	)
Income from continuing operations		58
Discontinued operations:
Loss from discontinued operations		(255	)
Benefit from income taxes		(100	)
Net loss from discontinued operations		(155	)
Net loss		(97	)
Net income applicable to non-controlling interests		15
Net loss applicable to Morgan Stanley	$	(112	)
Loss applicable to Morgan Stanley common shareholders	$	(513	)
Loss per basic common share:
Loss from continuing operations	$	(0.35	)
Loss on discontinued operations		(0.16	)
Loss per basic common share	$	(0.51	)
Loss per diluted common share:
Loss from continuing operations	$	(0.35	)
Loss on discontinued operations		(0.16	)
Loss per diluted common share	$	(0.51	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the actual financial results of the Company had the closing of Smith Barney and Citi Managed Futures been completed on January 1, 2009, nor is it indicative of the results of operations in future periods. Included in the unaudited pro forma combined financial information for the quarter ended March 31, 2009 were pro forma adjustments to reflect the results of operations of both Smith Barney and Citi Managed Futures as well as the impact of amortizing certain acquisition accounting adjustments such as amortizable intangible assets. The pro forma condensed financial information does not indicate the impact of possible business model changes nor does it consider any potential impacts of market conditions, expense efficiencies or other factors.

3. Fair Value Disclosures.

Fair Value Measurements.

A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis follows.

Financial Instruments Owned and Financial Instruments Sold, Not Yet Purchased

U.S. Government and Agency Securities

• U.S. Treasury Securities.    U.S. treasury securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. treasury securities are generally categorized in Level 1 of the fair value hierarchy.

• U.S. Agency Securities.    U.S. agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. Non-callable agency issued debt securities are generally valued using quoted market prices. Callable agency issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. Mortgage pass-throughs include mortgage pass-throughs and forward settling mortgage pools. The fair value of mortgage pass-throughs are model driven based on spreads of the comparable To-be-announced (“TBA”) security. Actively traded non-callable agency issued debt securities are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities and mortgage pass-throughs are generally categorized in Level 2 of the fair value hierarchy.

Other Sovereign Government Obligations

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

Corporate and Other Debt

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

• Residential Mortgage-Backed Securities (“RMBS”), Commercial Mortgage-Backed Securities (“CMBS”), and other Asset-Backed Securities (“ABS”).    RMBS, CMBS and other ABS may be valued based on price or spread data obtained from observed transactions or independent external parties such as

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vendors or brokers. When position-specific external price data are not observable, the fair value determination may require benchmarking to similar instruments and/or analyzing expected credit losses, default and recovery rates. In evaluating the fair value of each security, the Company considers security collateral-specific attributes including payment priority, credit enhancement levels, type of collateral, delinquency rates and loss severity among other factors. In addition for RMBS borrowers, FICO scores and the level of documentation for the loan are also considered. Market standard models, such as Intex, Trepp or others, may be deployed to model the specific collateral compositions and cash flow structure of each deal. Key inputs to these models are market spreads, forecasted credit losses, default and prepayments rates for each asset category. Valuation levels of RMBS and CMBS indices are also used as an additional data point for benchmarking purposes or to price outright index positions.

Fair value for retained interests in securitized financial assets (in the form of one or more tranches of the securitization) is determined using observable prices or, in cases where observable prices are not available for certain retained interests, the Company estimates fair value based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved.

RMBS, CMBS and other ABS, including retained interests in these securitized financial assets, are categorized in Level 3 if external prices or spread inputs are unobservable or if the comparability assessment involves significant subjectivity related to property type differences, cash flows, performance and other inputs; otherwise, they are categorized in Level 2 of the fair value hierarchy.

• Corporate Bonds.    The fair value of corporate bonds is estimated using recently executed transactions, market price quotations (where observable), bond spreads or credit default swap spreads obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments. The spread data used are for the same maturity as the bond. If the spread data does not reference the issuer, then data that reference a comparable issuer are used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name credit default swap spreads and recovery rates as significant inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where prices, spreads or any of the other aforementioned key inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

• Collateralized Debt Obligations (“CDOs”).    The Company holds cash CDOs that typically reference a tranche of an underlying synthetic portfolio of single name credit default swaps. The collateral is usually ABS or other corporate bonds. Credit correlation, a primary input used to determine the fair value of a cash CDO, is usually unobservable and derived using a benchmarking technique. The other model inputs such as credit spreads, including collateral spreads, and interest rates are typically observable. CDOs are categorized in Level 2 of the fair value hierarchy when the credit correlation input is insignificant. In instances where the credit correlation input is deemed to be significant, these instruments are categorized in Level 3 of the fair value hierarchy.

• Corporate Loans and Lending Commitments.    The fair value of corporate loans is estimated using recently executed transactions, market price quotations (where observable), implied yields from comparable debt, and market observable credit default swap spread levels obtained from independent external parties such as vendors and brokers adjusted for any basis difference between cash and derivative instruments, along with proprietary valuation models and default recovery analysis where such transactions and quotations are unobservable. The fair value of contingent corporate lending commitments is estimated by using executed transactions on comparable loans and the anticipated market price based on pricing indications from syndicate banks and customers. The valuation of these commitments also takes into account certain fee income. Corporate loans and lending commitments are

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generally categorized in Level 2 of the fair value hierarchy; in instances where prices or significant spread inputs are unobservable, they are categorized in Level 3 of the fair value hierarchy.

• Mortgage Loans.    Mortgage loans are valued using prices based on transactional data for identical or comparable instruments. Where observable prices are not available, the Company estimates fair value based on benchmarking to prices and rates observed in the primary market for similar loan or borrower types, or based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved. Due to the subjectivity involved in comparability assessment related to mortgage loan vintage, geographical concentration, prepayment speed and projected loss assumptions, the majority of loans are classified in Level 3 of the fair value hierarchy.

• Auction Rate Securities (“ARS”).    The Company primarily holds investments in Student Loan Auction Rate Securities (“SLARS”) and Municipal Auction Rate Securities (“MARS”) with interest rates that are reset through periodic auctions. SLARS are ABS backed by pools of student loans. MARS are municipal bonds often wrapped by municipal bond insurance. ARS were historically traded and valued as floating rate notes, priced at par due to the auction mechanism. Beginning in fiscal 2008, uncertainties in the credit markets have resulted in auctions failing for certain types of ARS. Once the auctions failed, ARS could no longer be valued using observations of auction market prices. Accordingly, the fair value of ARS is determined using independent external market data where available and an internally developed methodology to discount for the lack of liquidity and non-performance risk in the current market environment.

Inputs that impact the valuation of SLARS are the underlying collateral types, level of seniority in the capital structure, amount of leverage in each structure, credit rating and liquidity considerations. Inputs that impact the valuation of MARS are independent external market data, the maximum rate, quality of underlying issuers/insurers and evidence of issuer calls. MARS are generally categorized in Level 2 as the valuation technique relies on observable external data. The majority of SLARS are generally categorized in Level 3 of the fair value hierarchy.

Corporate Equities.

• Exchange-Traded Equity Securities.    Exchange-traded equity securities are generally valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied and they are categorized in Level 1 of the fair value hierarchy; otherwise, they are categorized in Level 2.

Derivative and Other Contracts.

• Listed Derivative Contracts.    Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to OTC derivatives; they are generally categorized in Level 2 of the fair value hierarchy.

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

Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques, and model inputs from comparable benchmarks, including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material subjectivity

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swaps, certain option contracts and certain credit default swaps. In the case of more established derivative products, the pricing models used by the Company are widely accepted by the financial services industry. A substantial majority of OTC derivative products valued by the Company using pricing models fall into this category and are categorized within Level 2 of the fair value hierarchy.

Other derivative products, including complex products that have become illiquid, require more judgment in the implementation of the valuation technique applied due to the complexity of the valuation assumptions and the reduced observability of inputs. This includes derivative interests in certain mortgage-related CDO securities, basket credit default swaps, CDO-squared positions (a CDO-squared is a special purpose vehicle that issues interests, or tranches, that are backed by tranches issued by other CDOs) and certain types of ABS credit default swaps where direct trading activity or quotes are unobservable. These instruments involve significant unobservable inputs and are categorized in Level 3 of the fair value hierarchy.

Derivative interests in complex mortgage-related CDOs and ABS credit default swaps, for which observability of external price data is extremely limited, are valued based on an evaluation of the market and model input parameters sourced from similar positions as indicated by primary and secondary market activity. Each position is evaluated independently taking into consideration the underlying collateral performance and pricing, behavior of the tranche under various cumulative loss and prepayment scenarios, deal structures (e.g., non-amortizing reference obligations, call features) and liquidity. While these factors may be supported by historical and actual external observations, the determination of their value as it relates to specific positions nevertheless requires significant judgment.

For basket credit default swaps and CDO-squared positions, the correlation input between reference credits is unobservable for each specific swap and is benchmarked to standardized proxy baskets for which correlation data are available. The other model inputs such as credit spread, interest rates and recovery rates are observable. In instances where the correlation input is deemed to be significant, these instruments are categorized in Level 3 of the fair value hierarchy.

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

For further information on derivative instruments and hedging activities, see Note 9.

Investments.

• The Company’s investments include direct private equity investments and investments in private equity funds, real estate funds and hedge funds. Initially, the transaction price is generally considered by the Company as the exit price and is the Company’s best estimate of fair value.

After initial recognition, in determining the fair value of internally and externally managed funds, the Company considers the net asset value of the fund provided by the fund manager to be the best estimate

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of fair value. For direct private equity investments and privately held investments within internally managed funds, fair value after initial recognition is based on an assessment of each underlying investment, considering rounds of financing and third-party transactions, discounted cash flow analyses and market-based information, including comparable company transactions, trading multiples and changes in market outlook, among other factors.

Investments in private equity and real estate funds are generally categorized in Level 3 of the fair value hierarchy. Investments in hedge funds that are redeemable at the measurement date or in the near future, are categorized in Level 2 of the fair value hierarchy; otherwise they are categorized in Level 3.

Physical Commodities.

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

Securities Available for Sale.

• Securities available for sale primarily include U.S. government and agency securities. These securities are valued using quoted prices in active markets and, accordingly, are categorized in Level 1 of the fair value hierarchy (see Note 4).

Commercial Paper and Other Short-term Borrowings/Long-Term Borrowings.

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

Deposits.

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

The following fair value hierarchy tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009. See Note 1 for a discussion of the Company’s policies regarding this fair value hierarchy.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2010

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Counterparty and Cash Collateral Netting			Balance at March 31, 2010
	(dollars in millions)
Assets
Financial instruments owned:
U.S. government and agency securities:
U.S. Treasury securities	$	27,276		$	—		$	—		$	—		$	27,276
U.S. agency securities		11,105			30,892			1			—			41,998
Total U.S. government and agency securities		38,381			30,892			1			—			69,274
Other sovereign government obligations		25,186			6,075			80			—			31,341
Corporate and other debt:
State and municipal securities		—			4,637			398			—			5,035
Residential mortgage-backed securities		—			3,466			625			—			4,091
Commercial mortgage-backed securities		—			2,247			779			—			3,026
Asset-backed securities		—			2,729			149			—			2,878
Corporate bonds		—			39,677			1,145			—			40,822
Collateralized debt obligations		—			2,081			1,512			—			3,593
Loans and lending commitments		—			14,267			13,503			—			27,770
Other debt		—			1,056			1,921			—			2,977
Total corporate and other debt		—			70,160			20,032			—			90,192
Corporate equities(1)		62,328			4,727			536			—			67,591
Derivatives and other contracts:
Interest rate contracts		1,743			600,743			930			—			603,416
Credit contracts		—			105,339			19,815			—			125,154
Foreign exchange rate contracts		2			49,193			453			—			49,648
Equity contracts		2,725			33,945			587			—			37,257
Commodity contracts		6,778			65,397			1,729			—			73,904
Other		—			93			282			—			375
Netting(2)		(9,769	)		(752,856	)		(9,683	)		(69,540	)		(841,848	)
Total derivatives and other contracts		1,479			101,854			14,113			(69,540	)		47,906
Investments		934			1,002			7,546			—			9,482
Physical commodities		—			4,898			—			—			4,898
Total financial instruments owned		128,308			219,608			42,308			(69,540	)		320,684
Securities available for sale		18,637			—			—			—			18,637
Securities received as collateral		16,011			880			—			—			16,891
Intangible assets(3)		—			—			175			—			175
Liabilities
Commercial paper and other short-term borrowings	$	—		$	1,220		$	300		$	—		$	1,520
Deposits		—			4,774			15			—			4,789
Financial instruments sold, not yet purchased:
U.S. government and agency securities:
U.S. Treasury securities		23,636			1			—			—			23,637
U.S. agency securities		2,486			97			—			—			2,583
Total U.S. government and agency securities		26,122			98			—			—			26,220
Other sovereign government obligations		20,068			2,686			—			—			22,754
Corporate and other debt:
State and municipal securities		—			4			—			—			4
Commercial mortgage-backed securities		—			69			—			—			69
Asset-backed securities		—			52			4			—			56
Corporate bonds		—			7,972			17			—			7,989
Unfunded lending commitments		—			343			213			—			556
Other debt		—			652			317			—			969
Total corporate and other debt		—			9,092			551			—			9,643
Corporate equities(1)		27,717			1,679			13			—			29,409
Derivatives and other contracts:
Interest rate contracts		1,689			572,678			546			—			574,913
Credit contracts		—			95,200			11,863			—			107,063
Foreign exchange rate contracts		3			50,399			247			—			50,649
Equity contracts		2,524			40,932			1,288			—			44,744
Commodity contracts		7,636			63,918			1,639			—			73,193
Other		—			390			861			—			1,251
Netting(2)		(9,769	)		(752,856	)		(9,683	)		(41,728	)		(814,036	)
Total derivative and other contracts		2,083			70,661			6,761			(41,728	)		37,777
Physical commodities		—			39			—			—			39
Total financial instruments sold, not yet purchased		75,990			84,255			7,325			(41,728	)		125,842
Obligation to return securities received as collateral		16,011			880			—			—			16,891
Other secured financings		—			7,749			1,811			—			9,560
Long-term borrowings		—			31,645			6,728			—			38,373

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1) The Company holds or sells short for trading purposes, equity securities issued by entities in diverse industries and of varying size.

(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 9.

(3) Amount represents mortgage servicing rights (“MSRs”) accounted for at fair value. See Note 6 for further information on MSRs.

Transfers Between Level 1 and Level 2 During the Quarter Ended March 31, 2010.

Financial instruments owned—Derivative and other contracts and Financial instruments sold, not yet purchased—Derivative and other contracts.    During the quarter ended March 31, 2010, the Company reclassified approximately $1.3 billion of derivative assets and approximately $1.5 billion of derivative liabilities from Level 2 to Level 1 as these listed derivatives became actively traded and were valued based on quoted prices from the exchange.

Financial instruments owned—Corporate equities.    During the quarter ended March 31, 2010, the Company reclassified approximately $1.0 billion of certain Corporate equities from Level 2 to Level 1 as transactions in these securities occurred with sufficient frequency and volume to constitute an active market.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Balance at December 31, 2009
	(dollars in millions)
Assets
Financial instruments owned:
U.S. government and agency securities:
U.S. Treasury securities	$	15,394	$	—	$	—	$	—		$	15,394
U.S. agency securities		19,670		27,115		36		—			46,821
Total U.S. government and agency securities		35,064		27,115		36		—			62,215
Other sovereign government obligations		21,080		4,362		3		—			25,445
Corporate and other debt:
State and municipal securities		—		3,234		713		—			3,947
Residential mortgage-backed securities		—		4,285		818		—			5,103
Commercial mortgage-backed securities		—		2,930		1,573		—			4,503
Asset-backed securities		—		4,797		591		—			5,388
Corporate bonds		—		37,363		1,038		—			38,401
Collateralized debt obligations		—		1,539		1,553		—			3,092
Loans and lending commitments		—		13,759		12,506		—			26,265
Other debt		—		2,093		1,662		—			3,755
Total corporate and other debt		—		70,000		20,454		—			90,454
Corporate equities(1)		49,732		7,700		536		—			57,968
Derivatives and other contracts(2)		2,310		102,466		14,549		(70,244	)		49,081
Investments		743		930		7,613		—			9,286
Physical commodities		—		5,329		—		—			5,329
Total financial instruments owned		108,929		217,902		43,191		(70,244	)		299,778
Securities received as collateral		12,778		855		23		—			13,656
Intangible assets(3)		—		—		137		—			137
Liabilities
Commercial paper and other short-term borrowings	$	—	$	791	$	—	$	—		$	791
Deposits		—		4,943		24		—			4,967
Financial instruments sold, not yet purchased:
U.S. government and agency securities:
U.S. Treasury securities		17,907		1		—		—			17,908
U.S. agency securities		2,573		22		—		—			2,595
Total U.S. government and agency securities		20,480		23		—		—			20,503
Other sovereign government obligations		16,747		1,497		—		—			18,244
Corporate and other debt:
State and municipal securities		—		9		—		—			9
Commercial mortgage-backed securities		—		8		—		—			8
Asset-backed securities		—		63		4		—			67
Corporate bonds		—		5,812		29		—			5,841
Collateralized debt obligations		—		—		3		—			3
Unfunded lending commitments		—		732		252		—			984
Other debt		—		483		431		—			914
Total corporate and other debt		—		7,107		719		—			7,826
Corporate equities(1)		18,125		4,472		4		—			22,601
Derivative and other contracts(2)		3,383		67,847		6,203		(39,224	)		38,209
Total financial instruments sold, not yet purchased		58,735		80,946		6,926		(39,224	)		107,383
Obligation to return securities received as collateral		12,778		855		23		—			13,656
Other secured financings		—		6,570		1,532		—			8,102
Long-term borrowings		—		30,745		6,865		—			37,610

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(1) The Company holds or sells short for trading purposes, equity securities issued by entities in diverse industries and of varying size.

(2) For positions with the same counterparty that cross over the levels of the fair value hierarchy, both counterparty netting and cash collateral netting are included in the column titled “Counterparty and Cash Collateral Netting.” For contracts with the same counterparty, counterparty netting among positions classified within the same level is included within that level. For further information on derivative instruments and hedging activities, see Note 9.

(3) Amount represents mortgage servicing rights (“MSRs”) accounted for at fair value. See Note 6 for further information on MSRs.

The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2010 and 2009, respectively. Level 3 instruments may be hedged with instruments classified in Level 1 and Level 2. As a result, the realized and unrealized gains (losses) for assets and liabilities within the Level 3 category presented in the tables below do not reflect the related realized and unrealized gains (losses) on hedging instruments that have been classified by the Company within the Level 1 and/or Level 2 categories. Additionally, both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

For assets and liabilities that were transferred into Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred into Level 3 at the beginning of the period; similarly, for assets and liabilities that were transferred out of Level 3 during the period, gains (losses) are presented as if the assets or liabilities had been transferred out at the beginning of the period.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2010

	Beginning Balance at December 31, 2009			Total Realized and Unrealized Gains (Losses)(1)			Purchases, Sales, Other Settlements and Issuances, net			Net Transfers In and/or (Out) of Level 3			Ending Balance at March 31, 2010			Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2010(2)
	(dollars in millions)
Assets
Financial instruments owned:
U.S. agency securities	$	36		$	—		$	(35	)	$	—		$	1		$	—
Other sovereign government obligations		3			2			76			(1	)		80			1
Corporate and other debt:
State and municipal securities		713			(18	)		(297	)		—			398			1
Residential mortgage-backed securities		818			24			(220	)		3			625			19
Commercial mortgage-backed securities		1,573			109			(860	)		(43	)		779			42
Asset-backed securities		591			1			(440	)		(3	)		149			10
Corporate bonds		1,038			(55	)		128			34			1,145			(48	)
Collateralized debt obligations		1,553			133			(171	)		(3	)		1,512			121
Loans and lending commitments		12,506			155			572			270			13,503			143
Other debt		1,662			252			8			(1	)		1,921			244
Total corporate and other debt		20,454			601			(1,280	)		257			20,032			532
Corporate equities		536			70			(7	)		(63	)		536			56
Net derivatives and other contracts:
Interest rate contracts		387			9			7			(19	)		384			1
Credit contracts		8,824			(434	)		96			(534	)		7,952			(352	)
Foreign exchange rate contracts		254			(285	)		201			36			206			(308	)
Equity contracts		(689	)		(96	)		58			26			(701	)		(88	)
Commodity contracts		7			(25	)		108			—			90			83
Other		(437	)		(147	)		4			1			(579	)		(113	)
Total net derivative and other contracts(3)		8,346			(978	)		474			(490	)		7,352			(777	)
Investments		7,613			56			19			(142	)		7,546			50
Securities received as collateral		23			—			(23	)		—			—			—
Intangible assets		137			38			—			—			175			30
Liabilities
Commercial paper and other short-term borrowings	$	—		$	—		$	300		$	—		$	300		$	—
Deposits		24			1			—			(8	)		15			1
Financial instruments sold, not yet purchased:
Corporate and other debt:
Asset-backed securities		4			—			—			—			4			—
Corporate bonds		29			(42	)		(79	)		25			17			(36	)
Collateralized debt obligations		3			—			(3	)		—			—			—
Unfunded lending commitments		252			(32	)		(71	)		—			213			(29	)
Other debt		431			25			(76	)		(13	)		317			24
Total corporate and other debt		719			(49	)		(229	)		12			551			(41	)
Corporate equities		4			(1	)		5			3			13			—
Obligation to return securities received as collateral		23			—			(23	)		—			—			—
Other secured financings		1,532			(104	)		175			—			1,811			(104	)
Long-term borrowings		6,865			5			45			(177	)		6,728			5

(1) Total realized and unrealized gains (losses) are primarily included in Principal transactions—Trading in the condensed consolidated statements of income except for $56 million related to Financial instruments owned—Investments, which is included in Principal transactions—Investments.

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(2) Amounts represent unrealized gains (losses) for the quarter ended March 31, 2010 related to assets and liabilities still outstanding at March 31, 2010.

(3) Net derivative and other contracts represent Financial instruments owned—Derivative and other contracts net of Financial instruments sold, not yet purchased—Derivative and other contracts. For further information on Derivative instruments and hedging activities, see Note 9.

Financial instruments owned—Corporate and other debt.    During the quarter ended March 31, 2010, the Company reclassified approximately $0.6 billion of certain Corporate and other debt, primarily corporate loans, from Level 3 to Level 2. The Company reclassified the corporate loans as external prices and/or spread inputs for these instruments became observable.

The Company also reclassified approximately $0.9 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction in market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments. The Company reclassified the corporate loans as external prices and/or spread inputs became unobservable.

Financial instruments owned—Net derivative and other contracts.    The net losses in Net derivative and other contracts were primarily driven by tightening of credit spreads on underlying reference entities of bespoke basket credit default swaps.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2009

	Beginning Balance at December 31, 2008		Total Realized and Unrealized Gains or (Losses)(1)			Purchases, Sales, Other Settlements and Issuances, net			Net Transfers In and/or (Out) of Level 3			Ending Balance at March 31, 2009		Unrealized Gains (Losses) for Level 3 Assets/ Liabilities Outstanding at March 31, 2009(2)
	(dollars in millions)
Assets
Financial instruments owned:
U.S. government and agency securities	$	127	$	(1	)	$	(86	)	$	(23	)	$	17	$	—
Other sovereign government obligations		1		(1	)		(1	)		3			2		(2	)
Corporate and other debt		34,918		(3,314	)		226			(342	)		31,488		(3,501	)
Corporate equities		976		(95	)		(231	)		296			946		(95	)
Net derivative and other contracts(3)		23,382		2,363			250			(9,474	)		16,521		3,132
Investments		9,698		(1,319	)		510			(55	)		8,834		(1,269	)
Securities received as collateral		30		—			(27	)		—			3		—
Intangible assets		184		(25	)		—			—			159		(25	)
Liabilities
Financial instruments sold, not yet purchased:
Corporate and other debt	$	3,808	$	(20	)	$	647		$	(2,525	)	$	1,950	$	(47	)
Corporate equities		27		20			44			23			74		4
Obligation to return securities received as collateral		30		—			(27	)		—			3		—
Other secured financings		6,148		1,053			(542	)		(289	)		4,264		1,053
Long-term borrowings		5,473		(129	)		83			(14	)		5,671		(129	)

(1) Total realized and unrealized gains (losses) are primarily included in Principal transactions—Trading in the condensed consolidated statements of income except for $(1,319) million related to Financial instruments owned—Investments, which is included in Principal transactions—Investments.

(2) Amounts represent unrealized gains (losses) for the quarter ended March 31, 2009 related to assets and liabilities still outstanding at March 31, 2009.

(3) Net derivative and other contracts represent Financial instruments owned—Derivative and other contracts net of Financial instruments sold, not yet purchased—Derivative and other contracts. For further information on derivative instruments and hedging activities, see Note 9.

Financial instruments owned—Corporate and other debt.    The net losses in Corporate and other debt were primarily driven by certain corporate loans and lending commitments, certain asset-backed securities, including residential and commercial mortgage loans, and certain commercial whole loans.

During the quarter ended March 31, 2009, the Company reclassified approximately $2.3 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to asset-backed securities and certain corporate loans. The reclassifications were due to a reduction in market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be

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utilized for the fair value measurement of these instruments. These unobservable inputs include, depending upon the position, assumptions to establish comparability to bonds, loans or swaps with observable price/spread levels, default recovery rates, forecasted credit losses and prepayment rates.

During the quarter ended March 31, 2009, the Company reclassified approximately $2.7 billion of certain Corporate and other debt from Level 3 to Level 2. These reclassifications primarily related to commercial mortgage-backed securities, subprime CDO and other subprime ABS securities. Their fair value was highly correlated with similar instruments in an observable market and, due to market deterioration, unobservable inputs were no longer deemed significant. In addition, certain corporate loans were reclassified as more liquidity re-entered the market and external prices and spread inputs for these instruments became observable.

Financial instruments owned—Net derivative and other contracts.    The net gains in Net derivative and other contracts were primarily driven by widening of credit spreads on underlying reference entities of single name credit default swaps.

During the quarter ended March 31, 2009, the Company reclassified approximately $9.6 billion of certain Derivatives and other contracts from Level 3 to Level 2. These reclassifications of certain Derivatives and other contracts were related to single name mortgage-related credit default swaps and credit default swaps on certain classes of CDOs. The primary reason for the reclassifications is that, due to market deterioration, unobservable inputs, such as correlation, for these derivative contracts were no longer deemed significant to the fair value measurement. In addition, certain corporate tranche-indexed credit default swaps were reclassified due to increased availability of transaction data, broker quotes and/or consensus pricing.

Financial instruments owned—Investments.    The net losses from investments were primarily related to investments associated with the Company’s real estate products and private equity portfolio.

Financial instruments sold, not yet purchased—Corporate and other debt.    During the quarter, the Company reclassified approximately $2.5 billion of certain Corporate and other debt from Level 3 to Level 2. These reclassifications primarily related to contracts referencing commercial mortgage-backed securities, subprime CDO and other subprime ABS securities. Their fair value was highly correlated with similar instruments in an observable market and, due to market deterioration, unobservable inputs were no longer deemed significant to the fair value measurement.

Other secured financings.    The net gains in Other secured financings were primarily due to net gains on liabilities resulting from securitizations recognized on balance sheet. These net gains are offset by net losses in Financial instruments owned—Corporate and other debt.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Investments that Calculate Net Asset Value.

The following table presents information about the Company’s investments in private equity funds, real estate funds and hedge funds measured at fair value based on net asset value at March 31, 2010 and December 31, 2009, respectively.

	At March 31, 2010				At December 31, 2009
	Fair Value		Unfunded Commitment		Fair Value		Unfunded Commitment
	(dollars in millions)
Private equity funds	$	1,814	$	1,171	$	1,728	$	1,251
Real estate funds		930		547		823		674
Hedge funds(1):
Long-short equity hedge funds		1,137		—		1,597		—
Fixed income/credit-related hedge funds		403		—		407		—
Event-driven hedge funds		149		—		146		—
Multi-strategy hedge funds		188		—		235		—
Total	$	4,621	$	1,718	$	4,936	$	1,925

(1) Fixed income/credit-related hedge funds, event-driven hedge funds, and multi-strategy hedge funds are redeemable at least on a quarterly basis with a notice period of ninety days or less. At March 31, 2010, approximately 48% of the fair value amount of long-short equity hedge funds is redeemable at least quarterly, 19% is redeemable every six months and 33% of these funds have a redemption frequency of greater than six months. At December 31, 2009, approximately 36% of the fair value amount of long-short equity hedge funds is redeemable at least quarterly, 15% is redeemable every six months and 49% of these funds have a redemption frequency of greater than six months. The notice period for long-short equity hedge funds is primarily ninety days or less.

Private Equity Funds.    Amount includes several private equity funds that pursue multiple strategies including leveraged buyouts, venture capital, infrastructure growth capital, distressed investments, and mezzanine capital. In addition, the funds may be structured with a focus on specific domestic or foreign geographic regions. These investments are generally not redeemable with the funds. Instead, the nature of the investments in this category is that distributions are received through the liquidation of the underlying assets of the fund. At March 31, 2010, it is estimated that 30% of the fair value of the funds will be liquidated in the next five years, another 30% of the fair value of the funds will be liquidated between five to ten years and the remaining 40% of the fair value of the funds have a remaining life of greater than ten years.

Real Estate Funds.    Amount includes several real estate funds that invest in real estate assets such as commercial office buildings, retail properties, multi-family residential properties, developments, or hotels. In addition, the funds may be structured with a focus on specific geographic domestic or foreign regions. These investments are generally not redeemable with the funds. Distributions from each fund will be received as the underlying investments of the funds are liquidated. At March 31, 2010, it is estimated that 21% of fair value of the funds will be liquidated within the next five years, another 29% of the fair value of the funds will be liquidated between five to ten years and the remaining 50% of the fair value of the funds have a remaining life of greater than ten years.

Hedge Funds.    Investments in hedge funds may be subject to initial period lock-up restrictions or gates. A hedge fund lock-up provision is a provision which provides that, during a certain initial period, an investor may not make a withdrawal from the fund. The purpose of a gate is to restrict the level of redemptions that an investor in a particular hedge fund can demand on any redemption date.

• Long-short Equity Hedge Funds.    Amount includes investments in hedge funds that invest, long or short, in equities. Equity value and growth hedge funds purchase stocks perceived to be undervalued and sell

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

stocks perceived to be overvalued. Investments representing approximately 38% of the fair value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for 41% of investments subject to lock-up restrictions ranged from one to three years at March 31, 2010. The remaining restriction period for the other 59% of investments subject to lock-up restrictions was estimated to be greater than three years at March 31, 2010. Investments representing approximately 33% of the fair value of the investments in long-short equity hedge funds cannot be redeemed currently because an exit restriction has been imposed by the hedge fund manager. The restriction period for 86% of investments subject to an exit restriction is expected to be less than a year at March 31, 2010.

• Fixed Income/Credit-Related Hedge Funds.    Amount includes investments in hedge funds that employ long-short, distressed or relative value strategies in order to benefit from investments in undervalued or over-valued securities that are primarily debt or credit related. At March 31, 2010, investments representing approximately 85% of the fair value of the investments in fixed income/credit-related hedge funds cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments was two years or less at March 31, 2010.

• Event-Driven Hedge Funds.    Amount includes investments in hedge funds that invest in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buyouts. This may involve the simultaneous purchase of stock in companies being acquired, and the sale of stock in its acquirer, hoping to profit from the spread between the current market price and the ultimate purchase price of the target company. At March 31, 2010, investments representing approximately 98% of the value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for these investments was two years or less at March 31, 2010.

• Multi-strategy Hedge Funds.    Amount includes investments in hedge funds that pursue multiple strategies to realize short and long-term gains. Management of the hedge funds has the ability to overweight or underweight different strategies to best capitalize on current investment opportunities. At March 31, 2010, investments representing approximately 61% of the fair value of the investments in this category cannot be redeemed currently because the investments include certain initial period lock-up restrictions. The remaining restriction period for 58% of investments subject to lock-ups was two years or less at March 31, 2010. The remaining restriction period for the other 42% of investments subject to lock-up restrictions was estimated to be greater than three years at March 31, 2010.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value Option.

The Company elected the fair value option for certain eligible instruments that are risk managed on a fair value basis. The following tables present net gains (losses) due to changes in fair value for items measured at fair value pursuant to the fair value option election for the quarter ended March 31, 2010 and 2009.

	Principal Transactions- Trading			Interest Expense			(Losses) Gains Included in Net Revenues
	(dollars in millions)
Three months ended March 31, 2010
Commercial paper and other short-term borrowings	$	13		$	—		$	13
Deposits		(25	)		(47	)		(72	)
Long-term borrowings		(366	)		(202	)		(568	)
Three months ended March 31, 2009
Commercial paper and other short-term borrowings	$	84		$	—		$	84
Deposits		(87	)		(92	)		(179	)
Long-term borrowings		(1,405	)		(224	)		(1,629	)

In addition to the amounts in the above table, as discussed in Note 1, all of the instruments within Financial instruments owned or Financial instruments sold, not yet purchased are measured at fair value, either through the election of the fair value option, or as required by other accounting guidance.

The following tables present information on the Company’s short-term and long-term borrowings (including structured notes and junior subordinated debentures), loans and unfunded lending commitments for which the fair value option was elected:

Gains (Losses) Due to Changes in Instrument Specific Credit Spreads

	Three Months Ended March 31,
	2010			2009
	(dollars in millions)
Short-term and long-term borrowings(1)	$	53		$	(1,636	)
Loans(2)		316			(349	)
Unfunded lending commitments(3)		(21	)		2

(1) Gains (losses) were attributable to widening or (tightening), respectively, of the Company’s credit spreads and were determined based upon observations of the Company’s secondary bond market spreads. The remainder of changes in overall fair value of the short-term and long-term borrowings is attributable to changes in foreign currency exchange rates and interest rates and movements in the reference price or index for structured notes.

(2) Instrument-specific credit gains or (losses) were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates.

(3) Gains (losses) were generally determined based on the differential between estimated expected client and contractual yields at each respective period end.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amount by Which Contractual Principal Amount Exceeds Fair Value

	At March 31, 2010		At December 31, 2009
	(dollars in billions)
Short-term and long-term debt borrowings(1)	$	1.0	$	1.9
Loans(2)		23.6		24.4
Loans 90 or more days past due in non-accrual status or both(2)(3)		20.8		21.0

(1) These amounts do not include structured notes where the repayment of the initial principal amount fluctuates based on changes in the reference price or index.

(2) The majority of this difference between principal and fair value amounts emanates from the Company’s distressed debt trading business, which purchases distressed debt at amounts well below par.

(3) The aggregate fair value of loans that were in non-accrual status, which includes all loans 90 or more days past due, was $3.8 billion and $3.9 billion at March 31, 2010 and December 31, 2009, respectively. The aggregate fair value of loans that were 90 or more days past due was $0.8 billion and $0.7 billion at March 31, 2010 and December 31, 2009, respectively.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis.

Certain assets were measured at fair value on a non-recurring basis and are not included in the tables above. These assets may include loans, equity method investments, premises and equipment, intangible assets and real estate investments.

The following tables present, by caption on the condensed consolidated statement of financial condition, the fair value hierarchy for those assets measured at fair value on a non-recurring basis for which the Company recognized a non-recurring fair value adjustment for the quarter ended March 31, 2010 and 2009, respectively.

Three Months Ended March 31, 2010.

	Carrying Value at March 31, 2010		Fair Value Measurements Using:						Total Losses for the Three Months Ended March 31, 2010(1)
			Quoted Prices in Active Markets for Identical Assets (Level  1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in millions)
Loans(2)	$	634	$	—	$	—	$	634	$	(3	)
Other investments(3)		17		—		—		17		(5	)
Intangible assets(4)		5		—		—		5		(10	)
Total	$	656	$	—	$	—	$	656	$	(18	)

(1) Losses are recorded within Other expenses in the condensed consolidated statement of income except for fair value adjustments related to Loans and losses related to Other investments, which are included in Other revenues.

(2) Non-recurring change in fair value for loans held for investment were calculated based upon the fair value of the underlying collateral. The fair value of the collateral was determined using internal expected recovery models.

(3) Losses recorded were determined primarily using discounted cash flow models.

(4) Losses related to management contracts and were determined using discounted cash flow models.

In addition to the losses included in the table above, the Company incurred a loss of approximately $932 million in connection with the planned disposition of Revel (see Note 1). The loss related to Premises, equipment and software costs and was included in discontinued operations (see Note 18). The fair value of Revel, net of estimated costs to sell, included in Premises, equipment and software costs was approximately $240 million at March 31, 2010 and was classified in Level 3. Fair value was determined using discounted cash flow models.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

There were no liabilities measured at fair value on a non-recurring basis during the quarter ended March 31, 2010.

Three Months Ended March 31, 2009.

	Carrying Value at March 31, 2009		Fair Value Measurements Using:						Total Losses for the Three Months Ended March 31,  2009(1)
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in millions)
Loans(2)	$	386	$	—	$	—	$	386	$	(98	)
Other investments(3)		145		—		—		145		(4	)
Premises, equipment and software costs(3)		8		—		—		8		(5	)
Total	$	539	$	—	$	—	$	539	$	(107	)

(1) Losses are recorded within Other expenses in the condensed consolidated statement of income except for losses related to Loans and Other investments, which are included in Other revenues.

(2) Losses for loans held for investment were calculated based upon the fair value of the underlying collateral. The fair value of the collateral was determined using internal expected recovery models.

(3) Losses recorded were determined primarily using discounted cash flow models.

In addition to the impairment losses mentioned in the table above, impairment losses of approximately $171 million (of which $40 million related to Other investments, $6 million related to Intangible assets, and $125 million related to Other assets) were included in discontinued operations related to Crescent (see Note 18). The carrying value of Crescent assets subject to impairment at March 31, 2009 was $265 million (of which $18 million related to Other investments, $21 million related to Intangible assets and $226 million related to Other assets) all of which were classified in Level 3. Fair values were generally determined using discounted cash flow models or third-party appraisals and valuations.

There were no liabilities measured at fair value on a non-recurring basis during the quarter ended March 31, 2009.

Financial Instruments Not Measured at Fair Value.

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

The Company’s long-term borrowings are recorded at amortized amounts unless elected under the fair value option or designated as a hedged item in a fair value hedge. For long-term borrowings not measured at fair value, the fair value of the Company’s long-term borrowings was estimated using either quoted market prices or discounted cash flow analyses based on the Company’s current borrowing rates for similar types of borrowing

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

arrangements. At March 31, 2010, the carrying value of the Company’s long-term borrowings not measured at fair value was approximately $1.3 billion higher than fair value. At December 31, 2009, the carrying value of the Company’s long-term borrowings not measured at fair value was approximately $1.4 billion higher than fair value.

4. Securities Available for Sale.

In the first quarter of 2010, the Company purchased certain debt securities that are classified as AFS. The following table presents information about the Company’s AFS securities:

	At March 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses(1)		Other-than- temporary Impairment	Fair Value
	(dollars in millions)
Debt securities available for sale:
U.S. government and agency securities	$	18,671	$	—	$	34	$  —	$	18,637

(1) The unrealized losses are attributable to changes in interest rates since purchase. The Company does not intend to sell these securities or expect to be required to sell these securities prior to recovery of the amortized costs basis. In addition, the Company does not expect these securities to experience a credit loss given the explicit and implicit guarantee provided by the U.S. government.

The table below presents the fair value of investments in debt securities available for sale that have been in an unrealized loss position for less than 12 months or for 12 months or longer at March 31, 2010:

	Less than 12 months				12 months or longer				Total
At March 31, 2010	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(dollars in millions)
Debt securities available for sale:
U.S. government and agency securities	$	18,637	$	34	$	—	$	—	$	18,637	$	34

The following table presents the amortized cost and fair value of debt securities available for sale by contractual maturity dates at March 31, 2010:

At March 31, 2010	Amortized Cost		Fair Value		Yield
	(dollars in millions)
U.S. government and agency securities:
Due within 1 year	$	1,807	$	1,806	0.4	%
After 1 year but through 5 years		16,864		16,831	1.2	%
Total	$	18,671	$	18,637	1.1	%

5. Collateralized Transactions.

The Company pledges its financial instruments owned to collateralize repurchase agreements and other securities financings. Pledged financial instruments that can be sold or repledged by the secured party are identified as Financial instruments owned (pledged to various parties) in the condensed consolidated statements of financial

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condition. The carrying value and classification of financial instruments owned by the Company that have been loaned or pledged to counterparties where those counterparties do not have the right to sell or repledge the collateral were as follows:

	At March 31, 2010		At December 31, 2009
	(dollars in millions)
Financial instruments owned:
U.S. government and agency securities	$	16,395	$	18,376
Other sovereign government obligations		6,059		4,584
Corporate and other debt		10,482		13,111
Corporate equities		15,187		10,284
Total	$	48,123	$	46,355

The Company enters into reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance the Company’s inventory positions. The Company’s policy is generally to take possession of Securities purchased under agreements to resell. The Company also engages in securities financing transactions for customers through margin lending. Under these agreements and transactions, the Company either receives or provides collateral, including U.S. government and agency securities, other sovereign government obligations, corporate and other debt, and corporate equities. The Company receives collateral in the form of securities in connection with reverse repurchase agreements, securities borrowed and derivative transactions, and customer margin loans. In many cases, the Company is permitted to sell or repledge these securities held as collateral and use the securities to secure repurchase agreements, to enter into securities lending and derivative transactions or for delivery to counterparties to cover short positions. At March 31, 2010 and December 31, 2009, the fair value of financial instruments received as collateral where the Company is permitted to sell or repledge the securities was $507 billion and $429 billion, respectively, and the fair value of the portion that had been sold or repledged was $361 billion and $311 billion, respectively.

The Company additionally receives securities as collateral in connection with certain securities for securities transactions in which the Company is the lender. In instances where the Company is permitted to sell or repledge these securities, the Company reports the fair value of the collateral received and the related obligation to return the collateral in the condensed consolidated statements of financial condition. At March 31, 2010 and December 31, 2009, $17 billion and $14 billion, respectively, were reported as Securities received as collateral and an Obligation to return securities received as collateral in the condensed consolidated statements of financial condition. Collateral received in connection with these transactions that was subsequently repledged was approximately $16 billion and $13 billion at March 31, 2010 and December 31, 2009, respectively.

The Company manages credit exposure arising from reverse repurchase agreements, repurchase agreements, securities borrowed and securities loaned transactions by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Company, in the event of a customer default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations. The Company also monitors the fair value of the underlying securities as compared with the related receivable or payable, including accrued interest, and, as necessary, requests additional collateral to ensure such transactions are adequately collateralized. Where deemed appropriate, the Company’s agreements with third parties specify its rights to request additional collateral. Customer receivables generated from margin lending activity are

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

collateralized by customer-owned securities held by the Company. For these transactions, adherence to the Company’s collateral policies significantly limits the Company’s credit exposure in the event of customer default. The Company may request additional margin collateral from customers, if appropriate, and, if necessary, may sell securities that have not been paid for or purchase securities sold but not delivered from customers.

At March 31, 2010 and December 31, 2009, cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements were as follows:

	March 31, 2010		December 31, 2009
	(dollars in millions)
Cash deposited with clearing organizations or segregated under federal and other regulations or requirements	$	22,367	$	23,712
Securities(1)		14,381		11,296
Total	$	36,748	$	35,008

(1) Securities deposited with clearing organizations or segregated under federal and other regulations or requirements are sourced from Federal funds sold and securities purchased under agreements to resell and Financial instruments owned in the condensed consolidated statements of financial condition.

Other secured financings include the liabilities related to transfers of financial assets that are accounted for as financings rather than sales, consolidated VIEs where the Company is deemed to be the primary beneficiary, and certain equity-linked notes and borrowings where in all instances these liabilities are payable solely from the cash flows of the related assets accounted for as Financial instruments owned (see Note 6).

6. Variable Interest Entities and Securitization Activities.

The Company is involved with various special purpose entities (“SPEs”) in the normal course of business. In most cases, these entities are deemed to be VIEs.

The Company applies accounting guidance for consolidation of VIEs to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Entities that previously met the criteria as QSPEs that were not subject to consolidation prior to January 1, 2010 became subject to the consolidation requirements for VIEs on that date. Excluding entities subject to the Deferral (as defined in Note 1), effective January 1, 2010, the primary beneficiary of a VIE is the party that both (1) has the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (2) has an obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. The Company consolidates entities of which it is the primary beneficiary.

The Company’s variable interests in VIEs include debt and equity interests, commitments, guarantees, derivative instruments and certain fees. The Company’s involvement with VIEs arises primarily from:

• Interests purchased in connection with market making and retained interests held as a result of securitization activities.

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

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

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• Derivatives entered into with VIEs.

• Structuring of credit-linked notes (“CLNs”) or other asset-repackaged notes designed to meet the investment objectives of clients.

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

The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE. This determination is based upon an analysis of the design of the VIE, including the VIE’s structure and activities, the power to make significant economic decisions held by the Company and by other parties and the variable interests owned by the Company and other parties.

The power to make the most important decisions may take a number of different forms in different types of VIEs. The Company considers servicing or collateral management decisions as representing the power to make the most important economic decisions in transactions such as securitizations or collateral debt obligations.

For many transactions, such as CLNs and other asset-repackaged notes, there are no significant economic decisions made on an ongoing basis. In these cases, the Company focuses its analysis on decisions made prior to the initial closing of the transaction and at the termination of the transaction. Based upon factors, which include an analysis of the nature of the assets, the number of investors, the standardization of the legal documentation and the level of the continuing involvement by the Company, the Company concluded in most of these transactions that decisions made prior to the initial closing were shared between the Company and the initial investors. The Company focused its control decision on any right held by the Company or investors related to the termination of the VIE.

Except for consolidated VIEs included in other structured financings in the tables below, the Company accounts for the assets held by the entities primarily in Financial instruments owned and the liabilities of the entities as Other secured financings in the condensed consolidated statements of financial condition. The Company includes assets held by consolidated VIEs included in other structured financings in the tables below primarily in Receivables, Premises, equipment and software costs and Other assets and the liabilities primarily as Other liabilities and accrued expenses and Payables in the consolidated statements of financial condition. Except for consolidated VIEs included in other structured financings, the assets and liabilities are measured at fair value, with changes in fair value reflected in earnings.

The assets owned by many consolidated VIEs cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities issued by many consolidated VIEs are non-recourse to the Company. In certain other consolidated VIEs, the Company has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present information at March 31, 2010 and December 31, 2009 about VIEs that the Company consolidates. Consolidated VIE assets and liabilities are presented after intercompany eliminations and include assets financed on a non-recourse basis. As a result of the accounting guidance adopted on January 1, 2010, the Company consolidated a number of VIEs that had not previously been consolidated and de-consolidated a number of VIEs that had previously been consolidated at December 31, 2009.

	At March 31, 2010
	Mortgage and Asset-backed Securitizations		Collateralized Debt Obligations		Managed Real Estate Partnerships		Other Structured Financings		Other
	(dollars in millions)
VIE assets	$	4,668	$	1,764	$	1,757	$	696	$	1,844
VIE liabilities	$	3,827	$	1,734	$	139	$	2,861	$	851

	At December 31, 2009
	Mortgage and Asset-backed Securitizations		Credit and Real Estate		Commodities Financing		Other Structured Financings
	(dollars in millions)
VIE assets	$	2,715	$	2,629	$	1,509	$	762
VIE liabilities	$	992	$	687	$	1,370	$	73

In general, the Company’s exposure to loss in consolidated VIEs is limited to losses that would be absorbed on the VIE’s assets recognized in its financial statements, net of losses absorbed by third party holders of the VIE’s liabilities. At March 31, 2010, managed real estate partnerships reflected non-controlling interests of $1,260 million. The Company also has additional maximum exposure to losses of approximately $1,115 million and $533 million at March 31, 2010 and December 31, 2009, respectively. This additional exposure relates primarily to certain derivatives (e.g., credit derivatives in which the Company has sold unfunded protection in synthetic collateralized debt obligations, typically for the most senior tranche, in which the total protection sold by the VIE exceeds the amount of collateral held) and commitments, guarantees and other forms of involvement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents information about certain non-consolidated VIEs in which the Company had variable interests at March 31, 2010. Many of the VIEs included in this table met the QSPE requirements under previous accounting guidance. QSPEs were not included as non-consolidated VIEs in prior periods. The table includes all VIEs in which the Company has determined that its maximum exposure to loss is greater than specific thresholds or meets certain other criteria. The non-consolidated VIEs included in the March 31, 2010 and December 31, 2009 tables are based on different criteria.

	At March 31, 2010
	Mortgage and Asset-backed Securitizations		Collateralized Debt Obligations		Municipal Tender Option Bonds		Other Structured Financings		Other
	(dollars in millions)
VIE assets that the Company does not consolidate (unpaid principal balance)(1)	$	114,592	$	11,245	$	6,729	$	1,766	$	7,443
Maximum exposure to loss:
Debt and equity interests(2)	$	7,827	$	693	$	85	$	975	$	2,739
Derivatives and other contracts		1,166		1,062		—		—		284
Commitments, guarantees and other		—		—		4,297		783		524
Total maximum exposure to loss	$	8,993	$	1,755	$	4,382	$	1,758	$	3,547
Carrying value of exposure to loss—Assets:
Debt and equity interests(2)	$	7,827	$	693	$	85	$	802	$	2,739
Derivatives and other contracts		892		784		—		—		128
Total carrying value of exposure to loss—Assets	$	8,719	$	1,477	$	85	$	802	$	2,867
Carrying value of exposure to loss—Liabilities:
Derivatives and other contracts	$	274	$	245	$	—	$	—	$	45
Commitments, guarantees and other		—		—		24		41		334
Total carrying value of exposure to loss—Liabilities	$	274	$	245	$	24	$	41	$	379

(1) Mortgage and asset-backed securitizations include VIE assets as follows: $42.3 billion of residential mortgages; $32.2 billion of commercial mortgages; $14.2 billion of U.S. agency collateralized mortgage obligations and $25.9 billion of other consumer or commercial loans.

(2) Mortgage and asset-backed securitizations include VIE debt and equity interests as follows: $1.2 billion of residential mortgages; $1.7 billion of commercial mortgages; $3.2 billion of U.S. agency collateralized mortgage obligations and $1.6 billion of other consumer or commercial loans.

The Company’s maximum exposure to loss often differs from the carrying value of the VIE’s assets. The maximum exposure to loss is dependent on the nature of the Company’s variable interest in the VIEs and is limited to the notional amounts of certain liquidity facilities, other credit support, total return swaps, written put options, and the fair value of certain other derivatives and investments the Company has made in the VIEs. Liabilities issued by VIEs generally are non-recourse to the Company. Where notional amounts are utilized in quantifying maximum exposure related to derivatives, such amounts do not reflect fair value write downs already recorded by the Company.

The Company’s maximum exposure to loss does not include the offsetting benefit of any financial instruments that the Company may utilize to hedge these risks associated with the Company’s variable interests. In addition, the Company’s maximum exposure to loss is not reduced by the amount of collateral held as part of a transaction with the VIE or any party to the VIE directly against a specific exposure to loss.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Securitization transactions generally involve VIEs. The Company owned additional securities issued by securitization SPEs for which the maximum exposure to loss is less than specific thresholds. These additional securities totaled $6.5 billion at March 31, 2010. These securities were either retained in connection with transfers of assets by the Company or acquired in connection with secondary market-making activities. Securities issued by securitization SPEs consist of $2.4 billion of securities backed primarily by residential mortgage loans, $0.4 billion of securities backed by U.S. agency collateralized mortgage obligations, $1.6 billion of securities backed by commercial mortgage loans, $1.3 billion of securities backed by collateralized debt obligations or collateralized loan obligations and $0.8 billion backed by other consumer loans, such as credit card receivables, automobile loans and student loans. The Company’s primary risk exposure is limited to the securities issued by the SPE owned by the Company, with the risk highest on the most subordinate class of beneficial interests. These securities generally are included in Financial instruments owned—Corporate and other debt and are measured at fair value. The Company does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees, or similar derivatives. The Company’s maximum exposure to loss is equal to the fair value of the securities owned.

The following table presents information about the Company’s non-consolidated VIEs at December 31, 2009 in which the Company had significant variable interests or served as the sponsor and had any variable interest as of that date. The non-consolidated VIEs included in the March 31, 2010 and December 31, 2009 tables are based on different criteria.

	At December 31, 2009
	Mortgage and Asset-backed Securitizations		Credit and Real Estate		Municipal Tender Option Bond Trusts		Other Structured Financings
	(dollars in millions)
VIE assets that the Company does not consolidate	$	720	$	11,848	$	339	$	5,775
Maximum exposure to loss:
Debt and equity interests	$	16	$	2,330	$	40	$	861
Derivatives and other contracts		1		4,949		—		—
Commitments, guarantees and other		—		200		31		623
Total maximum exposure to loss	$	17	$	7,479	$	71	$	1,484
Carrying value of exposure to loss—Assets:
Debt and equity interests	$	16	$	2,330	$	40	$	682
Derivatives and other contracts		1		2,382		—		—
Total carrying value of exposure to loss—Assets	$	17	$	4,712	$	40	$	682
Carrying value of exposure to loss—Liabilities:
Derivatives and other contracts	$	—	$	484	$	—	$	—
Commitments, guarantees and other		—		—		—		45
Total carrying value of exposure to loss—Liabilities	$	—	$	484	$	—	$	45

The Company’s transactions with VIEs primarily includes securitizations, municipal tender option bond trusts, credit protection purchased through CLNs, collateralized loan and debt obligations, equity-linked notes, managed real estate partnerships and asset management investment funds. Such activities are described below.

Securitization Activities.    In a securitization transaction, the Company transfers assets (generally commercial or residential mortgage loans or U.S. agency securities) to an SPE, sells to investors most of the beneficial interests,

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such as notes or certificates, issued by the SPE and in many cases retains other beneficial interests. In many securitization transactions involving commercial mortgage loans, the Company transfers a portion of the assets transferred to the SPE with unrelated parties transferring the remaining assets.

The purchase of the transferred assets by the SPE is financed through the sale of these interests. In some of these transactions, primarily involving residential mortgage loans in the U.S. and Europe and commercial mortgage loans in Europe, the Company serves as servicer for some or all of the transferred loans. In many securitizations, particularly involving residential mortgage loans, the Company also enters into derivative transactions, primarily interest rate swaps or interest rate caps, with the SPE.

In most of these transactions, the SPE met the criteria to be a QSPE under the accounting guidance effective prior to January 1, 2010 for the transfer and servicing of financial assets. The Company did not consolidate QSPEs if they met certain criteria regarding the types of assets and derivatives they held, the activities in which they engaged and the range of discretion they may have exercised in connection with the assets they held. SPEs that formerly met the criteria to be a QSPE are now subject to the same consolidation requirements as other VIEs.

The primary risk retained by the Company in connection with these transactions generally is limited to the beneficial interests issued by the SPE that are owned by the Company, with the risk highest on the most subordinate class of beneficial interests. These beneficial interests generally are included in Financial instruments owned—Corporate and other debt and are measured at fair value. The Company does not provide additional support in these transactions through contractual facilities, such as liquidity facilities, guarantees, or similar derivatives.

Although not obligated, the Company generally makes a market in the securities issued by SPEs in these transactions. As a market maker, the Company offers to buy these securities from, and sell these securities to, investors. Securities purchased through these market-making activities are not considered to be retained interests, although these beneficial interests generally are included in Financial instruments owned—Corporate and other debt and are measured at fair value.

The Company enters into derivatives, generally interest rate swaps and interest rate caps with a senior payment priority in many securitization transactions. The risks associated with these and similar derivatives with SPEs are essentially the same as similar derivatives with non-SPE counterparties and are managed as part of the Company’s overall exposure.

See Note 9 for further information on derivative instruments and hedging activities.

Municipal Tender Option Bond Trusts.    In a municipal tender option bond transaction, the Company, on behalf of a client, transfers a municipal bond to a trust. The trust issues short-term securities which the Company, as the remarketing agent, sells to investors. The client retains a residual interest. The short-term securities are supported by a liquidity facility pursuant to which the investors may put their short-term interests. In some programs, the Company provides this liquidity facility; in most programs, a third-party provider will provide such liquidity facility. The Company may purchase short-term securities in its role either as remarketing agent or liquidity provider. The client can generally terminate the transaction at any time. The liquidity provider can generally terminate the transaction upon the occurrence of certain events. When the transaction is terminated, the municipal bond is generally sold or returned to the client. Any losses suffered by the liquidity provider upon the sale of the bond are the responsibility of the client. This obligation generally is collateralized.

Credit Protection Purchased Through CLNs.    In a CLN transaction, the Company transfers assets (generally high quality securities or money market investments) to an SPE, enters into a derivative transaction in which the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SPE writes protection on an unrelated reference asset or group of assets through a credit default swap, a total return swap or similar instrument, and sells to investors the securities issued by the SPE. In some transactions, the Company may also enter into interest rate or currency swaps with the SPE. Upon the occurrence of a credit event related to the reference asset, the SPE will sell the collateral securities in order to make the payment to the Company. The Company is generally exposed to price changes on the collateral securities in the event of a credit event and subsequent sale. These transactions are designed to provide investors with exposure to certain credit risk on the reference asset. In some transactions, the assets and liabilities of the SPE are recognized in the Company’s condensed consolidated financial statements. In other transactions, the transfer of the collateral securities is accounted for as a sale of assets and the SPE is not consolidated. The structure of the transaction determines the accounting treatment. CLNs are included in Other in the above VIE tables.

The derivatives in CLN transactions consist of total return swaps, credit default swaps or similar contracts in which the Company has purchased protection on a reference asset or group of assets. Payments by the SPE are collateralized. The risks associated with these and similar derivatives with SPEs are essentially the same as similar derivatives with non-SPE counterparties and are managed as part of the Company’s overall exposure.

Other Structured Financings.    The Company primarily invests in equity interests issued by entities that develop and own low income communities (including low income housing projects) and entities that construct and own facilities that will generate energy from renewable resources. The equity interests entitle the Company to its share of tax credits and tax losses generated by these projects. In addition, the Company has issued guarantees to investors in certain low-income housing funds. The guarantees are designed to return an investor’s contribution to a fund and the investor’s share of tax losses and tax credits expected to be generated by the fund. The Company is also involved with entities designed to provide tax-efficient yields to the Company or its clients.

Collateralized Loan and Debt Obligations.    A collateralized loan obligation (“CLO”) or a CDO is an SPE that purchases a pool of assets, consisting of corporate loans, corporate bonds, asset-backed securities or synthetic exposures on similar assets through derivatives and issues multiple tranches of debt and equity securities to investors. In the Asset Management business segment, the Company manages CLOs with assets of $1.7 billion at March 31, 2010, and receives a management fee for these services. The Company’s maximum exposure to loss on these managed CLOs was immaterial at March 31, 2010. The Company consolidates these CLOs. The Company’s maximum exposure to loss on other CLOs and CDOs not managed by the Company is $3.1 billion at March 31, 2010.

Equity-Linked Notes.    In an equity-linked note transaction included in the tables above, the Company typically transfers to an SPE either (1) a note issued by the Company, the payments on which are linked to the performance of a specific equity security, equity index or other index or (2) debt securities issued by other companies and a derivative contract, the terms of which will relate to the performance of a specific equity security, equity index or other index. These transactions are designed to provide investors with exposure to certain risks related to the specific equity security, equity index or other index. Equity-linked notes are included in Other in the above VIE tables.

Managed Real Estate Partnerships.    The Company sponsors funds that invest in real estate assets. Certain of these funds are classified as VIEs primarily because the Company has provided financial support through lending facilities and other means. The Company also serves as the general partner for these funds and owns limited partnership interests in them. These funds are consolidated at March 31, 2010.

Asset Management Investment Funds.    The tables above do not include certain investments made by the Company held by entities qualifying for accounting purposes as investment companies.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Transfers of Assets with Continuing Involvement.

The following table presents information at March 31, 2010 regarding transactions with SPEs in which the Company, acting as principal, transferred assets with continuing involvement and received sales treatment. The transferees in most of these transactions formerly met the criteria for QSPEs.

	At March 31, 2010
	Residential Mortgage Loans		Commercial Mortgage Loans		U.S. Agency Collateralized Mortgage Obligations		Credit- Linked Notes and  Other
	(dollars in millions)
SPE assets (unpaid principal balance)(1)	$	55,702	$	90,063	$	2,075	$	8,167
Retained interests (fair value):
Investment grade	$	162	$	122	$	1,415	$	—
Non-investment grade		109		489		—		2,329
Total retained interests (fair value)	$	271	$	611	$	1,415	$	2,329
Interests purchased in the secondary market (fair value):
Investment grade	$	50	$	233	$	6	$	—
Non-investment grade		85		22		—		52
Total interests purchased in the secondary market (fair value)	$	135	$	255	$	6	$	52
Derivative assets (fair value)	$	263	$	887	$	—	$	942
Derivative liabilities (fair value)	$	137	$	1	$	—	$	336

(1) Amounts include assets transferred by unrelated transferors.

	At March 31, 2010
	Level 1		Level 2		Level 3		Total
	(dollars in millions)
Retained interests (fair value):
Investment grade	$	—	$	1,535	$	164	$	1,699
Non-investment grade		—		156		2,771		2,927
Total retained interests (fair value)	$	—	$	1,691	$	2,935	$	4,626
Interests purchased in the secondary market (fair value):
Investment grade	$	—	$	209	$	80	$	289
Non-investment grade		—		148		11		159
Total interests purchased in the secondary market (fair value)	$	—	$	357	$	91	$	448
Derivative assets (fair value)	$	—	$	851	$	1,241	$	2,092
Derivative liabilities (fair value)	$	—	$	19	$	455	$	474

Transferred assets are carried at fair value prior to securitization, and any changes in fair value are recognized in the condensed consolidated statements of income. The Company may act as underwriter of the beneficial interests issued by securitization vehicles. Investment banking underwriting net revenues are recognized in connection with these transactions. The Company may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included in the condensed consolidated statements of financial condition at fair value. Any changes in the fair value of such retained interests are recognized in the condensed consolidated statements of income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net gains at the time of securitization were not material in the three months ended March 31, 2010.

During the three months ended March 31, 2010, the Company received proceeds from new securitization transactions of $5 billion. During the three months ended March 31, 2010, the Company received proceeds from cash flows from retained interests in securitization transactions of $1.2 billion.

The Company provides representations and warranties that certain assets transferred in securitization transactions conform to specific guidelines (see Note 10).

Failed Sales.

In order to be treated as a sale of assets for accounting purposes, a transaction must meet all of the criteria stipulated in the accounting guidance for the transfer of financial assets. If the transfer fails to meet these criteria, that transfer is treated as a failed sale. In such case, the Company continues to recognize the assets in Financial instruments owned and the Company recognizes the associated liabilities in Other secured financings in the condensed consolidated statements of financial condition.

The assets transferred to many unconsolidated VIEs in transactions accounted for as failed sales cannot be removed unilaterally by the Company and are not generally available to the Company. The related liabilities issued by many unconsolidated VIEs are non-recourse to the Company. In certain other failed sale transactions, the Company has the unilateral right to remove assets or provides additional recourse through derivatives such as total return swaps, guarantees or other forms of involvement.

The following tables present information about transfers of assets treated by the Company as secured financings at March 31, 2010 and December 31, 2009:

	At March 31, 2010
	Commercial Mortgage Loans		Credit- Linked Notes		Other
	(dollars in millions)
Assets
Unpaid principal amount	$	110	$	1,063	$	215
Fair value		104		660		214
Other secured financings
Unpaid principal amount		66		1,037		215
Fair value		66		658		214

	At December 31, 2009
	Residential Mortgage Loans		Commercial Mortgage Loans		Credit- Linked Notes		Other
	(dollars in millions)
Assets
Unpaid principal amount	$	376	$	324	$	1,059	$	1,332
Fair value		151		291		1,012		1,294
Other secured financings
Unpaid principal amount		267		271		1,025		1,332
Fair value		138		269		978		1,294

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Mortgage Servicing Activities.

Mortgage Servicing Rights.    The Company may retain servicing rights to certain mortgage loans that are sold through its securitization activities. These transactions create an asset referred to as MSRs, which totaled approximately $175 million and $137 million as of March 31, 2010 and December 31, 2009, respectively, and are included within Intangible assets and carried at fair value in the condensed consolidated statements of financial condition.

SPE Mortgage Servicing Activities.    The Company services residential mortgage loans in the U.S. and Europe and commercial mortgage loans in Europe owned by SPEs, including SPEs sponsored by the Company and SPEs not sponsored by the Company. The Company generally holds retained interests in Company-sponsored SPEs. In some cases, as part of its market making activities, the Company may own some beneficial interests issued by both Company-sponsored and non-Company sponsored SPEs.

The Company provides no credit support as part of its servicing activities. The Company is required to make servicing advances to the extent that it believes that such advances will be reimbursed. Reimbursement of servicing advances is a senior obligation of the SPE, senior to the most senior beneficial interests outstanding. Outstanding advances are included in Other assets and are recorded at cost. Advances at March 31, 2010 and December 31, 2009 totaled approximately $2.2 billion net of reserves of $17 million and $23 million at March 31, 2010 and December 31, 2009, respectively.

The following tables present information about the Company’s mortgage servicing activities for SPEs to which the Company transferred loans as of March 31, 2010 and December 31, 2009:

	At March 31, 2010
	Residential Mortgage Unconsolidated SPEs			Residential Mortgage Consolidated SPEs			Commercial Mortgage Unconsolidated SPEs		Commercial Mortgage Consolidated SPEs
	(dollars in millions)
Assets serviced (unpaid principal balance)	$	15,917		$	3,044		$	7,946	$	2,217
Amounts past due 90 days or greater (unpaid principal balance)(1)	$	6,476		$	1,001		$	—	$	6
Percentage of amounts past due 90 days or greater(1)		40.7	%		32.9	%		—		0.3	%
Credit losses	$	403		$	26		$	—	$	—

(1) Includes loans that are at least 90 days contractually delinquent, loans for which the borrower has filed for bankruptcy, loans in foreclosure and real estate owned.

	At December 31, 2009
	Residential Mortgage QSPEs			Residential Mortgage Failed Sales			Commercial Mortgage QSPEs
	(dollars in millions)
Assets serviced (unpaid principal balance)	$	18,902		$	1,110		$	10,901
Amounts past due 90 days or greater (unpaid principal balance)(1)	$	7,297		$	408		$	5
Percentage of amounts past due 90 days or greater(1)		38.6	%		36.8	%		—

(1) Includes loans that are at least 90 days contractually delinquent, loans for which the borrower has filed for bankruptcy, loans in foreclosure and real estate owned.

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The Company also serviced residential and commercial mortgage loans for SPEs sponsored by unrelated parties with unpaid principal balances totaling $19 billion and $20 billion at March 31, 2010 and December 31, 2009, respectively.

7.    Goodwill and Net Intangible Assets.

The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. The Company tests for impairment at the reporting unit level, which is generally one level below its business segments. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective book value. If the estimated fair value exceeds the book value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below book value, however, further analysis is required to determine the amount of the impairment.

The estimated fair values of the reporting units are generally determined utilizing methodologies that incorporate price-to-book, price-to-earnings and assets under management multiples of certain comparable companies.

The Company completed its annual goodwill impairment testing at July 1, 2009, which did not result in any goodwill impairment.

Goodwill.

Changes in the carrying amount of the Company’s goodwill, net of accumulated impairment losses for the quarter ended March 31, 2010 were as follows:

	Institutional Securities		Global Wealth Management Group			Asset Management		Total
	(dollars in millions)
Goodwill at December 31, 2009	$	373	$	5,618		$	1,171	$	7,162
Foreign currency translation adjustments and other		9		(2	)		—		7
Goodwill at March 31, 2010(1)(2)	$	382	$	5,616		$	1,171	$	7,169

(1) The Asset Management business segment amounts at March 31, 2010 and December 31, 2009 included approximately $404 million related to Retail Asset Management.

(2) The amount of the Company’s goodwill before accumulated impairments of $673 million at March 31, 2010 was $7,842 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net Intangible Assets.

Changes in the carrying amount of the Company’s intangible assets for the quarter ended March 31, 2010 were as follows:

	Institutional Securities			Global Wealth Management Group			Asset Management			Total
	(dollars in millions)
Amortizable net intangible assets at December 31, 2009	$	161		$	4,292		$	184		$	4,637
Mortgage servicing rights (see Note 6)		135			2			—			137
Indefinite-lived intangible assets		—			280			—			280
Net intangible assets at December 31, 2009	$	296		$	4,574		$	184		$	5,054
Amortizable net intangible assets at December 31, 2009	$	161		$	4,292		$	184		$	4,637
Foreign currency translation adjustments and other		5			1			—			6
Amortization expense		(4	)		(83	)		(3	)		(90	)
Impairment losses		—			—			(10	)		(10	)
Amortizable net intangible assets at March 31, 2010		162			4,210			171			4,543
Mortgage servicing rights (see Note 6)		172			3			—			175
Indefinite-lived intangible assets		—			280			—			280
Net intangible assets at March 31, 2010	$	334		$	4,493		$	171		$	4,998

8. Long-Term Borrowings.

The Company’s long-term borrowings included the following components:

	At March 31, 2010		At December 31, 2009
	(dollars in millions)
Senior debt	$	174,619	$	178,797
Subordinated debt		4,030		3,983
Junior subordinated debentures		10,554		10,594
Total	$	189,203	$	193,374

During the quarter ended March 31, 2010, the Company issued notes with a principal amount of approximately $8 billion representing senior unsecured notes that were not guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The amount included non-U.S. dollar currency notes aggregating approximately $1 billion. During the quarter ended March 31, 2010, approximately $10 billion of notes were repaid.

The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately 5.7 years and 5.6 years at March 31, 2010 and December 31, 2009, respectively.

FDIC’s Temporary Liquidity Guarantee Program (“TLGP”).

At March 31, 2010 and December 31, 2009, the Company had long-term debt outstanding of $23.8 billion under the TLGP. These borrowings are senior unsecured debt obligations of the Company and guaranteed by the FDIC under the TLGP. The FDIC has concluded that the guarantee is backed by the full faith and credit of the U.S. government.

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9.    Derivative Instruments and Hedging Activities.

The Company trades, makes markets and takes proprietary positions globally in listed futures, OTC swaps, forwards, options and other derivatives referencing, among other things, interest rates, currencies, investment grade and non-investment grade corporate credits, loans, bonds, U.S. and other sovereign securities, emerging market bonds and loans, credit indices, asset-backed security indices, property indices, mortgage-related and other asset-backed securities and real estate loan products. The Company uses these instruments for trading, foreign currency exposure management, and asset and liability management.

The Company manages its trading positions by employing a variety of risk mitigation strategies. These strategies include diversification of risk exposures and hedging. Hedging activities consist of the purchase or sale of positions in related securities and financial instruments, including a variety of derivative products (e.g., futures, forwards, swaps and options). The Company manages the market risk associated with its trading activities on a Company-wide basis, on a worldwide trading division level and on an individual product basis.

The Company incurs credit risk as a dealer in OTC derivatives. Credit risk with respect to derivative instruments arises from the failure of a counterparty to perform according to the terms of the contract. The Company’s exposure to credit risk at any point in time is represented by the fair value of the derivative contracts reported as assets. The fair value of a derivative represents the amount at which the derivative could be exchanged in an orderly transaction between market participants, and is further described in Notes 1 and 3.

In connection with its derivative activities, the Company generally enters into master netting agreements and collateral arrangements with counterparties. These agreements provide the Company with the ability to offset a counterparty’s rights and obligations, request additional collateral when necessary or liquidate the collateral in the event of counterparty default.

The tables below present a summary by counterparty credit rating and remaining contract maturity of the fair value of OTC derivatives in a gain position at March 31, 2010 and December 31, 2009, respectively. Fair value is presented in the final column net of collateral received (principally cash and U.S. government and agency securities):

OTC Derivative Products—Financial Instruments Owned at March 31, 2010(1)

	Years to Maturity								Cross-Maturity and Cash Collateral Netting(3)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Credit Rating(2)	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
AAA	$	534	$	1,952	$	3,287	$	9,769	$	(6,753	)	$	8,789	$	8,443
AA		5,635		6,953		7,101		16,481		(26,290	)		9,880		8,010
A		9,111		8,809		7,102		25,507		(39,564	)		10,965		9,800
BBB		3,404		3,990		2,347		7,501		(9,623	)		7,619		5,547
Non-investment grade		2,488		3,067		1,710		4,516		(3,983	)		7,798		6,233
Total	$	21,172	$	24,771	$	21,547	$	63,774	$	(86,213	)	$	45,051	$	38,033

(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. The table does not include listed derivatives and the effect of any related hedges utilized by the Company. The table also excludes fair values corresponding to other credit exposures, such as those arising from the Company’s lending activities.

(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department using methodologies generally consistent with those employed by external rating agencies.

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(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

OTC Derivative Products—Financial Instruments Owned at December 31, 2009(1)

	Years to Maturity								Cross-Maturity and Cash Collateral Netting(3)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Credit Rating(2)	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
AAA	$	852	$	2,026	$	3,876	$	9,331	$	(6,616	)	$	9,469	$	9,082
AA		6,469		7,855		6,600		15,071		(25,576	)		10,419		8,614
A		8,018		10,712		7,990		22,739		(38,971	)		10,488		9,252
BBB		3,032		4,193		2,947		7,524		(8,971	)		8,725		5,902
Non-investment grade		2,773		3,331		2,113		4,431		(4,534	)		8,114		6,525
Total	$	21,144	$	28,117	$	23,526	$	59,096	$	(84,668	)	$	47,215	$	39,375

(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. The table does not include listed derivatives and the effect of any related hedges utilized by the Company. The table also excludes fair values corresponding to other credit exposures, such as those arising from the Company’s lending activities.

(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department using methodologies generally consistent with those employed by external rating agencies.

(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

Hedge Accounting.

The Company applies hedge accounting using various derivative financial instruments and non-U.S. dollar-denominated debt used to hedge interest rate and foreign exchange risk arising from assets and liabilities not held at fair value as part of asset and liability management and foreign currency exposure management.

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

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least monthly.

Fair Value Hedges—Interest Rate Risk.    The Company’s designated fair value hedges consisted primarily of interest rate swaps designated as fair value hedges of changes in the benchmark interest rate of fixed rate senior long-term borrowings. The Company uses regression analysis to perform an ongoing prospective and retrospective assessment of the effectiveness of these hedging relationships (i.e., the Company applies the “long-haul” method of hedge accounting). A hedging relationship is deemed effective if the fair values of the hedging instrument (derivative) and the hedged item (debt liability) change inversely within a range of 80% to 125%. The Company considers the impact of valuation adjustments related to the Company’s own credit spreads and counterparty credit spreads to determine whether they would cause the hedging relationship to be ineffective.

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

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

The following tables summarize the fair value of derivative instruments designated as accounting hedges and the fair value of derivative instruments not designated as accounting hedges by type of derivative contract on a gross basis at March 31, 2010 and December 31, 2009. Fair values of derivative contracts in an asset position are included in Financial instruments owned—Derivative and other contracts. Fair values of derivative contracts in a liability position are reflected in Financial instruments sold, not yet purchased—Derivative and other contracts.

	Assets at March 31, 2010					Liabilities at March 31, 2010
	Fair Value			Notional		Fair Value			Notional
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	5,045		$	74,230	$	52		$	7,348
Foreign exchange contracts		270			8,253		109			6,588
Total derivatives designated as accounting hedges		5,315			82,483		161			13,936
Derivatives not designated as accounting hedges(1):
Interest rate contracts		598,371			15,841,899		574,861			15,768,660
Credit contracts		125,154			2,392,889		107,063			2,197,530
Foreign exchange contracts		49,378			1,295,384		50,540			1,313,783
Equity contracts		37,257			530,173		44,744			549,783
Commodity contracts		73,904			457,418		73,193			426,403
Other		375			12,115		1,251			6,607
Total derivatives not designated as accounting hedges		884,439			20,529,878		851,652			20,262,766
Total derivatives	$	889,754		$	20,612,361	$	851,813		$	20,276,702
Cash collateral netting		(62,054	)		—		(34,242	)		—
Counterparty netting		(779,794	)		—		(779,794	)		—
Total derivatives	$	47,906		$	20,612,361	$	37,777		$	20,276,702

(1) Notional amounts include net notionals related to long and short futures contracts of $65 billion and $64 billion, respectively. The variation margin on these futures contracts (excluded from the table above) of $494 million and $42 million is included in Receivables—Brokers, dealers and clearing organizations and Payables—Brokers, dealers and clearing organizations, respectively, on the condensed consolidated statements of financial condition.

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	Assets at December 31, 2009					Liabilities at December 31, 2009
	Fair Value			Notional		Fair Value			Notional
	(dollars in millions)
Derivatives designated as accounting hedges:
Interest rate contracts	$	4,343		$	69,026	$	175		$	12,248
Foreign exchange contracts		216			10,781		105			7,125
Total derivatives designated as accounting hedges		4,559			79,807		280			19,373
Derivatives not designated as accounting hedges(1):
Interest rate contracts		622,786			16,285,375		599,291			16,123,706
Credit contracts		146,064			2,557,917		125,234			2,404,995
Foreign exchange contracts		52,312			1,174,815		51,369			1,107,989
Equity contracts		41,366			476,510		49,198			492,681
Commodity contracts		64,614			453,132		63,714			414,765
Other		389			12,908		1,123			6,180
Total derivatives not designated as accounting hedges		927,531			20,960,657		889,929			20,550,316
Total derivatives	$	932,090		$	21,040,464	$	890,209		$	20,569,689
Cash collateral netting		(62,738	)		—		(31,729	)		—
Counterparty netting		(820,271	)		—		(820,271	)		—
Total derivatives	$	49,081		$	21,040,464	$	38,209		$	20,569,689

(1) Notional amounts include net notionals related to long and short futures contracts of $434 billion and $696 billion, respectively. The variation margin on these futures contracts (excluded from the table above) of $601 million and $27 million is included in Receivables—Brokers, dealers and clearing organizations and Payables—Brokers, dealers and clearing organizations, respectively, on the condensed consolidated statements of financial condition.

The following tables summarize the gains or losses reported on derivative instruments designated and qualifying as accounting hedges for the quarter ended March 31, 2010 and 2009, respectively.

Derivatives Designated as Fair Value Hedges.

The following table presents gains (losses) reported on derivative instruments and the related hedge item as well as the hedge ineffectiveness included in Interest expense in the condensed consolidated statements of income from interest rate contracts:

Interest Rate Contracts	Three Months Ended March  31,
	2010			2009
	(dollars in millions)
Gain (loss) recognized on derivatives	$	721		$	(2,759	)
(Loss) gain recognized on borrowings		(566	)		2,690
Total	$	155		$	(69	)

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Derivatives Designated as Net Investment Hedges.

	Gains Recognized in OCI (effective portion)(1)
Product Type	Three Months Ended March 31,
	2010		2009
	(dollars in millions)
Foreign exchange contracts(2)	$	220	$	230
Debt instruments		—		103
Total	$	220	$	333

(1) No gains (losses) related to net investment hedges were reclassified from Other comprehensive income (“OCI”) into income during the quarter ended March 31, 2010 and 2009, respectively.

(2) A gain of $1 million and a gain of $9 million were recognized in income related to amounts excluded from hedge effectiveness testing during the quarter ended March 31, 2010 and 2009, respectively.

The table below summarizes gains (losses) on derivative instruments not designated as accounting hedges for the three months ended March 31, 2010 and 2009, respectively:

	Gains (Losses) Recognized in Income(1)(2)
	Three Months Ended March 31,
Product Type	2010			2009
	(dollars in millions)
Interest rate contracts	$	620		$	(1,888	)
Credit contracts		(597	)		2,557
Foreign exchange contracts		(157	)		2,415
Equity contracts		(483	)		(1,240	)
Commodity contracts		551			752
Other contracts		(57	)		482
Total derivative instruments	$	(123	)	$	3,078

(1) Gains (losses) on derivative contracts not designated as hedges are primarily included in Principal transactions—Trading.

(2) Gains (losses) associated with derivative contracts that have physically settled are excluded from the table above. Gains (losses) on these contracts are reflected with the associated cash instruments, which are also included in Principal transactions—Trading.

The Company also has certain embedded derivatives that have been bifurcated from the related structured borrowings. Such derivatives are classified in Long-term borrowings and had a net fair value of $34 million and $110 million at March 31, 2010 and December 31, 2009, respectively, and a notional of $2,603 million and $3,442 million at March 31, 2010 and December 31, 2009, respectively. The Company recognized gains of $13 million and $45 million related to changes in the fair value of its bifurcated embedded derivatives for the quarter ended March 31, 2010 and 2009, respectively.

At March 31, 2010 and December 31, 2009, the amount of payables associated with cash collateral received that was netted against derivative assets was $62.1 billion and $62.7 billion, respectively. The amount of receivables in respect of cash collateral paid that was netted against derivative liabilities was $34.2 billion and $31.7 billion, respectively. Cash collateral receivables and payables of $7 million and $190 million, respectively, at March 31, 2010, and $62 million and $227 million, respectively, at December 31, 2009, were not offset against certain contracts that did not meet the definition of a derivative.

Credit-Risk-Related Contingencies.

In connection with certain OTC trading agreements, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a

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credit ratings downgrade. At March 31, 2010 and December 31, 2009, the aggregate fair value of derivative contracts that contain credit-risk-related contingent features that are in a net liability position totaled $27,544 million and $23,052 million, respectively, for which the Company has posted collateral of $22,906 million and $20,607 million, respectively, in the normal course of business. At March 31, 2010 and December 31, 2009, the amount of additional collateral or termination payments that could be called by counterparties under the terms of such agreements in the event of a one-notch downgrade of the Company’s long-term credit rating was approximately $938 million and $717 million, respectively. Additional collateral or termination payments of approximately $998 million and $975 million could be called by counterparties in the event of a two-notch downgrade at March 31, 2010 and December 31, 2009, respectively. Of these amounts, $1,297 million and $1,203 million at March 31, 2010 and December 31, 2009, respectively, related to bilateral arrangements between the Company and other parties where upon the downgrade of one party, the downgraded party must deliver incremental collateral to the other party. These bilateral downgrade arrangements are a risk management tool used extensively by the Company as credit exposures are reduced if counterparties are downgraded.

Credit Derivatives and Other Credit Contracts.

The Company enters into credit derivatives, principally through credit default swaps, under which it provides counterparties protection against the risk of default on a set of debt obligations issued by a specified reference entity or entities. A majority of the Company’s counterparties are banks, broker-dealers, insurance and other financial institutions, and monoline insurers. The table below summarizes certain information regarding protection sold through credit default swaps and CLNs at March 31, 2010:

Credit Ratings of the Reference Obligation	Protection Sold
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability(1)(2)
	Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)
Single name credit default swaps:
AAA	$	1,051	$	4,496	$	10,827	$	27,789	$	44,163	$	2,021
AA		10,985		29,994		31,490		35,028		107,497		1,211
A		31,325		100,673		90,316		49,196		271,510		(2,960	)
BBB		54,964		152,644		131,424		76,316		415,348		(6,116	)
Non-investment grade		54,395		173,862		109,046		62,152		399,455		16,822
Total		152,720		461,669		373,103		250,481		1,237,973		10,978
Index and basket credit default swaps:
AAA		39,140		54,676		47,970		49,719		191,505		(1,331	)
AA		35		39		5,248		12,483		17,805		1,197
A		268		4,263		24,237		9,798		38,566		128
BBB		9,683		53,938		176,356		121,372		361,349		(588	)
Non-investment grade		25,591		130,777		142,392		121,638		420,398		22,874
Total		74,717		243,693		396,203		315,010		1,029,623		22,280
Total credit default swaps sold	$	227,437	$	705,362	$	769,306	$	565,491	$	2,267,596	$	33,258
Other credit contracts(3)(4)	$	—	$	42	$	—	$	1,026	$	1,068	$	1,004
CLNs(4)		174		287		1,968		1,165		3,594		(956	)
Total credit derivatives and other credit contracts	$	227,611	$	705,691	$	771,274	$	567,682	$	2,272,258	$	33,306

(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit spreads of the underlying reference entity or entities tightened during the quarter ended March 31, 2010.

(3) Other credit contracts are credit default swaps that are considered hybrid instruments.

(4) Fair value amount shown represents the fair value of the hybrid instruments.

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The table below summarizes certain information regarding protection sold through credit default swaps and CLNs at December 31, 2009:

Credit Ratings of the Reference Obligation	Protection Sold
	Maximum Potential Payout/Notional										Fair Value (Asset)/ Liability(1)(2)
	Years to Maturity
	Less than 1		1-3		3-5		Over 5		Total
	(dollars in millions)
Single name credit default swaps:
AAA	$	926	$	2,733	$	10,969	$	30,542	$	45,170	$	846
AA		13,355		31,475		38,360		39,424		122,614		1,355
A		35,164		101,909		100,489		50,432		287,994		(3,115	)
BBB		57,979		161,309		151,143		80,216		450,647		(6,753	)
Non-investment grade		58,408		180,311		123,972		63,871		426,562		25,870
Total		165,832		477,737		424,933		264,485		1,332,987		18,203
Index and basket credit default swaps:
AAA		41,517		59,925		51,750		53,917		207,109		(1,563	)
AA		—		1,113		4,082		17,120		22,315		1,794
A		198		3,604		25,425		5,666		34,893		(377	)
BBB		12,866		65,484		183,799		93,906		356,055		(2,101	)
Non-investment grade		40,941		160,331		160,127		132,267		493,666		27,665
Total		95,522		290,457		425,183		302,876		1,114,038		25,418
Total credit default swaps sold	$	261,354	$	768,194	$	850,116	$	567,361	$	2,447,025	$	43,621
Other credit contracts(3)(4)	$	—	$	51	$	24	$	1,089	$	1,164	$	1,118
CLNs(4)		160		74		337		668		1,239		(335	)
Total credit derivatives and other credit contracts	$	261,514	$	768,319	$	850,477	$	569,118	$	2,449,428	$	44,404

(1) Fair value amounts are shown on a gross basis prior to cash collateral or counterparty netting.

(2) Fair value amounts of certain credit default swaps where the Company sold protection have an asset carrying value because credit spreads of the underlying reference entity or entities tightened during 2009.

(3) Other credit contracts are credit default swaps that are considered hybrid instruments.

(4) Fair value amount shown represents the fair value of the hybrid instruments.

Single Name Credit Default Swaps.    A credit default swap protects the buyer against the loss of principal on a bond or loan in case of a default by the issuer. The protection buyer pays a periodic premium (generally quarterly) over the life of the contract and is protected for the period. The Company in turn will have to perform under a credit default swap if a credit event as defined under the contract occurs. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity. In order to provide an indication of the current payment status or performance risk of the credit default swaps, the external credit ratings, primarily Moody’s credit ratings, of the underlying reference entity of the credit default swaps are disclosed.

Index and Basket Credit Default Swaps.    Index and basket credit default swaps are credit default swaps that reference multiple names through underlying baskets or portfolios of single name credit default swaps. Generally, in the event of a default on one of the underlying names, the Company will have to pay a pro rata

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portion of the total notional amount of the credit default index or basket contract. In order to provide an indication of the current payment status or performance risk of these credit default swaps, the weighted average external credit ratings, primarily Moody’s credit ratings, of the underlying reference entities comprising the basket or index were calculated and disclosed.

The Company also enters into index and basket credit default swaps where the credit protection provided is based upon the application of tranching techniques. In tranched transactions, the credit risk of an index or basket is separated into various portions of the capital structure, with different levels of subordination. The most junior tranches cover initial defaults, and once losses exceed the notional of the tranche, they are passed on to the next most senior tranche in the capital structure. As external credit ratings are not always available for tranched indices and baskets, credit ratings were determined based upon an internal methodology.

Credit Protection Sold Through CLNs.    The Company has invested in CLNs, which are hybrid instruments containing embedded derivatives, in which credit protection has been sold to the issuer of the note. If there is a credit event of a reference entity underlying the CLN, the principal balance of the note may not be repaid in full to the Company.

Purchased Credit Protection.    For single name credit default swaps and non-tranched index and basket credit default swaps, the Company has purchased protection with a notional amount of approximately $1.7 trillion and $1.9 trillion at March 31, 2010 and December 31, 2009, respectively, compared with a notional amount of approximately $1.9 trillion and $2.1 trillion, at March 31, 2010 and December 31, 2009, respectively, of credit protection sold with identical underlying reference obligations. In order to identify purchased protection with the same underlying reference obligations, the notional amount for individual reference obligations within non-tranched indices and baskets was determined on a pro rata basis and matched off against single name and non-tranched index and basket credit default swaps where credit protection was sold with identical underlying reference obligations. The Company may also purchase credit protection to economically hedge loans and lending commitments. In total, not considering whether the underlying reference obligations are identical, the Company has purchased credit protection of $2.3 trillion with a positive fair value of $51 billion compared with $2.3 trillion of credit protection sold with a negative fair value of $33 billion at March 31, 2010. In total, not considering whether the underlying reference obligations are identical, the Company has purchased credit protection of $2.5 trillion with a positive fair value of $65 billion compared with $2.4 trillion of credit protection sold with a negative fair value of $44 billion as of December 31, 2009.

The purchase of credit protection does not represent the sole manner in which the Company risk manages its exposure to credit derivatives. The Company manages its exposure to these derivative contracts through a variety of risk mitigation strategies, which include managing the credit and correlation risk across single name, non-tranched indices and baskets, tranched indices and baskets, and cash positions. Aggregate market risk limits have been established for credit derivatives, and market risk measures are routinely monitored against these limits. The Company may also recover amounts on the underlying reference obligation delivered to the Company under credit default swaps where credit protection was sold.

10.    Commitments, Guarantees and Contingencies.

Commitments.

The Company’s commitments associated with outstanding letters of credit and other financial guarantees obtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements, mortgage lending and margin lending at March 31, 2010 are summarized below by period of expiration. Since

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commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:

	Years to Maturity								Total at March 31, 2010
	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
Letters of credit and other financial guarantees obtained to satisfy collateral requirements	$	853	$	1	$	1	$	6	$	861
Investment activities		940		767		167		72		1,946
Primary lending commitments—investment grade(1)(2)		10,558		27,321		3,938		163		41,980
Primary lending commitments—non-investment grade(1)		833		4,179		3,957		2,656		11,625
Secondary lending commitments(1)		67		99		140		35		341
Commitments for secured lending transactions		1,296		454		208		—		1,958
Forward starting reverse repurchase agreements(3)		75,289		101		—		—		75,390
Commercial and residential mortgage-related commitments(1)		906		—		—		—		906
Underwriting commitments		500		—		—		—		500
Other commitments		216		12		150		—		378
Total	$	91,458	$	32,934	$	8,561	$	2,932	$	135,885

(1) These commitments are recorded at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the condensed consolidated statements of financial condition (see Note 3).

(2) This amount includes commitments to asset-backed commercial paper conduits of $276 million at March 31, 2010, of which $268 million have maturities of less than one year and $8 million of which have maturities of one to three years.

(3) The Company enters into forward starting securities purchased under agreements to resell (agreements that have a trade date as of or prior to March 31, 2010 and settle subsequent to period-end) that are primarily secured by collateral from U.S. government agency securities and other sovereign government obligations. These agreements primarily settle within three business days and as of March 31, 2010, $75.3 billion of the $75.4 billion settled within three business days.

For further description of these commitments, refer to Note 11 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K.

The Company sponsors several nonconsolidated investment funds for third-party investors where the Company typically acts as general partner of, and investment adviser to, these funds and typically commits to invest a minority of the capital of such funds with subscribing third-party investors contributing the majority. The Company’s employees, including its senior officers, as well as the Company’s directors may participate on the same terms and conditions as other investors in certain of these funds that the Company forms primarily for client investment, except that the Company may waive or lower applicable fees and charges for its employees. The Company has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investment funds.

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Guarantees.

The table below summarizes certain information regarding the Company’s obligations under guarantee arrangements at March 31, 2010:

Type of Guarantee	Maximum Potential Payout/Notional										Carrying Amount (Asset)/ Liability			Collateral/ Recourse
	Years to Maturity								Total
	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
Credit derivative contracts(1)	$	227,437	$	705,362	$	769,306	$	565,491	$	2,267,596	$	33,258		$	—
Other credit contracts		—		42		—		1,026		1,068		1,004			—
CLNs		174		287		1,968		1,165		3,594		(956	)		—
Non-credit derivative contracts(1)(2)		687,468		345,211		147,654		234,030		1,414,363		67,446			—
Standby letters of credit and other financial guarantees issued(3)(4)		1,267		2,938		402		4,990		9,597		657			5,500
Market value guarantees		—		—		87		679		766		41			126
Liquidity facilities		4,396		82		306		87		4,871		24			6,400
Whole loan sales guarantees		—		—		—		42,506		42,506		90			—
General partner guarantees		194		82		112		49		437		62			—

(1) Carrying amount of derivative contracts are shown on a gross basis prior to cash collateral or counterparty netting. For further information on derivative contracts, see Note 9.

(2) Amounts include a guarantee to investors in undivided participating interests in claims the Company made against a derivative counterparty that filed for bankruptcy protection. To the extent, in the future, any portion of the claims is disallowed or reduced by the bankruptcy court in excess of a certain amount, then the Company must refund a portion of the purchase price plus interest. See Note 16 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K.

(3) Approximately $2.0 billion of standby letters of credit are also reflected in the “Commitments” table in primary and secondary lending commitments. Standby letters of credit are recorded at fair value within Financial instruments owned or Financial instruments sold, not yet purchased in the condensed consolidated statements of financial condition.

(4) Amounts include guarantees issued by consolidated real estate funds sponsored by the Company of approximately $1.6 billion. These guarantees relate to obligations of the fund’s investee entities, including guarantees related to capital expenditures and principal and interest debt payments. Accrued losses under these guarantees of approximately $0.8 billion are reflected as a reduction of the carrying value of the related fund investments, which are reflected in Financial instruments owned—Investments on the condensed consolidated statement of financial condition.

The Company has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to real estate investments of $1.3 billion at March 31, 2010. One of the Company’s real estate funds is currently engaged in negotiations with its lenders regarding a potential restructuring of loans provided to a specific investment in the fund’s portfolio. These loans have been extended to allow negotiations to continue. In that context, the lenders may allege various claims that would imply that the fund is obliged to support this investment to an extent that would exceed the fund’s available liquid resources. In that event, the fund would assert substantial defenses to such claims. The Company is not obliged to provide any support to the fund. A consolidated subsidiary is the general partner of the fund but the loans and guarantees are non-recourse to any other entity or assets of the Company. While the Company cannot provide assurance that the fund’s negotiations will result in a restructuring, it does not currently believe that the resolution of the restructuring will require the Company to pay or contribute amounts in excess of the amount of guarantees included in the dollar amount set forth above at March 31, 2010.

For further description of these commitments, refer to Note 11 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K.

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The Company has obligations under certain guarantee arrangements, including contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying measure (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or non-occurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Also included as guarantees are contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity’s failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others.

Other Guarantees and Indemnities.

In the normal course of business, the Company provides guarantees and indemnifications in a variety of commercial transactions. These provisions generally are standard contractual terms. Certain of these guarantees and indemnifications are described below.

• Trust Preferred Securities.    The Company has established Morgan Stanley Capital Trusts for the limited purpose of issuing trust preferred securities to third parties and lending the proceeds to the Company in exchange for junior subordinated debentures. The Company has directly guaranteed the repayment of the trust preferred securities to the holders thereof to the extent that the Company has made payments to a Morgan Stanley Capital Trust on the junior subordinated debentures. In the event that the Company does not make payments to a Morgan Stanley Capital Trust, holders of such series of trust preferred securities would not be able to rely upon the guarantee for payment of those amounts. The Company has not recorded any liability in the condensed consolidated financial statements for these guarantees and believes that the occurrence of any events (i.e., non-performance on the part of the paying agent) that would trigger payments under these contracts is remote. See Note 13 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K for details on the Company’s junior subordinated debentures.

• Indemnities.    The Company provides standard indemnities to counterparties for certain contingent exposures and taxes, including U.S. and foreign withholding taxes, on interest and other payments made on derivatives, securities and stock lending transactions, certain annuity products and other financial arrangements. These indemnity payments could be required based on a change in the tax laws or change in interpretation of applicable tax rulings or a change in factual circumstances. Certain contracts contain provisions that enable the Company to terminate the agreement upon the occurrence of such events. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated.

• Exchange/Clearinghouse Member Guarantees.    The Company is a member of various U.S. and non-U.S. exchanges and clearinghouses that trade and clear securities and/or derivative contracts. Associated with its membership, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange or the clearinghouse. While the rules governing different exchange or clearinghouse memberships vary, in general the Company’s guarantee obligations would arise only if the exchange or clearinghouse had previously exhausted its resources. The maximum potential payout under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the condensed consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote.

• Guarantees on Securitized Assets.    As part of the Company’s Institutional Securities securitization and related activities, the Company provides representations and warranties that certain assets transferred in securitization transactions conform to specified guidelines. The Company may be required to repurchase

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such assets or indemnify the purchaser against losses if the assets do not meet certain conforming guidelines. Due diligence is performed by the Company to ensure that asset guideline qualifications are met, and, to the extent the Company has acquired such assets from other parties, the Company seeks to obtain its own representations and warranties regarding the assets. In many securitization transactions, some, but not all, of the original asset sellers provide the representations and warranties directly to the purchaser, and the Company makes representations and warranties only with respect to other assets. The maximum potential amount of future payments the Company could be required to make would be equal to the current outstanding balances of assets transferred by the Company that are subject to its representations and warranties.

• Merger and Acquisition Guarantees.    The Company may, from time to time, in its role as investment banking advisor be required to provide guarantees in connection with certain European merger and acquisition transactions. If required by the regulating authorities, the Company provides a guarantee that the acquirer in the merger and acquisition transaction has or will have sufficient funds to complete the transaction and would then be required to make the acquisition payments in the event the acquirer’s funds are insufficient at the completion date of the transaction. These arrangements generally cover the time frame from the transaction offer date to its closing date and, therefore, are generally short term in nature. The maximum potential amount of future payments that the Company could be required to make cannot be estimated. The Company believes the likelihood of any payment by the Company under these arrangements is remote given the level of the Company’s due diligence associated with its role as investment banking advisor.

• Guarantees on Morgan Stanley Stable Value Program.    On September 30, 2009, the Company entered into an agreement with the investment manager for the Stable Value Program (“SVP”), a fund within the Company’s 401(k) plan, and certain other third parties. Under the agreement, the Company contributed $20 million to the SVP on October 15, 2009 and recorded the contribution in Compensation and benefits expense. Additionally, the Company may have a future obligation to make a payment of $40 million to the SVP following the third anniversary of the agreement, after which the SVP would be wound down over a period of time. The future obligation is contingent upon whether the market-to-book value ratio of the portion of the SVP that is subject to certain book-value stabilizing contracts has fallen below a specific threshold and the Company and the other parties to the agreement all decline to make payments to restore the SVP to such threshold as of the third anniversary of the agreement. The Company has not recorded a liability for this guarantee in the condensed consolidated financial statements.

In the ordinary course of business, the Company guarantees the debt and/or certain trading obligations (including obligations associated with derivatives, foreign exchange contracts and the settlement of physical commodities) of certain subsidiaries. These guarantees generally are entity or product specific and are required by investors or trading counterparties. The activities of the subsidiaries covered by these guarantees (including any related debt or trading obligations) are included in the Company’s condensed consolidated financial statements.

Contingencies.

Legal.    In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or are in financial distress.

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The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters; how or if such matters will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the condensed consolidated statement of financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s revenues, income or cash flows for such period. Legal reserves have been established in accordance with the requirements for accounting for contingencies. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change.

11. Regulatory Requirements.

Morgan Stanley.    The Company is a financial holding company under the Bank Holding Company Act of 1956 and is subject to the regulation and oversight of the Board of Governors of the Federal Reserve System (the “Fed”). The Fed establishes capital requirements for the Company, including well-capitalized standards, and evaluates the Company’s compliance with such capital requirements. The Office of the Comptroller of the Currency and the Office of Thrift Supervision establish similar capital requirements and standards for the Company’s national banks and federal savings bank, respectively.

The Company calculates its capital ratios and risk-weighted assets (“RWAs”) in accordance with the capital adequacy standards for financial holding companies adopted by the Fed. These standards are based upon a framework described in the “International Convergence of Capital Measurement and Capital Standards,” July 1988, as amended, also referred to as Basel I. In December 2007, the U.S. banking regulators published a final Basel II Accord that requires internationally active banking organizations, as well as certain of its U.S. bank subsidiaries, to implement Basel II standards over the next several years. The Company will be required to implement these Basel II standards as a result of becoming a financial holding company.

At March 31, 2010, the Company was in compliance with Basel I capital requirements with ratios of Tier 1 capital to RWAs of 15.1% and total capital to RWAs of 16.1% (6% and 10% being well-capitalized for regulatory purposes, respectively). In addition, financial holding companies are also subject to a Tier 1 leverage ratio as defined by the Fed. The Company calculated its Tier 1 leverage ratio as Tier 1 capital divided by adjusted average total assets (which reflects adjustments for disallowed goodwill, certain intangible assets and deferred tax assets). The adjusted average total assets are derived using weekly balances for the calendar quarter.

The following table summarizes the capital measures for the Company at March 31, 2010 and December 31, 2009:

	March 31, 2010				December 31, 2009
	Balance		Ratio		Balance		Ratio
	(dollars in millions)
Tier 1 capital	$	50,122	15.1	%	$	46,670	15.3	%
Total capital		53,411	16.1	%		49,955	16.4	%
RWAs		331,913	—			305,000	—
Adjusted average assets		821,517	—			804,456	—
Tier 1 leverage		—	6.1	%		—	5.8	%

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The Company’s Significant U.S. Bank Operating Subsidiaries.    The Company’s domestic bank operating subsidiaries are subject to various regulatory capital requirements as administered by U.S. federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s U.S. bank operating subsidiaries’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s U.S. bank operating subsidiaries must meet specific capital guidelines that involve quantitative measures of the Company’s U.S. bank operating subsidiaries’ assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

At March 31, 2010, the Company’s U.S. bank operating subsidiaries met all capital adequacy requirements to which they are subject and exceeded all regulatorily mandated and targeted minimum regulatory capital requirements to be well-capitalized. There are no conditions or events that management believes have changed the Company’s U.S. bank operating subsidiaries’ category.

The table below sets forth the Company’s significant U.S. bank operating subsidiaries’ capital at March 31, 2010 and December 31, 2009.

	March 31, 2010			December 31, 2009
	Amount		Ratio	Amount		Ratio
	(dollars in millions)
Total Capital (to RWAs):
Morgan Stanley Bank, N.A.	$	9,129	21.3%	$	8,880	18.4%
Morgan Stanley Trust	$	754	83.0%	$	602	70.3%
Tier I Capital (to RWAs):
Morgan Stanley Bank, N.A.	$	7,601	17.8%	$	7,360	15.3%
Morgan Stanley Trust	$	754	83.0%	$	602	70.3%
Leverage Ratio:
Morgan Stanley Bank, N.A.	$	7,601	10.7%	$	7,360	10.7%
Morgan Stanley Trust	$	754	10.9%	$	602	8.9%

Under regulatory capital requirements adopted by the U.S. federal banking agencies, U.S. depository institutions, in order to be considered well-capitalized, must maintain a capital ratio of Tier 1 capital to RWAs of 6%, a ratio of total capital to RWAs of 10%, and a ratio of Tier 1 capital to average book assets (leverage ratio) of 5%. Each U.S. depository institution subsidiary of the Company must be well-capitalized in order for the Company to continue to qualify as a financial holding company and to continue to engage in the broadest range of financial activities permitted to financial holding companies. At March 31, 2010, the Company’s three U.S. depository institutions maintained capital at levels in excess of the universally mandated well-capitalized levels. These subsidiary depository institutions maintain capital at levels sufficiently in excess of the “well-capitalized” requirements to address any additional capital needs and requirements identified by the federal banking regulators.

MS&Co. and Other Broker-Dealers.    MS&Co. is a registered broker-dealer and registered futures commission merchant and, accordingly, is subject to the minimum net capital requirements of the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority and the Commodity Futures Trading Commission. MS&Co. has consistently operated with capital in excess of its regulatory capital requirements. MS&Co.’s net capital totaled $7,658 million and $7,854 million at March 31, 2010 and December 31, 2009, respectively, which exceeded the amount required by $6,510 million and $6,758 million, respectively. Morgan Stanley Smith Barney LLC is a registered broker-dealer and registered futures commission merchant, introducing business to MS&Co. and Citi, and has operated with capital in excess of its regulatory capital requirements.

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MSIP, a London-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Authority, and MSJS, a Tokyo-based broker-dealer subsidiary, is subject to the capital requirements of the Financial Services Agency. MSIP and MSJS have consistently operated in excess of their respective regulatory capital requirements.

MS&Co. is required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. MS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. At March 31, 2010, MS&Co. had tentative net capital in excess of the minimum and the notification requirements.

Other Regulated Subsidiaries.    Certain other U.S. and non-U.S. subsidiaries are subject to various securities, commodities and banking regulations, and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These subsidiaries have consistently operated in excess of their local capital adequacy requirements.

Morgan Stanley Derivative Products Inc. (“MSDP”), a derivative products subsidiary rated Aa2 by Moody’s Investors Service, Inc. (“Moody’s”) and AAA by Standard & Poor’s Ratings Services, a Division of the McGraw-Hill Companies Inc. (“S&P”), maintains certain operating restrictions that have been reviewed by Moody’s and S&P. On December 21, 2009, MSDP was downgraded from a triple-A rating to Aa2 rating by Moody’s but maintained its AAA rating by S&P. The downgrade did not significantly impact the Company’s results of operations or financial condition. MSDP is operated such that creditors of the Company should not expect to have any claims on the assets of MSDP, unless and until the obligations to its own creditors are satisfied in full. Creditors of MSDP should not expect to have any claims on the assets of the Company or any of its affiliates, other than the respective assets of MSDP.

12. Total Equity.

During the quarter ended March 31, 2010 and 2009, the Company did not purchase any of its common stock as part of its share repurchase program. At March 31, 2010, the Company had approximately $1.6 billion remaining under its current share repurchase authorization. Share repurchases by the Company are subject to regulatory approval.

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13. Earnings per Common Share.

Basic EPS is computed by dividing income available to Morgan Stanley common shareholders by the weighted average number of common shares outstanding for the period. Common shares outstanding include common stock and vested restricted stock unit awards where recipients have satisfied either the explicit vesting terms or retirement eligibility requirements. Diluted EPS reflects the assumed conversion of all dilutive securities. The Company calculates EPS using the two-class method (see Note 1) and determines whether instruments granted in share-based payment transactions are participating securities. The following table presents the calculation of basic and diluted EPS (in millions, except for per share data):

	Three Months Ended March 31,
	2010			2009
Basic EPS:
Income (loss) from continuing operations	$	2,080		$	(35	)
Net loss from discontinued operations		(69	)		(155	)
Net income (loss)		2,011			(190	)
Net income (loss) applicable to non-controlling interests		235			(13	)
Net income (loss) applicable to Morgan Stanley		1,776			(177	)
Less: Preferred dividends (Series A Preferred Stock)		(11	)		(11	)
Less: Preferred dividends (Series B Preferred Stock)		(196	)		(196	)
Less: Preferred dividends (Series C Preferred Stock)		(13	)		(29	)
Less: Preferred dividends (Series D Preferred Stock)		—			(125	)
Less: Amortization of issuance discount for Series D Preferred Stock(1)		—			(40	)
Less: Allocation of earnings to participating restricted stock units(2):
From continuing operations		(54	)		—
From discontinued operations		2			—
Less: Allocation of undistributed earnings to Equity Units(1):
From continuing operations		(99	)		—
From discontinued operations		6			—
Net income (loss) applicable to Morgan Stanley common shareholders	$	1,411		$	(578	)
Weighted average common shares outstanding		1,315			1,012
Earnings (loss) per basic common share:
Income (loss) from continuing operations	$	1.12		$	(0.41	)
Net loss on discontinued operations		(0.05	)		(0.16	)
Earnings (loss) per basic common share	$	1.07		$	(0.57	)
Diluted EPS:
Earnings (loss) applicable to Morgan Stanley common shareholders	$	1,411		$	(578	)
Preferred stock dividends (Series B Preferred Stock)		196			—
Income (loss) available to common shareholders plus assumed conversions	$	1,607		$	(578	)
Weighted average common shares outstanding		1,315			1,012
Effect of dilutive securities:
Stock options and restricted stock units(2)		1			—
Series B Preferred Stock		310			—
Weighted average common shares outstanding and common stock equivalents		1,626			1,012
Earnings (loss) per diluted common share:
Income (loss) from continuing operations	$	1.03		$	(0.41	)
Net loss on discontinued operations		(0.04	)		(0.16	)
Earnings (loss) per diluted common share	$	0.99		$	(0.57	)

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(1) See Note 13 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K.

(2) Restricted stock units that are considered participating securities participate in all of the earnings of the Company in the computation of basic EPS, and therefore, such restricted stock units are not included as incremental shares in the diluted calculation.

The following securities were considered antidilutive and, therefore, were excluded from the computation of diluted EPS:

Number of Antidilutive Securities Outstanding at End of Period:	Three Months Ended March 31,
	2010	2009
	(shares in millions)
Restricted stock units and performance stock units	47	68
Stock options	73	88
Equity Units(1)(2)	116	116
CPP Warrant(2)	—	65
Series B Preferred Stock	—	311
Total	236	648

(1) The Equity Units participate in substantially all of the earnings of the Company (i.e., any earnings above $0.27 per quarter) in basic EPS (assuming a full distribution of earnings of the Company), and therefore, the Equity Units generally would not be included as incremental shares in the diluted calculation.

(2) See Note 13 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K.

14. Interest Income and Interest Expense.

Details of Interest income and Interest expense were as follows:

	Three Months Ended March, 31
	2010			2009
	(dollars in millions)
Interest income(1):
Financial instruments owned(2)	$	1,143		$	1,289
Securities available for sale		10			—
Loans		70			88
Interest bearing deposits with banks		41			113
Federal funds sold and securities purchased under agreements to resell and securities borrowed		150			444
Other		334			311
Interest income	$	1,748		$	2,245
Interest expense(1):
Commercial paper and other short-term borrowings	$	3		$	37
Deposits		172			150
Long-term debt		1,064			1,472
Securities sold under agreements to repurchase and securities loaned		286			463
Other		(158	)		187
Interest expense	$	1,367		$	2,309
Net interest	$	381		$	(64	)

(1) Interest income and expense are recorded within the condensed consolidated statements of income depending on the nature of the instrument and related market conventions. When interest is included as a component of the instrument’s fair value, interest is included within Principal transactions—Trading revenues or Principal transactions—Investment revenues. Otherwise, it is included within Interest income or Interest expense.

(2) Interest expense on Financial instruments sold, not yet purchased is reported as a reduction to Interest income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Employee Benefit Plans.

The Company maintains various pension and benefit plans for eligible employees. The following table presents the components of the net periodic benefit expense:

	Three Months Ended March 31,
	2010			2009
	(dollars in millions)
Service cost, benefits earned during the period	$	26		$	31
Interest cost on projected benefit obligation		41			40
Expected return on plan assets		(32	)		(30	)
Net amortization of prior service costs		(2	)		(3	)
Net amortization of actuarial loss		8			11
Net periodic benefit expense	$	41		$	49

16. Income Taxes.

The Company is under continuous examination by the Internal Revenue Service (the “IRS”) and other tax authorities in certain countries, such as Japan and the United Kingdom (the “U.K.”), and states in which the Company has significant business operations, such as New York. During 2010, the IRS and the Japanese tax authorities are expected to conclude the field work portion of their examinations on issues covering tax years 1999 - 2005 and 2007 - 2008, respectively. Also during 2010, the Company expects to reach a conclusion with the U.K. tax authorities on issues through tax year 2007, including those in appeals. Additionally during 2010, the Company may reach a conclusion with the New York State and New York City tax authorities on issues covering years 2002 - 2006. The Company regularly assesses the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. The Company has established unrecognized tax benefits that the Company believes are adequate in relation to the potential for additional assessments. Once established, the Company adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change. The Company believes that the resolution of tax matters will not have a material effect on the condensed consolidated statements of financial condition of the Company, although a resolution could have a material impact on the Company’s condensed consolidated statements of income for a particular future period and on the Company’s effective income tax rate for any period in which such resolution occurs.

It is reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next twelve months. At this time, however, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax benefits and impact on the effective tax rate over the next twelve months.

During the quarter ended March 31, 2010, as part of the Company’s periodic review of the business, liquidity and capital requirements of its non-U.S. subsidiaries, it was determined that prior-years’ undistributed earnings of certain non-U.S. subsidiaries for which U.S. federal income taxes have been provided will remain indefinitely reinvested abroad. The Company does not intend to use these earnings as a source of funding of its operations in the U.S. in the foreseeable future. As a result of this determination, the income tax provision for the quarter ended March 31, 2010 included a benefit of $382 million, or $0.21 per diluted share, associated with the release of the previously provided U.S. federal deferred tax liability associated with these earnings.

67

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. Segment and Geographic Information.

The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company’s management organization. The Company provides a wide range of financial products and services to its customers in each of its business segments: Institutional Securities, Global Wealth Management Group and Asset Management. For further discussion of the Company’s business segments, see Note 1.

Revenues and expenses directly associated with each respective segment are included in determining its operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, generally based on each segment’s respective net revenues, non-interest expenses or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category to reconcile the business segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations primarily represents the effect of timing differences associated with the revenue and expense recognition of commissions paid by the Asset Management business segment to the Global Wealth Management Group business segment associated with sales of certain products and the related compensation costs paid to the Global Wealth Management Group business segment’s global representatives. Intersegment eliminations also reflect the effect of fees paid by the Institutional Securities business segment to the Global Wealth Management Group business segment related to the bank deposit program.

Selected financial information for the Company’s segments is presented below:

Three Months Ended March 31, 2010	Institutional Securities			Global Wealth Management Group		Asset Management			Discover		Intersegment Eliminations(4)			Total
	(dollars in millions)
Total non-interest revenues	$	5,219		$	2,914	$	673		$	—	$	(109	)	$	8,697
Net interest		125			191		(20	)		—		85			381
Net revenues	$	5,344		$	3,105	$	653		$	—	$	(24	)	$	9,078
Income (loss) from continuing operations before income taxes	$	2,067		$	278	$	173		$	—	$	(2	)	$	2,516
Provision for (benefit from) income taxes		330			64		43			—		(1	)		436
Income (loss) from continuing operations		1,737			214		130			—		(1	)		2,080
Discontinued operations(1):
Gain (loss) from discontinued operations		(938	)		—		65			775		(2	)		(100	)
Benefit from income taxes		—			—		(30	)		—		(1	)		(31	)
Gain (loss) on discontinued operations(2)		(938	)		—		95			775		(1	)		(69	)
Net income (loss)		799			214		225		$	775	$	(2	)		2,011
Net income applicable to non-controlling interests		4			115		116			—		—			235
Net income (loss) applicable to Morgan Stanley	$	795		$	99	$	109		$	775	$	(2	)	$	1,776

68

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three Months Ended March 31, 2009	Institutional Securities			Global Wealth Management Group		Asset Management			Intersegment Eliminations			Total
	(dollars in millions)
Total non-interest revenues	$	1,851		$	1,112	$	43		$	(45	)	$	2,961
Net interest		(250	)		187		(21	)		20			(64	)
Net revenues	$	1,601		$	1,299	$	22		$	(25	)	$	2,897
(Loss) income from continuing operations before income taxes	$	(464	)	$	119	$	(283	)	$	(2	)	$	(630	)
(Benefit from) provision for income taxes		(607	)		46		(33	)		(1	)		(595	)
Income (loss) from continuing operations		143			73		(250	)		(1	)		(35	)
Discontinued operations(1):
Gain (loss) from discontinued operations		17			—		(276	)		4			(255	)
Provision for (benefit from) income taxes		6			—		(108	)		2			(100	)
Gain (loss) on discontinued operations(2)		11			—		(168	)		2			(155	)
Net income (loss)		154			73		(418	)		1			(190	)
Net loss applicable to non-controlling interests		(13	)		—		—			—			(13	)
Net income (loss) applicable to Morgan Stanley	$	167		$	73	$	(418	)	$	1		$	(177	)

(1) See Note 18 for a discussion of discontinued operations.

(2) In the quarter ended March 31, 2010, amounts included a loss of $932 million related to the planned disposition of Revel included within the Institutional Securities business segment and a gain of $775 million related to the legal settlement with DFS. Amounts for the quarter ended March 31, 2009 primarily included MSCI within the Institutional Securities business segment and Crescent and Retail Asset Management within the Asset Management business segment.

Net Interest	Institutional Securities			Global Wealth Management Group		Asset Management			Intersegment Eliminations			Total
	(dollars in millions)
Three Months Ended March 31, 2010
Interest income	$	1,408		$	339	$	6		$	(5	)	$	1,748
Interest expense		1,283			148		26			(90	)		1,367
Net interest	$	125		$	191	$	(20	)	$	85		$	381
Three Months Ended March 31, 2009
Interest income	$	2,018		$	226	$	7		$	(6	)	$	2,245
Interest expense		2,268			39		28			(26	)		2,309
Net interest	$	(250	)	$	187	$	(21	)	$	20		$	(64	)

Total Assets(1)	Institutional Securities		Global Wealth Management Group		Asset Management		Total
	(dollars in millions)
At March 31, 2010	$	747,391	$	62,051	$	10,277	$	819,719
At December 31, 2009	$	719,232	$	44,154	$	8,076	$	771,462

(1) Corporate assets have been fully allocated to the Company’s business segments.

69

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company operates in both U.S. and non-U.S. markets. The Company’s non-U.S. business activities are principally conducted through European and Asian locations. The net revenues disclosed in the following table reflect the regional view of the Company’s consolidated net revenues on a managed basis, based on the following methodology:

• Institutional Securities: advisory and equity underwriting—client location, debt underwriting—revenue recording location, sales and trading—trading desk location.

• Global Wealth Management Group: global representative coverage location.

• Asset Management: client location, except for merchant banking business, which is based on asset location.

	Three Months Ended March 31,
Net revenues	2010		2009
	(dollars in millions)
Americas	$	6,199	$	2,589
Europe, Middle East, and Africa		2,013		59
Asia		866		249
Net revenues	$	9,078	$	2,897

18. Discontinued Operations.

See Note 1 for a discussion of the Company’s discontinued operations.

The table below provides information regarding amounts included in discontinued operations:

	Three Months Ended March 31,
	2010			2009
	(dollars in millions)
Net revenues(1):
Revel	$	—		$	(1	)
Crescent		—			60
Retail Asset Management		185			110
MSCI		—			96
Other		—			1
	$	185		$	266
Pre-tax (loss) gain on discontinued operations(1):
Revel(2)	$	(938	)	$	(3	)
Crescent		—			(306	)
Retail Asset Management		66			33
MSCI		—			22
DFS(3)		775			—
Other		(3	)		(1	)
	$	(100	)	$	(255	)

(1) Amounts included eliminations of intersegment activity.

(2) Revel amount included a loss of approximately $932 million in connection with its planned disposition.

(3) Amount relates to the legal settlement with DFS.

70

MORGAN STANLEY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

19. Subsequent Events.

Common Dividend. On April 21, 2010, the Company announced that its Board of Directors declared a quarterly dividend per common share of $0.05. The dividend is payable on May 14, 2010 to common shareholders of record on April 30, 2010.

U.K. Tax. In April 2010, the U.K. government enacted legislation imposing a payroll tax on discretionary bonuses over a certain amount awarded to certain employees in the period from December 9, 2009 to April 5, 2010. The Company is still evaluating the impact of this legislation and will recognize a charge in Compensation and benefits expense in the second quarter of 2010 reflecting the amount that will be currently payable by the Company in August 2010.

Japan Securities Joint Venture. On May 1, 2010, the Company and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) closed the previously announced transaction to form a joint venture in Japan of their respective investment banking and securities businesses. MUFG and the Company have integrated their respective Japanese securities companies by forming two joint venture companies. MUFG contributed the wholesale and retail securities businesses conducted in Japan by its subsidiary Mitsubishi UFJ Securities Co., Ltd. into one of the joint venture entities named Mitsubishi UFJ Morgan Stanley Securities, Co., Ltd. (“MUMSS”). The Company contributed the investment banking operations conducted in Japan by its subsidiary, Morgan Stanley Japan Securities Co., Ltd. (“MSJS”), into MUMSS and contributed the sales and trading and capital markets business conducted in Japan by MSJS into a second joint venture entity called Morgan Stanley MUFG Securities, Co., Ltd. (“MSMS” and, together with MUMSS, the “Joint Venture”). Following the respective contributions to the Joint Venture and a cash payment of 26 billion yen from MUFG to the Company at closing of the transaction (subject to certain post-closing cash adjustments), the Company owns a 40% economic interest in the Joint Venture and MUFG owns a 60% economic interest in the Joint Venture. The Company holds a 40% voting interest and MUFG holds a 60% voting interest in MUMSS, while the Company holds a 51% voting interest and MUFG holds a 49% voting interest in MSMS.

71

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Morgan Stanley:

We have reviewed the accompanying condensed consolidated statement of financial condition of Morgan Stanley and subsidiaries (the “Company”) as of March 31, 2010, and the related condensed consolidated statements of income, comprehensive income, cash flows and changes in total equity for the three-month periods ended March 31, 2010 and March 31, 2009. These condensed consolidated financial statements are the responsibility of the management of the Company.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of the Company as of December 31, 2009, and the consolidated statements of income, comprehensive income, cash flows and changes in total equity for the year then ended (not presented herein) included in the Company’s Annual Report on Form 10-K; and in our report dated February 26, 2010, which report contains explanatory paragraphs concerning the adoption of Financial Accounting Standards Board (“FASB”) accounting guidance that addresses noncontrolling interests in consolidated financial statements, the computation of Earnings Per Share under the two-class method for share-based payment transactions that are participating securities and the accounting for uncertainties in income taxes and an explanatory paragraph concerning the Company changing its fiscal year end from November 30 to December 31, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated statement of financial condition from which it has been derived.

As discussed in Note 1 to the condensed consolidated financial statements, effective January 1, 2010, the Company adopted FASB accounting guidance that addresses transfers of financial assets and extinguishments of liabilities and consolidation of variable interest entities.

/s/ Deloitte & Touche LLP

New York, New York

May 7, 2010

72

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction.

Morgan Stanley (or the “Company”), a financial holding company, is a global financial services firm that maintains significant market positions in each of its business segments—Institutional Securities, Global Wealth Management Group and Asset Management. The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. A summary of the activities of each of the business segments is as follows.

Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and market-making activities in equity and fixed income securities and related products, including foreign exchange and commodities; and investment activities.

Global Wealth Management Group, which includes the Company’s 51% interest in Morgan Stanley Smith Barney Holdings LLC (“MSSB”), provides brokerage and investment advisory services to individual investors and small-to-medium sized businesses and institutions covering various investment alternatives; financial and wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and trust and fiduciary services.

Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge funds and funds of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party distribution channels (see “Discontinued Operations—Retail Asset Management Business” herein). Asset Management also engages in investment activities.

The discussion of the Company’s results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company’s future results, please see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Competition” and “Supervision and Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain Factors Affecting Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”).

Discontinued Operations.

Revel Entertainment Group, LLC.    On March 31, 2010, the Board of Directors authorized a plan of disposal by sale for Revel Entertainment Group, LLC (“Revel”), a development stage enterprise and subsidiary of the Company that is primarily associated with a development property in Atlantic City, New Jersey. The results of Revel are reported as discontinued operations for all periods presented and were formerly included within the Institutional Securities business segment. The quarter ended March 31, 2010 includes a loss of approximately $932 million in connection with such planned disposition.

Retail Asset Management Business.    On October 19, 2009, as part of a restructuring of its Asset Management business segment, the Company entered into a definitive agreement to sell substantially all of its retail asset management business (“Retail Asset Management”), including Van Kampen Investments, Inc. (“Van Kampen”), to Invesco Ltd. (“Invesco”). This transaction allows the Company’s Asset Management business segment to focus on its institutional client base, including corporations, pension plans, large intermediaries, foundations and endowments, sovereign wealth funds and central banks, among others.

Under the terms of the definitive agreement, Invesco will purchase substantially all of Retail Asset Management, operating under both the Morgan Stanley and Van Kampen brands, in a stock and cash transaction. The Company

73

will receive a 9.4% minority interest in Invesco. The transaction, which has been approved by the Boards of Directors of both companies, is expected to close in mid-2010, subject to customary regulatory, client and fund shareholder approvals. The results of Retail Asset Management are reported as discontinued operations for all periods presented.

MSCI Inc.    In May 2009, the Company divested all of its remaining ownership interest in MSCI Inc. (“MSCI”). The results of MSCI are reported as discontinued operations through the date of sale and were formerly included within the Institutional Securities business segment.

Crescent.    Discontinued operations for the quarter ended March 31, 2009 include operating results related to Crescent Real Estate Equities Limited Partnership (“Crescent”), a former real estate subsidiary of the Company. The Company completed the disposition of Crescent in the fourth quarter of 2009, whereby the Company transferred its ownership interest in Crescent to Crescent’s primary creditor in exchange for full release of liability on the related loans. The results of Crescent were formerly included in the Asset Management business segment.

Discover.    On June 30, 2007, the Company completed the spin-off of its business segment Discover Financial Services (“DFS”) to its shareholders. On February 11, 2010, DFS paid the Company $775 million in complete satisfaction of its obligations to the Company regarding the sharing of proceeds from the lawsuit against Visa and MasterCard. The payment is recorded as a gain in discontinued operations for the quarter ended March 31, 2010.

See Note 18 to the condensed consolidated financial statements for additional information on discontinued operations.

74

Executive Summary.

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts).

	Three Months Ended March  31,
	2010(1)			2009(2)
Net revenues:
Institutional Securities	$	5,344		$	1,601
Global Wealth Management Group		3,105			1,299
Asset Management		653			22
Intersegment Eliminations		(24	)		(25	)
Consolidated net revenues	$	9,078		$	2,897
Consolidated net income (loss)	$	2,011		$	(190	)
Net income (loss) applicable to non-controlling interests		235			(13	)
Net income (loss) applicable to Morgan Stanley	$	1,776		$	(177	)
Income (loss) from continuing operations applicable to Morgan Stanley:
Institutional Securities	$	1,733		$	161
Global Wealth Management Group		99			73
Asset Management		14			(250	)
Intersegment Eliminations		(1	)		(1	)
Income (loss) from continuing operations applicable to Morgan Stanley	$	1,845		$	(17	)
Amounts applicable to Morgan Stanley:
Income (loss) from continuing operations applicable to Morgan Stanley	$	1,845		$	(17	)
Loss from discontinued operations applicable to Morgan Stanley, after tax		(69	)		(160	)
Net income (loss) applicable to Morgan Stanley	$	1,776		$	(177	)
Earnings (loss) earnings applicable to Morgan Stanley common shareholders	$	1,411		$	(578	)
Earnings (loss) per basic common share:
Income (loss) from continuing operations	$	1.12		$	(0.41	)
Net loss from discontinued operations(3)		(0.05	)		(0.16	)
Earnings (loss) per basic common share(4)	$	1.07		$	(0.57	)
Earnings (loss) per diluted common share:
Income (loss) from continuing operations	$	1.03		$	(0.41	)
Net loss from discontinued operations(3)		(0.04	)		(0.16	)
Earnings (loss) per diluted common share(4)	$	0.99		$	(0.57	)
Regional net revenues(5):
Americas	$	6,199		$	2,589
Europe, Middle East and Africa		2,013			59
Asia		866			249
Consolidated net revenues	$	9,078		$	2,897

75

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts)—(Continued).

	Three Months Ended March 31,
	2010(1)			2009(2)
Average common equity (dollars in billions)(6):
Institutional Securities	$	16.3		$	20.3
Global Wealth Management Group		6.6			1.3
Asset Management		2.4			2.4
Parent company capital(6)		12.2			4.2
Total from continuing operations		37.5			28.2
Discontinued operations		0.6			1.4
Consolidated average common equity	$	38.1		$	29.6
Return on average common equity(6):
Consolidated		16	%		N/M
Institutional Securities(6)		41	%		2	%
Global Wealth Management Group		6	%		20	%
Asset Management		1	%		N/M
Book value per common share(7)	$	27.65		$	27.10
Tangible common equity(8)	$	31,097		$	26,399
Tangible book value per common share(9)	$	22.24		$	24.41
Tangible common equity to risk-weighted assets ratio(10)		9.4	%		9.2	%
Effective income tax rate from continuing operations(11)		17.3	%		94.4	%
Worldwide employees(12)		62,211			43,317
Average liquidity (dollars in billions)(13):
Parent company liquidity	$	65		$	61
Bank and other subsidiary liquidity		90			84
Total liquidity	$	155		$	145
Capital ratios(14):
Total capital ratio		16.1	%		18.2	%
Tier 1 capital ratio		15.1	%		16.7	%
Tier 1 leverage ratio		6.1	%		7.1	%
Tier 1 common ratio		8.3	%		6.2	%
Consolidated assets under management or supervision (dollars in billions)(15)(16):
Asset Management	$	262		$	250
Global Wealth Management Group		413			119
Total	$	675		$	369

76

Financial Information and Statistical Data (dollars in millions, except where noted and per share amounts)—(Continued).

	Three Months Ended March 31,
	2010(1)			2009(2)
Institutional Securities:
Pre-tax profit margin(18)		39	%		N/M
Global Wealth Management Group:
Global representatives(19)		18,140			8,148
Annualized net revenue per global representative (dollars in thousands)(20)	$	685		$	630
Assets by client segment (dollars in billions):
$10 million or more	$	481		$	146
$1 million to $10 million		670			191
Subtotal $1 million or more		1,151			337
$100,000 to $1 million		408			162
Less than $100,000		45			26
Total client assets	$	1,604		$	525
Fee-based assets as a percentage of total client assets		26	%		24	%
Client assets per global representative (dollars in millions)(21)	$	88		$	64
Bank deposits (dollars in billions)(22)	$	114		$	47
Pre-tax profit margin(18)		9	%		9	%
Asset Management(15):
Assets under management or supervision (dollars in billions)(17)	$	262		$	250
Pre-tax profit margin(18)		26	%		N/M

N/M – Not Meaningful.

(1) Information includes MSSB effective May 31, 2009 (see Note 2 to the condensed consolidated financial statements).

(2) Certain prior-period information has been reclassified to conform to the current period’s presentation.

(3) Amounts include the operating results related to Revel, Retail Asset Management, Crescent, MSCI and other discontinued operations. The first quarter of 2010 also included a gain of $775 million related to the legal settlement with DFS.

(4) For the calculation of basic and diluted EPS, see Note 13 to the condensed consolidated financial statements.

(5) In the first quarter of 2009, regional net revenues in Europe, Middle East and Africa were negatively impacted by the tightening of the Company’s credit spreads resulting from the increase in fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for which the fair value option was elected. Regional net revenues reflect the regional view of the Company’s consolidated net revenues, on a managed basis, based on the following methodology:

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

(6) The computation of average common equity for each business segment is based upon an economic capital framework that estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. Economic capital is assigned to each business segment based on a regulatory capital framework plus additional capital for stress losses. The Company defines available Parent company capital as capital not specifically designated to a particular business segment. Economic capital requirements are met by regulatory Tier 1 equity (including Morgan Stanley shareholders’ equity, certain preferred stock, eligible hybrid capital instruments, non-controlling interests and deductions of certain goodwill, intangible assets, net deferred tax assets and debt valuation adjustment (“DVA”)), subject to regulatory limits. The economic capital framework will evolve over time in response to changes in the business and regulatory environment and to incorporate enhancements in modeling techniques. The return on average common equity uses income from continuing operations applicable to Morgan Stanley less preferred dividends as a percentage of average common equity. The effective tax rates used in the computation of business segment return on average common equity were determined on a separate entity basis. Excluding the effect of the discrete tax benefit in the quarter ended March 31, 2010, the return on average common equity for the Institutional Securities business would have been 31%.

(7) Book value per common share equals common shareholders’ equity of $38,667 million at March 31, 2010 and $29,314 million at March 31, 2009, divided by period end common shares outstanding of 1,398 million at March 31, 2010 and 1,082 million at March 31, 2009.

(8) Tangible common equity equals common shareholders’ equity less goodwill and intangible assets net of allowable mortgage servicing rights. The deduction for goodwill and intangible assets at March 31, 2010 includes only the Company’s share of MSSB’s goodwill and intangible assets.

77

(9) Tangible book value per common share equals tangible common equity divided by period end common shares outstanding.

(10) Tangible common equity to risk-weighted assets (“RWAs”) ratio equals tangible common equity divided by total RWAs of $331,913 million at March 31, 2010 and $288,262 million at March 31, 2009.

(11) The effective tax rate for the quarter ended March 31, 2010 includes a tax benefit of $382 million, or $0.21 per diluted share, related to the reversal of U.S. deferred tax liabilities associated with prior-years’ undistributed earnings of certain non-U.S. subsidiaries that were determined to be indefinitely reinvested abroad. Excluding this benefit, the annual effective tax rate in the quarter ended March 31, 2010 would have been 32.5%. The effective tax rate for the quarter ended March 31, 2009 included a tax benefit of $331 million, or $0.33 per diluted share, resulting from the cost of anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates. Excluding this benefit, the annual effective tax rate for the quarter ended March 31, 2009 would have been 41.9%.

(12) Worldwide employees at March 31, 2010 include worldwide employees of businesses contributed by Citigroup Inc. (“Citi”) related to MSSB.

(13) For a discussion of average liquidity, see “Liquidity and Capital Resources—Liquidity Management Policies—Liquidity Reserves” herein.

(14) For a discussion of total capital ratio, Tier 1 capital ratio and Tier 1 leverage ratio, see “Liquidity and Capital Resources—Regulatory Requirements” herein. For a discussion of Tier 1 common ratio, see “Liquidity and Capital Resources—The Balance Sheet” herein.

(15) Amounts exclude certain asset management businesses following the decision to sell the Retail Asset Management business to Invesco.

(16) Revenues and expenses associated with these assets are included in the Company’s Asset Management and Global Wealth Management Group business segments.

(17) Amounts include Asset Management’s proportional share of assets managed by entities in which it owns a non-controlling interest.

(18) Percentages represent income from continuing operations before income taxes as a percentage of net revenues.

(19) Global representatives at March 31, 2010 include global representatives of businesses contributed by Citi related to MSSB.

(20) Annualized net revenue per global representative for the quarter ended March 31, 2010 and 2009 equals Global Wealth Management Group’s net revenues divided by the quarterly weighted average global representative headcount for the quarter ended March 31, 2010 and 2009, respectively.

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

(22) Approximately $56 billion of the bank deposit balances at March 31, 2010 are held at Company-affiliated depositories with the remainder held at Citi-affiliated depositories. These deposit balances are held at certain of the Company’s Federal Deposit Insurance Corporation (the “FDIC”) insured depository institutions for the benefit of retail clients through their accounts.

Global Market and Economic Conditions.

During the first quarter of 2010, market and economic conditions continued the recovery that began during 2009.

In the U.S., major equity market indices ended the first quarter of 2010 higher as compared with the beginning of the year, primarily due to investor confidence in an economic recovery and better than expected corporate earnings. Government and business spending increased, while certain sectors of the real estate markets and consumer spending remained challenged. The unemployment rate decreased to 9.7% at March 31, 2010 from 10.0% at December 31, 2009. The Federal Open Market Committee (“FOMC”) kept its interest rates at historically low levels, and at March 31, 2010, the federal funds target rate was between zero and 0.25%, and the discount rate was 0.75%.

In Europe, major European equity market indices ended the first quarter of 2010 slightly higher as compared with the beginning of the year, despite adverse economic developments, especially in Greece, that emerged during the quarter. Industrial output in the European region was primarily driven by German exports. The euro area unemployment rate remained relatively unchanged at approximately 10% at March 31, 2010. The European Central Bank (“ECB”) kept its benchmark interest rate at 1.00% and the Bank of England (“BOE”) kept its benchmark interest rate at 0.50%.

In Asia, industrial output was higher, driven by exports from both China and Japan. China’s economy also continued to benefit from government spending for capital projects. Equity markets at the end of the first quarter of 2010 were lower in China, while higher in Japan, as compared with the beginning of the year.

Overview of the Quarter ended March 31, 2010 Financial Results.

The Company recorded net income applicable to Morgan Stanley of $1,776 million during the quarter ended March 31, 2010 compared with a net loss applicable to Morgan Stanley of $177 million in the quarter ended March 31, 2009. Comparisons of the current quarter results with the prior year period were affected by results of MSSB, which closed on May 31, 2009.

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Net revenues (total revenues less interest expense) increased to $9,078 million in the quarter ended March 31, 2010 from $2,897 million in the quarter ended March 31, 2009. Net revenues included gains of approximately $54 million related to the widening of the Company’s credit spreads on certain long-term and short-term borrowings accounted for at fair value, compared with losses of $1,708 million in the quarter ended March 31, 2009 related to the tightening of the Company’s credit spreads on such borrowings. Non-interest expenses increased 86% to $6,562 million from the prior year period, primarily due to higher compensation costs and higher non-compensation costs. Compensation and benefits expense increased 123%, primarily reflecting the consolidation of the expenses of MSSB and higher net revenues. Non-compensation expenses increased 38%, primarily due to additional operating costs and integration costs related to MSSB. Discontinued operations included a loss of $932 million on the planned disposition of Revel and a gain of $775 million related to the legal settlement with DFS. Diluted EPS were $0.99 in the quarter ended March 31, 2010 compared with $(0.57) in the prior year period. Diluted EPS from continuing operations were $1.03 in the quarter ended March 31, 2010 compared with $(0.41) in the prior year period.

The Company’s effective income tax rate from continuing operations was 17.3% for the quarter ended March 31, 2010 compared with 94.4% for the quarter ended March 31, 2009. The results for the quarter ended March 31, 2010 included a tax benefit of $382 million related to the reversal of U.S. deferred tax liabilities associated with prior-years’ undistributed earnings of certain non-U.S. subsidiaries that were determined to be indefinitely reinvested abroad. The results for the quarter ended March 31, 2009 included a tax benefit of $331 million resulting from the cost of anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates. Excluding the benefits noted above, the annual effective tax rate from continuing operations in the quarter ended March 31, 2010 and 2009 would have been 32.5% and 41.9%, respectively. The decrease in the effective tax rate is reflective of the level and geographic mix of earnings. See Note 16 to the condensed consolidated financial statements for further discussion of the tax benefit recorded in the quarter ended March 31, 2010.

Institutional Securities.    Institutional Securities recorded income from continuing operations before income taxes of $2,067 million in the quarter ended March 31, 2010, compared with a loss from continuing operations before income taxes of $464 million in the quarter ended March 31, 2009.

Net revenues increased $3,743 million to $5,344 million in the quarter ended March 31, 2010, which reflected gains of approximately $54 million resulting from the widening of the Company’s credit spreads on certain long-term and short-term borrowings accounted for at fair value compared with losses of $1,678 million resulting from the tightening of the Company’s credit spreads on such borrowings in the quarter ended March 31, 2009.

Investment banking revenues increased 9% to $887 million from the prior year period, primarily reflecting higher equity and fixed income underwritings, partially offset by lower advisory fees from merger, acquisition and restructuring transactions. Advisory fees from merger, acquisition and restructuring transactions were $327 million, a decrease of 20% and in line with the industry-wide decline in completed market activity from the comparable period of 2009. Underwriting revenues of $560 million increased 40% from the first quarter of 2009. Equity underwriting revenues increased 70% to $264 million, as market activity increased significantly from very low levels a year ago. Fixed income underwriting revenues increased 21% to $296 million, with higher fees from bond issuances, partially offset by lower loan syndication revenues.

Equity sales and trading revenues increased 49% to $1,419 million in the quarter ended March 31, 2010 from the comparable period of 2009. The increase was primarily due to negative revenue in the first quarter of the prior year related to the significant improvement in the Company’s debt-related credit spreads. Equity sales and trading revenues reflected positive revenue of $48 million in the quarter ended March 31, 2010 due to the widening of the Company’s credit spreads resulting from the decrease in the fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for which the fair value option was elected, compared with negative revenue of $555 million in the quarter ended March 31, 2009, related to the tightening of the Company’s credit spreads. The current quarter also reflected higher prime brokerage

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revenues, partially offset by lower net revenues from derivative products. Prime brokerage net revenues increased primarily due to higher average client balances. Results in the derivatives business reflected declining levels of market liquidity and volatility during the quarter.

Fixed income sales and trading revenues increased 119% to $2,723 million in the quarter ended March 31, 2010 from $1,244 million in the prior year quarter. Interest rate, currency and credit product revenues in the first quarter of 2010 reflected strong results in credit products particularly in investment grade and distressed debt trading and securitized products. Interest rate, currency and credit product net revenues in the first quarter of 2009 included losses of approximately $460 million resulting from exposure to certain Eastern European counterparties. Results in the first quarter of 2009 also included negative revenue of $1.0 billion from the tightening of the Company’s credit spreads resulting from the increase in the fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for which the fair value option was elected. Commodity net revenues decreased 52% in the quarter ended March 31, 2010, primarily reflecting reduced levels of volatility and client activity.

In the quarter ended March 31, 2010, other sales and trading net revenues reflected net gains of $1 million compared with net losses of $804 million in the quarter ended March 31, 2009. Results for the first quarter of 2010 included net losses of $15 million (losses on related hedges of $198 million, partially offset by mark-to-market valuations and realized gains of $183 million) associated with loans and lending commitments. Results for the prior year quarter included net losses of $437 million (mark-to-market valuations and realized losses of $333 million and losses on related hedges of $104 million) associated with loans and lending commitments largely related to certain “event-driven” lending to non-investment grade companies. Results in the quarter ended March 31, 2009 also included losses of $143 million, reflecting the improvement in the Company’s debt-related credit spreads on certain debt related to China Investment Corporation Ltd.’s (“CIC”) investment in the Company, and writedowns of securities of $166 million in the Company’s domestic subsidiary banks, Morgan Stanley Bank, N.A. and Morgan Stanley Trust (collectively, the “Subsidiary Banks”).

Principal transactions net investment gains of $174 million were recognized in the quarter ended March 31, 2010 as compared with net investment losses of $790 million in the quarter ended March 31, 2009. The current quarter gains and the prior year quarter losses primarily related to principal investments in real estate and investments that benefit certain employee deferred compensation plans.

Non-interest expenses increased 59% to $3,277 million, primarily due to higher compensation and benefits costs, due to higher levels of net revenues. Non-compensation expenses increased 8%, primarily resulting from higher levels of business activity.

Global Wealth Management Group.    Global Wealth Management Group recorded income from continuing operations before income taxes of $278 million in the quarter ended March 31, 2010, compared with $119 million in the quarter ended March 31, 2009. The quarter ended March 31, 2010 includes operating results of MSSB, which closed on May 31, 2009.

Net revenues were $3,105 million, a 139% increase over the prior year quarter, primarily related to incremental net revenues from MSSB. Client assets in fee-based accounts increased 233% to $413 billion at March 31, 2010 and increased as a percentage of total client assets to 26% compared with 24% at March 31, 2009. In addition, total client assets rose to $1,604 billion from $525 billion at March 31, 2009, primarily due to the consolidation of MSSB.

Non-interest expenses increased 140% in the quarter ended March 31, 2010 and included the consolidation of operating expenses of MSSB, the amortization of MSSB’s intangible assets, and deal closing costs of $6 million and integration costs of $100 million for MSSB. Compensation and benefits expense increased 134% in the quarter ended March 31, 2010, primarily reflecting MSSB and higher net revenues. As a result of the MSSB transaction, the number of global representatives increased 123% to 18,140 at March 31, 2010 from 8,148 at March 31, 2009.

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Asset Management.    Asset Management recorded income from continuing operations before income taxes of $173 million in the quarter ended March 31, 2010 compared with a loss from continuing operations before income taxes of $283 million in the quarter ended March 31, 2009. Net revenues were $653 million compared with $22 million from the prior year period. The increase was primarily due to net investment gains associated with the Company’s merchant banking business related to valuation gains within certain consolidated real estate funds sponsored by the Company in the quarter ended March 31, 2010. The prior year quarter reflected net investment losses in the Company’s merchant banking business. Asset management, distribution and administration fees increased 12% in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009, primarily reflecting higher fund management and administration fees due to an increase in average assets under management in equity and alternatives asset classes. Assets under management or supervision within Asset Management were $262 billion at March 31, 2010, up from $250 billion at March 31, 2009, an increase of 5%. This increase reflected market appreciation, partially offset by net customer outflows of $27.9 billion primarily in the Company’s money market funds. Non-interest expenses increased 57% in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009, primarily reflecting an increase in compensation and benefits expense. The increase primarily reflected principal investment losses in the prior year quarter related to employee deferred compensation and co-investment plans, compared with gains in the current quarter.

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Certain Factors Affecting Results of Operations.

The Company’s results of operations may be materially affected by market fluctuations and by economic factors. In addition, results of operations in the past have been, and in the future may continue to be, materially affected by many factors of a global nature, including the effect of political and economic conditions and geopolitical events; the effect of market conditions, particularly in the global equity, fixed income and credit markets, including corporate and mortgage (commercial and residential) lending and commercial real estate investments; the impact of current, pending and future legislation, regulation, and legal actions in the U.S. and worldwide; the level and volatility of equity, fixed income and commodity prices, and interest rates, currency values and other market indices; the availability and cost of both credit and capital as well as the credit ratings assigned to the Company’s unsecured short-term and long-term debt; investor sentiment and confidence in the financial markets; the Company’s reputation; the actions and initiatives of current and potential competitors; and technological changes. Such factors also may have an impact on the Company’s ability to achieve its strategic objectives on a global basis. For a further discussion of these and other important factors that could affect the Company’s business, see “Competition” and “Supervision and Regulation” in Part I, Item 1, and “Risk Factors” in Part I, Item 1A of the Form 10-K.

Results of Operations.

The following items significantly affected the Company’s results of operations in the quarters ended March 31, 2010 and March 31, 2009.

Real Estate Investments.    The Company recorded losses in the following business segments related to real estate investments. These amounts exclude investments that benefit certain deferred compensation and employee co-investment plans.

	Three Months Ended March 31,
	2010			2009
	(dollars in billions)
Institutional Securities
Continuing operations(1)	$	—		$	(0.5	)
Discontinued operations(2)		(0.9	)		—
Total Institutional Securities		(0.9	)		(0.5	)
Asset Management:
Continuing operations(3)		—			(0.2	)
Discontinued operations(2)		—			(0.3	)
Total Asset Management		—			(0.5	)
Total	$	(0.9	)	$	(1.0	)

(1) Losses related to net realized and unrealized losses from the Company’s limited partnership investments in real estate funds and are reflected in Principal transactions net investment revenues in the condensed consolidated statements of income.

(2) On March 31, 2010, the Board of Directors authorized a plan of disposal for Revel, a development stage enterprise and subsidiary of the Company that is primarily associated with a development property in Atlantic City, New Jersey. The results of Revel, including the loss from the planned disposal, are reported as discontinued operations for all periods presented and were formerly included within the Institutional Securities business segment. In the Asset Management business segment, amounts relate to Crescent.

(3) Losses related to net realized and unrealized losses from real estate investments in the Company’s merchant banking business and are reflected in Principal transactions—Investments in the condensed consolidated statements of income.

See “Other Matters—Real Estate” herein for further information.

Settlement with DFS.    On February 11, 2010, the Company and DFS entered into an agreement in which each party released the other party from claims related to the sharing of proceeds from the lawsuit against Visa and

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MasterCard. In addition, the Company and DFS entered into an agreement to provide that payments made by DFS to the Company in satisfaction of its obligations under the special dividend declared by DFS in June 2007, shall not exceed $775 million. Also on February 11, 2010, DFS paid the Company $775 million in complete satisfaction of its obligations to the Company under the special dividend. This payment is included in discontinued operations in the condensed consolidated statement of income for the quarter ended March 31, 2010.

Mortgage-Related Trading.    In the quarter ended March 31, 2010, the Company recorded mortgage-related trading gains of approximately $300 million, primarily related to commercial mortgage-backed securities and commercial whole loan positions.

In the quarter ended March 31, 2009, the Company recorded mortgage-related gains of approximately $0.1 billion. The $0.1 billion included gains on commercial mortgage-backed securities and commercial whole loan positions of approximately $0.6 billion, partially offset by losses on U.S. subprime mortgage proprietary trading exposures of $0.3 billion and losses on non-subprime residential mortgages of approximately $0.2 billion.

Monoline Insurers.    Monoline insurers (“Monolines”) provide credit enhancement to capital markets transactions. The quarter ended March 31, 2010 included losses of $143 million related to Monoline credit exposures as compared with gains of $12 million in the quarter ended March 31, 2009. The current credit environment continued to affect the ability of such financial guarantors to provide credit enhancement to existing capital market transactions. The Company’s direct exposure to Monolines is limited to bonds that are insured by Monolines and to derivative contracts with a Monoline as counterparty (principally an affiliate of MBIA Inc.). The Company’s exposure to Monolines as of March 31, 2010 consisted primarily of asset-backed securities bonds of approximately $26 million in the portfolio of the Company’s Subsidiary Banks that are collateralized primarily by first and second lien subprime mortgages enhanced by financial guarantees, approximately $1.8 billion in insured municipal bond securities and approximately $202 million in net counterparty exposure (gross exposure of approximately $5.1 billion net of cumulative credit valuation adjustments of approximately $2.5 billion and net of hedges). Net counterparty exposure is defined as potential loss to the Company over a period of time in an event of 100% default of a Monoline, assuming zero recovery. The Company’s hedging program for Monoline risk includes the use of transactions that effectively mitigate certain market risk components of existing underlying transactions with the Monolines.

Income Tax Benefit.    In the quarter ended March 31, 2010, the Company recorded a tax benefit of $382 million, or $0.21 per diluted share, related to the reversal of U.S. deferred tax liabilities associated with prior-years’ undistributed earnings of certain non-U.S. subsidiaries that were determined to be indefinitely reinvested abroad. In the quarter ended March 31, 2009, the Company recognized a tax benefit of $331 million resulting from the cost of anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.

MSSB.    During the quarter ended March 31, 2010, the Company recorded deal closing costs of approximately $6 million and integration costs of approximately $100 million. During the quarter ended March 31, 2009, the Company recorded deal closing costs of approximately $10 million and integration costs of approximately $31 million.

Corporate Lending.    The Company recorded the following amounts primarily associated with loans and lending commitments carried at fair value within the Institutional Securities business segment:

	Three Months Ended March 31,
	2010(1)			2009(1)
	(dollars in billions)
Gains (losses) on loans and lending commitments	$	0.2		$	(0.3	)
Losses on hedges		(0.2	)		(0.1	)
Total losses	$	—		$	(0.4	)

(1) Amounts include realized and unrealized gains (losses).

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Morgan Stanley Debt.    Net revenues reflected gains of $54 million in the quarter ended March 31, 2010 from the widening of the Company’s credit spreads on certain long-term and short-term borrowings, including structured notes and junior subordinated debentures that are accounted for at fair value. Net revenues reflected losses of $1,708 million in the quarter ended March 31, 2009 from the tightening of the Company’s credit spreads on such borrowings.

In addition, in the quarter ended March 31, 2009, the Company recorded gains of approximately $250 million from repurchasing its debt in the open market and mark-to-market gains of approximately $70 million on certain swaps previously designated as hedges of a portion of the Company’s long-term debt. These swaps were no longer considered hedges once the related debt was repurchased by the Company (i.e., the swaps were “de-designated” as hedges). During the period the swaps were hedging the debt, changes in fair value of these instruments were generally offset by adjustments to the basis of the debt being hedged.

Structured Investment Vehicles.    The Company recognized gains of $43 million in the quarter ended March 31, 2009 related to securities issued by structured investment vehicles (“SIVs”) included in the Company’s condensed consolidated statements of financial condition.

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Business Segments.

Substantially all of the Company’s operating revenues and operating expenses can be directly attributed to its business segments. Certain revenues and expenses have been allocated to each business segment, generally in proportion to its respective revenues or other relevant measures.

As a result of treating certain intersegment transactions as transactions with external parties, the Company includes an Intersegment Eliminations category to reconcile the business segment results to the Company’s consolidated results. Income before taxes in Intersegment Eliminations primarily represents the effect of timing differences associated with the revenue and expense recognition of commissions paid by the Asset Management business segment to the Global Wealth Management Group business segment associated with sales of certain products and the related compensation costs paid to the Global Wealth Management Group business segment’s global representatives. Intersegment eliminations also reflect the effect of fees paid by the Institutional Securities business segment to the Global Wealth Management Group business segment related to the bank deposit program. Losses from continuing operations before income taxes recorded in Intersegment Eliminations were $2 million in the quarters ended March 31, 2010 and March 31, 2009.

See “Other Matters—Segments” herein for further information regarding transactions affecting the Global Wealth Management Group and Institutional Securities.

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INSTITUTIONAL SECURITIES

INCOME STATEMENT INFORMATION

	Three Months Ended March 31,
	2010			2009
	(dollars in millions)
Revenues:
Investment banking	$	887		$	811
Principal transactions:
Trading		3,411			1,106
Investments		174			(790	)
Commissions		581			512
Asset management, distribution and administration fees		26			26
Other		140			186
Total non-interest revenues		5,219			1,851
Interest income		1,408			2,018
Interest expense		1,283			2,268
Net interest		125			(250	)
Net revenues		5,344			1,601
Compensation and benefits		2,171			1,040
Non-compensation expenses		1,106			1,025
Total non-interest expenses		3,277			2,065
Income (loss) from continuing operations before income taxes		2,067			(464	)
Provision for (benefit from) income taxes		330			(607	)
Income from continuing operations		1,737			143
Discontinued operations:
(Loss) gain from discontinued operations		(938	)		17
Provision for income taxes		—			6
(Loss) gain on discontinued operations		(938	)		11
Net income		799			154
Net income (loss) applicable to non-controlling interests		4			(13	)
Net income applicable to Morgan Stanley	$	795		$	167
Amounts attributable to Morgan Stanley common shareholders:
Income from continuing operations, net of tax	$	1,733		$	161
(Loss) gain from discontinued operations, net of tax		(938	)		6
Net income applicable to Morgan Stanley	$	795		$	167

Investment Banking.    Investment banking revenues for the quarter ended March 31, 2010 increased 9% from the comparable period of 2009, primarily reflecting higher equity and fixed income underwritings, partially offset by lower advisory fees from merger, acquisition and restructuring transactions. Advisory fees from merger, acquisition and restructuring transactions were $327 million, a decrease of 20% and in line with the industry-wide decline in completed market activity from the comparable period of 2009. Underwriting revenues of $560 million increased 40% from the first quarter of 2009. Equity underwriting revenues increased 70% to $264 million, as market activity increased significantly from very low levels a year ago. Fixed income underwriting revenues increased 21% to $296 million, with higher fees from bond issuances, partially offset by lower loan syndication revenues.

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Sales and Trading Revenues.    Sales and trading revenues are composed of principal transactions trading revenues, commissions, asset management, distribution and administration fees and net interest revenues (expenses). In assessing the profitability of its sales and trading activities, the Company views principal trading, commissions, asset management, distribution and administration fees and net interest revenues (expenses) in the aggregate. In addition, decisions relating to principal transactions are based on an overall review of aggregate revenues and costs associated with each transaction or series of transactions. This review includes, among other things, an assessment of the potential gain or loss associated with a transaction, including any associated commissions, dividends, the interest income or expense associated with financing or hedging the Company’s positions, and other related expenses.

See “Other Matters—Segments” and “Other Matters—Dividend Income” herein for further information.

Total sales and trading revenues increased 197% in the quarter ended March 31, 2010 from the comparable period of 2009.

Sales and trading revenues by business were as follows:

	Three Months Ended March 31,
	2010		2009(1)
	(dollars in millions)
Equity	$	1,419	$	954
Fixed income		2,723		1,244
Other(2)		1		(804	)
Total sales and trading revenues	$	4,143	$	1,394

(1) All prior-period amounts have been reclassified to conform to the current period’s presentation.

(2) Other sales and trading net revenues primarily include net gains (losses) from loans and lending commitments and related hedges associated with the Company’s Institutional Securities’ lending and other corporate activities.

Equity.    Equity sales and trading revenues increased 49% to $1,419 million in the quarter ended March 31, 2010 from the comparable period of 2009. The increase was primarily due to negative revenue in the first quarter of the prior year related to the significant improvement in the Company’s debt-related credit spreads. Equity sales and trading revenues reflected positive revenue of $48 million in the quarter ended March 31, 2010 due to the widening of the Company’s credit spreads resulting from the decrease in the fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for which the fair value option was elected, compared with negative revenue of $555 million in the quarter ended March 31, 2009, related to the tightening of the Company’s credit spreads. The current quarter also reflected higher prime brokerage revenues, partially offset by lower net revenues from derivative products. Prime brokerage net revenues increased primarily due to higher average client balances. Results in the derivatives business reflected declining levels of market liquidity and volatility during the quarter.

In the quarter ended March 31, 2010, equity sales and trading revenues also reflected unrealized gains related to changes in the fair value of net derivative contracts attributable to the tightening of the counterparties’ credit default spreads compared with unrealized losses in the quarter ended March 31, 2009 related to the widening of the counterparties’ credit default spreads. The Company also recorded unrealized gains in the quarter ended March 31, 2010 related to changes in the fair value of net derivative contracts attributable to the widening of the Company’s credit default swap spreads compared with unrealized losses in the prior year quarter related to the tightening of the Company’s credit default swap spreads. The unrealized gains and losses were immaterial in both quarters and do not reflect any gains or losses on related non-derivative hedging instruments.

Fixed Income.    Fixed income sales and trading revenues increased 119% to $2,723 million in the quarter ended March 31, 2010 from $1,244 million in the prior year quarter. Interest rate, currency and credit product revenues in the first quarter of 2010 reflected strong results in credit products, particularly in investment grade and

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distressed debt trading and securitized products. Interest rate, currency and credit product net revenues in the first quarter of 2009 included losses of approximately $460 million resulting from exposure to certain Eastern European counterparties. Results in the first quarter of 2009 also included negative revenue of $1.0 billion from the tightening of the Company’s credit spreads resulting from the increase in the fair value of certain of the Company’s long-term and short-term borrowings, primarily structured notes, for which the fair value option was elected. Commodity net revenues decreased 52% in the quarter ended March 31, 2010, primarily reflecting reduced levels of volatility and client activity.

In the quarter ended March 31, 2010, fixed income sales and trading revenues reflected net unrealized gains of $537 million related to changes in the fair value of net derivative contracts attributable to the tightening of the counterparties’ credit default spreads compared with unrealized losses of $552 million in the quarter ended March 31, 2009 related to the widening of the counterparties’ credit default spreads. The Company also recorded unrealized gains of $99 million in the quarter ended March 31, 2010, related to changes in the fair value of net derivative contracts attributable to the widening of the Company’s credit default swap spreads compared with unrealized losses of $341 million in the quarter ended March 31, 2009 related to the tightening of the Company’s credit default swap spreads. The unrealized gains and losses on credit default spreads do not reflect any gains or losses on related non-derivative hedging instruments.

Other.    In addition to the equity and fixed income sales and trading revenues discussed above, sales and trading revenues included other trading revenues, consisting primarily of certain activities associated with the Company’s corporate lending activities. In the quarter ended March 31, 2010, other sales and trading net revenues reflected net gains of $1 million compared with net losses of $804 million in the quarter ended March 31, 2009. Results for the first quarter of 2010 included net losses of $15 million (losses on related hedges of $198 million, partially offset by mark-to-market valuations and realized gains of $183 million) associated with loans and lending commitments. Results for the prior year quarter included net losses of $437 million (mark-to-market valuations and realized losses of $333 million and losses on related hedges of $104 million) associated with loans and lending commitments largely related to certain “event-driven” lending to non-investment grade companies. The valuation of these commitments could change in future periods depending on, among other things, the extent that they are renegotiated or repriced or if the associated acquisition transaction does not occur. Results in the quarter ended March 31, 2009 also included losses of $143 million, reflecting the improvement in the Company’s debt-related credit spreads on certain debt related to CIC’s investment in the Company, and writedowns of securities of $166 million in the Company’s Subsidiary Banks.

Principal Transactions—Investments.    Principal transactions net investment gains of $174 million were recognized in the quarter ended March 31, 2010 as compared with net investment losses of $790 million in the quarter ended March 31, 2009. The current quarter gains and the prior year quarter losses primarily related to principal investments in real estate and investments that benefit certain employee deferred compensation plans.

Other.    Other revenues decreased 25% in the quarter ended March 31, 2010 compared with the first quarter of 2009. The current quarter included higher net servicing fee income. The first quarter of 2009 primarily included gains from the Company’s repurchase of debt in the open market (see “Certain Factors Affecting Results of Operations—Morgan Stanley Debt” herein for further discussion), partially offset by an impairment charge on certain loans.

Non-interest Expenses.    Non-interest expenses increased 59% in the quarter ended March 31, 2010, primarily due to higher compensation expense. Compensation and benefits expense increased 109% from the prior year period, primarily due to a higher level of net revenues. Non-compensation expenses increased 8% in the first quarter of 2010. Occupancy and equipment expense decreased 21% in the first quarter of 2010, primarily due to lower leasing costs and lease exiting costs that were incurred in the first quarter of 2009. Brokerage, clearing and exchange fees increased 40%, primarily due to increased trading activity. Marketing and business development expense increased 35%, primarily due to higher levels of business activity.

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GLOBAL WEALTH MANAGEMENT GROUP

INCOME STATEMENT INFORMATION

	Three Months Ended March 31,
	2010		2009
	(dollars in millions)
Revenues:
Investment banking	$	173	$	61
Principal transactions:
Trading		342		246
Investments		6		(14	)
Commissions		682		262
Asset management, distribution and administration fees		1,628		511
Other		83		46
Total non-interest revenues		2,914		1,112
Interest income		339		226
Interest expense		148		39
Net interest		191		187
Net revenues		3,105		1,299
Compensation and benefits		1,972		844
Non-compensation expenses		855		336
Total non-interest expenses		2,827		1,180
Income from continuing operations before income taxes		278		119
Provision for income taxes		64		46
Income from continuing operations		214		73
Net income		214		73
Net income applicable to non-controlling interests		115		—
Net income applicable to Morgan Stanley	$	99	$	73

On May 31, 2009, MSSB was formed (see Note 3 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K). The Company owns 51% of MSSB, which is consolidated. As a result, the operating results for MSSB are included in the Global Wealth Management Group business segment since May 31, 2009. Net income applicable to non-controlling interests of $115 million in the quarter ended March 31, 2010 primarily represents Citi’s interest in MSSB.

Investment Banking.    Investment banking revenues increased $112 million in the quarter ended March 31, 2010, primarily due to the consolidation of operating revenues of MSSB.

Principal Transactions—Trading.    Principal transactions trading revenues increased 39% in the quarter ended March 31, 2010, primarily due to the consolidation of the operating revenues of MSSB. The results in the quarter ended March 31, 2010 also reflected net gains associated with investments that benefit certain employee deferred compensation plans.

Principal Transactions—Investments.    Principal transactions net investment gains were $6 million in the quarter ended March 31, 2010 compared with net investment losses of $14 million in the quarter ended March 31, 2009. The results in the first quarter of 2010 primarily reflected net gains associated with investments that benefit certain employee deferred compensation plans compared with losses on such plans in the prior year period.

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Commissions.    Commission revenues increased 160% in the quarter ended March 31, 2010, reflecting the consolidation of operating revenues of MSSB and higher client activity.

Asset Management, Distribution and Administration Fees.    Asset management, distribution and administration fees increased 219% in the quarter ended March 31, 2010, primarily due to consolidating the operating revenues of MSSB and fees associated with customer account balances in the bank deposit program. Beginning in June 2009, revenues in the bank deposit program are primarily included in Asset management, distribution and administration fees prospectively. These revenues were previously reported in Interest income. This change is the result of agreements that were entered into in connection with the MSSB transaction.

Balances in the bank deposit program rose to $113.5 billion at March 31, 2010 from $46.8 billion at March 31, 2009, primarily due to MSSB, which include balances held at Citi’s depository institutions. Deposits held by certain of the Company’s FDIC-insured depository institutions were $55.5 billion of the $113.5 billion deposits at March 31, 2010.

Client assets in fee-based accounts increased to $413 billion at March 31, 2010 and represented 26% of total client assets compared with 24% at March 31, 2009. Total client asset balances increased to $1,604 billion at March 31, 2010 from $525 billion at March 31, 2009, primarily due to MSSB. Client asset balances in households greater than $1 million increased to $1,151 billion at March 31, 2010 from $337 billion at March 31, 2009.

Other.    Other revenues increased 80% in the quarter ended March 31, 2010 compared with the prior period, primarily due to MSSB.

Net Interest.    Net interest revenues increased 2% in the quarter ended March 31, 2010, primarily due to the consolidation of operating results of MSSB partially offset by the change in classification of the bank deposit program noted above and increased funding costs.

Non-interest Expenses.    Non-interest expenses increased 140% in the quarter ended March 31, 2010 and included the consolidation of operating expenses of MSSB, the amortization of MSSB’s intangible assets, and deal closing costs of $6 million and integration costs of $100 million for MSSB. Compensation and benefits expense increased 134% in the quarter ended March 31, 2010, primarily reflecting MSSB and higher net revenues. Non-compensation expenses increased 154%. Occupancy and equipment expense increased 115%, primarily due to the operating expenses of MSSB. Information processing and communications expense increased 142%, professional services expense increased 107% and other expenses increased 360% in the quarter ended March 31, 2010, primarily due to the operating expenses of MSSB.

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ASSET MANAGEMENT

INCOME STATEMENT INFORMATION

	Three Months Ended March 31,
	2010			2009
	(dollars in millions)
Revenues:
Investment banking	$	—		$	1
Principal transactions:
Trading		(1	)		3
Investments		189			(346	)
Asset management, distribution and administration fees		414			369
Other		71			16
Total non-interest revenues		673			43
Interest income		6			7
Interest expense		26			28
Net interest		(20	)		(21	)
Net revenues		653			22
Compensation and benefits		275			93
Non-compensation expenses		205			212
Total non-interest expenses		480			305
Income (loss) from continuing operations before income taxes		173			(283	)
Provision for (benefit from) income taxes		43			(33	)
Income (loss) from continuing operations		130			(250	)
Discontinued operations:
Gain (loss) from discontinued operations		65			(276	)
Benefit from income taxes		(30	)		(108	)
Gain (loss) from discontinued operations		95			(168	)
Net income (loss)		225			(418	)
Net income applicable to non-controlling interests		116			—
Net income (loss) applicable to Morgan Stanley	$	109		$	(418	)
Amounts attributable to Morgan Stanley common shareholders:
Income (loss) from continuing operations, net of tax	$	14		$	(250	)
Gain (loss) from discontinued operations, net of tax		95			(168	)
Net income (loss) applicable to Morgan Stanley	$	109		$	(418	)

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Statistical Data.

The results presented in the statistical tables below exclude the operations of Retail Asset Management, as those results are included in discontinued operations for all periods presented (see Note 18 to the condensed consolidated financial statements).

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

	At March 31,				Average For the Three Months Ended March 31,
	2010		2009(1)		2010		2009(1)
	(dollars in billions)
Assets under management or supervision by asset class:
Core asset management:
Equity	$	81	$	57	$	79	$	59
Fixed income—long term		56		51		55		52
Money market		51		71		55		78
Alternatives(2)		43		34		41		36
Total core asset management		231		213		230		225
Merchant banking:
Private equity		5		4		5		4
Infrastructure		4		4		4		4
Real estate		15		24		15		30
Total merchant banking		24		32		24		38
Total assets under management or supervision		255		245		254		263
Share of non-controlling interest assets(3)		7		5		7		6
Total	$	262	$	250	$	261	$	269

(1) Prior-period information has been reclassified to conform to the current period’s presentation.

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

(3) Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a non-controlling interest.

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Activity in Asset Management’s assets under management or supervision during the quarters ended March 31, 2010 and 2009 was as follows:

	Three Months Ended March 31,
	2010			2009(1)
	(dollars in billions)
Balance at beginning of period	$	266		$	290
Net flows by asset class:
Core asset management:
Equity		(1	)		(2	)
Fixed income—long term		2			(4	)
Money market		(9	)		(9	)
Alternatives(2)		—			(4	)
Total core asset management		(8	)		(19	)
Merchant banking:
Real estate		1			(1	)
Total merchant banking		1			(1	)
Total net flows		(7	)		(20	)
Net market appreciation/(depreciation)		3			(19	)
Total net decrease		(4	)		(39	)
Net decrease in share of non-controlling interest assets(3)		—			(1	)
Balance at end of period	$	262		$	250

(1) Prior-period information has been reclassified to conform to the current period’s presentation.

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

(3) Amounts represent Asset Management’s proportional share of assets managed by entities in which it owns a non-controlling interest.

Principal Transactions—Trading.    In the quarter ended March 31, 2010, the Company recognized losses of $1 million compared with gains of $3 million in the quarter ended March 31, 2009. Trading results in the quarter ended March 31, 2010 included losses from hedges on certain investments. The results in the prior year quarter also included net gains of $43 million related to securities issued by SIVs, partially offset by losses from hedges on certain investments and long-term debt.

Principal Transactions—Investments.    The Company recorded principal transactions net investment gains of $189 million in the quarter ended March 31, 2010 compared with losses of $346 million in the quarter ended March 31, 2009. The results in the current quarter were primarily related to net investment gains associated with the Company’s merchant banking business, primarily due to valuation gains within certain consolidated real estate funds sponsored by the Company. The Company consolidated certain fund partnerships during the quarter ended September 30, 2009 after providing them with financial assistance and in light of the continued deterioration of equity in the funds. Additional fund partnerships were consolidated as of January 1, 2010 due to the adoption of new consolidation rules. Earnings of these funds related to the limited partnership interests not owned by the Company are reported in Net income (loss) applicable to non-controlling interests on the condensed consolidated statements of income. The current quarter also included gains on private equity and alternatives investments. Losses in the quarter ended March 31, 2009 were primarily related to net investment losses associated with the Company’s merchant banking business, including real estate and private equity investments, and losses associated with certain investments for the benefit of the Company’s employee deferred compensation and co-investment plans.

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Asset Management, Distribution and Administration Fees.    Asset management, distribution and administration fees increased 12% in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009. The increase in the quarter primarily reflected higher fund management and administration fees due to an increase in average assets under management in equity and alternatives asset classes.

The Company’s increase in assets under management reflected market appreciation, partially offset by net customer outflows of $27.9 billion primarily in the Company’s money market funds.

Other.    Other revenues increased $55 million in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009, reflecting higher revenues associated with Lansdowne Partners, a London-based investment manager, and Avenue Capital Group, a New York-based investment manager, in which the Company has non-controlling interests.

Non-interest Expenses.    Non-interest expenses increased 57% in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009, primarily reflecting an increase in compensation and benefits expense. Compensation and benefits expense increased $182 million in the quarter ended March 31, 2010. The increase primarily reflected principal investment losses in the prior year quarter related to employee deferred compensation and co-investment plans, compared with gains in the current quarter. Non-compensation expenses decreased 3% in the quarter ended March 31, 2010.

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Accounting Developments.

Scope Exception Related to Embedded Credit Derivatives.

In March 2010, the FASB issued accounting guidance that changes the accounting for credit derivatives embedded in beneficial interests in securitized financial assets. The new guidance will eliminate the scope exception for embedded credit derivatives, unless they are created solely by subordination of one financial instrument to another. Bifurcation and separate recognition may be required for certain beneficial interests that are currently not accounted for at fair value through earnings. This new guidance is effective for the Company beginning in the third quarter of 2010. The Company does not expect the new accounting guidance to have any impact on the condensed consolidated financial statements.

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Other Matters.

Real Estate.

The Company acts as the general partner for various real estate funds and also invests in certain of these funds as a limited partner.

The Company’s real estate investments are shown below. Such amounts exclude investments that benefit certain employee deferred compensation and co-investment plans:

	March 31, 2010		December 31, 2009
	(dollars in billions)
Consolidated interests(1)	$	0.5	$	1.5
Real estate funds		0.5		0.5
Infrastructure fund		0.2		0.2
Total(2)	$	1.2	$	2.2

(1) Condensed consolidated statement of financial condition amounts represent investment assets of consolidated subsidiaries, net of non-controlling interests. The decrease from December 31, 2009 to March 31, 2010 was primarily due to the $932 million write-off in connection with the planned disposition of Revel (see Note 18 to the condensed consolidated financial statements).

(2) The Company has contractual capital commitments, guarantees, lending facilities and counterparty arrangements with respect to these investments of $1.3 billion at March 31, 2010 (see Note 10 to the condensed consolidated financial statements). One of the Company’s real estate funds is currently engaged in negotiations with its lenders regarding a potential restructuring of loans provided to a specific investment in the fund’s portfolio. These loans have been extended to allow negotiations to continue. In that context, the lenders may allege various claims that would imply that the fund is obliged to support this investment to an extent that would exceed the fund’s available liquid resources. In that event, the fund would assert substantial defenses to such claims. The Company is not obliged to provide any support to the fund. A consolidated subsidiary is the general partner of the fund but the loans and guarantees are non-recourse to any other entity or assets of the Company. While the Company cannot provide assurance that the fund’s negotiations will result in a restructuring, it does not currently believe that the resolution of the restructuring will require the Company to pay or contribute amounts in excess of the amount of guarantees included in the dollar amount set forth above at March 31, 2010.

See “Certain Factors Affecting Results of Operations—Real Estate Investments” herein for further information.

U.K. Tax

In April 2010, the U.K. government enacted legislation imposing a payroll tax on discretionary bonuses over a certain amount awarded to certain employees in the period from December 9, 2009 to April 5, 2010. The Company is still evaluating the impact of this legislation and will recognize a charge in Compensation and benefits expense in the second quarter of 2010 reflecting the amount that will be currently payable by the Company in August 2010.

For a further discussion regarding the regulatory outlook for the Company, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Outlook” in Part II, Item 7, included in the Form 10-K.

Japan Securities Joint Venture.

On May 1, 2010, the Company and Mitsubishi UFJ Financial Group, Inc. (“MUFG”) closed the previously announced transaction to form a joint venture in Japan of their respective investment banking and securities businesses. MUFG and the Company have integrated their respective Japanese securities companies by forming two joint venture companies. MUFG contributed the wholesale and retail securities businesses conducted in Japan by its subsidiary Mitsubishi UFJ Securities Co., Ltd. into one of the joint venture entities named Mitsubishi UFJ Morgan Stanley Securities, Co., Ltd. (“MUMSS”). The Company contributed the investment banking

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operations conducted in Japan by its subsidiary, Morgan Stanley Japan Securities Co., Ltd. (“MSJS”), into MUMSS and contributed the sales and trading and capital markets business conducted in Japan by MSJS into a second joint venture entity called Morgan Stanley MUFG Securities, Co., Ltd. (“MSMS” and, together with MUMSS, the “Joint Venture”). Following the respective contributions to the Joint Venture and a cash payment of 26 billion yen from MUFG to the Company at closing of the transaction (subject to certain post-closing cash adjustments), the Company owns a 40% economic interest in the Joint Venture and MUFG owns a 60% economic interest in the Joint Venture. The Company holds a 40% voting interest and MUFG holds a 60% voting interest in MUMSS, while the Company holds a 51% voting interest and MUFG holds a 49% voting interest in MSMS.

Segments.

Global Wealth Management Group and Institutional Securities.    

Effective January 1, 2010, certain transfer pricing arrangements between the Global Wealth Management Group business segment and the Institutional Securities business segment relating to Global Wealth Management Group business segment’s fixed income trading activities were modified to conform to agreements with Citi in connection with MSSB. In addition, with an effective date of January 1, 2010, the Global Wealth Management Group business segment sold approximately $3 billion of Auction Rate Securities to the Institutional Securities business segment at book value.

Institutional Securities.    The Company changed the allocation methodology for funding costs between equity and fixed income sales and trading to more accurately reflect business activity. Effective January 1, 2010, funding costs are allocated 35% to equity sales and trading and 65% to fixed income sales and trading. Prior to January 1, 2010, funding costs were allocated 20% and 80% to equity and fixed income sales and trading, respectively.

Effective January 1, 2010, Equity sales and trading revenues include Asset management, distribution and administrations fees as these fees relate to administrative services primarily provided to the Company’s prime brokerage clients and therefore, closely align to equity sales and trading revenues. Prior periods have been adjusted to conform to the current presentation.

Dividend Income.

Effective January 1, 2010, the Company reclassified dividend income associated with trading and investing activities to Principal transactions—Trading or Principal transactions—Investments depending upon the business activity. Previously, these amounts were included in Interest and dividends on the condensed consolidated statements of income. These reclassifications were made in connection with the Company’s conversion to a financial holding company. Prior periods have been adjusted to conform to the current presentation.

Securities Available for Sale.

In the first quarter of 2010, the Company established a portfolio of debt securities in order to manage interest rate risk. The securities have been classified as “securities available for sale” in accordance with accounting guidance for investments in debt and equity securities and are included within the Global Wealth Management Group business segment.

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Critical Accounting Policies.

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to the condensed consolidated financial statements). The Company believes that of its significant accounting policies (see Note 2 to the consolidated financial statements for the year ended December 31, 2009 in the Form 10-K), the following involve a higher degree of judgment and complexity.

Fair Value.

Financial Instruments Measured at Fair Value.    A significant number of the Company’s financial instruments are carried at fair value. The Company makes estimates regarding valuation of assets and liabilities measured at fair value in preparing the condensed consolidated financial statements. These assets and liabilities include but are not limited to:

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

• Securities available for sale;

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

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

• Certain Deposits;

• Other secured financings; and

• Certain Long-term borrowings, primarily structured notes and certain junior subordinated debentures.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable prices and inputs and minimizes the use of unobservable prices and inputs by requiring that the relevant observable inputs be used when available. The hierarchy is broken down into three levels, wherein Level 1 uses observable prices in active markets, and Level 3 consists of valuation techniques that incorporate significant unobservable inputs and therefore require the greatest use of judgment. In periods of market disruption, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3. In addition, a downturn in market conditions could lead to declines in the valuation of many instruments. For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes 1 and 3 to the condensed consolidated financial statements.

Level 3 Assets and Liabilities.    The Company’s Level 3 assets before the impact of cash collateral and counterparty netting across the levels of the fair value hierarchy were $42.5 billion and $43.4 billion at March 31, 2010 and December 31, 2009, respectively, and represented approximately 12% and 14% at March 31, 2010 and December 31, 2009, respectively, of the assets measured at fair value (5% and 6% of total assets at March 31, 2010 and December 31, 2009, respectively). Level 3 liabilities before the impact of cash collateral and counterparty netting across the levels of the fair value hierarchy were $16.2 billion and $15.4 billion at March 31, 2010 and December 31, 2009, respectively, and represented approximately 8% and 9%, respectively, of the Company’s liabilities measured at fair value.

Transfers In/Out of Level 3 During the Quarter Ended March 31, 2010.    The Company reclassified approximately $0.6 billion of certain Corporate and other debt, primarily corporate loans, from Level 3 to Level 2. The Company reclassified the corporate loans as external prices and/or spread inputs for these instruments became observable.

The Company also reclassified approximately $0.9 billion of certain Corporate and other debt from Level 2 to Level 3. The reclassifications were primarily related to corporate loans and were generally due to a reduction in

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market price quotations for these or comparable instruments, or a lack of available broker quotes, such that unobservable inputs had to be utilized for the fair value measurement of these instruments. The Company reclassified the corporate loans as external prices and/or spread inputs became unobservable.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis.    Certain of the Company’s assets were measured at fair value on a non-recurring basis. The Company incurs losses or gains for any adjustments of these assets to fair value. A downturn in market conditions could result in impairment charges in future periods.

For assets and liabilities measured at fair value on a non-recurring basis, fair value is determined by using various valuation approaches. The same hierarchy as described above, which maximizes the use of observable inputs and minimizes the use of unobservable inputs by generally requiring that the observable inputs be used when available, is used in measuring fair value for these items.

For further information on financial assets and liabilities that are measured at fair value on a non-recurring basis, see Note 3 to the condensed consolidated financial statements.

Fair Value Control Processes.    The Company employs control processes to validate the fair value of its financial instruments, including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. These control processes include reviews of the pricing model’s theoretical soundness and appropriateness by Company personnel with relevant expertise who are independent from the trading desks. Additionally, groups independent from the trading divisions within the Financial Control Group, Market Risk Department and Credit Risk Management Department participate in the review and validation of the fair values generated from pricing models, as appropriate. Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.

Consistent with market practice, the Company has individually negotiated agreements with certain counterparties to exchange collateral (“margining”) based on the level of fair values of the derivative contracts they have executed. Through this margining process, one party or each party to a derivative contract provides the other party with information about the fair value of the derivative contract to calculate the amount of collateral required. This sharing of fair value information provides additional support of the Company’s recorded fair value for the relevant over-the-counter (“OTC”) derivative products. For certain OTC derivative products, the Company, along with other market participants, contributes derivative pricing information to aggregation services that synthesize the data and make it accessible to subscribers. This information is then used to evaluate the fair value of these OTC derivative products. For more information regarding the Company’s risk management practices, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

Goodwill and Intangible Assets.

Goodwill.    The Company tests goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. The Company tests for impairment at the reporting unit level, which is generally one level below its business segments. Goodwill no longer retains its association with a particular acquisition once it has been assigned to a reporting unit. As such, all of the activities of a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective book value. If the estimated fair value exceeds the book value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below book value, however, further analysis is required to determine the amount of the impairment. The estimated fair values of the reporting units are derived based on valuation techniques the Company believes market participants would use for each of the reporting units. The estimated fair values are generally determined

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utilizing methodologies that incorporate price-to-book, price-to-earnings and assets under management multiples of certain comparable companies.

Intangible Assets.    Amortizable intangible assets are amortized over their estimated useful lives and reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets, an impairment exists when the carrying amount of the intangible asset exceeds its fair value. An impairment loss will be recognized only if the carrying amount of the intangible asset is not recoverable and exceeds its fair value. The carrying amount of the intangible asset is not recoverable if it exceeds the sum of the expected undiscounted cash flows.

Indefinite-lived intangible assets are not amortized but are reviewed annually (or more frequently when certain events or circumstances exist) for impairment. For indefinite-lived intangible assets, an impairment exists when the carrying amount exceeds its fair value.

See Note 3 to the condensed consolidated financial statements for intangible asset impairments recorded during the quarter ended March 31, 2010.

For both goodwill and intangible assets, to the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. For amortizable intangible assets, the new cost basis is amortized over the remaining useful life of that asset.

See Note 7 to the condensed consolidated financial statements for further information on goodwill and intangible assets.

Legal, Regulatory and Tax Contingencies.

In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

Reserves for litigation and regulatory proceedings are generally determined on a case-by-case basis and represent an estimate of probable losses after considering, among other factors, the progress of each case, prior experience and the experience of others in similar cases, and the opinions and views of internal and external legal counsel. Given the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how such matters will be resolved, when they will ultimately be resolved or what the eventual settlement, fine, penalty or other relief, if any, might be.

The Company is subject to the income and indirect tax laws of the U.S., its states and municipalities and those of the foreign jurisdictions in which the Company has significant business operations. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. The Company must make judgments and interpretations about the application of these inherently complex tax laws when determining the provision for income taxes and the expense for indirect taxes and must also make estimates about when in the future certain items affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be settled with the taxing authority upon examination or audit. The Company

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regularly assesses the likelihood of assessments in each of the taxing jurisdictions resulting from current and subsequent years’ examinations, and tax reserves are established as appropriate.

The Company establishes reserves for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be estimated in accordance with the requirements for accounting for contingencies. The Company establishes reserves for potential losses that may arise out of tax audits in accordance with accounting for income taxes. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of a legal claim, tax assessment or regulatory fine/penalty may ultimately be materially different from the recorded reserves, if any.

See Notes 10 and 16 to the condensed consolidated financial statements for additional information on legal proceedings and tax examinations.

Special Purpose Entities and Variable Interest Entities.

The Company’s involvement with special purpose entities (“SPEs”) consists primarily of the following:

• Transferring financial assets into SPEs;

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

• Holding one or more classes of securities issued by, or making loans to or investments in, SPEs that hold debt, equity, real estate or other assets;

• Purchasing and selling (in both a market-making and a proprietary-trading capacity) securities issued by SPEs/variable interest entities (“VIE”), whether such vehicles are sponsored by the Company or not;

• Entering into derivative transactions with SPEs (whether or not sponsored by the Company);

• Providing warehouse financing to collateralized debt obligations and collateralized loan obligations;

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

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

• Serving as an asset manager to various investment funds that may invest in securities that are backed, in whole or in part, by SPEs; and

• Structuring and/or investing in other structured transactions designed to provide enhanced, tax-efficient yields to the Company or its clients.

The Company engages in securitization activities related to commercial and residential mortgage loans, U.S. agency collateralized mortgage obligations, corporate bonds and loans, municipal bonds and other types of financial instruments. The Company’s involvement with SPEs is discussed further in Note 6 to the condensed consolidated financial statements.

In most cases, these SPEs are deemed for accounting purposes to be VIEs. The Company applies accounting guidance for consolidation of VIEs to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Entities that previously met the criteria as qualifying special purpose entities (“QSPEs”) that were not subject to consolidation prior to January 1, 2010 became subject to the consolidation requirements for VIEs on that date. Excluding entities subject to the Deferral, effective January 1, 2010, the primary beneficiary of a VIE is the party that both (1) has the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance and (2) has an obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. The Company consolidates entities of which it is the primary beneficiary.

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The Company determines whether it is the primary beneficiary of a VIE upon its initial involvement with the VIE and reassesses whether it is the primary beneficiary on an ongoing basis as long as it has any continuing involvement with the VIE. This determination is based upon an analysis of the design of the VIE, including the VIE’s structure and activities, the power to make significant economic decisions held by the Company and by other parties and the variable interests owned by the Company and other parties.

In addition, the Company serves as an investment advisor to unconsolidated money market and other funds.

See Note 1 to the condensed consolidated financial statements for information on accounting guidance adopted on January 1, 2010 for transfers of financial assets.

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Liquidity and Capital Resources.

The Company’s senior management establishes the liquidity and capital policies of the Company. Through various risk and control committees, the Company’s senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate and currency sensitivity of the Company’s asset and liability position. The Company’s Treasury Department, Firm Risk Committee (“FRC”), Asset and Liability Management Committee (“ALCO”) and other control groups assist in evaluating, monitoring and controlling the impact that the Company’s business activities have on its condensed consolidated statements of financial condition, liquidity and capital structure.

The Balance Sheet.

The Company actively monitors and evaluates the composition and size of its balance sheet. A substantial portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising principally from Institutional Securities sales and trading activities. The liquid nature of these assets provides the Company with flexibility in managing the size of its balance sheet. The Company’s total assets increased to $819,719 million at March 31, 2010 from $771,462 million at December 31, 2009. The increase in total assets was primarily due to higher Financial instruments owned, Securities available for sale and Securities borrowed.

Within the sales and trading related assets and liabilities are transactions attributable to securities financing activities. At March 31, 2010, securities financing assets and liabilities were $385 billion and $344 billion, respectively. At December 31, 2009, securities financing assets and liabilities were $376 billion and $316 billion, respectively. Securities financing transactions include repurchase and resale agreements, securities borrowed and loaned transactions, securities received as collateral and obligation to return securities received, customer receivables/payables and related segregated customer cash. Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are treated as collateralized financings (see Note 1 to the condensed consolidated financial statements). Securities sold under agreements to repurchase and securities loaned were $206 billion at March 31, 2010 and averaged $224 billion during the quarter ended March 31, 2010. Securities purchased under agreements to resell and securities borrowed were $320 billion at March 31, 2010 and averaged $317 billion during the quarter ended March 31, 2010.

Securities financing assets and liabilities also include matched book transactions with minimal market, credit and/or liquidity risk. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The customer receivable portion of the securities financing transactions includes customer margin loans, collateralized by customer owned securities, and customer cash, which is segregated according to regulatory requirements. The customer payable portion of the securities financing transactions primarily includes customer payables to the Company’s prime brokerage clients. The Company’s risk exposure on these transactions is mitigated by collateral maintenance policies that limit the Company’s credit exposure to customers. Included within securities financing assets was $17 billion and $14 billion at March 31, 2010 and December 31, 2009, respectively, recorded in accordance with accounting guidance for the transfer of financial assets that represented equal and offsetting assets and liabilities for fully collateralized non-cash loan transactions.

The Company uses the Tier 1 leverage ratio, risk based capital ratios (see “Regulatory Requirements” herein), Tier 1 common ratio and the balance sheet leverage ratio as indicators of capital adequacy when viewed in the context of the Company’s overall liquidity and capital policies. These ratios are commonly-used measures to assess capital adequacy and frequently referred to by investors.

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The following table sets forth the Company’s total assets and leverage ratios at March 31, 2010 and December 31, 2009 and average balances during the three months ended March 31, 2010:

	Balance at						Average Balance(1)
	March 31, 2010			December 31, 2009			For the Three Months  Ended March 31, 2010
	(dollars in millions, except ratio data)
Total assets	$	819,719		$	771,462		$	835,794
Common equity	$	38,667		$	37,091		$	38,106
Preferred equity		9,597			9,597			9,597
Morgan Stanley shareholders’ equity		48,264			46,688			47,703
Junior subordinated debentures issued to capital trusts		10,554			10,594			10,587
Subtotal		58,818			57,282			58,290
Less: Goodwill and net intangible assets(2)		(7,570	)		(7,612	)		(7,592	)
Tangible Morgan Stanley shareholders’ equity	$	51,248		$	49,670		$	50,698
Common equity	$	38,667		$	37,091		$	38,106
Less: Goodwill and net intangible assets(2)		(7,570	)		(7,612	)		(7,592	)
Tangible common equity(3)	$	31,097		$	29,479		$	30,514
Leverage ratio(4)		16.0x			15.5x			16.5x
Tier 1 common ratio(5)		8.3	%		8.2	%		N/M

N/M —Not meaningful.

(1) The Company calculates its average balances based upon weekly amounts, except where weekly balances are unavailable, the month-end balances are used.

(2) Goodwill and net intangible assets exclude mortgage servicing rights (net of disallowable mortgage servicing rights) of $157 million and $123 million at March 31, 2010 and December 31, 2009, respectively, and include only the Company’s share of MSSB’s goodwill and intangible assets.

(3) Tangible common equity equals common equity less goodwill and net intangible assets as defined above. The Company views tangible common equity as a useful measure to investors because it is a commonly utilized metric and reflects the common equity deployed in the Company’s businesses.

(4) Leverage ratio equals total assets divided by tangible Morgan Stanley shareholders’ equity. The increase in the leverage ratio was driven by the increase in assets.

(5) The Tier 1 common ratio equals Tier 1 common equity divided by RWAs. The Company defines Tier 1 common equity as Tier 1 capital less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying restricted core capital elements, adjusted for the portion of goodwill and non-servicing assets associated with MSSB’s non-controlling interests (i.e., Citi’s share of MSSB’s goodwill and intangibles). The Company views its definition of the Tier 1 common equity as a useful measure for investors as it reflects the actual ownership structure and economics of the joint venture. This definition of Tier 1 common equity may evolve in the future as regulatory rules may be implemented based on a final proposal regarding non-controlling interest (also referred to as minority interest) as initially presented in December 2009 in the Basel Committee on Banking Supervision Consultative Document Strengthening the resilience of the banking sector (“BCBS 164”). For a discussion of RWAs and Tier 1 capital, see “Regulatory Requirements” herein.

Balance Sheet and Funding Activity for the Three Months Ended March 31, 2010.

During the quarter ended March 31, 2010, the Company issued notes with a principal amount of approximately $8 billion, including non-U.S. dollar currency notes aggregating approximately $1 billion. In connection with the note issuances, the Company generally enters into certain transactions to obtain floating interest rates based primarily on short-term London Interbank Offered Rates (“LIBOR”) trading levels. The weighted average maturity of the Company’s long-term borrowings, based upon stated maturity dates, was approximately 5.7 years at March 31, 2010.

At March 31, 2010, the aggregate outstanding principal amount of the Company’s senior indebtedness was approximately $175 billion (including guaranteed obligations of the indebtedness of subsidiaries).

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Equity Capital Management Policies.

The Company’s senior management views equity capital as an important source of financial strength. The Company actively manages its consolidated equity capital position based upon, among other things, business opportunities, capital availability and rates of return together with internal capital policies, regulatory requirements and rating agency guidelines and, therefore, in the future may expand or contract its equity capital base to address the changing needs of its businesses. The Company attempts to maintain total equity, on a consolidated basis, at least equal to the sum of its operating subsidiaries’ equity.

At March 31, 2010, the Company’s equity capital (which includes shareholders’ equity and junior subordinated debentures issued to capital trusts) was $58,818 million, an increase of $1,536 million from December 31, 2009, primarily due to the increase in net income applicable to Morgan Stanley.

At March 31, 2010, the Company had approximately $1.6 billion remaining under its current share repurchase program out of the $6 billion authorized by the Board in December 2006. The share repurchase program is for capital management purposes and considers, among other things, business segment capital needs as well as equity-based compensation and benefit plan requirements. Share repurchases by the Company are subject to regulatory approval. During the quarter ended March 31, 2010, the Company did not repurchase common stock as part of its capital management share repurchase program (see also “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II, Item 2).

The Board determines the declaration and payment of dividends on a quarterly basis. In April 2010, the Company announced that its Board declared a quarterly dividend per common share of $0.05 (see Note 19 to the condensed consolidated financial statements). The Company also announced that its Board declared a quarterly dividend of $250.00 per share of Series A Floating Rate Non-Cumulative Preferred Stock (represented by depositary shares, each representing 1/1,000th interest in a share of preferred stock and each having a dividend of $0.25); a quarterly dividend of $25.00 per share of Series B Non-Cumulative Non-Voting Perpetual Convertible Preferred Stock and a quarterly dividend of $25.00 per share of Series C Non-Cumulative Non-Voting Perpetual Preferred Stock.

Economic Capital.

The Company’s economic capital framework estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. The framework continued to evolve over time in response to changes in the business and regulatory environment and to incorporate enhancements in modeling techniques.

Economic capital is assigned to each business segment and sub-allocated to product lines. In principal, each business segment is capitalized as if it were an independent operating entity. This process is intended to align equity capital with the risks in each business in order to allow senior management to evaluate returns on a risk-adjusted basis (such as return on equity and shareholder value added).

Economic capital is based on regulatory capital plus additional capital for stress losses. The Company assesses stress loss capital across various dimensions of market, credit, business and operational risks. Economic capital requirements are met by regulatory Tier 1 capital. For a further discussion of the Company’s Tier 1 capital, see “Regulatory Requirements” herein. The difference between the Company’s Tier 1 capital and aggregate economic capital requirements denotes the Company’s Parent capital position.

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The Company uses economic capital to allocate Tier 1 capital and common equity to its business segments. The following table presents the Company’s allocated average Tier 1 capital and average common equity for the quarter ended March 31, 2010 and the quarter ended December 31, 2009:

	Three Months Ended March  31, 2010				Three Months Ended December 31, 2009
	Average Tier 1 Capital		Average Common Equity		Average Tier 1 Capital		Average Common Equity
	(dollars in billions)
Institutional Securities	$	24.3	$	16.3	$	24.8	$	16.9
Global Wealth Management Group		2.4		6.6		3.4		7.3
Asset Management		3.2		2.4		3.0		2.0
Parent capital		19.1		12.2		14.8		9.8
Total from continuing operations		49.0		37.5		46.0		36.0
Discontinued operations		0.4		0.6		0.6		0.8
Total	$	49.4	$	38.1	$	46.6	$	36.8

Average Tier 1 capital and common equity allocated to the Institutional Securities business segment decreased from the quarter ended December 31, 2009 driven by decreases in market risk exposures. Average Tier 1 capital and common equity allocated to the Global Wealth Management Group business segment decreased from the quarter ended December 31, 2009 driven by re-evaluation of its operational risk exposure. Average Tier 1 capital and common equity allocated to Asset Management increased from the quarter ended December 31, 2009, primarily due to the consolidation of certain real estate funds sponsored by the Company.

The Company generally uses available Parent capital for prospective regulatory requirements, organic growth, acquisitions and other capital needs while maintaining adequate capital ratios. For a discussion of risk-based capital ratios, see “Regulatory Requirements” herein.

Liquidity and Funding Management Policies.

The primary goal of the Company’s liquidity management and funding activities is to ensure adequate funding over a wide range of market environments. Given the mix of the Company’s business activities, funding requirements are fulfilled through a diversified range of secured and unsecured financing.

The Company’s liquidity and funding risk management policies are designed to mitigate the potential risk that the Company may be unable to access adequate financing to service its financial obligations without material franchise or business impact. The key objectives of the liquidity and funding risk management framework are to support the successful execution of the Company’s business strategies while ensuring sufficient liquidity through the business cycle and during periods of stressed market conditions.

Liquidity Management Policies.

The principal elements of the Company’s liquidity management framework are the Contingency Funding Plan (“CFP”) and liquidity reserves. Comprehensive financing guidelines (secured funding, long-term funding strategy, surplus capacity, diversification and staggered maturities) support the Company’s target liquidity profile.

Contingency Funding Plan.    The CFP is the Company’s primary liquidity risk management tool. The CFP models a potential, prolonged liquidity contraction over a one-year time period and sets forth a course of action to effectively manage a liquidity event. The CFP and liquidity risk exposures are evaluated on an ongoing basis and reported to the FRC, ALCO and other appropriate risk committees.

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

The CFP is produced on a parent and major subsidiary level to capture specific cash requirements and cash availability at various legal entities. The CFP assumes that the parent company does not have access to cash that may be held at certain subsidiaries due to regulatory, legal or tax constraints.

Liquidity Reserves.    The Company seeks to maintain sufficient liquidity reserves that are sized to cover daily funding needs and meet strategic liquidity targets as outlined in the CFP. These liquidity reserves are held in the form of cash deposits and pools of central bank eligible unencumbered securities. The parent company liquidity reserve is managed globally and consists of overnight cash deposits and unencumbered U.S. and European government bonds, agencies and agency pass-throughs. The Company believes that diversifying the form in which its liquidity reserves (cash and securities) are maintained enhances its ability to quickly and efficiently source funding in a stressed environment. The Company’s funding requirements and target liquidity reserves may vary based on changes to the level and composition of its balance sheet, timing of specific transactions, client financing activity, market conditions and seasonal factors.

For the quarter ended March 31, 2010, the total Company liquidity reserve was $153 billion and averaged $155 billion. For the quarter ended March 31, 2010, the total parent liquidity reserve was $57 billion and averaged $65 billion.

Capital Covenants.

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

Funding Management Policies.

The Company’s funding management policies are designed to provide for financings that are executed in a manner that reduces the risk of disruption to the Company’s operations. The Company pursues a strategy of diversification of secured and unsecured funding sources (by product, by investor and by region) and attempts to ensure that the tenor of the Company’s liabilities equals or exceeds the expected holding period of the assets being financed. Maturities of financings are designed to manage exposure to refinancing risk in any one period.

The Company funds its balance sheet on a global basis through diverse sources. These sources may include the Company’s equity capital, long-term debt, repurchase agreements, securities lending, deposits, commercial paper, letters of credit and lines of credit. The Company has active financing programs for both standard and structured products in the U.S., European and Asian markets, targeting global investors and currencies such as the U.S. dollar, euro, British pound, Australian dollar and Japanese yen.

Secured Financing.    A substantial portion of the Company’s total assets consists of liquid marketable securities and short-term receivables arising principally from its Institutional Securities sales and trading activities. The liquid nature of these assets provides the Company with flexibility in financing these assets with collateralized borrowings.

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

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

The Company also has the ability to access liquidity from the Board of Governors of the Federal Reserve System (the “Fed”) against collateral through the Primary Credit Facility, which is available to provide daily access to funding for depository institutions. The Term Auction Facility was available to depository institutions and allowed for the borrowing of longer term funding on a regular basis at auction on pre-announced dates. The last auction for the Term Auction Facility was on March 8, 2010.

Unsecured Financing.    The Company views long-term debt and deposits as stable sources of funding for core inventories and illiquid assets. Securities inventories not financed by secured funding sources and the majority of current assets are financed with a combination of short-term funding, floating rate long-term debt or fixed rate long-term debt swapped to a floating rate and deposits. The Company uses derivative products (primarily interest rate, currency and equity swaps) to assist in asset and liability management and to hedge interest rate risk (see Note 10 to the consolidated financial statements for the year ended December 31, 2009 included in the Form 10-K).

Temporary Liquidity Guarantee Program (“TLGP”).    In October 2008, the Secretary of the U.S. Treasury invoked the systemic risk exception of the FDIC Improvement Act of 1991, and the FDIC announced the TLGP. Based on the Final Rule adopted on November 21, 2008, the TLGP provides a guarantee, through the earlier of maturity or June 30, 2012, of certain senior unsecured debt issued by participating Eligible Entities (including the Company) between October 14, 2008 and June 30, 2009. At March 31, 2010 and December 31, 2009, the Company had $23.8 billion of senior unsecured debt outstanding under the TLGP. There have been no issuances under the TLGP since March 31, 2009.

Short-Term Borrowings.    The Company’s unsecured short-term borrowings may consist of commercial paper, bank loans, bank notes and structured notes with maturities of 12 months or less at issuance.

The table below summarizes the Company’s short-term unsecured borrowings:

	At March 31, 2010		At December 31, 2009
	(dollars in millions)
Commercial paper	$	823	$	783
Other short-term borrowings		2,500		1,595
Total	$	3,323	$	2,378

Deposits.    The Company’s bank subsidiaries’ funding sources include bank deposit sweeps, repurchase agreements, federal funds purchased, certificates of deposit, money market deposit accounts, commercial paper and Federal Home Loan Bank advances.

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Deposits were as follows:

	At March 31, 2010(1)		At December 31, 2009(1)
	(dollars in millions)
Savings and demand deposits	$	59,056	$	57,114
Time deposits(2)		4,870		5,101
Total	$	63,926	$	62,215

(1) Total deposits insured by the FDIC at March 31, 2010 and December 31, 2009 were $46 billion.

(2) Certain time deposit accounts are carried at fair value under the fair value option (see Note 3 to the condensed consolidated financial statements).

On October 3, 2008, under the Emergency Economic Stabilization Act of 2008, the FDIC temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased coverage lasts through December 31, 2013 and is in effect for the Company’s two U.S. depository institutions.

Pursuant to an FDIC interim rule in April 2010, the Company’s FDIC-insured subsidiaries have elected to opt out of the Transaction Account Guarantee Program (“TAGP”) effective July 1, 2010. Thus, after June 30, 2010, funds held in noninterest-bearing transaction accounts, and certain Negotiable Order of Withdrawal and linked Money Market Deposit accounts will no longer be guaranteed in full under the TAGP, but will be insured up to $250,000 under the FDIC’s general deposit rules.

Long-Term Borrowings.    The Company uses a variety of long-term debt funding sources to generate liquidity, taking into consideration the results of the CFP requirements. In addition, the issuance of long-term debt allows the Company to reduce reliance on short-term credit sensitive instruments (e.g., commercial paper and other unsecured short-term borrowings). Financing transactions are generally structured to ensure staggered maturities, thereby mitigating refinancing risk, and to maximize investor diversification through sales to global institutional and retail clients. Availability and cost of financing to the Company can vary depending on market conditions, the volume of certain trading and lending activities, the Company’s credit ratings and the overall availability of credit. During the quarter ended March 31, 2010, the Company issued approximately $8 billion principal amount of unsecured debt, which included approximately $1 billion of non-U.S. dollar currency notes.

The Company may from time to time engage in various transactions in the credit markets (including, for example, debt repurchases) that it believes are in the best interests of the Company and its investors. Maturities and debt repurchases during the quarter ended March 31, 2010 were approximately $10 billion in aggregate.

Long-term borrowings at March 31, 2010 consisted of the following (dollars in millions):

	U.S. Dollar		Non-U.S. Dollar		At March 31, 2010
Due in 2010	$	14,467	$	2,821	$	17,288
Due in 2011		17,791		9,668		27,459
Due in 2012		21,873		15,743		37,616
Due in 2013		3,416		20,120		23,536
Due in 2014		10,732		5,952		16,684
Thereafter		45,753		20,867		66,620
Total	$	114,032	$	75,171	$	189,203

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Credit Ratings.

The Company relies on external sources to finance a significant portion of its day-to-day operations. The cost and availability of financing generally are dependent on the Company’s short-term and long-term credit ratings. In addition, the Company’s debt ratings can have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical, such as OTC derivative transactions, including credit derivatives and interest rate swaps. Factors that are important to the determination of the Company’s credit ratings include the level and quality of earnings, capital adequacy, liquidity, risk appetite and management, asset quality, business mix and perceived levels of government support.

The rating agencies have stated that they currently incorporate various degrees of uplift from perceived government support in the credit ratings of systemically important banks including the credit ratings of the Company. Proposed financial reform legislation in the U.S. may be seen as limiting the possibility of extraordinary government support for the financial system in any future financial crises which may lead to reduced uplift assumptions for U.S. banks and thereby place downward pressure on credit ratings. At the same time, the proposed legislation also has credit ratings positive features such as higher standards for capital and liquidity levels. The net result on credit ratings and the timing of any rating agency actions is currently uncertain. The Company continues to closely monitor developments in the U.S. financial reform legislative process.

In connection with certain OTC trading agreements and certain other agreements associated with the Institutional Securities business segment, the Company may be required to provide additional collateral or immediately settle any outstanding liability balances with certain counterparties in the event of a credit rating downgrade. At March 31, 2010, the amount of additional collateral or termination payments that could be called by counterparties under the terms of such agreements in the event of a one-notch downgrade of the Company’s long-term credit rating was approximately $1,610 million. A total of approximately $2,983 million in collateral or termination payments could be called in the event of a two-notch downgrade. A total of approximately $3,825 million in collateral or termination payments could be called in the event of a three-notch downgrade.

At April 30, 2010, the Company’s and Morgan Stanley Bank, N.A.’s senior unsecured ratings were as set forth below:

	Company			Morgan Stanley Bank, N.A.
	Short-Term Debt	Long-Term Debt	Rating Outlook	Short-Term Debt	Long-Term Debt	Rating Outlook
Dominion Bond Rating Service Limited	R-1 (middle)	A (high)	Negative	—	—	—
Fitch Ratings	F1	A	Stable	F1	A+	Stable
Moody’s Investors Service	P-1	A2	Negative	P-1	A1	Negative
Rating and Investment Information, Inc.	a-1	A+	Negative	—	—	—
Standard & Poor’s	A-1	A	Negative	A-1	A+	Negative

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Commitments.

The Company’s commitments associated with outstanding letters of credit and other financial guarantees obtained to satisfy collateral requirements, investment activities, corporate lending and financing arrangements, mortgage lending and margin lending at March 31, 2010 are summarized below by period of expiration. Since commitments associated with these instruments may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:

	Years to Maturity								Total at March 31, 2010
	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
Letters of credit and other financial guarantees obtained to satisfy collateral requirements	$	853	$	1	$	1	$	6	$	861
Investment activities		940		767		167		72		1,946
Primary lending commitments—investment grade(1)(2)		10,558		27,321		3,938		163		41,980
Primary lending commitments—non-investment grade(1)		833		4,179		3,957		2,656		11,625
Secondary lending commitments(1)		67		99		140		35		341
Commitments for secured lending transactions		1,296		454		208		—		1,958
Forward starting reverse repurchase agreements(3)		75,289		101		—		—		75,390
Commercial and residential mortgage-related commitments(1)		906		—		—		—		906
Underwriting commitments		500		—		—		—		500
Other commitments		216		12		150		—		378
Total	$	91,458	$	32,934	$	8,561	$	2,932	$	135,885

(1) These commitments are recorded at fair value within Financial instruments owned and Financial instruments sold, not yet purchased in the condensed consolidated statements of financial condition (see Note 3 to the condensed consolidated financial statements).

(2) This amount includes commitments to asset-backed commercial paper conduits of $276 million at March 31, 2010, of which $268 million have maturities of less than one year and $8 million of which have maturities of one to three years.

(3) The Company enters into forward starting securities purchased under agreements to resell (agreements that have a trade date as of or prior to March 31, 2010 and settle subsequent to period-end) that are primarily secured by collateral from U.S. government agency securities and other sovereign government obligations. These agreements primarily settle within three business days and as of March 31, 2010, $75.3 billion of the $75.4 billion settled within three business days.

Regulatory Requirements.

The Company is a financial holding company under the Bank Holding Company Act of 1956 and is subject to the regulation and oversight of the Fed. The Fed establishes capital requirements for the Company, including well-capitalized standards, and evaluates the Company’s compliance with such capital requirements (see “Supervision and Regulation—Financial Holding Company” in Part I, Item 1 of the Form 10-K). The Office of the Comptroller of the Currency and the Office of Thrift Supervision establish similar capital requirements and standards for the Company’s national banks and federal savings bank, respectively.

The Company calculates its capital ratios and RWAs in accordance with the capital adequacy standards for financial holding companies adopted by the Fed. These standards are based upon a framework described in the “International Convergence of Capital Measurement and Capital Standards,” July 1988, as amended, also referred to as Basel I. In December 2007, the U.S. banking regulators published a final Basel II Accord that requires internationally active banking organizations, as well as certain of its U.S. bank subsidiaries, to implement Basel II standards over the next several years. The Company will be required to implement these Basel II standards as a result of becoming a financial holding company.

At March 31, 2010, the Company was in compliance with Basel I capital requirements with ratios of Tier 1 capital to RWAs of 15.1% and total capital to RWAs of 16.1% (6% and 10% being well-capitalized for

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regulatory purposes, respectively). In addition, financial holding companies are also subject to a Tier 1 leverage ratio as defined by the Fed. The Company calculated its Tier 1 leverage ratio as Tier 1 capital divided by adjusted average total assets (which reflects adjustments for disallowed goodwill, certain intangible assets and deferred tax assets). The adjusted average total assets are derived using weekly balances for the calendar quarter.

The following table reconciles the Company’s total shareholders’ equity to Tier 1 and Total Capital as defined by the regulations issued by the Fed and presents the Company’s consolidated capital ratios at March 31, 2010 and December 31, 2009 (dollars in millions):

	At March 31, 2010			At December 31, 2009
	(dollars in millions)
Allowable capital
Tier 1 capital:
Common shareholders’ equity	$	38,667		$	37,091
Qualifying preferred stock		9,597			9,597
Qualifying mandatorily convertible trust preferred securities		5,694			5,730
Qualifying restricted core capital elements		11,687			10,867
Less: Goodwill		(7,169	)		(7,162	)
Less: Non-servicing intangible assets		(4,840	)		(4,931	)
Less: Net deferred tax assets		(2,268	)		(3,242	)
Less: Debt valuation adjustment		(587	)		(554	)
Other deductions		(659	)		(726	)
Total Tier 1 capital		50,122			46,670
Tier 2 capital:
Other components of allowable capital:
Qualifying subordinated debt		3,144			3,127
Other qualifying amounts		145			158
Total Tier 2 capital		3,289			3,285
Total allowable capital	$	53,411		$	49,955
Total risk-weighted assets	$	331,913		$	305,000
Capital ratios
Total capital ratio		16.1	%		16.4	%
Tier 1 capital ratio		15.1	%		15.3	%
Tier 1 leverage ratio		6.1	%		5.8	%

Total allowable capital is composed of Tier 1 and Tier 2 capital. Tier 1 capital consists predominately of common shareholders’ equity as well as qualifying preferred stock, trust preferred securities mandatorily convertible to common equity and qualifying restricted core capital elements (including other junior subordinated debt issued to trusts and non-controlling interests) less goodwill, non-servicing intangible assets (excluding allowable mortgage servicing rights), net deferred tax assets (recoverable in excess of one year) and DVA. DVA represents the cumulative change in fair value of certain of the Company’s borrowings (for which the fair value option was elected) that was attributable to changes in the Company’s own instrument-specific credit spreads and is included in retained earnings. For a further discussion of fair value, see Note 3 to the condensed consolidated financial statements. Tier 2 capital consists principally of qualifying subordinated debt.

At March 31, 2010, the Company calculated its RWAs in accordance with the regulatory capital requirements of the Fed, which is consistent with guidelines described under Basel I. RWAs reflect both on and off-balance sheet

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risk of the Company. The risk capital calculations will evolve over time as the Company enhances its risk management methodology and incorporates improvements in modeling techniques while maintaining compliance with the regulatory requirements and interpretations.

Market RWAs reflect capital charges attributable to the risk of loss resulting from adverse changes in market prices and other factors. For a further discussion of the Company’s market risks and Value-at-Risk (“VaR”) model, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A, of the Form 10-K. In the quarter ending March 31, 2010, the Fed completed its review of the Company’s market risk models for the calculation of market RWAs. The outcome of the review resulted in an increase in the Company’s calculation of market RWAs. Market RWAs incorporate two components: systematic risk and specific risk. Systematic and specific risk charges are computed using either the Company’s VaR model or Standardized Approach in accordance with regulatory requirements.

Credit RWAs reflect capital charges attributable to the risk of loss arising from a borrower or counterparty failing to meet its financial obligations. For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” in Part II, Item 7A, of the Form 10-K and in Item 3 herein. Credit RWAs are determined using Basel I regulatory capital guidelines for U.S. banking organizations issued by the Fed.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market Risk.

The Company uses Value-at-Risk (“VaR”) as one of a range of risk management tools. VaR values should be interpreted in light of the method’s strengths and limitations, which include, but are not limited to: historical changes in market risk factors may not be accurate predictors of future market conditions; VaR estimates represent a one-day measurement and do not reflect the risk of positions that cannot be liquidated or hedged in one day; and VaR estimates may not fully incorporate the risk of more extreme market events that are outsized relative to observed historical market behavior or reflect the historical distribution of results beyond the 95% confidence interval. A small proportion of market risk generated by trading positions is not included in VaR, and the modeling of the risk characteristics of some positions relies upon approximations that, under certain circumstances, could produce significantly different VaR results from those produced using more precise measures. For a further discussion of the Company’s VaR methodology and its limitations, and the Company’s risk management policies and control structure, see “Quantitative and Qualitative Disclosures about Market Risk—Risk Management” in Part II, Item 7A of the Form 10-K.

The tables below present the following: the Company’s Aggregate, Trading, and Non-Trading quarter end, quarterly average, high, and low VaRs (see Table 1 below). The VaR statistics that would result if the Company were to adopt alternative parameters for its calculations, such as the reported confidence level (95% vs. 99%) for the VaR statistic or a shorter historical time series (four years vs. one year) of market data upon which it bases its simulations are also disclosed (see Table 2 below).

Aggregate VaR also incorporates certain non-trading risks, including (a) the interest rate risk generated by funding liabilities related to institutional trading positions, (b) public company equity positions recorded as investments by the Company and (c) corporate loan exposures that are awaiting distribution to the market. Investments made by the Company that are not publicly traded are not reflected in the VaR results presented below. Aggregate VaR also excludes the credit spread risk generated by the Company’s funding liabilities and the interest rate risk associated with approximately $7.7 billion of certain funding liabilities primarily related to fixed and other non-trading assets as of both March 31, 2010 and December 31, 2009. The credit spread risk sensitivity of the Company’s mark-to-market funding liabilities corresponded to an increase in value of approximately $12 million and $11 million for each +1 basis point widening in the Company’s credit spread level at March 31, 2010 and December 31, 2009, respectively.

The credit spread risk relating to the Company’s mark-to-market derivative counterparty exposure is also managed separately from VaR. The credit spread risk sensitivity of this exposure corresponds to an increase in value of approximately $7 million and $8 million for each +1 basis point widening in the Company’s credit spread level as of March 31, 2010 and December 31, 2009, respectively.

The counterparty portfolio, which reflects adjustments, net of hedges, relating to counterparty credit risk and other market risks, was reclassified from Non-Trading VaR into Trading VaR as of January 1, 2010. This reclassification reflects regulatory consideration surrounding the Company’s conversion to a financial holding company, and the trading book nature of the Company’s counterparty risk-hedging activities. Total Trading and Non-Trading VaR was not affected by this change; however this reclassification increased Trading VaR and decreased Non-Trading VaR. Table 1 shows the VaR results for the quarter ended March 31, 2010 reflecting these adjustments and restates the VaR results for the quarter ended December 31, 2009 to capture the counterparty portfolio in Trading VaR.

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

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Table 1 below presents 95%/one-day VaR for each of the Company’s primary market risk exposures and on an aggregate basis at March 31, 2010 and December 31, 2009. The average, high and low figures for the quarters ended March 31, 2010 and December 31, 2009 are also included.

Table 1: 95% Total VaR	95% One-Day VaR for the Quarter Ended March 31, 2010												95% One-Day VaR for the Quarter Ended December 31, 2009
Primary Market Risk Category	Period End			Average			High			Low			Period End			Average			High			Low
	(dollars in millions)
Interest rate and credit spread	$	127		$	127		$	145		$	115		$	142		$	136		$	145		$	121
Equity price		29			26			31			21			23			25			30			20
Foreign exchange rate		37			32			50			17			26			28			47			14
Commodity price		26			27			34			23			24			23			28			19
Less Diversification benefit(1)		(76	)		(69	)		(95	)		(48	)		(57	)		(60	)		(88	)		(43	)
Total Trading VaR	$	143		$	143		$	165		$	128		$	158		$	152		$	162		$	131
Total Non-Trading VaR	$	65		$	62		$	69		$	57		$	67		$	72		$	78		$	66
Total Trading and Non-Trading VaR	$	167		$	169		$	197		$	151		$	187		$	187		$	205		$	160

(1) Diversification benefit equals the difference between Total VaR and the sum of the VaRs for the four primary risk categories. This benefit arises because the simulated one-day losses for each of the four primary market risk categories occur on different days; similar diversification benefits also are taken into account within each category.

The Company’s average Trading VaR for the quarter ended March 31, 2010 was $143 million compared with $152 million for the quarter ended December 31, 2009. The decrease in Trading VaR was driven primarily by decreased risk taking in interest rate and corporate credit risk, partially offset by increased position taking in foreign exchange and commodities.

The Company’s average Non-Trading VaR for the quarter ended March 31, 2010 was $62 million compared with $72 million for the quarter ended December 31, 2009. The decrease in Non-Trading VaR was driven primarily by decreases in loan exposure in the Non-Trading account.

The Company’s average Total Trading and Non-Trading VaR for the quarter ended March 31, 2010 was $169 million compared with $187 million for the quarter ended December 31, 2009. The decrease in Total Trading and Non-Trading VaR was driven primarily by decreased risk taking in interest rate and corporate credit spread risk, partially offset by increased position taking in foreign exchange and commodities.

VaR Statistics under Varying Assumptions.

VaR statistics are not readily comparable across firms because of differences in the breadth of products included in each firm’s VaR model, in the statistical assumptions made when simulating changes in market factors, and in the methods used to approximate portfolio revaluations under the simulated market conditions. These differences can result in materially different VaR estimates for similar portfolios. The extreme market volatilities in the latter part of 2008 have had a significant impact on VaR in 2009. The impact varies depending on the factor history assumptions, the frequency with which the factor history is updated, and the confidence level. As a result, VaR statistics are more reliable and relevant when used as indicators of trends in risk taking rather than as a basis for inferring differences in risk taking across firms.

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Table 2 below presents the VaR statistics that would result if the Company were to adopt alternative parameters for its calculations, such as the reported confidence level (95% versus 99%) for the VaR statistic or a shorter historical time series (four years versus one year) for market data upon which it bases its simulations:

Table 2: 95% and 99% Average Trading VaR with Four-Year / One- Year Historical Time Series	95% Average One-Day VaR for the Quarter Ended March 31, 2010						99% Average One-Day VaR for the Quarter Ended March 31, 2010
Primary Market Risk Category	Four-Year Factor History			One-Year Factor History			Four-Year Factor History			One-Year Factor History
	(dollars in millions)
Interest rate and credit spread	$	127		$	129		$	251		$	207
Equity price		26			26			36			36
Foreign exchange rate		32			34			57			55
Commodity price		27			23			44			37
Less Diversification benefit(1)		(69	)		(64	)		(108	)		(110	)
Total Trading VaR	$	143		$	148		$	280		$	225

(1) Diversification benefit equals the difference between Total VaR and the sum of the VaRs for the four risk categories. This benefit arises because the simulated one-day losses for each of the four primary market risk categories occur on different days; similar diversification benefits also are taken into account within each category.

Distribution of VaR Statistics and Net Revenues for the quarter ended March 31, 2010.

As shown in Table 1 above, the Company’s average 95%/one-day Trading VaR for the quarter ended March 31, 2010 was $143 million. The histogram below presents the distribution of the Company’s daily 95%/one-day Trading VaR for the quarter ended March 31, 2010. The most frequently occurring value was between $130 million and $135 million, while for approximately 63% of trading days during the quarter, VaR ranged between $130 million and $145 million.

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One method of evaluating the reasonableness of the Company’s VaR model as a measure of the Company’s potential volatility of net revenue is to compare the VaR with actual trading revenue. Assuming no intra-day trading, for a 95%/one-day VaR, the expected number of times that trading losses should exceed VaR during the year is 13, and, in general, if trading losses were to exceed VaR more than 21 times in a year, the accuracy of the VaR model could be questioned. Accordingly, the Company evaluates the reasonableness of its VaR model by comparing the potential declines in portfolio values generated by the model with actual trading results. For days where losses exceed the 95% or 99% VaR statistic, the Company examines the drivers of trading losses to evaluate the VaR model’s accuracy relative to realized trading results.

The Company did not incur daily trading losses in excess of the 95%/one-day Trading VaR for the quarter ended on March 31, 2010. Over the longer term, trading losses are expected to exceed VaR an average of three times per quarter at the 95% confidence level. The Company bases its VaR calculations on the long term (or unconditional) distribution with four years of observations, and therefore evaluates its risk from a longer term perspective. The Company is evaluating enhancements to the VaR model to make it more responsive to more recent market conditions, while maintaining a longer-term perspective.

The histogram below shows the distribution of daily net trading revenue for the quarter ended March 31, 2010 for the Company’s trading businesses (these figures include revenue from the counterparty portfolio and also include net interest and non-agency commissions but exclude certain non-trading revenues such as primary, fee-based and prime brokerage revenue credited to the trading businesses). During the quarter ended March 31, 2010, the Company experienced net trading losses on 4 days.

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Credit Risk.

For a further discussion of the Company’s credit risks, see “Quantitative and Qualitative Disclosures about Market Risk—Credit Risk” in Part II, Item 7A of the Form 10-K.

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

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

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

The following table presents information about the Company’s corporate funded loans and lending commitments at March 31, 2010. The “total corporate lending exposure” column includes both lending commitments and funded loans. Fair value of corporate lending exposure represents the fair value of loans that have been drawn by the borrower and lending commitments that were outstanding at March 31, 2010. Lending commitments represent legally binding obligations to provide funding to clients at March 31, 2010 for both “relationship-driven” and “event-driven” lending transactions. As discussed above, these loans and lending commitments have varying terms, may be senior or subordinated, may be secured or unsecured, are generally contingent upon representations, warranties and contractual conditions applicable to the borrower, and may be syndicated, traded or hedged by the Company.

At March 31, 2010, the aggregate amount of investment grade loans was $5.7 billion and the aggregate amount of non-investment grade loans was $7.6 billion. At March 31, 2010, the aggregate amount of lending commitments outstanding was $53.6 billion. In connection with these corporate lending activities (which include corporate funded loans and lending commitments), the Company had hedges (which include “single name,” “sector” and “index” hedges) with a notional amount of $22.3 billion related to the total corporate lending exposure of $67.0 billion at March 31, 2010.

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The table below shows the Company’s credit exposure from its corporate lending positions and lending commitments at March 31, 2010. Since commitments associated with these business activities may expire unused, they do not necessarily reflect the actual future cash funding requirements:

Corporate Lending Commitments and Funded Loans at March 31, 2010

	Years to Maturity								Total Corporate Lending Exposure(2)		Corporate Lending Exposure at Fair Value(3)		Corporate Lending Commitments(4)
Credit Rating(1)	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
AAA	$	541	$	220	$	—	$	—	$	761	$	—	$	761
AA		3,036		4,860		277		—		8,173		198		7,975
A		2,894		9,702		1,414		181		14,191		1,982		12,209
BBB		4,996		16,502		2,928		160		24,586		3,551		21,035
Investment grade		11,467		31,284		4,619		341		47,711		5,731		41,980
Non-investment grade		1,630		6,017		5,893		5,714		19,254		7,629		11,625
Total	$	13,097	$	37,301	$	10,512	$	6,055	$	66,965	$	13,360	$	53,605

(1) Obligor credit ratings are determined by Credit Risk Management using methodologies generally consistent with those employed by external rating agencies.

(2) Total corporate lending exposure represents the Company’s potential loss assuming the fair value of funded loans and lending commitments were zero.

(3) The Company’s corporate lending exposure carried at fair value includes $13.0 billion of funded loans and $0.5 billion of lending commitments recorded in Financial instruments owned and Financial instruments sold, not yet purchased, respectively, in the condensed consolidated statements of financial condition at March 31, 2010. The Company’s corporate lending exposure carried at amortized cost includes $850 million of funded loans recorded in Loans in the condensed consolidated statements of financial condition.

(4) Amounts represent the notional amount of unfunded lending commitments less the amount of commitments reflected in the Company’s condensed consolidated statements of financial condition.

“Event-driven” Loans and Lending Commitments at March 31, 2010.

Included in the total corporate lending exposure amounts in the table above at March 31, 2010 is “event-driven” exposure of $7.3 billion composed of funded loans of $1.6 billion and lending commitments of $5.7 billion. Included in the $7.3 billion of “event-driven” exposure at March 31, 2010 were $5.7 billion of loans and lending commitments to non-investment grade borrowers that were closed.

Activity associated with the corporate “event-driven” lending exposure during the quarter ended March 31, 2010 was as follows (dollars in millions):

“Event-driven” lending exposures at December 31, 2009	$	5,621
Closed commitments		3,237
Net reductions, primarily through distributions		(1,568	)
Mark-to-market adjustments		(6	)
“Event-driven” lending exposures at March 31, 2010	$	7,284

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Credit Exposure—Derivatives.    The table below presents a summary by counterparty credit rating and remaining contract maturity of the fair value of OTC derivatives in a gain position at March 31, 2010. Fair value is presented in the final column net of collateral received (principally cash and U.S. government and agency securities):

OTC Derivative Products—Financial Instruments Owned at March 31, 2010(1)

	Years to Maturity								Cross- Maturity and Cash Collateral Netting(3)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Credit Rating(2)	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
AAA	$	534	$	1,952	$	3,287	$	9,769	$	(6,753	)	$	8,789	$	8,443
AA		5,635		6,953		7,101		16,481		(26,290	)		9,880		8,010
A		9,111		8,809		7,102		25,507		(39,564	)		10,965		9,800
BBB		3,404		3,990		2,347		7,501		(9,623	)		7,619		5,547
Non-investment grade		2,488		3,067		1,710		4,516		(3,983	)		7,798		6,233
Total	$	21,172	$	24,771	$	21,547	$	63,774	$	(86,213	)	$	45,051	$	38,033

(1) Fair values shown represent the Company’s net exposure to counterparties related to the Company’s OTC derivative products. The table does not include listed derivatives and the effect of any related hedges utilized by the Company. The table also excludes fair values corresponding to other credit exposures, such as those arising from the Company’s lending activities.

(2) Obligor credit ratings are determined by the Company’s Credit Risk Management Department using methodologies generally consistent with those employed by external rating agencies.

(3) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

The following table summarizes the fair values of the Company’s OTC derivative products recorded in Financial instruments owned and Financial instruments sold, not yet purchased by product category and maturity at March 31, 2010, including on a net basis, where applicable, reflecting the fair value of related non-cash collateral for financial instruments owned:

OTC Derivative Products—Financial Instruments Owned at March 31, 2010

	Years to Maturity								Cross- Maturity and Cash Collateral Netting(1)			Net Exposure Post-Cash Collateral		Net Exposure Post- Collateral
Product Type	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	9,723	$	17,605	$	19,668	$	61,947	$	(77,457	)	$	31,486	$	28,123
Foreign exchange forward contracts and options		3,801		752		177		45		(2,012	)		2,763		2,542
Equity securities contracts (including equity swaps, warrants and options)		1,864		985		389		698		(2,001	)		1,935		872
Commodity forwards, options and swaps		5,784		5,429		1,313		1,084		(4,743	)		8,867		6,496
Total	$	21,172	$	24,771	$	21,547	$	63,774	$	(86,213	)	$	45,051	$	38,033

(1) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral received is netted on a counterparty basis, provided legal right of offset exists.

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OTC Derivative Products—Financial Instruments Sold, Not Yet Purchased at March 31, 2010(1)

	Years to Maturity								Cross- Maturity and Cash Collateral Netting(2)			Total
Product Type	Less than 1		1-3		3-5		Over 5
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	6,336	$	10,591	$	13,186	$	34,395	$	(45,120	)	$	19,388
Foreign exchange forward contracts and options		4,283		613		250		74		(1,958	)		3,262
Equity securities contracts (including equity swaps, warrants and options)		4,689		2,722		1,093		831		(6,032	)		3,303
Commodity forwards, options and swaps		5,075		4,366		1,159		873		(5,328	)		6,145
Total	$	20,383	$	18,292	$	15,688	$	36,173	$	(58,438	)	$	32,098

(1) Since these amounts are liabilities of the Company, they do not result in credit exposures.

(2) Amounts represent the netting of receivable balances with payable balances for the same counterparty across maturity and product categories. Receivable and payable balances with the same counterparty in the same maturity category are netted within the maturity category, where appropriate. Cash collateral paid is netted on a counterparty basis, provided legal right of offset exists.

The Company’s derivatives (both listed and OTC), on a net of counterparty and cash collateral basis, at March 31, 2010 and December 31, 2009 are summarized in the table below, showing the fair value of the related assets and liabilities by product category:

	At March 31, 2010				At December 31, 2009
Product Type	Assets		Liabilities		Assets		Liabilities
	(dollars in millions)
Interest rate and currency swaps, interest rate options, credit derivatives and other fixed income securities contracts	$	31,760	$	19,603	$	33,307	$	20,911
Foreign exchange forward contracts and options		2,763		3,262		3,022		2,824
Equity securities contracts (including equity swaps, warrants and options)		3,958		6,930		3,619		7,371
Commodity forwards, options and swaps		9,425		7,982		9,133		7,103
Total	$	47,906	$	37,777	$	49,081	$	38,209

Each category of derivative products in the above tables includes a variety of instruments, which can differ substantially in their characteristics. Instruments in each category can be denominated in U.S. dollars or in one or more non-U.S. currencies.

The Company determines the fair values recorded in the above tables using various pricing models. For a discussion of fair value as it affects the condensed consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in Part I, Item 2, herein and Notes 1 and 3 to the condensed consolidated financial statements.

Credit Derivatives.    A credit derivative is a contract between a seller (guarantor) and buyer (beneficiary) of protection against the risk of a credit event occurring on a set of debt obligations issued by a specified reference entity. The beneficiary pays a periodic premium (typically quarterly) over the life of the contract and is protected for the period. If a credit event occurs, the guarantor is required to make payment to the beneficiary based on the terms of the credit derivative contract. Credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay, obligation acceleration, repudiation and payment moratorium. Debt restructurings are also considered a credit event in some cases. In certain transactions referenced to a portfolio of referenced entities or asset-backed securities, deductibles and caps may limit the guarantor’s obligations.

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The Company trades in a variety of derivatives and may either purchase or write protection on a single name or portfolio of referenced entities. The Company is an active market-maker in the credit derivatives markets. As a market-maker, the Company works to earn a bid-offer spread on client flow business and manage any residual credit or correlation risk on a portfolio basis. The Company also trades and takes credit risk in credit default swap form on a proprietary basis. Further, the Company uses credit derivatives to manage its exposure to residential and commercial mortgage loans and corporate lending exposures.

The Company actively monitors its counterparty credit risk related to credit derivatives. A majority of the Company’s counterparties are banks, broker-dealers, insurance, and other financial institutions and Monolines. Contracts with these counterparties do not include ratings-based termination events but do include counterparty rating downgrades, which may result in additional collateral being required by the Company. For further information on the Company’s exposure to Monolines, see “Certain Factors Affecting Results of Operations— Monoline Insurers” herein. The master agreements with these Monoline counterparties are generally unsecured, and the few ratings-based triggers (if any) generally provide the Company the ability to terminate only upon significant downgrade. As with all derivative contracts, the Company considers counterparty credit risk in the valuation of its positions and recognizes credit valuation adjustments as appropriate.

The following table summarizes the key characteristics of the Company’s credit derivative portfolio by counterparty at March 31, 2010. The fair values shown are before the application of any counterparty or cash collateral netting:

	At March 31, 2010
	Fair Values(1)				Notionals
	Receivable		Payable		Beneficiary		Guarantor
	(dollars in millions)
Banks and securities firms	$	105,920	$	98,018	$	2,098,133	$	2,002,863
Insurance and other financial institutions		14,217		9,007		199,635		262,375
Monolines		4,839		—		22,816		—
Non-financial entities		178		38		2,239		2,358
Total	$	125,154	$	107,063	$	2,322,823	$	2,267,596

(1) Amounts shown are presented before the application of any counterparty or cash collateral netting. The Company’s credit default swaps are classified in both Level 2 and Level 3 of the fair value hierarchy. Approximately 16% of receivable fair values and 11% of payable fair values represent Level 3 amounts.

Country Exposure.    At March 31, 2010, primarily based on the domicile of the counterparty, approximately 6% of the Company’s credit exposure (for credit exposure arising from corporate loans and lending commitments as discussed above and current exposure arising from the Company’s OTC derivative contracts) was to emerging markets, and no one emerging market country accounted for more than 1% of the Company’s credit exposure.

The Company defines emerging markets to include generally all countries where the economic, legal and political systems are transitional and in the process of developing into more transparent and accountable systems that are consistent with advanced countries.

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The following tables show the Company’s percentage of credit exposure from its primary corporate loans and lending commitments and OTC derivative products by country at March 31, 2010:

Country	Corporate Lending Exposure(1)
United States	66	%
United Kingdom	6
Germany	6
Other	22
Total	100	%
(1)    Credit exposure amounts are based on the domicile of the counterparty.
Country	OTC Derivative Products(1)(2)
United States	33	%
Cayman Islands	14
United Kingdom	8
Italy	8
France	4
Germany	3
Jersey	3
Ireland	2
Canada	2
Other	23
Total	100	%

(1) Credit exposure amounts are based on the domicile of the counterparty.

(2) Credit exposure amounts do not reflect the offsetting benefit of financial instruments that the Company utilizes to hedge credit exposure arising from OTC derivative products.

Industry Exposure.    The Company also monitors its credit exposure to individual industries for credit exposure arising from corporate loans and lending commitments as discussed above and current exposure arising from the Company’s OTC derivative contracts.

The following table shows the Company’s percentage of credit exposure from its primary corporate loans and lending commitments and OTC derivative products by industry at March 31, 2010:

Industry	Corporate Lending Exposure
Utilities-related	14	%
Consumer-related entities	9
Financial institutions	9
Media-related entities	8
Energy-related entities	7
Telecommunications	7
General industrials	7
Technology-related industries	6
Healthcare-related entities	6
Chemical-related industries	5
Other	22
Total	100	%

123

Industry	OTC Derivative Products
Financial institutions	38	%
Sovereign entities	20
Insurance	11
Utilities-related entities	9
Energy-related entities	4
Natural resources-related entities	3
Other	15
Total	100	%

124

FINANCIAL DATA SUPPLEMENT (Unaudited)

Average Balances and Interest Rates and Net Interest Income

	Three Months Ended March 31, 2010
	Average Weekly Balance		Interest			Annualized Average Rate
	(dollars in millions)
Assets
Interest earning assets:
Financial instruments owned(1):
U.S	$	155,440	$	975		2.5	%
Non-U.S		102,951		168		0.7
Securities available for sale:
U.S		4,749		10		0.9
Loans:
U.S		6,818		65		3.9
Non-U.S		204		5		9.9
Interest bearing deposits with banks:
U.S		35,442		23		0.3
Non-U.S		19,924		18		0.4
Federal funds sold and securities purchased under agreements to resell and securities borrowed:
U.S		216,466		27		0.1
Non-U.S		101,001		123		0.5
Other:
U.S		28,065		334		4.8
Non-U.S		20,289		—		—
Total		691,349	$	1,748		1.0	%
Non-interest earning assets		144,445
Total assets	$	835,794
Liabilities and Equity
Interest bearing liabilities:
Commercial paper and other short-term borrowings:
U.S	$	1,677		3		0.7	%
Non-U.S		744		—		—
Deposits:
U.S		63,358		172		1.1
Non-U.S		101		—		—
Long-term debt:
U.S		188,994		1,061		2.3
Non-U.S		4,317		3		0.3
Financial instruments sold, not yet purchased(1):
U.S		14,820		—		—
Non-U.S		64,986		—		—
Securities sold under agreements to repurchase and securities loaned:
U.S		150,018		146		0.4
Non-U.S		73,959		140		0.8
Other:
U.S		84,357		(120	)	(0.6	)
Non-U.S		35,362		(38	)	(0.4	)
Total		682,693		1,367		0.8
Non-interest bearing liabilities and equity		153,101
Total liabilities and equity	$	835,794
Net interest income and net interest rate spread			$	381		0.2	%

125

FINANCIAL DATA SUPPLEMENT (Unaudited)—Continued

Average Balances and Interest Rates and Net Interest Income

	Three Months Ended March 31, 2009
	Average Balance(2)		Interest			Annualized Average Rate
	(dollars in millions)
Assets
Interest earning assets:
Financial instruments owned(1)	$	175,625	$	1,289		3.0	%
Loans		6,443		88		5.5
Interest bearing deposits with banks		80,366		113		0.6
Federal funds sold and securities purchased under agreements to resell and securities borrowed		224,589		444		0.8
Other		36,735		311		3.4
Total	$	523,758	$	2,245		1.7	%
Non-interest earning assets		162,185
Total assets	$	685,943
Liabilities and Equity
Interest bearing liabilities:
Commercial paper and other short-term borrowings	$	4,915	$	37		3.1	%
Deposits		55,503		150		1.1
Long-term debt		176,850		1,472		3.4
Financial instruments sold, not yet purchased(1)		53,144		—		—
Securities sold under agreements to repurchase and securities loaned		130,817		463		1.4
Other		118,046		187		0.6
Total	$	539,275	$	2,309		1.7	%
Non-interest bearing liabilities and equity		146,668
Total liabilities and equity	$	685,943
Net interest income and net interest rate spread			$	(64	)	—	%

(1) Interest expense on Financial instruments sold, not yet purchased is reported as a reduction of Interest income.

(2) The Company calculates its average balances based upon weekly amounts, except where weekly balances are unavailable, month-end balances are used.

126

FINANCIAL DATA SUPPLEMENT (Unaudited)—Continued

Rate/Volume Analysis

The following table sets forth an analysis of the effect on net interest income of volume and rate changes:

	Three Months Ended March 31, 2010  versus Three Months Ended March 31, 2009
	Increase (decrease) due to change in:						Net change
	Volume			Rate
	(in millions)
Interest earning assets
Financial instruments owned	$	607		$	(753	)	$	(146	)
Securities available for sale		10			—			10
Loans		8			(26	)		(18	)
Interest bearing deposits with banks		(35	)		(37	)		(72	)
Federal funds sold and securities purchased under agreements to resell and securities borrowed		184			(478	)		(294	)
Other		98			(75	)		23
Change in interest income	$	872		$	(1,369	)	$	(497	)
Interest bearing liabilities
Commercial paper and other short-term borrowings	$	(19	)	$	(15	)	$	(34	)
Deposits		22			—			22
Long-term debt		137			(545	)		(408	)
Securities sold under agreements to repurchase		330			(507	)		(177	)
Other		2			(347	)		(345	)
Change in interest expense	$	472		$	(1,414	)	$	(942	)
Change in net interest income	$	400		$	45		$	445

127

Part II—Other Information.

Item 1. Legal Proceedings.

In addition to the matters described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”) and those described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for a particular future period depending on, among other things, the level of the Company’s revenues or income for such period.

The following developments have occurred with respect to certain matters previously reported in the Form 10-K:

Residential Mortgage-Related Matters.

On March 17, 2010, the United States District Court for the Southern District of New York denied without prejudice the underwriter defendants’ motion to dismiss the complaint in the In re: Lehman Brothers Equity/Debt Securities Litigation matter and granted plaintiffs leave to file an amended complaint, which they filed on April 23, 2010.

Auction Rate Securities Matters.

On April 20, 2010, the Company’s Board of Directors resolved to reject, in its entirety, the demand made upon it by letter from plaintiffs’ counsel in In re Morgan Stanley & Co. Inc. Auction Rate Securities Derivative Litigation and thereafter advised plaintiffs’ counsel of same.

Executive Compensation-Related Matter.

On April 16, 2010, the defendants filed motions to dismiss the shareholder derivative complaint in Security Police and Fire Professionals of America Retirement Fund v. Mack, et al.

Item 1A. Risk Factors.

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of the Form 10-K.

128

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The table below sets forth the information with respect to purchases made by or on behalf of the Company of its common stock during the quarterly period ended March 31, 2010.

Issuer Purchases of Equity Securities

(dollars in millions, except per share amounts)

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (C)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (January 1, 2010—January 31, 2010)
Share Repurchase Program (A)	—		—	—	$	1,560
Employee Transactions (B)	8,214,737	$	29.79	—		—
Month #2 (February 1, 2010—February 28, 2010)
Share Repurchase Program (A)	—		—	—	$	1,560
Employee Transactions (B)	75,514	$	27.72	—		—
Month #3 (March 1, 2010—March 31, 2010)
Share Repurchase Program (A)	—		—	—	$	1,560
Employee Transactions (B)	517,289	$	29.16	—		—
Total
Share Repurchase Program (A)	—		—	—	$	1,560
Employee Transactions (B)	8,807,540	$	29.74	—		—

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

(B) Includes: (1) shares delivered or attested in satisfaction of the exercise price and/or tax withholding obligations by holders of employee and director stock options (granted under employee and director stock compensation plans) who exercised options; (2) shares withheld, delivered or attested (under the terms of grants under employee and director stock compensation plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares; and (3) shares withheld, delivered and attested (under the terms of grants under employee and director stock compensation plans) to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock units. The Company’s employee and director stock compensation plans provide that the value of the shares withheld, delivered or attested shall be valued using the fair market value of the Company’s common stock on the date the relevant transaction occurs, using a valuation methodology established by the Company.

(C) Share purchases under publicly announced programs are made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions (including with employee benefit plans) as market conditions warrant and at prices the Company deems appropriate.

Item 6. Exhibits.

An exhibit index has been filed as part of this Report on Page E-1.

129

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MORGAN STANLEY (Registrant)
By:	/s/ RUTH PORAT
	Ruth Porat Executive Vice President and Chief Financial Officer
By:	/s/ PAUL C. WIRTH
	Paul C. Wirth Finance Director and Controller

Date: May 7, 2010

130

EXHIBIT INDEX

MORGAN STANLEY

Quarter Ended March 31, 2010

Exhibit No.	Description
10.1	Aircraft Time Sharing Agreement, dated as of January 1, 2010, by and between Corporate Services Support Corp. and James P. Gorman.
10.2	Agreement between Morgan Stanley and James P. Gorman, dated August 16, 2005, and amendment to agreement dated December 17, 2008 (filed hereto as a result of Mr. Gorman becoming a named executive officer pursuant to Item 402 of Regulation S-K).
10.3	Agreement between Morgan Stanley and Kenneth M. deRegt, dated February 14, 2008 (filed hereto as a result of Mr. deRegt becoming a named executive officer pursuant to Item 402 of Regulation S-K).
10.4	Form of Award Certificate for Discretionary Retention Awards of Stock Units.
10.5	Form of Award Certificate under the Morgan Stanley Compensation Incentive Plan.
10.6	Form of Award Certificate for Performance Stock Units.
12	Statement Re: Computation of Ratio of Earnings to Fixed Charges and Computation of Earnings to Fixed Charges and Preferred Stock Dividends.
15	Letter of awareness from Deloitte & Touche LLP, dated May 7, 2010, concerning unaudited interim financial information.
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certification of Chief Executive Officer.
32.2	Section 1350 Certification of Chief Financial Officer.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Financial Condition—March 31, 2010 and December 31, 2009, (ii) the Condensed Consolidated Statements of Income—Three Months Ended March 31, 2010 and 2009, (iii) the Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2010 and 2009, (iv) the Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2010 and 2009, (v) the Condensed Consolidated Statements of Changes in Total Equity—Three Months Ended March 31, 2010 and 2009, and (vi) Notes to Condensed Consolidated Financial Statements (unaudited), tagged as blocks of text.*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

E-1

EX-10.1

EXHIBIT 10.1

AIRCRAFT TIME-SHARING AGREEMENT

This Agreement, effective as of the 1^st day of January 2010, by and between Corporate Services Support Corp., a corporation organized and existing under the laws of the State of Delaware (“CSSC”), and James P. Gorman (“User”).

WITNESSETH:

WHEREAS, CSSC is the operator of the aircraft listed on Schedule A hereto, as amended from time to time (collectively, the “Aircraft”); and

WHEREAS, CSSC has the right and lawful authority to enter into time sharing agreements, as provided in §91.501 of the Federal Aviation Regulations (“FARs”); and

WHEREAS, from time to time, User may desire to lease the Aircraft, with flight crew, from CSSC for User’s personal travel at User’s discretion on a time-sharing basis in accordance with §91.501 of the FARs; and

WHEREAS, CSSC has agreed to make the Aircraft, with flight crew, available to User for User’s personal travel on a non-exclusive time-sharing basis in accordance with §91.501 of the FARs; and

WHEREAS, this Agreement sets forth the understanding of the parties as to the terms under which CSSC will provide User with the use, on a non-exclusive time-sharing basis, of the Aircraft.

NOW THEREFORE, in consideration of the mutual covenants herein set forth, the parties agree as follows:

1. Provision of Aircraft and Crew. Subject to Aircraft availability, CSSC agrees to provide the Aircraft and flight crew to User on a time sharing basis in accordance with the provisions of §§ 91.501(b)(6), 91.501(c)(1) and 91.501(d) of the FARs. CSSC shall provide, at its sole expense, qualified flight crew for all flight operations under this Agreement. If CSSC is no longer the operator of any of the Aircraft, Schedule A shall be amended to delete any reference to such Aircraft and this Agreement shall be terminated as to such Aircraft but shall remain in full force and effect with respect to each of the other Aircraft, if any. No such termination shall affect any of the rights and obligations of the parties accrued or incurred prior to such termination. If CSSC becomes the operator of any aircraft not listed on Schedule A hereto, Schedule A shall be modified to include such Aircraft, and thereafter this Agreement shall remain in full force and effect with respect to such Aircraft and each of the other Aircraft, if any.

2. Term. The term of this Agreement (the “Term”) shall commence on the date hereof and shall continue until terminated by either party on written notice to the other party. This Agreement shall terminate immediately in the event that User is no longer an employee or director of Morgan Stanley or any of its affiliates. Notwithstanding the foregoing, any provisions directly or indirectly related to User’s payment obligations for flights completed prior to the date of termination shall survive the termination of this Agreement.

1

3. Reimbursement of Expenses. For each flight conducted under this Agreement, User shall pay CSSC an amount (as determined by CSSC) equal to the actual expenses of operating such flight, not to exceed the sum of the following expenses as permitted pursuant to FAR 91.501(d):

(a) Fuel, oil, lubricants, and other additives;

(b) Travel expenses of the crew, including food, lodging, and ground transportation;

(c) Hangar and tie-down costs away from the Aircraft’s base of operation;

(d) Insurance obtained for the specific flight;

(e) Landing fees, airport taxes, and similar assessments;

(f) Customs, foreign permit, and similar fees directly related to the flight;

(g) In-flight food and beverages;

(h) Passenger ground transportation;

(i) Flight planning and weather contract services; and

(j) An additional charge equal to one hundred percent (100%) of the expenses listed in subsection (a) above.

4. Invoicing and Payment. All payments to be made to CSSC by User hereunder shall be paid in the manner set forth in this Section 4. CSSC will pay, or cause to be paid, all expenses related to the operation of the Aircraft hereunder in the ordinary course. As soon as practicable after the end of each calendar quarter during the Term, or shorter period of time as mutually agreed by the parties, CSSC shall provide or cause to be provided to User an invoice showing all personal use of the Aircraft by User pursuant to this Agreement during that quarter and a complete accounting detailing all amounts payable by User pursuant to Section 3 for that quarter (plus applicable domestic or international air transportation excise taxes, and any other fees, taxes or charges assessed on passengers by and remitted to a government agency or airport authority). User shall pay all amounts due under the invoice not later than 30 days after receipt thereof. In the event CSSC has not received supplier invoices for reimbursable charges relating to such flight prior to such invoicing, CSSC shall issue supplemental invoice(s) for such charge(s) to User, and User shall pay each supplemental invoice within 30 days after receipt thereof.

5. Flight Requests. User will provide the designated representatives of CSSC with flight requests for User’s personal travel to be undertaken pursuant to this Agreement and proposed flight schedules as far in advance of User’s desired departure as possible and in accordance with all reasonable policies established by CSSC. Flight requests shall be in a form, whether oral or written, mutually convenient to and agreed upon by the parties. CSSC shall have sole and exclusive authority over the scheduling of the Aircraft. CSSC shall not be liable to User or any other person for loss, injury, or damage occasioned by the delay or failure to furnish the Aircraft and crew pursuant to this Agreement for any reason. In addition to requested schedules and departure times, User shall provide at least the following information for each proposed flight reasonably in advance of the desired departure time as required by CSSC or its flight crew:

(a) departure point;

(b) destination;

(c) date and time of flight;

(d) number and identity of anticipated passengers;

(e) nature and extent of luggage and/or cargo expected to be carried;

(f) date and time of return flight, if any; and

(g) any other information concerning the proposed flight that may be pertinent to or required by CSSC or its flight crew.

Subject to Aircraft and crew availability, CSSC shall use its good faith efforts, consistent with its approved policies, to accommodate User’s needs, avoid conflicts in scheduling and enable User to enjoy the benefits of this Agreement. Although every good faith effort shall be made to avoid its occurrence, any flights scheduled under this Agreement are subject to cancellation by either party without incurring liability to the other party. In the event of a cancellation, the canceling party shall provide the maximum notice reasonably practicable.

2

6. Operational Authority and Control. CSSC shall be responsible for the physical and technical operation of the Aircraft and the safe performance of all flights under this Agreement, and shall retain full authority and control, including exclusive operational control and exclusive possession, command and control of the Aircraft for all flights under this Agreement. CSSC shall furnish at its expense a fully qualified flight crew with appropriate credentials to conduct each flight undertaken under this Agreement and included on the insurance policies that CSSC is required to maintain hereunder. In accordance with applicable FARs, the qualified flight crew provided by CSSC will exercise all required and/or appropriate duties and responsibilities in regard to the safety of each flight conducted hereunder. The pilot-in-command shall have absolute discretion in all matters concerning the preparation of the Aircraft for flight and the flight itself, the load carried and its distribution, the decision whether or not a flight shall be undertaken, the route to be flown, the place where landings shall be made, and all other matters relating to operation of the Aircraft. User specifically agrees that the flight crew shall have final and complete authority to delay or cancel any flight for any reason or condition that in the sole judgment of the pilot-in-command could compromise the safety of the flight, and to take any other action that in the sole judgment of the pilot-in-command is necessitated by considerations of safety. No such action of the pilot-in-command shall create or support any liability to User or any other person for loss, injury, damage or delay. CSSC’s operation of the Aircraft hereunder shall be strictly within the guidelines and policies established by CSSC and FAR Part 91.

7. Aircraft Maintenance. CSSC shall, at its own expense, cause the Aircraft to be inspected, maintained, serviced, repaired, overhauled, and tested in accordance with FAR Part 91 so that the Aircraft will remain in good operating condition and in a condition consistent with its airworthiness certification and shall take such requirements into account in scheduling the Aircraft hereunder. Performance of maintenance, preventive maintenance or inspection shall not be delayed or postponed for the purpose of scheduling the Aircraft unless such maintenance or inspection can safely be conducted at a later time in compliance with applicable laws, regulations and requirements, and such delay or postponement is consistent with the sound discretion of the pilot-in-command. In the event that any non-standard maintenance is required during the term and will interfere with User’s requested or scheduled flights, CSSC, or CSSC’s pilot-in-command, shall notify User of the maintenance required, the effect on the ability to comply with User’s requested or scheduled flights and the manner in which the parties will proceed with the performance of such maintenance and conduct of such flight(s). In no event shall CSSC be liable to User or any other person for loss, injury or damage occasioned by the delay or failure to furnish the Aircraft under this Agreement, whether or not maintenance-related.

8. Insurance. CSSC, at its expense, will maintain or cause to be maintained in full force and effect throughout the Term of this Agreement (i) comprehensive aircraft and liability insurance against bodily injury and property damage claims, including, without limitation, contractual liability, in respect of the Aircraft in such amount as is customarily maintained by prudent operators of similar aircraft, but in no event less than $300,000,000 for each single occurrence; and (ii) hull insurance for the full replacement cost of the Aircraft. Such policies shall (A) name User as an additional insured; (B) provide that in respect of the interests of User in such policies, the insurance shall not be invalidated by any action or inaction of CSSC, regardless of any breach or violation of any warranties, declarations or conditions contained in such policies or otherwise binding on CSSC; (C) include provisions whereby the insurer(s) irrevocably and unconditionally waive all rights of subrogation they may have or acquire against User; (D) permit the use of the Aircraft by CSSC for compensation or hire to the extent necessary to perform its obligations under this Agreement; and (E) include a cross-liability clause to the effect that such insurance, except for the limits of liability, shall operate to give User the same protection as if there were a separate policy issued to him.

CSSC shall use reasonable commercial efforts to provide such additional insurance for specific flights under this Agreement as User may request in writing. User acknowledges that any trips scheduled to the European Union may require CSSC to purchase additional insurance to comply with applicable regulations. The cost of all flight-specific insurance shall be borne by User as provided in Section 3(d).

3

9. Use of Aircraft. User warrants that:

(i) He will use the Aircraft under this Agreement for and only for his own account, including the carriage of his guests, and will not use the Aircraft for the purpose of providing transportation of passengers or cargo for compensation or hire or for common carriage;

(ii) He will not permit any lien, security interest or other charge or encumbrance to attach against the Aircraft as a result of his actions or inactions, and shall not attempt to convey, mortgage, assign, lease or in any way alienate the Aircraft or CSSC’s rights hereunder or create any kind of lien or security interest involving the Aircraft or do anything or take any action that might mature into such a lien; and

(iii) During the Term of this Agreement, he will abide by and conform to all such laws, governmental and airport orders, rules, and regulations as shall from time to time be in effect relating in any way to the operation or use of the Aircraft by the lessee under a time sharing arrangement and all applicable policies of CSSC.

10. Limitation of Liability. NEITHER CSSC (NOR ITS AFFILIATES) MAKES, HAS MADE OR SHALL BE DEEMED TO MAKE OR HAVE MADE ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO ANY AIRCRAFT TO BE USED HEREUNDER OR ANY ENGINE OR COMPONENT THEREOF INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, AIRWORTHINESS, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR TITLE.

IN NO EVENT SHALL CSSC OR ITS AFFILIATES BE LIABLE FOR OR HAVE ANY DUTY FOR INDEMNIFICATION OR CONTRIBUTION TO USER, HIS EMPLOYEES, AGENTS OR GUESTS FOR ANY CLAIMED INDIRECT, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES, REGARDLESS OF WHETHER IT KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGE, LOSS OR EXPENSE. The provisions of this Section 10 shall survive the termination or expiration of this Agreement.

11. Base of Operations. For purposes of this Agreement, the base of operation of the Aircraft is Westchester County Airport, White Plains, New York; provided, that such base may be changed at CSSC’s sole discretion upon notice from CSSC to User.

4

12. Notices and Communications. All notices and other communications under this Agreement shall be in writing (except as permitted in Section 5) and shall be given (and shall be deemed to have been duly given upon receipt or refusal to accept receipt) by personal delivery, by telefax (with a simultaneous confirmation copy sent by first class mail properly addressed and postage prepaid), or by a reputable overnight courier service, addressed as follows:

If to CSSC:	Corporate Support Services Corp.
	[Redacted]
If to User:	James P. Gorman
	[Redacted]

or to such other person or address as either party may from time to time designate in writing to the other party.

13. Entire Agreement. This Agreement constitutes the entire understanding between the parties with respect to its subject matter, and there are no representations, warranties, rights, obligations, liabilities, conditions, covenants, or agreements relating to such subject matter that are not expressly set forth herein. There are no third-party beneficiaries of this Agreement.

14. Further Acts. CSSC and User shall from time to time perform such other and further acts and execute such other and further instruments as may be required by law or may be reasonably necessary (i) to carry out the intent and purpose of this Agreement, and (ii) to establish, maintain and protect the respective rights and remedies of the other party.

15. Successors and Assigns. User shall not have the right to assign, transfer or pledge this Agreement. This Agreement shall be binding on the parties hereto and their respective heirs, executors, administrators, successors and assigns, and shall inure to the benefit of the parties hereto, and, except as otherwise provided herein, their respective heirs, executors, administrators, other legal representatives, successors and permitted assigns.

16. Taxes. User shall be responsible for paying, and CSSC shall be responsible for collecting from User and paying over to the appropriate authorities, all applicable Federal excise taxes imposed under IRC §4261 and all sales, use and other excise taxes imposed by any authority in connection with the use of the Aircraft by User hereunder.

17. Governing Law and Consent to Jurisdiction. This Agreement shall be governed by the laws of the State of New York without regard to its choice of law principles, other than Section 5-1401 and Section 5-1402 of the New York General Obligations Law. The parties hereby consent and agree to submit to the exclusive jurisdiction and venue of any state or federal court in New York, New York in any proceedings hereunder, and each hereby waives any objection to any such proceedings based on improper venue or forum non-conveniens or similar principles. The parties hereto hereby further consent and agree to the exercise of such personal jurisdiction over them by such courts with respect to any such proceedings, waive any objection to the assertion or exercise of such jurisdiction and consent to process being served in any such proceedings in the manner provided for the giving of notices hereunder.

18. Severability. If any provision of this Agreement is held to be illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions shall not be affected or impaired.

19. Amendment or Modification. This Agreement may be amended, modified or terminated only in writing duly executed by the parties hereto.

20. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement, binding on all the parties notwithstanding that all the parties are not signatories to the same counterpart. Each party may transmit its signature by facsimile, and any faxed counterpart of this Agreement shall have the same force and effect as a manually-executed original.

5

21. Truth-in-Leasing Compliance. CSSC, on behalf of User, shall (i) deliver a copy of this Agreement to the Aircraft Registration Branch, Technical Section, of the FAA in Oklahoma City within 24 hours of its execution; (ii) notify the appropriate Flight Standards District Office at least 48 hours prior to the first flight under this Agreement of the registration number of the Aircraft, and the location of the airport of departure and departure time for such flight; and (iii) carry a copy of this Agreement onboard the Aircraft at all times when the Aircraft is being operated under this Agreement.

22. TRUTH IN LEASING STATEMENT PURSUANT TO SECTION 91.23 OF THE FEDERAL AVIATION REGULATIONS:

(A) CSSC CERTIFIES THAT EACH OF THE AIRCRAFT HAS BEEN INSPECTED AND MAINTAINED DURING THE 12-MONTH PERIOD PRECEDING THE DATE OF THIS AGREEMENT (OR SUCH SHORTER PERIOD AS CSSC SHALL HAVE POSSESSED THE AIRCRAFT) IN ACCORDANCE WITH THE PROVISIONS OF PART 91 OF THE FEDERAL AVIATION REGULATIONS. EACH OF THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED IN COMPLIANCE WITH THE MAINTENANCE AND INSPECTION REQUIREMENTS FOR ALL OPERATIONS TO BE CONDUCTED UNDER THIS AGREEMENT.

(B) CSSC AGREES, CERTIFIES AND ACKNOWLEDGES, AS EVIDENCED BY ITS SIGNATURE BELOW, THAT WHENEVER ANY OF THE AIRCRAFT IS OPERATED UNDER THIS AGREEMENT, CSSC SHALL BE KNOWN AS, CONSIDERED, AND SHALL IN FACT BE THE OPERATOR OF THE AIRCRAFT, AND THAT CSSC UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.

(C) THE PARTIES UNDERSTAND THAT AN EXPLANATION OF FACTORS AND PERTINENT FEDERAL AVIATION REGULATIONS BEARING ON OPERATIONAL CONTROL CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.

[Remainder of page intentionally left blank]

6

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date set forth above. The persons signing below warrant their authority to sign.

Corporate Services Support Corp.		USER:	James P. Gorman
By:	/s/ Jessica Gorman Taylor		/s/ James P. Gorman
Name:	Jessica Gorman Taylor
Title:	Authorized Signatory

A legible copy of this Agreement shall be kept in the Aircraft for all operations conducted hereunder.

7

SCHEDULE A

Two Gulfstream Aerospace G-V aircraft bearing Federal Aviation Administration Registration Numbers [            ] and [            ] and Manufacturer’s Serial Numbers [            ] and [            ], respectively, together with engines and components installed therein.

8

EX-10.2

EXHIBIT 10.2

August 16, 2005

James P. Gorman

[Address Redacted]

Dear James:

I am pleased to extend to you an offer of employment as President & Chief Operating Officer of Individual Investor Group and a Managing Director of Morgan Stanley. We anticipate that you will begin employment with Morgan Stanley on February 16, 2006 (your “date of hire”). You will report to Zoe Cruz, Acting President of Morgan Stanley, and will be a member of the Firm’s Management Committee or any successor committee thereto (the “Management Committee”).

Base Salary. Your annualized base salary for fiscal 2006 will be $300,000, payable in semi-monthly installments.

Total Reward. In recognition of the 2005 compensation you will be forfeiting from your current employer, you will be awarded a 2005 Total Reward amount on your date of hire. The 2005 Total Reward will consist of an amount representing a year-end discretionary bonus that we anticipate will be payable 45% in cash and 55% in the form of an equity-based award (such as restricted stock units or other equity-based awards in effect at the time, at the discretion of the Compensation, Management Development and Succession Committee (the “Committee”)) under the Firm’s Equity Incentive Compensation Plan, plus an amount equal to the base salary that you would have earned with the Firm had you been employed by the Firm from December 1, 2004 to your date of hire (minus any amount that you have received or do receive as base salary or 2005 year-end bonus from your current employer). Your 2005 year-end bonus will be determined as if you had been employed by the Firm for the full fiscal year and will take into consideration the 2005 year-end bonus previously expected by you from your current employer.

From time to time, we review the terms of the equity-based compensation and the percentage component that it constitutes of Total Reward with the Committee. Your actual award in any year will be consistent with the terms and conditions of other Management Committee members at the time of the award and will be subject to certain restrictions and cancellation provisions (for example, your equity award, even if vested, is subject to cancellation if you engage in certain prohibited conduct). All payments are subject to applicable withholdings and deductions.

Replacement Equity/New Hire Stock Units. The Firm will make you awards of Morgan Stanley stock options and restricted stock units intended to offset the equity-based awards at your current employer (whether or not vested) that you forfeit to any extent (including, if a stock option is not forfeited, the loss of any time value in an option resulting from the truncation of the exercise period for such option, including by virtue of your exercise of such option, but in the case of the Specified Stock Options (as such term is defined in Annex A), only to the extent that you exercise such options because they were at risk for forfeiture by your current employer) (“Replacement Equity”). Such awards will be made on your date of hire in the case of any such forfeiture prior to such date or any option as to which the option term is limited on such date to not more than 90 days following such date. In the case of any other

such forfeiture after your date of hire, the Firm shall, at its discretion, make a cash payment or grant an equity-based award (i.e., stock options or restricted stock units, as applicable) as soon as administratively practicable after such date of forfeiture (any such time, a “post-forfeiture grant date”). The terms of such Replacement Equity are described in Annex A. Notwithstanding the foregoing, with respect to the 32,233 stock units granted on January 23, 2001 described in Annex A, the value of such units shall be payable in cash on your date of hire if your current employer causes their forfeiture.

The value of your Morgan Stanley stock options will be determined on your date of hire (or the post-forfeiture grant date, if applicable) based on the closing price of your current employer’s stock on that date and the value of your forfeited stock options on your date of hire (or the date of forfeiture, if later). The number and strike price of the Morgan Stanley stock options you will receive corresponding to the value of your forfeited stock options will be determined using the closing price of Morgan Stanley common stock on your date of hire (or the post-forfeiture grant date, if applicable). The values of your forfeited stock options and the Morgan Stanley stock options will be determined using the methodology and assumptions previously agreed to by you and the Firm. Your Morgan Stanley stock options will expire ten years after their grant.

The value of your Morgan Stanley restricted stock units will be determined based on the closing price of your current employer’s stock on the date of this letter. The number of Morgan Stanley restricted stock units you will receive corresponding to the value of your forfeited equity-based awards (other than stock options) will be determined using the closing price of Morgan Stanley common stock on the date of this letter.

In addition, on your date of hire, the Firm will make you a one-time new hire award of Morgan Stanley restricted stock units valued at $2,500,000 (“New Hire Stock Units”). The number of Morgan Stanley restricted stock units you will receive corresponding to this value will be determined using the closing price of Morgan Stanley common stock on the date of this letter.

Subject to continued employment, your stock options and restricted stock units forming your Replacement Equity and New Hire Stock Units will vest and be paid out as shown in Annex A. The Replacement Equity is intended as an offset of the awards you forfeit at your current employer and is contingent upon satisfactory confirmation of such previous awards. Your Replacement Equity and New Hire Stock Units will be subject to the cancellation provisions described in Annex A. Except as specifically provided in this letter (including the attached Annexes), the terms and conditions of the Replacement Equity and New Hire Stock Units will be substantially similar to the terms and conditions of the 2004 Management Committee annual stock unit awards granted under the Firm’s Equity Incentive Compensation Plan (including the definition and effect of a Full Career Retirement). Your Replacement Equity and New Hire Stock Units will not constitute part of your Total Reward.

If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability (as such terms are defined in Annex B), then notwithstanding any other provision of this letter agreement, the Replacement Equity and New Hire Stock Units will vest, all stock units forming part of such awards will be paid out upon such termination and all stock options forming part of the Replacement Equity will remain exercisable for their full respective terms, or, if the Replacement Equity and the New Hire Stock Units have not been granted, you will receive a cash payment equal to the value of any awards you forfeit at your current employer and the value of your New Hire Stock Units.

Equity-Based Awards Generally. All payments relating to your awards are subject to applicable withholding and deductions. If any stock unit award that is granted to you (not including restricted stock units awarded as part of Replacement Equity) is scheduled to be paid to you when you are an executive officer of Morgan Stanley and is not deemed to be granted pursuant to performance criteria and

therefore not deductible to the Firm, payment or conversion of such stock units will be deferred until six (6) months after your employment terminates; provided, however, that in the event that you die or there is a Change in Ownership of Morgan Stanley (as will be defined in your award certificate), in each case that occurs at any time on or after the deferral from the original conversion date, payment will be made as soon as administratively practicable after such event.

The foregoing awards and their terms will be subject to approval by the Committee and, except as specifically provided in this letter (including the attached Annexes), will be subject to the same cancellation provisions, sales restrictions and other terms as are in effect at the time for similar equity-based awards (for example, your equity awards, even if vested but not converted in the case of stock units, are subject to cancellation if you engage in certain prohibited conduct) and the terms and conditions of the award certificate and the equity compensation plan under which the awards are issued. The Management Committee Equity Ownership Commitment will apply to any Morgan Stanley common stock you own and any equity-based award that may be granted to you.

Severance. In the event that you resign other than for Good Reason or are terminated for Cause prior to the end of the applicable fiscal year, you will receive solely your unpaid base salary as of the date of termination. If you are terminated other than for Cause, you resign for Good Reason or you terminate your employment as a result of your death or Disability on or prior to November 30, 2006, you will receive a severance payment that is no less than your 2005 Total Reward (on an annualized basis), payable to you in cash within 30 days of such termination.

All payments are subject to your execution and non-revocation of a release in a form reasonably acceptable to the Firm and to you. Except as specifically provided in this letter (including the attached Annexes), your entitlements upon death or Disability shall be governed by the applicable Morgan Stanley benefits programs. Historically, all stock units and stock options issued under the Equity Incentive Compensation Plan have vested immediately on an employee’s termination of employment due to death, Disability or Full Career Retirement.

Full Career/Section 409A/Section 4999. You will be accorded Full Career Retirement status for purposes of all equity-based awards granted to you during your employment at Morgan Stanley and for any other purpose for which Full Career Retirement status is provided generally to other members of the Management Committee. Full Career Retirement status provides that so long as you do not engage in any conduct that constitutes a cancellation event under the relevant equity-based award, such equity-based award will vest upon your termination of employment. Transfer restrictions will lift on schedule (e.g., restricted stock units will convert to shares of Morgan Stanley common stock on their scheduled conversion date). Your awards will remain subject to all terms and conditions approved by the Committee for such awards, including without limitation, the cancellation of the award for certain prohibited conduct.

Notwithstanding any provision of this agreement to the contrary, if at the time of your termination you are a “specified employee” as defined in Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), you shall not be entitled to any payments upon a termination of your employment until the earlier of (i) the date which is six (6) months after your termination of employment for any reason other than death or, in the case of any severance to which you are entitled under this letter or New Hire Stock Units and Replacement Equity, disability (as such term is used in Section 409A(a)(2)(C) of the Code) or (ii) the date of your death, or in the case of any severance to which you are entitled under this letter or New Hire Stock Units and Replacement Equity, disability (as such term is used in Section 409A(a)(2)(C) of the Code). The provisions of this paragraph shall only apply if required to comply with Section 409A of the Code. In addition, if any provision of this agreement contravenes Section 409A of the Code or any regulations or Treasury guidance promulgated thereunder, the Firm shall reform such provision; provided that the Firm shall:

(i) maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A of the Code and (ii) notify and consult with you regarding such amendments or modifications prior to the effective date of any such change.

In the event it shall be determined that any payment or distribution you receive from Morgan Stanley (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, or any interest or penalties are incurred by you with respect to such excise tax (together, the “Excise Tax”), you shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount on an after-tax basis of the Gross-Up Payment equal to the Excise Tax imposed upon all such Payments.

Benefits. You will be eligible for the Firm’s benefits programs in accordance with the terms and conditions of those programs. For details on all benefits plans, please read the Summary Plan Descriptions included in your orientation package. In addition, you will be entitled to participate in all perquisite and other plans, programs or arrangements on a basis no less favorable than provided to all members of the Management Committee to the extent such perquisites, plans, programs or arrangements are offered to all members of the Management Committee. Notwithstanding the foregoing, during your employment with the Firm, the Firm shall provide you with a car and driver, without any out-of-pocket expense (including with respect to any tax arising therefrom, if other members of the Management Committee with this benefit are reimbursed for such tax) on your part.

You are eligible for immediate participation in the Firm’s Health and Welfare benefits program, under which you may elect an individualized package of medical, dental, disability, life and accidental death and dismemberment insurance coverage, for which the Firm pays a substantial portion of the cost.

Approximately two to three weeks from the date of your acceptance of this letter, you will receive a personalized Health and Welfare Benefits Enrollment package, which includes your benefit costs and options. You will have 31 days from the date printed on the personalized Enrollment Worksheet to contact the Benefit Center to enroll. Otherwise, you will receive the coverages listed in the ‘If You Do Not Make Elections’ section of the Worksheet. Alternatively, if you prefer, within approximately one week after we send the Benefits Enrollment package, we will arrange a meeting to complete your benefits selections, or you may access the Benefit Center’s Web site at [web site address redacted] to review your options and enroll in coverage by using your Social Security number and Personal Identification Number (PIN). Your initial PIN is [redacted]. Any elected health and welfare coverage will be effective as of your date of hire.

Upon your date of hire, you will be eligible to participate in the Morgan Stanley 401(k) Plan (“401(k) Plan”) and you will be eligible for the Firm’s 401(k) Match. Generally, you must remain employed through December 31 to receive a Match for that year. With respect to your own contributions to the 401(k) Plan, enrollment is ongoing. You may elect to contribute to this Plan from your base salary, bonus and commissions, as applicable, at any time.

On the first of the month following your completion of one year of service, you may elect to participate in the Firm’s Employee Stock Purchase Plan (ESPP) which allows eligible participants to purchase Morgan Stanley common stock at a discount with after-tax payroll deductions.

Also on the first of the month following your completion of one year of service, you will be eligible to participate in the Firm’s Pension Plan. Enrollment is automatic. You will be vested in your 401(k) Match after three years of service, and you will be vested under the Pension Plan after five years of service.

You will also be eligible for six weeks of vacation for each calendar year, pro-rated from your date of hire.

Additional Terms and Conditions. We remind you that this offer is contingent upon a number of additional steps in the employment process including, but not limited to, background and reference checking and a drug screening test. The Health Center is open Monday through Friday from 9:00 am until 2:00 pm. Please come in no earlier than 48 hours from your date of hire for your drug screening. You do not need to make an appointment. You are also required to show appropriate proof of authorization to commence work in the United States. We ask that you complete Part 1 of the attached Form I-9, on or before your first day of work (see, in the attached packet, a list of the type of documentation we will need). This is a requirement of the Immigration Reform and Control Act of 1986. If you are not legally able to work for the Firm in the United States in the position offered you, or if any part of the screening process proves unsatisfactory to the Firm or you are unable to complete Part 1 of the Form I-9, the Firm reserves the right to rescind any outstanding offer of employment or terminate your employment without notice or severance benefits and rescind any stock unit or stock option or restricted stock awards described herein. Further, this offer is contingent on your obtaining and retaining all licenses and registrations from the NASD, exchanges, state securities commissions and other regulatory bodies as Morgan Stanley shall determine necessary for your position. Also in the enclosed packet, please find personnel forms that need to be completed and brought with you on your date of hire.

You acknowledge that in the course of your employment with the Firm, you are not permitted to make any unauthorized use of documents or other information that are the confidential, trade secret or proprietary information (“Confidential Information”) of another individual or company. Likewise, you may not bring onto Firm premises any Confidential Information, whether documents or other tangible forms, relating to your prior employer(s)’ business.

In the event of your termination of employment, you will not be required to seek other employment or take any other action by way of mitigation of amounts payable to you under any provision of this letter or otherwise, and such amounts shall not be reduced whether or not you obtain other employment.

Except as expressly set forth herein, nothing in this letter should be construed as a guarantee of any particular level of benefits, of your participation in any benefit plan, or of continued employment for any period of time. You should understand that your employment will be “at will”, which means that either you or the Firm may terminate your employment for any reason, at any time, subject to the terms of this letter. Morgan Stanley reserves the right, subject to the terms of this letter, to amend, modify or terminate, in its sole discretion, all benefit and compensation plans in effect from time to time. This offer constitutes the entire understanding and contains a complete statement of all agreements between you and Morgan Stanley and supersedes all prior or contemporaneous verbal or written agreements, understandings or communications. If there is any conflict with the benefit information included in this letter or any verbal representation and the Plan documents or insurance contracts, the Plan documents or insurance documents control. This letter is governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflicts of laws. This letter may not be amended or modified otherwise than by a written agreement executed by the parties or their respective successors and legal representatives.

With the formalities covered, we are looking forward to your joining Morgan Stanley. If you have questions regarding the above, please feel free to call Karen Jamesley at [redacted].

We ask that you confirm your acceptance by signing and dating this offer letter in the area designated below and returning this letter to Karen at [redacted]. Your signature below confirms that you are subject to no contractual or other restriction or obligation that is inconsistent with your accepting this offer of employment and performing your duties.

Please retain the additional copy of this offer letter for your reference.

Very truly yours,

/s/ Zoe Cruz

Offer Accepted and Agreed To:

Signed:	/s/ James P. Gorman
Date:	August 18, 2005

Annex A

The Replacement Equity awarded in the form of Morgan Stanley restricted stock units and stock options shall have the following terms:

Restricted Stock Units: Morgan Stanley restricted stock units granted in lieu of 261,399 unvested stock unit awards that are expected to be forfeited:

Vesting and conversion dates:   •   33.3% on February 16, 2007   •   33.3% on February 16, 2008   •   33.3% on February 16, 2009 Subject to cancellation until conversion under the following circumstances (the “RSU Cancellation Provisions”):   •     Violation of 90 day notice period, except for non-Cause or Good Reason termination   •     Violation of Morgan Stanley non-compete, as defined for the 2004 annual EICP awards made to members of the Management Committee   •     All other Morgan Stanley cancellation provisions applicable to 2004 annual EICP awards made to members of the Management Committee will apply as provided in such awards, except for Cause as modified by Annex B

Stock Units: Vested stock unit awards at your current employer that you may nonetheless forfeit:

Grant Date (Current Employer)	# of Shares (Vested)	Settlement Date
1/23/01	32,233	1/31/06
1/28/02	36,997	1/31/07

If either of the above two vested stock unit awards are forfeited by your current employer, Morgan Stanley shall:

1. if the January 2001 grant is forfeited, pay you the cash value of that grant as of your date of hire; and

2. if the January 2002 grant is forfeited, grant you a vested stock unit award that will be paid in shares of common stock on or about January 31, 2007 and will be subject to all of the RSU Cancellation Provisions.

Stock Options:

Vesting dates:   •     As of your date of hire, 60% of Morgan Stanley stock options granted to offset stock options at your current employer other than Specified Stock Options, plus all Specified Stock Options Stock options subject to cancellation prior to exercise until the scheduled expiration date under the following circumstances:   •     Violation of 90 day notice period, except for non-Cause or Good Reason termination

•   40% on February 16, 2007   NOTE: Any stock options that are granted on a post-forfeiture grant date will be vested when granted. •     Violation of Morgan Stanley non-compete, as defined for the 2004 annual EICP awards made to members of the Management Committee ; provided that the giving of 90 days notice shall not, prior to the expiration of such notice period, be deemed to constitute a violation of such non-compete, notwithstanding your potential engagement in competition following the expiration of such notice period   •     All other Morgan Stanley cancellation provisions applicable to 2004 annual EICP awards made to members of the Management Committee will apply as provided in such awards, except for Cause as modified by Annex B

These Morgan Stanley stock options are intended to offset stock option awards at your current employer that are either (1) forfeited by you on or prior to your date of hire (or the post-forfeiture grant date, if applicable) or (2) as to which you lose time value either (a) because you exercise them prior to your date of hire to preclude their forfeiture by your current employer or (b) because the circumstances result in the truncation of the exercise period of such options. In consideration for such lost value, Morgan Stanley shall either (as applicable):

1. grant you a stock option having a value at grant equal to the value of the option that was forfeited on your date of hire (or the date of forfeiture, if later); or

2. grant you a stock option having a value equal to the excess of the notional Black-Scholes value of such vested stock option at your date of hire (assuming no exercise) over the intrinsic value of such vested stock option on the date of exercise (or, if none, your date of hire).

For the avoidance of doubt, the following is a schedule of your vested and unvested stock options at your current employer (with the understanding that you may forfeit your vested stock options, notwithstanding their vested status):

Grant Date	# of Shares (Vested) (1)	# of Shares (Unvested) (1)	Strike Price / Share		Expiration Date
7/31/99	107,660	0	$	35.82812	7/26/09
1/31/00	101,760	0	$	43.78125	1/27/10
1/23/01(2)	128,929	0	$	77.5625	1/23/11
1/28/02(2)	110,990	0	$	53.745	1/28/12
1/27/03	71,385	23,795	$	36.065	1/27/13
1/26/04	26,954	26,954	$	59.85	1/26/14

(1) The vested status of awards assumes (a) a termination date with respect to your current employer of February 14, 2006 and (b) that vesting will continue during the period from the date of this letter through such date.

(2) This award is a Specified Stock Option.

The New Hire Stock Units awarded in the form of Morgan Stanley restricted stock units shall have the following terms:

Vesting and conversion dates:   •   20% on February 16, 2007   •   20% on February 16, 2008   •   20% on February 16, 2009   •   20% on February 16, 2010   •   20% on February 16, 2011 Subject to cancellation until conversion under the following circumstances:   •     Violation of 90 day notice period, except for non-Cause or Good Reason termination   •     Violation of Morgan Stanley non-compete, as defined for the 2004 annual EICP awards made to members of the Management Committee   •     All other Morgan Stanley cancellation provisions applicable to 2004 annual EICP awards made to members of the Management Committee will apply as provided in such awards, except for Cause as modified by Annex B

Annex B

“Cause” means:

i. any act or omission which constitutes a material breach of your material obligations to the Firm or of the provisions of this letter, in either case of which you have been made aware in writing, or your continued failure or refusal to perform substantially any material duties reasonably required of you, other than any such breach, failure or refusal resulting from incapacity due to physical or mental illness, which breach (if susceptible to cure), failure or refusal is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm; provided, however, that this clause (i) will not constitute “Cause” for purposes of your Replacement Equity and New Hire Stock Units (or their cash equivalents) upon your termination of employment;

ii. your willful commission of any illegal, dishonest or fraudulent act which is materially and demonstrably injurious to the interest or business reputation of the Firm;

iii. your conviction of a felony or your guilty or nolo contedere plea by you with respect thereto; and

iv. your material violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

For purposes of this provision, no act or failure to act on your part will be considered “willful” unless done, or omitted to be done, by you in bad faith or without reasonable belief that your action or omission was in the best interests of Morgan Stanley or was done or omitted to be done with reckless disregard of the consequences. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board of Directors of Morgan Stanley (the “Board”) or the Management Committee or upon instructions of the Chairman and Chief Executive Officer of Morgan Stanley or based upon advice of counsel for Morgan Stanley shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of Morgan Stanley.

“Good Reason” means a voluntary termination by you following:

i. removal from the Management Committee or from the position of President & Chief Operating Officer of Individual Investor Group;

ii. a change in your reporting relationship such that you are no longer reporting to the President of Morgan Stanley;

iii. a material diminution of your duties and responsibilities as the President & Chief Operating Officer of Individual Investor Group that is not agreed to by the parties or the assignment to you of duties materially inconsistent with your position (including status, offices, titles and reporting requirements), duties or responsibilities as contemplated herein, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces such position, duties or responsibilities;

iv. any material breach by Morgan Stanley of its material obligations to provide payments or benefits as required in this agreement or the failure of the Committee to approve the New Hire Stock Units or Replacement Equity;

v. Morgan Stanley’s requiring your principal office to be based at any office or location other than (a) the office or location designated as Morgan Stanley’s principal corporate offices for its Individual Investor Group Division or (b) the office or location designated as Morgan Stanley’s principal executive offices (i.e., where the principal office of the Chief Executive of Morgan Stanley is located);

vi. any purported termination by Morgan Stanley of your employment otherwise than as expressly permitted by this letter; or

vii. a failure by Morgan Stanley to require any successor (whether direct or indirect, by purchase, merger, consolidation, spin-off or otherwise) to all or substantially all of the business and/or assets of Morgan Stanley to assume expressly and agree to perform the terms herein as if no such succession had taken place.

It is further provided that you shall not be entitled to terminate your employment for Good Reason unless you have given the Chief Executive Officer written notification of your intention to terminate your employment for Good Reason describing the factual basis for such “Good Reason” and the event giving rise to “Good Reason” is not cured by the Firm within thirty (30) business days after the receipt of such notice by the Chief Executive Officer.

“Disability” means your becoming disabled such that you are prevented from performing your usual duties and services hereunder for a period of one hundred and twenty (120) consecutive days or for shorter periods aggregating one hundred and twenty (120) days in any twelve (12) month period.

December 17, 2008

Dear James,

This letter confirms the understanding between you and Morgan Stanley (the “Company”) regarding certain amendments to be made to your offer letter with the Company dated August 16, 2005 (the “Offer Letter”) to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”). As we have discussed, Section 409A is a provision of the US tax code that restricts the timing of payments and benefits constituting nonqualified deferred compensation. Regulations issued under Section 409A require documentary compliance for all nonqualified deferred compensation arrangements by December 31, 2008.

• In the event your employment is involuntarily terminated by the Company other than for Cause, you resign for Good Reason or your employment terminates as a result of your Disability, in each case, after the date hereof, the stock units forming part of your Replacement Equity and New Hire Stock Units granted to you in connection with your commencement of employment with the Company will vest on your termination and be paid out on their scheduled conversion dates, provided that, following such employment termination, such stock units will not be subject to cancellation.

• Notwithstanding anything to the contrary in your Offer Letter or the award certificate for your New Hire Stock Units, the tranche of your New Hire Stock Units scheduled to convert on February 16, 2009 will convert on such date.

• Notwithstanding anything to the contrary in your Offer Letter, any payment relating to any stock unit award that is granted to you (other than your Replacement Equity) that is scheduled to be paid when you are an executive officer of Morgan Stanley and is not deemed to be granted pursuant to performance criteria and therefore not deductible to the Firm, may be deferred until and paid upon your “Separation from Service”. For purposes of your Offer Letter, Separation from Service shall mean a “separation from service” as determined under Section 409A using the default provisions thereunder.

• Notwithstanding anything to the contrary in your Offer Letter, in the event that you are a “specified employee” at the time of your “Separation from Service”, to the extent required to comply with Section 409A, payments relating to your stock units described above and any other payments to which you are entitled upon a termination of your employment, shall be deferred until the earlier of the first business day following the date that is six months after your Separation from Service and the date of your death. “Specified Employee” shall mean a “specified employee” as defined in Section 409A of the Code and determined in accordance with Firm policy.

1

• Any Gross-Up Payment or other tax reimbursement payment to which you are entitled under your Offer Letter, shall be paid to you as soon as practicable after you pay the related Excise Tax or tax payment, as applicable, and in no event later than the end of the calendar year following the calendar year in which you remit such Excise Tax or tax payment, as applicable.

Any capitalized terms not defined herein shall have the meaning assigned to them in your Offer Letter. For the avoidance of doubt, none of the foregoing will constitute Good Reason and all other terms of your Offer Letter, Replacement Equity and New Hire Stock Units shall remain in full force and effect.

We ask that you confirm your acceptance of the foregoing by signing and dating this letter in the area designated below and returning this letter to me.

	/S/    KAREN C. JAMESLEY
By:	Karen C. Jamesley
Title:	Global Head of Human Resources
Confirmed and Agreed to:
	/S/    JAMES P. GORMAN
By:	James P. Gorman
Title:	Co-President
Date:	Dec. 17, 2008

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EX-10.3

EXHIBIT 10.3

February 14, 2008

Mr. Kenneth deRegt

[Address redacted]

Dear Ken:

I am pleased to extend to you an offer of employment at Morgan Stanley (collectively with Morgan Stanley’s subsidiaries and affiliates, “Morgan Stanley” or the “Firm”). You will be employed by Morgan Stanley & Co. Incorporated. Your position will be that of Managing Director in the Office of the Chairman and you will serve as a member of the Firm’s Operating Committee.

For fiscal 2008, beginning December 1, 2007, your Total Reward will consist of an annual base salary of $300,000, pro-rated from the date you commence employment, paid in semi-monthly installments plus a year-end bonus that is payable partially in cash and, as determined by a committee of the Board of Directors (the “Committee”), partially in the form of long-term incentive compensation, which may consist of an equity-based award (such as Morgan Stanley restricted stock units or other equity-based awards in effect at the time) under one of the Firm’s compensation plans and will be consistent with awards to other Operating Committee members. All components of your Total Reward are contingent upon satisfactory performance and conduct and that you remain employed through, and not give or receive notice of termination of your employment prior to, November 30, 2008. Payment of your Total Reward is contingent upon your execution of the Firm’s standard sign-on agreement (the “Sign-On Agreement”), which is attached to this letter (see description below). All payments are subject to applicable withholdings and deductions.

In addition, the Firm will grant you a one-time award of Morgan Stanley restricted stock units (“the Sign-on Award”) with a value of $1,000,000 which will be granted effective as of your employment commencement date. The number of Morgan Stanley restricted stock units you receive will be determined by dividing the value of your Morgan Stanley restricted stock unit award by the volume weighted average price of Morgan Stanley common stock on your employment commencement date. Subject to satisfactory and continued employment, your restricted stock units will vest and convert to shares on the following schedule: 50% will vest and convert to shares on the second anniversary of your start date and 50% on the third anniversary of your start date. The attached term sheet sets forth the terms, including settlement schedule and any provision for accelerated settlement, of your Morgan Stanley restricted stock units. This Sign-on Award will not constitute part of your Total Reward.

The foregoing awards and their terms are subject to approval by the Committee and are subject to the same cancellation provisions, sales restrictions and other terms (except as specifically provided herein) as are in effect at the time for similar equity-based awards (for example, your equity award, even if vested, is subject to cancellation under specified circumstances). The foregoing awards and their terms are also subject to the terms and conditions of the award certificate and the equity compensation plan under which the awards are issued. The Management Committee Equity Ownership Commitment will apply to any Morgan Stanley common stock you own and any equity-based award that may be granted to you. This Commitment requires that you retain 75% of common stock and equity awards (net of tax and exercise cost) held when you become subject to the commitment and subsequently awarded to you.

Since you had achieved Full Career Retirement status during your prior employment with the Firm, you will be provided Full Career Retirement for purposes of any annual long-term incentive award granted to you during your employment at Morgan Stanley, provided that such award otherwise contains provisions for Full Career Retirement. Full Career Retirement status currently provides that so long as you do not engage in any conduct that constitutes a cancellation event under the relevant long-term incentive award, such long-term incentive award will vest upon your termination of employment. Transfer restrictions on shares and cancellation provisions will lift, and the long-term incentive award will be settled, on schedule. The award will remain subject to all terms and conditions approved by the Committee for such award, including without limitation, the cancellation of the award under certain specified circumstances stated in the applicable award agreement.

The foregoing awards are offered by the Firm and are accepted by you as fully satisfying any loss that you may suffer, including as a result of any former employer forfeiting or otherwise cancelling, as a result of your termination of employment from your former employer, any stock, stock units, stock options (including the loss of any time value in stock options) or other long-term incentive awards or other investment right (contingent or actual) that you may currently enjoy by reason of that employment.

In addition, if any provision of this agreement fails to comply with Section 409A of the Internal Revenue Code or any regulations or Treasury guidance promulgated thereunder, or would result in your recognizing income for United States federal income tax purposes with respect to any amount payable under this agreement before the date of payment, or to incur interest or additional tax pursuant to Section 409A, the Firm reserves the right to reform such provision without seeking or obtaining your consent; provided that the Firm shall maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Section 409A.

Each calendar year you work for Morgan Stanley you will be eligible for 6 weeks of vacation.

Included in your package is a summary of the Firm’s benefit plans. We will provide you with an extensive overview of the Benefits Enrollment Package and assist you in the enrollment process. Health and welfare benefits (medical, dental, vision, life, accident and disability insurance) are generally available retroactive to the date you commence employment and must be elected within your 31-day enrollment period, as indicated on your Enrollment package.

If you wish, you may review your options and enroll in coverage on the Benefit Center website [website address redacted] approximately three days following your hire date. To log on you will need your Social Security Number and Personal Identification Number (“PIN”). Your initial PIN is [redacted]. If you do not contact the Benefit Center within your 31-day enrollment period, you will receive the health and welfare coverage as indicated in the Enrollment Guide and on your Summary Chart on the Benefit Center website.

Generally, your prior service with Morgan Stanley is considered in determining your service under the Morgan Stanley benefit plans including the Excess and SERP retirement plans. Also, upon your date of hire you will be eligible to contribute to the Morgan Stanley 401(k) Plan and receive a Company Match.

As a Managing Director with the Firm, you will be uniquely positioned to advance the Firm’s business interests. As a result, the Firm requires certain commitments of you in the event your employment with the Firm terminates, so that the Firm can protect those business interests and ensure an orderly transition of business, responsibilities, and business relationships for the benefit of the Firm, our clients and customers and our other employees. In summary, these commitments include that you: (i) give the Firm

advance written notice of your intention to terminate your employment of at least (a)180 days if you are a member of the Morgan Stanley Operating Committee (or a successor or equivalent committee) at the time of notice of resignation, (b) 90 days if you are a Managing Director (or equivalent title) at the time of notice of resignation or (c) 60 days if you are an Executive Director (or equivalent title) at the time of notice of resignation; (ii) refrain from soliciting or hiring certain Firm employees for 180 days after the termination of your employment and from soliciting certain clients and customers for 90 days after the termination of your employment (180 days member of the Morgan Stanley Operating Committee at the time of your notice of termination); and (iii) abide by the obligations of confidentiality as set forth in the Firm’s Code of Conduct, as amended from time to time (the “Code of Conduct”). These provisions are more fully set forth in the attached Sign-On Agreement and the Code of Conduct, both of which you will be required to acknowledge in connection with commencing employment. The Sign-On Agreement constitutes a material part of the Firm’s offer of employment to you, which will not be deemed accepted unless and until you return an executed original of the Sign-On Agreement to us. Therefore, this offer of employment, including payment of your Total Reward and your receipt of any benefits described herein, is contingent upon your execution of the attached Sign-On Agreement. In addition, we remind you that this offer is contingent upon a number of additional steps in the employment process including, but not limited to, background and reference checking. Enclosed is a new hire kit that contains forms that you will be required to complete.

You are also required to show appropriate proof of authorization to commence work in the United States. We ask that you complete Part 1 of the Form I-9, on or before your first day of work (see, in the attached packet, a list of the type of documentation we will need.). This is a requirement of the Immigration Reform and Control Act of 1986. If you are not legally able to work for the Firm in the United States in the position offered you, or if any part of the screening process proves unsatisfactory to the Firm or you are unable to complete Part 1 of the Form I-9, the Firm reserves the right to rescind any outstanding offer of employment or terminate your employment without notice or severance benefits and rescind any long-term incentive or equity-based awards described herein. Further, this offer is contingent on your obtaining and retaining all licenses and registrations from the NASD, exchanges, state securities commissions and other regulatory bodies as Morgan Stanley shall determine necessary for your position. You must also bring with you a government-issued photo identification, in a form acceptable to Morgan Stanley (such as a valid passport or a driver’s license.) Also in the enclosed packet, please find personnel forms that need to be completed and brought with you on your first day of work.

You acknowledge that in the course of your employment with the Firm, you are not permitted to make any unauthorized use of documents or other information that are the confidential, trade secret or proprietary information of another individual or company (“Confidential Information”). Likewise, you may not bring onto Firm premises any Confidential Information, whether documents or other tangible forms, relating to your prior employers’ business.

You understand and agree that as a condition of employment, you must, upon the commencement of employment, transfer any outside brokerage/securities accounts to Morgan Stanley unless you are granted a waiver in writing by the Compliance Department. Nothing in this letter should be construed as a guarantee of any particular level of benefits, of your participation in any benefit plan, or of continued employment for any period of time. You should understand that your employment will be “at will,” which means that the Firm may terminate your employment for any reason, with or without cause, and at any time (subject to the Sign-On Agreement). During your employment, subject to applicable law and in accordance with Morgan Stanley’s Drug, Alcohol and Controlled Substance Usage Policy, you may be subject to drug testing, including for reasonable suspicion of use of controlled

substances. Morgan Stanley reserves the right to amend, modify or terminate, in its sole discretion, all benefit and compensation plans in effect from time to time. This offer letter and the Sign-On Agreement constitute the entire understanding and contain a complete statement of all agreements between you and Morgan Stanley and supersede all prior or contemporaneous verbal or written agreements, understandings or communications (including, without limitation, any term sheet or other summary writing relating to your employment). You acknowledge that you have not relied on any assurance or representation not expressly stated in this offer letter. If there is any conflict with the benefit information included in this letter or any verbal representation and the Plan documents or insurance contracts, the Plan documents or insurance documents control.

With the formalities covered, we are looking forward to you joining Morgan Stanley. As stated, we will meet with you to walk through your benefits in more detail and to walk through any remaining new hire paperwork. If you have any questions, please feel free to call Karen Jamesley at [redacted].

We ask that you confirm your acceptance by signing and dating this offer letter in the area designated below and returning this letter to Karen Jamesley at [redacted]. Your signature below confirms that you are subject to no contractual or other restriction or obligation that is inconsistent with your accepting this offer of employment and performing your duties. Please also sign, date and return the attached Sign-On Agreement to Karen Jamesley in the Human Resources Department. Please retain the additional copy of this offer letter and an additional signed copy of the Sign-On Agreement for your reference.

Very truly yours,

/s/ John J. Mack

John J. Mack

Chairman of the Board and Chief Executive Officer

Offer Accepted and Agreed To:

Signed:	/s/ Kenneth deRegt
Date:	February 25, 2008

Name: Kenneth deRegt

Title: Managing Director in the Office of the Chairman

DISCRETIONARY NEW HIRE AWARD TERM SHEET

STOCK UNIT     = A NOTIONAL SHARE THAT CONSTITUTES AN UNSECURED PROMISE TO PAY ONE SHARE OF MORGAN STANLEY COMMON STOCK IN THE FUTURE SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS.

INITIAL VALUE OF AWARD	=       $1,000,000
NUMBER OF STOCK UNITS AWARDED	=       To be determined by dividing the initial value of the award by the market value
MARKET VALUE	=       The volume weighted average price of Morgan Stanley common stock on the employment commencement date

The following is an abbreviated general description of the terms and conditions of the 2008 award granted to you under the Employee Equity Accumulation Plan. This summary does not address all 2008 award features. Your 2008 Award Certificate provides a full explanation of the terms and conditions of your 2008 award, which may differ from the description in this summary. Unless otherwise defined herein, all capitalized terms shall have the meaning set forth in your 2008 Award Certificate. If there is any conflict between the terms of this summary and those in your 2008 Award Certificate, the latter will control. You will also be provided with a prospectus and tax supplement that contains important information about these awards.

Morgan Stanley reserves the right to modify the terms of awards to the extent necessary or advisable in order to comply with Section 409A of the Internal Revenue Code (“Section 409A”), including, without limitation, the payment provisions applicable to stock units.

TERMS OF NEW HIRE STOCK UNIT AWARD

Earning Award You have no right to your 2008 award until it is “earned”. Generally, to earn your award, you must not engage in any activity that constitutes a cancellation event. The cancellation events are summarized below.

Date of the Award Employment commencement date

Scheduled Vesting Date(s) Stock units will vest on the following schedule: 50% on the second anniversary of your employment commencement date (“First Scheduled Vesting Date”) and 50% on the third anniversary of your employment commencement date (“Second Scheduled Vesting Date”).

Scheduled Conversion Date(s) (stock units convert to shares) Stock units will convert to shares of Morgan Stanley common stock on the following schedule: 50% on the second anniversary of your employment commencement date and 50% on the third anniversary of your employment commencement date. Each such date is a “Scheduled Conversion Date.”

Until conversion, stock units constitute a contingent and unsecured promise of the Firm to pay the unit holder shares of Morgan Stanley common stock.

Notwithstanding the other provisions of the award, the conversion of your vested stock units will be deferred if, at the time scheduled for conversion, Morgan Stanley considers you to be one of its executive officers and your compensation may not be fully deductible by virtue of Section 162(m) of the Internal Revenue Code. This deferral will continue until your “Separation from Service” under Section 409A, and your vested stock units will convert into Morgan Stanley common stock upon your Separation from Service. If, however, Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, conversion of your stock units will be delayed until the first business day following the date that is six months after your Separation from Service (subject to earlier conversion in the event of your death or your employment at a Governmental Employer under the circumstances described below).

Transfer Restrictions You may not sell, pledge or otherwise transfer stock units for any reason. Shares received from stock unit conversions may be sold, pledged or transferred, subject to compliance with U.S. securities laws and Firm policies.

Dividends and Dividend Equivalents When Morgan Stanley pays a regular or ordinary dividend on its common stock, dividend equivalents are generally paid in cash through payroll until conversion of stock units to shares. Shares received from stock unit conversions will receive dividends in the same manner as shares held by other shareholders.

Termination of Employment If your Employment terminates under circumstances not involving a cancellation event (other than due to death, Disability, Governmental Service Termination or Qualifying Termination), the provisions described below for Full Career Retirement will apply to your stock units.

The special provisions that apply if your Employment terminates for death, Disability, Full Career Retirement, Governmental Service Termination or Qualifying Termination, are described below.

Death If you die while Employed, unvested stock units will vest. Stock units will convert and be paid to your beneficiary or estate upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

If you die after your termination of Employment but prior to the applicable Scheduled Conversion Date, vested stock units that you held as of the date of your death will convert and be paid to your beneficiary or estate upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

Disability If your Employment terminates due to Disability, then, subject to the cancellation provisions described below: (1) unvested stock units will vest on your termination date, and (2) stock units will convert, and cancellation provisions will lift, on the applicable Scheduled Conversion Date. Disability is defined in accordance with the Firm’s long-term disability plan applicable to you.

Full Career Retirement If you Full Career Retire, then, subject to the cancellation provisions described below: (1) unvested stock units will vest on your termination date; and (2) stock units will convert, and cancellation provisions will lift, on the applicable Scheduled Conversion Date.

Full Career Retirement is defined as a termination not involving any cancellation event (and other than due to death, Disability, Governmental Service Termination or Qualifying Termination).

Governmental Service If your Employment terminates in a Governmental Service Termination and not involving a cancellation event, then, provided that you sign an agreement satisfactory to the Firm relating to your repayment obligations summarized below, unvested stock units will vest, and stock units will convert, on the date of your Governmental Service Termination.

If your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event and, following your termination of Employment, you accept employment with a Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your repayment obligations summarized below, your outstanding vested stock units will convert to shares upon your commencement of such employment, provided you present the Firm with satisfactory evidence that the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

If your stock units convert due to this provision and you engage in any activity constituting a cancellation event within the period of time that would have resulted in cancellation of all or a portion of your stock units, you will be required to pay to Morgan Stanley an amount equal to the number of stock units that would have been canceled upon the occurrence of such cancellation event, multiplied by the fair market value of Morgan Stanley common stock on the date your stock units converted plus interest on such amount.

“Governmental Service Termination” means the termination of your Employment and your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

“Governmental Employer” means a governmental department or agency, self-regulatory agency or other public service employer.

Qualifying Termination If your employment terminates in a Qualifying Termination, unvested stock units will vest and will be paid upon your Qualifying Termination. If, however, Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Qualifying Termination, conversion of your stock units will be delayed until the first business day following the date that is six months after your Qualifying Termination (subject to earlier conversion in the event of your death or your employment at a Governmental Employer under the circumstances described above).

“Qualifying Termination” means your termination of Employment within eighteen (18) months following a Change in Control, under either of the following circumstances: (a) the Firm terminates your employment under circumstances not involving any cancellation event; or (b) you resign from the Firm due to (i) a materially adverse alteration in your position or in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control or (ii) the Firm requiring your principal place of employment to be located more than 75 miles from the location where you were principally employed at the time of the Change in Control (except for required travel on the Firm’s business to an extent substantially consistent with your business travel obligations in the ordinary course of business prior to the Change in Control).

Cancellation for Competitive Activity If you voluntarily terminate Employment and you engage in Competitive Activity:

(1) Prior to the First Scheduled Vesting Date, all stock units will be canceled;

(2) On or after the First Scheduled Vesting Date but before the Second Scheduled Vesting Date, the stock units that remain outstanding after the First Scheduled Conversion Date will be canceled.

You will be deemed to have engaged in “Competitive Activity” if you (a) become, or enter into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serve in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (i) that are similar or substantially related to the services that you provided to the Firm, or (ii) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (iii) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding your termination of employment with the Firm; or (b) either alone or in concert with others, form, or acquire a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

A “Competitor” means any corporation, partnership or other entity that is engaged in any activity, or that owns a significant interest in any corporation, partnership or other entity, that competes with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

Cancellation for Other Events All vested and unvested stock units will be subject to cancellation until the applicable Scheduled Conversion Date for:

(a) misuse of Proprietary Information or failure to comply with your obligations under the Firm’s Code of Conduct or otherwise with respect to Proprietary Information;

(b) resignation of employment with the Firm without giving the Firm prior written notice of at least:

i. 180 days if you are a member of the Morgan Stanley Management Committee (or successor or equivalent committee) at the time of notice of resignation;

ii. 90 days if you are a Managing Director (or equivalent title) at the time of notice of resignation;

iii. 60 days if you are an Executive Director (or equivalent title) at the time of notice of resignation; and

iv. 30 days for all other participants;

(c) making Unauthorized Comments; or

(d) termination for Cause (or a later determination that you could have been terminated for Cause).

In addition all vested and unvested stock units will be subject to cancellation if, without the consent of the Firm:

(a) while Employed, including during any notice period applicable to you in connection with your termination of Employment, or within 180 days after termination of Employment, you directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind) hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided, however, that this clause applies only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with your termination of Employment or during the 180 days preceding the notice of your termination of Employment; or

(b) while Employed, including during any notice period applicable to you in connection with your termination of Employment, or within 90 days after termination of Employment (180 days if you are a Management Committee member at the time of notice of termination), you directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind) solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided, however, that this clause applies only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with your termination of Employment or during the 180 days preceding the notice of your termination of Employment.

“Proprietary Information” means any information that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including,

without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems information; algorithms; technology and business processes; business, product, or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business; provided that such Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, videotapes, audiotapes, and oral communications.

You will be deemed to have made “Unauthorized Comments” about the Firm if you, while Employed or following termination of Employment make, directly or indirectly, any negative, derogatory or disparaging comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audio tape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

“Cause” means:

(x) any act or omission which constitutes a breach by you of your obligations to the Firm (including, without limitation, your failure to comply with any notice or non-solicitation restrictions that may be applicable to you) or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm; or

(y) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(z) a violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules and regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

Certification You may be required to provide Morgan Stanley with a written certification or other evidence that it deems appropriate, in its sole discretion, to confirm that no cancellation event has occurred. If you fail to submit a timely certification or evidence, Morgan Stanley will cancel your award.

Tax Withholding You may elect to satisfy the tax or other withholding obligations arising upon conversion of your stock units by having Morgan Stanley withhold shares in an amount sufficient to satisfy such withholding obligations.

Award Modification Morgan Stanley generally has the right to modify or amend the terms of your award without your consent. However, Morgan Stanley may not make a modification that would materially impair your rights in such award without your consent unless such modification is necessary or advisable (i) to comply with any law, regulation, ruling, judicial decision, accounting standard or similar pronouncement or (ii) to ensure that awards are not subject to federal, state or local income tax prior to payment.

Timing of Conversion With respect to any provision for vested stock units to convert to shares of common stock on a specified event or date, such conversion will be considered to have been timely made as long as conversion is made by December 31 of the year in which occurs the specified event or date or, if later, by the 15th day of the third calendar month following such specified event or date.

U.S. Taxation In general, when your stock units convert to shares, the then current market value of shares will be taxed as ordinary income. FICA and Medicare tax apply at the time that stock units vest. Please refer to the Tax Supplement for a fuller discussion of these tax consequences.

Non-U.S. Taxation Taxation on grant, vesting and stock unit conversion depends on tax laws and regulations in your jurisdiction.

Governing Law New York law.

Please refer to your award certificate for definitions of terms used herein

IF YOU HAVE QUESTIONS, CALL THE EXECUTIVE COMPENSATION DEPT. AT [REDACTED] OR YOUR COVERAGE OFFICER.

___________________

THIS SUMMARY IS AN ABBREVIATED DESCRIPTION OF THE AWARD AND DOES NOT ADDRESS ALL AWARD FEATURES, INCLUDING, BUT NOT LIMITED TO, TERMS WHICH MAY VARY IN CERTAIN NON-U.S. JURISDICTIONS. THE PLAN DOCUMENTS AND AWARD CERTIFICATE THAT WILL BE FURNISHED TO YOU UPON APPROVAL OF THE AWARD BY THE COMPENSATION, MANAGEMENT DEVELOPMENT AND SUCCESSION COMMITTEE OF MORGAN STANLEY’S BOARD OF DIRECTORS OR ITS DELEGATE WILL PROVIDE THE COMPLETE GOVERNING EXPLANATION OF THE TERMS AND CONDITIONS OF THE DISCRETIONARY AWARD, WHICH MAY DIFFER FROM THE DESCRIPTION IN THIS SUMMARY.

NOTHING IN THIS SUMMARY OR IN ANY CORRESPONDENCE RELATED TO THIS DISCRETIONARY AWARD SHOULD BE CONSTRUED AS A GUARANTEE OF A DISCRETIONARY BONUS OR ANY PARTICULAR LEVEL OF COMPENSATION, BONUS, OR BENEFITS. THE FIRM DOES NOT COMMIT TO GRANTING ANY DISCRETIONARY AWARD IN THE FUTURE. THIS AWARD DOES NOT CREATE A CONTRACT OR GUARANTEE OF EMPLOYMENT, OR MODIFY ANY AGREEMENT ENTERED INTO BY MORGAN STANLEY AND YOU. THIS SUMMARY IS NOT INTENDED TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER PERSON FOR THE PURPOSE OF AVOIDING U.S. FEDERAL TAX PENALTIES THAT MAY BE IMPOSED ON YOU OR SUCH OTHER PERSON.

EX-10.4

EXHIBIT 10.4

MORGAN STANLEY

2007 EQUITY INCENTIVE COMPENSATION PLAN

[YEAR] DISCRETIONARY RETENTION AWARDS

AWARD CERTIFICATE FOR STOCK UNITS

TABLE OF CONTENTS FOR AWARD CERTIFICATE

1.	Stock units generally.	3
2.	Vesting schedule and conversion.	3
3.	Special provision for certain employees.	4
4.	Dividend equivalent payments.	5
5.	Death, Disability and Full Career Retirement.	5
6.	Involuntary termination by the Firm.	6
7.	Governmental Service.	6
8.	Qualifying Termination.	7
9.	Specified employees.	7
10.	Cancellation of awards under certain circumstances.	8
11.	Tax and other withholding obligations.	11
12.	Obligations you owe to the Firm.	11
13.	Nontransferability.	12
14.	Designation of a beneficiary.	12
15.	Ownership and possession.	12
16.	Securities law compliance matters.	13
17.	Compliance with laws and regulation.	13
18.	No entitlements.	14
19.	Consents under local law.	14
20.	Award modification.	14
21.	Governing law.	15
22.	Defined terms.	15

MORGAN STANLEY

[YEAR]

DISCRETIONARY RETENTION AWARDS

AWARD CERTIFICATE FOR STOCK UNITS

Morgan Stanley has awarded you retention stock units as part of your discretionary long-term incentive compensation for services provided during [year] and as an incentive for you to remain in Employment and provide services to the Firm through the Scheduled Vesting Dates. This Award Certificate sets forth the general terms and conditions of your [year] stock unit award. The number of stock units in your award has been communicated to you independently.

If you are employed outside the United States, you will also receive an “International Supplement” that contains supplemental terms and conditions for your [year] stock unit award. You should read this Award Certificate in conjunction with the International Supplement, if applicable, in order to understand the terms and conditions of your stock unit award.

Your stock unit award is made pursuant to the Plan. References to “stock units” in this Award Certificate mean only those stock units included in your [year] stock unit award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purpose of the stock unit award is, among other things, to align your interests with the interests of the Firm and Morgan Stanley’s stockholders, to reward you for your continued Employment and service to the Firm in the future and your compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn each portion of your [year] stock unit award only if you (1) remain in continuous Employment through the applicable Scheduled Vesting Date (subject to limited exceptions set forth below), (2) do not engage in any activity that is a cancellation event set forth in Section 10(c) below and (3) satisfy obligations you owe to the Firm as set forth in Section 12 below. Even if your award has vested, you will have no right to your award if a cancellation event occurs under the circumstances set forth in Section 10(c) below. As Morgan Stanley deems appropriate, it will require you to provide a written certification or other evidence, from time to time in its sole discretion, to confirm that no cancellation event has occurred, including upon a termination of Employment and/or during a specified period of time prior to each Scheduled Conversion Date. If you fail to timely provide any required certification or other evidence, Morgan Stanley will cancel your award. It is your responsibility to provide the Executive Compensation Department with your up-to-date contact information.

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Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 22 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 22 below have the meanings set forth in the Plan.

1. Stock units generally.

Each of your stock units corresponds to one share of Morgan Stanley common stock. A stock unit constitutes a contingent and unsecured promise of Morgan Stanley to pay you one share of Morgan Stanley common stock on the conversion date for the stock unit. As the holder of stock units, you have only the rights of a general unsecured creditor of Morgan Stanley. You will not be a stockholder with respect to the shares of Morgan Stanley common stock corresponding to your stock units unless and until your stock units convert to shares.

2. Vesting schedule and conversion.

(a) Vesting schedule. Except as otherwise provided in this Award Certificate, your stock units will vest according to the following schedule: (i) 50% of your stock units will vest on the First Scheduled Vesting Date and (ii) the remaining 50% of your stock units will vest on the Second Scheduled Vesting Date.¹ Any fractional stock units resulting from the application of the vesting schedule will be aggregated and will vest on the Second Scheduled Vesting Date. Except as otherwise provided in this Award Certificate, each portion of your stock units will vest only if you continue to provide future services to the Firm by remaining in continuous Employment through the applicable Scheduled Vesting Date and providing value added services to the Firm during this timeframe. The special vesting terms set forth in Sections 5, 6, 7 and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) if the Firm terminates your employment in an involuntary termination under the circumstances described in Section 6, (iv) upon a Governmental Service Termination or (v) upon a Qualifying Termination. Vested stock units remain subject to the cancellation and withholding provisions set forth in this Award Certificate.

(b) Conversion. Except as otherwise provided in this Award Certificate, (i) 50% of your stock units will, to the extent vested, convert to shares of Morgan Stanley common stock on the First Scheduled Conversion Date and (ii) the remaining 50% of your stock units will, to the extent vested, convert to shares of Morgan Stanley common stock on the Second Scheduled Conversion Date.² The special conversion provisions set forth in Sections 5(a), 5(b), 7 and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death or you die after termination of your Employment, (ii) upon your Governmental Service

¹ The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

² The conversion schedule presented in this form of Award Certificate is indicative. The conversion schedule applicable to awards may vary.

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Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 7(b), or (iii) upon a Qualifying Termination.

The shares delivered upon conversion of stock units pursuant to this Section 2(b) will not be subject to any transfer restrictions, other than those that may arise under the securities laws, the Firm’s policies or Section 12 below, or to cancellation under the circumstances set forth in Section 10(c).

(c) Accelerated conversion. Morgan Stanley shall have no right to accelerate the conversion of any of your stock units or the payment of any of your dividend equivalents, except to the extent that such acceleration is not prohibited by Section 409A and would not result in your being required to recognize income for United States federal income tax purposes before your stock units convert to shares of Morgan Stanley common stock or your dividend equivalents are paid or your incurring additional tax or interest under Section 409A. If any stock units are converted to shares of Morgan Stanley common stock or any dividend equivalents are paid prior to the applicable Scheduled Conversion Date pursuant to this Section 2(c), these shares or dividend equivalents may not be transferable and may remain subject to applicable vesting, cancellation and withholding provisions, as determined by Morgan Stanley.

(d) Rule of construction for timing of conversion. Whenever this Award Certificate provides for your stock units to convert to shares, or your dividend equivalents to be paid, on the First Scheduled Conversion Date or the Second Scheduled Conversion Date or upon a different specified event or date, such conversion or payment will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages based on a delay in conversion of your stock units (or delivery of Morgan Stanley shares following conversion) or payment of the dividend equivalents, as applicable, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as conversion or payment, as applicable, is made by December 31 of the year in which occurs the applicable Scheduled Conversion Date or such other specified event or date or, if later, by the 15th day of the third calendar month following such specified event or date. Similarly, neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate), based on any acceleration of the conversion of your stock units or payment of your dividend equivalents pursuant to Section 2(c), as applicable.

3. Special provision for certain employees.

Notwithstanding the other provisions of this Award Certificate, if Morgan Stanley considers you to be one of its executive officers at the time provided for the conversion of your vested stock units and determines that your compensation may not be fully deductible by virtue of Section 162(m) of the Internal Revenue Code, Morgan Stanley shall delay payment of the nondeductible portion of your compensation, including delaying, to the extent nondeductible, conversion of the stock units and payment of the dividend equivalents, unless the Committee, in its sole discretion, determines not to delay such conversion or payment. This delay will continue until your Separation from Service or to the extent permitted under Section 409A, the end of the first earlier taxable year of the Firm as of the last day of which you are no longer an executive officer (subject to earlier conversion in the event of your death as described below).

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4. Dividend equivalent payments.

Until your stock units convert to shares, if Morgan Stanley pays a regular or ordinary dividend on its common stock, you will be credited with cash dividend equivalents with respect to your vested and unvested stock units. Morgan Stanley will credit the dividend equivalents when it pays the corresponding dividend on its common stock. Your dividend equivalents will vest and be paid at the same time as, and subject to the same vesting and cancellation provisions set forth in this Award Certificate with respect to, your stock units (provided that, subject to Section 2(d), the dividend equivalents may be paid following the Scheduled Conversion Date on the next administratively practicable payroll date). The decision to pay a dividend and, if so, the amount of any such dividend, is determined by Morgan Stanley in its sole discretion. No dividend equivalents will be paid to you on any canceled stock units.

5. Death, Disability and Full Career Retirement.

The following special vesting and payment terms apply to your stock units:

(a) Death during Employment. If your Employment terminates due to death, all of your unvested stock units will vest on the date of your death. Your stock units will convert to shares of Morgan Stanley common stock and be delivered to the beneficiary you have designated pursuant to Section 14 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

After your death, the cancellation provisions set forth in Section 10(c) will no longer apply, and the shares delivered upon conversion of stock units pursuant to this Section 5(a) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies).

(b) Death after termination of Employment. If you die after the termination of your Employment but prior to the applicable Scheduled Conversion Date, any vested stock units that you held at the time of your death will convert to shares of Morgan Stanley common stock and be delivered to the beneficiary you have designated pursuant to Section 14 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death.

After your death, the cancellation provisions set forth in Section 10(c) will no longer apply, and the shares delivered upon conversion of stock units pursuant to this Section 5(b) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies).

(c) Disability or Full Career Retirement. If your Employment terminates due to Disability or in a Full Career Retirement, all of your unvested stock units will vest on the

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date your Employment terminates. Your stock units will convert to shares of Morgan Stanley common stock on the applicable Scheduled Conversion Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Conversion Date.

6. Involuntary termination by the Firm.

If the Firm terminates your employment under circumstances not involving any cancellation event set forth in Section 10(c), your unvested stock units will vest on the date your employment with the Firm terminates and your stock units will convert to shares of Morgan Stanley common stock on the applicable Scheduled Conversion Date, provided that you sign an agreement and release satisfactory to the Firm. If you do not sign such an agreement and release satisfactory to the Firm within the timeframe set by the Firm in connection with your involuntary termination as described in this Section 6, any stock units that were unvested immediately prior to your termination shall be canceled. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Conversion Date.

7. Governmental Service.

(a) General treatment of awards upon Governmental Service Termination. If your Employment terminates in a Governmental Service Termination and not involving a cancellation event set forth in Section 10(c), then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 7(c), all of your unvested stock units will vest on the date of your Governmental Service Termination. Your vested stock units will convert to shares of Morgan Stanley common stock on the date of your Governmental Service Termination.

(b) General treatment of vested awards upon acceptance of employment at a Governmental Employer following termination of Employment. If your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event set forth in Section 10(c) and, following your termination of Employment, you accept employment with a Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 7(c), all of your outstanding vested stock units will convert to shares of Morgan Stanley common stock upon your commencement of such employment, provided you present the Firm with satisfactory evidence demonstrating that as a result of such employment the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(c) Repayment obligation. If you engage in any activity constituting a cancellation event set forth in Section 10(c) within the applicable period of time that would have resulted in cancellation of all or a portion of your stock units had they not converted to shares pursuant to Sections 7(a) or 7(b) above (disregarding, for purposes of determining whether a cancellation event has occurred, any Full Career Retirement condition set forth in Section 10(c)(1)), you will be required to pay to Morgan Stanley an amount equal to:

(i) the number of stock units that would have been canceled upon the occurrence of such cancellation event multiplied by the fair market value, determined using a valuation methodology established by Morgan Stanley, of Morgan Stanley common stock on the date your stock units converted to shares of Morgan Stanley common stock; plus

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(ii) any dividend equivalents that were paid to you on the number of stock units described in the foregoing clause (i) when your stock units converted to shares pursuant to Section 7(a) or 7(b); plus

(iii) interest on the amounts described in the preceding clauses (i) and (ii) at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date of such conversion through the date preceding the payment date.

8. Qualifying Termination.

If your employment terminates in a Qualifying Termination, all of your unvested stock units will vest, cancellation provisions will lapse, and, subject to Section 9, your stock units will convert to shares of Morgan Stanley common stock upon your Qualifying Termination.

9. Specified employees.

Notwithstanding any other terms of this Award Certificate, if Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, any conversion of your stock units and payment of your accrued dividend equivalents that otherwise would occur upon your Separation from Service (including, without limitation, stock units whose conversion was delayed due to Section 162(m) of the Internal Revenue Code, as provided in Section 3, and stock units payable upon your Qualifying Termination, as provided in Section 8) will be delayed until the first business day following the date that is six months after your Separation from Service; provided, however, that in the event that your death, your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 7(b) occurs at any time after the Date of the Award, conversion and payment will be made in accordance with Section 5(a), 5(b), or 7, as applicable.

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10. Cancellation of awards under certain circumstances.

(a) Cancellation of unvested awards. Your unvested stock units, and any dividend equivalents credited on your stock units, will be canceled if your Employment terminates for any reason other than death, Disability, a Full Career Retirement, an involuntary termination by the Firm described in Section 6, a Governmental Service Termination or a Qualifying Termination.

(b) General treatment of vested awards. Except as otherwise provided in this Award Certificate, your vested stock units will convert to shares of Morgan Stanley common stock, and the dividend equivalents credited on your stock units will be paid, on the applicable Scheduled Conversion Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Conversion Date.

(c) Cancellation of awards under certain circumstances. The cancellation events set forth in this Section 10(c) are designed, among other things, to incentivize compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 10(c) shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 10(c) no longer apply).

Your stock units (and any dividend equivalents credited thereon), even if vested, are not earned until the applicable Scheduled Conversion Date (and until you satisfy all obligations you owe to the Firm as set forth in Section 12 below) and, unless prohibited by applicable law, will be canceled prior to the applicable Scheduled Conversion Date in any of the circumstances set forth below in Section 10(c)(1) or (2). Although you will become the beneficial owner of shares underlying your stock units following conversion of your stock units, the Firm may retain custody of your shares (and any dividend equivalents credited thereon) following conversion of your stock units pending any investigation or other review that impacts the determination as to whether the stock units (and any dividend equivalents credited thereon) are cancellable under the circumstances set forth below and, in such an instance, the shares underlying such stock units (and any dividend equivalents credited thereon) shall be forfeited in the event the Firm determines that the stock units (and any dividend equivalents credited thereon) were cancellable under the circumstances set forth below.

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(1) Competitive Activity. If you resign and the resulting termination satisfies the definition of a Full Career Retirement, or if you resign (whether in a Full Career Retirement or otherwise) following the applicable Scheduled Vesting Date, but prior to the applicable Scheduled Conversion Date, and in either case you engage in Competitive Activity, the following shall apply, subject to applicable law:³

(i) If your Competitive Activity occurs before the First Scheduled Conversion Date, then all of your stock units (and any dividend equivalents credited on your stock units) will be canceled immediately.

(ii) If your Competitive Activity occurs on or after the First Scheduled Conversion Date but before the Second Scheduled Conversion Date, then the 50% of your stock units that are scheduled to convert on the Second Scheduled Conversion Date (and any dividend equivalents credited on those stock units) will be canceled immediately.

(2) Other Events. If any of the following events occur at any time before the applicable Scheduled Conversion Date, all of your stock units (whether or not vested), and any dividend equivalents credited on your stock units, will be canceled immediately, subject to applicable law:

(i) Your Employment is terminated for Cause or you engage in conduct constituting Cause (either during or following Employment and whether or not your Employment has been terminated as of the applicable Scheduled Conversion Date);

(ii) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

³ Provided that, for the Chief Executive Officer only, this provision only applies if such termination is not a termination for Good Reason. For these purposes, Good Reason is defined as a resignation following: (i) his removal from the position of Chief Executive Officer of Morgan Stanley; (ii) his failure to be elected or reelected to the Board of Directors of Morgan Stanley; (iii) a change in his reporting relationship such that he is no longer reporting directly and solely to the Board of Directors of Morgan Stanley; (iv) a material diminution of his duties and responsibilities as the Chief Executive Officer of Morgan Stanley that is not agreed by the parties or the assignment to him of duties materially inconsistent with his position, duties or responsibilities, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces his position, duties or responsibilities; (v) any material breach by Morgan Stanley of its material obligations to provide payments or benefits as required in his offer letter; or (vi) Morgan Stanley’s requiring his principal office to be based at any office or location other than the office or location designated as Morgan Stanley’s principal executive offices.

Notwithstanding the foregoing, he will not be deemed to have resigned for Good Reason unless (i) he has given the Chairman of the Board written notification of his intention to do so, describing the factual basis for “Good Reason” and (ii) the event giving rise to “Good Reason” is not cured by Morgan Stanley within 30 business days after the Chairman of the Board’s receipt of the notice.

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(iii) You disclose Confidential and Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Confidential and Proprietary Information other than in connection with the business of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements) or otherwise existing between you and the Firm, relating to Confidential and Proprietary Information or an assignment, procurement or enforcement of rights in Confidential and Proprietary Information;

(iv) You engage in a Wrongful Solicitation;

(v) You make any Unauthorized Comments;

(vi) You fail or refuse, following your termination of Employment, to cooperate with or assist the Firm in a timely manner in connection with any investigation, regulatory matter, lawsuit or arbitration in which the Firm is a subject, target or party and as to which you may have pertinent information; or

(vii) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

(A) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation;

(B) 90 days before the date on which your employment with the Firm terminates if clause (A) of this Section 10(c)(2)(vii) does not apply to you and you are a Managing Director (or equivalent title) at the time of notice of your resignation;

(C) 60 days before the date on which your employment with the Firm terminates if you are an Executive Director (or equivalent title) at the time of notice of your resignation; and

(D) 30 days before the date on which your employment with the Firm terminates if none of clauses (A) through (C) of this Section 10(c)(2)(vii) apply to you at the time of notice of your resignation.

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11. Tax and other withholding obligations.

Any vesting, whether on a Scheduled Vesting Date or some other date, of a stock unit award (including dividend equivalents that have been credited in respect of your stock units), and any conversion of a stock unit award or crediting or payment of dividend equivalents, shall be subject to the Firm’s withholding of all required United States federal, state, local and foreign income and employment/payroll taxes (including Federal Insurance Contributions Act taxes). You authorize the Firm to withhold such taxes from any payroll or other payment or compensation to you, including by canceling or accelerating payment of a portion of this award (including any dividend equivalents that have been credited on your stock units) in an amount not to exceed such taxes imposed upon such vesting, conversion, crediting or payment and any additional taxes imposed as a result of such cancellation or acceleration, and to take such other action as the Firm may deem advisable to enable it and you to satisfy obligations for the payment of withholding taxes and other tax obligations, assessments, or other governmental charges, whether of the United States or any other jurisdiction, relating to the vesting or conversion of your stock units or the crediting or payment of dividend equivalents. However, the Firm may not deduct or withhold such sum from any payroll or any other payment or compensation (including from your award), except to the extent it is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes before your stock units convert to shares of Morgan Stanley common stock or to incur interest or additional tax under Section 409A.

Pursuant to rules and procedures that Morgan Stanley establishes, you may elect to satisfy the tax or other withholding obligations arising upon conversion of your stock units by having Morgan Stanley withhold shares of Morgan Stanley common stock in an amount sufficient to satisfy the tax or other withholding obligations. Shares withheld will be valued using the fair market value of Morgan Stanley common stock on the date your stock units convert (or such other appropriate date determined by Morgan Stanley based on local legal, tax or accounting rules and practices) using a valuation methodology established by Morgan Stanley. In order to comply with applicable accounting standards or the Firm’s policies in effect from time to time, Morgan Stanley may limit the amount of shares that you may have withheld.

12. Obligations you owe to the Firm.

As a condition to the earning, payment, conversion or distribution of your award, the Firm may require you to pay such sum to the Firm as may be necessary to satisfy any obligation that you owe to the Firm. Notwithstanding any other provision of this Award Certificate, your award, even if vested or converted, is not earned until after such obligations and any tax withholdings or other deductions required by law are satisfied. Notwithstanding the foregoing, Morgan Stanley may not reduce the number of shares to be delivered upon conversion of your stock units or the amount of dividend equivalents to be paid in respect of your award or delay the payment of your award to satisfy obligations that you owe to the Firm except (i) to the extent authorized under Section 11, relating to tax and other withholding obligations or (ii) to the extent such reduction or delay is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes before your stock units convert to shares of Morgan Stanley common stock or to incur additional tax or interest under Section 409A.

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Morgan Stanley’s determination of any amount that you owe the Firm shall be conclusive. The fair market value of Morgan Stanley common stock for purposes of the foregoing provisions shall be determined using a valuation methodology established by Morgan Stanley.

13. Nontransferability.

You may not sell, pledge, hypothecate, assign or otherwise transfer your award, other than as provided in Section 14 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to your award will be made only to you.

Your personal representatives, heirs, legatees, beneficiaries, successors and assigns, and those of Morgan Stanley, shall all be bound by, and shall benefit from, the terms and conditions of your award.

14. Designation of a beneficiary.

You may make a written designation of beneficiary or beneficiaries to receive all or part of your award to be delivered or paid under this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and submit the Beneficiary Designation form on the Executive Compensation website at [website redacted].

Any shares or dividend equivalents that become deliverable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

If you previously filed a designation of beneficiary form for your equity awards with the Executive Compensation Department, such form will also apply to all of your equity awards, including this award. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive shares or payments under this award, Morgan Stanley may determine in its sole discretion to deliver the shares or make the payments in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to this award.

15. Ownership and possession.

(a) Before conversion. Generally, you will not have any rights as a stockholder in the shares of Morgan Stanley common stock corresponding to your stock units unless and until your stock units convert to shares.

If Morgan Stanley contributes shares of Morgan Stanley common stock corresponding to your stock units to a grantor trust it has established, you may be permitted to direct the trustee how to vote the shares in the trust corresponding to your stock units. Voting rights, if any, are governed by the terms of the grantor trust and Morgan Stanley may amend any such voting rights, in its sole discretion, at any time. Morgan Stanley is under no obligation to

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contribute shares corresponding to stock units to a trust. If Morgan Stanley elects not to contribute shares corresponding to your stock units to a trust, you will not have voting rights with respect to shares corresponding to your stock units until your stock units convert to shares.

(b) Following conversion. Subject to Section 10(c), following conversion of your stock units you will be the beneficial owner of the shares of Morgan Stanley common stock issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares.

(c) Custody of shares. Morgan Stanley may maintain possession of the shares subject to your award until such time as your shares are no longer subject to restrictions on transfer.

16. Securities law compliance matters.

Morgan Stanley may affix a legend to any stock certificates representing shares of Morgan Stanley common stock issued upon conversion of your stock units (and any stock certificates that may subsequently be issued in substitution for the original certificates). The legend will read substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE WERE ISSUED PURSUANT TO THE MORGAN STANLEY 2007 EQUITY INCENTIVE COMPENSATION PLAN AND ARE SUBJECT TO THE TERMS AND CONDITIONS THEREOF AND OF AN AWARD CERTIFICATE FOR STOCK UNITS AND ANY SUPPLEMENT THERETO.

THE SECURITIES REPRESENTED BY THIS STOCK CERTIFICATE MAY BE SUBJECT TO RESTRICTIONS ON TRANSFER BY VIRTUE OF THE SECURITIES ACT OF 1933.

COPIES OF THE PLAN, THE AWARD CERTIFICATE FOR STOCK UNITS AND ANY SUPPLEMENT THERETO ARE AVAILABLE THROUGH THE EXECUTIVE COMPENSATION DEPARTMENT.

Morgan Stanley may advise the transfer agent to place a stop order against such shares if it determines that such an order is necessary or advisable.

17. Compliance with laws and regulation.

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares issued upon conversion of your stock units (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with any applicable constitution, rule, regulation or policy of any of the exchanges or associations or other institutions with which the Firm or a Related Employer has membership or other privileges, and any applicable law or applicable rule or regulation of any governmental agency, self-regulatory organization or state or federal regulatory body.

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18. No entitlements.

(a) No right to continued Employment. This award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the First Scheduled Vesting Date, the Second Scheduled Vesting Date, the First Scheduled Conversion Date, the Second Scheduled Conversion Date, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

(b) No right to future awards. This award, and all other awards of stock units and other equity-based awards, are discretionary. This award does not confer on you any right or entitlement to receive another award of stock units or any other equity-based award at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Firm’s discretion to determine the amount, if any, of your compensation. This award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

19. Consents under local law.

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

20. Award modification.

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your award, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your award in a manner that would materially impair your rights in your award without your consent; provided, however, that Morgan Stanley may, but is not required to, without your consent, amend or modify your award in any manner that Morgan Stanley considers necessary or advisable to (i) comply with any Legal Requirement, (ii) ensure that your award does not result in an excise or other supplemental tax on the Firm under any Legal Requirement, or (iii) ensure that your award is not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to conversion of your stock units to shares or delivery

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of such shares following conversion or the crediting or payment of dividends. Morgan Stanley will notify you of any amendment of your award that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Co-Head of Human Resources or the Chief Operating Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

21. Governing law.

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

22. Defined terms.

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) “Access Person” means an individual designated by the Firm’s Compliance Department as an “access employee” or “access person”, which, for example, currently includes all Managing Directors of the Firm.

(b) “Board” means the Board of Directors of Morgan Stanley.

(c) “Cause” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm, including, without limitation, (A) your failure to comply with any notice or non-solicitation restrictions that may be applicable to you or (B) your failure to comply with the Firm’s compliance, ethics or risk management standards, or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

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(d) A “Change in Control” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (A) any employee plan established by Morgan Stanley or any of its Subsidiaries, (B) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes, during any 12-month period, the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of the total voting power of the stock of Morgan Stanley; provided, however, that the provisions of this subsection (1) are not intended to apply to or include as a Change in Control any transaction that is specifically excepted from the definition of Change in Control under subsection (3) below;

(2) a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “Existing Board”) cease for any reason to constitute at least 50% of the Board; provided, however, that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements; provided that immediately following such merger or consolidation the voting securities of Morgan Stanley outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity of such merger or consolidation or parent entity thereof) 50% or more of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, 50% or more of the total voting power of the stock of such surviving entity or parent entity thereof); and provided further that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Control; or

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(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under Section 409A) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (x) no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (y) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Control unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A. In addition, no Change in Control shall be deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Control shall be as defined or interpreted pursuant to Section 409A.

(e) “Committee” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(f) “Competitive Activity” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

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(g) “Competitor” means any corporation, partnership or other entity that competes, or that owns a significant interest in any corporation, partnership or other entity that competes, with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

(h) “Confidential and Proprietary Information” means any information that is classified as confidential in the Firm’s Global Policy on Confidential Information or that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems information; algorithms; technology and business processes; business, product or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Confidential and Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Confidential and Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, electronic communications, videotapes, audiotapes, and oral communications.

(i) “Date of the Award” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

(j) “Disability” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(k) “Employed” and “Employment” refer to employment with the Firm and/or Related Employment.

(l) The “Firm” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Confidential and Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate and Section 10(c)(2)(vi) of this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Confidential and Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or your Related Employer, as applicable.

(m) “First Scheduled Conversion Date” means [second anniversary of February 2 following the Date of the Award], provided, however, that if such date is not during an open Access Person trading window period, then pursuant to Section 2(d), the First Scheduled Conversion Date for active employees will be delayed until the first day of the next open trading window applicable to Access Persons following [second anniversary of February 2 following the Date of the Award] (but in no event beyond [December 31 of the second year following the Date of the Award]).

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(n) “First Scheduled Vesting Date” means [second anniversary of February 2 following the Date of the Award].

(o) “Full Career Retirement” means the termination of your Employment by you or by the Firm for any reason other than under circumstances involving any cancellation event described in Section 10(c), and other than due to your death or Disability, a Governmental Service Termination or pursuant to a Qualifying Termination, on or after the date on which:

(1) you have attained age 50 and completed at least 12 years of service as a [    ]⁴ of the Firm or equivalent officer title; or

(2) you have attained age 50 and completed at least 15 years of service as an officer of the Firm at the level of [    ]⁵ or above; or

(3) you have completed at least 20 years of service with the Firm; or

(4) you have attained age 55 and have completed at least 5 years of service with the Firm and the sum of your age and years of service equals or exceeds 65.⁶

For the purposes of the foregoing definition, service with the Firm will include any period of service with the following entities and any of their predecessors:

(i) AB Asesores (“ABS”) prior to its acquisition by the Firm (provided that only years of service as a partner of ABS shall count towards years of service as an officer);

(ii) Morgan Stanley Group Inc. and its subsidiaries (“MS Group”) prior to the merger with and into Dean Witter, Discover & Co.;

(iii) Miller Anderson & Sherrerd, L.L.P. prior to its acquisition by MS Group;

(iv) Van Kampen Investments Inc. and its subsidiaries prior to its acquisition by MS Group;

(v) FrontPoint Partners LLC and its subsidiaries prior to its acquisition by the Firm; and

⁴ Specified officer title(s) in one or more specified business units.

⁵ Specified officer title(s) in one or more specified business units.

⁶ Age and service conditions specified in clauses (1) through (4) may vary from year to year.

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(vi) Dean Witter, Discover & Co. and its subsidiaries (“DWD”) prior to the merger of Morgan Stanley Group Inc. with and into Dean Witter, Discover & Co.;

provided that, in the case of an employee who has transferred employment from DWD to MS Group or vice versa, a former employee of DWD will receive credit for employment with DWD only if he or she transferred directly from DWD to Morgan Stanley & Co. Incorporated or its affiliates subsequent to February 5, 1997, and a former employee of MS Group will receive credit for employment with MS Group only if he or she transferred directly from MS Group to Morgan Stanley DW Inc. or its affiliates subsequent to February 5, 1997.

(p) “Governmental Employer” means a governmental department or agency, self-regulatory agency or other public service employer.

(q) “Governmental Service Termination” means the termination of your Employment due to your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(r) “Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(s) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.

(t) “Management Committee” means the Morgan Stanley Management Committee and any successor or equivalent committee.

(u) “Plan” means the 2007 Equity Incentive Compensation Plan, as amended.

(v) “Qualifying Termination” means your Separation from Service within eighteen (18) months following a Change in Control under either of the following circumstances: (a) the Firm terminates your employment under circumstances not involving any cancellation event; or (b) you resign from the Firm due to (i) a materially adverse alteration in your position or in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control, as determined by the Committee or its delegees, or (ii) the Firm requiring your principal place of employment to be located more than 75 miles from the location where you were principally employed at the time of the Change in Control (except for required travel on the Firm’s business to an extent substantially consistent with your business travel obligations in the ordinary course of business prior to the Change in Control).

(w) “Related Employment” means your employment with an employer other than the Firm (such employer, herein referred to as a “Related Employer”), provided that: (i) you undertake such employment at the written request or with the written consent of Morgan

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Stanley’s Global Co-Head of Human Resources (or if such position no longer exists, the holder of an equivalent position); (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Firm in its discretion as Related Employment; and, provided further that the Firm may (1) determine at any time in its sole discretion that employment that was recognized by the Firm as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(x) “Scheduled Conversion Date” means the First Scheduled Conversion Date and/or the Second Scheduled Conversion Date, as the context requires.

(y) “Scheduled Vesting Date” means the First Scheduled Vesting Date and/or the Second Scheduled Vesting Date, as the context requires.

(z) “Second Scheduled Conversion Date” means [third anniversary of February 2 following the Date of the Award], provided, however, that if such date is not during an open Access Person trading window period, then pursuant to Section 2(d), the Second Scheduled Conversion Date for active employees will be delayed until the first day of the next open trading window applicable to Access Persons following [third anniversary of February 2 following the Date of the Award] (but in no event beyond [December 31 of the third year following the Date of the Award]).

(aa) “Second Scheduled Vesting Date” means [third anniversary of February 2 following the Date of the Award].

(bb) “Section 409A” means Section 409A of the Internal Revenue Code and any regulations thereunder.

(cc) “Separation from Service” means a separation from service with the Firm for purposes of Section 409A determined using the default provisions set forth in Treasury Regulation §1.409A-1(h) or any successor regulation thereto. For purposes of this definition, Morgan Stanley’s subsidiaries and affiliates include (and are limited to) any corporation that is in the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Morgan Stanley and any trade or business that is under common control with Morgan Stanley (within the meaning of Section 414(c) of the Internal Revenue Code), determined in each case in accordance with the default provisions set forth in Treasury Regulation §1.409A-1(h)(3).

(dd) You will be deemed to have made “Unauthorized Comments” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory, disparaging or defamatory comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audio tape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

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(ee) A “Wrongful Solicitation” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided, however, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination) after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided, however, that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

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IN WITNESS WHEREOF, Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

MORGAN STANLEY

/s/

[Name]

[Title]

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EX-10.5

EXHIBIT 10.5

MORGAN STANLEY

MORGAN STANLEY COMPENSATION INCENTIVE PLAN

[YEAR] DISCRETIONARY RETENTION AWARDS

AWARD CERTIFICATE

TABLE OF CONTENTS FOR AWARD CERTIFICATE

1.	Your award generally.	3
2.	Vesting schedule and payment.	3
3.	Special provision for certain employees.	5
4.	Death, Disability and Full Career Retirement.	5
5.	Involuntary termination by the Firm.	5
6.	Governmental Service.	6
7.	Qualifying Termination.	7
8.	Specified employees.	7
9.	Cancellation of Applicable Account Value under certain circumstances.	7
10.	Tax and other withholding obligations.	10
11.	Obligations you owe to the Firm.	11
12.	Nontransferability.	11
13.	Designation of a beneficiary.	11
14.	No entitlements.	12
15.	Consents under local law.	12
16.	Award modification.	12
17.	Governing law.	13
18.	Defined terms.	13

MORGAN STANLEY

MORGAN STALEY COMPENSATION INCENTIVE PLAN

[YEAR] DISCRETIONARY RETENTION AWARDS

AWARD CERTIFICATE

Morgan Stanley has granted you an award under the Morgan Stanley Compensation Incentive Plan (the “Plan”) as part of your discretionary long-term incentive compensation for services provided during [year] and as an incentive for you to remain in Employment and provide services to the Firm through the Scheduled Vesting Dates. This Award Certificate sets forth the general terms and conditions of your [year] award under the Plan. The initial value of your [year] award has been communicated to you independently.

If you are employed outside the United States, you will also receive an “International Supplement” that contains supplemental terms and conditions for your [year] award. You should read this Award Certificate in conjunction with the International Supplement, if applicable, and the Plan in order to understand the terms and conditions of your [year] award.

Your [year] award is made pursuant to the Plan. References to Applicable Account Value in this Award Certificate mean only the Applicable Account Value related to your [year] award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purposes of the [year] award are, among other things, to facilitate the allocation of a portion of your discretionary above-base compensation for [year] to the notional investment opportunities afforded by the Plan, to reward you for your continued Employment and service to the Firm in the future and your compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, you will earn each portion of your [year] award only if you (1) remain in continuous Employment through the applicable Scheduled Vesting Date (subject to limited exceptions set forth below), (2) do not engage in any activity that is a cancellation event set forth in Section 9(c) below and (3) satisfy obligations you owe to the Firm as set forth in Section 11 below. Even if your award has vested, you will have no right to your award if a cancellation event occurs under the circumstances set forth in Section 9(c) below. As Morgan Stanley deems appropriate, Morgan Stanley will require you to provide a written certification or other evidence, from time to time in its sole discretion, to confirm that no cancellation event has occurred, including upon a termination of Employment and/or during a specified period of time prior to each Scheduled Distribution Date thereafter. If you fail to provide any required certification or other evidence, Morgan Stanley will cancel your award. It is your responsibility to provide the Executive Compensation Department with your up-to-date contact information.

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Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 18 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 18 below have the meanings set forth in the Plan.

1. Your award generally.

(a) Applicable Account Value. This Award Certificate uses the term “Applicable Account Value” to refer to your [year] award under the Plan and the notional return (positive or negative) thereon based on the performance of the Notional Investments to which your account is notionally allocated. If you receive another award under the Plan (for example, an award for a future year), your total Account Value under Plan will include the Applicable Account Value of your [year] award and the applicable Account Value of such other award(s).

(b) Notional allocation of account. The notional allocation of your Applicable Account Value is subject to the ultimate discretion of the Firm and is made exclusively for the purpose of determining your Applicable Account Value from time to time in accordance with the Plan. You may notionally allocate your Applicable Account Value to any one fund, or any combination of funds, offered as Notional Investments under the Plan. \

2. Vesting schedule and payment.

(a) Vesting schedule. Except as otherwise provided in this Award Certificate, your Applicable Account Value will vest according to the following schedule: (i) 50% of your Applicable Account Value will vest on the First Scheduled Vesting Date and (ii) the remaining portion of your Applicable Account Value will vest on the Second Scheduled Vesting Date.¹ Except as otherwise provided in this Award Certificate, each portion of your Applicable Account Value will vest only if you continue to provide future services to the Firm by remaining in continuous Employment through the applicable Scheduled Vesting Date and providing value added services to the Firm during this timeframe. The special vesting terms set forth in Sections 4, 5, 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) if the Firm terminates your employment in an involuntary termination under the circumstances described in Section 5, (iv) upon a Governmental Service Termination or (v) upon a Qualifying Termination. The vested portion of your Applicable Account Value remains subject to the cancellation and withholding provisions set forth in this Award Certificate.

(b) Payment. Except as otherwise provided in this Award Certificate, (i) 50% of your Applicable Account Value will, to the extent vested, be paid in cash (minus applicable tax

¹ The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

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and other withholding liabilities) on the First Scheduled Distribution Date and (ii) the remaining portion of your Applicable Account Value will, to the extent vested, be paid in cash (minus applicable tax and other withholding liabilities) on the Second Scheduled Distribution Date (provided that, subject to Section 2(d), your Applicable Account Value may be paid to you following the applicable Scheduled Distributed Date on the next administratively practicable payroll date).² The special payment provisions set forth in Sections 4(a), 4(b), 6 and 7 of this Award Certificate apply (i) if your Employment terminates by reason of your death or you die after termination of your Employment, (ii) upon your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 6(b), or (iii) upon a Qualifying Termination.

(c) Accelerated payment. Morgan Stanley shall have no right to accelerate the payment of any portion of your Applicable Account Value, except to the extent that such acceleration is not prohibited by Section 409A and would not result in your being required to recognize income for United States federal income tax purposes prior to the distribution of your Applicable Account Value or your incurring additional tax or interest under Section 409A. If any portion of your Applicable Account Value is paid prior to the applicable Scheduled Distribution Date pursuant to this Section 2(c), Morgan Stanley may condition such payment on your agreement that if you engage in any activity constituting a cancellation event set forth in Section 9(c) within the applicable period of time that would have resulted in cancellation of all or a portion of your Applicable Account Value (had it not been paid pursuant to this Section 2(c)), you will be required to repay to Morgan Stanley an amount equal to the payment you received (before taking account of any withholding) in respect of the portion of your Applicable Account Value that would have been canceled upon the occurrence of such cancellation event, plus interest on such amount at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date such portion of your Applicable Account Value was paid through the date preceding the repayment date.

(d) Rule of construction for timing of payment. Whenever this Award Certificate provides for all or a portion of your Applicable Account Value to be paid on the First Scheduled Distribution Date or the Second Scheduled Distribution Date or upon a different specified event or date, such payment will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages based on a delay in the payment of your Applicable Account Value, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as payment is made by December 31 of the year in which occurs the applicable Scheduled Distribution Date or such other specified event or date or, if later, by the 15th day of the third calendar month following such specified event or date. Similarly, neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate), based on any acceleration of the payment of your Applicable Account Value pursuant to Section 2(c).

² The payment schedule presented in this form of Award Certificate is indicative. The payment schedule applicable to awards may vary.

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3. Special provision for certain employees.

Notwithstanding the other provisions of this Award Certificate, if Morgan Stanley considers you to be one of its executive officers at the time provided for the payment of the vested portion of your Applicable Account Value and determines that your compensation may not be fully deductible by virtue of Section 162(m) of the Internal Revenue Code, Morgan Stanley shall delay payment of the nondeductible portion of your compensation, including delaying payment of your Applicable Account Value to the extent nondeductible, unless the Administrator, in its sole discretion, determines not to delay such payment. This delay will continue until your “Separation from Service” or to the extent permitted under Section 409A, the end of the first earlier taxable year of the Firm as of the last day of which you are no longer an executive officer (subject to earlier conversion in the event of your death).

4. Death, Disability and Full Career Retirement.

The following special vesting and payment terms apply to your award:

(a) Death during Employment. If your Employment terminates due to death, any unvested portion of your Applicable Account Value will vest on the date of your death. Your Applicable Account Value will be paid to the beneficiary you have designated pursuant to Section 12 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death. After your death, the cancellation provisions set forth in Section 9(c) will no longer apply.

(b) Death after termination of Employment. If you die after the termination of your Employment but prior to an applicable Scheduled Distribution Date, the vested portion of your Applicable Account Value that you held at the time of your death will be paid to the beneficiary you have designated pursuant to Section 12 or the legal representative of your estate, as applicable, upon your death, provided that your estate or beneficiary notifies the Firm of your death within 60 days following your death. After your death, the cancellation provisions set forth in Section 9(c) will no longer apply.

(c) Disability or Full Career Retirement. If your Employment terminates due to Disability or in a Full Career Retirement, any unvested portion of your Applicable Account Value will vest on the date your Employment terminates. Your Applicable Account Value will be paid on the applicable Scheduled Distribution Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Distribution Date.

5. Involuntary termination by the Firm.

If the Firm terminates your employment under circumstances not involving any cancellation event set forth in Section 9(c), the unvested portion of your Applicable Account Value will vest on the date your employment with the Firm terminates and your Applicable

5

Account Value will be paid on the applicable Scheduled Distribution Date, provided that you sign an agreement and release satisfactory to the Firm. If you do not sign such an agreement and release satisfactory to the Firm within the timeframe set by the Firm in connection with your involuntary termination as described in this Section 5, any portion of your Applicable Account Value that was unvested immediately prior to your termination shall be canceled. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Distribution Date.

6. Governmental Service.

(a) General treatment of awards upon Governmental Service Termination. If your Employment terminates in a Governmental Service Termination and not involving a cancellation event set forth in Section 9(c), then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 6(c), any unvested portion of your Applicable Account Value will vest on the date of your Governmental Service Termination. Your vested Applicable Account Value will be paid on the date of your Governmental Service Termination.

(b) General treatment of vested awards upon acceptance of employment at a Governmental Employer following termination of Employment. If your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event set forth in Section 9(c) and, following your termination of Employment, you accept employment with a Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 6(c), the vested portion of your Applicable Account Value will be paid upon your commencement of such employment, provided you present the Firm with satisfactory evidence demonstrating that as a result of such employment the divestiture of your continued interest in your Applicable Account Value is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(c) Repayment obligation. If you engage in any activity constituting a cancellation event set forth in Section 9(c) within the applicable period of time that would have resulted in cancellation of all or a portion of your Applicable Account Value had it not been paid pursuant to Sections 6(a) or 6(b) above (disregarding, for purposes of determining whether a cancellation event has occurred, any Full Career Retirement condition set forth in Section 9(c)(1)), you will be required to repay to Morgan Stanley the amount distributed to you pursuant to Sections 6(a) or 6(b) above that would have been canceled upon the occurrence of such cancellation event (before taking account of any withholding), plus interest on such amount at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date of such payment through the date preceding the repayment date.

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7. Qualifying Termination.

If your employment terminates in a Qualifying Termination, any unvested portion of your Applicable Account Value will vest, cancellation provisions will lapse, and, subject to Section 8, your Applicable Account Value will be paid upon your Qualifying Termination.

8. Specified employees.

Notwithstanding any other terms of this Award Certificate, if Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, payment of any portion of your Applicable Account Value that otherwise would be made upon your Separation from Service (including, without limitation, any payments that were delayed due to Section 162(m) of the Internal Revenue Code, as provided in Section 3, and any portion of your Applicable Account Value payable upon your Qualifying Termination, as provided in Section 7) will be delayed until the first business day following the date that is six months after your Separation from Service; provided, however, that in the event that your death, your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 6(b) occurs at any time after the Date of the Award, payment will be made in accordance with Section 4(a), 4(b), or 6, as applicable.

9. Cancellation of Applicable Account Value under certain circumstances.

(a) Cancellation of unvested Applicable Account Value. Any unvested portion of your Applicable Account Value will be canceled if your Employment terminates for any reason other than death, Disability, a Full Career Retirement, an involuntary termination by the Firm described in Section 5, a Governmental Service Termination or a Qualifying Termination.

(b) General treatment of vested Applicable Account Value. Except as otherwise provided in this Award Certificate, the vested portion of your Applicable Account Value will be paid on the applicable Scheduled Distribution Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the applicable Scheduled Distribution Date.

(c) Cancellation of Applicable Account Value under certain circumstances. The cancellation events set forth in this Section 9(c) are designed, among other things, to incentivize compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 9(c) shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 9(c) no longer apply).

Your Applicable Account Value, even if vested, is not earned until the applicable Scheduled Distribution Date (and until you satisfy all obligations you owe to the Firm as set forth in Section 11 below) and, unless prohibited by applicable law, will be canceled prior to the

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applicable Scheduled Distribution Date in any of the circumstances set forth below in Section 9(c)(1) or (2). The Firm may retain custody of your Applicable Account Value following a Scheduled Distribution Date pending any investigation or other review that impacts the determination as to whether your Applicable Account Value is cancellable under the circumstances set forth below and, in such an instance, your Applicable Account Value shall be forfeited in the event the Firm determines that the Applicable Account Value was cancellable under the circumstances set forth below.

(1) Competitive Activity. If you resign and the resulting termination satisfies the definition of a Full Career Retirement and you engage in competitive activity, the following shall apply, subject to applicable law: ³

(i) If your Competitive Activity occurs before the First Scheduled Distribution Date, then your entire Applicable Account Value will be canceled immediately.

(ii) If your Competitive Activity occurs on or after the First Scheduled Distribution Date but before the Second Scheduled Distribution Date, then the 50% of your Applicable Account Value that is scheduled to be paid on the Second Scheduled Distribution date will be canceled immediately.

(2) Other Events. If any of the following events occur at any time before the applicable Scheduled Distribution Date, your entire Applicable Account Value (whether or not vested), will be canceled immediately, subject to applicable law:

(i) Your Employment is terminated for Cause or you engage in conduct constituting Cause (either during or following Employment and whether or not your Employment has been terminated as of the applicable Scheduled Distribution Date);

³ Provided that, for the Chief Executive Officer only, this provision only applies if such termination is not a termination for Good Reason. For these purposes, Good Reason is defined as a resignation following: (i) his removal from the position of Chief Executive Officer of Morgan Stanley; (ii) his failure to be elected or reelected to the Board of Directors of Morgan Stanley; (iii) a change in his reporting relationship such that he is no longer reporting directly and solely to the Board of Directors of Morgan Stanley; (iv) a material diminution of his duties and responsibilities as the Chief Executive Officer of Morgan Stanley that is not agreed by the parties or the assignment to him of duties materially inconsistent with his position, duties or responsibilities, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces his position, duties or responsibilities; (v) any material breach by Morgan Stanley of its material obligations to provide payments or benefits as required in his offer letter; or (vi) Morgan Stanley’s requiring his principal office to be based at any office or location other than the office or location designated as Morgan Stanley’s principal executive offices.

Notwithstanding the foregoing, he will not be deemed to have resigned for Good Reason unless (i) he has given the Chairman of the Board written notification of his intention to do so, describing the factual basis for “Good Reason” and (ii) the event giving rise to “Good Reason” is not cured by Morgan Stanley within 30 business days after the Chairman of the Board’s receipt of the notice.

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(ii) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

(iii) You disclose Confidential and Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Confidential and Proprietary Information other than in connection with the business of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements), or otherwise existing between you and the Firm, relating to Confidential and Proprietary Information or an assignment, procurement or enforcement of rights in Confidential and Proprietary Information;

(iv) You engage in a Wrongful Solicitation;

(v) You make any Unauthorized Comments;

(vi) You fail or refuse, following your termination of Employment, to cooperate with or assist the Firm in a timely manner in connection with any investigation, regulatory matter, lawsuit or arbitration in which the Firm is a subject, target or party and as to which you may have pertinent information; or

(vii) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

(A) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation;

(B) 90 days before the date on which your employment with the Firm terminates if clause (A) of this Section 9(c)(2)(vii) does not apply to you and you are a Managing Director (or equivalent title) at the time of notice of your resignation;

(C) 60 days before the date on which your employment with the Firm terminates if you are an Executive Director (or equivalent title) at the time of notice of your resignation; and

(D) 30 days before the date on which your employment with the Firm terminates if none of clauses (A) through (C) of this Section 9(c)(2)(vii) apply to you at the time of notice of your resignation.

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(3) Clawback. The Firm may, in its discretion, cancel all or any portion of your Applicable Account Value (whether vested or unvested) prior to the Scheduled Distribution Date, under any of the following circumstances:

(i) You take any action, or you omit to take any action (including with respect to supervisory responsibilities), where such action or omission:

(A) causes or contributes to the need for a material restatement of the Firm’s financial results; or

(B) causes or is reasonably expected to cause a substantial financial loss or any injury to the interest or business reputation of the Firm or of a business area; or

(ii) The Firm determines that there has been (A) a substantial loss on a trading position, investment, commitment or other holding; or (B) a loss on a trading position, investment, commitment or other holding where you have operated outside the risk parameters or risk profile applicable to such position, investment, commitment or holding, and in the case of either (A) or (B), such position, investment, commitment or holding was a factor in your award determination.

10. Tax and other withholding obligations.

Any vesting, whether on a Scheduled Vesting Date or some other date, of all or a portion of your Applicable Account Value, and any payment of all or a portion of your Applicable Account Value shall be subject to the Firm’s withholding of all required United States federal, state, local and foreign income and employment/payroll taxes (including Federal Insurance Contributions Act taxes). You authorize the Firm to withhold such taxes from any payroll or other payment or compensation to you, including by canceling or accelerating payment of a portion of your Applicable Account Value in an amount not to exceed such taxes imposed upon such vesting or distribution and any additional taxes imposed as a result of such cancellation or acceleration, and to take such other action as the Firm may deem advisable to enable it and you to satisfy obligations for the payment of withholding taxes and other tax obligations, assessments, or other governmental charges, whether of the United States or any other jurisdiction, relating to the vesting or payment of your Applicable Account Value. However, the Firm may not deduct or withhold such sum from any payroll or any other payment or compensation (including from your Applicable Account Value), except to the extent it is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes prior to the distribution of your Applicable Account Value or to incur interest or additional tax under Section 409A.

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11. Obligations you owe to the Firm.

As a condition to the earning, payment or distribution of your award, the Firm may require you to pay such sum to the Firm as may be necessary to satisfy any obligation that you owe to the Firm. Notwithstanding any other provision of this Award Certificate, your award, even if vested, is not earned until after such obligations and any tax withholdings or other deductions required by law are satisfied. Notwithstanding the foregoing, Morgan Stanley may not reduce the amount of your Applicable Account Value to be distributed to satisfy obligations that you owe to the Firm except (i) to the extent authorized under Section 10, relating to tax and other withholding obligations or, otherwise, (ii) to the extent such reduction is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes prior to the distribution of your Applicable Account Value or to incur additional tax or interest under Section 409A. Morgan Stanley’s determination of any amount that you owe the Firm shall be conclusive.

12. Nontransferability.

You may not sell, pledge, hypothecate, assign or otherwise transfer your Applicable Account Value, other than as provided in Section 13 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to your Applicable Account Value will be made only to you.

Your personal representatives, heirs, legatees, beneficiaries, successors and assigns, and those of Morgan Stanley, shall all be bound by, and shall benefit from, the terms and conditions of your award.

13. Designation of a beneficiary.

You may make a written designation of beneficiary or beneficiaries to receive all or part of the amounts to be distributed in respect of your Applicable Account Value in the event of your death. To make a beneficiary designation, you must complete and submit the Beneficiary Designation form on the Executive Compensation website at [website redacted].

Any portion of your Applicable Account Value that becomes payable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

If you previously filed a designation of beneficiary form for your award(s) under the Plan with the Executive Compensation Department, such form will also apply to all of your awards under the Plan, including this [year] award. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive your Applicable Account Value, Morgan Stanley may determine in its sole discretion to distribute the amounts in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to such amounts.

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14. No entitlements.

(a) No right to continued Employment. This [year] award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the First Scheduled Vesting Date, the Second Scheduled Vesting Date, the First Scheduled Distribution Date, the Second Scheduled Distribution Date, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

(b) No right to future awards. This award, and all other awards under the Plan, are discretionary. This award does not confer on you any right or entitlement to receive another award under the Plan or any other award under any other incentive compensation plan of Morgan Stanley at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Firm’s discretion to determine the amount, if any, of your compensation. This award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

15. Consents under local law.

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

16. Award modification.

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your award, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your award in a manner that would materially impair your rights in your award without your consent; provided, however, that Morgan Stanley may, but is not required to, without your consent, amend or modify your award in any manner that Morgan Stanley considers necessary or advisable to (i) comply with any Legal Requirement, (ii) ensure that your award does not result in an excise or

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other supplemental tax on the Firm under any Legal Requirement, or (iii) ensure that your award is not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to payment or distribution. Morgan Stanley will notify you of any amendment of your award that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Co-Head of Human Resources or the Chief Operating Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

17. Governing law.

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

18. Defined terms.

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) “Board” means the Board of Directors of Morgan Stanley.

(b) “Cause” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm, including, without limitation, (A) your failure to comply with any notice or non-solicitation restrictions that may be applicable to you or (B) your failure to comply with the Firm’s compliance, ethics or risk management standards, or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

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(c) A “Change in Control” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (A) any employee plan established by Morgan Stanley or any of its Subsidiaries, (B) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes, during any 12-month period, the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of the total voting power of the stock of Morgan Stanley; provided, however, that the provisions of this subsection (1) are not intended to apply to or include as a Change in Control any transaction that is specifically excepted from the definition of Change in Control under subsection (3) below;

(2) a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “Existing Board”) cease for any reason to constitute at least 50% of the Board; provided, however, that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements; provided that immediately following such merger or consolidation the voting securities of Morgan Stanley outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity of such merger or consolidation or parent entity thereof) 50% or more of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, 50% or more of the total voting power of the stock of such surviving entity or parent entity thereof); and provided further that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Control; or

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(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under Section 409A) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (x) no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (y) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Control unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A. In addition, no Change in Control shall be deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Control shall be as defined or interpreted pursuant to Section 409A.

(d) “Competitive Activity” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

(e) “Competitor” means any corporation, partnership or other entity that competes, or that owns a significant interest in any corporation, partnership or other entity that competes, with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

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(f) “Confidential and Proprietary Information” means any information that is classified as confidential in the Firm’s Global Policy on Confidential Information or that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems information; algorithms; technology and business processes; business, product or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Confidential and Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Confidential and Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, electronic communications, videotapes, audiotapes, and oral communications.

(g) “Date of the Award” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

(h) “Disability” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(i) “Employed” and “Employment” refer to employment with the Firm and/or Related Employment.

(j) The “Firm” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Confidential and Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate and Section 9(c)(2)(vi) of this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Confidential and Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or your Related Employer, as applicable.

(k) “First Scheduled Distribution Date” means [second anniversary of February 2 following the Date of the Award].

(l) “First Scheduled Vesting Date” means [second anniversary of February 2 following the Date of the Award].

(m) “Full Career Retirement” means the termination of your Employment by you or by the Firm for any reason other than under circumstances involving any cancellation event described in Section 9(c), and other than due to your death or Disability, a Governmental Service Termination or pursuant to a Qualifying Termination, on or after the date on which:

(1) you have attained age 50 and completed at least 12 years of service as a [         ]⁴ of the Firm or equivalent officer title; or

⁴ Specified officer title(s) in one or more specified business units.

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(2) you have attained age 50 and completed at least 15 years of service as an officer of the Firm at the level of [        ]⁵ or above; or

(3) you have completed at least 20 years of service with the Firm; or

(4) you have attained age 55 and have completed at least 5 years of service with the Firm and the sum of your age and years of service equals or exceeds 65.⁶

For the purposes of the foregoing definition, service with the Firm will include any period of service with the following entities and any of their predecessors:

(i) AB Asesores (“ABS”) prior to its acquisition by the Firm (provided that only years of service as a partner of ABS shall count towards years of service as an officer);

(ii) Morgan Stanley Group Inc. and its subsidiaries (“MS Group”) prior to the merger with and into Dean Witter, Discover & Co.;

(iii) Miller Anderson & Sherrerd, L.L.P. prior to its acquisition by MS Group;

(iv) Van Kampen Investments Inc. and its subsidiaries prior to its acquisition by MS Group;

(v) FrontPoint Partners LLC and its subsidiaries prior to its acquisition by the Firm; and

(vi) Dean Witter, Discover & Co. and its subsidiaries (“DWD”) prior to the merger of Morgan Stanley Group Inc. with and into Dean Witter, Discover & Co.;

provided that, in the case of an employee who has transferred employment from DWD to MS Group or vice versa, a former employee of DWD will receive credit for employment with DWD only if he or she transferred directly from DWD to Morgan Stanley & Co. Incorporated or its affiliates subsequent to February 5, 1997, and a former employee of MS Group will receive credit for employment with MS Group only if he or she transferred directly from MS Group to Morgan Stanley DW Inc. or its affiliates subsequent to February 5, 1997.

⁵ Specified officer title(s) in one or more specified business units.

⁶ Age and service conditions specified in clauses (1) through (4) may vary from year to year.

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(n) “Governmental Employer” means a governmental department or agency, self-regulatory agency or other public service employer.

(o) “Governmental Service Termination” means the termination of your Employment due to your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in your Applicable Account Value is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(p) “Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(q) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.

(r) “Management Committee” means the Morgan Stanley Management Committee and any successor or equivalent committee.

(s) “Qualifying Termination” means your Separation from Service within eighteen (18) months following a Change in Control under either of the following circumstances: (a) the Firm terminates your employment under circumstances not involving any cancellation event; or (b) you resign from the Firm due to (i) a materially adverse alteration in your position or in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control, as determined by the Administrator, or (ii) the Firm requiring your principal place of employment to be located more than 75 miles from the location where you were principally employed at the time of the Change in Control (except for required travel on the Firm’s business to an extent substantially consistent with your business travel obligations in the ordinary course of business prior to the Change in Control).

(t) “Related Employment” means your employment with an employer other than the Firm (such employer, herein referred to as a “Related Employer”), provided that: (i) you undertake such employment at the written request or with the written consent of Morgan Stanley’s Global Co-Head of Human Resources (or if such position no longer exists, the holder of an equivalent position); (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Firm in its discretion as Related Employment; and, provided further that the Firm may (1) determine at any time in its sole discretion that employment that was recognized by the Firm as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(u) “Scheduled Distribution Date” means the First Scheduled Distribution Date and/or the Second Scheduled Distribution Date, as the context requires.

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(v) “Scheduled Vesting Date” means the First Scheduled Vesting Date and/or the Second Scheduled Vesting Date, as the context requires.

(w) “Second Scheduled Distribution Date” means [third anniversary of February 2 following the Date of the Award].

(x) “Second Scheduled Vesting Date” means [third anniversary of February 2 following the Date of the Award].

(y) “Section 409A” means Section 409A of the Internal Revenue Code and any regulations thereunder.

(z) “Separation from Service” means a separation from service with the Firm for purposes of Section 409A determined using the default provisions set forth in Treasury Regulation §1.409A-1(h) or any successor regulation thereto. For purposes of this definition, Morgan Stanley’s subsidiaries and affiliates include (and are limited to) any corporation that is in the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Morgan Stanley and any trade or business that is under common control with Morgan Stanley (within the meaning of Section 414(c) of the Internal Revenue Code), determined in each case in accordance with the default provisions set forth in Treasury Regulation §1.409A-1(h)(3).

(aa) You will be deemed to have made “Unauthorized Comments” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory, disparaging or defamatory comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audio tape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

(bb) A “Wrongful Solicitation” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided, however, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination)

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after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided, however, that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

IN WITNESS WHEREOF, Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

MORGAN STANLEY

/s/

[Name]

[Title]

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EX-10.6

EXHIBIT 10.6

MORGAN STANLEY

2007 EQUITY INCENTIVE COMPENSATION PLAN

AWARD CERTIFICATE FOR

[YEAR] PERFORMANCE STOCK UNITS

TABLE OF CONTENTS FOR AWARD CERTIFICATE

1.	Performance stock units generally.	3
2.	Performance measures.	3
3.	Vesting and conversion.	4
4.	Special provision for certain employees.	6
5.	Dividend equivalent payments.	7
6.	Death, Disability and Full Career Retirement.	8
7.	Involuntary termination by the Firm.	9
8.	Governmental Service.	10
9.	Change in Control.	11
10.	Specified employees.	11
11.	Cancellation of awards under certain circumstances.	12
12.	Tax and other withholding obligations.	14
13.	Obligations you owe to the Firm.	15
14.	Nontransferability.	15
15.	Designation of a beneficiary.	15
16.	Ownership and possession.	16
17.	Securities law compliance matters.	16
18.	Compliance with laws and regulation.	17
19.	No entitlements.	17
20.	Consents under local law.	18
21.	Award modification.	18
22.	Governing law.	18
23.	Defined terms.	18

MORGAN STANLEY

[YEAR]

DISCRETIONARY RETENTION AWARDS

AWARD CERTIFICATE FOR PERFORMANCE STOCK UNITS

Morgan Stanley has awarded you performance stock units (PSUs) as part of your discretionary long-term incentive compensation for services provided during [year] and as an incentive for you to remain in Employment and provide services to the Firm. This Award Certificate sets forth the general terms and conditions of your [year] performance stock unit award. The number of PSUs in your Target Award has been communicated to you independently.

If you are employed outside the United States, you will also receive an “International Supplement” that contains supplemental terms and conditions for your [year] PSU award. You should read this Award Certificate in conjunction with the International Supplement, if applicable, in order to understand the terms and conditions of your performance stock unit award.

Your PSU award is made pursuant to the Plan. References to “performance stock units” or “PSUs” (which terms are used interchangeably) in this Award Certificate mean only those performance stock units included in your [year] PSU award, and the terms and conditions herein apply only to such award. If you receive any other award under the Plan or another equity compensation plan, it will be governed by the terms and conditions of the applicable award documentation, which may be different from those herein.

The purpose of your PSU award is, among other things, to align your interests with the interests of the Firm and Morgan Stanley’s stockholders, to reward you for your continued Employment and service to the Firm in the future and your compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. In view of these purposes, the number of PSUs that you earn will depend on the Company’s performance during the Performance Period. Moreover, you will earn PSUs included in your [year] PSU award only if you (1) remain in continuous Employment through the Scheduled Vesting Date (subject to limited exceptions set forth below), (2) do not engage in any activity that is a cancellation event set forth in Section 11(c) below and (3) satisfy obligations you owe to the Firm as set forth in Section 13 below. Even if your PSUs have vested, you will have no right to your award if a cancellation event occurs under the circumstances set forth in Section 11(c) below. As Morgan Stanley deems appropriate, Morgan Stanley will require you to provide a written certification or other evidence, from time to time in its sole discretion, to confirm that no cancellation event has occurred, including upon a termination of Employment and/or during a

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specified period of time prior to each Scheduled Conversion Date. If you fail to timely provide any required certification or other evidence, Morgan Stanley will cancel your award. It is your responsibility to provide the Executive Compensation Department with your up-to-date contact information.

Capitalized terms used in this Award Certificate that are not defined in the text have the meanings set forth in Section 23 below. Capitalized terms used in this Award Certificate that are not defined in the text or in Section 23 below have the meanings set forth in the Plan.

1. Performance stock units generally.

Each PSU corresponds to one share of Morgan Stanley common stock. A PSU constitutes a contingent and unsecured promise of Morgan Stanley to pay you one share of Morgan Stanley common stock on the conversion date for the PSU. As the holder of PSUs, you have only the rights of a general unsecured creditor of Morgan Stanley. You will not be a stockholder with respect to the shares of Morgan Stanley common stock corresponding to your PSUs unless and until your PSUs convert to shares.

2. Performance measures.

The portion, if any, of your Target Award that you earn will be based on Morgan Stanley performance against the performance measures set forth in this Section 2 and the other terms and conditions of this Award Certificate, and may vary from zero to two times the number of PSUs included in your Target Award.

(a) Average Morgan Stanley ROE. One-half of your Target Award will be earned based on MS Average ROE. The number of PSUs that you earn based on MS Average ROE (subject to vesting and the other terms and conditions of your award) will be determined by multiplying the number of PSUs representing one-half of the Target Award by a multiplier determined as follows:

• If MS Average ROE is less than 7.5%, the multiplier will be zero

• If MS Average ROE is 7.5%, the multiplier will be .25

• If MS Average ROE is 12.0%, the multiplier will be 1.00

• If MS Average ROE is 18.0% or more, the multiplier will be 2.00

If MS Average ROE is between two thresholds, then the multiplier will be obtained by straight-line interpolation between the two thresholds. For example, if MS Average ROE is 15%, the multiplier will be 1.50. If MS Average ROE is less than 7.5%, you will not earn any PSUs as a result of the MS Average ROE measure, and one-half of your [year] PSU award will be canceled.

(b) Relative Total Shareholder Return. One-half of your Target Award will be earned based on Morgan Stanley’s Total Shareholder Return as compared to the Total Shareholder Return of each member of the Comparison Group. The number of PSUs that you earn based on Morgan Stanley’s TSR as compared to each member the Comparison Group’s

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TSR (subject to vesting and the other terms and conditions of your award) will be determined by multiplying the number of PSUs representing one-half of your Target Award by a multiplier determined in accordance with the following performance grid:

MS TSR Rank	Multiplier
1	2.00
2	1.75
3	1.50
4	1.25
5	1.00
6	0.75
7	0.50
8	0.25
9	0.00
10	0.00

In the event that any member of the Comparison Group is involved in any event that results in such member ceasing to be traded on a national exchange at any time during the Performance Period or in the event that the Committee determines, in its sole discretion, that a change in circumstances of a member of the Comparison Group during the Performance Period would cause the inclusion of such entity in the Comparison Group to no longer be appropriate, then, in each case, such entity shall be removed as a member of the Comparison Group and the performance grid described above relating to the relative TSR performance goal will be adjusted based on the number of companies remaining in the Comparison Group, with a rank of “1” resulting in a multiplier of 2 and the “last” rank resulting in a multiplier of 0; provided that, in the event all but one member of the Comparison Group are removed, then the performance grid will be adjusted such that a rank of first results in a multiplier of 1 and a rank of last results in a multiplier of 0; provided, further, in the event all members of the Comparison Group are removed, then the performance grid will be adjusted such that the multiplier will be 1. The multiplier for the ranks in between first and last will be determined based on straight-line interpolation.

(c) Adjustments. If an event occurs with respect to Morgan Stanley or any member of the Comparison Group that renders, in the sole determination of the Committee, any of the performance measures set forth in Section 2(a) or Section 2(b) to no longer be appropriate, then the Committee may adjust such measures, as it deems appropriate in its sole discretion, to carry out the intent of the original terms of this award.

3. Vesting and conversion.

(a) Vesting schedule. Except as otherwise provided in this Award Certificate, you will vest in any PSUs that are earned in accordance with Section 2 on the Scheduled Vesting Date.¹ Except as otherwise provided in this Award Certificate, PSUs will vest only if you

¹ The vesting schedule presented in this form of Award Certificate is indicative. The vesting schedule applicable to awards may vary.

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continue to provide future services to the Firm by remaining in continuous Employment through the Scheduled Vesting Date and providing value added services to the Firm during this timeframe. The special vesting terms set forth in Sections 6, 7 and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death or Disability, (ii) upon your Full Career Retirement, (iii) if the Firm terminates your employment in an involuntary termination under the circumstances described in Section 7 or (iv) upon a Governmental Service Termination. Vested PSUs remain subject to the cancellation and withholding provisions set forth in this Award Certificate.

(b) Conversion. Except as otherwise provided in this Award Certificate, your PSUs, to the extent earned and vested, will convert to shares of Morgan Stanley common stock on the Scheduled Conversion Date, with any fractional shares to be distributed in cash.² The special conversion provisions set forth in Sections 6(a), 6(b) and 8 of this Award Certificate apply (i) if your Employment terminates by reason of your death or you die after termination of your Employment or (ii) upon your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 8(b).

No PSUs will convert to shares of Morgan Stanley common stock until the Committee certifies the extent to which the performance criteria set forth in Section 2 have been satisfied.

The shares delivered upon conversion of PSUs pursuant to this Section 3(b) will not be subject to any transfer restrictions, other than those that may arise under the securities laws, the Firm’s policies or Section 13 below, or to cancellation under the circumstances set forth in Section 11(c), but will be subject to clawback as set forth in Section 3(c).

(c) Clawback. In the event and to the extent the Committee reasonably determines that the performance certified by the Committee, and on the basis of which PSUs were converted to shares of Morgan Stanley common stock, was based on materially inaccurate financial statements or other performance metric criteria, you will be obligated to repay to the Firm:

(i) the number of shares that were delivered upon conversion of your PSUs, less the number of shares that would have been delivered had your PSUs converted to shares based on accurate financial statements or other performance metric criteria (such number of shares determined in each case by the Committee and before satisfaction of tax or other withholding obligations pursuant to Section 12) (the “Clawback Shares”); provided, however, that to the extent that any of the Clawback Shares have been transferred, you shall repay to the Firm an amount equal to the number of Clawback Shares so transferred multiplied by the fair market value, determined using a valuation methodology established by Morgan Stanley, of Morgan Stanley common stock on the date your PSUs converted to shares of Morgan Stanley common stock; plus

² The conversion schedule presented in this form of Award Certificate is indicative. The conversion schedule applicable to awards may vary.

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(ii) any dividend equivalents that were paid on the Clawback Shares when your PSUs converted to shares; plus

(iii) interest on the amounts described in the preceding clauses (i) and (ii) at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date of such conversion through the date preceding the repayment date.

(d) Accelerated conversion. Morgan Stanley shall have no right to accelerate the conversion of any of your PSUs or the payment of any of your dividend equivalents, except to the extent that such acceleration is not prohibited by Section 409A and would not result in your being required to recognize income for United States federal income tax purposes before your PSUs convert to shares of Morgan Stanley common stock or your dividend equivalents are paid or your incurring additional tax or interest under Section 409A. If any PSUs are converted to shares of Morgan Stanley common stock or any dividend equivalents are paid prior to the Scheduled Conversion Date pursuant to this Section 2(d), these shares or dividend equivalents may not be transferable and may remain subject to applicable vesting, cancellation and withholding provisions, as determined by Morgan Stanley.

(e) Rule of construction for timing of conversion. Whenever this Award Certificate provides for your PSUs to convert to shares, or your dividend equivalents to be paid, on the Scheduled Conversion Date or upon a different specified event or date, such conversion or payment will be considered to have been timely made, and neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages based on a delay in conversion of your PSUs (or delivery of Morgan Stanley shares following conversion) or payment of your dividend equivalents, as applicable, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate) in respect of any such delay, as long as conversion or payment, as applicable, is made by December 31 of the year in which occurs the Scheduled Conversion Date or such other specified event or date or, if later, by the 15th day of the third calendar month following such specified event or date. Similarly, neither you nor any of your beneficiaries or your estate shall have any claim against the Firm for damages, and the Firm shall have no liability to you (or to any of your beneficiaries or your estate), based on any acceleration of the conversion of your PSUs or payment of your dividend equivalents pursuant to Section 3(d), as applicable.

4. Special provision for certain employees.

Notwithstanding the other provisions of this Award Certificate, if Morgan Stanley considers you to be one of its executive officers at the time provided for the conversion of your vested PSUs and determines that your compensation may not be fully deductible by virtue of Section 162(m) of the Internal Revenue Code, Morgan Stanley shall delay payment of the nondeductible portion of your compensation, including delaying, to the extent nondeductible, conversion of your vested PSUs and payment of the dividend equivalents, unless the Committee, in its sole discretion, determines not to delay such conversion and payment. This delay will

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continue until your Separation from Service or to the extent permitted under Section 409A, the end of the first earlier taxable year of the Firm as of the last day of which you are no longer an executive officer (subject to earlier conversion in the event of your death as described below).

5. Dividend equivalent payments.

If Morgan Stanley pays a regular or ordinary dividend on its common stock, you will be credited with cash dividend equivalents with respect to your PSU award in an amount equal to the amount of the dividend that would have been paid on a number of shares of Morgan Stanley common stock corresponding to your Target Award. Morgan Stanley will credit the dividend equivalents when it pays the corresponding dividend on its common stock. Your dividend equivalents will vest and be paid at the same time as, and subject to the same vesting and cancellation provisions set forth in this Award Certificate with respect to, your PSUs (provided that, subject to Section 3(e), the dividend equivalents may be paid following the date on which the PSUs convert to shares of Morgan Stanley common stock on the next administratively practicable payroll date). The amount of dividend equivalents paid to you will be based on the number of PSUs that actually convert to shares (and will be paid only if your PSUs convert to shares), provided that such dividend equivalents will be reduced to the extent that application of the performance measures set forth in Section 2 results in your earning less than the Target Award and will be increased to the extent that application of those performance measures results in your earning more than the Target Award. (For example, if you earn 80% of the Target Award based on the performance measures, 20% of the dividend equivalents credited in respect of regular or ordinary dividends will be canceled.) If your PSU award is subject to a pro rata reduction upon the termination of your Employment (as described below) and your award is to be paid on a date following such termination, the amount of dividend equivalents credited to you in respect of regular or ordinary dividends paid on Morgan Stanley common stock following your termination shall continue to be based on the number of shares of Morgan Stanley common stock corresponding to your Target Award, and the amount paid to you (subject to the other terms and conditions of this Award Certificate) shall be the amount calculated as provided above in this Section 5, in each case multiplied by the Pro Ration Fraction. If your PSU award is subject to a pro rata reduction upon the termination of your Employment and is paid out on such termination (as described below), the amount of dividend equivalents paid to you shall be calculated based on the number of shares of Morgan Stanley common stock corresponding to your Target Award (adjusted, if applicable, as provided in this Section 5) multiplied by the Pro Ration Fraction. In the event of a Change in Control, the Committee in its discretion may provide that any dividend equivalents credited in respect of your [year] PSU award following the Change in Control will be based on the number of shares of Morgan Stanley common stock earned as provided in Section 9 (rather than on the number of shares corresponding to your Target Award), it being understood that the amount of dividend equivalents actually paid to you on the Scheduled Conversion Date (or earlier as provided in this Award Certificate in the event of certain terminations of employment) will be calculated as provided in this Section 5.

Notwithstanding the foregoing, in the event your PSU award is canceled in full on or before the Scheduled Conversion Date, all dividend equivalents credited to you in respect of regular or ordinary dividends will be canceled.

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The decision to pay a dividend and, if so, the amount of any such dividend, is determined by Morgan Stanley in its sole discretion. No dividend equivalents will be paid to you on any canceled PSUs.

6. Death, Disability and Full Career Retirement.

The following special earning, vesting and payment terms apply to your PSUs:

(a) Death during Employment. If you die while Employed, then the number of PSUs that will vest, and the number of shares of Morgan Stanley common stock the beneficiary you have designated pursuant to Section 15 or the legal representative of your estate, as applicable, will receive as of the date of your death, will be determined by multiplying (i) the number of shares earned based on the performance measures set forth in Section 2 but applied as though the Performance Period ended with the last Morgan Stanley quarter ending simultaneously with or before the date of your death, for which earnings information for Morgan Stanley has been released as of the date of your death, by (ii) the Pro Ration Fraction, provided that your beneficiary or estate notifies the Firm of your death within 60 days following your death; provided that if your death occurs following the end of the Performance Period, then your beneficiary or estate, as applicable, will receive shares (if any) in an amount and at such time that you would have received such shares had your death not occurred. For example, if your death occurs following the end of Morgan Stanley’s third quarter (but prior to the end of the fourth quarter) and earnings information has not been released by Morgan Stanley for such quarter, the performance measures will be applied as though the Performance Period ended with Morgan Stanley’s second quarter (provided Morgan Stanley has released earning information for such quarter).

After your death, the cancellation provisions set forth in Section 11(c) will no longer apply. The shares delivered upon conversion of PSUs pursuant to this Section 6(a) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies) but will be subject to clawback as set forth in Section 3(c).

(b) Death after termination of Employment. If you die following your termination of Employment as a result of your Disability, Full Career Retirement or an involuntary termination not involving any cancellation event and your [year] PSU award was not canceled in connection with your termination or thereafter, then the number of PSUs that will vest, and the number of shares of Morgan Stanley common stock the beneficiary you have designated pursuant to Section 15 or the legal representative of your estate, as applicable, will receive as of the date of your death, will be determined by multiplying (i) the number of shares that would have been delivered to you based on applying the performance measures set forth in Section 2 as though the Performance Period ended with the last Morgan Stanley quarter ending simultaneously with or before the date of your death for which earnings information for Morgan Stanley has been released as of the date of your death, by (ii) the Pro Ration Fraction determined upon your termination of Employment, provided that your beneficiary or estate notifies the Firm of your death within 60 days following your death; provided that if your death occurs following the end of the Performance Period, then your beneficiary or estate, as applicable, will receive shares (if any) in an amount and at such time that you would have received such shares had your death not occurred.

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After your death, the cancellation provisions set forth in Section 11(c) will no longer apply. The shares delivered upon conversion of PSUs pursuant to this Section 6(b) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies) but will be subject to clawback as set forth in Section 3(c).

(c) Disability. If your Employment terminates due to Disability, then, subject to any transfer restrictions and the cancellation provisions described herein, you will vest in a number of PSUs, and receive a number of shares of Morgan Stanley common stock on the Scheduled Conversion Date, determined by multiplying (i) the number of shares that would have been delivered to you, based on the performance measures described in Section 2, had you remained in Employment through the Scheduled Conversion Date, by (ii) the Pro Ration Fraction. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the Scheduled Conversion Date.

(d) Full Career Retirement. If your employment terminates in a termination that satisfies the definition of Full Career Retirement, then, subject to any transfer restrictions and the cancellation provisions described herein, you will vest in a number of PSUs, and receive a number of shares of Morgan Stanley common stock on the Scheduled Conversion Date, equal to (A) if your Full Career Retirement termination occurs on or before [first anniversary of June 30 following the Date of the Award], the amount determined by multiplying (i) the number of shares that would have been delivered to you, based on the performance measures set forth in Section 2, had you remained in Employment through the Scheduled Conversion Date, by (ii) the Pro Ration Fraction and (B) if your Full Career Retirement termination occurs following [first anniversary of June 30 following the Date of the Award], the number of shares that would have been delivered to you, based on the performance measures set forth in Section 2, had you remained in Employment through the Scheduled Conversion Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the Scheduled Conversion Date.

7. Involuntary termination by the Firm.

If the Firm terminates your employment under circumstances not involving any cancellation event set forth in Section

11(c) and you sign an agreement and release satisfactory to the Firm, then, subject to any transfer restrictions and the cancellation provisions described herein, you will vest in a number of PSUs, and receive a number of shares of Morgan Stanley common stock on the Scheduled Conversion Date, determined by multiplying (i) the number of shares that would have been delivered to you, based on the performance measures set forth in Section 2, had you remained in Employment through the Scheduled Conversion Date, by (ii) the Pro Ration Fraction. If you do not sign such an agreement and release satisfactory to the Firm within the timeframe set by the Firm in connection with your involuntary termination as described in this Section 7, any PSUs that were unvested immediately prior to your termination shall be canceled. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the Scheduled Conversion Date.

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8. Governmental Service.

(a) General treatment of awards upon Governmental Service Termination. If your Employment terminates in a Governmental Service Termination and not involving a cancellation event set forth in Section 11(c), then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 8(c), you will vest in a number of PSUs, and receive as of the date of your Governmental Service Termination a number of shares of Morgan Stanley common stock, determined by multiplying (i) the number of shares earned based on the performance measures set forth in Section 2 but applied as though the Performance Period ended with the last Morgan Stanley quarter ending simultaneously with or before the effective date of your Governmental Service Termination, for which earnings information for Morgan Stanley has been released as of the date of your Governmental Service Termination, by (ii) the Pro Ration Fraction.

(b) General treatment of vested awards upon acceptance of employment at a Governmental Employer following termination of Employment. If (i) your Employment terminates other than in a Governmental Service Termination and not involving a cancellation event set forth in Section 11(c), (ii) your [year] PSU award was not canceled in connection with your termination or thereafter, (iii) following your termination of Employment, you accept employment with a Governmental Employer, and (iv) you present the Firm with satisfactory evidence demonstrating that as a result of such employment the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer, then, provided that you sign an agreement satisfactory to the Firm relating to your obligations pursuant to Section 8(c), you will receive, upon your commencement of employment with such Governmental Employer, the number of shares determined by multiplying (x) the number of shares of Morgan Stanley common stock earned based on the performance measures set forth in Section 2 but applied as though the Performance Period ended with the last Morgan Stanley quarter ending simultaneously with or before your acceptance of employment at a Governmental Employer, for which earnings information for Morgan Stanley has been released as of such date, by (y) the Pro Ration Fraction.

(c) Repayment obligation. Shares delivered upon conversion of PSUs pursuant to Section 8(a) or 8(b) will not be subject to any transfer restrictions (other than those that may arise under the securities laws or the Firm’s policies) but will be subject to clawback as set forth in Section 3(c). Moreover, if you engage in any activity constituting a cancellation event set forth in Section

11(c) within the applicable period of time that would have resulted in cancellation of all or a portion of your PSUs had they not converted to shares pursuant to Section 8(a) or 8(b), you will be required to pay to Morgan Stanley an amount equal to:

(i) the number of PSUs that would have been canceled upon the occurrence of such cancellation event multiplied by the fair market value, determined using a valuation methodology established by Morgan Stanley, of Morgan Stanley common stock on the date your PSUs converted to shares of Morgan Stanley common stock; plus

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(ii) any dividend equivalents that were paid to you on the number of PSUs described in the foregoing clause (i) when your PSUs converted to shares pursuant to Section 8(a) or 8(b); plus

(iii) interest on the amounts described in the preceding clauses (i) and (ii) at the average rate of interest Morgan Stanley paid to borrow money from financial institutions during the period from the date of such conversion through the date preceding the payment date.

9. Change in Control.

In the event of a Change in Control, you will receive on the Scheduled Conversion Date (subject to earlier payment as described in Section 6 upon death and in Section 8 in connection with “Governmental Service” and subject to any transfer restrictions and the cancellation provisions set forth herein) the number of shares earned based on the performance measures in Section 2 but applied as though the Performance Period ended with the last quarter of Morgan Stanley ending simultaneously with or before the effective date of the Change in Control; provided, however, that no such payment shall be made if your Employment terminates following the Change in Control, but prior to the Scheduled Vesting Date, for any reason other than for death, Disability, Full Career Retirement, Governmental Service Termination or an involuntary termination not involving any cancellation event. For the avoidance of doubt, following a Change in Control, the provisions of this Award Certificate setting forth the consequences of a termination of employment shall continue to apply (including all provisions governing the timing of payment), except that whenever this Award Certificate provides for you to receive upon or following a termination of employment a number of shares determined by applying the Pro Ration Fraction, the Pro Ration Fraction shall be applied to the number of shares calculated pursuant to the immediately preceding sentence (e.g., applying the performance measures described herein as though the Performance Period ended with the last quarter of Morgan Stanley ending simultaneously with or before the effective date of the Change in Control).

10. Specified employees.

Notwithstanding any other terms of this Award Certificate, if Morgan Stanley considers you to be one of its “specified employees” as defined in Section 409A at the time of your Separation from Service, any conversion of your PSUs and payment of your accrued dividend equivalents that otherwise would occur upon your Separation from Service (including, without limitation, PSUs whose conversion was delayed due to Section 162(m) of the Internal Revenue Code, as provided in Section 4) will be delayed until the first business day following the date that is six months after your Separation from Service; provided, however, that in the event that your death, your Governmental Service Termination or your employment at a Governmental Employer following your termination of employment with the Firm under circumstances set forth in Section 8(b) occurs at any time after the Date of the Award, conversion and payment will be made in accordance with Section 6 or 8, as applicable.

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11. Cancellation of awards under certain circumstances.

(a) Cancellation of unvested awards. Your unvested PSUs, including any dividend equivalents credited on your PSUs, will be canceled if your Employment terminates for any reason other than death, Disability, a Full Career Retirement, an involuntary termination by the Firm described in Section 7 or a Governmental Service Termination.

(b) General treatment of vested awards. Except as otherwise provided in this Award Certificate, your PSUs, to the extent earned and vested, including any dividend equivalents credited on your PSUs, will convert to shares of Morgan Stanley common stock or be paid, as applicable, on the Scheduled Conversion Date. The cancellation and withholding provisions set forth in this Award Certificate will continue to apply until the Scheduled Conversion Date.

(c) Cancellation of awards under certain circumstances. The cancellation events set forth in this Section 11(c) are designed, among other things, to incentivize compliance with the Firm’s policies (including the Code of Conduct), to protect the Firm’s interests in non-public, confidential and/or proprietary information, products, trade secrets, customer relationships, and other legitimate business interests, and to ensure an orderly transition of responsibilities. This Section 11(c) shall apply notwithstanding any other terms of this Award Certificate (except where sections in this Award Certificate specifically provide that the cancellation events set forth in this Section 11(c) no longer apply).

Notwithstanding Morgan Stanley’s performance based on the measures set forth in Section 2 or your satisfaction of the vesting conditions of this Award Certificate, PSUs (and any dividend equivalents credited thereon) are not earned until the Scheduled Conversion Date (and until you satisfy all obligations you owe to the Firm as set forth in Section 13 below) and, unless prohibited by applicable law, will be canceled prior to the Scheduled Conversion Date in any of the circumstances set forth below in Section

11(c)(1) or (2). Although you will become the beneficial owner of shares of Morgan Stanley common stock following conversion of your PSUs, the Firm may retain custody of your shares following conversion of your PSUs (and any dividend equivalents credited thereon) pending any investigation or other review that impacts the determination as to whether the PSUs (and any dividend equivalents credited thereon) are cancellable under the circumstances set forth below and, in such an instance, the shares underlying such PSUs (and any dividend equivalents credited thereon) shall be forfeited in the event the Firm determines that the PSUs were cancellable under the circumstances set forth below.

(1) Competitive Activity. If you resign Employment and engage in Competitive Activity prior to the Scheduled Conversion Date, your [year] PSU award, whether or not vested and irrespective of Morgan Stanley’s performance based on the measures set forth in Section 2, including any dividend equivalents credited on your PSUs, will be canceled immediately, subject to applicable law.³

³ Provided that, for the Chief Executive Officer only, this provision only applies if such termination is not a termination for Good Reason. For these purposes, Good Reason is defined as a resignation following: (i) his removal from the position of Chief Executive Officer of Morgan Stanley; (ii) his failure to be elected or reelected to the Board of Directors of Morgan Stanley; (iii) a change in his reporting relationship such that he is no longer reporting directly and solely to the Board of Directors of Morgan Stanley; (iv) a material diminution of his duties and responsibilities as the Chief Executive Officer of Morgan Stanley that is not agreed by the parties or the assignment to him of duties materially inconsistent with his position, duties or responsibilities, or any other material action by Morgan Stanley which is materially inconsistent or materially reduces his position, duties or responsibilities; (v) any material breach by Morgan Stanley of its material obligations to provide payments or benefits as required in his offer letter; or (vi) Morgan Stanley’s requiring his principal office to be based at any office or location other than the office or location designated as Morgan Stanley’s principal executive offices.

Notwithstanding the foregoing, he will not be deemed to have resigned for Good Reason unless (i) he has given the Chairman of the Board written notification of his intention to do so, describing the factual basis for “Good Reason” and (ii) the event giving rise to “Good Reason” is not cured by Morgan Stanley within 30 business days after the Chairman of the Board’s receipt of the notice.

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(2) Other Events. If any of the following events occur at any time before the Scheduled Conversion Date, your [year] PSU award, whether or not vested and irrespective of Morgan Stanley’s performance based on the measures set forth in Section 2, including any dividend equivalents credited on your PSUs, will be canceled immediately, subject to applicable law:

(i) Your Employment is terminated for Cause or you engage in conduct constituting Cause (either during or following Employment and whether or not your Employment has been terminated as of the Scheduled Conversion Date);

(ii) Following the termination of your Employment, the Firm determines that your Employment could have been terminated for Cause (for these purposes, “Cause” will be determined without giving consideration to any “cure” period included in the definition of “Cause”);

(iii) You disclose Confidential and Proprietary Information to any unauthorized person outside the Firm, or use or attempt to use Confidential and Proprietary Information other than in connection with the business of the Firm; or you fail to comply with your obligations (either during or after your Employment) under the Firm’s Code of Conduct (and any applicable supplements) or otherwise existing between you and the Firm, relating to Confidential and Proprietary Information or an assignment, procurement or enforcement of rights in Confidential and Proprietary Information;

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(iv) You engage in a Wrongful Solicitation;

(v) You make any Unauthorized Comments;

(vi) You fail or refuse, following your termination of Employment, to cooperate with or assist the Firm in a timely manner in connection with any investigation, regulatory matter, lawsuit or arbitration in which the Firm is a subject, target or party and as to which you may have pertinent information; or

(vii) You resign from your employment with the Firm without having provided the Firm prior written notice of your resignation at least:

(A) 180 days before the date on which your employment with the Firm terminates if you are a member of the Management Committee at the time of notice of your resignation; and

(B) 90 days before the date on which your employment with the Firm terminates if clause (A) of this Section 11(c)(2)(vii) does not apply to you at the time of notice of your resignation.

12. Tax and other withholding obligations.

Any vesting, whether on a Scheduled Vesting Date or some other date, of your PSU award (including dividend equivalents that have been credited in respect of your PSUs), and any conversion of PSUs or crediting or payment of dividend equivalents, shall be subject to the Firm’s withholding of all required United States federal, state, local and foreign income and employment/payroll taxes (including Federal Insurance Contributions Act taxes). You authorize the Firm to withhold such taxes from any payroll or other payment or compensation to you, including by canceling or accelerating payment of a portion of this award (including any dividend equivalents that have been credited on your PSUs) in an amount not to exceed such taxes imposed upon such vesting, conversion, crediting or payment and any additional taxes imposed as a result of such cancellation or acceleration, and to take such other action as the Firm may deem advisable to enable it and you to satisfy obligations for the payment of withholding taxes and other tax obligations, assessments, or other governmental charges, whether of the United States or any other jurisdiction, relating to the vesting or conversion of your PSUs or the crediting or payment of dividend equivalents. However, the Firm may not deduct or withhold such sum from any payroll or any other payment or compensation (including from your PSU award), except to the extent it is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes before your PSUs convert to shares of Morgan Stanley common stock or to incur interest or additional tax under Section 409A.

Pursuant to rules and procedures that Morgan Stanley establishes, you may elect to satisfy the tax or other withholding obligations arising upon conversion of your PSUs by having Morgan Stanley withhold shares of Morgan Stanley common stock in an amount

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sufficient to satisfy the tax or other withholding obligations. Shares withheld will be valued using the fair market value of Morgan Stanley common stock on the date your PSUs convert (or such other appropriate date determined by Morgan Stanley based on local legal, tax or accounting rules and practices) using a valuation methodology established by Morgan Stanley. In order to comply with applicable accounting standards or the Firm’s policies in effect from time to time, Morgan Stanley may limit the amount of shares that you may have withheld.

13. Obligations you owe to the Firm.

As a condition to the earning, payment, conversion or distribution of your award, the Firm may require you to pay such sum to the Firm as may be necessary to satisfy any obligation that you owe to the Firm. Notwithstanding any other provision of this Award Certificate, your award, even if vested or converted, is not earned until after such obligations and any tax withholdings or other deductions required by law are satisfied. Notwithstanding the foregoing, Morgan Stanley may not reduce the number of shares to be delivered upon conversion of your PSUs or the amount of dividend equivalents to be paid in respect of your award or delay the payment of your award to satisfy obligations that you owe to the Firm except (i) to the extent authorized under Section 11, relating to tax and other withholding obligations or (ii) to the extent such reduction or delay is not prohibited by Section 409A and would not cause you to recognize income for United States federal income tax purposes before your PSUs convert to shares of Morgan Stanley common stock or to incur additional tax or interest under Section 409A.

Morgan Stanley’s determination of any amount that you owe the Firm shall be conclusive. The fair market value of Morgan Stanley common stock for purposes of the foregoing provisions shall be determined using a valuation methodology established by Morgan Stanley.

14. Nontransferability.

You may not sell, pledge, hypothecate, assign or otherwise transfer your award, other than as provided in Section 15 (which allows you to designate a beneficiary or beneficiaries in the event of your death) or by will or the laws of descent and distribution. This prohibition includes any assignment or other transfer that purports to occur by operation of law or otherwise. During your lifetime, payments relating to your award will be made only to you.

Your personal representatives, heirs, legatees, beneficiaries, successors and assigns, and those of Morgan Stanley, shall all be bound by, and shall benefit from, the terms and conditions of your award.

15. Designation of a beneficiary.

You may make a written designation of beneficiary or beneficiaries to receive all or part of your award to be delivered or paid under this Award Certificate in the event of your death. To make a beneficiary designation, you must complete and submit the Beneficiary Designation form on the Executive Compensation website at [website redacted].

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Any shares or dividend equivalents that become deliverable upon your death, and as to which a designation of beneficiary is not in effect, will be distributed to your estate.

If you previously filed a designation of beneficiary form for your equity awards with the Executive Compensation Department, such form will also apply to all of your equity awards, including this award. You may replace or revoke your beneficiary designation at any time. If there is any question as to the legal right of any beneficiary to receive shares or payments under this award, Morgan Stanley may determine in its sole discretion to deliver the shares or make the payments in question to your estate. Morgan Stanley’s determination shall be binding and conclusive on all persons and it will have no further liability to anyone with respect to this award.

16. Ownership and possession.

(a) Before conversion. Generally, you will not have any rights as a stockholder in the shares of Morgan Stanley common stock corresponding to your [year] PSU award unless and until your PSUs convert to shares. Without limiting the generality of the preceding sentence, you will not have any voting rights with respect to shares corresponding to your PSU award until PSUs convert to shares.

(b) Following conversion. Subject to Section 11(c), following conversion of your PSUs you will be the beneficial owner of the shares of Morgan Stanley common stock issued to you, and you will be entitled to all rights of ownership, including voting rights and the right to receive cash or stock dividends or other distributions paid on the shares.

(c) Custody of shares. Morgan Stanley may maintain possession of the shares subject to your award until such time as your shares are no longer subject to restrictions on transfer.

17. Securities law compliance matters.

Morgan Stanley may affix a legend to any stock certificates representing shares of Morgan Stanley common stock issued upon conversion of your PSUs (and any stock certificates that may subsequently be issued in substitution for the original certificates). The legend will read substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE WERE ISSUED PURSUANT TO THE MORGAN STANLEY 2007 EQUITY INCENTIVE COMPENSATION PLAN AND ARE SUBJECT TO THE TERMS AND CONDITIONS THEREOF AND OF AN AWARD CERTIFICATE FOR PERFORMANCE STOCK UNITS AND ANY SUPPLEMENT THERETO.

THE SECURITIES REPRESENTED BY THIS STOCK CERTIFICATE MAY BE SUBJECT TO RESTRICTIONS ON TRANSFER BY VIRTUE OF THE SECURITIES ACT OF 1933.

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COPIES OF THE PLAN, THE AWARD CERTIFICATE FOR PERFORMANCE STOCK UNITS AND ANY SUPPLEMENT THERETO ARE AVAILABLE THROUGH THE EXECUTIVE COMPENSATION DEPARTMENT.

Morgan Stanley may advise the transfer agent to place a stop order against such shares if it determines that such an order is necessary or advisable.

18. Compliance with laws and regulation.

Any sale, assignment, transfer, pledge, mortgage, encumbrance or other disposition of shares issued upon conversion of your PSUs (whether directly or indirectly, whether or not for value, and whether or not voluntary) must be made in compliance with any applicable constitution, rule, regulation or policy of any of the exchanges or associations or other institutions with which the Firm or a Related Employer has membership or other privileges, and any applicable law or applicable rule or regulation of any governmental agency, self-regulatory organization or state or federal regulatory body.

19. No entitlements.

(a) No right to continued Employment. This award is not an employment agreement, and nothing in this Award Certificate, the International Supplement, if applicable, or the Plan shall alter your status as an “at-will” employee of the Firm or your employment status at a Related Employer. None of this Award Certificate, the International Supplement, if applicable, or the Plan shall be construed as guaranteeing your employment by the Firm or a Related Employer, or as giving you any right to continue in the employ of the Firm or a Related Employer, during any period (including without limitation the period between the Date of the Award and any of the Scheduled Vesting Date, the Scheduled Conversion Date, or any portion of any of these periods), nor shall they be construed as giving you any right to be reemployed by the Firm or a Related Employer following any termination of Employment.

(b) No right to future awards. This award, and all other awards of PSUs and other equity-based awards, are discretionary. This award does not confer on you any right or entitlement to receive another award of PSUs or any other equity-based award at any time in the future or in respect of any future period.

(c) No effect on future employment compensation. Morgan Stanley has made this award to you in its sole discretion. This award does not confer on you any right or entitlement to receive compensation in any specific amount for any future fiscal year, and does not diminish in any way the Firm’s discretion to determine the amount, if any, of your compensation. This award is not part of your base salary or wages and will not be taken into account in determining any other employment-related rights you may have, such as rights to pension or severance pay.

(d) Award Terms Control. In the event of any conflict between any terms applicable to equity awards in any employment agreement, offer letter or other arrangement that you have entered into with the Firm and the terms set forth in this Award Certificate, the latter shall control.

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20. Consents under local law.

Your award is conditioned upon the making of all filings and the receipt of all consents or authorizations required to comply with, or required to be obtained under, applicable local law.

21. Award modification.

Morgan Stanley reserves the right to modify or amend unilaterally the terms and conditions of your award, without first asking your consent, or to waive any terms and conditions that operate in favor of Morgan Stanley. These amendments may include (but are not limited to) changes that Morgan Stanley considers necessary or advisable as a result of changes in any, or the adoption of any new, Legal Requirement. Morgan Stanley may not modify your award in a manner that would materially impair your rights in your award without your consent; provided, however, that Morgan Stanley may, but is not required to, without your consent, amend or modify your award in any manner that Morgan Stanley considers necessary or advisable to (i) comply with any Legal Requirement, (ii) ensure that your award does not result in an excise or other supplemental tax on the Firm under any Legal Requirement, or (iii) ensure that your award is not subject to United States federal, state or local income tax or any equivalent taxes in territories outside the United States prior to conversion of your PSUs to shares or delivery of such shares following conversion or the crediting or payment of dividends. Morgan Stanley will notify you of any amendment of your award that affects your rights. Any amendment or waiver of a provision of this Award Certificate (other than any amendment or waiver applicable to all recipients generally), which amendment or waiver operates in your favor or confers a benefit on you, must be in writing and signed by the Global Co-Head of Human Resources or the Chief Operating Officer (or if such positions no longer exist, by the holder of an equivalent position) to be effective.

22. Governing law.

This Award Certificate and the related legal relations between you and Morgan Stanley will be governed by and construed in accordance with the laws of the State of New York, without regard to any conflicts or choice of law, rule or principle that might otherwise refer the interpretation of the award to the substantive law of another jurisdiction.

23. Defined terms.

For purposes of this Award Certificate, the following terms shall have the meanings set forth below:

(a) “Board” means the Board of Directors of Morgan Stanley.

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(b) “Cause” means:

(1) any act or omission which constitutes a breach of your obligations to the Firm, including, without limitation, (A) your failure to comply with any notice or non-solicitation restrictions that may be applicable to you or (B) your failure to comply with the Firm’s compliance, ethics or risk management standards, or your failure or refusal to perform satisfactorily any duties reasonably required of you, which breach, failure or refusal (if susceptible to cure) is not corrected (other than failure to correct by reason of your incapacity due to physical or mental illness) within ten (10) business days after written notification thereof to you by the Firm;

(2) your commission of any dishonest or fraudulent act, or any other act or omission, which has caused or may reasonably be expected to cause injury to the interest or business reputation of the Firm; or

(3) your violation of any securities, commodities or banking laws, any rules or regulations issued pursuant to such laws, or rules or regulations of any securities or commodities exchange or association of which the Firm is a member or of any policy of the Firm relating to compliance with any of the foregoing.

(c) A “Change in Control” shall be deemed to have occurred if any of the following conditions shall have been satisfied:

(1) any one person or more than one person acting as a group (as determined under Section 409A), other than (A) any employee plan established by Morgan Stanley or any of its Subsidiaries, (B) Morgan Stanley or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by stockholders of Morgan Stanley in substantially the same proportions as their ownership of Morgan Stanley, is or becomes, during any 12-month period, the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person(s) any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of the total voting power of the stock of Morgan Stanley; provided, however, that the provisions of this subsection (1) are not intended to apply to or include as a Change in Control any transaction that is specifically excepted from the definition of Change in Control under subsection (3) below;

(2) a change in the composition of the Board such that, during any 12-month period, the individuals who, as of the beginning of such period, constitute the Board (the “Existing Board”) cease for any reason to constitute at least 50% of the Board; provided, however, that any individual becoming a member of the Board subsequent to the beginning of such period whose election, or nomination for election by Morgan Stanley’s stockholders, was approved by a vote of at least a majority of the directors immediately prior to the date of such appointment or election shall be considered as though such individual were a member of the Existing Board;

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(3) the consummation of a merger or consolidation of Morgan Stanley with any other corporation or other entity, or the issuance of voting securities in connection with a merger or consolidation of Morgan Stanley (or any direct or indirect subsidiary of Morgan Stanley) pursuant to applicable stock exchange requirements; provided that immediately following such merger or consolidation the voting securities of Morgan Stanley outstanding immediately prior thereto do not continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity of such merger or consolidation or parent entity thereof) 50% or more of the total voting power of Morgan Stanley stock (or if Morgan Stanley is not the surviving entity of such merger or consolidation, 50% or more of the total voting power of the stock of such surviving entity or parent entity thereof); and provided further that a merger or consolidation effected to implement a recapitalization of Morgan Stanley (or similar transaction) in which no person (as determined under Section 409A) is or becomes the beneficial owner, directly or indirectly, of securities of Morgan Stanley (not including in the securities beneficially owned by such person any securities acquired directly from Morgan Stanley or its affiliates other than in connection with the acquisition by Morgan Stanley or its affiliates of a business) representing 50% or more of either the then outstanding shares of Morgan Stanley common stock or the combined voting power of Morgan Stanley’s then outstanding voting securities shall not be considered a Change in Control; or

(4) the complete liquidation of Morgan Stanley or the sale or disposition by Morgan Stanley of all or substantially all of Morgan Stanley’s assets in which any one person or more than one person acting as a group (as determined under Section 409A) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from Morgan Stanley that have a total gross fair market value equal to more than 50% of the total gross fair market value of all of the assets of Morgan Stanley immediately prior to such acquisition or acquisitions.

Notwithstanding the foregoing, (x) no Change in Control shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of Morgan Stanley common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns substantially all of the assets of Morgan Stanley immediately prior to such transaction or series of transactions and (y) no event or circumstances described in any of clauses (1) through (4) above shall constitute a Change in Control unless such event or circumstances also constitute a change in the ownership or effective control of Morgan Stanley, or in the ownership of a substantial portion of Morgan Stanley’s assets, as defined in Section 409A. In addition, no Change in Control shall be deemed to have occurred upon the acquisition of additional control of Morgan Stanley by any one person or more than one person acting as a group that is considered to effectively control Morgan Stanley.

For purposes of the provisions of this Award Certificate, terms used in the definition of a Change in Control shall be as defined or interpreted pursuant to Section 409A.

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(d) “Committee” means the Compensation, Management Development and Succession Committee of the Board, any successor committee thereto or any other committee of the Board appointed by the Board with the powers of the Committee under the Plan, or any subcommittee appointed by such Committee.

(e) “Competitive Activity” means:

(1) becoming, or entering into any arrangement as, an employee, officer, partner, member, proprietor, director, independent contractor, consultant, advisor, representative or agent of, or serving in any similar position or capacity with, a Competitor, where you will be responsible for providing, or managing or supervising others who are providing, services (x) that are similar or substantially related to the services that you provided to the Firm, or (y) that you had direct or indirect managerial or supervisory responsibility for at the Firm, or (z) that call for the application of the same or similar specialized knowledge or skills as those utilized by you in your services for the Firm, in each such case, at any time during the year preceding the termination of your employment with the Firm; or

(2) either alone or in concert with others, forming, or acquiring a 5% or greater equity ownership, voting interest or profit participation in, a Competitor.

(f) “Comparison Group” means Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, UBS and Wells Fargo.

(g) “Competitor” means any corporation, partnership or other entity that competes, or that owns a significant interest in any corporation, partnership or other entity that competes, with any business activity the Firm engages in, or that you reasonably knew or should have known that the Firm was planning to engage in, at the time of the termination of your Employment.

(h) “Confidential and Proprietary Information” means any information that is classified as confidential in the Firm’s Global Policy on Confidential Information or that may have intrinsic value to the Firm, the Firm’s clients or other parties with which the Firm has a relationship, or that may provide the Firm with a competitive advantage, including, without limitation, any trade secrets; inventions (whether or not patentable); formulas; flow charts; computer programs; access codes or other systems information; algorithms; technology and business processes; business, product or marketing plans; sales and other forecasts; financial information; client lists or other intellectual property; information relating to compensation and benefits; and public information that becomes proprietary as a result of the Firm’s compilation of that information for use in its business, provided that such Confidential and Proprietary Information does not include any information which is available for use by the general public or is generally available for use within the relevant business or industry other than as a result of your action. Confidential and Proprietary Information may be in any medium or form, including, without limitation, physical documents, computer files or discs, electronic communications, videotapes, audiotapes, and oral communications.

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(i) “Date of the Award” means [insert grant date, which typically will coincide approximately with the end of the fiscal year in respect of which the award is made].

(j) “Disability” means any condition that would qualify for a benefit under any group long-term disability plan maintained by the Firm and applicable to you.

(k) “Employed” and “Employment” refer to employment with the Firm and/or Related Employment.

(l) The “Firm” means Morgan Stanley (including any successor thereto) together with its subsidiaries and affiliates. For purposes of the definitions of “Cause,” “Confidential and Proprietary Information,” “Unauthorized Comments” and “Wrongful Solicitation” set forth in this Award Certificate and Section 11(c)(2)(vi) of this Award Certificate, references to the “Firm” shall refer severally to the Firm as defined in the preceding sentence and your Related Employer, if any. For purposes of the cancellation provisions set forth in this Award Certificate relating to disclosure or use of Confidential and Proprietary Information, references to the “Firm” shall refer to the Firm as defined in the second preceding sentence or your Related Employer, as applicable.

(m) “Full Career Retirement” has the meaning attributed to such term in your employment agreement or offer letter with the Firm or, if you are not party to an employment agreement or offer letter with the Firm (or if such agreement or letter does not include a definition of “Full Career Retirement”), means the termination of your Employment by you or by the Firm for any reason other than under circumstances involving any cancellation event described in Section 11(c), and other than due to your death or Disability, a Governmental Service Termination or pursuant to a Qualifying Termination, on or after the date on which:

(1) you have attained age 50 and completed at least 12 years of service as a [    ]⁴ of the Firm or equivalent officer title; or

(2) you have attained age 50 and completed at least 15 years of service as an officer of the Firm at the level of [    ]⁵ or above; or

(3) you have completed at least 20 years of service with the Firm; or

(4) you have attained age 55 and have completed at least 5 years of service with the Firm and the sum of your age and years of service equals or exceeds 65.⁶

For the purposes of the foregoing definition, service with the Firm will include any period of service with the following entities and any of their predecessors:

(i) AB Asesores (“ABS”) prior to its acquisition by the Firm (provided that only years of service as a partner of ABS shall count towards years of service as an officer);

⁴ Specified officer title(s) in one or more specified business units.

⁵ Specified officer title(s) in one or more specified business units.

⁶ Age and service conditions specified in clauses (1) through (4) may vary from year to year.

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(ii) Morgan Stanley Group Inc. and its subsidiaries (“MS Group”) prior to the merger with and into Dean Witter, Discover & Co.;

(iii) Miller Anderson & Sherrerd, L.L.P. prior to its acquisition by MS Group;

(iv) Van Kampen Investments Inc. and its subsidiaries prior to its acquisition by MS Group;

(v) FrontPoint Partners LLC and its subsidiaries prior to its acquisition by the Firm; and

(vi) Dean Witter, Discover & Co. and its subsidiaries (“DWD”) prior to the merger of Morgan Stanley Group Inc. with and into Dean Witter, Discover & Co.;

provided that, in the case of an employee who has transferred employment from DWD to MS Group or vice versa, a former employee of DWD will receive credit for employment with DWD only if he or she transferred directly from DWD to Morgan Stanley & Co. Incorporated or its affiliates subsequent to February 5, 1997, and a former employee of MS Group will receive credit for employment with MS Group only if he or she transferred directly from MS Group to Morgan Stanley DW Inc. or its affiliates subsequent to February 5, 1997.

(n) “Governmental Employer” means a governmental department or agency, self-regulatory agency or other public service employer.

(o) “Governmental Service Termination” means the termination of your Employment due to your commencement of employment at a Governmental Employer; provided that you have presented the Firm with satisfactory evidence demonstrating that as a result of such new employment, the divestiture of your continued interest in Morgan Stanley equity awards or continued ownership of Morgan Stanley common stock is reasonably necessary to avoid the violation of U.S. federal, state or local or foreign ethics law or conflicts of interest law applicable to you at such Governmental Employer.

(p) “Internal Revenue Code” means the United States Internal Revenue Code of 1986, as amended, and the rules, regulations and guidance thereunder.

(q) “Legal Requirement” means any law, regulation, ruling, judicial decision, accounting standard, regulatory guidance or other legal requirement.

(r) “Management Committee” means the Morgan Stanley Management Committee and any successor or equivalent committee.

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(s) “MS Average ROE” means Morgan Stanley’s return on average common shareholders’ equity excluding the impact of debt valuation adjustments during the years included in the Performance Period.

(t) “Performance Period” means three-year period consisting of the reporting years of Morgan Stanley of [year of the Date of the Award, first year following the Date of the Award and second year following the Date of the Award].

(u) “Plan” means the 2007 Equity Incentive Compensation Plan, as amended.

(v) “Pro Ration Fraction” means a fraction, the numerator of which is the number of days starting with and inclusive of [January 1 immediately preceding the Date of the Award] and ending on the effective date of your termination of Employment and the denominator of which is the number of days in the period beginning on [January 1 immediately preceding the Date of the Award] and ending on the Scheduled Vesting Date.

(w) “Related Employment” means your employment with an employer other than the Firm (such employer, herein referred to as a “Related Employer”), provided that: (i) you undertake such employment at the written request or with the written consent of Morgan Stanley’s Global Co-Head of Human Resources (or if such position no longer exists, the holder of an equivalent position); (ii) immediately prior to undertaking such employment you were an employee of the Firm or were engaged in Related Employment (as defined herein); and (iii) such employment is recognized by the Firm in its discretion as Related Employment; and, provided further that the Firm may (1) determine at any time in its sole discretion that employment that was recognized by the Firm as Related Employment no longer qualifies as Related Employment, and (2) condition the designation and benefits of Related Employment on such terms and conditions as the Firm may determine in its sole discretion. The designation of employment as Related Employment does not give rise to an employment relationship between you and the Firm, or otherwise modify your and the Firm’s respective rights and obligations.

(x) “Scheduled Conversion Date” means a date during [third year following the Date of the Award] determined by the Committee.

(y) “Scheduled Vesting Date” means [January 1 of the third year following the Date of the Award].

(z) “Section 409A” means Section 409A of the Internal Revenue Code and any regulations thereunder.

(aa) “Separation from Service” means a separation from service with the Firm for purposes of Section 409A determined using the default provisions set forth in Treasury Regulation §1.409A-1(h) or any successor regulation thereto. For purposes of this definition, Morgan Stanley’s subsidiaries and affiliates include (and are limited to) any corporation that is in the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as Morgan Stanley and any trade or business that is under common control with Morgan Stanley (within the meaning of Section 414(c) of the Internal Revenue Code), determined in each case in accordance with the default provisions set forth in Treasury Regulation §1.409A-1(h)(3).

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(bb) “Target Award” means the number of PSUs that has been communicated to you separately and that will be earned, subject to the other terms and conditions of this Award Certificate, if each of the multipliers set forth in Section 2(a) and 2(b) equals 1.

(cc) “Total Shareholder Return” or “TSR”, as it applies to Morgan Stanley’s common stock and each member of the Comparison Group’s common stock or American depository receipts (“ADRs”), as applicable, means the percentage change in value (positive or negative) over the Performance Period as measured by dividing (i) the sum of (A) the cumulative value of dividends and other distributions in respect of the common stock or ADR for the Performance Period, assuming dividend reinvestment, and (B) the difference (positive or negative) between the common stock or ADR price on the first and last days of the Performance Period (calculated on the basis of the average of the adjusted closing prices over the 30-day trading period immediately prior to the first day of the Performance Period and the average of the adjusted closing prices over the 30-day trading period ending on the last day of the Performance Period), by (ii) the common stock or ADR price on the first day of the Performance Period, calculated on the basis of the average of the adjusted closing prices over the 30-day trading period immediately prior to the first day of the Performance Period. For members of the Comparison Group, Total Shareholder Return will be measured over the period of three consecutive calendar years starting with [January 1 immediately preceding the Date of the Award].

(dd) You will be deemed to have made “Unauthorized Comments” about the Firm if, while Employed or following the termination of your Employment, you make, directly or indirectly, any negative, derogatory, disparaging or defamatory comment, whether written, oral or in electronic format, to any reporter, author, producer or similar person or entity or to any general public media in any form (including, without limitation, books, articles or writings of any other kind, as well as film, videotape, audio tape, computer/Internet format or any other medium) that concerns directly or indirectly the Firm, its business or operations, or any of its current or former agents, employees, officers, directors, customers or clients.

(ee) A “Wrongful Solicitation” occurs upon either of the following events:

(1) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 180 days after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you hire or solicit, recruit, induce, entice, influence or encourage any Firm employee to leave the Firm or become hired or engaged by another firm; provided, however, that this clause shall apply only to employees with whom you worked or had professional or business contact, or who worked in or with your business unit, during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment; or

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(2) while Employed, including during any notice period applicable to you in connection with the termination of your Employment, or within 90 days (180 days if you are a member of the Management Committee at the time of notice of termination) after the termination of your Employment, directly or indirectly in any capacity (including through any person, corporation, partnership or other business entity of any kind), you solicit or entice away or in any manner attempt to persuade any client or customer, or prospective client or customer, of the Firm (i) to discontinue or diminish his, her or its relationship or prospective relationship with the Firm or (ii) to otherwise provide his, her or its business to any person, corporation, partnership or other business entity which engages in any line of business in which the Firm is engaged (other than the Firm); provided, however, that this clause shall apply only to clients or customers, or prospective clients or customers, that you worked for on an actual or prospective project or assignment during any notice period applicable to you in connection with the termination of your Employment or during the 180 days preceding notice of the termination of your Employment.

IN WITNESS WHEREOF, Morgan Stanley has duly executed and delivered this Award Certificate as of the Date of the Award.

MORGAN STANLEY

/s/

[Name]

[Title]

26

EX-12

Exhibit 12

Morgan Stanley

Ratio of Earnings to Fixed Charges

and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends

(dollars in millions)

	Three  Months Ended March  31, 2010		2009		Fiscal 2008		Fiscal 2007		Fiscal 2006		Fiscal 2005		One Month Ended December  31, 2008
Ratio of Earnings to Fixed Charges
Earnings:
Income (loss) before income taxes(1)	$	2,582	$	808	$	1,396	$	3,192	$	8,564	$	5,340	$	(2,028	)
Add: Fixed charges, net		1,440		7,144		36,709		58,320		41,984		24,594		1,163
Income (loss) before income taxes and fixed charges, net	$	4,022	$	7,952	$	38,105	$	61,512	$	50,548	$	29,934	$	(865	)
Fixed Charges:
Total interest expense	$	1,368	$	6,893	$	36,485	$	58,108	$	41,876	$	24,466	$	1,143
Interest factor in rents		72		251		224		212		108		128		20
Total fixed charges	$	1,440	$	7,144	$	36,709	$	58,320	$	41,984	$	24,594	$	1,163
Ratio of earnings to fixed charges		2.8		1.1		1.0		1.1		1.2		1.2		*
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Earnings:
Income (loss) before income taxes(1)	$	2,582	$	808	$	1,396	$	3,192	$	8,564	$	5,340	$	(2,028	)
Add: Fixed charges, net		1,440		7,144		36,709		58,320		41,984		24,594		1,163
Income (loss) before income taxes and fixed charges, net	$	4,022	$	7,952	$	38,105	$	61,512	$	50,548	$	29,934	$	(865	)
Fixed Charges:
Total interest expense	$	1,368	$	6,893	$	36,485	$	58,108	$	41,876	$	24,466	$	1,143
Interest factor in rents		72		251		224		212		108		128		20
Preferred stock dividends		266		2,041		112		86		27		—		495
Total fixed charges and preferred stock dividends	$	1,706	$	9,185	$	36,821	$	58,406	$	42,011	$	24,594	$	1,658
Ratio of earnings to fixed charges and preferred stock dividends		2.4		0.9		1.0		1.1		1.2		1.2		*

(1) Income (loss) from continuing operations before income taxes does not include dividends on preferred securities subject to mandatory redemption, gain (loss) on discontinued operations, cumulative effect of accounting change (net), non-controlling interests and income or loss from equity investees.

Fixed charges consist of interest cost, including interest on deposits, interest on discontinued operations, dividends on preferred securities subject to mandatory redemption, and that portion of rent expense to be representative of the interest factor. Fixed charges do not include interest expense on uncertain tax liabilities as the Company records these amounts within the Provision for income taxes.

The preferred stock dividend amounts represent pre-tax earnings required to cover dividends on preferred stock.

* The earnings for the one month ended December 31, 2008 were inadequate to cover total fixed charges and total fixed charges and preferred stock dividends.

The coverage deficiencies for total fixed charges for the one month ended December 31, 2008 were $2,028.

The coverage deficiencies for total fixed charges and preferred stock dividends for the one month ended December 31, 2008 were $2,523.

EX-15

Exhibit 15

To the Board of Directors and Shareholders of Morgan Stanley:

We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited condensed consolidated financial information of Morgan Stanley and subsidiaries as of March 31, 2010 and for the three-month periods ended March 31, 2010 and March 31, 2009, and have issued our report dated May 7, 2010 (which report included an explanatory paragraph regarding the adoption of Financial Accounting Standards Board accounting guidance that addresses transfers of financial assets and extinguishments of liabilities and consolidation of variable interest entities.) As indicated in such report, because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, is incorporated by reference in the following Registration Statements of Morgan Stanley:

Filed on Form S-3:

Registration Statement No. 33-57202

Registration Statement No. 33-60734

Registration Statement No. 33-89748

Registration Statement No. 33-92172

Registration Statement No. 333-07947

Registration Statement No. 333-27881

Registration Statement No. 333-27893

Registration Statement No. 333-27919

Registration Statement No. 333-46403

Registration Statement No. 333-46935

Registration Statement No. 333-76111

Registration Statement No. 333-75289

Registration Statement No. 333-34392

Registration Statement No. 333-47576

Registration Statement No. 333-83616

Registration Statement No. 333-106789

Registration Statement No. 333-117752

Registration Statement No. 333-129243

Registration Statement No. 333-131266

Registration Statement No. 333-155622

Registration Statement No. 333-156423

Filed on Form S-4:

Registration Statement No. 333-25003

Filed on Form S-8:

Registration Statement No. 33-63024

Registration Statement No. 33-63026

Registration Statement No. 33-78038

Registration Statement No. 33-79516

Registration Statement No. 33-82240

Registration Statement No. 33-82242

Registration Statement No. 33-82244

Registration Statement No. 333-04212

Registration Statement No. 333-28141

Registration Statement No. 333-28263

Registration Statement No. 333-62869

Registration Statement No. 333-78081

Registration Statement No. 333-95303

Registration Statement No. 333-85148

Registration Statement No. 333-85150

Registration Statement No. 333-108223

Registration Statement No. 333-142874

Registration Statement No. 333-146954

Registration Statement No. 333-159503

Registration Statement No. 333-159504

Registration Statement No. 333-159505

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

/s/ Deloitte & Touche

New York, New York

May 7, 2010

EX-31.1

EXHIBIT 31.1

Certification

I, James P. Gorman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2010

/s/    JAMES P. GORMAN

James P. Gorman

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification

I, Ruth Porat, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Morgan Stanley;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2010

/s/    RUTH PORAT

Ruth Porat

Executive Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarter ended March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James P. Gorman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    JAMES P. GORMAN

James P. Gorman

President and Chief Executive Officer

Dated: May 7, 2010

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Morgan Stanley (the “Company”) on Form 10-Q for the quarter ended March 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ruth Porat, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/    RUTH PORAT

Ruth Porat

Executive Vice President and

Chief Financial Officer

Dated: May 7, 2010