Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934 (Amendment No.        )

Filed by the Registrant þ

Filed by a Party other than the Registrant ¨

Check the appropriate box:

MORGAN STANLEY

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Table of Contents

Notice of 2007 Annual Meeting of Shareholders

2000 Westchester Avenue

Purchase, New York

April 10, 2007, 9:00 a.m., local time

February 23, 2007

Fellow shareholder:

I cordially invite you to attend Morgan Stanley’s 2007 annual meeting of shareholders to:

Our Board of Directors recommends that you vote “FOR” the election of directors, the ratification of the appointment of the auditor and the approval of the 2007 Equity Incentive Compensation Plan and “AGAINST” the shareholder proposals.

We enclose our proxy statement, our annual report and a proxy card. Please submit your proxy. Thank you for your support of Morgan Stanley.

Very truly yours,

John J. Mack

Chairman and Chief Executive Officer

Table of Contents

Table of Contents

i

Table of Contents

ii

Table of Contents

Morgan Stanley

1585 Broadway

New York, New York 10036

February 23, 2007

Proxy Statement

We are sending you this proxy statement in connection with the solicitation of proxies by our Board of Directors for the 2007 annual meeting of shareholders. We are mailing this proxy statement and the accompanying form of proxy to shareholders on or about February 24, 2007. In this proxy statement, we refer to Morgan Stanley as the “Company,” “we” or “us” and the Board of Directors as the “Board.” When we refer to Morgan Stanley’s fiscal year, we mean the twelve-month period ending November 30 of the stated year (for example, fiscal 2006 is December 1, 2005 through November 30, 2006).

Annual meeting information

Date and location.    We will hold the annual meeting on Tuesday, April 10, 2007 at 9:00 a.m., local time, at our offices at 2000 Westchester Avenue, Purchase, New York.

Admission.    Only record or beneficial owners of Morgan Stanley’s common stock or their proxies may attend the annual meeting in person. When you arrive at the annual meeting, you must present photo identification, such as a driver’s license. Beneficial owners must also provide evidence of stock holdings, such as a recent brokerage account or bank statement.

Electronic access.    You may listen to the meeting at www.morganstanley.com. Please go to our website prior to the annual meeting to register.

Voting information

Record date.    The record date for the annual meeting is February 9, 2007. You may vote all shares of Morgan Stanley’s common stock that you owned as of the close of business on that date. Each share of common stock entitles you to one vote on each matter voted on at the annual meeting. On the record date, 1,064,566,982 shares of common stock were outstanding. We need a majority of the shares of common stock outstanding on the record date present, in person or by proxy, to hold the annual meeting.

Confidential voting.    Our bylaws provide that your vote is confidential and will not be disclosed to any officer, director or employee, except in certain limited circumstances such as when you request or consent to disclosure. Voting of the shares held in the Morgan Stanley 401(k) Plan (401(k) Plan) and the Employee Stock Ownership Plan (ESOP) also is confidential.

Submitting voting instructions for shares held through a broker.    If you hold shares through a broker, follow the voting instructions you receive from your broker. If you want to vote in person at the annual meeting, you must obtain a legal proxy from your broker and present it at the annual meeting. If you do not submit voting instructions to your broker, your broker may still be permitted to vote your shares. New York Stock Exchange (NYSE) member brokers may vote your shares as described below.

1

Table of Contents

If you do not submit voting instructions and your broker does not have discretion to vote your shares on a matter, your shares will not be counted in determining the outcome of the vote on that matter.

Submitting voting instructions for shares held in your name.    If you hold shares as a record holder, you may vote by submitting a proxy for your shares by mail, telephone or internet as described on the proxy card. If you submit your proxy via the internet, you may incur costs such as cable, telephone and internet access charges. Submitting your proxy will not limit your right to vote in person at the annual meeting. A properly completed and submitted proxy will be voted in accordance with your instructions, unless you subsequently revoke your instructions. If you submit a signed proxy card without indicating your vote, the person voting the proxy will vote your shares according to the Board’s recommendations.

Submitting voting instructions for shares held in employee plans.    If you hold shares in, or have been awarded stock units under, certain employee plans, you will receive directions on how to submit your voting instructions. Shares held in the following employee plans also are subject to the following rules.

Revoking your proxy.    You can revoke your proxy at any time before your shares are voted by (1) delivering a written revocation notice prior to the annual meeting to Thomas R. Nides, Secretary, Morgan Stanley, 1585 Broadway, New York, New York 10036; (2) submitting a later proxy that we receive no later than the conclusion of voting at the annual meeting; or (3) voting in person at the annual meeting. Attending the annual meeting does not revoke your proxy unless you vote in person at the meeting.

Votes required to elect directors. Each director will be elected by a majority of the votes cast with respect to such director. A “majority of the votes cast” means that the number of votes cast “for” a director exceeds the number of votes cast “against” that director. Under Delaware law, if the director is not elected at the annual meeting, the director will continue to serve on the Board as a “holdover director.” As required by the Company’s bylaws, each director has submitted an irrevocable letter of resignation as director that becomes effective if he or she is not elected by shareholders and the Board accepts the resignation. If a director is not elected, the Nominating and Governance Committee will consider the director’s resignation and recommend to the Board whether to accept or reject the resignation. The Board will decide whether to accept or reject the resignation and

2

Table of Contents

publicly disclose its decision and, if it rejects the resignation, the rationale behind the decision within 90 days after the election results are certified.

Votes required to adopt other proposals.    The ratification of Deloitte & Touche’s appointment, the approval of the Plan and the approval of the shareholder proposals each requires the affirmative vote of a majority of the shares of common stock represented at the annual meeting and entitled to vote thereon.

“Abstaining.” You may vote “abstain” for any nominee in the election of directors and on the other proposals. Shares voting “abstain” on any nominee for director will be excluded entirely from the vote and will have no effect on the election of directors. Shares voting “abstain” on the other proposals will be counted as present at the annual meeting for purposes of that proposal and your abstention will have the effect of a vote against the proposal.

Item 1—Election of directors

Our Board currently has twelve (12) directors. The entire Board stands for election at each annual meeting of shareholders. Each director holds office until his or her successor has been duly elected and qualified or the director’s earlier resignation, death or removal. The nominees are all current directors of Morgan Stanley, and each nominee has indicated that he or she will serve if elected. We do not anticipate that any nominee will be unable or unwilling to stand for election, but if that happens, your proxy will be voted for another person nominated by the Board.

		Roy J. Bostock (66).     Chairman of The Partnership for a Drug-Free America (since 2002). Chairman of the Committee for Economic Development (2002 to 2005). Chairman of B|Com3 Group, Inc., an advertising and marketing services firm that is now part of the Publicis Groupe S.A. (2000 to 2001). Chairman and Chief Executive Officer, D’Arcy, Masius Benton & Bowles (1990 to 2000).   Director since:    2005   Other directorships:    Northwest Airlines Corporation and Yahoo! Inc.
		Erskine B. Bowles (61).    President of the University of North Carolina (since January 2006). Senior advisor (since 2001) and Managing Director (1999 to 2001) of Carousel Capital LLC, a merchant bank. General Partner at the private investment firm of Forstmann Little & Company (1999 to 2001).   Director since:    2005   Other directorships:    General Motors Corporation and Cousins Properties Incorporated
		Howard J. Davies (56).    The Director, London School of Economics and Political Science (since September 2003). Chairman of the UK Financial Services Authority (August 1997 to September 2003). Deputy Governor, the Bank of England (September 1995 to August 1997).   Director since:    2004

3

Table of Contents

		C. Robert Kidder (62).    Chairman & CEO, 3Stone Advisors LLC, a private investment firm (since August 2006). Principal, Stonehenge Partners, Inc., a private investment firm (April 2004 to July 2006). President (November 2001 to March 2003) of Borden Capital, Inc., a company that provided financial and strategic advice to the Borden family of companies. Chairman of the Board (January 1995 to August 2004) and Chief Executive Officer (January 1995 to March 2002) of Borden Chemical, Inc. (formerly Borden, Inc.), a forest products and industrial chemicals company.   Director since:    1993   Other directorships:    Schering-Plough Corporation
		John J. Mack (62).    Chairman of the Board and Chief Executive Officer (since June 2005). Chairman of Pequot Capital Management (June 2005). Co-Chief Executive Officer of Credit Suisse Group (January 2003 to June 2004). President, Chief Executive Officer and Director of Credit Suisse First Boston (July 2001 to June 2004). President, Chief Operating Officer and Director of Morgan Stanley (May 1997 to March 2001).   Director since:    2005
		Donald T. Nicolaisen (62).    Chief Accountant, Securities and Exchange Commission (September 2003 to November 2005). Partner (1978 to September 2003) of PricewaterhouseCoopers, an accounting firm.   Director since: 2006   Other directorships:    MGIC Investment Corporation, Verizon Communications Inc. and Zurich Financial Services
		Charles H. Noski (54).    Corporate Vice President and Chief Financial Officer (December 2003 to March 2005) and Director (November 2002 to May 2005) of Northrop Grumman Corporation. Senior advisor to The Blackstone Group (March 2003 to November 2003). Vice Chairman of the Board (July 2002 to November 2002), Vice Chairman of the Board and Chief Financial Officer (February 2002 to July 2002) and Senior Executive Vice President and Chief Financial Officer (December 1999 to February 2002) of AT&T Corp. President, Chief Operating Officer and Director, Hughes Electronics Corporation (October 1997 to December 1999).   Director since:    2005   Other directorships:    Microsoft Corporation and Air Products and Chemicals, Inc.
		Hutham S. Olayan (53).    President, Chief Executive Officer and Director of Olayan America Corporation, the Americas-based arm of The Olayan Group (since 1985). Director of The Olayan Group, a private, multinational enterprise with diversified businesses and investments in the Middle East and globally (since 1981).   Director since:    2006

4

Table of Contents

		Charles E. Phillips, Jr. (47).     President and Director (since January 2004) and Executive Vice President, Strategy, Partnerships, and Business Development (May 2003 to January 2004) of Oracle Corporation, a software company. Managing Director, Morgan Stanley (December 1996 to May 2003).   Director since:    2006   Other directorships:    Oracle Corporation and Viacom, Inc.
		O. Griffith Sexton (63).     Advisory director of Morgan Stanley (since 1995). Adjunct professor of finance at Columbia Business School (since 1995) and visiting lecturer at Princeton University (since 2000).   Director since:    2005   Other directorships:    Investor AB
		Laura D. Tyson (59).     Professor, Walter A. Haas School of Business, University of California at Berkeley (since January 2007). Dean of the London Business School (January 2002 to December 2006). Dean (July 1998 to December 2001) and Class of 1939 Professor in Economics and Business Administration (January 1997 to July 1998) at the Walter A. Haas School of Business, University of California, Berkeley. National Economic Advisor to the President and Chair, President’s National Economic Council (February 1995 to December 1996).   Director since:    1997   Other directorships:    Eastman Kodak Company and AT&T Inc.
		Klaus Zumwinkel (63).     Chairman of the Board of Management, Deutsche Post AG, a global corporation comprised of four business divisions, including mail, express (including DHL Worldwide), logistics and financial services (since 1990).   Director since:    2004   Other directorships:    Deutsche Lufthansa AG (Supervisory Board), Deutsche Telekom AG (Chairman, Supervisory Board), Karstadt Quelle AG (Supervisory Board) and Deutsche Postbank AG (Chairman, Supervisory Board)

Our Board recommends a vote “FOR” the election of all twelve (12) nominees. Proxies solicited by our Board will be voted “FOR” these nominees unless otherwise instructed.

New director.    The Nominating and Governance Committee recommends director candidates to the full Board after receiving input from all directors. The Committee members, other Board members, and senior management discussed potential candidates during this search process.

The Board elected Mr. Phillips to the Board effective June 22, 2006. Mr. Mack and Ms. Tyson recommended Mr. Phillips as a director candidate to the Nominating and Governance Committee. The Committee members met or spoke with Mr. Phillips to assess him as a director candidate. The Committee unanimously recommended to the full Board that Mr. Phillips be elected as a director. The Board followed the Committee’s recommendation.

5

Table of Contents

Board meetings and committees.    Our Board met 13 times during fiscal 2006. Each director attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held while the director was a member. The Board’s standing committees include the following:

⁽¹⁾ The following changes occurred in the membership of the Audit Committee during fiscal 2006. On March 10, 2006, Mr. Noski became Committee Chair, Mr. Kidder concluded service as Committee Chair and Dr. Zumwinkel concluded Committee service. On April 4, 2006, Mr. Kidder concluded Committee service and Mr. Nicolaisen joined the Committee. Mr. Phillips joined the Committee on September 19, 2006. 

⁽²⁾ The following changes occurred in the membership of the Compensation, Management Development and Succession Committee during fiscal 2006. Mr. Kidder became Committee Chair on March 10, 2006. Mr. Bowles joined the Committee on January 1, 2006. Mr. Davies concluded Committee service on April 4, 2006. Mr. Nicolaisen joined the Committee on June 19, 2006.

⁽³⁾ The following changes occurred in the membership of the Nominating and Governance Committee during fiscal 2006. Dr. Zumwinkel joined the Committee on March 10, 2006. Ms. Olayan joined the Committee on April 4, 2006.

Our Board has adopted a written charter for each of the Audit Committee, Compensation, Management Development and Succession Committee and Nominating and Governance Committee setting forth the roles and

6

Table of Contents

responsibilities of each committee. The charters are available at our corporate governance website at www.morganstanley.com/about/company/governance/index.html.

Lead Director.    Mr. Kidder is currently the Lead Director appointed by the independent directors of the Board. The Lead Director’s duties and authority, set forth in our Corporate Governance Policies, include the authority to call meetings of non-employee directors and independent directors, to facilitate communication between the Chairman and the independent directors, and to be available, if requested by major shareholders, for consultation and direct communication.

Director independence.    The Board has determined that Messrs. Bostock, Bowles, Davies, Kidder, Nicolaisen, Noski, Ms. Olayan, Mr. Phillips, Dr. Tyson and Dr. Zumwinkel are independent in accordance with the Director Independence Standards established under our Corporate Governance Policies (attached as Annex A). Ten (10) of twelve (12) of our current directors are independent. All members of the Audit Committee, the Compensation, Management Development and Succession Committee and the Nominating and Governance Committee satisfy the standards of independence applicable to members of such committees. In addition, the Board has determined that Messrs. Nicolaisen, Noski and Phillips are “audit committee financial experts” within the meaning of current SEC rules.

In determining Mr. Bostock’s independence, the Board considered, in addition to relationships deemed immaterial under the Company’s categorical standards of director independence, two employment relationships of the Company with family members of Mr. Bostock. In connection with the Company’s acquisition of FrontPoint Partners LLC (FrontPoint) in December 2006, a son-in-law of Mr. Bostock who was employed at FrontPoint and held less than 5% of the equity interests in FrontPoint became a managing director of the Company in the Company’s asset management business. The Board considered that the managing director: received his pro rata share of the merger consideration (including contingent consideration that will become payable in 2008 if certain conditions are satisfied); received a retention payment to induce him to become and remain a Morgan Stanley employee; is not an executive officer of the Company within the meaning of relevant SEC and NYSE rules; and will be awarded compensation in line with his position at Morgan Stanley and in comparison to market standards. Another son-in-law of Mr. Bostock was a summer associate in the Company’s investment banking division during the summer of 2006. The Board considered that this son-in-law was awarded compensation in line with his position at Morgan Stanley and with respect to market standards. The Board also considered that Mr. Bostock has no influence over the asset management business and the investment banking division other than that possessed by any other Morgan Stanley non-employee director. The Board determined, consistent with NYSE rules and based upon the facts and circumstances, that both relationships are immaterial to Mr. Bostock’s independence.

Non-employee director meetings.    The Company’s Corporate Governance Policies provide that non-employee directors meet in executive sessions and that the Lead Director will preside over these executive sessions. If any non-employee directors are not independent, then the independent directors will meet in executive session and the Lead Director will preside over these executive sessions.

7

Table of Contents

Director compensation.    The Company pays non-employee directors promptly after the annual meeting of shareholders for the annual period beginning at the annual meeting of shareholders and concluding at the subsequent annual meeting of shareholders. Employee directors receive no compensation for Board service. Effective July 6, 2006, the Board, based upon the recommendation of the Nominating and Governance Committee, revised non-employee director equity awards and retainers.

Effective July 6, 2006, non-employee directors receive the following annual retainers for their Board service.

DECAP also provides that the non-employee directors may elect to (i) receive all or a portion of their retainers, on a current or deferred basis, in cash or shares of common stock and (ii) defer receipt of common stock grants. Directors receive interest credits on amounts held in deferred cash accounts and dividend equivalents on stock units.

8

Table of Contents

⁽¹⁾ Includes amounts the director elected under DECAP to allocate to the deferred cash account or to receive in the form of stock units. Reflects annual retainers for Board, committee and Lead Director service paid on or after the date of the 2006 annual meeting of shareholders and prorated amounts reflecting the changes in retainer fees approved effective July 6, 2006 and discussed on page 8.

⁽²⁾ Includes amounts the director elected under DECAP to receive in the form of stock units.

⁽³⁾ Value of 4,000 shares of common stock granted on April 4, 2006 with respect to the director’s election at the 2006 annual shareholders meeting. The value is calculated using $64.27, the closing price of the common stock on the grant date.

⁽⁴⁾ Mr. Bowles was elected to the Board as of December 2, 2005 and appointed to the Compensation, Management Development and Succession Committee as of January 1, 2006. His compensation reflects prorated amounts for the portion of the 2005-2006 annual service period during which he served as a director and member of the Committee.

⁽⁵⁾ Value of 4,000 shares of common stock granted on January 1, 2006 with respect to Mr. Bowles’ election to the Board in December 2005 and 4,000 shares of common stock granted on April 4, 2006 with respect to Mr. Bowles’ election at the 2006 annual shareholders meeting. The values are calculated using $56.74, the closing price of the common stock on December 30, 2005, and $64.27, the closing price of the common stock on April 4, 2006.

⁽⁶⁾ Mr. Phillips was elected to the Board as of June 22, 2006 and appointed to the Audit Committee as of September 19, 2006. His compensation reflects prorated amounts for the period from his election to the Board and appointment to the Committee until the 2007 annual meeting of shareholders.

⁽⁷⁾ Value of 4,000 shares of common stock granted on July 1, 2006 with respect to Mr. Phillips’ election to the Board. The value is calculated using $63.21, the closing price of common stock on June 30, 2006.

Director attendance at annual meetings.    The Company’s Corporate Governance Policies state that directors are expected to attend annual meetings of shareholders. All nine (9) incumbent directors, and the two additional nominees standing for election, attended the 2006 annual meeting of shareholders.

Corporate governance

Morgan Stanley has a corporate governance webpage at the “Company Information” link under the “About Morgan Stanley” link at www.morganstanley.com (www.morganstanley.com/about/company/governance/index.html).

9

Table of Contents

The Board has taken the following steps designed to enhance the Company’s corporate governance since the last annual meeting of shareholders:

At the 2006 annual shareholders meeting, shareholders approved the following Company-sponsored proposals:

Over the past two years, the Board has taken other steps designed to enhance the Company’s corporate governance:

10

Table of Contents

Our Corporate Governance Policies (including our Director Independence Standards), Code of Ethics and Business Conduct, Board Committee charters, Policy Regarding Communication by Shareholders and Other Interested Parties with the Board of Directors, Policy regarding Director Candidates Recommended by Shareholders, Policy Regarding Corporate Political Contributions, Policy Regarding Shareholder Rights Plan, information regarding the Integrity Hotline and the Management Committee Equity Ownership Commitment are available at our corporate governance webpage at www.morganstanley.com/about/company/governance/index.html and are available to any shareholder who requests them by writing to Morgan Stanley, Suite D, 1585 Broadway, New York, New York 10036. Our Director Independence Standards are also attached as Annex A.

Beneficial ownership of Company common stock

Stock ownership of directors and executive officers.    We encourage our directors, officers and employees to own our common stock; owning our common stock aligns their interests with your interests as shareholders. All Management Committee members, including the executive officers named in the Summary compensation table on page 25 (Named Executive Officers or NEOs), are subject to an Equity Ownership Commitment that requires Management Committee members to retain 75% of common stock and equity awards (net of tax and exercise price) held at the time they join the Management Committee and subsequently awarded until they leave the Company. This commitment ties a portion of their net worth to the Company’s stock price and provides a continuing incentive for them to work towards superior long-term stock performance. Management Committee members also may not engage in hedging strategies or sell short or trade derivatives involving Morgan Stanley securities while employed by the Company.

The following table sets forth the beneficial ownership of common stock, as of January 8, 2007, by each of our current directors and NEOs, and by all our current directors and current executive officers as a group.

⁽¹⁾ Each current director, NEO and current executive officer has sole voting and investment power with respect to these shares.

11

Table of Contents

⁽²⁾ Shares of common stock held in the Trust corresponding to stock units. Directors and executive officers may direct the voting of the shares corresponding to their stock units. Voting by executive officers is subject to the provisions of the Trust described on page 2.

⁽³⁾ See aggregated option exercises in last fiscal year and fiscal year-end option values on page 28 for information regarding option valuation for the NEOs.

⁽⁴⁾ Each NEO and director beneficially owned less than 1% of the shares of common stock outstanding. All current executive officers and directors as a group beneficially owned less than 1% of the common stock outstanding.

Principal shareholders.    The following table contains information regarding the only persons we know of that beneficially own more than 5% of our common stock.

⁽¹⁾ Percentages calculated based upon common stock outstanding as of February 9, 2007 and holdings of common stock set forth in the Schedule 13G Information Statements described in notes 2-3 below. These Information Statements state that State Street and Barclays beneficially owned 12.1% and 6.15%, respectively, of our common stock on December 31, 2006.

⁽²⁾ Based on a Schedule 13G Information Statement filed February 12, 2007 by State Street, acting in various fiduciary capacities. The Schedule 13G discloses that State Street had sole voting power as to 47,230,411 shares, shared voting power as to 80,657,153 shares and shared dispositive power as to 127,887,564 shares; that shares held by State Street on behalf of the Trust and a Company-sponsored equity-based compensation program amounted to 7.6% of the common stock as of December 31, 2006; and that State Street disclaimed beneficial ownership of all shares reported therein.

⁽³⁾ Based on a Schedule 13G Information Statement filed January 23, 2007 (dated January 31, 2007) by Barclays Global Investors, N.A., Barclays Global Fund Advisors, Barclays Global Investors, Ltd, Barclays Global Investors Japan Trust and Banking Company Limited, and Barclay’s Global Investors Japan Limited. In the Schedule 13G, the reporting entities do not affirm the existence of a group. The Schedule 13G discloses that the reporting entities, taken as a whole, had sole voting power as to 56,284,434 shares and sole dispositive power as to 64,442,639 shares and did not have shared power as to any shares.

Executive compensation

Compensation, Management Development and Succession Committee report on executive compensation.

Objectives of executive compensation program.    Morgan Stanley’s executive compensation program, under the direction of the Compensation, Management Development and Succession Committee of the Board, is designed to achieve three objectives:

12

Table of Contents

Compensation governance.    The Committee is composed solely of independent members of the Board and operates under a written charter adopted by the Board. We are responsible for reviewing and approving annually all compensation awarded to the Company’s executive officers, including the CEO and other NEOs, and administering the Company’s equity plans (including reviewing and approving equity grants to executive officers).

We follow procedures intended to ensure excellence in compensation governance, including:

13

Table of Contents

The Board has also taken steps to enhance our ability to effectively carry out our responsibilities, including:

Measuring fiscal 2006 performance.    We base executive incentive compensation decisions primarily upon progress towards the achievement of Company-wide performance priorities and execution against Company-wide and business-specific strategic goals. As described below, these priorities and goals are both qualitative and quantitative. Because of the volatility of several of the Company’s key businesses, we believe it is critical to evaluate performance both on an absolute basis (against financial and other measures established at the beginning of the year) and on a relative basis (by comparing the Company’s performance on these same measures to that of its key competitors). We consider competitive comparisons because favorable or unfavorable market conditions that unfold during the year may render the performance priorities established at the beginning of the year less meaningful as measures of the Company’s performance. Because the Company’s performance is heavily influenced by market conditions, our performance versus competitors’ performance is a more significant factor in our compensation decisions than our performance against predetermined goals.

Performance priorities.    At the beginning of fiscal 2006, the Board established performance priorities (on an absolute basis and as compared to key competitors, as applicable) in three key areas for the Company: financial performance; client and product development; and talent management. Our compensation decisions factored in progress made during the year toward the achievement of the following performance priorities.

14

Table of Contents

Strategic goals.    Our compensation decisions also factored in progress made during the year in executing against the Company’s long-term strategic plan, which was laid out by management in November 2005. The goals of that plan include accomplishing the following:

This plan is based upon several core strategic principles, including:

We believe the successful execution of this strategic plan will improve performance and benefit shareholders over the long term. Therefore, when evaluating the Company’s performance, we considered carefully both the progress the Company has made to date in executing this plan as well as its success in achieving financial and other performance priorities.

Other information factored into Management Committee compensation decisions for fiscal 2006.    In addition to reviewing the Company’s financial performance and progress towards its strategic goals, we factored the following into our determination of compensation for members of the Management Committee.

15

Table of Contents

Levels and mix of compensation.    In furtherance of our compensation objectives, we design total executive compensation packages that we believe will best create retention incentives, link pay to performance and align the interests of executives and shareholders. Total compensation for Management Committee members (excluding employee health and welfare benefits) consists of a combination of the following three components:

For several years, the Committee has determined year-end incentive compensation for the Management Committee members and made year-end equity awards to the Management Committee members after fiscal year-end, typically in the second week of December. This schedule coincides with the time when year-end financial results are available and nearly finalized and the Committee can evaluate the Company’s performance against the Company’s performance priorities and strategic goals. We granted fiscal 2006 year-end incentive compensation to the Management Committee members in December, after the end of the fiscal year and after our review of Company and individual performance for fiscal 2006.

We deliver a significant amount of Management Committee members’ year-end incentive compensation in the form of Morgan Stanley equity awards that are designed to link the members’ wealth accumulation directly to the Company’s stock price performance and, therefore, encourage members to think and act like owners of the Company. The cancellation provisions of the year-end equity awards granted to Management Committee members (described below) are designed to act as a retention device, and the vesting and delivery schedules of our year-end equity awards (also described below) are designed to provide a strong incentive to Management Committee members to increase shareholder value long after they performed the services in the year for which the equity awards were granted. Management Committee members also are subject to the Equity Ownership Commitment described above and may not engage in hedging strategies or sell short or trade derivatives involving Morgan Stanley securities while employed by the Company.

For fiscal 2006, the CEO received 100% of his year-end incentive compensation in the form of Morgan Stanley equity awards. Every other NEO received approximately 65% of his or her year-end incentive compensation in the form of Morgan Stanley equity awards. Each other Management Committee member received on average 60% of his or her year-end incentive compensation in the form of Morgan Stanley equity awards. We reviewed the percentage of year-end incentive compensation awarded in the form of equity awards to the named executive officers of the Investment Banks and other key competitors in prior years. For all Management Committee members, we awarded approximately 90% of the equity award in the form of RSUs and the remainder of the award in the form of stock options. The total number of RSUs awarded to each Management Committee member was calculated by dividing the portion of the year-end incentive compensation to be paid in the form of RSUs by the volume weighted average price of the Company’s common stock on the grant date. The number of stock options granted was calculated by dividing the portion of the year-end incentive compensation to be paid in the form of stock options by the Black-Scholes value of the stock options, consistent with SFAS No. 123R, “Share-Based Payment” (SFAS No. 123R), as of the grant date. Stock options were granted with an exercise price equal to the closing price of the Company’s common stock on the grant date.

In recent years, Morgan Stanley stock option and RSU awards have vested and become exercisable 50% approximately two years after grant and the remaining 50% approximately three years after grant. RSUs

16

Table of Contents

have converted to shares, and shares acquired upon exercise of stock options have become freely transferable, approximately five years after grant. For fiscal 2006 year-end awards, we modified the share delivery date for RSUs and the date after which shares acquired upon exercise of stock options become freely transferable to bring them in line with the final vesting date (approximately three years after grant). This time period is generally consistent with the market practice of several of our Core Competitors, which generally do not provide for delivery of shares or lapse of transfer restrictions on option shares on dates later than the final vesting date. The vesting schedule for fiscal 2006 year-end stock option and RSU awards remained unchanged from recent years.

Management Committee members are retirement-eligible for purposes of their fiscal 2006 year-end equity awards and, therefore, fiscal 2006 year-end stock options and RSUs granted to Management Committee members vest and become exercisable upon a voluntary or involuntary termination of employment not involving violation of any cancellation provision described below. Fiscal 2006 year-end stock options (and shares resulting from option exercises) and RSUs granted to Management Committee members are subject to cancellation if the Management Committee member voluntarily terminates employment and engages in competitive activity and for other reasons, such as termination for cause, disclosure of proprietary information and solicitation of employees or clients. We believe the cancellation provisions of the equity awards protect Morgan Stanley’s interests by, among other things, providing a strong disincentive for Management Committee members to leave the Company to compete, promoting the protection of confidential business information and maintaining the Company’s customer and employee relationships worldwide. Tables on pages 21 and 23 of this proxy statement list the dollar value of equity awards previously granted that would be available to the CEO and other NEOs upon a voluntary termination not involving violation of any cancellation provision and upon a “for cause” termination.

The Company’s fiscal 2006 year-end equity awards to Management Committee members also contain a change in control provision under which vesting is accelerated and a more stringent change in ownership provision, which, if triggered, would result in conversion of RSUs and lapse of transfer restrictions on shares acquired upon exercise of stock options. Because Management Committee members are retirement-eligible for purposes of their fiscal 2006 year-end equity awards (as described above), the Company expensed (consistent with SFAS No. 123R) during fiscal 2006 the entire value of Management Committee fiscal 2006 year-end equity awards and, therefore, would not recognize additional compensation expense with respect to these awards upon a change in control or change in ownership or upon the Management Committee member’s termination of employment.

All Management Committee members are eligible to participate in Company-sponsored retirement and savings plans (pension and/or defined contribution), and U.S.-benefits-eligible members are potentially eligible to participate in other post-retirement programs, such as retiree medical, on the same basis as other similarly-situated employees. Company contributions to defined contribution plans for the NEOs are disclosed in the All Other Compensation column in the Summary compensation table on page 25. The text under Defined benefit pension plans beginning on page 29 discusses all of the defined benefit pension arrangements for the NEOs.

The Company offers certain Management Committee members, including the CEO, the use of a Company car for personal travel. For security reasons, the Company’s Board-approved policy directs the CEO to use Company aircraft for all travel, including personal travel. The value of such personal air travel in fiscal 2006, $321,848, is disclosed in the Other Annual Compensation column in the Summary compensation table on page 25.

17

Table of Contents

Determining Management Committee incentive compensation for fiscal 2006.    We determined the fiscal 2006 cash incentive compensation and equity incentive compensation awards for each Management Committee member based on our assessment of his or her performance, analyzed as discussed above, and after considering all of the factors discussed above.

CEO compensation.    As reflected in its financial results, the Company made substantial progress toward the achievement of its performance priorities and strategic goals during fiscal 2006. As Chairman and CEO, Mr. Mack was instrumental in leading and overseeing these significant achievements. In particular, we took note of the following Company accomplishments this year:

The following table summarizes the Company’s performance on its key financial performance priorities established early in fiscal 2006. The Committee considered the Company’s performance as measured by absolute performance against fiscal 2005 performance and by relative performance against competitors.

⁽¹⁾ Bank of America, Bear Stearns, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Lehman Brothers, Merrill Lynch and UBS.

⁽²⁾ Bear Stearns, Goldman Sachs, Lehman Brothers and Merrill Lynch.

⁽³⁾ Third quarter 2006 year-to-date compared to third quarter 2005 year-to-date. All but Bear Stearns, Goldman Sachs and Lehman Brothers report their financial results on a calendar year basis and fourth quarter results were not available when determining Mr. Mack’s compensation.

⁽⁴⁾ For the period December 1, 2005 to November 30, 2006.

In short, the Company’s financial performance was excellent, both on an absolute basis and compared to its Core Competitors.

18

Table of Contents

19

Table of Contents

At our November 2006 meeting, we reviewed the Company’s and Mr. Mack’s accomplishments in fiscal 2006 and discussed compensation for Mr. Mack. Based on these accomplishments and the other factors discussed above (such as market compensation data and pay equity data), and after discussion with the other non-employee directors, we approved Mr. Mack’s compensation relating to fiscal 2006 at our December 2006 meeting.

The following table summarizes Mr. Mack’s compensation and benefits relating to fiscal 2006.

⁽¹⁾ 100% of year-end incentive compensation was paid in the form of equity awards.

⁽²⁾ Valued using $78.3420, the volume weighted average price of Morgan Stanley common stock on the grant date, December 12, 2006.

⁽³⁾ Valued using $22.4647, the Black-Scholes value of the stock options, consistent with SFAS No. 123R, on the grant date, December 12, 2006.

20

Table of Contents

The following table lists the dollar value (as of November 30, 2006) of equity awards previously granted and balances under voluntary deferred compensation plans, the 401(k) Plan, the ESOP, the ESPP and pension plans that would be available to Mr. Mack if his employment terminates with the Company on or before November 30, 2007 either in a voluntary termination not involving violation of any cancellation provision or “for cause.” All equity awards granted to Mr. Mack have been previously disclosed and are reflected on SEC Forms 3 and 4 that are on file with the SEC. Stock-based compensation expense, if any, associated with these equity awards has been fully recognized under U.S. generally accepted accounting principles in the Company’s financial statements in fiscal 2006 and prior years and, therefore, delivery of these awards would result in no incremental stock-based compensation expense to the Company. Mr. Mack’s employment agreement does not entitle him to receive any guaranteed cash severance upon his termination of employment by the Company or his resignation. Mr. Mack’s employment agreement is described under the caption Employment agreement beginning on page 24.

⁽¹⁾ Balance as of November 30, 2006, plus fiscal 2006 RSUs granted in December 2006.

⁽²⁾ Morgan Stanley RSUs valued using $76.4067, the volume weighted average price of Morgan Stanley common stock on November 30, 2006.

⁽³⁾ For purposes of this table, Morgan Stanley stock option awards valued on a grant-by-grant basis by multiplying the product of (a) the number of unexercised, in-the-money stock options by (b) the difference between $76.4067, the volume weighted average price of Morgan Stanley common stock on November 30, 2006, and the exercise prices of all such stock options. Does not include a value for fiscal 2006 stock option awards granted in December 2006 because such stock options were granted with an exercise price greater than the volume weighted average price of Morgan Stanley common stock on November 30, 2006. The grant-date Black-Scholes value, consistent with SFAS No. 123R, of the fiscal 2006 stock option awards granted in December 2006 is disclosed in footnote 3 to the table on page 20.

⁽⁴⁾ Represents the aggregate value of (i) the portion of Mr. Mack’s special long-term new hire RSU award granted upon rejoining the Company on June 30, 2005 that is fully vested and no longer subject to cancellation “for cause,” (ii) the portion of Mr. Mack’s special long-term new hire RSU award that will vest and no longer be subject to cancellation “for cause” on June 30, 2007, and (iii) fully vested unexercised in-the-money stock options granted in fiscal 2001 and prior years that are no longer subject to cancellation “for cause.”

⁽⁵⁾ Balance as of November 30, 2006.

⁽⁶⁾ Balance as of November 30, 2006, plus the Company contribution to the ESOP made in January 2007.

⁽⁷⁾ Valued as of November 30, 2006, except for the Capital Accumulation Plan and the Key Employee Private Equity Recognition Plan, which are valued as of August 31, 2006.

⁽⁸⁾ Total defined benefit pension benefit earned as of November 30, 2006, based on 33 credited years of service and payable as a single life annuity beginning at termination.

⁽⁹⁾ Present value of total annual defined benefit pension benefit as of November 30, 2006, based on payments commencing immediately and determined using a discount rate of 5.97% and the RP-2000 White Collar Combined Mortality Table Projected to 2010.

21

Table of Contents

Other NEO compensation.    Compensation for the other four NEOs was also based on their respective contributions in achieving the Company’s accomplishments outlined above, business unit revenue and PBT and the other factors discussed above (such as market compensation data, pay equity data and compensation recommendations).

The following table summarizes the compensation and benefits relating to fiscal 2006 for the other four NEOs.

⁽¹⁾ Mr. Johansson’s base salary was £170,000, converted to U.S. dollars using the fiscal 2006 year-end average of daily spot rates of approximately £1.00 to $1.8257.

⁽²⁾ Valued using $78.3420, the volume weighted average price of Morgan Stanley common stock on the grant date, December 12, 2006.

⁽³⁾ Valued using $79.2880, the volume weighted average price of Morgan Stanley common stock on the grant date, December 14, 2006.

⁽⁴⁾ Valued using $22.4647, the Black-Scholes value of the stock options, consistent with SFAS No. 123R, on the grant date, December 12, 2006.

⁽⁵⁾ Includes value of incremental accrual under the Supplemental Executive Retirement Plan (SERP); Ms. Cruz and Messrs. Johansson and Shear, however, are currently not eligible to receive benefits under the SERP. To be eligible to receive a benefit under the SERP, a participant must retire from active service on or after age 55, have at least 5 years of service and age plus years of service must be at least 65.

⁽⁶⁾ The fiscal 2006 Company contribution for Mr. Johansson was £25,500, converted to U.S. dollars using the fiscal 2006 year-end average of daily spot rates of approximately £1.00 to $1.8257.

The following table lists the dollar value (as of November 30, 2006) of equity awards previously granted and balances under voluntary deferred compensation plans, the 401(k) Plan, the ESOP, the ESPP and pension plans that would be available to each NEO, other than the CEO, if his or her employment terminates with the Company on or before November 30, 2007 either in a voluntary termination not involving violation of any cancellation provision or “for cause.” None of these four NEOs have employment agreements or other agreements with the Company that provide for severance or tax-gross up payments or any other post-termination benefits.

22

Table of Contents

⁽¹⁾ Balance as of November 30, 2006, plus fiscal 2006 RSUs granted in December 2006.

⁽²⁾ Morgan Stanley RSUs valued using $76.4067, the volume weighted average price of Morgan Stanley common stock on November 30, 2006.

⁽³⁾ For purposes of this table, Morgan Stanley stock option awards valued on a grant-by-grant basis by multiplying the product of (a) the number of unexercised, in-the-money stock options by (b) the difference between $76.4067, the volume weighted average price of Morgan Stanley common stock on November 30, 2006, and the exercise prices of all such stock options. Does not include a value for fiscal 2006 stock option awards granted in December 2006 because such stock options were granted with an exercise price greater than the volume weighted average price of Morgan Stanley common stock on November 30, 2006. The grant-date Black-Scholes value, consistent with SFAS No. 123R, of the fiscal 2006 stock option awards granted in December 2006 is disclosed in footnote 4 to the table on page 22.

⁽⁴⁾ Represents the aggregate value of (i) fully vested RSUs granted in fiscal 2001 and prior years that are no longer subject to cancellation “for cause,” (ii) fully vested fiscal 2002 year-end restricted stock unit awards that will no longer be subject to cancellation “for cause” after the scheduled conversion date in September 2007 and (iii) fully vested unexercised in-the-money stock options granted in fiscal 2001 and prior years that are no longer subject to cancellation “for cause.” Stock-based compensation expense, if any, associated with these equity awards has been fully recognized under U.S. generally accepted accounting principles in the Company’s financial statements in prior years and, therefore, delivery of these awards would result in no incremental stock-based compensation expense to the Company.

⁽⁵⁾ Balance as of November 30, 2006, plus, for Mr. Shear, his employee contribution to the 401(k) Plan made in January 2007 from his fiscal 2006 cash bonus.

⁽⁶⁾ Balance as of November 30, 2006, plus, for Ms. Cruz and Mr. Shear, the Company contribution to the ESOP made in January 2007.

⁽⁷⁾ Balance as of November 30, 2006.

⁽⁸⁾ Valued as of November 30, 2006, except for the Capital Accumulation Plan and the Key Employee Private Equity Recognition Plan, which are valued as of August 31, 2006.

23

Table of Contents

⁽⁹⁾ Balance as of November 30, 2006, which was £17,255, converted to U.S. dollars using the fiscal 2006 year-end rate of approximately £1.00 to $1.875, plus Mr. Johansson’s contribution of $328,918 made in January 2007 from his fiscal 2006 cash bonus.

⁽¹⁰⁾ Total defined benefit pension benefit earned as of November 30, 2006 under the Company-sponsored defined benefit pension plan for U.S. benefits-eligible employees, the Excess Plan for U.S. benefits-eligible employees and the SERP, as applicable, based on 23 credited years of service for Ms. Cruz, 11 credited years of service for Mr. Scully, 7 credited years of service for Mr. Johansson, and 23 credited years of service for Mr. Shear, and payable as a single life annuity following termination. Mr. Johansson’s benefit is based on credited years of service as a U.S. benefits-eligible employee to July 1, 1994. Does not include any benefit under the SERP for Ms. Cruz and Messrs. Johansson and Shear, each of whom are not eligible to receive a benefit under the SERP on or before November 30, 2007. Mr. Johansson is not eligible to participate in the Excess Plan.

⁽¹¹⁾ Present value of total annual defined benefit pension benefit as of November 30, 2006, based on payments commencing at the age at which the executive can receive the full value of their earned pension benefit under the plan, age 65 for Ms. Cruz and Messrs. Johansson and Shear and age 60 for Mr. Scully, and determined using a discount rate of 5.97% and the RP-2000 White Collar Combined Mortality Table Projected to 2010.

Total NEO compensation.    In line with the Company’s performance-based compensation objective, NEO compensation expense for fiscal 2006 generally moved in tandem with Company profits. While we reviewed and considered the relationships between Company performance and compensation expense, we followed no formal or informal policy that required compensation expense generally, or for any of the five NEOs individually, to move lock step with either changes in stock price, revenues, net income, income from continuing operations, profit before taxes, or other financial measures. Instead, we exercised discretion in light of these relationships and the other factors described above to determine individual year-end incentive compensation award amounts.

We certified in accordance with Section 162(m) that Morgan Stanley’s financial results for fiscal 2006 satisfied the performance criteria set in accordance with Section 162(m) for fiscal 2006. After analysis of all of the considerations set forth above, we awarded incentive compensation to the NEOs for fiscal 2006 that is below the maximum amount yielded by the application of the compensation formula contained in the performance criteria.

Conclusion.    We believe that our executive compensation program is competitive and performance-based and that it supports our compensation objectives of attracting, motivating and retaining talented executives and creating long-term shareholder value. We are confident that the Company’s base salaries, incentive compensation and other benefits for Management Committee members constitute a competitive total reward package that supports the Company’s commitment to linking compensation to performance.

Respectfully submitted,

C. Robert Kidder, Chair

Erskine B. Bowles

Donald T. Nicolaisen

Note: The following changes occurred in the membership of the Committee during fiscal 2006. Mr. Kidder became Committee Chair on March 10, 2006. Mr. Bowles joined the Committee on January 1, 2006. Mr. Davies concluded Committee service on April 4, 2006. Mr. Nicolaisen joined the Committee on June 19, 2006.

Employment agreement.    On June 30, 2005, the Company entered into an employment agreement with Mr. Mack. The agreement, as amended, provides as follows:

24

Table of Contents

Summary compensation table.    The following table contains information with respect to the CEO and the four other most highly compensated executive officers.

* Mr. Scully became an executive officer during fiscal 2006.

** Messrs. Johansson and Shear served as executive officers during part of fiscal 2005 and during fiscal 2006.

⁽¹⁾ Includes amounts contributed to various Morgan Stanley deferred compensation plans.

⁽²⁾ Awards of stock options for services in the fiscal year shown. The terms and present value of stock options granted for services in fiscal 2006 are described under Option grants in last fiscal year on page 27.

25

Table of Contents

⁽³⁾ Represents Company contributions awarded under defined contribution plans. Mr. Johansson participated in the U.K. Offshore Pension Plan 1 and the U.K. Offshore Pension Plan 4. Mr. Johansson’s Company contribution was £25,500 in each of fiscal 2006 and fiscal 2005. The amount of British sterling was converted to U.S. dollars using the year-end average of daily spot rates of approximately £1 to $1.8257 and £1 to $1.8354 for fiscal 2006 and fiscal 2005, respectively. For the other NEOs, the Company’s contribution was allocated to the ESOP.

⁽⁴⁾ Mr. Mack’s fiscal 2006 bonus was granted in the form of RSUs described in footnote 6 and stock options described in footnote 1 under Option grants in last fiscal year on page 27. Mr. Mack’s fiscal 2005 bonus was granted in the form of RSUs described in footnote 6.

⁽⁵⁾ The Company’s Board-approved policy directs the Chairman and CEO to use the Company aircraft when traveling by air. These amounts include $321,848 in fiscal 2006 and $407,762 in fiscal 2005, reflecting personal use of Company aircraft. Perquisites are valued based on the aggregate incremental cost to the Company. The value of personal use of corporate aircraft includes variable costs incurred in connection with personal flight activity, and does not include fixed costs of owning and operating the corporate aircraft. The value was calculated for fiscal 2006 based on the incremental variable cost of the personal travel, including: landing/parking/flight planning expenses; crew travel expenses; supplies and catering; aircraft fuel and oil expenses per hour of flight; maintenance, parts and external labor per hour of flight; customs, foreign permits and similar fees; and passenger ground transportation. The value was calculated for fiscal 2005 based on variable cost per passenger mile flown.

⁽⁶⁾ The market value of the common stock underlying RSUs using the closing price per share of common stock on the applicable grant date, as reported on the New York Stock Exchange Composite Transaction Tape. Fiscal 2006 RSUs were granted on December 12, 2006 (the closing price was $78.40) and December 14, 2006, as described in footnote 9, and 50% vest on January 2, 2009 and 50% vest on January 2, 2010. Fiscal 2005 RSUs were granted on December 13, 2005 (the closing price was $57.37) and 50% vest on January 2, 2008 and 50% vest on January 2, 2009. Fiscal 2004 RSUs were granted on December 14, 2004 (the closing price was $54.71) and 50% vested on January 2, 2007 and 50% vest on January 2, 2008. Unvested RSUs vest upon a voluntary or involuntary termination of employment not involving cause or any other cancellation event or upon a change in control of Morgan Stanley. Dividend equivalents are paid on RSUs at the same rate that dividends are paid on shares of common stock. These RSUs are not transferable, are generally distributed in the form of shares of common stock approximately three years after the grant date for fiscal 2006 RSUs and five years after the grant date for fiscal 2005 and 2004 RSUs and are subject to cancellation in certain circumstances.

The following tables list the number of RSUs awarded for performance in each applicable year and the total number and value (calculated using the closing price on November 30, 2006) of RSUs held as of fiscal 2006 year-end (including those awarded in December 2006 for service in fiscal 2006).

26

Table of Contents

⁽⁷⁾ Mr. Mack was awarded 500,000 RSUs when he rejoined the Company on June 30, 2005 (the closing price per share of common stock on that date was $52.47). The RSUs vest prorata over five years and generally contain the same terms as the RSUs described in footnote 6. Mr. Mack cannot sell the shares underlying the RSUs until the RSUs convert to shares, and the RSUs generally will not convert to shares until Mr. Mack terminates employment.

⁽⁸⁾ Mr. Johansson’s base salary was £170,000 for each of fiscal 2005 and fiscal 2006. The amount of British sterling was converted to U.S. dollars using the year-end average of daily spot rates of approximately £1 to $1.8257 and £1 to $1.8354 for fiscal 2006 and fiscal 2005, respectively.

⁽⁹⁾ The market value of the common stock underlying RSUs using the closing price per share of common stock on the grant date, as reported on the New York Stock Exchange Composite Transaction Tape. These fiscal 2006 RSUs were granted on December 14, 2006 (the closing price was $79.60). These RSUs have the same terms as described in footnote 6.

⁽¹⁰⁾ The market value of the common stock underlying RSUs using the closing price per share of common stock on the grant date, as reported on the New York Stock Exchange Composite Transaction Tape. These RSUs were granted on March 29, 2005 (the closing price was $53.61) and vest in four installments of 25% on each anniversary of the grant date. These RSUs are not transferable, are generally distributed in the form of shares of common stock approximately five years after the grant date and are subject to cancellation in certain circumstances. In the event of termination of employment due to death or disability, unvested RSUs are deemed to have vested prorata over four years based on the date of termination and any remaining unvested RSUs are canceled. RSUs vest upon a change in control of Morgan Stanley. Dividend equivalents are paid on RSUs at the same rate that dividends are paid on common stock.

Option grants in last fiscal year. The following table lists stock options granted to the NEOs for services in fiscal 2006.

⁽¹⁾ Awards under the Employees’ Equity Accumulation Plan (EEAP) for services in fiscal 2006. The Compensation, Management Development and Succession Committee approved the grant on December 12, 2006, with an exercise price equal to the closing price of $78.40 on that date. The number of options awarded was determined using the Black-Scholes value of stock options on the grant date as determined under SFAS No. 123R. These options vest and become exercisable 50% on January 2, 2009 and 50% on January 2, 2010, are not transferable and are subject to cancellation under certain circumstances. Shares of common stock acquired upon the exercise of such options generally may not be transferred or sold until January 2, 2010. Upon a change in control of the Company or the recipient’s voluntary or involuntary termination of employment under circumstances not involving violation of any cancellation provision, these options will vest and become

27

Table of Contents

exercisable, and the shares of common stock acquired upon exercise of the options will no longer be subject to transfer restrictions.

⁽²⁾ The present value of stock options granted was determined using the Black-Scholes model as of the grant date, consistent with SFAS No. 123R. The Black-Scholes value assumes (i) the stock option was exercised at the end of the expected option term (6.32 years); (ii) an expected stock price volatility of 23.771%; (iii) the risk free yield on the U.S. Treasury STRIPS with a remaining term closest to the expected option life on the grant date; and (iv) the Company’s annualized dividend yield on the grant date was constant over the expected option life.

Aggregated option exercises in last fiscal year and fiscal year-end option values. None of the NEOs exercised stock options in fiscal 2006. The following table discloses the number of shares underlying stock options held by each NEO as of November 30, 2006 (including those awarded on December 12, 2006 for service in fiscal 2006).

⁽¹⁾ The NEOs do not hold stock appreciation rights issued by the Company. The shares of common stock that would be acquired upon exercising certain of these options are subject to transfer restrictions.

⁽²⁾ The value of unexercised, in-the-money options is the aggregate, calculated on a grant-by-grant basis, of the product of (a) the number of unexercised options multiplied by (b) the difference between $76.4067, the volume weighted average price of our common stock on November 30, 2006, and the exercise prices of all such options. There is no assurance that such values will be realized. The actual value, if any, realized on the options will depend on the future price of the common stock.

⁽³⁾ Includes options that vested and became exercisable on January 2, 2007.

Nonqualified deferred compensation table. The following table contains information with respect to the participation of the NEOs in the Company’s unfunded nonqualified deferred compensation plans. Each NEO participated in one or more of five non-qualified deferred compensation plans as of November 30, 2006: the Pre-Tax Incentive Program (PTIP), the Capital Accumulation Plan (CAP), the Key Employee Private Equity Recognition Plan (KEPER), the Owners’ and Select Earners’ Plan (OSEP I) and the Officers’ and Select Earners’ Plan (OSEP II). The NEOs participate in the plans on the same terms and conditions as other similarly situated employees. Earnings on PTIP contributions are based on the performance of notional investments available under the plan that are selected by the participant. Earnings on CAP and KEPER contributions are based on notional interests in investment earnings and interest on risk capital investments selected by the Company. Earnings on OSEP I and OSEP II contributions are based on a fixed rate of return. Employees can no longer make contributions under any of these plans.

Under PTIP, participants generally elect, in accordance with rules and procedures determined by the Company, the payment method and commencement date of plan distributions. Under CAP and KEPER, participants generally receive plan distributions after dividends, distributions of capital, liquidation proceeds or other distributions are paid from the underlying investments. Under OSEP I and OSEP II, participants generally receive plan distributions in fifteen annual installments commencing upon termination of employment or death.

28

Table of Contents