- Bank deposit program continued to grow, ending the quarter over $19 billion, on track to exceed goal of $20 billion by year end.
- The company had another successful product launch in coordination with asset management, the Van Kampen dynamic credit opportunities closed end fund, with sales of over $1 billion.
- The company launched a new type of account, Morgan Stanley Advisory, a non-discretionary advisory account, in part to help mitigate some of the changes related to fee-based brokerage accounts in the industry.

Asset Management Business

- Net revenues of $1.4 billion were down 10%.
- Income before taxes was $491 million, up 62%. PBT margin was 36%, and return on equity increased to 35%, driven by a decrease in expenses primarily compensation.

- Revenues decline was driven by principal transaction investment revenues of $338 million that were 43% lower than last quarter on lower private equity and real estate and alternative gains. Of the $338 million, $211 million was from real estate and $136 million was from private equity. These numbers include the gross-up in employee deferred compensation in these businesses, which is offset by a similar gross-up in compensation expense. The company expects principal transactions investment revenues will be a growing but lumpy in nature part of revenues, as the company builds real estate, private equity and infrastructure businesses.

- Management and administrative fees continue to show good growth quarter to quarter, increasing 10% to $926 million, largely driven by higher average asset growth across all of businesses as well as higher incentive fees in alternatives business.
- Non-interest expenses of $873 million were down 28%, driven primarily by the reduction in compensation, reflecting current view of full-year performance and the related compensation payout of lower investment related expenses.
- Non-compensation expenses were lower this quarter, with lower professional service fees.

- The company has generated PBT margins that exceeded the 20% level it was expecting earlier this year, primarily due to the strength in investment gains, and in this quarter the adjustment of the compensation payout. Given the dramatic increase in the assets under management and as part of the completion of the movement to real estate group to the asset management division, the company has adjusted the compensation payouts in this area. The 28% year-to-date PBT margin reflects these factors to eliminate some of the quarterly noise.

Assets under management and supervision increased $17 billion to $577 billion.

- The company had $20.8 billion in total net in-flows, which marks the fourth consecutive quarter of net asset inflows.
- Positive net flows were driving by strength in institutional liquidity with $12.4 billion of inflows, largely driven by new and expanded client relationships and institutions placing funds in short-term money markets as they determine the impact of the market dislocation.

Non-U.S. channel had $6.1 billion of inflows, $1.2 billion in the Americas Intermediary channel, $1.1 billion in the Van Kampen branded funds, and $300 million in U.S. institutional.

This positive activity reflected strong flows from the alternatives and real estate products included in the launch of a Van Kampen dynamic credit opportunities closed end fund via the Van Kampen branded channel.

Morgan Stanley branded retail funds showed modest outflows.

Total year-to-date net inflows of $34.6 billion compared favorably to the $14.3 billion in net outflows seen through the nine months ended 2006. Flows into the newer products, primarily in real estate and other alternative areas, remain strong and the company continues to broaden product offerings. The company launched and incubated 24 new products, including 14 in alternatives, seven in equities, and three in fixed income. This positive trend in net flows in the face of down trending market indexes contributed to record assets under management of $577 billion at quarter end, up 3% from the last quarter.

The company repurchased approximately 10 million shares of common stock for approximately $627 million.

With respect to the pace of repurchases, the company evaluates and balances the needs of business for additional capital to invest in organic growth and make attractive acquisitions with objective over time of offsetting the dilutive impact of equity compensation to employees. The company has $2.8 billion remaining under current board authorization.

The company has added regional revenue disclosure at the firm-wide level.

The challenging market conditions experienced and in many parts of the credit markets were intense and have continued into September. The environment remains one of the high volatility, wide credit spreads, lack of observable market price and low liquidity, with investors very much on the sidelines waiting for more certainty of asset values. This affects not just trading opportunities, but the flow of origination and securitization activity.

In addition, being a major market player, the company remains exposed to risk exposures through a number of instruments: lending commitments, sub-prime, CDOs, commercial mortgages are examples. The company believes it will take at least a quarter or two for the credit markets to return to a more normal extension of credit and provision of liquidity.

Other parts of the fixed income business remain strong, with strong client interest rate, foreign exchange, and commodity products. In addition, equity markets have remained resistant and there is high market volume interest in derivatives and financing products.

Year-to-Date Financial Highlights

- The ratio is at 21%, which is an improvement over the 22% ratio for the same period last year.
- The tax rate in continuing operations remain 33%, consistent with last year''s normalized rate.
- The company has repurchased approximately 42 million shares of common stock for approximately $3.2 billion.
- 58% of revenues have come from the Americas, 28% from Europe, Middle East and Africa, and 14% from Asia.
- International revenues increased 50%, continuing to outpace the growth rate of the U.S. which increased 18%.
- The nine months compensation to net revenue ratio is 47%.