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Thursday, September 13, 2007

Response to Request for Qualifications for Investment Baking Services

Badger Tobacco Asset Securitization Corporation

440 South LaSalle Street 37th Floor Chicago, IL 60605

September 13, 2007

Mr. Frank R. Hoadley Badger Tobacco Asset Securitization Corporation C/O State of Wisconsin DOA Capital Finance Office 101 E. Wilson St, 10th Floor Madison, WI 53703

Dear Frank:

Thank you for the opportunity to submit our proposal to serve as a senior manager for the Badger Tobacco Asset Securitization Corporation’s upcoming financings. Morgan Stanley offers the Corporation a number of unique capabilities, which we summarize below:

Broad Distribution Capability. As a premier institutional firm and the long-standing leading Wall Street firm in the underwriting of Wisconsin tax-exempt bonds, Morgan Stanley will utilize its relationships and experience distributing Wisconsin debt to ensure that all potential institutional buyers of Wisconsin paper participate in the offering. In addition, Morgan Stanley is one of the three leading market makers of tobacco securitization bonds in the secondary market and a recognized price leader by institutional investors. Our MSA-bond secondary market prowess provides our syndicate desk with unique insight into the buyer base for these securities and their trading levels. Coverage of Tobacco Securitization Opportunity. Morgan Stanley has proactively provided tobacco securitization ideas to the State and in particular, we have provided the State with several analyses regarding tax treatment of the State’s original working capital financing in 2002 as well as IRS regulations and restrictions as a result of this designation. We have also discussed on several occasions the potential ability for certain of the tobacco monies to be de-allocated should the universal cap apply which would allow for the State to invest these monies on a taxable basis. Additionally, we have provided discussion in this RFP regarding additional marketing ideas to deal with the forward tobacco issuance calendar as well as the impact the size of the Corporation’s issue may have on pricing. Tobacco Securitization Experience. Morgan Stanley has been an active participant in the tobacco securitization market since 1998. The Firm has served as book-runner or joint book-runner for six securitizations totaling $884 million, co-senior manager for 11 transactions totaling $12.9 billion and co-manager for 18 transactions totaling $23.9 billion. Our most recent senior managed tobacco securitization experience includes the $197 million joint-led underwriting of Rhode Island Tobacco Settlement Asset Backed Bonds executed in June 2007.

Asset-Backed Securitization Experience. Morgan Stanley is a leader in the asset-backed securities market with “best-of-class” franchises in several sectors. Our Securitized Products Group (“SPG”) has won numerous awards in the sector, including International Financing Review’s “Securitization of the Year” Award for four of the past six years as well as IFR’s North American Securitization House of the Year for 2003. Morgan Stanley’s experience as book-running senior manager since July 2002 includes 1,258 asset-backed securitizations with a total par amount of $767.0 billion, including 745 transactions over $250 million with a total par amount of $734.8 billion. This experience also includes 267 transactions with a par amount of greater than $1 billion.

September 13, 2007 Page 2

Significant State of Wisconsin Experience. Morgan Stanley has a proven commitment to providing the highest level of service to the State of Wisconsin and its issuers. Morgan Stanley is a leading underwriter in the State of Wisconsin, ranking 3rd in State of Wisconsin financings since 2004. Morgan Stanley has senior managed 21 issues for a total par of $1.97 billion during this time and has structured over $20 million in NPV savings to the State through various refunding transactions. Extensive Retail Distribution – Nationally and In Wisconsin. Morgan Stanley’s substantial economic presence in Wisconsin complements our dedication to serving the State. The Firm ranks 3rd in Wisconsin by number of brokers. Morgan Stanley has 217 employees in Wisconsin and an annual payroll exceeding $24 million, including 134 financial advisors located in 10 retail offices. Our local financial advisors cover both smaller institutional and high-net-worth retail buyers, which we expect will be a critical investor base to anchoring the pricing of the Corporation’s financing.

Strong Capital Base. Recent market volatility has reemphasized the importance of a Firm’s willingness and ability to put its resources at risk for its clients. Illustrative of Morgan Stanley’s capital strength, our Firm’s credit ratings were upgraded on July 30th by Standard and Poor’s to “AA-” while other Wall Street firms have recently had their rating outlooks negatively impacted by the current debt market volatility. More importantly, Morgan Stanley has a proven track-record of committing capital in the primary market for both State of Wisconsin and tobacco securitization transactions. Excellent Working Relationship with Managers Across the Street. Morgan Stanley has a long history of not just good working relationships with syndicate members across the street but also actively coordinating activities of the entire syndicate to maximize participation in our clients’ transactions. This execution coordination pertains in particular to difficult credits where full participation by the entire syndicate is key to a successful pricing. Co-Book-Running Senior Manager Appointment

Given the size and credit complexity of the anticipated Corporation financing as well as the difficulties in the current volatile market environment, Morgan Stanley would recommend that the Corporation consider appointing two firms as book-running senior manager to the Corporation’s tobacco securitization. As is typical in the corporate market, both book-running senior managers would share in senior manager duties, however one would be primarily responsible for leadership in the structuring, documentation and general deal execution while the other would be responsible for spearheading marketing efforts, investor road shows, managing the orders and allotments and pricing of the bonds. This two pronged approach allows for the Corporation to leverage the expertise of two firms with experience structuring tobacco bonds as well as marketing and distributing both State of Wisconsin and tobacco asset-backed bonds.

Please do not hesitate to contact us if we can provide any additional information. Sincerely,

Stratford Shields Bill Mack Managing Director Executive Director and Head of Public Finance

Badger Tobacco Asset Securitization Corporation

Table of Contents September 13, 2007

Section 1

A Items Required for All Responses p. 1

B Items Required for Senior Manager Responses p. 5

Appendices

A Finance Team Resumes

B Morgan Stanley’s Tobacco Securitization Experience

C Morgan Stanley’s Wisconsin Underwriting Experience

D Morgan Stanley’s Required Certifications and 10-K and 10-Q Legal Proceedings

E DC Tobacco Settlement Financing Corporation Case Study

F Refunding Monitor

G Historical MMD Chart

Section 1

Response to Request for Qualifications

Badger Tobacco Asset Securitization Corporation Request for Qualifications for Investment Banking Services – September 13, 2007 Page 1 of 15

A. ITEMS REQUIRED FOR ALL RESPONSES

A.1. Name and Information about Firm.

Morgan Stanley & Co. Incorporated, a broker-dealer, is a corporation organized under the laws of the State of Delaware and is a wholly-owned subsidiary of Morgan Stanley, a New York Stock Exchange-listed company (ticker symbol “MS”). Morgan Stanley is a premier global financial services firm with leading market positions in our primary businesses – securities and asset management. Morgan Stanley has unmatched origination and distribution skills and a unique balance between institutional and individual investor capabilities. Subsidiaries of the Firm include mutual fund company Van Kampen/American Capital Inc. and Morgan Stanley Investment Management.

Morgan Stanley’s world headquarters is located in New York at 1585 Broadway in Times Square, New York City and the Firm’s Public Finance Department is based at 1221 Avenue of the Americas in New York City. We have regional public finance offices in Chicago, San Francisco, Los Angeles, Denver, Austin, Orlando and Boston. Morgan Stanley is not a minority or women-owned firm or other form of disadvantaged business enterprise.

A.2. Office Location.

The services requested in this RFQ would be performed out of our Chicago and New York public finance offices. Our Chicago office is located at 440 S. LaSalle Street, Chicago, IL. As the adjacent map highlights, Morgan Stanley’s Chicago Office is complemented by the Firm’s significant presence in the State of Wisconsin. Morgan Stanley currently ranks 3rd in Wisconsin

by number of brokers. The Firm’s 10 retail brokerage offices within the State employ 134 financial advisors who serve over 57,000 customer accounts holding in excess of $7.6 billion of assets, including $386 million in directly held municipal securities.

A.3. Contact Information.

Morgan Stanley’s finance team will be led by Bill Mack, Executive Director and lead Wisconsin coverage officer. Since joining Morgan Stanley is 2000, Mr. Mack has provided continuous coverage to Wisconsin issuers including the Corporation, the State, the City and County of Milwaukee, and the Milwaukee Metropolitan Sewerage District. He maintains coverage responsibilities for several other Midwestern clients including the Commonwealth of Kentucky, the State of Ohio, the State of Michigan and the State of Tennessee, Cook County, the City of Chicago, the Chicago Transit Authority, among others. Mr. Mack will serve as the Corporation’s day-to-day contact person and Morgan Stanley and will oversee all aspects of the financing. Contact information for Mr. Mack can be found in the table above and a brief resume for Mr. Mack can be found in Appendix A.

A.4. Banking Team.

Morgan Stanley’s finance team combines one of the industry’s most experienced public finance banking and underwriting teams along with senior professionals from the Firm’s Structured Products Group to ensure the best possible execution for the Corporation’s transaction. Stratford Shields, Managing Director and Head of Public Finance, will provide project oversight and management. As provided in our response to question A3, the finance team will be led by Bill Mack, Executive Director, who will serve as the day-to-day coverage banker for the Corporation’s financing.

Primary Contact Information

William Mack, Executive Director

440 S. LaSalle, 37th Floor Chicago, IL 60605

Phone: (312) 706-4266

Cellular: (312) 286-9190

Fax: (312) 291-5753

Email: [email protected]

Primary Contact Information

William Mack, Executive Director

440 S. LaSalle, 37th Floor Chicago, IL 60605

Phone: (312) 706-4266

Cellular: (312) 286-9190

Fax: (312) 291-5753

Email: [email protected]

Morgan Stanley Retail Branch OfficesWisconsin

• Our 10 retail offices in the State of Wisconsin serve 57,046 client accounts

• The Firm’s 134 Financial Advisors in the State of Wisconsin manage $7.6 billion in retail client assets

• 10 retail offices:

– Appleton – Sheboygan– Green Bay – Tomah– Madison (2) – Watertown– Mequon – Wauwatosa– Minocqua

Morgan Stanley Retail Branch OfficesWisconsin

• Our 10 retail offices in the State of Wisconsin serve 57,046 client accounts

• The Firm’s 134 Financial Advisors in the State of Wisconsin manage $7.6 billion in retail client assets

• 10 retail offices:

– Appleton – Sheboygan– Green Bay – Tomah– Madison (2) – Watertown– Mequon – Wauwatosa– Minocqua


Bill Daley, Executive Director, Jennie Huang, Vice President, and Veena Ramaswamy, Analyst, will provide banking coverage and analytical support. Craig McKenna, Managing Director and Manager of Municipal Capital Markets, will oversee all quantitative and financial analysis. Jack Kattan, Managing Director and Sanjeev Khana, Managing Director, of the Firm’s Structured Products Group will be integral members of the team, providing structuring, ratings, and marketing expertise for the securitization. Dennis Farrell, Executive Director, Manager of Municipal Credit Strategy, and former Head of Moody’s Public Finance ratings group will provide credit strategy expertise for the financing. The chart below provides contact information for Morgan Stanley’s finance team. A brief resume for each professional is included in Appendix A.

A.5. Underwriters.

As discussed in our response to question A4, Morgan Stanley has assembled an experienced group of professionals to ensure that the Corporation achieves the lowest cost of financing with the widest distribution of its securities. Don O’Brien, Managing Director, and Brian Wynne, Managing Director, are the Co-Heads of the National Municipal Syndicate, and are responsible for the pricing of all of the Firm’s municipal bond transactions. Nigel Key, Managing Director and Sales Manager, and Robert Shearer, Executive Director and Retail Sales Manager, will coordinate institutional and retail marketing and key distribution efforts for

this deal to ensure that the broadest possible group of investors participate in the financing to ensure the Corporation achieves the lowest possible cost of capital. Jim Higgins, Executive Director and High-Yield Bond Trader, is an active and respected market-maker among the major investors in this asset class and would work to ensure an orderly placement of the Corporation’s paper. Kevin Schwartz, Executive Director, will be responsible for any derivatives products the Corporation may consider. Contact information for each is included in the team chart earlier and resumes are included in Appendix A.

A.6. Experience With Similar Transactions.

Tobacco Securitization Experience. Morgan Stanley has been an active participant in the tobacco securitization market since 1998. The Firm has served as book-runner or joint book-runner for six securitizations totaling $884 million, co-senior manager for 11 transactions totaling $12.9 billion and co-manager for 18 transactions totaling $23.9 billion. This experience includes assignments for New Jersey’s Tobacco Settlement Financing Corporation and Rhode Island’s Tobacco Settlement Finance Corporation. A detailed list of our Tobacco experience including our liabilities and orders and allotments for each transaction can be found in Appendix B.

Secondary Market Presence in Tobacco Securitization Bonds

Morgan Stanley is one of the three largest market makers in tobacco securitization bonds. The Firm’s average daily inventory for MSA-backed bonds (excluding New York and Golden State appropriation-enhanced bonds) exceeds $250 million and the Firm estimates it has traded over $1 billion bonds in the secondary market since July 15, 2007 and $7.5 billion since January 1, 2004. In conjunction with the Firm’s strong research presence in the tobacco industry, Morgan Stanley is recognized by institutional investors as a price leader in this sector. Our secondary market prowess provides our syndicate and traders with unique insight into the buyer base and trading levels for MSA-backed securities, creating unique

Morgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance Team

Underwriting

Don O’BrienManaging Director ph: (212) 761-1559cell: (203) 912-0012fax: (212) 507-2622Donald.O’[email protected]

Brian WynneManaging Directorph: (212) 761-1561cell: (845) 641-8607fax: (212) [email protected]

Head of Public Finance

Stratford ShieldsHead of Morgan Stanley’s Public Finance Department ph: (312) 706-4334 cell: (312) 543-9053fax: (312) [email protected]

Municipal Capital Markets

Kevin SchwartzExecutive Directorph: (914) 225-0249cell: (203) 247-4582fax: (212) [email protected]

Securitized Products Group

Jack KattanManaging Director ph: (212) 761-1850cell: (917) 747-6032fax: (212) [email protected]

Sanjeev KhannaManaging Directorph: (212) 761-2132cell: (201) 294-3910fax: (212) [email protected]

Municipal Credit Strategy

Dennis FarrellExecutive Directorph: (212) 762-8294cell: (917) 692-3383fax: (212) [email protected]

Banking and Execution

Bill DaleyExecutive Directorph: (212) 762-9169cell: (917) 400-4930fax: (312) [email protected]

Jennie HuangVice Presidentph: (312) 706-4079cell: (917) 361-5087fax: (212) [email protected]

Veena RamaswamyAnalystph: (212) 762-7404cell: (917) 386-8272fax: (212) [email protected]

Quantitative Analysis

Craig McKennaManaging Directorph: (212) 762-8271cell: (917) 913-0704fax: (212) [email protected]

Sales and Retail Distribution

Nigel KeyManaging Director and Sales Managerph: (914) 225-0220fax: (212) [email protected]

Robert ShearerExecutive Director and Retail Sales Managerph: (914) 225-4619fax: (212) [email protected]

Project Management

William MackExecutive Directorph: (312) 706-4266cell: (312) 286-9190fax: (312) [email protected]

Sales & Trading

Jim HigginsExecutive Directorph: (914) 225-0270fax: (212) [email protected]

Morgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance TeamMorgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance Team

Underwriting





















Project Management


Sales & Trading



opportunities for the underwriting and placement of bonds.

As outlined in Question A9, the Firm is willing to commit capital to underwrite unsold balances for our primary market issuer clients, often placing and being allotted stock orders for bonds in difficult market environments. As a result, the Firm can be a key enabler of a primary market transaction. As an example, on the $911 million West Virginia Tobacco Settlement Finance Authority issue in June 2007, Morgan Stanley purchased approximately 50% ($450 million) of the transaction as a co-manager.

Unlike many other Wall Street firms, including leading underwriters of tobacco securitization debt in the primary market, Morgan Stanley’s presence in secondary market trading for tobacco bonds means the Firm is truly the Corporation’s economic partner in the pricing of its financing. A mis-pricing or cheapening of MSA-backed bonds would result in a substantial economic loss to our Firm on our inventory of bonds.

Below is a case study that highlights our recent tobacco securitization transaction experience in June 2007 with the Rhode Island Tobacco Settlement Finance Corporation.

Rhode Island Tobacco Settlement Finance Corporation (“RITSFC”). On June 27, 2007, Morgan Stanley served as joint-bookrunning senior manager for RITSFC’s $197.0

million Tobacco Settlement Asset-Backed Bonds. Following an aggressive timeline with the kick-off call on May 21st, Morgan Stanley worked closely with RITSFC to ensure a successful pricing by the end of the State’s fiscal year on June 30th. The bond issue was the first to capitalize on S&P’s revised tobacco rating criteria to include substantially more bonds in the higher rating category of BBB, thereby significantly lowering bond interest costs. Morgan Stanley assisted in coordinating a comprehensive marketing strategy for the bonds including an online investor road show presentation, which attracted 27 investors. The bonds were structured with three turbo capital appreciation bonds having a final maturity of June 1, 2052, as follows: $176.9 million Series 2007A

(BBB); $17.3 million Series 2007B (BBB-); and $2.7 million Series 2007C (not rated). Bond placement was broad, particularly for tobacco bonds, with multiple investors participating in the bond allocation. To help facilitate broad investor distribution, existing tobacco bonds in one investor’s portfolio were sold to make room for the Rhode Island offering. Spreads to MMD were narrow, particularly for the non-rated bonds, which priced through comparable tobacco issuers with similar structures as shown in the adjacent chart.

A.7. State of Wisconsin Transactions.

Morgan Stanley is a leading underwriter in the State of Wisconsin, ranking 3rd in State of Wisconsin negotiated and competitive financings since 2004. As detailed in the adjacent table, Morgan Stanley has senior managed 21 issues for a total par of $1.97 billion during this time.

Morgan Stanley had senior managed four transactions for the State in 2004 totaling $535.905 million in par amount, including three for its General Obligation credit and one for its transportation credit, aggregating over $20.4 million in net present value savings.

Morgan Stanley’s transaction experience in the State of Wisconsin since 2004 includes 13 issues for the State for a total par of $2.41 billion. This includes 10 senior managed issues for a total par of $1.52 billion. In addition, Morgan Stanley’s transaction experience for state authority level issuers in Wisconsin since 2004 includes four senior managed issues for the Wisconsin Health and Educational Facilities Authority (“WHEFA”) for a total par of $405.2 million. Morgan Stanley’s transaction experience for Wisconsin local governmental issuers since 2004 also

Leading Senior Managers of Wisconsin Municipal DebtJanuary 1, 2004 - Present

Rank Senior Manager Par ($ MM) Market Share

Number of Issues

1 Robert W Baird & Co 2,996.8 14.5 551

2 Merrill Lynch & Co 2,082.6 10.1 26

3 Morgan Stanley 1,971.2 9.6 21

4 Bear Stearns & Co 1,962.6 9.5 25

5 Citi 1,894.3 9.2 29

Comparable Non-Rated Spreads Issuer Spread to MMD Yield

Rhode Island 225 6.750%

Marin County, CA 265 6.900%

Iowa 250 7.125%

DC 292 7.250%

Comparable Non-Rated Spreads Issuer Spread to MMD Yield

Rhode Island 225 6.750%

Marin County, CA 265 6.900%

Iowa 250 7.125%

DC 292 7.250%


includes 31 financings for a total par of $457.1 million. This includes 11 senior managed issues for a total par of $336.8 million. A complete list of our State of Wisconsin, state authority issuer and Wisconsin local governmental transaction experience can be found in Appendix C.

A.8. References.

Morgan Stanley is proud of the service we provide to our municipal clients. We invite the Corporation to contact any of our Tobacco Securitization references listed below to obtain an unbiased account of our banking services.

A.9. Capital Strength.

Excess Net Capital Position

Morgan Stanley maintains one of the largest and most liquid capital positions on Wall Street. As of May 31st, the Firm reported $187.3 billion of total capital, including $39.5 billion in total equity and $3.3 billion in uncommitted excess net capital. The Firm places no restrictions on the amount of excess net capital available to underwrite offerings for municipal clients. Morgan Stanley’s excess net capital of $3.3 billion allows the Firm to incur an underwriting liability of $47.1 billion, well in excess of the Corporation’s financing.

Morgan Stanley’s strong capital position is also illustrated by the Firm’s credit ratings, which were upgraded by Standard & Poor’s to “AA-” on July 30th amid debt market turbulence that resulted in a negative credit outlook for other Wall Street firms. In its report, S&P noted the current market environment and stated, “Morgan Stanley’s competitive position leaves the firm especially well-positioned to withstand market volatility compared to industry peers.”

Recent market volatility has reemphasized the importance of a Firm’s willingness and ability to put its resources at risk for its clients. Continued

investor concern in the asset-backed mortgage market has resulted in the bankruptcy of two large mortgage originators, significant losses by certain hedge funds, as well as newly limited access to the debt markets for private equity financings and lower quality corporate debt issues. While the yields on high-quality fixed-income investments remain low, the taxable markets have experienced a general flight-to-quality that could spill over into the high-yield tax-exempt market, including lower quality credits like tobacco securitizations. The Commonwealth of Puerto Rico’s $240 million tobacco securitization was pulled on August 1st due to limited interest by certain investors. While we believe this result reflected specific issues related to the deeply subordinated nature of the structure and the marketing process undertaken by the book-running manager for this issue, the capital strength and commitment of the Corporation’s underwriting team is of significant importance in the current environment.

Willingness to Commit Capital for Clients

Morgan Stanley has repeatedly demonstrated its willingness to commit its capital on behalf of the State and its authorities. As an example of our willingness to commit capital to underwrite unsold balances, we cite the recent securitization by the State of New Jersey.

$3.62 Billion Tobacco Settlement Financing Corporation (New Jersey) Series 2007. Morgan Stanley served as a co-manager for the TSFC issue, which priced in January 2007. The general market tone soured during the pricing and continued to deteriorate throughout the day. In this environment, Morgan Stanley placed stock orders for $100 million bonds despite market conditions, $28 million of which were ultimately allotted and therefore of assistance to supporting the issue. As further evidence of Morgan Stanley’s support of the issue, the bonds traded off by as much as 16 basis points in the secondary market when they were “free-to-trade” the following day.

A.10. Required Certifications

Morgan Stanley’s Required Certifications are included in Appendix D.

Tobacco Securitization References Tobacco Settlement Finance Corporation c/o Department of Administration – Budget Office

State of West Virginia Department of Administration

Rosemary Booth Gallogly, Chair and Budget Director Secretary Robert Ferguson Jr.

One Capitol Hill 1900 Kanawha Boulevard East, Building 1, Room E-119

Providence, RI 02908 Charleston, WV 25305-0120

Ph: 401-222-6300 Ph: 304-558-4331

Fax: 401-222-6410 Fax: 304-558-2999

Email: [email protected] Email: [email protected]

Tobacco Securitization References Tobacco Settlement Finance Corporation c/o Department of Administration – Budget Office

State of West Virginia Department of Administration

Rosemary Booth Gallogly, Chair and Budget Director Secretary Robert Ferguson Jr.

One Capitol Hill 1900 Kanawha Boulevard East, Building 1, Room E-119

Providence, RI 02908 Charleston, WV 25305-0120

Ph: 401-222-6300 Ph: 304-558-4331

Fax: 401-222-6410 Fax: 304-558-2999

Email: [email protected] Email: [email protected]


B. ITEMS REQUIRED FOR SENIOR MANAGER RESPONSES

B.1. Statement of Interest

Morgan Stanley would like to be considered for the position of senior managing underwriter for any financing for the Badger Tobacco Asset Securitization Corporation. If selected, however, by the Corporation to serve as co-senior or co-managing underwriter, Morgan Stanley would be equally committed to providing the professional support, marketing efforts and capital resources necessary to guarantee the success of the Corporation’s financings.

B.2. Qualifications

As detailed throughout this response, Morgan Stanley has the experience, qualifications and resources to provide the Corporation with the highest level of investment banking and underwriting services for any of the Corporation’s financings. Tobacco Securitization Experience. As detailed in Question A6, Morgan Stanley has been an active participant in the tobacco securitization market since 1998. The Firm has served as book-runner or joint book-runner for six securitizations totaling $884 million, co-senior manager for 11 transactions totaling $12.9 billion and co-manager for 18 transactions totaling $23.9 billion. Our most recent senior-managed tobacco securitization experience includes the $197 million joint-led underwriting of Rhode Island Tobacco Settlement Asset Backed Bonds executed in June 2007.

Asset-Backed Securitization Experience. Morgan Stanley is a leader in the asset-backed securities market with “best-of-class” franchises in several sectors. Our Securitized Products Group (“SPG”), made up of over 300 employees worldwide, incorporates specialists for every aspect of structured and securitized debt solutions, including capital markets, banking, principal lending, trading and research. Morgan Stanley has won numerous awards in the sector, including International Financing Review’s “Securitization of the Year” Award for four of the past six years as well as IFR’s North American Securitization

House of the Year for 2003. Morgan Stanley’s experience as book-running senior manager since July 2002 includes 1,258 asset-backed securitizations with a total par amount of $767.0 billion, including 745 transactions over $250 million with a total par amount of $734.8 billion. This experience also includes 267 transactions with par greater than $1 billion. Morgan Stanley’s Excellence in Credit Derivatives. Morgan Stanley is one of only a few firms that has distinguished itself by making markets in credit derivatives in exceptional size. The Firm has been recognized as Credit Derivatives House of the Year by several industry publications, including Risk Magazine in 2006 and 2004, the Institutional Investor and the Financial Times in 2005 and Euromoney in 2004. Credit derivatives allow investors to purchase protection against a default by the issuer of a security. By combining the purchase of a credit derivative with that of the Corporation’s bonds, an investor is able to synthetically create a new security with a lower risk profile, potentially making the purchase of a Corporation bond more attractive. Diversifying the investor base for the Corporation’s bonds through offering credit derivatives creates additional demand for the securities and ultimately results in a lower cost of capital to the Corporation.

B.3. Timing of Pending Transaction

Given the Corporation’s intent to complete the transaction by November 15, 2007, the biggest challenge from a timing perspective is a potential “size penalty” that would occur from the confluence of a busy forward tobacco calendar and the current tone of the tobacco investor market. We have provided below a discussion of these considerations as well as strategies for mitigating any pricing impact on the Corporation’s anticipated financing.

Historical “Size Penalty” for MSA

January 2006 & 2004“Credit Derivatives House of the

Year”

“Morgan Stanley had a highly successful year in interest rate and credit derivatives while remaining one of the dominant players in the energy and commodities derivatives markets”

January 2005“Credit Derivatives House of the

Year”

Morgan Stanley’s “standout efforts to expand the credit derivatives market”… “has pushed boundaries both in terms of structuring and flow credit trading.”


Securitizations. Numerous factors will determine any “size penalty” for a Corporation’s issue, including (i) tax-exempt tobacco securitization supply in the period leading up to pricing; (ii) the perceived direction of interest rates; (iii) the tone of the market on the day of pricing; (iv) the impact of any MSA specific media/litigation events; (v) overall tax-exempt municipal supply; and (vi) the relative spread between the tax-exempt and taxable markets.

Secondary market trading levels on recent tobacco precedents can provide an illustration of the scope of this sizing penalty. The adjacent table illustrates secondary market trading levels for two New Jersey securitization bonds relative to MMD since May 2003. As illustrated in the below chart, the recent New Jersey financing – a $3.6 billion financing of significant size – priced at a wider spread than had been the case in the secondary market trading level leading up to the initial sale. While some of this spread widening may have been due to market anticipation of a refunding of outstanding tobacco bonds – pre-refunded bonds gain value as AAA securities are purchased for the refunding escrow to pay debt service. As the chart below illustrates, the New Jersey financing ultimately priced at wider spreads than it had in the secondary market since the slew of positive litigation events in late 2005 (discussed below).

Strategies for Mitigating Sizing Penalty Especially given the difficulties surrounding recent tobacco financings (e.g., New Jersey and California), it is crucial that the Corporation carefully plan a strategy for entering the market to mitigate the “size penalty” described above. These steps include:

• Careful Coordination and Order Book Flow. Sufficient pre-marketing and coordination with the syndicate by the senior manager provides the greatest opportunity for aggressive bond pricing. Several factors weigh into pricing and credit spreads, size being only one of them. For example, there were several difficulties in the pricing of the New Jersey transaction, which caused for under-subscription in the order book and subsequently wider spreads for the issuer. For example, an order for $750 million of premium bonds from one large buyer was not utilized in the structure. Ultimately, the underwriting syndicate, including Morgan Stanley, took down a fair share of bonds in order to provide aggressive pricing to the issuer. Regardless of the reasons for the difficulties in pricing, New Jersey provides a key illustration in the importance of a coordinated marketing plan and supportive syndicate in pricing of tobacco transactions of size, especially given the more limited group of investors that purchase tobacco bonds. Additional information on our marketing strategy is provided in our response to Question B9.

• Reserving a Spot on the Forward Calendar. As outlined in the adjacent chart, there is approximately $9-11 billion in potential tobacco securitization transactions that could come in the September through November time frame, including large transactions in Pennsylvania, Louisiana and Ohio. As discussed in more detail in our response to Question B9, early announcement of the timing of the Corporation’s transaction will reserve a spot on the forward calendar and encourage other potential MSA securitizations to schedule around the Corporation’s financing. This also provides key investors with the opportunity to reserve room in their portfolio for the Corporation’s issue.

• Market/Structure Transaction into Discreet Components. One way to reduce the size

Source Morgan Stanley

Secondary Market Trading – New Jersey

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

Mar-03

May-03

Jul-0

3

Aug-03

Oct-03

Dec-03

Mar-04

May-04

Jul-0

4

Aug-04

Oct-04

Dec-04

Mar-05

May-05

Jul-0

5

Sep-05

Nov-05

Jan-0

6

Mar-06

May-06

Jul-0

6

Sep-06

Nov-06

Jan-0

7

Mar-07

May-07

Yie

ld (%

)

6.125% New Jersey Series 2002 Maturing 20425.000% New Jersey Series 2007 Maturing 204130-Year MMD "AAA"

Yields calculated as volume-w eighted w eekly averages based on MSRB daily trading data.

1/04: MSA-negative Freedom Holdings decision

5/05: MSA-positive Freedom Holdings decision

1/07: NJ Refunding

February 4, 2005: DC District Court rules against DOJ Disgorgement

May 18, 2005: Second Circuit affirmed denial of preliminary injunction against MSA settlement payments in Freedom Holdings Case

October 17, 2005: US Supreme Court Denies Disgorgement of Revenues in DOJ Case

December 16, 2005: Illinois Supreme Court Reverses $10.1 BN Verdict in Miles/Price Case


Secondary Market Trading – New Jersey

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

Mar-03

May-03

Jul-0

3

Aug-03

Oct-03

Dec-03

Mar-04

May-04

Jul-0

4

Aug-04

Oct-04

Dec-04

Mar-05

May-05

Jul-0

5

Sep-05

Nov-05

Jan-0

6

Mar-06

May-06

Jul-0

6

Sep-06

Nov-06

Jan-0

7

Mar-07

May-07

Yie

ld (%

)

6.125% New Jersey Series 2002 Maturing 20425.000% New Jersey Series 2007 Maturing 204130-Year MMD "AAA"

Yields calculated as volume-w eighted w eekly averages based on MSRB daily trading data.

1/04: MSA-negative Freedom Holdings decision

5/05: MSA-positive Freedom Holdings decision

1/07: NJ Refunding

February 4, 2005: DC District Court rules against DOJ Disgorgement

May 18, 2005: Second Circuit affirmed denial of preliminary injunction against MSA settlement payments in Freedom Holdings Case

October 17, 2005: US Supreme Court Denies Disgorgement of Revenues in DOJ Case

December 16, 2005: Illinois Supreme Court Reverses $10.1 BN Verdict in Miles/Price Case

Forward Tobacco Financing Calendar

Issuer Estimated Size

($MM) Sale Date Status

Pennsylvania 550 Sept/Oct Legislation pending

Louisiana 1,600-2,800 TBD Potential legislative

special session

Ohio 5,500 Oct In Progress

Wisconsin 2,000 Oct/Nov RFP (Sept)

Total 9,650-10,850

Forward Tobacco Financing Calendar

Issuer Estimated Size

($MM) Sale Date Status

Pennsylvania 550 Sept/Oct Legislation pending

Louisiana 1,600-2,800 TBD Potential legislative

special session

Ohio 5,500 Oct In Progress

Wisconsin 2,000 Oct/Nov RFP (Sept)

Total 9,650-10,850


impact on the Corporation's bond pricing is to diversify its offering into smaller components to make the deal seem smaller to specific investor segments. This can be accomplished by incorporating several bond products into the structure, including serial bonds, current interest bonds, convertibles and capital appreciation bonds. Each of these bond products will appeal to different investor segments, thus allowing for certain investors to focus only one part of the deal. This reduces the sizing impact by providing the widest distribution across all investor segments, but also prevents market saturation in any one investor segment.

The diagram above illustrates the likely investors for various bond products. Structuring a transaction with a variety of bond products allows for easier inclusion of retail investors, national bond funds and insurance companies in addition to the traditional high yield funds, which are the typical buyers of tobacco offerings – yielding a lower cost of borrowing to the Corporation.

• Two Planned Tranches with Flexibility to Combine to One. Given the size of the contemplated financing, the Corporation may want to consider selling the bonds in two tranches. To the extent that the first tranche is well-received and well-subscribed, the Corporation could decide to issue more of its planned financing in this first tranche. This approach would also allow the Corporation to potentially issue a portion of the financing in a less volatile market and generate additional proceeds.

B.4. Conflicts.

Based on our survey of the professionals in the Public Finance Department, to the best of our knowledge, information and belief, we are not currently aware of any relationship between the Public Finance Department of the Firm and the Corporation which we would view as creating any actual or potential conflict of interest.

B.5. Working Relationships

Morgan Stanley has a long history of not just good working relationships with syndicate members across the street but also actively coordinating activities of the entire syndicate to maximize participation in our clients’ transactions. This execution coordination pertains in particular to difficult credits where full participation by the entire syndicate is key to a successful pricing.

As an example, Morgan Stanley served as co-senior book-running manager on the Rhode Island Tobacco financing which priced in June 2007 as well as the District of Columbia tobacco financing in 2001. We worked well in both situations with the entire syndicate and was able to achieve aggressive pricing and tight deal execution for our clients. A case study for the Rhode Island financing is provided in our response to question A6 and a case study to the District of Columbia tobacco financing is provided in AppendixE.

An example of our cooperation and involvement in a financing even when we are not book-running senior manager includes the recent West Virginia financing in June 2007 where Morgan Stanley served as co-manager. In this transaction for the State of West Virginia, Morgan Stanley’s proprietary trading desk submitted a sizeable order and was allotted 50% of the entire transaction ($450 million). Book-Running Senior Manager Approach to Maximize Syndicate Participation

It is imperative that this process be interactive between the senior manager, the Corporation and the syndicate. Morgan Stanley would commit to a transparent process and to working with the Corporation to ensure a fair and proper allocation of bonds. Additionally, as senior manager, our

Bond Type Characteristics Potential Investors

Serial Bonds

Current Interest Bonds

Convertible Bonds

Capital Appreciation Bonds

2008-2017

Average Life-Short & LongDiscount / Premium

Short / Long ConversionLong Call Feature

Callable / Non-callable Long average life

Retail InvestorsInsurance Companies

National Bond FundsInsurance CompaniesNon-Traditional Crossover BuyersProprietary Accounts & Hedge Funds

National Bond FundsNon-Traditional Crossover Buyers

High Yield Funds

1

2

3

4

Potential Investors of Serial Bonds, Current Interest Bonds, Convertible Bonds and Capital Appreciation Bonds

Bond Type Characteristics Potential Investors

Serial Bonds

Current Interest Bonds

Convertible Bonds

Capital Appreciation Bonds

2008-2017

Average Life-Short & LongDiscount / Premium

Short / Long ConversionLong Call Feature

Callable / Non-callable Long average life

Retail InvestorsInsurance Companies

National Bond FundsInsurance CompaniesNon-Traditional Crossover BuyersProprietary Accounts & Hedge Funds

National Bond FundsNon-Traditional Crossover Buyers

High Yield Funds

1

2

3

4

Potential Investors of Serial Bonds, Current Interest Bonds, Convertible Bonds and Capital Appreciation Bonds


approach toward working with the syndicate on a transaction is to build consensus on price views and market color. Ultimately, the syndicate as a group is liable for unsold balances on the transaction and we approach pricing as a group effort to provide the widest distribution and most aggressive pricing of the Corporation’s bonds. Below we have provided a description of our general approach to coordinating syndicate member efforts in senior managed transactions. Close Coordination and Communication with Syndicate. Morgan Stanley as senior manager works closely with co-managers to ensure all syndicate members have: 1) timely receipt of information, 2) the opportunity to provide substantive input into the marketing process, 3) accurate information on retention levels, allocation policies and designation rules 4) information on changing maturity size and projected average lives - allows co-managers to concentrate on specific maturities and minimize duplicate orders and 5) full coordination on order flow and pricing bonds. As senior manager, we would ensure early announcement of the pricing date in order to avoid a congested market as well help the underwriting syndicate with pre-marketing efforts and provide additional time for investors to plan with their investment decisions. Prior to the pre-marketing process, Morgan Stanley would host a conference call with all syndicate members. Prior to pricing, Morgan Stanley would also solicit priceviews and build a scale and recommended structure based on a consensus of the entire syndicate.

Preferred Designation Policy. A designation policy that rewards production is in the Corporation’s best interest. The policy must also meet other criteria, namely to allow for all managers to participate in the economics of the transaction commensurate with their risk exposure. Morgan Stanley would recommend a designation policy with 60% of the designation to the joint book running senior managers and incentive designations for the remaining 40% of the designations. This designation policy provides enough incentive for all of the firms within the syndicate to tap into their distribution networks and to maximize their participation in each transaction. It would also serve to stimulate production for the co-managers.

Allotment of Bonds. Allotments should reflect the appropriate reward for the work that management group members exhibit from the time retentions are assigned to the time of the bond sale. Those firms that support the Corporation’s transaction early in the marketing process should be rewarded. It is easy for a manager to turn in orders to support a transaction after the degree of market acceptance has been determined for a particular pricing level. The true test of a manager’s support of an issue, and the approach that will establish the best price for the Corporation, will be to reward those managers who put in orders early during the order period. As senior manager, we would work in partnership with the Corporation on allotments to ensure a fair and equitable distribution of bonds among all managers in the syndicate. To improve monitoring of the syndicate selling performance, Morgan Stanley recommends the order and allotment summary of each firm be distributed to the Corporation and the syndicate after pricing. Co-Manager Approach to Maximize Participation

Morgan Stanley actively engages in any transaction that we participate in, whether as senior manager or co-manager. As a co-manager, Morgan Stanley would support the Corporation’s transaction by providing pre-marketing and pricing commentary on investor demand to the senior manager to help shape structuring and by aggressively placing orders (both priority and member) and marketing decisions for the transaction. As discussed in more detail in our response to Question B9, Morgan Stanley has extensive marketing and distribution capabilities, is willing to commit its extensive capital base and is a leader in credit default swaps which allow investor to shed tobacco credit risk. Co-Book-Running Senior Manager Appointment

Given the size and credit complexity of the anticipated Corporation financing as well as the difficulties in the current volatile market environment, Morgan Stanley would recommend that the Corporation consider appointing two firms as book-running senior manager to the Corporation’s tobacco securitization. As is typical in the corporate market, both book-running senior


managers would share in senior manager duties, however one would be primarily responsible for leadership in the structuring, documentation and general deal execution while the other would be responsible for spearheading marketing efforts, investor road shows, managing the orders and allotments and pricing of the bonds. This two pronged approach allows for the Corporation to leverage the expertise of two firms with experience structuring tobacco bonds as well as marketing and distributing both State of Wisconsin and tobacco asset-backed bonds.

B.6. Detailed Structure Information

Assuming the transaction structure outlined in Section II.A of the RFP, Morgan Stanley has described below the details of a comprehensive finance plan which includes refunding considerations, structuring information, rating agency approaches and a pricing discussion. Based on market conditions as of September 10, 2007, we believe the Corporation/State could receive $284 million in upfront proceeds as well as $50 million in annual interest on the private placement bonds issue to the State Permanent Endowment Fund (“SPEF”).

Stand-Alone Refunding. The refunding portion of the above finance plan assumes the defeasance of all of the outstanding Series 2002 Bonds. This complete defeasance allows for the Corporation to revise certain of the legal provisions of the outstanding bonds. For example, we have assumed Liquidity Reserve Account on the new bonds and the release of the outstanding Liquidity Reserve Account (approximately $137 million), as has been the custom for recent transactions and vetted by the rating agencies. Additionally, the subordination of these bonds to the SPEF private placement bond would not be possible without a complete defeasance of the original securitization.

Under market conditions as of September 10, the Corporation’s tobacco bonds generate marginal savings, due in large part to the recent credit spread widening and risk repricing. These market conditions are discussed later in this response. Currently, only $168 million of the 2020-2023 maturities generate over 3% savings on a maturity-

by-maturity basis. A savings-by-maturity analysis is provided in Appendix F.

Assuming a $1.6 billion refunding of all of the outstanding Series 2002 Bonds, a refunding generates negative NPV savings of $23 million or -1.5% of refunded par. This refunding assumes that the refunding bonds are amortized to provide sufficient coverage to meet the rating agency’s investment grade stress tests and no extension of debt beyond the current final maturity of the Series 2002 Bonds (2032). The refunding does not assume $50 million in cash flow for the SPEF private placement bond is set aside. A 15 bps rally in the market would provide a savings neutral transaction. This refunding also assumes the release of the Liquidity Reserve Account – approximately $137 million – applied toward the refunding to lower the size of the transaction. The details of this refunding are provided in the chart above.

It should be noted that this refunding currently generates $73 million in negative arbitrage. We have assumed that the documents are written to permit certain agency securities are allowable defeasance securities in the escrow. Agencies provide an additional 50 bps of earnings in the escrow or approximately $30 million in additional NPV savings.

Refunding/Re-Leveraging. Additional value is available to the Corporation by combining the refunding transaction with an incremental securitization (senior and residual) of tobacco revenues. This additional value is available to the Corporation due to the increased ability to sell longer-dated senior and subordinated tobacco bonds. A more detailed discussion of the structured utilized in this scenario is provided below. As the chart on the following page illustrates, a combined refunding/re-leveraging of the tobacco revenues, less $50 million annually for the senior lien private placement bond generates $283 million in proceeds to the Corporation and the State. The majority of the proceeds are

Tobacco Settlement Asset Backed Bonds – Tax-Exempt Securitization Stand-Alone Refunding Market Conditions as of September 10, 2007

Current MarketCurrent Market Less 15

bps (break-even)

Refunding Par $1,597,190,000 $1,571,040,000

Refunded Par $1,554,085,000 $1,554,085,000

Final Maturity 6/1/2034 6/1/2034

NPV Savings ($23,493,430) $649,820

Liquidity Reserve Account Release $137,134,941 $137,134,941

Savings as % of Refunded Par -1.51% 0.04%

Negative Arbitrage $73,242,921 $64,190,932

Tobacco Settlement Asset Backed Bonds – Tax-Exempt Securitization Stand-Alone Refunding Market Conditions as of September 10, 2007

Current MarketCurrent Market Less 15

bps (break-even)

Refunding Par $1,597,190,000 $1,571,040,000

Refunded Par $1,554,085,000 $1,554,085,000

Final Maturity 6/1/2034 6/1/2034

NPV Savings ($23,493,430) $649,820

Liquidity Reserve Account Release $137,134,941 $137,134,941

Savings as % of Refunded Par -1.51% 0.04%

Negative Arbitrage $73,242,921 $64,190,932


provided by the 1st and second subordinate residual CABs structured on the long-end of the transaction. There is approximately $114 million in negative arbitrage in this transaction.

Private Placement Bond to SPEF. Selling a private placement bond to the SPEF provides several benefits to the Corporation and the State. Because the bonds are being sold senior to the anticipated securitization, the State reduces collection risk on these the $50 million in annual revenues. Additionally, since the State is a related entity to the Corporation, the cost of capital of this privately placed bond is not as relevant. We would expect the rating agencies to include this senior lien private placement bond into its debt calculations and have assumed accordingly in our cash flows.

Structure. The refunding/re-leveraging securitization assumes term bonds due in stated maturities of 2022, 2034 and 2048. Projected turbo redemption dates are 2014, 2017 and 2025 with projected average lives of 4-, 9 and 15 years, respectively. The current interest bonds also assume a 10-year par call feature.

First and second subordinated capital appreciation bonds are assumed to have 2052 stated maturities. It should also be noted that capital appreciation bonds will need to demonstrate that the subordinate bonds constitute bone fide “debt” that is eligible for federal tax-exemption on accreting interest rather than “equity”. The test requires that the present value of the TSR residuals remaining after the projected repayment date of all subordinate bonds equals or exceeds 10% of the total present value of all future projected TSRs. These maturities, projected redemption/average lives, call features and rating coverage levels are consistent with market standards and recent transactions.

In terms of general approach to leveraging tobacco cash flows, Morgan Stanley implements our

proprietary tobacco financing and forecasting model. The tobacco model takes the WEFA base case consumption forecast, adjusts for volume declines and inflation and incorporates all the specific terms of the MSA including OPM vs. SPM market shares and allocation to previously settled states. This stream of revenues are then applied toward a bonding capacity analysis, utilizing the structure described above. Additionally, the tobacco financing model structures separately the bonding capacity under rating agency coverage requirements for investment grade debt versus projected average lives and turbo redemption dates.

Ratings. Our primary goal in the rating process is to develop rating criteria that allow the Corporation to generate the most upfront proceeds from its tobacco financing. Morgan Stanley has extensive experience in working with the rating agencies to obtain tobacco credit ratings that achieve this goal. The three rating agencies currently limit the ratings of unenhanced turbo tobacco securitization bonds to Baa3/BBB/BBB on a senior basis. Additionally, Fitch placed $15 billion of state and local bonds in around 260 issue under review for a possible upgrade yesterday. Fitch, citing improved finances and operations at major cigarette makers and “continued manageability of litigation risk,” which would provide BBB+ long-term ratings. This rating would be a point of discussion with the rating agencies in the context of senior private placement bonds outstanding.

Additionally, the three rating agencies each have different rating criteria and stress tests for tobacco financings. The Corporation’s financing would generally need to be structured to the most stringent of these criteria. On the current interest bonds, we would recommend a rating by S&P and Fitch. Moody’s has typically rated tobacco financings a notch lower than the two agencies and we do not feel that this rating is necessary for successful pricing. Several issues have been sold without the Moody’s rating. Should the Corporation choose to proceed with subordinated CABs, we would recommend one Fitch rating. Fitch currently provides the most lenient stress tests for tobacco CABs, providing additional

Tobacco Settlement Asset Backed Bonds – Tax-Exempt Securitization Combined Finance Plan Market Conditions as of September 10, 2007

Total Par $1,886,668,737

Refunding & Re-Leveraging Par $1,375,635,000

1st Subordinate Residual CAB Par $390,477,690

2nd Subordinate Residual CAB Par $120,556,047

Refunded Par $1,554,085,000

Final Maturity 6/1/2052

NPV Savings ($38,484,607)

Liquidity Reserve Account Release $137,134,941

Negative Arbitrage $114,342,859

Tobacco Settlement Asset Backed Bonds – Tax-Exempt Securitization Combined Finance Plan Market Conditions as of September 10, 2007

Total Par $1,886,668,737

Refunding & Re-Leveraging Par $1,375,635,000

1st Subordinate Residual CAB Par $390,477,690

2nd Subordinate Residual CAB Par $120,556,047

Refunded Par $1,554,085,000

Final Maturity 6/1/2052

NPV Savings ($38,484,607)

Liquidity Reserve Account Release $137,134,941

Negative Arbitrage $114,342,859


upfront proceeds for the Corporation, and several CABs have been marketed based on this one rating. Certain issues have attained S&P ratings as well for subordinate CABs.

Pricing. Pricing on tobacco bonds will vary, depending on recent market precedents, marketing capabilities of the senior manager and the syndicate as well as market headlines such as litigation events or general interest rate moves. The credit spreads assumed in the above financing results are based on conversations with our investor base (non-specific to BTASC) and are consistent with credit spreads of recent tobacco financings. As illustrated in the credit spread chart to the right, the recent market volatility has caused for credit spreads to widen on tobacco financings. In particular, credit spread widening was apparent on the $3.6 billion New Jersey financing (82 bps on 2034 maturity) and $4.4 billion Golden State financing (129 bps on 2033 maturity). Market color on these two financings is that New Jersey was largely mispriced at spread that were through the market and created a significantly undersubscribed order book. As a result, spreads widened for the California deal where pricing was fairly uneventful. Post California, the market returned to more normal credit spreads including the Virginia transaction as well as the Marin County financing. Most recently, the Michigan tobacco financing was priced at a 164 bps spread to MMD for the 2034 maturity. At the height of the subprime mortgage turmoil investors are beginning to reprice risk in their portfolios. Morgan Stanley believes that credit spreads are currently around 140 - 150 bps over MMD on the long end of the curve which have come in 20-30 bps from pricing about a month ago. While credit spreads have come back, market experience on recent transaction shows that investor demand, while still available, is difficult with several firms across the street taking position and committing capital on behalf of their clients.

We have provided a discussion of ways the State can mitigate its exposure to market fluctuations, including selecting co-book-running senior managers to maximize participation by the underwriting syndicate.

These volatile credit spreads are countered by two forces. First, markets rallied significantly over the last two weeks with recent weak employment reports – first negative payroll numbers in years – as well as investor concerns that the liquidity squeeze and credit crunch may have wider impacts on US economic growth more generally. While credit spreads are wider, absolute yield have come in significantly over the last couple of months, as illustrated in the chart provided in Appendix G.

Additionally, pricing for a refunding transaction may provide the Corporation with a slightly lower yield than a pure securitization. Existing bondholders would have their Series 2002 bonds pre-refunded to the call date by an AAA quality refunding escrow. This leads to significant price appreciation in their Series 2002 Bonds. In addition, because the bonds have not been turbo amortizing as quickly as in original forecasts, bondholders are exposed to risk that the average life of their investment will be extended. A refunding would allow for them to reinvest in bond at a higher yield with more average life certainty. This may provide a slight benefit to the Corporation as it looks to price its refunding transaction.

B.7. Detailed Alternate Structure Information

Residual Financing. Given recent widening of credit spreads, Morgan Stanley would recommend that the Corporation consider a residual financing on the remaining TSRs post turbo payments on the outstanding Series 2002 bonds. Under this alternative structure, the State would be able to keep outstanding its aggressive cost of capital on the Series 2002 financing as well as the call feature on these bonds. While the residual bonds have a higher cost of capital than the senior bonds, the proposed transaction described in Question B6 also incorporates residual bonds for additional leverage.

89

100

129

82

0

20

40

60

80

100

120

140

1/24/2007New Jersey$1,263.6MM

19.7 yr

3/7/2007California$693.6MM

19.9 yr

4/26/2007Virginia

$335.6MM20.2 yr

6/21/2007Marin County (CA)

$17.3MM18.4 yr

Pricing DateIssuerTotal ParWAL

Spre

ad to

MM

D

Tobacco Settlement Revenue Securitizations (2007)Pricing Comparison: Current Interest Bonds

89

100

129

82

0

20

40

60

80

100

120

140

1/24/2007New Jersey$1,263.6MM

19.7 yr

3/7/2007California$693.6MM

19.9 yr

4/26/2007Virginia

$335.6MM20.2 yr

6/21/2007Marin County (CA)

$17.3MM18.4 yr

Pricing DateIssuerTotal ParWAL

Spre

ad to

MM

D

Tobacco Settlement Revenue Securitizations (2007)Pricing Comparison: Current Interest Bonds


More Efficient Refunding Structure. Much like the State’s OCI test for refunding GO debt, a future market environment could provide for greater call option value to the State, especially given recent market volatility. Additionally, the steepness of the yield curve creates significant negative arbitrage in the escrow. Also, rather than paying $23 million in negative NPV savings to refunding the entire series, the State could refund only those bonds which are generating savings.

Purchase Surety to Replace Liquidity Reserve Fund. Given the current competitive environment for credit enhancement, the Corporation can achieve aggressive pricing on a surety for its Liquidity Reserve Fund. Based on the Liquidity Reserve Requirement and current pricing estimates for a surety, we believe that the Corporation can release between $130-$134 million in upfront proceeds, as compared to the negative $23 million in savings from the refunding described in our response to Question B6. While this competitive surety market exists today, several insurers, including MBIA and AMBAC, have significant exposure to subprime mortgages through mortgage-backed securities and other collateralized debt obligations. This has caused credit default swaps to widen and may become increasingly evident in their policy pricing should the credit crunch worsen.

Partial TSR Securitization. Instead of a privately placed bond, the State may want to consider securitizing only a portion of the tobacco settlement monies. While this alternative structure does not provide for senior distributions to the SPEF out of the TSRs, a partial securitization does not require the additional coverage required as a result of considering the privately placed bond as debt of the Corporation and could provide for additional securitization upfront.

B.8. Working Capital Requirements

As we have discussed with the State, since the prior tobacco financing was a working capital financing, the State is restricted by several IRS arbitrage regulations. In short, these restrictions relate to the use of excess available monies of the Corporation and the State as well as earnings on

these funds. Additional details on these regulations are provided below as well as ideas that the Corporation may wish to consider to reduce the impact on the State’s fiscal operations.

In order to advance refund the working capital tobacco bonds, the Corporation and its related parties will need to provide identical “fiscal distress” certifications that were made in conjunction with the original financing: 1) the Corporation and the State do not reasonably expect to have any “available amounts” during a 5-year period and that 2) at the beginning of the 6th year and annually thereafter, any available amounts must redeem bonds, be invested in non-AMT bonds or be yield restricted. “Available amounts” are defined as Corporation/State funds that could be used for the type of working capital expenditures financed by the original tobacco bonds. At the beginning of the 6th year, available funds not used toward redeeming bonds are considered “replacement proceeds.”

It is our understanding that the State’s General Fund revenues may be treated as other replacement proceeds and, therefore, required to be used to redeem bonds, or be yield restricted invested in Non-AMT Bonds. However, these consequences would only apply if the State’s available amounts exceed the permitted working capital reserve, which the IRS allows to be as much as 5 percent of an issuer’s prior year expenditures from current revenues. It is also important to note that the universal cap provides a limitation on the amount of proceeds and other amounts that, for tax purposes, are treated as proceeds. Simply stated, the universal cap provides that there cannot be more proceeds than bonds (with the comparison of bonds to proceeds made on the basis of the “value” of both the outstanding bonds and the investments acquired with the proceeds). Amounts in excess of the universal cap cease to be treated as proceeds and are de-allocated. The effect of the universal cap on these types of financings is to free proceeds from the required yield restriction or investment in Non-AMT Bonds as the bonds are amortized; these de-allocated amounts can then be invested in taxable securities. As we have discussed, the universal cap analysis is also central to a tax-


exempt bond financed payment to the Endowment Fund to make annual payments to the State Health Care Quality Trust Fund.

Following are options for dealing with the prior working capital financing:

Optimizing Timing of Revenues and Expenditures. The State may wish to work with Tax Counsel to assure optimization of its use of revenues to avoid the creation of replacement proceeds.

Refund with Taxable Debt. Though costly in the current market, refunding the prior bonds with taxable bonds would eliminate all working capital requirements. Use General Fund Monies to Redeem Bonds. The State could maximize issuance of tax-exempt bonds for any State qualified capital expenditures to free up General Fund monies to pay down the bonds.

B.9. Marketing Plan

Maximizing Investor Interest

Targeting a broad range of investors through a diversified bond offering is critical to achieving the lowest possible cost of financing for the Corporation’s transaction. Below we have provided market color on recent trends in investor participation in tobacco issues.

Impact of Market Dislocation on Investor Participation. The recent market dislocation has caused the nature of investor interest in the tobacco market to change significantly. Morgan Stanley believes that the recent credit spread widening, while affecting price and spread, has begun to turn back since the original credit crunch that panicked the market a couple of months ago. While credit spreads may currently be wider than in 2006 where positive litigation events caused tobacco bonds to trade and price aggressively, they are still near historic lows, and are currently lower than when the Corporation originally priced its deal in 2002.

Additionally, we firmly believe that all investor segments are still participating in the tobacco market, although to a lesser degree and at a different price. Over the summer, total return

buyers and other trading accounts, who had been large purchasers of tobacco bonds, saw their positions lose significant value. While we anticipate that they will still be an active participant in this market, we expect to conduct extensive marketing and price discovery work to determine at what levels they choose to participate. Based on conversations with these investor segments, we believe that their participation is ultimately a matter of price, which can be coordinated and managed through an aggressive pre-marketing campaign.

Additionally, we believe that the core group of tobacco investors, hedge funds in particular, is still active, as demonstrated by the number and size and frequency of deals executed in 2007. The adjacent table highlights the likely demand from seven categories of potential investors as well as the most effective method to market the Corporation’s bonds to each investor group. In particular, we believe that PIMCO, Rochester and Goldman Sachs Asset Management, who have been some of the most active tobacco investors in the market, will continue to participate aggressively in its search for higher yielding paper. Any subordinate CABs the Corporation decides to sell will be helpful to achieving these investor needs.

Importantly, we have heard from conversations with buyers that recent press regarding the sale and fair pricing of tobacco issuances has caused certain investors to turn from participating in certain tobacco transactions. As a worldwide firm with global distribution capabilities, Morgan Stanley has good relationships with major buyers in all investors segments. As a senior manager, Morgan Stanley’s role as underwriter is to bring as many bidders to the order book as possible in

National Bond Funds

High Yield Funds

Insurance Companies

Proprietary Accounts & Hedge Funds

Non-Traditional Crossover Buyers (Taxable)

Retail Investors

$1.0 – 2.0 bn

$1.0 – 1.5 bn

$250 – 500 mm

$2.5 – 3.0 bn

$500 – 750 mm

Capital Commitment$500 mm - $1.0 bn

1

2

3

4

5

6

7

• Traditional tobacco buying base

• Sales force contact two weeksprior to pricing

• Investor conference calls• Investment swap opportunities• Notify of deal timing

immediately

• Expanded tobacco educationprocess

• One-on-one conference callsand meetings

• Explore credit default swaps forinternational buyers

Citi/Morgan Team

$500 – 700 mm• Educate Wisconsin retail • Local office meetings or

conference calls

Total $6.3

National Bond Funds

High Yield Funds

Insurance Companies

Proprietary Accounts &Hedge Funds

Non - Traditional CrossoverBuyers (Taxable)

Retail Investors

$1.0 – 2.0Bn

$1.0 – 1.5Bn

$250 - 500MM

$2.5 – 3.0Bn

$500 – 750MM

Capital Commitment$500 mm – 1.0Bn Morgan Stanley

$500 – 700MM

Total $6.3 – 9.5Bn

Targeted Investors

National Bond Funds

High Yield Funds

Insurance Companies

Proprietary Accounts & Hedge Funds

Non-Traditional Crossover Buyers (Taxable)

Retail Investors

$1.0 – 2.0 bn

$1.0 – 1.5 bn

$250 – 500 mm

$2.5 – 3.0 bn

$500 – 750 mm

Capital Commitment$500 mm - $1.0 bn

1

2

3

4

5

6

7

1

2

3

4

5

6

7

• Traditional tobacco buying base

• Sales force contact two weeksprior to pricing

• Investor conference calls• Investment swap opportunities• Notify of deal timing

immediately

• Expanded tobacco educationprocess

• One-on-one conference callsand meetings

• Explore credit default swaps forinternational buyers

Citi/Morgan Team

$500 – 700 mm• Educate Wisconsin retail • Local office meetings or

conference calls

Total $6.3

National Bond Funds

High Yield Funds

Insurance Companies

Proprietary Accounts &Hedge Funds

Non - Traditional CrossoverBuyers (Taxable)

Retail Investors

$1.0 – 2.0Bn

$1.0 – 1.5Bn

$250 - 500MM

$2.5 – 3.0Bn

$500 – 750MM

Capital Commitment$500 mm – 1.0Bn Morgan Stanley

$500 – 700MM

Total $6.3 – 9.5Bn

Targeted Investors


order to best represent the fair market value of the Corporation’s securities. Additionally, we look to pre-market aggressively in order to generate a well-subscribed book that will both be aggressive in pricing for the Corporation as well as fair to the underwriters.

Refunding Transaction Creates Additional Investor Capacity. Because a large portion of the Corporation’s financing is a refunding of outstanding bonds, we believe that current Wisconsin tobacco bondholders will have particular interest in participating in this transaction. Existing bondholders would have their Series 2002 Bonds pre-refunded to the call date by a AAA quality refunding escrow. This change in credit quality leads to price appreciation in their investment and limits the tobacco credit exposure. In addition, because the bond have not been turbo amortizing as quickly as in original forecasts, bondholders are exposed to risk that the average life of their investment will be extended. A refunding would allow for them to reinvest in bond at a higher yield with more average life certainty. As the refunding bonds move out of tobacco exposure into pre-refunded status, we believe that there will be additional investor capacity for Wisconsin tobacco bonds.

Marketing Strategy

Reserve a Spot on the Forward Calendar. In addition to our response to Question B3, our efforts would include notifying specific investors such as Oppenheimer, Goldman Sachs Asset Management, Dreyfus, Nuveen, Susquehanna as well as the national and Wisconsin specific funds. We would also give notice to the broader dealer/investor community through Bloomberg and TM3 wires.

Internet Roadshow for Institutional Investors. Morgan Stanley will work with the Corporation to host an institutional investor roadshow accessible via the internet in which the credit, Wisconsin’s MSA enforcement efforts, and the structure of the financing are explained to investors. A replay of this presentation will be available through the day of the institutional offering. While the investor community is familiar with the MSA credit, the internet roadshow serves to focus investor interest early in the process and create a dialogue with key

investors on structure in the days leading up to pricing. Select One-On-One Institutional Investor Meetings. Morgan Stanley would coordinate a series of one-on-one meetings with specific major investors for key governmental contacts to develop a personal interest and rapport with the investors and facilitate their participation in the transaction.

Solicit Investor Feedback on Structure. Concurrent with the electronic roadshow and one-on-one institutional investor meetings, Morgan Stanley’s institutional salespeople would make continuous calls on investors to solicit structure and price feedback in the days leading up to pricing. Diversifying the offering with coupon structures, average lives and call features is critical to attracting the broadest range of investors and achieving the best price. By soliciting investor interest early, the Corporation has the best opportunity to discover the needs of various investor segments. Retail Investor Outreach. Morgan Stanley has a record of attracting retail sales to State issues and would work with our retail sales force, to maximize retail and high-net-worth investor participation. Morgan Stanley would implement a targeted retail branch investor/broker education campaign for the Corporation’s current interest bonds. This outreach would begin with the electronic distribution of the deal-specific Selling Memorandum to registered representatives in Wisconsin at least ten business days prior to the institutional pricing, as outlined above. Members of the Morgan Stanley finance team would conduct afternoon visits at Morgan Stanley retail offices across the State to publicize the transaction. Morgan Stanley would also prepare a one-page “Primary Issues” flier on the specific offering for registered representatives to send from their individual PC workstations and the firm would promote the transaction on the “National Shout” daily system-wide broadcasts to our retail sales force. Retail-Only Order Period. Retail-only order periods are highly successful in maximizing access for individual investors to securities. During these periods, in-state retail orders are given the highest priority for designations. An interest rate scale is


established for the retail order period for use by retail brokers in soliciting orders for the transaction, and these bonds are removed from the offering during the institutional pricing the following day. Morgan Stanley’s Distribution System

Morgan Stanley’s distribution system combines strong relationships with the largest institutional tax-exempt investors, unique prowess with the major purchasers of MSA-backed bonds (due to our leading secondary market presence in the asset class), long-standing relationships with mid-sized institutional investors in Wisconsin (reflecting our past work as the leading national firm for the underwriting of tax-exempt Wisconsin paper), one of the largest retail networks in the United States, ten retail offices in the State of Wisconsin and a specialized “high-net-worth” sales force. Morgan Stanley will utilize its distribution system to tap important pockets of market demand and bring unique and value-added orders to the Corporation’s transaction. Our involvement will assist the Corporation in achieving the best possible price for its offering.

Premier Institutional Franchise. Morgan Stanley is recognized as a premier institutional firm because of our long-standing and extensive relationships with investors. The Firm has a team of 17 national institutional tax-exempt sales persons with an average of 13 years of experience. These individuals are exclusively dedicated to the coverage of the 150 largest institutions that regularly buy tax-exempt securities. Morgan Stanley would market this financing to the national investors, outlined in the adjacent table, whom we believe would be significant participants in the Corporation’s offering. Morgan Stanley also maintains a 90-person institutional sales force

located in 54 of our brokerage offices nationwide. Together with our specialized sales force of 151 generalists in Morgan Stanley’s Fixed Income Division, these professionals cover a second tier of institutional purchasers of tax-exempt securities. These buyers include regional banks, trust companies and corporations throughout the nation.

As outlined in Question A6, Morgan Stanley is one of the three largest market makers in tobacco securitization bonds and is recognized by institutional investors as a price leader in this sector. The unique insight of our syndicate desk into the buyer base and trading levels of tobacco bonds will be of significant added value to the Corporation in achieving the broadest possible distribution of its offering.

Top-Tier Retail Investor Network. In addition to our institutional investor capabilities, Morgan Stanley boasts one of the largest retail sales forces in the securities industry with 7,449 financial advisors in 378 retail offices throughout the fifty states. Morgan Stanley’s 3.1 million customer accounts hold $728 billion in assets, including $52.7 billion in directly-held municipal bonds. The size and structure of this retail network provides tremendous distribution strength and allows for the specific geographic targeting of customers for the placement of primary market offerings. In addition to the Firm’s nation-wide retail network, Morgan Stanley ranks 3rd by number of brokers in the State of Wisconsin. Morgan Stanley maintains 10 retail brokerage offices in the State of Wisconsin employing 134 financial advisors. These advisors serve over 57,000 customer accounts holding nearly $7.6 billion in assets, including $386 million in directly-held municipal bonds.

High-Net-Worth Retail Distribution Capability. Morgan Stanley’s retail distribution system also includes an effective network dedicated to the high-net-worth retail sector through our Private Wealth Management Group (“PWM”). This network enables Morgan Stanley to target individuals who, because of their wealth and income, are substantial individual purchasers of tax-exempt securities. Ticket sizes of $1 million or more are typical from our PWM sales force for municipal issues.

7. Morgan Stanley Commitment

1.National Bond Funds

Alliance/BernsteinAmerican FundsBlackrockColumbiaEaton VanceDelawareDeutscheDreyfusFederatedFidelityFranklinJohn HancockLord AbbettMFSMorgan Stanley/Van KampenNuveenPrudentialPutnamStrongThe Boston CompanyT. Rowe PriceUSAAVanguardWaddell & ReedWellington

2.High Yield Funds

Cedar RidgeColumbiaEaton VanceFranklinGoldman Sachs AMLord AbbettNuveenOppenheimerPIMCOPioneerT. Rowe PriceMorgan Stanley/Van Kampen

3.Insurance Companies

AllstateChubbCommerceGuardianHartfordLoewsNationwideRadian

4.Non-Traditional Crossover Buyers (Taxable)

American FundsFidelityPIMCOVanguard

5.Proprietary Accounts & Hedge Funds

1861AvivaCamulos CapitalCedar RidgeCiti Arb & PropConvexityDuration CorpFortressGoldman ArbMerrill Lynch PropMorgan Stanley PropSearleSorosStarkSusquehannaTOB CapitalUBS Arb

6. Retail Investors

Direct RetailManaged MoneyTrust Departments

Tax-Exempt Badger Tobacco Asset Securitization Corporation BondsTargeted Demand

7. Morgan Stanley Commitment

1.National Bond Funds

Alliance/BernsteinAmerican FundsBlackrockColumbiaEaton VanceDelawareDeutscheDreyfusFederatedFidelityFranklinJohn HancockLord AbbettMFSMorgan Stanley/Van KampenNuveenPrudentialPutnamStrongThe Boston CompanyT. Rowe PriceUSAAVanguardWaddell & ReedWellington

2.High Yield Funds

Cedar RidgeColumbiaEaton VanceFranklinGoldman Sachs AMLord AbbettNuveenOppenheimerPIMCOPioneerT. Rowe PriceMorgan Stanley/Van Kampen

3.Insurance Companies

AllstateChubbCommerceGuardianHartfordLoewsNationwideRadian

4.Non-Traditional Crossover Buyers (Taxable)

American FundsFidelityPIMCOVanguard

5.Proprietary Accounts & Hedge Funds

1861AvivaCamulos CapitalCedar RidgeCiti Arb & PropConvexityDuration CorpFortressGoldman ArbMerrill Lynch PropMorgan Stanley PropSearleSorosStarkSusquehannaTOB CapitalUBS Arb

6. Retail Investors

Direct RetailManaged MoneyTrust Departments

Tax-Exempt Badger Tobacco Asset Securitization Corporation BondsTargeted Demand

Appendix A

Finance Team Resumes

APPENDIX A: RESUMES


Stratford Shields, Managing Director and Head of Morgan Stanley’s Public Finance Department. Mr. Shields, one of the Firm’s senior public finance bankers, serves as Head of Morgan Stanley’s Public Finance Department. Mr. Shields ill provide project oversight for the Corporation’s financing. He recently served as Morgan Stanley’s lead banker for the State of Rhode Island’s Tobacco Settlement Financing Corporation’s Series 2007 bonds for which Morgan Stanley served as joint book-running senior manager.

Mr. Shields has worked extensively with the States of Pennsylvania, Kentucky, Rhode Island, Mississippi, and Illinois on credit structuring and designing rating agency strategies for new credits and for major transactions. Since 2000, he has served as lead banker on more than $10 billion of financings including large transactions such as a $1 billion sole managed transaction in 2006 for the Pennsylvania Higher Education Assistance Authority, more than $2 billion of financings for the Commonwealth of Kentucky and its authorities including the State Property and Buildings Commission and the Turnpike Authority of Kentucky. Mr. Shields led Morgan Stanley’s finance team for the State of Mississippi’s post-Katrina financings including coordinating institutional investor calls for the State after the Hurricane and serving as senior banker to the State for financings for its General Obligation, Department of Transportation and Development Bank (Hurricane Katrina Relief Bonds and Electric Utility Restoration Bonds) credits. Mr. Shields joined Morgan Stanley in 1996 after serving as a Vice President at Prudential Securities.

Prior to joining the securities industry, Mr. Shields served as President of the State Controlling Board and Deputy Director of the Ohio Office of Budget and Management (“OBM”). At OBM, Mr. Shields had

Morgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance Team

Underwriting





















Project Management


Sales & Trading


Morgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance TeamMorgan Stanley’s Badger Tobacco Asset Securitization Corporation Finance Team

Underwriting





















Project Management


Sales & Trading


oversight responsibilities for the State’s capital budget expenditures. He also served as Director of Administration for the Ohio Office of the Governor, where he was a member of the Executive Staff and Cabinet Management Council. Mr. Shields holds a B.A. in History from the Ohio State University, an M.A. in American Politics and International Relations from Columbia University, and an M.B.A. in Finance from Columbia Business School, where he was elected to the national honors society Beta Gamma Sigma.

Project Management

William Mack, Executive Director. Mr. Mack joined Morgan Stanley in June 2000 and serves as an Executive Director in the Midwest Group. He maintains coverage responsibilities for several Midwestern clients including the Corporation, State of Wisconsin, Milwaukee County, the City of Milwaukee, the Milwaukee Metropolitan Sewerage District, the State of Illinois, the State of Ohio, the State of Michigan and the State of Tennessee. Mr. Mack was recently the lead banker on the City of Chicago’s Wastewater Transmission Revenue Bond financing as well as a $264.225 million financing for the Kentucky State Property and Buildings Commission. Prior to joining Morgan Stanley, Mr. Mack was Chief of Staff for the Metropolitan Pier & Exposition Authority, the entity that owns and operates McCormick Place Convention Center and Chicago's Navy Pier. Mr. Mack received his J.D. with honors from Loyola University Chicago School of Law and a B.A. in Mathematics and Economics from the University of St. Thomas in St. Paul, Minnesota.


Bill Daley, Executive Director. Mr. Daley joined Morgan Stanley in January 2006, and currently serves as an Executive Director in Morgan Stanley’s New York office. He is responsible for working with a variety of municipal clients in Ohio, Illinois, Indiana, New Mexico and Pennsylvania. Most recently, Mr. Daley served as Vice President for Government and Industry Relations for Fannie Mae where he was responsible for developing and maintaining relationships with members of the U.S. Senate and U.S. House of Representatives. Mr. Daley also served as Fannie Mae’s Midwestern Regional Office's director of regional public affairs, where he developed and implemented business strategies for the region's eleven partnership offices. Mr. Daley’s experience includes high-level positions in the Office of the United States Trade Representative and the White House Office of Intergovernmental Affairs, where he worked with state and local elected officials. Mr. Daley received his MBA from Northwestern University’s Kellogg School of Management and a B.A. in Marketing from Providence College in Providence, Rhode Island.

Jennie Huang, Vice President. Ms. Huang has structured and executed over $8.5 billion of negotiated senior managed transactions, including over $215 million in savings for municipal issuers nationwide, and has over 6 years of experience in Public Finance. Her coverage in Wisconsin includes the Corporation, the State, the City of Milwaukee and Milwaukee County. Her other municipal coverage includes a wide variety of issuers throughout the Midwest and Southern regions of the country, including the states of Indiana, Mississippi, Wisconsin and Ohio, the city of New York as well as the Mississippi Department of Transportation. She has worked on a $155.03 million City of Chicago Wastewater bond issue, a $200 million Hurricane Relief Bond program providing liquidity to issuers along the Gulf Coast, $1 billion in refundings for the State of Wisconsin and a $1 billion refunding for the City of New York 10 months after September 11. Her transaction experience includes structuring and executing various types of transactions including new money/refunding, general obligation/revenue-backed/state appropriation, note/note takeout, commercial paper, GARVEEs and fixed rate/variable rate/derivative financings, among others. In addition to providing banking and execution support, she has developed analytical models for several issuers. She holds a B.A. in Political Science and Economics from the University of Pennsylvania.

Veena Ramaswamy, Analyst. Ms. Ramaswamy joined Morgan Stanley’s Public Finance Department in July 2006 and provides analytical and execution support for a range of issuers. Her experience includes both tobacco securitizations as well as work with other municipal issuers. Recently, Ms. Ramaswamy provided execution support for Morgan Stanley’s $197 million joint-led underwriting of Rhode Island Tobacco Settlement Asset Backed Bonds executed in June 2007. In December of 2006, Ms. Ramaswamy was part of the deal team for the City of Cincinnati’s $127 million Water System Refunding Revenue Bonds Series 2007A. In December of 2006, she also worked on the execution of Case Western Reserve University's $82 million Series 2006 refunding and restructuring. Ms. Ramaswamy received her B.S. in Economics from M.I.T..


Craig McKenna, Managing Director and Manager of Municipal Capital Markets. Mr. McKenna is the Department's lead quantitative banker with respect to complex financings, including new money and refunding issues. Mr. McKenna specializes in the quantitative analysis of debt issues and has extensive experience with derivative products. Mr. McKenna has overseen and maintained Morgan Stanley’s tobacco settlement securitization model since the signing of the Master Settlement Agreement in 1998 and coordinated the cashflow analyses for securitizations by the Chautauqua Tobacco Asset Securitization Corporation, the District of Columbia Tobacco Settlement Finance Corporation, the Arkansas Development Finance Authority, the California County Tobacco Securitization Agency, and the Virginia Tobacco Settlement Finance Corporation. Mr. McKenna is a graduate of Dartmouth College and has been a member of Morgan Stanley's Public Finance Department for 17 years.


Jack Kattan, Managing Director and Manager of Non-Mortgage Asset-Backed Securities. Mr. Kattan has been in Morgan Stanley’s Securitized Products Group since July 1995 and heads the Firm’s securitization finance origination and execution efforts for non-mortgage Asset-Backed Securities. He has structured offerings of various asset classes in the ABS market, including student loans, utility, stranded costs, auto loans, auto leases, dealer floorplan, credit card receivables, equipment loans and leases, manufactured housing loans, home equity loans and oil and gas receivables. Throughout his career, Mr. Kattan has structured many first-time asset classes and structures for issuers in the auto, student loan and utility ABS markets. He has also structured innovative operating business securitizations for PPL and UBS Principal Finance. Mr. Kattan has over fifteen years experience in asset-backed securitization, having previously worked at two other Wall Street firms. He holds a B.S. in Finance from the New York University Stern School of Business.

Sanjeev Khanna, Managing Director and Manager of the Corporate Securitization Group. Mr. Khanna joined Morgan Stanley in 1986 and is currently a senior banker and co-head of the Corporate Securitization Group within the Securitized Products Group. His team has been awarded IFR “Deal of the Year” status for 2000, 2001, 2002, 2004 and 2005. He is responsible for origination and structuring of asset-backed securities, focusing on corporate securitizations and esoteric and insurance asset classes. Some of his more notable transaction experience includes wireless cell towers, intellectual property, tax liens and public sector securitizations. He has worked extensively on all aspects of sale and securitization with various issuers including municipalities, corporations, commercial banks, insurance companies, mortgage conduits and federal agencies. Mr. Khanna received his B.S. from Columbia University.

Underwriting

Donald O’Brien, Managing Director and Co-Head of Municipal Syndicate. Mr. O’Brien has over 20 years of syndicate, sales and trading experience in the tax-exempt market. As the head of Morgan Stanley’s National Municipal Syndicate, he is responsible for the pricing of all of our Firm’s transactions. Mr. O'Brien has served as lead underwriter for large financings by major issuers including the States of

Wisconsin, Connecticut, New York, California, Massachusetts, Texas, Illinois and Ohio, among others. Mr. O’Brien led the underwriting group for the following large financings: State of California’s $1.7 billion Various Purpose GO Bonds in 2003; State of Michigan’s $1.2 billion General Obligation Notes in November 2005; and New York City’s 2004, 2005 and 2006 General Obligation Bonds with a combined total par amount of $2.6 billion. Mr.O’Brien served as lead underwriter for the $197 million joint-led underwriting of Rhode Island Tobacco Settlement Asset Backed Bonds executed in June 2007 as well as for securitizations by the Chautauqua Tobacco Asset Securitization Corporation, the Arkansas Development Finance Authority, the California County Tobacco Securitization Agency and the Virginia Tobacco Settlement Finance Corporation. Mr. O’Brien currently serves as Vice-Chairman for the Municipal Securities Rulemaking Board. Prior to joining Morgan Stanley in 1987, Mr. O’Brien was the chief long-term trader at another Wall Street firm. He is a graduate of the University of Rochester.

Brian Wynne, Managing Director and Co-Head of Municipal Syndicate. Mr. Wynne is responsible for underwriting a wide variety of issues for our municipal clients. He is co-head of the Firm’s National Municipal Syndicate. Mr. Wynne is lead underwriter for many state-level issuers including, the State of Texas, the Commonwealth of Puerto Rico and the State of Oregon. Mr. Wynne has been an underwriter for Morgan Stanley since 1989 and has 21 years of syndicate, sales and trading experience. He has previously worked at Alex Brown and Salomon Brothers.


Kevin R. Schwartz, Executive Director and Manager of Municipal Derivatives and Reinvestment. Mr. Schwartz is head of Morgan Stanley’s Municipal Derivatives and Reinvestment Group, which offers a full range of derivative and reinvestment products, including BMA and LIBOR swaps and swaptions, forward purchase agreements, repurchase agreements and investment agreements. While at Morgan Stanley, Mr. Schwartz has closed in excess of $500 million of Tobacco reinvestment agreements for a variety of issuers. Prior to joining Morgan Stanley, Mr. Schwartz spent five years in the Interest Rate Derivative Group of National Westminster Bank, focusing on Municipal Derivatives and Reinvestment. Mr. Schwartz began his career at Bear, Stearns & Co. Inc. as an Analyst in the Public Finance Department. Mr. Schwartz has a Bachelor of Arts in Economics from Bucknell University.

Credit Advisory Services

Dennis Farrell, Executive Director and Manager of Municipal Credit Strategy. Mr. Farrell serves as Head of the Municipal Credit Strategy Group. Prior to joining Morgan Stanley, Mr. Farrell was the Managing Director for the Public Finance Group of Moody’s Investors Service. As Head of the Moody’s municipal ratings group, Mr. Farrell managed 135 analysts and other professionals covering over 100,000 governments and not-for-profit issues throughout the U.S. and its territories. In his capacity, Mr. Farrell regularly participated in rating committees for tobacco securitizations with his structured finance colleagues. Under his leadership he was responsible for the development of the credit policies and procedures that are currently employed by Moody’s Public Finance analysts. In conjunction with establishing these standards, Mr. Farrell oversaw the development and use of Moody’s Financial Ratio Analysis (MFRA) and Moody’s Quantitative Ratings Estimator (Q-RATE), which are two integral tools used by the Moody’s analysts in their credit assignments. Mr. Farrell received his B.S. from State University of New York at Albany and M.B.A. from Baruch College.


Nigel Key, Managing Director and National Sales Manager and Director of Credit Research. Mr. Key joined the Firm in 1995 and serves as the National Institutional Sales Manager and Director of Credit Research for municipal finance. He is responsible for the coordination of new product development, marketing of portfolio strategy to clients and management of daily sales and trading inquiries. Prior to joining Morgan Stanley, Mr. Key worked at another Wall Street firm. He has over 20 years of sales

experience, and his clients include some of the largest municipal bond funds and insurers in the country. He earned a B.A. in Government at Dartmouth College. Mr. Key is in his 28th year in the industry.

Robert Shearer, Executive Director and Retail Sales Manager. Mr. Shearer works with Morgan Stanley’s national and regional underwriting desks and branch office employees to develop and execute our retail distribution strategy. Mr. Shearer would ensure the maximum level of retail participation of the Firm’s retail distribution system in Wisconsin and nationally. He has experience in a broad spectrum of municipal financings, including general obligation, revenue bonds and certificates of participation. Mr. Shearer has spent 23 years in the municipal bond industry, 20 in municipal finance and three in municipal bond law. He has been at Morgan Stanley since 1984. He is a graduate of Stanford University and the University of Michigan Law School and received an M.B.A. from Columbia University.

Sales & Trading

Jim Higgins, Executive Director and High-Yield Bond Trader. Mr. Higgins joined Morgan Stanley in 2004 and is one of the Firm’s senior high-yield bond traders with more than 24 years of experience in the sector. Mr. Higgins regularly holds positions in tax-exempt municipal securitization bonds in excess of $50 million and is an active and respected market-maker among the major investors in the asset class. In addition, Mr. Higgins trades airline, housing, healthcare, zero coupon, pollution control, industrial development, Puerto Rico, and distressed securities. Mr. Higgins is a graduate of Holy Cross.

Appendix B

Morgan Stanley Tobacco Securitization Experience

APPENDIX B

Morgan Stanley Book-Running Tobacco ExperienceJanuary 1999 - Present

Dated Date Issuer Issue Description Par ($MM) Morgan Stanley Role Purpose Initial Morgan Stanley Underwriting Liability Retail Member Priority Total Retail Member Priority Total

6/27/2007 Rhode Island Tobacco Settlement Fin Corp Tobacco Settle Asset Backed Bonds 197.0 Joint Book-Runner Residual 30.00% - 80,000 - 80,000 - - - -7/9/2002 California Co Tobacco Sec Agency Tobacco Settle Asset Backed Bonds 34.3 Book-Runner Residual 100.00% - 104,500 - 104,500 - 41,590 - 41,5906/26/2002 California Co Tobacco Sec Agency Tobacco Settle Asset-Backed Bonds 41.6 Book-Runner Residual 100.00% - 34,140 - 34,140 - 34,345 - 34,3459/1/2001 Arkansas Development Fin Auth Tobacco Settlement Revenue Bonds 60.0 Book-Runner New Money 50.00% 650 750 179,450 180,850 650 - 40,405 41,0553/13/2001 DC Tobacco Settlement Fin Corp Tobacco Asset Backed Bonds 521.1 Joint Book-Runner New Money N/A - 80,000 - 80,000 - 11,025 - 11,0259/15/2000 Chautauqua Tobacco Asset Sec Corp Tobacco Settlement Rev Bonds 30.1 Book-Runner New Money 100.00% - 46,010 - 46,010 - 30,155 - 30,155

Morgan Stanley Co-Senior Managed and Co-Managed Tobacco ExperienceJanuary 1999 - Present

Dated Date Issuer Issue Description Par ($MM) Morgan Stanley Role Purpose Initial Morgan Stanley Underwriting Liability Retail Stock Total Retail Stock Total

6/26/2007 West Virginia Tobacco Settlement Fin Auth Tobacco Settle Asset-Backed Bonds 947.9 Co-Manager New Money 1.00% - - - - - -3/14/2007 Golden State Tobacco Sec Corp Tobacco Settlement Bonds 4,446.8 Co-Manager Residual & Refunding 1.25% 16,140 249,000 265,140 16,895 - 16,8951/29/2007 NJ Tobacco Settlement Fin Corp Tobacco Settlement Senior Bonds 3,622.2 Co-Manager Refunding 0.50% 725 100,000 100,725 675 273,000 273,6755/17/2006 Michigan Tobacco Settle Fin Auth Taboacco Settlement Bonds 490.5 Co-Manager Residual 2.00% - - - - - -2/8/2006 TSASC Inc Tobacco Settle Asset-Backed Bonds 1,353.5 Co-Senior Manager Refunding 4.14% - 105,000 105,000 - 2,850 2,8508/4/2005 Golden State Tobacco Sec Corp Tobacco Settlement Asset Backed 3,140.6 Co-Manager Refunding 2.00% 6,010 170,000 176,010 2,535 5,325 7,8605/16/2005 Virginia Tobacco Settle Fin Corp Tobacco Settle Asset-Backed Bonds 448.3 Co-Manager New Money 6.00% 2,500 20,000 22,500 2,500 - 2,50012/2/2003 NY Tobacco Settlement Fin Corp Tobacco Settlement Bonds 2,015.4 Co-Senior Manager Residual 4.00% 26,425 80,000 106,425 17,325 1,200 18,5259/30/2003 Golden State Tobacco Sec Corp Tobacco Settlement Bonds 2,572.3 Co-Manager Residual 1.25% 16,140 249,000 265,140 16,895 - 16,8956/19/2003 NY Tobacco Settlement Fin Corp Asset Backed Revenue Bonds 2,093.2 Co-Senior Manager New Money 7.50% 14,055 115,000 129,055 11,755 2,600 14,3554/16/2003 Oregon Dept of Admin Services Oregon Appropriation Bonds 431.6 Co-Manager New Money 10.00% 10,155 50,000 60,155 10,155 23,095 33,2503/7/2003 NJ Tobacco Settlement Fin Corp Tobacco Settlement Bonds 1,659.2 Co-Senior Manager Residual 5.00% 28,220 45,000 73,220 25,890 50 25,9401/29/2003 Golden State Tobacco Sec Corp Tobacco Settlement Bonds 3,000.0 Co-Manager New Money 2.00% 24,165 122,000 146,165 23,915 37,355 61,27010/10/2002 Puerto Rico Childrens Trust Fund Tobacco Settlement Bonds 1,171.2 Co-Manager Residual & Refunding 10.00% 4,260 90,000 94,260 3,175 1,000 4,1758/28/2002 NJ Tobacco Settlement Fin Corp Tobacco Settle Asset-Backed Bonds 1,801.5 Co-Senior Manager New Money N/A 21,525 85,000 106,525 19,325 84,500 103,8258/15/2002 TSASC Inc Tobacco Settle Asset-Backed Bonds 500.0 Co-Senior Manager Residual 4.50% 4,600 36,000 40,600 4,500 5,995 10,4956/27/2002 RI Tobacco Settlement Fin Corp Tobacco Settlement Bonds 685.4 Co-Senior Manager New Money 12.00% - 60,000 60,000 - 19,780 19,7805/23/2002 Badger Tobacco Asset Sec Corp Tobacco Settle Asset-Backed Bonds 1,591.1 Co-Senior Manager New Money 4.00% - 55,000 55,000 - 62,365 62,36511/7/2001 LA Tobacco Settlement Fin Corp Tobacco Settlement Bonds 1,202.8 Co-Manager New Money 2.50% - 35,000 35,000 - 6,750 6,75010/25/2001 Iowa Tobacco Settlement Auth Tobacco Settle Asset Backed Bonds 644.2 Co-Manager New Money N/A - - - - - -8/15/2001 Northern Tobacco Sec Corp Tobacco Settlement Bonds 126.8 Co-Manager New Money N/A 4,640 7,500 12,140 3,235 1,160 4,3956/21/2001 Guam Economic Dev Auth Tobacco Seattlement Asset Bonds 25.5 Co-Manager New Money N/A - 1,000 1,000 - - -3/22/2001 SC Tobacco Settlement Mgmt Auth Tobacco Settle Asset-Backed Bonds 934.5 Co-Manager New Money 2.77% 100 30,000 30,100 100 1,750 1,85011/15/2000 Puerto Rico Childrens Trust Fund Tobacco Settlement Bonds 397.0 Co-Senior Manager New Money 10.00% 750 51,000 51,750 500 400 90010/26/2000 Northern Tobacco Sec Corp Tobacco Settlement Bonds 116.1 Co-Senior Manager New Money N/A - 10,000 10,000 - - -10/5/2000 Erie Tobacco Asset Sec Corp Tobacco Settlement Bonds 246.3 Co-Manager New Money 3.75% 0 - - 1,350 1,3508/15/2000 Monroe Tobacco Asset Sec Corp Tobacco Sett Asset-Backed Bonds 163.4 Co-Manager New Money N/A - 6,000 6,000 - - -11/23/1999 Nassau Co Tobacco Settlement Tobacco Settle Asset-Backed Bonds 294.5 Co-Manager New Money 15.00% - 20,000 20,000 - - -11/18/1999 TSASC Inc Tobacco Flex Amortization Bonds 709.3 Co-Senior Manager New Money 3.30% 1,750 65,000 66,750 1,750 6,250 8,000

Orders ($000) Allotments ($000)

Orders Allotments

Morgan Stanley

Appendix C

Morgan Stanley’s Wisconsin Underwriting Experience

APPENDIX C

Morgan Stanley State of Wisconsin Transaction ExperienceJanuary 1, 2004 - Present

Dated Date Issuer Issue Description Par ($ MM) Bid Role of Morgan Stanley Initial Morgan Stanley Underwriting Liability

1/28/2004 Wisconsin GO Refunding Bonds 147.0 N LEAD 40%


4/14/2004 Wisconsin General Obligation Bonds 307.4 C LEAD 16%


9/30/2004 Wisconsin Transportation Rev Ref Bonds 95.9 N LEAD 35%

10/21/2004 Wisconsin General Obligation Bonds 225.0 C CO-MGR 18%

1/25/2005 Wisconsin Clean Water Rev Refunding Bonds 107.0 N LEAD 50%

2/10/2005 Wisconsin GO Refunding Bonds 430.2 N CO-MGR 10%


3/10/2005 Wisconsin Transportation Revenue Bonds 235.6 N CO-MGR 10%

8/11/2005 Wisconsin General Obligation Bonds 186.6 C SOLE 100%

3/16/2006 Wisconsin Clean Water Revenue Bonds 80.0 C SOLE 100%

3/8/2007 Wisconsin Transportation Revenue Ref Bonds 206.6 C SOLE 100%

Total 2,411.2

Morgan Stanley

APPENDIX C

Morgan Stanley Wisconsin State Authority Transaction ExperienceJanuary 1, 2004 - present

Dated Date Issuer Issue Description Par ($ MM) Bid Role of Morgan Stanley

Initial Morgan Stanley Underwriting Liability

5/26/2005 Wisconsin Health and Ed Fac Auth Revenue Bonds 22.8 N LEAD 70%

5/26/2005 Wisconsin Health and Ed Fac Auth Var Rate Revenue Bonds 185.4 N LEAD 70%

6/9/2005 Wisconsin Health and Ed Fac Auth ARS Revenue Bonds 78.1 N LEAD 70%

11/16/2006 Wisconsin Health and Ed Fac Auth Revenue Bonds 118.8 N LEAD 50%

Total 405.2

Morgan Stanley

APPENDIX C

Morgan Stanley Wisconsin Local Governmental Transaction ExperienceJanuary 1, 2004 - Present

Dated Date Issuer Issue Description Par ($ MM) Bid Role of Morgan Stanley

Initial Morgan Stanley Underwriting Liability

2/1/2004 Greenfield City-Wisconsin GO Public Improvement Bonds 4.4 C CO-MGR 14%

2/15/2004 Winnebago Co-Wisconsin GO Refunding Bonds 3.4 C CO-MGR 12%

3/1/2004 Oshkosh City-Wisconsin GO Corporate Purpose Bonds 6.5 C CO-MGR 11%

3/1/2004 De Pere-Wisconsin GO Refunding Bonds 4.8 C CO-MGR 12%

5/1/2004 Wausau City-Wisconsin GO Promissory Notes 3.1 C CO-MGR 11%

5/1/2004 Wausau City-Wisconsin GO Refunding Bonds 5.4 C CO-MGR 11%

8/1/2004 Whitefish Bay Village-Wisconsin GO Corporate Purpose Bonds 3.3 C CO-MGR 20%

7/20/2004 Racine Co (Racine) USD TRANs Proissory Notes 46.4 C SOLE 100%

9/9/2004 Milwaukee City-Wisconsin School RANs 25.0 C SOLE 100%

11/1/2004 Dane Co-Wisconsin General Obligation Bonds 7.2 C CO-MGR 17%

3/1/2005 Fond du Lac Co-Wisconsin GO Corporate Purpose Bonds 9.8 C CO-MGR 15%

3/1/2005 Waunakee Village-Wisconsin GO Corporate Purpose Bonds 10.1 C CO-MGR 13%

4/21/2005 Milwaukee Metro Sewerage Dt GO Sewerage Sys Refunding Bonds 57.1 N LEAD 75%

5/1/2005 Oshkosh City-Wisconsin Storm Water Utility Revenue Bonds 4.8 C CO-MGR 10%

5/1/2005 Neenah City-Wisconsin GO Community Development Bonds 5.2 C CO-MGR 14%

6/1/2005 Brown Co-Wisconsin GO Airport Imp Bonds 4.0 C CO-MGR 14%

7/1/2005 Janesville City-Wisconsin GO Promissory Notes 11.2 C CO-MGR 11%

7/1/2005 Dane Co-Wisconsin General Obligation Bonds 14.3 C CO-MGR 18%

7/15/2005 Racine Co (Racine) USD TRANs Promissory Notes 46.4 C SOLE 100%

8/1/2005 Sun Prairie City-Wisconsin GO Public Safety Bonds 4.7 C CO-MGR 20%

8/1/2005 Sun Prairie City-Wisconsin GO Refunding Bonds 6.0 C CO-MGR 20%

8/1/2005 Kaukauna City-Wisconsin Environmental Imp Rev Bonds 7.0 N SOLE 100%

9/1/2005 Sheboygan City-Wisconsin GO Refunding Bonds 3.1 C CO-MGR 17%

9/1/2005 Sheboygan City-Wisconsin Water Utility Revenue Bonds 4.9 C CO-MGR 17%

12/1/2005 Marathon Co-Wisconsin GO Airport Refunding Bonds 4.1 C CO-MGR 24%

4/6/2006 Milwaukee City-Wisconsin GO Cash Flow Promissory Notes 66.0 C SOLE 100%

10/1/2006 Madison City-Wisconsin GO Promissory Notes 26.4 C SOLE 100%

11/16/2006 Milwaukee Co-Wisconsin Airport Revenue & Refunding Bonds 30.7 N LEAD 70%

1/24/2007 Beloit City-Wisconsin Water System Revenue Ref Bonds 14.1 C SOLE 100%

8/1/2007 La Crosse City-Wisconsin GO Corporate Purpose Ref Bonds 5.7 C SOLE 100%

6/1/2007 Beloit City-Wisconsin GO Corporate Purpose Bonds 12.1 C SOLE 100%

Total 457.1

Morgan Stanley

Appendix D

Morgan Stanley’s Required Certifications and

10K and 10Q Legal Proceedings

APPENDIX D Required Certifications

(A) Morgan Stanley & Co. Incorporated (the "Firm") certifies that to the best of its knowledge, information and belief, no relationship which would constitute a violation of Section 19.45 (6), Wisconsin Statutes, regarding a state public official or their immediate family exists. The Firm also certifies that no relationship exists which interferes with fair competition with respect to its submittal.

(B) Based on our survey of the professionals in the Public Finance Department, to the best of our knowledge, information and belief, we are not currently aware of any relationship between the Public Finance Department of the Firm and the Corporation which we would view as creating any actual or potential conflict of interest if the Firm is selected to perform the services contemplated by the Request for Proposal. Furthermore, the Firm will promptly provide notice to the Corporation when the Firm learns of any conflict of interest that arises in the future."

(C) Morgan Stanley & Co. Incorporated (“MS&Co.”) is a wholly-owned subsidiary of Morgan Stanley (“MS”), a Delaware holding company. MS files periodic reports with the Securities and Exchange Commission as required by the Securities Exchange Act of 1934, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning MS and its subsidiaries, including MS&Co. As a consolidated subsidiary of MS, MS&Co. does not file its own periodic reports with the SEC. As a result, we are attaching as Appendix D copies of the “Legal Proceedings” section of MS’s SEC 10-K filing for 2006 and its SEC 10-Q filings for the first two quarters of 2007 describing certain developments in certain legal proceedings.

In addition to the matters described in Appendix D, in the normal course of business, each of MS and MS&Co. 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 legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or otherwise in financial distress. Each of MS and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including MS and MS&Co.

In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, we cannot predict with certainty the eventual loss or range of loss related to such matters. MS is contesting liability and/or the amount of damages in each pending matter and believes, based on current knowledge, information and belief, and after consultation with counsel, that the outcome of each matter will not have a material adverse effect on the consolidated financial condition of MS, although the outcome could be material to MS’s operating results for a particular future period, depending on, among other things, the level of MS’s income for such period."

(D) To the best of our knowledge, information and belief, the Firm and persons covered by Municipal Securities Rulemaking Board Rule G-37 have not made any contributions during the past three years, directly or indirectly, to an official of the Corporation or the State. Furthermore, to help ensure compliance with MSRB Rule G-37, Morgan Stanley & Co. Incorporated has a Political Contributions Policy which prohibits the making, soliciting or coordinating of any political contribution, regardless of the amount, whether in cash or in kind, with the intent or for

the purpose of influencing the obtaining or retaining of municipal securities business. Except for de minimus contributions and solicitation activity permitted by MSRB Rule G-37, the Political Contributions Policy restricts contributions and solicitation activity on the state and local level by Restricted Persons, which include the Firm, affiliated political action committees, the Management Committee, certain executive officers, and all municipal finance professionals, and also includes pre-clearance and disclosure provisions for such individuals.

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended November 30, 2006

Commission File Number 1-11758

Morgan Stanley(Exact name of Registrant as specified in its charter)

Delaware 36-3145972(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

1585 BroadwayNew York, NY 10036 (212) 761-4000

(Address of principal executive offices, including zip code) (Registrant’s telephone number, including area code)

Title of each className of exchange on

which registered

Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock ExchangeDepository Shares, each representing 1/1,000th interest in a share of Floating Rate Non-Cumulative Preferred Stock, Series A,

$0.01 par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock Exchange8.03% Capital Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New York Stock Exchange7 1⁄4% Capital Securities of Morgan Stanley Capital Trust II (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . . . New York Stock Exchange6 1⁄4% Capital Securities of Morgan Stanley Capital Trust III (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . . . New York Stock Exchange6 1⁄4% Capital Securities of Morgan Stanley Capital Trust IV (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . . New York Stock Exchange5 3⁄4% Capital Securities of Morgan Stanley Capital Trust V (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . . . New York Stock Exchange6.60% Capital Securities of Morgan Stanley Capital Trust VI (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . . New York Stock Exchange6.60% Capital Securities of Morgan Stanley Capital Trust VII (and Registrant’s guaranty with respect thereto) . . . . . . . . . . . . . New York Stock ExchangeSPARQSSM due February 20, 2007 (2 issuances); SPARQS due March 20, 2007 (2 issuances); SPARQS due April 20, 2007;

SPARQS due May 20, 2007; SPARQS due June 20, 2007; SPARQS due August 20, 2007; SPARQS due September 20,2007 (2 issuances); SPARQS due October 20, 2007 (2 issuances); SPARQS due November 20, 2007; SPARQS dueDecember 20, 2007 (2 issuances); SPARQS due January 20, 2008 (2 issuances); SPARQS due February 20, 2008 . . . . . . . . . American Stock Exchange

Exchangeable Notes due December 30, 2008 (2 issuances); Exchangeable Notes due December 30, 2010; Exchangeable Notesdue April 30, 2011; Exchangeable Notes due June 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock Exchange

Callable Index-Linked Notes due December 30, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock ExchangeBRIDGESSM due August 30, 2008; BRIDGES due December 30, 2008 (2 issuances); BRIDGES due February 28, 2009;

BRIDGES due March 30, 2009; BRIDGES due June 30, 2009; BRIDGES due July 30, 2009; BRIDGES due August 30,2009; BRIDGES due October 30, 2009; BRIDGES due December 30, 2009; BRIDGES due June 15, 2010 . . . . . . . . . . . . . . American Stock Exchange

Capital Protected Notes due June 30, 2008; Capital Protected Notes due July 20, 2008; Capital Protected Notes dueSeptember 30, 2008; Capital Protected Notes due December 30, 2008; Capital Protected Notes due December 30, 2009;Capital Protected Notes due April 20, 2010; Capital Protected Notes due July 20, 2010 (2 issuances); Capital ProtectedNotes due August 30, 2010; Capital Protected Notes due October 30, 2010; Capital Protected Notes due January 30, 2011;Capital Protected Notes due March 30, 2011 (2 issuances); Capital Protected Notes due June 30, 2011; Capital ProtectedNotes due October 30, 2011; Capital Protected Notes due December 30, 2011; Capital Protected Notes due September 30,2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock Exchange

Capital Protected Notes due September 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The NASDAQ Stock Market LLCHITSSM due March 20, 2007; HITS due April 20, 2007; HITS due May 20, 2007; HITS due June 20, 2007; HITS due

December 20, 2007; HITS due January 20, 2008; HITS due February 20, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock ExchangeMPSSM due December 30, 2008; MPS due December 30, 2009; MPS due February 1, 2010; MPS due June 15, 2010; MPS due

December 30, 2010 (2 issuances); MPS due March 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock ExchangeMPS due March 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The NASDAQ Stock Market LLCStock Participation Notes due September 15, 2010; Stock Participation Notes due December 30, 2010 . . . . . . . . . . . . . . . . . . . . American Stock ExchangePLUSSM due February 20, 2007; PLUS due March 20, 2007; PLUS due April 20, 2007; PLUS due April 30, 2007; PLUS due

June 20, 2007; PLUS due July 20, 2007; PLUS due September 20, 2007; PLUS due October 20, 2007 (2 issuances); PLUSdue November 20, 2007 (2 issuances); PLUS due January 20, 2008; PLUS due February 20, 2008; PLUS due March 20,2008; PLUS due April 30, 2008; PLUS due June 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock Exchange

PLUS due February 20, 2007; PLUS due July 20, 2007; PLUS due August 20, 2007; PLUS due September 30, 2009 . . . . . . . . The NASDAQ Stock Market LLCPROPELSSM due December 30, 2011 (3 issuances) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock ExchangeStrategic Total Return Securities due December 17, 2009; Strategic Total Return Securities due March 30, 2010; Strategic

Total Return Securities due July 30, 2011(2 issuances); Strategic Total Return Securities due January 15, 2012 . . . . . . . . . . . American Stock ExchangeStrategic Total Return Securities due October 30, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The NASDAQ Stock Market LLCBOXESSM due October 30, 2031; BOXES due January 30, 2032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Stock Exchange

Philadelphia Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES È NO ‘

Indicate by check mark if Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ‘ NO È

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past90 days. YES È NO ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Exchange Act Rule 12b-2. Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘

Indicate by check mark whether Registrant is a shell company (as defined in Exchange Act Rule 12b-2). YES ‘ NO È

As of May 31, 2006, the aggregate market value of the common stock of Registrant held by non-affiliates of Registrant was approximately $63,258,828,406.58. Thiscalculation does not reflect a determination that persons are affiliates for any other purposes.As of January 31, 2007, there were 1,066,418,476 shares of Registrant’s common stock, $.01 par value, outstanding.Documents Incorporated By Reference: Portions of Registrant’s definitive proxy statement for its annual stockholders’ meeting to be held on April 10, 2007 areincorporated by reference in Part III of this Form 10-K.

Item 3. Legal Proceedings.In addition to the matters described below, in the normal course of business, Morgan Stanley 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 actualor threatened legal actions include claims for substantial compensatory and/or punitive damages or claims forindeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants insuch cases are bankrupt or in financial distress.

Morgan Stanley is also involved, from time to time, in other reviews, investigations and proceedings (bothformal and informal) by governmental and self-regulatory agencies regarding Morgan Stanley’s business,including, among other matters, accounting and operational matters, certain of which may result in adversejudgments, settlements, fines, penalties, injunctions or other relief. The number of these reviews, investigationsand proceedings has increased in recent years with regard to many firms in the financial services industry,including Morgan Stanley.

Morgan Stanley contests liability and/or the amount of damages as appropriate in each pending matter. In view ofthe inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seeksubstantial or indeterminate damages or where investigations and proceedings are in the early stages, MorganStanley cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if suchmatters will be resolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty orother relief, if any, might be. Subject to the foregoing, and except for the Coleman Litigation (see also Note 9 in“Notes to Consolidated Financial Statements” in Part II, Item 8), Morgan Stanley believes, based on currentknowledge and after consultation with counsel, that the outcome of all other pending matters will not have amaterial adverse effect on the consolidated financial condition of Morgan Stanley, although the outcome of suchmatters could be material to Morgan Stanley’s operating results for a particular future period, depending on,among other things, the level of Morgan Stanley’s revenues or income for such period.

Coleman Litigation.

On May 8, 2003, Coleman (Parent) Holdings Inc. (“CPH”) filed a complaint against Morgan Stanley in theCircuit Court of the Fifteenth Judicial Circuit for Palm Beach County, Florida. The complaint relates to the 1998merger between The Coleman Company, Inc. (“Coleman”) and Sunbeam, Inc. (“Sunbeam”). The complaint, asamended, alleges that CPH was induced to agree to the transaction with Sunbeam based on certain financialmisrepresentations, and it asserts claims against Morgan Stanley for aiding and abetting fraud, conspiracy andpunitive damages. Shortly before trial, which commenced in April 2005, the trial court granted, in part, a motionfor entry of a default judgment against Morgan Stanley and ordered that portions of CPH’s complaint, includingthose setting forth CPH’s primary allegations against Morgan Stanley, be read to the jury and deemed establishedfor all purposes in the action. In May 2005, the jury returned a verdict in favor of CPH and awarded CPH $604million in compensatory damages and $850 million in punitive damages. On June 23, 2005, the trial court issueda final judgment in favor of CPH in the amount of $1,578 million, which includes prejudgment interest andexcludes certain payments received by CPH in settlement of related claims against others.

On June 27, 2005, Morgan Stanley filed a notice of appeal with the District Court of Appeal for the FourthDistrict of Florida (the “Court of Appeal”) and posted a supersedeas bond, which automatically stayed executionof the judgment pending appeal. Morgan Stanley filed its initial brief in support of its appeal on December 7,2005 and, on June 28, 2006, the Court of Appeal heard oral argument. Morgan Stanley’s appeal seeks to reversethe judgment of the trial court on several grounds and asks that the case be remanded for entry of a judgment infavor of Morgan Stanley or, in the alternative, for a new trial.

IPO Fee Litigation.

Starting in late 1998, purported class actions, later captioned In re Public Offering Fee Antitrust Litigation (the“purchaser actions”) and In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation (the “issuer

24

actions”), were initiated in the U.S. District Court for the Southern District of New York (the “SDNY”) againstMorgan Stanley and numerous other underwriters. The consolidated proceedings, one on behalf of purchasersand the other on behalf of issuers of certain shares in initial public offerings (“IPOs”), allege that defendantsconspired to fix the underwriters’ spread at 7% in IPOs of U.S. companies in the $20 million to $80 million rangein violation of Section 1 of the Sherman Act. The complaints seek treble damages and injunctive relief.Plaintiffs’ claims for damages in the purchaser actions have been dismissed, but the claims for injunctive reliefremain. Plaintiffs’ claims for damages and injunctive relief remain in the issuer actions. Plaintiffs moved forclass certification in both actions, and defendants opposed that motion on May 25, 2005. On October 25, 2005,plaintiffs moved for summary judgment, which defendants opposed. On April 18, 2006, the court deniedplaintiffs’ motion for class certification in the issuer actions. On May 1, 2006, plaintiffs filed a petition pursuantto Federal Rule of Civil Procedure 23(f) for leave to appeal the denial of class certification, and on August 1,2006, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) granted plaintiffs’ petition. Thecase is otherwise stayed pending the appeal on class certification.

IPO Allocation Matters.

In March 2001, a purported class action, now captioned In re Initial Public Offering Antitrust Litigation, wasinitiated in the SDNY against Morgan Stanley and numerous other underwriters of various IPOs. Theconsolidated amended complaint alleges that defendants required customers who wanted allocations of “hot” IPOsecurities to pay undisclosed and excessive underwriters’ compensation in the form of increased brokeragecommissions and to buy shares of securities offered in the IPOs after the IPOs were completed (“tie-inpurchases”) at escalating price levels higher than the IPO price (a practice plaintiffs refer to as “laddering”). Thecomplaint alleges violations of federal and/or state antitrust laws, including Section 1 of the Sherman Act. OnSeptember 28, 2005, the Second Circuit reversed the district court’s dismissal of this matter. On January 12,2006, the Second Circuit denied defendants’ petition for rehearing en banc. On March 8, 2006, defendants filed apetition to the U.S. Supreme Court for writ of certiorari, which was granted on December 7, 2006.

Also beginning in March 2001, numerous purported class actions, now captioned In re Initial Public OfferingSecurities Litigation, were filed in the SDNY against certain issuers of IPO securities, certain individual officersof those issuers, Morgan Stanley and other underwriters of those IPOs, purportedly on behalf of purchasers ofstock in the IPOs or the aftermarket. These complaints make factual allegations similar to the complaint in theantitrust action described above, but claim violations of the federal securities laws, including Sections 11 and12(a)(2) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Exchange Act. Some of thecomplaints also allege that continuous “buy” recommendations by the defendants’ research analysts improperlyincreased or sustained the prices at which the securities traded after the IPOs. On February 19, 2003, theunderwriter defendants’ joint motion to dismiss was denied, except as to certain specified offerings. OnDecember 5, 2006, the Second Circuit reversed the SDNY’s grant of class certification, and ruled that these casescould not be certified for class treatment. On January 5, 2007, plaintiffs filed a petition for rehearing andrehearing en banc.

On June 10, 2004, plaintiffs and issuer defendants entered into a definitive settlement agreement under whichinsurers of the issuers would guarantee recovery of at least $1 billion by class members. As part of thesettlement, the settling issuer defendants agreed to assign to class members certain claims they had against theunderwriters. Starting in late 2004, purported assignees of certain issuers filed suits in the SDNY against severalunderwriter defendants, including Morgan Stanley, on the ground that underwriters breached the underwritingagreement and related duties by allocating shares in each company’s IPO to customers who allegedly paid theunderwriters “excess compensation.” On October 11, 2005, the SDNY dismissed the complaint with leave toreplead. Plaintiffs filed a second amended complaint, which was dismissed with prejudice on February 24, 2006.Plaintiff filed a notice of appeal on May 31, 2006.

On April 2, 2002, a purported class action complaint, captioned Breakaway Solutions, Inc. v. Morgan Stanley &Co. Incorporated, et al., was filed in the Delaware Court of Chancery against Morgan Stanley and two other

25

underwriters. The complaint was brought on behalf of a class of issuers that issued IPO securities from January 1,1998 to October 31, 2000 pursuant to underwriting agreements with defendants and whose securities increased invalue by 15 percent or more within 30 days following the IPO. The complaint alleges that defendants allocatedunderpriced stock to certain of defendants’ favored clients and, directly or indirectly, shared in portions of theprofits of such favored clients pursuant to side agreements or understandings, with the alleged effect of deprivingissuers of millions of dollars in IPO proceeds. The complaint alleges breach of contract, breach of covenant ofgood faith, breach of fiduciary duty, indemnification or contribution and unjust enrichment and restitution. Thecourt dismissed plaintiffs’ claims except for its breach of fiduciary duty claim.

On September 30, 2005, Breakaway Solutions, Inc. (“Breakaway”) filed another complaint in an individualaction against Morgan Stanley and two other underwriters in the Supreme Court of the State of New York. Thecomplaint alleges that defendants underpriced Breakaway’s IPO stock, allocated this underpriced stock tofavored clients pursuant to a profit sharing arrangement, and that Morgan Stanley improperly sold Breakawayshares before expiration of the lock-up period. The complaint alleges breach of fiduciary duty and breach of thecovenant of good faith against all the defendants and fraud and unjust enrichment against Morgan Stanley. Thisaction has been stayed by agreement of the parties.

Global Wealth Management Group Employment Matters.

Wage and Hour Matters. Complaints raising allegations of unpaid overtime and unlawful wage deductionsagainst Morgan Stanley have been filed in New Jersey, New York, Connecticut, Texas, Florida, Illinois andCalifornia seeking damages on behalf of certain current and former employees. In New Jersey, a purported classaction, captioned Steinberg v. Morgan Stanley & Co., Inc. and Morgan Stanley DW Inc., was filed in theSuperior Court of New Jersey, Law Division, Bergen County (“New Jersey Superior Court”) on September 1,2005 and was removed to the U.S. District Court for the District of New Jersey (the “New Jersey District Court”)on October 7, 2005. A second purported class action, captioned Robert Adler et al. v. Morgan Stanley & Co., Inc.and Morgan Stanley DW Inc., was filed in New Jersey Superior Court on May 22, 2006. On September 25, 2006,a third purported New Jersey class action, captioned Jeff Quinn and John Volpe v. Morgan Stanley, was filed inthe New Jersey District Court.

On September 9, 2005, a purported class action, captioned Gasman v. Morgan Stanley, was filed in theSDNY. On September 23, 2005, another purported class action, captioned Roles v. Morgan Stanley et al., wasfiled in the U.S. District Court for the Eastern District of New York.

On May 22, 2006, a purported class action, captioned Janemarie Lenihan v. Morgan Stanley & Co., Inc. andMorgan Stanley DW Inc., was filed in the U.S. District Court for the District of Connecticut. On June 23, 2006, apurported class action, captioned Kyle R. Armitage v. Morgan Stanley & Co., Inc., was filed in the U.S. DistrictCourt for the Eastern District of Texas. On September 15, 2006, Morgan Stanley filed its answer and affirmativedefenses to the Armitage complaint. On June 26, 2006, a purported class action, captioned Jennifer Taub v.Morgan Stanley DW Inc., was filed in the U.S. District Court for the Southern District of Florida. On August 24,2006, a purported class action, captioned Joseph Stowell, Jr., v. Morgan Stanley DW Inc., was filed in the U.S.District Court for the Central District of Illinois. On September 8, 2006, plaintiffs in the Armitage and Stowellmatters moved before the Judicial Panel on Multi-District Litigation (the “Judicial Panel”) to coordinate thevarious pending matters in the U.S. District Court for the Northern District of Illinois (the “Northern District ofIllinois”).

On October 18, 2006, a purported class action, captioned Vernon Brown v. Morgan Stanley was filed in the U.S.District Court for the Southern District of California (the “Southern District of California”).

On October 9, 2006, Morgan Stanley reached an agreement to resolve the wage and hour claims filed by theSteinberg, Adler, Gasman, Roles, Lenihan and Brown plaintiffs. The agreement, which is subject to, among otherthings, court approval, will resolve all claims brought by plaintiffs in New Jersey, New York, Connecticut and

26

California as well as those of all other potential class members nationwide. On November 29, 2006, for purposesof executing the settlement, a consolidated amended complaint, captioned Steinberg, et al. v. Morgan Stanley(“Steinberg II”), was filed in the Southern District of California.

On November 21, 2006, the Taub matter was dismissed with prejudice.

On November 30, 2006, a hearing was held in St. Louis, Missouri before the Judicial Panel on the Armitage andStowell plaintiffs’ motion for consolidation in the Northern District of Illinois. On December 27, 2006, the Panelissued an order centralizing the Gasman, Roles, Steinberg, Lenihan, Armitage and Stowell matters in theSouthern District of California. The Judicial Panel also treated the Quinn, Brown and Steinberg II matters aspotential “tag along” cases and issued a conditional transfer order transferring those cases to the Southern Districtof California as well.

Gender Matters. Morgan Stanley has also been named in two purported class actions alleging genderdiscrimination under state and federal law. On June 22, 2006, a purported class action, captioned Joanne Augst-Johnson et al. v. Morgan Stanley DW Inc., was filed in the U.S. District Court for the District of Columbia. OnJune 22, 2006, a second purported class action, captioned Daisy Jaffe v. Morgan Stanley DW Inc., was filed inthe U.S. District Court for the Northern District of California. Plaintiffs seek damages in law and in equity.

On October 12, 2006, a first amended complaint adding an additional named plaintiff, Denise Williams, was filedin the Jaffe matter. On October 30, 2006, Morgan Stanley filed a motion to stay the class claims and a motion todismiss certain of plaintiff Williams’ claims. On November 13, 2006, plaintiffs agreed to voluntarily dismisswithout prejudice the claims which were the subject of Morgan Stanley’s motion to dismiss. On January 19,2007, the court granted Morgan Stanley’s motion to stay the class-wide allegations until March 15, 2007.

Late Trading and Market Timing.

Starting in July 2003, Morgan Stanley received subpoenas and requests for information from various regulatoryand governmental agencies, including the SEC, the NYSE and various states, in connection with industry-wideinvestigations of broker-dealers and mutual fund complexes relating to possible late trading and market timing ofmutual funds. Morgan Stanley continues to cooperate with and provide information to regulators in connectionwith their inquiries.

AOL Time Warner Litigation.

Since 2003, Morgan Stanley has been named as a defendant in a number of state court actions involving AOLTime Warner, including cases in California, Ohio and West Virginia. All of these cases also name as defendantsAOL Time Warner, numerous individual defendants, AOL Time Warner’s auditors and other investment bankingdefendants. The complaints allege that AOL Time Warner issued false and misleading financial statements by,among other things, inflating advertising revenues. These complaints name Morgan Stanley in its capacity asfinancial advisor to Time Warner in the merger of America Online and Time Warner and/or as underwriter ofbond offerings completed in 2001 and 2002. The complaints allege violations of Section 11 of the Securities Actand Section 14(a) of the Exchange Act (and Rule 14a-9 thereunder) in connection with the merger registrationstatement, as well as various state and common laws and violations of Section 11 and 12(a)(2) of the SecuritiesAct in connection with the bond registration statements.

In the coordinated California proceedings, claims based on California common law fraud and Sections 25400 and25500 of the California Corporations Code remain against Morgan Stanley. In the Ohio action, state securitieslaw claims remain against Morgan Stanley. Motions to dismiss are pending in the West Virginia action.

On January 30, 2006, numerous new individual actions were filed against Morgan Stanley and other defendantsby plaintiffs opting out of the class settlement of a previously filed federal class action. The claims against

27

Morgan Stanley in that class action had been dismissed by the SDNY. The new complaints contain similarfactual allegations against Morgan Stanley and assert similar claims, but also include a claim for violation ofSection 10(b) of the Exchange Act. These actions were transferred to the SDNY and consolidated. Plaintiffs havefiled amended complaints in these actions. On June 30, 2006, defendants filed motions to dismiss the claimscommon to all complaints.

Global Wealth Management Group NASD Email Matter.

On December 19, 2006, the NASD commenced a disciplinary proceeding against MSDWI, alleging that itprovided false information regarding the existence of emails and failed to provide such emails to arbitrationclaimants and regulators in response to discovery obligations and regulatory inquiries, failed to preserve booksand records and failed to establish and maintain systems and written procedures reasonably designed to preserverequired records and to ensure that it conducted adequate searches in response to regulatory inquiries anddiscovery requests for email, in violation of section 17(a) of the Exchange Act, Rule 17a-4 thereunder, NASDConduct Rules 2110, 3010 (a) and (b) and 3110, NASD Procedural Rule 8210 and Interpretative Material 10100under NASD Code of Arbitration Procedure.

Shareholder Derivative Matters.

Beginning on July 19, 2005, shareholder plaintiffs filed purported derivative actions on behalf of Morgan Stanleyagainst certain present and former directors and its former chief legal officer based on, among other things,agreements to pay the former CEO and co-President of Morgan Stanley and the handling of a lawsuit resulting inan adverse judgment against Morgan Stanley. Four lawsuits filed in the SDNY have been consolidated, under theheading In re Morgan Stanley Derivative Litigation, and on January 23, 2006, plaintiffs filed a second amendedconsolidated complaint that includes claims for, among other things, violations of Sections 10(b) and 14(a) of theExchange Act and breach of fiduciary duties and seeks, among other things, rescission of the severance andcompensation agreements and damages. On March 9, 2006, defendants moved to dismiss.

On July 19, 2005, a derivative lawsuit was filed in a New York state court challenging the agreement to pay theformer co-President of Morgan Stanley and seeking an accounting for losses as a result thereof. This matter hasbeen stayed by agreement of the parties.

Indonesian Litigation.

In November 2003, two proceedings were initiated in the Indonesian District Courts by two members of the AsiaPulp & Paper Group (PT Indah Kiat Pulp & Paper Tbk and PT Lontar Papyrus Pulp & Paper Industry,respectively) against Morgan Stanley and 13 other defendants with respect to two bond issues in 1994 and 1995that were guaranteed by plaintiffs and in which Morgan Stanley acted as underwriter. The claims alleged that thebond issues were invalid and contrary to Indonesian law, and alleged damages in the amount of all principal andinterest paid under the bonds as well as other amounts. In November 2006 the Indonesian Supreme Court upheldthe decisions at first instance and on appeal in favor of the plaintiff and declared the bond issues to be illegal andvoid, holding that defendants (including Morgan Stanley) had committed unspecified tortious acts, but awardingno damages.

In April 2004, another proceeding was filed in the Indonesian District Courts by PT Lontar Papyrus againstMorgan Stanley and 28 other defendants, alleging that the defendants violated injunctions issued by theIndonesian District Court in the first claim brought by PT Lontar Papyrus and conspired to cause the failure ofplaintiff’s restructuring negotiations. Plaintiff seeks damages in respect of losses allegedly suffered. OnSeptember 28, 2005, the Indonesian District Court rejected the plaintiff’s claim against Morgan Stanley. OnSeptember 13, 2006, Morgan Stanley filed its counter-arguments to the plaintiff’s memorandum of appeal thatwas filed with the Indonesian High Court on April 19, 2006.

In October 2004, an additional proceeding was filed in the Indonesian District Courts by APP InternationalFinance Company BV, a member of the Asia Pulp & Paper Group and the issuer of the 1995 bond issue, against

28

Morgan Stanley and 18 other defendants, making allegations similar to those in the November 2003 claimbrought by PT Lontar Papyrus. Plaintiff seeks damages in respect of losses allegedly suffered. On December 28,2006, the Indonesian District Court issued its judgment, declaring the bond issue to be illegal and void, holdingthat defendants (including Morgan Stanley) had committed unspecified tortious acts, but awarding no damages.Morgan Stanley has appealed this decision to the Indonesian High Court.

In January 2005, an additional proceeding was filed in the Indonesian District Courts by Indah Kiat InternationalFinance Company BV, a member of the Asia Pulp & Paper Group and the issuer of the 1994 bond issue, againstMorgan Stanley and other defendants, making allegations similar to those in the November 2003 claim broughtby PT Indah Kiat. Plaintiff seeks damages in respect of losses allegedly suffered. In October 2006, theIndonesian High Court upheld on appeal the decision of the Indonesian District Court in favor of the plaintiff,declaring the bond issue to be null and void, holding that defendants (including Morgan Stanley) had committedunspecified tortious acts, but awarding no damages. Morgan Stanley has appealed this decision to the IndonesianSupreme Court in Jakarta.

The following matter was terminated during the quarter ended November 30, 2006:

General American Litigation.

On April 24, 2006, a Second Amended Petition, captioned Finke, et al. v. Morgan Stanley & Co. Incorporated, etal., was filed in the Missouri Circuit Court, Twenty-Second Judicial Circuit (St. Louis City), by the Director ofthe Department of Insurance for the State of Missouri and the Special Deputy Liquidator for General AmericanMutual Holding Company against MS&Co., Morgan Stanley and a former officer of General American. Theamended petition, which updated a petition first filed on or about July 28, 2004, asserts several causes of actionagainst the Morgan Stanley defendants, including claims for fraud, breach of fiduciary duty and negligentmisrepresentation. The case arises out of the firm’s investment banking work in connection with a potentialdemutualization and initial public offering of General American in 1998-1999. Plaintiffs sought compensatorydamages of over $1 billion and punitive damages of over $3 billion. On November 8, 2006, the court grantedfinal approval of a settlement agreement between the parties to resolve the matter.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year endedNovember 30, 2006.

29

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

È QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2007

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-11758

Morgan Stanley(Exact Name of Registrant as Specified in its Charter)

Delaware 36-3145972(State of Incorporation) (I.R.S. Employer Identification No.)

1585 BroadwayNew York, NY 10036

(Address of PrincipalExecutive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (212) 761-4000

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 theRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes È No ‘

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

Large Accelerated Filer È Accelerated Filer ‘ Non-Accelerated Filer ‘

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes ‘ No È

As of March 31, 2007, there were 1,053,930,564 shares of the Registrant’s Common Stock, par value $.01 pershare, outstanding.

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 fiscal year endedNovember 30, 2006 (the “Form 10-K”) and those described below, in the normal course of business, theCompany has been named, from time to time, as a defendant in various legal actions, including arbitrations, classactions and other litigation, arising in connection with its activities as a global diversified financial servicesinstitution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/orpunitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that wouldotherwise 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 formaland 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 number of these reviews, investigations andproceedings has increased in recent years with regard to many firms in the financial services industry, includingthe Company.

The Company contests liability and/or the amount of damages in each pending matter. In view of the inherentdifficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial orindeterminate damages or where investigations and proceedings are in the early stages, the Company cannotpredict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will beresolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, ifany, might be. Subject to the foregoing, and except for the Coleman Litigation (see also Note 8 in “Notes toCondensed Consolidated Financial Statements” in Part I, Item 1), the Company believes, based on currentknowledge and after consultation with counsel, that the outcome of the pending matters will not have a materialadverse effect on the consolidated financial condition of the Company, although the outcome of such matterscould be material to the Company’s operating results for a particular future period, depending on, among otherthings, 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.

Coleman Litigation.

On March 21, 2007, the District Court of Appeal for the Fourth District of Florida issued an opinion reversing thetrial court’s award for compensatory and punitive damages and remanding the matter to the trial court for entryof judgment for the Company. The opinion will become final upon disposition of any timely filed motions forrehearing.


Wage and Hour Matters. On January 19, 2007, a putative class action, captioned Christopher D. Bart and EricN. Wulff v. Morgan Stanley DW Inc., seeking to recover unpaid overtime for a class of financial advisors wasfiled in the U.S. District Court for the Northern District of Ohio, Eastern District—Cleveland.

Gender Matters. On February 22, 2007, in Joanne Augst-Johnson et al. v. Morgan Stanley DW Inc., theCompany reached agreement to resolve the matter. The agreement, which is subject to, among other things, courtapproval, will resolve all of the class-wide and individual plaintiffs’ claims raised in the complaint.

On March 21, 2007, in Daisy Jaffe v. Morgan Stanley DW Inc., the court issued an order extending the stay untilApril 15, 2007.

89


In February 2007 and March 2007, the parties entered into settlement agreements that resolved all claims in thecoordinated California action, the Ohio action and the West Virginia Action, with the exception of plaintiffs’claims against Ernst & Young.

Item 1A. Risk Factors

For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of the Form10-K.

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 itscommon stock during the quarterly period ended February 28, 2007.

Issuer Purchases of Equity Securities(dollars in millions, except per share amounts)

Period

TotalNumber of

SharesPurchased

Average PricePaid Per

Share

Total Number ofShares PurchasedAs Part of PubliclyAnnounced Plansor Programs (D)

Approximate DollarValue of Sharesthat May Yet BePurchased Under

the Plans orPrograms

Month #1(December 1, 2006—December 31, 2006)Share Repurchase Program (A) . . . . . . . . . . . . 986,000 $80.50 986,000 $5,920,626,462Employee Transactions (B) . . . . . . . . . . . . . . . 455,692 $80.83 N/A N/AOdd-Lot Tender Shares (C) . . . . . . . . . . . . . . . 184,604 $78.41 184,604 N/A

Month #2(January 1, 2007—January 31, 2007)Share Repurchase Program (A) . . . . . . . . . . . . 7,485,067 $81.88 7,485,067 $5,307,745,610Employee Transactions (B) . . . . . . . . . . . . . . . 1,023,829 $81.62 N/A N/AOdd-Lot Tender Shares (C) . . . . . . . . . . . . . . . 25,816 $80.40 25,816 N/A

Month #3(February 1, 2007—February 28, 2007)Share Repurchase Program (A) . . . . . . . . . . . . 6,071,415 $82.43 6,071,415 $4,807,283,856Employee Transactions (B) . . . . . . . . . . . . . . . 92,510 $79.64 N/A N/AOdd-Lot Tender Shares (C) . . . . . . . . . . . . . . . 2,359 $81.70 2,359 N/A

TotalShare Repurchase Program (A) . . . . . . . . . . . . 14,542,482 $82.02 14,542,482 $4,807,283,856Employee Transactions (B) . . . . . . . . . . . . . . . 1,572,031 $81.28 N/A N/AOdd-Lot Tender Shares (C) . . . . . . . . . . . . . . . 212,779 $78.69 212,779 N/A

(A) On December 19, 2006, the Company announced that its Board of Directors authorized the repurchase of up to $6 billion of theCompany’s outstanding stock under a new share repurchase program (the “Share Repurchase Program”). The Share Repurchase Programreplaces the Company’s Equity Anti-dilution Program and Capital Management Program with one repurchase program for capitalmanagement purposes that will consider, among other things, business segment capital needs, as well as equity-based compensation andbenefit plan requirements. The Company expects to exercise the authorization over 12-18 months at prices the Company deemsappropriate, subject to its unallocated capital position, market conditions and regulatory considerations.

90

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

È QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2007

OR

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-11758

Morgan Stanley(Exact Name of Registrant as Specified in its Charter)

Delaware 36-3145972(State of Incorporation) (I.R.S. Employer Identification No.)

1585 BroadwayNew York, NY 10036

(Address of PrincipalExecutive Offices)

(Zip Code)

Registrant’s telephone number, including area code: (212) 761-4000

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 theRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90days. Yes È No ‘

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of theExchange Act. (Check one):

Large Accelerated Filer È Accelerated Filer ‘ Non-Accelerated Filer ‘

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes ‘ No È

As of June 29, 2007, there were 1,052,546,403 shares of the Registrant’s Common Stock, par value $.01 pershare, outstanding.

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 fiscal year endedNovember 30, 2006 (the “Form 10-K”), the Company’s Quarterly Report on Form 10-Q for the quarterly periodended February 28, 2007 (the “First Quarter Form 10-Q”) and those described below, in the normal course ofbusiness, the Company has been named, from time to time, as a defendant in various legal actions, includingarbitrations, class actions, and other litigation, arising in connection with its activities as a global diversifiedfinancial services institution. Certain of the actual or threatened legal actions include claims for substantialcompensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, theissuers 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 formaland 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 number of these reviews, investigations andproceedings has increased in recent years with regard to many firms in the financial services industry, includingthe Company.

The Company contests liability and/or the amount of damages in each pending matter. In view of the inherentdifficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial orindeterminate damages or where investigations and proceedings are in the early stages, the Company cannotpredict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will beresolved, when they will ultimately be resolved, or what the eventual settlement, fine, penalty or other relief, ifany, might be. Subject to the foregoing, and except for the Coleman Litigation (see also Note 8 in “Notes toCondensed Consolidated Financial Statements” in Part I, Item 1), the Company believes, based on currentknowledge and after consultation with counsel, that the outcome of the pending matters will not have a materialadverse effect on the consolidated financial condition of the Company, although the outcome of such matterscould be material to the Company’s operating results for a particular future period, depending on, among otherthings, 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-Kand the First Quarter Form 10-Q.

Coleman Litigation.

On June 4, 2007, the District Court of Appeal for the Fourth District of Florida (the “Court of Appeal”)March 21, 2007 opinion became final when the Court of Appeal issued an order denying Coleman (Parent)Holdings Inc.’s (“CPH”) motions for rehearing, rehearing en banc and for certification of certain questions forreview by the Florida Supreme Court. On June 11, 2007, the trial court issued an order cancelling the supersedeasbond that the Company had posted. On July 2, 2007 CPH filed a petition with the Florida Supreme Court askingthat court to review the Court of Appeal’s decision.

IPO Allocation Matters.

On April 6, 2007, in the numerous purported class actions, now captioned In re Initial Public Offering SecuritiesLitigation, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) denied plaintiffs’ petition forrehearing and, on May 18, 2007, the Second Circuit denied plaintiffs’ petition for rehearing en banc.

On May 24, 2007, in Breakaway Solutions, Inc. v. Morgan Stanley & Co. Incorporated, et al., plaintiff filed aSecond Amended Complaint that removed any class allegations. The case is proceeding as an individual action.

104

On June 12, 2007, purported assignees of certain issuers and underwriter defendants filed a joint notice ofvoluntary dismissal with prejudice in the Second Circuit in the case in which the assignees had appealed thedismissal of their claims by the U.S. District Court for the Southern District of New York (the “SDNY”) onFebruary 24, 2006.

On June 18, 2007, in the numerous purported class actions, now captioned, In re Initial Public Offering AntitrustLitigation, the U.S. Supreme Court reversed the Second Circuit’s decision, ruling that the breadth of federalsecurities regulation prevented the antitrust suit.


Wage and Hour Matters. On May 25, 2007, in Bart et al. v. Morgan Stanley DW Inc., the Company filed aNotification of Potential Tagalong Action with the Judicial Panel on Multi-District Litigation (“JPML”). OnJune 7, 2007, the JPML issued a conditional transfer order, transferring Bart to the U.S. District Court for theSouthern District of California.

Gender Matters. On April 24, 2007, in Joanne Augst-Johnson et al. v. Morgan Stanley & Co. Inc., the partiesfiled a motion for preliminary approval of the settlement which included, among other provisions, a payment tothe settlement fund and certain programmatic relief.

On April 16, 2007, in Daisy Jaffe v. Morgan Stanley DW Inc., the court issued an order extending the stay untilMay 15, 2007. On June 25, 2007, the court extended the stay until August 6, 2007.

Indonesian Litigation.

In April and May 2007, the Company and other defendants filed memoranda in support of an application forCivil Review of the Indonesian Supreme Court’s November 14, 2006 decision in favor of PT Indah Kiat Pulp &Paper Tbk.

In May 2007, the Company received notification that the Indonesian High Court had affirmed the IndonesianDistrict Court’s September 28, 2005 decision to reject PT Lontar Papyrus’ claim against the Company.


In May 2007, the parties entered into a settlement agreement that resolved all claims in the consolidated actionsin the SDNY, with the exception of plaintiffs’ claims against Ernst & Young.

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.

105

Appendix E

DC Tobacco Settlement Financing CorporationCase Study

APPENDIX E

District of Columbia Tobacco Settlement Financing Corporation. In February 2001, the District of Columbia Tobacco Settlement Financing Corporation completed its $518 million financing, for which Morgan Stanley served as joint-bookrunning senior manager. Morgan Stanley and the other co-bookrunning senior manager conducted a comprehensive

institutional investor survey (over 100 institutional investors). As this was the first "jumbo" transaction completed on a tax-exempt basis for an issuer without any specialty tax benefit, this survey also served to provide a baseline indication of investor appetite for the entire tobacco bond sector, and the survey confirmed the Firm's recommendation that investors had moved away from the flexible amortization structure in favor of fixed serials and supersinkers. Morgan Stanley then combined the results of this survey with the financing goals of the District, which included general obligation debt defeasance and budget relief, in order to arrive at the ultimate financing structure – fixed serial maturities with supersinker term bonds wherein approximately 50% of the residual MSA payments were pledged for the early redemption of the supersinkers.

In order to facilitate the broadest placement of the tobacco securities, Morgan Stanley and the other co-bookrunner conducted an extensive premarketing campaign that began approximately eight weeks before final pricing. An integral part of this program was a series of one-on-one meetings with major institutional investors that had theretofore abstained from participating in tobacco securitizations before mailing the preliminary offering circular. These meetings enabled the finance team to further tailor certain aspects of the financing to meet these investors needs. The co-bookrunners also coordinated an investor roadshow, internet roadshow and conducted investor conference calls with both of our tobacco equity research analysts, in order to further raise market awareness of the financing. As a result of these efforts, the bond sale was a success. The inclusion of a non-callable (but turbo amortizing) term bond was a direct result of Morgan Stanley's premarketing efforts and resulted in a major institutional investor placing its first order for the tobacco bonds of a non-specialty state tax issuer. This was an investor who had consistently told our tobacco team that once they became comfortable with the tobacco credit, they would want to "own it for the long term," hence the non-callable feature.

Appendix F

Refunding Monitor

Sep 13, 2007 5:03 am Prepared by Morgan Stanley/JJH (Finance 6.003 btasc:BTASC-REF2) Page 1

REFUNDING CANDIDATES

Badger Tobacco Asset Securitization CorporationRefunding (Stand-Alone)

Refunded Refunded Call Call Escrow New Refunding % Cum. %Maturity Coupon Par Date Price Rate Yield Par Savings Savings Savings

2002:06/01/2008 5.000% 31,220,000.00 4.011% 4.011% 32,248,314.29 -322,483.15 -1.033% -1.033%06/01/2009 5.000% 33,565,000.00 4.510% 4.642% 34,736,509.46 -412,992.99 -1.230% -1.135%06/01/2010 5.500% 35,070,000.00 4.420% 4.777% 37,025,837.61 -671,882.18 -1.916% -1.409%06/01/2011 5.750% 32,770,000.00 4.460% 4.836% 35,166,444.87 -758,800.87 -2.316% -1.633%06/01/2012 5.750% 34,040,000.00 4.510% 4.869% 36,822,690.67 -875,979.47 -2.573% -1.825%06/01/2013 6.125% 37,685,000.00 06/01/2012 100.000 4.510% 4.890% 41,407,885.22 -653,676.58 -1.735% -1.809%06/01/2014 6.125% 39,080,000.00 06/01/2012 100.000 4.510% 4.905% 42,940,696.68 -354,645.59 -0.907% -1.664%06/01/2015 6.125% 41,480,000.00 06/01/2012 100.000 4.510% 4.915% 45,577,791.67 -49,845.48 -0.120% -1.439%06/01/2016 6.125% 44,285,000.00 06/01/2012 100.000 4.510% 4.924% 48,659,896.44 278,681.16 0.629% -1.161%06/01/2017 6.125% 46,730,000.00 06/01/2012 100.000 4.510% 4.930% 51,346,436.95 627,448.00 1.343% -0.850%06/01/2018 6.125% 42,785,000.00 06/01/2012 100.000 4.510% 4.935% 47,011,712.07 865,037.34 2.022% -0.556%06/01/2019 6.125% 47,560,000.00 06/01/2012 100.000 4.510% 4.939% 52,258,432.30 1,269,036.46 2.668% -0.227%06/01/2020 6.125% 50,830,000.00 06/01/2012 100.000 4.510% 4.943% 55,851,474.22 1,669,086.79 3.284% 0.118%06/01/2021 6.125% 56,430,000.00 06/01/2012 100.000 4.510% 4.946% 62,004,695.85 2,183,535.22 3.869% 0.487%06/01/2022 6.125% 61,205,000.00 06/01/2012 100.000 4.510% 4.949% 67,251,416.09 2,709,599.85 4.427% 0.867%06/01/2023 6.125% 67,195,000.00 06/01/2012 100.000 4.510% 5.989% 76,065,647.51 -4,256,771.79 -6.335% 0.177%06/01/2024 6.125% 73,555,000.00 06/01/2012 100.000 4.510% 5.980% 83,265,253.40 -4,552,418.18 -6.189% -0.426%06/01/2025 6.125% 80,490,000.00 06/01/2012 100.000 4.510% 5.972% 91,115,767.06 -4,870,809.79 -6.051% -0.955%06/01/2026 6.125% 87,875,000.00 06/01/2012 100.000 4.510% 5.965% 99,475,686.80 -5,203,463.95 -5.921% -1.418%06/01/2027 6.125% 95,765,000.00 06/01/2012 100.000 4.510% 5.959% 108,407,273.36 -5,553,107.88 -5.799% -1.821%06/01/2028 7.000% 100,000,000.00 06/01/2012 100.000 4.510% 5.953% 117,298,030.88 1,010,685.91 1.011% -1.573%06/01/2029 6.375% 112,710,000.00 06/01/2012 100.000 4.510% 5.948% 128,908,490.32 -4,043,991.08 -3.588% -1.754%06/01/2030 6.375% 120,815,000.00 06/01/2012 100.000 4.510% 5.944% 138,178,327.20 -4,126,734.56 -3.416% -1.900%06/01/2031 6.375% 129,735,000.00 06/01/2012 100.000 4.510% 5.940% 148,380,294.49 -4,220,472.30 -3.253% -2.017%06/01/2032 6.375% 51,210,000.00 06/01/2012 100.000 4.510% 5.936% 58,569,814.47 -1,587,321.34 -3.100% -2.053%

1,554,085,000.00 1,739,974,819.88 -31,902,286.45

Sep 13, 2007 5:03 am Prepared by Morgan Stanley/JJH (Finance 6.003 btasc:BTASC-REF2) Page 2

REFUNDING CANDIDATES

Badger Tobacco Asset Securitization CorporationRefunding (Stand-Alone)

Assumptions:

Delivery Date 11/15/2007Issuance Expenses 1.000%Refunding Series REF2Coupon Alignment 12/01/2007Escrow Size Based on Lesser of yield or Current (SLG)Interest accrued through delivery is Funded by escrowPV Savings Based on Replacement arbitrage yieldSavings Expressed as a Percent of Par of refunded bondsEscrow Coupon/SLGS Adjustment 0.500%

Appendix G

Historical MMD Chart

Appendix G

As of September 12, 2007

1

20-Year MMD has fallen significantly over the past month


3.75

3.85

3.95

4.05

4.15

4.25

4.35

4.45

4.55

4.65

1/2/07

1/17/0

7

1/31/0

7

2/14/0

7

3/1/07

3/15/0

7

3/29/0

7

4/12/0

7

4/26/0

7

5/10/0

7

5/24/0

7

6/8/07

6/22/0

7

7/9/07

7/23/0

7

8/6/07

8/20/0

7

9/4/07

Historical 20-Yr MMD Interest Rates (Since January 2007)%

Current (9/12/2007): 4.20%

Max (8/24/2007): 4.62%