INSTITUTIONAL SECURITIES

Institutional Securities net income increased to $825 million from last year's third quarter of $264 million. Net revenues increased 32 percent, driven by the Company's fixed income business, which achieved its second best quarter, and an improved market for equity underwriting.

• Fixed income sales and trading net revenues more than doubled from third quarter 2002 to $1.5 billion. The increase resulted from strong performances in the credit products, interest-rate and currency products, and commodities groups. The revenue increases in credit products and interest rate products reflected a favorable trading environment, strong capital markets activity and increases in interest rate volatility. Higher commodities revenues were driven by increased activity in electricity, natural gas and oil markets.
• Equity sales and trading net revenues declined 21 percent from a year ago to $830 million, reflecting lower revenues in the Company's cash and derivative products businesses. Sharply lower equity market volatility negatively affected results.
• Advisory revenues were $130 million, down 13 percent from last year due to declining levels of global M&A activity. Industry-wide, completed M&A transaction volume fell 24 percent compared with third quarter 2002.¹
• Underwriting revenues of $388 million were 55 percent above last year's third quarter. An improved market share in equity — combined with an industry-wide increase in equity underwriting activity — drove the increase. An increase in industry-wide fixed income underwriting activity also contributed to these results.
• For the calendar year-to-date, the Company ranked third in completed global M&A with a 20 percent market share; fifth in announced global M&A with a 14 percent market share; third in worldwide equity and equity related issuances with a 10 percent market share; and fourth in U.S. investment grade debt issuances with an 11 percent market share.²

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INDIVIDUAL INVESTOR GROUP

The Individual Investor Group net income rose to $125 million compared to $18 million for the third quarter of 2002.

• Total net revenues increased 3 percent from third quarter 2002 to $1,054 million. Third quarter 2002 net revenues included $95 million associated with the sale of the Company's MS Online brokerage accounts, and a $45 million writedown of an equity investment related to the Company's European retail securities activities. In the current quarter, principal transaction trading revenues increased 22 percent and commissions rose 7 percent, driven primarily by increased individual investor interest in equity products.
• Total client assets of $544 billion were 5 percent higher than the end of last year's third quarter, reflecting, in part, a 10 percent increase in the S&P 500 over the same period of time. In addition, client assets in fee-based accounts rose 14 percent to $122 billion, and the percentage of client assets in fee-based accounts increased to 22 percent from 21 percent a year ago.
• At quarter-end, the number of global financial advisors was 11,326 — a decrease of 318 for the quarter and 2,264 over the past year.

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INVESTMENT MANAGEMENT

Investment Management net income rose to $116 million from $97 million in last year's third quarter. The increase was driven primarily by a lower income tax rate. Asset management fees decreased 4 percent reflecting lower distribution and redemption fees.

• The Company's assets under management were $433 billion, up $12 billion over the second quarter of this year and $9 billion over the third quarter of last year. The increase during the quarter reflected market appreciation and positive net customer flows, while the increase from last year was due to market appreciation.
• Retail assets of $268 billion were $9 billion higher than the end of the second quarter and $8 billion higher than a year ago. Institutional assets were $165 billion, an increase of $3 billion for the quarter and $1 billion compared to a year ago.
• Among full-service brokerage firms, the Company had the highest number of domestic funds (47) receiving one of Morningstar's two highest ratings.³ The percent of the Company's fund assets performing in the top half of the Lipper rankings over three years was 69 percent, unchanged from a year ago.⁴

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CREDIT SERVICES

Credit Services quarterly net income declined to $185 million from $209 million in the third quarter of 2002. On a managed loan basis, an increase in the provision for loan losses was partially offset by lower non-interest expenses and higher net interest income.

• Managed credit card loans at quarter end rose 1 percent from a year ago to $50 billion and the interest rate spread was unchanged at 8.91 percent.
• Merchant and cardmember fees were essentially unchanged at $523 million as higher merchant discount fees from increased transaction volume were offset by lower cardmember late fees. Transaction volume rose 2 percent from a year ago to $24.8 billion, driven by a 6 percent increase in sales.
• The managed credit card net charge-off rate increased to 6.90 percent — 83 basis points above a year ago and 40 basis points above last quarter. The over-30-day delinquency rate was 6.05 percent — 33 basis points above last year but 16 basis points below last quarter. Sustained high levels of U.S. bankruptcy filings and unemployment along with changes in the Company's account re-aging policy, which tightened terms under which delinquent accounts are returned to a current status — negatively affected the charge-off and delinquency rates.
• Non-interest expenses of $542 million declined 12 percent compared with third quarter 2002, primarily due to a decline in marketing and advertising expenses.

As of August 31, 2003, the Company had repurchased approximately 9 million shares of its common stock since the end of fiscal 2002. The Company also announced that its Board of Directors declared a $0.23 quarterly dividend per common share. The dividend is payable on October 31, 2003, to common shareholders of record on October 10, 2003.

Total capital at August 31, 2003 was $78.2 billion, including $26.5 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $21.79, based on 1.1 billion shares outstanding.

Morgan Stanley is a global financial services firm and a market leader in securities, investment management and credit services. With more than 600 offices in 28 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.

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