Net revenues (total revenues less interest expense and the provision for loan losses) of $5.4 billion were 3 percent higher than last year's third quarter but 18 percent below this year's second quarter. Non-interest expenses of $4.1 billion were 23 percent higher than a year ago, but 15 percent below last quarter. In the third quarter of 2003, the year-to-date effect of changes to the terms of the Company's equity-based compensation program reduced compensation expense by $519 million and increased net income by $350 million, diluted earnings per share by $0.32 and the annualized return on average common equity by 6.1 percentage points.

Business Highlights

• For the first eight months of calendar 2004, the Company ranked first in global equity and equity-linked issuances, first in global IPOs, and second in both global debt issuances and global completed M&A.
• Firmwide assets under management reached $510 billion at quarter end, an 18 percent increase from a year ago.¹
• Credit quality at Discover Card continued to improve, with net charge-off and delinquency rates at their lowest levels in more than three years. Pre-tax earnings were $330 million -- up 13 percent from a year ago and Discover Card's second best quarter in four years.

Philip J. Purcell, chairman and CEO, said, "Our firm continued to generate significant momentum with clients. In investment banking, we completed several landmark deals. Our Investment Management business and Discover Card also performed well, but reduced trading revenues resulted in lower quarterly earnings for the firm."

The Company recorded a pre-tax loss of $42 million in the current quarter related to the markdown of certain aircraft that are subject to a probable sale and, accordingly, have been designated as "held for sale". The revenues and expenses associated with these aircraft have been classified as "discontinued operations" for all periods presented.

For the first nine months of 2004, net income was $3,286 million, an 18 percent increase over $2,773 million a year ago. Diluted earnings per share were $2.97, up 18 percent from a year ago. Net revenues rose 16 percent to $18.3 billion and non-interest expenses increased 16 percent to $13.3 billion. The annualized return on average common equity for the nine-month period was 16.6 percent compared with 16.3 percent last year.

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INSTITUTIONAL SECURITIES

Institutional Securities posted pre-tax income² of $682 million, down 43 percent from the third quarter of 2003 -- largely driven by higher non-interest expenses, which included the impact of last year's compensation program changes. Net revenues of $2.8 billion were 1 percent lower, reflecting a decline in fixed income sales and trading revenues, largely offset by improved results in advisory and underwriting activities, and higher equity sales and trading revenues.

• Fixed income sales and trading net revenues were $1.2 billion, down 19 percent from the third quarter of 2003. Revenues declined sharply in interest rate & currency products. Mixed U.S. economic data coupled with higher global energy prices led to concerns about the strength of economic growth, and resulted in a more difficult trading environment. Commodities had another strong quarter, although slightly lower than last year, as tight oil supplies, concerns about production disruptions and growing demand drove energy prices and volatilities higher. Credit products revenues were modestly lower this quarter.
• Equity sales and trading net revenues increased 6 percent from last year to $883 million. The increase was driven primarily by higher revenues from the Company's Prime Brokerage and cash businesses. This quarter's revenues were impacted by continuing low levels of market volatility, which reduced trading opportunities.
• The Company's aggregate average trading VaR was $79 million in the current quarter compared with $54 million in the third quarter of last year, and $72 million in the second quarter of 2004.
• Advisory revenues were $310 million, a 138 percent increase from last year's third quarter. There was a significant increase in the Company's market share in completed M&A transactions and a 62 percent increase in industry-wide completed M&A activity over the same period.³
• Underwriting revenues were $401 million, up 3 percent from last year's third quarter. Equity underwriting revenues rose 9 percent. While industry-wide equity underwriting activity fell 12 percent compared to last year, the Company's volume of activity increased 12 percent over the same period. The Company's equity global market share rose from 7 percent a year ago to 9 percent in the current quarter. Fixed income underwriting revenues declined 2 percent from a year ago, compared with a 1 percent increase in industry-wide activity. The Company's fixed income global market share remained at 8 percent.³
• For the calendar year-to-date, the Company ranked first in global equity and equity-linked issuances with a 12 percent market share, first in global IPOs with a 15 percent market share, second in global debt issuances with a 7 percent market share, second in completed global M&A with a 32 percent market share and fourth in announced global M&A with a 24 percent market share.⁴ Landmark transactions completed during the quarter included the $1.9 billion Google IPO, the $3.1 billion Deutsche PostBank IPO and the defense of Aventis resulting in its $65.7 billion sale to Sanofi-Synthelabo S.A. Significant M&A transactions announced during the quarter included National Grid Transco's $10.7 billion asset sale and the $1.4 billion sale of Marks & Spencer Money to HSBC.
• Non-interest expenses for the quarter rose 32 percent to $2.1 billion. Compensation expense increased because last year's third quarter included the year-to-date impact of changes in the Company's equity-based compensation program. In addition, higher levels of business activity resulted in increases in the professional services and other expense categories. Expected costs related to legal and regulatory matters increased to approximately $50 million, driven by a failure to deliver certain prospectuses pursuant to regulatory requirements.

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INDIVIDUAL INVESTOR GROUP

The Individual Investor Group posted pre-tax income of $22 million, an 88 percent decline from last year's third quarter. The decline in earnings resulted from higher non-interest expenses, partially offset by a modest increase in net revenues.

• Total net revenues rose 2 percent from a year ago to $1.1 billion, driven by a 28 percent increase in asset management, distribution and administration fees, reflecting higher client asset levels in fee-based accounts. This increase was largely offset by declines of 12 percent in commissions and 25 percent in principal transaction trading revenues resulting from lower sales of fixed income products.
• Non-interest expenses increased 21 percent from a year ago to $1.1 billion. Compensation expense was higher because last year's third quarter included the year-to-date impact of changes in the Company's equity-based compensation program. Also, legal and regulatory expenses increased approximately $70 million, of which the largest driver was expected costs associated with a failure to deliver certain prospectuses pursuant to regulatory requirements.
• Total client assets were $576 billion, a 6 percent increase from last year's third quarter and a decrease of 1 percent from this year's second quarter. Client assets in fee-based accounts rose 20 percent to $146 billion over the past twelve months and increased as a percentage of total client assets to 25 percent from 22 percent over the same period.
• At quarter-end, the number of global financial advisors was 10,785 -- 541 lower than a year ago but an increase of 63 over the quarter.

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INVESTMENT MANAGEMENT

Investment Management pre-tax income rose 33 percent from last year's third quarter to $217 million. Net revenues increased 16 percent to $692 million, driven by higher investment gains and an increase in average assets under management. Non-interest expenses rose 9 percent to $475 million on higher compensation expenses reflecting the increase in net revenues, as well as the impact of last year's compensation program change.

• Assets under management within Investment Management were $394 billion, $49 billion above the third quarter of last year. The increase resulted from both market appreciation and positive net flows.
• Institutional assets were $200 billion, an increase of $45 billion from a year ago. The increase in institutional assets reflected market appreciation and the continuation of robust growth in liquidity products. Retail assets of $194 billion were $4 billion higher than a year ago.
• Among full-service brokerage firms, the Company had the highest number of domestic funds (37) receiving one of Morningstar's two highest ratings.⁵ In addition, the percent of the Company's fund assets performing in the top half of the Lipper rankings was 60 percent over one year, 70 percent over three years and 76 percent over five years.⁶
• Investment gains for the quarter were $90 million, up from $10 million a year ago and included approximately $75 million associated with an ownership interest in Vanguard Health Systems.

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CREDIT SERVICES

Credit Services posted pre-tax income of $330 million on a managed basis, up 13 percent from last year's third quarter. The increase was driven by a lower provision for loan losses, reflecting improved credit quality, partially offset by a decline in net interest income, lower merchant and cardmember fees and higher non-interest expenses driven by an increase in marketing expenses.

• Managed credit card loans of $47.1 billion at quarter end were 6 percent lower than a year ago although slightly above the level at the beginning of the quarter. Net interest income fell $100 million from a year ago, reflecting the decline in credit card loan balances and a narrower interest rate spread, which contracted eight basis points to 8.83 percent, as a lower yield more than offset lower cost of funds.
• Managed merchant and cardmember fees were $499 million, down 5 percent from a year ago, primarily due to lower late and overlimit fees. The decline in these fees reflected sharply lower credit card delinquencies.
• Transaction volume increased 2 percent to $25.4 billion, the second highest quarterly volume ever.
• The managed credit card net charge-off rate for the third quarter was 5.76 percent, 114 basis points below a year ago -- and its lowest level in more than three years. The decrease reflects the effect of the Company's credit and collection initiatives and an industry-wide improvement in credit quality, including the stabilization of bankruptcy filings.
• The managed credit card over-30-day delinquency rate was 4.81 percent, a decrease of 124 basis points from the third quarter of 2003. The managed credit card over-90-day delinquency rate was 2.22 percent, 69 basis points lower than a year ago.
• Non-interest expenses of $567 million rose 5 percent from a year ago, primarily due to increased marketing expenses, largely related to account acquisition activity and merchant initiatives.

As of August 31, 2004, the Company had repurchased approximately 9 million shares of its common stock since the end of fiscal 2003. The Company also announced that its Board of Directors declared a $0.25 quarterly dividend per common share. The dividend is payable on October 29, 2004, to common shareholders of record on October 8, 2004.

Total capital at August 31, 2004 was $101.2 billion, including $30.3 billion of common shareholders' equity and junior subordinated debt issued to capital trusts. Book value per common share was $25.00, based on 1.1 billion shares outstanding.

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OTHER MATTERS

The Company also announced that it has reached an agreement in principle with the Staff of the New York Stock Exchange relating to its failure to comply with certain prospectus delivery requirements, operational deficiencies, employee defalcations (including the Soto matter) and other matters. The settlement will include a fine of $19 million. Negotiations with the Staff about the details of the resolution have not concluded, and no assurance can be given that a resolution will be achieved.

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 27 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.

Access this press release on-line @www.morganstanley.com

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