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INSTITUTIONAL SECURITIES

FULL YEAR
The Company's Institutional Securities business posted net income of $1,703 million in fiscal 2002, down 31 percent from a year ago. Net revenues declined 20 percent to $9.3 billion, reflecting the impact of difficult markets. Total non-interest expenses, including restructuring charges of $117 million, declined 15 percent to $6.6 billion.

Investment banking and equity underwriting were negatively impacted by the continued industry-wide slowdown in M&A activity and equity issuance. For the first eleven months of calendar 2002, industry-wide announced and completed global M&A activity fell 31 percent and 45 percent, respectively, from year-ago levels. Worldwide equity and equity-related issuance was 23 percent lower. Fixed income underwriting revenues also declined from the prior year, reflecting a 21 percent decrease in industry-wide U.S. investment grade issuance.²

The Company ranked #2 with a market share of 29 percent in completed global M&A; #3 with a market share of 19 percent in announced global M&A; #4 with a market share of 10 percent in U.S. investment grade debt; and #4 with a market share of 8 percent in worldwide equity and equity-related underwritings.³ In equity research, the Company tied for first place in the Institutional Investor's 2002 Global Research Poll.

In the Company's equity sales and trading business, a decline in market indexes, lower dollar volumes and the decrease in the level of primary issuance resulted in difficult trading conditions. In fixed income sales and trading, a sharp decline in commodity price volatility and less favorable trading conditions for interest rate products depressed overall results.

FOURTH QUARTER
Institutional Securities posted net income of $453 million, a decline of 21 percent versus fourth quarter 2001. Net revenues decreased 13 percent to $1.9 billion, primarily due to continued difficult market conditions. Non-interest expenses, including restructuring charges of $117 million, were 10 percent lower than last year's fourth quarter.

• Advisory revenues were $271 million, down 16 percent from fourth quarter 2001. The decline in advisory revenues reflects the decline in global M&A activity. Industry-wide, global completed M&A transaction volume fell 24 percent compared to a year ago.⁴
• Underwriting revenues fell 16 percent from last year's fourth quarter to $346 million on lower-equity and fixed-income underwriting activity.
• Fixed-income sales and trading net revenues were $589 million, down 22 percent from fourth quarter 2001. A more difficult trading environment for interest rate products was partially offset by a more favorable one for credit products.
• Equity sales and trading net revenues of $634 million were down 26 percent from a year ago, primarily due to declines in customer trading volumes and lower market volatility.

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INDIVIDUAL INVESTOR GROUP

FULL YEAR
The Individual Investor Group recorded a net loss of $7 million for the year compared to a net loss of $44 million in fiscal 2001. Net revenues declined 11 percent to $4.0 billion as retail participation in equity markets was down throughout the year. Total non-interest expenses, including restructuring charges of $112 million, decreased 12 percent from a year ago. Total client assets of $517 billion were 13 percent lower than the end of last year, compared to declines of 18 percent in the S&P 500 and 23 percent in the Nasdaq. Client assets in fee-based accounts fell 5 percent to $104 billion, but represented 20 percent of total client assets compared to 18 percent at 2001 fiscal year end.

FOURTH QUARTER
IIG reported a fourth quarter net loss of $31 million compared to net income of $14 million a year ago. The decrease was driven by lower revenues and the $112 million in restructuring charges.

• Net revenues declined 8 percent to $907 million, primarily reflecting a decline in retail participation in equity markets compared to last year.
• During the quarter, the number of global financial advisors decreased by 1,044 to 12,546, and client assets in fee-based accounts increased by $1 billion to $104 billion.

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INVESTMENT MANAGEMENT

FULL YEAR
Investment Management reported net income of $525 million, 9 percent higher than last year's $480 million. The increase was driven by a 14 percent decline in non-interest expenses and lower income tax expense which more than offset lower net revenues. The revenue decline reflected a decrease in the Company's average assets under management and a shift in asset mix away from equity products. Assets under management were $420 billion, down $39 billion, or 8 percent, from a year ago, primarily as a result of a decline in market values. During the year, the Company launched 21 new funds or products, generating sales of nearly $1.2 billion. Among investment managers, the Company had the fourth highest number of domestic funds (48), receiving one of Morningstar's two highest ratings.⁵ The percent of the Company's fund assets performing in the top half of the Lipper rankings for one year was 65 percent compared to 59 percent a year ago.⁶

FOURTH QUARTER
Investment Management's net income was $116 million, a 32 percent increase from $88 million in the fourth quarter of 2001. The earnings increase reflects a decline in non-interest expenses and income tax expense — partially offset by lower net revenues driven primarily by lower average assets under management.

• Retail assets fell $5 billion during the quarter and $33 billion from a year ago to a total of $247 billion.
• Institutional assets rose $1 billion during the fourth quarter but declined $6 billion over the past twelve months to $173 billion.

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CREDIT SERVICES

FULL YEAR
Credit Services achieved record net income of $767 million, up 9 percent from a year ago. An increase in the interest rate spread on Discover's credit card portfolio, higher merchant and cardmember fees and lower marketing and business development costs were partially offset by an increase in the provision for loan losses. Managed credit card loans were $51.1 billion at fiscal year end, 4 percent greater than a year ago, and the interest spread increased 82 basis points over the same time period. The credit card charge-off rate increased 83 basis points to 6.19 percent. The increase in charge-offs reflects persisting softness in the U.S. economy and a high level of national bankruptcy filings. The over-30-day delinquency rate declined 89 basis points to 5.96 percent, and the over-90-day rate declined 36 basis points to 2.66 percent. Total transaction volume rose to a record $97.3 billion, and Discover ended the fiscal year with 46.5 million cardmember accounts.

FOURTH QUARTER
Credit Services' fourth quarter net income was $194 million, up 1 percent from a year ago. A lower provision for loan losses offset an increase in marketing and business development expenses.

• The interest rate spread on Discover's credit card portfolio contracted by 20 basis points compared to last year's fourth quarter, driven by a lower finance charge yield which more than offset a decline in the cost of funds.
• Merchant and cardmember fees were $542 million, essentially unchanged from a year ago. Higher merchant discount revenue from increased transaction volume was offset by lower cardmember fees. Transaction volume rose 15 percent to a record $25.3 billion, as a result of higher balance transfers and an increase in sales.
• The credit card net charge-off rate was 5.96 percent, 6 basis points lower than the third quarter, but 11 basis points higher than a year ago. The increase in the charge-off rate from fourth quarter 2001 was largely the result of an increase in bankruptcy losses.

Morgan Stanley reports its results in four business segments: institutional securities, individual investor group, investment management and credit services. Previously, the results of the institutional and individual securities activities were reported in one reporting segment. Management is currently evaluating how it allocates revenues and expenses among its business segments and expects to change such allocations in the future. Business segment results will reflect reallocations of revenues and expenses that result from such changes and the effect may be material to a particular segment. Reallocations of revenues or expenses among segments will have no effect on Morgan Stanley's overall results of operations.

Total capital at November 30, 2002 was $65.9 billion, including $23.1 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $20.24, based on quarter-end shares outstanding of 1.08 billion.

The Company announced that its Board of Directors declared a $0.23 quarterly dividend per common share. The dividend is payable on January 31, 2003 to common shareholders of record on January 10, 2003.

The Company repurchased approximately 22 million shares of its common stock during the 2002 fiscal year.

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

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