Net income for the fourth quarter ended November 30, 2003 was $1,041 million — a 42 percent increase from the fourth quarter of 2002, but 18 percent below the third quarter of 2003. Diluted earnings per share were $0.94 compared to $0.67 a year ago and $1.15 in the third quarter. Fourth quarter net revenues of $5.1 billion were 20 percent ahead of last year's fourth quarter and 3 percent below this year's third quarter. The annualized return on average common equity for the quarter was 17.3 percent.

Philip J. Purcell, Chairman & CEO, said, "We are very pleased with our full year results. Business activity has clearly picked up, both in the capital markets and at the retail level. We ended the year with increased market shares in key areas of our business and enter 2004 with significant momentum."

The Company also announced that its Board of Directors declared a $0.25 quarterly dividend per common share — a 9 percent increase from $0.23 per common share in the previous quarter. The dividend is payable on January 30, 2004 to common shareholders of record on January 9, 2004.

During the third quarter, the Company completed an extensive analysis of its equity-based compensation program and implemented changes that emphasized long-term service and retention objectives, including longer vesting periods and higher eligibility requirements for all equity-based awards. As a result, the Company is expensing awards over a longer period of service. The effect of these changes reduced compensation expense recorded for restricted stock awards by $438 million in fiscal 2003. In addition, in connection with the fiscal 2003 adoption of SFAS No. 123, the Company recorded compensation expense of $171 million based on the fair value of stock options granted in fiscal 2003. The net effect of these changes reduced compensation expense by $267 million, increased net income by $180 million, or $0.16 per share, and increased the return on average common equity by 0.8 percent in fiscal 2003. By business segment, the increase in net income was as follows: Institutional Securities, $154 million; Individual Investor Group, $17 million; Investment Management, $8 million; and Credit Services, $1 million. The business segment review below includes the effects of these changes.

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INSTITUTIONAL SECURITIES

FULL YEAR
The Company's Institutional Securities business posted net income of $2,464 million, an increase of 48 percent from a year ago. Net revenues rose 23 percent to $11.2 billion, driven by record results in fixed income and an improved environment in equity underwriting during the second half of the year. Total non-interest expenses increased 17 percent to $7.6 billion, largely reflecting the increase in business activity. This year's expenses included $323 million in aircraft impairment charges, while 2002 expenses included $117 million in restructuring charges and a $74 million aircraft impairment charge.

In the Company's fixed income sales and trading business, revenues increased 65 percent from a year ago to $5.4 billion. The increase was broad-based, with significant gains in the interest rate and currency products, credit products and commodities groups. All three product areas benefited from strong customer flows and high levels of market volatility. In equity sales and trading, revenues increased 2 percent to $3.6 billion as the benefit of rising market indices was partially offset by the negative impact of lower dollar volumes, and a decline in market volatility during the second half of the year.

In investment banking, the Company ranked #2 with a market share of 21 percent in announced global M&A, and #4 with a market share of 19 percent in completed global M&A. In addition, the Company improved its market share and ranked #2 in U.S investment grade debt underwriting and #3 in worldwide equity and equity-related underwritings.¹ Total underwriting revenues rose 18 percent from last year to $1.4 billion, benefiting from the Company's improved market share and increased industry-wide fixed income underwriting activity. Advisory revenues fell 31 percent to $662 million, partially reflecting a decline in industry-wide completed M&A volume.²

The increase in losses from unconsolidated investees, which principally represents the Company's operating losses from investment partnerships related to synthetic fuel production, was attributable to additional investments made by the Company. These operating losses are more than offset by tax benefits, including tax credits, which are included in income tax expense. The Company had previously reported the operating losses from investment partnerships within income tax expense.

FOURTH QUARTER
Institutional Securities posted net income of $753 million, an increase of 69 percent versus fourth quarter 2002. Net revenues rose 42 percent to $2.6 billion, primarily due to continued strength in the Company's fixed income business and an improved environment for equity trading and underwriting. Non-interest expenses were 35 percent above last year's fourth quarter, due to the improved business environment.

• Fixed income sales and trading net revenues were $977 million, up 66 percent from fourth quarter 2002. Tighter credit spreads, a steeper yield curve and increased interest rate, currency and commodities market volatility — drove the overall increase.
• Equity sales and trading net revenues of $919 million were up 48 percent from the prior year's fourth quarter. Rising market indices, higher dollar volumes and increased primary activity led to increases across the Company's equity businesses.
• Advisory revenues were $225 million, down 17 percent from fourth quarter 2002, reflecting the industry-wide decline in completed M&A activity. Industry-wide, completed M&A transaction volume was 36 percent lower than a year ago.³
• Underwriting revenues rose 21 percent from last year's fourth quarter to $391 million due to increased market share in investment grade debt and higher levels of industry-wide equity and fixed income underwriting activity.

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INDIVIDUAL INVESTOR GROUP

FULL YEAR
The Individual Investor Group reported net income of $265 million for the year, compared to $59 million in fiscal 2002. Net revenues were essentially unchanged at $4.0 billion, as retail participation in equity markets increased over the second half of the year after declining during the first half. The second half upswing was consistent with a stronger economy and improving investor confidence. Total non-interest expenses decreased 10 percent from a year ago, which included $112 million in restructuring charges. Total client assets of $565 billion rose 9 percent from the end of fiscal 2002, reflecting, in part, a 13 percent increase in the S&P 500 over the same period. In addition, client assets in fee-based accounts increased 21 percent to $130 billion, and represented 23 percent of total client assets compared to 21 percent a year ago. The number of global financial advisors was 11,086 — a decline over the past year of 1,460.

FOURTH QUARTER
Driven by higher net revenues, IIG net income rose to $79 million from a net loss of $11 million a year ago. Non-interest expenses declined 2 percent from fourth quarter 2002, which included the $112 million in restructuring charges noted above.

• Net revenues rose 16 percent to $1,089 million, primarily due to increases in commissions and higher fee-based revenues.
• During the quarter, total client assets increased by $21 billion, or 4 percent, to $565 billion while client assets in fee-based accounts increased by $8 billion, or 7 percent, to $130 billion.

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INVESTMENT MANAGEMENT

FULL YEAR
Investment Management reported net income of $326 million, 22 percent lower than last year's $418 million. The decline was driven by an 8 percent decrease in net revenues reflecting a decline in average assets under management and a less favorable asset mix. Assets under management at November 30 were $462 billion, up $42 billion, or 10 percent, from a year ago — primarily as a result of market appreciation. During the year, the Company launched 10 new funds or products, generating sales of approximately $2.4 billion. Among full-service brokerage firms, the Company had the highest number of domestic funds (41) receiving one of Morningstar's two highest ratings.⁴ The percent of the Company's fund assets performing in the top half of the Lipper rankings for one year was 57 percent compared to 62 percent a year ago.⁵

FOURTH QUARTER
Investment Management's net income was $61 million, a 27 percent decline from $84 million in the fourth quarter of 2002. The earnings decline was due to an increase in non-interest expenses, primarily compensation and legal costs — partially offset by higher net revenues, driven by higher average assets under management and an improving asset mix.

• Retail assets increased $9 billion during the quarter and $21 billion from a year ago to a total of $277 billion.
• Institutional assets rose $20 billion during the fourth quarter and $21 billion over the past twelve months to $185 billion.

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CREDIT SERVICES

FULL YEAR
Credit Services net income was $688 million, down 9 percent from 2002's record earnings of $760 million. The current year's results included pretax severance and facilities closing charges of $35 million. The decline in earnings, on a managed basis, was driven by a higher provision for loan losses — which more than offset an increase in net interest income and lower marketing and business development costs. The managed credit card charge-off rate increased 41 basis points from a year ago to 6.60 percent. The over-30-day-delinquency rate increased 1 basis point to 5.97 percent and the over-90-day-delinquency rate increased 16 basis points to 2.82 percent. Relatively high levels of unemployment and near record levels of U.S. bankruptcy filings along with changes in the Company's re-age policy — which tightened terms under which delinquent accounts are returned to a current status — negatively affected charge-off and delinquency rates. Managed credit card loans were $48.4 billion at fiscal year end, 5 percent lower than a year ago. Total transaction volume rose to a record $97.9 billion, and Discover added over 600,000 new merchant locations during the fiscal year.

FOURTH QUARTER
Credit Services fourth quarter net income was $131 million, down 31 percent from a year ago. The current quarter's earnings included the $35 million in pretax severance and facilities closing charges noted above. On a managed basis, a higher provision for loan losses and a decline in merchant and cardmember fees more than offset a decrease in marketing and business development expenses and higher net interest income.

• The interest rate spread on Discover's credit card portfolio increased 43 basis points from a year ago, driven by a decline in the cost of funds that more than offset a lower finance charge yield.
• Merchant and cardmember fees were $512 million, down 6 percent from last year's fourth quarter. An increase in merchant discount revenue driven by higher sales activity was more than offset by a decline in cardmember late fees. Total transaction volume declined 9 percent to $23.0 billion, due to a lower level of balance transfers.
• The credit card net charge-off rate was 6.87 percent, 92 basis points higher than a year ago but 3 basis points lower than the third quarter. The over-30-day-delinquency rate declined 8 basis points from last quarter to 5.97 percent, and the over-90-day-delinquency rate declined 9 basis points over the same period to 2.82 percent. The decline in the over-30-day-delinquency rate was the third consecutive quarterly decrease.

Total capital at November 30, 2003 was $83.0 billion, including $27.9 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $23.10, based on quarter-end shares outstanding of 1.1 billion.

The Company repurchased approximately 9 million shares of its common stock during the 2003 fiscal year.

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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