Net income for the fourth quarter ended November 30, 2004 was $1,200 million, up 18 percent from the fourth quarter of 2003 and 43 percent ahead of the third quarter of 2004. Fourth quarter net revenues were $5.4 billion, 7 percent ahead of last year's fourth quarter and equal to this year's third quarter. Non-interest expenses of $3.8 billion represented a 6 percent increase from last year but were 9 percent lower than last quarter. Diluted earnings per share were $1.09 compared to $0.92 a year ago and $0.76 in the third quarter. The annualized return on average common equity for the fourth quarter was 17.4 percent compared with 16.9 percent a year ago and 12.3 percent last quarter.

Full Year Business Highlights

• Institutional Securities' investment banking revenues of $3.0 billion were 44 percent above last year.
• For the first eleven months of calendar 2004, the Company increased its market share and ranked first in global equity and global IPOs, and second in global completed M&A. The Company also ranked second in global debt issuances.
• Fixed income achieved record sales and trading results.
• Investment Management's assets under management reached $424 billion at year-end, a 19 percent increase from a year ago. Net customer related flows were $29 billion for the year.
• Discover Card pre-tax earnings rose 16 percent from a year ago to a record $1.3 billion.
• In November, Discover Card announced the agreement to acquire the PULSE debit card network, which will enable Discover to offer expanded services to financial institutions, merchants and consumers in the rapidly expanding debit card market.

Philip J. Purcell, Chairman & CEO, said in a statement, "We are pleased with our fourth quarter and full year results. Fixed income and Discover Card had record years, investment banking activity has picked up significantly, and both equities and investment management made strong contributions to earnings. It's clear that our client focused strategy is working. Our focus in 2005 will be on improving margins and leveraging the strategic mix of our businesses."

The Company also announced that its Board of Directors declared a $0.27 quarterly dividend per common share -- an 8 percent increase from $0.25 per common share in the previous quarter. The dividend is payable on January 31, 2005 to common shareholders of record on January 14, 2005.

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INSTITUTIONAL SECURITIES

FULL YEAR

The Company's Institutional Securities business posted pre-tax income¹ of $4,097 million, a 12 percent increase from 2003. Net revenues rose 17 percent to $13.1 billion, driven by record results in fixed income and significant increases in advisory and equities. Non-interest expenses rose 19 percent to $9.0 billion, reflecting higher compensation levels and costs associated with increased business activity.

Fixed income sales and trading revenues were $5.6 billion, up 4 percent from a strong performance in 2003. The increase was driven by a record year in commodities and improved results in credit products, while interest rate & currency products declined slightly from last year's record revenues. Commodities benefited as tight oil supplies, growing demand and global political instability drove energy prices and volatility higher. Credit products benefited from increased customer flows and favorable trading conditions.

Equity sales and trading revenues rose 13 percent to $4.1 billion. Prime brokerage had a record year driven by robust growth in client asset balances. Equity cash revenues increased reflecting higher market volumes and derivatives increased modestly despite continued low levels of volatility.

Advisory revenues rose 75 percent to $1.2 billion, reflecting a significant increase in the Company's market share from 18 percent to 27 percent² and a 33 percent increase in industrywide completed M&A activity. Underwriting revenues rose 29 percent from last year to $1.9 billion. Equity underwriting revenues rose 55 percent compared to a 45 percent increase in industry wide activity. In a resurgent IPO market, the Company ranked first in global IPO market share,³ completing 42 transactions compared to 14 a year ago. Fixed income underwriting revenues rose 8 percent, compared to a 4 percent increase in industry-wide activity. High yield and securitized products drove the increase in revenues.

For the calendar year-to-date, the Company ranked first in global equity and equity-linked issuances with an 11 percent market share, first in global IPOs with an 11 percent market share, second in global debt issuances with a 7 percent market share, second in completed global M&A with a 27 percent market share and fifth in announced global M&A with a 21 percent market share.³

FOURTH QUARTER

Pre-tax income was $1,097 million for the quarter, up slightly from $1,064 million in the fourth quarter of 2003. A 9 percent increase in net revenues to $2.8 billion, reflecting improved results in advisory and equity sales and trading, was offset by a 13 percent increase in non-interest expenses reflecting higher compensation levels and costs associated with increased business activity.

• Fixed income sales and trading net revenues were $890 million, down 9 percent from the fourth quarter of 2003. Revenues declined significantly in interest rate & currency products, as a decline in interest rate volatility in the U.S. and most major countries resulted in a less favorable trading environment. Credit products revenues were down modestly this quarter, as lower investment grade and high yield were partially offset by an increase in securitized products. Commodities achieved a record quarter, driven by a strong performance in oil liquids, which benefited from increased market volatility.
• Equity sales and trading net revenues of $966 million rose 5 percent from the prior year -- driven by higher revenues in the Company's prime brokerage and cash businesses.
• Advisory revenues were $290 million, up 29 percent from fourth quarter 2003, driven by a 47 percent increase in industry-wide completed M&A activity and an increase in the Company's completed M&A global market share from 14 percent to 16 percent.⁴
• Total underwriting revenues declined 4 percent from last year's fourth quarter to $377 million. Equity underwriting revenues declined 7 percent despite a 19 percent increase in industry volume, and fixed income underwriting revenues were virtually unchanged.

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INDIVIDUAL INVESTOR GROUP

FULL YEAR

The Individual Investor Group reported pre-tax income of $371 million, down 20 percent from $464 million in fiscal 2003 -- largely driven by higher non-interest expenses. In the fourth quarter of 2004, the Company changed its method of accounting to recognize certain asset management and account fees over the relevant contract period as compared to when billed. This change decreased net revenues by $107 million, non-interest expenses by $27 million and pre-tax income by $80 million for both the full year and quarterly results.

Net revenues for the year were $4.6 billion, a 9 percent increase over a year ago, reflecting higher asset management, distribution and administration fees driven primarily by an increase in client assets in fee-based accounts. Commission revenues also increased, due to higher equity market volumes. Total non-interest expenses were $4.2 billion, a 12 percent increase from a year ago. The increase was driven by higher compensation expenses reflecting higher revenues, and higher professional services expenses including sub-advisory, consulting and legal costs. Total client assets increased to $602 billion, up 7 percent from fiscal 2003 yearend. Client assets in fee-based accounts rose 21 percent to $157 billion at fiscal year-end and increased as a percentage of total client assets to 26 percent from 23 percent. The number of global financial advisors was 10,962 -- a decline of 124 from a year ago.

FOURTH QUARTER

IIG pre-tax income for the fourth quarter was $51 million, a decline of 67 percent from $153 million a year ago -- reflecting a 7 percent decline in net revenues and a 2 percent increase in non-interest expenses.

• Net revenues fell 7 percent to $1.1 billion, due to the change in the recognition of certain asset management and account fees discussed above and a decline in principal transactions revenues.
• Non-interest expenses increased 2 percent from a year ago to $1.0 billion on higher professional services expenses driven by increases in consulting expenses and subadvisory fees.
• During the quarter, total client assets increased by $26 billion, or 5 percent, to $602 billion. Client assets in fee-based accounts increased by $11 billion, or 8 percent, to $157 billion and the number of global financial advisors increased by 177 to 10,962.

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INVESTMENT MANAGEMENT

FULL YEAR

Investment Management reported pre-tax income of $827 million, up 72 percent from last year's $482 million. The increase reflects a 20 percent increase in net revenues to $2.7 billion, driven by an increase in asset management fees and higher investment gains. Noninterest expenses increased 7 percent to $1.9 billion, largely due to higher compensation expense reflecting higher revenues, and an increase in professional services expenses driven by higher consulting, sub-advisory and legal costs. Assets under management at November 30, 2004 were $424 billion, up $67 billion, or 19 percent, from a year ago -- as a result of both market appreciation and positive net flows. Among full-service brokerage firms, the Company had the highest number of domestic funds (42) 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 was 71 percent over one year, 75 percent over three years and 73 percent over five years. Performance for the one and three year time periods was significantly better than a year ago.⁶ Investment gains for the year were $248 million, a $229 million increase from a year ago. The largest gains were associated with the Company's holdings in Vanguard Health Systems, Inc. and Ping An Insurance (Group) Company of China, Ltd.

FOURTH QUARTER

Investment Management's pre-tax income was $231 million, a 138 percent increase from $97 million in the fourth quarter of 2003. The increase reflected a 20 percent increase in net revenues to $714 million, driven by significantly higher investment gains and an increase in average assets under management. Non-interest expenses declined 3 percent to $483 million. Institutional assets rose $22 billion during the fourth quarter and $58 billion over the past twelve months to $222 billion. Retail assets increased $8 billion during the quarter and $9 billion from a year ago to $202 billion.

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CREDIT SERVICES

FULL YEAR

Credit Services pre-tax income was a record $1,272 million on a managed basis, up 16 percent from 2003 earnings of $1,093 million. The increase in earnings was driven by a decline in the provision for loan losses, reflecting improved credit quality -- that more than offset lower net interest income and merchant and cardmember fees. Non-interest expenses were relatively flat as higher marketing expenses were offset by lower compensation. The managed credit card charge-off rate decreased 60 basis points from a year ago to 6.00 percent, benefiting from the effect of the Company's credit and collection initiatives and an industrywide improvement in credit quality. The over-30-day-delinquency rate decreased 142 basis points to 4.55 percent and the over-90-day-delinquency rate was 64 basis points lower at 2.18 percent. Managed credit card loans were $48.3 billion at fiscal year-end -- virtually unchanged from a year ago. On a managed basis, net interest income fell $246 million from a year ago to $4.4 billion, reflecting lower average credit card loan balances, partially offset by an increase in the interest rate spread. Merchant and cardmember fees decreased $136 million, largely as a result of lower late and overlimit fees.

FOURTH QUARTER

Credit Services posted fourth quarter pre-tax income of $279 million on a managed basis, up 33 percent from a year ago. The increase was driven by a decline in the provision for loan losses, partially offset by a decrease in net interest income, lower merchant and cardmember fees and higher non-interest expenses.

• Managed credit card loans of $48.3 billion were virtually unchanged from a year ago and up 2 percent from the end of the third quarter. Net interest income declined $112 million from a year ago, reflecting a decrease in average credit card loan balances and a narrowing of the interest rate spread.
• Merchant and cardmember fees were $485 million, down 5 percent from a year ago, due to lower late and overlimit fees and higher cardmember rewards, partially offset by higher balance transfer fees and merchant discount revenues. The decline in late fees primarily reflected lower credit card delinquencies, while the increase in merchant discount revenue was driven by higher sales activity.
• Total transaction volume was $25.7 billion, a 12 percent increase from a year ago and the second highest quarterly volume.
• The credit card net charge-off rate was 5.45 percent, 142 basis points lower than last year's fourth quarter and 31 basis points lower than this year's third quarter. The over-30-day-delinquency rate declined 26 basis points from the third quarter to 4.55 percent, and the over-90-day-delinquency rate declined 4 basis points over the same period to 2.18 percent. The charge-off rate is at its lowest level in more than three years, while the over-30-day-delinquency rate is lower than at any time since 1995.
• Non-interest expenses of $621 million rose 3 percent from a year ago, due to increased marketing expenses.

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OTHER MATTERS

Total capital at November 30, 2004 was $110.8 billion, including $31.1 billion of common shareholders' equity and junior subordinated debt issued to capital trusts. Book value per common share was $25.95, based on quarter-end shares outstanding of 1.1 billion.

The Company repurchased approximately 23 million shares of its common stock during the 2004 fiscal year. The Company currently anticipates that it will increase common stock repurchases pursuant to its publicly announced equity anti-dilution program and expects that these repurchases will be between 35 million and 80 million shares for fiscal 2005. The actual amount of the repurchases will be subject to market conditions and certain other factors.

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.

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

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