Morgan Stanley Reports Third Quarter Results; Net Revenue of $6.9 Billion Is Highest Since Second Quarter 2000, with Record Revenues in Institutional Securities

Morgan Stanley (NYSE: MWD) today reported net income of $144million for the quarter ended August 31, 2005 - a decrease of 83percent from the third quarter of 2004 and 84 percent from the secondquarter of 2005. The annualized return on average common equity was2.0 percent in the current quarter, compared with 12.3 percent in thethird quarter of 2004 and 13.1 percent in the second quarter of 2005.Diluted earnings per share were $0.13 compared with $0.76 a year agoand $0.86 in the second quarter. Results for the third quarter of 2005include an after-tax charge of approximately $1 billion fordiscontinued operations related to the planned sale of the Company'saircraft financing business.

Income from continuing operations was $1,166 million for thequarter, an increase of 36 percent from the third quarter of 2004 and25 percent from the second quarter of 2005. The annualized return onaverage common equity from continuing operations on a pro forma basiswas 17.1 percent in the current quarter, compared with 13.3 percent inthe third quarter of 2004 and 13.8 percent in the second quarter of2005.(1) Diluted earnings per share from continuing operations were$1.09 compared to $0.78 a year ago and $0.86 in the second quarter.

The results for the quarter also include compensation charges forsenior management severance and new hires. These charges increasednon-interest expenses by approximately $178 million, decreased dilutedearnings per share by $0.12 and decreased annualized return on averagecommon equity by 1.8 percentage points. These compensation chargeswere allocated to the business segments as follows: InstitutionalSecurities, $109 million; Retail Brokerage, $31 million; AssetManagement, $16 million; and Discover, $22 million. Excluding theeffect of both the discontinued operations and the charges for seniormanagement severance and new hires, quarterly earnings per share andannualized return on average common equity on a pro forma basis wouldbe $1.21 and 18.9 percent, respectively.(2)

Net revenues (total revenues less interest expense and theprovision for loan losses) of $6.9 billion were 29 percent higher thanlast year's third quarter and 15 percent above this year's secondquarter. Non-interest expenses of $5.2 billion were 26 percent higherthan a year ago and 12 percent above last quarter.

For the first nine months of 2005, net income was $2,474 million,diluted earnings per share were $2.29 and annualized return on equitywas 11.6 percent. Net revenues of $19.8 billion were 8 percent higherthan a year ago and non-interest expenses of $14.6 billion were up 11percent. For the first nine months of 2005, income from continuingoperations was $3,446 million, a 2 percent increase from $3,388million a year ago. The annualized return on average common equityfrom continuing operations on a pro forma basis was 17.0 percentcompared to 18.1 percent a year ago.(1) Diluted earnings per sharefrom continuing operations were $3.19 compared to $3.06 last year.

John J. Mack, Chairman and CEO, said, "Morgan Stanley achievedstrong revenue growth this quarter, particularly across all aspects ofour institutional securities business. Given the management changesand other distractions the Firm has faced over the past nine months,this impressive performance is a testament to the talent andcommitment of our people and the fundamental strength of ourfranchise.

"Institutional securities achieved record revenues, with fixedincome's best third quarter ever and strong results in both equitiesand investment banking. We maintained our #1 position in M&A, we were#3 in global IPOs, and we were #5 in global debt and equityunderwriting. In key businesses, like retail and asset management, weare bringing new leadership to help us build on their strongpotential, and we are making necessary investments in infrastructureto support the business.

"Even with this quarter's strong performance, we believe there issubstantial room for further improvement over time, both to grow thebusiness and to improve profitability. Our goal for Morgan Stanley isto be a clear leader in delivering not only innovative services to ourclients, but also superior returns to our shareholders. We alreadyhave moved quickly to enhance the leadership of key businesses, makecritical strategic decisions and further strengthen the Board ofDirectors. We still have a great deal of work to do, but the franchiseis fundamentally strong, and we are intensely focused on improvingprofit margins and growth within a robust risk and controlenvironment, with the overriding goal of creating substantiallong-term shareholder value."

Key actions Morgan Stanley took over the past three months toimprove performance include:

-- Leadership changes: The Company attracted James Gorman to lead retail, Gary Lynch as Chief Legal Officer, and Eileen Murray to lead technology and operations. It also assembled a new leadership team and organizational structure in institutional securities, and launched the search for new leadership in asset management.

-- Strategic decisions: The Company made the decision to retain Discover as a valuable asset of Morgan Stanley, and to sell its non-core aircraft financing business.

-- Strengthened governance: The Company added three new highly qualified directors to help ensure it has the strongest possible corporate governance.

INSTITUTIONAL SECURITIES

Institutional Securities posted income before taxes(3) of $1,288million, up 91 percent from the third quarter of 2004. Record netrevenues of $4.2 billion were 51 percent higher, driven by near recordresults in the Company's fixed income business and strong results inboth its equities and investment banking businesses. The quarter'spre-tax margin was 31 percent compared with 24 percent a year ago.

-- Advisory revenues were $388 million, up 25 percent from the third quarter of 2004, compared to a 30 percent increase in industry-wide completed M&A transaction volume.(4)

-- Underwriting revenues of $510 million rose 27 percent from last year's third quarter. Fixed income underwriting revenues increased 54 percent from a year ago, relative to a 21 percent increase in industry-wide activity. Equity underwriting revenues were flat compared with a 35 percent increase in industry-wide activity.(4)

-- For the calendar year-to-date, the Company ranked first in global announced M&A with a 30 percent market share, third in global IPOs with an 8 percent market share, fifth in global equity and equity-linked issuances with an 8 percent market share and fifth in global debt issuances with a 6 percent market share.(5)

-- Fixed income sales and trading net revenues were $2.0 billion, up 63 percent from the third quarter of 2004, and a record for a third quarter. The increase was broad-based and driven by strong performances in interest rate & currency products and credit products. Interest rate & currency products revenues reflected strong new deal activity and successful positioning in interest rate and foreign exchange and significantly higher revenues in emerging markets. Credit products revenues increased as a result of tightening credit spreads in corporate credit products and solid results in securitized and structured products. Commodities revenues were up primarily in electricity and natural gas.

-- Equity sales and trading net revenues were $1.3 billion, a 45 percent increase from a year ago and the highest total since the first quarter of 2001. The increase was driven by an improved performance in equity trading strategies and strong customer flows in the derivatives business. Revenues in the Company's Prime Brokerage business continued at near record levels.

-- The Company's aggregate average trading VaR was $78 million in the current quarter compared with $79 million in the third quarter of 2004 and $87 million in the second quarter of 2005.

-- Non-interest costs were $2.9 billion, a 37 percent increase from a year ago. Compensation expenses increased reflecting higher revenues and the costs noted above associated with senior management changes. Non-compensation expenses were higher primarily resulting from increased levels of business activity in the current quarter.

RETAIL BROKERAGE

Retail Brokerage reported pre-tax income of $30 million comparedto $22 million in the third quarter of 2004. The modest increase inearnings resulted from higher revenues, partially offset by anincrease in non-interest expenses. Non-compensation expenses for bothperiods were adversely affected by significant charges related tolegal and regulatory matters. Charges in the current quarter primarilyrelate to alleged employment matters, but also include certainregulatory and branch litigation matters. The quarter's pre-tax marginwas 2 percent, equal to a year ago.

-- Net revenues of $1.3 billion were up 12 percent from a year ago. Asset management, distribution and administration fees increased 12 percent on higher client asset levels in fee-based accounts and commissions rose 9 percent on increased activity in equity products.

-- Non-interest expenses were up 11 percent from a year ago to $1.2 billion. Compensation expenses were up resulting from higher revenues and the costs noted above associated with senior management changes. Non-compensation expenses increased primarily because of higher costs associated with legal and regulatory matters.

-- Total client assets were $619 billion, a 7 percent increase from last year's third quarter. Client assets in fee-based accounts rose 16 percent to $170 billion over the past twelve months and increased as a percentage of total client assets to 27 percent from 25 percent over the same period.

-- At quarter-end, the number of global representatives was 9,311 -- down 1,127 for the quarter and 1,474 over the past year, resulting largely from the previously announced sales force reduction.

ASSET MANAGEMENT

Asset Management reported pre-tax income of $162 million, 25percent lower than last year's $217 million. The quarter's pre-taxmargin was 24 percent compared with 31 percent a year ago. Netrevenues fell 2 percent to $679 million, reflecting lower PrivateEquity revenues, partially offset by an increase in revenues fromhigher average assets under management. Non-interest expensesincreased 9 percent to $517 million. Excluding results from thePrivate Equity business, pre-tax income declined 1 percent over lastyear and the pre-tax margin was 22 percent compared to 24 percent ayear ago. Assets under management were $428 billion, up $34 billion or9 percent from the third quarter of last year. The increase over thepast year resulted primarily from market appreciation.

-- Institutional assets were $227 billion, an increase of $27 billion from a year ago - reflecting market appreciation. Retail assets of $201 billion were $7 billion higher than a year ago. The increase resulted from market appreciation partly offset by customer out-flows.

-- Among full-service brokerage firms, the Company had the highest number of domestic funds (42) receiving one of Morningstar's two highest ratings.(6) In addition, the percent of the Company's long-term fund assets performing in the top half of the Lipper rankings was 67 percent over one year, 59 percent over three years, 71 percent over five years and 81 percent over ten years.(7)

DISCOVER

Discover posted pre-tax income of $239 million on a managed basis,down 28 percent from $330 million a year ago. Net revenues of $911million were 3 percent higher than last year's third quarter,reflecting a lower provision for loan losses and higher merchant,cardmember and other fees - partially offset by lower net interestincome. Non-interest expenses were significantly higher primarily as aresult of the costs noted above associated with senior managementchanges, and higher operating expenses resulting from the acquisitionof PULSE, which was acquired during the first quarter of 2005. Thequarter's pre-tax margin was 26 percent compared with 37 percent ayear ago.

-- Net sales volume increased 10 percent from last year to a record $22.4 billion.

-- At quarter end, managed credit card loans of $47.1 billion were equal to a year ago. Managed net interest income fell $87 million from a year ago, reflecting a tighter interest rate spread, which contracted 85 basis points to 7.95 percent, as the increase in yield was offset by higher cost of funds.

-- Managed merchant, cardmember and other fees were $532 million, up 7 percent from last year. The increase was primarily due to higher merchant discount and transaction processing revenues, partially offset by lower overlimit fees and higher cardmember rewards.

-- The managed credit card net charge-off rate for the third quarter was 5.12 percent, 64 basis points below a year ago. Improvement in the net charge-off rate was partially mitigated by increased bankruptcy charge-offs in advance of the effective date of new bankruptcy legislation.

-- The managed credit card over-30-day delinquency rate was 3.91 percent, a decrease of 90 basis points from the third quarter of 2004, and the managed credit card over-90-day delinquency rate was 1.80 percent, 42 basis points lower than a year ago.

As of August 31, 2005, the Company repurchased approximately 46million shares of its common stock since the end of fiscal 2004. TheCompany also announced that its Board of Directors declared a $0.27quarterly dividend per common share. The dividend is payable onOctober 31, 2005, to common shareholders of record on October 14,2005.

Total capital at August 31, 2005 was $118.4 billion, including$31.1 billion of common shareholders' equity and junior subordinateddebt issued to capital trusts. Book value per common share was $26.07,based on 1.1 billion shares outstanding.

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

A financial summary follows. Additional financial, statistical andbusiness-related information, as well as information regardingbusiness and segment trends, is included in a Financial Supplement.Both the earnings release and the Financial Supplement are availableon-line at www.morganstanley.com

The information above contains forward-looking statements. Readersare cautioned not to place undue reliance on forward-lookingstatements, which speak only as of the date on which they are made andwhich reflect management's current estimates, projections,expectations or beliefs and which are subject to risks anduncertainties that may cause actual results to differ materially. Fora discussion of additional risks and uncertainties that may affect thefuture results of the Company please see "Forward-Looking Statements"immediately preceding Part I, Item 1, "Competition" and "Regulation"in Part I, Item 1 and "Certain Factors Affecting Results ofOperations" in Part II, Item 7 of the Company's Annual Report on Form10-K for the fiscal year ended November 30, 2004 and "Management'sDiscussion and Analysis of Financial Condition and Results ofOperations" in the Company's Quarterly Reports on Form 10-Q for thequarterly periods ended February 28, 2005 and May 31, 2005 and otheritems throughout the Form 10-K and Forms 10-Q.

(1)Pro forma annualized return on average common equity fromcontinuing operations is computed assuming a $1.5 billion equityallocation for the Company's aircraft financing business for allperiods through July 2005 and $0.4 billion for August 2005. Thedecrease in equity allocated to this business primarily reflects thedecrease in asset value as a result of the charge referred to above.

(2)Pro forma annualized return on average common equity calculatedbased on footnote 1 (noted above) and excludes $178 million of expensein the third quarter of 2005.

(3)Represents income from continuing operations before losses fromunconsolidated investees, taxes and cumulative effect of an accountingchange.

(4)Source: Thomson Financial -- for the periods: June 1, 2004 toAugust 31, 2004 and June 1, 2005 to August 31, 2005.

(5)Source: Thomson Financial -- for the period January 1, 2005 toAugust 31, 2005.

(6)Full-service brokerage firms include: Morgan Stanley, MerrillLynch, Citigroup and Prudential. As of August 31, 2005.

(7)For the one, three, five and ten year periods ending August 31,2005.
MORGAN STANLEY
Quarterly Financial Summary
(unaudited, dollars in millions)

Quarter Ended
-----------------
Aug 31, Aug 31, %
2005 2004 Change
------------------------
Net revenues
Institutional Securities $4,164 $ 2,765 51%
Retail Brokerage 1,255 1,124 12%
Asset Management 679 692 (2%)
Discover 911 884 3%
Intersegment Eliminations (62) (67) 7%
--------- --------
Consolidated net revenues $6,947 $ 5,398 29%
========= ========
Income before taxes (1)
Institutional Securities $1,288 $ 673 91%
Retail Brokerage 30 22 36%
Asset Management 162 217 (25%)
Discover 239 330 (28%)
Intersegment Eliminations 23 31 (26%)
--------- --------
Consolidated income before taxes $1,742 $ 1,273 37%
========= ========

Earnings per basic share: (2)
Income from continuing operations $ 1.12 $ 0.80 40%
Discontinued operations $(0.98) $(0.02) *
Cumulative effect of accounting change (3) $ - $ - --
Earnings per basic share $ 0.14 $0.78 (82%)

Earnings per diluted share: (2)
Income from continuing operations $ 1.09 $ 0.78 40%
Discontinued operations $(0.96) $ (0.02) *
Cumulative effect of accounting change (3) $ - $ - --
Earnings per diluted share $ 0.13 $ 0.76 (83%)

Average common shares outstanding
Basic 1,045.9 1,081.4
Diluted 1,072.0 1,105.5
Period end common shares outstanding 1,082.7 1,096.7

Return on common equity 2.0% 12.3%
--------------------------

(1) Represents consolidated income from continuing operations
before losses from unconsolidated investees, taxes,
dividends on preferred securities subject to
mandatory redemption and cumulative effect of accounting change.
(2) Summation of the quarters' earnings per common share may not
equal the annual amounts due to the averaging effect of the
number of shares and share equivalents throughout the year.
(3) Represents the effects of the adoption of SFAS 123(R)
in the first quarter of fiscal 2005.

Note: Certain reclassifications have been made to prior period
amounts to conform to the current presentation.


MORGAN STANLEY
Quarterly Financial Summary
(unaudited, dollars in millions)

Quarter Ended
-----------------
Aug 31, May 31, %
2005 2005 Change
------------------------
Net revenues
Institutional Securities $4,164 $3,340 25%
Retail Brokerage 1,255 1,228 2%
Asset Management 679 642 6%
Discover 911 888 3%
Intersegment Eliminations (62) (67) 7%
--------- --------
Consolidated net revenues $6,947 $6,031 15%
========= ========
Income before taxes (1)
Institutional Securities $1,288 $ 813 58%
Retail Brokerage 30 118 (75%)
Asset Management 162 175 (7%)
Discover 239 263 (9%)
Intersegment Eliminations 23 25 (8%)
--------- --------
Consolidated income before taxes $1,742 $1,394 25%
========= ========

Earnings per basic share: (2)
Income from continuing operations $ 1.12 $ 0.88 27%
Discontinued operations $(0.98) $ - *
Cumulative effect of accounting change (3) $ - $ - --
Earnings per basic share $ 0.14 $ 0.88 (84%)

Earnings per diluted share: (2)
Income from continuing operations $ 1.09 $ 0.86 27%
Discontinued operations $(0.96) $ - *
Cumulative effect of accounting change (3) $ - $ - --
Earnings per diluted share $ 0.13 $ 0.86 (85%)

Average common shares outstanding
Basic 1,045.9 1,053.8
Diluted 1,072.0 1,079.8
Period end common shares outstanding 1,082.7 1,086.7

Return on common equity 2.0% 13.1%
--------------------------

(1) Represents consolidated income from continuing operations
before losses from unconsolidated investees, taxes,
dividends on preferred securities subject to
mandatory redemption and cumulative effect of accounting change.
(2) Summation of the quarters' earnings per common share may not
equal the annual amounts due to the averaging effect of the
number of shares and share equivalents throughout the year.
(3) Represents the effects of the adoption of SFAS 123(R)
in the first quarter of fiscal 2005.

Note: Certain reclassifications have been made to prior period
amounts to conform to the current presentation.


MORGAN STANLEY
Quarterly Financial Summary
(unaudited, dollars in millions)

Nine Months Ended
-----------------
Aug 31, Aug 31, %
2005 2004 Change
------------------------
Net revenues
Institutional Securities $11,519 $10,281 12%
Retail Brokerage 3,721 3,544 5%
Asset Management 2,017 2,024 --
Discover 2,758 2,653 4%
Intersegment Eliminations (199) (218) 9%
--------- --------
Consolidated net revenues $19,816 $18,284 8%
========= ========
Income before taxes (1)
Institutional Securities $ 3,178 $ 3,173 --
Retail Brokerage 501 320 57%
Asset Management 624 596 5%
Discover 856 950 (10%)
Intersegment Eliminations 72 89 (19%)
--------- --------
Consolidated income before taxes $ 5,231 $ 5,128 2%
========= ========

Earnings per basic share: (2)
Income from continuing operations $ 3.26 $ 3.13 4%
Discontinued operations $ (0.97) $ (0.09) *
Cumulative effect of accounting change (3) $0.05 $ - *
Earnings per basic share $2.34 $ 3.04 (23%)

Earnings per diluted share: (2)
Income from continuing operations $ 3.19 $ 3.06 4%
Discontinued operations $ (0.95) $ (0.09) *
Cumulative effect of accounting change (3) $0.05 $ - *
Earnings per diluted share $2.29 $ 2.97 (23%)

Average common shares outstanding
Basic 1,056.2 1,081.2
Diluted 1,080.3 1,107.5
Period end common shares outstanding 1,082.7 1,096.7

Return on common equity 11.6% 16.6%
--------------------------

(1) Represents consolidated income from continuing operations
before losses from unconsolidated investees, taxes,
dividends on preferred securities subject to
mandatory redemption and cumulative effect of accounting change.
(2) Summation of the quarters' earnings per common share may not
equal the annual amounts due to the averaging effect of the
number of shares and share equivalents throughout the year.
(3) Represents the effects of the adoption of SFAS 123(R)
in the first quarter of fiscal 2005.

Note: Certain reclassifications have been made to prior period
amounts to conform to the current presentation.