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Morgan Stanley Reports Record Second Quarter Results
Record Quarterly EPS from Continuing Operations of $2.45, Up 41%
Record Quarterly Net Revenues of $11.5 Billion, Up 32%
Record Quarterly Income from Continuing Operations of $2.6 Billion, Up 41%
Record Net Revenues, Net Income and EPS for First Six Months of FY07

NEW YORK, June 20, 2007 - Morgan Stanley (NYSE: MS) today reported record income fromcontinuing operations for the second quarter ended May 31, 2007 of $2,582 million, an increase of 41
percent from $1,828 million in the second quarter of 2006. Diluted earnings per share from continuing
operations were a record $2.45 compared with $1.74 a year ago. Net revenues were a record $11.5
billion, 32 percent above last year's second quarter. Non-interest expenses of $7.6 billion increased 31
percent from last year. The annualized return on average common equity from continuing operations
was 27.5 percent in the current quarter, compared with 23.7 percent in the second quarter of 2006.

For the first six months of 2007, income from continuing operations was a record $5,141 million, a 50
percent increase from $3,430 million a year ago. Diluted earnings per share from continuing
operations were a record $4.86 compared with $3.25 last year. Net revenues rose 31 percent to arecord $22.5 billion and non-interest expenses increased 24 percent to $14.8 billion. The annualized
return on average common equity from continuing operations was 28.2 percent, compared with 22.8
percent a year ago.

Net income for the quarter was $2,582 million, an increase of 40 percent from $1,841 million in thesecond quarter of 2006. For the first six months of 2007, net income was a record $5,254 million, a 54
percent increase from $3,415 million a year ago. Diluted earnings per share were $2.45 for thequarter, compared with $1.75 in the second quarter of 2006, and the annualized return on averagecommon equity for the second quarter was 27.5 percent compared with 23.7 percent a year ago. For
the first six months, diluted earnings per share were a record $4.96, compared with $3.23 a year ago,
and the annualized return on average common equity was 28.7 percent compared with 22.5 percent
last year.

Business Highlights•

Institutional Securities achieved record net revenues of $7.4 billion, up 39 percent from lastyear. Pre-tax income rose 55 percent to a record $3.0 billion.

•

Investment Banking achieved record results, with revenues of $1.7 billion, a 65 percent
increase from the second quarter of 2006. Advisory revenues and underwriting revenues bothreached record highs.

•

Equity sales and trading delivered record revenues of $2.2 billion, up 33 percent from lastyear, reflecting record results in Prime Brokerage and Derivatives.

•

Fixed income sales and trading revenues increased 34 percent to $2.9 billion, the second-bestquarter ever in this business.

•

Global Wealth Management delivered its fifth consecutive quarter of improved performanceand achieved a pre-tax margin of 16 percent. Client assets per global representative andfinancial advisor productivity reached all-time highs, and the Firm increased the number ofglobal representatives to 8,137.

•

Asset Management recorded net customer inflows of $9.3 billion - more than double the priorquarter. Assets under management reached $560 billion at quarter-end, a 23 percent increase
from a year ago.

•

Discover continues to be well positioned for success as a stand-alone company, and delivered
its sixth consecutive quarter of receivables growth due to increased net sales volume andstable payment rates. The spin-off of Discover remains on track and is scheduled to occur onJune 30, 2007.

John J. Mack, Chairman and CEO, said, "Morgan Stanley delivered record revenues and earnings in
the second quarter and the first half of the year, as we continued to build momentum across our
securities businesses and continued to see the benefits of our diverse mix of products, clients andbusinesses around the globe. Thanks to the commitment and focus of our people, we've now achieved
seven straight quarters with ROE above 20 percent, and we're well on our way to reaching our goal of
doubling 2005 earnings over five years. But we believe there is still work that remains to be done, andwe remain intensely focused on delivering value to Morgan Stanley's clients and shareholders over thelong term."

2

INSTITUTIONAL SECURITIES 1
Institutional Securities posted record pre-tax income2 of $3.0 billion, up 55 percent from $1.9 billion
in the second quarter of 2006. Record net revenues of $7.4 billion were 39 percent higher, driven bystrong results across all businesses. The quarter’s pre-tax margin was 40 percent, compared with 36
percent in last year’s second quarter. The quarter’s return on average common equity was 35 percent
compared with 28 percent a year ago.
•

Advisory revenues were a record $725 million, a 99 percent increase from last year’s second
quarter.

•

Record underwriting revenues of $979 million increased 46 percent from last year’s second
quarter. Fixed income underwriting revenues were a record $486 million, a 63 percent increase
from the prior year’s second quarter and equity underwriting revenues increased 33 percent to$493 million over the same period.

•

Fixed income sales and trading net revenues were $2.9 billion, a 34 percent increase over thesecond quarter of 2006. The increase was driven by strong results in interest rate & currency andcredit products, partly offset by lower results in commodities. Interest rate & currency products
benefited from record revenues in emerging markets and higher results in interest rate trading.
Credit products had strong results, with higher client activity and trading revenues driven bycorporate credit and structured products. These were offset by lower securitized products
revenues, primarily in residential mortgage securities. Commodities revenues were down slightly
from last year’s second quarter with lower revenues in electricity and natural gas.

•

Equity sales and trading net revenues were a record $2.2 billion, an increase of 33 percent fromlast year’s second quarter. Favorable global market conditions and increased client flows in all
regions across cash, derivatives and financing markets drove revenues higher. Prime Brokerage
financed higher client balances for the 17th consecutive quarter, which contributed to record
revenues for the business.

•

Investment revenues were $396 million compared with $389 million in the second quarter of last
year.

•

The Company’s aggregate average trading VaR measured at the 95 percent confidence level was$81 million compared with $63 million for the second quarter of 2006 and $90 million for the firstquarter of 2007. Total aggregate average trading and non-trading VaR was $87 million comparedwith $70 million for the second quarter of 2006 and $92 million for the first quarter of 2007. At

1

The results for all periods presented reflect the transfer of the real estate investing business from Institutional
Securities to Asset Management. Real estate advisory and certain passive limited partnership interests remain in
Institutional Securities.
2
Represents income from continuing operations before losses from unconsolidated investees and taxes.
3quarter end, the Company’s aggregate trading VaR was $86 million, and the aggregate trading andnon-trading VaR was $93 million.
•

Non-interest expenses were $4.4 billion, an increase of 30 percent from the second quarter of lastyear. Compensation costs were higher compared with a year ago resulting from higher revenues
and non-compensation expenses increased as a result of higher levels of business activity andbusiness investment.

For the first five months of calendar 2007, the Company ranked first in global completed M&A with a
38 percent market share, second in global announced M&A with a 33 percent market share, third inglobal IPOs with an 8 percent market share, fifth in global equity and equity-related issuances with an
8 percent market share and fifth in global debt issuance with a 6 percent market share.3

GLOBAL WEALTH MANAGEMENT GROUP
Global Wealth Management Group's pre-tax income for the second quarter was $269 million, a 67
percent increase from $161 million in the second quarter of last year. The quarter's pre-tax margin
was 16 percent compared with 12 percent in last year's second quarter. The quarter's return on averagecommon equity was 41 percent compared with 14 percent a year ago, reflecting lower capital allocatedto the business and the increase in net income.
•Net revenues of $1.6 billion were up 17 percent from a year ago reflecting stronger transactional
revenues due to increased underwriting activity, higher asset management revenues resulting fromgrowth in fee-based products and higher net interest revenue from growth in the bank deposit
sweep program.

•

Non-interest expenses were $1.4 billion, up 11 percent from a year ago. Compensation costs
increased from a year ago, primarily reflecting higher revenues and investment in the business.
Non-compensation expenses declined from a year ago primarily reflecting lower charges for legal
and regulatory matters.

•

Total client assets were $728 billion, a 16 percent increase from last year’s second quarter. Client
assets in fee-based accounts rose 17 percent to $210 billion over the last 12 months and represent
29 percent of total assets.

•

The 8,137 global representatives at quarter-end achieved record average annualized revenue andtotal client assets per global representative of $814,000 and $89 million, respectively.

ASSET MANAGEMENT 1
3

Source: Thomson Financial – for the period January 1, 2007 to May 31, 2007.
4

Asset Management reported pre-tax income for the second quarter of $306 million, 16 percent higher
than last year's $264 million. The quarter’s pre-tax margin was 20 percent compared with 29 percent a
year ago and the return on average common equity was 23 percent compared with 28 percent in lastyear’s second quarter. The decline in the pre-tax margin and return on average common equity
primarily reflects the continued investment in the business.
•

Net revenues increased 68 percent to a record $1,509 million primarily reflecting investment gains
from the real estate, private equity and alternatives businesses. The increase was also driven by
investment revenues associated with employee deferred compensation and co-investment plansthat are essentially offset by compensation expense related to these plans.4 Management andadministration fees were also higher due to an increase in assets under management and higher
performance fees from the alternatives business, including FrontPoint Partners.

•

Non-interest expenses increased 90 percent to $1,203 million driven by higher compensation
costs4 resulting from increased revenues and investment in the private equity and alternatives
businesses. Non-compensation expenses increased from last year resulting from higher levels of
business activity and business investment.

•

Asset Management recorded net customer inflows of $9.3 billion for the quarter, which
represented the third consecutive quarter of positive flows. The quarter reflected positive longterm flows across most distribution channels and continued strong flows into institutional money
markets. This compared with $5.1 billion of net outflows a year ago and is more than double theflows recorded in the first quarter of this year.

•

Assets under management or supervision at May 31, 2007 were $560 billion, up $106 billion, or
23 percent, from a year ago, driven by increases in equity, alternative and institutional money
market asset classes. These increases primarily resulted from market appreciation and net
customer inflows.

•

The percent of the Company’s long-term fund assets performing in the top half of the Lipper
rankings was 52 percent over one year, 60 percent over three years, 74 percent over five years and81 percent over 10 years.

DISCOVER
Discover’s second quarter pre-tax income was $333 million on a managed basis, a 38 percent decline
compared with $541 million in last year’s record second quarter. Net revenues of $1,035 million were
13 percent lower than a year ago, which included a favorable impact following changes in federal
4

The Company maintains various deferred compensation plans for the benefit of certain employees. Beginningin fiscal 2007, changes in the fair value of assets or profits associated with such plans are reflected in net
revenues, and changes in the fair value of liabilities associated with such plans are reflected in compensation
expense.
5

bankruptcy legislation in 2005. The quarter’s pre-tax margin was 32 percent compared with 45
percent a year ago. The quarter’s return on average common equity was 16 percent compared with 27
percent a year ago.
•

Transaction volume increased 5 percent from a year ago to $29.9 billion, primarily driven byhigher sales volume.

•

Managed credit card loans of $51.3 billion were up 6 percent from a year ago and increased 1
percent from the end of the first quarter.

•

Managed merchant, cardmember and other fees were $551 million, 2 percent higher than lastyear’s second quarter. Higher merchant discount revenues driven by higher sales activity werepartly offset by lower late and overlimit fee revenues.

•

The provision for consumer loan losses on a managed basis was $531 million, up 43 percent fromlast year, reflecting a continued trend toward more normalized bankruptcy charge-offs in thedomestic portfolio and increased credit losses in the U.K.

•

Managed net interest income of $970 million decreased $30 million, or 3 percent, reflecting anarrowing of the interest rate spread resulting from a higher cost of funds and a lower yield, partly
offset by a 7 percent increase in average credit card loans.

•

Non-interest expenses increased 8 percent to $702 million, primarily due to higher professionalfees, which were primarily related to consulting costs associated with the spin-off and increased
legal fees related to the VISA/MasterCard litigation.

•

The managed credit card net charge-off rate was 4.24 percent, 94 basis points higher than last
year's second quarter. The managed credit card over-30-day delinquency rate was 3.13 percent, 16
basis points lower than the second quarter of 2006, and the over-90-day delinquency rate was 1.52
percent, 1 basis point below the same period of last year.

OTHER MATTERS
The Company previously announced that its Board of Directors approved the spin-off of DiscoverFinancial Services (“DFS”). The distribution of all of the outstanding shares of DFS common stock
will be made on June 30, 2007 to Morgan Stanley shareholders of record as of the close of business onJune 18, 2007. Morgan Stanley will distribute one share of DFS common stock for every two sharesof Morgan Stanley common stock outstanding on the record date. Upon the spin-off, the results of
DFS for all prior periods will be reported in discontinued operations on an after-tax basis.

As of May 31, 2007, the Company repurchased approximately 33 million shares of its common stock
since the end of fiscal 2006.

6

The Company announced that its Board of Directors declared a $0.27 quarterly dividend per commonshare. The dividend is payable on July 31, 2007, to common shareholders of record on July 13, 2007.
The Company also announced that its Board of Directors declared a quarterly dividend of $382.68 pershare of Series A Floating Rate Non-Cumulative Preferred Stock (represented by depositary shares,
each representing 1/1,000th interest in a share of preferred stock and each having a dividend of$0.38268) to be paid on July 16, 2007 to preferred shareholders of record on July 1, 2007.

Total capital as of May 31, 2007 was $187.3 billion, including $44.4 billion of common shareholders'equity, preferred equity and junior subordinated debt issued to capital trusts. Book value per commonshare was $36.52, based on 1.1 billion shares outstanding.

Morgan Stanley is a leading global financial services firm providing a wide range of investmentbanking, securities, investment management, wealth management and credit services. The Company's
employees serve clients worldwide including corporations, governments, institutions and individuals
from more than 600 offices in 32 countries. For further information about Morgan Stanley, please
visit www.morganstanley.com.

A financial summary follows. Financial, statistical and business-related information, as well as
information regarding business and segment trends, is included in the Financial Supplement. Both theearnings release and the Financial Supplement are available online in the Investor Relations section atwww.morganstanley.com.

###(See Attached Schedules)

The information above contains forward-looking statements. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date on which they are
made and which reflect management’s current estimates, projections, expectations or beliefs andwhich are subject to risks and uncertainties that may cause actual results to differ materially. Fora discussion of additional risks and uncertainties that may affect the future results of theCompany, please see “Forward-Looking Statements” immediately preceding Part I, Item 1,“Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain
Factors Affecting Results of Operations” in Part II, Item 7 of the Company’s Annual Report on
Form 10-K for the fiscal year ended November 30, 2006 and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Risk Factors” in the Company’s
Quarterly Reports on Forms 10-Q and other items throughout the Form 10-K, Forms 10-Q and
the Company’s Current Reports on Form 8-K.
7

MORGAN STANLEY
Quarterly Financial Summary (1)(unaudited, dollars in millions)

May 31, 2007
Net revenues
Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations
Consolidated net revenues

7,393
1,642
1,509
1,035
(56)
11,523

$

$

$

2,965
269
306
333
1
3,874

Earnings per basic share:
Income from continuing operations
Discontinued operations
Earnings per basic share$$$

Earnings per diluted share:
Income from continuing operations
Discontinued operations
Earnings per diluted share$$$

Income before taxes (2)Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations
Consolidated income before taxes

Average common shares outstanding
Basic
Diluted
Period end common shares outstanding
Return on average common equityfrom continuing operations
Return on average common equity

(1)
(2)
Note:

$

Quarter Ended
May 31, 2006$$

Feb 28, 2007

5,305
1,400
898
1,191
(90)
8,704

$

$

$

1,910
161
264
541
(13)
2,863

2.57
2.57

$
$
$

2.45
2.45

$
$
$

$

Percentage Change From:
May 31, 2006
Feb 28, 2007

Six Months Ended
May 31, 2007
May 31, 2006

7,124
1,511
1,368
1,025
(47)
10,981

39%
17%
68%
(13%)
38%
32%

4%
9%
10%
1%
(19%)
5%

$

55%
67%
16%
(38%)
108%
35%

4%
17%
(20%)
(10%)
(80%)
1%

$

$

2,860
229
381
372
5
3,847

1.81
0.01
1.82

$
$
$

2.52
0.11
2.63

42%
*
41%

1.74
0.01
1.75

$
$
$

2.40
0.11
2.51

41%
*
40%

$

14,517
3,153
2,877
2,060
(103)
22,504

$

$

$

5,825
498
687
705
6
7,721

2%
*
(2%)

$
$
$

2%
*
(2%)

$
$
$

$

10,742
2,689
1,635
2,280
(139)
17,207

35%
17%
76%
(10%)
26%
31%

$

3,631
185
432
1,020
6
5,274

60%
169%
59%
(31%)
-46%

5.09
0.12
5.21

$
$
$

3.37
(0.01)
3.36

51%
*
55%

4.86
0.10
4.96

$
$
$

3.25
(0.02)
3.23

50%
*
54%

$

996,544,761
1,045,643,087
1,051,690,047

1,013,241,715
1,054,733,745
1,071,786,172

1,009,186,993
1,057,912,545
1,061,644,077

1,002,894,369
1,051,684,753
1,051,690,047

1,016,756,096
1,056,493,761
1,071,786,172

27.5%
27.5%

23.7%
23.7%

28.8%
29.9%

28.2%
28.7%

22.8%
22.5%

All periods have been restated to reflect the transfer of the real estate investing business from Institutional Securities to Asset Management.
Real estate advisory and certain passive limited partnership interests remain in Institutional Securities.
Represents consolidated income from continuing operations before gain/(loss) from unconsolidated investees, taxes
and gain/(loss) from discontinued operations.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
8

Percentage
ChangeMORGAN STANLEY
Quarterly Consolidated Income Statement Information(unaudited, dollars in millions)

Investment banking
Principal transactions:
Trading
Investments
Commissions
Fees:
Asset management, distribution and admin.
Merchant, cardmember and otherServicing and securitizations income
Interest and dividends
Other
Total revenues
Interest expense
Provision for consumer loan losses
Net revenues

May 31, 2007

Quarter Ended
May 31, 2006

Feb 28, 2007

$

$

$

Compensation and benefits
Occupancy and equipment
Brokerage, clearing and exchange fees
Information processing and communications
Marketing and business development
Professional services
Other
Total non-interest expenses
Income from continuing operations before gain/(loss)
from unconsolidated investees and taxes
Gain/(loss) from unconsolidated investees
Provision for income taxes
Income from continuing operations
Discontinued operations (1)Gain/(loss) from discontinued operations
Income tax benefit/(provision)
Gain/(loss) from discontinued operations
Net income
Preferred stock dividend requirements
Earnings applicable to common shareholders
Return on average common equityfrom continuing operations
Return on average common equity
Pre-tax profit margin (2)Compensation and benefits as a % of net revenues
(1)
(2)
Note:

$
$
$

1,913

1,132

Percentage Change From:
May 31, 2006
Feb 28, 2007

1,227

69%

56%

Six Months Ended
May 31, 2007
May 31, 2006
$

3,140

$

Percentage
Change

2,114

49%

4,838
1,004
1,123

3,559
629
994

4,158
880
1,005

36%
60%
13%

16%
14%
12%

8,996
1,884
2,128

6,645
929
1,914

35%
103%
11%

1,596
261
643
16,066290
27,73416,007204
11,523

1,321
277
651
10,111
125
18,799
9,965
130
8,704

1,479
297
556
14,814245
24,661
13,485
195
10,981

21%
(6%)
(1%)
59%
132%
48%
61%
57%
32%

8%
(12%)
16%
8%
18%
12%
19%
5%
5%

3,075
558
1,199
30,880535
52,39529,492399
22,504

2,589
566
1,247
20,655259
36,91819,426285
17,207

19%
(1%)
(4%)
50%
107%
42%
52%
40%
31%

5,218
301
366
381
340
626
417
7,649

3,802
236
340
364
297
537
265
5,841

4,992
280
361
369
294
499
339
7,134

37%
28%
8%
5%
14%
17%
57%
31%

5%
8%
1%
3%
16%
25%
23%
7%

10,210
581
727
750
634
1,125
756
14,783

8,044
466
632
710
535
970
576
11,933

27%
25%
15%
6%
19%
16%
31%
24%

3,874
(21)
1,271
2,582

2,863
23
1,058
1,828

3,847
(27)
1,261
2,559

35%
(191%)
20%
41%

1%
22%
1%
1%

7,721
(48)
2,532
5,141

5,274
3
1,847
3,430

46%
*
37%
50%

0
0
0
2,582
17
2,565

21
(8)
13
1,841
1,841

174
(61)
113
2,672
17
2,655

*
*
*
40%
*
39%

*
*
*
(3%)
-(3%)

174
(61)
113
5,254
34
5,220

(26)
11
(15)
3,415
3,415

*
*
*
54%
*
53%

27.5%
27.5%
34%
45%

$
$
$

$
$
$

23.7%
23.7%
33%
44%

28.8%
29.9%
35%
46%

Gain/(loss) from discontinued operations for the quarter ended Feb 28, 2007 reflects the operating results for Quilter Holdings Limited and thegain related to the sale of this business.
Income before taxes, excluding gain/(loss) from unconsolidated investees, as a % of net revenues.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
9

$
$
$

28.2%
28.7%
34%
45%

$
$
$

22.8%
22.5%
31%
47%