Morgan Stanley Announces Key Actions to Drive Improved Profitability, Growth and Returns to Shareholders

-- Board Decides to Keep Discover as an Asset of Morgan Stanley that Can Create Value for Shareholders and Realize Growth Opportunities

-- Will Sell Non-Strategic Aircraft Leasing Business and Invest Proceeds in Core Businesses to Generate Higher ROE; Expects Q305 After-Tax Non-Cash Charge of Approximately $1.0 Billion

-- Three Respected, Experienced Business Leaders - Roy J. Bostock, Charles H. Noski and O. Griffith Sexton - Named to Board of Directors

Morgan Stanley (NYSE: MWD) today announced that its Board ofDirectors has approved several actions intended to drive improvedprofitability, growth and returns to shareholders across the Company'sglobal financial services businesses. The Company will retain DiscoverFinancial Services as an important contributor to shareholder valueand will sell its non-core aircraft-leasing business, AWAS, one of theworld's largest aircraft leasing companies.

The Board of Directors also elected three new directors: Roy J.Bostock, former Chairman of BCom3 Group, one of the world's leadingadvertising agencies, and a current director of Yahoo! Inc. andNorthwest Airlines; Charles H. Noski, former Vice Chairman of theBoard of AT&T and a current director of Microsoft Corporation and AirProducts & Chemicals, Inc.; and O. Griffith Sexton, an adjunctprofessor of finance at Columbia Business School, a long-timeinvestment banker and a current director at Investor AB and HamiltonLane. Mr. Bostock and Mr. Noski are considered independent directors,and their election increases the number of independent directors from10 to 12.

John J. Mack, who became Chairman and Chief Executive Officer ofMorgan Stanley on June 30, noted that the Discover and AWAS actionsare initial steps toward improving the Company's performance. Mr. Mackalso emphasized that one of his top priorities is to implement theinitiatives announced late last month to significantly improveprofitability in Morgan Stanley's retail brokerage business.

"Morgan Stanley has tremendous strengths as a global financialservices firm, but it is clear that our current level of profitabilityis unacceptable and we need to improve our performance," Mr. Macksaid. "We must be relentless in improving profit margins, growth andreturn on equity, while continuing to deliver innovative services toour clients. We have to ensure that the Firm operates with the scaleand flexibility to compete successfully in a fast-changing,competitive marketplace. We need to be smarter about using our capitalefficiently as we continue to focus on risk management. We must alsocreate a more cohesive culture by reducing bureaucracy and eliminatinginsular silos - all with the objective of shaping a 'one firm'mentality.

"Our overriding goal for Morgan Stanley is to be the clear leaderin offering premier, innovative financial services to our clients,while delivering superior returns to our shareholders. The decisionsto keep Discover, divest the aircraft leasing business and strengthenour retail business are our first steps toward achieving that goal. Wewill now focus on identifying other steps we need to take in themonths ahead."

Keeping Discover as a Valuable Asset

The Board of Directors has decided, based on the results of arecently completed in-depth analysis, that it is in the best interestsof Morgan Stanley's shareholders to retain Discover FinancialServices. The Board concluded that Discover can create value forMorgan Stanley shareholders and realize its growth potential as anasset of Morgan Stanley.

"Having looked closely at the Discover business," Mr. Mack said,"the Board and I are convinced that Discover is not only a strongbusiness, but also an attractive asset for Morgan Stanley. It is aunique, successful franchise with growth opportunities that givesMorgan Stanley a consistent stream of stable, high-quality earningsand substantial cash flow, diversifies the Company's earnings andbroadens our scale and capital base."

Among the considerations in the decision to retain the businessare that Discover:

-- Delivered record before-tax earnings of $1.27 billion in 2004, representing 19% of Morgan Stanley's total before-tax earnings and in excess of 19% ROE.

-- Enjoys a strong brand and a loyal customer base of 50 million Cardmembers.

-- Added more than one million merchant locations to its Discover Network in 2004 and is now accepted at more of the top 100 U.S. retailers than any other credit network.

-- Has significantly improved credit quality over the past three years, and, in the second quarter of 2005, reported an over-30-day delinquency rate of 3.9% on managed loans, the lowest in 15 years.

-- Is poised for new growth due to a favorable 2004 court ruling that allows the Discover Network to partner with financial institutions in the U.S. for the first time.

-- Launched new partnerships with GE Consumer Credit, offering Wal-Mart- and Sam's Club-branded cards on the Discover Network.

-- Acquired the fast-growing PULSE debit network in January 2005. PULSE has more than 4,100 financial institution customers.

-- Recently formed a new partnership with China UnionPay, China's largest payment network with 800 million cards.

-- Has a growing Morgan Stanley card business in the U.K.

-- Benefits from certain synergies between Discover and Morgan Stanley, including lower funding costs for Discover as well as shared corporate functions and the ability to leverage resources.

"Of course, the U.S. credit card industry is in a low-growth stageright now - about 3 to 5% annually - and the rising cost of funds putsadditional pressure on earnings in the short term," Mr. Mack added."But given the strengths of Discover, its powerful brand name and itscontinuing strong ROE, retaining the business and investing in it overtime give us a good chance to create value through domestic growth inexcess of industry trends, growth in international profit and theunique opportunities in the payments business."

In April, the Board of Directors authorized the analysis ofDiscover as a possible spin-off. The analysis included, among otherthings, an evaluation of capital structure, financial projections,credit ratings and anticipated market valuations, together withconsideration of the value of Discover to Morgan Stanley. Aftercareful examination of the completed analysis, Mr. Mack recommended tothe Board of Directors that Morgan Stanley retain Discover, and theBoard agreed.

Opportune Time to Exit Non-Strategic Aircraft Leasing Business

The Board of Directors also has determined that it is in the bestinterests of Morgan Stanley's shareholders to sell AWAS, its non-coreaircraft leasing business, and redeploy the proceeds of the sale backinto the Company's core businesses with the goal of delivering ahigher return on equity for the Company and its shareholders.

"Aircraft leasing is not a business that fits with our strategy,"Mr. Mack said. "We have long made it clear that we should divest thisbusiness and focus on our core financial services. Today, we believethat the marketplace offers the opportunity to execute a transaction,in light of several other recent transactions and expressions ofinterest in our business. While this will mean a significantafter-tax, non-cash accounting charge, there is no question that wenow have an opportunity to execute a sale that brings in the bestvalue for our shareholders, given the current market for theseassets."

AWAS is one of the world's largest and most experienced aircraftleasing companies, with 155 aircraft leased to 75 customers in 45countries. With the aircraft-leasing markets on an upturn over thepast 12 months, lease rates and leasing activity have improved. In thefirst quarter of 2005, AWAS completed the divestiture of 25 planesthat had been held for sale. As of the end of the second fiscalquarter, AWAS had no planes on the ground, with all of the aircraft inthe portfolio either leased or committed to a lease transaction.

The Company will take an after-tax, non-cash accounting charge inthe third quarter to write down the value of this business to itsestimated market value. Based on information currently available, itestimates the charge after taxes at approximately $1.0 billion. TheCompany said that this estimate might be adjusted as additionalinformation becomes available and discussions with potentialpurchasers begin. The sale process will begin immediately, with theclosing of a transaction anticipated in mid-2006.

Initiatives to Improve Performance in Retail Business

"Our retail brokerage operation generates strong revenue for theCompany," Mr. Mack said. "But it faces tough competition in themarketplace, and we are going to work hard to substantially improvethe productivity and profitability of this key business, whilemaintaining a sharp focus on client needs. Our retail strategy focuseson the more profitable, wealthier client segments and on increasingthe number of top-quality financial advisors and investmentrepresentatives we need to serve those clients. We believe the stepswe are taking should drive a significant improvement in margins."

As announced yesterday, James P. Gorman has been named Presidentand Chief Operating Officer of the Individual Investor Group,effective February 2006, responsible for leading Morgan Stanley'sglobal retail sales force. Mr. Gorman will be a member of MorganStanley's management committee and report to Acting President ZoeCruz.

The Company is taking specific actions to restructure and enhancethe performance of the retail sales force, including increasing theeffectiveness of its financial advisor training program, reducingheadcount and working to generate new revenue streams, includingbanking and deposits. These initiatives are designed to take advantageof favorable long-term trends in the retail business and marketplace,such as the growing numbers of high-net-worth clients, now thefastest-growing market segment for the industry. Morgan Stanley hasidentified many opportunities to improve its offerings for theseclients in key areas such as financial planning, alternativeinvestments, retirement vehicles, liability products and deposits.

Three New Members Elected to the Board of Directors

Commenting on the election by the Board of Messrs. Bostock, Noskiand Sexton, Mr. Mack said, "The Board has elected three individualswho are respected and experienced business leaders. They will makemajor contributions to our business strategy and represent the higheststandards of governance. Their appointments will help ensure that theFirm achieves the best possible, most objective sources of advice andoversight available."

Miles Marsh, Morgan Stanley's Lead Director, said, "Our Nominatingand Governance Committee recommended Roy Bostock, Chuck Noski andGriff Sexton because they add breadth of experience and perspective tothe Board. All three have wide exposure to the many complex anddemanding issues involved in the governance of major blue-chip,publicly traded companies, as well as the needs of institutionalinvestors and management. Their skills, talents and ideas are awelcome addition to our Board and we look forward to working closelywith them."

Mr. Bostock, 64, currently serves as Chairman of the Partnershipfor a Drug Free America. Until 2001, Mr. Bostock was Chairman ofBCom3 Group, an advertising and marketing services firm that is nowpart of the Publicis Group. Mr. Bostock played a major role inbuilding some of the most prominent advertising firms in the U.S.,beginning with Benton & Bowles in 1964. Following the creation,through a merger, of D'Arcy Masius Benton & Bowles in 1985, Mr.Bostock became President of the combined firm. By 1990, he had alsoserved as Chief Operating Officer and was named Chairman and ChiefExecutive Officer. In that capacity, he saw the agency through severalmore transactions. In 2000, the agency was renamed the BCom3 Groupand Mr. Bostock became Chairman. Mr. Bostock is a member of the boardsof directors of Northwest Airlines and Yahoo! Inc. and a TrusteeEmeritus of Duke University. A graduate of Duke, he has an MBA fromHarvard.

Mr. Noski, 52, was most recently Corporate Vice President andChief Financial Officer and a director of Northrop GrummanCorporation. Prior to joining Northrop in 2003, Mr. Noski was a senioradvisor to the Blackstone Group. Earlier, Mr. Noski was SeniorExecutive Vice President and Chief Financial Officer as well as ViceChairman of the Board of AT&T. Mr. Noski has also been President,Chief Operating Officer and a director of Hughes ElectronicsCorporation and a partner with Deloitte & Touche. He is a member ofthe boards of directors of Microsoft and Air Products & Chemicals. Heholds a master's degree in accounting and a bachelor's degree inbusiness administration from California State University, Northridge.

Mr. Sexton, 61, is an adjunct professor of finance at ColumbiaBusiness School and a visiting lecturer at Princeton University, wherehe teaches courses in corporate finance. Prior to his academic career,Mr. Sexton was an investment banker at Morgan Stanley from 1973 to1995, where he was engaged in the development and execution ofadvisory assignments involving a wide variety of corporate financialtransactions. Since 1995, he also has served as an active advisorydirector of Morgan Stanley. He is a member of the boards of directorsof Investor AB, a publicly traded Swedish investment company, andHamilton Lane, a privately held asset-management company based inPhiladelphia. A former U.S. naval aviator and Vietnam veteran, Mr.Sexton holds a BSE from Princeton and an MBA from Stanford.

Conference Call Today

The company will hold an analyst conference call today at 5:15 pm(ET). Live audio of the conference call will be available on theMorgan Stanley website at www.morganstanley.com or by dialing1-877-810-2615 (pass code 50371139) in the United States.International callers dial 617-786-8334 (pass code 50371139). Aplayback of the call will be available today at the same web siteaddress. To listen to the playback dial 1-888-286-8010 (pass code74395699) within the United States or 617-801-6888 (pass code74395699) internationally.

About Discover

Discover Financial Services, Inc., a business unit of MorganStanley (NYSE:MWD), operates the Discover Card with more than 50million Cardmembers, the Discover Network with more than 4 millionmerchant and cash access locations and the PULSE ATM/debit networkcurrently serving more than 4,100 banks, credit unions and savingsinstitutions. For more information, visit www.discovercard.com,www.discovernetwork.com or www.pulse-eft.com.

About AWAS

Headquartered in Seattle and with offices in New York, Miami,London, Singapore and Sydney, AWAS is one of the world's leadingaircraft leasing companies, trading in the very competitive and highlyspecialized market of aviation operating leases. AWAS currently owns155 modern Stage 3-type jet aircraft and has airline customerssituated in 45 countries around the world. AWAS is managed by a teamof aviation industry professionals. Additional information about AWAScan be found by visiting its website at www.awas.com.

About Morgan Stanley

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.

FORWARD LOOKING STATEMENTS

This release may contain forward-looking statements. Readers arecautioned not to place undue reliance on forward-looking statements,which speak only as of the date on which they are made, which reflectmanagement's current estimates, projections, expectations or beliefsand which are subject to risks and uncertainties that may cause actualresults to differ materially. In particular, the Company's ability toeffect a sale of the Company's aircraft leasing business, to realizethe full extent of cost savings or benefits from such sale and toassure that subsequent developments (including the ultimate structure,pricing and timing of the transaction) do not cause actual charges toexceed the currently estimated charges to be incurred in thetransaction may cause actual results to differ materially from theCompany's current estimates, projections, expectations or beliefs. Inaddition, the future performance of Discover Financial Services issubject to numerous risks impacting the credit card industry that maycause actual results to differ materially from the Company's currentestimates, projections and beliefs, including: rising cost of fundspressuring spreads; slow industry growth with rising payment rates;future loan loss rate uncertainty, especially given bankruptcy reformand changing minimum payment requirements; and a consolidatingindustry with competitive pressures and increasing marketingconstraints. For a discussion of additional risks and uncertaintiesthat may affect the future 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 FactorsAffecting Results of Operations" in Part II, Item 7 of the Company'sAnnual Report on Form 10-K for the fiscal year ended November 30, 2004and "Management's Discussion and Analysis of Financial Condition andResults of Operations" in the Company's Quarterly Reports on Form 10-Qfor the quarterly periods ended February 28, 2005 and May 31, 2005 andin other items throughout the Form 10-K and Forms 10-Q.