Morgan Stanley (MS) 10-Q 2007 Q2 Quarterly report

Exhibit 99.1

Morgan Stanley

Unaudited Pro Forma Condensed Consolidated Financial Information

The accompanying unaudited pro forma condensed consolidated financial information has been prepared to reflect the June 30, 2007 (the “Distribution Date”) distribution by Morgan Stanley (the “Company”) of all the shares of Discover Financial Services (“Discover”) to the Company’s stockholders (the “Discover spin-off”). On the Distribution Date, the Company distributed one share of common stock of Discover, par value $0.01 per share, for every two shares of the Company’s common stock held by stockholders of record as of June 18, 2007. Stockholders will receive cash in lieu of fractional shares for amounts less than one full Discover share. The Company has received a ruling from the Internal Revenue Service that, based on customary representations and qualifications, the distribution will be tax-free to Morgan Stanley stockholders for U.S. federal income tax purposes. Discover common stock is listed on the New York Stock Exchange under the ticker symbol “DFS”.

The unaudited pro forma condensed consolidated statements of income for the fiscal years ended November 30, 2006, 2005 and 2004, the three months ended February 28, 2007 and for the three and six months ended May 31, 2007 gives effect to the Discover spin-off as if the distribution and related transactions occurred on December 1, 2003. The unaudited pro forma condensed consolidated statement of financial condition as of May 31, 2007 gives effect to the Discover spin-off as if the distribution and related transactions occurred on May 31, 2007. The unaudited pro forma condensed consolidated financial statements are subject to the assumptions and adjustments set forth in the accompanying notes. Management believes that the assumptions used and adjustments made are reasonable under the circumstances and given the information available.

The unaudited pro forma condensed consolidated financial information is for illustrative and informational purposes only and is not intended to represent, or be indicative of, what the Company’s results of operations or financial position would have been had the Discover spin-off occurred on the dates indicated. The unaudited pro forma condensed consolidated financial information also should not be considered representative of the Company’s future financial position or results of operations.

The unaudited pro forma condensed consolidated financial information should be read in conjunction with the:

• Accompanying notes to the unaudited pro forma condensed consolidated financial information;

• The Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2006;

• The Company’s Current Report on Form 8-K dated April 10, 2007;

• The Company’s Quarterly Report on Form 10-Q for the three months ended February 28, 2007;

• The Company’s Quarterly Report on Form 10-Q for the three and six months ended May 31, 2007;

• Discover’s Registration Statement on Form 10 initially filed with the Securities Exchange Commission on March 23, 2007, as amended by Amendment No. 1 filed on May 1, 2007, Amendment No. 2 filed on May 9, 2007, Amendment No. 3 filed on May 18, 2007 and Amendment No. 4 filed on June 1, 2007.

1

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION

(dollars in millions)

	May 31, 2007
	Morgan Stanley Historical(a)		Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Assets
Cash and cash equivalents	$	31,786	$	(7,892	)	$	4,139	(c)	$	28,383
							350	(d)
Cash and securities deposited with clearing organizations or segregated under federal and other regulations or requirements		47,114		(1	)		—			47,113
Financial instruments owned:
U.S. government and agency securities		35,198		(73	)		—			35,125
Other sovereign government obligations		28,764		—			—			28,764
Corporate and other debt		167,751		—			—			167,751
Corporate equities		99,728		—			—			99,728
Derivative contracts		56,461		(28	)		—			56,433
Investments		10,050		—			—			10,050
Physical commodities		3,165		—			—			3,165
Total financial instruments owned		401,117		(101	)		—			401,016
Securities received as collateral		112,236		—			—			112,236
Collateralized agreements:
Securities purchased under agreements to resell		144,051		—			—			144,051
Securities borrowed		252,213		—			—			252,213
Receivables:
Consumer loans, net		21,917		(21,854	)		—			63
Customers		113,866		—			—			113,866
Brokers, dealers and clearing organizations		17,009		—			—			17,009
Other loans		14,334		—			—			14,334
Fees, interest and other		11,991		(312	)		—			11,679
Other investments		13,302		—			—			13,302
Office facilities and other equipment, at cost, net		4,501		(658	)		—			3,843
Goodwill		2,977		(536	)		—			2,441
Intangible assets, net		1,155		(200	)		—			955
Other assets		10,424		(4,119	)		—			6,305
Total assets	$	1,199,993	$	(35,673	)	$	4,489		$	1,168,809

2

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION—(Continued)

(dollars in millions)

	May 31, 2007
	Morgan Stanley Historical(a)		Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Liabilities and Shareholders’ Equity
Commercial paper and other short-term borrowings	$	33,747	$	(530	)	$	—		$	33,217
Deposits		43,577		(23,080	)		—			20,497
Financial instruments sold, not yet purchased:
U.S. government and agency securities		18,085		—			—			18,085
Other sovereign government obligations		23,586		—			—			23,586
Corporate and other debt		6,321		—			—			6,321
Corporate equities		58,491		—			—			58,491
Derivative contracts		58,919		(40	)		—			58,879
Physical commodities		1,147		—			—			1,147
Total financial instruments sold, not yet purchased		166,549		(40	)		—			166,509
Obligation to return securities received as collateral		112,236		—			—			112,236
Collateralized financings:
Securities sold under agreements to repurchase		252,710		—			—			252,710
Securities loaned		147,216		—			—			147,216
Other secured financings		43,456		—			—			43,456
Payables:
Customers		142,080		—			—			142,080
Brokers, dealers and clearing organizations		13,656		—			—			13,656
Interest and dividends		6,541		(228	)		—			6,313
Intercompany notes payable		—		(4,274	)		4,274	(c)		—
Other liabilities and accrued expenses		26,782		(1,491	)		—			25,291
Long-term borrowings		171,932		(250	)		—			171,682
Total liabilities		1,160,482		(29,893	)		4,274			1,134,863
Total shareholders’ equity		39,511		(5,780	)		215	(c)(d)		33,946
Total liabilities and shareholders’ equity	$	1,199,993	$	(35,673	)	$	4,489		$	1,168,809

See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition.

3

MORGAN STANLEY

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT

OF FINANCIAL CONDITION

(a) Reflects the Company’s historical condensed consolidated statement of financial condition.

(b) Reflects the Company’s distribution of Discover’s assets and liabilities to the Company’s stockholders.

(c) Reflects the net receipt of cash from Discover in connection with the settlement of intercompany funding prior to the Discover spin-off. Such intercompany balances were previously eliminated in the Company’s historical consolidated financial statements.

(d) Reflects the receipt of a $350 million cash dividend from Discover prior to the Discover spin-off.

4

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

	Fiscal Year Ended November 30, 2006
	Morgan Stanley Historical(a)		Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	4,755	$	—		$	—		$	4,755
Principal transactions:
Trading		11,738		—			—			11,738
Investments		1,669		—			—			1,669
Commissions		3,770		—			—			3,770
Fees:
Asset management, distribution and administration		5,238		—			—			5,238
Merchant, cardmember and other fees, net		1,167		(1,167	)		—			—
Servicing and securitization income		2,338		(2,338	)		—			—
Interest and dividends		45,199		(2,458	)		—			42,741
Other		571		(35	)		—			536
Total revenues		76,445		(5,998	)		—			70,447
Interest expense		41,937		(952	)		245	(c)		41,230
Provision for consumer loan losses		756		(756	)		—			—
Net revenues		33,752		(4,290	)		(245	)		29,217
Non-interest expenses:
Compensation and benefits		14,328		(922	)		52	(d)		13,458
Occupancy and equipment		993		(91	)		10	(d)		912
Brokerage, clearing and exchange fees		1,305		—			—			1,305
Information processing and communications		1,463		(387	)		4	(d)		1,080
Marketing and business development		1,244		(604	)		3	(d)		643
Professional services		2,242		(368	)		13	(d)		1,887
Other		1,204		(332	)		5	(d)		877
Total non-interest expenses		22,779		(2,704	)		87			20,162
Income from continuing operations before losses from unconsolidated investees and income taxes		10,973		(1,586	)		(332	)		9,055
Losses from unconsolidated investees		228		(3	)		—			225
Provision for income taxes		3,265		(506	)		(101	)		2,658
Income from continuing operations	$	7,480	$	(1,077	)	$	(231	)	$	6,172
Earnings per basic common share:
Income from continuing operations	$	7.39							$	6.06
Earnings per diluted common share:
Income from continuing operations	$	7.08							$	5.77
Average common shares outstanding:
Basic		1,010					5	(e)		1,015
Diluted		1,055					12	(e)		1,067

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

5

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

	Fiscal Year Ended November 30, 2005
	Morgan Stanley Historical(a)			Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	3,843		$	—		$	—		$	3,843
Principal transactions:
Trading		7,365			—			—			7,365
Investments		981			—			—			981
Commissions		3,331			—			—			3,331
Fees:
Asset management, distribution and administration		4,915			—			—			4,915
Merchant, cardmember and other fees, net		1,323			(1,323	)		—			—
Servicing and securitization income		1,609			(1,609	)		—			—
Interest and dividends		28,160			(2,174	)		—			25,986
Other		464			(5	)		—			459
Total revenues		51,991			(5,111	)		—			46,880
Interest expense		24,425			(781	)		143	(c)		23,787
Provision for consumer loan losses		878			(878	)		—			—
Net revenues		26,688			(3,452	)		(143	)		23,093
Non-interest expenses:
Compensation and benefits		11,267			(865	)		58	(d)		10,460
Occupancy and equipment		1,038			(92	)		11	(d)		957
Brokerage, clearing and exchange fees		1,069			—			—			1,069
Information processing and communications		1,400			(353	)		5	(d)		1,052
Marketing and business development		1,160			(587	)		3	(d)		576
Professional services		1,898			(294	)		14	(d)		1,618
Other		1,765			(343	)		6	(d)		1,428
September 11th related insurance recoveries, net		(251	)		—			—			(251	)
Total non-interest expenses		19,346			(2,534	)		97			16,909
Income from continuing operations before losses from unconsolidated investees, income taxes and cumulative effect of accounting change, net		7,342			(918	)		(240	)		6,184
Losses from unconsolidated investees		311			—			—			311
Provision for income taxes		1,852			(340	)		(64	)		1,448
Income from continuing operations before cumulative effect of accounting change, net	$	5,179		$	(578	)	$	(176	)	$	4,425
Earnings per basic common share:
Income from continuing operations	$	4.93								$	4.20
Earnings per diluted common share:
Income from continuing operations	$	4.80								$	4.07
Average common shares outstanding:
Basic		1,050						4	(e)		1,054
Diluted		1,080						8	(e)		1,088

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

6

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

	Fiscal Year Ended November 30, 2004
	Morgan Stanley Historical(a)		Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	3,341	$	—		$	—		$	3,341
Principal transactions:
Trading		5,510		—			—			5,510
Investments		607		—			—			607
Commissions		3,235		—			—			3,235
Fees:
Asset management, distribution and administration		4,436		—			—			4,436
Merchant, cardmember and other fees, net		1,317		(1,317	)		—			—
Servicing and securitization income		1,921		(1,921	)		—			—
Interest and dividends		18,575		(1,859	)		—			16,716
Other		323		(10	)		—			313
Total revenues		39,265		(5,107	)		—			34,158
Interest expense		14,706		(648	)		112	(c)		14,170
Provision for consumer loan losses		926		(926	)		—			—
Net revenues		23,633		(3,533	)		(112	)		19,988
Non-interest expenses:
Compensation and benefits		9,812		(752	)		41	(d)		9,101
Occupancy and equipment		839		(84	)		8	(d)		763
Brokerage, clearing and exchange fees		931		—			—			931
Information processing and communications		1,304		(344	)		5	(d)		965
Marketing and business development		1,121		(575	)		2	(d)		548
Professional services		1,538		(263	)		8	(d)		1,283
Other		1,278		(296	)		2	(d)		984
Total non-interest expenses		16,823		(2,314	)		66			14,575
Income from continuing operations before losses from unconsolidated investees, dividends on preferred securities subject to mandatory redemption and income taxes		6,810		(1,219	)		(178	)		5,413
Losses from unconsolidated investees		328		—			—			328
Provision for income taxes		1,854		(443	)		(51	)		1,360
Dividends on preferred securities subject to mandatory redemption		45		—			—			45
Income from continuing operations	$	4,583	$	(776	)	$	(127	)	$	3,680
Earnings per basic common share:
Income from continuing operations	$	4.24							$	3.39
Earnings per diluted common share:
Income from continuing operations	$	4.15							$	3.30
Average common shares outstanding:
Basic		1,080					6	(e)		1,086
Diluted		1,105					10	(e)		1,115

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

7

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

	Six months Ended May 31, 2007
	Morgan Stanley Historical(a)			Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	3,140		$	—		$	—		$	3,140
Principal transactions:
Trading		8,996			—			—			8,996
Investments		1,884			—			—			1,884
Commissions		2,128			—			—			2,128
Fees:
Asset management, distribution and administration		3,075			—			—			3,075
Merchant, cardmember and other fees, net		558			(558	)		—			—
Servicing and securitization income		1,199			(1,122	)		—			77
Interest and dividends		30,880			(1,384	)		—			29,496
Other		535			(18	)		—			517
Total revenues		52,395			(3,082	)		—			49,313
Interest expense		29,492			(623	)		142	(c)		29,011
Provision for consumer loan losses		399			(399	)		—			—
Net revenues		22,504			(2,060	)		(142	)		20,302
Non-interest expenses:
Compensation and benefits		10,210			(466	)		26	(d)		9,770
Occupancy and equipment		581			(46	)		5	(d)		540
Brokerage, clearing and exchange fees		727			—			—			727
Information processing and communications		750			(191	)		2	(d)		561
Marketing and business development		634			(283	)		1	(d)		352
Professional services		1,125			(194	)		(1	)(d)		930
Other		756			(175	)		1	(d)		582
Total non-interest expenses		14,783			(1,355	)		34			13,462
Income from continuing operations before losses from unconsolidated investees and income taxes		7,721			(705	)		(176	)		6,840
Losses from unconsolidated investees		(48	)		(2	)		—			(46	)
Provision for income taxes		2,532			(261	)		(58	)		2,213
Income from continuing operations	$	5,141		$	(442	)	$	(118	)	$	4,581
Earnings per basic common share:
Income from continuing operations	$	5.09								$	4.50
Earnings per diluted common share:
Income from continuing operations	$	4.86								$	4.27
Average common shares outstanding:
Basic		1,003						7	(e)		1,010
Diluted		1,052						14	(e)		1,066

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

8

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

( in millions, except per share data)

	Three months Ended May 31, 2007
	Morgan Stanley Historical(a)			Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	1,913		$	—		$	—		$	1,913
Principal transactions:
Trading		4,838			—			—			4,838
Investments		1,004			—			—			1,004
Commissions		1,123			—			—			1,123
Fees:
Asset management, distribution and administration		1,596			—			—			1,596
Merchant, cardmember and other fees, net		261			(261	)		—			—
Servicing and securitization income		643			(601	)		—			42
Interest and dividends		16,066			(704	)		—			15,362
Other		290			(9	)		—			281
Total revenues		27,734			(1,575	)		—			26,159
Interest expense		16,007			(336	)		55	(c)		15,726
Provision for consumer loan losses		204			(204	)		—			—
Net revenues		11,523			(1,035	)		(55	)		10,433
Non-interest expenses:
Compensation and benefits		5,218			(236	)		13	(d)		4,995
Occupancy and equipment		301			(24	)		2	(d)		279
Brokerage, clearing and exchange fees		366			—			—			366
Information processing and communications		381			(97	)		1	(d)		285
Marketing and business development		340			(141	)		1	(d)		200
Professional services		626			(113	)		(2	)(d)		511
Other		417			(91	)		1	(d)		327
Total non-interest expenses		7,649			(702	)		16			6,963
Income from continuing operations before losses from unconsolidated investees and income taxes		3,874			(333	)		(71	)		3,470
Losses from unconsolidated investees		(21	)		(1	)		—			(20	)
Provision for income taxes		1,271			(123	)		(24	)		1,124
Income from continuing operations	$	2,582		$	(209	)	$	(47	)	$	2,326
Earnings per basic common share:
Income from continuing operations	$	2.57								$	2.30
Earnings per diluted common share:
Income from continuing operations	$	2.45								$	2.18
Average common shares outstanding:
Basic		997						7	(e)		1,004
Diluted		1,046						14	(e)		1,060

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

9

MORGAN STANLEY

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share data)

	Three Months Ended February 28, 2007
	Morgan Stanley Historical(a)			Discover Distribution(b)			Pro forma Adjustments			Morgan Stanley Pro forma
	(unaudited)
Revenues:
Investment banking	$	1,227		$	—		$	—		$	1,227
Principal transactions:
Trading		4,158			—			—			4,158
Investments		880			—			—			880
Commissions		1,005			—			—			1,005
Fees:
Asset management, distribution and administration		1,479			—			—			1,479
Merchant, cardmember and other fees, net		297			(297	)		—			—
Servicing and securitization income		556			(521	)		—			35
Interest and dividends		14,814			(680	)		—			14,134
Other		245			(9	)		—			236
Total revenues		24,661			(1,507	)		—			23,154
Interest expense		13,485			(287	)		87	(c)		13,285
Provision for consumer loan losses		195			(195	)		—			—
Net revenues		10,981			(1,025	)		(87	)		9,869
Non-interest expenses:
Compensation and benefits		4,992			(230	)		13	(d)		4,775
Occupancy and equipment		280			(22	)		2	(d)		260
Brokerage, clearing and exchange fees		361			—			—			361
Information processing and communications		369			(94	)		1	(d)		276
Marketing and business development		294			(142	)		1	(d)		153
Professional services		499			(81	)		1	(d)		419
Other		339			(83	)		1	(d)		257
Total non-interest expenses		7,134			(652	)		19			6,501
Income from continuing operations before losses from unconsolidated investees and income taxes		3,847			(373	)		(106	)		3,368
Losses from unconsolidated investees		(27	)		(1	)		—			(26	)
Provision for income taxes		1,261			(138	)		(35	)		1,088
Income from continuing operations	$	2,559		$	(234	)	$	(71	)	$	2,254
Earnings per basic common share:
Income from continuing operations	$	2.52								$	2.20
Earnings per diluted common share:
Income from continuing operations	$	2.40								$	2.08
Average common shares outstanding:
Basic		1,009						7	(e)		1,016
Diluted		1,058						15	(e)		1,073

See Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income.

10

MORGAN STANLEY

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS

OF INCOME

(a) Reflects the Company’s historical condensed consolidated statements of income.

(b) Reflects the elimination of the revenues and expenses of Discover’s continuing operations from the Company’s historical results.

(c) Reflects an adjustment for intercompany interest expense. This amount reflects an allocation of the Company’s funding costs, which are managed on a consolidated basis, that had been charged by the Company to Discover. The intercompany funding was used to finance Discover’s receivables and operations, and such intercompany amounts have been repaid. The intercompany amounts were eliminated in the Company’s historical consolidated financial statements.

(d) Reflects adjustments associated with certain allocated costs related to Discover. Such allocated costs will be retained by the Company as they represent certain corporate functions that will not be transferred to Discover in conjunction with the Discover spin-off. Amounts for Professional services for the three months ended February 28, 2007, three months ended May 31, 2007 and six months ended May 31, 2007 include adjustments for approximately $2 million, $5 million and $7 million, respectively, of costs directly associated with the Discover spin-off.

(e) Represents the net dilutive impact of the issuance of additional stock-based compensation awards (including stock options and restricted stock units) to Morgan Stanley employees in order to maintain the pre-Discover spin-off intrinsic value of such awards, and the recission of stock-based compensation awards held by active employees of Discover.

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