10-K

 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                   FORM 10-K
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997
                        COMMISSION FILE NUMBER 1-11758
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
               DELAWARE                              36-3145972
    (STATE OR OTHER JURISDICTION OF     (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)
             1585 BROADWAY                               10036
            NEW YORK, N.Y.                           (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 761-4000
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 


                                                         NAME OF EACH EXCHANGE
        TITLE OF EACH CLASS                               ON WHICH REGISTERED
        -------------------                             -----------------------
                                                     
   Common Stock, $.01 par value                         New York Stock Exchange
                                                        Pacific Stock Exchange
   Rights to Purchase Series A Junior Participating
    Preferred Stock                                     New York Stock Exchange
                                                        Pacific Stock Exchange
   Depositary Shares, each representing 1/4 of a share  New York Stock Exchange
    of 7 3/4%
    Cumulative Preferred Stock, $200 stated value
   Depositary Shares, each representing 1/8 of a share  New York Stock Exchange
    of 7 3/8%
    Cumulative Preferred Stock, $200 stated value
   Depositary Shares, each representing 1/4 of a share  New York Stock Exchange
    of Series A Fixed/Adjustable Rate
    Cumulative Preferred Stock, $200 stated value
   7.82% Capital Units; 7.80% Capital Units; 9.00%      New York Stock Exchange
    Capital Units;
    8.40% Capital Units; 8.20% Capital Units; 8.03%
    Capital Units*
   6% PERQSSM Due February 16, 1999; 10% PERQS due      American Stock Exchange
    April 15, 1999+
   Exchangeable Notes Due September 30, 2000;           New York Stock Exchange
    Exchangeable Notes Due
    December 31, 2001; Exchangeable Notes Due March
    29, 2002;
    Exchangeable Notes Due July 31, 2003++
   PEEQSSM Due May 1, 2001+++                           American Stock Exchange
   Nikkei 225 Protection Step-Up Exchangeable Notes     New York Stock Exchange
    Due July 31, 2003

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*  Each Capital Unit consists of (a) a Subordinated Debenture (of the same
   rate) of Morgan Stanley Finance plc guaranteed by the Registrant and (b) a
   related purchase contract of the Registrant requiring the holder to
   purchase one Depositary Share representing shares (or fractional shares) of
   the Registrant's Cumulative Preferred Stock (of the same rate), $200 stated
   value. The Capital Units and the Depositary Shares are registered on the
   New York Stock Exchange.
+  ""Performance Equity-linked Redemption Quarterly-pay Securities." The issue
   price and amount payable at maturity with respect to the PERQS are based on
   the share price of certain non-affiliated companies.
++ Notes which are exchangeable on a defined date for equity securities of
   certain non-affiliated companies.
+++ ""Protected Exchangeable Equity-linked Securities." Principal protected
    notes which are exchangeable for cash based on the value of the S&P 500
    Index.
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  Aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 26, 1998 was approximately $28,428,925,812. For purposes
of this information, the outstanding shares of common stock owned by (1)
directors and executive officers of the Registrant and (2) certain senior
officers of certain wholly-owned subsidiaries of the Registrant who are
subject to certain restrictions on voting and disposition, were deemed to be
shares of common stock held by affiliates.
 
  Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date:
 
  As of January 26, 1998, there were 605,394,651 shares of Common Stock, $.01
par value, outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
(1) Morgan Stanley, Dean Witter, Discover & Co. 1997 Annual Report to
    Shareholders--Incorporated in part in Form 10-K, Parts I, II and IV.
 
(2) Morgan Stanley, Dean Witter, Discover & Co. Proxy Statement for its 1998
    Annual Meeting of Stockholders--Incorporated in part in Form 10-K, Parts I
    and III.
 
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                                    PART I
 
ITEM 1.  BUSINESS
 
A. GENERAL
 
BACKGROUND AND OVERVIEW
 
  Morgan Stanley, Dean Witter, Discover & Co. (the "Company"*) is a preeminent
global financial services firm that maintains leading market positions in each
of its three primary businesses--securities, asset management and credit
services.** The Company is a combination of Dean Witter, Discover & Co. ("Dean
Witter Discover") and Morgan Stanley Group Inc. ("Morgan Stanley") and was
formed pursuant to a merger of equals that was effected on May 31, 1997 in
which Morgan Stanley was merged with and into Dean Witter Discover (the
"Merger"). The Company combines three well recognized brands in the financial
services industry: Morgan Stanley, Dean Witter and Discover(R) Card. The
Company combines global strength in investment banking (including in the
origination of quality underwritten public offerings and in mergers and
acquisitions advice) and institutional sales and trading, with strength in
providing investment and global asset management products and services to its
customers and in providing quality consumer credit products to its customers,
primarily through its Discover Card brand.
 
  At November 30, 1997, the Company had the third largest account executive
sales organization in the United States, with 9,946 professional account
executives and 399 branches, and one of the largest global asset management
operations of any full-service securities firm, with total assets under
management and administration of $338 billion. In addition, based on its
approximately 40 million general purpose credit card accounts as of November
30, 1997, the Company was the nation's largest credit card issuer as measured
by number of accounts and cardmembers.
 
  The Company conducts its business from its headquarters in New York City,
its regional offices and branches throughout the United States, and its
principal offices in London, Tokyo, Hong Kong and throughout the world. Dean
Witter Discover was incorporated under the laws of the State of Delaware in
1981, and its predecessor companies date back to 1924. Morgan Stanley was
incorporated under the laws of the State of Delaware in 1975, and its
predecessor companies date back to 1935. At November 30, 1997, the Company had
47,277 employees. None of the Company's employees is covered by a collective
bargaining agreement.
 
  The Company, through its subsidiaries, provides a wide range of financial
and securities services on a global basis and provides credit and transaction
services nationally. Its securities businesses ("Securities") include
securities underwriting, distribution and trading; merger, acquisition,
restructuring, real estate, project finance and other corporate finance
advisory activities; full-service brokerage; research services; the trading of
foreign exchange and commodities as well as derivatives on a broad range of
asset categories, rates and indices; and securities lending. The Company's
asset management businesses ("Asset Management") include providing global
asset management advice and services to individual and institutional investors
through well-recognized brand names, including Dean Witter InterCapital
("InterCapital"), Van Kampen American Capital ("VKAC"), Morgan Stanley Asset
Management ("MSAM") and Miller Anderson & Sherrerd ("MAS"); global custody and
securities clearance; and principal investment activities. The Company's
credit and transaction services
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*Unless the context otherwise requires, the term "Company" means Morgan
   Stanley, Dean Witter, Discover & Co. and its consolidated subsidiaries. At
   the Company's 1998 Annual Meeting of Stockholders, stockholders will be
   requested to approve a proposal to change the Company's name to "Morgan
   Stanley Dean Witter & Co."
**Except for the historical information contained in this Form 10-K, certain
   items herein, including (without limitation) certain matters discussed
   under "Legal Proceedings" in Part I, Item 3 of this Report; "Management's
   Discussion and Analysis of Financial Condition and Results of Operations"
   incorporated by reference in Part II, Item 7 of this Report ("MD&A"); and
   "Quantitative and Qualitative Disclosure about Market Risk" incorporated by
   reference in Part II, Item 7A of this Report; are forward-looking
   statements. The matters referred to in such statements could be affected by
   the risks and uncertainties involved in the Company's businesses, including
   (without limitation) the effect of economic and market conditions, the
   level and volatility of interest rates and currency values and equity and
   commodity prices, the actions undertaken by both current and potential new
   competitors, the impact of current, pending or future legislation and
   regulation both in the United States and throughout the world and other
   risks and uncertainties detailed in the MD&A and in "Competition and
   Regulation" herein.

 
businesses ("Credit Services") include the operation of the NOVUS(R) Network,
a proprietary network of merchant and cash access locations, and the issuance
of the Discover Card and other proprietary general purpose credit cards. The
Company's services are provided to a large and diversified group of clients
and customers, including corporations, governments, financial institutions and
individuals.
 
  The Company conducts its worldwide business through several highly
integrated subsidiaries and affiliates, which frequently participate together
in the facilitation and consummation of a single transaction. Because of the
increasing integration of the international financial markets, the Company
manages its principal operating subsidiaries on a coordinated global basis
with a view to the profitability of the enterprise as a whole. Financial
information concerning the Company for each of the three periods ended
November 30, 1997, November 30, 1996 and November 30, 1995, including the
amount of total revenue contributed by classes of similar products or services
that accounted for 10% or more of the Company's consolidated revenue in any
one of those periods and information with respect to the Company's operations
by geographic area, is set forth in the Consolidated Financial Statements and
the Notes thereto in the 1997 Annual Report to Shareholders and is
incorporated herein by reference.*
 
  A discussion of the Company's preparations to address the potential effects
on its operations resulting from the Year 2000 computer code issue appears on
pages 56 and 57 of "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" in the
1997 Annual Report to Shareholders and is incorporated herein by reference.
 
B. SECURITIES
 
OVERVIEW
 
  The Company is a leading global financial services firm which provides
financial services and advice to, and raises capital worldwide for, a broad
group of domestic and international corporate clients through Morgan Stanley &
Co. Incorporated (U.S.) ("MS&Co."), Morgan Stanley & Co. International Limited
(U.K.), Morgan Stanley Japan Limited (Japan), Morgan Stanley Asia Limited
(non-Japan Asia) and other direct and indirect subsidiaries. The Company also
conducts sales and trading activities both as principal and agent on behalf of
a wide range of domestic and international institutional investors. The
Company offers individual investors a broad range of securities and savings
products primarily through Dean Witter Reynolds Inc. ("DWR") and other direct
and indirect subsidiaries.
 
INVESTMENT BANKING
 
 Underwriting
 
  The Company manages and participates in public offerings and private
placements of debt, equity and other securities denominated in U.S. dollars
and other currencies in the U.S. and international capital markets. The
Company is a leading underwriter of common stock, preferred stock and other
equity-related securities, including American Depositary Receipts ("ADRs"),
Preferred Equity Redemption Cumulative Stock ("PERCS(R)"), Performance Equity-
linked Redemption Quarterly-pay Securities ("PERQSSM") and capital securities.
The Company also underwrites taxable fixed income securities and tax exempt
securities, mortgage-related securities, including private pass-throughs and
collateralized mortgage obligations ("CMOs"), and other asset-backed
securities. The Company is active as an underwriter and distributor of
commercial paper and other short-term and medium-term securities. The Company
is also involved in tender offers, repurchase programs, consent solicitations,
rights offerings and exchange offers on behalf of clients.
 
 Financial Advisory Services
 
  The Company provides domestic and international corporate and institutional
clients with a wide range of advisory services on key strategic matters such
as mergers, acquisitions, joint ventures, privatizations, defenses,
divestitures, spin-offs, restructurings, proxy mechanisms and leveraged
buyouts as well as long-range financial
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*  Prior to the Merger, Dean Witter Discover's year ended on December 31 and
   Morgan Stanley's fiscal year ended on November 30. Subsequent to the
   Merger, the Company adopted a fiscal year ending on November 30. See "Notes
   to Consolidated Financial Statements, Note 1" incorporated by reference in
   Part II, Item 8 of this Report.
 
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planning. Other such services provided to clients include advice with respect
to recapitalizations, dividend policy, valuations, foreign exchange exposures
and financial risk management strategies. The Company furnishes advice and
other services relating to a wide variety of project financings, including
infrastructure, electric power and natural resource projects. In addition, the
Company provides advisory services in connection with the purchase, sale and
financing of real estate and lease transactions.
 
 Financing
 
  The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking activities.
The Company may provide extensions of credit to leveraged companies in the
form of senior or subordinated debt, as well as bridge financing on a select
basis. The Company conducts senior lending activities, including the
origination and syndication of senior secured loans of non-investment grade
companies.
 
  A subsidiary of the Company also acts as general partner of Princes Gate
Investors II, L.P. ("Princes Gate"), a limited partnership with $975 million
in aggregate investment capacity that was formed to invest in special
situation opportunities. Princes Gate generally makes minority equity and
equity-related investments which are short to medium-term in duration and
which arise out of the Company's worldwide investment banking activities. See
also "ASSET MANAGEMENT--Principal Investing."
 
SALES, TRADING AND MARKET-MAKING ACTIVITIES
 
 Equity
 
  The Company's equity sales, trading and market-making activities cover
domestic and foreign equity and equity-related securities (both exchange
traded and over-the-counter ("OTC")), including ADRs, World Equity Benchmark
Shares ("WEBSSM") and restricted/control stock; convertible debt and preferred
securities, including PERCS(R), PERQSSM and warrants; equity index products,
equity swaps, options and other structured products; and international index
arbitrage, equity repurchases, and program and block trade execution. The
Company also engages in a variety of proprietary trading activities including
risk arbitrage, which involves, among other things, investing for the
Company's own account in securities of companies involved in publicly
announced corporate transactions in which the Company is not, at the time of
investment, acting as adviser or agent.
 
  The Company provides various equity financing services, including prime
brokerage, which offers consolidated clearance and settlement of securities
trades, custody, financing and portfolio reporting services. The Company acts
as principal and agent in stock borrowing and stock loan transactions in
support of its domestic and international trading and brokerage, asset
management and clearing activities, and as an intermediary between broker-
dealers. A subsidiary of the Company is also engaged in the clearance of
securities for its preferred shareholders who are registered broker-dealers.
Morgan Stanley Capital International ("MSCI"), a joint venture between the
Company and Capital International Perspective, S.A., markets and distributes
over 3,500 country, industry and regional benchmark indices covering 51
countries (including The World, EAFE(R) and Emerging Market Indices), and a
28-year historical database, including fundamental and valuation data on over
5,500 companies in developed and emerging market countries.
 
 Fixed Income
 
  The Company distributes and trades domestic and international debt
securities, including preferred stock and corporate debt instruments (bonds,
medium-term notes and commercial paper), offers investment strategies to
institutional accounts, develops swap and other risk management strategies for
customers, and assists corporations in their repurchase of debt. In addition,
the Company trades a full range of money market and other short-term
instruments, including certificates of deposit, bankers' acceptances,
floating-rate certificates of deposit and floating-rate notes. The Company is
an active dealer and market-maker in a broad range of long-term and
 
                                       3

 
short-term tax exempt securities. The Company is also involved in structuring
debt securities with multiple risk/return factors designed to suit investor
objectives and repackaged asset vehicles ("RAVs") through which investors can
restructure asset portfolios to provide liquidity or recharacterize risk
profiles.
 
  MS&Co. is one of 37 primary dealers of U.S. government securities currently
recognized by the Federal Reserve Bank of New York. As such, it is among the
firms with which the Federal Reserve conducts its open market operations and
is required to submit bids in Treasury auctions, make secondary markets in
U.S. government securities, provide the Federal Reserve Bank of New York with
market information and maintain certain capital standards. The Company is also
a member of a number of selling groups responsible for the distribution of
various issues of U.S. agency and other debt securities. As such, it is
required to make secondary markets in these securities and to provide market
information to the U.S. agency issuers. The Company is also a member of the
primary syndicate that issues German government bonds, a member of the
Japanese government bond syndicate and a primary dealer in Canadian, French
and Italian government bonds. The Company also makes secondary markets in
various foreign government bonds and corporate bonds issued in the Eurobond
market and in the U.S.
 
  The Company's daily trading inventory positions in government and agency
securities are financed substantially through the use of repurchase
agreements. The Company also borrows and lends fixed income securities. In
addition, the Company acts as an intermediary between borrowers and lenders of
short-term funds utilizing repurchase and reverse repurchase agreements. At
any given point in time, the Company may hold large positions in certain types
of securities or commitments to purchase securities of a single issuer,
sovereign governments and other entities, issuers located in a particular
country or geographic area, public and private issuers involving developing
countries or issuers engaged in a particular industry. In addition,
substantially all of the collateral held by the Company for reverse repurchase
agreements and bonds borrowed consists of securities issued by the U.S.
government, federal agencies or non-U.S. governments.
 
  The Company trades and distributes mortgage and other asset-backed
securities. The Company makes markets and trades in Government National
Mortgage Association ("GNMA") securities, Federal Home Loan Mortgage Corp.
("FHLMC") participation certificates and Federal National Mortgage Association
("FNMA") obligations. The Company enters into commitments, such as forward
contracts, standby arrangements and OTC options contracts, for GNMA, FHLMC and
FNMA securities. The Company also acts as an underwriter of and market-maker
in mortgage-backed securities, CMOs and related instruments, and a market-
maker in commercial, residential and real estate loan products. In this
capacity, the Company takes positions in market segments where liquidity can
vary greatly from time to time.
 
  The Company also underwrites, trades, invests and makes markets in high-
yield debt securities and emerging market loans and securitized instruments.
"High-yield" refers to companies or sovereigns whose debt is rated as non-
investment grade. Securities owned by the Company in connection with its high-
yield trading activities typically rank subordinate to bank debt of the issuer
and may rank subordinate to other debt of the issuer. The market for these
securities has been, and may in the future be, characterized by periods of
illiquidity. In addition, the Company, through its market-making and trading
activities, may be the sole or principal source of liquidity in certain issues
and, as a result, may substantially affect the prices at which such issues
trade. To mitigate the potential impact on the Company's operating results of
the greater risk inherent in high-yield debt securities and emerging market
loans and securitized instruments, the Company has policies to control total
inventory positions in these securities and instruments. Additionally, the
Company has credit policies to manage exposures to individual high-yield
issuers and emerging market counterparties.
 
 Foreign Exchange and Commodities
 
  The Company actively trades numerous foreign currencies on a spot and
forward basis with its customers, for its own account and to hedge its
securities positions or liabilities. In connection with its market-making
activities, the Company takes open positions in the foreign exchange market
for its own account. The Company, on a more limited basis, enters into forward
currency transactions as agent and principal. The Company is a
 
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leading participant in currency futures trading at the International Monetary
Market division of the Chicago Mercantile Exchange and is a leading dealer in
OTC and exchange traded currency options on a worldwide basis. The Company
also trades as principal in the spot, forward and futures markets in a variety
of commodities, including precious metals, base metals, crude oil, oil
products, natural gas and related energy products. The Company is an active
market-maker in swaps and OTC options on commodities such as metals, crude
oil, oil products, natural gas and electricity, and offers a range of hedging
programs relating to production, consumption and reserve/inventory management.
The Company is also an electricity power marketer in the U.S.
 
 Derivatives
 
  The Company actively offers to clients and trades for its own account a
variety of financial instruments described as "derivative products" or
"derivatives." These products, some of which may be complex in structure,
generally take the form of exchange traded futures and options and OTC
forwards, options, swaps, caps, collars, floors, swap options and similar
instruments which derive their value from underlying interest rates, foreign
exchange rates or commodity or equity instruments and indices. All of the
Company's trading-related business units use derivative products as an
integral part of their respective trading strategies, and such products are
used extensively to manage the market exposure that results from proprietary
trading activities. In addition, as a dealer in certain derivative products
(most notably interest rate and currency swaps) the Company enters into
derivative contracts to meet a variety of risk management and other financial
needs of its clients. Through the Company's triple-A rated subsidiary (Morgan
Stanley Derivative Products Inc.), the Company also enters into swap and
related derivative transactions with certain clients seeking a triple-A rated
counterparty.*
 
  Derivatives facilitate risk transfer and enhance liquidity in the
marketplace, and the origination and trading of derivatives have been utilized
as efficient and cost effective tools that enable users to adjust risk
profiles, such as interest rate or currency risk, or to take proprietary
trading positions. Widespread acceptance of derivatives has contributed to the
development of more complex OTC products structured for particular clients to
address specific financing and risk management needs. Derivative transactions
may have both on- and off-balance sheet implications, depending on the nature
of the contract. The Company's use of derivative products may subject the
Company to various risks, although in many cases derivatives serve to reduce,
rather than increase, the Company's exposure to losses from market, credit and
other risks. In times of market stress, liquidity in certain derivatives
positions, as well as in underlying cash instruments, may be reduced. The
risks associated with derivative products are managed in a manner consistent
with the Company's overall risk management policies. The Company manages its
exposure to changes in interest rates, foreign currencies and other factors on
an individual product basis, generally by entering into offsetting or other
positions in a variety of financial instruments and derivative products. In
addition, with respect to certain derivatives, the Company has agreements with
customers that permit the Company to close out positions or require additional
collateral (and in many cases require excess collateral) if certain events
occur. In certain instances, the Company may also limit the types of
derivative products that may be traded in a particular account. See also "Risk
Management" incorporated by reference in Part II, Item 7A of this Report.
 
SECURITIES SERVICES TO INDIVIDUAL INVESTORS
 
 Brokerage Activities
 
  DWR is a full-service retail broker-dealer that offers clients a broad range
of securities and savings products that are supported by the Company's
underwriting, research, execution and operational capabilities. At November
30, 1997, DWR had the third largest account executive sales organization in
the domestic securities industry, with 9,946 account executives located in 399
branch offices providing investment services to more than 3.5 million client
accounts with assets of $302 billion. DWR is among the largest members of the
New York Stock Exchange ("NYSE") and is a member of all other major U.S.
securities exchanges.
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*For a detailed discussion of the Company's use of derivatives, see "MD&A --
   Derivative Financial Instruments" incorporated by reference in Part II,
   Item 7 of this Report and "Notes to Consolidated Financial Statements, Note
   8" incorporated by reference in Part II, Item 8 of this Report. In
   addition, the Company uses derivative products (primarily interest rate and
   currency swaps) to assist in asset and liability management and to reduce
   borrowing costs. See also "Notes to Consolidated Financial Statements, Note
   6" incorporated by reference in Part II, Item 8 of this Report.
 
                                       5

 
  The Company has implemented a strategy that focuses on serving the
investment needs of individual clients through its account executive sales
force. To implement this strategy, the Company has undertaken an aggressive
campaign focusing on the growth of its account executive sales organization
and the accumulation of client assets. Through internal training, retention of
existing account executives and recruiting, the Company has increased its
account executive sales organization by over 40% over the past five years.
Client assets have increased by 95% over the same five-year period.
 
  Two of the Company's products designed to help clients manage their assets
are the Active Assets(R) Account ("AAA-Account") and the IRA-2000(R)
Individual Retirement Account (the "IRA-2000 Account"). Through the AAA-
Account, DWR clients can consolidate their financial assets into a single
account at DWR. Clients can invest AAA-Account funds in a wide variety of
investment products and can ensure that funds are automatically invested in
any of four different money market funds and a money market account insured by
the Federal Deposit Insurance Corporation ("FDIC"). The AAA-Account offers
clients additional features and benefits such as increased insurance, check
writing, direct deposit, automated bill payment, a Visa debit card that draws
directly from the AAA-Account and a year-end summary statement detailing
annual purchases, sales and other AAA-Account transactions. Total client
assets in AAA-Accounts were $117.6 billion as of November 30, 1997.
 
  Clients planning for their retirement have access through the IRA-2000
Account to a broad array of investment choices. Total client assets in IRA-
2000 Accounts were $67.3 billion as of November 30, 1997. DWR also offers
defined contribution plan services for businesses, including 401(k) plans.
 
 Equity and Fixed Income Securities
 
  The Company provides execution, trading and research services to its
individual clients on listed equity securities, OTC equity securities, options
and ADRs. The Company acts as a market-maker in many equity securities traded
on the NASDAQ and in a number of ADRs. The Company also acts as a specialist
in many securities listed on regional securities exchanges.
 
  The Company provides trading and execution services to individual clients
for a broad range of fixed income securities, including U.S. government
obligations, mortgage and other asset-backed securities, corporate bonds,
preferred stocks, municipal securities and certificates of deposit. DWR is a
primary dealer in U.S. government securities. The Company's fixed income
trading activity on behalf of individual investors focuses primarily on
establishing and maintaining inventory based upon actual and anticipated
orders from its clients, rather than risk-oriented proprietary trading.
 
 Financial Institutions Group
 
  The Company's Financial Institutions Group offers comprehensive securities
products and services to banks across the country. The services include
investment products, technological support, branch network workstations, and
operations and processing systems. The Company currently provides such
services to NationsSecurities, an affiliate of NationsBank Corp., and Banc One
Securities Corporation, an affiliate of Banc One Corporation.
 
RESEARCH
 
  The Company's global research department ("Research"), comprised of
economists, industry analysts and strategists, is actively engaged in a wide
range of research activities. Research produces reports and studies on the
economy, financial markets, portfolio strategy, technical market analyses and
industry developments. It analyzes worldwide trends covering a broad range of
industries and more than 2,000 individual companies, half of which are located
outside of the U.S. Research also provides analyses and forecasts relating to
economic and monetary developments affecting matters such as interest rates,
foreign currencies and securities and economic trends. Support for the sales
and trading of fixed income securities is also provided in the form of
quantitative and credit analyses and the development of research products that
are distributed to the Company's institutional and retail clients. Timely data
contained in Research's numerous publications, such as the Investment Strategy
 
                                       6

 
Chartbook and The Competitive Edge, are disseminated to both individual and
institutional investors through a proprietary database accessible via the
Internet and through DWR's account executives. In addition, Research provides
analytical support and publishes reports on mortgage-related securities and
the markets in which they are traded and does original research on valuation
techniques.
 
OPERATIONS AND INFORMATION PROCESSING
 
  In its Securities business, the Company executes and clears all of its
transactions (delivery of securities sold, receipt of securities purchased and
transfer of related funds) through its own facilities and through memberships
in various clearing corporations. In order to minimize the risks of systems
failures, the Company maintains redundant processing systems.
 
COMPETITION AND REGULATION
 
 Competition
 
  The Company encounters intense competition in all aspects of the financial
services business and competes worldwide directly with other firms, a number
of which have greater capital and other resources. The Company and its
competitors also employ advertising and direct solicitation of potential
customers as methods of increasing business, and many of the Company's
competitors engage in more extensive advertising programs than does the
Company. Among the principal competitive factors affecting the Company's
business are the Company's general reputation, the overall quality of its
professionals, its ability to maintain existing client relationships and
develop new ones, the relative prices of services and products offered and its
capability in originating and marketing innovative products and services.
Moreover, the Company's ability to access capital at competitive rates (which
is generally dependent on the Company's credit ratings) and to efficiently
commit capital are important competitive factors in relation not only to
generating potentially higher sales and trading revenues, but also attracting
business opportunities involving the facilitation of major transactions by
clients.
 
  In addition to competition from firms traditionally engaged in the financial
services business, there has been increased competition from other sources,
such as commercial banks, insurance companies and other companies offering
financial services both in the U.S. and globally. As a result of recent and
pending legislative and regulatory initiatives in the U.S. to remove or
relieve certain restrictions on commercial banks, competition in some markets
which have traditionally been dominated by investment banks and retail
securities firms has increased and may continue to increase in the near
future. In addition, recent convergence and consolidation in the financial
services industry will lead to increased competition from larger diversified
financial services organizations. Such competition, among other things,
affects the Company's ability to attract and retain highly skilled
individuals. In addition, the complementary trends in the financial services
industry of consolidation and globalization present, among other things,
technological, risk management and other infrastructure challenges that will
require effective resource allocation in order for the Company to remain
competitive.
 
 Regulation
 
  The Company's securities business is, and the securities, commodities and
financial services industries generally are, subject to extensive regulation
in the U.S. at both the federal and state levels and internationally. Various
regulatory bodies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets.
 
  MS&Co., DWR and certain other subsidiaries of the Company are broker-
dealers. MS&Co. and DWR are registered as broker-dealers with the Securities
and Exchange Commission ("SEC") and in all 50 states, the District of Columbia
and Puerto Rico, and are members of the National Association of Securities
Dealers, Inc. ("NASD") and the NYSE. Broker-dealers are subject to regulation
by securities administrators in those states in which they conduct business.
Broker-dealers are also subject to regulations that cover all aspects of the
securities business, including sales and trading practices, use and
safekeeping of customers' funds and securities, capital structure, record-
keeping and the conduct of directors, officers and employees. The SEC, other
governmental regulatory authorities, including state securities commissions,
and self-regulatory organizations may institute
 
                                       7

 
administrative proceedings, which may result in censure, fine, the issuance of
cease-and-desist orders, the suspension or expulsion of a broker-dealer or
member, its officers or employees or other similar consequences. Occasionally,
the Company's subsidiaries have been subject to investigations and proceedings
and fines have been imposed for infractions of various regulations relating to
their activities as a broker-dealer, none of which, to date, has had a
material adverse effect on the Company or its business.
 
  Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by
the SEC or other governmental regulatory and self-regulatory authorities (such
as changes to the U.S. Internal Revenue Code and related regulations or rules
promulgated by the Financial Accounting Standards Board) or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the manner of operation and profitability of the Company.
 
  The Company's U.S. broker-dealer subsidiaries, including MS&Co. and DWR, are
members of the Securities Investor Protection Corporation ("SIPC"), which
provides, in the event of the liquidation of a broker-dealer, protection for
customers' accounts held by the firm of up to $500,000 for each customer,
subject to a limitation of $100,000 for claims for cash balances. Margin
lending by certain subsidiaries is subject to the margin rules of the Federal
Reserve Board as to the amount they may lend in connection with certain
purchases of securities by customers, and such subsidiaries are also required
by NYSE rules to impose maintenance requirements on the amount of securities
contained in margin accounts.*
 
  As broker-dealers, MS&Co. and DWR are subject to the SEC's temporary risk
assessment rules which require, among other things, that a broker-dealer
maintain and preserve certain information, describe risk management policies
and procedures and report on the financial condition of certain affiliates
whose financial activities are reasonably likely to have a material impact on
the financial and operational condition of the broker-dealer.
 
  As futures commission merchants, MS&Co. and DWR are registered with the
Commodity Futures Trading Commission ("CFTC") and their activities in the
futures and options-on-futures markets are subject to regulation by the CFTC
and various domestic boards of trade and other commodity exchanges. Certain
subsidiaries of the Company are registered as commodity trading advisers
and/or commodity pool operators with the CFTC. The Company's futures and
options-on-futures business is also regulated by the National Futures
Association, a not-for-profit membership corporation, which has been
designated a registered futures association by the CFTC and of which MS&Co.
and DWR are members.
 
  With respect to OTC derivatives, the Company is a member of the
International Swaps and Derivatives Association ("ISDA"), the Group of 30 and
the Derivatives Policy Group, a group of securities firms formed at the
request of the SEC and CFTC to address concerns regarding the OTC derivatives
activities of U.S. broker-dealer affiliates not subject to direct regulatory
oversight. The Derivatives Policy Group has agreed to adhere to a voluntary
oversight framework relating to reporting, capital, management controls and
counterparty relationships.
 
  Certain of the Company's government securities activities are conducted
through Morgan Stanley Market Products Inc., which is a member of the NASD and
is registered as a government securities broker-dealer with the SEC and in
certain states. The Department of the Treasury has promulgated regulations
concerning, among other things, capital adequacy, custody and use of
government securities and transfers and control of government securities
subject to repurchase transactions. The rules of the Municipal Securities
Rulemaking Board, which are enforced by the NASD, govern the municipal
securities activities of the Company.
 
  The Company's securities business is also subject to extensive regulation by
various non-U.S. governments, securities exchanges, central banks and
regulatory bodies, especially in those jurisdictions in which the Company
maintains an office. For example, the Company's business in the United Kingdom
is regulated by The Securities and Futures Authority Limited and the Bank of
England, and a number of exchanges, including the London Stock Exchange and
the London International Financial Futures and Options Exchange. The Deutsche
Bundesbank,
- --------
* These rules augment the Company's margin policies, which are in many cases
more stringent.
 
                                       8

 
the Bundesaufsichtsamt fur das Kreditwesen (the Federal Banking Supervisory
Authority), the Bundesaufsichtsamt fur den Wertpapierhandel (the Federal
Supervisory Authority for Securities Trading), the Deutsche Terminboerse (the
German Futures Exchange) and the Frankfurt Stock Exchange regulate the
Company's activities in the Federal Republic of Germany. The Company's
business in Japan is subject to Japanese law applicable to foreign securities
firms and related regulations of the Japanese Ministry of Finance and to the
rules of the Bank of Japan, the Japanese Securities Dealers Association and
several Japanese securities and futures exchanges, including the Tokyo Stock
Exchange, the Osaka Securities Exchange and the Tokyo International Financial
Futures Exchange. The Monetary Authority of Singapore and the Singapore
International Monetary Exchange Ltd. regulate the Company's business in
Singapore; and the Company's operations in Hong Kong are regulated by the
Securities and Futures Commission, The Stock Exchange of Hong Kong Ltd. and
the Hong Kong Futures Exchange Ltd.
 
  As registered broker-dealers and member firms of the NYSE, certain
subsidiaries of the Company, including MS&Co. and DWR, are subject to the
SEC's net capital rule, and as futures commission merchants, MS&Co. and DWR
are subject to the net capital requirements of the CFTC and various commodity
exchanges. Many non-U.S. securities exchanges and regulatory authorities also
either have imposed or are imposing rules relating to capital requirements
that apply to subsidiaries of the Company (such as rules that have been
promulgated in connection with the European Union Capital Adequacy Directive),
including certain European subsidiaries that are considered banking
organizations under local law. These rules, which specify minimum capital
requirements, are designed to measure general financial integrity and
liquidity and require that at least a minimum amount of assets be kept in
relatively liquid form. Compliance with the capital requirements may limit
those operations of the Company that require the intensive use of capital,
such as underwriting, principal investing and trading activities, and the
financing of customer account balances, and also restricts the Company's
ability to withdraw capital from its subsidiaries, which in turn may limit the
Company's ability to pay dividends, repay debt or redeem or purchase shares of
its outstanding capital stock. A change in such rules, or the imposition of
new rules, affecting the scope, coverage, calculation or amount of capital
requirements, or a significant operating loss or any unusually large charge
against capital, would adversely affect the ability of the Company to pay
dividends or to expand or even maintain present levels of business.
 
C. ASSET MANAGEMENT
 
  The Company, primarily through InterCapital and VKAC, manages a wide range
of asset management products for individual investors. Through MSAM and MAS,
the Company provides global portfolio management to a wide range of
institutional investors. Through its Morgan Stanley Services division, the
Company provides a full range of global custody and correspondent clearing
services to institutional clients. The Company also sponsors, acts as general
partner for and invests in several limited partnerships which conduct a
variety of activities broadly described as principal investing.
 
DEAN WITTER INTERCAPITAL INC.
 
  InterCapital markets and provides investment advisory and administrative
services to proprietary open- and closed-end funds and to certain individual
and institutional clients. InterCapital fund assets include equities, taxable
and tax-exempt fixed income securities and money market instruments. At
November 30, 1997, there were 143 InterCapital funds and portfolios with
assets of approximately $102 billion for which InterCapital and its wholly
owned subsidiary, Dean Witter Services Company Inc., served in various
investment management and administrative capacities.
 
  Shares of InterCapital products that are open-end investment companies are
distributed by Dean Witter Distributors Inc., a wholly owned subsidiary of the
Company and a registered broker-dealer ("Distributors"), which has entered
into selected dealer agreements with DWR, NationsSecurities and Banc One
Securities Corporation. DWR and its affiliates are compensated for their
distribution related expenses through fees authorized pursuant to the
provisions of Rule 12b-1 under the Investment Company Act of 1940, contingent
deferred sales charges and front-end sales charges.
 
                                       9

 
VAN KAMPEN AMERICAN CAPITAL, INC.
 
  VKAC markets and provides investment advisory and administrative services to
open- and closed-end funds and to certain individual and institutional
clients, and markets and provides ongoing evaluation and credit surveillance
for unit investment trusts ("UITs"). Sponsored fund assets cover a broad range
of taxable and tax-exempt domestic and international products. Sponsored UITs
include portfolios of nationally diversified and single-state insured and
uninsured municipal securities and, depending on market demand, also include
portfolios of government securities, insured and uninsured corporate debt
securities, global fixed income securities and equity securities. At November
30, 1997, VKAC had more than 60 open-end funds and 37 closed-end funds and
2,500 series of tax exempt and equity UITs and VKAC and its affiliates
managed, administered or supervised approximately $68 billion of assets.
 
  VKAC distributes its investment products through a large and diversified
network of unaffiliated national and regional broker-dealers, commercial banks
and thrifts, insurance companies and their affiliated broker-dealers and
financial planners ("Retail Distribution Firms"), as well as DWR account
executives. A relatively small number of Retail Distribution Firms account for
a substantial portion of sales of VKAC's products and VKAC has proprietary and
preferred distribution relationships with several of its unaffiliated Retail
Distribution Firms.
 
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
 
  MSAM and MAS primarily manage assets for institutions around the world,
including pension funds, corporations, non-profit organizations and
governmental agencies, investing in domestic and international equities and
fixed income securities (including emerging markets). MSAM and MAS sponsor
open- and closed-end funds with assets that include equities, taxable and tax-
exempt fixed income securities and balanced and multi-asset-class products.
MSAM and MAS also manage assets through separate accounts and pooled vehicles.
MSAM provides a broad range of fiduciary and named fiduciary services for
pension funds and trusts.
 
  At November 30, 1997, MSAM and MAS had assets under management or
supervision of approximately $145 billion, of which approximately $46 billion
related to international products. Institutional assets under management or
supervision were composed of approximately $30 billion related to mutual funds
and approximately $115 billion related to separate accounts, pooled vehicles
and other arrangements.
 
  The Company has begun and expects to continue distributing certain domestic
and international investment products advised or sub-advised by MSAM and MAS
through its InterCapital and VKAC distribution networks.
 
MORGAN STANLEY SERVICES
 
  Through its Morgan Stanley Services division, the Company provides global
custody ("Global Custody") and correspondent clearing ("Correspondent
Clearing") services to institutional clients.
 
  Global Custody provides custody, clearance and settlement, agency securities
lending, foreign exchange, valuation and cash management services, and
maintains a network of 78 agent banks in 71 countries. Global Custody supports
mutual funds, investment limited partnerships, investment managers, investment
funds, insurance companies, banks, foundations, endowments, family trusts,
government agencies and public and private pension funds. In April 1997, the
Company acquired the institutional global custody business of Barclays PLC
("Barclays"). At November 30, 1997, Global Custody had approximately $377
billion in global assets under custody, including approximately $150 billion
of assets from the Barclays acquisition that remain subject to such Barclays'
clients agreeing to become clients of Global Custody.
 
  Correspondent Clearing provides execution, clearance and settlement, margin
lending and cash management services primarily to U.S. broker-dealers and
other institutional clients.
 
PRINCIPAL INVESTING
 
  The Company's principal investing activities include, among other things,
making commitments to purchase, and making negotiated investments in, equity
and debt securities in merger, acquisition, restructuring,
 
                                      10

 
private investment and leveraged capital transactions. Such activities also
include venture capital investments and investments in real estate assets,
portfolios and operating companies. Such activities are generally conducted
through private investment funds in which the Company acts as general partner
and clients of the Company are limited partners. The Company typically
contributes a minority of the capital of the principal investment funds, and
clients of the Company contribute the remaining capital. The Company also
typically receives management fees for operating the principal investment
funds, as well as a share of the profits of the funds when investment
performance criteria have been met.
 
  In the private equity area, Morgan Stanley Capital Partners III, L.P. ("MSCP
III") was formed in 1994 with $1.9 billion in capital commitments to invest in
private equity or equity-related securities of operating and financial
services companies. As of November 30, 1997, MSCP III, and its predecessor
funds (which are no longer making new investments) had $1.6 billion of cost
basis in their portfolios related to 31 companies in a wide range of
industries.
 
  In the venture capital area, Morgan Stanley Venture Partners III, L.P.
("MSVP III") was formed in 1996 with $275 million in capital commitments to
invest in private equity or equity-related securities of U.S. emerging growth
companies, primarily in the healthcare and information technology sectors. As
of November 30, 1997, MSVP III, and its predecessor funds (which are no longer
making new investments), had $155 million of cost basis remaining in their
portfolios related to 29 companies.
 
  In the real estate area, The Morgan Stanley Real Estate Fund II, L.P.
("MSREF II") was formed in 1994 with approximately $1 billion in capital
commitments to invest in real estate assets. As of November 30, 1997, MSREF II
and its predecessor fund (which is no longer making new investments) had $788
million of cost basis in real estate assets remaining in their portfolios
relating to 38 investments. A successor fund to MSREF II is in the process of
being formed, which had its initial closing in December 1997 and additional
closings are scheduled for 1998.
 
  In the emerging markets area, Morgan Stanley Global Emerging Markets Private
Investment Fund, L.P. ("MSGEM") was formed in 1997 with approximately $204
million in capital commitments (as of its first closing) to invest in private
equity or equity-related securities of emerging markets companies. MSGEM
expects to consummate its first investment in the first quarter of 1998.
 
  In the investment management area, Morgan Stanley Real Estate Special
Situations Investment Program ("Special Situations") was created in 1997 as a
series of separate accounts managed by MSAM with approximately $325 million in
capital commitments to invest in private equity or equity-related securities
of real estate companies (including real estate investment trusts). As of
November 30, 1997, Special Situations had $157.1 million of cost basis in its
portfolios related to 9 real estate companies.
 
  From time to time, the Company expects to sponsor additional funds and
commit to invest in such funds.
 
  Equity securities purchased in principal investment transactions generally
are held for appreciation, are not readily marketable and do not provide
dividend income. As of November 30, 1997, the aggregate carrying value of the
Company's investments (directly and indirectly through the above-referenced
funds and Princes Gate and its affiliates and predecessors) in 101 privately
held companies was $128 million and in 35 publicly held companies was $547
million. At November 30, 1997, the Company had aggregate commitments of
approximately $150 million to make future investments in connection with its
principal investment activities (including Princes Gate). The Company's future
commitments extend until November 2007. For a discussion of Princes Gate, see
"SECURITIES--Investment Banking."
 
  It is not possible to determine whether or when the Company will realize the
value of the investments, including any appreciation, dividends or other
distributions thereon, since, among other things, such investments are
generally subject to restrictions on such realization relating to the
circumstances of particular transactions. Moreover, estimates of the eventual
realizable value of the investments fluctuate significantly over time in light
of business, market, economic and financial conditions generally or in
relation to specific transactions or other factors, including the financial
leverage involved in the underlying transactions.
 
                                      11

 
  The Company may also underwrite, trade, invest and make markets in, and
publish research with respect to, the securities and senior loans of issuers
in which the Company or the principal investment funds have an investment.
Such securities may include equity and high-yield debt securities of such
issuers. In addition, the Company may provide financial advisory services to,
and have securities and commodity trading relationships with these issuers.
From time to time, the Company may provide loans, financing commitments or
other extensions of credit, including on a subordinated and interim basis, to
companies (which may otherwise be leveraged) associated with its principal
investment activities.
 
OTHER ASSET MANAGEMENT ACTIVITIES
 
 NOVUS Financial
 
  NOVUS Financial Corporation ("NOVUS Financial") is a consumer finance
organization engaged in the business of originating and servicing consumer
loans, with a broad range of products designed to meet the needs of its
customer base. Most of its loans are secured by mortgages on residential
properties, or by automobiles, boats or recreational vehicles. For
distribution of its products, NOVUS Financial utilizes DWR account executives
and direct mail solicitations.
 
 Investment Consulting Services
 
  The Company provides investment consulting services ("ICS") that assist
clients in analyzing their investment objectives and in selecting investment
advisory services offered by unaffiliated investment advisers. Through ICS,
the Company's clients can obtain professional money management services that
are not typically available to individual investors. Such combined services
are commonly referred to as "wrap accounts." Total ICS assets as of November
30, 1997 amounted to $14 billion.
 
 Insurance Services
 
  The Company, through its wholly owned insurance agency subsidiaries, acts as
a national general agency for leading insurance carriers to meet the insurance
and annuity needs of individual investors. The Company receives commissions
with respect to the sale of such products. The Company maintains a strategic
alliance with Allstate Life Insurance Company ("Allstate Life") pursuant to
which the Company and Northbrook Life Insurance Company, a wholly owned
subsidiary of Allstate Life, manufacture, market and distribute proprietary
insurance products. The insurance products are sold exclusively by DWR's
account executives. The Company has a separate agreement with ITT Hartford
Life Insurance Companies to manufacture, market and distribute proprietary
products through DWR account executives.
 
 Unit Investment Trusts
 
  The Company, through DWR, is the sponsor of a diversified series of UITs
which provide clients with portfolios of pre-selected securities. DWR UITs
offer municipal, corporate and government bond portfolios as well as domestic
and global equity portfolios. Total UIT assets as of November 30, 1997
amounted to $6.1 billion.
 
 Managed Futures
 
  The Company's wholly owned subsidiary, Demeter Management Corporation
("Demeter"), acts as general partner of 21 commodity pools (including a family
of open-ended partnerships) organized as limited partnerships whose limited
partners are individual and institutional investors. These commodity pools
trade futures and forward contracts on organized futures exchanges and in the
interbank foreign exchange market. Demeter retains and monitors commodity
trading advisers registered under the Commodity Exchange Act to manage the
assets of these partnerships. As of November 30, 1997, commodity pools
operated by Demeter had approximately $1.2 billion under management.
 
 Real Estate
 
  Dean Witter Realty Inc. ("Realty"), a wholly owned subsidiary of the
Company, has been engaged principally in real estate asset management. During
the 1980's, the Company raised capital for both public and
 
                                      12

 
private limited partnerships. As of November 30, 1997, Realty managed $1.3
billion of real estate (at cost) consisting of office, retail, industrial,
research and development, and residential properties. The Company is currently
in the process of arranging for the sale of most of these properties.
 
 Fiduciary Services
 
  Dean Witter Trust FSB ("DWT"), a federal savings bank that is a wholly owned
subsidiary of the Company, offers trust and other fiduciary services to both
individual and corporate clients, primarily trustee services for personal
trusts and tax-qualified retirement plans. DWT markets these trustee services
nationwide through DWR's account executives. DWT also provides transfer agent
and dividend disbursing services for the Company, the InterCapital funds and
certain other entities.
 
COMPETITION AND REGULATION
 
 Competition
 
  The investment management industry is highly competitive, with approximately
6,700 open-end management investment companies holding over $4.4 trillion in
assets as of November 30, 1997. Competition in the sale of mutual funds is
affected by a number of factors including investment objectives and
performance, advertising and sales promotion efforts, the level of fees,
distribution channels and the types and quality of services offered. In
addition to fund products offered by other broker-dealers, the funds offered
by the Company are in competition with funds sold directly by investment
management firms and insurance companies, as well as with other investment
alternatives sold by such companies and by banks and other financial
institutions.
 
 Regulation
 
  The Company and certain subsidiaries, including MS&Co., DWR, InterCapital,
MSAM, MAS and certain affiliates of VKAC, are registered as investment
advisers with the SEC and in certain states. Virtually all aspects of the
Company's investment advisory business are subject to various federal and
state laws and regulations. These laws and regulations are primarily intended
to benefit the investment product holder and generally grant supervisory
agencies and bodies broad administrative powers, including the power to limit
or restrict the Company from carrying on its investment advisory business in
the event that it fails to comply with such laws and regulations. In such
event, the possible sanctions which may be imposed include the suspension of
individual employees, limitations on the Company's engaging in the investment
advisory business for specified periods of time, the revocation of
registrations under applicable laws or other censures and fines.
 
  The Company's asset management business is also subject to regulation
outside the U.S. The Investment Management Regulatory Organization Limited
regulates the Company's business in the United Kingdom; the Japanese Ministry
of Finance and the Japan Securities Investment Advisors Association regulates
the Company's business in Japan; the Securities and Exchange Board of India
regulates the Company's business in India; and the Monetary Authority of
Singapore regulates the Company's business in Singapore.
 
  Morgan Stanley Trust Company, the Company's principal subsidiary that
engages in Global Custody, is subject to regulation by the New York State
Banking Department and in the United Kingdom by the Securities and Futures
Authority Limited.
 
  Companies in the principal investment portfolio that are in certain
regulated industries (e.g., insurance or broadcasting) or subject to
regulation in non-U.S. jurisdictions could subject the Company to additional
regulation by virtue of the Company's affiliation with the principal
investment funds that own equity interests in such companies or otherwise.
 
  DWT is subject to comprehensive regulation and periodic examination by the
federal Office of Thrift Supervision ("OTS") and by the FDIC. DWT has its
deposits insured by the FDIC and pays FDIC assessments to the Savings
Association Insurance Fund. DWT is also a registered transfer agent, subject
to regulation in such capacity by the SEC.
 
                                      13

 
  As a result of its ownership of DWT, the Company is registered with the OTS
as a savings and loan holding company ("SLHC") and subject to regulation and
examination by the OTS as a SLHC. The Company is classified as a unitary SLHC,
and will continue to be so classified as long as it and DWT continue to comply
with certain conditions. Unitary SLHCs are exempt from the material
restrictions imposed upon the activities of SLHCs that are not unitary SLHCs.
SLHCs other than unitary SLHCs are generally prohibited from engaging in
activities other than conducting business as a savings association, managing
or controlling savings associations, providing services to subsidiaries or
engaging in activities permissible for bank holding companies (as to the
regulation of bank holding companies, see "CREDIT AND TRANSACTION SERVICES--
Competition and Regulation"). Should the Company fail to continue to qualify
as a unitary SLHC, the Company, in order to continue in those of its present
businesses that would not be permissible for a SLHC, could be required to
divest control of DWT. Certain acquisitions of the Company's common stock may
be subject to regulatory approval and notice by virtue of its status as a
SLHC.
 
D. CREDIT AND TRANSACTION SERVICES
 
  As of November 30, 1997, Credit Services was the largest single issuer of
general purpose credit cards in the United States as measured by the number of
accounts and cardmembers. Credit Services' proprietary general purpose credit
cards are issued by the Company's NOVUS Services business unit, which operates
the NOVUS Network, the Company's proprietary merchant and cash access network
(the "NOVUS Network"). These cards include the Discover Card, the Private
Issue(R) Card and co-branded and affinity cards.
 
NOVUS SERVICES
 
 Overview
 
  NOVUS Services offers general purpose credit cards designed to appeal to
different market segments of consumers for use on the NOVUS Network. The NOVUS
Network is the third largest domestic credit card network and consists of
merchant and cash locations that accept credit cards that carry the NOVUS
logo. NOVUS Services issues several brands of proprietary cards, including the
Discover Card, the Private Issue Card and certain co-branded and affinity
cards, including the Smithsonian Card (an affinity program in conjunction with
the Smithsonian Institution) and the Universal Studios Card (a co-branded
credit card in conjunction with Universal Studios that offers cardmembers the
opportunity to participate in a variety of entertainment options).
 
  NOVUS Services promotes its proprietary cards through the use of different
and distinctive features that are designed to appeal to different consumer
bases. These include the Discover Card, which is designed to appeal to the
value-conscious consumer with the Cashback Bonus(R) award, no annual fee and
interest rates indexed to the prime rate; and the Private Issue Card, which
offers consumers a choice of three sets of terms, based on their specific
interests, and four card designs, three designed by celebrity artists.
 
  Cardmembers use the Discover Card as well as other general purpose credit
cards issued by the Company bearing the NOVUS logo to purchase goods and
services at participating merchant locations and to obtain cash advances at
certain merchant and bank locations and at automated teller machines or by
means of checks drawn against their lines of credit. NOVUS Services also
offers cardmembers various financial services, including a revolving line of
credit, credit insurance, and card registration to protect against losses in
connection with card theft or loss. Discover and Private Issue cardmembers are
also offered money market deposit accounts and time deposits.
 
  Cardmembers receive account statements monthly and may elect to pay all or
part of the outstanding balance each month. The unpaid portion of the
outstanding balance is carried over to the next month, and finance charges are
assessed on the revolving balance. A late fee is charged if less than a
required minimum portion of the outstanding balance is paid each month.
Cardmembers are assessed other fees if their credit card use violates other
terms of the cardmember agreement. NOVUS Services accrues revenues through
finance charges on cardmembers' revolving balances, the fees paid by merchants
to the Company for transactions effected through the NOVUS Network,
transaction fees paid by cardmembers for cash advances, late payment fees,
overlimit fees,
 
                                      14

 
fees from providing product enhancements to cardmembers (e.g., credit life
insurance and card registration), merchant fees for processing transactions on
other networks, and proceeds from the sale of point-of-sale terminals and
related equipment to merchants.
 
  Cardmember rewards, primarily the Cashback Bonus award, pursuant to which
the Company annually pays Private Issue cardmembers electing this feature and
Discover cardmembers a percentage of their purchase amounts ranging up to one
percent (up to two percent for the Private Issue Card), are based upon a
cardmember's level of annual purchases. The Cashback Bonus award is remitted
to cardmembers in the form of a check or as a credit to their accounts in the
anniversary month of the account opening.
 
  Cardmembers enter into agreements governing the terms and conditions of
their accounts. Cardmember agreements for each type of card are generally
uniform from state to state. Most of the Company's proprietary general purpose
credit cards are issued by Greenwood Trust Company ("Greenwood Trust"), an
indirect wholly owned subsidiary of the Company. Because of certain banking
law restrictions, most of the Company's proprietary general purpose credit
cards may be used only for personal and household (as opposed to commercial)
transactions.
 
 Merchants
 
  Discover Cards, as well as the Company's other proprietary general purpose
credit cards, are accepted only by merchants who are members of the NOVUS
Network. Since its introduction in 1986, the NOVUS Network has expanded
rapidly and currently includes merchants and cash access locations across the
U.S.
 
  Acting as both the issuing and acquiring entity, NOVUS Services retains the
entire merchant fee paid to the NOVUS Network in a given transaction. Because
of its independence from the bankcard associations, NOVUS Services has greater
flexibility than MasterCard or Visa participants in dealing with merchants.
The Company believes that this gives the Company greater opportunities to
provide customized programs to merchants in such areas as processing
arrangements and to attract certain merchants by tailoring program terms to
meet their specific needs.
 
  NOVUS Services employs its own national sales and support force to increase
and maintain its merchant base. In contrast, MasterCard's and Visa's marketing
efforts to merchants are generally indirect and rely largely on the
unaffiliated sales forces of participating acquiring banks and their agents.
In addition, the Company conducts telemarketing operations for the purpose of
acquiring merchant business.
 
 Marketing
 
  NOVUS Services, as the issuer of the Discover Card and other cards for use
on the NOVUS Network, is distinguished from MasterCard and Visa card issuers
in that it directly controls the brand image, features, service level and
pricing of its cards to both cardmembers and merchants. MasterCard and Visa
issuers compete directly with each other using the same brands and sharing
common processes. The ability to control its products provides NOVUS Services
with competitive advantages that are not available to any single MasterCard or
Visa issuer, including efficiencies in operations, product positioning and
marketing execution. NOVUS Services has the ability to direct and deliver a
consistent, nationwide message for the Discover Card and the Company's other
general purpose proprietary credit cards. Because the Company manages all
aspects of both the cardmember and merchant relationship, it can determine and
promote its advertising campaign and control the campaign's content, timing
and promotional features.
 
 Credit
 
  Cardmembers undergo credit reviews to establish that they meet standards of
ability and willingness to pay. Cardmember applications are evaluated using a
credit scoring system. The Company's credit scoring system is based on credit
scoring systems developed by scoring-model vendors and is customized using the
Company's criteria and historical data. Applications not approved under the
credit scoring system may be reviewed and approved by the Company's credit
analysts.
 
                                      15

 
  Applicants receiving pre-selected solicitations must satisfy criteria
specified by NOVUS Services. All recipients of pre-selected solicitations have
been pre-screened through credit bureaus utilizing a custom model. Pre-
screening is a process by which an independent credit reporting agency
identifies individuals satisfying creditworthiness criteria supplied by the
Company (in the form of a point scoring model or other screening factors) that
are intended to provide a general indication, based on available information,
of such person's ability and willingness to pay their obligations. Recipients
who respond to the Company's pre-selected solicitations are post-screened by
the Company to confirm continued satisfaction of the Company's
creditworthiness criteria.
 
  Each cardmember's credit line is reviewed at least annually, and may be
reviewed more frequently if requested by the cardmember or if the Company
deems more frequent review appropriate. Such reviews include scoring the
cardmember's payment behavior on the applicable account as well as reviewing
the cardmember's credit bureau record. Actions resulting from account review
may include raising or lowering a cardmember's credit line or closing the
account.
 
  During fiscal 1996 and continuing in fiscal 1997, the Company, including
NOVUS Services, experienced an increase in its net charge-off rate which was
consistent with the industry-wide trend of increasing credit loss rates that
the Company believes is related, in part, to increased consumer debt levels
and bankruptcy rates. In response to this environment and as part of its
ongoing review of cardmember credit quality, the Company implemented
initiatives in fiscal 1996 and fiscal 1997, including raising credit quality
standards for new accounts, selectively reducing credit limits, increasing
collection efforts and closing accounts.*
 
 Operations
 
  The Company performs the functions required to service and operate its
proprietary cards' accounts either by itself or through processing agreements
that the Company has with third parties. These functions include new account
solicitation, application processing, new account fulfillment, transaction
authorization and processing, cardmember billing, payment processing,
cardmember service and collection of delinquent accounts. NOVUS Services
maintains several operations centers throughout the country. Additionally,
NOVUS Services operations are supported by systems at computer centers
operated by an unaffiliated communication services provider.
 
SPS TRANSACTION SERVICES, INC.
 
  SPS Transaction Services, Inc. ("SPS"), a 74% owned, publicly held
subsidiary of the Company, provides technology-based outsourcing services.
SPS' primary services include electronic processing of non-cash point-of-sale
transactions (primarily credit card transactions), consumer private label
credit card program administration, commercial accounts receivable processing
and call center teleservices.
 
  In its network transaction processing business, SPS provides electronic
point-of-sale data capture, data transport for authorization or verification
purposes, file delivery for payment settlement and full reporting services.
SPS typically markets these services directly to large regional and national
merchants and competes with other large networks and merchant acquirers for
this business.
 
  Consumer private label credit card programs are offered to large merchants
and service providers. Services for this business include new account
processing, statement and remittance processing, cardholder customer service,
collections and marketing services. SPS may also act as the card issuer and
own the credit card loans outstanding through Hurley State Bank ("Hurley
Bank"), a wholly owned subsidiary.
 
  SPS also offers commercial account processing services which feature a
billing and account receivable management system for clients with businesses
as customers. Services are customized to client requirements and include
monthly revolving account statements or invoice-based billing.
- --------
*  For additional information regarding credit losses and the Company's
   response, see "MD&A" incorporated by reference in Part II, Item 7 of this
   Report.
 
                                      16

 
  SPS provides call-center based inbound teleservicing programs that focus on
customer service solutions. Services include on-line technical help desk
support via telephone or Internet/E-mail, catalog order entry and a variety of
customer service applications.
 
PRIME OPTION SERVICES
 
  Prime Option Services is an organization that, together with NationsBank of
Delaware, N.A. ("NationsBank"), markets a co-branded MasterCard general
purpose credit card under the brand name Prime OptionSM. Issued by NationsBank
under an agreement with MountainWest Financial Corporation ("MountainWest"),
an indirect wholly owned subsidiary of the Company, which participates in the
marketing, funding and servicing of the accounts, Prime Option MasterCard
offers special value and flexibility to consumers through targeted offers of
features and pricing based on behavioral and demographic characteristics.
 
DISCOVER BROKERAGE DIRECT INC.
 
  In January 1997, the Company acquired Lombard Brokerage, Inc. (which
subsequently changed its name to Discover Brokerage Direct Inc. ("Discover
Brokerage")), a San Francisco-based company that offers financial services
nationwide through its Internet site, an automated telephone system and a core
group of registered account representatives. The financial services provided
by Discover Brokerage, principally to individual investors, include detailed
account information, real-time securities price quotes, trade execution, third
party research data and news stories, graphs and real-time portfolio
performance.
 
  Through Discover Brokerage, the Company focuses on the growing number of
consumers utilizing alternatives to the traditional brokerage channel to plan
their financial future. Discover Brokerage's principal strengths include
providing these customers direct access to financial data to make decisions
and then execute value priced transactions. The Company plans to grow Discover
Brokerage by expanding its product line. Discover Brokerage is also initiating
a marketing campaign to the holders of the Company's Discover and Private
Issue Cards. The Company believes that Discover Brokerage will enhance the
Company's ability to market financial services and products to the holders of
the Discover Card and through distribution channels not reached by full-
service brokers.
 
COMPETITION AND REGULATION
 
 Competition
 
  Credit Services competes in highly competitive businesses. In particular,
the Company's credit cards compete in a highly competitive industry. The
market includes other bank-issued credit cards (the vast majority of which
bear the MasterCard or Visa service mark) and charge cards issued by travel
and entertainment companies. In the Credit Services business, competition
centers on merchant acceptance of credit cards, credit card account
acquisition and customer utilization of credit cards. Merchant acceptance is
based on both competitive transaction pricing and the volume and usage of
credit cards in circulation. Credit card account acquisition and customer
utilization are driven by the offering of credit cards with competitive and
appealing features such as no annual fees, low introductory interest rates and
other customized features targeting specific consumer groups.
 
  The credit card industry has experienced increased competitive use of
advertising, targeted marketing and pricing competition in interest rates,
annual fees and reward programs as new credit card issuers seek to enter the
market and established credit card issuers seek to expand. More recently,
issuers have increased their efforts to attract balances from competing
sources of credit via low-priced balance transfer programs. In addition, banks
have issued and aggressively marketed co-branded credit cards, which offer
certain benefits relating to the business of the bank's co-branding partner.
The Company believes its proprietary merchant base enables it to promote the
Discover Card and its other proprietary card brand names on a national basis,
thereby building customer acceptance and use.
 
                                      17

 
 Regulation
 
  The Company conducts portions of its Credit Services businesses through
banking institutions. Greenwood Trust is a state bank chartered under the laws
of the State of Delaware. Hurley Bank is a state bank chartered under the laws
of the State of South Dakota. Bank of New Castle, an indirect wholly owned
subsidiary of the Company, is a state bank chartered under the laws of the
State of Delaware. MountainWest is an industrial loan company chartered under
the laws of the State of Utah. Greenwood Trust, Hurley Bank, Bank of New
Castle and MountainWest (each a "Bank" and, collectively, the "Banks") each
have their deposits insured by the FDIC and pay FDIC assessments. Each Bank is
subject to comprehensive regulations and periodic examinations by the state
banking commissioner of the state in which it is chartered and by the FDIC.
 
  Generally, a company which controls a "bank," as defined in the Bank Holding
Company Act of 1956 (the "BHCA"), is required to register as a bank holding
company under that act and becomes subject to regulation and examination as a
bank holding company by the Federal Reserve Board. Greenwood Trust is a "bank"
as defined in the BHCA. However, because Greenwood Trust did not come within
the BHCA's definition of the term "bank" prior to the amendment of the BHCA by
the Competitive Equality Banking Act of 1987 ("CEBA"), under certain
grandfathering provisions of CEBA the Company is not treated as a bank holding
company as long as the Company and Greenwood Trust comply with certain
restrictions set forth in CEBA. Hurley Bank, Bank of New Castle and
MountainWest are not "banks" under the BHCA as long as each complies with
certain other restrictions set forth in CEBA. Under the BHCA, a bank holding
company is generally prohibited from engaging in any activities other than
those of banking, managing or controlling banks, or providing services for its
subsidiaries. Should Greenwood Trust fail to continue to qualify for
grandfather rights under CEBA or should any of the other Banks fail to
continue to be operated so as to maintain its exempt status as a non-bank
under the BHCA, the Company, in order to continue to engage in those of its
present businesses that would not be permissible for a bank holding company
under the BHCA, could be required to divest control of those institutions or,
in the case of Greenwood Trust, to change the activities of the institution
significantly.
 
  The relationships among cardholders, credit card issuers and sellers of
merchandise in transactions financed by the extension of credit under credit
accounts are extensively regulated by federal and state consumer protection
laws and regulations. Under federal law, each of the Banks may charge interest
at the rate allowed by the law of the state in which it is located. The states
where the Banks are domiciled do not limit the amount of interest that may be
charged on loans of the types offered by the Banks. As a result, each of the
Banks is permitted to export interest rates pursuant to federal law. The
application of federal and state bankruptcy and debtor relief laws affect the
Company to the extent such laws result in any loans being charged off as
uncollectible.
 
  Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal bank regulatory agencies are required to take "prompt
corrective action" in respect of banks that do not meet minimum capital
requirements, and certain restrictions are imposed upon banks that meet
certain capital requirements but are not "well capitalized" for purposes of
FDICIA. A bank that is not well capitalized, as defined for purposes of
FDICIA, is, among other consequences, generally prohibited from accepting
brokered deposits and offering interest rates on any deposits significantly
higher than the prevailing rate in its normal market area or nationally
(depending upon where the deposits are solicited). Greenwood Trust,
MountainWest and Hurley Bank currently use brokered deposits as a funding
source. If Greenwood Trust, MountainWest or Hurley Bank were unable to use
brokered deposits as a funding source, the funding costs of the institution,
particularly those of Greenwood Trust, would likely increase.
 
  Certain acquisitions of the Company's common stock may be subject to
regulatory approval and notice under Federal and state banking law. In
addition, Greenwood Trust would no longer qualify for grandfather rights under
CEBA if direct or indirect control of Greenwood Trust were transferred to a
third party. In that event, the third party would either have to operate as a
bank holding company under the BHCA or significantly modify the activities of
Greenwood Trust. The Merger did not affect Greenwood Trust's qualification for
grandfather rights under CEBA.
 
                                      18

 
  Discover Brokerage is a registered broker-dealer and a member of the NASD.
See "SECURITIES--Competition and Regulation" for a discussion of the
regulations covering the Company's broker-dealers.
 
ITEM 2. PROPERTIES
 
  The Company's executive offices are located at 1585 Broadway, New York, New
York, where the Company occupies approximately 958,000 square feet as its New
York headquarters. The Company also occupies approximately 368,000 square feet
at 750 Seventh Avenue, New York, New York. Both the 1585 Broadway and 750
Seventh Avenue buildings are owned by the Company. The Company also owns a
600,000 square foot building in Riverwoods, Illinois that houses Credit
Services' executive offices, and an adjacent undeveloped 43 acre parcel.
 
  The Company leases 864,000 square feet at Two World Trade Center, New York,
New York under a lease expiring on May 31, 2006 and also occupies space
aggregating approximately 829,000 square feet at various other locations in
Manhattan under leases expiring between 1998 and 2006. In addition, the
Company leases space aggregating approximately 383,000 square feet in
Brooklyn, New York under a lease expiring in 2013.*
 
  The Company's London headquarters are located at 25 Cabot Square, Canary
Wharf, and occupy approximately 641,000 square feet (inclusive of common
areas) of a building constructed by the Company. The Company owns the ground
lease obligation and the freehold interest in the land and the building. The
Company also leases approximately 350,000 square feet at 20 Cabot Square,
Canary Wharf, under a lease arrangement expiring in 2020.
 
  The Company's Tokyo headquarters are located at Yebisu GPT, Ebisu, Shibuya-
ku, where the Company occupies approximately 152,000 square feet of office
space under a lease arrangement expiring in 1998, but renewable at the
Company's option in two-year increments.
 
  The Company's subsidiaries have offices, operations centers and warehouse
facilities located throughout the United States and certain subsidiaries
maintain offices in international locations. The Company's properties are
leased on terms and for durations which are reflective of commercial standards
in the communities where these offices and other properties are located.
Facilities owned or occupied by the Company and its subsidiaries are believed
to be adequate for the purposes for which they are currently used and are well
maintained.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is involved in the following litigation matters:
 
  I. The National Commercial Bank v. Morgan Stanley Asset Management Inc., et
al. On May 2, 1994, a complaint was filed in the United States District Court
for the Southern District of New York by The National Commercial Bank ("NCB")
against Morgan Stanley Asset Management Inc. ("MSAM Inc.") and three present
and former MSAM Inc. employees. The complaint alleged that NCB established a
managed account at MSAM Inc. in or about February 1993 to trade United States
Treasury securities and that in August 1993 that account suffered substantial
losses. The complaint alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and Rule 10b-5
promulgated thereunder, common law fraud, common law constructive fraud,
breach of fiduciary duty, breach of contract, negligence and negligent
misrepresentation, and sought compensatory damages in excess of $39 million,
punitive damages in an unspecified amount, costs, attorneys' fees and
interest. On June 28, 1994, defendants filed answers to the complaint. On July
11, 1994, defendants filed third-party complaints against two employees of
NCB, asserting claims over and for contribution and indemnity in the event
defendants are determined to be liable to NCB. The
- --------
*  The totals for aggregate square footage leased by the Company do not
   include space occupied by the Company's branch securities offices in New
   York and throughout the U.S.
 
                                      19

 
complaint, answers and third-party complaints were thereafter amended. The
claims against MSAM Inc.'s two present employees were thereafter dismissed
without prejudice as were the claims against the two employees of NCB. On
October 15, 1997, summary judgment was granted to MSAM Inc. on the securities
law fraud claims and as to certain of the common law fraud and negligent
misrepresentation claims. On February 13, 1998, the parties reached an
agreement to settle the matter.
 
  II. Term Trust Class Actions.  A putative class action, Thomas D. Keeley, et
al. v. DWR et al. (the "Keeley Action") was commenced in the California
Superior Court, Orange County, on October 27, 1994 and later consolidated with
three similar class actions. Defendants are the Company, DWR, Distributors,
InterCapital, Dean Witter Services Company Inc., TCW Management Co., Trust
Company of the West, TCW Asset Management Co., Inc., TCW Funds Management,
Inc. and eight individuals, including two DWR employees. Plaintiffs allege
breach of fiduciary duty, unjust enrichment, fraud, deceit and violation of
the California Corporation Code in the marketing and selling of the TCW/DW
Term Trusts 2000, 2002 and 2003. Plaintiffs seek unspecified compensatory and
punitive damages. Defendants filed an answer to the first amended class
complaint denying all wrongdoing on December 6, 1995, and motions for judgment
on the pleadings on March 13, 1997. In the Keeley Action, defendants' motions
for judgment on the pleadings were denied on June 23, 1997. Plaintiff's motion
to certify the class is pending.
 
  III. NASDAQ Antitrust Litigation. On December 16, 1994, a consolidated
amended complaint was filed in the United States District Court for the
Southern District of New York against a total of 33 defendants, including
MS&Co. and DWR. The consolidated amended complaint alleged that MS&Co., DWR
and other participants and market makers on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") engaged in a
conspiracy to fix the "spread" between bid and ask prices for securities
traded on the NASDAQ in violation of Section 1 of the Sherman Act. The
plaintiff class was alleged to include persons throughout the United States
who are customers of the defendants or their affiliates and who traded
securities on the NASDAQ between May 1, 1989 and May 27, 1994. Plaintiffs were
alleged to have been damaged in that they paid more for securities purchased
on the NASDAQ, or received less for securities sold, than they would have but
for the alleged conspiracy. The consolidated amended complaint sought
compensatory damages, treble damages, declaratory and injunctive relief,
attorneys' fees and costs. Judgment against each of the defendants was sought
on a joint and several basis.
 
  On February 2, 1995, MS&Co., DWR and the other named defendants filed a
motion to dismiss, which was granted on August 10, 1995 with leave to replead.
On August 22, 1995, plaintiffs filed a Refiled Consolidated Complaint which
was identical in substance to the dismissed pleading except that it listed by
name the stocks that plaintiffs contended were the subject of the alleged
conspiracy. On December 18, 1995, MS&Co. and DWR filed their answers. On
December 10, 1996, four institutional investors filed a new complaint making
the same allegations made in the consolidated amended complaint; this action
was automatically consolidated with the pending action. On December 26, 1996,
the court granted, in part, plaintiffs' motion for class certification. On
April 14, 1997, the district court granted plaintiffs' motion to include
institutional investors in the previously certified class. On December 23,
1997, the parties reached an agreement in principle to settle the action. The
agreement was preliminarily approved by the court on December 31, 1997.
 
  IV. Department of Justice NASDAQ Investigation. On July 17, 1996, MS&Co.,
DWR and 22 other dealers who make markets in securities traded on NASDAQ
entered into an Order and Stipulation with the United States Department of
Justice which simultaneously filed a civil complaint in the United States
District Court for the Southern District of New York alleging that the 24
market makers had violated Section 1 of the Sherman Act. The complaint
asserted, and MS&Co. and DWR deny, that the various market makers had entered
into a so-called "quoting convention" under which the market makers avoided
the use of odd-eighth quotes when the spread between the bid and ask price was
at least 3/4. The Order and Stipulation commits the 24 market makers to avoid
engaging in certain practices which could support the existence of a purported
"quoting convention" and to adopt various procedures to assure compliance with
their agreement. The Order and
 
                                      20

 
Stipulation is subject to court approval and, if approved, will result in the
dismissal of the complaint. On May 21, 1997, certain intervenors appealed a
portion of the Order and Stipulation, and the district court entered an order
staying certain portions of the Order and Stipulation pending the appeal.
 
  V. TCW/DW North American Government Income Trust Litigation. Several
purported class action lawsuits, which have been consolidated for pretrial
purposes (together, the "TNORA Action"), were instituted in January 11, 1995
in the United States District Court for the Southern District of New York
against the TCW/DW North American Government Income Trust (the "Trust"), DWR,
some of the Trust's trustees and officers, its underwriter and distributor,
the Trust's unaffiliated adviser, the Trust's manager, and other defendants,
by certain shareholders of the Trust. The consolidated amended complaint
asserts claims under the Securities Act of 1933 and generally alleges that the
defendants made inadequate and misleading disclosures in the prospectuses for
the Trust, in particular as such disclosures related to the nature and risks
of the Trust's investments in mortgage-backed securities and Mexican
securities. Plaintiffs also challenge certain fees paid by the Trust as
excessive. Damages are sought in an unspecified amount. Defendants moved to
dismiss the consolidated amended complaint. Although on May 8, 1996 the
motions to dismiss were denied, upon reconsideration on August 28, 1996 the
court dismissed several of plaintiffs' claims and clarified its earlier
opinion denying defendants' motion to dismiss. In addition, on August 28,
1996, the court granted plaintiffs' motion for class certification. On
December 4, 1996, in light of a new decision by the United States Court of
Appeals for the Second Circuit, defendants filed a new motion for
reconsideration of the court's decision denying the motion to dismiss, which
was denied on November 20, 1997.
 
  VI. Global Opportunity Fund Litigation. On December 19, 1995, 20 investors
in a Cayman Islands investment fund named The Global Opportunity Fund (the
"Fund") brought an action against Morgan Stanley Bank Luxembourg, S.A.
("MSBL") in Luxembourg Commercial Court seeking damages in the amount of $44
million and costs. The apparent core of plaintiffs' complaint is that MSBL was
responsible for providing certain net asset valuations to the Fund and
performed that function in a negligent manner. On August 14, 1997, MSBL
applied to the Luxembourg Commercial Court to join Barclays de Zoete Weld
Incorporated ("BZW") into the proceedings in order to assert a claim for
indemnity against BZW in the event that MSBL is held liable. A consolidated
hearing of both matters is scheduled for November 25-26, 1998.
 
  VII. County of Orange and Moorlach v. Morgan Stanley & Co., Inc. On June 11,
1996, an adversary proceeding was commenced by Orange County and its
Treasurer-Tax Collector against MS&Co. The proceeding was originally filed in
the United States Bankruptcy Court for the Central District of California,
where Orange County's Chapter 9 bankruptcy proceeding was then pending. The
action is now pending before the United States District Court for the Central
District of California. The complaint asserts that Orange County, acting
through its former Treasurer-Tax Collector, entered into various reverse
repurchase agreements and other transactions with MS&Co. which were beyond the
County's authority or ultra vires, and, therefore, void. The complaint also
asserts that MS&Co. allowed Orange County to enter into unsuitable
transactions. In addition, the complaint alleges that MS&Co. violated the
automatic stay provisions of the Bankruptcy Code when it liquidated the
County's collateral and closed out certain reverse repurchase transactions
subsequent to the County's December 6, 1994 bankruptcy filing. The complaint
asserts claims for ultra vires, setoff, equitable subordination, restitution,
enforcement of the automatic stay, avoidance of post-petition transfers and
negligence, and seeks compensatory damages in an unspecified amount,
declaratory and injunctive relief, restitution, interest, various costs and
attorneys' fees. On August 29, 1996, MS&Co. filed its answer to the complaint.
Discovery is proceeding. MS&Co. has joined in a motion by a defendant in a
related case to dismiss all of the ultra vires claims asserted in that matter,
which are essentially identical to those asserted in the complaint against
MS&Co. A hearing on that motion is presently scheduled for March 30, 1998.
 
  DWR was also named in a similar action. A stipulation to stay proceedings
was entered into by the parties.
 
  VIII. Litigation Regarding Merger. On February 12, 1997, certain
stockholders of the Company filed a putative class action complaint (the
"Brody Action") in the Delaware Court of Chancery, New Castle County, against
the Company and certain of its directors. The complaint alleges certain
breaches of fiduciary duty owed
 
                                      21

 
to the Company's stockholders by the Company and the named directors in
connection with entering into the Agreement and Plan of Merger between Dean
Witter, Discover & Co. and Morgan Stanley Group Inc. dated as of February 4,
1997, and seeks a variety of equitable relief. The defendants have not yet
responded to the complaint, but intend to contest the Brody Action vigorously.
 
  IX. In re Sumitomo Copper Litigation. On April 10, 1997, a consolidated
amended class action complaint was filed in the United States District Court
for the Southern District of New York against Sumitomo Corporation, Sumitomo
Corporation of America (together, "Sumitomo"), Global Minerals and Metals
Corp. ("Global"), Winchester (USA) Inc., Winchester Holdings USA Inc.
(together, "Winchester"), certain individuals associated with Sumitomo, Global
and Winchester, Merrill Lynch & Co., Merrill Lynch Commodity Financing Inc.,
Merrill Lynch Pierce Fenner & Smith (Brokers & Dealers) Limited and MS&Co. The
amended complaint alleges that Sumitomo, Global and certain individuals
associated with each of them, conspired to manipulate and artificially inflate
the price of copper futures contracts on the Comex Division of the New York
Mercantile Exchange, and that the other defendants, including MS&Co., aided
and abetted the manipulation. The plaintiff class purportedly consists of all
persons who purchased copper futures contracts between February 6, 1995 and
June 15, 1996 or between June 24, 1993 and September 9, 1993. MS&Co. had a
counterparty trading relationship in the copper market with Sumitomo during
part of the purported class period. The amended complaint asserts a
manipulation claim under the Commodity Exchange Act against certain of the
defendants other than MS&Co. The amended complaint seeks compensatory damages
in an unspecified amount, treble damages for the RICO claim, interest, costs
and attorneys' fees. On October 31, 1997, MS&Co. filed its answer. Discovery
is proceeding.
 
  X. In re Merrill Lynch, et al. Securities Litigation. On January 19, 1995, a
putative class action was filed in the United States District Court in New
Jersey on behalf of all persons who placed market orders to purchase or sell
NASDAQ securities with DWR between November 4, 1992 and November 4, 1994. The
complaint, consolidated with another action against other brokerage firms,
seeks unspecified damages and alleges that DWR failed to provide best
execution of customer market orders for NASDAQ securities. The complaint
asserts claims for violations of Section 10(b) of the Exchange Act, Rule 10b-5
promulgated thereunder and state law claims for breach of fiduciary duty and
unjust enrichment. On December 15, 1995, the Court granted summary judgment in
favor of DWR and on June 19, 1997 a three judge panel of the Third Circuit
Court of Appeals affirmed. On January 30, 1998, the full Court of Appeals,
sitting en banc, reversed and remanded the case to district court for further
proceedings.
 
  XI. Other. In addition to the matters described above, the Company,
including MS&Co. and DWR, has been named from time to time as a defendant in
various legal actions, including arbitrations, arising in connection with its
activities as a global diversified financial services institution, certain of
which include large claims for punitive damages. The Company, including MS&Co.
and DWR, is also involved, from time to time, in investigations and
proceedings by governmental and self-regulatory agencies.
 
  In view of the inherent difficulty of predicting the outcome of such
matters, particularly in cases such as some of those described above in which
substantial damages are sought, the Company cannot state what the eventual
outcome of pending matters will be. The Company is contesting the allegations
made in each pending matter and believes, based on current knowledge and after
consultation with counsel, that the outcome of such matters will not have a
material adverse effect on the consolidated financial condition of the
Company, but may be material to the Company's operating results for any
particular period, depending on the level of the Company's income for such
period.
 
                                      22

 
                     EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The following table sets forth certain information concerning executive
officers of the Company as of January 29, 1998.
 


        NAME AND AGE              PRESENT TITLE AND PRINCIPAL OCCUPATION
        ------------              --------------------------------------
                        
 Philip J. Purcell, 54.... Chairman of the Board of Directors and Chief
                           Executive Officer of the Company since the Merger.
                           Mr. Purcell was the Chairman of the Board of
                           Directors and Chief Executive Officer of Dean Witter
                           Discover from 1986 until the Merger. He is a trustee
                           or director of approximately 87 registered
                           investment companies for which InterCapital serves
                           as investment manager or investment adviser. Mr.
                           Purcell is also a Director of SPS.
 John J. Mack, 53......... President, Chief Operating Officer and Director of
                           the Company since the Merger. Mr. Mack was the
                           President of Morgan Stanley from June 1993 until the
                           Merger. From March 1992 until the Merger, he was
                           also Chairman of Morgan Stanley's Operating
                           Committee. Mr. Mack was a Director and a Managing
                           Director of Morgan Stanley from December 1987 until
                           the Merger.
 Thomas C. Schneider, 60.. Executive Vice President, Chief Strategic and
                           Administrative Officer and Director of the Company
                           since the Merger. Mr. Schneider was Executive Vice
                           President and Chief Financial Officer of Dean Witter
                           Discover from 1987 until the Merger. He served as a
                           Director of Dean Witter Discover until February
                           1993. Mr. Schneider is also the Chairman of the
                           Board of Directors and Chief Financial Officer of
                           SPS.
 Robert G. Scott, 52...... Executive Vice President and Chief Financial Officer
                           of the Company since the Merger. Mr. Scott was a
                           Managing Director of MS&Co. from 1979 until the
                           Merger. He was the head of Investment Banking for
                           MS&Co. from 1994 to 1996. Mr. Scott was the head of
                           Worldwide Corporate Finance for MS&Co. from 1992 to
                           1994 and was the head of Worldwide Capital Market
                           Services of MS&Co. from 1985 until 1992.
 Christine A. Edwards, 45. Executive Vice President, Chief Legal Officer and
                           Secretary of the Company since the Merger. Mrs.
                           Edwards was Executive Vice President, General
                           Counsel and Secretary of Dean Witter Discover from
                           January 1991 until the Merger. She served as a
                           Director of Dean Witter Discover until February
                           1993. Mrs. Edwards is also a Director of SPS.

 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  There were no matters submitted to a vote of security holders during the
fiscal quarter ended November 30, 1997.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  Information relating to the principal market in which the Registrant's
Common Stock is traded, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal periods, the approximate
number of holders of record of Common Stock and the frequency and amount of
any cash dividends declared for the two most recent fiscal periods is set
forth under the caption "Quarterly Results" on page 98 of the Registrant's
1997 Annual Report to Shareholders and such information is incorporated by
reference herein.
 
 
                                      23

 
ITEM 6. SELECTED FINANCIAL DATA
 
  Selected Financial Data for the Registrant and its subsidiaries for each of
the last five fiscal years is set forth under the same caption on page 2 of
the 1997 Annual Report to Shareholders. Such information is incorporated by
reference herein and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto contained on pages 66 to 98 of such
Annual Report.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth under the same caption on pages 36 to 58 of the 1997
Annual Report to Shareholders. Such information is incorporated by reference
herein and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto contained on pages 66 to 98 of such Annual
Report.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The information required by this item is contained on pages 59 through 64 of
the 1997 Annual Report to Shareholders under the caption "Risk Management" and
is incorporated by reference herein.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Consolidated Financial Statements of the Registrant and its
subsidiaries, together with the Notes thereto and Independent Auditors' Report
thereon, are contained in the 1997 Annual Report to Shareholders on pages 65
to 98, and such information is incorporated by reference herein, including the
information appearing under the caption "Quarterly Results" on page 98 of such
Annual Report.
 
  The Statements of Financial Condition at December 31, 1997 and 1996 for the
Morgan Stanley U.K. Group Profit Sharing Scheme (the "Plan"), the Statements
of Changes in Plan Equity for the Years Ended December 31, 1997, 1996 and 1995
together with the Notes thereon and the Report of Independent Chartered
Accountants appear as Exhibit 99.1.
 
  The report of Ernst & Young LLP, independent auditors, on the consolidated
statement of financial condition of Morgan Stanley as of November 30, 1996 and
the related consolidated statements of income, cash flows and changes in
shareholder's equity for the fiscal years ended November 30, 1996 and 1995,
appears as Exhibit 99.2.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information relating to Directors and Nominees of the Registrant is set
forth under the caption "Election of Directors" on pages 4 to 6 of the Proxy
Statement of the Registrant for its 1998 Annual Meeting of Stockholders and is
incorporated by reference herein. Also incorporated by reference herein is the
information under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" that appears on page 24 of the Proxy Statement.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  Information relating to executive compensation is set forth under the
captions "Director Compensation" on pages 7 and 8 and "Compensation of
Executive Officers" (excluding the information under the subheadings "Report
of the Compensation Committees on Executive Compensation" and "Stock
Performance Graph") on pages 11 to 24 of the Proxy Statement of the Registrant
for its 1998 Annual Meeting of Stockholders and such information is
incorporated by reference herein.
 
                                      24

 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Information relating to security ownership of management and certain
beneficial owners is set forth under the captions "Stock Ownership of
Management" and "Principal Stockholders" on pages 9 and 10, respectively, of
the Proxy Statement of the Registrant for its 1998 Annual Meeting of
Stockholders and such information is incorporated by reference herein.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information regarding certain relationships and related transactions is set
forth under the caption "Interest of Management in Certain Transactions" on
page 24 of the Proxy Statement of the Registrant for its 1998 Annual Meeting
of Stockholders and such information is incorporated by reference herein.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) Documents filed as part of this Report:
 
1.  FINANCIAL STATEMENTS
 
  The financial statements required to be filed hereunder are listed on page
S-1 hereof.
 
2.  FINANCIAL STATEMENT SCHEDULES
 
  The financial statement schedules required to be filed hereunder are listed
on page S-1 hereof.
 
3.  EXHIBITS
 
  An exhibit index has been filed as part of this report on page E-1 hereto
and is incorporated herein by reference.
 
(b) A Current Report on Form 8-K, dated September 23, 1997, was filed with the
    Securities and Exchange Commission in connection with the announcement of
    the Company's third fiscal quarter financial results.
 
                                      25

 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on February 20,
1998.
 
                                          Morgan Stanley, Dean Witter,
                                           Discover & Co. (Registrant)
 
                                              By /s/ Philip J. Purcell
                                          _____________________________________
                                                    Philip J. Purcell
                                             Chairman of the Board and Chief
                                                    Executive Officer
 
                               POWER OF ATTORNEY
 
  We, the undersigned directors and executive officers of Morgan Stanley, Dean
Witter, Discover & Co., hereby severally constitute Christine A. Edwards,
Robert G. Scott and Ronald T. Carman, and each of them singly, our true and
lawful attorneys with full power to them and each of them to sign for us, and
in our names in the capacities indicated below, any and all amendments to the
Annual Report on Form 10-K filed with the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our
said attorneys to any and all amendments to said Annual Report on Form 10-K.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON THE 20TH DAY OF FEBRUARY, 1998.
 


                 SIGNATURE                                     TITLE
                 ---------                                     -----
 
                                         
         /s/ Philip J. Purcell              Chairman of the Board and Chief Executive
___________________________________________ Officer
            (Philip J. Purcell)
 
            /s/ John J. Mack                President, Chief Operating Officer and
___________________________________________ Director
              (John J. Mack)
 
        /s/ Thomas C. Schneider             Executive Vice President, Chief Strategic
___________________________________________ and Administrative Officer and Director
           (Thomas C. Schneider)
 
         /s/ Richard B. Fisher              Chairman of the Executive Committee of
___________________________________________ Board of Directors and Director
            (Richard B. Fisher)
 
          /s/ Robert G. Scott               Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
             (Robert G. Scott)              Officer)
 
          /s/ Eileen K. Murray              Controller (Principal Accounting Officer)
___________________________________________
            (Eileen K. Murray)

 
                                      26

 


                 SIGNATURE                                     TITLE
                 ---------                                     -----
 
                                         
          /s/ Robert P. Bauman                               Director
___________________________________________
            (Robert P. Bauman)
 
         /s/ Edward A. Brennan                               Director
___________________________________________
            (Edward A. Brennan)
 
           /s/ Diana D. Brooks                               Director
___________________________________________
             (Diana D. Brooks)
 
          /s/ Daniel B. Burke                                Director
___________________________________________
             (Daniel B. Burke)
 
          /s/ C. Robert Kidder                               Director
___________________________________________
              (C. Rober Kidder)
 
           /s/ Miles L. Marsh                                Director
___________________________________________
             (Miles L. Marsh)
 
          /s/ Michael A. Miles                               Director
___________________________________________
            (Michael A. Miles)
 
          /s/ Allen E. Murray                                Director
___________________________________________
             (Allen E. Murray)
 
      /s/ Clarence B. Rogers, Jr.                            Director
___________________________________________
         (Clarence B. Rogers, Jr.)
 
        /s/ Laura D'Andrea Tyson                             Director
___________________________________________
          (Laura D'Andrea Tyson)

 
                                       27

 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
 
                         INDEX TO FINANCIAL STATEMENTS
                       AND FINANCIAL STATEMENT SCHEDULES
                        ITEMS (14)(A)(1) AND (14)(A)(2)
 


                                                                  PAGE
                                                         -----------------------
                                                         FORM 10-K ANNUAL REPORT
                                                         --------- -------------
                                                             
FINANCIAL STATEMENTS
- --------------------
Independent Auditors' Report...........................                  65
Consolidated Statements of Financial Condition at
 November 30, 1997 and Fiscal Year-End 1996............                  66
Consolidated Statements of Income for the Fiscal Year
 Ended November 30, 1997, Fiscal Year-End 1996 and
 Fiscal Year-End 1995..................................                  68
Consolidated Statements of Cash Flows for the Fiscal
 Year Ended November 30, 1997, Fiscal Year-End 1996 and
 Fiscal Year-End 1995..................................                  69
Consolidated Statements of Changes in Shareholders'
 Equity for the Fiscal Year Ended November 30, 1997,
 Fiscal Year-End 1996 and Fiscal Year-End 1995.........                  70
Notes to Consolidated Financial Statements.............                  72
FINANCIAL STATEMENT SCHEDULES
- -----------------------------
Schedule I--Condensed Financial Information of Morgan
 Stanley, Dean Witter, Discover & Co. (Parent Company
 Only)--at November 30, 1997 and Fiscal Year-End 1996
 and for each of the Three Fiscal Years in the Period
 Ended November 30, 1997...............................  S-2--S-5

 
                                      S-1

 
                                                                      SCHEDULE I
 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                             (PARENT COMPANY ONLY)
 
                  CONDENSED STATEMENTS OF FINANCIAL CONDITION
 
                    (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)


                                                   NOVEMBER 30, FISCAL YEAR-END
                                                       1997          1996
                                                   ------------ ---------------
                                                          
ASSETS:
  Cash and cash equivalents.......................   $   145        $    12
  Financial instruments owned.....................       632            700
  Advances to subsidiaries........................    44,047         53,821
  Investment in subsidiaries, at equity...........    12,650         10,343
  Other assets....................................     1,383            988
                                                     -------        -------
    Total assets..................................   $58,857        $65,864
                                                     =======        =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
  Short-term borrowings...........................   $16,745        $20,458
  Payables to subsidiaries........................     4,433         12,001
  Other liabilities and accrued expenses..........       853            720
  Long-term borrowings............................    22,870         20,983
                                                     -------        -------
                                                      44,901         54,162
                                                     -------        -------
Commitments and contingencies
Shareholders' equity:
  Preferred stock.................................       876          1,223
  Common stock (1) ($0.01 par value, 1,750,000,000
   shares authorized, 602,829,994 and 611,314,509
   shares issued, 594,708,971 and 572,682,876
   shares outstanding at November 30, 1997 and
   fiscal year-end 1996)..........................         6              6
  Paid-in capital (1).............................     3,952          4,007
  Retained earnings...............................     9,330          7,477
  Cumulative translation adjustments..............        (9)           (11)
                                                     -------        -------
    Subtotal......................................    14,155         12,702
  Note receivable related to sale of preferred
   stock to ESOP..................................       (68)           (78)
  Common stock held in treasury, at cost (1)
   ($0.01 par value, 8,121,023 and 38,631,633
   shares at November 30, 1997 and fiscal year-end
   1996)..........................................      (250)        (1,005)
  Stock compensation related adjustments..........       119             83
                                                     -------        -------
    Total shareholders' equity....................    13,956         11,702
                                                     -------        -------
Total liabilities and shareholders' equity........   $58,857        $65,864
                                                     =======        =======

- --------
(1) Amounts have been restated to reflect the Company's two-for-one stock
   split.
 
                  See Notes to Condensed Financial Statements.
 
                                      S-2

 
                                                                      SCHEDULE I
 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                             (PARENT COMPANY ONLY)
 
                         CONDENSED STATEMENTS OF INCOME
 
                             (DOLLARS IN MILLIONS)
 


                                            FISCAL 1997 FISCAL 1996 FISCAL 1995
                                            ----------- ----------- -----------
                                                           
REVENUES:
  Interest and dividends...................   $ 4,531     $ 3,751     $ 2,404
  Principal transactions...................         6         (64)         30
  Fiduciary fees...........................        23          21          17
  Other....................................         1           5           3
                                              -------     -------     -------
    Total revenues.........................     4,561       3,713       2,454
                                              -------     -------     -------
EXPENSES:
  Interest expense.........................     4,403       3,624       2,345
  Non-interest expenses....................        70           5          14
                                              -------     -------     -------
    Total expenses.........................     4,473       3,629       2,359
                                              -------     -------     -------
  Income before provision for income taxes
   and equity in earnings of subsidiaries..        88          84          95
  Provision for income taxes...............        44          24          26
                                              -------     -------     -------
  Income before equity in earnings of
   subsidiaries............................        44          60          69
  Equity in earnings of subsidiaries, net
   of tax..................................     2,542       1,920       1,396
                                              -------     -------     -------
  Net income...............................   $ 2,586     $ 1,980     $ 1,465
                                              =======     =======     =======
  Preferred stock dividend requirements....   $    66     $    66     $    65
                                              =======     =======     =======
  Earnings applicable to common shares.....   $ 2,520     $ 1,914     $ 1,400
                                              =======     =======     =======

 
 
 
                  See Notes to Condensed Financial Statements.
 
                                      S-3

 
                                                                      SCHEDULE I
 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                             (PARENT COMPANY ONLY)
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
 


                                            FISCAL 1997 FISCAL 1996 FISCAL 1995
                                            ----------- ----------- -----------
                                                           
Cash flows from operating activities:
 Net income................................   $ 2,586    $  1,980     $ 1,465
 Adjustments to reconcile net income to net
  cash provided by operating activities:
  Non-cash charges (credits) included in
   net income:
   Compensation payable in common or
    preferred stock........................       374         513         353
   Equity in subsidiaries' earnings, net of
    dividends..............................    (1,504)       (864)       (370)
  Changes in assets and liabilities:
   Financial instruments owned.............        69        (157)         99
   Other assets............................      (724)       (335)       (597)
   Other liabilities and accrued expenses..       306         113         304
                                              -------    --------     -------
Net cash (provided by) operating
 activities................................     1,107       1,250       1,254
                                              -------    --------     -------
Cash flows from investing activities:
  Net payments for:
   Investments in and advances to
    subsidiaries, at equity................     1,402     (11,526)     (7,691)
   Purchase of Miller Anderson & Sherrerd,
    LLP, net of cash acquired..............       --         (200)        --
   Purchase of Van Kampen American Capital,
    Inc., net of cash acquired.............       --         (986)        --
                                              -------    --------     -------
Net cash provided by (used for) investing
 activities................................     1,402     (12,712)     (7,691)
                                              -------    --------     -------
Cash flows from financing activities:
 Net (payments for) proceeds from short-
  term borrowings..........................    (3,779)      6,369       4,666
 Proceeds from:
  Issuance of common stock.................       224         156         122
  Issuance of cumulative preferred stock...       --          540         --
  Issuance of long-term borrowings.........     6,115       8,561       3,749
 Payments for:
  Repurchases of common stock..............      (124)     (1,133)       (267)
  Repayments of long-term borrowings.......    (3,912)     (2,629)     (1,603)
  Redemption of cumulative preferred stock.      (345)       (138)        --
  Cash dividends...........................      (416)       (313)       (235)
                                              -------    --------     -------
Net cash (used for) provided by financing
 activities................................    (2,237)     11,413       6,432
                                              -------    --------     -------
Dean Witter, Discover & Co.'s (Parent
 Company Only) net cash activity for the
 month of December 1996....................      (139)        --          --
                                              -------    --------     -------
Net increase (decrease) in cash and cash
 equivalents...............................       133         (49)         (5)
Cash and cash equivalents, at beginning of
 period....................................        12          61          66
                                              -------    --------     -------
Cash and cash equivalents, at end of
 period....................................   $   145    $     12     $    61
                                              =======    ========     =======

 
                  See Notes to Condensed Financial Statements.
 
 
                                      S-4

 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                             (PARENT COMPANY ONLY)
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
 
1. INTRODUCTION AND BASIS OF PRESENTATION
 
 The Merger
 
  On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged
with and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
"Merger"). At that time, Dean Witter Discover changed its corporate name to
Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In conjunction
with the Merger, the Company issued 260,861,078 shares of its common stock, as
each share of Morgan Stanley common stock then outstanding was converted into
1.65 shares of the Company's common stock. In addition, each share of Morgan
Stanley preferred stock was converted into one share of a corresponding series
of preferred stock of the Company. The Merger was treated as a tax-free
exchange.
 
 Basis of Financial Information
 
  The accompanying condensed financial statements (the "Parent Company
Financial Statements") give retroactive effect to the Merger, which was
accounted for as a pooling of interests. The pooling of interests method of
accounting requires the restatement of all periods presented as if Dean Witter
Discover and Morgan Stanley had always been combined. The fiscal year end 1996
shareholders' equity data reflects the accounts of the Company as if the
preferred and additional common stock had been issued during all of the
periods presented.
 
  The Parent Company Financial Statements, including the notes thereto, should
be read in conjunction with the consolidated financial statements of the
Company and the notes thereto found on pages 66 to 98 of the Company's Annual
Report to Shareholders which is incorporated by reference in this Form 10-K.
 
  Prior to the consummation of the Merger, Dean Witter Discover's year ended
on December 31 and Morgan Stanley's fiscal year ended on November 30.
Subsequent to the Merger, the Company adopted a fiscal year-end of November
30. In recording the pooling of interests combination, Dean Witter Discover's
financial statements for the years ended December 31, 1996 and 1995 were
combined with Morgan Stanley's financial statements for the fiscal years ended
November 30, 1996 and 1995 (on a combined basis, "fiscal 1996" and "fiscal
1995", respectively). The Company's results for the twelve months ended
November 30, 1997 ("fiscal 1997") include the results of Dean Witter Discover
that were restated to conform with the new fiscal year-end date. The Company's
results of operations for fiscal 1997 and fiscal 1996 include the month of
December 1996 for Dean Witter Discover.
 
2. TRANSACTIONS WITH SUBSIDIARIES
 
  The Company has transactions with its subsidiaries determined on an agreed-
upon basis and has guaranteed certain unsecured lines of credit and
contractual obligations of certain of its subsidiaries.
 
  The Company received cash dividends from its consolidated subsidiaries
totaling $1,088 million, $1,056 million and $892 million in fiscal 1997, 1996
and 1995, respectively.
 
                                      S-5

 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholders of
Morgan Stanley, Dean Witter, Discover & Co.:
 
  We have audited the consolidated financial statements of Morgan Stanley,
Dean Witter, Discover & Co. and subsidiaries at fiscal years ended November
30, 1997 and 1996, and for each of the three fiscal years in the period ended
November 30, 1997, and have issued our report thereon dated January 23, 1998;
such consolidated financial statements and report are included in your 1997
Annual Report to Shareholders and are incorporated herein by reference. Our
audits also included Schedule I listed in the Index to Financial Statements
and Financial Statement Schedules. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. The consolidated financial statements give
retroactive effect to the merger of Morgan Stanley Group Inc. and Dean Witter,
Discover & Co., which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the condensed financial statement schedules of Morgan Stanley Group Inc.
(Parent Company Only) as of November 30, 1996, and for the fiscal years ended
November 30, 1996 and 1995, which statements reflect total assets of $48,143
million as of November 30, 1996, and total revenues of $2,997 million and
$1,802 million for the fiscal years ended November 30, 1996 and 1995,
respectively. Those financial statement schedules were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Morgan Stanley Group Inc. (Parent Company
Only) for such periods, is based solely on the report of such other auditors.
In our opinion, based on our audits and the report of the other auditors, the
condensed financial statement schedules for Morgan Stanley, Dean Witter,
Discover & Co. (Parent Company Only), when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth herein.
 
DELOITTE & TOUCHE LLP
 
New York, New York
January 23, 1998
 
                                      S-6

 
                                 EXHIBIT INDEX
 
  Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by the
Registrant or its predecessor companies under the Securities Act of 1933, as
amended, or to reports or registration statements filed by the Registrant or
its predecessor companies under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), respectively, and are hereby incorporated by
reference to such statements or reports. Prior to the Merger, the Exchange Act
file number of Morgan Stanley Group Inc. ("Morgan Stanley") was 1-9085.
 


                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
   NO.                         DESCRIPTION                            PAGES
 -------                       -----------                         ------------
                                                             
 3.1     Amended and Restated Certificate of Incorporation of
         the Company (Exhibit 3.1 to the Company's Current
         Report on Form 8-K dated May 31, 1997).

 3.2*    By-Laws of the Company, as amended to date.

 4.1     Rights Agreement dated as of April 25, 1995 between the
         Company and Chemical Bank, as rights agent, which
         includes as Exhibit B thereto the Form of Rights
         Certificate (Exhibit 1 to the Company's Registration
         Statement on Form 8-A dated April 25, 1995).

 4.2     Amendment dated as of February 4, 1997 to the Rights
         Agreement between the Company and The Chase Manhattan
         Bank (as successor to Chemical Bank), as rights agent
         (Exhibit 4.1 to the Company's Current Report on Form 8-
         K dated February 4, 1997).

 4.3     Stockholders' Agreement dated February 14, 1986, as
         amended (Exhibit 4.2 to Morgan Stanley's Annual Report
         on Form 10-K for the fiscal year ended January 31,
         1993).

 4.4     Form of Consent and Amendment dated as of January 31,
         1996 between the Company and certain signatories to the
         Stockholders' Agreement referred to in Exhibit 4.3
         (Exhibit 4.3 to Morgan Stanley's Annual Report on Form
         10-K for the fiscal year ended November 30, 1995).

 4.5     Indenture dated as of February 24, 1993 between the
         Company and The First National Bank of Chicago, as
         trustee (Exhibit 4 to the Company's Registration
         Statement on Form S-3 (No. 33-57202)).

 4.6     Senior Indenture dated as of April 15, 1989 between the
         Company and The Chase Manhattan Bank (as successor to
         Chemical Bank), as trustee (Exhibit 4.12 to Morgan
         Stanley's Annual Report on Form 10-K for the fiscal
         year ended January 31, 1993).

 4.7     First Supplemental Senior Indenture dated as of May 15,
         1991 between the Company and The Chase Manhattan Bank
         (as successor to Chemical Bank), as trustee (Exhibit
         4.13 to Morgan Stanley's Annual Report on Form 10-K for
         the fiscal year ended January 31, 1993).

 4.8     Second Supplemental Senior Indenture dated as of April
         15, 1996 between the Company and The Chase Manhattan
         Bank (as successor to Chemical Bank), as trustee
         (Exhibit 4-b to Morgan Stanley's Current Report on Form
         8-K dated May 6, 1996).

 4.9     Third Supplemental Senior Indenture dated as of June 1,
         1997 between the Company and The Chase Manhattan Bank,
         as trustee (Exhibit 4-h to the Company's Registration
         Statement on Form S-3 (No. 333-27919)).

 4.10    Subordinated Indenture dated as of April 15, 1989
         between the Company and The First National Bank of
         Chicago, as trustee (Exhibit 4.10 to Morgan Stanley's
         Annual Report on Form 10-K for the fiscal year ended
         January 31, 1993).

 4.11    First Supplemental Subordinated Indenture dated as of
         May 15, 1991 between the Company and The First National
         Bank of Chicago, as trustee (Exhibit 4.11 to Morgan
         Stanley's Annual Report on Form 10-K for the fiscal
         year ended January 31, 1993).

 4.12    Second Supplemental Subordinated Indenture dated as of
         April 15, 1996 between the Company and The First
         National Bank of Chicago, as trustee (Exhibit 4-c to
         Morgan Stanley's Current Report on Form 8-K dated May
         6, 1996).

 
 
                                      E-1

 


                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
   NO.                         DESCRIPTION                            PAGES
 -------                       -----------                         ------------
                                                             
  4.13   Third Supplemental Subordinated Indenture dated as of
         June 1, 1997 between the Company and The First National
         Bank of Chicago, as trustee (Exhibit 4-l to the
         Company's Registration Statement on Form S-3 (No. 333-
         27919)).

  4.14   Subordinated Indenture dated as of November 15, 1993
         among Morgan Stanley Finance plc, the Company, as
         guarantor, and The Chase Manhattan Bank (as successor
         to Chemical Bank), as trustee (Exhibit 4.1 to Morgan
         Stanley's Current Report on Form 8-K dated November 19,
         1993).

  4.15   First Supplemental Subordinated Indenture dated as of
         June 1, 1997 among Morgan Stanley Finance plc, the
         Company, as guarantor, and The Chase Manhattan Bank, as
         trustee (Exhibit 4-f to the Company's Registration
         Statement on Form S-3 (No. 333-27881)).

  4.16   Voting Agreement dated March 5, 1991 among the Company,
         State Street Bank and Trust Company and Other Persons
         Signing Similar Voting Agreements (Exhibit 4.14 to
         Morgan Stanley's Annual Report on Form 10-K for the
         fiscal year ended January 31, 1993).

  4.17   Instruments defining the Rights of Security Holders,
         Including Indentures--In addition to Exhibits 4.1
         through 4.16 herein, pursuant to paragraph
         (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
         Company hereby undertakes to furnish to the Securities
         and Exchange Commission upon request copies of the
         instruments defining the rights of holders of long-term
         debt securities of the Company and its subsidiaries,
         none of which instruments authorizes the issuance of an
         amount of securities that exceeds 10% of the total
         assets of the Company and its subsidiaries on a
         consolidated basis.

 10.1    Amended Agreement for Systems Operations Services dated
         as of January 1, 1996 by and between the Company and
         Advantis, a New York general partnership (Exhibit 10.4
         to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1996).

 10.2    Form of Pooling and Servicing Agreement used in
         connection with the securitization of Discover Card
         receivables (Exhibit 10.6 to the Company's Registration
         Statement on Form S-1 (No. 33-56104)).

 10.3    Pooling and Servicing Agreement dated as of October 1,
         1993 between Greenwood Trust Company as master
         servicer, servicer and seller and Continental Bank,
         National Association, as trustee (Exhibit 4.1 to the
         Discover Card Master Trust I Registration Statement on
         Form S-1 (No. 33-71502)).

 10.4    First Amendment to Pooling and Servicing Agreement
         dated as of August 15, 1994 between Greenwood Trust
         Company, as master servicer, servicer and seller and
         Bank of America Illinois (formerly, Continental Bank,
         National Association) as trustee (Exhibit 4.4 to the
         Discover Card Master Trust I Current Report on Form 8-K
         dated August 1, 1995).

 10.5    Second Amendment to Pooling and Servicing Agreement
         dated as of February 29, 1996 between Greenwood Trust
         Company, as master servicer, servicer and seller and
         First Bank National Association (successor trustee to
         Bank of America Illinois, formerly Continental Bank,
         National Association) as trustee (Exhibit 4.4 to the
         Discover Card Master Trust I Current Report on Form 8-K
         dated April 30, 1996).

 10.6+   Dean Witter Reynolds Inc. Supplemental Pension Plan
         (formerly known as the Dean Witter Reynolds Financial
         Services Inc. Supplemental Pension Plan for Executives)
         (amended and restated as of December 14, 1993) (Exhibit
         10.32 to the Company's Annual Report on Form 10-K for
         the year ended December 31, 1993).

 
                                      E-2

 


                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
   NO.                         DESCRIPTION                            PAGES
 -------                       -----------                         ------------
                                                             
 10.7+   Omnibus Equity Incentive Plan (Exhibit 4.1 to the
         Company's Registration Statement on Form S-8 (No. 33-
         63024)).

 10.8+   Employees Replacement Stock Plan (Exhibit 4.2 to the
         Company's Registration Statement on Form S-8 (No. 33-
         63024)).

 10.9+   Amendment to the Employees Replacement Stock Plan
         (adopted June 18, 1993) (Exhibit 10.1 to the Company's
         Current Report on Form 8-K dated November 18, 1993).

 10.10+  Dean Witter START Plan (Saving Today Affords Retirement
         Tomorrow) (amended and restated) (Exhibit 10.9 to the
         Company's Annual Report on Form 10-K for the year ended
         December 31, 1996).

 10.11*+ Amendment to Dean Witter START Plan (Saving Today
         Affords Retirement Tomorrow) (adopted December 10,
         1997).

 10.12+  1993 Stock Plan for Non-Employee Directors (Exhibit 4.3
         to the Company's Registration Statement on Form S-8
         (No. 33-63024)).

 10.13+  Amendment to the 1993 Stock Plan for Non-Employee
         Directors (Exhibit 10.37 to the Company's Annual Report
         on Form 10-K for the year ended December 31, 1993).

 10.14+  Transferred Executives Pension Supplement (amended and
         restated) (Exhibit 10 to the Company's Quarterly Report
         on Form 10-Q for the quarter ended September 30, 1995).

 10.15+  1994 Omnibus Equity Plan (Exhibit 10.52 to the
         Company's Annual Report on Form 10-K for the year ended
         December 31, 1993).

 10.16+  Tax Deferred Equity Participation Plan (amended and
         restated October 21, 1994) (Exhibit 4.1 to Post-
         Effective Amendment No. 1 to the Company's Registration
         Statement on Form S-8 (33-82240)).

 10.17*+ Amendment to Tax Deferred Equity Participation Plan
         (adopted October 3, 1997).

 10.18+  Key Executive Employment Plan, as amended April 19,
         1996 (Exhibit 10.2 to the Company's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 1996).

 10.19*+ Directors' Equity Capital Accumulation Plan (amended
         and restated).

 10.20+  Employees Equity Accumulation Plan (Exhibit 10.34 to
         the Company's Annual Report on Form 10-K for the year
         ended December 31, 1996).

 10.21+  Sears Consumer Financial Corporation Supplemental
         Retirement Income Plan (currently known as the NOVUS
         Credit Services Inc. Supplemental Retirement Income
         Plan (Exhibit 10.36 to the Company's Registration
         Statement on Form S-1 (No. 33-56104)).

 10.22+  First Amendment to the NOVUS Credit Services Inc.
         Supplemental Retirement Income Plan (Exhibit 10.41 to
         the Company's Annual Report on Form 10-K for the year
         ended December 31, 1993).

 10.23+  Second Amendment to the NOVUS Credit Services Inc.
         Supplemental Retirement Income Plan (Exhibit 10.42 to
         the Company's Annual Report on Form 10-K for the year
         ended December 31, 1993).

 10.24+  Third Amendment to the NOVUS Credit Services Inc.
         Supplemental Retirement Income Plan (Exhibit 10.27 to
         the Company's Annual Report on Form 10-K for the year
         ended December 31, 1994).

 10.25+  Employee Stock Purchase Plan (amended and restated)
         (Exhibit 10.42 to the Company's Annual Report on Form
         10-K for the year ended December 31, 1995).

 
                                      E-3

 


                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
   NO.                         DESCRIPTION                            PAGES
 -------                       -----------                         ------------
                                                             
 10.26*+ Amendment to Employee Stock Purchase Plan (adopted
         December 19, 1997).

 10.27+  Form of Agreement under the Morgan Stanley & Co.
         Incorporated Owners' and Select Earners' Plan (Exhibit
         10.1 to Morgan Stanley's Annual Report on Form 10-K for
         the fiscal year ended January 31, 1993).

 10.28+  Form of Agreement under the Officers' and Select
         Earners' Plan (Exhibit 10.2 to Morgan Stanley's Annual
         Report on Form 10-K for the fiscal year ended January
         31, 1993).

 10.29+  Morgan Stanley & Co. Incorporated Excess Benefit Plan
         (amended and restated) (Exhibit 10.5 to Morgan
         Stanley's Annual Report on Form 10-K for the fiscal
         year ended January 31, 1993).

 10.30+  Morgan Stanley & Co. Incorporated Supplemental
         Executive Retirement Plan, as amended (Exhibit 10.6 to
         Morgan Stanley's Annual Report on Form 10-K for the
         fiscal year ended January 31, 1993).

 10.31+  Performance Unit Plan (amended and restated) (Exhibit
         10.8 to Morgan Stanley's Annual Report on Form 10-K for
         the fiscal year ended January 31, 1993).

 10.32+  1988 Equity Incentive Compensation Plan, as amended
         (Exhibit 10.12 to Morgan Stanley's Annual Report on
         Form 10-K for the fiscal year ended January 31, 1993).

 10.33+  1995 Equity Incentive Compensation Plan (Annex A to
         Morgan Stanley's Proxy Statement for its 1996 Annual
         Meeting of Stockholders).

 10.34+  1988 Capital Accumulation Plan, as amended (Exhibit
         10.13 to Morgan Stanley's Annual Report on Form 10-K
         for the fiscal year ended January 31, 1993).

 10.35+  Form of Deferred Compensation Agreement under the Pre-
         Tax Incentive Program (Exhibit 10.12 to Morgan
         Stanley's Annual Report on Form 10-K for the fiscal
         year ended January 31, 1994).

 10.36+  Form of Deferred Compensation Agreement under the Pre-
          Tax Incentive Program 2 (Exhibit 10.12 to Morgan
          Stanley's Annual Report for the fiscal year ended
          November 30, 1996).

 10.37   Trust Agreement dated March 5, 1991 between the Company
          and State Street Bank and Trust Company (Exhibit 10.15
          to Morgan Stanley's Annual Report on Form 10-K for the
          fiscal year ended January 31, 1993).

 10.38   First Amendment to Trust Agreement dated April 3, 1996
          between the Company and State Street Bank and Trust
          Company (Exhibit 10.14 to Morgan Stanley's Annual
          Report on Form 10-K for the fiscal year ended November
          30, 1996).

 10.39   Lease Agreement dated July 8, 1985 by and between Fund
          for Regional Development acting by and through The
          Port Authority of New York and New Jersey and Dean
          Witter Reynolds Inc. (Exhibit 10.41 to the Company's
          Registration Statement on Form S-l (No. 33-56104)).

 10.40   Agreement of Lease dated May 13, 1986 between Morgan
          Stanley & Co. Incorporated and Forest City Pierrepont
          Associates, as amended (Exhibit 10.18 to Morgan
          Stanley's Annual Report on Form 10-K for the fiscal
          year ended January 31, 1993).

 10.41   Agreement of Sublease between McGraw-Hill, Inc. and
          Morgan Stanley & Co. Incorporated, as amended (Exhibit
          10.19 to Morgan Stanley's Annual Report on Form 10-K
          for the fiscal year ended January 31, 1993).

 10.42   Lease dated January 22, 1993 between Rock-McGraw, Inc.
          and Morgan Stanley & Co. Incorporated (Exhibit 10.22
          to Morgan Stanley's Annual Report on Form 10-K for the
          fiscal year ended January 31, 1993).

 
                                      E-4

 


                                                                   SEQUENTIALLY
 EXHIBIT                                                             NUMBERED
   NO.                         DESCRIPTION                            PAGES
 -------                       -----------                         ------------
                                                             
  10.43  Agreement of Lease dated February 10, 1995 among Canary
          Wharf Limited, Morgan Stanley UK Group and the Company
          (Exhibit 10.18 to Morgan Stanley's Annual Report on
          Form 10-K for the fiscal year ended January 31, 1995).

  10.44  Amended and Restated Agreement and Plan of Merger dated
          as of April 10, 1997 (Annex I to the Joint Proxy
          Statement/Prospectus included as part of the Company's
          Registration Statement on Form S-4 (No. 333-25003)).

  11*    Statement Re: Computation of Earnings Per Common Share.

  12*    Statement Re: Computation of Ratio of Earnings to Fixed
          Charges and Computation of Earnings to Fixed Charges
          and Preferred Stock Dividends.

  13*    The following portions of the Company's 1997 Annual
          Report to Shareholders, which are incorporated by
          reference in this Annual Report on Form 10-K, are
          filed as an Exhibit:

  13.1   "Quarterly Results" (page 98).

  13.2   "Selected Financial Data" (page 2).

  13.3   "Management's Discussion and Analysis of Financial
          Condition and Results of Operations" (pages 36 to 58).

  13.4   "Risk Management" (pages 59 to 64)

  13.5   Consolidated Financial Statements of the Company and
          its subsidiaries, together with the Notes thereto and
          the Independent Auditor's Report thereon (pages 65 to
          98).

  21*    Subsidiaries of the Company.

  23.1*  Consent of Deloitte & Touche LLP.

  23.2*  Consent of Ernst & Young LLP.

  23.3*  Consent of Deloitte & Touche with respect to the
          Financial Statements for the fiscal year ended
          December 31, 1997 for the Morgan Stanley U.K. Group
          Profit Sharing Scheme.

  24     Powers of Attorney (included on signature page).

  27*    Financial Data Schedule.

  99.1*  Financial Statements for the year ended December 31,
          1997 for the Morgan Stanley U.K. Group Profit Sharing
          Scheme.

  99.2*  Report of Ernst & Young LLP.

- --------
 
  * Filed herewith.
  + Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to    Item 14(c).
 
                                      E-5

 
 
 
 
 
                        LOGO  Printed on Recycled Paper
 

EX-3.2

 
                                                                     EXHIBIT 3.2

                                                    AS AMENDED FEBRUARY 17, 1998
                                                                                

                                                                                
                              AMENDED AND RESTATED
                                     BYLAWS
                                       OF
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.

                     (HEREINAFTER CALLED THE "CORPORATION")


                                   ARTICLE 1
                              OFFICES AND RECORDS
                                        

     SECTION 1.01.  Delaware Office.  The principal office of the Corporation in
the State of Delaware shall be located in the City of Wilmington, County of New
Castle.

     SECTION 1.02.  Other Offices.  The Corporation may have such other offices,
either within or without the State of Delaware, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.



                                   ARTICLE 2
                                  STOCKHOLDERS
                                        

     SECTION 2.01.  Annual Meeting.  The annual meeting of the stockholders of
the Corporation shall be held at such date, place and time as may be fixed by
resolution of the Board of Directors.

     SECTION 2.02.  Special Meeting.  Subject to the rights of the holders of
any series of preferred stock of the Corporation (the "Preferred Stock") or any
other series or class of stock as set forth in the Amended and Restated
Certificate of Incorporation, special meetings of the stockholders may be called
at any time only by the Secretary at the direction of the Board of Directors
pursuant to a resolution adopted by the Board of Directors.

     SECTION 2.03.  Place of Meeting.  The Board of Directors may designate the
place of meeting for any meeting of the stockholders.  If no designation is made
by the Board of Directors, the place of meeting shall be the principal office of
the Corporation, which will be 1585 Broadway, New York, New York.

     SECTION 2.04.  Notice of Meeting.  Written or printed notice, stating the
place, day and hour of the meeting and, in the case of special meetings, the
purpose or purposes for which such special meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally, or by mail, to each
stockholder of record entitled to vote at 

 
such meeting. Such further notice shall be given as may be required by law. Only
such business shall be conducted at a special meeting of stockholders as shall
have been brought before the meeting pursuant to the Corporation's notice of
meeting. Any previously scheduled meeting of the stockholders may be postponed,
and (unless the Amended and Restated Certificate of Incorporation otherwise
provides) any special meeting of the stockholders may be canceled, by resolution
of the Board of Directors upon public notice given prior to the time previously
scheduled for such meeting of stockholders.

     SECTION 2.05.  Quorum and Adjournment.  Except as otherwise provided by law
or by the Amended and Restated Certificate of Incorporation, the holders of a
majority of the voting power of the outstanding shares of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders, except that when specified business is to be voted on by a class
or series voting as a class, the holders of a majority of the voting power of
the shares of such class or series shall constitute a quorum for the transaction
of such business.  The Chairman of the Board or the holders of a majority of the
voting power of the shares of Voting Stock so represented may adjourn the
meeting from time to time, whether or not there is such a quorum (or, in the
case of specified business to be voted on by a class or series, the Chairman of
the Board or the holders of a majority of the voting power of the shares of such
class or series so represented may adjourn the meeting with respect to such
specified business).  No notice of the time and place of adjourned meetings need
be given except as required by law.  The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.

     SECTION 2.06.  Proxies.  At all meetings of stockholders, a stockholder may
vote by proxy as may be permitted by law; provided, that no proxy shall be voted
after three years from its date, unless the proxy provides for a longer period.
Any proxy to be used at a meeting of stockholders must be filed with the
Secretary of the Corporation or his representative at or before the time of the
meeting.

     SECTION 2.07.  Notice of Stockholder Business and Nominations.

     (a) Annual Meetings of Stockholders.

     (i) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (A) pursuant to the
Corporation's notice of meeting delivered pursuant to Section 2.04 of these
Amended and Restated Bylaws, (B) by or at the direction of the Board of
Directors or (C) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complied with the notice procedures set forth in clauses
(ii) and (iii) of this Section 2.07(a) and who was a stockholder of record at
the time such notice is delivered to the Secretary of the Corporation.

                                       2

 
     (ii) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (C) of paragraph (a) (i) of
this Bylaw, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and, in the case of business other than
nominations, such other business must otherwise be a proper matter for
stockholder action.  To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than ninety days nor more than one hundred and twenty days prior to the first
anniversary of the preceding year's annual meeting; provided however, that with
respect to the annual meeting to be held in 1998, the anniversary date shall be
deemed to be April 2, 1998; provided further, that in the event that the date of
the annual meeting is advanced by more than thirty days, or delayed by more than
ninety days, from such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the one hundred and twentieth day prior to
such annual meeting and not later than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made.  In no
event shall the public announcement of an adjournment or postponement of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described in this Section 2.07(a). Such stockholder's notice shall set
forth (A) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is other-wise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder, including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (C) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (2) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.

     (iii) Notwithstanding anything in the second sentence of clause (ii) of
this Section 2.07(a) to the contrary, in the event that the number of directors
to be elected to the Board of Directors of the Corporation is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least one hundred days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice required by this Bylaw shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the Corporation.

                                       3

 
     (b) Special Meetings of Stockholders.

     Only such business shall be conducted at a special meeting of stockholders
as shall have been brought before the meeting pursuant to the Corporation's
notice of meeting pursuant to Section 2.04 of these Amended and Restated Bylaws.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this Bylaw
and who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation.  In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate such number of persons for
election to such position(s) as are specified in the Corporation's Notice of
Meeting, if the stockholder's notice as required by clause (ii) of Section
2.07(a) of these Amended and Restated Bylaws shall be delivered to the Secretary
at the principal executive offices of the Corporation not earlier than the one
hundred and twentieth day prior to such special meeting and not later than the
close of business on the later of the ninetieth day prior to such special
meeting or the tenth day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.  In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period for the giving of a stockholder's notice as described above.

     (c) General

     (i) Only persons who are nominated in accordance with the procedures set
forth in this Bylaw shall be eligible to be elected as directors at a meeting of
stockholders and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Bylaw.  Except as otherwise provided by law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws, the Chairman of the Board shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set forth in this Bylaw and,
if any proposed nomination or business is not in compliance with this Bylaw, to
declare that such defective proposal or nomination shall be disregarded.

     (ii) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.

                                       4

 
     (iii) Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Bylaw.  Nothing in this Bylaw shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.

     SECTION 2.08.  Procedure For Election of Directors; Voting.  The election
of directors submitted to stockholders at any meeting shall be decided by a
plurality of the votes cast thereon, except as otherwise set forth in the
Amended and Restated Certificate of Incorporation with respect to the right of
the holders of any series of Preferred Stock or any other series or class of
stock to elect additional directors under specified circumstances.  Except as
otherwise provided by law, the Amended and Restated Certificate of Incorporation
or these Amended and Restated Bylaws, all matters other than the election of
directors submitted to the stockholders at any meeting shall be decided by the
affirmative vote of a majority of the voting power of the shares present in
person or represented by proxy at the meeting and entitled to vote thereon, and
where a separate vote by class is required, a majority of the voting power of
the shares of that class present in person or represented by proxy at the
meeting and entitled to vote thereon.

     The vote on any matter, including the election of directors, shall be by
written ballot.  Each ballot shall be signed by the stockholder voting, or by
such stockholder's proxy, and shall state the number of shares voted.

     SECTION 2.09.  Inspectors of Elections; Opening and Closing the Polls.

     (a)  The Board of Directors by resolution shall appoint one or more
inspectors, which inspector or inspectors may not be directors, officers or
employees of the Corporation, to act at the meeting and make a written report
thereof.  One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act.  If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act, at a meeting of stockholders, the Chairman of the Board shall
appoint one or more inspectors to act at the meeting.  Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability.  The inspectors shall have the duties prescribed by the
General Corporation Law of the State of Delaware.

     (b)  The Chairman of the Board shall fix and announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the stockholders will vote at the meeting.

                                       5

 
                                   ARTICLE 3
                              BOARD OF DIRECTORS
                                        

     SECTION 3.01.  General Powers.  The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors.  In
addition to the powers and authorities by these Amended and Restated Bylaws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law or by the Amended and Restated Certificate of Incorporation or by these
Amended and Restated Bylaws required to be exercised or done by the
stockholders.

     SECTION 3.02.  Number, Tenure and Qualifications. Subject to Section 3.12
of these Amended and Restated Bylaws and to the rights of the holders of any
series of Preferred Stock, or any other series or class of stock as set forth in
the Amended and Restated Certificate of Incorporation, to elect directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively pursuant to a resolution adopted by the Board of Directors, but
shall consist of not less than three nor more than fourteen directors.  However,
no decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.  The directors, other than those who
may be elected by the holders of any series of Preferred Stock, or any other
series or class of stock as set forth in the Amended and Restated Certificate of
Incorporation, shall be divided into such classes and hold office for such terms
as set forth in, and may be removed only in accordance with, the Amended and
Restated Certificate of Incorporation.

     Each director shall be required to become a stockholder of the Corporation
within 60 days after the date such director is first elected to the Board of
Directors.

     SECTION 3.03.  Regular Meetings.  A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, each annual meeting of stockholders.  The Board of
Directors may, by resolution, provide the time and place for the holding of
additional regular meetings without other notice than such resolution.  Unless
otherwise determined by the Board of Directors, the Secretary of the Corporation
shall act as secretary at all regular meetings of the Board of Directors and in
the Secretary's absence a temporary secretary shall be appointed by the chairman
of the meeting.

     SECTION 3.04.  Special Meetings.  Special meetings of the Board of
Directors shall be called at the request of the Chairman of the Board and the
President, acting together, or a majority of the Board of Directors.  The person
or persons authorized to call special meetings of the Board of Directors may fix
the place and time of the meetings.  Unless otherwise determined by the Board of
Directors, the Secretary of the Corporation shall act as secretary at all
special meetings of the Board of Directors and in the Secretary's absence a
temporary secretary shall be appointed by the chairman of the meeting.

                                       6

 
     SECTION 3.05.  Notice.  Notice of any special meeting shall be mailed to
each director at his business or residence not later than three days before the
day on which such meeting is to be held or shall be sent to either of such
places by telegraph or facsimile or other electronic transmission, or be
communicated to each director personally or by telephone, not later than the day
before such day of meeting.  Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting, except for amendments to these Amended
and Restated Bylaws as provided pursuant to Section 8.01 hereof.  A meeting may
be held at any time without notice if all the directors are present (except as
otherwise provided by law) or if those present waive notice of the meeting in
accordance with Section 6.04 hereof, either before or after such meeting.

     SECTION 3.06.  Action Without Meeting.  Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if a written consent thereto is signed by all members
of the Board or of such committee, as the case may be, and such written consent
is filed with the records of the proceedings of the Board or such committee.

     SECTION 3.07.  Conference Telephone Meetings.  Members of the Board of
Directors, or any committee thereof, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.

     SECTION 3.08.  Quorum.  At all meetings of the Board of Directors, a
majority of the entire Board of Directors (as defined in Section 3.09(a)) shall
constitute a quorum for the transaction of business.  At all meetings of the
committees of the Board of Directors, the presence of 50% or more of the total
number of members (assuming no vacancies) shall constitute a quorum.  The act of
the directors or committee members present at any meeting at which there is a
quorum shall be the act of the Board of Directors or such committee, as the case
may be, except as otherwise provided in the Delaware General Corporation Law,
the Amended and Restated Certificate of Incorporation or these Amended and
Restated Bylaws.  If a quorum shall not be present at any meeting of the Board
of Directors or any committee, a majority of the directors or members, as the
case may be, present thereat may adjourn the meeting from time to time without
further notice other than announcement at the meeting.  If permitted by
applicable law, the directors or members, as the case may be, present at a duly
authorized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.

     SECTION 3.09.  Committees.  (a)  The Corporation shall have four standing
committees:  the executive committee, the nominating and directors committee,
the audit committee and the compensation committee.  The executive committee
shall have those 

                                       7

 
powers and authority as are delegated to it from time to time pursuant to a
resolution passed by a three-quarters vote of the total number of directors
specified in the resolution pursuant to Section 3.02 of these Amended and
Restated Bylaws which the Corporation would have if there were no vacancies (the
"entire Board of Directors").

     (b)  The nominating and directors committee shall have the following powers
and authority:  (i) evaluating and recommending director candidates to the Board
of Directors, (ii) assessing Board of Directors performance not less frequently
than every three years, (iii) recommending director compensation and benefits
philosophy for the Corporation, (iv) reviewing individual director performance
as issues arise, (v) periodically reviewing the Corporation's corporate
governance profile, and (vi) such additional powers and authority as the Board
of Directors may from time to time determine.  None of the members of the
nominating and directors committee shall be a member of the executive committee
or an officer or full-time employee of the Corporation or of any subsidiary or
affiliate of the Corporation.

     (c)  The audit committee shall have the following powers and authority:
(i) to recommend to the Board of Directors the appointment of independent public
accountants to audit the financial statements of the Corporation and to perform
such other duties from time to time as the audit committee may prescribe, (ii)
to receive the reports and comments of the Corporation's internal auditors and
of the independent public accountants, including reports on the adequacy of
internal controls, and to take such action with respect thereto as may seem
appropriate, (iii) to review the accounting principles employed in financial
reporting and (iv) to exercise such additional powers and authority as the Board
of Directors may from time to time determine.  None of the members of the audit
committee shall be a member of the executive committee or an officer or full-
time employee of the Corporation or of any subsidiary or affiliate of the
Corporation.

     (d)  The compensation committee shall have the following powers and
authority:  (i) determining and fixing the compensation for all senior officers
of the Corporation and those of its Subsidiaries (as defined in Section 6.07(f))
that the compensation committee shall from time to time consider appropriate, as
well as all employees of the Corporation and its Subsidiaries compensated at a
rate in excess of such amount per annum as may be fixed or determined from time
to time by the Board of Directors, (ii) performing the duties of the committees
of the Board of Directors provided for in any present or future stock option,
incentive compensation or employee benefit plan of the Corporation or, if the
compensation committee shall so determine, any such plan of any Subsidiary,
(iii) reviewing the operations of and policies pertaining to any present or
future stock option, incentive compensation or employee benefit plan of the
Corporation or any Subsidiary that the compensation committee shall from time to
time consider appropriate, and (iv) such additional powers and authority as the
Board of Directors may from time to time determine.  None of the members of the
compensation committee shall be a member of the executive committee or an
officer or full-time employee of the Corporation or of any subsidiary or
affiliate of the Corporation.

                                       8

 
     (e)  In addition, the Board of Directors may, by resolution passed by a
three-quarters vote of the entire Board of Directors, designate one or more
additional committees, with each such committee consisting of one or more
directors of the Corporation and having such powers and authority as the Board
of Directors shall designate by such resolutions.

     (f)  Any modification to the powers and authority of any committee shall
require the adoption of a resolution by a three-quarters vote of the entire
Board of Directors.

     (g)  All acts done by any committee within the scope of its powers and
authority pursuant to these Amended and Restated Bylaws and the resolutions
adopted by the Board of Directors in accordance with the terms hereof shall be
deemed to be, and may be certified as being, done or conferred under authority
of the Board of Directors.  The Secretary or any Assistant Secretary is
empowered to certify that any resolution duly adopted by any such committee is
binding upon the Corporation and to execute and deliver such certifications from
time to time as may be necessary or proper to the conduct of the business of the
Corporation.

     (h)  Regular meetings of committees shall be held at such times as may be
determined by resolution of the Board of Directors or the committee in question
and no notice shall be required for any regular meeting other than such
resolution.  A special meeting of any committee shall be called by resolution of
the Board of Directors, or by the Secretary or an Assistant Secretary upon the
request of the chairman or a majority of the members of any committee.  Notice
of special meetings shall be given to each member of the committee in the same
manner as that provided for in Section 3.05 of these Amended and Restated
Bylaws.

     SECTION 3.10.  Committee Members.  (a)  Each member of any committee of the
Board of Directors shall hold office until such member's successor is elected
and has qualified, unless such member sooner dies, resigns or is removed.  The
number of directors which shall constitute any committee shall be determined by
resolution adopted by a three-quarters vote of the entire Board of Directors.

     (b)  The Board of Directors may remove a director from a committee or
change the chairmanship of a committee only by resolution adopted by a three-
quarters vote of the entire Board of Directors.

     (c)  The Board of Directors may designate one or more directors as
alternate members of any committee to fill any vacancy on a committee and to
fill a vacant chairmanship of a committee, occurring as a result of a member or
chairman leaving the committee, whether through death, resignation, removal or
otherwise; provided, that any such designation may only be amended by a three-
quarters vote of the entire Board of Directors.

                                       9

 
     SECTION 3.11.  Committee Secretary.  The Board of Directors may elect a
secretary of any such committee.  If the Board of Directors does not elect such
a secretary, the committee shall do so.  The secretary of any committee need not
be a member of the committee, but shall be selected from a member of the staff
of the office of the Secretary of the Corporation, unless otherwise provided by
the Board of Directors or the committee, as applicable.

     SECTION 3.12.  Certain Modifications.  Except as otherwise provided in the
Amended and Restated Certificate of Incorporation, any action by the Board of
Directors to change the number of directors comprising the Board or comprising
any class of directors to other than an even number of directors shall require a
three-quarters vote of the entire Board of Directors.

     SECTION 3.13.  Compensation.  The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid
compensation as director  or chairman of any committee and for attendance at
each meeting of the Board of Directors.  Members of special or standing
committees may be allowed like compensation and payment of expenses for
attending committee meetings.



                                   ARTICLE 4
                                   OFFICERS
                                        

     SECTION 4.01.  General.  The officers of the Corporation shall be elected
by the Board of Directors and shall consist of: a Chairman of the Board and
Chief Executive Officer; a President and Chief Operating Officer; a Chief
Financial Officer; a Chief Strategic and Administrative Officer; a Chief Legal
Officer; one or more Senior Executive Vice Presidents; one or more Executive
Vice Presidents; one or more Senior Vice Presidents; one or more First Vice
Presidents; one or more Vice Presidents; a Secretary; one or more Assistant
Secretaries; a Treasurer; one or more Assistant Treasurers; a Controller; and
such other officers as in the judgment of the Board of Directors may be
necessary or desirable.  All officers chosen by the Board of Directors shall
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article 4. Such officers shall also
have powers and duties as from time to time may be conferred by the Board of
Directors or any committee thereof.  Any number of offices may be held by the
same person, unless otherwise prohibited by law, the Amended and Restated
Certificate of Incorporation or these Amended and Restated Bylaws.  The officers
of the Corporation need not be stockholders or directors of the Corporation.

     SECTION 4.02.  Election and Term of Office.  Subject to Section 4.08 of
these Amended and Restated Bylaws, the elected officers of the Corporation shall
be elected annually by the Board of Directors at the regular meeting of the
Board of Directors held after each annual meeting of the stockholders.  If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient.  Subject to 

                                       10

 
Section 4.08 of these Amended and Restated Bylaws, each officer shall hold
office until his successor shall have been duly elected and shall have qualified
or until his death or until he shall resign or be removed.

     SECTION 4.03.  Chairman of the Board and Chief Executive Officer.  The
Chairman of the Board shall be a member of the Board of Directors and shall be
an officer of the Corporation.  The Chairman of the Board shall be the Chief
Executive Officer of the Corporation and shall supervise, coordinate and manage
the Corporation's business and activities and supervise, coordinate and manage
its operating expenses and capital allocation, shall have general authority to
exercise all the powers necessary for the Chief Executive Officer of the
Corporation and shall perform such other duties and have such other powers as
may be prescribed by the Board of Directors or these Amended and Restated
Bylaws, all in accordance with basic policies as established by and subject to
the oversight of the Board of Directors.  The Chairman of the Board, if present,
shall preside at all meetings of the Board of Directors.

     SECTION 4.04.  President and Chief Operating Officer.  The President and
Chief Operating Officer shall be a member of the Board of Directors and an
officer of the Corporation.  The President and Chief Operating Officer shall
supervise, coordinate and manage the Corporation's business and activities and
supervise, coordinate and manage its operating expenses and capital allocation,
shall have general authority to exercise all the powers necessary for the
President and Chief Operating Officer of the Corporation and shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors and the Chairman and Chief Executive Officer.  In the absence or
disability of  the Chairman of the Board and Chief Executive Officer, the duties
of the Chairman of the Board shall be performed and the Chairman of the Board's
authority may be exercised by the President and Chief Operating Officer, and in
the event the President and Chief Operating Officer is absent or disabled, such
duties shall be performed and such authority may be exercised by a director
designated for this purpose by the Board of Directors.

     SECTION 4.05.  Chief Financial Officer.  The Chief Financial Officer shall
have responsibility for the financial affairs of the Corporation and shall
exercise supervisory responsibility for the performance of the duties of the
Treasurer and the Controller.  The Chief Financial Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.

     SECTION 4.06.  Chief Strategic and Administrative Officer.  The Chief
Strategic and Administrative Officer shall have the responsibility for the
business strategy and strategic planning for the Corporation and shall have the
responsibility for making recommendations regarding the capital allocation of
the Corporation.  The Chief Strategic 

                                       11

 
and Administrative Officer shall perform such other duties and have such other
powers as may be prescribed by the Board of Directors or these Amended and
Restated Bylaws, all in accordance with basic policies as established by and
subject to the oversight of the Board of Directors, the Chairman and Chief
Executive Officer and the President and Chief Operating Officer.

     SECTION 4.07.  Chief Legal Officer.  The Chief Legal Officer shall have
responsibility for the legal affairs of the Corporation and for the performance
of the duties of the Secretary.  The Chief Legal Officer shall perform such
other duties and have such other powers as may be prescribed by the Board of
Directors or these Amended and Restated Bylaws, all in accordance with basic
policies as established by and subject to the oversight of the Board of
Directors, the Chairman and Chief Executive Officer and the President and Chief
Operating Officer.

     SECTION 4.08.  Certain Actions.  Notwithstanding anything to the contrary
contained in these Amended and Restated Bylaws, the removal of the current
Chairman and Chief Executive Officer or the current President and Chief
Operating Officer as of May 31, 1997, or any modification to either of their
respective roles, duties or authority shall require a three-quarters vote of the
entire Board of Directors.

     SECTION 4.09.  Vacancies.  A newly created office and a vacancy in any
office because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the terms at any meeting of the Board of
Directors.



                                   ARTICLE 5
                       STOCK CERTIFICATES AND TRANSFERS
                                        

     SECTION 5.01.  Stock Certificates and Transfers.  (a)  The interest of each
stockholder of the Corporation shall be evidenced by certificates for shares of
stock in such form as the appropriate officers of the Corporation may from time
to time prescribe; provided that the Board of Directors may provide by
resolution or resolutions that all or some of all classes or series of the stock
of the Corporation shall be represented by uncertificated shares.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and upon request every holder
of uncertificated shares shall be entitled to have a certificate signed by, or
in the name of the Corporation by the Chairman of the Board of Directors, or the
President or any other authorized officer and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation
representing the number of shares registered in certificate form.  Except as
otherwise expressly provided by law, the rights and obligations of the holders
of uncertificated stock and the rights and obligations of the holders of
certificates representing stock of the same class and series shall be identical.

     (b)  The certificates of stock shall be signed, countersigned and
registered in such manner as the Board of Directors may by resolution prescribe,
which resolution may 

                                       12

 
permit all or any of the signatures on such certificates to be in facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.

     (c)  The shares of the stock of the Corporation represented by certificates
shall be transferred on the books of the Corporation by the holder thereof in
person or by his attorney, upon surrender for cancelation of certificates for
the same number of shares, with an assignment and power of transfer endorsed
thereon or attached thereto, duly executed, with such proof of the authenticity
of the signature as the Corporation or its agents may reasonably require.  Upon
receipt of proper transfer instructions from the registered owner of
uncertificated shares such uncertificated shares shall be canceled and issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the Corporation.  Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to the Delaware General Corporation Law or, unless
otherwise provided by the Delaware General Corporation Law, a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.

     SECTION 5.02.  Lost, Stolen or Destroyed Certificates.  No certificate for
shares or uncertificated shares of stock in the Corporation shall be issued in
place of any certificate alleged to have been lost, destroyed or stolen, except
on production of such evidence of such loss, destruction or theft and on
delivery to the Corporation of a bond of indemnity in such amount, upon such
terms and secured by such surety, as the Board of Directors or its designee may
in its or his discretion require.



                                   ARTICLE 6
                           MISCELLANEOUS PROVISIONS
                                        

     SECTION 6.01.  Fiscal Year.  The fiscal year of the Corporation shall be as
specified by the Board of Directors.

     SECTION 6.02.  Dividends.  The Board of Directors may from time to time
declare, and the Corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its Amended and
Restated Certificate of Incorporation.

                                       13

 
     SECTION 6.03.  Seal.  The corporate seal shall have thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.

     SECTION 6.04.  Waiver of Notice.  Whenever any notice is required to be
given to any stockholder or director of the Corporation under the provisions of
the General Corporation Law of the State of Delaware, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice.  Neither the business to be transacted at, nor the purpose of, any
annual or special meeting of the stockholders or any meeting of the Board of
Directors or committee thereof need be specified in any waiver of notice of such
meeting.

     SECTION 6.05.  Audits.  The accounts, books and records of the Corporation
shall be audited upon the conclusion of each fiscal year by an independent
certified public accountant selected by the audit committee, and it shall be the
duty of the audit committee to cause such audit to be made annually.

     SECTION 6.06.  Resignations.  Any director or any officer, whether elected
or appointed, may resign at any time upon notice of such resignation to the
Corporation.

     SECTION 6.07.  Indemnification and Insurance.

     (a)  Each person who was or is made a party or is threatened to be made a
party to or is involved in any manner in any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
or a person of whom he or she is the legal representative is or was a director
or officer of the Corporation or a director or elected officer of a Subsidiary,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted from time to time by the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended (but, if permitted by
applicable law, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment) or any
other applicable laws as presently or hereafter in effect, and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided however, that the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by this Bylaw.  The
Corporation shall pay the expenses incurred by such person in defending any such
proceeding in advance of its final disposition upon receipt (unless the
Corporation upon authorization of the Board of Directors waives such requirement
to the extent permitted by applicable law) of an undertaking by or on behalf of
such person to repay such amount if it shall ultimately be 

                                       14

 
determined that such person is not entitled to be indemnified by the Corporation
as authorized in this Bylaw or otherwise.

     (b)  The indemnification and the advancement of expenses incurred in
defending a proceeding prior to its final disposition provided by, or granted
pursuant to this Bylaw shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the Amended
and Restated Certificate of Incorporation, other provision of these Amended and
Restated Bylaws, agreement, vote of stockholders or Disinterested Directors or
otherwise.  No repeal, modification or amendment of, or adoption of any
provision inconsistent with, this Section 6.07, nor to the fullest extent
permitted by applicable law, any modification of law, shall adversely affect any
right or protection of any person granted pursuant hereto existing at, or with
respect to any events that occurred prior to, the time of such repeal,
amendment, adoption or modification.

     (c)  The Corporation may maintain insurance, at its expense, to protect
itself and any person who is or was a director, officer, partner, member,
employee or agent of the Corporation or a Subsidiary or of another corporation,
partnership, limited liability company, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the General Corporation Law of the State of Delaware.

     (d)  The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and rights to be paid by
the Corporation the expenses incurred in defending any proceeding in advance of
its final disposition, to any person who is or was an employee or agent (other
than a director or officer) of the Corporation or a Subsidiary and to any person
who is or was serving at the request of the Corporation or a Subsidiary as a
director, officer, partner, member, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust or other
enterprise, including service with respect to employee benefit plans maintained
or sponsored by the Corporation or a Subsidiary, to the fullest extent of the
provisions of this Bylaw with respect to the indemnification and advancement of
expenses of directors and officers of the Corporation.

     (e)  If any provision or provisions of this Bylaw shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the validity,
the legality and enforceability of the remaining provisions of this Bylaw
(including, without limitation, each portion of any paragraph or clause of this
Bylaw containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (2) to the fullest
extent possible, the provisions of this Bylaw (including, without limitation,
each such portion of any paragraph of this Bylaw containing any such provision
held to be invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.

                                       15

 
     (f)  For purposes of these Amended and Restated Bylaws:

     (1)  "Disinterested Director" means a director of the Corporation who is
not and was not a party to the proceeding or matter in respect of which
indemnification is sought by the claimant.

     (2)  "Subsidiary" means a corporation, a majority of the capital stock of
which is owned directly or indirectly by the Corporation, other than directors'
qualifying shares.

     (g)  Any notice, request, or other communication required or permitted to
be given to the Corporation under this Bylaw shall be in writing and either
delivered in person or sent by telecopy, telex, telegram, overnight mail or
courier service, or certified or registered mail, postage prepaid, return
receipt requested, to the Secretary of the Corporation and shall be effective
only upon receipt by the Secretary.



                                   ARTICLE 7
                           CONTRACTS, PROXIES, ETC.
                                        

     SECTION 7.01.  Contracts.  Except as otherwise required by law, the Amended
and Restated Certificate of Incorporation or these Amended and Restated Bylaws,
any contracts or other instruments may be executed and delivered in the name and
on the behalf of the Corporation by such officer or officers of the Corporation
as the Board of Directors may from time to time direct.  Such authority may be
general or confined to specific instances as the Board may determine.  Subject
to the control and direction of the Board of Directors, the Chairman of the
Board, the President, the Chief Financial Officer, the Chief Strategic and
Administrative Officer, the Chief Legal Officer and the Treasurer may enter
into, execute, deliver and amend bonds, promissory notes, contracts, agreements,
deeds, leases, guarantees, loans, commitments, obligations, liabilities and
other instruments to be made or executed for or on behalf of the Corporation.
Subject to any restrictions imposed by the Board of Directors, such officers of
the Corporation may delegate such powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise of
such delegated power.

     SECTION 7.02.  Proxies.  Unless otherwise provided by resolution adopted by
the Board of Directors, the Chairman of the Board or the President may from time
to time appoint an attorney or attorneys or agent or agents of the Corporation,
in the name and behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or entity, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation or entity, or to consent in writing, in the
name of the Corporation as such holder, to any action by such other corporation
or entity, and may instruct the person or persons so appointed as to the manner
of casting such vote or giving such consent, and may execute or cause to be
executed in the name 

                                       16

 
and on behalf of the Corporation and under its corporate seal or otherwise, all
such written proxies or other instruments as he may deem necessary or proper in
the premises.



                                   ARTICLE 8
                                  AMENDMENTS
                                        

     SECTION 8.01.  Amendments.  These Amended and Restated Bylaws may be
altered, amended or repealed, in whole or in part, or new Amended and Restated
Bylaws may be adopted by the stockholders or by the Board of Directors at any
meeting thereof; provided however, that notice of such alteration, amendment,
repeal or adoption of new Amended and Restated Bylaws is contained in the notice
of such meeting of stockholders or in the notice of such meeting of the Board of
Directors and, in the latter case, such notice is given not less than twenty-
four hours prior to the meeting.  Unless a higher percentage is required by the
Amended and Restated Certificate of Incorporation as to any matter which is the
subject of these Amended and Restated Bylaws, all such amendments must be
approved by either the holders of eighty percent (80%) of the Voting Stock or by
a majority of the Board of Directors; provided further, notwithstanding the
foregoing, the Board of Directors may alter, amend or repeal, or adopt new
Amended and Restated Bylaws in conflict with, (i) any provision of these Amended
and Restated Bylaws which requires a three-quarters vote of the entire Board of
Directors for action to be taken thereunder, (ii) subsection (c) of Section 3.10
of these Amended and Restated Bylaws and (iii) this proviso to this Section 8.01
of these Amended and Restated Bylaws only by a resolution adopted by a three-
quarters vote of the entire board of Directors until December 31, 2000; provided
further, that, notwithstanding the foregoing, the Board of Directors may alter,
amend or repeal, or adopt new Amended and Restated Bylaws in conflict with, (i)
Section 4.08 of these Amended and Restated Bylaws and (ii) this further proviso
to this Section 8.01 of these Amended and Restated Bylaws only by a resolution
adopted by a three-quarters vote of the entire Board of Directors.

                                       17

EX-10.11

 
                                                                   EXHIBIT 10.11
                                             
                       Extract from Resolutions Approved
          by the Compensation Committee of the Board of Directors of
                           Dean Witter Reynolds Inc.
                             on December 10, 1997
         
            RESOLVED, that effective as of January 1, 1997, Section 4(b)(i)(3)
   of the Dean Witter START Plan shall be and hereby is amended by striking the
   first sentence and replacing it with a new sentence reading as follows:
   
                      (3) For Plan Years beginning on or after December 31,
             1992, the amount required to be allocated under this section shall
             be an amount equal to at least 24.9% but not more than 116.2% of
             the first $2,000, and at least 9.9% but not more than 46.2% of the
             remaining amount, of Basic Pre-Tax Contributions for each Plan Year
             made by the Participant, said percentages to be determined relative
             to the amount of Pre-tax Income for the fiscal year ending within
             the Plan Year of the Business Segment in which the Participant was
             an Employee on the last day of the Plan Year or on such
             Participant' s last day of employment immediately preceding the
             Participant's death, Total and Permanent Disability, Retirement or
             Release.
             

            RESOLVED, that effective as of January 1, 1998, Section 11(c) of
   the Dean Witter START Plan shall be and hereby is amended by adding a new
   sentence between the first sentence and the second sentence of such Section
   to read as follows:
   
             With respect to Participants whose employment terminates on or
             after January 1, 1998 if a Participant whose vested Accounts
             exceed the amount described in Section 411(a)(11) of the Code on
             the date the Participant terminates employment does not consent to
             the distribution of the Participant's Plan Benefit under Section 11
             (b), then payment of the Participant's Plan Benefit shall, subject
             to Section 13(a), be deferred to such date as the Participant
             shall elect.
             

 
     RESOLVED, that effective as of January 1, 1998, the last sentence of
Section 5(a)(i) of the Dean Witter START Plan be and it hereby is amended to
read as follows:

     "A Participant who is making Basic Pre-Tax Contributions equal to 6% of
     Earnings may also elect to make Supplemental Pre-Tax Contributions to the
     Plan equal to any whole percentage from 1% to 6% of Earnings; provided,
     that the Plan Administrator may at any time and from time to time limit the
     amount of Supplemental Pre-Tax Contributions allowed to be made by Highly
     Compensated Employees or terminate the ability of Highly Compensated
     Employees to make Supplemental Pre-Tax Contributions under the Plan.
     
     FURTHER RESOLVED, that effective as of January 1, 1998, Section 5(b) of the
Dean Witter START Plan be and it here by is amended to read as follows:

    In order that the Plan may comply with the requirements of Sections 401 (k)
    and 415 of the Code and the regulations thereunder, at any time during the
    Plan Year the Plan Administrator (at its sole discretion) may reduce the
    rate at which any Participant who is a Highly Compensated Employee may
    contribute Basic Pre-Tax Contributions and/or Supplemental Pre-Tax
    Contributions, or discontinue all such contributions, for the remainder of
    such Plan Year. Such a reduction or discontinuance may be applied
    selectively to individual Participants or to particular classes of
    Participants, as the Plan Administrator may determine. Any Participant whose
    Basic Pre-Tax Contributions and/or Supplemental Pre-Tax Contributions are
    reduced or discontinued under this Section 5(b) shall make Basic Pre-Tax
    Adjustment Contributions to the Plan during the remainder of the Plan Year
    equal to the percentage of the Participant's Earnings that the Plan
    Administrator has determined cannot be made as Basic Pre-Tax Contributions
    and/or Supplemental Pre-Tax Contributions, whichever is applicable;
    provided, that in order that the Plan may comply with the requirements of
    Section 40l(m) of the Code and the regulations thereunder, at any time
    during the Plan Year the Plan Administrator (at its sole discretion) may
    reduce the rate at which a Participant may contribute Basic After-Tax
    Adjustment Contributions, or discontinue all such contributions, for the
    remainder of such Plan Year. Any reduction or discontinuance of Basic Pre-
    Tax, Supplemental Pre-Tax or Basic After-Tax Adjustment Contributions made
    pursuant to this Section 5(b) shall automatically cease to apply upon the
    close of the Plan Year in which it is made, or on such earlier date in such
    Plan Year as the Plan Administrator may determine.
    
    FURTHER RESOLVED, that pursuant to the authority granted to the Plan
Administrator in Section 5(a)(i) of the Dean Witter START Plan, effective as of
January 1, 1998, Highly Compensated Employees shall be allowed to make
Supplemental Pre-Tax

 
Contributions in an amount equal to 1% of Earnings, subject to all applicable 
limitations provided in the Plan; and

    FURTHER RESOLVED, that the Chairman of the Board and Chief Executive 
Officer, any Executive Vice President, any Senior Vice President or any other 
proper officer of the corporation be, and each of them hereby is, authorized to 
take any and all actions which they deem necessary or appropriate to carry out 
the purposes or intent of the foregoing resolutions and to make, execute and 
deliver, or cause to be made, executed and delivered, all agreements, 
undertakings, documents, instruments or certificates in the name and on behalf 
of the Corporation as they may deem necessary or desirable in connection 
therewith, to perform or cause to be performed, the obligations of the 
Corporation referred to herein.

EX-10.17

 
                                                                EXHIBIT 10.17


                       EXTRACT FROM RESOLUTIONS APPROVED
          BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                              ON OCTOBER 3, 1997


RESOLVED:

        1. Except as otherwise provided in paragraph 3 below, that the Tax 
Deferred Equity Participation Plan (the "Plan") be and hereby is amended to 
change all references to calendar years, months and quarters to fiscal years, 
months and quarters, respectively, including all corresponding and related 
changes; and

        2. That the definition in the Plan of the term "Calculation Date" be and
hereby is amended to be the last day of the Company's fiscal year; and

        3. That Section 2(r) of the Plan, setting forth the definition of the 
term "Minimum Eligible Compensation," be and hereby is amended and restated to 
read in its entirety as follows:

"(r) 'Minimum Eligible Compensation' means $100,000 with respect to the calendar
year ending December 31, 1997, and with respect to each fiscal year of the 
Company beginning on or after December 1, 1997, such amount as the Committee 
shall determine."

        FURTHER RESOLVED, that each of the officers of the Corporation be and 
hereby is authorized and directed in the name and on behalf of the Corporation 
and under its corporate seal or otherwise to prepare, execute and deliver,
file and record all instruments, documents or other papers and to do all such
other acts and things as they in their discretion may deem appropriate to carry
into the effect of the foregoing resolutions.

EX-10.19

 
                                                                   EXHIBIT 10.19

                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                  DIRECTORS' EQUITY CAPITAL ACCUMULATION PLAN
                   (as amended and restated October 3, 1997)

                                        
     SECTION 1. PURPOSE
                -------

     Morgan Stanley, Dean Witter, Discover & Co., a Delaware corporation (the
"Company"), hereby adopts the Morgan Stanley, Dean Witter, Discover & Co.
Directors' Equity Capital Accumulation Plan (the "Plan"). The purpose of the
Plan is to promote the long-term growth and financial success of the Company by
attracting, motivating and retaining non-employee directors of outstanding
ability and assisting the Company in promoting a greater identity of interest
between the Company's non-employee directors and its stockholders.

     SECTION 2. ELIGIBILITY
                -----------

     Only directors of the Company who are not employees of the Company or any
affiliate of the Company ("Eligible Directors") shall participate in the Plan.

     SECTION 3. PLAN OPERATION
                --------------

     (a) Administration.  Other than as provided in Section 5(i) of the Plan,
         --------------                                                      
the Plan requires no discretionary action by any administrative body with regard
to any transaction under the Plan.  To the extent, if any, that questions of
administration arise, these shall be resolved by the Board of Directors of the
Company.  The Board may, in its discretion, delegate to the Chief Financial
Officer or the Chief Legal Officer of the Company any or all authority and
responsibility to act pursuant to this Plan.  All references to the "Plan
Administrators" in this Plan shall refer to the Board, or the Chief Financial
Officer or Chief Legal Officer if the Board has delegated its authority pursuant
to this Section 3(a).  The determination of the Plan Administrators on all
matters within their authority relating to the Plan shall be conclusive.

     (b) No Liability.  The Plan Administrators shall not be liable for any
         ------------                                                      
action or determination made in good faith with respect to the Plan or any award
hereunder, and the Company shall indemnify and hold harmless the Plan
Administrators from all losses and expenses (including reasonable attorneys'
fees) arising from the assertion or judicial determination of any such
liability.

     SECTION 4. SHARES OF STOCK SUBJECT TO THE PLAN
                -----------------------------------

     (a) Stock.  Awards under the Plan shall relate to shares of common stock,
         -----                                                                
par value $.01 per share, of the Company and any other shares into which such
stock shall thereafter be changed by reason of any merger, reorganization,
recapitalization, consolidation, split-up, combination of shares or similar
event as set forth in and in accordance with this Section 4 (the "Stock").

     (b) Shares Available for Awards.  Subject to Section 4(c) (relating to
         ---------------------------                                       
adjustments upon changes in capitalization), as of any date, the total number of
shares of Stock

                                       1

 
with respect to which awards may be granted under the Plan shall be equal to the
excess (if any) of (i) 350,000 shares over (ii) the sum of (a) the number of
shares subject to outstanding awards granted under the Plan and (b) the number
of shares previously issued pursuant to the Plan.  In accordance with (and
without limitation upon) the preceding sentence, shares of Stock covered by
awards granted under the Plan that are forfeited or expire unexercised shall
again become available for awards under the Plan.  Shares of Stock that shall be
issuable pursuant to the awards granted under the Plan shall be authorized and
unissued shares, treasury shares or shares of Stock purchased by, or on behalf
of, the Company in open-market transactions.

     (c) Adjustments.  In the event of any merger, reorganization,
         -----------                                              
recapitalization, consolidation, sale or other distribution of substantially all
of the assets of the Company, any stock dividend, split, spin-off, split-up,
split-off, distribution of cash, securities or other property by the Company, or
other change in the Company's corporate structure affecting the Stock, then the
following shall be automatically adjusted in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be awarded under
the Plan:

             (i)   the aggregate number of shares of Stock reserved for issuance
under the Plan,

             (ii)  the number of shares of Stock subject to outstanding awards,

             (iii) the number of "Stock Units" credited pursuant to Section
7(b) of the Plan,

             (iv)  the per share purchase price of Stock subject to Elective
Options and Director Options,

             (v)   the number of shares to be granted as Director Stock pursuant
to Section 6(b), and

             (vi)  the number of shares with respect to which Director Options
are granted pursuant to Section 5(a).

     SECTION 5. DIRECTOR OPTIONS; ELECTION TO RECEIVE OPTIONS.
                --------------------------------------------- 

     (a) Awards.  Subject to the provisions of this Section 5, each Eligible
         ------                                                             
Director shall receive the following options to purchase Stock for service as a
director of the Company (the "Director Options"):

             (i)   Initial Awards.  If a person is elected, appointed or 
                   ---------------
otherwise becomes an Eligible Director, then such Eligible Director shall
receive a Director Option to purchase 4,000 shares of Stock on the first day of
the calendar month following the month in which such Eligible Director first
becomes an Eligible Director; provided, however, that if a person is elected,
appointed or otherwise becomes an Eligible Director during a period 60 days
prior to the Company's annual meeting of its stockholders (the "Annual Meeting")
in any year, then such Eligible Director shall receive no Director Option
pursuant to this Section 5(a)(i).

             (ii)  Subsequent Awards.  As of the date of each Annual Meeting, 
                   -----------------
each Eligible Director shall automatically receive a Director Option to purchase
4,000 shares of  Stock provided that such Eligible Director shall continue to
serve as a director of the Company after such Annual Meeting.

                                       2

 
     (b)  Election to Receive Options.  An Eligible Director may elect (an
          ---------------------------                                     
"Option Election") to receive options to purchase Stock ("Elective Options") in
lieu of all (but not a portion) of the amount of the Eligible Director's annual
cash retainer for services as a member of the Board (the "Retainer") by
submitting an Option Election Form (an "Option Election Form") to the Company's
Secretary indicating that the Eligible Director elects to receive Elective
Options in lieu of Retainer.  An Option Election shall become effective only
with respect to the Retainer earned after the date on which the Option Election
Form is received by the Secretary; provided, however, that to the extent
required by the then applicable Rule 16b-3: (i)  no Option Election shall take
effect until at least six (6) months after the Option Election Form is received
by the Secretary; and (ii) each Option Election, once made, shall be
irrevocable. Notwithstanding the foregoing, an Option Election may be superseded
with respect to future payments of Retainer by submitting a new Option Election
Form to the Secretary; provided, however, that to the extent required by the
then applicable Rule 16b-3, such new Option Election shall not take effect until
at least six months after such new Option Election Form has been received by the
Secretary.

     (c)  Award of Elective Option.  Upon receipt by the Company's Secretary of
          ------------------------                                             
an effective Option Election Form from an Eligible Director, such Eligible
Director shall receive Elective Options to acquire whole shares of Stock (but
not fractional shares) in lieu of the Retainer elected to be received in
Elective Options.  Each such Option shall be awarded on the date on which the
Eligible Director becomes entitled to the payment of the Retainer, or if such
date is not a business day, then on the next succeeding business day.  The
number of shares of Stock subject to each such Option shall be the number of
whole shares of Stock determined by multiplying (i) the number three (3) by (ii)
the quotient obtained by dividing the amount of the Retainer by the Fair Market
Value of a share of Stock on the award date, provided that (x) in no
circumstances shall the Eligible Director be entitled to receive, or the Company
have any obligation to issue to the Eligible Director, any Elective Option in
respect of any fractional share of Stock and (y) in lieu of any Elective Option
in respect of any fractional share of stock, such Eligible Director shall be
entitled to receive, and the Company shall be obligated to pay to such Eligible
Director, cash equal to the value of any fractional share of Stock.

     (d) Exercise Price.  The purchase price of Stock subject to a Director
         --------------                                                    
Option or an Elective Option shall be the Fair Market Value (as defined in
Section 9) of the Stock on the date such Option is granted, rounded up to the
nearest whole cent.

     (e) Nontransferability. No Director Option or Elective Option granted
         ------------------                                               
pursuant to this Plan shall be sold, assigned or otherwise transferred by an
Eligible Director other than by will or the laws of descent or distribution and
may be exercised during the Eligible Director's lifetime only by such Eligible
Director.

     (f) Limitation on Exercise.  Director Options and Elective Options may not
         -----------------------                                               
be exercised for a period of six (6) months from the date such Options are
granted.

                                       3

 
     (g) Effect of Termination.
         --------------------- 

             (i)   If an Eligible Director's service as a director of the
Corporation terminates for a reason other than for cause, then the Director
Options and the Elective Options granted to such Eligible Director shall remain
exercisable following the date of such Eligible Director's termination of
service in accordance with the following provisions:

                   (A) Disability. If service terminates by reason of 
                       ----------
Disability (as hereinafter defined), until the earlier of three years after the
termination date and the expiration date of the Option; provided, however, that
upon the death of such Eligible Director, all outstanding Director Options and
Elective Options held by such Eligible Director shall remain exercisable until
the earlier of three years following such Eligible Director's death or the
expiration date of the Options. With respect to any Eligible Director,
"Disability" shall mean a "permanent and total disability" as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended.

                   (B) Normal Retirement.  If service terminates by reason of 
                       -----------------
Normal Retirement (as hereinafter defined), until the earlier of three years
following such termination by reason of Normal Retirement and the expiration
date of the Options; provided, however, that upon the death of such Eligible
Director, all outstanding Director Options and Elective Options held by such
Eligible Director shall remain exercisable until the earlier of three years
following such Eligible Director's death or the expiration date of the Options.
With respect to any Eligible Director, "Normal Retirement" shall mean the
termination of service for retirement at or after attaining age 65.

                   (C) Death While in Office.  If an Eligible Director dies 
                       ---------------------
while in office, all Director Options and Elective Options granted to the
Eligible Director before death shall be exercisable by the personal
representative of the Eligible Director's estate or by the person to whom such
Options pass under the Eligible Director's will (or, if applicable, pursuant to
the laws of descent or distribution) until the earlier of three years after the
Eligible Director's death or the expiration date of the Options.

                   (D) Other. If service terminates for any other reason 
                       -----
(except for Cause (as defined below)), until the earlier of ninety days after
the termination date and the expiration date of the Option.

             (ii)  If an Eligible Director is terminated for Cause, all Director
Options and Elective Options granted to such Eligible Director shall be
forfeited and shall no longer be exercisable, effective on the date of such
Eligible Director's Termination for Cause. For purposes of this Plan,
"Termination for Cause" means, with respect to any Eligible Director,
termination on account of any act of (A) fraud or intentional misrepresentation,
or (B) embezzlement, misappropriation or conversion of assets or opportunities
of the Company or any affiliate.

     (h) Expiration Date of Options.  All Director Options and Elective Options
         --------------------------                                            
shall expire on the tenth anniversary of the date on which they are granted.

                                       4

 
     (i) Notwithstanding any other provision hereof, the Board of Directors of
the Company shall have the authority, in its discretion, to amend any
outstanding Director Option or Elective Option granted pursuant to this Plan to
extend the exercisability thereof, provided, however, that no such amendment
shall cause such Option to remain exercisable beyond the original expiration
date of such Option.

     SECTION 6. DIRECTOR STOCK
                --------------

     (a) Awards.  Each Eligible Director shall receive the following shares of
         -------                                                              
Stock for service as a director of the Company (the "Director Stock"):

             (i)   Initial Awards. If a person is elected, appointed or 
                   --------------
otherwise becomes an Eligible Director, then such Eligible Director shall
receive 600 shares of Director Stock on the first day of the calendar month
following the month in which such Eligible Director becomes an Eligible
Director; provided, however, that if a person is elected, appointed or otherwise
becomes an Eligible Director during a period of 60 days prior to the Annual
Meeting in any year, then such Eligible Director shall receive no Director Stock
pursuant to this Section 6(a)(i).

             (ii)  Subsequent Awards. As of the date of each Annual Meeting, 
                   -----------------
each Eligible Director shall automatically receive 600 shares of Director Stock,
provided that such Eligible Director shall continue to serve as a director of
the Company after such Annual Meeting.

     (b) Limitation on Transfer.  Director Stock may not be sold, transferred,
         -----------------------                                              
pledged, assigned  or otherwise conveyed by an Eligible Director for a period of
six (6) months from the date such Stock is awarded.

     (c) Deferral of Awards.  An Eligible Director may elect to defer the
         -------------------                                             
receipt of all or a portion of the Director Stock by making an election pursuant
to Section 7(a), in which case there shall be credited to the Eligible
Director's Stock Unit Account (as defined in Section 7(b)) a number of units
equal to the number of shares of Director Stock being deferred.

     SECTION 7. ELECTIVE DEFERRALS
                ------------------

     (a) Election. Each Eligible Director may elect to defer (a "Deferral
         --------                                                        
Election") all or part of: (i) the Retainer;  (ii) the fees payable for meetings
of the Board or any committee thereof ("Meeting Fees"); or (iii) shares of
Director Stock. An Eligible Director may make a Deferral Election by submitting
a Deferral Election Form (a "Deferral Election Form") to the Secretary of the
Company, indicating: (i) the percentage of the Retainer, Meeting Fees and
Director Stock to be deferred (the "Deferred Amount"); (ii) the date on which
distribution of Deferred Amounts should begin the ("Distribution Date"); (iii)
whether distributions are to be made in a lump sum, installments or a
combination thereof; (iv) the percentage of deferred Retainer and Meeting Fees
to be credited to the Stock Unit Account (as hereinafter defined) and the Cash
Account (as hereinafter defined); and (v) from which Account each distribution
is to be made. A Deferral Election shall be effective only with respect to the
Retainer, Meeting Fees and 

                                       5

 
Director Stock which are earned after the Deferral Election is made; provided,
however, that to the extent required by the then applicable Rule 16b-3: (i) no
Deferral Election shall take effect until a date at least six months after the
Deferral Election Form is received by the Secretary and (ii) all Deferral
Elections, once made, shall be irrevocable. Notwithstanding the foregoing, a
Deferral Election may be superseded with respect to future payments of Retainer
and Meeting Fees and grants of Director Stock by submitting a new Deferral
Election Form to the Secretary; provided, however, that to the extent required
by the then applicable Rule 16b-3: (i) no revocation shall be effective to make
any change with respect to Deferred Amounts previously deferred; (ii) no change
in Deferred Amount shall take effect until a date at least six months after such
new Deferral Election Form has been received by the Secretary; (iii) any such
Deferral Election shall be irrevocable; and (iv) any change in a beneficiary
(described in the next sentence) shall become effective immediately upon receipt
by the Secretary. An Eligible Director may designate, in any Deferral Election
Form, one or more beneficiaries to receive any distributions under the Plan upon
the Eligible Director's death, and may change such designation at any time by
submitting a new Deferral Election Form to the Secretary.

     (b)  Stock Unit Deferral.  An Eligible Director may elect to have all or
          -------------------                                                
part of the Deferred Amount credited to an account (a "Stock Unit Account") in
units which are equivalent in value to shares of Stock ("Stock Units"), except
that an Eligible Director who defers the receipt of Director Stock shall have
credited to the Stock Unit Account a number of  Stock Units equal to the number
of shares of Director Stock being deferred. The Deferred Amount allocated to the
Stock Unit Account shall be credited to the Stock Unit Account as of the date on
which the Eligible Director becomes entitled to payment or receipt of the
Deferred Amount. The number of Stock Units credited to the Stock Unit Account on
account of deferred Retainer and Meeting Fees shall be an amount equal to the
result obtained by dividing (i) such Deferred Amount by (ii) the Fair Market
Value of a share of Stock on the date on which the Eligible Director becomes
entitled to payment of such Deferred Amount (or if such date is not a business
day, then on the next succeeding business day). If Stock Units exist in an
Eligible Director's Stock Unit Account on a dividend record date for the
Company's Stock, the Stock Unit Account shall be credited, on the dividend
payment date related to such dividend record date, with an additional number of
Stock Units equal to (i) the cash dividend paid on one share of Stock,
multiplied by (ii) the number of Stock Units in the Stock Unit Account on the
dividend record date, divided by (iii) the Fair Market Value of a share of Stock
on the dividend payment date.


     (c) Cash Deferral.  An Eligible Director may elect to have all or part of
         -------------                                                        
the Deferred Amount derived from Retainer or Meeting Fees credited to a cash
account (a "Cash Account").  The Deferred Amount allocated to the Cash Account
shall be credited thereto on the date on which the Eligible Director becomes
entitled to payment of such Deferred Amount.  As of the last day of each fiscal
quarter and the date of termination of the Eligible Director's service on the
Company's Board of Directors (the "Service Termination Date") the Eligible
Director's Cash Account will be credited with an additional amount equal to (i)
the "Rate of Interest", multiplied by (ii) the Average Daily Cash Balance,
multiplied by (iii) the number of days during which such Cash Account had a
positive balance, divided by (iv) 365.  The "Rate of Interest" shall equal the
time weighted average interest rate paid by the Company for such quarter, or
shorter period ending on the Service Termination Date, to institutions from
which it borrows funds.  The "Average Daily Cash Balance" shall equal the sum of
the daily balances for such 

                                       6

 
Cash Account for such quarter or shorter period, divided by the number of days
on which a positive balance existed in such Cash Account.

     (d) Distributions.
         ------------- 

             (i)   Distribution Date.  Each Eligible Director shall designate 
                   -----------------
on the Deferral Election Form one of the following dates as a Distribution Date
with respect to amounts credited to the Stock Unit Account or Cash Account
thereafter: (A) the first day of the calendar month following the date of the
Eligible Director's death; (B) the first day of the calendar month following the
Service Termination Date; (C) the first day of a calendar month specified by the
Eligible Director, provided that, to the extent necessary to adhere to the
requirements of Rule 16b-3 in effect from time to time under the Securities
Exchange Act of 1934 in effect from time to time (the "1934 Act"), such day is
at least six months after the date on which the Secretary receives the Deferral
Election Form; or (D) the earlier to occur of (A), (B) or (C). Unless a Deferral
Election Form designates a different Distribution Date for the Eligible
Director's Stock Unit Account than for the Eligible Director's Cash Account, the
Eligible Director shall be deemed to have selected the same Distribution Date
for each such Account.

             (ii)  Distribution Method.  An Eligible Director shall request on
                   -------------------
the Deferral Election Form that distributions which are subject to such Deferral
Election Form be made in (A) a lump sum, (B) no more than 120 monthly, 40
quarterly or 10 annual installments or (C) in part as provided in clause (A) and
in part as provided in clause (B). The amount to be distributed in any
installment pursuant to a specific Deferral Election Form shall be determined by
dividing the balance in the Cash Account or the number of Stock Units in the
Stock Unit Account, as the case may be, that are subject to such Deferral
Election Form by the number of remaining installments. If an Eligible Director
receives a distribution on an installment basis, undistributed Deferred Amounts
shall remain subject to the provisions of Section 7.

             (iii) Form of Distributions.  All distributions from the Cash 
                   ---------------------
Account shall be paid in cash. Distributions made from the Stock Unit Account
shall be in the form of a certificate for a number of whole shares of Stock
equal to the number of whole Stock Units to be distributed and cash in lieu of
any fractional share (determined by using the Fair Market Value of a share of
Stock on the date on which such distributions are distributed, but if such date
is not a business day, then on the next preceding business day).

     SECTION 8. ELECTION TO RECEIVE STOCK.
                --------------------------

     (a) Election. An Eligible Director may elect (a "Stock Election") to
         --------                                                        
receive all or a portion of the Eligible Director's Retainer and Meeting Fees in
shares of Stock by submitting a Stock Election Form (a "Stock Election Form") to
the Company's Secretary indicating the percentage of the Retainer and the
percentage of Meeting Fees to be paid in Stock.  A Stock Election shall become
effective with respect to the Retainer and Meeting Fees, respectively, accruing
on and after the first day of the fiscal quarter and fiscal month, respectively,
following the date on which the Stock Election Form is received by the
Secretary; provided, however, that to the extent required by the then applicable
Rule 16b-3:  (i) no Stock Election shall take effect until at least six months
after the Stock Election Form is received by the Secretary; and (ii) each Stock
Election, once made, shall be irrevocable.  Notwithstanding 

                                       7

 
the foregoing, a Stock Election may be superseded with respect to future
payments of Retainer and Meeting Fees by submitting a new Stock Election Form to
the Secretary; provided, however, that to the extent required by the then
applicable Rule 16b-3, such new Stock Election shall not take effect until at
least six months after such new Stock Election Form has been received by the
Secretary.

     (b) Payment in Stock. Upon receipt by the Company's Secretary of an
         -----------------                                              
effective Stock Election Form from an Eligible Director, such Eligible Director
shall thereafter receive whole shares of Stock (but not fractional shares) in
lieu of Retainer and Meeting Fees elected to be received in Stock (the "Stock
Amounts"). The number of shares of Stock to be received by an Eligible Director
with respect to any Stock Amount shall be the number of whole shares of Stock
determined by dividing the Stock Amount by the Fair Market Value of a share of
Stock on the date on which the Eligible Director becomes entitled to payment of
the Stock Amount (or if such date is not a business day, then on the next
succeeding business day), provided that (i) in no circumstances shall the
Eligible Director be entitled to receive, or the Company have any obligation to
issue to the Eligible Director, any fractional share of Stock and (ii) in lieu
of any fractional share of Stock, such Eligible Director shall be entitled to
receive, and the Company shall be obligated to pay to such Eligible Director,
cash equal to the value of any fractional share of Stock. A certificate
representing such whole shares of Stock shall be issued to such Eligible
Director promptly after such date, and such Eligible Director shall be deemed to
own such number of whole shares of Stock, including without limitation for
purposes of dividends and voting, as of such date.

     SECTION 9. FAIR MARKET VALUE
                -----------------

     "Fair Market Value" shall mean, with respect to each share of Stock for any
day:

     (a) if the Stock is listed for trading on the New York Stock Exchange, the
closing price, regular way, of the Stock as reported on the New York Stock
Exchange Composite Tape, rounded up to the nearest whole cent, or if no such
reported sale of the Stock shall have occurred on such date, on the next
preceding date on which there was such a reported sale, or

     (b) if the Stock is not so listed, but is listed on another national
securities exchange or authorized for quotation on the NASDAQ National Market
System ("NMS"), the closing price, regular way, of the Stock on such exchange or
NMS, rounded up to the nearest whole cent, as the case may be, on which the
largest number of shares of Stock have been traded in the aggregate on the
preceding twenty trading days, or, if no such reported sale of the Stock shall
have occurred on such date on such exchange or NMS, as the case may be, on the
next preceding date on which there was such a reported sale on such exchange or
NMS, as the case may be, or

     (c) if the Stock is not listed for trading on a national securities
exchange or authorized for quotation on NMS, the average of the closing bid and
asked prices as reported by the National Association of Securities Dealers
Automated Quotation System, rounded up to the nearest whole cent, or, if no such
prices shall have been so reported for such date, on the next preceding date for
which such prices were so reported.

                                       8

 
     SECTION 10. ISSUANCE OF CERTIFICATES
                 ------------------------

     (a)  Restrictions on Transferability.  All shares of Stock delivered under
          -------------------------------                                      
the Plan shall be subject to such stop-transfer orders and other restrictions as
the Company may deem advisable or legally necessary under any laws, statutes,
rules, regulations and other legal requirements, including, without limitation,
those of any stock exchange upon which the Stock is then listed and any
applicable federal, state or foreign securities law.

     (b) Compliance with Laws.  Anything to the contrary herein notwithstanding,
         --------------------                                                   
the Company shall not be required to issue any shares of Stock under the Plan
if, in the opinion of legal counsel to the Company, the issuance and delivery of
such shares would constitute a violation by the Eligible Director or the Company
of any applicable law or regulation of any governmental authority, including,
without limitation, federal and state securities laws, or the regulations of any
stock exchanges on which the Company's securities may then be listed.

     SECTION 11. WITHHOLDING TAXES
                 -----------------

     The Company shall require as a condition of delivery of any shares of Stock
that the Eligible Director remit an amount sufficient to satisfy all foreign,
federal, state, local and other governmental withholding tax requirements
relating thereto (if any) and any or all indebtedness or other obligation of the
Eligible Director to the Company or any of its subsidiaries.

     SECTION 12. PLAN AMENDMENTS AND TERMINATION
                 -------------------------------

     The Board of Directors of the Company may suspend or terminate the Plan at
any time and may amend it at any time and from time to time, in whole or in
part.

     SECTION 13. LISTING, REGISTRATION AND LEGAL COMPLIANCE
                 ------------------------------------------

     If the Plan Administrators shall at any time determine that any Consent (as
hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights hereunder or the taking of any other action
hereunder (each such action being hereinafter referred to as a "Plan Action"),
then such Plan Action shall not be taken, in whole or in part, unless and until
such Consent shall have been effected or obtained.   The term "Consent" as used
herein with respect to any Plan Action means (i) the listing, registrations or
qualifications in respect thereof upon any securities exchange or under any
foreign, federal, state or local law, rule or regulation, (ii) any and all
consents, clearances and approvals in respect of a Plan Action by any
governmental or other regulatory bodies, or  (iii) any and all written
agreements and representations by an Eligible Director with respect to the
disposition of Stock or with respect to any other matter, which the Plan
Administrators shall deem necessary or desirable in order to comply with the
terms of any such listing, registration or qualification or to obtain an
exemption from the requirement that any such listing, qualification or
registration be made.

                                       9

 
     SECTION 14. RIGHT OF DISCHARGE RESERVED
                 ---------------------------

     Nothing in the Plan shall confer upon any Eligible Director the right to
continue as a director of the Company or affect any right that the Company or
any Eligible Director may have to terminate the service of such Eligible
Director.

     SECTION 15. RIGHTS AS A STOCKHOLDER
                 -----------------------

     An Eligible Director shall not, by reason of any Director Option, Elective
Option, Stock Unit or Stock Amount, have any rights as a stockholder of the
Company until Stock has been delivered to such Eligible Director upon the
exercise of such Director Option or Elective Option or the distribution
regarding such Stock Unit or Stock Amount. An Eligible Director shall, with
respect to all shares of Director Stock, be entitled to all the rights
(including dividend and voting rights) of a stockholder of Stock.

     SECTION 16. UNFUNDED PLAN
                 -------------

     The Plan shall be unfunded and shall not create (or be construed to create)
a trust or a separate fund or funds.  The Plan shall not establish any fiduciary
relationship between the Company and any Eligible Director or other person.  To
the extent any person holds any rights by virtue of a pending grant or deferral
under the Plan, such rights shall be no greater than the rights of an unsecured
general creditor of the Company.

     SECTION 17. GOVERNING LAW
                 -------------

     The Plan is deemed adopted, made and delivered in Delaware and shall be
governed by the laws of the State of Delaware applicable to agreements made and
to be performed entirely within such state.

     SECTION 18. SEVERABILITY
                 ------------

     If any part of the Plan is declared by any court or governmental authority
to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate
any portion of the Plan not declared to be unlawful or invalid.  Any Section or
part of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.

     SECTION 19. NOTICES
                 -------

     All notices and other communications hereunder shall be given in writing
and shall be deemed given when personally delivered against receipt or five days
after having been mailed by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows: (a) if to the Company, Morgan
Stanley, Dean Witter, Discover & Co., 1585 Broadway, New York, New York 10036,
Attention:  Corporate Secretary; and (b) if to an Eligible Director, 

                                       10

 
at the Eligible Director's principal residential address last furnished to the
Company. Either party may, by notice, change the address to which notice to such
party is to be given.

     SECTION 20. SECTION HEADINGS
                 ----------------

     The Section headings contained herein are for the purposes of convenience
only and are not intended to define or limit the contents of said Sections.

                                       11

EX-10.26

 
                                                                   EXHIBIT 10.26
                                           
                       Extract from Resolutions Approved
                         by the Board of Directors of
                  Morgan Stanley, Dean Witter, Discover & Co.
                             on December 19, 1997
            


            
         RESOLVED, that Sections 4.2 and 4.5(b), respectively, of the Employee
Stock Purchase Plan be and hereby are amended to read in their entirety as
follows:

         4.2 Amount of Deduction. When enrolling, the Eligible Employee
             -------------------
         shall specify a payroll deduction amount of from 1% to 8% (in
         whole numbers) of Eligible Compensation which shall be withheld
         from such Eligible Employee's regular paychecks, including bonus
         paychecks, for the Plan Year; provided, however, that the amount
         of Eligible Compensation deducted for an Eligible Employee for
         any Plan Year may not exceed $8,000. The Committee, in its sole
         discretion, may authorize payment in respect of any option
         exercised hereunder by personal check.
         
         4.5(b) At any time during the Plan Year (but not more than once
         in any calendar quarter) a Participant may increase or decrease the
         percentage of Eligible Compensation subject to payroll deduction
         within the limits provided in Section 4.2 by filing the form
         prescribed by the Committee with the Company. Such increase or
         decrease shall become effective with the first pay period following
         receipt of such form to which it may be practically applied.
         Notwithstanding any increase in the percentage of Eligible
         Compensation subject to payroll deduction pursuant to this Section
         4.5(b), in no event may the amount of Eligible Compensation
         deducted for an Eligible Employee for any Plan Year exceed
         $8,000.
         
          RESOLVED FURTHER, that the appropriate officers of the Company, and
their designees, acting in the name and on behalf of the Company and under its
corporate seal or otherwise, be and hereby are authorized to prepare, execute
and deliver, file and record all instruments, documents and other papers and to
do all such other acts as they in their discretion may deem necessary or
appropriate to carry into effect the intent of the foregoing resolutions.

EX-11

 
                                                                      EXHIBIT 11
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                       COMPUTATION OF EARNINGS PER SHARE
 
                        (IN MILLIONS, EXCEPT SHARE DATA)
 


                                                         FISCAL
                                         --------------------------------------
                                             1997         1996         1995
                                         ------------ ------------ ------------
                                                          
PRIMARY:
Common stock and common stock
 equivalents:
  Average common shares outstanding.....  586,788,619  581,090,678  594,028,529
  Average common shares issuable under
   employee
   benefit plans........................    7,394,266   13,387,857   14,217,904
                                         ------------ ------------ ------------
    Total average common and common
     equivalent
     shares outstanding.................  594,182,885  594,478,535  608,246,433
                                         ============ ============ ============
Earnings:
  Net income............................ $      2,586 $      1,980 $      1,465
  Less: Preferred stock dividend
   requirements.........................           66           66           65
                                         ------------ ------------ ------------
   Earnings applicable to common shares. $      2,520 $      1,914 $      1,400
                                         ============ ============ ============
Primary earnings per share.............. $       4.25 $       3.22 $       2.30
                                         ============ ============ ============
FULLY DILUTED:
Common stock and common stock
 equivalents:
  Average common shares outstanding.....  586,788,619  581,090,678  594,028,529
  Average common shares issuable under
   employee
   benefit plans........................   10,131,715   17,609,204   15,588,911
Common shares issuable upon conversion
 of ESOP preferred stock................   12,123,590   12,312,219   12,481,428
                                         ------------ ------------ ------------
    Total average common and common
     equivalent shares outstanding......  609,043,924  611,012,101  622,098,868
                                         ============ ============ ============
Earnings:
  Net income............................ $      2,586 $      1,980 $      1,465
  Less:
   Preferred stock dividend
    requirements........................           61           62           62
                                         ------------ ------------ ------------
   Earnings applicable to common shares. $      2,525 $      1,918 $      1,403
                                         ============ ============ ============
Fully diluted earnings per share........ $       4.15 $       3.14 $       2.25
                                         ============ ============ ============

 

EX-12

 
                                                                     EXHIBIT 12
                      RATIO OF EARNINGS TO FIXED CHARGES
     AND RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
                             (DOLLARS IN MILLIONS)
 


                                                                FISCAL
                                                        -----------------------
                                                         1997    1996    1995
                                                        ------- ------- -------
                                                               
RATIO OF EARNINGS TO FIXED CHARGES
Earnings:
  Income before income taxes........................... $ 4,274 $ 3,117 $ 2,292
  Add:
    Fixed charges, net.................................  10,898   9,026   8,285
                                                        ------- ------- -------
    Income before income taxes and fixed charges, net.. $15,172 $12,143 $10,577
                                                        ======= ======= =======
Fixed charges:
  Total interest expense............................... $10,806 $ 8,934 $ 8,190
  Interest factor in rents.............................      92      92      95
                                                        ------- ------- -------
    Total fixed charges................................ $10,898 $ 9,026 $ 8,285
                                                        ======= ======= =======
Ratio of earnings to fixed charges.....................     1.4     1.3     1.3
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
 DIVIDENDS
Earnings:
  Income before income taxes........................... $ 4,274 $ 3,117 $ 2,292
  Add:
    Fixed charges, net.................................  10,898   9,026   8,285
                                                        ------- ------- -------
    Income before income taxes and fixed charges, net.. $15,172 $12,143 $10,577
                                                        ======= ======= =======
Fixed charges:
  Total interest expense............................... $10,806 $ 8,934 $ 8,190
  Interest factor in rents.............................      92      92      95
  Preferred stock dividends............................     110     101      95
                                                        ------- ------- -------
    Total fixed charges and preferred stock dividends.. $11,008 $ 9,127 $ 8,380
                                                        ======= ======= =======
Ratio of earnings to fixed charges and preferred stock
 dividends.............................................     1.4     1.3     1.3

 
  "Earnings" consist of income before income taxes and fixed charges. "Fixed
charges" consist of interest costs, including interest on deposits, and that
portion of rent expense estimated to be representative of the interest factor.
The preferred stock dividend amounts represent pre-tax earnings required to
cover dividends on preferred stock.

EX-13.1

                                                                    EXHIBIT 13.1
 
17.  QUARTERLY RESULTS (UNAUDITED)



                                                                      1997                            
- ------------------------------------------------------------------------------------------------------
                                                                 FISCAL QUARTER                       
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS,
EXCEPT SHARE AND PER SHARE DATA)              FIRST          SECOND           THIRD          FOURTH   
- ------------------------------------------------------------------------------------------------------
                                                                                       
Revenues
   Investment banking                 $         522   $         581   $         818   $         773   
   Principal transactions:
     Trading                                    869             722             778             822   
     Investments                                 56             136             206              65   
   Commissions                                  490             484             559             553   
   Fees:
     Asset management, distribution
       and administration                       587             610             656             652   
     Merchant and cardmember                    436             424             433             411   
     Servicing                                  202             184             196             180   
   Interest and dividends                     3,369           3,197           3,570           3,447   
   Other                                         29              38              41              36   
- ------------------------------------------------------------------------------------------------------
     Total revenues                           6,560           6,376           7,257           6,939   
   Interest expense                           2,709           2,478           2,765           2,854   
   Provision for consumer
     loan losses                                379             376             385             353   
- ------------------------------------------------------------------------------------------------------
   Net revenues                               3,472           3,522           4,107           3,732   
- ------------------------------------------------------------------------------------------------------
Non-interest expenses
   Compensation and benefits                  1,490           1,505           1,849           1,175   
   Occupancy and equipment                      128             127             134             137   
   Brokerage, clearing and
     exchange fees                               95             113             130             122   
   Information processing
     and communications                         270             267             249             294   
   Marketing and business
     development                                288             274             293             324   
   Professional services                         93              99             127             132   
   Other                                        180             180             219             191   
   Merger-related expenses                       --              74              --              --   
- ------------------------------------------------------------------------------------------------------
   Total non-interest expenses                2,544           2,639           3,001           2,375   
- ------------------------------------------------------------------------------------------------------
Income before income taxes                      928             883           1,106           1,357   
Provision for income taxes                      357             356             428             547   
- ------------------------------------------------------------------------------------------------------
Net income                            $         571   $         527   $         678   $         810   
- --------------------------------------================================================================
Earnings applicable to
   common shares(1)                   $         552   $         509   $         663   $         796   
- --------------------------------------================================================================
Per common share(2)
   Primary earnings(3)                $         .93   $         .85   $        1.11   $        1.33   
   Fully diluted earnings(3)          $         .91   $         .83   $        1.09   $        1.30   
   Dividends to common
     shareholders                     $         .14   $         .14   $         .14   $         .14   
   Book value                         $       18.70   $       19.37   $       20.25   $       22.11   
Average common and
     equivalent shares(2)
   Primary                              593,495,440     598,282,535     597,921,853     600,038,489   
   Fully diluted                        606,621,425     611,724,590     610,187,894     612,255,249   

Stock price range(4)                   $32.19-43.75    $34.50-41.50    $41.00-53.88    $47.31-58.75   
- ------------------------------------------------------------------------------------------------------

                             
                                                     1996                                             
- ----------------------------------------------------------------------------------------------------- 
                                                                    FISCAL QUARTER                    
- ----------------------------------------------------------------------------------------------------- 
(DOLLARS IN MILLIONS,                                                                                 
EXCEPT SHARE AND PER SHARE DATA)              FIRST           SECOND           THIRD          FOURTH  
- ----------------------------------------------------------------------------------------------------- 
                                                                                       
Revenues                                                                                              
   Investment banking                 $         464    $         599   $         477   $         650  
   Principal transactions:                                                                            
     Trading                                    823              679             534             623  
     Investments                                 (7)              38              29              26  
   Commissions                                  455              463             412             446  
   Fees:                                                                                              
     Asset management, distribution                                                                   
       and administration                       397              429             427             479  
     Merchant and cardmember                    319              346             379             461  
     Servicing                                  198              189             220             202  
   Interest and dividends                     2,794            2,809           3,038           2,647  
   Other                                         30               37              23              36  
- ----------------------------------------------------------------------------------------------------- 
     Total revenues                           5,473            5,589           5,539           5,570  
   Interest expense                           2,250            2,245           2,419           2,020  
   Provision for consumer                                                                             
     loan losses                                224              270             302             418  
- ----------------------------------------------------------------------------------------------------- 
   Net revenues                               2,999            3,074           2,818           3,132  
- ------------------------------------------------------------------------------------------------------
Non-interest expenses                                                                                 
   Compensation and benefits                  1,275            1,303           1,171           1,322  
   Occupancy and equipment                      119              120             122             132  
   Brokerage, clearing and                                                                            
     exchange fees                               77               79              76              85  
   Information processing                                                                             
     and communications                         232              239             249             276  
   Marketing and business                                                                             
     development                                229              243             247             308  
   Professional services                         60               80              85             109  
   Other                                        167              166             160             175  
   Merger-related expenses                       --               --              --              --  
- ----------------------------------------------------------------------------------------------------- 
   Total non-interest expenses                2,159            2,230           2,110           2,407  
- ----------------------------------------------------------------------------------------------------- 
Income before income taxes                      840              844             708             725  
Provision for income taxes                      322              304             250             261  
- ----------------------------------------------------------------------------------------------------- 
Net income                            $         518    $         540   $         458   $         464  
- --------------------------------------=============================================================== 
Earnings applicable to                                                                                
   common shares(1)                   $         502    $         523   $         443   $         446  
- --------------------------------------=============================================================== 
Per common share(2)                                                                                   
   Primary earnings(3)                $         .83    $         .87   $         .75   $         .76  
   Fully diluted earnings(3)          $         .81    $         .86   $         .73   $         .74  
   Dividends to common                                                                                
     shareholders                     $         .11    $         .11   $         .11   $         .11  
   Book value                         $       15.86    $       16.42   $       16.93   $       18.43  
Average common and                                                                                    
     equivalent shares(2)                                                                             
   Primary                              606,585,943      600,219,450     591,882,036     587,117,776  
   Fully diluted                        620,807,404      612,616,954     604,879,722     601,438,805  
Stock price range(4)                   $22.50-29.00     $25.56-31.06    $24.13-28.88    $27.56-34.38  
- ----------------------------------------------------------------------------------------------------- 


(1)  Amounts shown are used to calculate primary earnings per share.
(2)  Per share and share data have been restated to reflect the Company's
     two-for-one stock split.
(3)  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.
(4)  Prices represent the range of sales per share on the New York Stock
     Exchange for the periods indicated. The number of stockholders of record at
     November 30, 1997 approximated 192,440. The number of beneficial owners of
     common stock is believed to exceed this number.


MSDWD 98
      --

EX-13.2

                                                                    EXHIBIT 13.2
 
SELECTED FINANCIAL DATA




FISCAL YEAR(1) (DOLLARS IN MILLIONS, EXCEPT SHARE DATA)        1997            1996            1995           1994            1993
- ------------------------------------------------------------------------------------------------------------------------------------

INCOME STATEMENT DATA:
- ----------------------
                                                                                                                 
Revenues
   Investment banking                                  $      2,694    $      2,190    $      1,556    $      1,102    $      1,642
   Principal transactions:
     Trading                                                  3,191           2,659           1,685           1,614           1,778
     Investments                                                463              86             121             154             157
   Commissions                                                2,086           1,776           1,533           1,323           1,284
   Fees:
     Asset management, distribution and
        administration                                        2,505           1,732           1,377           1,317           1,074
     Merchant and cardmember                                  1,704           1,505           1,135             940             771
     Servicing                                                  762             809             680             565             506
   Interest and dividends                                    13,583          11,288          10,530           8,715           7,336
   Other                                                        144             126             115             127             104
                                                       ----------------------------------------------------------------------------

     Total revenues                                          27,132          22,171          18,732          15,857          14,652
   Interest expense                                          10,806           8,934           8,190           6,697           5,620
   Provision for consumer loan losses                         1,493           1,214             722             530             433
                                                       ----------------------------------------------------------------------------
     Net revenues                                            14,833          12,023           9,820           8,630           8,599
                                                       ----------------------------------------------------------------------------

Non-interest expenses
   Compensation and benefits                                  6,019           5,071           4,005           3,535           3,687
   Other                                                      4,466           3,835           3,464           3,133           2,737
   Merger-related expenses                                       74              --              --              --              --
   Relocation charge                                             --              --              59              --              --
                                                       ----------------------------------------------------------------------------
     Total non-interest expenses                             10,559           8,906           7,528           6,668           6,424
                                                       ----------------------------------------------------------------------------
Income before income taxes                                    4,274           3,117           2,292           1,962           2,175
Provision for income taxes                                    1,688           1,137             827             705             803
                                                       ----------------------------------------------------------------------------
Net income                                             $      2,586    $      1,980    $      1,465    $      1,257    $      1,372
                                                       ----------------------------------------------------------------------------
Earnings applicable to common shares(2)                $      2,520    $      1,914    $      1,400    $      1,192    $      1,317
                                                       ----------------------------------------------------------------------------
PER SHARE DATA:(3)
- ------------------

Earnings per common share
   Primary                                             $       4.25    $       3.22    $       2.30    $       1.96    $       2.24
   Fully diluted                                               4.15            3.14            2.25            1.93            2.20
Book value per common share                                   22.11           18.43           15.63           13.38           11.43
Dividends per common share                                     0.56            0.44            0.32            0.25            0.15

BALANCE SHEET AND
OTHER OPERATING DATA:
- ---------------------

Total assets                                           $    302,287    $    238,860    $    181,961    $    159,477    $    161,519
Consumer loans                                               20,033          21,262          19,733          14,731          11,091
Total capital(4)                                             33,577          31,152          24,644          20,933          15,112
Long-term borrowings(4)                                      19,621          19,450          14,636          12,352           7,702
Shareholders' equity                                         13,956          11,702          10,008           8,581           7,410
Return on average common shareholders' equity                  22.0%           20.0%           16.4%           15.8%           21.7%

Average common and equivalent shares(2)(3)              594,182,885     594,478,535     608,246,433     606,721,462     586,639,815
- -------------------------------------------------------=============================================================================



(1)  Fiscal 1993 through fiscal 1996 represents the combination of Morgan
     Stanley's financial statements for the fiscal years ended November 30 with
     Dean Witter Discover's financial statements for the years ended December
     31.
(2)  Amounts shown are used to calculate primary earnings per common share.
(3)  Per share data have been restated to reflect the Company's two-for-one
     stock split.
(4)  Excludes the current portion of long-term borrowings and includes Capital
     Units.


MSDWD 2
      -

EX-13.3

                                                                    EXHIBIT 13.3
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

INTRODUCTION
- ------------

THE COMPANY

On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged with
and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the "Merger"). At
that time, Dean Witter Discover changed its corporate name to Morgan Stanley,
Dean Witter, Discover & Co. (the "Company"). In conjunction with the Merger,
each share of Morgan Stanley common stock then outstanding was converted into
1.65 shares of the Company's common stock (the "Exchange Ratio"), and each share
of Morgan Stanley preferred stock was converted into one share of a
corresponding series of preferred stock of the Company. The Merger was treated
as a tax-free exchange.

     The Company is a pre-eminent global financial services firm that maintains
leading market positions in each of its businesses--Securities and Asset
Management, and Credit and Transaction Services. The Company combines three
well-recognized brands in the financial services industry: Morgan Stanley, Dean
Witter and Discover(R) Card. The Company also combines global strengths in
investment banking (including in the origination of quality underwritten public
offerings and mergers and acquisitions advice) and institutional sales and
trading, with strengths in providing investment and global asset management
services to its customers and in providing quality consumer credit products
primarily through its Discover(R) Card brand.

BASIS OF FINANCIAL INFORMATION

The Company's consolidated financial statements give retroactive effect to the
Merger in a transaction accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods presented
as if Dean Witter Discover and Morgan Stanley always had been combined. The
consolidated statement of changes in shareholders' equity reflects the accounts
of the Company as if the additional preferred and common stock had been issued
during all of the periods presented.

     Prior to the consummation of the Merger, Dean Witter Discover's year ended
on December 31 and Morgan Stanley's fiscal year ended on November 30. Subsequent
to the Merger, the Company adopted a fiscal year-end of November 30. In
recording the pooling of interests combination, Dean Witter Discover's financial
statements for the years ended December 31, 1996 and 1995 were combined with
Morgan Stanley's financial statements for the fiscal years ended November 30,
1996 and 1995 (on a combined basis, "fiscal 1996" and "fiscal 1995,"
respectively). The Company's results for the twelve months ended November 30,
1997 ("fiscal 1997") include the results of Dean Witter Discover that were
restated to conform to the new fiscal year-end date. The Company's results of
operations for fiscal 1997 and fiscal 1996 include the month of December 1996
for Dean Witter Discover.

     Certain reclassifications have been made to prior-year amounts to conform
to the current presentation. All material intercompany balances and transactions
have been eliminated.

RESULTS OF OPERATIONS
- ---------------------

CERTAIN FACTORS AFFECTING RESULTS OF OPERATIONS*

The Company's results of operations may be materially affected by market
fluctuations and by economic factors. In addition, results of operations in the
past have been and in the future may continue to be materially affected by many
factors of a global nature, including economic and market conditions; the
availability of capital; the level and volatility of interest rates; currency
values and other market indices; the availability of credit; inflation; and
legislative and regulatory developments. Such factors also may have an impact on
the Company's ability to achieve its strategic objectives, including (without
limitation) continued profitable global expansion.

- --------------------------------------------------------------------------------
*    This Management's Discussion and Analysis of Financial Condition and
     Results of Operations contains forward-looking statements, as well as a
     discussion of some of the risks and uncertainties involved in the Company's
     businesses that could affect the matters referred to in such statements.


MSDWD36
     --

 
      The Company's Securities and Asset Management business, particularly its
involvement in primary and secondary markets for all types of financial
products, including derivatives, is subject to substantial positive and negative
fluctuations due to a variety of factors that cannot be predicted with great
certainty, including variations in the fair value of securities and other
financial products and the volatility and liquidity of trading markets.
Fluctuations also occur due to the level of market activity, which, among other
things, affects the flow of investment dollars into mutual funds and the size,
number and timing of transactions or client assignments (including realization
of returns from the Company's principal and merchant banking investments). In
the Company's Credit and Transaction Services business, changes in economic
variables may substantially affect consumer loan growth and credit quality. Such
variables include the number of personal bankruptcy filings, the rate of
unemployment and the level of consumer debt to income ratios.

      The Company's results of operations also may be materially affected by
competitive factors. In addition to competition from firms traditionally engaged
in the securities business, there has been increased competition from other
sources, such as commercial banks, insurance companies, mutual fund groups and
other companies offering financial services both in the U.S. and globally. As a
result of recent and pending legislative and regulatory initiatives in the U.S.
to remove or relieve certain restrictions on commercial banks, competition in
some markets that have traditionally been dominated by investment banks and
retail securities firms has increased and may continue to increase in the near
future. In addition, recent convergence and consolidation in the financial
services industry will lead to increased competition from larger diversified
financial services organizations. Fiscal 1997 was characterized by a record
level of strategic alliances in the financial services industry which focused on
expanding asset management capabilities and combining institutional and retail
businesses, including product origination and distribution capabilities.

      Such competition, among other things, affects the Company's ability to
attract and retain highly skilled individuals. Competitive factors also affect
the Company's success in attracting and retaining clients and assets through its
ability to meet investors' saving and investment needs by consistency of
investment performance and accessibility to a broad array of financial products
and advice. In the credit services industry, competition centers on merchant
acceptance of credit cards, credit card account acquisition and customer
utilization of credit cards. Merchant acceptance is based on both competitive
transaction pricing and the number of credit cards in circulation. Credit card
account acquisition and customer utilization are driven by the offering of
credit cards with competitive and appealing features such as no annual fees, low
introductory interest rates and other customized features targeting specific
consumer groups and by having broad merchant acceptance.

      As a result of the above economic and competitive factors, net income and
revenues in any particular period may not be representative of full-year results
and may vary significantly from year to year and from quarter to quarter. The
Company intends to manage its business for the long term and help mitigate the
potential effects of market downturns by strengthening its competitive position
in the global financial services industry through diversification of its revenue
sources and enhancement of its global franchise. The Company's ability and
success in maintaining high levels of profitable business activities,
emphasizing fee-based assets that are designed to generate a continuing stream
of revenues, managing risks in both the Securities and Asset Management and
Credit and Transaction Services businesses, evaluating credit product pricing
and monitoring costs will continue to affect its overall financial results. In
addition, the complementary trends in the financial services industry of
consolidation and globalization present, among other things, technological, risk
management and other infrastructure challenges that will require effective
resource allocation in order for the Company to remain competitive.




                                                                        MSDWD 37
                                                                              --

 
MARKET AND ECONOMIC CONDITIONS IN FISCAL 1997

The favorable market and economic conditions which characterized fiscal 1996
continued throughout much of fiscal 1997, contributing to higher industry-wide
securities revenues and to record levels of net income and net revenues for the
Company's Securities and Asset Management business. In addition, the Company's
Securities and Asset Management business ended the fiscal year with record
levels of account executives, customer accounts and assets, and assets under
management and administration. The Company's Credit and Transaction Services
business also recorded record levels of net income, net revenues, managed
consumer loans and customer accounts despite difficult conditions in the
industry which resulted in higher rates of credit card loan charge-offs.

     Market conditions in the U.S. were favorable for much of fiscal 1997, as
moderate economic growth, low levels of unemployment and continued growth in
corporate profits generally prevailed. Despite these conditions, the level of
inflation has remained relatively low. U.S. financial markets also experienced
periods of increased volatility during fiscal 1997. In the first half of the
year, bond markets were affected by fears of inflationary pressures due to
consistently strong indicators of economic growth, which prompted the Federal
Reserve Board to raise the overnight lending rate by .25% in March 1997. The
bond markets rallied later in the year as interest rates fell across the yield
curve. This decline in interest rates reflected the continuing stability of
inflation and the Federal Reserve Board's interest rate policy. The market for
U.S. government securities was particularly strong during the latter part of the
year, as market instability in certain Asian markets increased investor demand
for less risky investments. The performance of U.S. equity markets also was very
positive in fiscal 1997, primarily resulting from strong corporate earnings,
high levels of cash inflows into mutual funds, and a high volume of equity
issuances. U.S. equity markets also experienced periods of increased volatility,
particularly during the second and fourth fiscal quarters. During both of these
periods, equity markets experienced sharp selloffs that were subsequently
followed by strong recoveries.

     In fiscal 1997, European financial markets provided investors with solid
returns despite a slight downturn during the fourth quarter. The robust
performance of these markets reflected strong corporate earnings and optimism
that economic growth in the region will continue to remain solid. European
financial markets also were impacted by the prospects of the approaching
European Economic and Monetary Union ("EMU"). The EMU is scheduled to commence
on January 1, 1999 when the European Currency Unit (the "ECU") will be replaced
by the "Euro" at a conversion rate of 1:1. Those national currencies which are
to participate in the EMU will ultimately cease to exist as separate currencies
and will be replaced by the Euro. Throughout fiscal 1997, varying expectations
regarding the probability and timing of the EMU often caused volatility in
certain interest rates and currencies.

     In the Far East, the conditions in Japanese financial markets were
generally weak during the fiscal year, as the nation's rate of economic growth
remained sluggish. Investors also have been concerned with the strength of
Japan's financial system. The Japanese banking sector has been burdened by
underperforming real estate loans, rising unemployment, an anemic stock market
and fears regarding the potential impact of the economic crisis that began in
fiscal 1997 in much of Asia. Financial markets in Southeast Asia also
experienced difficult conditions, including the currency crisis that impacted
the region, which impaired creditworthiness and undermined investor confidence
in the region's highly leveraged banking sector. Conditions in these markets
were particularly volatile in the third and fourth fiscal quarters, as increased
investor concerns resulted in significant declines in certain Asian equity
markets. The currencies of certain nations in the region also experienced
sizable depreciation during this period.

     The worldwide market for mergers and acquisitions continued to be robust
during fiscal 1997, resulting in record levels of revenues by the Company's
investment banking business. The need for economies of scale, loca-


MSDWD 38
      --

 
tion, financial capacity and the ability to compete globally contributed to an
aggressive acquisition marketplace which was further stimulated by relatively
low interest rates and the buoyant equity markets. The markets for the
underwriting of securities also were robust, as corporations, like consumers,
were capitalizing on low interest rates to refinance debt obligations. Primary
markets also benefited from the continued flow of funds into the equity markets
from mutual funds, asset allocation adjustments, the continued cross border
flows of capital and a significant number of privatizations.

     In fiscal 1997, consumer demand and retail sales continued to increase
although at a slower rate than the prior year, favorably impacting credit card
transaction volume and consumer loan growth. In fiscal 1997, the Company
continued to invest in growth through the expansion of its NOVUS(R) Network and
by increasing its marketing and solicitation activities. However, credit quality
issues have continued to be a challenge for the credit services industry and the
Company, as levels of consumer debt and personal bankruptcies continued to
increase during fiscal 1997 with resulting continued increases in industry-wide
credit card loan losses.

FISCAL 1997 AND 1996 RESULTS FOR THE COMPANY

The Company achieved net income of $2,586 million in fiscal 1997, a 31% increase
from fiscal 1996. In fiscal 1996, net income increased 35% to $1,980 million
from fiscal 1995. Primary earnings per common share increased 32% to $4.25 in
fiscal 1997 and 40% to $3.22 in fiscal 1996. Fully diluted earnings per common
share increased 32% to $4.15 in fiscal 1997 and 40% to $3.14 in fiscal 1996. The
Company's return on average shareholders' equity was 22%, 20% and 16% in fiscal
1997, fiscal 1996 and fiscal 1995, respectively. The Company's fiscal 1997 net
income includes $63 million of costs related to the Merger. These costs, which
consisted primarily of proxy solicitation costs, severance costs, financial
advisory and accounting fees, and legal and regulatory filing fees, were
recorded by the Company during the second fiscal quarter.

     The remainder of Results of Operations is presented on a business segment
basis. With the exception of fiscal 1997's merger-related expenses,
substantially all of the operating revenues and operating expenses of the
Company can be directly attributed to its two business segments: Securities and
Asset Management, and Credit and Transaction Services. Certain reclassifications
have been made to prior-period amounts to conform to the current year's
presentation.



SECURITIES AND ASSET MANAGEMENT
STATEMENTS OF INCOME

FISCAL YEAR (DOLLARS IN MILLIONS)                     1997       1996       1995
- --------------------------------------------------------------------------------
                                                                    
Revenues:
   Investment banking                              $ 2,694    $ 2,190    $ 1,556
   Principal transactions:
     Trading                                         3,191      2,659      1,685
     Investments                                       463         86        121
   Commissions                                       2,059      1,776      1,533
   Asset management, distribution
     and administration fees                         2,505      1,732      1,377
   Interest and dividends                           10,455      8,571      8,138
   Other                                               132        122        113
- --------------------------------------------------------------------------------
     Total revenues                                 21,499     17,136     14,523
Interest expense                                     9,633      7,902      7,265
- --------------------------------------------------------------------------------
     Net revenues                                   11,866      9,234      7,258
- --------------------------------------------------------------------------------
Compensation and benefits                            5,475      4,585      3,584
Occupancy and equipment                                462        432        406
Brokerage, clearing and exchange fees                  448        317        289
Information processing and
   communications                                      602        514        474
Marketing and business development                     393        296        235
Professional services                                  378        282        203
Other                                                  511        382        417
Relocation charge                                       --         --         59
- --------------------------------------------------------------------------------
   Total non-interest expenses                       8,269      6,808      5,667
- --------------------------------------------------------------------------------
Income before income taxes                           3,597      2,426      1,591
Provision for income taxes                           1,416        880        559
- --------------------------------------------------------------------------------
   Net income                                      $ 2,181    $ 1,546    $ 1,032
- ---------------------------------------------------=============================



                                                                        MSDWD 39
                                                                              --

 
SECURITIES AND ASSET MANAGEMENT

Securities and Asset Management provides a wide range of financial products,
services and investment advice to individual and institutional investors.
Securities and Asset Management business activities are conducted in the U.S.
and throughout the world and include investment banking, research, institutional
sales and trading, global asset management, and investment and asset management
products and services for individual clients. At November 30, 1997, the
Company's Dean Witter Reynolds Inc. ("DWR") account executives provided
investment services to more than 3.5 million client accounts with assets of $302
billion. The Company had the third largest account executive sales organization
in the U.S. with 9,946 professional account executives and 399 branches at
November 30, 1997. With well-recognized brand names, including those associated
with Dean Witter InterCapital Inc. ("ICAP"), Van Kampen American Capital, Inc.
("VKAC"), Morgan Stanley Asset Management and Miller Anderson & Sherrerd, LLP
("MAS"), the Company has one of the largest global asset management operations
of any full-service securities firm, with total assets under management or
supervision of $338 billion at November 30, 1997.

     Securities and Asset Management achieved record net revenues and net income
of $11,866 million and $2,181 million in fiscal 1997, increases of 29% and 41%,
respectively, from fiscal 1996. In fiscal 1996, Securities and Asset Management
net revenues and net income increased 27% and 50%, respectively, from fiscal
1995. The Company's fiscal 1997 and 1996 levels of net revenues and net income
in its Securities and Asset Management business reflect a strong global market
for mergers and acquisitions, as well as improved sales and trading results
primarily driven by favorable economic conditions and increased customer trading
volume and the positive accumulation and management of client assets. These
results were partially offset in both years by increased costs for
incentive-based compensation, as well as increased non-compensation expenses
associated with the Company's higher level of global business activities. The
growth in net income in both years was impacted by favorable business
environments and the Company's focus on accumulating client assets and building
fee-based assets under management and administration.

Investment Banking

Investment banking revenues are derived from the underwriting of securities
offerings and fees from advisory services. Investment banking revenues were as
follows:



FISCAL YEAR (DOLLARS IN MILLIONS)                     1997       1996       1995
- --------------------------------------------------------------------------------
                                                                    
Advisory fees from merger, acquisition
   and restructuring transactions                   $  920     $  848     $  622
Equity underwriting revenues                           888        722        503
Debt underwriting revenues                             886        620        431
                                                    ----------------------------
   Total investment banking revenues                $2,694     $2,190     $1,556
- ----------------------------------------------------============================


Investment banking revenues increased 23% and attained record levels in fiscal
1997, surpassing the Company's previous level of record revenues that were
recorded in fiscal 1996. Revenues in both fiscal 1997 and fiscal 1996 benefited
from increased advisory fees from merger, acquisition and restructuring
transactions, as well as increased revenues from underwriting debt and equity
securities.

     The worldwide merger and acquisition markets remained robust for the third
consecutive year with more than $1.6 trillion of transactions (per Securities
Data Company) announced during calendar year, 1997, including record volume in
the U.S. The sustained growth of the merger and acquisition markets, coupled
with the Company's global presence and strong market share, had a positive
impact on advisory fees, which increased 8% in fiscal 1997. As was the case in
fiscal 1996, merger and acquisition activity was diversified across many
industries in the Company's client base. In fiscal 1997, the health care,
banking and other financial services, telecommunications, technology and energy
sectors contributed the greatest level of activity. Advisory fees from real
estate 



MSDWD 40
      --

 
transactions were also higher as compared with the prior year, benefiting
from a stable financing environment, favorable economic conditions and a strong
real estate market, including accelerated consolidation activity among real
estate investment trusts ("REITS"). The 36% increase in advisory fees in 1996
was primarily due to high transaction volumes that were propelled in part by
rising stock prices, as well as the Company's strong global presence and broad
client base.

     Equity underwriting revenues increased 23% in fiscal 1997, primarily due to
a higher volume of equity offerings and an increased market share, particularly
in Europe, as compared with the prior year. The primary market for equity
issuances continued to benefit from the high volume of cash inflows into equity
mutual funds, as well as from a favorable economic environment. Equity
underwriting revenues increased 44% in fiscal 1996 and were positively affected
by a strong primary calendar as new issuances were readily absorbed by the
increased flows of money into the equity markets. Additionally, reduced concerns
regarding inflation and lower interest rates positively affected the demand for
new equity issuances.

     Revenues from debt underwriting increased 43% in fiscal 1997. The increase
was primarily attributable to higher revenues from high-yield debt issuances, as
the favorable market conditions which existed for much of fiscal 1997 enabled
certain high-yield issuers to obtain attractive rates of financing. Issuers in
the telecommunications sector were particularly active in the high-yield debt
market. Debt financing revenues also were impacted by higher revenues from
securitized debt issuances, resulting from the Company's continued focus on this
business sector and an increase in the number of asset-backed transactions. In
fiscal 1996, revenues from debt financing activity increased 44% and were
positively affected by a relatively stable interest rate environment as the
Federal Reserve Board maintained short-term interest rates at a constant level
subsequent to a modest decrease in the Federal Funds rate in January 1996.
Fiscal 1996 debt underwriting revenues reflected a continued demand for
corporate new issues as interest rates remained relatively low, an increased
level of high-yield issuance activity and increased revenues from securitized
debt transactions.

Principal Transactions

Principal transactions include revenues from customers' purchases and sales of
securities in which the Company acts as principal and gains and losses on
securities held for resale. Principal trading revenues were as follows:



FISCAL YEAR (DOLLARS IN MILLIONS)                   1997        1996        1995
- --------------------------------------------------------------------------------
                                                                    
Equities                                          $1,310      $1,181      $  728
Fixed income                                       1,187       1,172         710
Foreign exchange                                     500         169         177
Commodities                                          194         137          70
                                                  ------------------------------
   Total principal trading revenues               $3,191      $2,659      $1,685
- --------------------------------------------------==============================


Equity trading revenues increased 11% to record levels in fiscal 1997,
reflecting favorable market conditions that contributed to strong customer
demand and high trading volumes. The increased revenues were primarily from
trading in equity cash products, as the strong rates of return generated by many
global equity markets contributed to higher customer trading volumes and the
continuance of high levels of cash inflows into mutual funds. Revenues also
benefited from the strong performance of many foreign equity markets,
particularly in Europe, which led to higher trading volumes as U.S. investors
sought to increase their positions in these markets. Equity trading revenues
increased 62% in fiscal 1996, reflecting increased customer trading activity,
particularly in the U.S., as the strong market was driven by low inflation, a
moderately growing economy and relatively low interest rates. Equity cash
products were positively affected as individual investors infused money into
equity mutual funds at a high level. Revenues from equity derivative


                                                                        MSDWD 41
                                                                              --

 
products increased as the Company expanded its proprietary trading activities to
capitalize on increased levels of volatility, particularly in the U.S. options
and futures markets.

     Fixed income trading revenues increased 1% in fiscal 1997. Revenues from
trading in fixed income products were positively affected by high levels of
customer trading volumes, a large amount of new debt issuances and increased
demand for credit sensitive fixed income products. Revenues from trading in
high-yield debt securities and fixed income derivative products were
particularly favorably impacted by these developments. Securitized debt trading
revenues also increased, as the Company continued to focus on this market
segment by expanding its level of activity in several key areas. Trading
revenues benefited from higher revenues from trading in commercial whole loans
and mortgage swaps, coupled with increased securitization volumes and innovative
structures. These increases were offset by lower revenues from trading in
government and investment grade corporate securities. Fixed income trading
revenues increased 65% in fiscal 1996, primarily due to higher revenues from
high-yield, emerging market, swaps and securitized debt trading. High-yield
trading revenues benefited from increased volumes as positive corporate earnings
increased investor demand for high-yield issues. Emerging market revenues
increased, in part, due to higher levels of volatility in Russian securities, as
well as the strengthening of Latin American markets, specifically in developing
countries such as Mexico, Argentina and Brazil. Swaps trading revenue increased
significantly, benefiting from an increased customer base, significant increases
in volume and a favorable interest rate environment. Securitized debt trading
revenues increased substantially as the Company increased its focus on this
market segment by expanding its level of activity in securitized debt products.
Revenues from trading in mortgage-backed securities and commercial whole loans
contributed significantly to the overall revenue increase as securitizations
increased and innovative structures were created.

     Revenues from foreign exchange trading increased 196% to record levels in
fiscal 1997, primarily resulting from the Company's increased client market
share and from high levels of volatility in the foreign exchange markets. The
U.S. dollar appreciated against many currencies throughout the year due to the
strong growth of the U.S. economy and continued low levels of inflation. In
addition, many European currencies experienced periods of increased volatility
due to uncertainty regarding the timing of the EMU and the strength of the Euro,
while the performance of the yen was affected by sluggish economic growth in
Japan. Other Asian currencies were particularly volatile during the latter half
of fiscal 1997, primarily due to the depreciation of certain currencies,
including Thailand's baht. Higher trading volumes and an increasing customer
base also contributed to the increase in revenues. Foreign exchange trading
revenues declined 5% in fiscal 1996, primarily due to decreased volatility in
the foreign exchange markets due to the narrowing of the differences in
inflation rates among certain European nations.

     Commodities trading revenues increased 42% and reached record levels in
fiscal 1997, benefiting from higher revenues from trading in energy products,
including the Company's increased presence in the electricity markets, precious
metals and natural gas. Volatility in these products was high during most of the
year due to fluctuating levels of customer demand and inventory. In both fiscal
1997 and fiscal 1996, commodities trading revenues benefited from the expansion
of the customer base for commodity-related products, including derivatives, and
the use of such products for risk management purposes. Revenues from commodities
trading increased 96% in fiscal 1996, benefiting from volatile markets that were


                                                                        MSDWD 42
                                                                              --

 
buoyed by low inventories, robust demand and the industry's expectation for much
of fiscal 1996 that Iraq would re-enter the world crude oil market. In fiscal
1996, revenues from energy-related products increased significantly due to
increased volatility as the prices of natural gas, crude oil and heating oil
increased to their highest levels since the early 1990s.

     Principal transaction investment revenues aggregating $463 million were
recognized in fiscal 1997 as compared with $86 million in fiscal 1996. Fiscal
1997 revenues reflect a record level of revenues from the Company's merchant
banking business. The higher revenues primarily reflect increases in the
carrying value of certain of the Company's merchant banking investments,
including an increase related to the Company's holdings of Fort James
Corporation, the entity created from the merger of Fort Howard Corporation and
James River Corporation of Virginia, as well as realized gains on certain
positions that were sold during the year. Higher revenues from certain real
estate and venture capital investment gains also contributed to the increase.
Fiscal 1996 revenues also reflect increases in the carrying value of certain of
the Company's merchant banking investments, as well as revenues from other
principal investments, including real estate investments.

Commissions

Commission revenues primarily arise from agency transactions in listed and
over-the-counter equity securities and sales of mutual funds, futures, insurance
products and options. Commission revenues increased 16% in fiscal 1997,
primarily reflecting high customer trading volumes, particularly in the third
and fourth fiscal quarters when the New York Stock Exchange experienced some of
the highest trading volume in its history. The strong returns posted by many
global equity markets encouraged an increased investor demand for equity
securities and resulted in high levels of cash inflows into mutual funds.
Commission revenues also benefited from an increase in the Company's market
share and from the continued strength in the market for equity issuances. In
fiscal 1996, the 16% increase in commission revenues primarily reflected
increased market participation by investors resulting from favorable market
conditions and a strong primary calendar, particularly in the U.S., and an
increase in sales of mutual fund and insurance products. In addition, commission
revenues improved as institutional investors purchased more foreign and emerging
market issuances.

Net Interest

Interest and dividend revenues and expense are a function of the level and mix
of total assets and liabilities, including financial instruments owned, reverse
repurchase and repurchase agreements, customer margin loans and the prevailing
level, term structure and volatility of interest rates. Interest and dividend
revenues and expense should be viewed in the broader context of principal
trading results. Decisions relating to principal transactions in securities are
based on an overall review of aggregate revenues and costs associated with each
transaction or series of transactions. This review includes an assessment of the
potential gain or loss associated with a trade, the interest income or expense
associated with financing or hedging the Company's positions, and potential
underwriting, commission or other revenues associated with related primary or
secondary market sales. Net interest revenues increased 23% in fiscal 1997,
reflecting higher levels of trading activities and retail customer financing
activity, including margin interest. Net interest revenues decreased 23% in
fiscal 1996, partly attributable to changes in the mix of the Company's fixed
income inventory, coupled with the general trend in interest rates. In both
fiscal 1997 and fiscal 1996, net interest revenues reflected increased financing
costs associated with higher average levels of balance sheet usage, particularly
in equity-related businesses.

Asset Management, Distribution and Administration Fees

Asset management, distribution and administration fees include revenues from
asset management services, including fund management fees which are received for


                                                                        MSDWD 43
                                                                              --

 
investment management and for promoting and distributing mutual funds ("12b-1
fees"), other administrative fees and non-interest revenues earned from
correspondent clearing and custody services. Fund management fees arise from
investment management services the Company provides to registered investment
companies (the "Funds") pursuant to various contractual arrangements. The
Company receives management fees based upon each Fund's average daily net
assets. The Company receives 12b-1 fees for services it provides in promoting
and distributing certain open-ended Funds. These fees are based on either the
average daily Fund net asset balances or average daily aggregate net Fund sales
and are affected by changes in the overall level and mix of assets under
management and administration. The Company also receives fees from investment
management services provided to segregated customer accounts pursuant to various
contractual arrangements.

      Asset management, distribution and administration fees were as follows:



FISCAL YEAR (DOLLARS IN MILLIONS)                   1997        1996        1995
- --------------------------------------------------------------------------------
                                                                    
Asset management, distribution
   and administration fees                        $2,505      $1,732      $1,377
- --------------------------------------------------==============================


The Company's customer assets under management or supervision and global assets
under custody were as follows:



(DOLLARS IN BILLIONS)                                   1997      1996      1995
- --------------------------------------------------------------------------------
                                                                    
Customer assets under management
   or supervision (at fiscal year-end)                  $338      $278      $149
- --------------------------------------------------------========================
Global assets under custody
   (at fiscal year-end)                                 $377      $144      $111
- --------------------------------------------------------========================



In fiscal 1997, asset management, distribution and administration fees increased
45%, reflecting the Company's continuing strategic emphasis on the asset
management business. The increase also reflects revenues from VKAC, which was
acquired by the Company on October 31, 1996. Fiscal 1997 revenues benefited from
higher levels of fund management fees and increased revenues from international
equity, emerging market and U.S. domestic equity and fixed income products and
continued growth in customer assets under management or supervision. Revenues
also were positively impacted by the Company's acquisition of the institutional
global custody business of Barclays Bank PLC ("Barclays") on April 3, 1997. In
fiscal 1996, the 26% increase in asset management, distribution and
administration fees reflected growth in both asset management activities,
including the acquisition of MAS, and global clearing and custody services.
Higher revenues from 12b-1 fees also contributed to the increase in fiscal 1996.

     As of November 30, 1997, assets under management or supervision had
increased significantly as compared with fiscal year-end 1996. The increase in
assets under management or supervision in both fiscal 1997 and fiscal 1996
reflected continued inflows of customer assets as well as appreciation in the
value of customer portfolios, particularly in equity funds, and growth in
international equity and domestic fixed income funds. In fiscal 1997,
approximately 50% of the increase in assets under management or supervision was
attributable to the acquisition of net new assets, while the remaining 50%
reflected market appreciation.

     Global assets under custody also increased significantly in fiscal 1997.
Approximately $204 billion of the increase is attributable to the Company's
acquisition of Barclays, and approximately $150 billion of these assets remain
subject to current clients of Barclays agreeing to become clients of the
Company. In both fiscal 1997 and fiscal 1996, global assets under custody also
increased due to additional assets placed under custody with the Company, as
well as appreciation in the value of customer portfolios.


MSDWD 44
      --

 
Non-Interest Expenses



FISCAL YEAR (DOLLARS IN MILLIONS)                   1997        1996        1995
- --------------------------------------------------------------------------------
                                                                    
Compensation and benefits                         $5,475      $4,585      $3,584
Occupancy and equipment                              462         432         406
Brokerage, clearing and exchange fees                448         317         289
Information processing and
   communications                                    602         514         474
Marketing and business development                   393         296         235
Professional services                                378         282         203
Other                                                511         382         417
Relocation charge                                     --          --          59
                                                  -------------------------------
   Total non-interest expenses                    $8,269      $6,808      $5,667
- --------------------------------------------------==============================


Fiscal 1997's total non-interest expenses increased 21% to $8,269 million.
Within that category, employee compensation and benefits expense increased 19%,
reflecting increased levels of incentive compensation based on record fiscal
1997 revenues and earnings. Excluding compensation and benefits expense,
non-interest expenses increased $571 million, including $266 million of
operating costs related to VKAC and the global institutional custody business of
Barclays. Occupancy and equipment expenses increased 7%, principally reflecting
the occupancy costs of VKAC and increased office space in London and Hong Kong.
Brokerage, clearing and exchange fees increased 41%, primarily reflecting the
acquisitions of VKAC and the institutional global custody business of Barclays,
as well as higher levels of trading volume in the global securities markets.
Information processing and communications costs increased 17% due to higher data
services costs related to an increased number of employees, incremental costs
related to VKAC and continued enhancements to the Company's information
technology infrastructure. Marketing and business development expenses increased
33%, reflecting higher travel and entertainment costs relating to increased
levels of business activity associated with active financial markets. Additional
advertising costs associated with VKAC's retail mutual funds also contributed to
the increase. Professional services expenses increased 34%, reflecting higher
consulting costs as a result of information technology initiatives and the
increased level of overall business activity. Other expenses increased 34%,
which includes goodwill amortization of $43 million associated with the
acquisitions of VKAC and Barclays, as well as the impact of a higher level of
business activity on various operating expenses.

      Fiscal 1996's total non-interest expenses increased 20% to $6,808 million.
Within that category, employee compensation and benefits expense increased 28%,
reflecting increased levels of incentive compensation based on higher fiscal
1996 revenues and earnings, the impact of salaries and benefits relating to
additional personnel hired during the year or joining the Company as the result
of the MAS and VKAC acquisitions, and higher costs related to training new
account executives. Excluding compensation and benefits expense, non-interest
expenses increased $199 million (excluding fiscal 1995's relocation charge),
including $48 million of operating costs related to MAS and VKAC. Occupancy and
equipment expenses increased 6%, principally reflecting costs associated with
the relocation of Morgan Stanley's New York offices, new leased office space in
Tokyo, and the occupancy costs of MAS and VKAC. Brokerage, clearing and exchange
fees increased 10%, reflecting increased trade volumes, both in the U.S. and in
Europe, and the continued growth in the international component of the Company's
sales and trading activities. Information processing and communications costs
increased 8% in fiscal 1996 due to continued emphasis on technology initiatives.
Marketing and business development and professional services expenses increased
32% in fiscal 1996, reflecting significantly higher travel and entertainment,
consulting 



                                                                        MSDWD 45
                                                                              --

 
and advertising costs as a result of the increased level of the Company's global
business activities. Other expenses decreased 8% in fiscal 1996, which primarily
reflects a reduction in legal expenses partially offset by the amortization of
goodwill related to the acquisitions of MAS and VKAC.

CREDIT AND TRANSACTION SERVICES

Credit and Transaction Services, which had approximately 40 million general
purpose credit card accounts at November 30, 1997, was the largest single issuer
of general purpose credit cards in the United States as measured by number of
accounts and cardmembers. Consumers use general purpose credit cards to purchase
goods and services and obtain cash advances. Credit and Transaction Services
proprietary general purpose credit cards are offered principally by the
Company's NOVUS Services business unit, which operates the NOVUS(R) Network.
These include the Discover Card, the Private Issue(R) Card, and co-branded and
affinity program cards. The Prime Option(SM) MasterCard(R) is a co-branded
general purpose credit card issued by NationsBank of Delaware, N.A., and
serviced by Prime Option Services. SPS Transaction Services, Inc. ("SPS") is a
74% owned, publicly held subsidiary. Services provided by SPS include electronic
transaction processing, consumer private label credit card program
administration, commercial accounts receivable processing and call center
teleservices. Discover Brokerage Direct offers discount trading services,
principally to individual investors, through its Internet site, an automated
telephone system and a core group of registered representatives, and is an
example of the Company's efforts to satisfy the demand for financial services
outside the traditional full-service brokerage channel.



CREDIT AND TRANSACTION SERVICES
STATEMENTS OF INCOME

FISCAL YEAR (DOLLARS IN MILLIONS)                     1997       1996       1995
- --------------------------------------------------------------------------------
                                                                    
Fees:
   Merchant and cardmember                          $1,704     $1,505     $1,135
   Servicing                                           762        809        680
Commissions                                             27         --         --
Other                                                   12          4          2
- --------------------------------------------------------------------------------
   Total non-interest revenues                       2,505      2,318      1,817
- --------------------------------------------------------------------------------
Interest revenue                                     3,128      2,717      2,392
Interest expense                                     1,173      1,032        925
- --------------------------------------------------------------------------------
   Net interest income                               1,955      1,685      1,467
Provision for consumer loan losses                   1,493      1,214        722
- --------------------------------------------------------------------------------
   Net credit income                                   462        471        745
- --------------------------------------------------------------------------------
   Net revenues                                      2,967      2,789      2,562
- --------------------------------------------------------------------------------
Compensation and benefits                              544        486        421
Occupancy and equipment                                 64         61         48
Brokerage, clearing and exchange fees                   12         --         --
Information processing
   and communications                                  478        482        415
Marketing and business development                     786        731        639
Professional services                                   73         52         49
Other                                                  259        286        289
- --------------------------------------------------------------------------------
   Total non-interest expenses                       2,216      2,098      1,861
- --------------------------------------------------------------------------------
Income before income taxes                             751        691        701
Provision for income taxes                             283        257        268
- --------------------------------------------------------------------------------
Net income                                          $  468     $  434     $  433
- ----------------------------------------------------============================



In fiscal 1997, Credit and Transaction Services net income increased 8% to $468
million. Fiscal 1997 net income was positively impacted by higher average levels
of consumer loans, credit card fees and interest revenue enhancements introduced
in fiscal 1996 and higher general purpose credit card transaction volume,
partially offset by increased consumer credit losses and higher non-interest
expenses. In fiscal 1996, Credit and Transaction Services net income of $434
million remained level compared with fiscal 1995, as revenues from higher levels
of transaction



MSDWD 46
      --

 
volume and average loans and increased credit card fees were offset by a higher
rate of consumer credit losses.

     Due to the Company's recent adoption of a November 30 fiscal year-end and
the seasonality of the credit card business, certain information for November
30, 1996 is presented in order to provide a more meaningful comparison with the
November 30, 1997 balances (see also "Seasonal Factors" herein).

     Credit and Transaction Services statistical data was as follows:



FISCAL YEAR                                      NOV. 30,
(DOLLARS IN BILLIONS)                   1997        1996        1996        1995
- --------------------------------------------------------------------------------
                                                                 
Consumer loans:
   Owned                               $20.9       $20.1       $22.1       $20.4
   Managed                             $36.0       $33.3       $35.3       $30.3
General Purpose
   Credit Card
   transaction
   volume                              $55.8       $53.1       $53.6       $47.5
- ---------------------------------------=========================================




Merchant and Cardmember Fees

Merchant and cardmember fees include revenues from fees charged to merchants on
credit card sales, late payment fees, overlimit fees, insurance fees, cash
advance fees, the administration of credit card programs and transaction
processing services.

     Merchant and cardmember fees increased 13% in fiscal 1997 and 33% in fiscal
1996. The increase in both fiscal years was primarily the result of higher
revenues from overlimit fees, late payment fees and merchant fees. Overlimit
fees were implemented in March 1996, and the amount of the fee was increased in
the fourth quarter of fiscal 1996. The increase in overlimit fees in fiscal 1997
was due to a higher incidence of overlimit occurrences. The increase in late
payment fee revenues in both fiscal years was due to an increase in the
incidence of late payments and higher levels of delinquent accounts. In both
fiscal years, higher merchant fee revenues were primarily the result of
continued growth in the level of general purpose credit card transaction volume.
Fiscal 1996 revenues also benefited from increases in credit insurance fees,
primarily due to higher enrollments and favorable loss experience rebates.

Servicing Fees

Servicing fees are revenues derived from consumer loans which have been sold to
investors through asset securitizations. Cash flows from the interest yield and
cardmember fees generated by securitized loans are used to pay investors in
these loans a predetermined fixed or floating rate of return on their
investment, to reimburse the investors for losses of principal through charged
off loans and to pay the Company a fee for servicing the loans. Any excess cash
flows remaining are paid to the Company. The servicing fees and excess net cash
flows paid to the Company are reported as servicing fees in the consolidated
statements of income. The sale of consumer loans through asset securitizations
therefore has the effect of converting portions of net credit income and fee
income to servicing fees.

      The table below presents the components of servicing fees:



FISCAL YEAR (DOLLARS IN MILLIONS)                1997         1996         1995
- -------------------------------------------------------------------------------
                                                                   
Merchant and
   cardmember fees                            $   436      $   307      $   137
Interest revenue                                2,116        2,025        1,647
Interest expense                                 (829)        (792)        (681)
Provision for consumer
   loan losses                                   (961)        (731)        (423)
- -------------------------------------------------------------------------------
Servicing fees                                $   762      $   809      $   680
- ----------------------------------------------==================================



Servicing fees are affected by the level of securitized loans, the spread
between the interest yield on the securitized loans and the yield paid to the
investors, the rate of credit losses on securitized loans and the level of
cardmember fees earned from securitized loans. Servicing fees also include the
effects of interest rate contracts entered into by the Company as part of its
interest rate risk management program. Servicing fees decreased 6% in fiscal
1997 and 


                                                                        MSDWD 47
                                                                              --

 
increased 19% in fiscal 1996. The decline in fiscal 1997 servicing fees was
attributable to higher credit losses, partially offset by higher merchant and
cardmember fees and net interest revenues. The increased revenues in fiscal 1996
were primarily due to higher net interest cash flows and cardmember fees from
securitized loans, partially offset by increased credit losses from securitized
loans. The increased net interest cash flows in fiscal 1996 were due to higher
average levels of securitized loans.

Net Interest Income

Net interest income is equal to the difference between interest revenue derived
from Credit and Transaction Services consumer loans and short-term investment
assets and interest expense incurred to finance those assets. Credit and
Transaction Services assets, consisting primarily of consumer loans, earn
interest revenue at both fixed rates and market indexed variable rates. The
Company incurs interest expense at fixed and floating rates. Interest expense
also includes the effects of interest rate contracts entered into by the Company
as part of its interest rate risk management program. This program is designed
to reduce the volatility of earnings resulting from changes in interest rates
and is accomplished primarily through matched financing, which entails matching
the repricing schedules of consumer loans and the related financing.

      The following tables present analyses of Credit and Transaction Services
average balance sheets and interest rates in fiscal 1997, fiscal 1996 and fiscal
1995 and changes in net interest income during those fiscal years:

AVERAGE BALANCE SHEET ANALYSIS



FISCAL YEAR (DOLLARS IN MILLIONS)                   1997                            1996                              1995
- -----------------------------------------------------------------------------------------------------------------------------------
                                        AVERAGE                       AVERAGE                         AVERAGE
                                        BALANCE      RATE  INTEREST   BALANCE     RATE    INTEREST    BALANCE      RATE    INTEREST
- -----------------------------------------------------------------------------------------------------------------------------------

ASSETS
- ------
                                                                                                     
Interest earning assets:
General purpose credit card loans       $19,512     14.03%   $2,738   $17,083    13.99%     $2,391    $14,691     14.75%     $2,167
Other consumer loans                      1,773     15.73       279     1,766    14.25         252      1,312     13.48         177
Investment securities                       176      5.45        10       234     5.38          13        195      5.85          11
Other                                     1,680      6.06       101     1,078     5.60          61        578      6.03          37
- -----------------------------------------------------------------------------------------------------------------------------------

   Total interest earning assets         23,141     13.52     3,128    20,161    13.47       2,717     16,776     14.25       2,392
Allowance for loan losses                  (828)                         (669)                           (598)
Non-interest earning assets               1,726                         1,352                           1,221
- -----------------------------------------------------------------------------------------------------------------------------------
   Total assets                         $24,039                       $20,844                         $17,399
- -----------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------

Interest bearing liabilities:
Interest bearing deposits
   Savings                              $   963      4.27%   $   41   $ 1,021     4.58%     $   47    $ 1,050      4.71%     $   49
   Brokered                               4,589      6.66       306     3,418     6.93         237      3,222      7.21         232
   Other time                             2,212      6.12       135     1,921     6.05         116      1,278      6.41          83
- -----------------------------------------------------------------------------------------------------------------------------------
     Total interest bearing deposits      7,764      6.21       482     6,360     6.29         400      5,550      6.55         364
Other borrowings                         11,371      6.07       691    10,307     6.11         632      8,312      6.75         561
- -----------------------------------------------------------------------------------------------------------------------------------
     Total interest bearing liabilities  19,135      6.13     1,173    16,667     6.18       1,032     13,862      6.67         925
Shareholder's equity/other liabilities    4,904                         4,177                           3,537
- -----------------------------------------------------------------------------------------------------------------------------------
     Total liabilities and
         shareholders' equity           $24,039                       $20,844                         $17,399
- ----------------------------------------===========================================================================================
Net interest income                                          $1,955                         $1,685                           $1,467
- ----------------------------------------===========================================================================================
Net interest margin(1)                                         8.45%                          8.36%                            8.74%

- ----------------------------------------===========================================================================================
Interest rate spread(2)                              7.39%                        7.29%                            7.58%
- ----------------------------------------===========================================================================================

(1)  Net interest margin represents net interest income as a percentage of total
     interest earning assets.
(2)  Interest rate spread represents the difference between the rate on total
     interest earning assets and the rate on total interest bearing liabilities.


MSDWD 48
      --

 
RATE/VOLUME ANALYSIS



FISCAL YEAR (DOLLARS IN MILLIONS)                                     1997 VS. 1996                        1996 VS. 1995
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) DUE TO CHANGES IN:                 VOLUME          RATE         TOTAL        VOLUME          RATE          TOTAL

- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
INTEREST REVENUE
- ----------------
General purpose credit card loans                        $339            $8          $347          $353         $(129)         $224
Other consumer loans                                        1            26            27            61            14            75
Investment securities                                      (3)           --            (3)            3            (1)            2
Other                                                      33             7            40            29            (5)           24
                                                                                     ----                                      ----
     Total interest revenue                               400            11           411           482          (157)          325
- -----------------------------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE
- ----------------

Interest bearing deposits
   Savings                                                 (3)           (3)           (6)           (1)           (1)           (2)

   Brokered                                                81           (12)           69            15           (10)            5
   Other time                                              18             1            19            41            (8)           33
                                                                                     ----                                      ----

     Total interest bearing deposits                       88            (6)           82            53           (17)           36
Other borrowings                                           64            (5)           59           136           (65)           71
                                                                                     ----                                      ----
     Total interest expense                               151           (10)          141           188           (81)          107
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income                                      $249           $21          $270          $294          $(76)         $218
- ---------------------------------------------------------==========================================================================


Net interest income increased 16% in fiscal 1997 and 15% in fiscal 1996. The
increases in both years were due to higher average levels of consumer loans
outstanding, partially offset by the effects of higher charge-offs on interest
revenue. The impact of higher charge-offs in fiscal 1997 was mitigated by
pricing actions implemented in the fourth quarter of fiscal 1996. In both years,
the effects of changes in interest rates on the Company's variable rate loan
portfolio were substantially offset by comparable changes in the Company's cost
of funds for the related financing. Fiscal 1997's revenues also were impacted by
the pricing actions implemented in the fourth quarter of fiscal 1996. The
Company believes that the effect of changes in market interest rates on net
interest income were mitigated as a result of its liquidity and interest rate
risk policies.

     The supplemental table below provides average managed loan balance and rate
information which takes into account both owned and securitized loans:


SUPPLEMENTAL AVERAGE MANAGED LOAN INFORMATION



FISCAL YEAR (DOLLARS IN MILLIONS)                                 1997                       1996                       1995
- -----------------------------------------------------------------------------------------------------------------------------------
                                                          AVERAGE                    AVERAGE                   AVERAGE
                                                          BALANCE        RATE        BALANCE        RATE        BALANCE       RATE
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                                                               

Consumer loans                                            $34,619       14.83%       $31,459       14.83%       $25,897       15.41%
General purpose credit card loans                          32,176       14.72         29,021       14.81         23,970       15.41
Total interest earning assets                              36,475       14.38         32,770       14.46         26,670       15.14
Total interest bearing liabilities                         32,469        6.17         29,277        6.22         23,756        6.75
Consumer loan interest rate spread                                       8.66                       8.61                       8.66
Interest rate spread                                                     8.21                       8.24                       8.39
Net interest margin                                                      8.89                       8.90                       9.12
- ----------------------------------------------------------=========================================================================



Provision for Consumer Loan Losses

The provision for consumer loan losses is the amount necessary to establish the
allowance for loan losses at a level that the Company believes is adequate to
absorb estimated losses in its consumer loan portfolio at the balance sheet
date. The Company's allowance for loan losses is regularly evaluated by
management for adequacy on a portfolio-by-portfolio basis and was $884 million
at fiscal year-end 1997 and $802 million at fiscal year-end 1996.

      The provision for consumer loan losses, which is affected by net
charge-offs, loan volume and changes in the amount of consumer loans estimated
to be uncollectable,



                                                                        MSDWD 49
                                                                              --

 
increased 23% in fiscal 1997 and 68% in fiscal 1996. In both fiscal 1997 and
fiscal 1996, the increase was primarily due to higher net charge-offs, which
resulted from an increase in the percentage of consumer loans charged off and a
higher level of average consumer loans outstanding. In fiscal 1996, the effect
of an increase in the Company's estimate of the allowance for loan losses,
primarily in the fourth quarter of fiscal 1996, was partially offset by a lower
provision for losses for consumer loans intended to be securitized. The
increases in both years in the Company's net charge-off rate were consistent
with the industry-wide trend of increasing credit loss rates that the Company
believes is related, in part, to increased consumer debt levels and bankruptcy
rates. The Company believes this trend may continue and the Company may
experience a higher net charge-off rate in fiscal 1998. In fiscal 1996, the
Company took steps to reduce the impact of this trend, including raising credit
quality standards for new accounts, selectively reducing credit limits and
increasing collection activity. The Company continued to implement similar
measures in fiscal 1997, including a more stringent screening of new
cardmembers, tightened overlimit authorization procedures, and the closing of
certain high risk accounts. The Company believes these measures, designed to
improve credit quality, had a minimal impact in fiscal 1997 due to the period of
time necessary for such measures to have a meaningful effect on portfolio credit
quality, but believes they may have an increased effect in fiscal 1998. The
Company's expectations about future charge-off rates and credit quality are
subject to uncertainties that could cause actual results to differ materially
from what has been discussed above. Factors that influence the level and
direction of consumer loan delinquencies and charge-offs include changes in
consumer spending and payment behaviors, bankruptcy trends, the seasoning of the
Company's loan portfolio, interest rate movements and their impact on consumer
behavior, and the rate and magnitude of changes in the Company's consumer loan
portfolio, including the overall mix of accounts, products and loan balances
within the portfolio.

     Consumer loans are considered delinquent when interest or principal
payments become 30 days past due. Consumer loans are charged off when they
become 180 days past due, except in the case of bankruptcies and fraudulent
transactions, where loans are charged off earlier. Loan delinquencies and
charge-offs are primarily affected by changes in economic conditions and may
vary throughout the year due to seasonal consumer spending and payment
behaviors. The Company believes that changes in its consumer loan delinquency
rates in fiscal 1997 and 1996 were related to the industry-wide credit
conditions discussed previously.

     From time to time, the Company has offered and may continue to offer
cardmembers with accounts in good standing the opportunity to skip the minimum
monthly payment, while continuing to accrue periodic finance charges, without
being considered to be past due ("skip-a-payment"). The comparison of
delinquency rates at any particular point in time may be affected depending on
the timing of the "skip-a-payment" program. The delinquency rate for consumer
loans 30-89 days past due at November 30, 1997 was favorably impacted by a
skip-a-payment offer allowing certain cardmembers to skip their October 1997
monthly payment. The following table presents delinquency and net charge-off
rates with supplemental managed loan information:

ASSET QUALITY



FISCAL YEAR (DOLLARS IN MILLIONS)                        1997          NOVEMBER 30, 1996         1996                 1995
- ----------------------------------------------------------------------------------------------------------------------------------

                                                   OWNED    MANAGED     OWNED    MANAGED     OWNED   MANAGED      OWNED    MANAGED
- ----------------------------------------------------------------------------------------------------------------------------------

                                                                                                       
Consumer loans at period-end                     $20,917    $35,950   $20,085    $33,316   $22,064   $35,261    $20,442    $30,340
Consumer loans contractually past due as a
   percentage of period-end consumer loans:
     30 to 89 days                                  3.96%      3.91%     4.45%      4.49%     4.42%     4.41%      4.19%      4.19%
     90 to 179 days                                 3.11%      3.07%     2.78%      2.78%     2.89%     2.82%      2.16%      2.14%
Net charge-offs as a percentage of
   average consumer loans                           6.78%      6.95%     5.29%      5.43%     5.45%     5.59%      3.69%      3.92%
- -------------------------------------------------==================================================================================



MSDWD 50
      --

 
Non-Interest Expenses

Total non-interest expenses increased 6% to $2,216 million in fiscal 1997 and
13% to $2,098 million in fiscal 1996.

     Employee compensation and benefits expense increased 12% in fiscal 1997 and
15% in fiscal 1996. The increases in both years were due to higher headcount and
employment costs associated with processing increased credit card transaction
volume and servicing additional NOVUS Network merchants and active credit card
accounts, including collection activities.

     Brokerage, clearing and exchange fees of $12 million were recorded in
fiscal 1997. These expenses relate to the trading volume recorded by Discover
Brokerage Direct, the Company's provider of electronic brokerage services that
was acquired in January 1997.

     Information processing and communications expense decreased 1% in fiscal
1997 and increased 16% in fiscal 1996. In both fiscal years, there were higher
costs associated with processing increased transaction volume, servicing
additional NOVUS Network merchants and active credit card accounts, and
developing the systems supporting the Company's multi-card strategy. In fiscal
1997, such increases were offset by an adjustment resulting from the sale of the
Company's indirect interest in one of the Company's transaction processing
vendors.

     Marketing and business development expense increased 8% in fiscal 1997 and
14% in fiscal 1996. In both years, the increase was primarily attributable to
higher cardmember rewards expense. Cardmember rewards expense includes the
Cashback Bonus(R) award, pursuant to which the Company annually pays Discover
cardmembers and Private Issue cardmembers electing this feature a percentage of
their purchase amounts ranging up to one percent (up to 2% for the Private Issue
card) based upon a cardmember's level of annual purchases. Cardmember rewards
expense increased due to continued growth in credit card transaction volume and
increased cardmember qualification for higher award levels. Both years' expenses
also were impacted by higher marketing and promotional costs associated with the
growth of new and existing credit card brands.

     Professional services expense increased 40% in fiscal 1997 and remained
relatively level in fiscal 1996. The increase in fiscal 1997 was primarily due
to higher expenditures for consumer credit counseling and collections services.

     Other non-interest expenses decreased 9% in fiscal 1997 and remained
relatively level in fiscal 1996. Other expenses primarily include fraud losses,
credit inquiry fees and other administrative costs. The decrease in fiscal 1997
was due to a continuing decline in the level of fraud losses. In fiscal 1995,
the Company began implementing several measures designed to reduce fraud losses.
Since the Company began implementing these measures, fraud losses as a
percentage of transaction volume have declined.

Seasonal Factors

The credit card lending activities of Credit and Transaction Services are
affected by seasonal patterns of retail purchasing. Historically, a substantial
percentage of credit card loan growth occurs in the fourth calendar quarter,
followed by a flattening or decline of consumer loans in the subsequent first
calendar quarter. Merchant fees, therefore, have historically tended to increase
in the first fiscal quarter, reflecting higher sales activity in the month of
December. Additionally, higher cardmember rewards expense is accrued in the
fiscal first quarter, reflecting seasonal growth in retail sales volume.

LIQUIDITY AND CAPITAL RESOURCES

The Balance Sheet

The Company's total assets increased to $302.3 billion at November 30, 1997 from
$238.9 billion at fiscal year-end 1996, primarily reflecting growth in financial
instruments owned, reverse repurchase agreements, and securities borrowed. Due
to the favorable operating conditions throughout fiscal 1997, the Company
operated with a larger balance sheet as compared with fiscal 1996, as well as
higher levels of balance sheet leverage. The growth is 


                                                                        MSDWD 51
                                                                              --

 
primarily attributable to the Company's fixed income activities, most notably
corporate debt, foreign sovereign government obligations and reverse repurchase
agreements used in both financing activities and the Company's fixed income
matched book activities. The Company was positioned to capitalize on favorable
conditions in the global fixed income markets, particularly in the global
high-yield and sovereign debt markets. Securities borrowed also rose during
fiscal 1997, reflecting an increase in collateralized lending to facilitate
higher levels of customer activity, as well as increases related to the
Company's proprietary trading activities. A substantial portion of the Company's
total assets consists of highly liquid marketable securities and short-term
receivables arising principally from securities transactions. The highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business.

Funding and Capital Policies

The Company's senior management establishes the overall funding and capital
policies of the Company, reviews the Company's performance relative to these
policies, monitors the availability of sources of financing, reviews the foreign
exchange risk of the Company, and oversees the liquidity and interest rate
sensitivity of the Company's asset and liability position. The primary goal of
the Company's funding and liquidity activities is to ensure adequate financing
over a wide range of potential credit ratings and market environments.

     Many of the Company's businesses are capital-intensive. Capital is required
to finance, among other things, the Company's securities inventories,
underwriting, principal investments, merchant banking activities, consumer loans
and investments in fixed assets. As a policy, the Company attempts to maintain
sufficient capital and funding sources in order to have the capacity to finance
itself on a fully collateralized basis at all times, including periods of
financial stress. Currently, the Company believes that it has sufficient capital
to meet its needs. In addition, the Company attempts to maintain total equity,
on a consolidated basis, at least equal to the sum of all of its subsidiaries'
equity. Subsidiary equity capital requirements are determined by regulatory
requirements (if applicable), asset mix, leverage considerations and earnings
volatility.

     The Company views return on equity to be an important measure of its
performance, in the context of both the particular business environment in which
the Company is operating and its peer group's results. In this regard, the
Company actively manages its consolidated capital position based upon, among
other things, business opportunities, capital availability and rates of return
together with internal capital policies, regulatory requirements and rating
agency guidelines and therefore may, in the future, expand or contract its
capital base to address the changing needs of its businesses. The Company also
had returned internally generated equity capital which was in excess of the
needs of its businesses through common stock repurchases and dividends.

     The Company's liquidity policies emphasize diversification of funding
sources. The Company also follows a funding strategy which is designed to ensure
that the tenor of the Company's liabilities equals or exceeds the expected
holding period of the assets being financed. Short-term funding generally is
obtained at rates related to U.S., Euro or Asian money market rates for the
currency borrowed. Repurchase transactions are effected at negotiated rates.
Other borrowing costs are negotiated depending upon prevailing market conditions
(see Notes 5 and 6 to the consolidated financial statements). Maturities of both
short-term and long-term financings are designed to minimize exposure to
refinancing risk in any one period.

     The volume of the Company's borrowings generally fluctuates in response to
changes in the amount of repurchase transactions outstanding, the level of the
Company's securities inventories and consumer loans receivable, and overall
market conditions. Availability and cost of financing to the Company can vary
depending


MSDWD 52
      --

 
upon market conditions, the volume of certain trading activities, the Company's
credit ratings and the overall availability of credit. The Company, therefore,
maintains a surplus of unused short-term funding sources at all times to
withstand any unforeseen contraction in credit capacity. In addition, the
Company attempts to maintain cash and unhypothecated marketable securities equal
to at least 110% of its outstanding short-term unsecured borrowings. The Company
has in place a contingency funding strategy which provides a comprehensive
one-year action plan in the event of a severe funding disruption.

     The Company views long-term debt as a stable source of funding for core
inventories, consumer loans and illiquid assets and therefore maintains a
long-term debt-to-capitalization ratio at a level appropriate for the current
composition of its balance sheet. In general, fixed assets are financed with
fixed rate long-term debt, and securities inventories and all current assets are
financed with a combination of short-term funding, floating rate long-term debt,
or fixed rate long-term debt swapped to a floating basis. Both fixed rate and
variable rate long-term debt (in addition to sources of funds accessed directly
by the Company's Credit and Transaction Services business) are used to finance
the Company's consumer loan portfolio. Consumer loan financing is targeted to
match the repricing characteristics of the loans financed. The Company uses
derivative products (primarily interest rate and currency swaps) to assist in
asset and liability management, reduce borrowing costs and hedge interest rate
risk (see Note 6 to the consolidated financial statements).

     The Company's reliance on external sources to finance a significant portion
of its day-to-day operations makes access to global sources of financing
important. The cost and availability of financing generally are dependent on the
Company's short-term and long-term debt ratings. In addition, the Company's debt
ratings can have a significant impact on certain trading revenues, particularly
in those businesses where longer term counterparty performance is critical, such
as over-the-counter derivative transactions.

     As of January 31, 1998, the Company's credit ratings were as follows:



                                     COMMERCIAL               SENIOR
                                          PAPER                 DEBT
- ---------------------------------------------------------------------
                                                            
Moody's Investors Service                   P-1                   A1
Standard & Poor's                           A-1                   A+
Thomson BankWatch                         TBW-1                   AA
Dominion Bond Rating Service        R-1 (middle)                 n/a
Duff & Phelps                               D-1+                 AA-
Fitch-IBCA, Inc.                             F1+                 AA-
Japan Bond Research Institute               n/a                  AA-
- ------------------------------------=================================


As the Company continues its global expansion and as revenues are increasingly
derived from various currencies, foreign currency management is a key element of
the Company's financial policies. The Company benefits from operating in several
different currencies because weakness in any particular currency often is offset
by strength in another currency. The Company closely monitors its exposure to
fluctuations in currencies and, where cost-justified, adopts strategies to
reduce the impact of these fluctuations on the Company's financial performance.
These strategies include engaging in various hedging activities to manage income
and cash flows denominated in foreign currencies and using foreign currency
borrowings, when appropriate, to finance investments outside the U.S.

Principal Sources of Funding

The Company funds its balance sheet on a global basis. The Company's funding for
its Securities and Asset Management business is raised through diverse sources.
These sources include the Company's capital, including equity and long-term
debt; repurchase agreements; U.S., Canadian, Euro and French commercial paper;
letters of credit; unsecured bond borrows; German Schuldschein loans; securities
lending; buy/sell agreements; municipal reinvestments; master notes; and
committed and uncommitted lines of credit. Repurchase agreement transactions,
securities lending and a portion of the Company's bank 


                                                                        MSDWD 53
                                                                              --

 
borrowings are made on a collateralized basis and therefore provide a more
stable source of funding than short-term unsecured borrowings.

     The funding sources utilized for the Company's Credit and Transaction
Services business include the Company's capital, including equity and long-term
debt, asset securitizations, commercial paper, deposits, asset-backed commercial
paper, Fed Funds and short-term bank notes. The Company sells consumer loans
through asset securitizations using several transaction structures. Riverwoods
Funding Corporation ("RFC"), an entity included in the consolidated financial
statements of the Company, issues asset-backed commercial paper.

     The Company's bank subsidiaries solicit deposits from consumers, purchase
Fed Funds and issue short-term bank notes. Interest bearing deposits are
classified by type as savings, brokered and other time deposits. Savings
deposits consist primarily of money market deposits and certificate of deposit
accounts sold directly to cardmembers and savings deposits from DWR clients.
Brokered deposits consist primarily of certificates of deposit issued by the
Company's bank subsidiaries. Other time deposits include institutional
certificates of deposit. The Company, through Greenwood Trust Company, an
indirect subsidiary of the Company, sells notes under a short-term bank note
program.

     The Company maintains borrowing relationships with a broad range of banks,
financial institutions, counterparties and others from which it draws funds in a
variety of currencies.

     In November 1997, the Company replaced the predecessor Dean Witter Discover
and Morgan Stanley holding company senior revolving credit agreements with a
senior revolving credit agreement with a group of banks to support general
liquidity needs, including the issuance of commercial paper (the "MSDWD
Facility"). Under the terms of the MSDWD Facility, the banks are committed to
provide up to $6.0 billion. The MSDWD Facility contains restrictive covenants
which require, among other things, that the Company maintain shareholders'
equity of at least $8.3 billion at all times. The Company believes that the
covenant restrictions will not impair the Company's ability to pay its current
level of dividends. At November 30, 1997, no borrowings were outstanding under
the MSDWD Facility.

     The Company maintains a master collateral facility that enables Morgan
Stanley & Co. Incorporated ("MS&Co."), one of the Company's U.S. broker-dealer
subsidiaries, to pledge certain collateral to secure loan arrangements, letters
of credit and other financial accommodations (the "MS&Co. Facility"). As part of
the MS&Co. Facility, MS&Co. also maintains a secured committed credit agreement
with a group of banks that are parties to the master collateral facility under
which such banks are committed to provide up to $1.5 billion. The credit
agreement contains restrictive covenants which require, among other things, that
MS&Co. maintain specified levels of consolidated shareholders' equity and Net
Capital, each as defined. In January 1998, this facility was renewed, and the
amount of the commitment was increased to $1.875 billion. At November 30, 1997,
no borrowings were outstanding under the MS&Co. Facility.
  
     The Company also maintains a revolving committed financing facility that
enables Morgan Stanley & Co. International Limited ("MSIL")to secure committed
funding from a syndicate of banks by providing a broad range of collateral under
repurchase agreements (the "MSIL Facility"). Such banks are committed to provide
up to an aggregate of $1.85 billion available in 12 major currencies. The
facility agreements contain restrictive covenants which require, among other
things, that MSIL maintain specified levels of Shareholders' Equity and
Financial Resources, each as defined. At November 30, 1997, no borrowings were
outstanding under the MSIL Facility.
   
     RFC maintains a senior bank credit facility which supports the issuance of
asset-backed commercial paper. In fiscal 1997, RFC renewed this facility and
increased its amount to $2.55 billion from $2.1 billion. Under the terms of the
asset-backed commercial paper program, certain


MSDWD 54
      --

 
assets of RFC were subject to a lien in the amount of $2.6 billion at November
30, 1997. RFC has never borrowed from its senior bank credit facility. 

        The Company anticipates that it will utilize the MSDWD Facility, the
MS&Co. Facility or the MSIL Facility for short-term funding from time to time
(see Note 5 to the consolidated financial statements).

Fiscal 1997 and Subsequent Activity

During fiscal 1997, the Company took several steps to extend the maturity of its
liabilities, reduce its reliance on unsecured short-term funding and increase
its capital. These steps contributed to a net increase in capital of $2,425
million to $33,577 million at November 30, 1997. The additions to capital
included net issuances of senior notes and subordinated debt aggregating $2,655
million.

     During fiscal 1997, the Company and Morgan Stanley Finance plc, a U.K.
subsidiary ("MS plc"), issued 8.03% Capital Units in an aggregate amount of $134
million. Each Capital Unit consists of (a) a Subordinated Debenture of MS plc
guaranteed by the Company, and (b) a related Purchase Contract issued by the
Company requiring the holder to purchase one Depositary Share representing
shares (or fractional shares) of the Company's 8.03% Cumulative Preferred Stock.
     
     During fiscal 1997, the Company redeemed all 975,000 shares of its 8.88%
Cumulative Preferred Stock at a redemption price of $201.632 per share, which
reflects the stated value of $200 per share together with an amount equal to all
dividends accrued and unpaid to, but excluding, the redemption date. During
fiscal 1997, the Company also redeemed all 750,000 shares of its 8-3/4%
Cumulative Preferred Stock at a redemption price of $200 per share, which was
equal to the stated value of $200 per share.
    
     During fiscal 1997, the Company repurchased shares of its common stock at
an aggregate cost of $124 million and an average cost per share of $34.22. Prior
to the consummation of the Merger, both Morgan Stanley and Dean Witter Discover
rescinded any outstanding share repurchase authorizations.
   
     Between November 30, 1997 and January 31, 1998, additional debt obligations
aggregating approximately $1,659 million were issued. These notes have
maturities from 1998 to 2004.
     
     At November 30, 1997, certain assets of the Company, such as real property,
equipment and leasehold improvements of $1.7 billion, and goodwill and other
intangible assets of $1.4 billion, were illiquid. In addition, certain equity
investments made in connection with the Company's merchant banking and other
principal investment activities, high-yield debt securities, emerging market
debt, and certain collateralized mortgage obligations and mortgage-related loan
products are not highly liquid. In connection with its merchant banking and
other principal investment activities, the Company has equity investments
(directly or indirectly through funds managed by the Company) in privately and
publicly held companies. As of November 30, 1997, the aggregate carrying value
of the Company's equity investments in privately held companies (including
direct investments and partnership interests) was $128 million, and its
aggregate investment in publicly held companies was $547 million.
    
     The Company acts as an underwriter of and as a market-maker in
mortgage-backed pass-through securities, collateralized mortgage obligations and
related instruments, and as a market-maker in commercial, residential and real
estate loan products. In this capacity, the Company takes positions in market
segments in which liquidity can vary greatly from time to time. The carrying
value of the portion of the Company's mortgage-related portfolio at November 30,
1997 traded in markets that the Company believed were experiencing lower levels
of liquidity than traditional mortgage-backed pass-through securities
approximated $2,697 million.
     
     In addition, at November 30, 1997, the aggregate value of high-yield debt
securities and emerging market loans and securitized instruments held in
inventory was $2,188 million (a substantial portion of which was subordinated
debt) with not more than 4%, 14% and 16% of all such securities, loans and
instruments attributable to any


                                                                        MSDWD 55
                                                                              --

 
one issuer, industry or geographic region, respectively. Non-investment grade
securities generally involve greater risk than investment grade securities due
to the lower credit ratings of the issuers, which typically have relatively high
levels of indebtedness and are, therefore, more sensitive to adverse economic
conditions. In addition, the market for non-investment grade securities and
emerging market loans and securitized instruments has been, and may in the
future be, characterized by periods of volatility and illiquidity. The Company
has in place credit and other risk policies and procedures to control total
inventory positions and risk concentrations for non-investment grade securities
and emerging market loans and securitized instruments.
     
     The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1997 approximately $150
million in connection with its merchant banking and other principal investment
activities. Additionally, the Company has provided and will continue to provide
financing, including margin lending and other extensions of credit to clients.
    
     The Company may, from time to time, also provide financing or financing
commitments to companies in connection with its investment banking and merchant
banking activities. The Company may provide extensions of credit to leveraged
companies in the form of senior or subordinated debt, as well as bridge
financing on a selective basis (which may be in connection with the Company's
commitment to the Morgan Stanley Bridge Fund, LLC). At November 30, 1997, the
Company had one such loan of $355 million outstanding in connection with its
securitized debt underwriting activities.
    
     The Company also engages in senior lending activities, including
origination, syndication and trading of senior secured loans of non-investment
grade companies. Such companies are more sensitive to adverse economic
conditions than investment grade issuers, but the loans are generally made on a
secured basis and are senior to the non-investment grade securities of these
issuers that trade in the capital markets. At November 30, 1997, the aggregate
value of senior secured loans and positions held by the Company was $738
million, and aggregate senior secured loan commitments were $325 million.
     
     The gross notional and fair value amounts of derivatives used by the
Company for asset and liability management and as part of its trading activities
are summarized in Notes 6 and 8, respectively, to the consolidated financial
statements (see also "Derivative Financial Instruments" herein).

Year 2000 and EMU

Many of the world's computer systems currently record years in a two-digit
format. Such computer systems will be unable to properly interpret dates beyond
the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with which
they electronically interact, such as customers, creditors and borrowers.

     To ensure that the Company's computer systems are Year 2000 compliant, a
team of information technology professionals began preparing for the Year 2000
issue in 1995. Since then, the Company has been reviewing each of its systems
and programs to identify those that contain two-digit year codes. The Company is
assessing the amount of programming required to upgrade or replace each of the
affected programs with the goal of completing all relevant internal software
remediation and testing by the end of 1998 with continuing Year 2000 compliance
efforts through 1999. In addition, the Company is actively working with all of
its major external counterparties and suppliers to assess their compliance
efforts and the Company's exposure to them.
 
     Based upon current information, the Company believes that its Year 2000
expenditures for 1998 and through the project's completion will be approximately
$125 million. Costs incurred relating to this project are being expensed by the
Company during the period in which they are incurred. The Company's expectations


MSDWD 56
      --

 
about future costs associated with the Year 2000 issue are subject to
uncertainties that could cause actual results to differ materially from what has
been discussed above. Factors that could influence the amount and timing of
future costs include the success of the Company in identifying systems and
programs that contain two-digit year codes, the nature and amount of programming
required to upgrade or replace each of the affected programs, the rate and
magnitude of related labor and consulting costs, and the success of the
Company's external counterparties and suppliers in addressing the Year 2000
issue.

     Modifications to the Company's computer systems and programs are also being
made in order to prepare for the upcoming EMU. The EMU, which will ultimately
result in the replacement of certain European currencies with the "Euro," will
primarily impact the Company's Securities and Asset Management business. Costs
associated with the modifications necessary to prepare for the EMU are also
being expensed by the Company during the period in which they are incurred.
 
     Preparation relating to the Year 2000 issue and the EMU transition will
also create additional resource allocation challenges that the Company and other
international financial institutions will need to address.

Regulatory Capital Requirements

DWR and MS&Co. are registered broker-dealers and registered futures commission
merchants and, accordingly, are subject to the minimum net capital requirements
of the Securities and Exchange Commission ("SEC"), the New York Stock Exchange
and the Commodity Futures Trading Commission. MSIL, a London-based broker-dealer
subsidiary, is regulated by the Securities and Futures Authority ("SFA") in the
United Kingdom and, accordingly, is subject to the Financial Resources
Requirements of the SFA. Morgan Stanley Japan Limited ("MSJL"), a Tokyo-based
broker-dealer, is regulated by the Japanese Ministry of Finance with respect to
regulatory capital requirements. DWR, MS&Co., MSIL and MSJL have consistently
operated in excess of their respective regulatory requirements (see Note 10 to
the consolidated financial statements).
 
     Certain of the Company's subsidiaries are Federal Deposit Insurance
Corporation ("FDIC") insured financial institutions. Such subsidiaries are
therefore subject to the regulatory capital requirements adopted by the FDIC.
These subsidiaries have consistently operated in excess of these and other
regulatory requirements.
   
     Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their applicable local capital adequacy requirements. In addition,
Morgan Stanley Derivative Products Inc., a triple-A rated subsidiary through
which the Company conducts some of its derivative activities, has established
certain operating restrictions which have been reviewed by various rating
agencies.

Effects of Inflation and Changes in Foreign Exchange Rates

Because the Company's assets to a large extent are liquid in nature, they are
not significantly affected by inflation. However, inflation may result in
increases in the Company's expenses, which may not be readily recoverable in the
price of services offered. To the extent inflation results in rising interest
rates and has other adverse effects upon the securities markets, on the value of
financial instruments and upon the markets for consumer credit services, it may
adversely affect the Company's financial position and profitability.

     A portion of the Company's business is conducted in currencies other than
the U.S. dollar. Non-U.S. dollar assets typically are financed by direct
borrowing or swap-based funding in the same currency. Changes in foreign
exchange rates affect non-U.S. dollar revenues as well as non-U.S. dollar
expenses. Those foreign exchange exposures that arise and are not hedged by an
offsetting foreign currency exposure are actively managed by the Company to
minimize risk of loss due to currency fluctuations.


                                                                        MSDWD 57
                                                                              --

 
Derivative Financial Instruments

The Company actively offers to clients and trades for its own account a variety
of financial instruments described as "derivative products" or "derivatives."
These products generally take the form of futures, forwards, options, swaps,
caps, collars, floors, swap options and similar instruments which derive their
value from underlying interest rates, foreign exchange rates, or commodity or
equity instruments and indices. All of the Company's trading-related divisions
use derivative products as an integral part of their respective trading
strategies, and such products are used extensively to manage the market exposure
that results from a variety of proprietary trading activities (see Note 8 to the
consolidated financial statements). In addition, as a dealer in certain
derivative products, most notably interest rate and currency swaps, the Company
enters into derivative contracts to meet a variety of risk management and other
financial needs of its clients. Given the highly integrated nature of derivative
products and related cash instruments in the determination of overall trading
division profitability and the context in which the Company manages its trading
areas, it is not meaningful to allocate trading revenues between the derivative
and underlying cash instrument components. Moreover, the risks associated with
the Company's derivative activities, including market and credit risks, are
managed on an integrated basis with associated cash instruments in a manner
consistent with the Company's overall risk management policies and procedures
(see "Risk Management" following Management's Discussion and Analysis of
Financial Condition and Results of Operations). It should be noted that while
particular risks may be associated with the use of derivatives, in many cases
derivatives serve to reduce, rather than increase, the Company's exposure to
market, credit and other risks.

     The total notional value of derivative trading contracts outstanding at
November 30, 1997 was $2,529 billion (as compared with $1,317 billion at fiscal
year-end 1996). While these amounts are an indication of the degree of the
Company's use of derivatives for trading purposes, they do not represent the
Company's market or credit exposure and may be more indicative of customer
utilization of derivatives. The Company's exposure to market risk relates to
changes in interest rates, foreign currency exchange rates or the fair value of
the underlying financial instruments or commodities. The Company's exposure to
credit risk at any point in time is represented by the fair value of such
contracts reported as assets. Such total fair value outstanding as of November
30, 1997 was $17.1 billion. Approximately $14.2 billion of that credit risk
exposure was with counterparties rated single-A or better (see Note 8 to the
consolidated financial statements).

     The Company also uses derivative products (primarily interest rate,
currency and equity swaps) to assist in asset and liability management, reduce
borrowing costs and hedge interest rate risk (see Notes 5 and 6 to the
consolidated financial statements).

     The Company believes that derivatives are valuable tools that can provide
cost-effective solutions to complex financial problems and remains committed to
providing its clients with innovative financial products. The Company
established Morgan Stanley Derivative Products Inc. to offer derivative products
to clients who will enter into derivative transactions only with triple-A rated
counterparties. In addition, the Company, through its continuing involvement
with regulatory, self-regulatory and industry activities such as the
International Swaps and Derivatives Association Inc. (ISDA), the Securities
Industry Association, the Group of 30 and the U.S. securities firms' Derivatives
Policy Group, provides leadership in the development of policies and practices
in order to maintain confidence in the markets for derivative products, which is
critical to the Company's ability to assist clients in meeting their overall
financial needs.


MSDWD 58
      --

EX-13.4

                                                                    EXHIBIT 13.4
 
RISK MANAGEMENT
- ---------------

RISK MANAGEMENT POLICY AND CONTROL STRUCTURE

Risk is an inherent part of the Company's business and activities. The extent to
which the Company properly and effectively identifies, assesses, monitors and
manages each of the various types of risk involved in its activities is critical
to its soundness and profitability. The Company's broad-based portfolio of
business activities helps reduce the impact that volatility in any particular
area or related areas may have on its net revenues as a whole. The Company seeks
to identify, assess, monitor and manage, in accordance with defined policies and
procedures, the following principal risks involved in the Company's business
activities: market risk, credit risk, operational risk, legal risk and funding
risk. Funding risk is discussed in the Liquidity and Capital Resources section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 36.

     Risk management at the Company is a multi-faceted process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the global financial services
business, the Company's risk management policies and procedures are evolutionary
in nature and are subject to ongoing review and modification.

     The Management Committee, composed of the Company's most senior officers,
establishes the overall risk management policies for the Company and reviews the
Company's performance relative to these policies. The Management Committee has
created several Risk Committees to assist it in monitoring and reviewing the
Company's risk management practices. These Risk Committees, among other things,
review the general framework, levels and monitoring procedures relating to the
Company's market and credit risk profile, general sales practice policies,
pricing of consumer loans and reserve adequacy, legal enforceability and
operational and systems risks. The Controllers, Treasury, Law, Compliance and
Governmental Affairs and Market Risk Departments, which are all independent of
the Company's business units, assist senior management and the Risk Committees
in monitoring and controlling the Company's risk profile. In addition, the
Internal Audit Department, which also reports to senior management, evaluates
the Company's operations and control environment through periodic examinations
of business operational areas. The Company continues to be committed to
employing qualified personnel with appropriate expertise in each of its various
administrative and business areas to implement effectively the Company's risk
management and monitoring systems and processes.

     The following is a discussion of the Company's risk management policies and
procedures for its principal risks (other than funding risk). The discussion
focuses on the Company's securities trading (primarily its institutional trading
activities) and consumer lending and related activities. The Company believes
that these activities generate a substantial portion of its principal risks.
This discussion and the estimated amounts of the Company's market risk exposure
generated by the Company's statistical analyses are forward looking statements.
However, the analyses used to assess such risks are not projections of future
events, and actual results may vary significantly from such analyses due to
actual events in the markets in which the Company operates and certain other
factors described below.

MARKET RISK

Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio. For a
discussion of the Company's currency exposure relating to its net monetary
investments in non-U.S. dollar functional currency subsidiaries, see Note 10 to
the consolidated financial statements.


                                                                        MSDWD 59
                                                                              --

 
TRADING AND RELATED ACTIVITIES

Primary Market Risk Exposures and Market Risk Management

During fiscal 1997, the Company had exposures to a wide range of interest rates,
equity prices, foreign exchange rates and commodity prices -- and associated
volatilities and spreads -- related to a broad spectrum of global markets in
which it conducts its trading activities. The Company is exposed to interest
rate risk as a result of maintaining market making and proprietary positions and
trading in interest rate sensitive financial instruments (e.g., risk arising
from changes in the level or volatility of interest rates, the timing of
mortgage prepayments, the shape of the yield curve and credit spreads for
corporate bonds and emerging market debt). The Company is exposed to equity
price risk as a result of making markets in equity securities and equity
derivatives and maintaining proprietary positions. The Company is exposed to
foreign exchange rate risk in connection with making markets in foreign
currencies, foreign currency options and maintaining foreign exchange positions.
The Company's currency trading covers many foreign currencies including the yen,
deutsche mark, pound sterling and French franc. The Company is exposed to
commodity price risk as a result of trading in commodity-related derivatives and
physical commodities.
  
     The Company manages its trading positions by employing a variety of hedging
strategies, which include diversification of risk exposures and the purchase or
sale of positions in related securities and financial instruments, including a
variety of derivative products (e.g., swaps, options, futures and forwards). The
Company manages the market risk associated with its trading activities
Company-wide, on a trading division level worldwide and on an individual product
basis. The Company manages and monitors its market risk exposures in such a way
as to maintain a portfolio that the Company believes is well-diversified with
respect to market risk factors. Market risk guidelines and limits have been
approved for the Company and each trading division of the Company worldwide
(equity, fixed income, foreign exchange and commodities). Discrete market risk
limits are assigned to trading divisions and trading desks within trading areas
which are compatible with the trading division limits. Trading division risk
managers, desk risk managers and the Market Risk Department all monitor market
risk measures against limits and report major market and position events to
senior management.

     The Market Risk Department independently reviews the Company's trading
portfolios on a regular basis from a market risk perspective utilizing
Value-at-Risk and other quantitative and qualitative risk measurements and
analyses. The Company may use measures, such as rate sensitivity, convexity,
volatility and time decay measurements, to estimate market risk and to assess
the sensitivity of positions to changes in market conditions. Stress testing,
which measures the impact on the value of existing portfolios of specified
changes in market factors, for certain products is performed periodically and
reviewed by trading division risk managers, desk risk managers and the Market
Risk Department.

Value-at-Risk

The Company uses a statistical technique known as Value-at-Risk ("VaR") to
assist management in measuring its exposure to market risk related to its
trading positions. The VaR model is one of the tools used by senior management
to monitor and review the market risk exposure of the Company's trading
portfolios.

VaR Methodology, Assumptions and Limitations. VaR incorporates numerous
variables that could impact the fair value of the Company's trading portfolio,
including equity and commodity prices, interest rates, foreign exchange rates
and associated volatilities, as well as correlation that exists among these
variables. The VaR model generally takes into account linear and non-linear
exposures to price and interest rate risk and linear exposure to implied
volatility risks. The Company estimates VaR using a model based on historical
simulation with a confidence level of 99%. Historical simulation involves
constructing a distribution of hypothetical daily changes in trading portfolio
value. The hypothetical changes in portfolio value are based on daily observed
percentage changes in key market indices or other market factors ("market risk
factors") to which the portfolio is sensitive. In the case of the Company's VaR,
the historical 


MSDWD 60
      --

 
observation period is approximately four years. The Company's one-day 99% VaR
corresponds to the negative change in portfolio value that, based on observed
market risk factor moves, would have been exceeded with a frequency of 1%, or
once in 100 trading days.

     VaR models such as the Company's are continually evolving as trading
portfolios become more diverse and modeling techniques and systems capabilities
improve. During fiscal 1997, the position and risk coverage of the Company's VaR
model were broadened and risk measurement methodologies were refined. Among the
most significant enhancements were the incorporation of name-specific risk in
global equities and in U.S. corporate and high-yield bonds. As of November 30,
1997, a total of approximately 420 market risk factor benchmark data series were
incorporated in the Company's VaR model covering interest rates, equity prices,
foreign exchange rates, commodity prices and associated volatilities. In
addition, the model includes market risk factors for approximately 7,500 equity
names and 60 classes of corporate and high-yield bonds.
 
     Among their benefits, VaR models permit estimation of a portfolio's
aggregate market risk exposure, incorporating a range of varied market risks;
reflect risk reduction due to portfolio diversification; and are comprehensive
yet relatively easy to interpret. However, VaR risk measures should be
interpreted in light of the methodology's limitations, which include that past
changes in market risk factors will not always accurately predict future changes
in a portfolio's value; it is not possible to perfectly model all of a trading
portfolio's market risk factors; published VaR results reflect past trading
positions while future risk depends on future positions; and VaR using a one-day
time horizon does not fully capture the market risk of positions that cannot be
liquidated or hedged within one day. The Company is aware of these and other
limitations and therefore uses VaR as only one component in its risk management
review process. This process also incorporates stress testing and extensive risk
monitoring and control at the trading desk, division and Company levels.

VaR for Fiscal 1997. The table below presents the results of the Company's VaR
for each of the Company's primary market risk exposures and on an aggregate
basis at November 30, 1997 incorporating substantially all financial instruments
generating market risk (including funding liabilities related to trading
positions and certain merchant banking positions). A small proportion of trading
positions however, were not covered, and the modeling of the risk
characteristics of some positions involved approximations which could be
significant under certain circumstances. Market risks that the Company has found
particularly difficult to incorporate in its VaR model include certain risks
associated with mortgage-backed securities and certain commodity price risks
(such as electricity price risk).

     Since VaR is based on historical data and changes in market risk factor
returns, VaR should not be viewed as predictive of the Company's future
financial performance or its ability to manage and monitor risk and there can be
no assurance that the Company's actual losses on a particular day will not
exceed the VaR amounts indicated below or that such losses will not occur more
than once in 100 trading days.




PRIMARY MARKET RISK CATEGORY                                    99%/ONE-DAY VaR
(DOLLARS IN MILLIONS, PRE-TAX)                             AT NOVEMBER 30, 1997
- --------------------------------------------------------------------------------
                                                                          
Interest rate                                                                $28
Equity price                                                                  17
Foreign exchange rate                                                          7
Commodity price                                                                6
- --------------------------------------------------------------------------------
Subtotal                                                                      58
Less diversification benefit(1)                                               19
- --------------------------------------------------------------------------------
Aggregate Value-at-Risk                                                      $39
- -----------------------------------------------------------------------------===


(1)  Equals the difference between aggregate VaR and the sum of the VaRs for the
     four risk categories. This benefit arises because the simulated 99%/one-
     day losses for each of the four primary market risk categories occur on
     different days; similar diversification benefits are also taken into
     account within each such category.


                                                                        MSDWD 61
                                                                              --

 
In order to facilitate comparison with other global financial services firms,
the Company notes that its aggregate year-end VaR for other confidence levels
and time horizons was as follows: $21 million for 95%/one-day VaR and $98
million for 99%/two-week VaR.

     The chart below presents supplemental information regarding 99%/one-day VaR
over the course of fiscal 1997 for substantially all of the Company's
institutional trading activities. These activities include most of the Company's
trading-related market risk, but exclude certain market risks incorporated in
the Company's November 30, 1997 VaR calculation discussed above such as market
risks related to the Company's retail trading activities, equity price risk in
certain merchant banking positions and funding liabilities related to trading
positions.


                           [LINE CHART APPEARS HERE]

Description of Line Chart: Shown on page 62 is a line graph displaying 99%/one-
day Value-at-Risk, as defined in the annual report text, for trading days in
fiscal year 1997. The horizontal axis of the chart is marked to indicate the
start of each fiscal quarter. The vertical axis of the chart is marked to
indicate VaR in millions of dollars. The values displayed in the graph start the
fiscal year in the $30-35 million range and end the fiscal year in the $35-40
million range. The maximum VaR, in the $40-45 million range is reached in the
first quarter and the minimum VaR, in the $20-25 million range is reached in the
second quarter.




The Company evaluates the reasonableness of its VaR model by comparing the
potential declines in portfolio values generated by the model with actual
trading results.

The histogram below shows daily trading revenue net of interest expense for
fiscal 1997 for substantially all of the Company's institutional trading
activities. In fiscal 1997, the Company did not incur any daily trading losses
in its institutional trading business in excess of the corresponding daily
99%/one-day VaR.


                           [HISTOGRAM APPEARS HERE]
                             
Description of Histogram: Shown on page 62 is a histogram displaying the
frequency distribution of daily trading revenue, as defined in the annual report
text. The horizontal axis of the chart is marked to indicate the daily trading
revenue in millions of dollars beginning at less than $15 million on the left
and increasing from the $15 million level at intervals at $2 1/2 million to
greater than $50 million on the right. The vertical axis is marked to indicate
the number of days. The histogram shows that daily trading revenue was most
frequently in the range of $17.5-20 million, and that trading revenue fell
within this range on 48 days. The histogram shows that the number of days in a
range generally, but not invariably, falls the further one goes above or below
this range. The histogram also shows that trading revenue was less than - $15
million on one day and exceeded $50 million on four days.

CONSUMER LENDING AND RELATED ACTIVITIES

Interest Rate Risk and Management

In its consumer lending activities, the Company is exposed to market risk
primarily from changes in interest rates. Such changes in interest rates impact
interest earning assets, principally credit card and other consumer loans and
net servicing fees received in connection with consumer loans sold through asset
securitizations, as well as the interest sensitive liabilities which finance
these assets, including asset securitizations, commercial paper, medium-term
notes, long-term borrowings, deposits, asset-backed commercial paper, Fed Funds
and short-term bank notes.


MSDWD 62
      --

 
     The Company's interest rate risk management policies are designed to reduce
the potential volatility of earnings which may arise from changes in interest
rates. This is accomplished primarily by matching the repricing of credit card
and consumer loans, and the related financing. To the extent that asset and
related financing repricing characteristics of a particular portfolio are not
matched effectively, the Company utilizes interest rate derivative contracts,
such as swap, cap and cost of funds agreements, to achieve its matched financing
objectives. Interest rate swap agreements effectively convert the underlying
asset or financing from fixed to variable repricing, variable to fixed
repricing, or in more limited circumstances from variable to variable repricing.
Interest rate cap agreements effectively establish a maximum interest rate on
certain variable rate financings. Cost of funds agreements, entered into in
connection with certain private label credit card merchant agreements,
effectively establish a fixed rate of financing for the related private label
credit card portfolio.

Sensitivity Analysis Methodology, Assumptions and Limitations

For its consumer lending activities, the Company uses a variety of techniques to
assess its interest rate risk exposure, one of which is interest rate
sensitivity simulation. For purposes of presenting the possible earnings effect
of a hypothetical, adverse change in interest rates over the 12-month period
from November 30, 1997, the Company assumed that all interest rate sensitive
assets and liabilities will be impacted by a hypothetical, immediate 100 basis
point increase in interest rates as of the beginning of the period.

     Interest rate sensitive assets are assumed to be those for which the stated
interest rate is not contractually fixed for the next 12-month period. Thus,
assets which have a market-based index, such as the prime rate, which will reset
before the end of the 12-month period, or assets whose rates are fixed at
November 30, 1997, but which will mature, or otherwise contractually reset to a
market-based indexed rate prior to the end of the 12-month period, are
rate-sensitive. The latter category includes certain credit card loans which may
be offered at below-market rates for an introductory period, such as for balance
transfers and special promotional programs, after which the loans will
contractually reprice in accordance with the Company's normal market-based
pricing structure. For purposes of measuring rate-sensitivity for such loans,
only the effect of the hypothetical 100 basis point change in the underlying
market-based index, such as the prime rate, has been considered rather than the
full change in the rate to which the loan would contractually reprice. For
assets which have a fixed rate at November 30, 1997 but which contractually
will, or are assumed to, reset to a market-based index during the next 12
months, earnings sensitivity is measured from the expected repricing date. In
addition, for all interest rate sensitive assets, earnings sensitivity is
calculated net of expected loan losses.

     Interest rate sensitive liabilities are assumed to be those for which the
stated interest rate is not contractually fixed for the next 12-month period.
Thus, liabilities which have a market-based index, such as the prime, commercial
paper, or LIBOR rates, which will reset before the end of the 12-month period,
or liabilities whose rates are fixed at November 30, 1997, but which will mature
and be replaced with a market-based indexed rate prior to the end of the
12-month period, are rate-sensitive. For liabilities which have a fixed rate at
November 30, 1997, but which are assumed to reset to a market-based index during
the next 12 months, earnings sensitivity is measured from the expected repricing
date.

     Assuming a hypothetical, immediate 100 basis point increase in the interest
rates affecting all interest rate sensitive assets and liabilities as of
November 30, 1997, pre-tax income of consumer lending activities (Credit and
Transaction Services) over the next 12-month period would be reduced by
approximately $66 million.

     The hypothetical model assumes that the balances of interest rate sensitive
assets and liabilities at November 30, 1997 will remain constant over the next
12-month period. It does not assume any growth, strategic change in business
focus, change in asset pricing philosophy, or change in asset/liability funding
mix. Thus, this model represents a static analysis which cannot adequately
portray how the Company would respond to significant changes in market
conditions. Furthermore, the analysis does not necessarily reflect the Company's
expectations regarding the movement of interest rates in the near term,
including the likelihood of an immediate 100 basis point


                                                                        MSDWD 63
                                                                              --

 
change in market interest rates nor necessarily the actual effect on earnings if
such rate changes were to occur.

CREDIT RISK

The Company's exposure to credit risk arises from the possibility that a
customer or counterparty to a transaction might fail to perform under its
contractual commitment, resulting in the Company incurring losses. With respect
to its trading activities, the Company has credit guidelines which limit the
Company's credit exposure to any one counterparty. Specific credit risk limits
based on the credit guidelines are also in place for each type of counterparty
(by rating category) as well as for secondary positions in high-yield and
emerging market debt. In addition to monitoring credit limits, the Company
manages the credit exposure relating to the Company's trading activities by
reviewing counterparty financial soundness periodically, by entering into master
netting agreements and collateral arrangements with counterparties in
appropriate circumstances and by limiting the duration of exposure. With respect
to its consumer lending activities, potential credit card holders undergo credit
reviews by the Credit Department to establish that they meet standards of
ability and willingness to pay. Credit card applications are evaluated using
credit scoring systems (statistical evaluation models that assign point values
to information contained in applications). The Company's credit scoring systems
are customized using the Company's criteria and historical data. Each
cardmember's credit line is reviewed at least annually, and actions resulting
from such review may include lowering a cardmember's credit line or closing the
account. In addition, the Company reviews the creditworthiness of prospective
Novus Network merchants and conducts annual reviews of merchants, with greatest
scrutiny given to merchants with substantial sales volume.

OPERATIONAL RISK

Operational risk refers to the risk of loss resulting from improper processing
of transactions or deficiencies in the Company's operating systems or control
processes. With respect to its trading activities, the Company has developed and
continues to enhance specific policies and procedures that are designed to
provide, among other things, that all transactions are accurately recorded and
properly reflected in the Company's books and records and confirmed on a timely
basis; position valuations are subject to periodic independent review
procedures; and collateral and adequate documentation (e.g., master agreements)
are obtained from counterparties in appropriate circumstances. With respect to
its consumer lending activities, operating systems are designed to provide for
the efficient servicing of consumer loan accounts. The Company manages
operational risk through its system of internal controls which provides checks
and balances to ensure that transactions and other account-related activity
(e.g., new account solicitation, transaction authorization and processing,
billing and collection of delinquent accounts) are properly approved, processed,
recorded and reconciled. Disaster recovery plans are in place on a Company-wide
basis for critical systems, and redundancies are built into the systems as
deemed appropriate.

LEGAL RISK

Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts its business. The
Company has established procedures based on legal and regulatory requirements on
a worldwide basis that are designed to ensure compliance with all applicable
statutory and regulatory requirements. The Company, principally through the Law,
Compliance and Governmental Affairs Department, also has established procedures
that are designed to ensure that senior management's policies relating to
conduct, ethics and business practices are followed globally. In connection with
its business, the Company has various procedures addressing issues, such as
regulatory capital requirements, sales and trading practices, new products, use
and safekeeping of customer funds and securities, credit granting, collection
activities, money-laundering and recordkeeping. The Company also has established
procedures to mitigate the risk that a counterparty's performance obligations
will be unenforceable, including consideration of counterparty legal authority
and capacity, adequacy of legal documentation, the permissibility of a
transaction under applicable law and whether applicable bankruptcy or insolvency
laws limit or alter contractual remedies.


MSDWD 64
      --

EX-13.5

                                                                    EXHIBIT 13.5
 
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of 
Morgan Stanley, Dean Witter,
Discover & Co.

We have audited the accompanying consolidated statements of financial condition
of Morgan Stanley, Dean Witter, Discover & Co. and subsidiaries at fiscal years
ended November 30, 1997 and 1996, and the related consolidated statements of
income, cash flows and changes in shareholders' equity for each of the three
fiscal years in the period ended November 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Morgan Stanley Group Inc. and Dean Witter,
Discover & Co., which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the consolidated statement of financial condition of Morgan Stanley Group Inc.
and subsidiaries as of November 30, 1996, or the related statements of income,
cash flows and changes in shareholders' equity for the fiscal years ended
November 30, 1996 and 1995, which statements reflect total assets of $196,446
million as of November 30, 1996 and total revenues of $13,144 million and
$10,797 million for the fiscal years ended November 30, 1996 and 1995,
respectively. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Morgan Stanley Group Inc. and subsidiaries for such periods, is
based solely on the report of such other auditors.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

     In our opinion, based on our audits and the report of the other auditors,
the accompanying consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Morgan Stanley, Dean
Witter, Discover & Co. and subsidiaries at fiscal years ended November 30, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended November 30, 1997, in
conformity with generally accepted accounting principles.






/s/ Deloitte & Touche LLP

New York, New York
January 23, 1998

                                                                        MSDWD 65
                                                                              --

 


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                                                                                    At Fiscal
                                                                                    November 30,    Year-End 
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)                                            1997            1996   
                                                                                                     
ASSETS
 
Cash and cash equivalents                                                           $  8,255        $  6,544
Cash and securities deposited with clearing organizations or segregated under                               
     federal and other regulations (including securities at fair value of $4,655                            
     at November 30, 1997 and $3,759 at fiscal year-end 1996)                          6,890           5,209
Financial instruments owned:                                                                                
     U.S. government and agency securities                                            12,901          12,032
     Other sovereign government obligations                                           22,900          19,473
     Corporate and other debt                                                         24,499          16,899
     Corporate equities                                                               10,329          12,662
     Derivative contracts                                                             17,146          11,220
     Physical commodities                                                                242             375
Securities purchased under agreements to resell                                       84,516          64,021
Securities borrowed                                                                   55,266          43,546
Receivables:                                                                                                
     Consumer loans (net of allowances of $884 at November 30, 1997 and                                     
     $802 at fiscal year-end 1996)                                                    20,033          21,262
     Customers, net                                                                   12,259           8,600
     Brokers, dealers and clearing organizations                                      13,263           5,421
     Fees, interest and other                                                          4,705           3,981
Office facilities, at cost (less accumulated depreciation and amortization of                               
     $1,279 at November 30, 1997 and $1,060 at fiscal year-end 1996)                   1,705           1,681
Other assets                                                                           7,378           5,934
Total assets                                                                        $302,287        $238,860 
 




MSDWD 66
      --

 


                                                                                                    At Fiscal
                                                                                    November 30,    Year-End 
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)                                            1997            1996   
                                                                                                     
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Commercial paper and other short-term borrowings                                    $ 22,614        $ 26,326
Deposits                                                                               8,993           7,213
Financial instruments sold, not yet purchased:                                                              
     U.S. government and agency securities                                            11,563          11,395
     Other sovereign government obligations                                           12,095           6,513
     Corporate and other debt                                                          1,699           1,176
     Corporate equities                                                               13,305           8,900
     Derivative contracts                                                             15,599           9,982
     Physical commodities                                                                 68             476
Securities sold under agreements to repurchase                                       111,680          86,863
Securities loaned                                                                     14,141          12,907
Payables:                                                                                                   
     Customers                                                                        25,086          22,062
     Brokers, dealers and clearing organizations                                      16,097           1,820
     Interest and dividends                                                              970           1,678
Other liabilities and accrued expenses                                                 8,630           6,340
Long-term borrowings                                                                  24,792          22,642
                                                                                     287,332         226,293                
Capital Units                                                                            999             865
Commitments and contingencies                                                                               
Shareholders' equity:                                                                                       
     Preferred stock                                                                     876           1,223
     Common stock(1) ($0.01 par value, 1,750,000,000 shares authorized,                                     
     602,829,994 and 611,314,509 shares issued, 594,708,971 and 572,682,876 shares                          
     outstanding at November 30, 1997 and fiscal year-end 1996)                            6               6
     Paid-in capital(1)                                                                3,952           4,007
     Retained earnings                                                                 9,330           7,477
     Cumulative translation adjustments                                                   (9)            (11)
     Subtotal                                                                         14,155          12,702
     Note receivable related to sale of preferred stock to ESOP                          (68)            (78)
     Common stock held in treasury, at cost(1) ($0.01 par value, 8,121,023 and                              
     38,631,633 shares at November 30, 1997 and fiscal year-end 1996)                   (250)         (1,005)
     Stock compensation related adjustments                                              119              83
     Total shareholders' equity                                                       13,956          11,702
Total liabilities and shareholders' equity                                          $302,287        $238,860 
 


(1) Amounts have been restated to reflect the Company's two-for-one stock split.
    See Notes to Consolidated Financial Statements.


MSDWD 67
      --

 


CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEAR (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)           1997          1996          1995
                                                                                         
Revenues:
     Investment banking                                               $      2,694  $      2,190  $      1,556
     Principal transactions:
        Trading                                                              3,191         2,659         1,685
        Investments                                                            463            86           121
     Commissions                                                             2,086         1,776         1,533
     Fees:
        Asset management, distribution and administration                    2,505         1,732         1,377
        Merchant and cardmember                                              1,704         1,505         1,135
        Servicing                                                              762           809           680
     Interest and dividends                                                 13,583        11,288        10,530
     Other                                                                     144           126           115
             Total revenues                                                 27,132        22,171        18,732
     Interest expense                                                       10,806         8,934         8,190
     Provision for consumer loan losses                                      1,493         1,214           722
             Net revenues                                                   14,833        12,023         9,820
Non-interest expenses:
     Compensation and benefits                                               6,019         5,071         4,005
     Occupancy and equipment                                                   526           493           454
     Brokerage, clearing and exchange fees                                     460           317           289
     Information processing and communications                               1,080           996           889
     Marketing and business development                                      1,179         1,027           874
     Professional services                                                     451           334           252
     Other                                                                     770           668           706
     Relocation charge                                                           -             -            59
     Merger-related expenses                                                    74             -             -
        Total non-interest expenses                                         10,559         8,906         7,528
Income before income taxes                                                   4,274         3,117         2,292
Provision for income taxes                                                   1,688         1,137           827
Net income                                                            $      2,586  $      1,980  $      1,465
 
Preferred stock dividend requirements                                 $         66  $         66  $         65
 
Earnings applicable to common shares(1)                               $      2,520  $      1,914  $      1,400
 
Earnings per common share(2)
     Primary                                                                 $4.25         $3.22         $2.30
 
     Fully diluted                                                           $4.15         $3.14         $2.25
 
Average common shares outstanding(2)
     Primary                                                           594,182,885   594,478,535   608,246,433
 
     Fully diluted                                                     609,043,924   611,012,101   622,098,868
 

(1) Amounts shown are used to calculate primary earnings per common share.
(2) Per share and share data have been restated to reflect the Company's two-
for-one stock split.
See Notes to Consolidated Financial Statements.



MSDWD 68
      --

 


CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year (DOLLARS IN MILLIONS)                                              1997       1996       1995
                                                                                         
Cash flows from operating activities
 
     Net income                                                             $  2,586   $  1,980   $ 1,465
        Adjustments to reconcile net income to net cash used for
          operating activities:
             Non-cash charges included in net income:
                Deferred income taxes                                            (77)      (426)     (212)
                Compensation payable in common or preferred stock                374        513       353
                Depreciation and amortization                                    338        251       201
                Relocation charge                                                  -          -        59
                Provision for losses on credit receivables                     1,493      1,214       722
             Changes in assets and liabilities:
                Cash and securities deposited with clearing organizations
                  or segregated under federal and other regulations           (1,691)    (1,943)      519
             Financial instruments owned, net of financial instruments
                  sold, not yet purchased                                      1,730     (2,536)   (9,846)
             Securities borrowed, net of securities loaned                   (10,561)   (13,087)    2,489
             Receivables and other assets                                    (13,808)    (8,227)      390
             Payables and other liabilities                                   19,028      6,910     2,484
Net cash used for operating activities                                          (588)   (15,351)   (1,376)
Cash flows from investing activities
 
     Net (payments for) proceeds from:
             Office facilities                                                 (301)      (152)     (403)
             Purchase of Miller Anderson & Sherrerd, LLP, net of cash              -      (200)         -
               acquired
             Purchase of Van Kampen American Capital, Inc., net of cash            -      (986)         -
               acquired
             Net principal disbursed on consumer loans                       (4,994)    (7,532)   (7,429)
             Purchases of consumer loans                                        (11)       (51)     (307)
             Sales of consumer loans                                          2,783      4,824     1,827
             Other investing activities                                          (5)       (40)     (116)
Net cash used for investing activities                                       (2,528)    (4,137)   (6,428)
Cash flows from financing activities
 
     Net (payments for) proceeds from short-term borrowings                  (1,336)     8,106     5,833
     Securities sold under agreements to repurchase, net of securities
       purchased under agreements to resell                                   3,080      7,748    (1,384)
     Proceeds from:
             Deposits                                                         2,113      1,022       982
             Issuance of cumulative preferred stock                               -        540         -
             Issuance of common stock                                           224        156       122
             Issuance of long-term borrowings                                 6,619      8,745     4,311
             Issuance of Capital Units                                          134          -       513
     Payments for:
             Repayments of long-term borrowings                              (3,964)    (2,637)   (1,604)
             Redemption of cumulative preferred stock                          (345)      (138)        -
             Repurchases of common stock                                       (124)    (1,133)     (267)
             Cash dividends                                                    (416)      (313)     (235)
Net cash provided by financing activities                                     5,985     22,096     8,271
Dean Witter, Discover & Co.'s net cash activity for the month of
     December 1996                                                           (1,158)         -         -
Net increase in cash and cash equivalents                                     1,711      2,608       467
Cash and cash equivalents, at beginning of period                             6,544      3,936     3,469
Cash and cash equivalents, at end of period                                $  8,255   $  6,544   $ 3,936
 

See Notes to Consolidated Financial Statements.
                                                                        MSDWD 69
                                                                              --



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                                                                     Note Receivable  Common Stock
                                                                       Cumulative    Related to Sale  Held in
                             Preferred  Common    Paid-in    Retained  Translation   of Preferred     Treasury,
(DOLLARS IN MILLIONS)        Stock      Stock(1)  Capital(1) Earnings  Adjustments   Stock to ESOP    at Cost(1)

                                                                                               
Balance at                                                                                                                
Fiscal Year-End 1994          $ 819     $6        $3,384     $4,758    $(3)          $(109)           $ (310)             
                                                                                                                          
Net income                        -     -              -      1,465      -               -                 -       
Dividends                         -     -              -       (242)     -               -                 -       
Conversion of ESOP                                                                                                      
 Preferred Stock                 (1)    -              1          -      -               -                 -       
     
Issuance of common stock          -     -             73          -      -               -                90      
Repurchases of common stock       -     -              -          -      -               -              (267)     
Compensation payable in                                                                                                 
     common stock                 -     -            149          -      -               -               126      
ESOP shares allocated, at                                                                                               
 cost                             -     -              -          -      -              20                 -       
Translation adjustments           -     -              -          -     (6)              -                 -       
Balance at                                                                                                              
Fiscal Year-End 1995            818      6         3,607      5,981     (9)            (89)             (361)               
                                                                                                                        
Net income                        -     -              -      1,980      -               -                 -       
Dividends                         -     -              -       (323)     -               -                 -       
Issuance of common stock in                                                                                          
     connection with MAS                                                                                             
      acquisition                 -     -              9          -      -               -                74      
Redemption of 9.36%                                                                                                  
     Cumulative Preferred                                                                                            
      Stock                    (138)    -              -          -      -               -                 -       
Issuance of 7-3/4%                                                                                                   
 Cumulative                                                                                                          
     Preferred Stock            200     -             (3)         -      -               -                 -       
Issuance of Series A                                                                                                 
     Fixed/Adjustable Rate                                                                                           
     Cumulative Preferred Stock 345     -             (2)         -      -               -                 -       
     Conversion of ESOP                                                
       Preferred Stock           (2)    -              2          -      -               -                 -       
Issuance of common stock          -     -             97          -      -               -               133            
Repurchases of common stock       -     -              -          -      -               -           $(1,133)           
Retirement of treasury                                                                                                     
 stock                            -     -             (4)      (161)     -               -               165            
Compensation payable in                                                                                                    
 common stock                     -     -            301          -      -               -               117            
ESOP shares allocated, at                                                                                                  
 cost                             -     -              -          -      -              11                 -              
Translation adjustments           -     -                         -     (2)              -                 -              



Other       Total    
                      
                
                      
$36         $ 8,581     
                      
  -            1,465   
  -            (242)  
                      
                      
  -               -    
  -             163   
  -            (267)  
                      
 19             294     
                      
  -              20   
  -              (6)  
                      
 55          10,008     
                      
  -           1,980   
  -            (323)  
                      
                      
  -              83   
                      
                      
  -            (138)  
                      
                      
  -             197   
                      
                      
  -             343   
                      
                      
  -               -   
  -             230   
  -          (1,133)  
                      
  -               -   
                      
 28             446     
                      
  -              11   
  -              (2)   


MSDWD 70
      --




                                                                                                      Note Receivable              
                                                                                        Cumulative    Related to Sale              
                                 Preferred Common       Paid-In         Retained        Translation   of Preferred                 
(DOLLARS IN MILLIONS)            Stock     Stock(1)     Capital(1)      Earnings        Adjustments   Stock to ESOP 
                                                                                     
Balance at                                                                                                                  
Fiscal Year-End 1996             $1,223    $6           $4,007          $7,477          $(11)         $ (78)                   
Net income                        -        -                 -           2,586             -              -                 
Dividends                         -        -                 -            (387)            -              -                 
Redemption of 8.88%                                                                                                         
     Cumulative Preferred                                                                                                   
      Stock                        (195)   -                 -               -             -              -                 
Redemption of 8-3/4%                                                                                                        
     Cumulative Preferred                                                                                                   
      Stock                        (150)   -                 -               -             -              -                 
Conversion of ESOP                                                                                                          
     Preferred                                                                                                                  
      Stock                          (2)   -                (1)              -             -              -                 
Issuance of common stock          -        -               (22)              -             -              -                 
Repurchases of common stock       -        -                 -               -             -              -                 
Compensation payable in                                                                                                     
     common stock                 -        -               (38)              -             -              -                 
ESOP shares allocated, at                                                                                                   
     cost                         -        -                 -               -             -             10                    
Retirement of treasury                                                                                                      
     stock                        -        -                (6)           (265)            -              -                 
Translation adjustments           -        -                 -               -             2              -                 
Issuance of common stock                                                                                                    
     in connection with                                                                                                     
     Lombard acquisition          -        -                14               -             -              -                 
Adjustment for change in                                                                                                    
     Dean Witter                                                                                                            
      Discover's year-end         -        -                (2)            (81)            -              -                 
Balance at                                                                                                                  
November 30, 1997                                                                                                           
                                                                                                                            
                                 $  876        $6       $3,952          $9,330          $ (9)        $  (68)



 
 Common Stock
 Held In     
 Treasury,   
 at Cost(1)    Other       Total
             
                      
 $(1,005)      $ 83        $11,702
                                  
       -          -          2,586
       -          -           (387)
                                  
                                  
       -          -           (195)
                                  
                                  
       -          -           (150)
                                  
                                  
       3          -              -      
     246          -            224
    (124)         -           (124)
                                  
     278        124            364     
                                  
       -          -             10
                                  
     271          -              -       
       -          -              2
                                  
                                  
      49          -             63
                                  
                                  
      32        (88)          (139)    
                                  
                                  
                                  
 $  (250)      $119        $13,956      
                                                   
(1) Amounts have been restated to reflect the Company's two-for-one stock split.
    See Notes to Consolidated Financial Statements.              

                                                                        MSDWD 71
                                                                              --

 
1. INTRODUCTION AND BASIS OF PRESENTATION
- -----------------------------------------

THE MERGER

On May 31, 1997, Morgan Stanley Group Inc. ("Morgan Stanley") was merged with
and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the "Merger"). At
that time, Dean Witter Discover changed its corporate name to Morgan Stanley,
Dean Witter, Discover & Co. (the "Company"). In conjunction with the Merger, the
Company issued 260,861,078 shares of its common stock, as each share of Morgan
Stanley common stock then outstanding was converted into 1.65 shares of the
Company's common stock (the "Exchange Ratio"). In addition, each share of Morgan
Stanley preferred stock was converted into one share of a corresponding series
of preferred stock of the Company. The Merger was treated as a tax-free
exchange.

THE COMPANY

The Company's consolidated financial statements include the accounts of Morgan
Stanley, Dean Witter, Discover & Co. and its U.S. and international
subsidiaries, including Morgan Stanley & Co. Incorporated ("MS&Co."), Morgan
Stanley & Co. International Limited ("MSIL"), Morgan Stanley Japan Limited
("MSJL"), Dean Witter Reynolds Inc. ("DWR"), Dean Witter InterCapital Inc.
("ICAP"), and NOVUS Credit Services Inc.

     The Company, through its subsidiaries, provides a wide range of financial
and securities services on a global basis and provides credit and transaction
services nationally. Its securities and asset management businesses include
securities underwriting, distribution and trading; merger, acquisition,
restructuring, real estate, project finance and other corporate finance advisory
activities; asset management; merchant banking and other principal investment
activities; brokerage and research services; the trading of foreign exchange and
commodities as well as derivatives on a broad range of asset categories, rates
and indices; and global custody, securities clearance services and securities
lending. The Company's credit and transaction services businesses include the
operation of the NOVUS Network, a proprietary network of merchant and cash
access locations, and the issuance of the Discover(R) Card and other proprietary
general purpose credit cards. The Company's services are provided to a large and
diversified group of clients and customers, including corporations, governments,
financial institutions and individuals.

BASIS OF FINANCIAL INFORMATION

The consolidated financial statements give retroactive effect to the Merger,
which was accounted for as a pooling of interests. The pooling of interests
method of accounting requires the restatement of all periods presented as if
Dean Witter Discover and Morgan Stanley had always been combined. The fiscal
year end 1996, 1995 and 1994 shareholders' equity data reflects the accounts of
the Company as if the preferred and additional common stock had been issued
during all of the periods presented.

     Prior to the consummation of the Merger, Dean Witter Discover's year ended
on December 31 and Morgan Stanley's fiscal year ended on November 30. Subsequent
to the Merger, the Company adopted a fiscal year end of November 30. In
recording the pooling of interests combination, Dean Witter Discover's financial
statements for the years ended December 31, 1996 and 1995 were combined with
Morgan Stanley's financial statements for the fiscal years ended November 30,
1996 and 1995 (on a combined basis, "fiscal 1996" and "fiscal 1995,"
respectively). The Company's results for the 12 months ended November 30, 1997
("fiscal 1997") include the results of Dean Witter Discover that were restated
to conform with the new fiscal year-end date. The Company's results of
operations for fiscal 1997 and fiscal 1996 include the month of December 1996
for Dean Witter Discover.

     The separate results of operations for Dean Witter Discover and Morgan
Stanley during the periods preceding the Merger that are included in the
Company's Consolidated Statements of Income were as follows:



                                      SIX MONTHS ENDED      FISCAL        FISCAL
(DOLLARS IN MILLIONS)                   MAY 31, 1997        1996          1995
- --------------------------------------------------------------------------------
                                                                    
Net Revenues:
   Dean Witter Discover                      $ 3,318       $ 6,247       $ 5,698
   Morgan Stanley                              3,676         5,776         4,122
                                             -----------------------------------
     Combined                                $ 6,994       $12,023       $ 9,820
- ---------------------------------------------===================================
Net Income:
   Dean Witter Discover                      $   472       $   951       $   856
   Morgan Stanley                                626         1,029           609
                                             -----------------------------------
     Combined                                $ 1,098       $ 1,980       $ 1,465
- ---------------------------------------------===================================




MSDWD 72
      --

 
In connection with the Merger, the Company incurred pre-tax expenses of $74
million ($63 million after tax) in the second fiscal quarter of 1997. These
expenses consisted primarily of proxy solicitation costs, severance costs,
financial advisory and accounting fees, legal costs and regulatory filing fees.

     The consolidated financial statements are prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions regarding certain trading inventory valuations,
consumer loan loss levels, the potential outcome of litigation and other matters
that affect the financial statements and related disclosures. Management
believes that the estimates utilized in the preparation of the consolidated
financial statements are prudent and reasonable. Actual results could differ
materially from these estimates.

     Certain reclassifications have been made to prior year amounts to conform
to the current presentation. All material intercompany balances and transactions
have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS

For purposes of these statements, cash and cash equivalents consist of cash and
highly liquid investments not held for resale with maturities, when purchased,
of three months or less.

     In connection with the fiscal 1997 purchase of Lombard Brokerage, Inc.
("Lombard"), the Company issued 1.9 million shares of common stock having a fair
value on the date of acquisition of approximately $63 million. In connection
with the purchase of Miller Anderson & Sherrerd, LLP ("MAS") in fiscal 1996, the
Company issued approximately $66 million of notes payable, as well as 3.3
million shares of common stock having a fair value on the date of acquisition of
approximately $83 million. In addition, in connection with the purchase in
fiscal 1996 of VK/AC Holding, Inc., the parent of Van Kampen American Capital,
Inc. ("VKAC"), the Company assumed approximately $162 million of long-term debt
(see Note 16).

CONSUMER LOANS

Consumer loans, which consist primarily of credit card and other consumer
installment loans, are reported at their principal amounts outstanding, less
applicable allowances. Interest on consumer loans is credited to income as
earned.

     Interest is accrued on credit card loans until the date of charge-off,
which generally occurs at the end of the month during which an account becomes
180 days past due, except in the case of bankruptcies and fraudulent
transactions, which are charged off earlier. The interest portion of charged off
credit card loans is written off against interest revenue. Origination costs
related to the issuance of credit cards are charged to earnings over periods not
exceeding 12 months.

ALLOWANCE FOR CONSUMER LOAN LOSSES

The allowance for consumer loan losses is a significant estimate that is
regularly evaluated by management for adequacy on a portfolio-by-portfolio basis
and is established through a charge to the provision for loan losses. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to pay.

     The Company uses the results of these evaluations to provide an allowance
for loan losses. The exposure for credit losses for owned loans is influenced by
the performance of the portfolio and other factors discussed above, with the
Company absorbing all related losses. The exposure for credit losses for
securitized loans is represented by the Company retaining a contingent risk
based on the amount of credit enhancement provided.

     In fiscal 1996, the Company revised its estimate of the allowance for
losses for loans intended to be securitized. This revision was based on the
Company's experience with credit losses related to securitized loans in a mature
asset 


                                                                        MSDWD 73
                                                                              --

 
securitization market and the issuance of Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," by the Financial Accounting
Standards Board ("FASB"), which eliminated the uncertainty surrounding the
appropriate accounting treatment for asset securitization transactions.

SECURITIZATION OF CONSUMER LOANS

The Company periodically sells consumer loans through asset securitizations and
continues to service these loans. The revenues derived from servicing these
loans are recorded in the consolidated statements of income as servicing fees
over the term of the securitized loans rather than at the time the loans are
sold. The effects of recording these revenues over the term of the securitized
loans rather than at the time the loans were sold are not material.

FINANCIAL INSTRUMENTS USED FOR TRADING 
AND INVESTMENT

Financial instruments, including derivatives, used in the Company's trading
activities are recorded at fair value, and unrealized gains and losses are
reflected in trading revenues. Interest revenue and expense arising from
financial instruments used in trading activities are reflected in the
consolidated statements of income as interest revenue or expense. The fair
values of the trading positions generally are based on listed market prices. If
listed market prices are not available or if liquidating the Company's positions
would reasonably be expected to impact market prices, fair value is determined
based on other relevant factors, including dealer price quotations and price
quotations for similar instruments traded in different markets, including
markets located in different geographic areas. Fair values for certain
derivative contracts are derived from pricing models which consider current
market and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions. Purchases and sales of financial instruments are
recorded in the accounts on trade date. Unrealized gains and losses arising from
the Company's dealings in over-the-counter ("OTC") financial instruments,
including derivative contracts related to financial instruments and commodities,
are presented in the accompanying consolidated statements of financial condition
on a net-by-counterparty basis, when appropriate.

     Equity securities purchased in connection with merchant banking and other
principal investment activities are initially carried in the consolidated
financial statements at their original costs. The carrying value of such equity
securities is adjusted when changes in the underlying fair values are readily
ascertainable, generally as evidenced by listed market prices or transactions
which directly affect the value of such equity securities. Downward adjustments
relating to such equity securities are made in the event that the Company
determines that the eventual realizable value is less than the carrying value.
The carrying value of investments made in connection with principal real estate
activities which do not involve equity securities are adjusted periodically
based on independent appraisals, estimates prepared by the Company of discounted
future cash flows of the underlying real estate assets or other indicators of
fair value.

     Loans made in connection with merchant banking and investment banking
activities are carried at cost plus accrued interest less reserves, if deemed
necessary, for estimated losses.

FINANCIAL INSTRUMENTS USED FOR ASSET AND 
LIABILITY MANAGEMENT

The Company has entered into various contracts as hedges against specific
assets, liabilities or anticipated transactions. These contracts include
interest rate swaps, foreign exchange forwards, foreign currency swaps and cost
of funds agreements. The Company uses interest rate and currency swaps to manage
the interest rate and currency exposure arising from certain borrowings and to
match the repricing characteristics of consumer loans with those of the
borrowings that fund these loans. For contracts that are designated as hedges of
the Company's assets and liabilities, gains and losses are deferred and
recognized as adjustments to interest revenue or expense over the remaining life
of the underlying assets or liabilities. For contracts that are hedges of asset
securitizations, gains and losses are recognized as adjustments to servicing
fees. Gains and losses resulting from the termination of hedge contracts prior
to their stated maturity are recognized ratably over the remaining life of the
instrument being hedged. The Company also uses foreign exchange forward
contracts to manage the currency exposure relating to its net monetary
investment in non-U.S. dollar functional currency operations. The gain or loss
from revaluing these contracts is deferred and reported within 



MSDWD 74
      --

 
cumulative translation adjustments in shareholders' equity, net of tax effects,
with the related unrealized amounts due from or to counterparties included in
receivables from or payables to brokers, dealers and clearing organizations.

SECURITIES TRANSACTIONS

Clients' securities transactions are recorded on a settlement date basis with
related commission revenues and expenses recorded on trade date. Securities
purchased under agreements to resell (reverse repurchase agreements) and
securities sold under agreements to repurchase (repurchase agreements),
principally government and agency securities, are treated as financing
transactions and are carried at the amounts at which the securities will
subsequently be resold or reacquired as specified in the respective agreements;
such amounts include accrued interest. Reverse repurchase and repurchase
agreements are presented on a net-by-counterparty basis, when appropriate. It is
the Company's policy to take possession of securities purchased under agreements
to resell. The Company monitors the fair value of the underlying securities as
compared with the related receivable or payable, including accrued interest,
and, as necessary, requests additional collateral. Where deemed appropriate, the
Company's agreements with third parties specify its rights to request additional
collateral.

     Securities borrowed and securities loaned are carried at the amounts of
cash collateral advanced and received in connection with the transactions. The
Company measures the fair value of the securities borrowed and loaned against
the collateral on a daily basis. Additional collateral is obtained as necessary
to ensure such transactions are adequately collateralized.

INVESTMENT BANKING

Underwriting revenues and fees for mergers and acquisitions and advisory
assignments are recorded when services for the transaction are substantially
completed. Transaction-related expenses are deferred and later expensed to match
revenue recognition.

OFFICE FACILITIES

Office facilities are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of buildings and improvements are
provided principally by the straight-line method, while depreciation and
amortization of furniture, fixtures and equipment are provided by both
straight-line and accelerated methods. Property and equipment are depreciated
over the estimated useful lives of the related assets, while leasehold
improvements are amortized over the lesser of the economic useful life of the
asset or, where applicable, the remaining term of the lease.

INCOME TAXES

Income tax expense is provided for using the asset and liability method, under
which deferred tax assets and liabilities are determined based upon the
temporary differences between the financial statement and income tax bases of
assets and liabilities, using currently enacted tax rates.

EARNINGS PER SHARE

The calculations of earnings per common share are based on the weighted average
number of common shares and share equivalents outstanding and give effect to
preferred stock dividend requirements. All per share and share amounts reflect
stock splits effected by Dean Witter Discover and Morgan Stanley prior to the
Merger, as well as the additional shares issued to Morgan Stanley shareholders
pursuant to the Exchange Ratio.

CARDMEMBER REWARDS

Cardmember rewards, primarily the Cashback Bonus award, pursuant to which the
Company annually pays Discover cardmembers and Private Issue cardmembers a
percentage of their purchase amounts ranging up to one percent (up to two
percent for the Private Issue Card), are based upon a cardmember's level of
annual purchases. The liability for cardmember rewards expense, included in
other liabilities and accrued expenses, is accrued at the time that qualified
cardmember transactions occur and is calculated on an individual cardmember
basis.


                                                                        MSDWD 75
                                                                              --

 
STOCK-BASED COMPENSATION

SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to account
for its stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under the provisions of APB No. 25,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire the stock.

TRANSLATION OF FOREIGN CURRENCIES

Assets and liabilities of operations having non-U.S. dollar functional
currencies are translated at year-end rates of exchange, and the income
statements are translated at weighted average rates of exchange for the year. In
accordance with SFAS No. 52, "Foreign Currency Translation," gains or losses
resulting from translating foreign currency financial statements, net of hedge
gains or losses and related tax effects, are reflected in cumulative translation
adjustments, a separate component of shareholders' equity. Gains or losses
resulting from foreign currency transactions are included in net income.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are amortized on a straight-line basis over
periods from five to 40 years, generally not exceeding 25 years, and are
periodically evaluated for impairment. At November 30, 1997, goodwill of
approximately $1.4 billion was included in the Company's consolidated statements
of financial condition as a component of Other Assets (see Note 16).

NEW ACCOUNTING PRONOUNCEMENTS

As of January 1, 1997, the Company adopted SFAS No. 125, which was effective for
transfers of financial assets made after December 31, 1996, except for transfers
of certain financial assets for which the effective date has been delayed for
one year. SFAS No. 125 provides financial reporting standards for the
derecognition and recognition of financial assets, including the distinction
between transfers of financial assets which should be recorded as sales and
those which should be recorded as secured borrowings. The adoption of the
enacted provisions of SFAS No. 125 had no material effect on the Company's
financial condition or results of operations. With respect to the provisions of
SFAS No. 125 which became effective in 1998, the Company does not expect the
impact of the adoption of the deferred provisions to be material to the
Company's financial condition or results of operations.

     In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS"), effective for periods ending after December 15, 1997, with restatement
required for all prior periods. SFAS No. 128 replaces the current EPS categories
of primary and fully diluted with "basic EPS," which reflects no dilution from
common stock equivalents, and "diluted EPS," which reflects dilution from common
stock equivalents and other dilutive securities based on the average price per
share of the Company's common stock during the period. The adoption of SFAS No.
128 would not have had, and is not expected to have, a material effect on the
Company's EPS calculations.

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements, which are effective for fiscal years
beginning after December 15, 1997, establish standards for the reporting and
display of comprehensive income and the disclosure requirements related to
segments.

3. CONSUMER LOANS
- -----------------

Consumer loans were as follows:



AT FISCAL YEAR-END (DOLLARS IN MILLIONS)                    1997          1996
- --------------------------------------------------------------------------------
                                                                       
Credit card                                                $20,914       $22,062
Other consumer installment                                       3             2
                                                           ---------------------
                                                            20,917        22,064
   Less
     Allowance for loan losses                                 884           802
                                                           ---------------------
     Consumer loans, net                                   $20,033       $21,262
- -----------------------------------------------------------=====================



MSDWD 76
      --

 
Activity in the allowance for consumer loan losses was as follows:



FISCAL YEAR (DOLLARS IN MILLIONS)                1997         1996         1995
- -------------------------------------------------------------------------------
                                                                   
Balance beginning of period                   $   781(2)   $   709      $   556
Additions
Provision for loan losses                       1,493        1,214          722
Purchase of loan portfolios                        --            4           31
                                              ---------------------------------
Total additions                                 1,493        1,218          753
                                              ---------------------------------
Deductions
Charge-offs                                     1,639        1,182          711
Recoveries                                       (196)        (155)        (120)
                                              ---------------------------------
Net charge-offs                                 1,443        1,027          591
                                              ---------------------------------
Other(1)                                           53          (98)          (9)
                                              ---------------------------------
Balance end of period                         $   884      $   802      $   709
- ----------------------------------------------=================================


(1)  Primarily reflects net transfers related to asset securitizations.
(2)  Beginning balance differs from the fiscal 1996 end of period balance due to
     the Company's change in fiscal year-end.

Interest accrued on loans subsequently charged off, recorded as a reduction of
interest revenue, was $301 million, $181 million and $115 million in fiscal
1997, 1996 and 1995.

     At fiscal year-end 1997 and 1996, $5,385 million and $5,695 million of the
Company's consumer loans had minimum contractual maturities of less than one
year. Because of the uncertainty regarding consumer loan repayment patterns,
which historically have been higher than contractually required minimum
payments, this amount may not necessarily be indicative of the Company's actual
consumer loan repayments.

     At fiscal year-end 1997, the Company had commitments to extend credit in
the amount of $178.5 billion. Commitments to extend credit arise from agreements
to extend to customers unused lines of credit on certain credit cards provided
there is no violation of conditions established in the related agreement. These
commitments, substantially all of which the Company can terminate at any time
and which do not necessarily represent future cash requirements, are
periodically reviewed based on account usage and customer creditworthiness.

     The Company received proceeds from asset securitizations of $2,783 million,
$4,528 million, and $1,827 million in fiscal 1997, 1996 and 1995. The
uncollected balances of consumer loans sold through asset securitizations were
$15,033 million and $13,197 million at fiscal year-end 1997 and 1996.

     The Company uses interest rate exchange agreements to hedge the risk from
changes in interest rates on servicing fee revenues (which are derived from
loans sold through asset securitizations). Gains and losses from these
agreements are recognized as adjustments to servicing fees. Under these interest
rate exchange agreements the Company primarily pays floating rates and receives
fixed rates.

     In connection with certain asset securitizations, the Company has written
interest rate cap agreements with notional amounts of $303 million and strike
rates of 11%. Any settlement payments made under these agreements will generally
be passed back to the Company through an adjustment of servicing fees, although
this is subject to the risk of counterparty nonperformance. At fiscal year end
1997 and 1996, the fair values of these agreements were not material. No
payments have been made by the Company under these agreements, which expire
through 2000.

     The estimated fair value of the Company's consumer loans approximated
carrying value at fiscal year end 1997 and 1996. The Company's consumer loan
portfolio, including securitized loans, is geographically diverse, with a
distribution approximating that of the population of the United States.

4. DEPOSITS
- -----------

Deposits were as follows:



AT FISCAL YEAR-END (DOLLARS IN MILLIONS)                       1997         1996
- --------------------------------------------------------------------------------
                                                                       
Demand, passbook and
   money market accounts                                     $1,210       $1,716
Consumer certificate accounts                                 1,498        1,354
$100,000 minimum certificate accounts                         6,285        4,143
                                                             -------------------
   Total                                                     $8,993       $7,213
- -------------------------------------------------------------===================


The weighted average interest rates of interest-bearing deposits outstanding
during fiscal 1997 and 1996 were 6.2% and 6.3%.

     At fiscal year-end 1997 and 1996, the notional amounts of interest rate
exchange agreements that hedged deposits outstanding were $535 million and $495
million and had fair values of $7 million and $5 million. Under these interest
rate exchange agreements the Company primarily pays floating rates and receives
fixed 


                                                                        MSDWD 77
                                                                              --

 
rates. At November 30, 1997, the weighted average interest rate of the Company's
deposits including the effect of interest rate exchange agreements was 6.16%.

     At November 30, 1997, certificate accounts maturing over the next five
years were as follows:



(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
                                                                          
1998                                                                      $3,810
1999                                                                       1,579
2000                                                                         963
2001                                                                         819
2002                                                                         312
- --------------------------------------------------------------------------======


The estimated fair value of the Company's deposits, using current rates for
deposits with similar maturities, approximated carrying value at fiscal year-end
1997 and 1996.

5. SHORT-TERM BORROWINGS
- ------------------------

At fiscal year-end 1997 and 1996, commercial paper in the amount of $15,447
million and $18,890 million, with weighted average interest rates of 5.5% and
5.4%, was outstanding.

     At fiscal year-end 1997 and 1996, the notional amounts of interest rate
contracts that hedged commercial paper outstanding were $732 million and $808
million and had fair values of $(5) million and $(7) million. These interest
rate contracts converted the commercial paper to fixed rates. These contracts
had no material effect on the weighted average interest rates of commercial
paper.

     At fiscal year-end 1997 and 1996, other short-term borrowings of $7,167
million and $7,436 million were outstanding. These borrowings included bank
loans, federal funds and bank notes.

     In November 1997, the Company replaced the predecessor Dean Witter Discover
and Morgan Stanley holding company senior revolving credit agreements with a
senior revolving credit agreement with a group of banks to support general
liquidity needs, including the issuance of commercial paper (the "MSDWD
Facility"). Under the terms of the MSDWD Facility, the banks are committed to
provide up to $6.0 billion. The MSDWD Facility contains restrictive covenants
which require, among other things, that the Company maintain shareholders'
equity of at least $8.3 billion at all times. The Company believes that the
covenant restrictions will not impair the Company's ability to pay its current
level of dividends. At November 30, 1997, no borrowings were outstanding under
the MSDWD Facility.

     Riverwoods Funding Corporation ("RFC"), an entity included in the
consolidated financial statements of the Company, maintains a senior bank credit
facility to support the issuance of asset-backed commercial paper. In fiscal
1997, RFC renewed this facility and increased its amount to $2.55 billion from
$2.1 billion. Under the terms of the asset-backed commercial paper program,
certain assets of RFC were subject to a lien in the amount of $2.6 billion at
November 30, 1997. RFC has never borrowed from its senior bank credit facility.

     The Company maintains a master collateral facility that enables MS&Co. to
pledge certain collateral to secure loan arrangements, letters of credit and
other financial accommodations (the "MS&Co. Facility"). As part of the MS&Co.
Facility, MS&Co. also maintains a secured committed credit agreement with a
group of banks that are parties to the master collateral facility under which
such banks are committed to provide up to $1.5 billion. The credit agreement
contains restrictive covenants which require, among other things, that MS&Co.
maintain specified levels of consolidated shareholders' equity and Net Capital,
as defined. In January 1998, the MS&Co. Facility was renewed and the amount of
the commitment of the credit agreement was increased to $1.875 billion. At
November 30, 1997, no borrowings were outstanding under the MS&Co. Facility.

     The Company also maintains a revolving committed financing facility that
enables MSIL to secure committed funding from a syndicate of banks by providing
a broad range of collateral under repurchase agreements (the "MSIL Facility").
Such banks are committed to provide up to an aggregate of $1.85 billion
available in 12 major currencies. The facility agreements contain restrictive
covenants which require, among other things, that MSIL maintain specified levels
of Shareholders' Equity and Financial Resources, each as defined. At November
30, 1997, no borrowings were outstanding under the MSIL Facility.

     The Company anticipates that it will utilize the MSDWD Facility, the MS&Co.
Facility or the MSIL Facility for short-term funding from time to time.


MSDWD 78
      --

 
6. LONG-TERM BORROWINGS
- -----------------------

MATURITIES AND TERMS

Long-term borrowings at fiscal year-end consist of the following:



                                                         U.S. DOLLAR                  NON-U.S. DOLLAR(1)        AT FISCAL YEAR-END
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                          INDEX/
                                                 FIXED     FLOATING       EQUITY        FIXED    FLOATING         1997         1996
(DOLLARS IN MILLIONS)                             RATE         RATE       LINKED         RATE        RATE        TOTAL        TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                                                           
Due in fiscal 1997                             $    --      $    --      $    --     $    --      $    --      $    --      $ 4,057
Due in fiscal 1998                               1,190        3,488          747         468          277        6,170        5,616
Due in fiscal 1999                                 774        2,474          488         200          757        4,693        3,218
Due in fiscal 2000                                 774        1,501           22          48           73        2,418        1,686
Due in fiscal 2001                               1,335          719           68          52          108        2,282        2,226
Due in fiscal 2002                               1,077        1,097           91          17          341        2,623        1,299
Thereafter                                       5,460          140          194         774           38        6,606        4,540
- ------------------------------------------------------------------------------------------------------------------------------------

   Total                                       $10,610      $ 9,419      $ 1,610     $ 1,559      $ 1,594      $24,792      $22,642
- -----------------------------------------------=====================================================================================
   Weighted average coupon
     at fiscal year-end                            7.1%         5.9%         n/a         5.3%         5.0%         6.1%         6.2%
- -----------------------------------------------=====================================================================================



(1)  Weighted average coupon was calculated utilizing non-U.S. dollar interest
     rates.

MEDIUM-TERM NOTES

Included in the table above are medium-term notes of $14,049 million and $13,272
million at fiscal year-end 1997 and 1996. The effective weighted average
interest rate on all medium-term notes was 5.9% in fiscal 1997 and 5.8% in
fiscal 1996. Maturities of these notes range from fiscal 1998 through fiscal
2023.

STRUCTURED BORROWINGS

U.S. dollar index/equity linked borrowings include various structured
instruments whose payments and redemption values are linked to the performance
of a specific index (i.e., Standard & Poor's 500), a basket of stocks or a
specific equity security. To minimize the exposure resulting from movements in
the underlying equity position or index, the Company has entered into various
equity swap contracts and purchased options which effectively convert the
borrowing costs into floating rates based upon London Interbank Offered Rates
("LIBOR"). These instruments are included in the preceding table at their
redemption values based on the performance of the underlying indices, baskets of
stocks, or specific equity securities at fiscal year-end 1997 and 1996.

OTHER BORROWINGS

U.S. dollar contractual floating rate borrowings bear interest based on a
variety of money market indices, including LIBOR and Federal Funds rates.
Non-U.S. dollar contractual floating rate borrowings bear interest based on Euro
floating rates.

     Included in the Company's long-term borrowings are subordinated notes of
$1,302 million and $1,325 million at fiscal year-end 1997 and 1996 respectively.
The effective weighted average interest rate on these subordinated notes was
7.2% in fiscal 1997 and 7.0% in fiscal 1996. Maturities of the subordinated
notes range from fiscal 1999 to fiscal 2016.

     Certain of the Company's long-term borrowings are redeemable prior to
maturity at the option of the holder. These notes contain certain provisions
which effectively enable noteholders to put the notes back to the Company and
therefore are scheduled in the foregoing table to mature in fiscal 1998 through
fiscal 1999. The stated maturities of these notes, which aggregate $1,495
million, are from fiscal 1998 to fiscal 2004.

     MS&Co., a registered U.S. broker-dealer subsidiary of the Company, has
outstanding approximately $313 million of 6.81% fixed rate subordinated Series C
notes,


                                                                        MSDWD 79
                                                                              --

 
$96 million of 7.03% fixed rate subordinated Series D notes, $82 million of
7.28% fixed rate subordinated Series E notes and $25 million of 7.82% fixed rate
subordinated Series F notes. These notes have maturities from 2001 to 2016. The
terms of such notes contain restrictive covenants which require, among other
things, that MS&Co. maintain specified levels of Consolidated Tangible Net Worth
and Net Capital, each as defined.

ASSET AND LIABILITY MANAGEMENT

A portion of the Company's fixed rate long-term borrowings is used to fund
highly liquid marketable securities, short-term receivables arising from
securities transactions and consumer loans. The Company uses interest rate swaps
to more closely match the duration of these borrowings to the duration of the
assets being funded and to minimize interest rate risk. These swaps effectively
convert certain of the Company's fixed rate borrowings into floating rate
obligations. In addition, for non-U.S. dollar currency borrowings that are not
used to fund assets in the same currency, the Company has entered into currency
swaps which effectively convert the borrowings into U.S. dollar obligations. The
Company's use of swaps for asset and liability management reduced its interest
expense and effective average borrowing rate as follows:



AT FISCAL YEAR-END (DOLLARS IN MILLIONS)              1997     1996        1995
- -------------------------------------------------------------------------------
                                                                   
Net reduction in interest expense
   from swaps for the fiscal year                      $21      $29         $20
Weighted average coupon of long-term
   borrowings at fiscal year-end(1)                    6.1%     6.2%        6.6%
Effective average borrowing rate for
   long-term borrowings after swaps
   at fiscal year-end(1)                               6.0%     6.1%        6.4%
- -------------------------------------------------------========================


(1)  Included in the weighted average and effective average calculations are
     non-U.S. dollar interest rates.

The effective weighted average interest rate on the Company's index/equity
linked notes, which is not included in the table above, was 5.7% and 5.6% in
fiscal 1997 and fiscal 1996, respectively, after giving effect to the related
hedges.

     The table below summarizes the notional or contract amounts of these swaps
by maturity and weighted average interest rates to be received and paid at
fiscal year end 1997. Swaps utilized to hedge the Company's structured
borrowings are presented at their redemption values:



                                                       U.S. DOLLAR                 NON-U.S. DOLLAR(1)
- ------------------------------------------------------------------------------------------------------------------------------------
                                           RECEIVE       RECEIVE                  RECEIVE       RECEIVE
                                             FIXED      FLOATING      INDEX/        FIXED      FLOATING                   AT FISCAL
                                               PAY           PAY      EQUITY          PAY           PAY       NOV. 30,     YEAR-END
(DOLLARS IN MILLIONS)                     FLOATING      FLOATING      LINKED     FLOATING      FLOATING(2)  1997 TOTAL   1996 TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                                                          
Maturing in fiscal 1997                    $    --       $    --     $    --      $    --       $    --       $    --      $ 1,878
Maturing in fiscal 1998                        974           320         747          468           235         2,744        2,411
Maturing in fiscal 1999                        542           375         488          187           380         1,972        1,668
Maturing in fiscal 2000                        375           120          22           48            73           638          379
Maturing in fiscal 2001                        924             5          68           52            33         1,082        1,093
Maturing in fiscal 2002                        720            --          91           17             3           831          533
Thereafter                                   3,434            --         194          774            38         4,440        2,227
- ------------------------------------------------------------------------------------------------------------------------------------
Total                                      $ 6,969       $   820     $ 1,610      $ 1,546       $   762       $11,707      $10,189
- -------------------------------------------=========================================================================================
Weighted average at fiscal   
   year-end(3)               
     Receive rate                             6.72%         6.17%        n/a         5.06%         3.67%
     Pay rate                                 5.83%         5.96%        n/a         5.87%         6.75%
- -------------------------------------------=========================================================================================



(1)  The differences between the receive rate and the pay rate may reflect
     differences in the rate of interest associated with the underlying
     currency.

(2)  These amounts include currency swaps used to effectively convert borrowings
     denominated in one currency into obligations denominated in another
     currency.

(3)  The table was prepared under the assumption that interest rates remain
     constant at year-end levels. The variable interest rates to be received or
     paid will change to the extent that rates fluctuate. Such changes may be
     substantial. Variable rates presented generally are based on LIBOR or
     Treasury bill rates.


MSDWD 80
      --

 
As noted above, the Company uses interest rate and currency swaps to modify the
terms of its existing borrowings. Activity during the periods in the notional
value of the swap contracts used by the Company for asset and liability
management (and the unrecognized gain at period end) is summarized in the table
below:



FISCAL YEAR (DOLLARS IN MILLIONS)                           1997           1996
- -------------------------------------------------------------------------------
                                                                      
Notional value at beginning of period                   $ 10,189       $  7,355
Additions                                                  3,567          4,137
Matured                                                   (1,657)        (1,068)
Terminated                                                  (216)          (157)
Effect of foreign currency translation
   on non-U.S. dollar notional values and
   changes in redemption values on
   structured borrowings                                    (176)           (78)
                                                        -----------------------
Notional value at fiscal year-end                       $ 11,707       $ 10,189
- --------------------------------------------------------=======================
Unrecognized gain at fiscal year-end                    $    104       $    139
- --------------------------------------------------------=======================


The Company also uses interest rate swaps to modify certain of its repurchase
financing agreements. The Company had interest rate swaps with notional values
of approximately $1.8 billion and $1.1 billion at fiscal year end 1997 and 1996,
and unrecognized gains of approximately $13 million and $14 million as of fiscal
year end 1997 and 1996, for such purpose. The unrecognized gains on these swaps
were offset by unrecognized losses on certain of the Company's repurchase
financing agreements.

     The estimated fair value of the Company's long-term borrowings approximated
carrying value based on rates available to the Company at year-end for
borrowings with similar terms and maturities.

     Cash paid for interest for the Company's borrowings and deposits
approximated interest expense in fiscal 1997, 1996 and 1995.

7. COMMITMENTS AND CONTINGENCIES
- --------------------------------

The Company has non-cancelable operating leases covering office space and
equipment. At fiscal year-end 1997, future minimum rental commitments under such
leases (net of subleases, principally on office rentals) were as follows:



(DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
                                                                          
1998                                                                        $309
1999                                                                         268
2000                                                                         240
2001                                                                         210
2002                                                                         183
Thereafter                                                                   701
- ----------------------------------------------------------------------------====

                                                   
Occupancy lease agreements, in addition to base rentals, generally provide for
rent and operating expense escalations resulting from increased assessments for
real estate taxes and other charges. Total rent expense, net of sublease rental
income, was $262 million, $264 million and $271 million in fiscal 1997, 1996 and
1995, respectively.

     The Company has an agreement with IBM, under which the Company receives
information processing, data networking and related services. Under the terms of
the agreement, the Company has an aggregate minimum annual commitment of $166
million subject to annual cost of living adjustments.

     During fiscal 1995, the Company recognized a pretax charge of $59 million
($39 million after tax, which reduced primary and fully diluted earnings per
share by $0.06). The charge was in connection with the relocation of the
majority of Morgan Stanley's New York City employees from leased space at 1221
and 1251 Avenue of the Americas to space in the Company's buildings at 1585
Broadway and 750 Seventh Avenue that were purchased in fiscal 1993 and fiscal
1994, respectively, as well as a move to new leased office space in Tokyo. The
charge specifically covered the Company's termination of certain leased office
space and the write-off of remaining leasehold improvements in both cities.


                                                                        MSDWD 81
                                                                              --

 
     In the normal course of business, the Company has been named as a defendant
in various lawsuits and has been involved in certain investigations and
proceedings. Some of these matters involve claims for substantial amounts.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with outside counsel,
that the resolution of such matters will not have a material adverse effect on
the consolidated financial condition of the Company, but may be material to the
Company's operating results for any particular period, depending upon the level
of the Company's income for such period.

     The Company had approximately $5.5 billion of letters of credit outstanding
at November 30, 1997 to satisfy various collateral requirements.

     Financial instruments sold, not yet purchased represent obligations of the
Company to deliver specified financial instruments at contracted prices, thereby
creating commitments to purchase the financial instruments in the market at
prevailing prices. Consequently, the Company's ultimate obligation to satisfy
the sale of financial instruments sold, not yet purchased may exceed the amounts
recognized in the consolidated statements of financial condition.

     The Company also has commitments to fund certain fixed assets and other
less liquid investments, including at November 30, 1997, approximately $150
million in connection with its merchant banking and other principal investment
activities. Additionally, the Company has provided and will continue to provide
financing, including margin lending and other extensions of credit to clients
(including subordinated loans on an interim basis to leveraged companies
associated with its investment banking and its merchant banking and other
principal investment activities), that may subject the Company to increased
credit and liquidity risks.

8.   TRADING ACTIVITIES
- -----------------------

TRADING REVENUES

The Company's trading activities include providing securities brokerage,
derivatives dealing, and underwriting services to clients. While trading
activities are generated by client order flow, the Company also takes
proprietary positions based on expectations of future market movements and
conditions. The Company's trading strategies rely on the integrated management
of its client-driven and proprietary transactions, along with the hedging and
financing of these positions.

     The Company manages its trading businesses by product groupings and
therefore has established distinct, worldwide trading divisions having
responsibility for equity, fixed income, foreign exchange and commodities
products. Because of the integrated nature of the markets for such products,
each product area trades cash instruments as well as related derivative products
(i.e., options, swaps, futures, forwards and other contracts with respect to
such underlying instruments or commodities). Revenues related to principal
trading are summarized below by trading division:



FISCAL YEAR (DOLLARS IN MILLIONS)                   1997        1996        1995
- --------------------------------------------------------------------------------
                                                                    
Equities                                          $1,310      $1,181      $  728
Fixed Income                                       1,187       1,172         710
Foreign Exchange                                     500         169         177
Commodities                                          194         137          70
                                                  ------------------------------
Total principal trading revenues                  $3,191      $2,659      $1,685
- --------------------------------------------------==============================


Interest revenue and expense are integral components of trading activities. In
assessing the profitability of trading activities, the Company views net
interest and principal trading revenues in the aggregate.

     The Company's trading portfolios are managed with a view toward the risk
and profitability of the portfolios to the Company. The nature of the equities,
fixed income, foreign exchange and commodities activities conducted by the
Company, including the use of derivative products in these businesses, and the
market, credit and concentration risk management policies and procedures
covering these activities are discussed below.


MSDWD 82
      --

 
EQUITIES

The Company makes markets and trades in the global secondary markets for
equities and convertible debt and is a dealer in equity warrants, exchange
traded and OTC equity options, index futures, equity swaps and other
sophisticated equity derivatives. The Company's activities as a dealer primarily
are client-driven, with the objective of meeting clients' needs while earning a
spread between the premiums paid or received on its contracts with clients and
the cost of hedging such transactions in the cash or forward market or with
other derivative transactions. The Company limits its market risk related to
these contracts, which stems primarily from underlying equity/index price and
volatility movements, by employing a variety of hedging strategies, such as
delta hedging (delta is a measure of a derivative contract's price movement
based on the movement of the price of the security or index underlying the
contract). The Company also takes proprietary positions in the global equity
markets by using derivatives, most commonly futures and options, in addition to
cash positions, intending to profit from market price and volatility movements
in the underlying equities or indices positioned.

     Equity option contracts give the purchaser of the contract the right to buy
(call) or sell (put) the equity security or index underlying the contract at an
agreed-upon price (strike price) during or at the conclusion of a specified
period of time. The seller (writer) of the contract is subject to market risk,
and the purchaser is subject to market risk (to the extent of the premium paid)
and credit risk. Equity swap contracts are contractual agreements whereby one
counterparty receives the appreciation (or pays the depreciation) on an equity
investment in return for paying another rate, often based upon equity index
movements or interest rates. The counterparties to the Company's equity
transactions include commercial banks, investment banks, broker-dealers,
investment funds and industrial companies.

FIXED INCOME

The Company is a market-maker for U.S. and non-U.S. government securities,
corporate bonds, money market instruments, medium-term notes and Eurobonds,
high-yield securities, emerging market securities, mortgage- and other
asset-backed securities, preferred stock and tax-exempt securities. In addition,
the Company is a dealer in interest rate and currency swaps and other related
derivative products, OTC options on U.S. and foreign government bonds and
mortgage-backed forward agreements ("TBA"), options and swaps. In this capacity,
the Company facilitates asset and liability management for its customers in
interest rate and currency swaps and related products and OTC government bond
options.

     Swaps used in fixed income trading are, for the most part, contractual
agreements to exchange interest payment streams (i.e., an interest rate swap may
involve exchanging fixed for floating interest payments) or currencies (i.e., a
currency swap may involve exchanging yen for U.S. dollars in one year at an
agreed-upon exchange rate). The Company profits by earning a spread between the
premium paid or received for these contracts and the cost of hedging such
contracts. The Company seeks to manage the market risk of its swap portfolio,
which stems from interest rate and currency movements and volatility, by using
modeling that quantifies the sensitivity of its portfolio to movements in
interest rates and currencies and by adding positions to or selling positions
from its portfolio as needed to minimize such sensitivity. Typically, the
Company adjusts its positions by entering into additional swaps or interest rate
and foreign currency futures, foreign currency forwards and by purchasing or
selling additional underlying government bonds. The Company manages the risk
related to its option portfolio by using a variety of hedging strategies such as
delta hedging, which includes the use of futures and forward contracts to hedge
market risk. The Company also is involved in using debt securities to structure
products with multiple risk/return factors designed to suit investor objectives.

     The Company is an underwriter of and a market-maker in mortgage-backed
securities and collateralized mortgage obligations ("CMO") as well as
commercial, residential and real estate loan products. The Company also
structures mortgage-backed swaps for its clients, enabling them to derive the
cash flows from an underlying mort- 


                                                                        MSDWD 83
                                                                              --

 
gage-backed security without purchasing the cash position. The Company earns the
spread between the premium inherent in the swap and the cost of hedging the swap
contract through the use of cash positions or TBA contracts. The Company also
uses TBAs in its role as a dealer in mortgage-backed securities and facilitates
customer trades by taking positions in the TBA market. Typically, these
positions are hedged by offsetting TBA contracts or underlying cash positions.
The Company profits by earning the bid-offer spread on such transactions.
Further, the Company uses TBAs to ensure delivery of underlying mortgage-backed
securities in its CMO issuance business. As is the case with all mortgage-backed
products, market risk associated with these instruments results from interest
rate fluctuations and changes in mortgage prepayment speeds. The counterparties
to the Company's fixed income transactions include investment advisors,
commercial banks, insurance companies, investment funds and industrial
companies.

FOREIGN EXCHANGE

The Company is a market-maker in a number of foreign currencies. In this
business, it actively trades currencies in the spot and forward markets earning
a dealer spread. The Company seeks to manage its market risk by entering into
offsetting positions. The Company conducts an arbitrage business in which it
seeks to profit from inefficiencies between the futures, spot and forward
markets. The Company also makes a market in foreign currency options. This
business largely is client-driven and involves the purchasing and writing of
European and American style options and certain sophisticated products to meet
specific client needs. The Company profits in this business by earning spreads
between the options' premiums and the cost of the hedging of such positions. The
Company limits its market risk by using a variety of hedging strategies,
including the buying and selling of the currencies underlying the options based
upon the options' delta equivalent. Foreign exchange option contracts give the
purchaser of the contract the right to buy (call) or sell (put) the currency
underlying the contract at an agreed-upon strike price at or over a specified
period of time. Forward contracts and futures represent commitments to purchase
or sell the underlying currencies at a specified future date at a specified
price. The Company also takes proprietary positions in currencies to profit from
market price and volatility movements in the currencies positioned.

     The majority of the Company's foreign exchange business relates to major
foreign currencies such as deutsche marks, yen, pound sterling, French francs,
Swiss francs, Italian lire and Canadian dollars. The balance of the business
covers a broad range of other currencies. The counterparties to the Company's
foreign exchange transactions include commercial banks, investment banks,
broker-dealers, investment funds and industrial companies.

COMMODITIES

The Company, as a major participant in the world commodities markets, trades in
physical precious, base and platinum group metals, electricity, energy products
(principally oil, refined oil products and natural gas) as well as a variety of
derivatives related to these commodities such as futures, forwards and exchange
traded and OTC options and swaps. Through these activities, the Company provides
clients with a ready market to satisfy end users' current raw material needs and
facilitates their ability to hedge price fluctuations related to future
inventory needs. The former activity at times requires the positioning of
physical commodities. Derivatives on those commodities, such as futures,
forwards and options, often are used to hedge price movements in the underlying
physical inventory. The Company profits as a market-maker in physical
commodities by capturing the bid-offer spread inherent in the physical markets.

        To facilitate hedging for its clients, the Company often is required to
take positions in the commodity markets in the form of forward, option and swap
contracts involving oil, natural gas, precious and base metals, and electricity.
The Company generally hedges these positions by using a variety of hedging
techniques such as delta hedging, whereby the Company takes positions in the
physical markets and/or positions in other commodity derivatives such as futures
and forwards to offset the market risk in the underlying derivative. The Company
prof-


MSDWD 84
      --

 
its from this business by earning a spread between the premiums paid or received
for these derivatives and the cost of hedging such derivatives.

     The Company also maintains proprietary trading positions in commodity
derivatives, including futures, forwards and options in addition to physical
commodities, to profit from price and volatility movements in the underlying
commodities markets.

     Forward, option and swap contracts on commodities are structured similarly
to like-kind derivative contracts for cash financial instruments. The
counterparties to OTC commodity contracts include precious metals producers,
refiners and consumers as well as shippers, central banks, and oil, gas and
electricity producers.

     The following discussions of risk management, market risk, credit risk,
concentration risk and customer activities relate to the Company's trading
activities.

RISK MANAGEMENT

Risk management at the Company is a multi-faceted process with independent
oversight which requires constant communication, judgment and knowledge of
specialized products and markets. The Company's senior management takes an
active role in the risk management process and has developed policies and
procedures that require specific administrative and business functions to assist
in the identification, assessment and control of various risks. In recognition
of the increasingly varied and complex nature of the financial services
business, the Company's risk management policies and procedures are evolutionary
in nature and are subject to ongoing review and modification. Many of the
Company's risk management and control practices are subject to periodic review
by the Company's internal auditors as well as to interactions with various
regulatory authorities.

     The Management Committee, composed of the Company's most senior officers,
establishes the overall risk management policies for the Company and reviews the
Company's performance relative to these policies. The Management Committee has
created several Risk Committees to assist it in monitoring and reviewing the
Company's risk management practices. These Risk Committees, among other things,
review the general framework, levels and monitoring procedures relating to the
Company's market and credit risk profile, general sales practice policies, legal
enforceability and operational and systems risks. The Controllers, Treasury,
Law, Compliance and Governmental Affairs and Market Risk Departments, which are
all independent of the Company's business units, assist senior management and
the Risk Committees in monitoring and controlling the Company's risk profile. In
addition, the Internal Audit Department, which also reports to senior
management, evaluates the Company's operations and control environment through
periodic examinations of business operational areas. The Company continues to be
committed to employing qualified personnel with appropriate expertise in each of
its various administrative and business areas to implement effectively the
Company's risk management and monitoring systems and processes.

MARKET RISK

Market risk refers to the risk that a change in the level of one or more market
prices, rates, indices, volatilities, correlations or other market factors, such
as liquidity, will result in losses for a specified position or portfolio.

     The Company manages the market risk associated with its trading activities
Company-wide, on a trading division level worldwide and on an individual product
basis. Market risk guidelines and limits have been approved for the Company and
each trading division of the Company worldwide. Discrete market risk limits are
assigned to trading divisions and trading desks within trading areas which are
compatible with the trading division limits. Trading division risk managers,
desk risk managers and the Market Risk Department all monitor market risk
measures against limits and report major market and position events to senior
management.

     The Market Risk Department independently reviews the Company's trading
portfolios on a regular basis from a market risk perspective utilizing
Value-at-Risk and other quantitative and qualitative risk measurements and
analyses. The Company may use measures, 


                                                                        MSDWD 85
                                                                              --

 
such as rate sensitivity, convexity, volatility and time decay measurements, to
estimate market risk and to assess the sensitivity of positions to changes in
market conditions. Stress testing, which measures the impact on the value of
existing portfolios of specified changes in market factors, for certain products
is performed periodically and is reviewed by trading division risk managers,
desk risk managers and the Market Risk Department.

CREDIT RISK

The Company's exposure to credit risk arises from the possibility that a
counterparty to a transaction might fail to perform under its contractual
commitment, resulting in the Company incurring losses. The Company has credit
guidelines which limit the Company's credit exposure to any one counterparty.
Specific credit risk limits based on the credit guidelines are also in place for
each type of counterparty (by rating category) as well as for secondary
positions of high-yield and emerging market debt.

     The Credit Department administers and monitors the credit limits among
trading divisions on a worldwide basis. In addition to monitoring credit limits,
the Company manages the credit exposure relating to the Company's trading
activities by reviewing counterparty financial soundness periodically, by
entering into master netting agreements and collateral arrangements with
counterparties in appropriate circumstances and by limiting the duration of
exposure. In certain cases, the Company also may close out transactions or
assign them to other counterparties to mitigate credit risk.

CONCENTRATION RISK

The Company is subject to concentration risk by holding large positions in
certain types of securities or commitments to purchase securities of a single
issuer, including sovereign governments and other entities, issuers located in a
particular country or geographic area, public and private issuers involving
developing countries or issuers engaged in a particular industry. Financial
instruments owned by the Company include U.S. government and agency securities
and securities issued by other sovereign governments (principally Japan and
Italy), which, in the aggregate, represented approximately 12% of the Company's
total assets at fiscal year end 1997. In addition, substantially all of the
collateral held by the Company for resale agreements or bonds borrowed, which
together represented approximately 34% of the Company's total assets at fiscal
year end 1997, consists of securities issued by the U.S. government, federal
agencies or other sovereign government obligations. Positions taken and
commitments made by the Company, including positions taken and underwriting and
financing commitments made in connection with its merchant banking and principal
investment activities, often involve substantial amounts and significant
exposure to individual issuers and businesses, including non-investment grade
issuers. The Company seeks to limit concentration risk through the use of the
systems and procedures described in the preceding discussions of market and
credit risk.

CUSTOMER ACTIVITIES

The Company's customer activities involve the execution, settlement, custody and
financing of various securities and commodities transactions on behalf of
customers. Customer securities activities are transacted on either a cash or
margin basis. Customer commodities activities, which include the execution of
customer transactions in commodity futures transactions (including options on
futures), are transacted on a margin basis.

     The Company's customer activities may expose it to off-balance sheet credit
risk. The Company may have to purchase or sell financial instruments at
prevailing market prices in the event of the failure of a customer to settle a
trade on its original terms or in the event cash and securities in customer
margin accounts are not sufficient to fully cover customer losses. The Company
seeks to control the risks associated with customer activities by requiring
customers to maintain margin collateral in compliance with various regulations
and Company policies.

NOTIONAL/CONTRACT AMOUNTS AND 
FAIR VALUES OF DERIVATIVES

The gross notional or contract amounts of derivative instruments and fair value
(carrying amount) of the related assets and liabilities at fiscal year-end 1997
and 1996, as 


MSDWD 86
      --

 
well as the average fair value of those assets and liabilities for fiscal year
1997 and 1996, are presented in the table which follows. Fair value represents
the cost of replacing these instruments and is further described in Note 2.
Future changes in interest rates, foreign currency exchange rates or the fair
values of the financial instruments, commodities or indices underlying these
contracts may ultimately result in cash settlements exceeding fair value amounts
recognized in the consolidated statements of financial condition. Assets
represent unrealized gains on purchased exchange traded and OTC options and
other contracts (including interest rate, foreign exchange and other forward
contracts and swaps) net of any unrealized losses owed to these counterparties
on offsetting positions in situations where netting is appropriate. Similarly,
liabilities represent net amounts owed to counterparties. These amounts will
vary based on changes in the fair values of underlying financial instruments
and/or the volatility of such underlying instruments:



FISCAL YEAR-END                                                  FISCAL YEAR-END                              AVERAGE
GROSS NOTIONAL/CONTRACT AMOUNT(1)(2)                              FAIR VALUES(3)                           FAIR VALUES(3)(4)
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN BILLIONS, AT FISCAL YEAR-END)                   ASSETS              LIABILITIES            ASSETS          LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------------
  1997      1996                                        1997        1996        1997     1996      1997      1996     1997    1996
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                
                    Interest rate and currency swaps
                      and options (including caps,
$1,042    $  622      floors and swap options)         $ 7.1       $ 4.9       $ 6.3    $ 5.0     $ 4.8      $4.2    $ 5.9    $3.8
                    Foreign exchange forward and
 1,035       362      futures contracts and options      4.6         2.2         4.2      2.0       3.4       1.6      3.2     1.6
                    Mortgage-backed securities
                      forward contracts, swaps
    42        31      and options                         .3          .2          --       .1        .3        .2       --      .1  

                    Other fixed income securities
                      contracts (including futures
   220       178      contracts and options)              --          .2          .1       .2        --        .2       --      .4
                    Equity securities contracts
                      (including equity swaps,
                      futures contracts, and
   112        61      warrants and options)              3.8         2.3         3.8      1.5       2.6       1.6      2.6     1.1
                    Commodity forwards, futures,
    78        63      options and swaps                  1.3         1.4         1.2      1.2       1.1       1.3       .9      .7
- ----------------------------------------------------------------------------------------------------------------------------------
$2,529    $1,317    Total                              $17.1       $11.2       $15.6    $10.0     $12.2      $9.1    $12.6    $7.7
==================================================================================================================================


(1)  The notional amounts of derivatives have been adjusted to reflect the
     effects of leverage, where applicable.
(2)  Notional amounts include purchased and written options of $572 billion and
     $549 billion, respectively, at fiscal year-end 1997, and $247 billion and
     $193 billion, respectively, at fiscal year-end 1996.
(3)  These amounts represent carrying value (exclusive of collateral) at fiscal
     year-end 1997 and 1996, respectively, and do not include receivables or
     payables related to exchange traded futures contracts.
(4)  Amounts are calculated using a monthly average.


                                                                        MSDWD 87
                                                                              --

 
The gross notional or contract amounts of these instruments are indicative of
the Company's degree of use of derivatives for trading purposes but do not
represent the Company's exposure to market or credit risk. Credit risk arises
from the failure of a counterparty to perform according to the terms of the
contract. The Company's exposure to credit risk at any point in time is
represented by the fair value of the contracts reported as assets. These amounts
are presented on a net-by-counterparty basis when appropriate, but are not
reported net of collateral, which the Company obtains with respect to certain of
these transactions to reduce its exposure to credit losses. The Company monitors
the creditworthiness of counterparties to these transactions on an ongoing basis
and requests additional collateral when deemed necessary. The Company believes
that the ultimate settlement of the transactions outstanding at fiscal year-end
1997 will not have a material effect on the Company's financial condition.

     The remaining maturities of the Company's swaps and other derivative
products at fiscal year-end 1997 and 1996 are summarized in the following table,
showing notional values by year of expected maturity:




                                                                                  LESS THAN    1 TO 3    3 TO 5  MORE THAN
(DOLLARS IN BILLIONS)                                                                1 YEAR     YEARS     YEARS    5 YEARS    TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 
AT FISCAL YEAR-END 1997
- -----------------------

Interest rate and currency swaps and options (including caps, floors and
   swap options)                                                                     $  210    $  318    $  209    $  305    $1,042
Foreign exchange forward and futures contracts and options                            1,026         7         2        --     1,035
Mortgage-backed securities forward contracts, swaps and options                          20         1         4        17        42
Other fixed income securities contracts (including futures contracts and options)       109        80        26         5       220
Equity securities contracts (including equity swaps, futures contracts, and
   warrants and options)                                                                 87        17         7         1       112
Commodity forwards, futures options and swaps                                            58        14         4         2        78
- -----------------------------------------------------------------------------------------------------------------------------------
   Total                                                                             $1,510    $  437    $  252    $  330    $2,529
- -----------------------------------------------------------------------------------------------------------------------------------
   Percent of total                                                                      60%       17%       10%       13%      100%
- -------------------------------------------------------------------------------------==============================================

AT FISCAL YEAR-END 1996
- -----------------------

Interest rate and currency swaps and options (including caps, floors and
   swap options)                                                                     $  132    $  191    $  119    $  180    $  622
Foreign exchange forward and futures contracts and options                              338        20         4        --       362
Mortgage-backed securities forward contracts, swaps and options                          20         1         2         8        31
Other fixed income securities contracts (including futures contracts and options)       132        39         6         1       178
Equity securities contracts (including equity swaps, futures contracts, and
   warrants and options)                                                                 50         9         2        --        61
Commodity forwards, futures options and swaps                                            50        10         2         1        63
- -----------------------------------------------------------------------------------------------------------------------------------
   Total                                                                             $  722    $  270    $  135    $  190    $1,317
- -------------------------------------------------------------------------------------==============================================
   Percent of total                                                                      55%       21%       10%       14%      100%
- -------------------------------------------------------------------------------------==============================================




MSDWD 88
      --

 
The credit quality of the Company's trading-related derivatives at fiscal
year-end 1997 and 1996 is summarized in the table below, showing the fair value
of the related assets by counterparty credit rating. The actual credit ratings
are determined by external rating agencies or by equivalent ratings used by the
Company's Credit Department:



                                                                                               COLLATERALIZED      OTHER
                                                                                                         NON-       NON-
                                                                                                   INVESTMENT INVESTMENT
(DOLLARS IN MILLIONS)                                          AAA        AA           A       BBB      GRADE      GRADE      TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
AT FISCAL YEAR-END 1997
- -----------------------

Interest rate and currency swaps and options
   (including caps, floors and swap options)               $   740    $ 2,757    $ 2,534   $   434    $    26    $   560    $ 7,051
Foreign exchange forward contracts and options                 788      2,504      1,068        72         --        176      4,608
Mortgage-backed securities forward contracts,
   swaps and options                                           156         90         50         2         --         10        308
Other fixed income securities contracts (including options)     14          4         10         2          7          8         45
Equity securities contracts (including equity swaps,
   warrants and options)                                     1,141        917        567       233        780        152      3,790
Commodity forwards, options and swaps                           70        425        380       312         12        145      1,344
- -----------------------------------------------------------------------------------------------------------------------------------
   Total                                                   $ 2,909    $ 6,697    $ 4,609   $ 1,055    $   825    $ 1,051    $17,146
- -----------------------------------------------------------------------------------------------------------------------------------
   Percent of total                                             17%        39%        27%        6%         5%         6%       100%
- -----------------------------------------------------------========================================================================
AT FISCAL YEAR-END 1996
- -----------------------

Interest rate and currency swaps and options
   (including caps, floors and swap options)               $   739    $ 1,393    $ 1,977   $   674    $    25    $   152    $ 4,960
Foreign exchange forward contracts and options                 727        824        539        28         --         50      2,168
Mortgage-backed securities forward contracts,
   swaps and options                                            66         65         64        19         --          5        219
Other fixed income securities contracts (including options)     53         52         41        22          6         31        205
Equity securities contracts (including equity swaps,
   warrants and options)                                     1,074        274        408        60        426         43      2,285
Commodity forwards, options and swaps                           95        318        318       280         72        300      1,383
- -----------------------------------------------------------------------------------------------------------------------------------
   Total                                                   $ 2,754    $ 2,926    $ 3,347   $ 1,083    $   529    $   581    $11,220
- -----------------------------------------------------------------------------------------------------------------------------------
   Percent of total                                             24%        26%        30%       10%         5%         5%       100%
- -----------------------------------------------------------========================================================================




The Company has also obtained assets posted as collateral by investment grade
counterparties amounting to $1,219 million and $948 million at fiscal year-end
1997 and fiscal year-end 1996, respectively.

9. PREFERRED STOCK AND CAPITAL UNITS
- ------------------------------------

Preferred stock is composed of the following issues:



                                                                                SHARES OUTSTANDING AT               BALANCE AT
                                                                                   FISCAL YEAR-END                FISCAL YEAR-END
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)                                                              1997           1996           1997           1996
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                                                                     

ESOP Convertible Preferred Stock, liquidation preference $35.88               3,646,664      3,699,302           $131         $  133

Series A Fixed/Adjustable Rate Cumulative Preferred Stock,
     stated value $200                                                        1,725,000      1,725,000            345            345

7-3/4% Cumulative Preferred Stock, stated value $200                          1,000,000      1,000,000            200            200

7-3/8% Cumulative Preferred Stock, stated value $200                          1,000,000      1,000,000            200            200

8.88% Cumulative Preferred Stock, stated value $200                                  --        975,000             --            195

8-3/4% Cumulative Preferred Stock, stated value $200                                 --        750,000             --            150

- ------------------------------------------------------------------------------------------------------------------------------------
   Total                                                                                                         $876        $ 1,223
- ------------------------------------------------------------------------------======================================================




                                                                        MSDWD 89
                                                                              --

 
Each issue of outstanding preferred stock ranks in parity with all other
outstanding preferred stock of the Company. 

     During fiscal 1997, the Company redeemed all 975,000 shares of its 8.88%
Cumulative Preferred Stock at a redemption price of $201.632 per share, which
reflects the stated value of $200 per share together with an amount equal to all
dividends accrued and unpaid to, but excluding, the redemption date. During
fiscal 1997, the Company also redeemed all 750,000 shares of its 8-3/4%
Cumulative Preferred Stock at a redemption price of $200 per share, which was
equal to the stated value of $200 per share.

     The Company has Capital Units outstanding which were issued by the Company
and Morgan Stanley Finance plc ("MS plc"), a U.K. subsidiary. A Capital Unit
consists of (a) a Subordinated Debenture of MS plc guaranteed by the Company and
having maturities from 2013 to 2017 and (b) a related Purchase Contract issued
by the Company, which may be accelerated by the Company beginning approximately
one year after the issuance of each Capital Unit, requiring the holder to
purchase one Depositary Share representing shares (or fractional shares) of the
Company's Cumulative Preferred Stock. The aggregate amount of Capital Units
outstanding was $999 million at fiscal year end 1997 and $865 million at fiscal
year end 1996.

     During fiscal 1997, the Company and MS plc issued 8.03% Capital Units in
the aggregate amount of $134 million which mature in 2017.

     The estimated fair value of the Capital Units approximated carrying value
at fiscal year-end 1997 and fiscal year-end 1996.

10. COMMON STOCK AND SHAREHOLDERS' EQUITY
- -----------------------------------------

In conjunction with the Merger, the Company increased the number of authorized
common shares to 1,750 million and changed the number of authorized preferred
shares to 30 million.

     Prior to the consummation of the Merger, both Morgan Stanley and Dean
Witter Discover rescinded their respective outstanding share repurchase
authorizations. At the time of the Merger, 5,902,751 shares of Morgan Stanley
common stock which had been held in treasury were retired.

     MS&Co. and DWR are registered broker-dealers and registered futures
commission merchants and, accordingly, subject to the minimum net capital
requirements of the Securities Exchange Commission, the New York Stock Exchange
and the Commodity Futures Trading Commission. MS&Co. and DWR have consistently
operated in excess of these requirements. MS&Co.'s net capital totaled $2,186
million at November 30, 1997 which exceeded the amount required by $1,753
million. DWR's net capital totaled $764 million at November 30, 1997 which
exceeded the amount required by $643 million. MSIL, a London-based broker-dealer
subsidiary, is subject to the capital requirements of the Securities and Futures
Authority, and MSJL, a Tokyo-based broker-dealer, is subject to the capital
requirements of the Japanese Ministry of Finance. MSIL and MSJL have
consistently operated in excess of their respective regulatory capital
requirements.

     Under regulatory net capital requirements adopted by the Federal Deposit
Insurance Corporation ("FDIC") and other regulatory capital guidelines,
FDIC-insured financial institutions must maintain (a) 3% to 5% of Tier 1
capital, as defined, to total assets ("leverage ratio") and (b) 8% combined Tier
1 and Tier 2 capital, as defined, to risk weighted assets ("risk-weighted
capital ratio"). At November 30, 1997, the leverage ratio and risk-weighted
capital ratio of each of the Company's FDIC-insured financial institutions
exceeded these and all other regulatory minimums.

     Certain other U.S. and non-U.S. subsidiaries are subject to various
securities, commodities and banking regulations, and capital adequacy
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These subsidiaries have consistently operated
in excess of their local capital adequacy requirements. Morgan Stanley
Derivative Products 


MSDWD 90
      --

 
Inc., the Company's triple-A rated derivative products subsidiary, also has
established certain operating restrictions which have been reviewed by various
rating agencies.

     The regulatory capital requirements referred to above, and certain
covenants contained in various agreements governing indebtedness of the Company,
may restrict the Company's ability to withdraw capital from its subsidiaries. At
November 30, 1997, approximately $4,303 million of net assets of consolidated
subsidiaries may be restricted as to the payment of cash dividends and advances
to the Company.

     Cumulative translation adjustments include gains or losses resulting from
translating foreign currency financial statements from their respective
functional currencies to U.S. dollars, net of hedge gains or losses and related
tax effects. The Company uses foreign currency contracts and designates certain
non-U.S. dollar currency debt as hedges to manage the currency exposure relating
to its net monetary investments in non-U.S. dollar functional currency
subsidiaries. Increases or decreases in the value of the Company's net foreign
investments generally are tax-deferred for U.S. purposes, but the related hedge
gains and losses are taxable currently. Therefore, the gross notional amounts of
the contracts and debt designated as hedges exceed the Company's net foreign
investments to result in effective hedging on an after-tax basis. The Company
attempts to protect its net book value from the effects of fluctuations in
currency exchange rates on its net monetary investments in non-U.S. dollar
subsidiaries by selling the appropriate non-U.S. dollar currency in the forward
market. However, under some circumstances, the Company may elect not to hedge
its net monetary investments in certain foreign operations due to market
conditions, including the availability of various currency contracts at
acceptable costs. Information relating to the hedging of the Company's net
monetary investments in non-U.S. dollar functional currency subsidiaries and
their effects on cumulative translation adjustments is summarized below:



                                                             AT FISCAL YEAR-END
- -------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)                                       1997         1996
- -------------------------------------------------------------------------------
                                                                       
Net investments in non-U.S. dollar functional
   currency subsidiaries                                   $ 1,128      $ 1,279
- -----------------------------------------------------------====================
Gross notional amounts of foreign exchange
   contracts and non-U.S. dollar debt
   designated as hedges(1)                                 $ 1,881      $ 2,247
- -----------------------------------------------------------====================
Cumulative translation adjustments resulting
   from net investments in subsidiaries with
   a non-U.S. dollar functional currency                   $     6      $   100
Cumulative translation adjustments resulting
   from realized or unrealized gains or losses
   on hedges, net of tax                                   $   (15)     $  (111)
                                                           ---------------------
     Total cumulative translation adjustments              $    (9)     $   (11)
- -----------------------------------------------------------====================


(1)  Notional amounts represent the contractual currency amount translated at
     respective fiscal year-end spot rates.

11.  EMPLOYEE COMPENSATION PLANS
- --------------------------------

The Company has adopted a variety of compensation plans for certain of its
employees as well as the Company's non-employee directors. These plans are
designed to facilitate a pay-for-performance policy, provide compensation
commensurate with other leading financial services companies and provide for
internal ownership in order to align the interests of employees with the
long-term interests of the Company's shareholders. These plans are summarized
below.

EQUITY-BASED COMPENSATION PLANS

The Company is authorized to issue up to approximately 260 million shares of its
common stock in connection with awards under its equity-based compensation
plans. At November 30, 1997, approximately 164 million shares were available for
future grant under these plans.

Stock Option Awards

Stock option awards have been granted pursuant to several equity-based
compensation plans. Each plan provides for the granting of stock options having
an exercise price not less than the fair value of the Company's common stock (as
defined in the plan) on the date of grant. Such options generally become
exercisable over a one to five year period and expire seven to 10 years from the
date of grant.


                                                                        MSDWD 91
                                                                              --

 
     The following table sets forth activity relating to the Company's stock
option awards (share data in millions):



                                                       FISCAL 1997                 FISCAL 1996                    FISCAL 1995
- -----------------------------------------------------------------------------------------------------------------------------------
                                                 NUMBER          WEIGHTED     NUMBER          WEIGHTED     NUMBER          WEIGHTED
                                                     OF           AVERAGE         OF           AVERAGE         OF           AVERAGE
                                                 SHARES    EXERCISE PRICE     SHARES    EXERCISE PRICE     SHARES    EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
Options outstanding at beginning of period         60.3            $17.04       63.1            $14.46       39.0            $10.60
Granted                                            20.2             48.16        7.5             30.15       32.0             17.89
Exercised                                         (14.9)            11.68       (9.0)             9.45       (7.3)             8.60
Forfeited                                          (1.5)            26.66       (1.3)            21.14        (.6)            17.17
- -----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of period               64.1            $27.85       60.3            $17.04       63.1            $14.46
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of period               44.3            $26.67       36.4            $13.82       36.0            $12.38
- ---------------------------------------------------================================================================================


The following table presents information relating to the Company's stock options
outstanding at November 30, 1997 (share data in millions):



                                   OPTIONS OUTSTANDING            OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------
                                       WEIGHTED      AVERAGE                     WEIGHTED
                                        AVERAGE    REMAINING                      AVERAGE
RANGE OF                    NUMBER     EXERCISE         LIFE         NUMBER      EXERCISE
EXERCISE PRICES        OUTSTANDING        PRICE       (YEARS)   EXERCISABLE         PRICE
- -----------------------------------------------------------------------------------------
                                                                       
$ 6.00 - $12.99                4.0        $8.51         1.9             4.0         $8.51
$13.00 - $19.99               31.8        17.24         6.9            26.0         17.07
$20.00 - $26.99                2.0        23.02         4.2              .7         23.62
$27.00 - $33.99                5.9        30.02         5.1              --         33.13
$34.00 - $40.99                3.5        35.55         8.9              .1         36.19
$41.00 - $47.99                4.9        43.33         6.2             3.7         43.23
$48.00 - $54.99               11.9        53.75        10.0             9.7         53.73
$55.00 - $61.99                 .1        57.35         5.2              .1         57.35
                       ------------------------------------------------------------------
Total                         64.1                      7.0            44.3      
- -----------------------==================================================================


Deferred Compensation Awards

The Company has made deferred compensation awards under a number of equity-based
compensation plans. These plans provide for the deferral of a portion of certain
key employees' compensation with payments made in the form of the Company's
common stock or in the right to receive unrestricted shares (collectively,
"Restricted Stock"). Compensation expense for all such awards (including those
subject to forfeiture) amounted to $347 million, $534 million and $235 million
in fiscal 1997, fiscal 1996 and fiscal 1995. Compensation expense for Restricted
Stock awards was determined based on the fair value of the Company's common
stock (as defined in the plans). The number of Restricted Stock shares
outstanding were 62 million at fiscal year-end 1997, 65 million at fiscal
year-end 1996, and 56 million at fiscal year-end 1995.

     Restricted Stock awarded under these plans are subject to restrictions on
sale, transfer or assignment until the end of a specified restriction period,
generally 5 to 10 years from the date of grant. Holders of Restricted Stock
generally may forfeit ownership of a portion of their award if employment is
terminated before the end of the relevant restriction period. Holders of vested
Restricted Stock generally will forfeit ownership only in certain limited
situations, including termination for cause during the restriction period.

Employees Equity Accumulation Plan

Shareholders approved the Employees' Equity Accumulation Plan on May 28, 1997.
This plan is intended to align key employees' interest with shareholders'
through equity-based compensation and to permit the granting of awards that will
constitute performance-based compensation for certain executive officers. Under
this plan, the Company will issue an aggregate of not more than 30 million
shares of common stock, as calculated in accordance with the plan.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, employees may purchase shares of the
Company's common stock at not less than 85% of the fair value on the date of
purchase. Employees of the Company purchased 0.5 million shares of common stock
in fiscal 1997, 0.7 million shares in fiscal 1996 and 0.8 million shares in
fiscal 1995.


MSDWD 92
      --

 
     The discount to fair value was $2 million for both fiscal 1997 and fiscal
1996 and $1 million in fiscal 1995. The plan is "non-compensatory" under APB No.
25, and, accordingly, no charge to earnings has been recorded for the amount of
the discount to fair value.

Non-Employee Director Awards

The Company sponsors a stock plan for non-employee directors under which shares
of the Company's common stock have been authorized for issuance in the form of
option grants, stock awards or deferred compensation. The effect of these grants
on results of operations was not material.

OTHER COMPENSATION PLANS

Capital Accumulation Plan

Under the Capital Accumulation Plan ("CAP"), vested units consisting of
unsecured rights to receive payments based on notional interests in existing and
future risk-capital investments made directly or indirectly by the Company ("CAP
Units") are granted to key employees. The value of the CAP Units awarded for
services rendered in fiscal 1997, 1996 and 1995 was approximately $14 million,
$7 million and $12 million, respectively, all of which relate to vested units.

Carried Interest Plans

Under various Carried Interest Plans, certain key employees effectively
participate in a portion of the Company's realized gains from certain of its
equity investments in merchant banking transactions. Compensation expense for
fiscal 1997, 1996 and 1995 related to these plans aggregated $38 million, $0.2
million and $14 million, respectively.

Real Estate Fund Plans

Under the Real Estate Compensation Plan and the Real Estate Profits
Participation Plan, select employees and consultants may participate in certain
gains realized by the Company's real estate funds. Compensation expense relating
to these plans aggregated $8 million, $13 million and $9 million for fiscal
1997, fiscal 1996 and fiscal 1995, respectively.

Profit Sharing Plans

The Company sponsors qualified profit sharing plans covering substantially all
U.S. employees and also provides cash payment of profit sharing to employees of
its international subsidiaries. Contributions are made to eligible employees at
the discretion of management based upon the financial performance of the
Company. Total profit sharing expense for fiscal 1997, fiscal 1996 and fiscal
1995 (excluding Company contributions to the Employee Stock Ownership Plan,
which increased in fiscal 1995) was $113 million, $72 million and $51 million,
respectively.

Employee Stock Ownership Plan

The Company has a $140 million leveraged employee stock ownership plan, funded
through an independently managed trust. The Employee Stock Ownership Plan
("ESOP") was established to broaden internal ownership of the Company and to
provide benefits to its employees in a cost-effective manner. Each of the
3,646,664 preferred shares outstanding at fiscal year end 1997 is held by the
ESOP trust, is convertible into 3.3 shares of the Company's common stock and is
entitled to annual dividends of $2.78 per preferred share. The ESOP trust funded
its stock purchase through a loan of $140 million from the Company. The ESOP
trust note, due September 19, 2010 (extendable at the option of the ESOP trust
to September 19, 2015), bears a 10-3/8% interest rate per annum with principal
payable without penalty on or before the due date. The ESOP trust expects to
make principal and interest payments on the note from funds provided by
dividends on the shares of convertible preferred stock and contributions from
the Company. The note receivable from the ESOP trust is reflected as a reduction
in the Company's shareholders' equity. Shares allocated to employees generally
may not be withdrawn until the employee's death, disability, retirement or
termination. Upon withdrawal, each share of ESOP preferred stock generally will
be converted into 3.3 shares of the Company's common stock. If the fair value of
such 3.3 common shares at conversion is less than the $35.88 liquidation value
of an ESOP preferred share, the Company will pay the withdrawing employee the
difference in additional common shares or cash.


                                                                        MSDWD 93
                                                                              --

 
     Contributions to the ESOP by the Company and allocation of ESOP shares to
employees are made annually at the discretion of the Board of Directors. The
cost of shares allocated to participants' accounts amounted to $8 million in
fiscal 1997, $9 million in fiscal 1996 and $13 million in fiscal 1995. The ESOP
debt service costs for fiscal 1997, fiscal 1996 and fiscal 1995 were paid from
dividends received on preferred stock held by the plan and from Company
contributions.

PRO FORMA EFFECT OF SFAS NO. 123

Had the Company elected to recognize compensation cost pursuant to SFAS No. 123
for its stock option plans and the Employee Stock Purchase Plan, net income
would have been reduced by $196 million, $41 million and $147 million for fiscal
1997, 1996 and 1995. Primary and fully diluted earnings per common share would
have been reduced by $0.36, $0.08 and $0.25 for fiscal 1997, 1996 and 1995.

     The weighted average fair value at date of grant for stock options granted
during fiscal 1997, 1996 and 1995 was $16.76, $9.08 and $7.27 per option,
respectively. The fair value of stock options at date of grant was estimated
using the Black-Scholes option pricing model utilizing the following weighted
average assumptions:



FISCAL YEAR                                      1997         1996         1995 
- --------------------------------------------------------------------------------
                                                                    
Risk-free interest rate                           6.0%         5.5%         7.4%
Expected option life in years                     6.0          5.3          8.1
Expected stock price volatility                  28.0%        27.5%        29.7%
Expected dividend yield                           1.3%         1.6%         1.9%
- -------------------------------------------------===============================


12. EMPLOYEE BENEFIT PLANS
- --------------------------

The Company sponsors various pension plans for the majority of its worldwide
employees. The Company provides certain other postretirement benefits, primarily
health care and life insurance, to eligible employees. The Company also provides
certain benefits to former or inactive employees prior to retirement. The
following summarizes these plans:

Pension Plans

Substantially all of the U.S. employees of the Company and its U.S. affiliates
are covered by non-contributory pension plans that are qualified under Section
401(a) of the Internal Revenue Code (the "Qualified Plans"). Unfunded
supplementary plans (the "Supplemental Plans") cover certain executives. In
addition to the Qualified Plans and the Supplemental Plans (collectively, the
"U.S. Plans"), ten of the Company's international subsidiaries also have pension
plans covering substantially all of their employees. These pension plans
generally provide pension benefits that are based on each employee's years of
credited service and on compensation levels specified in the plans. For the
Qualified Plans and the other international plans, the Company's policy is to
fund at least the amounts sufficient to meet minimum funding requirements under
applicable employee benefit and tax regulations. Liabilities for benefits
payable under the Supplemental Plans are accrued by the Company and are funded
when paid to the beneficiaries.

     The Company also maintains a separate pension plan which covers
substantially all employees of the Company's U.K. subsidiaries (the "U.K.
Plan"). During fiscal 1996, the benefit structure of the U.K. Plan was changed
from a defined benefit plan to a defined contribution plan. Under the defined
contribution plan, benefits are determined by the purchasing power of the
accumulated value of contributions paid. Under the defined benefit plan,
benefits were expressed as a proportion of earnings at or near retirement based
on years of service. In fiscal 1997 and 1996, the Company's expense related to
the defined contribution U.K. Plan was $15 million and $3 million, respectively.

     The following tables present information for the Dean Witter Discover
predecessor pension plans and Morgan Stanley predecessor pension plans on an
aggregate basis.

   Pension expense includes the following components:



FISCAL YEAR (DOLLARS IN MILLIONS)                    1997       1996       1995
- -------------------------------------------------------------------------------
                                                                   
U.S. Plans
   Service cost, benefits earned during
     the period                                     $  54      $  48      $  35
   Interest cost on projected benefit
     obligation                                        67         58         50
   Return on plan assets                             (170)      (111)      (103)
   Difference between actual and
     expected return on assets                        104         53         51
   Net amortization                                     1          2         (1)
                                                    ----------------------------
Total U.S. Plans                                       56         50         32
International plans                                     9         12         13
                                                    ----------------------------
Total pension expense                               $  65      $  62      $  45
- ----------------------------------------------------============================



MSDWD 94
      --

 
The following table provides the assumptions used in determining the projected
benefit obligation for the U.S. Plans:



FISCAL YEAR                                                1997            1996
- --------------------------------------------------------------------------------
                                                                       
Weighted average discount rate                             7.25%      7.50-7.75%
Rate of increase in future
   compensation levels                                     5.00%           5.00%
Expected long-term rate of return
   on plan assets                                          9.00%           9.00%
- -----------------------------------------------------------=====================


     The following table sets forth the funded status of the U.S. Plans:



                                             1997                                   1996
- --------------------------------------------------------------------------------------------------------
AT FISCAL YEAR-END
(DOLLARS IN MILLIONS)             QUALIFIED        SUPPLEMENTAL           QUALIFIED        SUPPLEMENTAL
- --------------------------------------------------------------------------------------------------------
                                                                                         
Actuarial present value
   of vested benefit
   obligation                       $  (735)            $   (34)            $  (592)            $   (38)
                                    --------------------------------------------------------------------
                                                                                               
Accumulated benefit                                                                            
   obligation                       $  (807)            $   (71)            $  (636)            $   (59)
Effect of future                                                                               
   salary increases                    (181)                (30)               (140)                (19)
                                    --------------------------------------------------------------------
Projected benefit                                                                              
   obligation                          (988)               (101)               (776)                (78)
Plan assets at fair                                                                            
   market value                                                                                
   (primarily listed                                                                           
   stocks and bonds)                  1,006                  --                 785                  --
                                    --------------------------------------------------------------------
Projected benefit                                                                              
   obligation less than                                                                        
   or (in excess of)                                                                           
   plan assets                           18                (101)                  9                 (78)
Unrecognized net                                                                               
   (gain) or loss                        (4)                 27                 (15)                 13
Unrecognized prior                                                                             
   service cost                          31                  (4)                  5                  (4)
Unrecognized net                                                                               
   transition                                                                                  
   obligation                             3                   5                  --                   5
                                    --------------------------------------------------------------------
Prepaid (accrued)                                                                              
   pension cost at                                                                             
   fiscal year-end                  $    48             $   (73)            $    (1)            $   (64)
- ------------------------------------====================================================================


POSTRETIREMENT BENEFITS

The Company has unfunded postretirement benefit plans that provide medical and
life insurance for eligible retirees, employees and dependents. At fiscal year
end 1997 and 1996, the Company's accrued postretirement benefit costs were $91
million and $85 million.

POSTEMPLOYMENT BENEFITS

Postemployment benefits include, but are not limited to, salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits, and continuation of health care and life insurance coverage provided
to former or inactive employees after employment but before retirement. These
benefits were not material to the consolidated financial statements in fiscal
1997, 1996 and 1995.

13. INCOME TAXES
- ----------------

  The provision for income taxes consists of:



FISCAL YEAR (DOLLARS IN MILLIONS)                1997         1996         1995
- -------------------------------------------------------------------------------
                                                                   
Current
   U.S. federal                               $ 1,079      $ 1,096      $   730
   U.S. state and local                           348          290          205
   Non-U.S                                        338          177          104
                                              ---------------------------------
                                                1,765        1,563        1,039
                                              ---------------------------------
Deferred
   U.S. federal                                   (45)        (326)        (120)
   U.S. state and local                           (17)         (74)         (54)
   Non-U.S                                        (15)         (26)         (38)
                                              ---------------------------------
                                                  (77)        (426)        (212)
                                              ---------------------------------
Provision for income taxes                    $ 1,688      $ 1,137      $   827
- ----------------------------------------------=================================


The following table reconciles the provision to the U.S. federal statutory
income tax rate:



FISCAL YEAR                                       1997        1996        1995
- ------------------------------------------------------------------------------
                                                                   
U.S. federal statutory income tax rate            35.0%       35.0%       35.0%
U.S. state and local income taxes, net
   of U.S. federal income tax benefits             5.1         4.6         4.2
Lower tax rates applicable to
   non-U.S. earnings                              (1.1)       (1.7)       (2.9)
Reduced tax rate applied to dividends              (.1)        (.1)        (.2)
Other                                               .6        (1.3)         --
                                                  ----------------------------
Effective income tax rate                         39.5%       36.5%       36.1%
- --------------------------------------------------============================



                                                                        MSDWD 95
                                                                              --

 
As of November 30, 1997 the Company had approximately $2.2 billion of earnings
attributable to foreign subsidiaries for which no tax provisions have been
recorded for income tax that could occur upon repatriation. Except to the extent
such earnings can be repatriated tax efficiently, they are permanently invested
abroad. It is not practicable to determine the amount of income taxes payable in
the event all such foreign earnings are repatriated. Deferred income taxes
reflect the net tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when such differences are
expected to reverse. Significant components of the Company's deferred tax assets
and liabilities at fiscal year-end 1997 and 1996 are as follows:



AT FISCAL YEAR-END (DOLLARS IN MILLIONS)                       1997         1996
- --------------------------------------------------------------------------------
                                                                       
Deferred tax assets
   Employee compensation and benefit plans                   $1,168       $1,061
   Loan loss allowance                                          459          437
   Other valuation and liability allowances                     545          448
   Other                                                        180          100
                                                             -------------------
Total deferred tax assets                                     2,352        2,046
                                                             -------------------
Deferred tax liabilities
   Prepaid commissions                                          233          200
   Valuation of inventory, investments and
     receivables                                                298          225
   Other                                                        265          169
                                                             -------------------
Total deferred tax liabilities                                  796          594
                                                             -------------------
Net deferred tax assets                                      $1,556       $1,452
- -------------------------------------------------------------===================


     Cash paid for income taxes were $1,251 million, $1,190 million and $887
million in fiscal 1997, 1996 and 1995.

14. GEOGRAPHIC AREA DATA
- ------------------------

Total revenues, net revenues, income before taxes and identifiable assets of the
Company's operations by geographic area are as follows:



                                                        TOTAL REVENUES                                   NET REVENUES
- -----------------------------------------------------------------------------------------------------------------------------------
                                             FISCAL          FISCAL          FISCAL          FISCAL          FISCAL          FISCAL
(DOLLARS IN MILLIONS)                          1997            1996            1995            1997            1996            1995
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
International
   Europe                                  $  6,468        $  5,616        $  4,551        $  1,757        $  1,429        $  1,079
   Asia                                         952             768             748             866             700             626
- -----------------------------------------------------------------------------------------------------------------------------------
     Total                                    7,420           6,384           5,299           2,623           2,129           1,705
- -----------------------------------------------------------------------------------------------------------------------------------
North America                                28,711          24,235          18,110          12,519          10,193           8,374
   Eliminations                              (8,999)         (8,448)         (4,677)           (309)           (299)           (259)
- -----------------------------------------------------------------------------------------------------------------------------------
     Total                                 $ 27,132        $ 22,171        $ 18,732        $ 14,833        $ 12,023        $  9,820
- -------------------------------------------========================================================================================




                                                     INCOME BEFORE TAXES                              IDENTIFIABLE ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
                                           FISCAL          FISCAL          FISCAL          FISCAL           FISCAL           FISCAL
(DOLLARS IN MILLIONS)                        1997            1996            1995            1997             1996             1995
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                              
International
   Europe                               $     399       $     328       $     237       $ 126,138        $ 113,734        $  85,393
   Asia                                       240             161             158          30,656           21,561           17,363
- -----------------------------------------------------------------------------------------------------------------------------------
     Total                                    639             489             395         156,794          135,295          102,756
North America                               3,635           2,628           1,897         307,728          242,510          178,009
   Eliminations                                --              --              --        (162,235)        (138,945)         (98,804)
- -----------------------------------------------------------------------------------------------------------------------------------
     Total                              $   4,274       $   3,117       $   2,292       $ 302,287        $ 238,860        $ 181,961
- ----------------------------------------===========================================================================================



Because of the international nature of the financial markets and the resulting
geographic integration of the Company's business, the Company manages its
business with a view to the profitability of the enterprise as a whole, and, as
such, profitability by geographic area is not necessarily meaningful.



MSDWD 96
      --

 
15. SEGMENT INFORMATION
- -----------------------

The Company is in the business of providing financial services, and operates in
two business segments -- Securities and Asset Management and Credit and
Transaction Services. Securities and Asset Management engages in delivering a
broad range of financial products and services, including asset management, to
individual and institutional investors. Credit and Transaction Services is
engaged in the issuance and servicing of general purpose credit cards, consumer
lending and electronic transaction processing services.

     The following table presents certain information regarding these business
segments:



FISCAL YEAR (DOLLARS IN MILLIONS)         1997             1996             1995
- --------------------------------------------------------------------------------
                                                                    
Total revenues
   Securities & Asset
     Management                       $ 21,499         $ 17,136         $ 14,523
   Credit & Transaction Services         5,633            5,035            4,209
Income before income taxes(1)
   Securities & Asset
     Management                          3,597            2,426            1,591
   Credit & Transaction Services           751              691              701
Identifiable assets at
  end of period(2)
   Securities & Asset
     Management                        277,878          213,967          159,318
   Credit & Transaction
     Services                           24,409           24,893           22,643
- ---------------------------------------=========================================

(1)  Excludes merger-related expenses of $74 million.
(2)  Corporate assets have been fully allocated to the Company's business
     segments.

16. ACQUISITIONS AND DISPOSITION
- --------------------------------

In January 1997, the Company acquired Lombard, a company which provides discount
trading services, principally to individual investors, through its Internet
site, an automated telephone system, and a core group of registered
representatives. Subsequent to the date of acquisition, Lombard's corporate name
was changed to Discover Brokerage Direct, Inc.

     In April 1997, the Company acquired the institutional global custody
business of Barclays PLC ("Barclays"). The amount of consideration for this
business is to be fixed over a period of time based on account retention.
Barclays has agreed to provide global subcustodial services to the Company for a
period of time after completion of the acquisition.

     In July 1997, the Company sold the DWR institutional futures business to
Carr Futures, Inc., a subsidiary of Credit Agricole Indosuez. This sale did not
have a material effect on the Company's results of operations or financial
position.

     In fiscal 1996, the Company completed its purchase of MAS, an institutional
investment manager, for $350 million, payable in a combination of cash, notes
and common stock of the Company. The Company's fiscal 1996 results include the
results of MAS since January 3, 1996, the date of acquisition.

     In fiscal 1996, the Company completed its purchase of VKAC for $1.175
billion. The consideration for the purchase of the equity of VKAC consisted of
cash and approximately $26 million of preferred securities issued by one of the
Company's subsidiaries and exchangeable into common stock of the Company. The
Company's fiscal 1996 results include the results of VKAC since October 31,
1996, the date of acquisition.


                                                                        MSDWD 97
                                                                              --

 
17. QUARTERLY RESULTS (UNAUDITED)
- ---------------------------------



                                                                      1997                            
- ------------------------------------------------------------------------------------------------------
                                                                 FISCAL QUARTER                       
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS,
EXCEPT SHARE AND PER SHARE DATA)              FIRST          SECOND           THIRD           FOURTH  
- ------------------------------------------------------------------------------------------------------
                                                                                       
Revenues
   Investment banking                          $522            $581            $818            $773   
   Principal transactions:
     Trading                                    869             722             778             822   
     Investments                                 56             136             206              65   
   Commissions                                  490             484             559             553   
   Fees:
     Asset management, distribution
       and administration                       587             610             656             652   
     Merchant and cardmember                    436             424             433             411   
     Servicing                                  202             184             196             180   
   Interest and dividends                     3,369           3,197           3,570           3,447   
   Other                                         29              38              41              36   
- ------------------------------------------------------------------------------------------------------
     Total revenues                           6,560           6,376           7,257           6,939   
   Interest expense                           2,709           2,478           2,765           2,854   
   Provision for consumer
     loan losses                                379             376             385             353   
- ------------------------------------------------------------------------------------------------------
   Net revenues                               3,472           3,522           4,107           3,732   
- ------------------------------------------------------------------------------------------------------
Non-interest expenses
   Compensation and benefits                  1,490           1,505           1,849           1,175   
   Occupancy and equipment                      128             127             134             137   
   Brokerage, clearing and
     exchange fees                               95             113             130             122   
   Information processing
     and communications                         270             267             249             294   
   Marketing and business
     development                                288             274             293             324   
   Professional services                         93              99             127             132   
   Other                                        180             180             219             191   
   Merger-related expenses                       --              74              --              --   
- ------------------------------------------------------------------------------------------------------
   Total non-interest expenses                2,544           2,639           3,001           2,375   
- ------------------------------------------------------------------------------------------------------
Income before income taxes                      928             883           1,106           1,357   
Provision for income taxes                      357             356             428             547   
- ------------------------------------------------------------------------------------------------------
Net income                                     $571            $527            $678            $810   
- --------------------------------------================================================================
Earnings applicable to
   common shares(1)                            $552            $509            $663            $796   
- --------------------------------------================================================================
Per common share(2)
   Primary earnings(3)                         $.93            $.85           $1.11           $1.33   
   Fully diluted earnings(3)                   $.91            $.83           $1.09           $1.30   
   Dividends to common
     shareholders                              $.14            $.14            $.14            $.14   
   Book value                                $18.70          $19.37          $20.25          $22.11   
Average common and
     equivalent shares(2)
   Primary                              593,495,440     598,282,535     597,921,853     600,038,489   
   Fully diluted                        606,621,425     611,724,590     610,187,894     612,255,249   
Stock price range(4)                   $32.19-43.75    $34.50-41.50    $41.00-53.88    $47.31-58.75   
- ------------------------------------------------------------------------------------------------------


                                                                         1996                         
- ------------------------------------------------------------------------------------------------------
                                                                    FISCAL QUARTER                    
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS,                                                                                 
EXCEPT SHARE AND PER SHARE DATA)              FIRST           SECOND           THIRD          FOURTH  
- ------------------------------------------------------------------------------------------------------
                                                                                       
Revenues                                                                                              
   Investment banking                 $         464    $         599   $         477   $         650  
   Principal transactions:                                                                            
     Trading                                    823              679             534             623  
     Investments                                 (7)              38              29              26  
   Commissions                                  455              463             412             446  
   Fees:                                                                                              
     Asset management, distribution                                                                   
       and administration                       397              429             427             479  
     Merchant and cardmember                    319              346             379             461  
     Servicing                                  198              189             220             202  
   Interest and dividends                     2,794            2,809           3,038           2,647  
   Other                                         30               37              23              36  
- ------------------------------------------------------------------------------------------------------
     Total revenues                           5,473            5,589           5,539           5,570  
   Interest expense                           2,250            2,245           2,419           2,020  
   Provision for consumer                                                                             
     loan losses                                224              270             302             418  
- ------------------------------------------------------------------------------------------------------
   Net revenues                               2,999            3,074           2,818           3,132  
- ------------------------------------------------------------------------------------------------------
Non-interest expenses                                                                                 
   Compensation and benefits                  1,275            1,303           1,171           1,322  
   Occupancy and equipment                      119              120             122             132  
   Brokerage, clearing and                                                                            
     exchange fees                               77               79              76              85  
   Information processing                                                                             
     and communications                         232              239             249             276  
   Marketing and business                                                                             
     development                                229              243             247             308  
   Professional services                         60               80              85             109  
   Other                                        167              166             160             175  
   Merger-related expenses                       --               --              --              --  
- ------------------------------------------------------------------------------------------------------
   Total non-interest expenses                2,159            2,230           2,110           2,407  
- ------------------------------------------------------------------------------------------------------
Income before income taxes                      840              844             708             725  
Provision for income taxes                      322              304             250             261  
- ------------------------------------------------------------------------------------------------------
Net income                                     $518             $540            $458            $464  
- --------------------------------------================================================================
Earnings applicable to                                                                                
   common shares(1)                            $502             $523            $443            $446  
- --------------------------------------================================================================
Per common share(2)                                                                                   
   Primary earnings(3)                         $.83             $.87            $.75            $.76  
   Fully diluted earnings(3)                   $.81             $.86            $.73            $.74  
   Dividends to common 
     shareholders                              $.11             $.11            $.11            $.11  
   Book value                                $15.86           $16.42          $16.93          $18.43  
Average common and                                                                                    
     equivalent shares(2)                                                                             
   Primary                              606,585,943      600,219,450     591,882,036     587,117,776  
   Fully diluted                        620,807,404      612,616,954     604,879,722     601,438,805  
Stock price range(4)                   $22.50-29.00     $25.56-31.06    $24.13-28.88    $27.56-34.38  
- ------------------------------------------------------------------------------------------------------


(1)  Amounts shown are used to calculate primary earnings per share.
(2)  Per share and share data have been restated to reflect the Company's
     two-for-one stock split.
(3)  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.
(4)  Prices represent the range of sales per share on the New York Stock
     Exchange for the periods indicated. The number of stockholders of record at
     November 30, 1997 approximated 192,440. The number of beneficial owners of
     common stock is believed to exceed this number.


MSDWD 98
      --

EX-21

                                                                      EXHIBIT 21
 
                  MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
                  -------------------------------------------
                            As of January 26, 1998


 
 
                                                                         YEAR OF
                                                     JURISDICTION    INCORPORATION/
                                                   OF INCORPORATION     FORMATION
                                                   ----------------     ---------
                                                                   
Dean Witter Alliance Capital Corporation                Delaware           1993
Dean Witter Asset Corporation                           Delaware           1992
Dean Witter Capital Corporation                         Delaware           1987
     Dean Witter Advisers Inc.                          Delaware           1989
     Dean Witter Capital Advisers Inc.                  Delaware           1989
     DW Administrators Inc.                             Delaware           1989
     DW Window Coverings Holding, Inc.                  Delaware           1988
Dean Witter Distributors Inc.                           Delaware           1992
Dean Witter Equipment Corporation                       Delaware           1984
     Dean Witter Aviation Capital Inc.                  Delaware           1984
Dean Witter Futures and Currency Management Inc.        Delaware           1987
Dean Witter InterCapital Inc.                           Delaware           1992
     Dean Witter Services Company Inc.                  Delaware           1994
Dean Witter Realty Inc.                                 Delaware           1982
     Cook Street Credit Company                         Colorado           1984
     Cool Springs Inc.                                  Massachusetts      1991
     Dean Witter Global Realty Inc.                     Delaware           1995
     Dean Witter Holding Corporation                    Delaware           1983
         Cameron Leasing Corporation                    Delaware           1982
         Civic Center Leasing Corporation               Delaware           1983
         Lee Leasing Corporation                        Delaware           1982
         Lewiston Leasing Corporation                   Delaware           1983
         Sartell Leasing Corporation                    Delaware           1982
     Dean Witter Leasing Corporation                    Delaware           1982
     Dean Witter Realty Advisors Inc.                   Delaware           1996
     Dean Witter Realty Credit Corporation              Delaware           1982
     Dean Witter Realty Fourth Income Properties Inc.   Delaware           1986
     Dean Witter Realty Growth Properties Inc.          Delaware           1985
     Dean Witter Realty Income Associates I Inc.        Delaware           1983
     Dean Witter Realty Income Associates II Inc.       Delaware           1984
     Dean Witter Realty Income Properties I Inc.        Delaware           1983
     Dean Witter Realty Income Properties II Inc.       Delaware           1984
     Dean Witter Realty Income Properties III Inc.      Delaware           1985
     Dean Witter Realty Securitization Inc.             Delaware           1997
     Dean Witter Realty Yield Plus Assignor Inc.        Delaware           1987
     Dean Witter Realty Yield Plus Inc.                 Delaware           1987
     Dean Witter Realty Yield Plus II Inc.              Delaware           1988
     DW Arboretum Plaza Inc.                            Delaware           1992
     DW Bennington Property Inc.                        Delaware           1993
     DW Chesterbrook Investors Inc.                     Delaware           1992
     DW Duportail Investors Inc.                        Delaware           1992
     DW Greycoat Inc.                                   Delaware           1993
     DW Morris Drive Incorporated                       Delaware           1992
     DW 1200 Incorporated                               Delaware           1992
     DW Reston Technology Park Inc.                     Delaware           1992
     DW Tech Park II Inc.                               Delaware           1992
     GF Braker Inc.                                     Delaware           1994
     Green Orchard Inc.                                 Massachusetts      1991
 

 
 
 
                                                                                        YEAR OF
                                                                    JURISDICTION     INCORPORATION/
                                                                  OF INCORPORATION      FORMATION
                                                                  ----------------      ---------
                                                                                   
(Dean Witter Realty Inc., continued)
     LLJV Funding Corporation                                        Massachusetts        1984
     LS Atlanta Associates Inc.                                      Delaware             1994
     LS Bayport, Inc.                                                Delaware             1991
     LS Lake, Inc.                                                   Delaware             1991
     LS Richmond Mall Inc.                                           Delaware             1990
     Realty Management Services Inc.                                 Delaware             1982
     SBA/DW/CB Temp Inc.                                             Delaware             1991
     SBA/DWR, Inc.                                                   Delaware             1982
Dean Witter Reynolds Inc.                                            Delaware             1968
     Dean Witter Reynolds Insurance Agency (Massachusetts) Inc.      Massachusetts        1975
     Dean Witter Reynolds Insurance Agency (Ohio) Inc.               Ohio                 1977
     Dean Witter Reynolds Insurance Agency (Oklahoma) Inc.           Oklahoma             1976
     Dean Witter Reynolds Insurance Agency (Texas) Inc.              Texas                1978
     Dean Witter Reynolds Insurance Services (Alabama) Inc.          Alabama              1991
     Dean Witter Reynolds Insurance Services (Arizona) Inc.          Arizona              1974
     Dean Witter Reynolds Insurance Services (Arkansas) Inc.         Arkansas             1977
     Dean Witter Reynolds Insurance Services (Illinois) Inc.         Illinois             1975
     Dean Witter Reynolds Insurance Services Inc.                    Delaware             1972
         Dean Witter Reynolds Insurance Agency (Indiana) Inc.        Indiana              1975
         FD Insurance Services, Inc.                                 Delaware             1997
         FD Insurance Services of Nevada, Inc.                       Nevada               1997
         FD Insurance Services of New Mexico, Inc.                   New Mexico           1997
         FD Insurance Services of Texas, Inc.                        Texas                1997
     Dean Witter Reynolds Insurance Services, Inc. (Puerto Rico)     Puerto Rico          1987
     Dean Witter Reynolds Insurance Services (Maine) Inc.            Maine                1995
     Dean Witter Reynolds Insurance Services (Montana) Inc.          Montana              1977
     Dean Witter Reynolds Insurance Services (New  Hampshire) Inc.   New Hampshire        1977
     Dean Witter Reynolds Insurance Services (South Dakota) Inc.     South Dakota         1977
     Dean Witter Reynolds Insurance Services (Wyoming) Inc.          Wyoming              1977
     DWR Special Partners Inc.                                       Delaware             1982
Dean Witter Reynolds International Incorporated                      Delaware             1978
     Dean Witter Reynolds GmbH                                       Germany              1974
     Dean Witter Reynolds (Hong Kong) Limited                        Hong Kong            1979
     Dean Witter Reynolds International, Inc.                        Panama               1959
         Dean Witter Reynolds (Geneva) S.A                           Switzerland          1991
     Dean Witter International Ltd.                                  U.K.                 1988
         Dean Witter Capital Markets International Ltd. (U.K.)       U.K.                 1987
         Dean Witter Futures Limited                                 U.K.                 1977
         Dean Witter Reynolds Limited                                U.K.                 1968
     Dean Witter Reynolds International, S.A                         France               1979
     Dean Witter Reynolds (Italy) Inc.                               Delaware             1974
     Dean Witter Reynolds (Lausanne) S.A                             Switzerland          1973
     Dean Witter Reynolds (Lugano) S.A                               Switzerland          1989
     Dean Witter Reynolds S.p.A                                      Italy                1978
Dean Witter Reynolds Partners Inc.                                   Delaware             1982
     DWR Special Advisors Inc.                                       Delaware             1982
Dean Witter Reynolds Venture Equities Inc.                           Delaware             1981
     Dean Witter Venture Management Inc.                             Delaware             1986
Dean Witter Trust FSB                                                Federal Charter      1996
Dean Witter Venture Inc.                                             Delaware             1993


                                       2

 
                                                                     YEAR OF
                                                   JURISDICTION   INCORPORATION/
                                                 OF INCORPORATION   FORMATION
                                                 ----------------   ---------

Demeter Management Corporation                        Delaware        1977
DWD Electronic Financial Services Inc.                Delaware        1997
     Discover Brokerage Direct Inc.                   California      1992
         Bay One Technologies Group, Inc.             California      1996
DWR Partnership Administrators Inc.                   Delaware        1989
DWR Wind Technologies Inc.                            Delaware        1986
NOVUS Credit Services Inc.                            Delaware        1960
     Bank of New Castle                               Delaware        1988
     Discover Card Bank Limited                       Gibraltar       1992
     Discover Services Corporation                    Delaware        1990
     Greenwood Trust Company                          Delaware        1911
     Mountain Receivables Corp.                       Delaware        1996
     Mountain West Financial Corporation              Utah            1990
     NOVUS Consumer Discount Company                  Pennsylvania    1967
     NOVUS Development Corporation                    Delaware        1995
     NOVUS Financial Corporation                      Delaware        1969
     NOVUS Financial Corporation of Iowa              Iowa            1977
     NOVUS Financial Corporation of Minnesota         Minnesota       1994
     NOVUS Financial Corporation of Tennessee         Tennessee       1975
     NOVUS Financial Corporation of Washington        Washington      1991
     NOVUS Services (Canada), Inc.                    Canada          1985
     NOVUS Services, Inc.                             Delaware        1985
     SCFC Receivables Corp.                           Delaware        1989
         Discover Receivables Financing Corporation   Delaware        1989
         Discover Receivables Financing Group, Inc.   Delaware        1990
     SCFC Receivables Financing Corporation           Delaware        1988
     SPS Transaction Services, Inc.                   Delaware        1991
         Hurley State Bank                            South Dakota    1986
         SPS Payment Systems, Inc.                    Delaware        1992
              MedCash, Inc.                           Delaware        1993
              Med-Link Technologies, Inc.             Delaware        1995
              Quality Asset Management, Inc.          Delaware        1993
              Ruf Corporation                         Kansas          1976
              SPS Commercial Services, Inc.           Delaware        1995
              SPS Newco, Inc.                         Delaware        1994
              SPS Receivables Financing Corporation   Delaware        1997
     Utah Receivables Financing Corporation           Delaware        1997
One Water Corporation                                 Massachusetts   1985
Reynolds Securities Inc.                              Delaware        1978
Tempo-GP, Inc.                                        Delaware        1986
Tempo-LP, Inc.                                        Delaware        1986

                                       3

 
 
 
                                                                        YEAR OF
                                                    JURISDICTION    INCORPORATION/
                                                  OF INCORPORATION     FORMATION
                                                  ----------------     ---------   
                                                                    
Fourth Street Development Co. Incorporated           Delaware              1990
Fourth Street Ltd.                                   Delaware              1990
Jolter Investments Inc.                              Delaware              1989
Morgan Rundle Inc.                                   Delaware              1978
     MR Ventures Inc.                                Delaware              1982
Morgan Stanley & Co. Incorporated                    Delaware              1969
     Morgan Stanley Flexible Agreements Inc.         Delaware              1992
     MS Securities Services Inc.                     Delaware              1981
     Prime Dealer Services Corp.                     Delaware              1994
Morgan Stanley ABS Capital I Inc.                    Delaware              1997
Morgan Stanley ABS Capital II Inc.                   Delaware              1997
Morgan Stanley Advisory Partnership Inc.             Delaware              1985
Morgan Stanley Asset Funding Inc.                    Delaware              1997
Morgan Stanley Asset Management (CPO) Inc.           Delaware              1996
Morgan Stanley Asset Management Inc.                 Delaware              1980
     Morgan Stanley Asset Management Holdings Inc.   Delaware              1995
         Miller Anderson & Sherrerd, LLP             Pennsylvania          1971
              MAS Fund Distribution, Inc.            Pennsylvania          1992
     Morgan Stanley Global Franchise Inc.            Delaware              1997
Morgan Stanley Baseball, Inc.                        Delaware              1989
Morgan Stanley Capital Group Inc.                    Delaware              1984
Morgan Stanley Capital I Inc.                        Delaware              1985
Morgan Stanley Capital (Jersey) Limited              Jersey, Channel Is.   1987
Morgan Stanley Capital Partners III, Inc.            Delaware              1993
Morgan Stanley Capital Services Inc.                 Delware               1985
Morgan Stanley Commercial Mortgage Capital, Inc.     Delaware              1994
Morgan Stanley Commodities Management, Inc.          Delaware              1992
Morgan Stanley Derivative Products Inc.              Delaware              1994
Morgan Stanley Developing Country Debt II, Inc.      Delaware              1991
Morgan Stanley Emerging Markets Inc.                 Delaware              1990
Morgan Stanley Equity (C.I.) Limited                 Jersey, Channel Is.   1995
Morgan Stanley Equity Finance Limited                England               1997
Morgan Stanley Equity Investors Inc.                 Delaware              1988
Morgan Stanley Finance (Jersey) Limited              Jersey, Channel Is.   1990
Morgan Stanley Funding, Inc.                         Delaware              1997
Morgan Stanley Global Emerging Markets, Inc.         Delaware              1996
Morgan Stanley Insurance Agency Inc.                 Delaware              1985
Morgan Stanley International Incorporated            Delaware              1963
     Bank Morgan Stanley AG                          Switzerland           1973
     Morgan Stanley AOZT                             Russia                1994
     Morgan Stanley Asia (China) Limited             Hong Kong             1991
     Morgan Stanley Asia Holdings I Inc.             Delaware              1990
     Morgan Stanley Asia Holdings II Inc.            Delaware              1990
     Morgan Stanley Asia Holdings III Inc.           Delaware              1990
     Morgan Stanley Asia Holdings IV Inc.            Delaware              1990
     Morgan Stanley Asia Holdings V Inc.             Delaware              1990
     Morgan Stanley Asia Holdings VI Inc.            Delaware              1990
 

                                       4

 
 
 

                                                                                          YEAR OF
                                                                     JURISDICTION OF  INCORPORATION/
                                                                      INCORPORATION      FORMATION
                                                                      -------------      ---------
                                                                                      
(Morgan Stanley International Incorporated, continued)
     Morgan Stanley Asia Pacific (Holdings) Limited                    Cayman Islands        1995
         Morgan Stanley Asia Regional (Holdings) I LLC                 Cayman Islands        1995
              Morgan Stanley Asia Limited                              Hong Kong             1984
              Morgan Stanley Futures (Hong Kong) Limited               Hong Kong             1988
              Morgan Stanley Hong Kong Securities Limited              Hong Kong             1988
              Morgan Stanley Pacific Limited                           Hong Kong             1987
         Morgan Stanley Asia Regional (Holdings) II LLC                Cayman Islands        1995
         Morgan Stanley Asia Regional (Holdings) III LLC               Cayman Islands        1995
              Morgan Stanley Asia (Singapore) Pte                      Rep. of Singapore     1992
              Morgan Stanley Asset Management Singapore Company        Rep. of Singapore     1990
              Morgan Stanley Capital Group (Singapore) Pte             Rep. of Singapore     1990
              Morgan Stanley Futures (Singapore) Pte                   Rep. of Singapore     1992
         Morgan Stanley Asia Regional (Holdings) IV LLC                Cayman Islands        1995
         Morgan Stanley Japan (Holdings) Ltd.                          Cayman Islands        1984
              Morgan Stanley Japan Limited                             Hong Kong             1993
     Morgan Stanley Asia Pacific (Holdings) I Limited                  Cayman Islands        1995
     Morgan Stanley Asia (Taiwan) Ltd.                                 Rep. of China         1990
     Morgan Stanley Asset & Investment Trust Management Co., Limited   Japan                 1987
     Morgan Stanley Asset Management S.A                               Luxembourg            1988
     Morgan Stanley Australia Limited                                  Australia             1989
     Morgan Stanley Australia Securities Limited                       Australia             1997
     Morgan Stanley Bank Luxembourg S.A                                Luxembourg            1989
     Morgan Stanley Canada Limited                                     Canada                1982
     Morgan Stanley Capital SA                                         France                1989
     Morgan Stanley Capital (Luxembourg) S.A                           Luxembourg            1993
     Morgan Stanley Financial Services Beteiligungs GmbH               Germany               1993
         Morgan Stanley Financial Services GmbH & Co. KG               Germany               1993
     Morgan Stanley Group (Europe) Plc                                 England               1988
         Morgan Stanley Asset Management Limited                       England               1986
         Morgan Stanley Capital Group Limited                          England               1993
         Morgan Stanley (Europe) Limited                               England               1993
         Morgan Stanley Finance plc                                    England               1993
         Morgan Stanley Properties Limited                             England               1986
         Morgan Stanley Property Management (UK) Limited               England               1987
         Morgan Stanley Services (UK) Limited                          England               1993
         Morgan Stanley UK Group                                       England               1976
              Morgan Stanley & Co. International Limited               England               1986
                  Morgan Stanley Funding Limited                       Jersey, Channel Is.   1997
                  Morgan Stanley International Nominees Limited        England               1994
              Morgan Stanley & Co. Limited                             England               1986
              Morgan Stanley Securities Limited                        England               1986
                  Morstan Nominees Limited                             England               1986
         MS Leasing UK Limited                                         England               1991
     Morgan Stanley Holding (Deutschland) GmbH                         Germany               1990
         Morgan Stanley Bank AG                                        Germany               1986
     Morgan Stanley Hong Kong Nominees Limited                         Hong Kong             1988
     Morgan Stanley International Insurance Ltd.                       Bermuda               1995
     Morgan Stanley Latin America Incorporated                         Delaware              1994
         Morgan Stanley Administadora de Carteiras Ltda.               Brazil                1996
         Morgan Stanley do Brasil Ltda.                                Brazil                1995
 

                                       5

 
 
 
                                                                                     YEAR OF
                                                                  JURISDICTION    INCORPORATION/
                                                                OF INCORPORATION     FORMATION
                                                                ----------------     ---------
                                                                           
     (Morgan Stanley Latin America Incorporated, continued)
         Morgan Stanley Latin American Derivatives Ltd.          Cayman Islands        1997
         MS Carbocol Advisors Incorporated                       Delaware              1995
     Morgan Stanley Mauritius Company Limited                    Mauritius             1993
         Morgan Stanley Asset Management India Private Limited   India                 1993
         Morgan Stanley India Securities Private Limited         India                 1995
              Morgan Stanley India Private Limited               India                 1995
     Morgan Stanley Middle East Inc.                             Delaware              1997
     Morgan Stanley Offshore Investment Company Ltd.             Cayman Islands        1987
     Morgan Stanley S.A                                          France                1992
     Morgan Stanley Services (Jersey) Limited                    Jersey, Channel Is.   1997
     Morgan Stanley South Africa (Pty) Limited                   South Africa          1994
     Morgan Stanley SPV I (Cayman Islands) LLC                   Cayman Islands        1996
         Farlington Corporation                                  Ireland               1996
              ITALSEC S.r.l                                      Italy                 1996
     Morgan Stanley SPV II (Cayman Islands) LLC                  Cayman Islands        1996
     Morgan Stanley (Structured Products) Jersey Limited         Jersey, Channel Is.   1994
     Morgan Stanley (Thailand) Limited                           Thailand              1997
     Morgan Stanley Wertpapiere GmbH                             Germany               1989
     MS Balmoral Inc.                                            Cayman Islands        1997
     MS Italy (Holdngs) Inc.                                     Delaware              1990
         Banca Morgan Stanley SpA                                Italy                 1990
     MS LDC, Ltd.                                                Delaware              1991
     MSAM/Kokusai (Cayman Islands), Inc.                         Cayman Islands        1996
     MSL Incorporated                                            Delaware              1976
Morgan Stanley (Jersey) Limited                                  Jersey, Channel Is.   1986
Morgan Stanley LEF I, Inc.                                       Delaware              1989
Morgan Stanley Leveraged Capital Fund Inc.                       Delaware              1985
Morgan Stanley Leveraged Equity Fund II, Inc.                    Delaware              1987
     Morgan Stanley Capital Partners Asia Limited                Hong Kong             1992
Morgan Stanley Leveraged Equity Holdings Inc.                    Delaware              1987
Morgan Stanley Market Products Inc.                              Delaware              1987
Morgan Stanley Mortgage Capital Inc.                             New York              1984
Morgan Stanley Overseas Finance Ltd.                             Cayman Islands        1997
Morgan Stanley Overseas Services (Jersey) Limited                Jersey, Channel Is.   1986
Morgan Stanley Real Estate Investment Management Inc.            Delaware              1990
     Morgan Stanley Real Estate Fund, Inc.                       Delaware              1989
         MSREF I, L.L.C                                          Delaware              1995
     MSREF I-CO, L.L.C                                           Delaware              1995
Morgan Stanley Real Estate Investment Management II, Inc.        Delaware              1994
     MSREF II-CO, L.L.C                                          Delaware              1995
Morgan Stanley Realty Incorporated                               Delaware              1969
     Brooks Harvey & Co., Inc.                                   Delaware              1971
     Morgan Stanley Realty of California Inc.                    California            1970
     Morgan Stanley Realty of Illinois Inc.                      Delaware              1989
     Brooks Harvey of Florida, Inc.                              Florida               1978
     Morgan Stanley Realty Japan Ltd.                            Japan                 1991
     BH-MS Realty Inc.                                           Delaware              1983
         BH-MS Leasing Inc.                                      Delaware              1983
              BH-Sartell Inc.                                    Delaware              1983
The Morgan Stanley Scholarship Fund Inc. (Not-For-Profit)        Delaware              1985
 

                                       6

 
 
 
                                                                                               YEAR OF
                                                                             JURISDICTION   INCORPORATION/
                                                                           OF INCORPORATION   FORMATION
                                                                           ----------------   ----------  
                                                                                         
Morgan Stanley Senior Funding, Inc.                                            Delaware         1996
Morgan Stanley Services Inc.                                                   Delaware         1988
Morgan Stanley Structured Products (Cayman) I Limited                          Cayman Islands   1997
Morgan Stanley Structured Products (Cayman) II Limited                         Cayman Islands   1997
Morgan Stanley Technical Services Inc.                                         Delaware         1989
Morgan Stanley Technical Services MB/VC Inc.                                   Delaware         1993
Morgan Stanley Trust Company                                                   New York         1992
Morgan Stanley Venture Capital Inc.                                            Delaware         1984
Morgan Stanley Venture Capital II, Inc.                                        Delaware         1992
Morgan Stanley Venture Capital III, Inc.                                       Delaware         1996
Morgan Stanley Ventures Inc.                                                   Delaware         1984
Morstan Development Company, Inc.                                              Delaware         1971
     Moranta, Inc.                                                             Georgia          1979
     Porstan Development Company, Inc.                                         Oregon           1982
MS 10020, Inc.                                                                 Delaware         1994
MS 10036, Inc.                                                                 Delaware         1996
MS Capital Cayman Ltd.                                                         Cayman Islands   1997
MS Capital Holdings Inc.                                                       Delaware         1997
     Morgan Stanley Capital (Delaware) L.L.C                                   Delaware         1997
MS Financing Inc.                                                              Delaware         1986
     Morgan Stanley 750 Building Corp.                                         Delaware         1994
     MS Tokyo Properties Ltd.                                                  Japan            1989
MS Holdings Incorporated                                                       Delaware         1995
MS Real Estate Special Situations Inc.                                         Delaware         1997
MS Real Estate Special Situations GP Inc.                                      Delaware         1997
MS Technology Holdings, Inc.                                                   Delaware         1997
MS Venture Capital (Japan) Inc.                                                Delaware         1989
MSAM Holdings II, Inc.                                                         Delaware         1996
     VK/AC Holding, Inc.                                                       Delaware         1992
         Van Kampen American Capital, Inc.                                     Delaware         1992
              ACCESS Investor Services, Inc.                                   Delaware         1987
              American Capital Contractual Services, Inc.                      New York         1957
              Van Kampen American Capital Advisors, Inc.                       Delaware         1974
              Van Kampen American Capital Asset  Management, Inc.              Delaware         1936
              Van Kampen American Capital Distributors, Inc.                   Delaware         1974
              Van Kampen American Capital Exchange Corp.                       California       1975
              Van Kampen American Capital Insurance Agency of Illinois, Inc.   Illinois         1996
              Van Kampen American Capital Insurance Agency of Texas, Inc.      Texas            1996
              Van Kampen American Capital Investment Advisory Corp.            Delaware         1982
              Van Kampen American Capital Management, Inc.                     Delaware         1990
              Van Kampen American Capital Recordkeeping Services, Inc.         Delaware         1997
              Van Kampen American Capital Trust Company                        Texas            1986
              Van Kampen Merritt Equity Advisors Corp.                         Delaware         1992
              VKAC Cayman Limited                                              Cayman Islands   1995
              VK/AC System, Inc.                                               Delaware         1996
MSBF Inc.                                                                      Delaware         1995
MSCP III Holdings, Inc.                                                        Delaware         1994
MSIT Holdings, Inc.                                                            Delaware         1996
MSPL Co. Inc.                                                                  Delaware         1990
MSREF II, Inc.                                                                 Delaware         1994
     MSREF II, L.L.C                                                           Delaware         1995


                                       7

 
 
 
                                                                             YEAR OF
                                                            JURISDICTION   INCORPORATION/
                                                          OF INCORPORATION   FORMATION
                                                          ----------------   ----------  
                                                                        
MSREF III, Inc.                                                 Delaware        1997
MSREF Funding, Inc.                                             Delaware        1997
MSUH Holdings I, Inc.                                           Delaware        1996
     MSUH Holdings II, Inc.                                     Delaware        1996
         MS SP Urban Horizons, Inc.                             Delaware        1996
         MS Urban Horizons, Inc.                                Delaware        1994
PG Holdings, Inc.                                               Delaware        1991
PG Investors, Inc.                                              Delaware        1991
PG Investors II, Inc.                                           Delaware        1996
Pierpont Power, Inc.                                            New York        1987
Romley Computer Leasing Inc.                                    Delaware        1985
Strategic Investments I, Inc.                                   Delaware        1996
 

                                       8

EX-23.1

 
                                                                    EXHIBIT 23.1
                                                                                

INDEPENDENT AUDITORS' CONSENT


We consent to the incorporation by reference in the following Registration
Statements of Morgan Stanley, Dean Witter, Discover & Co. of our reports dated
January 23, 1998, included in and incorporated by reference in this Annual
Report on Form 10-K of Morgan Stanley, Dean Witter, Discover & Co. for the
fiscal year ended November 30, 1997:



Filed on Form S-3:
     Registration Statement No. 33-57202
     Registration Statement No. 33-60734
     Registration Statement No. 33-89748
     Registration Statement No. 33-92172
     Registration Statement No. 333-07947
     Registration Statement No. 333-22409
     Registration Statement No. 333-27881
     Registration Statement No. 333-27893
     Registration Statement No. 333-27919
     Registration Statement No. 333-46403

Filed on Form S-4:
     Registration Statement No. 333-25003

Filed on Form S-8:
     Registration Statement No. 33-62374
     Registration Statement No. 33-63024
     Registration Statement No. 33-63026
     Registration Statement No. 33-78038
     Registration Statement No. 33-79516
     Registration Statement No. 33-82240
     Registration Statement No. 33-82242
     Registration Statement No. 33-82244
     Registration Statement No. 333-04212
     Registration Statement No. 333-28141
     Registration Statement No. 333-25003
     Registration Statement No. 333-28263



/s/ DELOITTE & TOUCHE LLP

New York, New York
February 20, 1998

EX-23.2

 
                                                       EXHIBIT 23.2

                        CONSENT OF INDEPENDENT AUDITORS

                                        
We consent to the incorporation by reference in the Registration Statements
(Form S-4 No. 333-25003, Form S-3 No.33-92172, Form S-3 No. 33-57202, Form S-3
No. 33-60734, Form S-3 No. 33-89748, Form S-3 No. 333-7947, Form S-3 No. 333-
22409, Form S-3 No. 333-27919, Form S-3 No. 333-27881, Form S-3 No. 333-27893,
Form S-8 No. 333-28141, Form S-8 No. 33-62374, Form S-8 No. 33-63024, Form S-8
No. 33-63026, Form S-8 No. 33-78038, Form S-8 No. 33-79516, Form S-8 No. 33-
82240, Form S-8 No. 33-82242, Form S-8 No. 33-82244, Form S-8 No. 333-4212, Form
S-8 No. 333-28263, Amendment to Form S-4 No. 333-25003 on Form S-8, and Form S-3
No. 333-46403) of Morgan Stanley, Dean Witter, Discover & Co. of our report
dated May 27, 1997 with respect to the consolidated financial statements and
financial statement schedule of Morgan Stanley Group Inc. included in the Form
10-K of Morgan Stanley, Dean Witter, Discover & Co. filed on February 20, 1998.

 
/s/ ERNST & YOUNG LLP
 
 
New York, New York
February 20, 1998

EX-23.3

 
                                                                    EXHIBIT 23.3



CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS



TO THE DIRECTORS OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.

We consent to the incorporation by reference in the Registration Statement No.
333-28263 of Morgan Stanley, Dean Witter, Discover & Co. on Form S-8 of
our report dated 17 February 1998 relating to the Morgan Stanley UK Group Profit
Sharing Scheme, appearing in the Annual Report on Form 10-K of Morgan Stanley,
Dean Witter, Discover & Co. for the fiscal year ended 30 November 1997.


/s/ DELOITTE & TOUCHE

Chartered Accountants
1 Stonecutter Street
London England
17 February 1998

EX-27

 


 
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information
extracted from the Consolidated Statements of
Financial Condition and the Consolidated Statements
of Income and is qualified in its entirety by
reference to such consolidated financial statements.

       
                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          NOV-30-1997
<PERIOD-START>                             DEC-01-1996
<PERIOD-END>                               NOV-30-1997
<CASH>                                          15,145
<RECEIVABLES>                                   50,260
<SECURITIES-RESALE>                             84,516
<SECURITIES-BORROWED>                           55,266
<INSTRUMENTS-OWNED>                             88,017
<PP&E>                                           1,705
<TOTAL-ASSETS>                                 302,287
<SHORT-TERM>                                    31,607
<PAYABLES>                                      42,153
<REPOS-SOLD>                                   111,680
<SECURITIES-LOANED>                             14,141
<INSTRUMENTS-SOLD>                              54,329
<LONG-TERM>                                     24,792
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                        876
<COMMON>                                             6
<OTHER-SE>                                      13,074
<TOTAL-LIABILITY-AND-EQUITY>                   302,287
<TRADING-REVENUE>                                3,191
<INTEREST-DIVIDENDS>                            13,583
<COMMISSIONS>                                    2,086
<INVESTMENT-BANKING-REVENUES>                    2,694
<FEE-REVENUE>                                    4,971
<INTEREST-EXPENSE>                              10,806
<COMPENSATION>                                   6,019
<INCOME-PRETAX>                                  4,274
<INCOME-PRE-EXTRAORDINARY>                       4,274
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     2,586
<EPS-PRIMARY>                                     4.25
<EPS-DILUTED>                                     4.15
        


 

EX-99.1

                                                EXHIBIT 99.1

 
MORGAN STANLEY UK GROUP PROFIT
SHARING SCHEME

Accounts for the years ended

31 December 1997 and 1996

DELOITTE & TOUCHE
STONECUTTER COURT
1 STONECUTTER STREET
LONDON EC4A 4TR

 
                                 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME



REPORT AND FINANCIAL STATEMENTS 1997 AND 1996

CONTENTS                                                        Page

Report of the Independent Chartered Accountants                   1

Statement of the financial condition                              2

Statement of income and changes in scheme equity                  3

Notes to the financial statements                                 4

 
                                 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME





REPORT OF THE INDEPENDENT CHARTERED ACCOUNTANTS

TO THE TRUSTEES OF THE MORGAN STANLEY, DEAN WITTER, DISCOVER & CO. UK PROFIT
SHARING SCHEME

We have audited the accompanying statement of financial condition of the Morgan
Stanley UK Group Profit Sharing Scheme ("the Scheme") as of 31 December 1997 and
1996 and the related statement of income and changes in scheme equity for the
years ended 31 December 1997, 1996 and 1995. These financial statements are the
responsibility of the Scheme's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of the Scheme as of 31 December
1997 and 1996 and the income and changes in plan equity for the years ended 31
December 1997, 1996 and 1995 in conformity with United States generally accepted
accounting principles.

/s/ Deloitte & Touche
Chartered Accountants

1 Stonecutter Street
London, England

17 February 1998

 
                                 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME




STATEMENT OF THE FINANCIAL CONDITION
31 DECEMBER 1997 AND 1996

                                                            1997         1996
                                                               $            $

ASSETS

Investments at market value
  Morgan Stanley, Dean Witter, Discover & Co.
  Common Stock                                 2, 3   32,361,300   19,373,829
Amounts due from Trustee                                  33,834       99,827

Employee contributions receivable                      6,886,185    1,380,689
                                                      ----------   ----------

                                                      39,281,319   20,854,345
                                                      ==========   ==========


LIABILITIES AND PLAN EQUITY

Dividend income, net of withholding taxes,
  payable to participants                                18,189        99,743

Taxes withheld in respect of dividend income             15,646            82

Scheme Equity                                        39,247,484    20,754,520
                                                     ----------    ----------

                                                     39,281,319    20,854,345
                                                     ==========    ==========

 
                                MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME




STATEMENT OF INCOME AND CHANGES IN SCHEME EQUITY
YEARS ENDED 31 DECEMBER 1997 AND 1996


                                      NOTE        1997        1996          1995
                                                     $           $             $

CASH DIVIDENDS

Distribution from Morgan Stanley, Dean 
  Witter, Discover & Co. Common Stock          291,301     252,685       160,989

Less: United States tax withheld                38,021      37,902        24,148
                                            ----------  ----------    ----------

                                               253,280     214,783       136,841

Gain on sale of Morgan Stanley, Dean 
  Witter, Discover & Co. Common Stock    2     980,382   1,572,440       580,573

Change in unrealised appreciation of
  investments                            3  12,503,846   4,473,693     3,096,879

EMPLOYEE CONTRIBUTIONS

Current year                                 6,900,757   1,395,261     2,737,495
                                            ----------  ----------    ----------

INCOME FOR THE YEAR                         20,638,265   7,656,177     6,551,788

Less:
Dividend income payable to participants        233,049     202,148       128,791
Income tax payable                              20,232      12,635         8,050
Withdrawals disbursed to employees           1,754,676   2,172,670       828,659
Value of shares transferred to employees       137,342     440,689       127,626
                                            ----------  ----------    ----------

INCREASE IN SCHEME EQUITY                   18,492,966   4,828,035     5,458,662
SCHEME EQUITY AT 1 JANUARY                  20,754,520  15,926,485    10,467,823
                                            ----------  ----------    ----------

SCHEME EQUITY AT 31 DECEMBER                39,247,486  20,754,520    15,926,485
                                            ==========  ==========    ==========

 
                                MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME




NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1997 AND 1996

       SCHEME DESCRIPTION

       On 12 November 1987 the Morgan Stanley International Profit Sharing
       Scheme was established in the United Kingdom by a trust deed made between
       Morgan Stanley Group Inc., its subsidiary Morgan Stanley International
       and Noble Lowndes Settlement Trustees Limited. The scheme allows
       employees of Morgan Stanley International to accumulate pre-tax profit
       share contributions in the form of shares of Morgan Stanley, Dean Witter,
       Discover & Co. common stock. An updated deed was entered into on 3rd
       November 1997.

       ELIGIBILITY

       Full time employees of Morgan Stanley International with at least one
       year of service, commencing from the first of the month after the date of
       joining, are eligible to participate in the scheme. Employees may elect
       to participate in the scheme for the full amount of their profit share,
       up to a maximum of the lesser of 10% of UK base salary or (pound)8,000.

       FUNDING POLICY

       Amounts invested by employees are invested by Noble Lowndes Settlement
       Trustees Limited, as trustee, in Morgan Stanley, Dean Witter, Discover &
       Co. shares which are held by the trustee in their name on the employee's
       behalf. Shares in respect of the previous qualifying period are
       appropriated to employees within two weeks of 31 December (the qualifying
       date). The Trustee's fees and brokerage commissions are borne by Morgan
       Stanley International, the employer.

       During the first two years after allocation (the Retention Period)
       certain statutory restrictions apply limiting members' ability to deal in
       or withdraw their shares. After the Retention Period, members may
       withdraw their shares or instruct the trustees to sell their shares and
       withdraw the cash proceeds. The cost of withdrawals from the scheme is
       determined on a first in first out basis within the relevant employee
       allocation.

       TAXATION

       The United Kingdom Board of Inland Revenue has approved the scheme under
       Schedule 9, Income & Corporation Taxes Act 1988 and the Scheme is thus
       exempt from taxation.

       Employee contributions to the scheme are not liable to income tax if
       shares are held by the Trustees for at least five years after
       appropriation. If employees' shares are sold prior to the end of the
       three year period, some or all of the income tax benefits are lost.

1.     ACCOUNTING POLICIES

       FOREIGN CURRENCIES

       Monetary assets and liabilities denominated in foreign currencies are
       translated at the rate of exchange ruling at the balance sheet date
       except for employee contributions receivable, which are translated at the
       rate ruling at the time of share purchase, which occurs shortly after
       balance sheet date. Transactions in foreign currencies are translated at
       the approximate rate of exchange ruling at the date of the transaction.

       VALUATION OF INVESTMENTS

       The investments are recorded at market value based on the closing market
       prices on the New York Stock Exchange.

       DIVIDEND INCOME

       Dividend income is recorded when the applicable dividends are declared.
       Dividends are received net of US withholding tax and are allocated to
       participants according to their shareholdings.

 
                                 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME

NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1997 AND 1996

2.     CHANGES IN HOLDINGS OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO. COMMON
       STOCK

       On 31 May 1997, Morgan Stanley Group Inc. ("Morgan Stanley") merged with
       and into Dean Witter, Discover & Co. ("Dean Witter Discover") (the
       "Merger"). At that time Dean Witter, Discover & Co. changed its corporate
       name to Morgan Stanley, Dean Witter, Discover & Co. (the "Company"). In
       conjunction with the Merger, the Company issued 260,861,078 shares of its
       common stock, as each share of Morgan Stanley common stock then
       outstanding was converted into 1.65 shares of the Company's common stock.

 
 
                                                             NUMBER          TOTAL
                                                          OF SHARES           COST
                                                                                 $
                                                                
       At 1 January 1995                                    137,226      6,514,312
       Add:  Purchase January 1995                           39,564      2,371,619
                                                          ---------     ---------- 

                                                            176,790      8,885,931
       Less: Sales of shares during the year                (11,518)      (328,974)
             Transfers of shares during the year             (1,686)       (46,738)
                                                          ---------     ----------

       At 31 December 1995                                  163,586      8,510,219
       Add:  Purchase January 1996                           33,071      2,751,935
       Less: Sales of shares January 1996                    (7,337)      (190,392)
       Add:  Two for one stock split 26 
             January 1996                                   189,320             --
                                                          ---------     ----------

                                                            378,640     11,071,762
       Less: Sales of shares during the year                (30,809)      (694,307)
             Transfers of shares during the year             (8,683)      (156,081)
                                                          ---------     ----------

       At 31 December 1996                                  339,148     10,221,235
       Add:  Purchase January 1997                           24,291      1,395,261
       Add:  Rights Issue 2 June 1997                       223,402             --
                                                          ---------     ----------
                                                            586,841     11,616,496

       Less: Sales of shares during the year                (32,920)      (774,294)
             Transfers of shares during the year             (6,584)      (137,342)
                                                          ---------     ----------

       At 31 December 1997                                  547,337     10,704,860
                                                          =========     ==========
 

       Each stock purchase was made in one transaction representing more than 5%
       of the current value of the scheme at the beginning of the year.
 
 
                                                 1997          1996           1995
                                                    $             $              $
                                                                       
       Aggregate proceeds of sales          1,754,076     2,172,670        828,659
       Aggregate cost of sales               (774,294)     (884,699)      (328,974)
                                           ----------     ---------      ---------

       Net gain on sales                      980,382     1,287,971        499,685
                                           ----------     ---------      ---------

       Aggregate proceeds of transfers        137,342       440,689        127,626
       Aggregate cost of transfers           (137,342)     (156,220)       (46,738)
                                           ----------     ---------      ---------
 

 
                                 MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME

NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1997 AND 1996


                                                         
       Net gain on transfers                       --       284,469         80,888
                                           ----------     ---------      ---------

                                              980,382     1,572,440        580,573
                                           ==========     =========      =========
                                
 
        

 
                                MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME

NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1997 AND 1996


2.     CHANGES IN HOLDINGS OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.     
       Common Stock (contd.)

       Cost has been determined on a first out basis within the relevant
       employee allocation.

       The above analysis has been restated to reflect a correction of the value
       attributable to transfer in previous years and related adjustments to
       unrealised appreciation and gain on sales/transfers. These figures have
       been amended by the following amounts:

       Year ended 30 November 1996 - $310,997

       Year ended 30 November 1995 - $62,061

3.     CHANGE IN UNREALISED APPRECIATION OF INVESTMENTS

       At 31 December 1997 the closing price on the New York Stock Exchange for
       Morgan Stanley, Dean Witter, Discover & Co. common stock was $59.125 per
       share.

                                                    NUMBER
                                                 OF SHARES        TOTAL
                                                                      $
       Market value at 31 December 1997            547,337   32,361,300
       Average cost at 31 December 1997            547,337   10,704,860
                                                             ----------

       Unrealised appreciation at 31
         December 1997                                       21,656,440
       Unrealised appreciation at 1
         January 1997                                         9,152,594
                                                             ----------

       Increase in unrealised appreciation                   12,503,846
                                                             ==========

       Market value at 31 December 1996            339,148   19,373,829
       Average cost at 31 December 1996            339,148   10,221,235
                                                             ----------

       Unrealised appreciation at 31
         December 1997                                        9,152,594
       Unrealised appreciation at 1
         January 1996                                         4,678,901
                                                             ----------

       Increase in unrealised appreciation                    4,473,693
                                                             ==========

       Market value at 31 December 1995            163,586   13,189,120
       Average cost at 31 December 1995            163,586    8,510,219
                                                             ----------

       Unrealised appreciation at 31
         December 1995                                        4,678,901
       Unrealised appreciation at 1
         January 1995                                         1,582,022
                                                             ----------

       Increase in unrealised appreciation                    3,096,879
                                                             ==========

 
                                  MORGAN STANLEY UK GROUP PROFIT SHARING SCHEME

NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED 31 DECEMBER 1997 AND 1996


4.     NUMBER OF PARTICIPANTS


       There were 1,083 participants as of 31 December 1997, 878 as of 31
       December 1996, 543 as of 31 December 1995.

EX-99.2

 
                                                        Exhibit 99.2


Report of Independent Auditors

The Stockholders and
Board of Directors of
Morgan Stanley Group Inc.

We have audited the accompanying Consolidated Statement of Financial Condition
of Morgan Stanley Group Inc. as of November 30, 1996 and the related
Consolidated Statements of Income, Cash Flows and Changes in Stockholders'
Equity for the fiscal years ended November 30, 1996 and 1995 (not presented
separately herein).  Our audits also included the schedule of parent company
stand alone financial statements of Morgan Stanley Group Inc. (not presented
separately herein).  These financial statements and schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Morgan Stanley
Group Inc. at November 30, 1996 and the consolidated results of operations and
cash flows for the fiscal years ended November 30, 1996 and 1995 in conformity
with generally accepted accounting principles.  Also, in our opinion, the
related schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.

/s/ Ernst & Young LLP

New York, New York
May 27, 1997