The first was our merger, which brought together two highly profitable, successful companies, creating a powerful new company—one with enormous financial strength, global scope, and an unmatched breadth of market leadership across a number of businesses. The combination was widely heralded as raising the bar and dramatically affecting the competitive contours in the financial services marketplace. Our merger has been followed by many others as the wave of consolidation has continued, and it is clear at the beginning of 1998 that, by anticipating the trend, each of our companies gained a quality partner.

The second event—perhaps more an achievement than an event—was making the business decisions that would put the merger in place. This certainly was more difficult than the initial agreement and the formal consummation of the merger because when companies combine, there inevitably is the need to integrate certain functions, change old ways of doing things, and work together. We accomplished our transition to one company in remarkably short order, with very few distractions, and a rather sizable increase in revenues and earnings. In serving our customers and growing our businesses, our people never missed a beat. This is evident from our exceptionally strong financial results in an eventful and exceptional year for the global economy and financial markets.

Our new company earned $2.6 billion in 1997, an increase of $606 million, or 31% over the combined earnings of the predecessor companies in 1996. Earnings per share increased to $4.15 on a fully diluted basis—32% higher than $3.14 in 1996.    Return on equity was 22%, which compares favorably with our goal of an average of 18%-20% over the course of the business cycle.    Following the consummation of the merger on May 31, 1997, our share price was $41¼. Seven months later, on December 31, our stock had appreciated 44% to $59 1/8 a share, compared to an increase of 14.7% in the S&P 500 Index over the same period.

   In January 1998, our Board of Directors increased the quarterly cash dividend to $.20, a 43% increase from the prior quarterly dividend.

These achievements reflect a highly favorable business environment, including strong US securities markets throughout most of the year. So perhaps the truer measure of our 1997 performance is found in comparisons with our competitors. Based on these industry-wide comparisons, it is no exaggeration to say that this past year was one of the best in the history of our two firms.

We strengthened our leadership position in each of our major businesses. In securities, we maintained or increased our underwriting ranking in almost every market category. We increased market share in our individual investor securities business, measured by number of account executives compared to our major competitors, from 17.4% to 18.7%. And we were named #1 in global research by Institutional Investor. In asset management, 20 of our 33 Morningstar-rated institutional funds received a top four- or five-star rating, and our assets under management at Dean Witter InterCapital grew to over $102 billion, led by the $16 billion Dividend Growth Fund. In credit services, Discover® Card maintained its strong franchise with US consumers, and the J.D. Powers and Associates survey ranked Discover Card #1 in customer satisfaction among convenience cardholders.

We will not pretend that all these achievements in 1997 resulted from our merger announcement on February 5. Both Morgan Stanley and Dean Witter Discover were doing very well on their own before that. Still, the evidence is undeniable that the combination of the two companies has accelerated growth in several key areas.

The best place to start is with our individual investor securities business because there probably is no group more enthusiastic about the new company than our more than 2 million individual investor clients. In the past year, they gained access to stock research covering 2,000 companies around the globe, compared with 600 previously. They also now have the enhanced ability to invest in an expanded array of products, including more equity offerings and non-US stocks. As a result, Dean Witter brokerage revenues for equity issues more than doubled in the last six months of 1997 compared with the same period a year earlier.

If there is another group equally enthusiastic about the combined strengths of the new company, it is our investment banking clients. The distribution strength of the Dean Witter sales organization clearly has contributed to our gains in corporate finance. In several market categories, such as preferred stock and real estate investment trusts (REITs), the gains are almost entirely attributable to the joint efforts of Morgan Stanley origination and Dean Witter distribution. And, to quote from an October article in The Wall Street Journal on our underwriting success, "The honeymoon isn't over yet."

The merger has given us new strengths, and in 1998 we will focus our attention and resources on further growth opportunities in our core businesses. Since the merger, it has become clear that the name "Morgan Stanley Dean Witter" resonates with our clients. We already use this name for our research and investment banking products, and we are going to expand the use of this powerful brand in our individual and institutional securities and proprietary asset management businesses. We also are proposing to shareholders that Morgan Stanley Dean Witter & Co. become the name of our new company.

The Discover Card is our greatest strength in credit services and, in 1998, we will focus on growth opportunities directly related to this highly profitable franchise. We plan to begin issuing Discover Card outside the US in 1998. We also plan to focus on growth opportunities in our asset management business, where we have established strong franchises with both individuals and institutions in the US, but have barely begun to tap the market potential in Europe, Latin America, and Asia. In 1998, we plan to increase our presence in global asset management markets.

Over the next several years, our new company will benefit from two large-scale trends. The first is the increasing global demand for financial services, and the second is rapid industry consolidation in the face of rising demand. The link between these seemingly contradictory trends is the increasing complexity of global markets. This means that customers would prefer to work with financial services providers that can meet all their needs on a global basis. Morgan Stanley Dean Witter is exceptionally well-positioned to meet these needs. Our new company has six key attributes that, we believe, will make a crucial difference in the years ahead:

This begins with our capital, which gives us considerable flexibility and enormous staying power. At year-end, our common equity stood at $13 billion, and total capital (including preferred equity and long-term debt) was $34 billion. The diversity and growth potential of our earnings stream means we should continue to generate substantial capital internally. Because we have three profitable businesses (securities, asset management, and credit services), a broad institutional and individual customer base, a wide geographic base, and a strong stream of continuing revenues (asset management and credit services), we expect our earnings to be less subject to volatility than many of our competitors.

Few companies in our industry can match Morgan Stanley Dean Witter in the breadth of products and services we offer our clients—or, for that matter, in the diversity of our clients. We serve major pension funds, multinational corporations, governments, financial institutions, and individual investors and households, providing a full range of debt, equity, asset management, and risk management products in financial markets worldwide. This gives us not only diversity in our revenues but also a key competitive advantage in serving customers who increasingly are looking for providers that can meet a variety of needs—often in a single, complex transaction. In one such transaction in 1997, we provided high-yield financing, senior debt financing, a bridge loan, acquisition advisory services, and a foreign exchange hedge for the American and Mexican owners of Transportacion Ferroviaria Mexicana (TFM), a newly privatized railroad in Mexico. It was one of the largest acquisition financings in the history of Latin America.

The market share gains achieved in 1997 obviously are gratifying to us—they are one way to keep score. But their real importance lies less in satisfaction over a job well done than as an indication of future competitiveness. As consolidation in financial services continues and as markets become even faster-paced and more complex, we believe customers will want to work only with firms of proven reputation that are in the top tier. It follows that firms in the top tier in many categories should gain an increased share of each customer's business.

Throughout our history, innovation and the application of technology to meet the needs of our clients have been key to the success of both Morgan Stanley and Dean Witter Discover. We are making a significant, continued investment in technology in order to maintain our leadership in today's fast-paced global financial markets. We have committed more than $1.5 billion to technology-related spending in 1998. The year 2000 transition and the advent of the European Monetary Union are two key external challenges we face right now. We believe that over the long run our size, scale, and experience give us a competitive advantage when it comes to realizing the benefits of technology. Given the commitment required, we know it also is essential to focus our resources in areas where we have a leadership position and where we have the greatest opportunities.

Every annual report mentions the importance of people who work for the company, and in our first year as a new, combined company, we are not about to break with tradition. Our success, and our future promise, is the direct result of the commitment and talent of our 47,000 employees. To put it in a more hardheaded way, we are a labor-intensive company, with employee compensation accounting for 57% of our non-interest costs in 1997. Our future depends on people who provide innovative ideas to assist clients, who stay in touch with clients and their concerns, and who provide the technical and analytical support for our business. Since we depend on excellent people, retention always is a key issue, and we are doing well on that score. There were very few cutbacks as a result of the merger and very few voluntary departures, despite a highly competitive job market in the securities industry. We will continue to provide the incentives and environment to attract and retain the most talented people.

Our talent and commitment extends to the Board of Directors, who bring to our company a wealth of experience and strong, active leadership. We welcomed two new members to the Board in 1997: Laura D'Andrea Tyson, class of 1939 professor of economics and business administration at the University of California at Berkeley; and Diana D. Brooks, president and chief executive officer of Sotheby's Holdings, Inc. At year-end, Paul J. Rizzo, former vice chairman of International Business Machines, announced his decision to retire from our Board. We are grateful for his contribution during nine years of service, and we wish him well.

As we look to the future, there is no shortage of opportunities for our company. All it takes to succeed is the strength, commitment, and creativity to take advantage of these opportunities, and we know Morgan Stanley Dean Witter possesses these qualities in abundance. We are very proud of our company and are excited about the future. We want to thank our fellow shareholders for your support, and we want you to know we are going to do everything we can to continue to reward your commitment.

Philip J. Purcell Chairman & Chief Executive Officer February 5, 1998

John J. Mack President & Chief Operating Officer