Top Wall Street firm Morgan Stanley on Friday reported its worst quarter since 1998 as investment banking fees plummeted and trading revenues slid and said last week's attacks will hurt business further. 

Morgan Stanley, which operates the second largest U.S. brokerage and the Discover credit card business, posted a 41 percent profit decline in its fiscal third quarter, which ended before hijacked planes pulverized the World Trade Center on Sept. 11. 

The results, which reflect a summer slump across most securities business, bode ill for rivals Goldman Sachs Group Inc., Lehman Bros. Holdings Inc. and Bear Stearns Cos. Inc., which will issue results next week. 

Last week's attacks, which paralyzed Wall Street and caused the longest trading shut-down since the Great Depression, will dampen business even more. The stock market has posted gut-wrenching declines, with main market gauges off about 15 percent so far this week. Merger deals and new stock offerings, which carry fat banking fees, have dried up. 

``In the short term, the outlook has turned decidedly negative,'' Chief Financial Officer Stephen Crawford told reporters on a conference call. ``It would be hard to look at the market right now ... and see a fourth quarter that's going to be stronger then the third quarter.'' 

Morgan Stanley, which was the largest tenant in the destroyed World Trade Center but lost miraculously few employees, earned $735 million, or 65 cents a share, in its fiscal third quarter ended Aug. 31. That compared with earnings of $1.25 billion, or $1.09 a share, in last year's third quarter, as profits fell for the fourth consecutive quarter. 

Analysts had expected the company to earn between 55 cents and 70 cents a share in the third quarter, with a consensus of 64 cents, according to market research firm Thomson Financial/First Call. 

``In this market, I don't think this changes anything,'' said Jim Mitchell, an analyst at Putnam Lovell Securities. ``I don't think the results are going to stop the fall.'' 

Morgan Stanley's shares have dropped 20 percent since Sept. 10, the last day of trading before the air attack. U.S. stock markets closed for four days following the assault. Its shares were off 38 cents at $37.24 but later recovered for a gain of 78 cents to $38.40 in morning trading on the New York Stock Exchange. 

M&A, UNDERWRITING BUSINESS DECLINES 

The firm's results were its worst since the third quarter of 1998, when Morgan Stanley bailed out one of its own emerging leverage funds and was one of 11 firms that put up cash to rescue another troubled hedge fund, Long-Term Capital Management. Stock markets three years ago were also roiled by financial tumult in Asia and Russia. 

Total net revenues fell 16 percent to $5.3 billion. 

Many analysts expected Wall Street firms to implement layoffs after the summer ended, but market-watchers viewed those type of cuts in the wake of last week's disaster as distasteful and unlikely. 

``It's way too early to speculate'' on cost-cutting measures, Crawford said. The company's staff has dropped by a little over 500 people since last year, down to around 62,400 employees. Chief Financial Officer Stephen Crawford told reporters on a conference call. 

Morgan Stanley's advisory revenue fell 30 percent to $360 million, while underwriting revenue fell 34 percent to $417 million as a weak stock market kept companies from issuing stock or pulling the trigger on mergers. 

Institutional sales and trading revenues fell 8 percent to $1.8 billion, with fixed-income revenues offsetting weakness in equities. Revenues from its asset management unit fell 12 percent to $603 million, and its Discover credit card subsidiary pulled in revenues of $1.03 billion, down from $1.08 billion a year ago. 

Morgan Stanley, with about 14,300 brokers, runs the No. 2 U.S. full-service brokerage behind Merrill Lynch & Co. Inc. The company said brokerage revenues fell 20 percent to $1.1 billion as investors avoided beaten-down stocks. Morgan Stanley's third quarter also straddles the summer's traditionally slower months. 

Client portfolios have been hit by the market downturn as well, with total client assets declining 23 percent to $597 billion. 

Morgan Stanley's own portfolio took a loss amid the sagging markets. It booked a $58 million loss on investments, compared with a gain of $55 million last year. The paper losses -- which are not realized until the firm actually sells its holdings -- were mostly from investments in private companies, many in the technology and telecommunications sector, Crawford said. 

The earnings report is overshadowed by last Tuesday's deadly attack. Morgan Stanley had 3,700 people in the complex and all but six have been accounted for. Its retail brokerage processing unit was destroyed in the assault on the twin towers, forcing the company to move those operations to another site in lower Manhattan. 

Morgan Stanley shares fell nearly 18 percent during Morgan Stanley's third quarter, underperforming the Amex Broker-Dealer Index, which fell 14 percent in that period.