In addition to retiring Field Marshal Mohammed Tantawi and Army Chief of Staff Lieutenant General Sami Anan, Morsi rewrote the country's interim constitution and named a vice president.
The new appointments and changes to the constitution on Sunday gave Morsi control of the country's legislative process, all military decisions and final say over the writing of a permanent constitution.
The moves left the judiciary independent, but evoked both fear over the amount of power Morsi now has and relief that the last remnants of the regime of Hosni Mubarak have now been sidelined, 18 months after Mubarak resigned from the presidency.
The announcement of the change came in the final 10 days of Ramadan, around a period referred to as Laylat al-Qadr, which roughly translates to the Night of Fate.
It is considered the holiest time of the month, marking when the angel Gabriel came to Prophet Muhammad and gave him the first Koranic revelations.
Some speculated that Morsi, a former top official in the Muslim Brotherhood, timed the announcement for this night.
In Cairo's Tahrir Square, members of the Brotherhood began gathering in support of Morsi's decisions, some launching fireworks and chanting.
In a late-night speech, Morsi said he was acting in the interests of Egypt.
He said it was time for "new blood" and peppered his speech with religious references.
Although he offered no specifics behind his decision, he suggested an attack on Egyptian soldiers last week, the deadliest in nearly 40 years, contributed to the moves.
"There is no safety for those who don't do their jobs," Morsi said.
"There is no space to abandon responsibility."
Tantawi, who had been head of the Supreme Council of the Armed Forces and minister of defence, and Anan will serve as presidential advisers.
A senior judge with a reputation as a reformer, Mahmoud Mekki, was named vice president.
Mekki's brother, Ahmed, is Morsi's minister of justice.
Morsi also named a new minister of military production.
Morsi also cancelled the June 17 Election Day constitutional declaration that the supreme military council had made that gave it the final say over all military matters, including whether to go to war and who should serve as generals.
The decree had given the military council, or SCAF, legislative powers after a court ruling that led to the dissolution of parliament and gave the SCAF final say over who would craft a permanent constitution.
Morsi's declaration Sunday gave those powers to the president.
US officials in Washington offered no immediate reaction. Israeli officials, however, said there was a "sense of alarm" over what had taken place, though several said they had been ordered to remain quiet about the developments.
Israel's two prime-time newscasts led their broadcasts with news of Tantawi's retirement, along with the headline "Instability in Egypt to threaten Israel," and "Muslim Brotherhood on our doorstep."
"There is a longstanding relationship between the Israeli military and the Egyptian military that we rely upon to secure the peace," said a former Israeli defence official with longstanding diplomatic experience with Egypt, who was among those who said he was asked not to speak about his concerns to reporters.
"Tantawi is a man we know, a man we have known for decades and understand. We do not know Morsi."
Morsi immediately swore in replacements for the dismissed officials. Abdel-Fattah el-Sissi, the head of military intelligence and the youngest member of the military council, became minister of defence.
Sedky Sobhy, the commander of the Third Army, was appointed as chief of staff of the armed forces.