FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-7182

MERRILL LYNCH & CO., INC.

(Exact name of Registrant as specified in its charter)


Delaware	13-2740599

(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4 World Financial Center, New York, New York	10080

(Address of Principal Executive Offices)		(Zip Code)

(212) 449-1000

Registrant’s telephone number, Including Area Code:

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer X	Accelerated Filer	Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES NO X

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

883,809,515 shares of Common Stock and 2,663,196 Exchangeable Shares as of the close of business on July 28, 2006. The Exchangeable Shares, which were issued by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one basis and entitle holders to dividend, voting, and other rights equivalent to Common Stock.

Available Information

Merrill Lynch & Co., Inc. (“ML & Co.” or “Merrill Lynch”) files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including Merrill Lynch) file electronically with the SEC. The SEC’s internet site is www.sec.gov.

ML & Co.’s internet address is www.ml.com, and the investor relations section of our website can be accessed directly at www.ir.ml.com. ML & Co. makes available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are available through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Also posted on our website are corporate governance materials including Merrill Lynch’s Guidelines for Business Conduct, Code of Ethics for Financial Professionals, Director Independence Standards, Corporate Governance Guidelines and charters for the committees of our Board of Directors. In addition, our website includes information on purchases and sales of our equity securities by our executive officers and directors, as well as disclosures relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.

We will post on our website amendments to our Guidelines for Business Conduct and Code of Ethics and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange. The information on Merrill Lynch’s website is not incorporated by reference into this Report. Shareholders may obtain printed copies of these documents, free of charge, upon written request to Judith A. Witterschein, Corporate Secretary, Merrill Lynch & Co., Inc., 222 Broadway, 17th Floor, New York, NY 10038 or by email at corporate secretary@ml.com.

PART I. FINANCIAL INFORMATION


ITEM 1.	Financial Statements

Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)


			For the Three Months Ended

			June 30,		July 1,		Percent
			2006		2005		Inc. (Dec.)
(in millions, except per share amounts)
Net Revenues
	Asset management and portfolio service fees		$	1,773	$	1,431		23.9	%
	Commissions			1,586		1,247		27.2
	Principal transactions			1,182		1,006		17.5
	Investment banking			1,162		920		26.3
	Revenues from consolidated investments			186		84		121.4
	Other			1,110		664		67.2

		Subtotal		6,999		5,352		30.8

	Interest and dividend revenues			9,690		5,974		62.2
	Less interest expense			8,531		5,007		70.4

		Net interest profit		1,159		967		19.9

	Total Net Revenues			8,158		6,319		29.1

Non-Interest Expenses
	Compensation and benefits			3,980		3,148		26.4
	Communications and technology			429		395		8.6
	Brokerage, clearing, and exchange fees			253		216		17.1
	Occupancy and related depreciation			249		227		9.7
	Professional fees			196		183		7.1
	Advertising and market development			191		160		19.4
	Expenses of consolidated investments			145		35		314.3
	Office supplies and postage			57		51		11.8
	Other			309		309		-

	Total Non-Interest Expenses			5,809		4,724		23.0

Earnings Before Income Taxes				2,349		1,595		47.3
Income tax expense				716		460		55.7

Net Earnings			$	1,633	$	1,135		43.9
Preferred Stock Dividends				45		17		164.7

Net Earnings Applicable to Common Stockholders			$	1,588	$	1,118		42.0

Earnings Per Common Share
		Basic	$	1.79	$	1.25

		Diluted	$	1.63	$	1.14

Dividend Paid Per Common Share			$	0.25	$	0.20

Average Shares Used in Computing Earnings Per Common Share
		Basic		885.4		897.5

		Diluted		973.3		978.5

See Notes to Condensed Consolidated Financial Statements.

Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)


			For the Six Months Ended

			June 30,		July 1,		Percent
			2006		2005		Inc. (Dec.)
(in millions, except per share amounts)
Net Revenues
	Asset management and portfolio service fees		$	3,452	$	2,866		20.4	%
	Commissions			3,188		2,588		23.2
	Principal transactions			3,175		1,951		62.7
	Investment banking			2,127		1,733		22.7
	Revenues from consolidated investments			290		211		37.4
	Other			1,664		1,034		60.9

		Subtotal		13,896		10,383		33.8

	Interest and dividend revenues			18,354		11,505		59.5
	Less interest expense			16,130		9,337		72.8

		Net interest profit		2,224		2,168		2.6

	Total Net Revenues			16,120		12,551		28.4

Non-Interest Expenses
	Compensation and benefits			9,730		6,244		55.8
	Communications and technology			882		791		11.5
	Brokerage, clearing, and exchange fees			501		435		15.2
	Occupancy and related depreciation			490		460		6.5
	Professional fees			396		361		9.7
	Advertising and market development			335		286		17.1
	Expenses of consolidated investments			192		120		60.0
	Office supplies and postage			114		103		10.7
	Other			538		487		10.5

	Total Non-Interest Expenses			13,178		9,287		41.9

Earnings Before Income Taxes				2,942		3,264		(9.9	)
Income tax expense				834		917		(9.1	)

Net Earnings			$	2,108	$	2,347		(10.2	)
Preferred Stock Dividends				88		24		266.7

Net Earnings Applicable to Common Stockholders			$	2,020	$	2,323		(13.0	)

Earnings Per Common Share
		Basic	$	2.28	$	2.57

		Diluted	$	2.07	$	2.36

Dividend Paid Per Common Share			$	0.50	$	0.36

Average Shares Used in Computing Earnings Per Common Share
		Basic		884.6		902.7

		Diluted		977.2		985.9

See Notes to Condensed Consolidated Financial Statements.

Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


		June 30,		Dec. 30,
(dollars in millions)		2006		2005

ASSETS
Cash and cash equivalents		$	22,450	$	14,586
Cash and securities segregated for regulatory purposes or deposited with clearing organizations			18,307		11,949
Securities financing transactions
	Receivables under resale agreements		210,268		163,021
	Receivables under securities borrowed transactions		111,580		92,484

			321,848		255,505

Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $50,594 in 2006 and $38,678 in 2005)
	Equities and convertible debentures		35,395		32,933
	Mortgages, mortgage-backed, and asset-backed		31,601		29,233
	Corporate debt and preferred stock		30,883		27,436
	Contractual agreements		30,818		26,216
	Non-U.S. governments and agencies		17,782		15,157
	U.S. Government and agencies		11,747		8,936
	Municipals and money markets		6,083		5,694
	Commodities and related contracts		2,621		3,105

			166,930		148,710

Investment securities			66,647		69,273
Securities received as collateral			20,721		16,808
Other receivables
	Customers (net of allowance for doubtful accounts of $47 in 2006 and $46 in 2005)		44,890		40,451
	Brokers and dealers		13,844		12,127
	Interest and other		23,279		15,619

			82,013		68,197

Loans, notes, and mortgages (net of allowances for loan losses of $463 in 2006 and $406 in 2005)			70,442		66,041
Separate accounts assets			15,876		16,185
Equipment and facilities (net of accumulated depreciation and amortization of $5,137 in 2006 and $4,865 in 2005)			2,546		2,313
Goodwill and other intangible assets			6,936		6,035
Other assets			4,472		5,413

Total Assets		$	799,188	$	681,015

Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)


		June 30,			Dec. 30,
(dollars in millions, except per share amount)		2006			2005

LIABILITIES
Securities financing transactions
	Payables under repurchase agreements	$	254,014		$	198,152
	Payables under securities loaned transactions		23,299			19,335

			277,313			217,487

Commercial paper and other short-term borrowings			13,402			3,902
Deposits			79,442			80,016
Trading liabilities, at fair value
	Contractual agreements		33,183			28,755
	Equities and convertible debentures		24,692			19,119
	Non-U.S. governments and agencies		20,707			19,217
	U.S. Government and agencies		11,296			12,478
	Corporate debt and preferred stock		6,736			6,203
	Commodities and related contracts		1,725			2,029
	Municipals, money markets and other		1,398			1,132

			99,737			88,933

Obligation to return securities received as collateral			20,721			16,808
Other payables
	Customers		47,079			35,619
	Brokers and dealers		26,110			19,528
	Interest and other		37,033			28,501

			110,222			83,648


Liabilities of insurance subsidiaries			2,852			2,935
Separate accounts liabilities			15,876			16,185
Long-term borrowings			139,990			132,409
Long-term debt issued to TOPrS^SMpartnerships			3,092			3,092

Total Liabilities			762,647			645,415

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stockholders’ Equity (liquidation preference of $30,000 per share; issued: 2006 - 105,000 shares; 2005 - 93,000 shares)			3,147			2,773
	Less: Treasury stock, at cost (2005 - 3,315 shares)		—			100

Total Preferred Stockholders’ Equity			3,147			2,673
Common Stockholders’ Equity
	Shares exchangeable into common stock		39			41
	Common stock (par value $1.33¹/3 per share; authorized: 3,000,000,000 shares; issued: 2006 - 1,192,313,740 shares; 2005 - 1,148,714,008 shares)		1,589			1,531
	Paid-in capital		17,270			13,320
	Accumulated other comprehensive loss (net of tax)		(1,062	)		(844	)
	Retained earnings		28,383			26,824

			46,219			40,872
	Less: Treasury stock, at cost (2006 - 297,531,184 shares; 2005 - 233,112,271 shares)		12,825			7,945

Total Common Stockholders’ Equity			33,394			32,927

Total Stockholders’ Equity			36,541			35,600

Total Liabilities and Stockholders’ Equity		$	799,188		$	681,015

See Notes to Condensed Consolidated Financial Statements.

Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)


			For the
			Six Months Ended

			June 30,			July 1,
			2006			2005
(dollars in millions)
Cash flows from operating activities:
Net earnings			$	2,108		$	2,347
Noncash items included in earnings:
	Depreciation and amortization			243			242
	Stock-based compensation plan expense			2,462			517
	Deferred taxes			(586	)		256
	Policyholder reserves			62			65
	Undistributed earnings from equity investments			(189	)		(168	)
	Other			631			465
Changes in operating assets and liabilities:
	Trading assets			(18,321	)		6,877
	Cash and securities segregated for regulatory purposes or deposited with clearing organizations			(5,303	)		3,108
	Receivables under resale agreements			(47,247	)		(14,769	)
	Receivables under securities borrowed transactions			(19,096	)		14,526
	Customer receivables			(4,430	)		(1,522	)
	Brokers and dealers receivables			(1,718	)		190
	Proceeds from loans, notes, and mortgages held for sale			10,152			8,982
	Other changes in loans, notes, and mortgages held for sale			(15,212	)		(9,510	)
	Trading liabilities			6,078			(3,332	)
	Payables under repurchase agreements			55,862			(10,697	)
	Payables under securities loaned transactions			3,964			(1,478	)
	Customer payables			11,460			4,996
	Brokers and dealers payables			6,582			(715	)
	Other, net			465			(4,081	)

		Cash used for operating activities		(12,033	)		(3,701	)

Cash flows from investing activities:
Proceeds from (payments for):
	Maturities of available-for-sale securities			7,969			13,816
	Sales of available-for-sale securities			9,721			19,632
	Purchases of available-for-sale securities			(14,500	)		(32,984	)
	Maturities of held-to-maturity securities			2			13
	Loans, notes, and mortgages held for investment, net			650			(6,013	)
	Other investments and other assets			(904	)		105
	Equipment and facilities, net			(476	)		(94	)

		Cash provided by (used for) investing activities		2,462			(5,525	)

Cash flows from financing activities:
Proceeds from (payments for):
	Commercial paper and other short-term borrowings			9,500			2,859
	Issuance and resale of long-term borrowings			29,409			16,430
	Settlement and repurchases of long-term borrowings			(22,521	)		(14,925	)
	Deposits			(574	)		(277	)
	Derivative and other financing transactions			4,959			2,968
	Issuance of common stock			945			426
	Issuance of preferred stock			360			1,110
	Common stock repurchases			(5,008	)		(2,131	)
	Other stock transactions			572			91
	Dividends paid on common and preferred stock			(549	)		(364	)
	Excess tax benefits related to stock-based compensation			342			-

		Cash provided by financing activities		17,435			6,187

Increase (decrease) in cash and cash equivalents				7,864			(3,039	)
Cash and cash equivalents, beginning of period				14,586			20,790

Cash and cash equivalents, end of period			$	22,450		$	17,751

Supplemental Disclosure of Cash Flow Information:
Cash paid for:
	Income taxes		$	1,569		$	655
	Interest			15,564			8,803

See Notes to Condensed Consolidated Financial Statements.

Merrill Lynch & Co., Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2006


Note 1.	Summary of Significant Accounting Policies

For a complete discussion of Merrill Lynch’s accounting policies, refer to the Annual Report on Form 10-K for the year ended December 30, 2005 (“2005 Annual Report”).

Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch & Co., Inc. (“ML & Co.”) and subsidiaries (collectively, “Merrill Lynch”), whose subsidiaries are generally controlled through a majority voting interest but may be controlled by means of a significant minority ownership, by contract, lease or otherwise. In certain cases, Merrill Lynch subsidiaries (i.e., Variable Interest Entities (“VIEs”)) may also be consolidated based on a risks and rewards approach as required by Financial Accounting Standards Board (“FASB”) revised Interpretation No. 46 (“FIN 46R”). Intercompany transactions and balances have been eliminated. The interim Condensed Consolidated Financial Statements for the three- and six-month periods are unaudited; however, in the opinion of Merrill Lynch management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Condensed Consolidated Financial Statements have been included.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the 2005 Annual Report. The December 30, 2005 unaudited Condensed Consolidated Balance Sheet was derived from the audited 2005 Consolidated Financial Statements. The nature of Merrill Lynch’s business is such that the results of any interim period are not necessarily indicative of results for a full year. In presenting the Condensed Consolidated Financial Statements, management makes estimates that affect the reported amounts and disclosures in the financial statements. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. During the second quarter of 2006, Merrill Lynch reclassified cash flows from loans held for sale to operating activities, whereas in prior periods, these loans were classified as investing activities. Merrill Lynch believes that classifying cash flows from loans held for sale as operating activities correctly presents the cash flows associated with these loans as they have been acquired primarily for resale. All prior period amounts have been reclassified to conform to the current period presentation.

Merrill Lynch offers a broad array of products and services to its diverse client base of individuals, small to mid-size businesses, employee benefit plans, corporations, financial institutions, and governments around the world. These products and services are offered from a number of locations around the world. In some cases, the same or similar products and services may be offered to both individual and institutional clients, utilizing the same infrastructure. In other cases, a single infrastructure may be used to support multiple products and services offered to clients. When Merrill Lynch analyzes its profitability, it does not focus on the profitability of a single product or service. Instead, Merrill Lynch looks at the profitability of businesses offering an array of products and services to various types of clients. The profitability of the products and services offered to individuals, small to mid-size businesses, and employee benefit plans is analyzed separately from the profitability of products and services offered to corporations, financial institutions, and governments,

regardless of whether there is commonality in products and services infrastructure. As such, we do not separately disclose the costs associated with the products and services sold or our general and administrative costs, in total or by product.

When pricing its various products and services, Merrill Lynch considers multiple factors, including prices being offered in the market for similar products and services, the competitiveness of its pricing compared to competitors, the profitability of its businesses and its overall profitability, as well as the profitability, creditworthiness, and importance of the overall client relationships.

Expenses which are incurred to support products and services and infrastructures shared by businesses are allocated to the businesses based on various methodologies which may include headcount, square footage, and certain other criteria. Similarly, certain revenues may be shared based upon agreed methodologies. When looking at the profitability of various businesses, Merrill Lynch considers all expenses incurred, including overhead and the costs of shared services, as all are considered integral to the operation of the businesses.

New Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for Merrill Lynch beginning in the first quarter of 2007. Merrill Lynch is currently evaluating the impact of adopting the Interpretation.

In April 2006, the FASB issued a FASB Staff Position FIN 46(R)-6, Determining the Variability to be Considered in Applying FIN 46R (“ the FSP”). The FSP requires that the variability to be included when applying FIN 46R be based on a “by-design” approach and should consider what risks the variable interest entity was designed to create. The FSP is effective beginning in the third quarter of 2006 for all new entities with which Merrill Lynch becomes involved, and to all entities previously required to be analyzed under FIN 46R when a reconsideration event occurs as defined under paragraph 7 of the Interpretation. Merrill Lynch does not expect the adoption of the FSP to have a material impact on the Condensed Consolidated Financial Statements.

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets (“SFAS No. 156”). SFAS No. 156 amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS No. 156 also permits servicers to subsequently measure each separate class of servicing assets and liabilities at fair value rather than at the lower of cost or market. For those companies that elect to measure their servicing assets and liabilities at fair value, SFAS No. 156 requires the difference between the carrying value and fair value at the date of adoption to be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the election is made. Merrill Lynch will adopt SFAS No. 156 beginning in the first quarter of 2007. Merrill Lynch is currently assessing the impact of adopting SFAS No. 156 but does not expect the standard to have a material impact on the Condensed Consolidated Financial Statements.

be accounted for as a single financial instrument at fair value with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. Merrill Lynch will adopt SFAS No. 155 beginning in the first quarter of 2007. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instruments and the fair value of the combined hybrid financial instruments will be recognized as a cumulative-effect adjustment to beginning retained earnings. Merrill Lynch is currently assessing the impact of adopting SFAS No. 155.

During the first quarter of 2006, Merrill Lynch adopted the provisions of Statement No. 123 (revised 2004), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123R”). Under SFAS No. 123R, compensation expenses for share-based awards that do not require future service are recorded immediately, and share-based awards that require future service continue to be amortized into expense over the relevant service period. Merrill Lynch adopted SFAS No. 123R under the modified prospective method whereby the provisions of SFAS No. 123R are generally applied only to share-based awards granted or modified subsequent to adoption. Thus, for Merrill Lynch, SFAS No. 123R required the immediate expensing of share-based awards granted or modified in 2006 to retirement-eligible employees, including awards that are subject to non-compete provisions.

Prior to the adoption of SFAS No. 123R, Merrill Lynch had recognized expense for share-based compensation over the vesting period stipulated in the grant for all employees. This included those who had satisfied retirement eligibility criteria but were subject to a non-compete agreement that applied from the date of retirement through each applicable vesting period. Previously, Merrill Lynch had accelerated any unrecognized compensation cost for such awards if a retirement-eligible employee left Merrill Lynch. However, because SFAS No. 123R applies only to awards granted or modified in 2006, expenses for share-based awards granted prior to 2006 to employees who were retirement-eligible with respect to those awards must continue to be amortized over the stated vesting period.

In addition, beginning with performance year 2006, for which Merrill Lynch expects to grant stock awards in early 2007, Merrill Lynch will accrue the expense for future awards granted to retirement-eligible employees over the award performance year instead of recognizing the entire expense related to the award on the grant date. Compensation expense for all future stock awards granted to employees not eligible for retirement with respect to those awards will be recognized over the applicable vesting period.

SFAS No. 123R also requires expected forfeitures of share-based compensation awards for non-retirement-eligible employees to be included in determining compensation expense. Prior to the adoption of SFAS No. 123R, any benefits of employee forfeitures of such awards were recorded as a reduction of compensation expense when the employee left Merrill Lynch and forfeited the award. In the first quarter of 2006, Merrill Lynch recorded a benefit based on expected forfeitures which was not material to the results of operations for the quarter.

The adoption of SFAS No. 123R resulted in a first quarter charge to compensation expense of approximately $550 million on a pre-tax basis and $370 million on an after-tax basis.

contain more stringent retirement provisions. These provisions include a combination of increased age and length of service requirements. While the stock awards of employees who retire continue to vest, retired employees are subject to continued compliance with the strict non-compete provisions of those awards. To facilitate transition to the more stringent future requirements, the terms of most outstanding stock awards previously granted to employees, including certain executive officers, were modified, effective March 31, 2006, to permit employees to be immediately eligible for retirement with respect to those earlier awards. While Merrill Lynch modified the retirement-related provisions of the previous stock awards, the vesting and non-compete provisions for those awards remain in force.

Since the provisions of SFAS No. 123R apply to awards modified in 2006, these modifications required Merrill Lynch to record additional one-time compensation expense in the first quarter of 2006 for the remaining unamortized amount of all awards to employees who had not previously been retirement-eligible under the original provisions of those awards.

The one-time, non-cash charge associated with the adoption of SFAS No. 123R, and the policy modifications to previous awards resulted in a net charge to compensation expense in the first quarter of 2006 of approximately $1.8 billion pre-tax, and $1.2 billion after-tax, or a net impact of $1.34 and $1.21 on basic and diluted earnings per share, respectively. Policy modifications to previously granted awards amounted to $1.2 billion of the pre-tax charge and impacted approximately 6,300 employees.

Prior to the adoption of SFAS No. 123R, Merrill Lynch presented the cash flows related to income tax deductions in excess of the compensation expense recognized on share-based compensation as operating cash flows in the Condensed Consolidated Statements of Cash Flows. SFAS No. 123R requires cash flows resulting from tax deductions in excess of the grant-date fair value of share-based awards to be included in cash flows from financing activities. The excess tax benefits of $283 million related to total share-based compensation included in cash flows from financing activities in the first quarter of 2006 would have been included in cash flows from operating activities if Merrill Lynch had not adopted SFAS No. 123R.

As a result of adopting SFAS No. 123R, approximately $600 million of liabilities associated with the Financial Advisor Capital Accumulation Award Plan (“FACAAP”) were reclassified to stockholders’ equity. In addition, as a result of adopting SFAS No. 123R, the unamortized portion of employee stock grants, which was previously reported as a separate component of stockholders’ equity on the Condensed Consolidated Balance Sheets, has been reclassified to Paid-in Capital. Refer to Note 12 to the Condensed Consolidated Financial Statements for additional information.

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”). EITF 04-5 presumes that a general partner controls a limited partnership, and should therefore consolidate a limited partnership, unless the limited partners have the substantive ability to remove the general partner without cause based on a simple majority vote or can otherwise dissolve the limited partnership, or unless the limited partners have substantive participating rights over decision making. The guidance in EITF 04-5 was effective beginning in the third quarter of 2005 for all new limited partnership agreements and any limited partnership agreements that were modified. For those partnership agreements that existed at the date EITF 04-5 was issued, the guidance became effective in the first quarter of 2006. The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.


Note 2.	Segment Information

Merrill Lynch’s operations are organized into three business segments: Global Markets and Investment Banking (“GMI”), Global Private Client (“GPC”), and Merrill Lynch Investment Managers (“MLIM”). Prior period amounts have been reclassified to conform to the current period presentation. For information on each segment’s business activities, refer to Note 3 to the 2005 Annual Report.

The six month comparisons in the results by business segment table below include the impact of the $1.8 billion, pre-tax, one-time compensation expenses incurred in the first quarter of 2006. These one-time compensation expenses were recorded as follows: $1.4 billion to GMI, $281 million to GPC and $109 million to MLIM; refer to Note 1 to the Condensed Consolidated Financial Statements for further information on one-time compensation expenses.

Results by business segment are as follows:


(dollars in millions)

								Corporate Items
								(including
								intersegment
	GMI		GPC		MLIM			eliminations)			Total

Three Months Ended June 30, 2006
Non-interest revenues	$	3,920	$	2,500	$	618		$	(39	)⁽¹⁾	$	6,999
Net interest profit⁽²⁾		660		545		12			(58	)⁽³⁾		1,159

Net revenues		4,580		3,045		630			(97	)		8,158
Non-interest expenses		3,087		2,344		390			(12	)⁽¹⁾		5,809

Pre-tax earnings (loss)	$	1,493	$	701	$	240		$	(85	)	$	2,349

Quarter-end total assets	$	705,854	$	77,139	$	8,711		$	7,484		$	799,188


Three Months Ended July 1, 2005
Non-interest revenues	$	2,759	$	2,190	$	403		$	—	⁽¹⁾	$	5,352
Net interest profit⁽²⁾		680		378		2			(93	)⁽³⁾		967

Net revenues		3,439		2,568		405			(93	)		6,319
Non-interest expenses		2,341		2,111		284			(12	)⁽¹⁾		4,724

Pre-tax earnings (loss)	$	1,098	$	457	$	121		$	(81	)	$	1,595

Quarter-end total assets	$	540,230	$	70,250	$	9,366		$	6,294		$	626,140


Six Months Ended June 30, 2006
Non-interest revenues	$	7,780	$	4,919	$	1,174		$	23	⁽¹⁾	$	13,896
Net interest profit⁽²⁾		1,353		1,065		26			(220	)⁽³⁾		2,224

Net revenues		9,133		5,984		1,200			(197	)		16,120
Non-interest expenses		7,428		4,918		847			(15	)⁽¹⁾		13,178

Pre-tax earnings (loss)	$	1,705	$	1,066	$	353		$	(182	)	$	2,942


Six Months Ended July 1, 2005
Non-interest revenues	$	5,141	$	4,422	$	821		$	(1	)⁽¹⁾	$	10,383
Net interest profit⁽²⁾		1,615		749		(3	)		(193	)⁽³⁾		2,168

Net revenues		6,756		5,171		818			(194	)		12,551
Non-interest expenses		4,534		4,204		570			(21	)⁽¹⁾		9,287

Pre-tax earnings (loss)	$	2,222	$	967	$	248		$	(173	)	$	3,264


(1)	Primarily represents the elimination of intersegment revenues and expenses.


(2)	Management views interest income net of interest expense in evaluating results.
(3)	Represents acquisition financing costs and other corporate interest, including the impact of Trust Originated Preferred Securities (“TOPrS^SM”).


Note 3.	Securities Financing Transactions

Merrill Lynch enters into secured borrowing and lending transactions in order to meet customers’ needs and earn residual interest rate spreads, obtain securities for settlement and finance trading inventory positions.

Under these transactions, Merrill Lynch either receives or provides collateral, including U.S. Government and agencies, asset-backed, corporate debt, equity, and non-U.S. governments and agencies securities. Merrill Lynch receives collateral in connection with resale agreements, securities borrowed transactions, customer margin loans, and other loans. Under many agreements, Merrill Lynch is permitted to sell or repledge the securities received (e.g., use the securities to secure repurchase agreements, enter into securities lending transactions, or deliver to counterparties to cover short positions). At June 30, 2006 and December 30, 2005, the fair value of securities received as collateral where Merrill Lynch is permitted to sell or repledge the securities was $575 billion and $538 billion, respectively, and the fair value of the portion that has been sold or repledged was $461 billion and $402 billion, respectively. Merrill Lynch may use securities received as collateral for resale agreements to satisfy regulatory requirements such as Rule 15c3-3 of the SEC. At June 30, 2006 and December 30, 2005, the fair value of collateral used for this purpose was $19.3 billion, and $15.5 billion, respectively.

Merrill Lynch pledges firm-owned assets to collateralize repurchase agreements and other secured financings. Pledged securities that can be sold or repledged by the secured party are parenthetically disclosed in trading assets on the Condensed Consolidated Balance Sheets. The carrying value and classification of securities owned by Merrill Lynch that have been pledged to counterparties where those counterparties do not have the right to sell or repledge at June 30, 2006 and December 30, 2005 are as follows:


(dollars in millions)

		June 30, 2006		Dec. 30, 2005

Trading asset category
	Mortgages, mortgage-backed, and asset-backed	$	14,520	$	14,457
	Corporate debt and preferred stock		12,179		10,394
	U.S. Government and agencies		8,145		6,711
	Non-U.S. governments and agencies		3,474		3,353
	Equities and convertible debentures		3,262		4,019
	Municipals and money markets		1,044		100

Total		$	42,624	$	39,034


Note 4.	Investment Securities

Investment securities at June 30, 2006 and December 30, 2005 are presented below:


(dollars in millions)

			June 30, 2006		Dec. 30, 2005

Investment securities
	Available-for-sale⁽¹⁾		$	50,799	$	54,471
	Trading			6,855		5,666
	Held-to-maturity			280		271
	Non-qualifying⁽²⁾
		Equity investments		10,537		9,795
		Investments of insurance subsidiaries⁽³⁾		1,142		1,174
		Deferred compensation hedges⁽⁴⁾		1,600		1,457
		Investments in TOPrS^SMpartnerships and other investments		788		738

	Total		$	72,001	$	73,572


(1)	At June 30, 2006 and December 30, 2005, includes $5.4 billion and $4.3 billion, respectively, of investment securities reported in cash and securities segregated for regulatory purposes or deposited with clearing organizations.
(2)	Non-qualifying for SFAS No. 115 purposes.
(3)	Primarily represents insurance policy loans.
(4)	Represents investments which economically hedge deferred compensation liabilities.


Note 5.	Securitization Transactions and Transactions with Special Purpose Entities (“SPEs”)

Securitizations

In the normal course of business, Merrill Lynch securitizes: commercial and residential mortgage and home equity loans; municipal, government, and corporate bonds; and other types of financial assets. SPEs, frequently referred to as Variable Interest Entities, or VIEs, are often used when entering into or facilitating securitization transactions. Merrill Lynch’s involvement with SPEs used to securitize financial assets includes: structuring and/or establishing SPEs; selling assets to SPEs; managing or servicing assets held by SPEs; underwriting, distributing, and making loans to SPEs; making markets in securities issued by SPEs; engaging in derivative transactions with SPEs; owning notes or certificates issued by SPEs; and/or providing liquidity facilities and other guarantees to SPEs.

Merrill Lynch securitized assets of approximately $63.9 billion and $45.9 billion for the six months ended June 30, 2006 and July 1, 2005, respectively. For the six months ended June 30, 2006 and July 1, 2005, Merrill Lynch received $64.3 billion and $46.3 billion, respectively, of proceeds, and other cash inflows, from securitization transactions, and recognized net securitization gains of $259.9 million and $263.7 million, respectively, in Merrill Lynch’s Condensed Consolidated Statements of Earnings.

For the first six months of 2006 and 2005, cash inflows from securitizations related to the following asset types:


(dollars in millions)

		Six Months Ended

		June 30, 2006		July 1, 2005

Asset category
	Residential mortgage loans	$	43,767	$	30,810
	Municipal bonds		9,770		8,637
	Corporate and government bonds		1,698		1,374
	Commercial loans and other		9,106		5,517

		$	64,341	$	46,338

Retained interests in securitized assets were approximately $5.2 billion and $4.0 billion at June 30, 2006 and December 30, 2005, which related primarily to residential mortgage loan and municipal bond securitization transactions. The majority of the retained interest balance consists of mortgage-backed securities that have observable market prices. These retained interests include mortgage-backed securities that Merrill Lynch has committed to purchase and expects to sell to investors in the normal course of its underwriting activity.

The following table presents information on retained interests, excluding the offsetting benefit of financial instruments used to hedge risks, held by Merrill Lynch as of June 30, 2006 arising from Merrill Lynch’s residential mortgage loan, municipal bond and other securitization transactions. The sensitivities of the current fair value of the retained interests to immediate 10% and 20% adverse changes in assumptions and parameters are also shown.


(dollars in millions)

			Residential		Municipal
			Mortgage Loans		Bonds			Other

Retained interest amount			$	4,445	$	669		$	70
Weighted average credit losses (rate per annum)				0.8%		0.0%			0.6%
	Range			0.0 – 9.4%		0.0%			0.0 – 8.0%
		Impact on fair value of 10% adverse change	$	(68)	$	–		$	(2)
		Impact on fair value of 20% adverse change	$	(114)	$	–		$	(3)
Weighted average discount rate				8.1%		4.3%			10.3%
	Range			0.0 – 63.0%		0.5 – 10.0%			0.0 – 23.2%
		Impact on fair value of 10% adverse change	$	(137)	$	(52)		$	(7)
		Impact on fair value of 20% adverse change	$	(262)	$	(88)		$	(14)
Weighted average life (in years)				3.6		1.5			4.5
	Range			0.0 – 27.1		0.4 – 3.0			1.5 – 16.6
Weighted average prepayment speed (CPR)				16.5%		11.0%	⁽¹⁾		15.0%
	Range			0.0 – 70.0%		2.0 – 23.9%	⁽¹⁾		15.0 – 44.0%
		Impact on fair value of 10% adverse change	$	(82)	$	–		$	(1)
		Impact on fair value of 20% adverse change	$	(133)	$	–		$	(2)

CPR = Constant Prepayment Rate


(1)	Relates to select securitization transactions where assets are prepayable.

The preceding sensitivity analysis is hypothetical and should be used with caution. In particular, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Further, changes in fair value based on a 10% or 20% variation in an assumption or parameter generally cannot be extrapolated

because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the sensitivity analysis does not include the offsetting benefit of financial instruments that Merrill Lynch utilizes to hedge risks, including credit, interest rate, and prepayment risk, that are inherent in the retained interests. These hedging strategies are structured to take into consideration the hypothetical stress scenarios above such that they would be effective in principally offsetting Merrill Lynch’s exposure to loss in the event these scenarios occur.

The weighted average assumptions and parameters used initially to value retained interests relating to securitizations that were still held by Merrill Lynch as of June 30, 2006 are as follows:



	Residential			Municipal
	Mortgage Loans			Bonds			Other

Credit losses (rate per annum)		0.8	%		0.0	%		0.3%
Weighted average discount rate		8.1	%		3.9	%		10.4%
Weighted average life (in years)		3.6			3.5			3.0
Prepayment speed assumption (CPR)		15.6	%		9.0	%		9.1%

CPR = Constant Prepayment Rate

For residential mortgage loan and other securitizations, the investors and the securitization trust generally have no recourse to Merrill Lynch’s other assets for failure of mortgage holders to pay when due.

For municipal bond securitization SPEs, in the normal course of dealer market-making activities, Merrill Lynch acts as liquidity provider. Specifically, the holders of beneficial interests issued by municipal bond securitization SPEs have the right to tender their interests for purchase by Merrill Lynch on specified dates at a specified price. Beneficial interests that are tendered are then sold by Merrill Lynch to investors through a best efforts remarketing where Merrill Lynch is the remarketing agent. If the beneficial interests are not successfully remarketed, the holders of beneficial interests are paid from funds drawn under a standby liquidity letter of credit issued by Merrill Lynch.

In addition to standby letters of credit, in certain municipal bond securitizations, Merrill Lynch also provides default protection or credit enhancement to investors in securities issued by certain municipal bond securitization SPEs. Interest and principal payments on beneficial interests issued by these SPEs are secured by a guarantee issued by Merrill Lynch. In the event that the issuer of the underlying municipal bond defaults on any payment of principal and/or interest when due, the payments on the bonds will be made to beneficial interest holders from an irrevocable guarantee by Merrill Lynch.

The maximum commitment under these liquidity and default guarantees totaled $30.9 billion and $29.9 billion at June 30, 2006 and December 30, 2005, respectively. The fair value of the guarantees approximated $34 million and $14 million at June 30, 2006 and December 30, 2005, respectively, which is reflected in the Condensed Consolidated Financial Statements. Of these arrangements, $6.6 billion and $6.9 billion at June 30, 2006 and December 30, 2005, respectively, represent agreements where the guarantee is provided to the SPE by a third-party financial intermediary and Merrill Lynch enters into a reimbursement agreement with the financial intermediary. In these arrangements, if the financial intermediary incurs losses, Merrill Lynch has up to one year to fund those losses. Additional information regarding these commitments is provided in Note 10 to the Condensed Consolidated Financial Statements and in Note 12 of the 2005 Annual Report.

The following table summarizes principal amounts outstanding and delinquencies of securitized financial assets as of June 30, 2006 and December 30, 2005:


(dollars in millions)

	Residential		Municipal
	Mortgage Loans		Bonds		Other

June 30, 2006
Principal Amount Outstanding	$	104,845	$	15,486	$	10,005
Delinquencies		502		-		11

December 30, 2005
Principal Amount Outstanding	$	82,468	$	19,745	$	10,416
Delinquencies		688		-		-

Net credit losses associated with securitized financial assets for the six months ended June 30, 2006 and July 1, 2005 approximated $45 million and $3 million, respectively.

Variable Interest Entities

In January 2003, the FASB issued FIN 46, which provided additional guidance on the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, for enterprises that have interests in entities that meet the definition of a VIE, and on December 24, 2003, the FASB issued FIN 46R. FIN 46R requires that an entity shall consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both.

QSPEs are a type of VIE that holds financial instruments and distributes cash flows to investors based on preset terms. QSPEs are commonly used in mortgage and other securitization transactions. In accordance with Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and FIN 46R, Merrill Lynch does not consolidate QSPEs. Information regarding QSPEs can be found in the Securitization section of this Note and the Guarantees section in Note 10 to the Condensed Consolidated Financial Statements.

The following tables summarize Merrill Lynch’s involvement with VIEs as of June 30, 2006 and December 30, 2005, respectively. The table below does not include information on QSPEs.

Where an entity is a significant variable interest holder, FIN 46R requires that entity to disclose its maximum exposure to loss as a result of its interest in the VIE. It should be noted that this measure does not reflect Merrill Lynch’s estimate of the actual losses that could result from adverse changes because it does not reflect the economic hedges Merrill Lynch enters into to reduce its exposure.


(dollars in millions)

							Significant
							Variable				Other Involvement
	Primary Beneficiary						Interest Holder				with VIEs

	Total		Net		Recourse		Total				Total
	Asset		Asset		to Merrill		Asset		Maximum		Asset		Maximum
Description	Size⁽⁴⁾		Size⁽⁵⁾		Lynch⁽⁶⁾		Size⁽⁴⁾		Exposure		Size⁽⁴⁾		Exposure

June 30, 2006
Loan and Real Estate VIEs	$	5,369	$	5,121	$	-	$	186	$	186	$	-	$	-
Tax Planning VIEs⁽¹⁾⁽²⁾		30,871		9,407		6,125		657		27		-		-
Guaranteed and Other Funds		2,022		1,530		535		2,984		2,973		-		-
Credit Linked Note and Other VIEs⁽³⁾		155		55		-		-		-		9,909		695

December 30, 2005
Loan and Real Estate VIEs	$	5,144	$	5,140	$	-	$	116	$	63	$	-	$	-
Tax Planning VIEs⁽¹⁾⁽²⁾		29,617		8,365		5,823		5,416		2,297		-		-
Guaranteed and Other Funds		1,802		1,349		464		2,981		2,973		-		-
Credit Linked Note and Other VIEs⁽³⁾		130		30		-		-		-		8,835		780


(1)	Recourse to Merrill Lynch associated with Tax Planning VIEs primarily relates to transactions where the investors in the debt issued by the VIEs have recourse to both the assets of the VIEs and to Merrill Lynch, as well as certain indemnifications made by Merrill Lynch to the investors in the VIEs.
(2)	The maximum exposure for Tax Planning VIEs reflects the fair value of investments in the VIEs and derivatives entered into with the VIEs, as well as the maximum exposure to loss associated with indemnifications made by Merrill Lynch to investors in the VIEs.
(3)	The maximum exposure for Credit-Linked Note and Other VIEs is the fair value of the derivatives entered into with the VIEs if they are in an asset position as of June 30, 2006 and December 30, 2005, respectively.
(4)	This column reflects the total size of the assets held in the VIE.
(5)	This column reflects the size of the assets held in the VIE after accounting for intercompany eliminations and any balance sheet netting of assets and liabilities as permitted by FASB Interpretation No. 39.
(6)	This column reflects the extent, if any, to which investors have recourse to Merrill Lynch beyond the assets held in the VIE.


Note 6.	Loans, Notes, Mortgages and Related Commitments to Extend Credit

Loans, Notes, Mortgages and related commitments to extend credit at June 30, 2006 and December 30, 2005, are presented below. This disclosure includes commitments to extend credit that may result in loans held for investment and loans held for sale.


(dollars in millions)

		Loans						Commitments⁽¹⁾

		June 30,			Dec. 30,			June 30,			Dec. 30,
		2006			2005			2006⁽²⁾⁽³⁾			2005⁽³⁾

Consumer and small- and middle-market business:
	Mortgages	$	17,073		$	18,172		$	7,539		$	6,376
	Small- and middle-market business		3,851			4,994			2,406			3,062
	Other		2,936			2,558			77			75
Commercial:
	Secured		41,067			36,571			44,190			34,583
	Unsecured investment grade		4,481			3,283			21,680			22,061
	Unsecured non-investment grade		1,497			869			1,571			980

			70,905			66,447			77,463			67,137
	Allowance for loan losses		(463	)		(406	)		-			-
	Reserve for lending-related commitments		-			-			(310	)		(281	)

Total, net		$	70,442		$	66,041		$	77,153		$	66,856


(1)	Commitments are outstanding as of the date the commitment letter is issued and are comprised of closed and contingent commitments. Closed commitments represent the unfunded portion of existing commitments available for draw down. Contingent commitments are contingent on the borrower fulfilling certain conditions or upon a particular event, such as an acquisition. A portion of these contingent commitments may be syndicated among other lenders or replaced with capital markets funding.
(2)	See Note 10 to the Condensed Consolidated Financial Statements for a maturity profile of these commitments.
(3)	In addition to the loan origination commitments included in the table above, at June 30, 2006, Merrill Lynch entered into agreements to purchase $222 million of loans that, upon settlement date, are likely to be classified in loans held for investment and loans held for sale. Similar loan purchase commitments totaled $96 million at December 30, 2005. See Note 10 to the Condensed Consolidated Financial Statements for further information.

Activity in the allowance for loan losses is presented below:


(dollars in millions)

		Six Months Ended

		June 30,			July 1,
		2006			2005

Allowance for loan losses at beginning of period		$	406		$	283
Provision for loan losses			74			84
	Charge-offs		(26	)		(45	)
	Recoveries		7			6

Net charge-offs			(19	)		(39	)
Other			2			-

Allowance for loan losses at end of period		$	463		$	328

Consumer and small- and middle-market business loans, which are substantially secured, consisted of approximately 297,000 individual loans at June 30, 2006, and included residential mortgages, home

equity loans, small- and middle-market business loans, and other loans to individuals for household, family, or other personal expenditures. Commercial loans, which at June 30, 2006 consisted of approximately 12,000 separate loans, include corporate and institutional loans, commercial mortgages, asset-based loans, and other loans to businesses. The principal balance of nonaccrual loans was $217 million at June 30, 2006 and $256 million at December 30, 2005. The investment grade and non-investment grade categorization is determined using the credit rating agency equivalent of internal credit ratings. Non-investment grade counterparties are those rated lower than BBB. In some cases, Merrill Lynch enters into credit default swaps to mitigate credit exposure related to funded and unfunded commercial loans. The notional value of these swaps totaled $9.2 billion and $7.9 billion at June 30, 2006 and December 30, 2005, respectively. For information on credit risk management see Note 6 of the 2005 Annual Report.

The above amounts include $17.3 billion and $12.3 billion of loans held for sale at June 30, 2006 and December 30, 2005, respectively. Loans held for sale are loans that management expects to sell prior to maturity. At June 30, 2006, such loans consisted of $5.0 billion of consumer loans, primarily residential mortgages and automobile loans, and $12.3 billion of commercial loans, approximately 23% of which are to investment grade counterparties. At December 30, 2005, such loans consisted of $3.4 billion of consumer loans, primarily automobile loans and residential mortgages, and $8.9 billion of commercial loans, approximately 22% of which are to investment grade counterparties.

For further information on loans, notes and mortgages, see Notes 1 and 8 of the 2005 Annual Report.


Note 7.	Commercial Paper, Short- and Long-Term Borrowings, and Deposits

ML & Co. is the primary issuer of all debt instruments. For local tax or regulatory reasons, debt is also issued by certain subsidiaries.

On May 16, 2006, ML & Co. issued $2.0 billion of subordinated debt. ML & Co. pays interest on this subordinated debt at an annual rate of 6.05%. The subordinated debt matures on May 16, 2016 and is junior in right of payment to all of ML & Co.’s senior indebtedness.

Total borrowings at June 30, 2006 and December 30, 2005, which is comprised of commercial paper and other short-term borrowings, long-term borrowings and long-term debt issued to TOPrS^SM partnerships, consisted of the following:


(dollars in millions)

		June 30,		Dec. 30,
		2006		2005

Senior debt issued by ML & Co.		$	121,625	$	111,533
Senior debt issued by subsidiaries — guaranteed by ML & Co.			16,907		13,036
Subordinated debt issued by ML & Co.			1,970		-
Subordinated debt issued to TOPrS^SMpartnerships			3,092		3,092
Other subsidiary financing — not guaranteed by ML & Co.			1,676		1,391
Other subsidiary financing — non-recourse			11,214		10,351

	Total	$	156,484	$	139,403

These borrowing activities may create exposure to market risk, most notably interest rate, equity, and currency risk. Refer to Note 1 of the 2005 Annual Report, Derivatives section, for additional information on the use of derivatives to hedge these risks and the accounting for derivatives embedded in these instruments. Other subsidiary financing — non-recourse is primarily attributable to

consolidated entities that are VIEs. Additional information regarding VIEs is provided in Note 5 to the Condensed Consolidated Financial Statements.

Borrowings and Deposits at June 30, 2006 and December 30, 2005, are presented below:


(dollars in millions)

		June 30,		Dec. 30,
		2006		2005

Commercial paper and other short-term borrowings
	Commercial paper	$	12,827	$	3,420
	Other		575		482

	Total	$	13,402	$	3,902

Long-term borrowings⁽¹⁾
	Fixed-rate obligations⁽²⁾⁽⁴⁾	$	47,263	$	54,104
	Variable-rate obligations⁽³⁾⁽⁴⁾		93,579		79,071
	Zero-coupon contingent convertible debt (LYONs^®)		2,240		2,326

	Total	$	143,082	$	135,501

Deposits
	U.S.	$	59,819	$	61,784
	Non U.S.		19,623		18,232

	Total	$	79,442	$	80,016


(1)	Includes long-term debt issued to TOPrS^SM partnerships.
(2)	Fixed-rate obligations are generally swapped to floating rates.
(3)	Variable interest rates are generally based on rates such as LIBOR, the U.S. Treasury Bill Rate, or the Federal Funds Rate.
(4)	Included are various equity-linked or other indexed instruments.

Long-term borrowings, including adjustments related to fair value hedges and various equity-linked or other indexed instruments, and long-term debt issued to TOPrS^SM partnerships at June 30, 2006, mature as follows:


(dollars in millions)

Less than 1 year	$	24,628	17	%
1 – 2 years		28,174	20
2⁺ – 3 years		17,169	12
3⁺ – 4 years		21,041	15
4⁺ – 5 years		14,783	10
Greater than 5 years		37,287	26

Total	$	143,082	100	%

Certain long-term borrowing agreements contain provisions whereby the borrowings are redeemable at the option of the holder at specified dates prior to maturity. These borrowings are reflected in the above table as maturing at their put dates, rather than their contractual maturities. Management believes, however, that a portion of such borrowings will remain outstanding beyond their earliest redemption date.

A limited number of notes whose coupon or repayment terms are linked to the performance of equity, other indices, or baskets of securities may be accelerated based on the value of a referenced index or security, in which case Merrill Lynch may be required to immediately settle the obligation for cash or other securities. Refer to Note 1 of the 2005 Annual Report, Embedded Derivatives section for additional information.

Except for the $2.2 billion of LYONs^® that were outstanding at June 30, 2006, senior debt obligations issued by ML & Co. and senior debt issued by subsidiaries and guaranteed by ML & Co. do not contain provisions that could, upon an adverse change in ML & Co.’s credit rating, financial ratios, earnings, cash flows, or stock price, trigger a requirement for an early payment, additional collateral support, changes in terms, acceleration of maturity, or the creation of an additional financial obligation.

The fair values of long-term borrowings and related hedges approximated the carrying amounts at June 30, 2006 and December 30, 2005.

The effective weighted-average interest rates for borrowings, at June 30, 2006 and December 30, 2005 were:



	June 30,			Dec. 30,
	2006			2005

Commercial paper and other short-term borrowings		4.62	%		3.46	%
Long-term borrowings, contractual rate		4.01			3.70
Long-term debt issued to TOPrS^smpartnerships		7.31			7.31

See Note 9 of the 2005 Annual Report for additional information on Borrowings.

Other

Merrill Lynch also obtains standby letters of credit from issuing banks to satisfy various counterparty collateral requirements, in lieu of depositing cash or securities collateral. Such standby letters of credit aggregated $3.3 billion and $1.1 billion at June 30, 2006 and December 30, 2005, respectively.


Note 8.	Comprehensive Income

The components of comprehensive income are as follows:


(dollars in millions)

		Three Months						Six Months
		Ended						Ended

		June 30,			July 1,			June 30,			July 1,
		2006			2005			2006			2005

Net Earnings		$	1,633		$	1,135		$	2,108		$	2,347

Other comprehensive loss, net of tax:
	Foreign currency translation adjustment		(42	)		(146	)		(44	)		(205	)
	Net unrealized gain (loss) on investment securities available- for-sale		(107	)		61			(175	)		19
	Deferred gain (loss) on cash flow hedges		1			2			-			(20	)
	Minimum pension liability		1			(1	)		1			(1	)

Total other comprehensive loss, net of tax			(147	)		(84	)		(218	)		(207	)

Comprehensive income		$	1,486		$	1,051		$	1,890		$	2,140


Note 9.	Stockholders’ Equity and Earnings Per Share

The following table presents the computations of basic and diluted EPS:


(dollars in millions, except per share amounts)

		Three Months Ended						Six Months Ended

		June 30,			July 1,			June 30,			July 1,
		2006			2005			2006			2005

Net earnings		$	1,633		$	1,135		$	2,108		$	2,347
Preferred stock dividends			(45	)		(17	)		(88	)		(24	)

Net earnings applicable to common shareholders — for basic EPS		$	1,588		$	1,118		$	2,020		$	2,323
Interest expense on LYONs^®⁽¹⁾			-			-			1			1

Net earnings applicable to common shareholders — for diluted EPS		$	1,588		$	1,118		$	2,021		$	2,324

(shares in thousands)
Weighted-average basic shares outstanding⁽²⁾			885,373			897,524			884,555			902,669

Effect of dilutive instruments
	Employee stock options⁽³⁾		40,088			38,363			42,577			41,306
	FACAAP shares⁽³⁾		21,460			21,438			21,262			21,363
	Restricted shares and units⁽³⁾		25,979			18,617			27,708			17,691
	Convertible LYONs^®⁽¹⁾		415			2,551			1,090			2,854
	ESPP shares⁽³⁾		9			11			13			6

Dilutive potential common shares			87,951			80,980			92,650			83,220

Diluted Shares⁽⁴⁾			973,324			978,504			977,205			985,889

Basic EPS		$	1.79		$	1.25		$	2.28		$	2.57
Diluted EPS			1.63			1.14			2.07			2.36


(1)	See Note 9 of the 2005 Annual Report for further information on LYONs^®.
(2)	Includes shares exchangeable into common stock.
(3)	See Note 14 of the 2005 Annual Report for a description of these instruments.
(4)	Excludes 33 million instruments for the three and six month periods ended June 30, 2006, and 43 million instruments for the three and six month periods ended July 1, 2005 that were considered anti-dilutive and thus were not included in the above calculations.

The Board of Directors authorized the repurchase of an additional $6 billion of Merrill Lynch’s outstanding common shares under a program announced on February 26, 2006. During the second quarter of 2006, Merrill Lynch repurchased 41.4 million common shares at an average repurchase price of $73.26 per share.

On February 28, 2006, Merrill Lynch issued $360 million face value of floating rate, non-cumulative, perpetual preferred stock.

On January 18, 2006, the Board of Directors declared an additional 25% increase in the regular quarterly dividend to 25 cents per common share.


Note 10.	Commitments, Contingencies and Guarantees

Litigation

Merrill Lynch has been named as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with its activities as a global diversified financial services institution. The general decline of equity securities prices between 2000 and 2003 resulted in increased legal actions against many firms, including Merrill Lynch.

Some of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers who would otherwise be the primary defendants in such cases are bankrupt or otherwise in financial distress. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. The number of these investigations has also increased in recent years with regard to many firms, including Merrill Lynch.

Merrill Lynch believes it has strong defenses to, and where appropriate, will vigorously contest, many of these matters. Given the number of these matters, it is likely that some may result in adverse judgments, penalties, injunctions, fines, or other relief. Merrill Lynch may explore potential settlements before a case is taken through trial because of the uncertainty and risks inherent in the litigation process. In accordance with SFAS No. 5, Accounting for Contingencies, Merrill Lynch will accrue a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits and arbitrations, including almost all of the class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, Merrill Lynch cannot predict what the eventual loss or range of loss related to such matters will be. Merrill Lynch continues to assess these cases and believes, based on information available to it, that the resolution of these matters will not have a material adverse effect on the financial condition of Merrill Lynch as set forth in the Condensed Consolidated Financial Statements, but may be material to Merrill Lynch’s operating results or cash flows for any particular period and may impact ML & Co.’s credit ratings.

Tax Matters

Merrill Lynch is under examination by the Internal Revenue Service (“IRS”) and other tax authorities in major countries such as Japan and the United Kingdom, and states in which Merrill Lynch has significant business operations, such as New York. The tax years under examination vary by jurisdiction. An IRS examination covering the years 2001-2003 is expected to be completed in 2006, subject to the resolution of the Japanese issue discussed below. There are carryback claims from the years of 2001 and 2002 of approximately $250 million to $300 million, which are now under Joint Committee review. A tax benefit would be recorded to the extent that Merrill Lynch is successful in obtaining the tax benefit from these carryback claims. IRS audits have also commenced for the 2004 and 2005 tax years.

In the second quarter of 2005, Merrill Lynch paid a tax assessment from the Tokyo Regional Tax Bureau for the years 1998-2002. The assessment reflected the Japanese tax authority’s view that certain income on which Merrill Lynch previously paid income tax to other international jurisdictions, primarily the United States, should have been allocated to Japan. Merrill Lynch has begun the process of obtaining clarification from international authorities on the appropriate allocation of income among multiple jurisdictions to prevent double taxation.

Merrill Lynch regularly assesses the likelihood of additional assessments in each of the tax jurisdictions resulting from these examinations. Tax reserves have been established, which Merrill Lynch believes to be adequate in relation to the potential for additional assessments. However, there is a reasonable possibility that additional amounts may be incurred. The estimated additional possible amounts are no more than $150 million. Merrill Lynch will adjust the level of reserves when there is more information available, or when an event occurs requiring a change to the reserves. The reassessment of tax reserves could have a material impact on Merrill Lynch’s effective tax rate in the period in which it occurs.

Commitments

At June 30, 2006, Merrill Lynch’s commitments had the following expirations:


(dollars in millions)

			Commitment expiration

			Less than		1 – 3		3⁺– 5		Over 5
	Total		1 Year		Years		Years		Years

Commitments to extend credit⁽¹⁾	$	77,463	$	39,141	$	11,036	$	19,423	$	7,863
Purchasing and other commitments		7,748		5,548		675		576		949
Operating leases		3,243		561		1,016		815		851
Commitments to enter into resale agreements		12,169		12,169		-		-		-

Total	$	100,623	$	57,419	$	12,727	$	20,814	$	9,663


(1)	See Note 6 to the Condensed Consolidated Financial Statements.

Lending Commitments

Merrill Lynch primarily enters into commitments to extend credit, predominantly at variable interest rates, in connection with corporate finance, corporate and institutional transactions and asset-based lending transactions. Clients may also be extended loans or lines of credit collateralized by first and second mortgages on real estate, certain liquid assets of small businesses, or securities. These commitments usually have a fixed expiration date and are contingent on certain contractual conditions that may require payment of a fee by the counterparty. Once commitments are drawn upon, Merrill Lynch may require the counterparty to post collateral depending upon creditworthiness and general market conditions. See Note 6 to the Condensed Consolidated Financial Statements for additional information.

The contractual amounts of these commitments represent the amounts at risk should the contract be fully drawn upon, the client defaults, and the value of the existing collateral becomes worthless. The total amount of outstanding commitments may not represent future cash requirements, as commitments may expire without being drawn upon.

Purchasing and Other Commitments

Merrill Lynch had commitments to purchase partnership interests, primarily related to private equity and principal investing activities, of $1,048 million and $734 million at June 30, 2006 and December 30, 2005, respectively. Merrill Lynch also has entered into agreements with providers of market data, communications, systems consulting, and other office-related services. At June 30, 2006 and December 30, 2005, minimum fee commitments over the remaining life of these agreements aggregated $310 million and $517 million, respectively. Merrill Lynch entered into commitments to purchase loans of $5.5 billion ($5.3 billion of which may be included in trading assets and $221 million of which may be included in loans, notes, and mortgages) at June 30, 2006. Such

commitments totaled $3.3 billion at December 30, 2005. In addition, Merrill Lynch entered into institutional and margin-lending transactions, some of which are on a committed basis, but most of which are not. Merrill Lynch’s binding margin lending commitments totaled $434 million at June 30, 2006 and $381 million at December 30, 2005. Other purchasing commitments amounted to $468 million and $856 million at June 30, 2006 and December 30, 2005, respectively.

On July 24, 2006, Merrill Lynch, along with a consortium of additional investors, announced the execution of an agreement to acquire HCA Inc. HCA Inc. is a holding company whose affiliates own and operate hospitals and related health care entities.

MLIM

On February 15, 2006, Merrill Lynch announced that it had signed a definitive agreement under which it would combine its MLIM investment management business with BlackRock, Inc. (“BlackRock”) in exchange for a 49.8% interest in the combined firm, including a 45% voting interest. Merrill Lynch expects to recognize a gain upon the closing of this transaction which, based upon the price at the time of the announcement, is estimated to be over $1 billion. This transaction is expected to close around the end of the third quarter of 2006, subject to regulatory and shareholder approvals. The actual gain will be contingent upon BlackRock’s share price at closing, as well as closing adjustments. Merrill Lynch plans to account for its investment in BlackRock under the equity method of accounting.

Leases

As disclosed in Note 12 of the 2005 Annual Report, Merrill Lynch has entered into various noncancellable long-term lease agreements for premises that expire through 2024. Merrill Lynch has also entered into various noncancellable short-term lease agreements, which are primarily commitments of less than one year under equipment leases.

Guarantees

The derivatives in the following table meet the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (“FIN 45”), definition of guarantees and include certain written options and credit default swaps that contingently require Merrill Lynch to make payments based on changes in an underlying. Because the maximum exposure to loss could be unlimited for certain derivatives (e.g., interest rate caps) and the maximum exposure to loss is not considered when assessing the risk of contracts, the notional value of these contracts has been included to provide information about the magnitude of Merrill Lynch’s involvement with these types of transactions. Merrill Lynch records all derivative instruments at fair value on its Condensed Consolidated Balance Sheets.

The liquidity facilities and default facilities in the following table relate primarily to municipal bond securitization SPEs and Merrill Lynch-sponsored asset-backed commercial paper conduits. Merrill Lynch acts as liquidity provider to municipal bond securitization SPEs. As of June 30, 2006, the value of the assets held by the SPE plus any additional collateral pledged to Merrill Lynch exceeds the amount of beneficial interests issued, which provides additional support to Merrill Lynch in the event that the standby facility is drawn. As of June 30, 2006, the maximum payout if the standby facilities are drawn was $26.0 billion and the value of the municipal bond assets to which Merrill Lynch has recourse in the event of a draw was $29.6 billion. In certain instances, Merrill Lynch also provides default protection in addition to liquidity facilities. If the default protection is drawn, Merrill Lynch may claim the underlying assets held by the SPEs. As of June 30, 2006, the maximum payout if an issuer defaults was $4.9 billion, and the value of the assets to which Merrill

Lynch has recourse, in the event that an issuer of a municipal bond held by the SPE defaults on any payment of principal and/or interest when due, was $6.2 billion. In addition, Merrill Lynch provides a $3.0 billion liquidity facility and $60 million credit facility to a Merrill Lynch-sponsored asset-backed commercial paper conduit. The maximum exposure to loss for these two facilities combined is $3.1 billion and assumes a total loss on a portfolio of highly rated assets. In June 2006, Merrill Lynch sponsored a second asset backed commercial paper conduit where Merrill Lynch provides a $5 billion liquidity facility and a $400 million standby letter of credit to a conduit that holds asset backed loans. The combined maximum exposure is zero and no letters of credit were issued pursuant to the commitment as of June 30, 2006. For additional information on these facilities, see Note 12 of the 2005 Annual Report and Note 5 to the Condensed Consolidated Balance Sheets.

In addition, Merrill Lynch makes guarantees to counterparties in the form of standby letters of credit. Merrill Lynch holds marketable securities of $570 million as collateral to secure these guarantees.

Further, in conjunction with certain principal-protected mutual funds, Merrill Lynch guarantees the return of the initial principal investment at the termination date of the fund. At June 30, 2006, Merrill Lynch’s maximum potential exposure to loss with respect to these guarantees is $634 million assuming that the funds are invested exclusively in other general investments (i.e., the funds hold no risk-free assets), and that those other general investments suffer a total loss. As such, this measure significantly overstates Merrill Lynch’s exposure or expected loss at June 30, 2006. These transactions met the FASB issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”) definition of derivatives and, as such, were carried as a liability with a fair value of $7 million at June 30, 2006.

Merrill Lynch also provides indemnifications related to the U.S. tax treatment of certain foreign tax planning transactions. The maximum exposure to loss associated with these transactions at June 30, 2006 is $165 million; however, Merrill Lynch believes that the likelihood of loss with respect to these arrangements is remote.

These guarantees and their expiration are summarized at June 30, 2006 as follows:


(dollars in millions)

	Maximum
	Payout/		Less than		1 – 3		3⁺ – 5		Over		Carrying
	Notional		1 Year		Years		Years		5 Years		Value

Derivative contracts⁽¹⁾	$	1,397,508	$	330,612	$	378,340	$	240,228	$	448,328	$	37,779

Liquidity facilities with SPEs⁽²⁾		29,094		28,651		333		110		-		33

Liquidity and default facilities with SPEs⁽³⁾		10,359		9,013		1,100		-		246		3

Residual value guarantees⁽⁴⁾		1,069		66		169		330		504		25

Standby letters of credit and other guarantees^(5)(6)(7)		3,918		1,547		584		1,475		312		19


(1)	As noted above, the notional value of derivative contracts is provided rather than the maximum payout amount, although the notional value should not be considered as a reliable indicator of Merrill Lynch’s exposure to these contracts.
(2)	Amounts relate primarily to facilities provided to municipal bond securitization SPEs. Includes $6.6 billion of guarantees provided to SPEs by third-party financial institutions where Merrill Lynch has agreed to reimburse the financial institution if losses occur, and has up to one year to fund losses.
(3)	Amounts relate to liquidity facilities and credit default protection provided to municipal bond securitization SPEs and asset-backed commercial paper conduits sponsored by Merrill Lynch.
(4)	Includes residual value guarantees associated with the Hopewell campus and aircraft leases of $322 million.


(5)	Includes $173 million of reimbursement agreements with the Mortgage 100^SM program.
(6)	Includes guarantees related to principal-protected mutual funds.
(7)	Includes certain indemnifications related to foreign tax planning strategies.

See Note 12 of the 2005 Annual Report for additional information on guarantees.


Note 11.	Employee Benefit Plans

Merrill Lynch provides pension and other postretirement benefits to its employees worldwide through defined contribution pension, defined benefit pension, and other postretirement plans. These plans vary based on the country and local practices. Merrill Lynch reserves the right to amend or terminate these plans at any time. Refer to Note 13 of the 2005 Annual Report for a complete discussion of employee benefit plans.

Defined Benefit Pension Plans

Pension cost for the three and six month periods ended June 30, 2006 and July 1, 2005, for Merrill Lynch’s defined benefit pension plans, included the following components:


(dollars in millions)

	Three Months Ended

	June 30, 2006									July 1, 2005

	U.S.			Non-U.S.						U.S.			Non-U.S.
	Plans			Plans			Total			Plans			Plans			Total

Service cost	$	-		$	7		$	7		$	-		$	5		$	5
Interest cost		24			15			39			24			14			38
Expected return on plan assets		(28	)		(15	)		(43	)		(24	)		(12	)		(36	)
Amortization of unrecognized items and other		-			5			5			-			4			4

Total defined benefit pension cost	$	(4	)	$	12		$	8		$	-		$	11		$	11


(dollars in millions)

	Six Months Ended

	June 30, 2006									July 1, 2005

	U.S.			Non-U.S.						U.S.			Non-U.S.
	Plans			Plans			Total			Plans			Plans			Total

Service cost	$	-		$	14		$	14		$	-		$	11		$	11
Interest cost		48			31			79			48			29			77
Expected return on plan assets		(56	)		(30	)		(86	)		(48	)		(25	)		(73	)
Amortization of unrecognized items and other		-			9			9			-			8			8

Total defined benefit pension cost	$	(8	)	$	24		$	16		$	-		$	23		$	23

Merrill Lynch disclosed in its 2005 Annual Report that it expected to pay $3 million of benefit payments to participants in the U.S. non-qualified pension plans and Merrill Lynch expected to contribute $103 million to its non-U.S. defined benefit pension plans in 2006. Merrill Lynch periodically updates these estimates, and currently expects to contribute $7 million to its U.S. non-qualified pension plans and $65 million to its non-U.S. defined benefit pension plans in 2006. The overall decrease in total estimated contributions can primarily be attributed to changes in funding requirements relating to the U.K. pension plan.

Postretirement Benefits Other Than Pensions

Other postretirement benefit cost for the three and six month periods ended June 30, 2006 and July 1, 2005, included the following components:


(dollars in millions)

	Three Months Ended					Six Months Ended

	June 30, 2006			July 1, 2005		June 30, 2006			July 1, 2005

Service cost	$	2		$	4	$	4		$	9
Interest cost		4			8		8			16
Other		(2	)		3		(3	)		5

Total other postretirement benefits cost⁽¹⁾	$	4		$	15	$	9		$	30


(1)	The decrease in postretirement benefits cost can primarily be attributed to amendments to the U.S. postretirement plan.

Approximately 87% of the postretirement benefit cost components for the period relate to the U.S. postretirement plan.

Note 12. Employee Incentive Plans

Merrill Lynch adopted the provisions of SFAS No. 123R in the first quarter of 2006. See Note 1, Summary of Significant Accounting Policies — New Accounting Pronouncements, to the Condensed Consolidated Financial Statements for further information.

To align the interests of employees with those of stockholders, Merrill Lynch sponsors several employee compensation plans that provide eligible employees with shares of ML & Co. common stock or options to purchase such stock. The total pre-tax compensation cost and related tax benefits recognized in earnings for share-based compensation plans for the three months ended June 30, 2006 was $321 million and $129 million, respectively. The total pre-tax compensation cost and related tax benefits recognized in earnings for share-based compensation plans for the six months ended June 30, 2006 was $2.5 billion and $846 million, respectively, which includes approximately $1.8 billion associated with one-time, non-cash compensation expenses further described in Note 1 to the Condensed Consolidated Financial Statements. For the three months ended July 1, 2005, the total pre-tax compensation cost and related tax benefits recognized in earnings for stock-based compensation plans was $270 million and $96 million, respectively. For the six months ended July 1, 2005, the total pre-tax compensation cost and related tax benefits recognized in earnings for stock-based compensation plans was $520 million and $179 million, respectively.

As of June 30, 2006, there was $2.1 billion of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.3 years.

Below is a description of our share-based incentive plans.

Long-Term Incentive Compensation Plans (“LTIC Plans”), Employee Stock Compensation Plan (“ESCP”) and Equity Capital Accumulation Plan (“ECAP”)

LTIC Plans, ESCP and ECAP provide for grants of equity and equity-related instruments to certain employees. LTIC Plans consist of the Long-Term Incentive Compensation Plan, a shareholder approved plan used for grants to executive officers, and the Long-Term Incentive Compensation Plan

for Managers and Producers, a broad-based plan which was approved by the Board of Directors, but has not been shareholder approved. LTIC Plans provide for the issuance of Restricted Shares, Restricted Units, and Non-qualified Stock Options, as well as Incentive Stock Options, Performance Shares, Performance Units, Performance Options, Stock Appreciation Rights, and other securities of Merrill Lynch. ESCP, a broad-based plan approved by shareholders in 2003, provides for the issuance of Restricted Shares, Restricted Units, Non-qualified Stock Options and Stock Appreciation Rights. ECAP, a shareholder-approved plan, provides for the issuance of Restricted Shares and Performance Shares. All plans under LTIC, ESCP and ECAP may be satisfied using either treasury or newly issued shares. As of June 30, 2006, no instruments other than Restricted Shares, Restricted Units, Non-qualified Stock Options, Performance Options, Participation Units and Stock Appreciation Rights had been granted.

Restricted Shares and Units

Restricted Shares are shares of ML & Co. common stock carrying voting and dividend rights. A Restricted Unit is deemed equivalent in fair market value to one share of common stock. Substantially all awards are settled in shares of common stock. Recipients of Restricted Unit awards receive cash payments equivalent to dividends. Under these plans, such shares and units are restricted from sale, transfer, or assignment until the end of the restricted period. Such shares and units are subject to forfeiture during the vesting period, for grants under LTIC Plans, or the restricted period for grants under ECAP. Restricted Share and Restricted Unit grants made prior to 2003 generally cliff vest in three years. Restricted Share and Restricted Unit grants made in 2003 through 2005 generally cliff vest in four years. Restricted Shares and Restricted Units granted in January 2006 generally vest ratably over four years.

In January 2006, Participation Units were granted from the Long-Term Incentive Compensation Plan under Merrill Lynch’s Managing Partners Incentive Program. The awards granted under this program are fully at risk, and the potential payout will vary depending on Merrill Lynch’s financial performance against pre-determined return on average common stockholders’ equity (“ROE”) targets. One-third of the Participation Units shall convert into Restricted Shares on each of January 31, 2007, January 31, 2008 and January 31, 2009 (each a “Conversion Date”), based on ROE determined for the most recently completed fiscal year. Participation Units converted on the Conversion Date will cease to be outstanding immediately following conversion. If the minimum target is not met, the Participation Units will expire without being converted.

The activity for Restricted Shares and Units (including Restricted Units and Participation Units) under these plans during the six months ended June 30, 2006 follows:



	LTIC Plans						ECAP		ESCP						Total

															Restricted
	Restricted						Restricted		Restricted			Restricted			Shares and
	Shares			Units			Shares		Shares			Units			Units

Authorized for issuance at:
June 30, 2006		660,000,000			N/A			104,800,000		75,000,000			N/A			N/A
July l, 2005		660,000,000			N/A			104,800,000		75,000,000			N/A			N/A

Available for issuance at:
June 30, 2006		64,470,541			N/A			10,831,281		39,312,483			N/A			N/A
July 1, 2005		65,837,103			N/A			10,832,121		56,862,843			N/A			N/A

Outstanding, December 30, 2005		28,967,539			4,720,546			20,856		15,683,787			2,157,894			51,550,622

Granted — 2006		1,401,356			3,537,944			840		15,746,146			2,899,131			23,585,417
Delivered		(564,526	)		(285,436	)		-		-			-			(849,962	)
Forfeited		(746,929	)		(88,600	)		-		(673,032	)		(126,409	)		(1,634,970	)

Outstanding, June 30, 2006		29,057,440			7,884,454			21,696		30,756,901			4,930,616			72,651,107

N/A = Not Applicable

SFAS No. 123R requires the immediate expensing of share-based awards granted or modified in 2006 to retirement-eligible employees, including awards that are subject to non-compete provisions. The above activity contains awards with or without a future service requirement, as follows:



	No Future Service Required					Future Service Required

				Weighted Avg					Weighted Avg
	Shares/ Units			Grant Price		Shares/ Units			Grant Price

Outstanding, December 30, 2005		38,877,644			51.00		12,672,978			54.01

Granted — 2006		7,429,380			71.57		16,156,037			71.58
Delivered		(849,962	)		48.78		-			-
Forfeited		(1,221,155	)		57.35		(413,815	)		61.78
Service Criteria Satisfied⁽¹⁾		20,211,184			64.71		(20,211,184	)		64.71

Outstanding, June 30, 2006		64,447,091			57.58		8,204,016			61.85


(1)	Represents those awards where employees attained retirement-eligibility during 2006, subsequent to the grant date.

The total fair value of Restricted Shares and Units granted to retirement-eligible employees or for which service criteria were satisfied during the three and six months ended June 30, 2006 was $18 million and $2.1 billion respectively. The total fair value of Restricted Shares and Units vested during the six months ended July 1, 2005 was $680 million. No Restricted Shares and Units vested during the three months ended July 1, 2005.

The weighted-average fair value per share or unit granted for the three and six months ended June 30, 2006 follows:



		Three Months Ended		Six Months Ended

		June 30, 2006		June 30, 2006

LTIC Plans
	Restricted Shares		$76.76		$72.34
	Restricted Units		77.35		71.37
ECAP Restricted Shares			N/A		71.49
ESCP Plans
	Restricted Shares		N/A		71.54
	Restricted Units		77.35		71.67

N/A = Not Applicable

Non-Qualified Stock Options

Non-qualified Stock Options granted under LTIC Plans in 1996 through 2000 generally became exercisable over five years; options granted in 2001 and 2002 became exercisable after approximately six months. Option and Stock Appreciation Right grants made after 2002 generally become exercisable over four years. The exercise price of these grants is equal to 100% of the fair market value (as defined in LTIC Plans) of a share of ML & Co. common stock on the date of grant. Options and Stock Appreciation Rights expire ten years after their grant date.

The activity for Options and Stock Appreciation Rights under LTIC Plans for the six months ended June 30, 2006 follows:



							Weighted-Average
		Quantity			Weighted-Average		Remaining Life
		Outstanding			Exercise Price		(in years)

Outstanding, December 30, 2005			176,713,075			$49.10		4.44
	Granted		333,598			71.43		4.01
	Exercised		(25,879,934	)		36.53		3.26
	Forfeited		(218,906	)		48.12		7.04

Outstanding, June 30, 2006			150,947,833			51.31		4.48

Exercisable, June 30, 2006			140,445,057			51.46		4.31

All Options and Stock Appreciation Rights outstanding as of June 30, 2006 are fully vested or expected to vest.

The weighted-average fair value of options granted in the three months ended July 1, 2005 was $17.98 per option. No options were granted in the three months ended June 30, 2006. The weighted-average fair value of options granted in the six months ended June 30, 2006 and July 1, 2005 was $17.86 and $17.99, respectively. The fair value of each option award is estimated on the date of grant based on a Black-Scholes option pricing model using the following weighted-average assumptions. Expected volatilities are based on historical volatility of ML & Co. common stock. The expected life of options granted is equal to the contractual life of the options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the current dividend rate at the time of grant.



	Three Months Ended					Six Months Ended

	June 30, 2006⁽¹⁾		July 1, 2005			June 30, 2006			July 1, 2005

Risk-free interest rate		N/A		4.0	%		4.3	%		3.8	%
Expected life		N/A		5.0 yrs			4.4 yrs			4.6 yrs
Expected volatility		N/A		34.95	%		29.49	%		35.43	%
Dividend yield		N/A		1.44	%		1.44	%		1.14	%

N/A = Not Applicable


(1)	No options were granted during the second quarter of 2006.

Merrill Lynch received approximately $238 million and $919 million in cash from the exercise of stock options during the three and six months ended June 30, 2006. The net tax benefit realized from the exercise of these options was $52 million and $231 million, respectively.

The total intrinsic value of options exercised during the quarters ended June 30, 2006 and July 1, 2005 was $233 million and $52 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and July 1, 2005 was $985 million and $413 million, respectively. As of June 30, 2006, the total intrinsic value of options outstanding and exercisable was $2.8 billion and $2.6 billion, respectively.

Financial Advisor Capital Accumulation Award Plans (“FACAAP”)

Under FACAAP, eligible employees in GPC are granted awards generally based upon their prior year’s performance. Payment for an award is contingent upon continued employment for a period of time and is subject to forfeiture during that period. Awards granted in 2003 and thereafter are generally payable eight years from the date of grant in a fixed number of shares of ML & Co. common stock. For outstanding awards granted prior to 2003, payment is generally made ten years from the date of grant in a fixed number of shares of ML & Co. common stock unless the fair market value of such shares is less than a specified minimum value, in which case the minimum value is paid in cash. Eligible participants may defer awards beyond the scheduled payment date. Only shares of common stock held as treasury stock may be issued under FACAAP. FACAAP, which was approved by the Board of Directors, has not been shareholder approved.

At June 30, 2006, shares subject to outstanding awards totaled 35,684,312 while 15,247,382 shares were available for issuance through future awards. The weighted-average fair value of awards granted under FACAAP during the three and six months ended June 30, 2006 was $77.35 and $73.82 respectively.


Note 13.	Regulatory Requirements

Effective January 1, 2005, Merrill Lynch became a consolidated supervised entity (“CSE”) as defined by the SEC. As a CSE, Merrill Lynch is subject to group-wide supervision, which requires Merrill Lynch to compute allowable capital and risk allowances on a consolidated basis. As of June 30, 2006, Merrill Lynch is in compliance with applicable CSE standards.

Certain U.S. and non-U.S. subsidiaries are subject to various securities, banking, and insurance regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. These regulatory restrictions may impose regulatory capital requirements and limit the amounts that these subsidiaries can pay in dividends or advance to Merrill Lynch. Merrill Lynch’s principal regulated subsidiaries are discussed below.

Securities Regulation

As a registered broker-dealer and futures commission merchant, MLPF&S is subject to the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 (“the Rule”). Under the alternative method permitted by the Rule, the minimum required net capital, as defined, shall be the greater of 2% of aggregate debit items (“ADI”) arising from customer transactions or $500 million. At June 30, 2006, MLPF&S’s regulatory net capital of $2,579 million was approximately 15.3% of ADI, and its regulatory net capital in excess of the minimum required was $2,072 million.

MLPF&S is also subject to the capital requirements of the Commodity Futures Trading Commission, which requires that minimum net capital should not be less than 8% of the total customer risk margin requirement plus 4% of the total non-customer risk margin requirement. MLPF&S substantially exceeds both standards.

Merrill Lynch International (“MLI”), a U.K. regulated investment firm, is subject to capital requirements of the U.K. Financial Services Authority (“FSA”). Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At June 30, 2006, MLI’s financial resources were $11,689 million, exceeding the minimum requirement by $1,655 million.

Merrill Lynch Government Securities Inc. (“MLGSI”), a primary dealer in U.S. Government securities, is subject to the capital adequacy requirements of the Government Securities Act of 1986. This rule requires dealers to maintain liquid capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At June 30, 2006, MLGSI’s liquid capital of $1,461 million was 217% of its total market and credit risk, and liquid capital in excess of the minimum required was $654 million.

Merrill Lynch Japan Securities Co. Ltd. (“MLJS”), a Japan-based regulated broker-dealer, is subject to capital requirements of the Japanese Financial Services Agency (“JFSA”). Net capital, as defined, must exceed 120% of the total risk equivalents requirement of the JFSA. At June 30, 2006, MLJS’s net capital was $1,360 million, exceeding the minimum requirement by $768 million.

Banking Regulation

Merrill Lynch Bank USA (“MLBUSA”) is a Utah-chartered industrial bank, regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the State of Utah Department of Financial Institutions. Merrill Lynch Bank & Trust Co. (“MLB&T”) is a New Jersey-chartered state bank regulated by the FDIC and the New Jersey Department of Banking and Insurance. Both MLBUSA and MLB&T are required to maintain capital levels that at least equal minimum capital levels specified in federal banking laws and regulations. Failure to meet the minimum levels will result in certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the banks. The following table illustrates the actual capital ratios and capital amounts for MLBUSA and MLB&T as of June 30, 2006.


(dollars in millions)

				MLBUSA					MLB&T
	Well
	Capitalized			Actual			Actual		Actual			Actual
	Minimum			Ratio			Amount		Ratio			Amount

Tier 1 leverage (to average assets)		5	%		10.39	%	$	6,101		8.32	%	$	853
Tier 1 capital (to risk-weighted assets)		6	%		9.55			6,101		24.05			853
Total capital (to risk-weighted assets)		10	%		10.61			6,776		24.19			859

Merrill Lynch Capital Markets Bank Limited (“MLCMBL”), an Ireland-based regulated bank, is required to meet minimum regulatory capital requirements under the European Union (“EU”) banking law as implemented in Ireland by the Financial Regulator. At June 30, 2006, MLCMBL’s capital ratio was above the minimum requirement at 10.2% and its financial resources, as defined, were $3,487 million, exceeding the minimum requirement by $472 million.

Merrill Lynch International Bank Limited (“MLIB”), a U.K.-based regulated bank, is required to meet minimum regulatory capital requirements under the EU banking law as implemented in the U.K. MLIB’s consolidated capital ratio (including its subsidiary Merrill Lynch Bank (Suisse) S.A.), is above the minimum capital requirements established by the FSA. At June 30, 2006, MLIB’s consolidated capital ratio was 11.3% and its consolidated financial resources were $3,948 million, exceeding the minimum requirement by $350 million.

Prior to April 28, 2006, MLCMBL and MLIB were subsidiaries of Merrill Lynch International Finance Corporation (“MLIFC”) and were subject to capital requirements imposed by the State of New York Banking Department. Pursuant to an internal corporate reorganization, MLIFC is no longer a direct or indirect parent company of MLCMBL or MLIB, and therefore is no longer subject to such capital requirements.

On July 28, 2006, the High Court of Justice of England and Wales approved the transfer to MLCMBL of substantially all the business of MLIB. It is anticipated that the asset transfer will be completed at the end of the third quarter 2006, subject to appropriate regulatory approvals, court recognition of the English court order in Singapore and execution of business transfer agreements in jurisdictions where the English court order is not recognized. On the asset transfer date, MLCMBL will be renamed Merrill Lynch International Bank Limited, with the existing UK entity being renamed mlib (historic) Limited.

In July 2006, Merrill Lynch Trust Company, FSB (“MLTC-FSB”) received approval from the Office of Thrift Supervision (“OTS”) to become a full service thrift institution as the first step in an internal reorganization of certain banking businesses of Merrill Lynch. The reorganization is expected to provide Merrill Lynch with a more efficient platform to deliver banking products and services to clients and to provide a more effective avenue for future growth. As the second step in the internal reorganization, during the third quarter of 2006, MLB&T is expected to be merged with MLTC-FSB, and MLTC-FSB will be renamed Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”). The new entity will be regulated by the OTS and its deposits insured by the FDIC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Merrill Lynch & Co., Inc. and subsidiaries (“Merrill Lynch”) as of June 30, 2006, and the related condensed consolidated statements of earnings for the three-month and six-month periods ended June 30, 2006 and July 1, 2005, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2006 and July 1, 2005. These interim financial statements are the responsibility of Merrill Lynch’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the condensed consolidated financial statements, in 2006 Merrill Lynch changed its method of accounting for share-based payments to conform to Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Merrill Lynch as of December 30, 2005, and the related consolidated statements of earnings, changes in stockholders’ equity, comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 30, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

New York, New York

August 4, 2006


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements in this report may be considered forward-looking, including those about management expectations, strategic objectives, growth opportunities, business prospects, anticipated financial results, the impact of off balance sheet arrangements, significant contractual obligations, anticipated results of litigation and regulatory investigations and proceedings, and other similar matters. These forward-looking statements represent only Merrill Lynch & Co., Inc.’s (“ML & Co.” and, together with its subsidiaries, “Merrill Lynch”) beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond Merrill Lynch’s control, which affect its operations, performance, business strategy and results and could cause its actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by both current and potential competitors, general economic conditions, the effects of current, pending and future legislation, regulation and regulatory actions, and the other risks and uncertainties detailed in this report. See Risk Factors that Could Affect Our Business in the Annual Report on Form 10-K for the year ended December 30, 2005 (“2005 Annual Report”). Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. Merrill Lynch does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures Merrill Lynch may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Overview

Introduction

Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, Merrill Lynch created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, provides broker-dealer, investment banking, financing, wealth management, advisory, asset management, insurance, lending, and related products and services on a global basis.

Merrill Lynch’s activities are conducted through three business segments:

•

Global Markets and Investment Banking Group (“GMI”), Merrill Lynch’s institutional business segment provides equity, debt and commodities trading, capital market services, investment banking and advisory services to corporations, financial institutions, and governments around the world. GMI’s Global Markets division facilitates client transactions and is a market maker in securities, derivatives, currencies, commodities and other financial instruments to satisfy client demands, and in connection with proprietary trading activities. Global Markets also provides clients with financing, securities clearing, settlement, and custody services and also engages in principal investments and private equity investing for the account of Merrill Lynch. GMI’s Investment Banking division provides a wide range of origination and strategic advisory services for issuer clients, including underwriting and placement of public and private equity, debt and related securities, as well as lending and other financing activities for clients globally. These services also include advising clients on strategic issues, valuation, mergers, acquisitions and restructurings. GMI’s growth strategy entails a program of significant investments in personnel and technology to gain further scale in certain asset classes and geographies.


•	Global Private Client (“GPC”), Merrill Lynch’s full-service retail wealth management segment, provides brokerage and investment advisory services, offering a broad range of both proprietary and third-party wealth management products and services globally to individuals, small-to mid-size businesses, investment advisors and employee benefit plans. The largest portion of this business is offered through the Advisory Division, where services are delivered by Merrill Lynch Financial Advisors (“FAs”) through a global network of branch offices. GPC’s offerings include commission and fee-based investment accounts; banking, cash management, and credit services, including consumer and small business lending and credit cards; trust and generational planning; retirement services; and insurance products. GPC’s growth priorities include the hiring of additional FAs, client segmentation, annuitization of revenues through fee-based products, diversification of revenues through adding products and services, investments in technology to enhance productivity and efficiency, and disciplined expansion into additional geographic areas globally.

•	Merrill Lynch Investment Managers (“MLIM”), Merrill Lynch’s asset management segment, offers a wide range of investment management capabilities to retail and institutional investors through proprietary and third-party distribution channels globally. Asset management capabilities include equity, fixed income, money market, index, enhanced index and alternative investments (including hedge funds, private equity and property), which are offered through vehicles such as mutual funds, privately managed accounts, and both retail and institutional separate accounts. MLIM’s growth priorities include driving strong relative long-term investment performance and broadening the distribution of its products through multiple channels, while maintaining discipline on expenses. MLIM is committed to increasing sales in both the proprietary and non-proprietary channels in the United States, as well as non-U.S. regions. On February 15, 2006, Merrill Lynch entered into an agreement with BlackRock, Inc. (“BlackRock”), to combine the MLIM business with BlackRock. This transaction is expected to close around the end of the third quarter of 2006, subject to regulatory and shareholder approvals.

Critical Accounting Policies and Estimates

The following is a summary of Merrill Lynch’s critical accounting policies. For a full description of these and other accounting policies see Note 1 of the 2005 Annual Report and Note 1 to the Condensed Consolidated Financial Statements.

Use of Estimates

In presenting the Condensed Consolidated Financial Statements, management makes estimates regarding:


•	Valuations of assets and liabilities requiring fair value estimates including:


	•	Trading inventory and investment securities;
	•	Private equity investments;
	•	Loans and allowance for loan losses;


•	The outcome of litigation;
•	The realization of deferred tax assets and tax reserves;
•	Assumptions and cash flow projections used in determining whether variable interest entities (“VIEs”) should be consolidated and the determination of the qualifying status of special purpose entities (“QSPEs”);
•	The carrying amount of goodwill and other intangible assets;
•	Valuation of employee stock options;
•	Insurance reserves and recovery of insurance deferred acquisition costs;


•	Interim compensation and benefits accruals, particularly cash and stock incentive awards and FA compensation; and
•	Other matters that affect the reported amounts and disclosure of contingencies in the financial statements.

Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term. For more information regarding the specific methodologies used in determining estimates, refer to Use of Estimates in Note 1 of the 2005 Annual Report.

The following is a summary of Merrill Lynch’s critical accounting policies and estimates.

Valuation of Financial Instruments

Proper valuation of financial instruments is a critical component of Merrill Lynch’s financial statement preparation. Fair values for exchange-traded securities and certain exchange-traded derivatives, principally futures and certain options, are based on quoted market prices. Fair values for over-the-counter (“OTC”) derivative financial instruments, principally forwards, options, and swaps, represent amounts estimated to be received from or paid to a third party in settlement of these instruments. These derivatives are valued using pricing models based on the net present value of estimated future cash flows, and directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services, while taking into account the counterparty’s credit ratings, or Merrill Lynch’s own credit ratings as appropriate.

New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions, which may impact the level of precision in the Condensed Consolidated Financial Statements. For long-dated and illiquid contracts, extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables Merrill Lynch to mark-to-market all positions consistently when only a subset of prices is directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, Merrill Lynch continually refines its pricing models based on experience to correlate more closely to the market risk of these instruments. Obtaining the fair value for OTC derivative contracts requires the use of management judgment and estimates. At the inception of the contract, unrealized gains for these instruments are not recognized unless significant inputs to the valuation model are observable in the market.

Merrill Lynch holds investments that may have quoted market prices but that are subject to restrictions (e.g., consent of the issuer or other investors to sell) that may limit Merrill Lynch’s ability to realize the quoted market price. Accordingly, Merrill Lynch estimates the fair value of these securities based on management’s best estimate, which incorporates pricing models based on projected cash flows, earnings multiples, comparisons based on similar market transactions and/or review of underlying financial conditions and other market factors.

Valuation adjustments are an integral component of the mark-to-market process and may be taken where either the sheer size of the trade or other specific features of the trade or particular market (such as counterparty credit quality, concentration or market liquidity) requires adjustment to the values derived by the pricing models.

Because valuation may involve significant estimation where readily observable prices are not available, a categorization of Merrill Lynch’s financial instruments based on liquidity of the instrument and the amount of estimation required in determining its value as recorded in the Condensed Consolidated

Financial Statements is provided below. In preparing the categorization, certain estimates have been made regarding the allocation of netting adjustments permitted under FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, and other adjustments.

Assets and liabilities recorded on the Condensed Consolidated Balance Sheets can be broadly categorized as follows:


Category 1.	Highly liquid cash and derivative instruments, primarily carried at fair value, for which quoted market prices are readily available (for example, exchange-traded equity securities, certain listed options, and U.S. Government securities).

Category 2.	Liquid instruments, primarily carried at fair value, including:


	a)	Cash instruments for which quoted prices are available but which trade less frequently such that there may not be complete pricing transparency for these instruments across all market cycles (for example, corporate and municipal bonds and certain physical commodities);

	b)	Derivative instruments that are valued using a model, where inputs to the model are directly observable in the market (for example, U.S. dollar interest rate swaps); and

	c)	Instruments that are priced with reference to financial instruments whose parameters can be directly observed (for example, certain mortgage loans).

Category 3.

Less liquid instruments that are valued using management’s best estimate of fair value and instruments which are valued using a model, where either the inputs to the model and/or the models themselves require significant judgment by management. Areas where these valuation methodologies are primarily applied include private equity investments, long-dated or complex derivatives such as certain foreign exchange options and credit default swaps, distressed debt and commodity derivatives, such as long-dated options on gas and power and weather derivatives. In applying these models, management considers such factors as projected cash flows, market comparables, slope to the yield curve, volatility, and various market inputs.

At June 30, 2006 and December 30, 2005, certain assets and liabilities on the Condensed Consolidated Balance Sheets can be categorized using the above classification scheme as follows:


(dollars in millions)

June 30, 2006	Category 1		Category 2		Category 3		Total

Assets
Trading assets, excluding contractual agreements	$	64,995	$	68,723	$	2,394	$	136,112
Contractual agreements		6,628		19,216		4,974		30,818
Investment securities		5,883		49,432		11,332		66,647


Liabilities
Trading liabilities, excluding contractual agreements	$	50,570	$	15,954	$	30	$	66,554
Contractual agreements		5,271		20,472		7,440		33,183


December 30, 2005


Assets
Trading assets, excluding contractual agreements	$	56,556	$	63,344	$	2,594	$	122,494
Contractual agreements		5,008		18,177		3,031		26,216
Investment securities		6,115		54,805		8,353		69,273


Liabilities
Trading liabilities, excluding contractual agreements	$	48,688	$	11,248	$	242	$	60,178
Contractual agreements		4,623		17,490		6,642		28,755

In addition, other trading-related assets recorded in the Condensed Consolidated Balance Sheets at June 30, 2006 and December 30, 2005, include $321.8 billion and $255.5 billion, respectively, of receivables under resale agreements and receivables under securities borrowed transactions. Trading-related liabilities recorded in the Condensed Consolidated Balance Sheets at June 30, 2006 and December 30, 2005, include $277.3 billion and $217.5 billion, respectively, of payables under repurchase agreements and payables under securities loaned transactions. These securities financing transactions are recorded at their contractual amounts, which approximate fair value, and for which little or no estimation is required by management.

Litigation

Merrill Lynch has been named as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with its activities as a global diversified financial services institution. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. In accordance with SFAS No. 5, Accounting for Contingencies, Merrill Lynch will accrue a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits and arbitrations, including class action lawsuits, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, Merrill Lynch cannot predict what the eventual loss or range of loss related to such matters will be. See Note 12 and Other Information (Unaudited) — Legal Proceedings of the 2005 Annual Report for further information.

Variable Interest Entities

In the normal course of business, Merrill Lynch enters into a variety of transactions with VIEs. The applicable accounting guidance requires Merrill Lynch to perform a qualitative and/or quantitative analysis of each new VIE at inception to determine whether it must consolidate the VIE. In

performing this analysis, Merrill Lynch makes assumptions regarding future performance of assets held by the VIE, taking into account estimates of credit risk, estimates of the fair value of assets, timing of cash flows, and other significant factors. Although a VIE’s actual results may differ from projected outcomes, a revised consolidation analysis is generally not required subsequent to the initial assessment. If a VIE meets the conditions to be considered a QSPE, it is typically not required to be consolidated by Merrill Lynch. A QSPE’s activities must be significantly limited. A servicer of the assets held by a QSPE may have discretion in restructuring or working out assets held by the QSPE as long as the discretion is significantly limited and the parameters of that discretion are fully described in the legal documents that established the QSPE. Determining whether the activities of a QSPE and its servicer meet these conditions requires the use of judgment by management.

Income Taxes

Merrill Lynch is under examination by the Internal Revenue Service (“IRS”) and other tax authorities in major countries such as Japan and the United Kingdom, and states in which Merrill Lynch has significant business operations, such as New York. The tax years under examination vary by jurisdiction. An IRS examination covering the years 2001–2003 is expected to be completed in 2006, subject to the resolution of the Japanese issue discussed below. There are carryback claims from the years 2001 and 2002 of approximately $250 million to $300 million, which are now under Joint Committee review. A tax benefit would be recorded to the extent that Merrill Lynch is successful in obtaining the tax benefit from these carryback claims. IRS audits have also commenced for the 2004 and 2005 tax years.

In the second quarter of 2005, Merrill Lynch paid a tax assessment from the Tokyo Regional Tax Bureau for the years 1998–2002. The assessment reflected the Japanese tax authority’s view that certain income on which Merrill Lynch previously paid income tax to other international jurisdictions, primarily the United States, should have been allocated to Japan. Merrill Lynch has begun the process of obtaining clarification from international authorities on the appropriate allocation of income among multiple jurisdictions to prevent double taxation.

Business Environment⁽¹⁾

Following a generally strong first quarter global market conditions initially remained robust, but became less favorable midway through the second quarter. Market sentiment became cautious amid signs of inflation, high oil prices and fears that the Federal Reserve would raise interest rates more than expected. During the second quarter, both debt and equity markets conditions weakened as concerns grew over the tightening of monetary policy world-wide. The yield curve remained relatively flat, and for much of June became inverted as long-term Treasury yields dropped slightly below those of shorter term Treasury notes. Long-term interest rates, as measured by the 10-year U.S. Treasury bond, ended the quarter at 5.15%, up from 4.86% at the end of the first quarter. The U.S. Federal Reserve System’s Federal Open Market Committee raised the federal funds rate twice during the quarter to 5.25%, up from 4.75%.

Major U.S. equity indices generally declined from where they ended the first quarter, with particular weakness in May. The Nasdaq Composite declined 7.2% over the quarter and 1.5% on a year-to-date basis, while the Standard & Poor’s 500 index fell 1.9% for the quarter but was up 1.8% compared to where it started the year. The exception was the Dow Jones Industrial Average which rose 0.4% for the quarter and was up 4.0% since the start of the year.

International equity indices experienced similar declines during the second quarter as a result of indications that authorities in Europe and Asia would continue raising interest rates. The FTSE 100 Index declined 2.2% in the quarter but was up 3.8% year-to-date, while the Dow Jones Stoxx 50 Index declined 3.7% sequentially, but rose 0.9% year-to-date. In Japan, the Nikkei Stock Exchange Index fell 9.1% in the quarter and 3.8% year-to-date. After a particularly strong first quarter, emerging market indices also declined in the second quarter. Brazil’s Bovespa Index declined 3.5% in the second quarter, but was up 9.5% from the start of the year, while India’s Sensex Index declined 5.9% sequentially, but was up 12.9% year-to-date.

Second quarter global debt and equity underwriting volumes of $1.7 trillion were down 6% compared to the first quarter, but were essentially unchanged from the year-ago quarter. Global debt underwriting volumes of $1.5 trillion were down 9% compared to the first quarter and 5% compared to the year-ago quarter, while global equity underwriting volumes of $196 billion were up 14% compared to the first quarter and 73% compared to the year-ago quarter. Global debt and equity underwriting fees for the second quarter were $9.8 billion, up 2% sequentially and 23% from the second quarter of 2005.

Merger and acquisition (“M&A”) activity maintained the strong momentum experienced in the first quarter as the value of global announced deals rose to $1 trillion, up 9% from the first quarter and 36% from the year-ago quarter. In the United States, the value of announced deals increased to $371 billion, up 17% from the first quarter and 12% from the year-ago quarter. Globally, completed M&A activity totaled $640 billion in the second quarter, down 9% from the first quarter, but up 16% from the year-ago quarter. In the United States, completed deal volume totaled $235 billion, down 24% sequentially, but up 21% from the 2005 second quarter.

Merrill Lynch continually evaluates its businesses for profitability, performance, and client service to ensure alignment with its long-term strategic objectives under varying market and competitive conditions. The strategy of maintaining long-term client relationships, closely monitoring costs and risks, diversifying revenue sources, and growing fee-based and recurring revenues all continue as objectives to mitigate the effects of a volatile market environment on Merrill Lynch’s business as a whole.


(1)	Debt and equity underwriting and merger and acquisition statistics were obtained from Dealogic.

Results of Operations


(dollars in millions, except per share amounts)

			For the Three Months						For the Six Months
			Ended						Ended

			June 30,			July 1,			June 30,			July 1,
			2006			2005			2006			2005

Net Revenues
		Asset management and portfolio service fees	$	1,773		$	1,431		$	3,452		$	2,866
		Commissions		1,586			1,247			3,188			2,588
		Principal transactions		1,182			1,006			3,175			1,951
		Investment banking		1,162			920			2,127			1,733
		Revenues from consolidated investments		186			84			290			211
		Other		1,110			664			1,664			1,034

	Subtotal			6,999			5,352			13,896			10,383
Interest and dividend revenues				9,690			5,974			18,354			11,505
Less interest expense				8,531			5,007			16,130			9,337

	Net interest profit			1,159			967			2,224			2,168

Total Net Revenues				8,158			6,319			16,120			12,551

Non-interest expenses:
		Compensation and benefits		3,980			3,148			9,730			6,244
		Communications and technology		429			395			882			791
		Brokerage, clearing, and exchange fees		253			216			501			435
		Occupancy and related depreciation		249			227			490			460
		Professional fees		196			183			396			361
		Advertising and market development		191			160			335			286
		Expenses of consolidated investments		145			35			192			120
		Office supplies and postage		57			51			114			103
		Other		309			309			538			487

Total non-interest expenses				5,809			4,724			13,178			9,287

Earnings before income taxes			$	2,349		$	1,595		$	2,942		$	3,264

Net earnings			$	1,633		$	1,135		$	2,108		$	2,347

Earnings per common share:
	Basic		$	1.79		$	1.25		$	2.28		$	2.57
	Diluted			1.63			1.14			2.07			2.36

Annualized return on average common stockholders’ equity				18.6	%		14.3	%		11.9	%		14.9	%

Pre-tax profit margin				28.8	%		25.2	%		18.3	%		26.0	%

Compensation and benefits as a percentage of net revenues				48.8	%		49.8	%		60.4	%		49.7	%
Non-compensation expenses as a percentage of net revenues				22.4	%		24.9	%		21.4	%		24.2	%
Book value per common share			$	37.18		$	33.63		$	37.18		$	33.63

Quarterly Results of Operations

Merrill Lynch’s second quarter 2006 net earnings were $1.6 billion, on record net revenues of $8.2 billion, up 44% and 29%, respectively, from the second quarter of 2005. Earnings per common share were $1.79 basic and $1.63 diluted for the 2006 second quarter, both up 43% from the year-ago quarter. Pre-tax earnings were $2.3 billion, an increase of 47% from the prior-year period, and the pre-tax profit margin was 28.8%, up from 25.2% in the year-ago quarter.

Asset management and portfolio services fees primarily consist of (i) fees earned from the management and administration of retail mutual funds and separately managed accounts for retail investors, as well as institutional funds such as pension assets, (ii) performance fees earned on certain separately managed accounts and institutional money management arrangements, (iii) servicing fees related to these accounts and (iv) annual account fees and certain other account-related fees. Asset management and portfolio service fees were $1.8 billion, up 24% from the second quarter of 2005. The increase in asset management fees reflects the impact of net inflows of higher-yielding assets as well as higher average equity market values. The increase in portfolio service fees reflects the impact of net inflows into asset-priced accounts.

Commissions revenues primarily arise from agency transactions in listed and OTC equity securities and commodities, insurance products and options. Commissions revenues also include distribution fees for promoting and distributing mutual funds (“12b-1 fees”), as well as contingent deferred sales charges earned when a shareholder redeems shares prior to the required holding period. Commissions revenues were $1.6 billion, up 27% from the 2005 second quarter, due primarily to an increase in global transaction volumes, particularly in listed equities and mutual funds.

Principal transactions revenues include realized gains and losses from the purchase and sale of securities, such as equity securities, fixed income securities, including government bonds and municipal securities, in which Merrill Lynch acts as principal, as well as unrealized gains and losses on trading assets and liabilities, including commodities, derivatives, and loans. Principal transactions revenues were $1.2 billion, 17% higher than the year-ago quarter, due primarily to increased revenues in the trading of equity products.

Net interest profit is a function of (i) the level and mix of total assets and liabilities, including trading assets owned, deposits, financing and lending transactions, and trading strategies associated with the institutional securities business, and (ii) the prevailing level, term structure and volatility of interest rates. Net interest profit was $1.2 billion, up 20% from the 2005 second quarter, due primarily to the impact of rising short-term interest rates on deposit spreads earned, partially offset by the higher interest expenses. Net interest profit is an integral component of trading activity. In assessing the profitability of its client facilitation and trading activities, Merrill Lynch views principal transactions and net interest profit in the aggregate as net trading revenues. Changes in the composition of trading inventories and hedge positions can cause the mix of principal transactions and net interest profit to fluctuate.

Investment banking revenues include (i) origination revenues representing fees earned from the underwriting of debt, equity and equity-linked securities, as well as loan syndication and commitment fees and (ii) strategic advisory services revenues including merger and acquisition and other investment banking advisory fees. Investment banking revenues were $1.2 billion, up 26% from the year-ago quarter, driven primarily by increased equity origination and merger and acquisition advisory revenues, partially offset by a slight decline in debt origination revenues.

Revenues from consolidated investments include revenues from consolidated investments which are less than 100% owned. Revenues from consolidated investments were $186 million, up from $84 million in the 2005 second quarter, reflecting higher investment gains and additional investments.

Other revenues include realized investment gains and losses, equity income from unconsolidated subsidiaries, distributions on cost method investments, fair value adjustments on private equity investments that are held for capital appreciation and/or current income, gains related to the sale of mortgages, write-downs of certain available-for-sale securities, and translation gains and losses on foreign denominated assets and liabilities. Other revenues were $1.1 billion, 67% higher than the 2005 second quarter, due principally to revenues from private equity investments. The increase in private equity revenues was driven primarily by gains from several private equity investments that resulted from fair value adjustments associated with initial public offerings, the recapitalization of an underlying company, and the application of valuation methodologies. Revenues recorded in other

revenues associated with gains from private equity investments were almost three times the amount recorded during the second quarter of 2005.

Compensation and benefits expenses were $4.0 billion in the second quarter of 2006, or 48.8% of net revenues, down from 49.8% in the year-ago quarter.

Non-compensation expenses were $1.8 billion in the second quarter of 2006, up 16% from the year-ago quarter. The ratio of total non-compensation expenses to total net revenues was 22.4% during the second quarter of 2006, down from 24.9% in the year-ago quarter. Communications and technology costs were $429 million, up 9% from the second quarter of 2005 due primarily to higher market information and communications costs and system consulting costs related to investments for growth. Brokerage, clearing and exchange fees were $253 million, up 17% from the 2005 second quarter, due primarily to higher transaction volumes. Occupancy costs and related depreciation of $249 million increased 10% from the year-ago quarter, principally due to higher office rental expenses. Professional fees were $196 million, up 7% from the prior-year quarter due to higher legal and other professional fees. Advertising and market development expenses were $191 million, up 19% from the year-ago quarter due primarily to higher travel expenses associated with increased activity levels and increased advertising costs. Expenses of consolidated investments were $145 million, up from $35 million in the 2005 second quarter, principally due to increased minority interest expenses associated with the related increase in revenues from consolidated investments. Other expenses were $309 million, essentially unchanged from the year-ago quarter.

Year-to-date Results of Operations

For the first six months of 2006, net earnings were $2.1 billion, on record net revenues of $16.1 billion that grew 28% from the first half of 2005. Net earnings for the first six months of 2006 included $1.2 billion, after-tax, or $1.21 per diluted share, of one-time non-cash compensation expenses ($1.8 billion pre-tax) incurred in the first quarter 2006, arising from modifications to the retirement eligibility requirements for existing stock-based employee compensation awards and the adoption of SFAS No. 123 as revised in 2004 (“SFAS No. 123R”); (together, “one-time compensation expenses”). Refer to Note 1 to the Condensed Consolidated Financial Statements for further detail on the one-time compensation expenses.

Excluding the one-time compensation expenses, net earnings of $3.3 billion for the first six months of 2006 were up 40% from the prior-year period, and pre-tax earnings would have been $4.7 billion, up 44% from the first six months of 2005. On the same basis the pre-tax profit margin would have been 29.2%, up 3.2 percentage points from the first half of 2005, and the annualized return on average common equity was 19.0%, up 4.1 percentage points from the 14.9% in the first six months of 2005. Also on the same basis, earnings per common share would have been $3.63 basic and $3.28 diluted, up 41% and 39%, respectively, from the prior-year period. Management believes that, while the results excluding the one-time compensation expenses are considered “non-GAAP” measures, they depict the operating performance of the company more clearly and enable more meaningful period-to-period comparisons. See Exhibit 99.1 for a reconciliation of “non-GAAP” measures.

Merrill Lynch’s second quarter 2006 effective tax rate was 30.5%, bringing the year-to-date effective tax rate to 28.3%. Excluding the one-time compensation expenses, the effective tax rate for the first six months of 2006 was 30.1%, up from 28.1% for the prior-year period.

Business Segments

The following discussion provides details of net revenues by segment. Certain prior period amounts have been reclassified to conform to the current year presentation.

Merrill Lynch reports its results in three business segments: GMI, GPC, and MLIM. GMI provides full service global markets and origination capabilities, products and services to corporate, institutional, and government clients around the world, and in connection with proprietary trading activities. GPC provides wealth management products and services globally to individuals, small- to mid-size businesses, and employee benefit plans. MLIM manages financial assets for individual, institutional and corporate clients.

Certain MLIM and GMI products are distributed through GPC distribution channels, and, to a lesser extent, certain MLIM products are distributed through GMI. Revenues and expenses associated with these inter-segment activities are recognized in each segment and eliminated at the corporate level. In addition, revenue and expense sharing agreements for joint activities between segments are in place, and the results of each segment reflect the agreed-upon apportionment of revenues and expenses associated with these activities. The following segment results represent the information that is relied upon by management in its decision-making processes. These results exclude items reported in the Corporate segment. Business segment results are reclassified to reflect reallocations of revenues and expenses that result from changes in Merrill Lynch’s business strategy and organizational structure. See Note 2 to the Condensed Consolidated Financial Statements for further information.

Global Markets and Investment Banking

GMI’s Results of Operations


(dollars in millions)

			For the Three Months Ended									For the Six Months Ended

			June 30,			July 1,			% Inc.			June 30,			July 1,			% Inc.
			2006			2005			(Dec.)			2006			2005			(Dec.)

Global Markets
		Debt	$	1,725		$	1,606			7	%	$	3,816		$	3,268			17	%
		Equity		1,877			1,022			84			3,450			1,993			73

Total Global Markets net revenues				3,602			2,628			37			7,266			5,261			38

Investment Banking
		Origination Debt		367			374			(2	)		762			656			16
		Equity		315			223			41			552			465			19
		Strategic Advisory Services		296			214			38			553			374			48

Total Investment Banking net revenues				978			811			21			1,867			1,495			25

	Total net revenues			4,580			3,439			33			9,133			6,756			35
Non-interest expenses before one-time compensation expenses				3,087			2,341			32			6,059			4,534			34
One-time compensation expenses				-			-			-			1,369			-			N/M

Pre-tax earnings			$	1,493		$	1,098			36		$	1,705		$	2,222			(23	)

Pre-tax profit margin				32.6	%		31.9	%					18.7	%		32.9	%

N/ M = Not Meaningful

Despite challenging market conditions during the second quarter of 2006, each of GMI’s major business lines — Debt Markets, Equity Markets and Investment Banking — recorded increased net

revenues compared with the second quarter of 2005. GMI’s record net revenues of $4.6 billion were up 33% from the year-ago quarter. Pre-tax earnings were $1.5 billion, 36% higher from the prior-year period, driven by strong revenue growth and operating leverage. The pre-tax profit margin was 32.6%, up from 31.9% in the year-ago quarter.

For the first six months of 2006, GMI’s net revenues were a record at $9.1 billion, an increase of 35% from the first half of 2005. Pre-tax earnings of $1.7 billion and the pre-tax profit margin of 18.7% included $1.4 billion in one-time compensation expenses incurred in the first quarter of 2006. Excluding these one-time compensation expenses, pre-tax earnings for the first six months of 2006 were $3.1 billion, up 38% from the year-ago period, and the pre-tax profit margin was 33.7%, up from 32.9% in the prior year period. Refer to Note 1 to the Condensed Consolidated Financial Statements and Exhibit 99.1 for further detail on the one-time compensation expenses.

From a geographic perspective, Europe, Middle East and Africa (“EMEA”) and the United States were the largest dollar contributors to growth over the prior year quarter, whereas the Pacific Rim and Canada had the strongest growth on a percentage basis compared to the prior year quarter.

A detailed discussion of GMI’s net revenues follows:

Global Markets

In the second quarter of 2006, Global Markets net revenues were $3.6 billion, up 37% from the year-ago period. For the first half of 2006, Global Markets net revenues were $7.3 billion, up 38% from the prior-year period.

Debt Markets

Debt Markets net revenues include principal transactions and net interest profit (which management believes should be viewed in aggregate to assess trading results), commissions, revenues from principal investments, fair value adjustments on private equity investments made by non-broker-dealer subsidiaries that are held for capital appreciation and/or current income, and other revenues. In the second quarter of 2006, Debt Markets net revenues were $1.7 billion, up 7% from the second quarter of 2005, driven primarily by revenues in the principal investing and secured finance business and increased revenues from foreign exchange. These increases were partially offset by lower net revenues in trading interest rate products and commodities.

Year-to-date Debt Markets net revenues were $3.8 billion, up 17% from the year-ago period, driven principally by the increased net revenues in the principal investing and secured finance business and the trading of credit products.

Equity Markets

Equity Markets net revenues include commissions, principal transactions and net interest profit (which management believes should be viewed in aggregate to assess trading results), revenues from equity method investments, fair value adjustments on private equity investments that are held for capital appreciation and/or current income, and other revenues. During the second quarter of 2006, Equity Markets net revenues were $1.9 billion, an increase of 84% over the year-ago quarter with strong performances in every major revenue category, including a nearly threefold increase in revenues from private equity investments. The increase in private equity revenues was driven primarily by gains from several private equity investments that resulted from fair value adjustments associated with initial public offerings, the recapitalization of an underlying company, and the application of valuation methodologies.

Year-to-date Equity Markets net revenues were $3.5 billion, up 73% from the year-ago period, driven primarily by private equity-related gains, increased equity-linked and cash trading revenues, and higher equity financing net revenues.

Investment Banking

Investment Banking net revenues of $978 million were 21% higher than the 2005 second quarter, driven by increases in equity origination mandates and merger and acquisition advisory services, partly offset by a slight decline in debt origination revenues. For the first half of 2006, Investment Banking net revenues were $1.9 billion, up 25% from the prior-year period.

Origination

Origination revenues represent fees earned from the underwriting of debt, equity and equity-linked securities as well as loan syndication fees.

Origination revenues in the second quarter of 2006 were $682 million, up 14% from the year-ago quarter on higher equity origination revenues, which increased 41% from a year ago, as a result of a more robust environment, including a higher volume of convertible deals, as well as the benefits of continued investments in the business. The increase was partially offset by a 2% decline in debt origination revenues.

Year-to-date origination revenues increased 17% to $1.3 billion from the year-ago period, as a result of a more robust environment and benefits of continued investment in the business. Equity and debt origination revenues were up 19% and 16%, respectively, compared with the first six months of 2005.

Strategic Advisory Services

Strategic advisory services revenues, which include merger and acquisition and other advisory fees, were $296 million in the second quarter of 2006, up 38% from the year-ago quarter as overall deal volume as well as Merrill Lynch’s share of global completed merger and acquisition volume increased. Year-to-date strategic advisory services revenues increased 48% from the year-ago period, to $553 million on higher activity.

For additional information on GMI’s segment results, refer to Note 2 to the Condensed Consolidated Financial Statements.

Global Private Client

GPC’s Results of Operations


(dollars in millions)

		For the Three Months Ended									For the Six Months Ended

		June 30,			July 1,			% Inc.			June 30,			July 1,			% Inc.
		2006			2005			(Dec.)			2006			2005			(Dec.)

Fee-based revenues		$	1,533		$	1,286			19	%	$	2,991		$	2,557			17	%
Transactional and origination revenues			902			786			15			1,801			1,643			10
Net interest profit and related hedges⁽¹⁾			554			420			32			1,081			821			32
Other revenues			56			76			(26	)		111			150			(26	)

	Total net revenues		3,045			2,568			19			5,984			5,171			16
Non-interest expenses before one-time compensation expenses			2,344			2,111			11			4,637			4,204			10
One-time compensation expenses			-			-			-			281			-			N/M

Pre-tax earnings		$	701		$	457			53		$	1,066		$	967			10

Pre-tax profit margin			23.0	%		17.8	%					17.8	%		18.7	%

N/ M = Not Meaningful


(1)	Includes interest component of non-qualifying derivatives which are included in other revenues on the Condensed Consolidated Statement of Earnings.

GPC’s second quarter 2006 net revenues were $3.0 billion, up 19% from the year-ago quarter. The increase was primarily driven by record fee-based revenues, including record fees from annuitized-revenue products, record net interest profit as spreads on deposits increased with interest rates, and also higher transactional and origination revenues. GPC’s second quarter 2006 pre-tax earnings were a record $701 million, up 53% from the 2005 second quarter, and the pre-tax profit margin was also a record 23.0%, up by more than five percentage points from the prior-year period.

Total client assets in GPC accounts increased 11% from the year-ago quarter, to $1.5 trillion. Second quarter net inflows of client assets into annuitized-revenue products were $10 billion, bringing the year-to-date total to $23 billion. Total net new money for the second quarter and first six months of 2006 was $7 billion and $25 billion, respectively.

Financial Advisor headcount reached 15,520 at the end of the second quarter of 2006, a net increase of 1,100 since the second quarter of 2005, reflecting low turnover rates, recruiting efforts and the acquisition of Advest.

From a geographic viewpoint, GPC’s non-U.S. revenue growth was stronger than in the U.S. during the first half of 2006. Additionally, GPC continues to invest in the business internationally as evidenced by the private banking joint venture launched during the second quarter of 2006 with Mitsubishi UFJ Financial Group (“MUFG”) in Japan, bringing GPC’s private banking platform to MUFG’s large high-net-worth client base.

For the first six months of 2006, GPC’s net revenues increased 16% to $6.0 billion, driven by growth in nearly every major revenue category. Year-to-date pre-tax earnings of $1.1 billion and the pre-tax profit margin of 17.8% included $281 million in one-time compensation expenses incurred in the first quarter of 2006. Excluding these one-time compensation expenses, GPC’s year-to-date pre-tax earnings were $1.3 billion, up 39% from the year-ago period, and the pre-tax margin was 22.5%.

Refer to Note 1 to the Condensed Consolidated Financial Statements and Exhibit 99.1 for further detail on the one-time compensation expenses.

A detailed discussion of GPC’s revenues follows:

Fee-based revenues

Fee-based revenues are comprised of portfolio service fees which are primarily derived from accounts that charge an annual fee based on net asset value, such as Merrill Lynch Consults^® (a separately managed account product) and Unlimited Advantage^SM (a fee based brokerage account), as well as fees from insurance products, taxable and tax-exempt money market funds, and alternative investment products. Also included in fee-based revenues are fixed annual account fees and other account-related fees, and commissions related to distribution fees on mutual funds.

GPC generated $1.5 billion of fee-based revenues in the 2006 second quarter, up 19% from the year-ago quarter. On a year-to-date basis, fee-based revenues increased 17% from the year-ago period to $3.0 billion. This increase reflected growth in client assets due to higher market valuations and net inflows into annuitized products. This asset growth resulted in higher portfolio service fees and increased distribution fees related to mutual fund sales.

The value of client assets in GPC accounts at June 30, 2006 and July 1, 2005 follows.


(dollars in billions)

		June 30,		July 1,
		2006		2005

Assets in GPC accounts
	U.S.	$	1,370	$	1,234
	Non-U.S.		124		115

	Total	$	1,494	$	1,349

Transactional and origination revenues

Transactional and origination revenues include certain commission revenues, such as those that arise from agency transactions in listed and OTC equity securities, mutual funds, and insurance products. Also included are principal transactions revenues which primarily represent bid-offer revenues on government bonds and municipal securities, as well as new issue revenues which include selling concessions on newly issued debt and equity securities, including shares of closed-end funds.

Transactional and origination revenues were $902 million in the second quarter of 2006, 15% higher than the year-ago quarter. This increase is due principally to higher origination revenues driven by a few particularly large transactions in addition to a moderate increase in transactional revenues. Year-to-date transactional and origination revenues were $1.8 billion, up 10% from the year-ago period.

Net interest profit and related hedges

Net interest profit (interest revenues less interest expenses) and related hedges includes GPC’s allocation of the interest spread earned in Merrill Lynch’s banks for deposits, as well as interest earned on margin, small- and middle-market business and other loans, corporate funding allocations, and the interest component of non-qualifying derivatives.

GPC’s net interest profit and related hedges were $554 million in the second quarter of 2006, up 32% from the 2005 second quarter. This increase primarily reflects higher margins on deposits resulting from rising short-term interest rates. On a year-to-date basis, GPC’s net interest profit was $1.1 billion, 32% higher than the year-ago period.

Other revenues

GPC’s other revenues were $56 million in the second quarter of 2006, down 26% from $76 million in the year-ago period, due largely to lower mortgage-related revenues. For the first six months of 2006, other revenues were also down 26%, totaling $111 million.

For additional information on GPC’s segment results, refer to Note 2 to the Condensed Consolidated Financial Statements.

Merrill Lynch Investment Managers

MLIM’s Results of Operations


(dollars in millions)

		For the Three									For the Six
		Months Ended									Months Ended

		June 30,			July 1,			% Inc.			June 30,			July 1,			% Inc.
		2006			2005			(Dec.)			2006			2005			(Dec.)

Asset management fees		$	522		$	367			42	%	$	1,014		$	737			38	%
Commissions			29			25			16			61			53			15
Other revenues			79			13			508			125			28			346

	Total net revenues		630			405			56			1,200			818			47
Non-interest expenses before one-time compensation expenses			390			284			37			738			570			29
One-time compensation expenses			-			-			-			109			-			N/M

Pre-tax earnings		$	240		$	121			98		$	353		$	248			42

Pre-tax profit margin			38.1	%		29.9	%					29.4	%		30.3	%

N/ M = Not Meaningful

MLIM’s second quarter 2006 net revenues were $630 million, up 56% from the 2005 second quarter. This increase was driven principally by net inflows and higher average long-term asset values. MLIM’s pre-tax earnings for the 2006 second quarter were $240 million, up 98% from the 2005 second quarter, and the pre-tax margin was 38.1%, compared with 29.9% in the prior-year period. The increase in pre-tax earnings and pre-tax margin can be attributed to strong operating leverage which was enhanced by net benefits related to the pending merger with BlackRock. These net benefits pertain to certain projects which have been curtailed and employee attrition not replaced in advance of the BlackRock transaction.

For the first six months of 2006, MLIM’s net revenues were up 47% over the first half of 2005, to $1.2 billion. Pre-tax earnings of $353 million and the pre-tax profit margin of 29.4% included $109 million in one-time compensation expenses recognized during the first quarter of 2006. Excluding the one-time compensation expenses, the pre-tax earnings for the first half of 2006 were $462 million, up 86% from the year-ago period, and the pre-tax margin was 38.5%, up from 30.3% due primarily to strong operating leverage. Refer to Note 1 to the Condensed Consolidated Financial Statements and Exhibit 99.1 for further detail on the one-time compensation expenses.

On February 15, 2006, Merrill Lynch announced that it had signed a definitive agreement under which it would combine its MLIM investment management business with BlackRock in exchange for a 49.8% interest in the combined firm, including a 45% voting interest. Merrill Lynch expects to recognize a gain upon the closing of this transaction which, based upon the price at the time of the announcement, is estimated to be over $1 billion. This transaction is expected to close around the end of the third quarter of 2006, subject to regulatory and shareholder approvals. The actual gain will be

contingent upon BlackRock’s share price at closing, as well as closing adjustments. Merrill Lynch plans to account for its investment in BlackRock under the equity method of accounting.

A detailed discussion of MLIM’s revenues follows:

Asset management fees

Asset management fees primarily consist of fees earned from the management and administration of retail mutual funds and separately managed accounts for retail investors, as well as institutional funds such as pension assets. Asset management fees also include performance fees, which are generated in some cases by separately managed accounts and institutional money management arrangements.

Asset management fees were $522 million, up 42% from the second quarter of 2005 due to higher average equity market values and an improvement in the fee profile of assets under management and new money inflows. Year-to-date asset management fees were $1.0 billion, up 38% from the year-ago period. At the end of the second quarter of 2006, firmwide assets under management totaled $589 billion, with $583 billion managed by MLIM and $6 billion managed by GPC. Compared with the 2005 second quarter, assets under management increased 23%, due principally to positive market movement and net new money inflows. Net inflows for the quarter were $8 billion, primarily driven by the EMEA-Pacific retail business.

An analysis of changes in firmwide assets under management from July 1, 2005 to June 30, 2006 is as follows:


(dollars in billions)

			Net Changes Due To

	July 1,		New		Asset				June 30,
	2005⁽¹⁾		Money		Appreciation		Other⁽²⁾		2006⁽¹⁾

Assets under management	$	478	$	46	$	34	$	31	$	589


(1)	Includes $5 billion and $6 billion of assets managed by GPC as of July 1, 2005 and June 30, 2006, respectively.
(2)	Includes $18 billion of new assets from the acquisition of the pension business of Royal Philips Electronics, the impact of foreign exchange movements, reinvested dividends and other changes.

Commissions

Commissions for MLIM principally consist of distribution fees and contingent deferred sales charges (“CDSC”) related to mutual funds. The distribution fees represent revenues earned for promoting and distributing mutual funds, and the CDSC represents fees earned when a shareholder redeems shares prior to the specified holding period. Commissions revenues were $29 million in the second quarter of 2006, up 16% from the year-ago quarter on increased activity levels. Year-to-date commissions were $61 million, up 15% from the prior-year period.

Other revenues

Other revenues primarily include net interest profit, investment gains and losses and revenues from consolidated investments. Other revenues, totaled $79 million for the second quarter of 2006, up from $13 million a year ago reflecting increased investment gains from consolidated investments. Other revenues for the first six months of 2006 were $125 million, compared to $28 million for the first six months of 2005.

For additional information on MLIM’s segment results, refer to Note 2 to the Condensed Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Management continually monitors and evaluates the size and composition of the Consolidated Balance Sheet. The following table summarizes the June 30, 2006 and December 30, 2005 period-end, and first six months of 2006 and full-year 2005 average balance sheets:


(dollars in billions)

				2006				2005
		June 30,		Six Month		Dec. 30,		Full Year
		2006		Average⁽¹⁾		2005		Average⁽¹⁾

Assets
Trading-Related
Securities financing assets		$	342.6	$	336.9	$	272.3	$	268.3
Trading assets			166.9		187.1		148.7		182.9
Other trading-related receivables			61.1		60.9		54.3		60.9

			570.6		584.9		475.3		512.1

Non-Trading-Related
Cash			40.8		35.7		26.5		38.7
Investment securities			66.6		68.2		69.3		71.2
Loans, notes, and mortgages, net			70.4		68.7		66.0		60.6
Other non-trading assets			50.8		45.0		43.9		47.8

			228.6		217.6		205.7		218.3

	Total assets	$	799.2	$	802.5	$	681.0	$	730.4


Liabilities
Trading-Related
Securities financing liabilities		$	298.0	$	315.4	$	234.3	$	272.7
Trading liabilities			99.7		117.1		88.9		105.7
Other trading-related payables			75.5		71.0		56.9		63.8

			473.2		503.5		380.1		442.2

Non-Trading-Related
Commercial paper and other short-term borrowings			13.4		9.3		3.9		6.5
Deposits			79.4		81.3		80.0		79.2
Long-term borrowings			140.0		130.0		132.4		122.4
Long-term debt issued to TOPrS^SMpartnerships			3.1		3.1		3.1		3.1
Other non-trading liabilities			53.6		38.4		45.9		43.8

			289.5		262.1		265.3		255.0

	Total liabilities		762.7		765.6		645.4		697.2

Total stockholders’ equity			36.5		36.9		35.6		33.2

Total liabilities and stockholders’ equity		$	799.2	$	802.5	$	681.0	$	730.4


(1)	Averages represent management’s daily balance sheet estimates, which may not fully reflect netting and other adjustments included in period-end balances. Balances for certain assets and liabilities are not revised on a daily basis.

Off Balance Sheet Arrangements

As a part of its normal operations, Merrill Lynch enters into various off balance sheet arrangements that may require future payments. The table below outlines the significant off balance sheet arrangements, as well as the future expiration as of June 30, 2006:


(dollars in millions)

	Expiration

			Less
			than		1 - 3		3⁺- 5		Over
	Total		1 Year		Years		Years		5 Years

Liquidity facilities with SPEs⁽¹⁾	$	29,094	$	28,651	$	333	$	110	$	-
Liquidity and default facilities with SPEs⁽²⁾		10,359		9,013		1,100		-		246
Residual value guarantees⁽³⁾		1,069		66		169		330		504
Standby letters of credit and other guarantees ^(4)(5)(6)		3,918		1,547		584		1,475		312


(1)	Amounts relate primarily to facilities provided to municipal bond securitization SPEs and an asset-backed commercial paper conduit sponsored by Merrill Lynch.
(2)	Amounts relate to liquidity facilities and credit default protection provided to municipal bond securitization SPEs and asset-backed commercial paper conduits sponsored by Merrill Lynch.
(3)	Includes residual value guarantees associated with the Hopewell campus and aircraft leases of $322 million.
(4)	Includes $173 million of reimbursement agreements with the Mortgage 100 ^sm program.
(5)	Includes guarantees related to principal-protected mutual funds.
(6)	Includes certain indemnifications related to foreign tax planning strategies.

Refer to Note 10 to the Condensed Consolidated Financial Statements for additional information.

Contractual Obligations and Commitments

Contractual Obligations

In the normal course of business, Merrill Lynch enters into various contractual obligations that may require future cash payments. The accompanying table summarizes Merrill Lynch’s contractual obligations by remaining maturity at June 30, 2006. Excluded from this table are obligations recorded on the Condensed Consolidated Balance Sheets that are: (i) generally short-term in nature, including securities financing transactions, trading liabilities, commercial paper and other short-term borrowings and other payables; (ii) deposits; (iii) obligations that are related to Merrill Lynch’s insurance subsidiaries, including liabilities of insurance subsidiaries, which are subject to significant variability; and (iv) separate accounts liabilities, which fund separate accounts assets.


(dollars in millions)

	Expiration

			Less
			than		1 - 3		3⁺- 5		Over
	Total		1 Year		Years		Years		5 Years

Long-term borrowings⁽¹⁾	$	143,082	$	24,628	$	45,343	$	35,824	$	37,287
Purchasing and other commitments		7,748		5,548		675		576		949
Operating lease commitments		3,243		561		1,016		815		851


(1)	Includes long-term debt issued to TOPrS ^sm partnerships.

Commitments

At June 30, 2006, Merrill Lynch commitments had the following expirations:


(dollars in millions)

	Expiration

			Less than		1 - 3		3⁺ - 5		Over 5
	Total		1 Year		Years		Years		Years

Commitments to extend credit	$	77,463	$	39,141	$	11,036	$	19,423	$	7,863
Commitments to enter into resale agreements		12,169		12,169		-		-		-

Capital and Funding

The primary objectives of Merrill Lynch’s capital structure and funding policies are to support the successful execution of Merrill Lynch’s business strategies while ensuring:


	•	sufficient equity capital to support existing businesses and future growth plans and

	•	liquidity across market cycles and through periods of financial stress.

These objectives and Merrill Lynch’s capital and funding policies are discussed more fully in the 2005 Annual Report.

Capital

At June 30, 2006, equity capital, as defined by Merrill Lynch, was comprised of $33.4 billion of common equity, $3.1 billion of preferred stock, and $2.5 billion of long-term debt issued to TOPrS^sm partnerships (net of related investments). Equity capital is Merrill Lynch’s view of capital available to support its businesses and differs from stockholders’ equity as defined by U.S. generally accepted accounting principles, which does not include long-term debt issued to TOPrS^sm partnerships, net of related investments.

Merrill Lynch regularly reviews overall equity capital needs to ensure that its equity capital base can support the estimated risks and needs of its businesses, the regulatory and legal capital requirements of its subsidiaries, and standards pursuant to the Consolidated Supervised Entity rules. Merrill Lynch determines the appropriateness of its equity capital composition, taking into account that its preferred stock and TOPrS^sm are perpetual. In the event that capital is generated beyond estimated needs, Merrill Lynch returns capital to shareholders through share repurchases and dividends.

Merrill Lynch continued to grow its equity capital base in the first half of 2006 primarily through net earnings, additional preferred stock issuances, and the net effect of employee stock transactions, including the adoption of SFAS No. 123R, partially offset by common stock repurchases and dividends. Equity capital of $39.1 billion at June 30, 2006 was 2% higher than at December 30, 2005.

On February 28, 2006, Merrill Lynch issued $360 million face value of floating rate, non-cumulative, perpetual preferred stock.

On January 18, 2006, the Board of Directors declared an additional 25% increase in the regular quarterly dividend to 25 cents per common share.

Major components of the changes in equity capital for the first six months of 2006 are as follows:


(dollars in millions)

Balance at December 30, 2005		$	38,144
	Net earnings		2,108
	Issuance of preferred stock		360
	Common and preferred stock dividends		(549	)
	Common stock repurchases		(5,008	)
	Net effect of employee stock transactions and other⁽¹⁾		4,030

Balance at June 30, 2006		$	39,085


(1)	Includes effect of Accumulated other comprehensive loss, the reclassification of FACAAP liabilities to equity associated with the adoption of SFAS No. 123R, and other items.

Balance Sheet Leverage

Asset-to-equity leverage ratios are commonly used to assess a company’s capital adequacy. When assessing its capital adequacy, Merrill Lynch considers the risk profiles of the assets, the impact of hedging, off-balance sheet exposures, operational risk and other considerations. As leverage ratios are not risk sensitive, Merrill Lynch does not rely on them as a measure of capital adequacy.

Merrill Lynch believes that a leverage ratio adjusted to exclude certain assets considered to have low risk profiles and assets in customer accounts financed primarily by customer liabilities provides a more meaningful measure of balance sheet leverage in the securities industry than an unadjusted ratio. Adjusted assets are calculated by reducing total assets by (1) securities financing transactions and securities received as collateral less trading liabilities net of contractual agreements and (2) segregated cash and securities and separate account assets.

The following table provides calculations of Merrill Lynch’s leverage ratios at June 30, 2006 and December 30, 2005:


(dollars in millions)

		June 30, 2006			Dec. 30, 2005

Total assets		$	799,188		$	681,015
Less:
	Receivables under resale agreements		210,268			163,021
	Receivables under securities borrowed transactions		111,580			92,484
	Securities received as collateral		20,721			16,808
Add:
	Trading liabilities, at fair value, excluding contractual agreements		66,554			60,178

Sub-total			523,173			468,880
Less:
	Segregated cash and securities balances		18,307			11,949
	Separate account assets		15,876			16,185

Adjusted assets			488,990			440,746
Less:
	Goodwill and other intangible assets		6,936			6,035

Tangible adjusted assets		$	482,054		$	434,711
Stockholders’ equity		$	36,541		$	35,600
Add:
	Long-term debt issued to TOPrS^SMpartnerships, net of related investments⁽¹⁾		2,544			2,544

Equity capital		$	39,085		$	38,144
Tangible equity capital⁽²⁾		$	32,149		$	32,109
Leverage ratio⁽³⁾			20.4	x		17.9	x
Adjusted leverage ratio⁽⁴⁾			12.5	x		11.6	x
Tangible adjusted leverage ratio⁽⁵⁾			15.0	x		13.5	x


(1)	Due to the perpetual nature of TOPrS^SM and other considerations, Merrill Lynch views the long-term debt issued to TOPrS^SM partnerships (net of related investments) as a component of equity capital. However, the Long-term debt issued to TOPrS^SM partnerships is reported as a liability for accounting purposes. TOPrS^SM related investments were $548 million at June 30, 2006 and December 30, 2005.
(2)	Equity capital less goodwill and other intangible assets.
(3)	Total assets divided by equity capital.
(4)	Adjusted assets divided by equity capital.
(5)	Tangible adjusted assets divided by tangible equity capital.

Funding

Liquidity Risk Management

Merrill Lynch seeks to assure liquidity across market cycles and through periods of financial stress. Merrill Lynch’s primary liquidity objective is to ensure that all unsecured debt obligations maturing within one year can be repaid without issuing new unsecured debt or requiring liquidation of business assets. Toward this goal, Merrill Lynch has established a set of liquidity practices that are outlined below. In addition, Merrill Lynch maintains a contingency funding plan that outlines actions that would be taken in the event of a funding disruption.

Maintain sufficient long-term capital: Merrill Lynch regularly reviews its mix of assets, liabilities and commitments to ensure the maintenance of adequate long-term capital sources to meet long-term capital requirements. Merrill Lynch’s long-term capital sources include equity capital, long-term debt

obligations and certain deposit liabilities in banking subsidiaries which are considered by management to be long-term or stable in nature.

At June 30, 2006 and December 30, 2005, total long-term capital was as follows:


(dollars in billions)

		June 30,		Dec. 30,
		2006		2005

Equity capital		$	39.1	$	38.1
Long-term debt obligations⁽¹⁾			104.1		99.3
Deposit liabilities⁽²⁾			66.6		69.9

	Total long-term capital	$	209.8	$	207.3


(1)	Total long-term borrowings (excluding long term debt issued to TOPrS ^sm partnerships) less (1) the current portion and (2) other subsidiary financing — non-recourse. Borrowings that mature in more than one year, but contain provisions whereby the holder has the option to redeem the obligations within one year, are reflected as current portion of long-term borrowings and are not included in long-term capital. Management believes, however, that a portion of such borrowings will remain outstanding beyond their earliest redemption date.
(2)	Includes $56.0 billion and $10.6 billion of deposits in U.S. and non-U.S. banking subsidiaries, respectively, at June 30, 2006, and $60.2 billion and $9.7 billion of deposits, respectively, at December 30, 2005 that are considered by management to be long-term.

The following items are generally financed with long-term capital:


	•	The portion of assets that cannot be self-funded in the secured financing markets, considering stressed market conditions, including long-term, illiquid assets such as certain loans, goodwill and other intangible assets and fixed assets;

	•	Subsidiaries’ regulatory capital;

	•	Collateral on derivative contracts that may be required in the event of changes in Merrill Lynch’s ratings or movements in underlying instruments; and

	•	Portions of commitments to extend credit based on management’s estimate of the probability of drawdown.

At June 30, 2006, Merrill Lynch’s long-term capital sources of $209.8 billion exceeded Merrill Lynch’s estimated long-term capital requirements.

In assessing the appropriateness of its long-term capital, Merrill Lynch seeks to: (1) ensure sufficient matching of its assets based on factors such as holding period, contractual maturity and regulatory restrictions and (2) limit the amount of liabilities maturing in any particular period. Merrill Lynch also considers circumstances that might cause contingent funding obligations, including early repayment of debt.

The following chart presents Merrill Lynch’s long-term borrowings maturity profile as of June 30, 2006 (quarterly for two years and annually thereafter):

Note: Extendibles are debt instruments with an extendible maturity date. Unless debt holders instruct Merrill Lynch to redeem their debt with at least a one-year notification period, the maturity date of these instruments is automatically extended. Extendibles are included in long-term borrowings if the earliest maturity date is at least one year away. Based on past experience, the majority of Merrill Lynch’s extendibles are expected to remain outstanding beyond their earliest maturity date.

Major components of the change in long-term borrowings, including long-term debt issued to TOPrS^sm partnerships, during the first six months of 2006 are as follows:


(dollars in billions)

Balance at December 30, 2005	$	135.5
Issuance and resale		29.4
Settlement and repurchase		(22.5	)
Other⁽¹⁾		0.7

Balance at June 30, 2006⁽²⁾	$	143.1


(1)	Relates to foreign exchange and other movements.
(2)	See Note 7 to the Condensed Consolidated Financial Statements for the long-term borrowings maturity schedule.

Maintain sufficient funding to repay short-term obligations: The main alternative funding sources to unsecured borrowings are repurchase agreements, securities loaned, other secured borrowings, which require pledging unencumbered securities held for trading or investment purposes, or collateral and proceeds from maturing loans and other assets. Nonetheless, a key funding assumption is accessibility to a repurchase market for highly rated government, agency and certain other securities.

Merrill Lynch maintains a liquidity portfolio of U.S. Government and agency obligations and other instruments of high credit quality, funded predominantly with long term capital sources. The carrying value of this portfolio, net of related hedges, was $15.0 billion and $18.0 billion at June 30, 2006 and December 30, 2005, respectively. ML & Co. also maintained cash and cash equivalents, investments in short-term money market mutual funds, and certain highly liquid unencumbered securities of $7.1 billion and $7.4 billion at June 30, 2006 and December 30, 2005, respectively.

Merrill Lynch monitors the extent to which other unencumbered assets are available to ML & Co. as a source of funds, considering that some subsidiaries are restricted in their ability to upstream unencumbered assets to ML & Co. As of June 30, 2006 unencumbered assets, including amounts that may be restricted, were in excess of $150.1 billion, including the carrying value of the liquidity portfolio and cash balances. Of this amount, $40.1 billion, including the liquidity portfolio and cash, was available to ML & Co. at June 30, 2006, free of regulatory restrictions.

For liquidity planning purposes, Merrill Lynch considers as short-term debt obligations: (i) commercial paper and other short-term borrowings and (ii) the current portion of long-term borrowings. At June 30, 2006 and December 30, 2005, these short-term debt obligations are as follows:


(dollars in billions)

		June 30,		Dec. 30,
		2006		2005

Commercial paper and other short-term borrowings		$	13.4	$	3.9
Current portion of long-term borrowings			24.6		22.8

	Total short-term obligations	$	38.0	$	26.7

At June 30, 2006, Merrill Lynch’s liquidity portfolio, cash balances, maturing short-term assets and other unencumbered assets, some of which may be held in regulated entities but which management believes may be reasonably upstreamed to ML & Co., free of regulatory restrictions, were more than the amount that would be required to repay Merrill Lynch’s short-term obligations and other contingent cash outflows.

In addition to the sources of funding available to meet short-term obligations described above, Merrill Lynch maintains credit facilities that are available to cover immediate funding needs. Merrill Lynch maintains a committed, multi-currency, unsecured bank credit facility that totaled $4.5 billion at June 30, 2006 and $4.0 billion at December 30, 2005. This 364-day facility permits borrowings by ML & Co. and select subsidiaries and expires in June 2007. The facility includes a one year term-out feature that allows ML & Co., at its option, to extend borrowings under the facility for a further year beyond the expiration date in June 2007. At June 30, 2006 and December 30, 2005, there were no borrowings outstanding under this credit facility, although Merrill Lynch borrows regularly from this facility.

Merrill Lynch also maintains two committed, secured credit facilities which totaled $7.0 billion at June 30, 2006 and $5.5 billion at December 30, 2005. The facilities expire in December 2006 and May 2007 respectively. Both facilities include a one year term-out option that allows ML & Co. to extend borrowings under the facilities for a further year beyond their respective expiration dates. The secured facilities permit borrowings by ML & Co. and select subsidiaries, secured by a broad range of collateral. At June 30, 2006 and December 30, 2005 there were no borrowings outstanding under either facility.

In addition, Merrill Lynch maintains a committed, secured credit facility with a financial institution that totaled $6.25 billion at June 30, 2006 and December 30, 2005. The secured facility may be

collateralized by government obligations eligible for pledging. The facility expires in 2014, but may be terminated with at least nine months notice by either party. At June 30, 2006 and December 30, 2005, there were no borrowings outstanding under this facility.

Concentrate unsecured financing at ML & Co.: ML & Co. is the primary issuer of all unsecured, non-deposit financing instruments that are used primarily to fund assets in subsidiaries, some of which are regulated. The benefits of this strategy are greater control, reduced financing costs, wider name recognition by creditors, and greater flexibility to meet variable funding requirements of subsidiaries. Where regulations, time zone differences, or other business considerations make this impractical, some subsidiaries enter into their own financing arrangements.

Diversify unsecured funding sources: Merrill Lynch strives to continually expand and globally diversify its funding programs, its markets, and its investor and creditor base to minimize reliance on any one investor base or region. Merrill Lynch diversifies its borrowings by maintaining various limits, including a limit on the amount of commercial paper held by a single investor. Merrill Lynch benefits by distributing a significant portion of its debt issuances through its own sales force to a large, diversified global client base. Merrill Lynch also makes markets buying and selling its debt instruments.

Total borrowings outstanding at June 30, 2006 were issued in the following currencies:


(USD equivalent in millions)

USD	$	96,685	62	%
EUR		31,204	20
JPY		10,602	7
GBP		8,990	5
AUD		3,192	2
CAD		2,752	2
Other		3,059	2

Total	$	156,484	100	%

Adhere to prudent governance processes: In order to ensure that both daily and strategic funding activities are appropriate and subject to senior management review and control, liquidity management is reviewed in Asset/Liability Committee meetings with Treasury management and is presented to Merrill Lynch’s Risk Oversight Committee (“ROC”), ML & Co. executive management and the Finance Committee of the Board of Directors. Merrill Lynch also manages the growth and composition of its assets and sets limits on the level of unsecured funding at any time.

Credit Ratings

The cost and availability of unsecured funding are also impacted by credit ratings. In addition, credit ratings are important when competing in certain markets and when seeking to engage in long-term transactions including OTC derivatives. Factors that influence Merrill Lynch’s credit ratings include the credit rating agencies’ assessment of the general operating environment, relative positions in the markets in which Merrill Lynch competes, reputation, level and volatility of earnings, corporate governance, risk management policies, liquidity and capital management.

The senior debt and preferred stock ratings of ML & Co. and the ratings of preferred securities issued by subsidiaries on August 2, 2006 were as follows. Rating agencies express outlooks from time to time on these ratings. Each of these agencies describes its current outlook as stable, except for

Standard & Poor’s whose outlook on ML & Co. was raised to positive from stable on January 23, 2006.



			Preferred
Rating Agency	Senior Debt Ratings		Stock Ratings

Dominion Bond Rating Service Ltd.		AA (low)		Not Rated
Fitch Ratings		AA-		A+
Moody’s Investors Service, Inc.		Aa3		A2
Rating & Investment Information, Inc. (Japan)		AA		A+
Standard & Poor’s Ratings Services		A+		A-

In connection with certain OTC derivatives transactions and other trading agreements, Merrill Lynch could be required to provide additional collateral to certain counterparties in the event of a downgrade of the senior debt ratings of ML & Co. At June 30, 2006, the amount of additional collateral that would be required for such derivatives transactions and trading agreements was approximately $456 million in the event of a one-notch downgrade and approximately $1,024 million in the event of a two-notch downgrade of ML & Co.’s long term senior debt credit rating. Merrill Lynch considers additional collateral on derivative contracts that may be required in the event of changes in ML & Co.’s ratings as part of its liquidity management practices.

Risk Management

Risk-taking is integral to many of the core businesses in which Merrill Lynch operates. In the course of conducting its business operations, Merrill Lynch is exposed to a variety of risks including market, credit, liquidity, operational and other risks that are material and require comprehensive controls and ongoing oversight. Senior managers of Merrill Lynch’s core businesses are responsible and accountable for management of the risks associated with their business activities. In addition, there are independent control groups that manage market risk, credit risk, liquidity risk and operational risk, among other functions, which fall under the management responsibility of the Chief Financial Officer. Along with other control units these disciplines work to ensure risks are properly identified, measured, monitored, and managed throughout Merrill Lynch. For a full discussion of Merrill Lynch’s risk management framework, see the 2005 Annual Report.

Market Risk

Market risk is defined as the potential change in value of financial instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spread, and/or other risks. The Market Risk Framework defines and communicates Merrill Lynch’s market risk tolerance and broad overall limits across the firm by defining and constraining exposure to specific asset classes, market risk factors and Value at Risk (“VaR”). VaR is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movements in underlying risk factors.

The Market Risk Management Group is responsible for approving the products and markets in which Merrill Lynch’s major business units and functions will transact and take risk. Moreover, it is responsible for identifying the risks to which these business units will be exposed in these approved products and markets. Market Risk Management uses a variety of quantitative methods to assess the risk of Merrill Lynch’s positions and portfolios. In particular, Market Risk Management quantifies the sensitivities of Merrill Lynch’s current portfolios to changes in market variables. These sensitivities are then utilized in the context of historical data to estimate earnings and loss distributions that Merrill Lynch’s current portfolios would have incurred throughout the historical period. From these distributions, Market Risk Management derives a number of useful risk statistics, including VaR.

The VaR disclosed in the accompanying table is an estimate of the amount that Merrill Lynch’s current trading portfolios could lose with a specified degree of confidence, over a given time interval. The VaR for Merrill Lynch’s overall portfolios is less than the sum of the VaRs for individual risk categories because movements in different risk categories occur at different times and, historically, extreme movements have not occurred in all risk categories simultaneously. The difference between the sum of the VaRs for individual risk categories and the VaR calculated for all risk categories is shown in the following table and may be viewed as a measure of the diversification within Merrill Lynch’s portfolios. Market Risk Management believes that the tabulated risk measures provide broad guidance as to the amount Merrill Lynch could lose in future periods, and Market Risk Management works continually to improve its measurement and the methodology of the firm’s VaR. However, the calculation of VaR requires numerous assumptions and thus VaR should not be viewed as a precise measure of risk. In addition, VaR is not intended to capture worst case scenario losses.

To complement VaR and in recognition of its inherent limitations, Merrill Lynch uses a number of additional risk measurement methods and tools as part of its overall market risk management process. These include stress testing and event risk analysis, which examine portfolio behavior under significant adverse market conditions, including scenarios that would result in material losses for the firm.

To calculate VaR, Market Risk Management aggregates sensitivities to market risk factors and combines them with a database of historical market factor movements to simulate a series of profits and losses. The level of loss that is exceeded in that series 5% of the time is used as the estimate for the 95% confidence level VaR. The overall total VaR amounts are presented across major risk categories, which include exposure to volatility risk found in certain products, such as options.

The table that follows presents Merrill Lynch’s average and ending VaR for trading instruments for the first and second quarters of 2006 and the full-year 2005. Additionally, high and low VaR for the second quarter of 2006 is presented independently for each risk category and overall. Because high and low VaR numbers for these risk categories may have occurred on different days, high and low numbers for diversification benefit would not be meaningful. In the second quarter of 2006, Merrill Lynch made a refinement to the modeling of leveraged loans in the trading account, which lowered the trading VaR. Prior periods have been restated to reflect this refinement.



															Daily			Daily			Daily
		June 30,			March 31,			Dec. 30,			High		Low		Average			Average			Average
		2006			2006			2005			2Q06		2Q06		2Q06			1Q06			2005

Trading Value-at-Risk⁽¹⁾
	Interest rate and credit spread	$	56		$	35		$	37		$	56	$	33	$	44		$	42		$	37
	Equity		19			21			16			39		11		25			11			12
	Commodity		11			5			6			13		6		9			6			8
	Currency		4			4			2			9		2		4			4			3

			90			65			61							82			63			60
Diversification benefit			(37	)		(25	)		(23	)						(34	)		(23	)		(25	)

Overall⁽²⁾		$	53		$	40		$	38		$	65	$	37	$	48		$	40		$	35


(1)	Based on a 95% confidence level and a one-day holding period.
(2)	Overall VaR using a 95% confidence level and a one-week holding period was $92 million at June 30, 2006, $76 million at March 31, 2006 and $63 million at December 30, 2005.

At June 30, 2006, trading VaR was higher than the first quarter of 2006 due to increases in credit spread exposures, and, to a lesser extent, higher commodity exposures. If market conditions are favorable, Merrill Lynch may increase its risk taking in a number of its businesses, including certain proprietary trading activities and principal investments. These activities provide revenue opportunities while also increasing the loss potential under certain market conditions. Risk levels are monitored on a daily basis to ensure they remain within corporate risk guidelines and tolerance levels.

Non-Trading Market Risk

Non-trading market risk includes the risks associated with certain non-trading activities, including investment securities, securities financing transactions and equity investments. Also included are the risks related to treasury funding activities. Risks related to lending activities are covered in the Credit Risk section.

The primary market risk of non-trading investment securities, and non-trading repurchase and reverse repurchase agreements is expressed as sensitivity to changes in the general level of credit spreads which are defined as the differences in the yields on debt instruments from relevant LIBOR/ Swap rates. Non-trading investment securities include securities available-for-sale and held-to-maturity as well as investments of insurance subsidiaries. At the end of the second quarter of 2006, the total credit spread sensitivity of these instruments is a pre-tax loss of $22 million in fair market value for an increase of one basis point, which is one one-hundredth of a percent, in credit spreads, compared to a pre-tax loss of $20 million at the end of the first quarter of 2006 and $19 million at year-end 2005. This change in fair market value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.

The interest rate risk associated with the foregoing non-trading positions, together with treasury funding activities is expressed as sensitivity to changes in the general level of interest rates. Treasury funding activities include LYONs^®, TOPrS^sm and other long-term debt together with interest rate hedges. At the end of the second quarter of 2006, the net interest rate sensitivity of these positions is a pre-tax loss in fair market value of $2 million for a parallel one basis point increase in interest rates across all yield curves, unchanged from the end of the first quarter of 2006, and compared to $1 million at year-end 2005. This change in fair market value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.

Other non-trading equity investments include direct private equity interests, private equity fund investments, hedge fund interests, and certain direct and indirect real estate investments. These investments are broadly sensitive to general price levels in the equity or commercial real estate markets as well as to specific business, financial and credit factors which influence the performance and valuation of each investment uniquely. Refer to Note 5 of the 2005 Annual Report for additional information on these investments.

Credit Risk

Commercial Lending

Commercial lending conducted by Merrill Lynch consists primarily of corporate and institutional lending, asset-based finance, commercial finance, and commercial real estate related activities. In evaluating certain potential commercial lending transactions, Merrill Lynch utilizes a risk adjusted return on capital model in addition to other methodologies.

The following table presents a distribution of commercial loans and closed commitments for June 30, 2006, gross of allowances for loan losses and reserves, without considering the impact of purchased credit protection. Closed commitments represent the unfunded portion of existing commitments available for draw down and do not include contingent commitments extended but not yet closed. As of June 30, 2006, Merrill Lynch’s largest commercial lending industry concentration was to financial institutions including banks, insurance companies, finance companies, investment managers and other diversified financial institutions. Commercial borrowers were predominantly domiciled in the United States or had principal operations tied to the United States or its economy. The majority of all outstanding commercial loan balances had a remaining maturity of less than three years. Additional detail on Merrill Lynch’s commercial lending related activities can be found in Note 6 to the Condensed Consolidated Financial Statements. The following table depicts Merrill Lynch’s commercial lending balances by credit quality, industry and country at June 30, 2006.


(dollars in millions)

	Loans				Closed Commitments

By Credit Quality⁽¹⁾	Secured		Unsecured		Secured		Unsecured

Investment grade	$	18,163	$	4,481	$	16,748	$	21,539
Non-investment grade		22,904		1,497		9,707		1,366

Total	$	41,067	$	5,978	$	26,455	$	22,905


(1)	Based on credit rating agency equivalent of internal credit ratings.



	Loans						Closed Commitments

By Industry	Secured			Unsecured			Secured			Unsecured

Financial Institutions		38	%		12	%		41	%		30	%
Consumer Goods and Services		27			49			27			15
Real Estate		13			8			5			4
Technology/ Media/ Telecommunications		4			11			3			18
Energy/ Utilities		2			7			5			17
Industrial/ Manufacturing Goods and Services		5			5			4			10
All Other		11			8			15			6

Total		100	%		100	%		100	%		100	%



	Loans						Closed Commitments

By Country	Secured			Unsecured			Secured			Unsecured

United States		61	%		70	%		80	%		76	%
United Kingdom		14			4			10			5
Germany		2			-			1			8
Japan		4			5			-			-
Canada		3			1			2			3
All Other		16			20			7			8

Total		100	%		100	%		100	%		100	%

Residential Mortgage Lending

Merrill Lynch originates and purchases residential mortgage loans, certain of which include features that may result in additional credit risk when compared to more traditional types of mortgages. The potential additional credit risk arising from these mortgages is addressed through adherence to underwriting guidelines. Credit risk is closely monitored in order to ensure that reserves are sufficient and valuations are appropriate. For additional information on residential mortgage lending, see the 2005 Annual Report.

Derivatives

Merrill Lynch enters into International Swaps and Derivatives Association, Inc. master agreements or their equivalent (“master netting agreements”) with substantially all of its derivative counterparties as soon as possible. Agreements are negotiated bilaterally and can require complex terms. While every effort is taken to execute such agreements, it is possible that a counterparty may be unwilling to sign such an agreement and, as a result, would subject Merrill Lynch to additional credit risk. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset for risk management purposes. However, the enforceability of master netting agreements under bankruptcy laws in certain countries or in certain industries is not free from doubt, and receivables and payables with counterparties in these countries or industries are accordingly recorded on a gross basis.

In addition, to reduce the risk of loss, Merrill Lynch requires collateral, principally cash and U.S. Government and agency securities, on certain derivative transactions. From an economic standpoint, Merrill Lynch evaluates risk exposures net of related collateral. The following is a summary of counterparty credit ratings for the replacement cost (net of $14.4 billion of collateral, of which $7.1 billion represented cash collateral) of OTC trading derivatives in a gain position by maturity at June 30, 2006.


(dollars in millions)

	Years to Maturity								Cross-
									Maturity
Credit Rating⁽¹⁾	0-3		3⁺- 5		5⁺- 7		Over 7		Netting⁽²⁾			Total

AAA	$	1,434	$	423	$	190	$	1,290	$	(185	)	$	3,152
AA		3,420		929		960		3,346		(2,646	)		6,009
A		2,991		1,139		1,146		2,953		(4,797	)		3,432
BBB		1,743		452		466		1,662		(519	)		3,804
Other		2,120		531		268		405		(187	)		3,137

Total	$	11,708	$	3,474	$	3,030	$	9,656	$	(8,334	)	$	19,534


(1)	Represents credit rating agency equivalent of internal credit ratings.
(2)	Represents netting of payable balances with receivable balances for the same counterparty across maturity band categories. Receivable and payable balances with the same counterparty in the same maturity category, however, are net within the maturity category.

In addition to obtaining collateral, Merrill Lynch attempts to mitigate its default risk on derivatives whenever possible by entering into transactions with provisions that enable Merrill Lynch to terminate or reset the terms of its derivative contracts.

Non-Investment Grade Holdings and Highly Leveraged Transactions

Non-investment grade holdings and highly leveraged transactions involve risks related to the creditworthiness of the issuers or counterparties and the liquidity of the market for such investments. Merrill Lynch recognizes these risks and, whenever possible, employs strategies to mitigate exposures. The specific components and overall level of non-investment grade and highly leveraged positions may vary significantly from period to period as a result of inventory turnover, investment sales, and asset redeployment.

In the normal course of business, Merrill Lynch underwrites, trades, and holds non-investment grade cash instruments in connection with its investment banking, market-making, and derivative structuring

activities. Non-investment grade holdings are defined as debt and preferred equity securities rated lower than BBB or equivalent ratings by recognized credit rating agencies, sovereign debt in emerging markets, amounts due under derivative contracts from non-investment grade counterparties, and other instruments that, in the opinion of management, are non-investment grade.

In addition to the amounts included in the following table, derivatives may also expose Merrill Lynch to credit risk related to the underlying security where a derivative contract can either replicate ownership of the underlying security (e.g., long total return swaps) or potentially force ownership of the underlying security (e.g., short put options). Derivatives may also subject Merrill Lynch to credit spread or issuer default risk, in that changes in credit spreads or in the credit quality of the underlying securities may adversely affect the derivatives’ fair values. Merrill Lynch seeks to manage these risks by engaging in various hedging strategies to reduce its exposure associated with non-investment grade positions, such as purchasing an option to sell the related security or entering into other offsetting derivative contracts.

Merrill Lynch provides financing and advisory services to, and invests in, companies entering into leveraged transactions, which may include leveraged buyouts, recapitalizations, and mergers and acquisitions. On a selected basis, Merrill Lynch provides extensions of credit to leveraged companies, in the form of senior and subordinated debt, as well as bridge financing. In addition, Merrill Lynch syndicates loans for non-investment grade companies or in connection with highly leveraged transactions and may retain a portion of these loans.

Merrill Lynch holds direct equity investments in leveraged companies and interests in partnerships that invest in leveraged transactions. Merrill Lynch has also committed to participate in limited partnerships that invest in leveraged transactions. Future commitments to participate in limited partnerships and other direct equity investments will continue to be made on a selective basis.

Trading Exposures

The following table summarizes Merrill Lynch’s trading exposure to non-investment grade or highly leveraged issuers or counterparties:


(dollars in millions)

		June 30,			Dec. 30,
		2006			2005

Trading assets:
	Cash instruments	$	20,397		$	15,578
	Derivatives		5,838			6,750
Trading liabilities — cash instruments			(3,304	)		(3,400	)
Collateral on derivative assets			(2,701	)		(3,123	)

Net trading asset exposure		$	20,230		$	15,805

Included in the preceding table are debt and equity securities and bank loans of companies in various stages of bankruptcy proceedings or in default. At June 30, 2006, the carrying value of such debt and equity securities totaled $694 million, of which 48% resulted from Merrill Lynch’s market-making activities in such securities. This compared with $900 million at December 30, 2005, of which 61% related to market-making activities. Also included are distressed bank loans totaling $297 million and $290 million at June 30, 2006 and December 30, 2005, respectively.

Non-Trading Exposures

The following table summarizes Merrill Lynch’s non-trading exposures to non-investment grade or highly leveraged corporate issuers or counterparties:


(dollars in millions)

		June 30,		Dec. 30,
		2006		2005

Investment securities		$	500	$	554
Other investments⁽¹⁾:
	Partnership interests		3,245		2,371
	Other equity investments⁽²⁾		2,646		2,086
Other assets			-		76


(1)	Includes a total of $665 million and $556 million in investments held by employee partnerships at June 30, 2006 and December 30, 2005, respectively, for which a portion of the market risk of the investments rests with the participating employees.
(2)	Includes investments in 169 and 167 enterprises at June 30, 2006 and December 30, 2005, respectively.

In addition, Merrill Lynch had commitments to non-investment grade or highly leveraged corporate issuers or counterparties of $1.7 billion and $1.2 billion at June 30, 2006 and December 30, 2005, respectively, which primarily relate to commitments to invest in partnerships.

Recent Developments

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for Merrill Lynch beginning in the first quarter of 2007. Merrill Lynch is currently evaluating the impact of adopting the Interpretation.

In April 2006, the FASB issued a FASB Staff Position FIN 46(R)-6, Determining the Variability to be Considered in Applying FIN 46R (“ the FSP”). The FSP requires that the variability to be included when applying FIN 46R be based on a “by-design” approach and consider what risks the variable interest entity was designed to create. The FSP is effective beginning in the third quarter of 2006 for all new entities with which Merrill Lynch becomes involved, and to all entities previously required to be analyzed under FIN 46R when a reconsideration event occurs as defined under paragraph 7 of the Interpretation. Merrill Lynch does not expect the adoption of the FSP to have a material impact on the Condensed Consolidated Financial Statements.

and liabilities at fair value rather than at the lower of cost or market. For those companies that elect to measure their servicing assets and liabilities at fair value, SFAS No. 156 requires the difference between the carrying value and fair value at the date of adoption to be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the election is made. Merrill Lynch will adopt SFAS No. 156 beginning in the first quarter of 2007. Merrill Lynch is currently assessing the impact of adopting SFAS No. 156 but does not expect the standard to have a material impact on the Condensed Consolidated Financial Statements.

In February 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140(“SFAS No. 155”). SFAS No. 155 clarifies the bifurcation requirements for certain financial instruments and permits interests in hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation to be accounted for as a single financial instrument at fair value with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. Merrill Lynch will adopt SFAS No. 155 beginning in the first quarter of 2007. At adoption, any difference between the total carrying amount of the individual components of the existing bifurcated hybrid financial instruments and the fair value of the combined hybrid financial instruments will be recognized as a cumulative-effect adjustment to beginning retained earnings. Merrill Lynch is currently assessing the impact of adopting SFAS No. 155.

During the first quarter of 2006, Merrill Lynch adopted the provisions of Statement No. 123 (revised 2004), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123R”). Under SFAS No. 123R, compensation expenses for share-based awards that do not require future service are recorded immediately, and share-based awards that require future service continue to be amortized into expense over the relevant service period. Merrill Lynch adopted SFAS No. 123R under the modified prospective method whereby the provisions of SFAS No. 123R are generally applied only to share-based awards granted or modified subsequent to adoption. Thus, for Merrill Lynch, SFAS No. 123R required the immediate expensing of share-based awards granted or modified in 2006 to retirement-eligible employees, including awards that are subject to non-compete provisions.

the first quarter of 2006, Merrill Lynch recorded a benefit based on expected forfeitures which was not material to the results of operations for the quarter.

The adoption of SFAS No. 123R resulted in a first quarter charge to compensation expense of approximately $550 million on a pre-tax basis and $370 million on an after-tax basis.

The adoption of SFAS No. 123R, combined with other business and competitive considerations, prompted Merrill Lynch to undertake a comprehensive review of the company’s stock-based incentive compensation awards, including vesting schedules and retirement eligibility requirements, examining their impact to both Merrill Lynch and its employees. Upon the completion of this review, the Management Development and Compensation Committee of Merrill Lynch’s Board of Directors determined that to fulfill the objective of retaining high quality personnel, future stock grants should contain more stringent retirement provisions. These provisions include a combination of increased age and length of service requirements. While the stock awards of employees who retire continue to vest, retired employees are subject to continued compliance with the strict non-compete provisions of those awards. To facilitate transition to the more stringent future requirements, the terms of most outstanding stock awards previously granted to employees, including certain executive officers, were modified, effective March 31, 2006, to permit employees to be immediately eligible for retirement with respect to those earlier awards. While Merrill Lynch modified the retirement-related provisions of the previous stock awards, the vesting and non-compete provisions for those awards remain in force.

Statistical Data


			2nd Qtr.			3rd Qtr.		4th Qtr.		1st Qtr.		2nd Qtr.
			2005			2005		2005		2006		2006

Client Assets (dollars in billions)
Private Client:
		U.S.	$	1,234		$	1,271	$	1,341	$	1,381	$	1,370
		Non-U.S.		115			113		117		121		124

Total Private Client Assets				1,349			1,384		1,458		1,502		1,494
MLIM direct sales⁽¹⁾				236			272		291		316		326

Total Client Assets			$	1,585		$	1,656	$	1,749	$	1,818	$	1,820

Assets Under Management⁽²⁾			$	478		$	524	$	544	$	581	$	589
Retail				218			231		245		272		275
Institutional				215			246		250		259		266
Retail Separate Accounts				45			47		49		50		48
U.S.				311			322		333		347		346
Non-U.S.				167			202		211		234		243
Equity				249			285		299		330		333
Retail Money Market				46			45		45		48		46
Institutional Liquidity Funds				68			74		77		78		83
Fixed Income				115			120		123		125		127

Net New Money (dollars in billions)
All Private Client Accounts⁽³⁾			$	7		$	11	$	17	$	18	$	7
Annuitized-Revenue Products⁽³⁾⁽⁴⁾			$	8		$	10	$	10	$	13	$	10
Assets Under Management			$	(2	)	$	12	$	11	$	15	$	8

Full-Time Employees:⁽⁵⁾
		U.S.		40,900			41,900		43,200		43,400		43,600
		Non-U.S.		10,900			11,200		11,400		12,100		12,400

		Total		51,800			53,100		54,600		55,500		56,000

Private Client Financial Advisors:⁽⁶⁾				14,420			14,690		15,160		15,350		15,520

Balance Sheet (dollars in millions, except per share amounts)
Total assets			$	626,140		$	670,593	$	681,015	$	732,240	$	799,188
Total stockholders’ equity			$	33,041		$	33,630	$	35,600	$	37,825	$	36,541
Book value per common share			$	33.63		$	34.66	$	35.82	$	37.19	$	37.18
Share Information (in thousands)
Weighted-average shares outstanding:
	Basic			897,524			881,409		876,230		883,737		885,373
	Diluted			978,504			968,493		970,673		981,085		973,324
Common shares outstanding at period end				930,867			921,699		919,201		933,443		898,124


Note:	Certain prior period amounts have been reclassified to conform to the current period presentation.

(1) Reflects funds managed by MLIM not sold through Private Client channels.


(2)	Includes $5 billion of accounts managed by GPC at the end of 2Q05, 3Q05, 4Q05 and 1Q06, and $6 billion at the end of 2Q06.
(3)	GPC net new money excludes flows associated with the Institutional Advisory Division which serves certain small- and middle-market companies, as well as net outflows in the Amvescap retirement business and the Advest acquisition prior to its system conversion in early March.
(4)	Includes both net new client assets into annuitized-revenue products, as well as existing client assets transferred into annuitized-revenue products.
(5)	Excludes 100 full-time employees on salary continuation severance at the end of 2Q05, 3Q05, and 200 at the end of 4Q05, 1Q06; and 300 at the end of 2Q06.
(6)	Includes 140 Financial Advisors associated with the Mitsubishi UFJ joint venture at the end of 2Q06.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information under the caption Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management” above in this Report is incorporated herein by reference.

Item 4. Controls and Procedures

ML & Co.’s Disclosure Committee assists with the monitoring and evaluation of our disclosure controls and procedures. ML & Co.’s Chief Executive Officer, Chief Financial Officer and Disclosure Committee have evaluated the effectiveness of ML & Co.’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on that evaluation, ML & Co.’s Chief Executive Officer and Chief Financial Officer have concluded that ML & Co.’s disclosure controls and procedures are effective.

In addition, no change in ML & Co.’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the second fiscal quarter of 2006 that has materially affected, or is reasonably likely to materially affect, ML & Co.’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1.	Legal Proceedings

The following information supplements the discussions in Part I, Item 3 “Legal Proceedings” in ML & Co.’s Annual Report on Form 10-K for the fiscal year ended December 30, 2005 and ML & Co’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006:

Enron Litigation

United States v. Brown, et al.: On August 1, 2006, the United States Court of Appeals for the Fifth Circuit vacated the conviction of four former Merrill Lynch employees for conspiracy and wire fraud related to Enron’s alleged misrepresentations of its financial condition. The court affirmed the conviction of one of those former employees for perjury and obstruction of a Grand Jury investigation.

Newby v. Enron Corp. et al.: On July 5, 2006, the district court issued an order certifying the case as a class action. On July 19, 2006, Merrill Lynch and other defendants appealed that order to the United States Court of Appeals for the Fifth Circuit. Merrill Lynch’s appeal, which plaintiff opposes, challenges the district court’s rulings on 1) the standards for determining whether conduct amounts to a primary violation of the federal securities laws (which is actionable) or aiding and abetting (which is not actionable), 2) defendants’ potential liability for the conduct of others who allegedly caused losses to Enron’s investors, and 3) whether the so-called fraud-on-the-market theory, which is important to class certification, applies to the allegations against Merrill Lynch. On July 31, 2006, the district court denied plaintiff’s August 3, 2005 motion for partial summary judgment against Merrill Lynch. On August 2, 2006, plaintiff and certain defendants, including Merrill Lynch, requested that the start of the trial be postponed from October 16, 2006 to April 9, 2007.

Research

In re Merrill Lynch & Co., Inc. Shareholders Litigation: In July 2006, this matter was settled for an amount that did not have a material impact on ML & Co.’s financial condition or results of operations. The settlement is subject to documentation and court approval.

IPO Allocation Litigation

In re Initial Public Offering Antitrust Litigation: On June 19, 2006, the Supreme Court requested the government to submit its views on whether the defendants’ petition for certiorari should be granted. The petition seeks review of an appellate court decision reversing the district court’s dismissal of the action. The government has not yet submitted its views to the Supreme Court, and the Supreme Court has not yet decided whether to grant the petition for certiorari.

IPO Underwriting Fee Litigation

In re Public Offering Fee Antitrust Litigation and In re Issuer Plaintiff Initial Public Offering Fee Antitrust Litigation: On May 1, 2006, plaintiff filed an appeal of the district court’s decision declining to certify a class with the United States Court of Appeals for the Second Circuit. On August 1, 2006, the court of appeals agreed to hear the appeal.

Short Sales

Electronic Trading Group, LLC v. Banc of America Securities LLC, et al: Plaintiffs have advised the defendants that they intend to file an amended complaint on or before September 5, 2006. The defendants, including Merrill Lynch, will then have until November 8, 2006, to move to dismiss the amended complaint.

Avenius v. Banc of America Securities LLC, et al: On June 22, 2006, 37 purchasers of securities of Nova Star Financial filed an action against eleven financial services firms, including Merrill Lynch, in the California Superior Court in San Francisco. The case alleges that the defendants improperly depressed the price of Nova Star Financial shares by facilitating short sales that did not comply with regulatory requirements. The case was removed to federal court on July 21. Merrill Lynch intends to vigorously defend itself against these charges.

SwissAir

On July 24, 2006, Merrill Lynch Capital Markets Bank AG (“MLCMB AG”) filed its defense to the claims of the Liquidator of SAirGroup (“SwissAir”) in the commercial court of Zurich. The first hearing that considers the merits of the claims is likely to take place in late 2006 or early 2007.

Other

Merrill Lynch has been named as a defendant in various other legal actions, including arbitrations, class actions, and other litigation arising in connection with its activities as a global diversified financial services institution. The general decline of equity securities prices between 2000 and 2003 resulted in increased legal actions against many firms, including Merrill Lynch.

Some of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the issuers that would otherwise be the primary defendants in such cases are bankrupt or otherwise in financial distress. Merrill Lynch is also involved in investigations and/or proceedings by governmental and self-regulatory agencies. The number of these investigations has also increased in recent years with regard to many firms, including Merrill Lynch.

Merrill Lynch believes it has strong defenses to, and where appropriate, will vigorously contest, many of these matters. Given the number of these matters, some are likely to result in adverse judgments, penalties, injunctions, fines, or other relief. Merrill Lynch may explore potential settlements before a case is taken through trial because of the uncertainty and risks inherent in the litigation process. In accordance with SFAS No. 5, Merrill Lynch will accrue a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits and arbitrations, including most of the class action lawsuits disclosed in ML & Co.’s public filings, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, Merrill Lynch cannot predict what the eventual loss or range of loss related to such matters will be. Subject to the foregoing, Merrill Lynch continues to assess these cases and believes, based on information available to it, that the resolution of these matters will not have a material adverse effect on the financial condition of Merrill Lynch as set forth in the Condensed Consolidated Financial Statements, but may be material to Merrill Lynch’s operating results or cash flows for any particular period and may impact ML & Co.’s credit ratings.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 30, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing Merrill Lynch. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.


Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The table below sets forth the information with respect to purchases made by or on behalf of Merrill Lynch or any “affiliated purchaser” of Merrill Lynch’s common stock during the quarter ended June 30, 2006.

(dollars in millions, except per share amounts)

Total Number

Approximate

of Shares

Dollar Value of

Purchased as

Shares that May

Total Number

Average

Part of Publicly

Yet be Purchased

of Shares

Price Paid

Announced

Under the

Period

Purchased

per Share

Program⁽¹⁾

Program

Month #1 (Apr. 1, 2006 – May 5, 2006)

Capital Management Program

15,654,300

$78.35

15,654,300

$4,130

Employee Transactions⁽²⁾

321,560

77.31

N/A

Month #2 (May 6, 2006 – Jun. 2, 2006)

Capital Management Program

10,442,676

$72.56

10,442,676

$3,372

Employee Transactions⁽²⁾

336,242

72.07

N/A

Month #3 (Jun. 3, 2006 – Jun. 30, 2006)

Capital Management Program

15,309,000

$68.53

15,309,000

$2,323

Employee Transactions⁽²⁾

404,666

67.78

N/A

Second Quarter 2006 (Apr. 1, 2006 –
Jun. 30, 2006)

Capital Management Program

41,405,976

$73.26

41,405,976

$2,323

Employee Transactions⁽²⁾

1,062,468

72.02

N/A


(1)	Share repurchases under the program were made pursuant to open-market purchases, Rule 10b5-1 plans or privately negotiated transactions as market conditions warranted and at prices Merrill Lynch deemed appropriate.
(2)	Included in the total number of shares purchased are: (1) shares purchased during the period by participants in the Merrill Lynch 401(k) Savings and Investment Plan (“401(k)”) and the Merrill Lynch Retirement Accumulation Plan (“RAP”), (2) shares delivered or attested to in satisfaction of the exercise price by holders of ML & Co. employee stock options (granted under employee stock compensation plans) and (3) Restricted Shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon vesting and release of Restricted Shares. ML & Co.’s employee stock compensation plans provide that the value of the shares delivered or attested, or withheld, shall be the average of the high and low price of ML & Co.’s common stock (Fair Market Value) on the date the relevant transaction occurs. See Notes 13 and 14 of the 2005 Annual Report for additional information on these plans.


Item 4.	Submission of Matters to a Vote of Security Holders

On April 28, 2006, ML & Co. held its Annual Meeting of Shareholders. Further details concerning matters submitted for shareholders’ vote can be found in ML & Co.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006.


Item 6.	Exhibits


3		ML & Co.’s Amended and Restated By-Laws, effective as of July 24, 2006.
4		Instruments defining the rights of security holders, including indentures:
		ML & Co. hereby undertakes to furnish to the Securities and Exchange Commission, upon request, copies of the instruments that have not been filed which define the rights of holders of long-term debt securities of ML & Co. that authorize an amount of securities constituting 10% or less of the total assets of ML & Co. and its subsidiaries on a consolidated basis. Such instruments have not been filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
4.1		Supplemental Indenture dated as of May 16, 2006 between ML & Co. and JPMorgan Chase Bank, N.A. (filed as Exhibit 4(a) to ML & Co.’s Report on Form 8-K dated May 16, 2006)
10.1		ML & Co. 2006 Deferred Compensation Plan for a Select Group of Eligible Employees (filed as Exhibit 10.3 to ML & Co.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006).
10.2		Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
11		Statement re: computation of earnings per common share (the calculation of per share earnings is in Part I, Item 1, Note 9 to the Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).
12		Statement re: computation of ratios.
15		Letter re: unaudited interim financial information.
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Reconciliation of “Non-GAAP” Measures.

INDEX TO EXHIBITS

Exhibit


3		ML & Co.’s Amended and Restated By-Laws, effective as of July 24, 2006.
4		Instruments defining the rights of security holders, including indentures:
		ML & Co. hereby undertakes to furnish to the Securities and Exchange Commission, upon request, copies of the instruments that have not been filed which define the rights of holders of long-term debt securities of ML & Co. that authorize an amount of securities constituting 10% or less of the total assets of ML & Co. and its subsidiaries on a consolidated basis. Such instruments have not been filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
4.1		Supplemental Indenture dated as of May 16, 2006 between ML & Co. and JPMorgan Chase Bank, N.A. (filed as Exhibit 4(a) to ML & Co.’s Report on Form 10-Q for the quarterly period ended March 31, 2006).
10.1		ML & Co. 2006 Deferred Compensation Plan for a Select Group of Eligible Employees (filed as Exhibit 10.3 to ML & Co.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006).
10.2		Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
11		Statement re: computation of earnings per common share (the calculation of per share earnings is in Part I, Item 1, Note 9 to the Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted in accordance with Section (b)(11) of Item 601 of Regulation S-K).
12		Statement re: computation of ratios.
15		Letter re: unaudited interim financial information.
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1		Reconciliation of “Non-GAAP” Measures.


Part I. Financial Information			4

	Item 1. Financial Statements (unaudited)		4
		Condensed Consolidated Statements of Earnings	4
		Condensed Consolidated Balance Sheets	6
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9
		Note 1. Summary of Significant Accounting Policies	9
		Note 2. Segment Information	13
		Note 3. Securities Financing Transactions	14
		Note 4. Investment Securities	15
		Note 5. Securitization Transactions and Transactions with Special Purpose Entities (“SPEs”)	15
		Note 6. Loans, Notes, and Mortgages and Related Commitments to Extend Credit	20
		Note 7. Commercial Paper, Short- and Long-Term Borrowings, and Deposits	21
		Note 8. Comprehensive Income	23
		Note 9. Stockholders’ Equity and Earnings Per Share	24
		Note 10. Commitments, Contingencies and Guarantees	25
		Note 11. Employee Benefit Plans	29
		Note 12. Employee Incentive Plans	30
		Note 13. Regulatory Requirements	34
		Report of Independent Registered Public Accounting Firm	37
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
		Forward-Looking Statements	38
		Overview	38
		Critical Accounting Policies and Estimates	39
		Business Environment	44
		Results of Operations	45
		Business Segments	48
		Consolidated Balance Sheets	55
		Off Balance Sheet Arrangements	56
		Contractual Obligations and Commitments	56
		Capital and Funding	57
		Risk Management	64
		Non-Investment Grade Holdings and Highly Leveraged Transactions	68
		Recent Developments	70
		Statistical Data	74
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		75
	Item 4. Controls and Procedures		75

Part II. Other Information			76

	Item 1. Legal Proceedings		76
	Item 1A. Risk Factors		78
	Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities		78
	Item 4. Submission of Matters to a Vote of Security Holders		79
	Item 6. Exhibits		79
	Signatures		80
	Index to Exhibits		81
EX-3: AMENDED AND RESTATED BY-LAWS
EX-10.2: STOCKHOLDER AGREEMENT
EX-12: STATEMENT RE: COMPUTATION OF RATIOS
EX-15: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
EX-99.1: RECONCILIATION OF "NON-GAAP" MEASURES



	Jeffrey N. Edwards
	Senior Vice President and
	Chief Financial Officer



	Laurence A. Tosi
	Senior Vice President and Finance Director
	Principal Accounting Officer