EXHIBIT 13

Financial Table of Contents

Selected Financial Data
(dollars in millions, except per share amounts)

Selected Financial Data 27

Table of Contents

Management’s Discussion and Analysis

Merrill Lynch & Co., Inc. (“ML & Co.” and, together with its subsidiaries and affiliates, “Merrill Lynch”) is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance, and related services worldwide. The financial services industry, in which Merrill Lynch is a leading participant, is highly competitive and highly regulated. This industry and the global financial markets are influenced by numerous uncontrollable factors. These factors include economic conditions, monetary and fiscal policies, the liquidity of global markets, international and regional political events, regulatory developments, the competitive environment, and investor sentiment. These conditions or events can significantly affect the volatility of financial markets. While greater volatility may increase risk, it may also increase order flow and revenues in businesses such as trading and brokerage. Revenues and net earnings may vary significantly from period to period due to these unpredictable factors and the resulting market volatility and volumes.

     The financial services industry continues to be affected by the intensifying competitive environment, as demonstrated by consolidation through mergers and acquisitions and competition from new entrants as well as established competitors using the Internet or other technology to establish or expand their businesses, and diminishing margins in many mature products and services. The Gramm-Leach-Bliley Act, passed in 1999, which repealed U.S. laws that separated commercial banking, investment banking and insurance activities, together with changes to the industry resulting from previous reforms, has increased the number of companies competing for a similar customer base.

     In addition to providing historical information, Merrill Lynch may make or publish forward-looking statements about management expectations, strategic objectives, business prospects, anticipated financial performance, and other similar matters. A variety of factors, many of which are beyond its control, affect the operations, performance, business strategy, and results of Merrill Lynch and could cause actual results and experience to differ materially from the expectations and objectives expressed in these statements. These factors include, but are not limited to, the factors listed in the previous two paragraphs, as well as actions and initiatives taken by both current and potential competitors, the effect of current, pending, and future legislation and regulation both in the United States and throughout the world, and the other risks detailed in Merrill Lynch’s Form 10-K and in the following sections.

     Merrill Lynch undertakes no responsibility to update or revise any forward-looking statements.

Business Environment
After a record-breaking 1999 and a strong start in 2000, global financial markets slowed during the latter part of the year, particularly in equities. Investors tended to avoid the turbulent stock markets in the second half of the year, as technology stocks fell, and the Nasdaq posted its weakest performance since 1971. Initial public offerings (“IPOs”), which reached unprecedented volumes in 1999 due to extremely high customer demand, declined later in 2000 when investors lost confidence in companies without a history of profits. After raising interest rates a total of six times since June of 1999, the Federal Reserve kept rates constant throughout the second half of 2000, and then lowered the federal funds rate by a full point in January of 2001. A weak euro and rising energy prices, combined with a declining Nasdaq, caused dips in most major markets outside the United States, as evidenced by a decline in the Dow Jones World Stock Index, excluding the United States. Although global stock and bond issuance declined 9%, investment banks earned

28 Management’s Discussion and Analysis

record underwriting fees, due to several large IPOs in the first half of the year.

     The yield on the 10-year Treasury note fell to 5.11% at the end of 2000 from 6.44% at the end of 1999, and the yield on the 30-year bond dropped to 5.46% from 6.48%, as investors drove up the prices of government securities in an attempt to avoid losses in the stock market. A growing U.S. budget surplus allowed the Treasury to begin to buy back outstanding bonds, further increasing demand for outstanding issues and causing bond prices to rise, despite three interest rate hikes in the first half of 2000. Due to slower growth in corporate earnings and higher rates of default, high-grade corporate and high-yield bonds performed poorly in 2000. Credit spreads widened significantly throughout the year, as the spread between yields on Treasuries and corporate bonds reached its highest point in over ten years. In Europe, inflationary pressures led the European Central Bank to raise short-term rates six times in 2000.

     U.S. equity markets which, during 1999, experienced extraordinary gains that were led by an unprecedented demand for communications and technology stocks, delivered disappointing results in 2000, as the devaluation of many of these same stocks caused indices to fall. Prices of telecommunications, media, and technology stocks, collectively known as TMT stocks, which soared in 1999, decreased as a result of concerns over corporate profits. After achieving an all-time high in March of 2000, the Nasdaq declined 39.3% in 2000, erasing almost all of the gains achieved in 1999. In 2000, the Dow Jones Industrial Average and S&P 500 declined 6.2% and 10.1%, respectively, due to widespread market corrections as growth in the U.S. gross domestic product fell to its lowest level in five years.

     Global equity indices reflected the weak performance of U.S. equity indices. The Dow Jones World Stock Index, excluding the United States, was down 17.4% from the end of 1999. Rising oil prices and global interest rates, combined with a 6.3% decline in the value of the euro against the U.S. dollar, led to a downturn in global equity markets. Deflation of TMT stocks had the greatest impact in Europe, as well as Taiwan, Korea, and Japan. The decline in these stocks was partly offset by gains in Europe’s financial services, banking, and pharmaceutical sectors. Due to political uncertainty and stalled corporate restructuring in Japan, the Nikkei 225 index fell 27.2% in yen terms and 34.8% in U.S. dollar terms for the year, the sharpest decline since 1990. Emerging markets suffered the most, especially in Asia, where five stock markets declined by 30% or more, amidst rising U.S. interest rates and high oil prices throughout most of the year. Latin American markets also performed poorly, led by Argentina, where there was weak economic growth, high borrowing costs, and a 24.3% stock market decline for the year.

     Global underwriting volume, after reaching record levels in the first quarter of 2000, declined significantly by the end of the year. Total global stock and bond issuances were off 9% in 2000 at $3.0 trillion. Equity and equity-linked issues in the United States totaled $282 billion during 2000, surpassing the previous record of $214 billion set in 1999. Domestic IPOs surged to a record $73 billion during the year, a 15% increase from the record 1999 levels, driven by a strong first half of 2000. Widespread concern surrounding credit risk and quality led to a 12% decline in global debt issuances during 2000.

     Strategic advisory activities reached record levels in 2000, reflecting a continuation of the high level of merger and acquisition activity experienced during 1999. Companies continued to seek strategic alliances to increase earnings, in particular by combining Old Economy blue chip companies with New Economy, Internet-based companies. Additionally, in the United States, companies rushed to enter into deals before the anticipated elimination of pooling-of-interests accounting treatment. Announced mergers and acquisitions in the United States increased over 16% from 1999 to a record $1.8 trillion, while global deals advanced 6% to $3.5 trillion. After a record-setting 1999, European announced merger and acquisition levels were down 7%, as telecommunications industry deals slowed substantially.

     Merrill Lynch continually evaluates its businesses for profitability and performance under varying market conditions and, in light of the evolving conditions in its competitive environment, for alignment with its long-term strategic objectives. Maintaining long-term client relationships, closely monitoring costs and risks, diversifying revenue sources, and expanding strategically all contribute to mitigating the effects of volatility on Merrill Lynch’s business as a whole.

Results of Operations

     Merrill Lynch reported record net earnings of $3.8 billion for 2000, or $4.11 per diluted share, with a return on average

Management’s Discussion and Analysis 29

common stockholders’ equity of 24.2% and a pre-tax profit margin of 21.3%. These results represent a 41% increase in net earnings and a 20% increase in net revenues from 1999 and reflect record net revenues in every category and region. Net earnings in 1999 were $2.7 billion, or $3.11 per diluted share. Return on average common stockholders’ equity for 1999 was 23.8% and the pre-tax profit margin was 18.8%. In 1998, Merrill Lynch reported net earnings of $1.3 billion, or $1.49 per diluted share, which included a $288 million after-tax provision for costs related to staff reductions. Excluding the staff reduction provision, 1998 net earnings were $1.6 billion, or $1.83 per diluted share. On the same basis, return on average common stockholders’ equity was 16.3% and the pre-tax profit margin was 14.3% in 1998.

     The following charts illustrate the change in the composition of net revenues by category from 1996 to 2000.

     The following discussion provides details of operating performance for each of Merrill Lynch’s business segments, as well as details of products and services offered. The discussion also includes details of net revenues by segment. Certain prior year amounts have been restated to conform with the current year presentation. For further information, see Note 2 to the Consolidated Financial Statements.

Business Segments
Merrill Lynch reports its results in three business segments: Corporate and Institutional Client Group (“CICG”), Private Client Group (“PCG”), and Merrill Lynch Investment Managers (“MLIM”). CICG provides investment banking and capital market services to corporate, institutional, and governmental clients throughout the world. PCG provides wealth management services and products to individuals, small- to mid-size businesses and employee benefit plan clients globally. MLIM provides investment management services to a wide variety of retail and institutional clients.

     The following chart illustrates Merrill Lynch’s net revenues by segment for 2000.

     Certain MLIM and CICG products are distributed by PCG distribution channels, and to a limited extent, certain MLIM products are distributed through the distribution capabilities of CICG. Costs and revenues associated with these intersegment activities are recognized in each segment and eliminated at the corporate level. In addition, revenue sharing agreements for shared activities are in place and the results of each segment reflect the agreed-upon portion of these activities. The following segment operating results, which exclude certain corporate items, represent the information that is relied upon by management in its decision-making processes. Restatements occur to reflect reallocations of revenues and expenses which result from changes in Merrill Lynch’s business strategy and structure (see Note 14 to the Consolidated Financial Statements for further information).

CORPORATE AND INSTITUTIONAL CLIENT GROUP
CICG provides investment banking and strategic merger and acquisition advisory services, as well as equity, debt and capital markets trading services to its clients around the world. CICG raises capital for its clients through securities underwriting, private placements, and loan syndications. CICG trades securities, currencies, and other products and enters into over-the-counter derivative contracts to satisfy customer demand for these instruments. With more than 2,000 equity research, sales, trading, and capital markets professionals and equity trading and distribution activities in over 30 countries, Merrill Lynch has one of the largest equity trading and underwriting operations of any firm in the world. Through its expertise in government and corporate debt trading, CICG is also the leader in global distribution of new issue and secondary debt securities. CICG’s client-focused strategy provides investors with opportunities to

30 Management's Discussion and Analysis

diversify their portfolios, manage risk, and enhance returns by tailoring investments and structuring derivatives to meet clients’ customized needs.

     CICG continued to make progress on several strategic initiatives throughout the year. The merger with Herzog, Heine, Geduld, Inc. (“Herzog”), a leading Nasdaq market-maker, was completed during the third quarter of 2000, and as a result of the integration, internalization of Nasdaq order execution is increasing. For further information, see Note 2 to the Consolidated Financial Statements. As part of the expansion of its private equity business, Merrill Lynch launched, with partners, a $300 million venture capital fund to invest primarily in mobile Internet ventures and technologies in Europe and North America. In addition, Merrill Lynch joined with other financial firms to establish TheMarkets.com, a portal for institutional investors offering equity research, equity new issue information, and news and market data, as well as BondBook LLC, an electronic bond trading system. CICG continued to leverage technology more broadly to extend leadership, and expand services to clients in key markets. MLX MarketEdge was launched in Europe, delivering an equity trading platform for retail broker-dealers. The application provides electronic access to about 15,000 European and U.S. stocks with immediate execution. In 2000, CICG transferred its listed energy futures and options execution business and, in January 2001, announced an agreement to sell certain energy-trading assets. This transaction is expected to close in the first quarter of 2001. These sales are part of a focus on the reallocation of firm resources towards businesses where Merrill Lynch can generate the greatest returns.

     In May 2000, CICG launched a new business initiative – Merrill Lynch Securities Services Division – to both consolidate and expand the securities clearing, settlement, custody, and financing businesses. The new division was created to meet the expanding demand for global clearing and settlement services, as increased worldwide trading volumes and structural changes in markets place a greater premium on efficiency and scale in back-office processing functions.

     In 1999, CICG formed the Direct Markets e-business group to develop integrated, electronically-delivered products and services for CICG clients worldwide, including research, analytics, investment information, underwriting, trading, and post-trade reporting. In late 1999, Direct Markets introduced iDeal^SM , a new software platform for offering all types of debt and equity securities that is designed to increase the efficiency of the underwriting process, enhance the dissemination of information, and broaden distribution. Merrill Lynch’s iDeal platform was named best online site for equity and debt new issues by Euromoney. A strategic alliance with Multex.com was formed in December 1999 to co-develop global research and information web sites for Merrill Lynch clients, and to develop technology that will offer clients expanded market data and news, as well as interactive investor conference calls to give customers real-time access to Merrill Lynch’s research analysts. CICG has also invested in electronic trading and market systems.

CICG’S RESULTS OF OPERATIONS

     In 2000, CICG’s pre-tax earnings were a record $3.9 billion, up 44% from 1999, with a pre-tax profit margin of 30.9%, up more than 3 percentage points from 27.6% in 1999. CICG’s net revenues increased 28% from 1999 to $12.5 billion, due primarily to an outstanding performance in equity trading and origination, and record strategic advisory fees. In 1999, pre-tax earnings and net revenues rose 158% and 45%, respectively, from 1998, due to significantly improved market conditions and lower expense ratios. In 1998, the highly volatile global markets, particularly in the latter half of the year, negatively impacted financial markets, especially debt markets.

Client Facilitation and Trading
COMMISSIONS revenues advanced 19% in 2000 to $2.4 billion, primarily due to increased trading volume in global equity markets. In 1999, commissions revenues rose 15% to $2.0 billion, as a result of increased volume of listed and over-the-counter securities transactions.

PRINCIPAL TRANSACTIONS AND NET INTEREST PROFIT

     Trading of over-the-counter equity, debt, and derivative instruments and related hedging and financing activities generate both principal transactions revenues and net interest and dividend revenues. In assessing the profitability of its client facilitation and trading activities, Merrill Lynch aggregates net interest and principal transactions revenues. For financial reporting

Management’s Discussion and Analysis 31

purposes, realized and unrealized gains and losses on trading positions, including hedges, are recorded in principal transactions revenues and dividends and interest are recorded in net interest profit. Changes in the composition of trading inventories and hedge positions can cause the recognition of principal transactions and net interest revenues to fluctuate.

     Principal transactions and net interest profit was $6.0 billion in 2000, up 38% from 1999. Equities and equity derivatives net trading revenues advanced 63% from 1999 to $3.6 billion, due to significantly higher revenues from both U.S. and non-U.S. equities, as well as portfolio trading. The increase in revenues was largely a result of increased trading volumes in global markets, as well as higher dividend revenues. In addition, equity-related net interest rose due to increased stock loan and other secured financing activity. Debt and debt derivatives net trading revenues were $2.3 billion, up 11% from 1999, primarily due to increased global derivative trading, partially offset by lower trading revenue in investment-grade and emerging market debt. High-yield secondary trading declined in 2000 due to widening credit spreads and a reduction in liquidity. Net interest related to debt trading also declined as a result of higher funding costs.

     In 1999, principal transactions and net interest profit increased $2.6 billion from 1998 due to significantly improved global market conditions. Equities and equity derivatives net trading revenues advanced 54% from 1998 to $2.2 billion due to significantly higher revenues from both U.S. and non-U.S. equities, as well as convertibles, benefiting from improved market conditions. Debt and debt derivatives net trading revenues were $2.1 billion, up sharply from 1998, when revenues suffered from significant illiquidity in global debt markets, an unprecedented sharp widening of credit spreads, and counter-party credit losses.

INVESTMENT BANKING

Underwriting revenues were $2.0 billion, up 21% from 1999, due to increased equity and equity-linked underwriting revenues, which were partly offset by lower corporate bond and high-yield underwriting revenues. Merrill Lynch retained its position as the leading underwriter of total debt and equity securities for the 12th consecutive year globally and for the 13th consecutive year in the United States. Merrill Lynch’s underwriting market share information based on transaction value follows:

Strategic Advisory Services fees rose 7% in 2000 to a record $1.4 billion, benefiting from higher levels of merger and acquisition activity. Merrill Lynch’s merger and acquisition market share information based on transaction value follows:

OTHER REVENUES include investment gains and losses and partnership distributions. Other revenues increased 56% to $777 million in 2000, and remained virtually unchanged in 1999 compared with 1998.

PRIVATE CLIENT GROUP
PCG provides a choice of wealth management services that assist clients around the world in building financial assets and enhancing returns in relation to risk tolerance and investment objectives. In 2000, PCG made significant progress in developing a full range of services to provide clients with access to Merrill Lynch products with a choice of multiple platforms to access these services.

     In the United States, PCG offers its clients a choice of traditional commission-based investment accounts, and a variety of asset-priced investment services, as well as self-directed online accounts, many of which include access to Merrill Lynch’s award-winning research. Outside of the United States, Merrill

32 Management’s Discussion and Analysis

Lynch continues to expand its services to provide clients with a similar choice of wealth management services. As part of this expansion, in April 2000 Merrill Lynch formed a 50/50-owned corporation with HSBC Holdings plc (“HSBC”) to create the first global online investment and banking services company, serving individual self-directed customers outside the United States. This is a key element in PCG’s strategy to offer clients the widest possible choice of services to suit their investment needs. Merrill Lynch HSBC launched online integrated investment and banking services in Canada and Australia during 2000. These services include world-class research, which was also introduced in the United Kingdom as a prelude to the full U.K. launch in 2001.

     PCG provides a wide range of fee-based products and services, including Unlimited Advantage^SM , a U.S. fee-based, brokerage service introduced in 1999. Unlimited Advantage attracted $13 billion of net new money in 2000, bringing total assets to $83 billion at the end of the year, up 31% from the 1999 year-end. Total assets in asset-priced accounts increased 24% to $209 billion in 2000.

     Client assets in Merrill Lynch Direct^SM , the online investing service for self-directed investors introduced in 1999, grew to $3 billion at the end of 2000, including $1 billion of net new money. Over 850,000 clients now have online access to their Merrill Lynch accounts through either Merrill Lynch OnLine or Merrill Lynch Direct. Merrill Lynch’s online platforms continued to garner many awards throughout the year. Merrill Lynch Direct was named as one of the “Best Online Brokers of 2000” by Money magazine, and was praised as one of the “best values of all surveyed brokers” by BusinessWeek. Merrill Lynch’s platform of choice strategy for retail investors was named as the top brokerage by SmartMoney magazine in two of three categories in its “Best Broker” survey.

     PCG provides a wide range of other products, including retail brokerage, asset and liability management, retail and private banking, trust and generational planning services, and insurance products. Outside the United States, PCG’s products and services also include private banking services, which provide high-net-worth individuals with a host of products and services to meet their financial objectives, including investing and borrowing strategies, investment management, trust and personal holding company services, and currency management. PCG products and services are provided to individual investors, corporations, and institutions through various distribution networks, including approximately 20,200 Financial Consultants in over 1,000 Private Client offices in 34 countries.

     Financial Consultants and other investment professionals work with individual investors, small- and medium-sized businesses, and other organizations to address clients’ financial concerns by matching the numerous proprietary and third-party products offered by Merrill Lynch with the clients’ customized needs. These products include:

• The Cash Management Account® (“CMA”) for individuals, and Working Capital Management Account^SM
  (“WCMA® ”) for small- and mid-sized businesses, which encompass securities transactions, money sweeps, electronic funds-transfer capabilities, debit card access, and many other financial management features.
  
• A global array of mutual fund portfolios in over 100 mutual fund families covering a wide cross section of industries and regions of the world.
  
• Various advisory services with pricing alternatives, including Merrill Lynch Consults®, Merrill Lynch Mutual Fund Advisor^SM , and Global Funds Advisor^SM .
  
• Other services provided include mortgages and other consumer loans, margin lending, commercial financing, annuity and life insurance products, trust and other estate planning techniques, and advisory and administrative activities for defined contribution, defined benefit, and various stock plans.

     In mid-2000, cash inflows of certain CMA and other types of accounts were redirected from taxable money market funds that are included in assets under management and are not on the Consolidated Balance Sheets, to bank deposits at Merrill Lynch’s U.S. banks. As a result, U.S. bank deposits included in Demand and time deposits on the Consolidated Balance Sheets

Management’s Discussion and Analysis 33

grew to $55 billion from $6 billion at the end of 1999. These deposits were primarily invested in high quality marketable investment securities. For further information, see Note 4 to the Consolidated Financial Statements.

     During 2000, PCG took several actions to reallocate and focus the use of resources in its businesses. PCG entered into a long-term outsourcing arrangement for certain mortgage origination services of Merrill Lynch Credit Corporation with Cendant Mortgage Corporation effective in 2001, sold the Employee Stock Purchase Plan servicing business to Computer-share Ltd., and entered into an agreement to outsource the administrative services for smaller U.S. 401(k) plans to BISYS Plan Services, L.P. However, Merrill Lynch will continue to offer and fund mortgages for clients and provide structuring and advice for 401(k) plans, thereby retaining those elements of these businesses where it believes it can add the most value. Additionally, Merrill Lynch sold its Puerto Rico retail brokerage business to Santander Securities Corporation.

PCG’S RESULTS OF OPERATIONS

     Pre-tax earnings for PCG were a record $1.6 billion, up 17% from $1.4 billion in 1999. Net revenues were $12.1 billion, up 14% from 1999. In 1999, pre-tax earnings declined 11% and net revenues rose 11%. The 2000 pre-tax profit margin was 13.4%, compared with 13.1% in 1999, and 16.3% in 1998. The profitability of the PCG business in 2000 was driven by strong results outside the United States in the first quarter of 2000 and significantly reduced expenses in the United States in the second half of 2000. PCG’s 2000 expenses include a $70 million charge for compensation and benefits expenses related to staff reductions. Net revenues increased 11% in 1999 compared with 1998 due to increased trading volume and growth in assets in asset-priced accounts. Higher technology and advertising expenses in 1999 caused pre-tax earnings to decline 11% from 1998.

COMMISSIONS revenues increased 6% to a record $4.4 billion in 2000, as a result of increased mutual fund commissions. This increase was partly offset by a decline in listed securities commissions due to weaker market conditions in the second half of the year, as well as a shift in revenue to portfolio service fees as assets have moved from traditional transaction-priced accounts to asset-priced services. Commissions revenues increased 4% in 1999 to $4.1 billion as increased volume led to higher revenues from global listed and over-the-counter securities transactions.

PRINCIPAL TRANSACTIONS AND NEW ISSUE REVENUES remained virtually unchanged from 1999. In 1999, principal transactions and new issue revenues rose 8% from 1998 to $2.1 billion due to increased trading volumes as a result of favorable market conditions. PCG’s principal transactions revenues primarily represent realized bid-offer revenues in over-the-counter equity securities, government bonds, and municipal securities.

ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES which include asset management, portfolio service, account, and other fees, reached a record $3.8 billion, an increase of 23% from 1999. The increase was largely due to a rise in portfolio fees, as assets shifted to asset-priced accounts, such as Unlimited Advantage and Merrill Lynch Consults, during the year.

     The value of assets in Private Client accounts at year-end 2000, 1999, and 1998 is summarized as follows:

     An analysis of the change in assets in Private Client accounts from year-end 1999 to year-end 2000 is detailed below:

34 Management’s Discussion and Analysis

     Despite declines in all major equity markets, total assets in U.S. Private Client accounts remained essentially unchanged from the end of 1999, with net new money inflows of $119 billion during the year. Outside the United States, assets in Private Client accounts were $140 billion, with $31 billion of net new money inflows during the year.

NET INTEREST PROFIT was $1.7 billion, up 40% from $1.2 billion in 1999. Growth in deposits and the related investment portfolios at Merrill Lynch’s U.S. banks is primarily responsible for the increase in net interest. Additionally, higher average security-based and other customer-lending balances in 2000 generated an increase in net interest. In 1999, net interest profit increased 34%, principally due to higher interest revenue from customer-lending activities.

OTHER REVENUES increased 17% in 2000, from $124 million to $145 million, and increased 48% in 1999.

MERRILL LYNCH INVESTMENT MANAGERS

MLIM is one of the world’s largest investment managers, with $557 billion in assets under management. MLIM offers an extremely wide range of investment products, ranging from short-term fixed income portfolios to medium- and long-duration fixed income funds, as well as active, passive, and quantitative equity and balanced products that cover virtually every market in the world. These products are available in a wide variety of forms including mutual funds or their equivalent, closed end funds, unit investment trusts, and segregated portfolios. During 1999 and continuing into 2000, MLIM added to its traditional core of active investment capabilities with the formation of Merrill Lynch Quantitative Advisers, a management unit offering products that utilize quantitative techniques designed to provide consistent and high investment returns. Product breadth was further enhanced during 2000 by the development of private equity fund-of-funds and hedge fund capabilities. These businesses won significant new clients in 2000. MLIM provides investment management services to a diverse global clientele of institutions, including pension plans and corporations; high-net-worth individuals; mutual funds; and other investment vehicles. MLIM markets its services through the PCG distribution channel and both CICG and third-party distribution networks.

     MLIM made progress during 2000 by substantially improving worldwide investment performance. On an overall basis, 69% of total assets under management had investment results during 2000 that either met or exceeded a relevant benchmark. This improvement is evidenced in 78% of MLIM’s worldwide retail mutual fund assets exceeding the applicable industry median, and 61% of total institutional assets under management exceeding their benchmark during 2000. In the U.S. equity mutual fund market, 73% of MLIM assets performed above median in 2000, while nearly 50% of the assets were in first quartile funds.

     This improved investment performance was accompanied by continued investment in people, expansion of product range, and further business integration. During 2000, MLIM rebranded its business into a single global organization by uniting Merrill Lynch Asset Management and Merrill Lynch Mercury Asset Management under the MLIM brand name. In the United States, MLIM offers its products through the Merrill Lynch distribution network under the MLIM brand name and Merrill Lynch Mercury products are offered for sale through other financial intermediaries. Outside the United States, MLIM-branded products are available through both the Merrill Lynch distribution network and other financial intermediaries.

     Global Finance recognized the growing success and strength of MLIM by naming it “Best Asset Management Bank” in 2000.

     As part of the firmwide effort to reallocate resources towards businesses which add the most value, MLIM outsourced certain fund accounting and daily pricing services for Merrill Lynch’s U.S. retail mutual funds to State Street Bank and Trust Company, beginning January 1, 2001.

Management’s Discussion and Analysis 35

MLIM’S RESULTS OF OPERATIONS

     Pre-tax earnings for MLIM were $537 million in 2000, up 11% from $482 million in 1999. Results in 1999 include a $71 million pre-tax investment gain on the sale of an interest in the Royal Bank of Scotland. After adjusting for the gain, pre-tax earnings increased from 1999 by 31%. On the same basis, net revenues increased 15% from 1999 to $2.5 billion, and the pre-tax profit margin in 2000 was 21.6%, compared with an adjusted 19.1% in 1999, and 21.4% in 1998. The 2000 results also reflect revenue gains from a shift in product mix in U.S. equity mutual funds and U.K. institutional services. Pre-tax earnings declined 4% and net revenues increased 8% on an adjusted basis in 1999.

COMMISSIONS revenues were relatively unchanged in 2000. In 1999, commissions revenues rose 9% to $383 million due to increased mutual fund sales.

ASSET MANAGEMENT FEES advanced 14% in 2000 to a record $1.9 billion as a result of higher management and performance fees. The increase in 1999 was due to a 9% rise in assets under management.

     MLIM’s assets under management for each of the last three years were comprised of the following:

     At year-end 2000, assets under management totaled $557 billion, a 6% decline from 1999. Excluding the impact of net outflows of client cash balances to Merrill Lynch’s U.S. banks from money market funds, assets under management remained essentially unchanged from 1999. MLIM has attracted positive net new money for 5 consecutive quarters, including $33 billion in 2000, despite volatile markets in the second half of the year.

     An analysis of the change in assets under management from year-end 1999 to year-end 2000 is as follows:

36 Management’s Discussion and Analysis

OTHER REVENUES rose 3% to $203 million in 2000. The increase was due to higher net interest, offset by lower investment gains. Other revenues in 1999 increased by 55%, due to the pre-tax gain on the sale of an interest in the Royal Bank of Scotland.

Global Operations
Merrill Lynch’s non-U.S. operations are organized into five geographic regions:

• Europe, Middle East and Africa,
  
• Japan,
  
• Asia Pacific/Australia,
  
• Canada, and
  
• Latin America.
  

     The following charts illustrate the change in the composition of Merrill Lynch’s net revenues by geographic region from 1996 to 2000.

     The following summary of regional operating results excludes all items included in the corporate segment. For further information see Note 14 to the Consolidated Financial Statements.

EUROPE, MIDDLE EAST AND AFRICA

     Merrill Lynch operates in Europe, the Middle East and Africa as a dealer in a wide array of equity and debt products, and also provides investment management, investment banking, private banking, and research services. This region is poised for accelerated growth due to changes in demographics, the growth of an equity culture, and the development of the Euroland economy. In line with its strategy of becoming a global leader with a strong local presence in key markets, Merrill Lynch now has 47 offices in 21 countries in the region. In addition, Merrill Lynch HSBC, a 50/50-owned corporation formed earlier this year, which is headquartered in London, is combining HSBC’s world-class banking with Merrill Lynch’s world-renowned research capabilities and investment expertise, to offer online investment and banking services to individual, self-directed customers. A free research service was launched in the U.K. in December in advance of expanded service in 2001.

Management’s Discussion and Analysis 37

     As a result of the December 1997 acquisition of Mercury Asset Management, Merrill Lynch has preeminent investment management capabilities in this region. As part of the integration of the investment management business, Mercury Asset Management began to operate under the MLIM brand during the year.

     All of the region’s businesses performed well in 2000, with notable contributions from equity markets and investment banking. Merrill Lynch participated in several landmark transactions during the year, including lead manager for South Africa’s first private sector bond issue, lead role in the largest U.S. dollar-denominated bond deal at that time, and joint book runner in the largest accelerated equity book-building offering worldwide. Merrill Lynch has established itself as the leading equities house in the region, and was named “Equity House of the Year” by The Banker. This year was particularly successful in investment banking, as Merrill Lynch participated in a number of top deals in the region, and won seven categories in Corporate Finance magazine’s “Deals of the Year 2000” survey, including “Best M&A Takeover.” In addition, Merrill Lynch was named by the Reuters/Tempest Emerging Markets Survey as winner in the “Best Broker,” “Best Investment Bank,” and “Best Broker Execution” categories.

     In 2000, net revenues for the region increased 19% from 1999, primarily due to strong equity trading and advisory revenues. Pre-tax earnings increased 33% from 1999 to $1.5 billion, primarily due to increased revenues.

     In 1999, net revenues for the region were up 50%, primarily due to higher investment banking and equity and debt trading revenues, as market conditions stabilized compared with the second half of 1998. The increase in pre-tax earnings was mainly attributable to significantly higher revenues, resulting primarily from investment banking activities and the lower 1998 debt trading results.

JAPAN

     Merrill Lynch continued to enhance its presence in the region with the successful alignment of its various businesses in Japan. The firm now provides an integrated range of PCG, MLIM, and CICG products and services to individual, institutional, and corporate clients. In a difficult market environment during 2000, CICG and PCG distributed several equity public offerings through Merrill Lynch Japan Securities (“MLJS”), and launched eleven proprietary debt product offerings. Developing synergies between MLIM and PCG resulted in the successful introduction and distribution of six new MLIM funds.

     The region’s CICG business, which operates under the name Merrill Lynch Japan (”MLJ”), continued to improve its performance in 2000, with record revenues in its equity and advisory businesses. Merrill Lynch has significantly expanded its origination activities and presence in Japan, including involvement in the NTT Communications Corporation privatization. Merrill Lynch ranked No.2 in Japanese announced M&A, according to Thomson Financial Securities Data.

     The development of Merrill Lynch’s Private Client business in Japan in 2000 continued to be adversely impacted by the difficult market environment. Nevertheless, total client accounts surpassed 100,000, an increase of over 50% from 1999. MLJS introduced variable annuities and securities-based lending products for the first time in the region. In addition, the Japanese versions of the CMA account and Merrill Lynch OnLine were introduced. In March 2001, Merrill Lynch intends to combine MLJS with its institutional group, MLJ, which will facilitate further operating efficiencies.

     MLIM, one of the leading institutional money managers in Japan, continued to be adversely affected by the difficult market environment. MLIM has introduced a range of products including index funds, alternative investments, and unit investment trusts. MLIM is one of the few foreign asset management companies in the country with both institutional and retail businesses. During 2000, the business added 18 new institutional clients and $1.8 billion in net new money. In addition, MLIM Japan was selected as the “Best Japanese Equity Fund Manager” by leading pension plan sponsors.

     Net revenues in the Japan region were up 31% from 1999, reflecting improved equity and debt trading revenues and increased asset management fees. Pre-tax earnings reached $271 million in 2000, up sharply from 1999.

     Net revenues in the Japan region in 1999 were 82% higher than 1998. These higher revenues were partially offset by a full year of fixed expenses and higher production-related compensation costs associated with MLJS.

ASIA PACIFIC/AUSTRALIA

     Merrill Lynch serves a broad retail and institutional client base throughout the Asia Pacific/Australia region, and offers a

38 Management’s Discussion and Analysis

full range of PCG, MLIM, and CICG products. Merrill Lynch operates from offices in the People’s Republic of China, Hong Kong (a special administrative region of China), Singapore, Taiwan, South Korea, Thailand, Malaysia, Indonesia, India, the Philippines and Australia. Merrill Lynch has an established trading presence and exchange memberships in all major financial markets in the region. The Private Client business operates 16 offices, including two in the Western United States, offering investment services and wealth management products to its clients. MLIM operates 11 offices offering a diverse mix of investment management products and services to institutional and retail clients.

     During 2000, Private Client opened offices in Seoul, Korea and Kaohsiung, Taiwan, and MLIM restructured its business in Thailand with the sale of its asset management unit. Additionally, Merrill Lynch HSBC, the global online investment services and banking company, launched its services in Australia in December of 2000.

     The region had another record year in 2000, with record revenues in CICG, PCG, and MLIM. Merrill Lynch participated in some of the largest deals ever for the Asia Pacific/Australia region, including sole book-runner on the largest ever convertible bond offering, joint lead on the largest ever simultaneous equity placement and exchangeable bond offering, and joint sell-side advisor on the largest ever M&A transaction. IFR magazine awarded Merrill Lynch both “Asian Equity-Linked Deal of the Year” and “Asian Equity-Linked House of the Year,” and Institutional Investor magazine named Merrill Lynch No.1 in Asian Equity and Fixed Income Research for the second year in a row.

     Net revenues in the region grew 17% in 2000 to $1.3 billion. The increase resulted from strong revenues in equity markets and record Private Client revenues, as well as higher advisory fees. Pre-tax earnings rose 16% in 2000 to $226 million.

     In 1999, net revenues in the region were up $520 million from 1998 due to strong revenues from equities and equity derivatives and record Private Client revenues, as well as increased asset management fees. Pre-tax earnings rose to $194 million.

CANADA

     In 2000, Merrill Lynch solidified its position in Canada as a premier, full service securities firm, providing an integrated range of PCG, CICG, and MLIM products and services to individual and institutional clients as well as corporate and government issuers.

     Merrill Lynch’s Private Client Network made significant progress in 2000, ranking as one of the top three in Canada with a team of more than 1,200 Financial Consultants. PCG continued to grow as client assets increased to $34 billion. During the year, Merrill Lynch embarked on a wealth management strategy focusing on high-net-worth clients. In December, Merrill Lynch HSBC, the global online investment services and banking company, launched its services in Canada.

     In CICG, equity markets performed well, as a result of event-driven transactions and customer volume. Reuters, in its 2000 Survey, ranked Merrill Lynch Canada No.1 in the following categories: “Best Broker Research” according to corporations, and “Best Broker Product and Service” according to fund managers. In recognition of the debt markets business, Euromoney magazine awarded Merrill Lynch Canada “The Best Foreign Bond House.” Investment banking generated notable improvement in performance.

     MLIM offers a full range of investment solutions for both retail and institutional investors. Assets under management increased 15% from the end of 1999 to $6 billion. During the year, MLIM consolidated its Atlas family of mutual funds into the Merrill Lynch Funds group, resulting in nearly $3 billion in combined assets.

     Net revenues in the region increased 31% in 2000 to $823 million, as equity markets improved substantially in the region. Pre-tax earnings more than tripled to $153 million in 2000, primarily due to improved profitability in CICG and improved margins in PCG.

     Net revenues for the region in 1999 were down slightly from 1998. Pre-tax earnings increased significantly from 1998, primarily due to costs incurred in 1998 due to the Midland Walwyn merger.

LATIN AMERICA

     Merrill Lynch provides various brokerage and investment services, including financial planning, investment banking, research, and asset management to Latin American clients.

     The economies of the Latin American countries were on a recovery track through the first half of 2000, as the volatility stemming from the first quarter 1999 Brazilian currency devalu-

Management’s Discussion and Analysis 39

ation had substantially subsided. In the latter part of 2000, despite higher oil prices that favored certain Latin American economies, the downturn in the United States and other global stock markets dampened the pace of the region’s economic recovery.

     In January of 2000, Merrill Lynch executed a $1.1 billion secondary offering for Grupo Televisa, signifying the return of Latin American issuers to the equity markets, after a two-year absence. This equity offering was one of the largest non-privatization offerings by a corporate issuer in the region. Also in January, Merrill Lynch advised and executed a $3.3 billion exchange offer for an Argentine energy company. The innovative structure of the deal earned Merrill Lynch the title of “Best Foreign M&A House of the Year” in Euromoney’s Awards of Excellence issue. In August, Merrill Lynch executed a $4.3 billion secondary offering for a Brazilian company, the largest ever equity offering in Latin America and one of the largest privatizations in emerging markets history. Merrill Lynch continues to receive high honors in numerous categories, including “Best Equity House in Latin America” by LatinFinance and Global Finance, first place in Institutional Investor’s 2000 Latin America Research Team for the fourth consecutive year, and first place in LatinFinance’s 2000 Latin Research Olympics.

     Net revenues for the region increased 17% from 1999 due to the gain on the sale of the Puerto Rico retail brokerage business to Santander Securities Corporation and higher commissions revenues. Pre-tax earnings advanced 36% from 1999 to $169 million.

     Net revenues in 1999 increased 49% from 1998 as trading and investment banking revenues were negatively impacted by volatile global markets throughout most of 1998. Pre-tax earnings for 1999 rose $193 million from 1998 due to significantly improved performance by the debt markets group.

Non-Interest Expenses

Merrill Lynch’s non-interest expenses are summarized as follows:

(1) Excluding provision for costs related to staff reductions.

     Non-interest expenses were $21.1 billion in 2000, compared with $18.1 billion in 1999. The largest expense category, compensation and benefits, was up 21% from 1999 due to higher incentive and production-related compensation, resulting primarily from increased revenues. Also included in this

40 Management’s Discussion and Analysis

category is PCG’s $70 million charge related to staff reductions. An increase in the number of employees compared with year-end 1999 also contributed to this increase. Compensation and benefits were 51.3% of net revenues for 2000, relatively unchanged from 1999. Non-compensation expenses were 27.4% of net revenues, a three percentage point improvement from 1999.

     Communications and technology expense rose 13% in 2000 to $2.3 billion due to higher technology-related depreciation and systems consulting, as well as increased expenses related to market data services. Occupancy and related depreciation increased 6% to $1.0 billion.

     Advertising and market development expense was $939 million, up 20% from 1999 due to higher travel expenses and sales promotion costs associated with increased business activity. Brokerage, clearing, and exchange fees were $893 million, an increase of 15% from 1999 due to higher execution and clearing costs as a result of increased transaction volumes. Professional fees rose 12% to $637 million, partly as a result of higher employment service fees. Goodwill amortization was substantially unchanged at $217 million for the year, and other expenses declined 6% from 1999.

     Non-interest expenses in 1999 were up 16% compared with 1998. In the 1998 third quarter, Merrill Lynch recorded a $430 million ($288 million after-tax) provision for costs related to staff reductions aimed at reducing fixed and semi-fixed costs and resizing certain debt trading businesses. The staff reduction provision covered primarily severance costs, as well as costs to terminate long-term contracts and leases related to personnel reductions and resized businesses (see Note 2 to the Consolidated Financial Statements).

     Compensation and benefits rose 22% in 1999 due to higher levels of incentive compensation as a result of significantly higher profit and business volume compared with 1998. Communications and technology expense advanced 17% in 1999, primarily due to higher technology-related depreciation and communication maintenance and support, partly related to strategic online initiatives implemented during 1999. Occupancy and related depreciation increased 8% as a result of continued global expansion. Advertising and market development expense rose 13% from 1998, because of increased costs related to new advertising campaigns, particularly those related to Unlimited Advantage and online initiatives. Brokerage, clearing, and exchange fees, professional fees, and goodwill amortization remained virtually unchanged from 1998. Other expenses rose 33% partially due to higher provisions related to various business, operational, and legal matters.

Income Taxes
Merrill Lynch’s 2000 income tax provision was $1.7 billion, representing a 30.4% effective tax rate compared with 31.4% in 1999, and 34.2% in 1998. The decline in both the 2000 and 1999 effective tax rates was primarily attributable to an increase in lower-taxed non-U.S. income and additional tax-advantaged financing. Deferred tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Merrill Lynch assessed its ability to realize deferred tax assets primarily based on a strong earnings history and the absence of negative evidence as discussed in Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. During the last 10 years, average pre-tax earnings were $2.6 billion. Accordingly, management believes that it is more likely than not that deferred tax assets, net of the related valuation allowance, will be realized (see Note 12 to the Consolidated Financial Statements).

Management’s Discussion and Analysis 41

Balance Sheet

Overview

Management continually monitors and evaluates on a daily basis the level and composition of the balance sheet.

     The following charts illustrate the composition of the balance sheets at December 29, 2000 and December 31, 1999.

     In 2000, average total assets were $354 billion, up 18% from $300 billion in 1999. Average total liabilities in 2000 increased 17% to $335 billion from $286 billion in 1999, and average equity capital increased 31% to $19 billion during 2000. The major components of the increase in average total assets and liabilities are summarized as follows:

     Average balances in 2000 were higher compared with 1999, primarily resulting from increases in marketable investment securities, receivables, demand and time deposits, and long-term borrowings. The discussion that follows analyzes the changes in year-end financial statement balances of major asset and liability categories.

Trading-Related Assets and Liabilities

Trading-related balances primarily consist of trading assets (including securities pledged as collateral) and liabilities, receivables under resale agreements and securities borrowed transactions, payables under repurchase agreements and securities loaned transactions, and certain receivable/payable balances that result from trading activities. At December 29, 2000 total trading-related assets and liabilities were $276 billion and $197 billion, respectively.

     Although trading-related balances comprise a significant portion of the balance sheet, the magnitude of these balances does not necessarily convey a sense of the risk profile assumed by Merrill Lynch. The market and credit risks associated with trading-related balances are mitigated through various hedging strategies, as discussed in the following sections (see Note 3 to the Consolidated Financial Statements for descriptions of market and credit risks).

     Merrill Lynch reduces a significant portion of the credit risk associated with trading-related receivables by requiring counterparties to post cash or securities as collateral in accordance with collateral maintenance policies.

TRADING ASSETS AND LIABILITIES

Trading inventory principally represents securities purchased (“long” positions), securities sold but not yet purchased (“short” positions), and the fair value of derivative contracts (see Note 1 to the Consolidated Financial Statements). These

42 Management’s Discussion and Analysis

positions are primarily the result of market-making, hedging, and proprietary activities.

     Merrill Lynch acts as a market-maker in a wide range of securities, resulting in a significant amount of trading inventory to facilitate customer transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary trading inventory in seeking to profit from existing or projected market opportunities.

     Merrill Lynch uses both cash instruments and derivatives to manage trading inventory market risks. As a result of these hedging techniques, a significant portion of trading assets and liabilities represents hedges of other trading positions. Long U.S. Government securities, for example, may be hedged with short interest rate futures contracts. These hedging techniques, which are generally initiated at the trading unit level, are supplemented by corporate risk management policies and procedures (see the Risk Management section for a description of risk management policies and procedures).

     Trading assets, including securities pledged as collateral, at year-end 2000 were up 4% from year-end 1999, and trading liabilities increased 2% to $68.9 billion.

RESALE/REPURCHASE AGREEMENTS AND
SECURITIES BORROWED/LOANED TRANSACTIONS

Repurchase agreements and, to a lesser extent, securities loaned transactions are used to fund a significant portion of trading assets. Likewise, Merrill Lynch uses resale agreements and securities borrowed transactions to obtain the securities needed for delivery on short positions. These transactions are typically short-term in nature with a significant portion entered into on an overnight or open basis. Resale and repurchase agreements entered into on a term basis typically mature within 90 days.

     Merrill Lynch also enters into these transactions to meet customers’ needs. These “matched-book” repurchase and resale agreements or securities borrowed and loaned transactions are entered into with different customers using the same underlying securities, generating a spread between the interest revenue on the resale agreements or securities borrowed transactions and the interest expense on the repurchase agreements or securities loaned transactions. Exposures on these transactions are limited by their typically short-term nature and collateral maintenance policies.

     Receivables under resale agreements and securities borrowed transactions and payables under repurchase agreements and securities loaned transactions in 2000 increased 15% and 44% from year-end 1999, respectively, as a result of higher matched-book activity.

OTHER TRADING-RELATED RECEIVABLES AND PAYABLES

Securities trading may lead to various customer or broker-dealer balances. Broker-dealer balances may also result from recording trading inventory on a trade date basis. Certain receivable and payable balances also arise when customers or broker-dealers fail to pay for securities purchased or fail to deliver securities sold, respectively. These receivables are generally fully collateralized by the securities that the customer or broker-dealer purchased but did not receive. Customer receivables also include margin loans collateralized by customer-owned securities held by Merrill Lynch. Collateral policies significantly limit Merrill Lynch’s credit exposure to customers and broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will sell securities that have not been paid for, or purchase securities sold but not delivered, after a relatively short period of time, or will require additional margin collateral, as necessary. These measures reduce market risk exposure related to these balances.

     Interest receivable and payable balances related to trading inventory are principally short-term in nature. Interest balances for resale and repurchase agreements, securities borrowed and loaned transactions, and customer margin loans are generally considered when determining the collateral requirements related to these transactions.

     Trading-related receivables at year-end 2000 were up $5 billion from 1999, and trading-related payables declined $11 billion from year-end 1999, primarily due to changes in broker-dealer balances.

Non-Trading Assets

INVESTMENTS

Marketable investment securities, including those held for liquidity management purposes, consist of highly liquid debt and equity securities. Investments of insurance subsidiaries, primarily debt securities, are used to fund policyholder liabilities. Other investments consist of equity and debt securities, including those acquired in connection with merchant banking activities, and venture capital investments, including technology investments, such as Electronic Communications Networks (“ECNs”), and investments to hedge deferred compensation liabilities (see Note 4 to the Consolidated Financial Statements). Investments grew from $17.7 billion at year-end 1999 to $58.2 billion at year-end 2000, mainly as a result of growth in Marketable investment securities, which was funded by increased bank deposits at Merrill Lynch’s U.S. banks (see the Non-Trading Liabilities – Borrowings section for further information).

LOANS, NOTES, AND MORTGAGES

Merrill Lynch’s portfolio of loans, notes, and mortgages includes mortgage loans on residences, working capital loans to small-

Management’s Discussion and Analysis 43

and medium-sized businesses, and syndicated loans. Merrill Lynch generally maintains collateral on these extensions of credit in the form of securities, liens on real estate, perfected security interests in other assets of the borrower, and guarantees. Loans, notes, and mortgages rose $6.3 billion in 2000 to $17.5 billion due to increased consumer lending activities. Merrill Lynch maintained collateral of $14.1 billion at December 29, 2000 to reduce related default risk.

OTHER

Other non-trading assets, which include cash and cash equivalents, goodwill (related primarily to the Mercury acquisition), equipment and facilities, and other assets, increased $11.3 billion from year-end 1999 levels. This increase is primarily due to increased cash equivalent balances at Merrill Lynch’s U.S. banks.

Non-Trading Liabilities

BORROWINGS

Portions of trading and non-trading assets are funded through deposits, long-term borrowings, and commercial paper (see the Capital Adequacy and Liquidity section for further information on funding sources).

      Commercial paper decreased from $24.2 billion at year-end 1999 to $14.0 billion at year-end 2000. Demand and time deposits increased $50.0 billion in 2000 as a result of higher customer deposits in U.S. banking subsidiaries which resulted from the redirection of cash inflows of certain CMA and other types of accounts from taxable money market funds to bank deposits. Outstanding long-term borrowings increased to $70.2 billion at December 29, 2000 from $54.0 billion at December 31, 1999. Major components of the change in long-term borrowings for 2000 and 1999 follow:

OTHER

Other non-trading liabilities, which include liabilities of insurance subsidiaries and other payables, increased slightly from year-end 1999 levels.

Preferred Securities Issued by Subsidiaries

Preferred securities issued by subsidiaries consist primarily of Trust Originated Preferred Securities^SM (“TOPrS”^SM ) (see Note 7 to the Consolidated Financial Statements for further information). TOPrS proceeds are utilized as part of general balance sheet funding (see the Capital Adequacy and Liquidity section for more information). Preferred securities issued by subsidiaries declined $11 million during 2000 as a result of foreign exchange-related fluctuations related to a yen-denominated TOPrS issuance.

Stockholders’ Equity

Stockholders’ equity at December 29, 2000 increased 41% to $18.3 billion from $13.0 billion at year-end 1999. The 2000 increase primarily resulted from net earnings and the net effect of employee stock transactions, partially offset by dividends.

     In the third quarter of 2000, Merrill Lynch’s Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend. The par value of the stock remained at $1.33¹/3 per share. Accordingly, adjustments from paid-in capital to common stock and shares exchangeable into common stock were made to preserve the par value of the post-split shares. In addition, as a result of the merger with Herzog, after giving effect to the stock split, Merrill Lynch issued 17.1 million shares of common stock. All share and per share data have been restated for the effect of the stock split and the merger.

     At December 29, 2000, total common shares outstanding, excluding shares exchangeable into common stock, were 808.0 million, 7% higher than the 752.5 million shares outstanding at December 31, 1999. The increase was attributable principally to employee stock grants and option exercises.

     Total shares exchangeable into common stock at year-end 2000, issued in connection with the Midland Walwyn merger, were 4.7 million, compared with 8.0 million at year-end 1999.

     There were no common stock repurchases during 2000. In 1998, Merrill Lynch rescinded its share repurchase authority in order to facilitate pooling-of-interests accounting.

Capital Adequacy and Liquidity

The primary objectives of Merrill Lynch’s capital structure and funding policies are to:

• Ensure sufficient equity capital to absorb losses,
  
• Support the business strategies, and
  
• Assure liquidity at all times, across market cycles, and through periods of financial stress.
  

44 Management’s Discussion and Analysis

Capital Adequacy

At December 29, 2000, Merrill Lynch’s equity capital was comprised of $17.9 billion in common equity, $425 million in preferred stock, and $2.7 billion of TOPrS.

     Merrill Lynch continually reviews overall equity capital needs to ensure that its equity capital base can support the estimated risks and needs of its businesses, as well as the regulatory and legal capital requirements of its subsidiaries. Merrill Lynch uses statistically based risk models, developed in conjunction with risk management practices, to estimate potential losses arising from market and credit risks. Equity capital needs are determined based on these models, which dynamically capture changes in risk profile. Merrill Lynch also assesses the need for equity capital to support business risks, such as process risk, that may not be adequately measured through these risk models, as well as the potential use of equity capital to support growth. Merrill Lynch determines the appropriateness of its equity capital composition, which includes common stock, preferred stock, and TOPrS, taking into account the perpetual nature of its preferred stock and TOPrS. Based on these analyses and criteria, management believes that Merrill Lynch’s equity capital base of $21.0 billion is adequate.

     Merrill Lynch operates in many regulated businesses that require various minimum levels of capital (see Note 13 to the Consolidated Financial Statements for further information). Merrill Lynch’s broker-dealer, banking, insurance, and futures commission merchant activities are subject to regulatory requirements that may restrict the free flow of funds to affiliates. Regulatory approval is generally required for paying dividends in excess of certain established levels and making affiliated investments.

     Merrill Lynch’s leverage ratios were as follows:

     An asset-to-equity leverage ratio does not reflect the risk profile of assets, hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not rely on overall leverage ratios to assess risk-based capital adequacy.

Liquidity

Liquidity risk occurs when there are timing differences between cash inflows from the businesses and cash outflows for business needs and maturing debt obligations. Merrill Lynch’s liquidity policy is to maintain alternative funding sources such that all unsecured debt obligations maturing within one year can be repaid when due without issuing new unsecured debt or liquidating business assets. Primary alternative funding sources to unsecured borrowings are repurchase agreements, securities loaned, and secured bank loans, which require pledging unhy-pothecated marketable securities held for trading or liquidity purposes. Other funding sources include liquidating cash equivalents; securitizing loan assets; and drawing on a committed, senior, unsecured bank credit facility that, at December 29, 2000, totaled $8 billion and was not drawn upon. Merrill Lynch maintains a contingency funding plan, which outlines actions that would be taken in the event of a severe funding disruption.

     Merrill Lynch regularly reviews the level and mix of its assets and liabilities to assess its ability to conduct core business activities without issuing new unsecured debt or drawing upon its bank credit facilities. The mix of assets and liabilities provides flexibility in managing liquidity since a significant portion of assets turn over frequently and are typically match-funded with liabilities having similar maturities and cash flow characteristics. At December 29, 2000, a significant portion of Merrill Lynch’s assets was considered readily marketable by management.

     Merrill Lynch typically concentrates its unsecured, general-purpose funding at the ML & Co. level, except where tax regulations, time zone differences, or other business considerations make this impractical. The benefits of this strategy are enhanced control, reduced financing costs, wider name recognition by creditors, and greater flexibility to meet variable funding requirements of subsidiaries.

     Merrill Lynch strives to expand and diversify its funding programs, markets, and investor and creditor base. Merrill Lynch benefits by distributing a significant portion of its liabilities and equity through its own sales force to a large, diversified global client base. Available funding sources include:

• repurchase agreements and securities loaned transactions,
  
• U.S., Canadian, Euro, Japanese, and Australian commercial paper programs,
  
• letters of credit,
  
• master notes,
  
• deposits at Merrill Lynch’s banking subsidiaries,
  
• bank loans,
  

Management’s Discussion and Analysis 45

• long-term debt,
  
• TOPrS,
  
• preferred stock, and
  
• common stock.

     Commercial paper represented 3% and 8% of total assets at year-end 2000 and 1999, respectively. Merrill Lynch maintains strict concentration standards for commercial paper and other short-term borrowings, including limits for any single investor.

     Deposits at Merrill Lynch’s banking subsidiaries have increased from $17.6 billion at year-end 1999 to $67.6 billion at year-end 2000, including $54.9 billion at Merrill Lynch’s U.S. banks. The additional deposits were primarily invested in high quality marketable investment securities (see the Non-Trading Liabilities – Borrowings section for further information).

     In addition to equity capital sources, Merrill Lynch views long-term debt as a stable funding source for its core balance sheet assets. Long-term, less liquid assets are fully funded with long-term sources of capital, which include the non-current portion of long-term debt, TOPrS, preferred stock, and common equity. Generally, trading and other current assets are financed with a combination of short-term funding, long-term debt, and equity capital.

     As part of an overall liquidity management strategy, Merrill Lynch’s insurance subsidiaries regularly review the funding requirements of their contractual obligations for in-force, fixed-rate life insurance and annuity contracts as well as expected future acquisition and maintenance expenses for all contracts. The insurance subsidiaries develop and market primarily variable life insurance and variable annuity products. These products are not subject to the interest rate, asset/liability matching, or credit risks attributable to fixed-rate products, thereby reducing the insurance subsidiaries’ risk profile and liquidity demands. At December 29, 2000, approximately 80% of invested assets of insurance subsidiaries were considered liquid by management.

ASSET AND LIABILITY MANAGEMENT

The relationship between assets and liabilities is managed on a consolidated basis across businesses and subsidiaries. Merrill Lynch routinely issues debt in a variety of maturities and currencies to achieve the lowest cost financing possible. Merrill Lynch uses derivative transactions to more closely match the duration of these borrowings to the duration of the assets being funded to minimize interest rate risk. Merrill Lynch also enters into currency swaps, to ensure that foreign-currency denominated assets are funded with like-currency denominated liabilities (to the extent that the currency cannot be sourced more efficiently through a direct debt issuance). Merrill Lynch uses swaps for asset and liability management to reduce its interest expense and effective borrowing rate. For further information, see Note 6 to the Consolidated Financial Statements.

CREDIT RATINGS

The cost and availability of unsecured financing generally are dependent on credit ratings. Merrill Lynch’s senior long-term debt, preferred stock, and TOPrS were rated by several recognized credit rating agencies at December 29, 2000 as follows:

(1) Located in Japan.

     Approximately $84.9 billion of indebtedness at December 29, 2000 is considered senior indebtedness as defined under various indentures.

Capital Projects and Expenditures

Merrill Lynch continually prepares for the future by expanding its operations and investing in new technology to improve service to clients. To support business expansion, for example, Merrill Lynch is building a new European headquarters in London, for approximately $620 million; approximately $420 million has been spent to date.

     Merrill Lynch has a long-term capital commitment of up to $600 million to Merrill Lynch HSBC, the 50/50-owned corporation created to provide global online investment and banking services. At December 29, 2000, $522 million of the total commitment was unfunded. The timing of the funding of this commitment will be determined by the Board of Directors of Merrill Lynch HSBC, which has equal representation from Merrill Lynch and HSBC. Merrill Lynch expects the commitment to be funded over a five year period.

Risk Management

Risk Management Philosophy

Risk-taking is an integral part of Merrill Lynch’s core business activities. In the course of conducting its business operations, Merrill Lynch is exposed to a variety of risks. These risks include market, credit, liquidity, process, and other risks that are material and require comprehensive controls and management. The responsibility and accountability for these risks remain primarily with the businesses.

46 Management’s Discussion and Analysis

     The Corporate Risk Management (“CRM”) group ensures that these risks are properly identified, monitored, and managed throughout the firm. To accomplish this, CRM has established a risk management process, which includes:

• A formal risk governance organization that defines the oversight process and its components.
  
• A regular review of the entire risk management process by the Audit Committee of the Board of Directors.
  
• Clearly defined risk management policies and procedures supported by the most appropriate and advanced analytic tools available.
  
• Communication and coordination between the business, executive, and risk functions while maintaining strict segregation of responsibilities, controls, and oversight.
  
• Clearly articulated risk tolerance levels as defined by the Executive Management Committee (“EMC”) that are regularly reviewed to ensure that Merrill Lynch’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.

     The risk management process, combined with CRM’s personnel and analytic infrastructure, works to ensure that Merrill Lynch’s risk tolerance is well-defined and understood by the firm’s risk-takers as well as by its executive management. Other groups, including Audit, Finance, and Treasury, work with CRM to establish this overall risk management control process. While no risk management system can ever be absolutely complete, the goal of CRM is to make certain that risk-related losses occur within acceptable, predefined levels.

Risk Governance Structure

Merrill Lynch’s risk governance structure is comprised of the Audit Committee, the EMC, the Risk Oversight Committee (“ROC”), the Risk Policy Group (“RPG”), the business units, CRM, and various corporate governance committees. The roles of these respective groups are as follows:

     The Audit Committee is comprised entirely of external directors and has authorized the ROC to establish Merrill Lynch’s risk management policies.

     The EMC establishes risk tolerance levels for the firm and authorizes material changes in Merrill Lynch’s risk profile. It also ensures that the risks assumed by Merrill Lynch are managed within these tolerance levels and verifies that Merrill Lynch has implemented appropriate policies for the effective management of risks. The EMC must approve all substantive changes to risk policies, including those proposed by the ROC. The EMC pays particular attention to risk concentrations and liquidity concerns.

     The ROC, comprised of senior business and control managers and chaired by the Head of CRM, oversees Merrill Lynch’s risks and ensures that the business units create and implement processes to identify, measure, and monitor their risks. The ROC also assists the EMC in determining risk tolerance levels for the firm’s business units and monitors the activities of Merrill Lynch’s corporate governance committees, reporting significant issues and transactions to the EMC and the Audit Committee.

     The RPG is a working group of the ROC comprised of control managers and is chaired by the Head of CRM. The RPG reviews various risk-related issues and reports to the ROC.

     Various other governance committees exist to create policy, review activity, and ensure that new and existing business initiatives remain within established risk tolerance levels. These committees include the New Product Review Committee, Debt and Equity Capital Commitment Committees, Real Estate Capital Commitment Committee, Credit Policy Committee, Reserve Committee, Special Transactions Review Committee, and the Structured Products Committee. Representatives of the principal independent control functions participate as voting members of these committees.

Risk Framework

CRM’s chief monitoring and risk measurement tool is Merrill Lynch’s Risk Framework (“Framework”). The Framework defines and communicates Merrill Lynch’s risk tolerance and raises exceptions for certain areas of risk concentration. Exceptions and violations are reported and investigated at pre-defined and appropriate levels of management. The Framework and its limits have been approved by the EMC and the risk parameters that define the Framework have been reviewed by the Audit Committee. The EMC reviews the Framework annually and approves any material changes. The ROC reports all substantive Framework changes to the Audit Committee.

     The Framework establishes aggregate and broad risk limits for Merrill Lynch. Market risk limits are intended to constrain exposure to specific classes and factors of market risk 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. Credit risk limits are intended to constrain the magnitude and tenor of exposure to individual counterparties, types of counterparties, countries, and financing collateral. The Framework has been established for CICG, PCG, MLIM, and Treasury. Each business is responsible for ensuring that its risk activities adhere to the limits established under the Framework. Individual Frameworks are continually refined to increase the granularity and scope of risk coverage.

Corporate Risk Management

CRM is an independent control function responsible for Merrill Lynch’s risk management process. The head of CRM reports directly to the Chief Financial Officer, chairs the ROC and RPG, and is a member of the EMC. CRM manages Merrill Lynch’s market and credit risks. Market risk is defined to be the potential change in value of trading instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spreads, and/or other risks. Credit risks are defined to be the potential for loss that can occur as a result of impairment in the creditworthiness of an issuer or counterparty or a default by an issuer or counterparty on its contractual obligations. CRM also provides Merrill Lynch with an overview of its risk for various aggregate portfolios and develops the systems and analytics to conduct all risk management functions. CRM is organized into the following four groups:

     The CICG Market Risk Group is responsible for defining the products and markets in which CICG will transact and take risk. Moreover, it is responsible for identifying the risks to which CICG businesses will be exposed in these approved products and markets. The CICG Market Risk group also establishes the Framework market risk limits against which risk concentrations are monitored and controlled. Within the Group is a dedicated, separate quantitative unit that evaluates the efficacy of trading and risk models through stressing and testing the mathematical models used by various control and business units.

     The Credit Risk Group assesses the creditworthiness of existing and potential individual clients, institutional counterparties and issuers, and determines firmwide credit risk appetite within Framework limits. The Group reviews and monitors specific transactions as well as portfolio and other credit risk concentrations. It is also responsible for ongoing credit quality and limit compliance, and the Group works with the business units of Merrill Lynch to manage and mitigate credit risk. A specialist unit that focuses on early problem asset identification and management is also part of the Credit Risk Group.

     The Portfolio Risk Group has a variety of firmwide responsibilities including integrating market, credit and business risks through firmwide stress and event analysis, enhancing the internal attribution of economic capital to business units, and conducting country risk and rating assessments. The Group also has a Process Risk team that specifically focuses on the implementation of the firmwide process risk management program. In addition, the Portfolio Risk Group oversees the proprietary market risk taken within the Merrill Lynch Treasury function, PCG and MLIM.

     The Risk Infrastructure Group provides CRM with the analytic, technological, and policy support necessary to quantify and monitor firmwide market, credit and portfolio risk.

Efficacy

CRM continuously reviews and refines its risk processes and methodologies. The overall effectiveness and responsiveness of CRM can be seen on a broader level when analyzing weekly net trading revenues over time. CRM policies and procedures for monitoring and controlling risk combined with the businesses’ focus on customer order-flow driven revenues have helped Merrill Lynch to reduce earnings volatility within its portfolios. While no guarantee can be given regarding future earnings volatility, CRM continues to work on policies and procedures that assist the firm in measuring and monitoring its risks. A graph of Merrill Lynch’s weekly trading revenues for 2000 follows:

Market Risk

Merrill Lynch uses a variety of quantitative metrics to assess the risk of its positions and portfolios. In particular, CRM quantifies the sensitivities of Merrill Lynch’s present 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 present portfolios would have incurred throughout the historical period. From these distributions, CRM derives a number of useful risk statistics including VaR. VaR is an estimate of the amount that Merrill Lynch’s present portfolios could lose with a specified degree of confidence, over a given time interval. The VaR statistic for a particular risk category represents the amount that Merrill Lynch’s present portfolios could lose due to past market movements in that specific risk category.

48 Management’s Discussion and Analysis

     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 tables and may be viewed as a measure of the diversification within Merrill Lynch’s portfolios. CRM believes that the tabulated risk measures provide some guidance as to the amount Merrill Lynch could lose in future periods and it works continuously to improve its measurement and the methodology of its VaR. However, like all statistical measures, especially those that rely heavily on historical data, VaR needs to be interpreted with a clear understanding of its assumptions and limitations.

     In the Merrill Lynch VaR system, CRM uses a historical simulation approach to estimate value-at-risk using a 99% confidence level and a two-week holding period for trading and non-trading instruments. Sensitivities to market risk factors are aggregated and combined with a database of historical biweekly changes in market factors to simulate a series of profits and losses. The level of loss that is exceeded in that series 1% of the time is used as the estimate for the 99% confidence level VaR. The overall total VaR amounts are presented across major risk categories, including exposure to volatility risk found in certain products, e.g., options. The table that follows presents Merrill Lynch’s VaR for trading instruments at year-end 2000 and 1999 and the 2000 average VaR. Additionally, high and low VaR is presented based on an overall aggregate basis.

     During 2000, overall VaR declined due to a reduction in interest and credit spread VaR and increased diversification benefits that offset an increase in equity-related VaR.

     Merrill Lynch’s energy trading business, for which VaR has severe limitations as a risk measure, has been excluded from the table above. Shortly after year-end 2000, Merrill Lynch entered into an agreement to sell certain energy-trading assets. This asset sale is subject to satisfaction of certain conditions and is expected to close at the end of the first quarter of 2001.

     The following table presents Merrill Lynch’s VaR for non-trading instruments (excluding U.S. banks):

     Non-trading VaR increased during 2000 due to increases in interest rate and credit spread risk and equity risk, primarily due to an increase in marketable investment securities held for liquidity purposes. These increases were partially offset by a decrease in currency risk.

     In addition to the amounts reported in the accompanying table, non-trading interest rate VaR associated with Merrill Lynch’s TOPrS at year-end 2000 and 1999 was $138 million and $102 million, respectively. TOPrS, which are fixed-rate perpetual preferred securities, are considered a component of Merrill Lynch’s equity capital and, therefore, the associated interest rate sensitivity is not hedged.

     During 2000, client funds in certain CMA and other types of accounts were redirected from taxable money market funds to bank deposits at Merrill Lynch’s U.S. banks. This increase in deposits was invested in high quality marketable investment securities. The overall VaR for the U.S. banks, driven largely by these securities and based on a 99% confidence level and a two-week holding period, was $191 million at year-end 2000.

Credit Risk

Merrill Lynch’s Credit Risk Group uses a variety of methodologies to set limits on exposure resulting from a counterparty or issuer failing to perform on its contractual obligations. The Group performs analysis in the context of industrial, regional and global economic trends and incorporates portfolio and concentration effects when determining risk appetite. Credit risk limits take into account measures of both current and potential exposure and are set and monitored by broad risk type, sub-product type and tenor to maturity. Credit risk mitigation tech- niques include, where appropriate, the right to require initial collateral or margin, the right to terminate transactions or obtain collateral should unfavorable events occur, the right to call for collateral when certain exposure thresholds are exceeded, and the purchase of credit default insurance. With senior management involvement, Merrill Lynch conducts regular portfolio reviews, monitors counterparty creditworthiness, and evaluates transaction risk with a view toward early problem identification and protection against unacceptable credit-related losses.

     In 2000, the Credit Risk Group introduced enhanced methods to assist in the management of Merrill Lynch’s credit risk. The Credit Framework now includes increased product and tenor granularity, and the Group has made enhancements to Merrill Lynch’s internal credit rating and counterparty review process.

     Credit risk and exposure that originates from Merrill Lynch’s retail customer business is monitored constantly by CRM. Exposures include credit risks for mortgages, home equity lines of credit, margin accounts and working capital lines that Merrill Lynch maintains with certain small business clients. These exposures are collateralized in accordance with regulatory requirements governing such activities.

     Merrill Lynch enters into International Swaps and Derivatives Association, Inc. master agreements or their equivalent (“master netting agreements”) with each of its derivative counterparties as soon as possible. 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 on the Consolidated Balance Sheets, providing for a more meaningful balance sheet presentation of credit exposure.

     In addition, to reduce default risk, Merrill Lynch requires collateral, principally U.S. Government and agencies securities, on certain derivative transactions. From an economic standpoint, Merrill Lynch evaluates default risk exposures net of related collateral. The following is a summary of counterparty credit ratings for the replacement cost (net of $4.1 billion of collateral) of trading derivatives in a gain position by maturity at December 29, 2000. (The following table is inclusive of credit exposure from derivative transactions only and does not include other credit exposures, which may be material.)