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 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 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 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 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 Computershare 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:

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.

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:

1. Net of outflows of $36 billion of money market funds which transferred to bank deposits at Merrill Lynch's U.S. banks in 2000.
2. Represents segregated portfolios for individuals, small corporations, and institutions.

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:

1. Includes reinvested dividends of $11 billion and net outflows of $36 billion of retail money market funds which transferred to bank deposits at Merrill Lynch’s U.S. banks.
2. Includes $(17) billion impact of foreign exchange, primarily due to the decline in value of the British pound against the U.S. dollar.

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.

---