To Our Shareholders and Clients

A New Millennium
Merrill Lynch began this new century focused on the very value proposition upon which our company was founded: innovative products, access to experts and client focus second to none.

The year 2000 was a year of great contrasts. The world's Y2K jitters gave way to a feeling of euphoria, as technology extended its profound reach on the growth and efficiency of the global economy. World trade expanded, companies restructured and capital flowed across borders, looking for a good return. In a watershed event, China - home to one-fifth of the world's population - became poised to enter the World Trade Organization, confirming for us that globalization, while not without its challenges, is working.

Amid these promising signs, warnings came, too. The three shocks of 2000 - Oil, Euro and Nasdaq - diminished expectations for profits and global growth. Over all, stock market indices worldwide experienced their worst year since the early '80s, as markets felt the impact of rising interest rates and the overvaluation of the dot.coms.

If anything, the year confirmed that - in the new economy, in a new century - seemingly incompatible forces can and will coexist. This is the hallmark of the global economy.

Achieving Preeminence
In this new age, achieving preeminence requires not only delivering value to clients and shareholders today, but taking the right steps to enhance our ability to deliver it in the future.

In a volatile market environment, we continued to build leading positions around the globe in three complementary businesses: Corporate and Institutional, Private Client, and Investment Managers - all supported by the best research team on earth.

Together, they enable us to deliver a complete - and unprecedented - package of financial services to our clients, no matter who they are, what they need, where they live or how they choose to do business with us.

Yet we believe it is the combined strength and interaction of these businesses that provides an even greater advantage for our clients and shareholders. The leveraging of financial, human and technological resources - united under a powerful global brand - helps accelerate our firm's momentum and increases returns on the investments we are making in our future.

In fact, our strong, consistent financial performance today is the direct result of steps we took in prior years to create our global franchise. Now we're delivering the value that franchise holds.

In 2000, we:

• Achieved record earnings of $3.8 billion, $1.1 billion more than in 1999.
• Delivered earnings growth of 41%, and revenue growth of 20%. Since we accelerated our global growth strategy in 1995 with the acquisition of Smith New Court, earnings have grown at a compound annual rate of 27%.
• Improved our pretax margin two and a half percentage points, to more than 21%, on target to reach our goal of 24% by the end of 2003.
• Generated record revenues in every category and every region; 34% came from outside the U.S. We also continued to emphasize the growth of fee-based and recurring revenues.
• Attracted a record $150 billion in net new private client assets - and $33 billion in assets under management - bringing our total client assets to $1.7 trillion.
• Managed expense growth through a disciplined focus on resource allocation that included the strategic outsourcing and sale of certain businesses.

Delivering the Value of an Integrated Global Franchise
In the midst of an unprecedented global battle for supremacy in investment banking, our Corporate and Institutional Client Group achieved record performance. We maintained our position as the leading global underwriter of debt and equity securities, and achieved our highest market share in global equity and equity-linked origination in seven years. Meanwhile, record M&A advisory revenues reflected our increased global presence, and our particular emphasis on infusing top investment banking talent in our technology, media and telecommunications teams.

Our acquisition of Nasdaq market-maker Herzog Heine Geduld - along with our launch of MLX MarketEdge ^SM , a parallel wholesale equity trading initiative in Europe - filled out our global trading arsenal. Combined with our new Securities Services Division for clearing and settlement, we have created an end-to-end equity capability with global scale no competitor can match. Our Direct Markets e-commerce group continued in the vanguard of the technology revolution, pushing the envelope of innovation to provide a single electronic window for our institutional clients, and changing the face of the industry in the process.

With $1 trillion in client assets from households with $1 million or more in investable assets, our Private Client business is the dominant provider of wealth management services to high-net-worth investors around the world.

Driven by a longstanding commitment to putting the client first, a reshaping of our U.S. business combined all the channels through which we touch clients into a single Client Relationship Group - to approach the high-net-worth market as a fully integrated wealth management business. We also integrated our Direct business to more effectively serve investors who may have more fundamental financial needs, or who feel confident directing their own financial affairs.

Our "Merrill Anywhere" strategy delivers greater convenience and flexibility, extending the client experience from the largest and most experienced network of financial advisors in the business to the Internet, the phone and, ultimately, a wide range of wireless devices. Our online services were rated best on the web by Barron's, SmartMoney and others - and our platform of choice is now widely acknowledged as the standard for the industry.

With deposits of more than $50 billion and growing in our two U.S. banks - Merrill Lynch Bank & Trust and Merrill Lynch Bank USA - we're also leveraging our position in the post-Glass-Steagall environment.

Outside the U.S., our Private Client business delivered year-on-year revenue and organic asset growth of more than 20%.

We refined our client segmentation strategy to more effectively orchestrate our advisory services to high-net-worth and ultra-high-net-worth individuals. Toward that end, we created a Private Wealth Services group dedicated exclusively to serving the special needs of clients with $30 million or more in investable assets through specially trained teams with expertise in understanding the most complex financial challenges. For the broader base of high-net-worth clients who remain the cornerstone of our business, we continue to develop and extend long-term relationships built on trust and advice.

Our joint venture with HSBC - to form the first global, online investment and banking company - complements this strategy by speeding the launch of services to the growing number of self-directed affluent investors outside the U.S. In less than a year, we built and launched this new business in Canada and Australia, along with a world-class research service in the U.K. Within five years, we expect to roll out this service globally. Two strong brands - Merrill Lynch and HSBC - give us a great foundation to build on.

While we continue to pursue opportunities for our private client business in Japan, the environment remains challenging. Nevertheless, we are pleased with the impact we are having on addressing the growing needs of Japanese investors, and gratified by a 50% increase in client relationships there.

Through acquisition and internal investment, we've firmly established Merrill Lynch Investment Managers as a truly global asset manager - an integrated global franchise that leverages the power of our past investments and the strength of the Merrill Lynch franchise and brand.

World-class investment performance was our most important target for 2000, and the MLIM team delivered. For the year, 69% of our assets under management surpassed their respective benchmarks. Our focus on delivering superior investment performance is increasing investor confidence in our expanded product offering. Despite volatile markets, MLIM garnered record net new money of $33 billion.

With a global workforce of more than 70,000, we continued our efforts to make Merrill Lynch the best place to work through the enhancement of competitive policies and programs. We achieved measurable progress in the diversity of our workforce, reflected in our selection as one of the top 10 companies for working mothers in the U.S. Nurturing a culture without limitations, that values differences, is a steadfast goal.

Together with our employees, we worked hard to improve the communities where we live and work through numerous programs focused on youth, education, economic development and the arts. We are also striving to ensure that our policies and business activities promote the important consideration of the environment.

What Success Requires
What's ahead? As the world grapples with the complexities of globalization and change, continued volatility may bring periods of more tepid growth. At the same time, long-term demographic trends and technological developments bode very well for our industry.

In this new century, the greatest shareholder value will accrue to those companies that have mastered "the knowledge of the possible" in advance of change. This means having not only the right strategy, but the right people, brand, financial resources and management strength to execute it.

I am confident that Merrill Lynch is in a better position today than at any time in our history to seize the opportunities our global presence affords, create total financial relationships with clients, innovate as a market leader on their behalf and deliver continued strong returns to shareholders.

What's Enduring
Neither the unpredictability of the markets nor the certitude of the global technology revolution alters certain inherent truths about our business. Chief among them is that our clients are the ultimate arbiters of value. If we can succeed in serving their needs, we will have achieved our quest for preeminence, no matter how high the bar.

As this new century unfolds, three enduring characteristics continue to shape our thinking and behavior: the intelligence of our people, the principles we share and our optimism.

Our expertise and resourcefulness arm us with enormous power to help clients succeed.

Markets ebb and flow, but the Merrill Lynch Principles endure: Client Focus, Respect for the Individual, Teamwork, Responsible Citizenship, Integrity. These values are at the center of our company. They define our conduct with our colleagues, our clients and the world at large.

Yet, in the end, it is our optimism that drives us - in any circumstance - to deliver superior value for our clients and shareholders. Our bullishness remains, unabated.

David H. Komansky Chairman and Chief Executive Officer March 5, 2001

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