For the financial services industry, including Merrill Lynch, 2007 was a sobering year. The good news is that most of our businesses continue to perform at record levels and we have moved quickly to strengthen our balance sheet, capital position and risk management.

Most importantly, we never lost sight of where we stand or who we are. We remain squarely by the side of our clients as an essential partner, navigating a dynamic global economy and creating value across asset classes and geographies.

To our shareholders: When Charlie Merrill pioneered the investment business that defined his life’s work, he set forth principles that guided this firm and established the standards for investing throughout America and the world. For nearly a century, the dedication of Merrill Lynch to the principles of client service, integrity, excellence and teamwork built a company whose culture and leadership stood strongly and resolutely through years of prosperity and adversity. I am honored to be the CEO of this great global franchise. I am excited by the challenge to serve our clients and lead our company forward through these turbulent times.

In my first letter to you, our shareholders, I would like to address three topics, starting with our results in 2007 and my priorities during my early months. Then I will review the performance of each of our businesses. I will close by looking ahead at goals and opportunities for our clients and our company. While U.S. economic prospects are uncertain, we anticipate growth in our businesses in 2008, at home and across the world.

2007 RESULTS
Let me begin with 2007. While many of our businesses produced excellent, some even record-breaking results, we suffered the worst performance in the history of Merrill Lynch. We reported a net loss from continuing operations for the full year of $8.6 billion, or $10.73 per fully diluted share, following write-downs resulting from our exposures to the U.S. mortgage market in U.S. ABS CDOs and sub-prime residential mortgages and securities.

FOUR IMMEDIATE PRIORITIES
That must never happen again. Since my arrival, we have moved to restructure risk management and to reposition the firm for growth by meeting four priorities.

First, anticipating the possibility of a liquidity squeeze at year end, we reduced the size of our balance sheet and freed up additional liquidity and more than $2 billion of capital through the sale of non-core assets. We ended the year with the holding company’s excess liquidity of nearly $80 billion.

Our second priority was to bolster our capital base. We raised $12.8 billion, which exceeded what we lost, and we could have raised substantially more. I am happy to report that the rating agencies affirmed our credit ratings, and we are well capitalized. We can now set our sights on growing our businesses and leveraging global opportunities. Let me also note that our new shareholders represent a diverse group of long-term, passive, strategic investors who can help us in key markets.

Our third priority is to strengthen our management and organizational structure. We want the best people leading Merrill Lynch and we want to create a flatter, more horizontal structure to strengthen accountability, performance and teamwork. Toward that end, I have increased the number of my direct reports and ensured that experienced veterans are filling key leadership roles. I have also bolstered our risk management process to include a committee of senior executives, combining credit and risk management functions, which now reports directly to me every week. Risk-taking is intrinsic to the mission and success of Merrill Lynch, and we will strive to assure that it is appropriately sized to each business. Prudence in trading goes hand-in-hand with management of our balance sheet, including reducing illiquid assets.

Finally, we want to break down any silos and to build up teamwork, cross-selling and a one-firm mindset across the company. As a first step, we are changing our compensation philosophy. Just as we put our clients’ interests first in our businesses, we want to put the firm’s collective financial results first when it comes to determining compensation. Teamwork is a core value of Merrill Lynch and will be an essential element as we serve our clients in today’s volatile markets. We want to leverage to the fullest the talent, innovation and resources across our franchise.

OUR BUSINESS RESULTS
Turning to our businesses, their performance highlights the earnings power and potential of Merrill Lynch. Global Wealth Management is the face of our franchise in communities across America and the world. We consider our relationships with our clients our most valued resource. During 2007, GWM reported revenue growth of 18%, pretax earnings growth of 59%, and record assets of $1.75 trillion. GWM also generated $30 billion in net new money in the fourth quarter of 2007, the biggest increase since 2000, an inspiring performance in very challenging markets.

Global Markets & Investment Banking results suffered as a result of our exposure to U.S. ABS CDOs and sub-prime mortgages and securities; however we did see revenue growth in certain key businesses including a record year from both Equity Markets and Investment Banking (IBK). IBK growth was balanced, coming from both Advisory and Equity Origination. We placed in the top five league table rankings globally and are well-positioned with a balanced and growing presence in Europe, the Pacific Rim and emerging markets. Our goal is to rise into the top three in league table rankings globally in 2008.

Our Equity Markets business also had a record year, with revenue growth of 23%. Equity Markets is a strong business with a balanced mix between our cash and derivative businesses. We are driving robust growth in equities globally, in the U.S., EMEA and the Pacific Rim.

Finally, in Fixed Income, Currencies and Commodities (FICC), strong revenues in global rates and global currencies were more than offset by negative revenues from U.S. ABS CDOs and sub-prime mortgages and securities. Within FICC, a number of individual businesses generated record revenues, including our interest rate and currencies businesses, which we expect to remain robust in 2008. Our presence in the U.S. and internationally is strong in interest rates, currencies and commodities.

Our Global Research group continues to create profitable investment ideas for clients, and, among other awards, was named by The Wall Street Journal as “Best on the Street” for stock picking. The group is well positioned to identify global growth opportunities, while maintaining a leading U.S. presence.

LOOKING TO THE FUTURE
Merrill Lynch has strong businesses that are growing rapidly, expanding their global footprints, and offering superior products, services and solutions. I believe that Merrill Lynch has the best wealth management business in the world. In the U.S., where the economic outlook is uncertain, we can help our clients turn volatility into opportunity to reach their personal goals. Outside the U.S., where economic growth is stronger, we will compete to manage financial assets of millions of upwardly mobile individuals.

As for our Global Markets and Investment Banking businesses that already generate more than half of their revenues outside the U.S., we will continue to invest in growth opportunities. In January, I traveled to Moscow to open our new Russian office, symbolizing our commitment to expanding our presence in international markets and to the enduring promise that the success of global capitalism has instilled in people around the world. Finally, while we will always be a client-driven business, we will grow our principal investing businesses through third-party funds, in which we will be a significant participant.

In closing, I want to express my gratitude to our shareholders and clients for your trust. I am confident that your loyalty will be rewarded. We have faced adversity, tackled tough decisions and moved the company to a position of renewed strength. My pledge to our clients is to do our utmost, every day, to provide you the best of Merrill Lynch. My goal for our shareholders is to transform Merrill Lynch into the premier financial services franchise in the world. My message to our people is, let’s get started.

Thank you,
John A. Thain
Chairman and Chief Executive Officer
February 22, 2008

View Merrill Lynch 2007 Annual Report

Front cover (left to right): Dianne Greene, José Tavarez, Stanley Heilbronn, Savita Subramanian, Thanh Hong, Lyle LaMothe, Terri Ludwig, Lisa Clyde, Erick Bronner; Back cover (left to right), bottom row: Linda Esposito, David Stith, Todd Sears, Patricia Lee; middle row: Ninon Marapachi, Vilas Mhatre, Maria Minardo, Ryan McDay, Gabriela Velasquez de Orner, Andrew Scott; top row: Marlene Debel, Mark Pollard, Isabelle O’Hara, Jennifer Choi, Harold Razón, Deann Dubey, Corey Baylor, Dorothy Hurley, Erin F. Donnelly, David Ratcliffe, Taquana Bailey, Marge Benson

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Board of Directors:

John A. Thain Chairman and chief executive officer; former chief executive officer of NYSE Euronext, Inc. and its predecessor companies, NYSE Group, Inc. and New York Stock Exchange Inc., from 2004 until 2007; president from 1999 to 2004, chief operating officer from 2003 to 2004 and co-chief operating officer from 1999 to 2003 of The Goldman Sachs Group, Inc.; 52 years old; director of Merrill Lynch since 2007.

Carol T. Christ President of Smith College; former executive vice chancellor and provost, University of California, Berkeley; 63 years old; director of Merrill Lynch since 2007.

Armando M. Codina President and chief executive officer of Flagler Development Group, a real estate investment, development, construction, brokerage and property management firm; 61 years old; director of Merrill Lynch since 2005.

Virgis W. Colbert Retired executive vice president of Worldwide Operations for Miller Brewing Company; 68 years old; director of Merrill Lynch since 2006.

Alberto Cribiore Managing partner and founder of Brera Capital Partners, a global private equity investment firm; former co-president of Clayton, Dubilier & Rice, Inc.; 62 years old; director of Merrill Lynch since 2003; lead independent director since 2007.

John D. Finnegan Chairman of the board, president and chief executive officer of The Chubb Corporation, a property and casualty insurance company; former executive vice president of General Motors Corporation, and chairman and president of General Motors Acceptance Corporation, a subsidiary of General Motors Corporation; 59 years old; director of Merrill Lynch since 2004.

Judith Mayhew Jonas Former member of the U.K. government’s Equalities Review Panel; former provost of Kings College, Cambridge; former special advisor to the chairman of Clifford Chance, Solicitors; former vice chair of the London Development Agency; 59 years old; director of Merrill Lynch since 2006.

Aulana L. Peters Retired partner in the law firm of Gibson, Dunn & Crutcher L.L.P.; member of the International Public Interest Oversight Board; member of the U.S. Comptroller General’s Accountability Advisory Panel; former member of the Public Oversight Board of AICPA; former commissioner of the U.S. Securities and Exchange Commission; 66 years old; director of Merrill Lynch since 1994.

Joseph W. Prueher Consulting professor and senior advisor to the Stanford University Center for International Security and Cooperation; U.S. Ambassador to the People’s Republic of China from 1999 to 2001; U.S. Navy Admiral (Ret.), commander-in-chief of U.S. Pacific Command from 1996 to 1999; 65 years old; director of Merrill Lynch since 2001.

Ann N. Reese Co-founder and co-executive director of the Center for Adoption Policy, a not-for-profit corporation; former principal, Clayton, Dubilier & Rice, a private equity investment firm; former executive vice president and chief financial officer of ITT Corporation, a hotel and leisure company; 55 years old; director of Merrill Lynch since 2004.

Charles O. Rossotti Senior advisor to The Carlyle Group, a private global investment firm; former commissioner of Internal Revenue at the Internal Revenue Service; former chairman of the board, president and chief executive officer of American Management Systems, an international business and information technology consulting firm; 67 years old; director of Merrill Lynch since 2004.

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