Updated from 10 a.m.

Merrill Lynch's

(MER)

third-quarter earnings slid 8% from a year ago, pressured by reduced trading volume among clients who have laid off stocks for most of 2004.

Merrill earned $920 million, or 93 cents a share, in the three months to Sept. 24, compared with earnings of $1 billion, or $1 a share, lastyear. Revenue fell 3.2% from a year ago to $4.84 billion. Analysts had been forecasting earnings of 92 cents a share on revenue of $4.93 billion,according to Thomson Financial.

By sector, Merrill's revenue from commissions fell 0.6% from a year ago to $1.09 billion in the third quarter, asset management revenue rose 13.2% to $1.34 billion, principal transaction revenue slid 44.6% from a year ago to $390 million, and investment banking revenue fell 1.8% to $666 million.

Pretax earnings in Merrill's investment banking and trading arm fell22% from a year ago to $771 million on a 9% decline in net revenue to $2.3billion.

"Like the rest of the industry, we experienced very challenging marketconditions and resulting revenue pressures in the quarter," said StanO'Neal, Merrill's chairman and chief executive. The tough market environment has stopped the firm from making "gains in fillingstrategic gaps, enhancing service to our clients, broadening our revenueprofile and actively managing our equity capital," he added.

In the third quarter, Merrill announced it was getting back into theenergy trading business. In a deal scheduled to close by year's end,Merrill is paying about $1 billion for the energy trading business ofEntergy-Koch. Additionally, the firm added 600 employees during the thirdquarter, most of them brokers.

"We feel very good about the state of our business overall, and weremain committed to the investments we have identified that continue toenhance and grow our business," O'Neal said.

Indeed, most Wall Street analysts felt the quarter wasn't as bad as itcould have been for Merrill, given the slump in stock trading. Mostanalysts concur with O'Neal's assessment that that the firm is taking thenecessary steps to position itself for a better days ahead.

Glenn Schorr, a UBS brokerage analyst, said the quarter was a "modest''victory, given the beaten-down expectations Merrill confronted in thequarter. Mark Constant, a Lehman Brothers analyst, summed up the quarterthis way in a research note: "Not Great. Not Bad.''

"On balance, Merrill has 'cleared the deck' of 3Q04, a quarter of knownweakness, while meeting expectations to boot," said David Trone, aFox-Pitt Kelton brokerage analyst, in a research note. "That revenue was abit less than we expected is inconsequential to the bigger picture, and canonly be resolved with eventual improvement in the external environment.''

Investors seemed to agree with that way of thinking. In initialtrading, the stock declined before quickly rebounding despite an overall down day on Wall Street. In late morning trading, the stock was up 75 cents, or 1.5%, to $51.75.

In a sign of optimism about next year, Ahmass Fakahany, Merrill'sexecutive vice president and chief financial officer, said the firm expects its workforce to increase by about 5% in 2005. Most of the new hires, he said, will be brokers.

Farkahany, in a conference call, said Merrill is not allowing the"short term market challenges'' to deter its plans for future growth.

He also said the firm's "pipeline'' of investment banking deals issolid and expects activity on the corporate merger front to pickup in thecoming months.