<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

                                   FORM 10-K

               (x) Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                 For the fiscal year ended:  December 31, 1997
                                       or
                 (  ) Transition Report Pursuant to Section 13
                or 15(d) of the Securities Exchange Act of 1934


                        Commission file number:  0-18944

                       THE SECTOR STRATEGY FUND II L.P.
                       ---------------------------------
             (Exact name of registrant as specified in its charter)
             ------------------------------------------------------

               DELAWARE                                 13-3584544
   ------------------------------                   ---------------------
  (State of other jurisdiction of                    (I.R.S. Employer
  incorporation or organization)                     Identification No.)

                   C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
                        MERRILL LYNCH WORLD HEADQUARTERS
                             WORLD FINANCIAL CENTER
                SOUTH TOWER, 6TH FLOOR, NEW YORK, NY  10080-6106
                ------------------------------------------------
                    (Address of principal executive offices)

      Registrant's telephone number, including area code:  (212) 236-5662
                                                           --------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  
                                                       Limited Partnership Units
                                                       -------------------------
                                                            (Title of Class)   

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                                     Yes   X          No 
                                                         -----           -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                  [X]

Aggregate market value of the voting stock held by non-affiliates:  the
registrant is a limited partnership; as of February 1, 1998, limited partnership
units with an aggregate value of $29,718,072 were outstanding and held by non-
affiliates.

                      DOCUMENTS INCORPORATED BY REFERENCE

The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
 
                     THE SECTOR STRATEGY FUND(SM) II L.P.

                      ANNUAL REPORT FOR 1997 ON FORM 10-K


                               Table of Contents
                               -----------------


                                   PART I 
                                   ------
 
<TABLE> 
<CAPTION> 
                                                                                                PAGE
                                                                                                ----
<S>      <C>                                                                                     <C> 
Item 1     Business..............................................................................  1

Item 2     Properties............................................................................  8

Item 3     Legal Proceedings.....................................................................  8

Item 4     Submission of Matters to a Vote of Security Holders...................................  8


                                    PART II
                                    -------

Item 5     Market for Registrant's Common Equity and Related Stockholder Matters.................  8

Item 6     Selected Financial Data............................................................... 10

Item 7     Management's Discussion and Analysis of Financial Condition and Results of Operations. 15

Item 7A    Quantitative and Qualitative Disclosures About Market Risk............................ 18

Item 8     Financial Statements and Supplementary Data........................................... 18

Item 9     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 18

                                    PART III
                                    --------

Item 10    Directors and Executive Officers of the Registrant.................................... 19

Item 11    Executive Compensation................................................................ 21

Item 12    Security Ownership of Certain Beneficial Owners and Management........................ 21

Item 13    Certain Relationships and Related Transactions........................................ 22

                                    PART IV
                                    -------

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 22
</TABLE> 

                                     -ii-
<PAGE>
 
                                    PART I

ITEM 1: BUSINESS
        --------

        (a)     General Development of Business:
                -------------------------------

                The SECTOR Strategy Fund(SM) II L.P. (the "Partnership" or the
"Fund") was organized under the Delaware Revised Uniform Limited Partnership Act
on August 21, 1990 and began trading operations on December 5, 1990 ("SECTOR II
Units"). A re-opening of the Partnership through the public offering of SECTOR
III Limited Partnership Units ("SECTOR III Units") commenced operations on July
5, 1991. The Fund made only the initial offering of its units of limited
partnership interest ("Units"); Units may be redeemed as of the end of each
calendar month. The Partnership engages in the speculative trading of a
portfolio of futures and forward contracts and related options in the
currencies, interest rates, stock indices, metals, agricultural and energy
sectors of the world futures markets. References herein to the "Partnership" or
the "Fund" shall refer to both the SECTOR II and SECTOR III Units unless
otherwise indicated. The trading advisors managing the SECTOR II trading
accounts and SECTOR III trading accounts for the Partnership are referred to
herein as the "Trading Advisors." The Fund's objective is achieving substantial
capital appreciation over time while assuring investors of at least a
predetermined minimum Net Asset Value per Unit as of the Principal Assurance
Date.

                Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") is the general partner of the Partnership and selects and allocates the
Fund's assets among professional advisors ("Trading Advisors" or "Advisors"),
each unaffiliated with MLIP and each of which trades independently of the
others. MLIP also determines what percentage of the Fund's assets to allocate to
trading and what percentage to hold in reserve. Merrill Lynch Futures Inc. (the
"Commodity Broker" or "MLF") is the Partnership's commodity broker. The General
Partner is a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in
turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The
Commodity Broker is an indirect wholly-owned subsidiary of ML&Co. (ML&Co. and
its affiliates are herein sometimes referred to as "Merrill Lynch").

                In addition to its trading accounts, the Partnership maintains a
cash account. From time to time, the General Partner allocates and reallocates
Partnership assets among its trading and cash accounts in an attempt to increase
profit potential while limiting the downside risks associated with futures and
forward trading (in order to prevent ML&Co. from incurring any obligations under
its guarantee of a minimum Net Asset Value per Unit, as described below).
Initially, the General Partner allocated approximately 30% of the Partnership's
assets in each of the SECTOR II and SECTOR III portions to cash and
approximately 70% to the trading accounts. As of December 31, 1997, that ratio
was approximately 100% to trading for the SECTOR II Units and approximately 100%
trading for the SECTOR III Units.

                The total initial capitalization of the Partnership as of
December 5, 1990 was $136,410,000 for SECTOR II Units and as of July 5, 1991,
$194,005,000 for SECTOR III Units. Through December 31, 1997, SECTOR II Units
with an aggregate Net Asset Value of $146,621,667 have been redeemed (including
December 31, 1997 redemptions which were not actually paid until January 1998),
and SECTOR III Units with an aggregate Net Asset Value of $200,573,705 have been
redeemed (including December 31, 1997 redemptions which were actually paid in
January 1998), the Partnership's SECTOR II Unit capitalization was $13,829,930,
the Partnership's SECTOR III Unit capitalization was $26,820,527 and the Net
Asset Value of a SECTOR II Unit sold as of December 5, 1990 for $100 was $156.37
and the Net Asset Value of SECTOR III Unit sold as of July 5, 1991 for $100 was
$159.00.

                The Fund is a "principal protected" commodity pool. ML&Co.
provides the guarantee described below under Item 1(c), "Narrative Description
of Business -- ML&Co.'s 'Principal Protection' Undertaking to the Fund" -- that
the Net Asset Value per Unit will equal at least $125.10 as of December 31, 1999
for SECTOR II Units and at least $100.92 as of September 30, 1998 for SECTOR III
Units (the "Principal Assurance Dates"). The initial Principal Assurances Dates
for the SECTOR II Units and SECTOR III Units were December 31, 1995 and
September 30, 1996, respectively, at which time the minimum Net Asset Value per
Unit guaranteed by ML&Co. was $100 per Unit. As of January 1, 1996, the Fund
renewed the trading program for SECTOR II Units, setting a new Time Horizon of
two years

                                      -1-
<PAGE>
 
in duration with a second Principal Assurance Date of December 31, 1997 and a
minimum assured Net Asset Value of $100.12. As of October 1, 1996, the Fund
renewed the trading program for the SECTOR III Units also setting a new Time
Horizon of two years in duration, with a second Principal Assurance Date of
September 30, 1998 and a minimum assured Net Asset Value of $100.92. As of
January 1, 1998, the Fund renewed the trading program for SECTOR II Units,
setting a new Time Horizon of two years in duration with a third Principal
Assurance Date of December 31, 1999 and a minimum assured Net Asset Value of
$125.10. This guarantee does not prevent substantial investor losses, but rather
serves only as a form of "stop loss," limiting the maximum loss which investors
who retain their Units until the Principal Assurance Date can incur. In order to
protect ML&Co. from any liability under its guarantee at such time, if any, as
the Net Asset Value per Unit were to decline to 110% or less of the present
value of the guaranteed minimum Net Asset Value per SECTOR II or SECTOR III
Units, as the case may be, discounted back from their respective current
Principal Assurance Dates, MLIP would terminate trading altogether in order to
ensure that ML&Co. incurred no financial obligation to the Fund under ML&Co.'s
guarantee of the minimum Net Asset Value per Unit.

          Beginning in July 1997 MLIP may from time to time direct certain
individual Advisors to manage their Fund accounts as if they were managing up to
50% more equity than the actual capital allocated to them.  This additional
leverage is subject to the condition that the Fund as a whole will not trade as
if it had in excess of 20% more equity than actual capital.

          Through December 31, 1997 the highest month-end Net Asset Value per
SECTOR II and SECTOR III Units was $158.23 (July, 1997) and $159.00 (December,
1997), respectively, and the lowest $98.68 (January, 1991) and $97.74 (May,
1992), respectively.

      (b) Financial Information about Industry Segments:
          ---------------------------------------------

          The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."

      (c) Narrative Description of Business:
          ---------------------------------

          GENERAL

          The Fund trades in futures, options on futures and forward contracts
in major sectors of the world economy, with the objective of achieving
substantial capital appreciation over time, while assuring investors of at least
a predetermined minimum Net Asset Value per Unit as of the Principal Assurance
Date.

          The General Partner is the Partnership's trading manager, with
responsibility for selecting Advisors to manage the Partnership's assets,
allocating and reallocating Fund assets among these Advisors and determining the
percentage of the Partnership's assets committed to trading from time to time.

          Although considered as a whole, the Partnership trades in a
diversified range of international markets, certain of the Trading Advisors,
considered individually, concentrate primarily on trading in a limited portfolio
of markets.  The different "sectors" included in the Partnership's portfolio,
and the extent to which the portfolios traded by two or more Trading Advisors
may overlap, varies substantially over time.

          The Fund accesses certain of the Trading Advisors not by opening
individual managed accounts with them, but rather through investing in private
funds sponsored by MLIP through which the trading accounts of different MLIP-
sponsored funds managed by the same Advisor and pursuant to the same strategy
are consolidated.

          One of the objectives of the Fund is to provide diversification for a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance has historically often demonstrated a low degree of
performance correlation with traditional stock and bond holdings.  Since it
began trading, the Fund's returns have, in fact, frequently been significantly
non-correlated (not, however, negatively correlated) with the United States
stock and bond markets.

                                      -2-
<PAGE>
 
          ML&CO.'S "PRINCIPAL PROTECTION" UNDERTAKING TO THE FUND


          ML&Co., the parent company of the Merrill Lynch organization, which
includes the General Partner and the Commodity Broker, has agreed to contribute
sufficient capital to the Partnership so that it will have adequate funds, after
adjustment for all liabilities to third parties, that the Net Asset Value per
SECTOR II and SECTOR  III Unit, respectively, will be no less than $125.10 or
$100.92 as of their respective second Principal Assurance Dates. This guarantee,
which is effective only as of the Principal Assurance Date, is a guarantee only
of the return of a subscriber's initial investment, and not on a present value
basis, not a guarantee of profit.  This guarantee is a general, unsecured
obligation of ML&Co.

          OPERATION OF THE PARTNERSHIP AFTER THE SECOND PRINCIPAL ASSURANCE 
          DATES

          When the Fund reached the first Principal Assurance Dates for the
SECTOR II and SECTOR III Units, respectively, MLIP again "restarted" the Fund's
trading program and the ML&Co. guarantee for a two-year period ending December
31, 1999 and September 30, 1998, respectively.  MLIP may determine to terminate
the Partnership's operations with respect to either or both of the SECTOR II or
SECTOR III Units as of their second Principal Assurance Dates, to extend the
ML&Co. guarantee for a certain period of time (again resetting the minimum Net
Asset Value per Unit guaranteed by ML&Co.) or to continue to operate the Fund
without a "principal protection" feature.  All investors will be given notice no
later than 45 days prior to the Principal Assurance Date for their Units as to
what the operation of the Fund (if any) will be with respect to such Units after
such current Principal Assurance Date.

          USE OF PROCEEDS AND INTEREST INCOME


          General.  The Fund's assets are used as security for and to pay the
          -------                                                            
Fund's trading losses as well as its expenses and redemptions.  The primary use
of the Fund's capital is to permit the Advisors to trade on a speculative basis
in a wide range of different futures, forwards and options on futures markets,
while allocating to the Partnership's cash account such amounts as MLIP deems
appropriate in order to protect ML&Co. from any liability under its guarantee.
While being used for this purpose, the Fund's assets are also generally
available to earn interest, as more fully described below under "-- Available
Assets."

          Market Sectors.  The Partnership trades in a diversified group of
          --------------                                                   
markets under the direction of multiple independent Advisors.  These Advisors
can, and do, from time to time materially alter the allocation of their overall
trading commitments among different market sectors.   Except in the case of
certain trading programs which are purposefully limited in the markets which
they trade, there is essentially no restriction on the commodity interests which
may be traded by any Advisor or the rapidity with which an Advisor may alter its
market sector allocations.

          The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.

          Market Types.  The Fund trades on a variety of United States and
          ------------                                                    
foreign futures exchanges. Applicable exchange rules differ significantly among
different countries and exchanges.  Substantially all of the Fund's off-exchange
trading takes place in the highly liquid, institutionally-based currency forward
markets.  The forward markets are generally unregulated, and in its forward
trading the Fund does not deposit margin with respect to its positions.  The
Partnership's forward currency trading is executed exclusively through the
Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of
its affiliates, with MLF as the "back-to-back" intermediary to the ultimate
counterparties, which include Merrill Lynch International Bank  ("MLIB").

          As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time.  The
Fund has no policy restricting its relative commitments to any of these
different types of markets.

                                      -3-
<PAGE>
 
          The Fund's financial statements contain information relating to the
types of markets traded by the Fund.  There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.

          Custody of Assets.  All of the Fund's assets are currently held in 
          -----------------      
customer accounts at Merrill Lynch.

          Available Assets.  The Fund earns interest, as described below, on its
          ----------------                                                      
"Available Assets,"  which can be generally described as the cash actually held
by the Fund or invested in short-term Treasury bills.  Available Assets are held
primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are
comprised of the following:  (a) the Fund's cash balance in the offset accounts
(as described below) -- which includes "open trade equity" (unrealized gains and
losses on open positions) on United States futures contracts, which is paid into
or out of the Fund's account on a daily basis; and (b) the Fund's cash balance
in foreign currencies derived from its trading in non-U.S. dollar denominated
futures and options contracts, which includes open trade equity on those
exchanges which settle gains and losses on open positions in such contracts
prior to the closing out of such positions.  Available Assets do not include,
and the Fund does not earn interest on, the Fund's gains or losses on its open
forward, commodity option and certain foreign futures positions since such gains
or losses are not collected or paid until such positions are closed out.

          The Partnership's Available Assets may be greater than, less than or
equal to the Fund's Net Asset Value (on which the redemption value of the Units
is based) primarily because Net Asset Value reflects all gains and losses on
open positions as well as accrued but unpaid expenses.

          The interest income arrangements for the Partnership's U.S. dollar
Available Assets differ from those applicable to its non-U.S. dollar Available
Assets.  Interest income, once accrued by the Fund, is subject to the risk of
trading losses.

          Interest Earned on the Fund's U.S. Dollar Available Assets.  The
          ----------------------------------------------------------      
Fund's U.S. dollar Available Assets are held in cash in offset accounts and in
short-term Treasury bills purchased from dealers unaffiliated with Merrill
Lynch.  Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch.  An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.

          MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month.  The
Fund receives all the interest paid on the short-term Treasury bills in which it
invests.

          The use of the offset account arrangements for the Partnership's U.S.
dollar Available Assets may be discontinued by Merrill Lynch whether or not
Merrill Lynch otherwise continues to maintain its offset arrangements. The
offset arrangements are dependent on the banks' continued willingness to make
overnight credits available to Merrill Lynch, which, in turn, is dependent on
the credit standing of ML&Co.  If Merrill Lynch were to determine that the
offset arrangements had ceased to be practicable (either because ML&Co. credit
lines at participating banks were exhausted or for any other reason), Merrill
Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available
Assets to the maximum practicable extent in short-term Treasury bills.  All
interest earned on the U.S. dollar Available Assets so invested would be paid to
the Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements.  The remaining U.S.
dollar Available Assets of the Fund would be kept in cash to meet variation
margin payments and pay expenses, but would not earn interest for the Fund.

          The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of  the Fund's U.S. dollar Available Assets held in the offset accounts,
charging Merrill Lynch a small fee for this service.  The economic benefits
derived by Merrill Lynch -- net of the interest credits paid to the Fund and the
fee paid to the offset banks -- from the offset accounts have not exceeded  3/4
of 1% per annum of the Fund's average daily U.S. dollar Available Assets held in
the offset accounts. These revenues to Merrill Lynch are in addition to the
Brokerage Commissions and Administrative Fees paid by the Fund to MLF and MLIP,
respectively.

                                      -4-
<PAGE>
 
          Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available
          ----------------------------------------------------------------------
Assets.  Under the single currency margining system implemented for the
------                                                                 
Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options.
MLF provides the necessary margin, permitting the Fund to retain the monies
which would otherwise be required for such margin as part of the Fund's U.S.
dollar Available Assets.  The Fund does not earn interest on foreign margin
deposits provided by MLF.  The Fund does, however, earn interest on its non-U.S.
dollar Available Assets.  Specifically, the Fund is credited by Merrill Lynch
with interest at the local short-term rate on realized and unrealized gains on
non-U.S. dollar denominated positions for such gains actually held in cash by
the Fund.  Merrill Lynch charges the Fund Merrill Lynch's cost of financing
realized and unrealized losses on such positions.

          In order to avoid the expense of daily currency conversions, the Fund
holds foreign currency gains and finances foreign currency losses on an interim
basis until converted into U.S. dollars and either paid into or out of the
Fund's U.S. dollar Available Assets.  Foreign currency gains or losses on open
positions are not converted into U.S. dollars until the positions are closed.
Assets of the Fund while held in foreign currencies are subject to exchange rate
risk.

                                ________________

          The General Partner has determined that there may have been a
miscalculation in the interest credited to the Fund for a period prior to
November 1996.  Accordingly, Merrill Lynch has credited certain amounts to the
Fund's investors (directly, not by crediting the Fund itself).  For current
Merrill Lynch clients, this credit, which includes compounded interest, appeared
on their December 1997 account statements.  The total amount of the adjustment
was approximately $2,605,000 for SECTOR II Units and $4,141,000 for SECTOR III
Units.

          CHARGES

          The following table summarizes the charges incurred by the Fund during
          1995, 1996 and 1997.

<TABLE>
<CAPTION>
                            1995                        1996                        1997
                    -----------------------      -----------------------   ------------------------
                               % OF AVERAGE                 % OF AVERAGE                % OF AVERAGE
                    DOLLAR      MONTH-END        DOLLAR      MONTH-END       DOLLAR      MONTH-END
   COST             AMOUNT      NET ASSETS       AMOUNT      NET ASSETS      AMOUNT      NET ASSETS
   ----            ----------   -----------      ------      ----------     -------      -----------
<S>               <C>          <C>            <C>           <C>            <C>          <C>          
Brokerage          $6,481,462      9.45%     $ 4,213,004        8.92%    $ 2,732,838          6.56%
 Commissions
                                                                       
Administrative            ---       ---          113,600        0.24          78,081          0.19
 Fees                                                                  
                                                                       
Profit Shares       1,319,093      1.92          364,863        0.77         530,099          1.27
                   ----------      ----      -----------        ----     -----------          ----
                                                                       
  Total            $7,800,555     11.37%     $4, 691,467        9.93%    $ 3,341,018          8.02%
                   ==========     ======     ===========        =====    ===========          =====
</TABLE>

_______________
The Fund reimbursed MLIP for a total of $903,461 for the SECTOR II Units and a
total of $1,000,000 for the SECTOR III Units of organizational and offering
costs over the first 36 months of operations.

                              ____________________

                                      -5-
<PAGE>
 
          The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the  benefits which may be derived by Merrill
Lynch from the deposit of certain of the Fund's U.S. dollar Available Assets in
offset accounts.  See Item 1(c), "Narrative Description of Business -- Use of
Proceeds and Interest Income."

          The Fund's SECTOR II Units average month-end Net Assets during 1995,
1996 and 1997 equaled $24,692,247,  $16,918,994 and $14,791,387, respectively.

          The Fund's SECTOR III Units average month-end Net Assets during 1995,
1996 and 1997 equaled $43,886,806, $30,297,499 and $26,871,244, respectively.

          During 1995, 1996 and 1997, the Fund's SECTOR II Units earned
$1,257,868,  $733,578 and $640,195 in interest income, or approximately 5.09%,
4.34% and 4.33% of the Fund's average month-end Net Assets.

          During 1995, 1996 and 1997, the Fund's SECTOR III Units earned
$2,261,581,  $1,276,409 and $911,165 in interest income, or approximately 5.15%
,  4.21% and 3.39%  of the Fund's average month-end Net Assets.

          The 9% per annum Brokerage Commissions for the SECTOR II Units and the
10% per annum Brokerage Commissions for the Sector III Units paid by the Fund to
MLF were recharacterized as 8.75% and 9.75%, respectively, per annum Brokerage
Commissions and a 0.25% per annum Administrative Fee paid by the Fund to MLIP as
of January 1, 1996.  This recharacterization had no economic effect on the Fund.

          As of October 1, 1996, the 9.75% per annum Brokerage Commissions for
the SECTOR III Units were reduced to 8.75% per annum (0.7291% of the Fund's
month-end assets).

The variations in charges is primarily due to placing assets in Trading LLCs
(see Item 7).
                         ______________________________

                         DESCRIPTION OF CURRENT CHARGES
<TABLE>
<CAPTION>
 
RECIPIENT           NATURE OF PAYMENT       AMOUNT OF PAYMENT
---------           -----------------       -----------------  
<S>                 <C>                     <C>
MLF                 Brokerage Commissions   A flat-rate monthly commission of 0.7291 of 1% (an
                                            8.75% annual rate) of the SECTOR III and SECTOR II
                                            month-end assets committed to trading.  As of
                                            December 31, 1997 approximately 100% of the SECTOR
                                            II assets and 100% of the SECTOR III assets were
                                            allocated to trading.
 
                                            During 1995, 1996 and 1997, the round-turn (each
                                            purchase and sale or sale and purchase of a single futures
                                            contract) equivalent rate of the SECTOR III flat-rate
                                            Brokerage Commissions was approximately   $72,  $59
                                            and $63, respectively.

MLF                 Use of Fund assets      Merrill Lynch may derive an economic benefit from the
                                            deposit of certain of the Fund's U.S. dollar Available
                                            Assets in offset accounts; such benefit to date has not
                                            exceeded  3/4 of 1% of such average daily U.S. dollar
                                            Available Assets.
</TABLE> 

                                      -6-
<PAGE>
 
<TABLE> 
<CAPTION> 
RECIPIENT           NATURE OF PAYMENT       AMOUNT OF PAYMENT
---------           -----------------       -----------------  
<S>                 <C>                     <C>
MLIP                Administrative Fees     The Fund pays MLIP a monthly Administrative Fee equal
                                            to 0.020833 of 1% of the Fund's month-end assets
                                            committed to trading (0.25% annually).  MLIP pays all of
                                            the Fund's routine administrative costs.

MLIB                Bid-ask spreads         Under MLIP's F/X Desk arrangements, MLIB receives
                                            bid-ask spreads on the forward trades it executes with the
                                            Fund.

Other               Bid-ask spreads         The counterparties other than MLIB with which the F/X
  Counterparties                            Desk deals also each receive bid-ask spreads on the
                                            forward trades executed with the Fund.
 
                    F/X Desk service fees   Under the F/X Desk arrangements, MLIP or another
MLIP                                        Merrill Lynch entity receives a service fee equal, at current
                                            exchange rates, to approximately $5.00 to $12.50 on each
                                            purchase or sale of each futures contract-equivalent
                                            forward contract exe-cuted with counterparties other than
                                            MLIB.
 
MLIB                EFP differentials       MLIB or an affiliate receives a differential spread for
                                            exchanging the Fund's spot currency positions (which are
                                            acquired through the F/X Desk, as described above) for
                                            equivalent futures positions.
 
Trading Advisors    Profit Shares           Prior to January 1, 1997, all Advisors received quarterly
                                            Profit Shares ranging from 15% to 25% (depending on the
                                            Trading Advisor) of any New Trading Profit achieved by
                                            their Fund account.  As of January 1, 1997, a number of
                                            Advisors agreed to receive only annual Profit Shares.
                                            Profit Shares are also paid upon redemption of Units.  New
                                            Trading Profit is calculated separately in respect of each
                                            Advisor, irrespective of the overall performance of the
                                            Fund.  The Fund may pay substantial Profit Shares during
                                            periods when it is incurring significant overall losses.
 
 
MLF;                Extraordinary expenses  Actual costs incurred; none paid to date, and expected to
  Others                                    be negligible.
 
</TABLE>

                              -------------------

          REGULATION

          The General Partner, the Trading Advisors and the Commodity Broker are
each subject to regulation by the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association.  Other than in respect of its
periodic reporting requirements under the Securities Exchange Act of 1934, the
Partnership itself is generally not subject to regulation by the Securities and
Exchange Commission.  However, MLIP itself is registered as an "investment
adviser" under the Investment Advisers Act of 1940.

                                      -7-
<PAGE>
 
               (i) through (xii) -- not applicable.

               (xiii)  The Partnership has no employees.

           (d) Financial Information about Foreign and Domestic Operations
               -----------------------------------------------------------

and Export Sales:
---------------- 

          The Partnership does not engage in material operations in foreign
countries, nor is a material portion of the Partnership's revenues derived from
customers in foreign countries.  The Partnership does, however, trade, from the
United States, on a number of foreign commodity exchanges.

ITEM 2:  PROPERTIES
         ----------

         The Partnership does not use any physical properties in the
conduct of its business.

         The Partnership's only place of business is the place of business of
the General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.

ITEM 3:  LEGAL PROCEEDINGS
         -----------------

         ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP) -- as well as certain of its subsidiaries and
affiliates have been named as defendants in civil actions, arbitration
proceedings and claims arising out of their respective business activities.
Although the ultimate outcome of these actions cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with certainty, it
is the opinion of management that the result of these matters will not be
materially adverse to the business operations or the financial condition of MLIP
or the Fund.

         MLIP itself has never been the subject of any material litigation.

         On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF
and others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements.  MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

         The Partnership has never submitted any matters to a vote of its
Limited Partners.


                                    PART II

ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         ---------------------------------------------------------------------



         (a) Market Information:
             ------------------ 

             There is no established public trading market for the Units, nor
will one develop. Rather, Limited Partners may redeem Units as of the end of
each month at Net Asset Value. Units redeemed prior to the applicable Principal
Assurance Date are not entitled to any benefits under the ML&Co. guarantee.

         (b) Holders:
             ------- 

             As of December 31, 1997, there were 2,296 holders of Units,
including the General Partner.

                                      -8-
<PAGE>
 
               (c)                  Dividends:
                                    --------- 

          The Partnership has made no distributions since trading commenced, nor
does the General Partner presently intend to make any distributions in the
future.

                                      -9-
<PAGE>
 
ITEM 6:        SELECTED FINANCIAL DATA
               -----------------------

               The following selected financial data has been derived from the
audited financial statements of the Partnership.

<TABLE>
<CAPTION>
                                          FOR THE YEAR    FOR THE YEAR    FOR THE YEAR    FOR THE YEAR   FOR THE YEAR
                                             ENDED           ENDED           ENDED           ENDED          ENDED
                                          DECEMBER 31,   DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
----------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA                         1997            1996            1995            1994           1993
----------------------------------------  -------------  --------------  --------------  --------------  -------------
 
Revenues:
 
Trading Profits (Loss):
<S>                                       <C>            <C>             <C>             <C>             <C>
      Realized Gain                          $4,629,434    $ 6,760,623     $13,084,311     $(2,043,045)    $33,990,671
      Change in Unrealized Gain (Loss)           98,218     (1,911,494)     (1,408,174)     (1,470,617)      1,823,218
                                             ----------    -----------     -----------     -----------     -----------
 
         Total Trading Results                4,727,652      4,849,129      11,676,137      (3,513,662)     35,813,889
 
Interest Income                               1,551,360      2,009,987       3,519,449       3,540,215       4,620,271
                                             ----------    -----------     -----------     -----------     -----------
 
         Total Revenues                       6,279,012      6,859,116      15,195,586          26,553      40,434,160
                                             ----------    -----------     -----------     -----------     -----------
</TABLE>

<TABLE>
<CAPTION>
Expenses:
 
<S>                               <C>           <C>           <C>           <C>            <C>
   Brokerage Commissions                      2,732,838     4,213,004        6,481,462       8,306,339      14,439,608
    
   Administrative Fees                           78,081       113,600               -                -              -
              
   Profit Shares                                530,099       364,863        1,319,093         897,488       2,425,949
                                              -----------   -----------      -----------   -----------    ------------
 
         Total Expenses                       3,341,018     4,691,467        7,800,555       9,203,827      16,865,557
                                              -----------   -----------      -----------   -----------    ------------
 
      Earnings from Investment                1,708,985     2,258,309             -             -              -
                                              -----------   -----------    -----------     -----------   ------------
 
   Net Income (loss)                        $ 4,646,979   $ 4,425,958      $ 7,395,031     $(9,177,274)   $ 23,568,603
                                              ===========   ===========    ===========      ===========   ============
</TABLE>

     The significant variations in income statement line items is primarily due 
to placing assets in Trading LLCs (See Item 7).

                                      -10-
<PAGE>
 
<TABLE>
<S>                               <C>           <C>           <C>           <C>            <C>
 
 
                                  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,   DECEMBER 31,
BALANCE SHEET DATA*                 1997          1996          1995          1994           1993
----------------------           ----------   -----------   -----------   -----------   ------------
 
Fund Net Asset Value               $40,650,457   $42,584,105   $57,593,256   $76,783,553   $169,956,418

Net Asset Value

    per SECTOR II Unit             $    156.37   $    143.42   $    125.15   $    110.26   $     122.42

Net Asset Value

    per SECTOR III Unit            $    159.00   $    140.75   $    128.26   $    117.34   $     121.25*

</TABLE>

*  Balance Sheet Data is based on redemption values, which differ immaterially
from Net Asset Values as determined under Generally Accepted Accounting
Principles ("GAAP") due to the treatment of organizational and initial offering
cost reimbursements.

                                      -11-
<PAGE>
 
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR II UNIT*
------------------------------------------------------------------------------------------------------------------
         JAN.     FEB.     MAR.     APR.      MAY     JUNE     JULY     AUG.     SEPT.    OCT.     NOV.     DEC.
------------------------------------------------------------------------------------------------------------------
<S>     <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
1993    $115.60  $119.40  $118.08  $120.26  $120.81  $121.83  $128.86  $126.28  $124.47  $121.85  $121.01  $122.42
------------------------------------------------------------------------------------------------------------------
1994    $117.74  $113.15  $116.19  $113.73  $119.68  $119.10  $116.12  $111.44  $112.74  $113.05  $111.62  $110.26
------------------------------------------------------------------------------------------------------------------
1995    $108.34  $115.58  $124.97  $127.02  $131.03  $130.14  $127.55  $126.66  $124.80  $123.65  $124.30  $125.15
------------------------------------------------------------------------------------------------------------------
1996    $129.65  $123.52  $122.45  $124.82  $123.17  $121.68  $124.98  $123.96  $127.55  $139.16  $149.40  $143.42
------------------------------------------------------------------------------------------------------------------
1997    $150.05  $149.10  $148.60  $149.07  $147.91  $150.77  $158.23  $155.56  $155.08  $154.49  $154.47  $156.37
------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR III UNIT*
------------------------------------------------------------------------------------------------------------------
         JAN.     FEB.     MAR.     APR.      MAY     JUNE     JULY     AUG.     SEPT.    OCT.     NOV.     DEC.
------------------------------------------------------------------------------------------------------------------
<S>     <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
1993    $103.60  $107.39  $107.76  $110.47  $111.73  $112.34  $117.68  $120.20  $119.98  $118.55  $118.85  $121.25
------------------------------------------------------------------------------------------------------------------
1994    $116.65  $115.55  $117.57  $116.31  $119.68  $122.37  $119.77  $115.18  $117.13  $116.94  $118.61  $117.34
------------------------------------------------------------------------------------------------------------------
1995    $114.71  $122.70  $129.65  $128.97  $125.75  $123.17  $118.12  $119.65  $118.92  $119.78  $121.97  $128.26
------------------------------------------------------------------------------------------------------------------
1996    $132.39  $120.96  $120.08  $127.41  $124.26  $123.53  $125.16  $122.91  $126.15  $138.27  $142.98  $140.75
------------------------------------------------------------------------------------------------------------------
1997    $147.15  $149.44  $150.41  $146.96  $146.16  $147.82  $156.23  $151.82  $153.39  $153.98  $155.24  $159.00
------------------------------------------------------------------------------------------------------------------
</TABLE>



          Pursuant to CFTC policy, monthly performance is presented from January
1, 1993, even though the Units were outstanding prior to such date.

                                      -12-
<PAGE>
 
                       THE SECTOR STRATEGY FUND(SM) II L.P.
                                SECTOR II UNITS
                               DECEMBER 31, 1997

  Type of Pool:  Selected-Advisor/Publicly-Offered/"Principal Protected"/(1)/
                    Inception of Trading:   December 5, 1990
                    Aggregate Subscriptions:    $136,410,000
                     Current Capitalization:   $13,829,930
                 Worst Monthly Drawdown/(2)/:  (4.73)%  (2/96)
           Worst Peak-to-Valley Drawdown/(3)/:  (15.93)% (8/93-1/95)
                                 _____________

             Net Asset Value per Unit, December 31, 1997:   $156.37

<TABLE>
<CAPTION>
                MONTHLY RATES OF RETURN/(4)/
-----------------------------------------------------------
      MONTH         1997    1996    1995     1994     1993
-----------------------------------------------------------
<S>                <C>     <C>     <C>      <C>      <C>
January             4.62%   3.59%  (1.74)%  (3.82)%  (0.39)%
-----------------------------------------------------------
February           (0.63)  (4.73)    6.68    (3.90)    3.29
-----------------------------------------------------------
March              (0.34)  (0.86)    8.13     2.69    (1.10)
-----------------------------------------------------------
April               0.32    1.93     1.64    (2.12)    1.84
-----------------------------------------------------------
May                (0.78)  (1.32)    3.16     1.85     0.46
-----------------------------------------------------------
June                1.93   (1.21)   (0.68)    2.81     0.84
-----------------------------------------------------------
July                4.95    2.71    (1.99)   (2.50)    5.77
-----------------------------------------------------------
August             (1.69)  (0.82)   (0.69)   (4.03)   (2.01)
-----------------------------------------------------------
September          (0.31)   2.90    (1.47)    1.17    (1.43)
-----------------------------------------------------------
October            (0.38)   9.10    (0.92)    0.27    (2.11)
-----------------------------------------------------------
November           (0.01)   7.36     0.53    (0.44)   (0.69)
-----------------------------------------------------------
December            1.23   (4.00)    0.68    (2.03)    1.17
-----------------------------------------------------------
Compound Annual     9.02%  14.60%   13.52%  (9.93)%    5.49%
Rate of Return
-----------------------------------------------------------
</TABLE>

          (1)  Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets (i.e.,
assets committed to trading) to any single manager.  As the Fund may allocate
more than 25% of its trading assets to one or more Advisors, it is referred to
as a "Selected-Advisor" fund.  Applicable CFTC regulations define a "Principal
Protected" fund as one which is designed to limit the loss of participants'
initial investment.  MLIP's trading leverage policies and the ML&Co. guarantee
limit Limited Partners' losses on their Units to the time value of their
investments over the Time Horizon from the beginning of trading to the Principal
Assurance Date.

          (2)  Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993  by the SECTOR II Units; a
drawdown is measured on the basis of month-end Net Asset Value only, and does
not reflect intra-month figures.

          (3)  Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end.  For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.

          (4)  Monthly Rate of Return is the net performance of the SECTOR II
Units during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the SECTOR II
Units as of the beginning of such month.

                                      -13-
<PAGE>
 
                       THE SECTOR STRATEGY FUND(SM) II L.P.
                                SECTOR III UNITS
                               DECEMBER 31, 1997

  Type of Pool:  Selected-Advisor/Publicly-Offered/"Principal Protected"/(1)/
                      Inception of Trading:   July 5, 1991
                    Aggregate Subscriptions:   $194,005,000
                     Current Capitalization:   $26,820,527
                 Worst Monthly Drawdown/(2)/:  (8.64)%  (2/96)
           Worst Peak-to-Valley Drawdown/(3)/:  (9.30)%  (2/96-3/96)
                                 _____________

             Net Asset Value per Unit, December 31, 1997:   $159.00

<TABLE>
<CAPTION>
                MONTHLY RATES OF RETURN/(4)/
-----------------------------------------------------------
      MONTH         1997    1996    1995     1994     1993
-----------------------------------------------------------
<S>                <C>     <C>     <C>      <C>      <C>
January             4.55%   3.22%  (2.25)%  (3.79)%  (0.89)%
-----------------------------------------------------------
February            1.56   (8.64)    6.97    (0.94)    3.66
-----------------------------------------------------------
March               0.65   (0.73)    5.66     1.74     0.34
-----------------------------------------------------------
April              (2.29)   6.10    (0.53)   (1.07)    2.52
-----------------------------------------------------------
May                (0.54)  (2.47)   (2.50)    2.90     1.14
-----------------------------------------------------------
June                1.14   (0.59)   (2.05)    2.25     0.55
-----------------------------------------------------------
July                5.69    1.31    (4.10)   (2.12)    4.75
-----------------------------------------------------------
August             (2.82)  (1.79)    1.29    (3.83)    2.14
-----------------------------------------------------------
September           1.03    2.63    (0.61)    1.69    (0.18)
-----------------------------------------------------------
October             0.38    9.60     0.72    (0.17)   (1.19)
-----------------------------------------------------------
November            0.82    3.41     1.83     1.43     0.25
-----------------------------------------------------------
December            2.42   (1.56)    5.16    (1.06)    2.02
-----------------------------------------------------------
Compound Annual    12.98%   9.71%    9.28%  (3.22)%   15.99%
Rate of Return
-----------------------------------------------------------
</TABLE>

          (1)  Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets (i.e.,
assets committed to trading) to any single manager.  As the Fund may allocate
more than 25% of its trading assets to one or more Advisors, it is referred to
as a "Selected-Advisor" fund.  Applicable CFTC regulations define a "Principal
Protected" fund as one which is designed to limit the loss of participants'
initial investment.  MLIP's trading leverage policies and the ML&Co. guarantee
limit Limited Partners' losses on their Units to the time value of their
investments over the Time Horizon from the beginning of trading to the Principal
Assurance Date.

          (2)  Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993 by the SECTOR III Units; a
drawdown is measured on the basis of month-end Net Asset Value only, and does
not reflect intra-month figures.

          (3)  Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end.  For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.

          (4)  Monthly Rate of Return is the net performance of the SECTOR III
Units during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the SECTOR
III Units as of the beginning of such month.

                                      -14-
<PAGE>
 
ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
OF OPERATIONS
-------------

                  OPERATIONAL OVERVIEW; ADVISOR SELECTIONS

          The Fund's results of operations depend on MLIP's ability to select
Advisors and the Advisors' ability to trade profitably.  MLIP's selection
procedures, as well as the Advisors' trading methods, are confidential, so that
substantially the only available information relevant to the Fund's results of
operations is its actual performance record to date.  However, because of the
speculative nature of its trading, the Fund's past performance is not
necessarily indicative of its future results.

          MLIP's decision to terminate or reallocate assets among Trading
Advisors is based on a combination of numerous factors.  Advisors are, in
general, terminated primarily for unsatisfactory performance, but other factors
-- for example, a change in MLIP's or an Advisor's market outlook, apparent
deviation from announced risk control policies, excessive turnover of positions,
changes in principals, commitment of resources to other business activities,
etc. -- may also have a role in the termination or reallocation decision.  The
market judgment and experience of MLIP's principals is an important factor in
its allocation decisions.

          MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium-to long-term commitment to all
Advisors selected.  There can be no assurance as to the frequency or number of
Advisor changes that may take place in the future, or as to how long any Advisor
will manage assets for the Partnership.

                  RESULTS OF OPERATIONS

          General.  MLIP believes that multi-advisor futures funds should be
          -------                                                           
regarded as medium- to long-term (i.e., three to five years) investments, but it
is difficult to identify trends in the Fund's operations and virtually
impossible to make any predictions regarding future results based on the results
to date.  An investment in the Fund may be less successful over a longer than
over a shorter period.

          Markets with sustained price trends tend to be more favorable to
managed futures investments than whipsaw, choppy markets, but (i) this is not
always the case, (ii) it is impossible to predict when price trends will occur
and (iii) different Advisors are affected differently by trending markets as
well as by particular types of trends.

          MLIP attempts to control credit risk in the Fund's futures, forward
and options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF.  MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.

          MLIP attempts to control the market risk inherent in the Fund's
trading by MLIP's multi-advisor strategy and Trading Advisor selections.  MLIP
reviews the positions acquired by the Advisors on a daily basis in an effort to
determine whether the overall positions of the Fund may have become what MLIP
analyzes as being excessively concentrated in a limited number of markets -- in
which case MLIP may, as of the next month-end or quarter-end, adjust the Fund's
Advisor combination and/or allocations so as to attempt to reduce the risk of
such over-concentration occurring in the future.  MLIP also adjusts the
percentage of each series' capital allocated to trading, with the principal
objective of protecting ML&Co. from any liability under its guarantee of a
$125.10 and $100.92 minimum Net Asset Value per Unit as of the Principal
Assurance Date for SECTOR II and SECTOR III Units, respectively.  The market
risk to the Fund is limited by the combination of its "principal protection"
feature and multi-advisor strategy.

          The Units began trading with 70% of their capital committed to
trading.  As of December 31, 1997 that percentage was 100% for SECTOR II Units
and approximately 100% for SECTOR III Units.  MLIP determinations as to what
percentage of the Fund's assets to allocate to trading from time to time --
again, a determination primarily dictated by MLIP's objective of ensuring that
ML&Co. is never required to make any payments under its guarantee that the Net
Asset Value per Unit will be at least $125.10 for SECTOR II Units and $100.92
for SECTOR III Units as of their respective Principal Assurance Dates -- has a
material impact on the performance of the Fund.

          MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized); however,
MLIP has not done so to date and does not presently intend to do so.

                                      -15-
<PAGE>
 
          The variations in both the statement of financial condition and the
income statement line items is primarily due to the Partnership placing assets
under the management of certain of the Advisors not through opening managed
accounts with them but rather through investing in a private limited liability
companies ("Trading LLC's") sponsored by MLIP. The only members of the Trading
LLC are commodity pools sponsored by MLIP. Each Trading LLC trades under the
management of a single Advisor pursuant to a single strategy and at a uniform
degree of leverage. Placing assets with an Advisor through investing in a
Trading LLC rather than a managed account has no economic effect on the
Partnership, except to the extent that the Partnership benefits from the Advisor
not having to allocate trades among a number of different accounts (rather than
acquiring a single position for the Trading LLC as a whole ).

     The results of the Partnership's Trading LLC's investments are reflected in
the Partnership's financial statements as "Income from Investments."  These
investments are reflected in the financial statements at fair value based upon
the net asset value of the Partnership's interest in  the Trading LLCs.  Fair
value is equal to the market value of the net assets of each Trading LLC.  The
resulting difference between cost and fair value is reflected on the Statements
of Operations as income or loss from investments.

   PERFORMANCE SUMMARY

     1995

  In 1995, prevailing price trends in several key markets enabled the Advisors
to trade profitably for the Fund. Although trading in many of the traditional
commodity markets may have been lackluster, the currency and financial markets
offered exceptional trading conditions.  After months characterized by very
difficult trading environments, solid price trends across many markets
(including U.S. Treasury and non-dollar bond markets) began to emerge during the
first quarter of 1995. In the second quarter, market volatility once again began
to affect trading, as many previously strong price trends began to weaken and,
in some cases, reverse.  The U.S. dollar hit new lows versus the Japanese yen
and Deutschemark before rebounding sharply.  In addition, there were strong
indications that the U.S. economy was slowing which, when coupled with a failure
of the German Central Bank to lower interest rates, stalled a rally in the
German bond market.  During the third quarter, there was a correction in U.S.
bond prices after several months of a strong uptrend.  Despite exposure to the
global interest-rate markets, the Fund's long positions in Treasury bonds had a
negative impact on the Fund.  Throughout August and into September, the U.S.
dollar rallied sharply against the Japanese yen and the Deutschemark as a result
of the coordinated intervention by major central banks and widespread
recognition of the growing banking crisis in Japan.  Despite continued price
volatility during the final quarter of 1995, the Trading Advisors were able to
identify several trends in key markets.  U.S. Treasury bond prices continued
their strong move upward throughout November, due both to weak economic data and
optimism on federal budget talks.  As the year ended, the yield on the 30-year
Treasury bond was pushed to its lowest level in more than two years.

   1996

   1996  began with the East Coast blizzard, continuing difficulties in federal
budget talks and an economic slowdown having a negative impact on many markets.
The Fund was profitable in January due to strong profits in currency trading as
the U.S. dollar reached a 23-month high against the Japanese yen.  In February,
however, the Fund incurred its worst monthly loss due to the sudden reversals in
several strong price trends and considerable volatility in the currency and
financial markets. During March, large profits were taken in the crude oil and
gasoline markets as strong demand continued and talks between the United Nations
and Iraq were suspended.  This trend continued into the second quarter, during
which strong gains were also recognized in the agricultural markets as a
combination of drought and excessive rain drove wheat and grain prices to
historic highs.  In the late summer and early fall months, the Fund continued to
trade profitably as trending prices in a number of key markets favorably
impacted the Fund's performance.  In September heating oil hit a five-year high
on soaring prices in Europe, and the Fund was also able to capitalize on
downward trends in the metals markets.  Strong trends in the currency and global
bond markets produced significant gains in October and November, but the year
ended with declining performance as December witnessed the reversal of several
strong upward trends and increased volatility in key markets.

                                      -16-
<PAGE>
 
       1997

       Trend reversals and extreme market volatility, affected by such factors
as the Asian flu and El Nino, were characteristic of most of 1997.  However, the
year proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles.  Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year.  Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.

       In currency markets, the U.S. dollar rallied and started 1997 on a strong
note, rising to a four-year high versus the Japanese yen and two-and-a-half year
highs versus the Deutsche mark and the Swiss franc.  However, the dollar
underwent two significant corrections during the year.  The first correction
occurred in the Spring against the Japanese yen, due to the G7 finance
ministers' determination that a further dollar advance would be counter-
productive to their current goals.  From August through mid-November, the dollar
corrected against the Eurocurrencies in advance of a well-advertised tightening
by the Bundesbank.  By mid-December the dollar had bounced back to new highs
against the yen and was rallying against the mark.

       Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets.  Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years.  This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress.  Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets.  After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.

 
            PERFORMANCE OVERVIEW

          The principal variables which determine the net performance of the
Partnership are gross profitability and interest income.  During all periods set
forth under "Selected Financial Data," the interest rates in many countries were
at unusually low levels.  This negatively impacted revenues because interest
income is typically a major component of commodity pool profitability.  In
addition, low interest rates are frequently associated with reduced fixed-income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished.  On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the
Partnership may be reduced as compared to high yielding and much lower risk
fixed-income investments.

          The Partnership's Brokerage Commissions and Administrative Fees are a
constant percentage of assets charge.  The only Fund costs (other than the
insignificant F/X Desk service fees and EFP differentials as well as bid-ask
spreads on forward contracts) which are not based on a percentage of the Fund's
assets are the Profit Shares payable to the Trading Advisors on an Advisor-by-
Advisor basis.  During periods when Profit Shares are a high percentage of net
trading gains, it is likely that there has been substantial performance non-
correlation among the Advisors (so that the total Profit Shares paid to those
Advisors which have traded profitably are a high percentage, or perhaps even in
excess, of the total profits recognized, as other Advisors have incurred
offsetting losses, reducing overall trading gains but not the Profit Shares paid
to the successful Advisors) -- suggesting the likelihood of generally trendless,
non-consensus markets.

          The events that primarily determine the Fund's profitability are those
that produce sustained and major price movements.  The Advisors are generally
more likely to be able to profit from sustained trends, irrespective of their
direction, than from static markets.  During the course of the Partnership's
performance to date, such events have ranged from Federal Reserve Board
reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.

                                      -17-
<PAGE>
 
          Unlike many investment fields, there is no meaningful distinction in
the operation of the Fund between realized and unrealized profits.  Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time.  Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of variation margin.

          Except in unusual circumstances, factors -- regulatory approvals, cost
of goods sold, employee relations and the like -- which often materially affect
an operating business have virtually no impact on the Fund.

     LIQUIDITY AND CAPITAL RESOURCES

          The Fund's costs are generally proportional to its asset base, and,
within broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decrease in approximate
proportion to the size of the Fund account managed by each of them,
respectively.

          Inflation per se is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of major
price movements that can have a materially favorable or adverse impact on the
Fund's performance.

          Changes in the level of prevailing interest rates could have a
material effect on the Fund's trading leverage.  Interest rates directly affect
the calculation of the discounted value (discounted back from the Principal
Assurance Date) of the guaranteed minimum Net Asset Value per Unit and,
accordingly, the assets which a given series of Units has available for trading.

          In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
received or paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies).  In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains.  However, in general, there is no meaningful difference
between the Fund's realized and unrealized gains.

     THE YEAR 2000 COMPUTER ISSUE

     Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting, and computer maintenance.  These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations, or cash flows in future periods.  However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients, or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk.  Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.

ITEM 7A:       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
               ----------------------------------------------------------

     Not applicable.

 ITEM 8:        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                -------------------------------------------

     The financial statements required by this Item are included in Exhibit
 13.01.

     The supplementary financial information ("selected quarterly financial
 data" and "information about oil and gas producing activities") specified by
 Item 302 of Regulation S-K is not applicable.


 ITEM 9:        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                ---------------------------------------------------------------
 FINANCIAL DISCLOSURE
 --------------------

     There were no changes in or disagreements with accountants on accounting
 and financial disclosure.

                                      -18-
<PAGE>
 
                                    PART III

 ITEM 10:       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
                --------------------------------------------------

     (a,b)      Identification of Directors and Executive Officers:
                -------------------------------------------------- 

     As a limited partnership, the Partnership itself has no officers or
 directors and is managed by the General Partner. Trading decisions are made by
 the Trading Advisors on behalf of the Partnership.

           The directors and executive officers of MLIP as of February 1, 1998
 and their respective business backgrounds are as follows.
 
John R. Frawley, Jr.                    Chairman, Chief Executive Officer,
                                        President and Director

Jeffrey F. Chandor                      Senior Vice President, Director of
                                        Sales, Marketing and Research and
                                        Director
 
Joseph H. Moglia                        Director
 
Allen N. Jones                          Director
 
Stephen G. Bodurtha                     Director
 
Michael A. Karmelin                     Chief Financial Officer, Vice
                                        President and Treasurer
 
Steven B. Olgin                         Vice President, Secretary and Director
                                        of Administration

             John R. Frawley, Jr. was born in 1943.  Mr. Frawley is Chairman,
   Chief Executive Officer, President and a Director of MLIP and Co-Chairman of
   MLF. He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S")
   in 1966 and has served in various positions, including Retail and
   Institutional Sales, Manager of New York Institutional Sales, Director of
   Institutional Marketing, Senior Vice President of Merrill Lynch Capital
   Markets and Director of International Institutional Sales. Mr. Frawley holds
   a Bachelor of Science degree from Canisius College. Mr. Frawley served on the
   CFTC's Regulatory Coordination Advisory Committee from its formation in 1990
   through its dissolution in 1994. Mr. Frawley is currently serving his fourth
   consecutive one-year term as Chairman of the Managed Funds Association
   (formerly, the Managed Futures Association), a national trade association
   that represents the managed futures, hedge funds and fund of funds industry.
   Mr. Frawley is also a Director of that organization. Mr. Frawley currently
   serves on a panel created by the Chicago Mercantile Exchange and The Board of
   Trade of the City of Chicago to study cooperative efforts related to
   electronic trading, common clearing and the issues regarding a potential
   merger.

             Jeffrey F. Chandor was born in 1942.  Mr. Chandor is Senior Vice
   President, the Director of Sales, Marketing and Research and a Director of
   MLIP.  He joined MLPF&S in 1971 and has served as the Product Manager of
   International Institutional Equities, Equity Derivatives and Mortgage-Backed
   Securities as well as Managing Director of International Sales in the United
   States, and Managing Director of Sales in Europe.  Mr. Chandor holds a
   Bachelor of Arts degree from Trinity College, Hartford, Connecticut.

             Joseph H. Moglia was born in 1949.  He is a director of MLIP.  In
   1971, he graduated from Fordham University with a Bachelor of Arts degree in
   Economics.  He later received his Master of Science degree from the
   University of Delaware.  He taught at the high school and college level for
   sixteen years.  Mr. Moglia joined MLPF&S in 1984, and has served in a number
   of senior roles, including Director of New York Fixed Income Institutional
   Sales, 

                                      -19-
<PAGE>
 
   Director of Global Fixed Institutional Sales, and Director of the Municipal
   Division. He is currently Senior Vice President and Director of the
   Investment Strategy and Product Group in Merrill Lynch Private Client, and
   Director of Middle Markets.

     Allen N. Jones was born in 1942.  Mr. Jones is a Director of MLIP and, from
   July 1995 until January 1998, Mr. Jones was Chairman of the Board of
   Directors of MLIP.  Mr. Jones graduated from the University of Arkansas with
   a Bachelor of Science, Business Administration degree in 1964.  Since June
   1992, Mr. Jones has held the position of Senior Vice President of MLPF&S.
   From June 1992 through February 1994, Mr. Jones was the President and Chief
   Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains
   on the Board of Directors of MLIG and its subsidiary companies. From February
   1994 to April 1997, Mr. Jones was the Director of Individual Financial
   Services of the Merrill Lynch Private Client Group.  In April 1997, Mr. Jones
   became the Director of Private Client marketing.

     Stephen G. Bodurtha was born in 1958.  Mr. Bodurtha is a Director of MLIP.
   In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
   Connecticut with a Bachelor of Arts degree in Government, magna cum laude.
   From 1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of
   Merrill Lynch. In 1985, he was awarded his Master of Business Administration
   degree from Harvard University, where he also served as Associates Fellow
   (1985-1986).  From 1986 to 1989, Mr. Bodurtha held the positions of Associate
   and Vice President with Kidder, Peabody & Co., Incorporated where he worked
   in their Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in
   1989 and has held the position of First Vice President since 1995.  He has
   been the Director in charge of MLPF&S's Structured Investments Group since
   1995.

     Michael A. Karmelin was born in 1947.  Mr. Karmelin is Chief Financial
   Officer, Vice President and Treasurer of MLIP.  Prior to joining MLIP in
   April 1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch,
   Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited partnerships.
   Mr. Karmelin joined ML Hubbard in January 1994 and was a Vice President of ML
   Hubbard.  From May 1994 to April 1997, he was the Chief Financial Officer of
   ML Hubbard, responsible for its accounting, treasury and tax functions.
   Prior to joining ML Hubbard, Mr. Karmelin held several senior financial
   positions with ML&Co and MLPF&S from December 1985 to December 1993,
   including Vice President/Senior Financial Officer Corporate Real Estate and
   Purchasing, Manager Commitment Control/Capital Budgeting, and Senior Project
   Manager/Project Analysis.  Prior to joining ML&Co., Mr. Karmelin was employed
   at Avco Corporation for 17 years, where he held a variety of financial
   positions.  Mr. Karmelin holds a B.B.A. degree in Accounting from Baruch
   College, C.U.N.Y. and a Master of Business Administration degree in Corporate
   Strategy and Finance from New York University.  Mr. Karmelin passed the
   Certified Public Accounting examination in 1974 and is a member of the
   Treasury Management Association, the Institute of Management Accountants and
   The Strategic Leadership Forum.

     Steven B. Olgin was born in 1960.  Mr. Olgin is Vice President, Secretary
   and the Director of Administration of MLIP.  He joined MLIP in July 1994 and
   became a Vice President in July 1995.  From 1986 until July 1994, Mr. Olgin
   was an associate of the law firm of Sidley & Austin.  In 1982, Mr. Olgin
   graduated from The American University with a Bachelor of Science degree in
   Business Administration and a Bachelor of Arts degree in Economics.  In 1986,
   he received his Juris Doctor degree from The John Marshall Law School.  Mr.
   Olgin is a member of the Managed Funds Association's Government Relations
   Committee and has served as an arbitrator for the NFA.  Mr. Olgin is also a
   member of the Committee on Futures Regulation of the Association of the Bar
   of the City of New York.

     As of December 31, 1997, the principals of MLIP had no investments in the
   Fund and MLIP's general partner interest in the Fund was valued at $956,291.

     MLIP acts as general partner to twelve public futures funds whose units of
   limited partnership interest are registered under the Securities Exchange Act
   of 1934:  The Futures Expansion Fund Limited Partnership, The
   Growth and Guarantee Fund L.P., ML Futures Investments II L.P., ML Futures
   Investments L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R.
   Strategy Fund(SM) L.P., The SECTOR Strategy Fund(SM) V L.P., The SECTOR
   Strategy Fund(SM) VI L.P., ML Global Horizons L.P., ML Principal Protection
   L.P. (formerly, ML Principal Protection Plus L.P.), ML JWH Strategic
   Allocation Fund L.P. and the Fund. Because MLIP serves as the sole general
   partner of each

                                      -20-
<PAGE>
 
   of these funds, the officers and directors of MLIP effectively manage
   them as officers and directors of such funds.



     (c) Identification of Certain Significant Employees:
         ----------------------------------------------- 

         None.

     (d) Family Relationships:
          -------------------- 

         None.

     (e) Business Experience:
         ------------------- 

         See Item 10(a)(b) above.

     (f) Involvement in Certain Legal Proceedings:
         ---------------------------------------- 

         None.

     (g) Promoters and Control Persons:
         ----------------------------- 

         Not applicable.

   ITEM 11:  EXECUTIVE COMPENSATION
             ----------------------

     The directors and officers of the General Partner are remunerated by the
   General Partner.  The Partnership does not itself have any officers,
   directors or employees.  The Partnership pays Brokerage Commissions to an
   affiliate of the General Partner and Administrative Fees to the General
   Partner.  The General Partner or its affiliates may also receive certain
   economic benefits from holding the Fund's dollar Available Assets in offset
   accounts, as described in Item 1(c) above.  The directors and officers
   receive no "other compensation" from the Partnership, and the directors
   receive no compensation for serving as directors of the General Partner.
   There are no compensation plans or arrangements relating to a change in
   control of either the Partnership or the General Partner.

   ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
             --------------------------------------------------------------

         (a) Security Ownership of Certain Beneficial Owners:
             ----------------------------------------------- 

         As of December 31, 1997, no person or "group" is known to be or have
         been the beneficial owner of more than five percent of the Units.

         (b) Security Ownership of Management:
             -------------------------------- 

         As of December 31, 1997, the General Partner owned 2,145 SECTOR II
         Units and 3,905 SECTOR III Units (unit-equivalent general partnership
         interests), which was less than 3% of the total Units outstanding.

         (c)  Changes in Control:
              ------------------ 

              None.

                                      -21-
<PAGE>
 
   ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
             ----------------------------------------------

     (a)  Transactions with Management and Others:
          --------------------------------------- 

          The General Partner acts as administrative and trading manager of the
   Fund.  The General Partner provides all  normal ongoing administrative
   functions of the Partnership, such as accounting, legal and printing
   services.  The General Partner, which receives the Administrative Fees, pays
   all expenses relating to such services.

     (b)  Certain Business Relationships:
          ------------------------------ 

          MLF, an affiliate of the General Partner, acts as the principal
   commodity broker for the Partnership.

          In 1997 the Partnership accrued: (i) Brokerage Commissions of
   $2,732,838 to the Commodity Broker, which included $410,507 in consulting
   fees accrued by the Commodity Broker to the Trading Advisors; and (ii)
   Administrative Fees of $78,081 to MLIP. Through its investments in Trading
   LLCs, the following fees were paid: (i) Brokerage Commissions of $1,013,969
   to the Commodity Broker, which included $396,727 in consulting fees accrued
   by the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees
   of $28,970 to MLIP. In addition, MLIP and its affiliates may have derived
   certain economic benefits from maintaining a portion of the Fund's assets in
   "offset accounts," as described under Item 1(c), "Narrative Description of
   Business -- Use of Proceeds and Interest Income -- Interest Earned on the
   Fund's U.S. Dollar Available Assets" and Item 11, "Executive Compensation"
   herein, as well as from the Fund's F/X Desk and "exchange of futures for
   physical" ("EFP") trading.

          See Item 1(c), "Narrative Description of Business -- Charges" and "--
   Description of Current Charges" for a discussion of other business dealings
   between MLIP affiliates and the Partnership.

     (c)  Indebtedness of Management:
          -------------------------- 

          The Partnership is prohibited from making any loans, to management or
   otherwise.

     (d)  Transactions with Promoters:
          --------------------------- 

          Not applicable.

                                    PART IV

   ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
             ---------------------------------------------------------------
 
     (a)1.  Financial Statements (found in Exhibit 13.01):        Page
            ----------------------------------------------------  ----
 
            Independent Auditors' Report                             1
 
            Statements of Financial Condition as 
            of December 31, 1997 and 1996                            2
            
            For the years ended December 31, 1997, 1996 and 1995
            Statements of Income                                     3
            Statements of Changes in Partners' Capital               4
 
            Notes to Financial Statements                         5-14
     (a)2.  Financial Statement Schedules:
            ----------------------------- 

            Financial statement schedules not included in this Form 10-K have
            been omitted for the reason that they are not required or are not
            applicable or that equivalent information has been included in the
            financial statements or notes thereto.

     (a)3.  Exhibits:
            -------- 

            The following exhibits are incorporated by reference or are filed
            herewith to this Annual Report on Form 10-K:

                                      -22-
<PAGE>
 
   Designation         Description
   -----------         -----------

   3.01(a)             Amended and Restated Certificate of Limited Partnership
                       of the Registrant, dated July 27, 1995.

   Exhibit 3.01(a):    Is incorporated herein by reference from Exhibit 3.01(a)
  -----------------    contained in the Registrant's report on Form 10-Q for the
                       Quarter ended June 30, 1995.

   3.01(b)             Amended and Restated Limited Partnership Agreement of the
                       Partnership.

   Exhibit 3.01(b):    Is incorporated herein by reference from Exhibit 3.01(b)
  ----------------     contained in Amendment No. 1 to the Registration
                       Statement (File No. 33-39966) filed on May 8, 1991, on
                       Form S-1 under the Securities Act of 1933 (the
                       "Registrant's Registration Statement").

   10.01(x)            Form of Advisory Agreement between the Partnership,
                       Merrill Lynch Investment Partners Inc., Merrill Lynch
                       Futures Inc. and each Trading Advisor.

   Exhibit 10.01(x):   Is incorporated by reference from Exhibit 10.01(x)
  -----------------    contained in the Registrant's report on Form 10-Q for the
                       Quarter Ended June 30, 1995.

   10.02(b)            Form of Consulting Agreement between each of the Trading
                       Advisors, the Partnership and Merrill Lynch Futures Inc.

   Exhibit 10.02(b):   Is incorporated herein by reference from Exhibit 10.02
  -----------------    contained in the Registrant's Registration Statement.

   10.03               Form of Customer Agreement between the Partnership and
                       Merrill Lynch Futures Inc.

   Exhibit 10.03:      Is incorporated herein by reference from Exhibit 10.03
  ---------------      contained in the Registrant's Registration Statement.
                      
   10.05               Merrill Lynch & Co., Inc. Guarantee with respect to the
                       SECTOR II Units.

   Exhibit 10.05:      Is incorporated herein by reference from Exhibit 10.05
  ----------------     contained in Amendment No. 1 (as Exhibit B) to the
                       Registration Statement (File No. 33-36517) filed on
                       October 2, 1990.

   10.05(a)            Merrill Lynch & Co., Inc. Guarantee with respect to the
                       SECTOR III Units.

   Exhibit 10.05(a):   Is incorporated by reference from Exhibit 10.05 contained
  ------------------   in the Registrant's Registration Statement.

   10.07(i)            Foreign Exchange Desk Service Agreement among Merrill
                       Lynch International Bank, Merrill Lynch Investment
                       Partners Inc., Merrill Lynch Futures Inc. and the Fund.

   Exhibit 10.07(i):   Is incorporated herein by reference from Exhibit 10.07(i)
 -------------------   contained in the Registrant's report on Form 10-K for the
                       year ended December 31, 1996.

   10.07(ii)           Form of Advisory and Consulting Agreement Amendment among
                       Merrill Lynch Investment Partners Inc., each Advisor, the
                       Fund and Merrill Lynch Futures Inc.

   Exhibit 10.07(ii):  Is incorporated herein by reference from Exhibit
 --------------------  10.07(ii) contained in the Registrant's report on 
                       Form 10-K for the year ended December 31, 1996.


   10.07(iii)          Form of Amendment to the Customer Agreement among the
                       Partnership and MLF.

                                      -23-
<PAGE>
 
   Exhibit 10.07(iii)  Is incorporated herein by reference from Exhibit
  -------------------  10.07(iii) contained in the Registrant's report on Form
                       10-K for the year ended December 31, 1996.

   13.01               1997 Annual Report and Independent Auditors' Report.
                                                                           
   Exhibit 13.01:      Is filed herewith.                                  
   -------------                                                           
                                                                           
   13.01(a)            1997 Annual Reports and Independent Auditors' Reports for
                       the following Trading Limited Liability Companies       
                       sponsored by Merrill Lynch Investment Partners' Inc.:   
                       ML Millburn Global L.L.C.                               
                       ML Sjo Prospect L.L.C.                                  
                       ML Chesapeake Diversified L.L.C.                        
                       ML JWH Financial and Metals Portfolio L.L.C.             

   Exhibits 13.01(a):  Is incorporated herein by reference from Form 10-K 
   -----------------   (fiscal year ended December 31, 1997) Commission File 
                       number 0-18702 for The S.E.C.T.O.R. Fund (SM) L.P.
                       (Registration Statement File No. 33-34432 filed on May
                       25, 1990 under the Securities Act of 1993).

   28.01(i)            Prospectus of the Partnership with respect to the SECTOR
                       II portion, dated October 2, 1990.

   Exhibit 28.01(i):   Is incorporated by reference as filed with the Securities
  ------------------   and Exchange Commission on October 11, 1990 pursuant to
                       Rule 424 under the Securities Act of 1933.

   28.01(ii)           Prospectus of the Partnership with respect to the SECTOR
                       III portion, dated May 8, 1991.

   Exhibit 28.01(ii):  Is incorporated by reference as filed with the Securities
 --------------------  and Exchange Commission on May 14, 1991 pursuant to Rule
                       424 under the Securities Act of 1933.


       (b)     Report on Form 8-K:
               ------------------ 

               No reports on Form 8-K were filed during the fourth quarter of
               1997.

                                      -24-

<PAGE>
 
                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
   Exchange Act of 1934, the Registrant has duly caused this report to be signed
   on its behalf by the undersigned, thereunto duly authorized.

                    THE S.E.C.T.O.R. STRATEGY FUND(SM) II L.P.

                    By: MERRILL LYNCH INVESTMENT PARTNERS INC.
                    General Partner

                    By: /s/ John R. Frawley, Jr.
                        ------------------------
                    John R. Frawley, Jr.
                    Chairman, Chief Executive Officer, President and Director
                       (Principal Executive Officer)


             Pursuant to the requirements of Section 13 or 15(d) of the
   Securities Exchange Act of 1934, this report has been signed on March 14,
   1998 by the following persons on behalf of the Registrant and in the
   capacities indicated.
<TABLE>
<CAPTION>
 
Signature                                               Title                                    Date    
-----------------------------  ---------------------------------------------------------------------------
<S>                            <C>                                                          <C>          
                                                                                                         
   /s/ John R. Frawley, Jr.    Chairman, Chief Executive Officer, President and Director    March 25, 1998
-----------------------------  (Principal Executive Officer)                                             
   John R. Frawley, Jr.                                                                                  
                                                                                                         
   /s/ Michael A. Karmelin     Vice President, Chief Financial Officer, and Treasurer       March 25, 1998
-----------------------------  (Principal Financial and Accounting Officer) 
   Michael A. Karmelin         
                                                                                                         
   /s/ Jeffrey F. Chandor      Senior Vice President, Director of Sales,                    March 25, 1998
-----------------------------  Marketing and Research, and Director 
   Jeffrey F. Chandor                                               
                                                                                                         
   /s/ Allen N. Jones          Director                                                     March 25, 1998
-----------------------------                                                                            
   Allen N. Jones                                                                                         
</TABLE>


   (Being the principal executive officer, the principal financial and
   accounting officer and a majority of the directors of Merrill Lynch
   Investment Partners Inc.)

   MERRILL LYNCH INVESTMENT   General Partner of Registrant  March 25, 1998
   PARTNERS INC.

   By: /s/ John R. Frawley, Jr.
       ----------------------------
       John R. Frawley, Jr.

                                      -25-
<PAGE>
 
                       THE SECTOR STRATEGY FUND(SM) II L.P.

                                 1997 FORM 10-K

                               INDEX TO EXHIBITS
                               -----------------


                       Exhibit
                       -------

Exhibit 13.01          1997 Annual Report and Independent Auditors' Report

Exhibit 13.01(a)       1997 Annual Reports and Independent Auditors' Reports for
                       the following Trading Limited Liability Companies       
                       sponsored by Merrill Lynch Investment Partners' Inc.:   
                       ML Millburn Global L.L.C.                               
                       ML Sjo Prospect L.L.C.                                  
                       ML Chesapeake Diversified L.L.C.                        
                       ML JWH Financial and Metals Portfolio L.L.C.             
                       


                                      -26-