<PAGE>
 
                   ML GLOBAL HORIZONS L.P.
                   (A Delaware Limited Partnership)


                   Financial Statements for the years ended
                   December 31, 1998, 1997 and 1996 And
                   Independent Auditors' Report



[LOGO] MERRILL LYNCH
<PAGE>
 
To: The Limited Partners of ML Global Horizons L.P.

ML Global Horizons L.P. (the "Fund" or the "Partnership") ended its fifth fiscal
year of trading on December 31, 1998 with a Net Asset Value ("NAV") per Unit of
$163.42, representing an increase of 6.21% from the December 31, 1997 NAV per
Unit of $153.86. During 1998, trading profits were generated in the interest
rate, energy and currency markets while losses were incurred in metals, stock
index and agricultural trading.

Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited, and trading was
particularly profitable in positions in Eurodollars, German and Japanese bonds,
and U.S. Treasury notes and bonds. Global investors staged a major flight to
quality, resulting in a significant widening of credit spreads on a global
basis. In October, investors pushed the yields on U.S. Treasury bonds to a
31-year low. The long bond yield fell about 75 basis points in 1998 as the world
economy slowed more than expected, inflation continued to fall, the anticipated
small U.S. budget deficit turned into substantial surplus, and the Federal
Reserve lowered interest rates.

In energy markets, demand for crude oil in the Middle East was affected by low
oil prices early in the year, and trading resulted in losses. Initially buoyed
on concerns about a U.S.-led military strike against Iraq, crude oil fell to a
nine-year low, as the globally warm winter, the return of Iraq as a producer and
the Asian economic crisis added to OPEC's supply glut problems. Despite
production cuts initiated by OPEC at the end of March, world oil supplies
remained excessive and oil prices stood at relatively low levels throughout the
first half of 1998. Short heating oil positions in the third quarter proved
profitable for the Fund as the market for heating oil prices dropped to its
lowest level in more than a decade. In early December, oil and natural gas
prices dropped sharply, causing continued problems for many emerging market
countries that depend on commodity exports for economic growth and government
financing. These price pressures were mainly due to excessive supply
availability and near-term weather indications that inventories would remain at
more than adequate levels even in the event of a cold Northern Hemisphere
winter. Also, the December U.S. air attack on Iraq failed to cause any damage to
oil pumping and shipping operations, and oil prices fell over 10%.

In currency markets, results early in the year were mixed, although marginally
profitable. During the second quarter, strong gains were realized in positions
in the Japanese yen, which weakened during June to an eight-year low versus the
U.S. dollar. Significant gains from Japanese yen trading continued into the
third quarter, and Japan's problems spread to other sectors of the global
economy, causing commodities prices to decline as demand from the Asian
economies weakened. Japan's deepening recession and credit crunch continued
through the fourth quarter, and the Fund achieved gains from long yen positions.
<PAGE>
 
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter of a European Central Bank consensus that ten to
fifteen percent of reserves should be made up of gold bullion, which was at the
low end of expectations. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.

Trading results in stock index markets were also mixed in early 1998, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a
three-year low. As U.S. equity markets declined in July and August, the Fund
profited from short positions in the S&P 500, most notably during August, when
the index dropped 14.5%. Volatility in September made for a difficult trading
environment in the stock index sector, and the Fund incurred modest losses,
although results remained profitable for the quarter and the year overall in
these markets

In agricultural commodity markets, 1998 began with strong gains as live cattle
and hog prices trended downward throughout the first quarter. In the second
quarter, although the U.S. soybean crop got off to a good start which
contributed to higher yield expectations and a more burdensome supply outlook,
soybean prices traded in a volatile pattern. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries. The third
quarter resulted in losses as the U.S. soybean crop increased relative to the
USDA's production estimate as a result of timely rains, which contributed to
lower prices. These losses continued into the fourth quarter as the Fund was
caught on the short side of the soybean complex, as the soybean supply surplus
became more manageable following the November 10th USDA reports, causing prices
to gain upward momentum.

Despite a year of unprecedented volatility in key global markets, we were
pleased with the Fund's ability to generate a profit by trading both the long
and short side of a variety of markets, demonstrating its value as an element of
diversification in an investor's portfolio. We look forward to 1999 and the
opportunities it may present.

                                        Sincerely,
                                        John R. Frawley, Jr.
                                        President
                                        Merrill Lynch Investment Partners Inc.
                                        (General Partner)
<PAGE>
 
FOR THE EXCLUSIVE USE OF INVESTORS IN ML GLOBAL HORIZONS L.P. THIS ANNUAL REPORT
IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. AN
OFFER CAN ONLY BE MADE BY THE PROSPECTUS, AS SUPPLEMENTED, WHICH CONTAINS
IMPORTANT INFORMATION CONCERNING RISK FACTORS, PERFORMANCE AND OTHER MATERIAL
ASPECTS OF THE FUND, TOGETHER WITH SUMMARY FINANCIAL INFORMATION CURRENT WITHIN
60 DAYS. THE PROSPECTUS MUST BE READ CAREFULLY BEFORE ANY DECISION WHETHER TO
INVEST IS MADE. THIS ANNUAL REPORT MUST NOT BE REPRODUCED OR DISTRIBUTED IN ANY
MANNER. FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

TABLE OF CONTENTS
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                           Page
                                                                           ----
<S>                                                                    <C> 
INDEPENDENT AUDITORS' REPORT                                                  1
                                                                       
FINANCIAL STATEMENTS FOR THE YEARS ENDED                               
 DECEMBER 31, 1998, 1997 AND 1996:                                     
                                                                       
 Statements of Financial Condition                                            2
                                                                       
 Statements of Income                                                         3
                                                                       
 Statements of Changes in Partners' Capital                                   4
                                                                       
 Notes to Financial Statements                                             5-12
</TABLE> 
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
----------------------------



To the Partners of ML Global Horizons L.P.:

We have audited the accompanying statements of financial condition of ML Global
Horizons L.P. (the "Partnership") as of December 31, 1998 and 1997, and the
related statements of income and of changes in partners' capital for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Global Horizons L.P. as of December 31,
1998 and 1997, and the results of its operations for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.



DELOITTE & TOUCHE LLP


New York, New York
February 4, 1999
<PAGE>
 

ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
-------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                               1998           1997
                                                          -------------   -------------
ASSETS
<S>                                                      <C>             <C> 
Equity in commodity futures trading accounts:
    Cash and option premiums                              $ 106,424,609   $ 127,759,932
    Net unrealized profit on open contracts                   3,947,083       8,665,240
Accrued interest (Note 2)                                       407,106         572,654
                                                          -------------   -------------

                TOTAL                                     $ 110,778,798   $ 136,997,826
                                                          =============   =============

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
    Brokerage commissions payable (Note 2)                $     669,289   $     825,958
    Profit Shares payable (Note 3)                            1,197,683       1,196,823
    Administrative fees payable (Note 2)                         23,079          28,540
    Redemptions payable                                       4,299,253         612,978
    Incentive Override payable (Note 2)                         153,883         289,162
                                                          -------------   -------------

            Total liabilities                                 6,343,187       2,953,461
                                                          -------------   -------------
PARTNERS' CAPITAL:
    General Partner (8,298 Units and 10,194 Units)            1,356,079       1,568,439
    Limited Partners (630,758 Units and 873,830 Units)      103,079,532     134,446,411
    Subscriptions receivable (0 Units and 12,807 Units)            --        (1,970,485)
                                                          -------------   -------------

            Total partners' capital                         104,435,611     134,044,365
                                                          -------------   -------------

                TOTAL                                     $ 110,778,798   $ 136,997,826
                                                          =============   =============
NET ASSET VALUE PER UNIT
(Based on 639,056 and 871,217 Units Outstanding)          $      163.42   $      153.86
                                                          =============   =============

</TABLE> 

See notes to financial statements.

                                      -2-
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          1998              1997           1996
                                                      -------------   -------------   -------------
                                                       
<S>                                                    <C>             <C>             <C>    
 REVENUES:
     Trading profit (loss):
        Realized                                      $ 17,962,463    $  6,111,341   $ 20,458,327
        Change in unrealized                            (4,718,157)      6,329,441     (3,294,990)
                                                      -------------   -------------   -------------
            Total trading results                       13,244,306      12,440,782     17,163,337

    Interest income (Note 2)                             6,051,782       5,278,840      3,978,137
                                                      -------------   -------------   -------------
            Total revenues                              19,296,088      17,719,622     21,141,474
                                                      -------------   -------------   -------------

EXPENSES:
    Brokerage commissions (Note 2)                       8,970,371       7,727,226      6,646,004
    Profit Shares (Note 3)                               3,920,850       1,666,616      1,808,020
    Administrative fees (Note 2)                           309,323         266,456         57,091
    Incentive Override (Note 2)                            153,883         289,162        834,271
                                                      -------------   -------------   -------------
            Total expenses                              13,354,427       9,949,460      9,345,386
                                                      -------------   -------------   -------------
NET INCOME                                            $  5,941,661    $  7,770,162   $ 11,796,088
                                                      =============   =============  ==============
NET INCOME PER UNIT:
    Weighted average number of General Partner
     and Limited Partner Units outstanding (Note 4)        797,778         707,741        695,455
                                                      =============   =============  ==============

     Net income per weighted average General
       Partner and Limited Partner Unit               $       7.45    $      10.98   $      16.96
                                                      =============   =============  ==============


</TABLE>

See notes to financial statements.


                                      -3-
<PAGE>
 

ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
-------------------------------

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

 
                                                  Limited           General          Subscriptions
                                Units             Partners          Partner           Receivable                  Total
                            --------------      ---------------  ---------------     ---------------         --------------
<S>                        <C>                  <C>              <C>             <C>                 <C>    
PARTNERS' CAPITAL,
  DECEMBER 31, 1995            716,827         $  91,708,172     $   1,052,896     $  (3,620,575)            $  89,140,493

Subscriptions                  135,271            13,149,821            56,936         3,620,575                16,827,332

Redemptions                   (263,273)          (33,590,372)             --              --                   (33,590,372)

Net income                        --              11,621,500           174,588            --                    11,796,088
                            --------------      ---------------  -------------    ---------------             -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1996            588,825            82,889,121         1,284,420            --                    84,173,541

Subscriptions                  343,963            51,177,808           177,071            --                    51,354,879

Subscriptions receivable       (12,807)                  --               --          (1,970,485)               (1,970,485)

Redemptions                    (48,764)           (7,283,732)             --              --                    (7,283,732)

Net income                        --               7,663,214           106,948            --                     7,770,162
                            --------------      ---------------  --------------    ----------------           -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1997            871,217           134,446,411         1,568,439        (1,970,485)              134,044,365
 
Subscriptions                   43,666             6,798,138             8,766            --                     6,806,904

Subscriptions receivable        12,807                 --                 --          1,970,485                  1,970,485

Redemptions                   (288,634)          (44,030,662)         (297,142)           --                   (44,327,804)

Net income                        --               5,865,645            76,016            --                     5,941,661
                            --------------      ---------------  --------------    ----------------           -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1998            639,056         $ 103,079,532     $   1,356,079    $       --                 $ 104,435,611
                            ==============     ===============   ==============     ================         ==============

</TABLE>

See notes to financial statements.

                                      -4-
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

NOTES TO FINANCIAL STATEMENTS

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Organization
   ------------

   ML Global Horizons L.P. (the "Partnership") was organized as an open-end fund
   under the Delaware Revised Uniform Limited Partnership Act on May 11, 1993
   and commenced trading activities on January 4, 1994. The Partnership engages
   in the speculative trading of futures, options on futures and forward
   contracts on a wide range of commodities. When available for investment, the
   Partnership issues units of limited partnership interest ("Units") at Net
   Asset Value as of the beginning of each month. Merrill Lynch Investment
   Partners Inc. ("MLIP" or the "General Partner"), a wholly-owned subsidiary of
   Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of
   Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the
   Partnership. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill
   Lynch, is the Partnership's commodity broker. MLIP has agreed to maintain a
   general partner's interest of at least 1% of the total capital in the
   Partnership. MLIP and each Limited Partner share in the profits and losses of
   the Partnership in proportion to their respective interests in it.

   MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
   to manage the Partnership's assets, and allocates and reallocates the
   Partnership's assets among existing, replacement and additional Advisors.

   Estimates
   ---------

   The preparation of financial statements in conformity with generally accepted
   accounting principles requires management to make estimates and assumptions
   that affect the reported amounts of assets and liabilities and disclosure of
   contingent assets and liabilities at the date of the financial statements as
   well as the reported amounts of revenues and expenses during the reporting
   period. Actual results could differ from those estimates.

   Revenue Recognition
   -------------------

   Commodity futures, options on futures and forward contract transactions are
   recorded on the trade date and open contracts are reflected in net unrealized
   profit on open contracts in the Statements of Financial Condition at the
   difference between the original contract value and the market value (for
   those commodity interests for which market quotations are readily available)
   or at fair value. The change in unrealized (loss) profit on open contracts
   from one period to the next is reflected in change in unrealized in the
   Statements of Income.

                                      -5-
<PAGE>
 
Foreign Currency Transactions
-----------------------------

The Partnership's functional currency is the U.S. dollar; however, it transacts
business in currencies other than the U.S. dollar. Assets and liabilities
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the rates in effect at the dates of the Statements of Financial
Condition. Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in effect during the
period. Gains and losses resulting from the translation to U.S. dollars are
reported in total trading results currently.

Operating Expenses and Selling Commissions 
------------------------------------------

MLIP pays for all routine operating costs (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership,
including the costs of the ongoing offering of the Units. MLIP receives an
administrative fee as well as a portion of the brokerage commissions paid to MLF
by the Partnership.

No selling commissions have been or are paid directly by Limited Partners. All
selling commissions are paid by MLIP.

Income Taxes
------------

No provision for income taxes has been made in these financial statements as
each Partner is individually responsible for reporting income or loss based on
such Partner's respective share of the Partnership's income and expenses as
reported for income tax purposes.

Distributions
-------------

The Unitholders are entitled to receive, equally per Unit, any distributions
which may be made by the Partnership. No such distributions had been made as of
December 31, 1998.

Redemptions
-----------

A Limited Partner may require the Partnership to redeem some or all of such
Partner's Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice. Units redeemed on or
prior to the end of the twelfth full month after issuance are assessed an early
redemption charge of 3% of their Net Asset Value as of the date of redemption.
If an investor acquires Units at more than one time, such Units are treated on a
"first-in, first-out" basis for purposes of determining whether redemption
charges are applicable.

Dissolution of the Partnership
------------------------------

The Partnership will terminate on December 31, 2023 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.

Recently Issued Accounting Pronouncements
-----------------------------------------

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The General Partner does not
believe that the Statement will have a significant effect on the financial
statements of the Partnership.

                                      -6-
<PAGE>
 
2. RELATED PARTY TRANSACTIONS

   The Partnership's U.S. dollar assets are maintained at MLF. On assets held in
   U.S. dollars, Merrill Lynch credits the Partnership with interest at the
   prevailing 91-day U.S. Treasury bill rate. The Partnership is credited with
   interest on any of its net gains actually held by Merrill Lynch in non-U.S.
   dollar currencies at a prevailing local rate received by Merrill Lynch.
   Merrill Lynch may derive certain economic benefit, in excess of the interest
   which Merrill Lynch pays to the Partnership, from possession of such assets.

   Merrill Lynch charges the Partnership Merrill Lynch's cost of financing
   realized and unrealized losses on the Partnership's non-U.S. dollar-
   denominated positions.

   The General Partner determined that there may have been a miscalculation in
   the interest credited to the Partnership for a period prior to November 1996
   (such period may extend prior to that covered by these financial statements).
   Accordingly, the General Partner credited current and former investors who
   maintained a Merrill Lynch customer account in December 1997 with interest
   which was compounded. Former investors who do not maintain a Merrill Lynch
   customer account have been credited as their response forms are processed.
   The total amount of the adjustment was approximately $1,003,000. Since this
   amount was paid directly to investors by the General Partner, it is not
   reflected in these financial statements. The General Partner determined that
   interest was calculated appropriately since November 1996.

   Prior to January 1, 1996, the Partnership paid brokerage commissions to MLF
   at a flat monthly rate of .625 of 1% (a 7.5% annual rate) of the
   Partnership's month-end assets. Effective October 1, 1996, this percentage
   was reduced to .604 of 1% (a 7.25% annual rate) and the Partnership began to
   pay MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of
   the Partnership's month-end assets (this recharacterization had no economic
   effect on the Partnership). Month-end assets are not reduced, for purposes of
   calculating brokerage commissions and administrative fees, by any accrued
   brokerage commissions, administrative fees, Profit Shares, Incentive
   Overrides or other fees or charges.

   MLIP estimates that the round-turn equivalent commission rate charged to the
   Partnership during the years ended December 31, 1998, 1997 and 1996 was
   approximately $62, $98 and $74, respectively (not including, in calculating
   round-turn equivalents, forward contracts on a futures-equivalent basis).

   MLF pays the Advisors annual Consulting Fees generally ranging up to 4% of
   the Partnership's average month-end assets allocated to them for management,
   after reduction for a portion of the brokerage commissions.

   The Partnership paid to MLIP an Incentive Override equal to 10% of the Net
   New Gain, as defined, as of December 31, 1998, 1997 and 1996 and will do so
   as of each subsequent December 31 in respect of any Net New Gain then
   outstanding. Such payments are also made to MLIP from the redemption value of
   Units redeemed as of the end of interim months during a year, to the extent
   of any Net New Gain attributable to such Units when redeemed.

   The methods by which Incentive Overrides are calculated may result in certain
   disproportionate allocations of such fees and possible equity dilution among
   Partners purchasing Units at different times.

                                      -7-
<PAGE>
 
   Many of the Partnership's currency trades are executed in the spot and
   forward foreign exchange markets (the "FX Markets") where there are no direct
   execution costs. Instead, the participants, banks and dealers, including
   Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
   between the prices at which they are prepared to buy and sell a particular
   currency and such spreads are built into the pricing of the spot or forward
   contracts with the Partnership. The General Partner anticipates that some of
   the Partnership's foreign currency trades will be executed through MLIB, an
   affiliate of the General Partner. MLIB has discontinued the operation of the
   foreign exchange service desk, which included seeking multiple quotes from
   counterparties unrelated to MLIB for a service fee and trade execution.

   In its exchange of futures for physical ("EFP") trading, the Partnership
   acquires cash currency positions through banks and dealers, including Merrill
   Lynch. The Partnership pays a spread when it exchanges these positions for
   futures. This spread reflects, in part, the different settlement dates of the
   cash and the futures contracts, as well as prevailing interest rates, but
   also includes a pricing spread in favor of the banks and dealers, which may
   include a Merrill Lynch entity.

3. AGREEMENTS

   The Partnership and the Advisors have each entered into Advisory Agreements.
   These Advisory Agreements generally terminate one year after they are entered
   into, subject to certain renewal rights exercisable by the Partnership. The
   Advisors determine the commodity futures, options on futures and forward
   contract trades to be made on behalf of their respective Partnership
   accounts, subject to certain trading policies and to certain rights reserved
   by MLIP.

   Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
   as defined, recognized by each Advisor considered individually, irrespective
   of the overall performance of the Partnership, as of either the end of each
   calendar quarter or year and upon the net reallocation of assets away from an
   Advisor, are paid by the Partnership to each Advisor. Profit Shares are also
   paid out in respect of Units redeemed as of the end of interim months, to the
   extent of the applicable percentage of any New Trading Profit attributable to
   such Units.

   The methods by which Profit Share is calculated may result in certain
   disproportionate allocations of such fees and possible equity dilution among
   Partners purchasing Units at different times.

4. WEIGHTED AVERAGE UNITS

   The weighted average number of Units outstanding was computed for purposes of
   disclosing net income per weighted average Unit. The weighted average number
   of Units outstanding at December 31, 1998, 1997 and 1996 equals the Units
   outstanding as of such date, adjusted proportionately for Units sold and
   redeemed based on the respective length of time each was outstanding during
   the year.

                                      -8-
<PAGE>
 
5. FAIR VALUE AND OFF-BALANCE SHEET RISK

   The Partnership trades futures, options on futures and forward contracts in
   interest rates, stock indices, commodities, currencies, energy and metals.
   The Partnership's total trading results by reporting category for the years
   ended December 31, 1998, 1997 and 1996 were as follows:


                             Total Trading Results
                  -----------------------------------------------
                      1998            1997               1996
                  ------------    -------------     -------------
Interest Rates    $ 13,700,880    $ 3,934,415       $ 9,760,028
Stock Indices       (1,850,085)       (59,105)       (2,898,534)
Commodities           (113,534)     1,154,857        (1,260,126)
Currencies           2,224,110      6,017,661         6,729,908
Energy               4,392,566     (4,302,025)        3,648,527
Metals              (5,109,631)     5,694,979         1,183,534
                  ------------    -------------     -------------
                  $ 13,244,306    $12,440,782       $17,163,337
                  ============    =============     =============

   Market Risk
   -----------

   Derivative instruments involve varying degrees of off-balance sheet market
   risk, and changes in the level or volatility of interest rates, foreign
   currency exchange rates or the market values of the financial instruments or
   commodities underlying such derivative instruments frequently result in
   changes in the Partnership's net unrealized profit on such derivative
   instruments as reflected in the Statements of Financial Condition. The
   Partnership's exposure to market risk is influenced by a number of factors,
   including the relationships among derivative instruments held by the
   Partnership as well as the volatility and liquidity of the markets in which
   such derivative instruments are traded.

   The General Partner has procedures in place intended to control market risk
   exposure, although there can be no assurance that they will, in fact, succeed
   in doing so. These procedures focus primarily on monitoring the trading of
   the Advisors selected from time to time by the Partnership, calculating the
   Net Asset Value of the Advisors' respective Partnership accounts as of the
   close of business on each day and reviewing outstanding positions for over-
   concentrations both on an Advisor-by-Advisor and on an overall Partnership
   basis. While the General Partner does not itself intervene in the markets to
   hedge or diversify the Partnership's market exposure, the General Partner may
   urge Advisors to reallocate positions, or itself reallocate Partnership
   assets among Advisors (although typically only as of the end of a month) in
   an attempt to avoid over-concentrations. However, such interventions are
   unusual. Except in cases in which it appears that an Advisor has begun to
   deviate from past practice or trading policies or to be trading erratically,
   the General Partner's basic risk control procedures consist simply of the
   ongoing process of Advisor monitoring and selection, with the market risk
   controls being applied by the Advisors themselves.

                                      -9-
<PAGE>
 
   Fair Value
   ----------

   The derivative instruments traded by the Partnership are marked to market
   daily with the resulting net unrealized profit recorded in the Statements of
   Financial Condition and the related profit (loss) reflected in trading
   results in the Statements of Income.

   The contract/notional values of open contracts as of December 31, 1998 and
   1997 were as follows:


<TABLE> 
<CAPTION> 

                                           1998                                                           1997
                       ------------------------------------------------           ------------------------------------------------ 
                          Commitment to               Commitment to                      Commitment to            Commitment to
                        Purchase (Futures,           Sell (Futures,                    Purchase (Futures,         Sell (Futures,
                      Options & Forwards)          Options & Forwards)                  Options & Forwards)     Options & Forwards)
                     ---------------------        ---------------------           ---------------------     ----------------------  
<S>                 <C>                         <C>                                <C>                          <C> 
Interest Rates          $207,976,407                  $238,348,493                      $361,262,091                $216,261,891
Stock Indices             29,600,742                     7,780,773                         3,671,625                   9,837,452
Commodities               24,172,934                    25,312,669                        32,721,460                  39,980,310
Currencies               205,313,175                   201,659,534                        71,377,618                 290,360,085
Energy                     2,515,538                     8,005,502                               --                   12,218,655
Metals                       535,695                    11,919,683                        28,496,076                  51,889,407
                     ---------------------        ---------------------            ---------------------     ---------------------
                        $470,114,491                  $493,026,654                      $497,528,870                $620,547,800
                     =====================        =====================            =====================     =====================

</TABLE>


   Substantially all of the Partnership's derivative instruments outstanding at
   December 31, 1998 expire within one year.

   The contract/notional values of the Partnership's open exchange-traded and
   non-exchange-traded derivative instrument positions as of December 31, 1998
   and 1997 were as follows:

<TABLE>
<CAPTION>

                                                1998                                                       1997
                          --------------------------------------------                ---------------------------------------------
                             Commitment to            Commitment to                     Commitment to             Commitment to
                           Purchase (Futures,         Sell (Futures,                 Purchase (Futures,           Sell (Futures,
                          Options & Forwards)       Options & Forwards)              Options & Forwards)       Options & Forwards)
                          -------------------       ------------------               ------------------        -------------------
<S>                       <C>                       <C>                              <C>                        <C> 
Exchange-Traded             $324,691,745               $338,000,470                     $435,918,287              $484,549,200
Non-Exchange-Traded          145,422,746                155,026,184                       61,610,583               135,998,600
                          -------------------       ------------------               -------------------       -------------------
                            $470,114,491               $493,026,654                     $497,528,870              $620,547,800
                          ===================       ==================               ===================       ===================  
        
</TABLE>


                                      -10-
<PAGE>
 
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the years ended December 31, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
                                         1998                                               1997
                    --------------------------------------------------------------------------------------------------
                        Commitment to         Commitment to              Commitment to              Commitment to
                      Purchase (Futures,    Sell (Futures,             Purchase (Futures,           Sell (Futures,
                     Options & Forwards)   Options & Forwards)       Options & Forwards)          Options & Forwards)
                     -------------------   ------------------        ---------------------    ------------------------
<S>                  <C>                    <C>                       <C>                      <C> 
Interest Rates           $484,051,166          $204,220,124                 $355,706,292              $163,790,120
Stock Indices              19,654,747             8,701,191                   16,261,720                10,889,808
Commodities                35,596,122            51,072,651                   35,250,135                19,213,817
Currencies                178,348,477           192,740,868                   93,524,652               185,718,360
Energy                      4,133,644            11,337,474                    5,554,722                 5,244,100
Metals                     29,211,602            31,676,334                   30,160,151                39,147,176
                     -------------------   ------------------        ---------------------    ------------------------
                         $750,995,758          $499,748,642                 $536,457,672              $424,003,381
                     ===================   ===================       =====================    ========================
</TABLE>


A portion of the amounts indicated as off-balance sheet risk reflects offsetting
commitments to purchase and to sell the same instrument on the same date in the
future. These commitments are economically offsetting but are not, as a
technical matter, offset in the forward markets until the settlement date.

Credit Risk
-----------

The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.

The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance. The
credit risk associated with these instruments from counterparty nonperformance
is the net unrealized profit included on the Statements of Financial Condition.

                                      -11-
<PAGE>
 
The gross unrealized profit and net unrealized profit on the Partnership's open
derivative instrument positions as of December 31, 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
                                      1998                                        1997
                        ---------------------------------        -----------------------------------
                            Gross               Net                   Gross               Net
                         Unrealized         Unrealized              Unrealized         Unrealized
                            Profit              Profit               Profit              Profit
                        ----------------   --------------        -----------------   ---------------      
<S>                     <C>                <C>                    <C>                <C> 
Exchange-Traded         $ 7,385,648         $ 3,775,404             $10,018,862         $ 7,627,618
Non-Exchange Traded       1,874,047             171,679               2,824,800           1,037,622
                        ----------------   --------------        -----------------   ---------------      
                        $ 9,259,695         $ 3,947,083             $12,843,662         $ 8,665,240
                        ================   ==============        =================   ===============
</TABLE>


The Partnership has credit risk in respect of its counterparties and brokers,
but attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.

The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF (which includes a netting arrangement), to the extent that
such trading results in receivables from and payables to MLF, these receivables
and payables are offset and reported as a net receivable or payable.

                           * * * * * * * * * * * * *

                To the best of the knowledge and belief of the
                undersigned, the information contained in this
                       report is accurate and complete.

                                 /s/ Di Dario


                                Jo Ann Di Dario
                            Chief Financial Officer
                    Merrill Lynch Investment Partners Inc.
                              General Partner of
                            ML Global Horizons L.P.
                                     

                                      -12-