<PAGE>
 
                       The SECTOR Strategy Fund/SM/ V L.P.
                       (A Delaware Limited Partnership)
 
 
                       Financial Statements for the years ended
                       December 31, 1997, 1996 and 1995
                       and Independent Auditors' Report
 
 
 
 
<PAGE>
 
To:  The Limited Partners of THE SECTOR STRATEGY FUND/SM/ V L.P.


The SECTOR Strategy Fund/SM/ V L.P. (the "Fund" or "Partnership") ended its
fifth fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV")
per Unit of $132.21, representing an increase of 11.02% from the December 31,
1996 NAV per Unit of $119.09. During 1997, trading profits were generated in the
interest rate, currency, metals, stock index and agriculture markets while
losses were incurred in energy trading. (Trading results include that of the
Advisors, as well as, the Trading LLCs (defined in Note 5 to the financial
statements)).



Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, 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.



In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year.  Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal.  By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas.  In December, financial and economic problems in Asia reduced
demand for oil, and in combination with ample supplies, resulted in crude oil
prices declining once again.
<PAGE>
 
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting.  From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility.  Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period.  We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.



                              Sincerely,

                              John R. Frawley, Jr.
                              President
                              MERRILL LYNCH INVESTMENT PARTNERS INC.
                              (General Partner)



FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. 
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
 ------------------------------ 

 
TABLE OF CONTENTS
------------------------------------------------------------------------
 
                                                                    Page
                                                                    ----
 
INDEPENDENT AUDITORS' REPORT                                           1
 
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
  AND 1995:
 
  Statements of Financial Condition                                    2
 
  Statements of Operations                                             3
 
  Statements of Changes in Partners' Capital                           4
 
  Notes to Financial Statements                                     5-13
 
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
----------------------------



To the Partners of
 The SECTOR Strategy Fund/SM/ V L.P.:

We have audited the accompanying statements of financial condition of The SECTOR
Strategy Fund/SM/ V L.P. (a Delaware limited partnership; the "Partnership") as
of December 31, 1997 and 1996 and the related statements of operations and
changes in partners' capital for each of the three years in the period ended
December 31, 1997.  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 The SECTOR Strategy Fund/SM/ V L.P. as of
December 31, 1997 and 1996 and the results of its operations for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.


DELOITTE & TOUCHE LLP

February 6, 1998
New York, New York
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
-------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
-------------------------------------------------------------------------------------------

 
 
              ASSETS                                                   1997         1996
                                                                   -----------  -----------
 
<S>                    <C>                                         <C>          <C>
Accrued interest (Note 2)                                          $    15,390  $    42,724
Equity in commodity futures trading accounts:
    Cash and option premiums                                         3,396,218   10,635,825
    Net unrealized profit on open contracts                             17,058       56,151
Investment (Note 6)                                                  8,871,133    3,405,293
Receivable from investment (Note 6)                                    155,372      327,498
                                                                   -----------  -----------
 
                TOTAL                                              $12,455,171  $14,467,491
                                                                   ===========  ===========
 
LIABILITIES AND PARTNERS CAPITAL
 
LIABILITIES:
    Redemptions payable                                            $   215,502  $   327,498
    Brokerage commissions payable (Note 2)                              24,892       58,450
    Profit Shares payable (Note 3)                                       3,352       45,748
    Administrative fees payable (Note 2)                                   711        1,499
                                                                   -----------  -----------
 
            Total liabilities                                          244,457      433,195
                                                                   -----------  -----------
 
PARTNERS CAPITAL:
    General Partner (2,990 Units and 2,990 Units)                      395,313      356,079
    Limited Partner (89,367 Units and 114,856 Units)                11,815,401   13,678,217
                                                                   -----------  -----------
 
            Total partners' capital                                 12,210,714   14,034,296
                                                                   -----------  -----------
 
                TOTAL                                              $12,455,171  $14,467,491
                                                                   ===========  ===========
 
NET ASSETS VALUE PER UNIT
   (Based on 92,357 and 117,846 Units outstanding)                 $    132.21  $    119.09
                                                                   ===========  ===========
</TABLE>


                       See notes to financial statements.

                                      -2-
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
-------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------------------------------------------------------------------------

 
                                                                                   1997       1996           1995   
                                                                                ----------   ------------   ----------       
REVENUES:
 
    Trading profits (loss):
<S>                                                                     <C>    <C>                         <C>
        Realized                                                                $  368,946   $ 1,264,013    $5,460,869
        Change in unrealized                                                       (39,093)   (1,945,383)     (152,635)
                                                                                ----------   -----------    ----------
 
            Total trading results                                                  329,853      (681,370)    5,308,234
 
    Interest income (Note 2)                                                       292,197       782,522     1,600,013
                                                                                ----------   -----------    ----------
 
            Total revenues                                                         622,050       101,152     6,908,247
                                                                                ----------   -----------    ----------
 
EXPENSES:
    Brokerage commissions (Note 2)                                                 348,042     1,198,690     2,378,476
    Profit Shares (Note 3)                                                           9,118        50,339       524,877
    Administrative fees (Note 2)                                                     9,839        30,735        --
                                                                                ----------   -----------    ----------
 
            Total expenses                                                         366,999     1,279,764     2,903,353
                                                                                ----------   -----------    ----------
 
INCOME FROM INVESTMENT (Note 6)                                                  1,114,196       708,715        --
                                                                                ----------   -----------    ----------
 
NET INCOME (LOSS)                                                               $1,369,247   $  (469,897)   $4,004,894
                                                                                ==========   ===========    ==========
 
NET INCOME (LOSS) PER UNIT:
    Weighted average number of General
      Partner and Limited Partner Units
      outstanding (Note 4)                                                         104,332       166,173       293,583
                                                                                ==========   ===========    ==========
 
    Net income (loss) per weighted average
      General Partner and Limited Partner Unit                                  $    13.12   $     (2.83)   $    13.64
                                                                                ==========   ===========    ==========
</TABLE>
              See notes to financial statements.

                                      -3-
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
 ------------------------------ 

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-------------------------------------------------------------------------------


 
<TABLE>
<CAPTION>
 
 
                                                          Units of
                                                        Partnership      Limited       General
                                                          Interest       Partners       Partner       Total
                                                        -----------   ------------   -----------   ------------ 
<S>                                                     <C>            <C>            <C>           <C>
PARTNERSAE CAPITAL,  DECEMBER 31, 1994                      381,064   $ 38,004,265   $   528,877   $ 38,533,142
 
Redemptions                                                (155,470)   (16,248,910)     (233,072)   (16,481,982)
 
Net income                                                   --          3,955,320        49,574      4,004,894
                                                        -----------   ------------   -----------   ------------
 
PARTNERSAE CAPITAL,  DECEMBER 31, 1995                      225,594     25,710,675       345,379     26,056,054
 
Redemptions                                                (107,748)   (11,551,861)       --        (11,551,861)
 
Net income (loss)                                            --           (480,597)       10,700       (469,897)
                                                        -----------   ------------   -----------   ------------
 
PARTNERSAE CAPITAL,  DECEMBER 31, 1996                      117,846     13,678,217       356,079     14,034,296
 
Redemptions                                                 (25,489)    (3,192,829)                  (3,192,829)
 
Net income                                                               1,330,013         39,234     1,369,247
                                                        -----------   ------------   ------------   -----------
 
PARTNERSAE CAPITAL,  DECEMBER 31, 1997                       92,357   $ 11,815,401   $   395,313   $ 12,210,714
                                                        ===========   ============   ===========   ============
</TABLE>



See notes to financial statements.

                                      -4-
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
 ------------------------------ 

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    The SECTOR Strategy Fund/SM/ V L.P. (the "Partnership") was organized under
    the Delaware Revised Uniform Limited Partnership Act on July 16, 1992 and
    commenced trading activities on January 4, 1993. The Partnership engages in
    the speculative trading of futures, options on futures and forward contracts
    on a wide range of commodities. The initial capitalization included an
    investment from The SECTOR Strategy Fund/SM/ International V Ltd. (the
    "Company"). On April 1, 1994 the Company redeemed its investments from the
    Partnership to become a stand-alone trading company. Merrill Lynch
    Investment Partners Inc. (formerly, ML Futures 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 and Merrill Lynch Futures Inc. ("MLF"), also a Merrill Lynch
    affiliate, is its commodity broker. The General Partner has agreed to
    maintain a general partner's interest of at least 1% of the total capital of
    the Partnership. The General Partner 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 trading assets among existing, replacement and additional
    Advisors.

    MLIP also determines what percentage of the Partnership's total capital to
    allocate to trading from time to time, attempting to balance the
    desirability of reducing the opportunity costs of the Partnership's
    "principal protection" structure by allocating 100% (or more) of the
    Partnership's assets to trading against the necessity of preventing Merrill
    Lynch from ever being required to make any payments to the Partnership under
    the Merrill Lynch guarantee. (See Note 5.)

    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 and 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 fair value.
    The change in net unrealized profit (loss) on open contracts from one period
    to the next is reflected in change in unrealized in the Statements of
    Operations. Fair value is based on quoted market prices on the exchange or
    market on which the contract is traded.

                                      -5-

<PAGE>
 
    Operating Expenses
    ------------------

    The General Partner pays for all routine operating costs (including all
    legal, accounting, printing, postage and similar administrative expenses) of
    the Partnership. The General Partner receives an administrative fee as well
    as a portion of the brokerage commissions paid to MLF by the Partnership as
    reimbursement for the foregoing expenses.

    Income Taxes
    ------------
    
    No provision for income taxes has been made in the accompanying 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 distribution
    which may be made by the Partnership. No such distributions had been made as
    of December 31, 1997.

    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
    during the four successive six-month periods ending after the Partnership
    commenced trading were assessed early redemption charges of 4%, 3%, 2% and
    1%, respectively, of their Net Asset Value as of the date of redemption.

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

    The Partnership will terminate on December 31, 2022 or at an earlier date if
    certain conditions occur, as well as certain other circumstances set forth
    in the Limited Partnership Agreement.

2.  RELATED PARTY TRANSACTIONS

    The Partnership's U.S. dollar assets are held at MLF in cash. On the cash
    held at MLF, the Partnership receives interest from Merrill Lynch at the
    prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may derive certain
    economic benefits, in excess of the interest which Merrill Lynch pays to the
    Partnership, from possession of such cash.

    Merrill Lynch credits the Partnership with interest on the Partnership's 
    non-U.S. dollar-denominated assets based on local short-term rates. 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 has 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 will be credited as their response forms are
    processed. The total amount of the adjustment is approximately $1,464,000.
    Since this amount was paid directly to investors by the General Partner, it
    is not reflected in these financial

                                      -6-
<PAGE>
 
    statements. The General Partner has determined that interest has been
    calculated appropriately since November 1996.

    The Partnership paid brokerage commissions to MLF at a flat monthly rate of
    .833 of 1% (a 10% annual rate) of the Partnership's month-end net assets
    allocated to the trading. Effective January 1, 1996, the percentage was
    reduced to .813 of 1% (a 9.75% annual rate) of the Partnership's month-end
    assets allocated to trading 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 allocated to trading (this recharacterization had no
    economic effect on the Partnership). Effective February 1, 1997, the
    Partnership's brokerage commission rate was reduced to .729 of 1% (an 8.75%
    annual rate). Assets allocated to trading are not reduced, for purposes of
    calculating brokerage commissions and administrative fees, by any accrued
    brokerage commissions, administrative fees, Profit Shares or other fees or
    charges.

    The General Partner estimates that the round-turn equivalent commission rate
    charged to the Partnership during the years ended December 31, 1997, 1996
    and 1995 was approximately $136 , $55 and $21, respectively (not including,
    in calculating round-turn equivalents, forward contracts on a futures-
    equivalent basis).

    MLF pays the Advisors annual Consulting Fees 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 trades forward contracts through a foreign exchange service
    desk (the "F/X Desk") established by MLIP. The F/X Desk gives the
    Partnership access to counterparties in addition to (but also including)
    Merrill Lynch International Bank ("MLIB") MLIP or another Merrill Lynch
    entity charges a service fee equal to, at current exchange rates,
    approximately $5.00 to $12.50 on each purchase or sale (not round-turn) of a
    futures contract-equivalent face amount of a given currency traded in the
    forward markets. No service fees are charged on trades awarded to MLIB (
    which receives bid-ask spreads on such trades).

    In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
    the Partnership acquires spot or forward (collectively, "cash") currency
    positions through the F/X Desk in the same manner and on the same terms as
    in the case of the Partnership's other F/X Desk trading. When the
    Partnership exchanges these positions for futures, there is a differential
    between the prices of the two positions. This differential reflects, in
    part, the different settlement dates of the cash and the futures contracts
    and prevailing interest rates, but also includes a pricing spread in favor
    of MLIB or another Merrill Lynch entity. The Advisors, to date, have made
    little use of EFPs.
 
    The Partnership's F/X Desk service fee and EFP differential costs have, to
    date totaled no more than .25 of 1% per annum of the Partnership's average
    month-end assets.

3.  AGREEMENTS

    The Partnership and the Advisors have each entered into Advisory Agreements.
    The 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 and forward contract trades to be
    made on behalf of their respective Partnership accounts, subject to certain
    Partnership trading policies and to certain rights reserved by the General
    Partner.

    In the case of the Trading LLCs, as defined in Note 6, each Trading LLC
    entered into an Advisory Agreement with an Advisor.

                                      -7-
<PAGE>
 
    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, either as of the end of each
    calendar quarter or year, 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.

4.  WEIGHTED AVERAGE UNITS

    The weighted average number of Units outstanding was computed for purposes
    of disclosing net income (loss) per weighted average Unit. The weighted
    average number of Units outstanding at December 31, 1997, 1996 and 1995
    equals the Units outstanding as of such date, adjusted proportionately for
    Units redeemed based on the respective length of time each was outstanding
    during the preceding period.

5.  MERRILL LYNCH & CO., INC. GUARANTEE

    Merrill Lynch has guaranteed to the Partnership that it will have sufficient
    Net Assets as of the Principal Assurance Date, that the Net Asset Value per
    Unit as of such Principal Assurance Date will equal, after adjustment for
    all liabilities to third parties, not less the minimum assured Net Asset
    Value per Unit. Effective January 1, 1998, the Partnership restarted its
    trading program for an additional Time horizon, as defined, of two years'
    duration, with a new Principal Assurance Date of December 31, 1999 and a
    minimum assured Net Asset Value of $105.77.


6.  INVESTMENTS

    The Partnership places assets under the management of certain of the
    Advisors not through opening managed accounts with them but rather through
    investing in private limited liability companies ("Trading LLCs") sponsored
    by MLIP. The only members of the Trading LLCs 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 investments are reflected in the financial statements at fair value
    based upon the Partnership's interest in the Trading LLCs. Fair value is
    equal to the Partnership's portion of the market value of the net assets of
    the Trading LLCs. The resulting difference between cost and fair value is
    reflected on the Statement of Operations as income or loss from investments.

                                      -8-
<PAGE>
 
  As of December 31, 1997 and 1996 the Partnership had investments in the ML
  JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Sjo Prospect
  L.L.C. ("SJO LLC") as follows:
 

 
 
                                                   1997         1996
                                               ------------  ----------
JWH LLC                                        $  5,408,273  $3,405,293
SJO LLC                                           3,462,860      --
                                               ------------  ----------
Total                                          $  8,871,133  $3,405,293
                                               ============  ==========


<TABLE>
<CAPTION>
Total revenues and fees with respect to such investment is set forth as 
follows: 
 
For the year ended Decemer 31, 1997       Total      Brokerage   Administrative   Profit    Income from
                                         Revenue    Commissions       Fees         Share    Investment
<S>                                   <C>           <C>          <C>             <C>        <C>
JWH LLC                               $ 1,359,201   $   383,830  $       10,887    112,723  $   851,761
SJO LLC                                   591,634       289,219           8,192     31,788      262,435
                                      -----------   -----------  --------------  ---------  -----------
Total                                 $ 1,950,835   $   673,049  $       19,079  $ 144,511  $ 1,114,196
                                      ===========   ===========  ==============  =========  ===========
 
 
For the year ended Decemer 31, 1996      Total       Brokerage   Administrative   Profit    Income from
                                        Revenue     Commissions       Fees        Share     Investment
 
JWH LLC                               $    920,605  $    92,634  $        2,377  $ 116,879  $   708,715
                                      ============  ===========  ==============  =========  ===========
 
</TABLE>
Condensed statements of financial condition as of December 31, 1997 and 1996 and
statements of income for the periods ended December 31, 1997 and 1996 for JWH 
LLC and SJO LLC  are set forth as follows:



<TABLE>
<CAPTION>
                                                                             1997                1996
                                                                     ------------------------ ------------     
                                                                      JWH          SJO           JWH
                                                                      LLC          LLC           LLC
<S>                                                            <C>              <C>          <C>
Assets                                                               $62,481,438  $21,240,207  $80,825,364
                                                                     ===========  ===========  ===========
 
Liabilities                                                          $ 1,122,533  $ 2,058,617  $19,848,210
Members' Capital                                                      61,358,905   19,181,590   60,977,154
                                                                     -----------  -----------  -----------
 
Total                                                                $62,481,438  $21,240,207  $80,825,364
                                                                     ===========  ===========  ===========
 
Revenues                                                             $15,279,401  $ 3,903,267  $19,365,949
 
Expenses                                                               6,714,041    2,144,078    4,426,261
                                                                     -----------  -----------  -----------
 
Net Income                                                           $ 8,565,360  $ 1,759,189  $14,939,688
                                                                     ===========  ===========  ===========
</TABLE>

                                      -9-
<PAGE>
 
7. FAIR VALUE AND OFF-BALANCE SHEET RISK

   The Partnership trades futures, options 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, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
 
 
                                                         Total Trading Results
                                                ---------------------------------------      
                                                    1997          1996          1995
                                                ------------  -----------  ------------
<S>                                         <C>                 <C>          <C>
Interest Rates and
 Stock Indices                                  $    (92,197) $   (11,377) $  4,906,379
Commodities                                          164,054     (174,780)     (839,126)
Currencies                                           342,016      269,134     1,441,968
Energy                                               (64,047)    (603,378)      419,051
Metals                                               (19,973)    (160,969)     (620,038)
                                                ------------  -----------  ------------
                                                $    329,853  $  (681,370) $  5,308,234
                                                ============  ===========  ============
 
</TABLE>

   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 market values of the financial instruments or
   commodities underlying such derivative instruments frequently result in
   changes in the Partnership's unrealized profit (loss) 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 the derivative instruments held by the
   Partnership as well as the volatility and liquidity of the markets in which
   the derivative instruments are traded.

   The General Partner has procedures in place intended to control market risk,
   although there can be no assurance that they will, in fact, succeed in doing
   so. The procedures focus primarily on monitoring the trading of the Advisors
   selected from time to time for the Partnership, adjusting the percentage of
   the Partnership's total assets allocated to trading, calculating the Net
   Asset Value of the Advisors' respective Partnership accounts as of the close
   of business on each day and reviewing 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 (although the General Partner
   does adjust the percentage of the Partnership's total assets allocated to
   trading), 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-concentration. However,
   such interventions are unusual. Except in cases in which it appears that an
   Advisor has begun to deviate from past practice and 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.

   One important aspect of the General Partner's risk controls is its
   adjustments to the leverage at which the Partnership trades. By controlling
   the percentage of the Partnership's assets allocated to trading, the General
   Partner can directly affect the market exposure of the Partnership. Leverage
   control is the principal means by which the General Partner hopes to be able
   to ensure that Merrill Lynch is never required to make any payments under its
   guarantee that the Net Asset Value per Unit will equal no less than $100 as
   of the Principal Assurance Date.

                                     -10-
<PAGE>
 
  Fair Value
  ----------

  The derivative instruments traded by the Partnership are marked to market
  daily with the resulting unrealized profit (loss) recorded in the Statements
  of Financial Condition and the related profit (loss) reflected in trading
  revenues in the Statements of Operations.  The contract/notional values of
  open contracts as of December 31, 1997 and 1996 were as follows:

 
<TABLE>
<CAPTION>
 
 
                                                                1997                                      1996
                                               ----------------------------------------  ---------------------------------------
                                                  Commitment to        Commitment to      Commitment           Commitment to
                                                 Purchase (Futures,   Sell (Futures,     Purchase (Futures,   Sell (Futures,
                                                 Options & Forwards)  Options & Forward  Options & Forwards)  Options & Forwards)
                                               --------------------   -----------------  ------------------   ------------------
<S>                                              <C>                  <C>                <C>                  <C>
Interest Rates and                                 
  Stock Indices                                $          5,191,446   $       3,605,481  $       14,701,885   $          883,752
Commodities                                                   --                577,742             238,375              174,760
Currencies                                                2,688,064           3,771,760           2,315,661            5,025,340
Energy                                                        --                 70,560             129,600                --
Metals                                                      366,525             628,125             205,624              652,082
                                               --------------------   -----------------  ------------------   ------------------
                                               $          8,246,035   $       8,653,668  $       17,591,145   $        6,735,934
                                               ====================   =================  ==================   ==================
</TABLE>


  Substantially all of the Partnership's derivative instruments outstanding at
  December 31, 1997, expire within one year.

  The contract/notional values of the exchange-traded and non-exchange-traded
  open derivative instrument positions as of December 31, 1997 and 1996 were as
  follows:
<TABLE>
<CAPTION>

                                                                1997                                      1996
                                               ----------------------------------------   ----------------------------------------
                                                  Commitment to        Commitment to           Commitment          Commitment to
                                               Purchase (Futures,      Sell (Futures,      Purchase (Futures,     Sell (Futures,
                                               Options & Forwards)   Options & Forward    Options & Forwards)   Options & Forwards)
                                               ------------------    ------------------   -------------------   ------------------
<S>                                            <C>                  <C>                   <C>                   <C>
 
Exchange-Traded                                $        5,191,446    $        4,253,783    $       15,736,015   $        2,928,090
Non-Exchange-
 Traded                                                 3,054,589             4,399,885             1,855,130            3,807,844
                                               ------------------    ------------------    ------------------   ------------------
 
                                               $        8,246,035    $        8,653,668    $       17,591,145   $        6,735,934
                                               ==================    ==================    ==================   ==================
 
</TABLE>

                                     -11-
<PAGE>
 
  The average fair values, based on contract/notional values, of Partnership's
  derivative instrument positions which were open as of the end of each calendar
  month during the years ended December 31, 1997 and 1996 were as follows:

 
<TABLE>
<CAPTION>
 
                                                               1997                                         1996
                                              ----------------------------------------   -------------------------------------------
                                                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 and
  Stock Indices                               $        10,943,098   $        10,638,175  $         66,308,080   $       40,648,741
Commodities                                               646,831               267,468             4,379,786            1,232,126
Currencies                                              3,882,292             5,239,264            11,852,984           14,288,621
Energy                                                    105,153               247,775             1,947,329            1,377,394
Metals                                                  1,058,720             1,014,697             2,474,297            2,816,658
                                              -------------------   -------------------  --------------------   -------------------
                                              $        16,636,094   $        17,407,379  $         86,962,476   $       60,363,540
                                              ===================   ===================  ====================   ===================
 
</TABLE>
 
  A portion of the amounts indicated as off-balance sheet risk reflects
  offsetting commitments to purchase and sell the same derivative instrument on
  the same date in the future.  These commitments are economically offsetting
  but are not, as a technical matter, offset in the forward market 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 also 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 gain, if any, included on the Statements
  of Financial Condition.

  The Partnership also has credit risk because the sole counterparty or broker
  with respect to most of the Partnership's assets is MLF.

                                     -12-
<PAGE>
 
  The gross unrealized profit and net unrealized profit on the Partnership's
  open derivative instrument positions as of December 31, 1997 and 1996 were as
  follows:

<TABLE>
<CAPTION>
                                                              1997                                       1996
                                               ------------------------------------       ------------------------------------
                                               Gross Unrealized     Net Unrealized        Gross Unrealized      Net Unrealized
                                               Profit               Profit (Loss)         Profit                Profit
                                               ----------------     ---------------       ----------------      -------------- 
<S>                                            <C>                  <C>                   <C>                   <C>
Exchange-Traded                                $         34,125     $        30,870       $         57,600      $       48,583
Non-Exchange-Traded                                      48,885             (13,812)                26,193               7,568
                                               ----------------     ---------------       ----------------      --------------
 
                                               $         83,010     $        17,058       $         83,793      $       56,151
                                               ================     ===============       ================      ==============
</TABLE>

  The Partnership controls credit risk by dealing almost exclusively
  with Merrill Lynch entities as brokers and counterparties.

  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, 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/Michael A. Karmelin

                              Michael A. Karmelin
                            Chief Financial Officer
                     Merrill Lynch Investment Partners Inc.
                               General Partner of
                      The SECTOR Strategy Fund/SM/ V L.P.

                                     -13-