<PAGE>
 
The SECTOR Strategy Fund/SM/ V L.P.
(A Delaware Limited Partnership)

Financial Statements for the years ended
December 31, 1996, 1995 and 1994 and
Independent Auditors' Report
<PAGE>
 
To:        The Limited Partners of The SECTOR Strategy Fund/SM/ V L.P.

The SECTOR Strategy FundSM V L.P. (the "Fund" or the "Partnership") ended its
fourth fiscal year of trading on December 31, 1996 with a Net Asset Value
("NAV") per Unit of $119.09, representing an increase of 3.11% from the December
31, 1995 NAV per Unit of $115.50. During the fiscal year, trading profits were
generated in the interest rate and currency sectors while losses were incurred
in the energy, agriculture, stock index and metals sectors.

In 1996, strong price trends prevailed in several key markets enabling the
Fund's Trading Advisors to trade profitably for the Fund. Although trading in
stock index and agricultural commodity markets may have been lackluster, the
global bond and currency markets offered substantial trading opportunities.
Interest rate and currency price trends resulted in profitable trading
opportunities in these markets throughout the year.

As the new year began, the U.S. dollar rallied throughout most of January, after
being locked in a tight trading range for the two prior months. However, the
dollar weakened against major currencies in February, and returned to a
relatively narrow trading range. In March, crude oil prices rose throughout most
of the month, as unusually cold weather in the U.S. and Europe resulted in an
extended period of strong demand and oil talks between the United Nations and
Iraq were suspended.

During April, grain and soybean prices rallied to new highs, sometimes daily, as
adverse weather conditions and strong demand affected prices. Difficult trading
conditions in many markets prevailed and a lack of clear price trends in key
markets negatively impacted the Fund's performance in May and June. For example,
U.S. bond markets remained trendless as continued volatility, reflected investor
confusion over conflicting reports on the direction of the economy.

As the third quarter of 1996 began, it was the U.S. stock market that
experienced increased volatility coupled with sharp declines in July. In the
currency markets, the U.S. dollar posted its biggest one-day gain against the
Deutsche mark in almost four months on August 14, after comments from the
Bundesbank's chief economist encouraged expectations for lower German interest
rates. In September, crude oil prices continued, as they had during the summer,
to trend upward throughout most of the month.

Despite continued price volatility during the final quarter of 1996, the Fund's
Trading Advisors were able to single out trends in key markets, such as the
world's major bond markets which rallied into October and November.
Additionally, price trends prevailed in several major foreign currency markets,
for instance, the British pound extended its rally into November, as it soared
to a 4-year high against the U.S. dollar and a 29-month high against the
Deutsche mark on November 20. In December, however, the world's major bond
market rallies came to an abrupt halt early in the month. Specifically, U.S.
Treasury prices dropped on reports of strength in the economy, as well as a
weaker dollar which further encouraged investor selling of treasury securities.
<PAGE>
 
Although the Fund was profitable overall in 1996, we look for improved
performance in the coming year. To that end, we will continue to work diligently
with the Trading Advisors to meet the Fund's objective of achieving, through
speculative trading, substantial capital appreciation over time. We look forward
to 1997 and the trading opportunities it may bring.

                              Sincerely,
                              John R. Frawley, Jr.
                              President and Chief Executive Officer
                              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, 1996, 1995 
  AND 1994:

  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 FundSM V L.P. (a Delaware limited partnership; the "Partnership") as of
December 31, 1996 and 1995 and the related statements of operations and changes
in partners' capital for each of the three years in the period ended December
31, 1996. 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 FundSM V L.P. (a
Delaware limited partnership) as of December 31, 1996 and 1995 and the results
of its operations for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

February 3, 1997
New York, New York
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
--------------------------------
 
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
----------------------------------------------------------------------------- 
<TABLE> 
<CAPTION> 

ASSETS                                                                1996                 1995
------                                                                ----                 ----
<S>                                                               <C>                  <C>      
Accrued interest (Note 2)                                          $    42,724          $    105,038
Equity in commodity futures trading accounts:                     
    Cash and option premiums                                        10,635,825            24,941,940
    Net unrealized profit on open contracts                             56,151             2,001,534
Investment (Note 6)                                                  3,405,293               -
Receivable from investment (Note 6)                                    327,498               -
                                                                  -------------    ------------------
                                                                  
                TOTAL                                              $14,467,491           $27,048,512
                                                                  =============    ==================
                                                                  
                                                                  
LIABILITIES AND PARTNERS' CAPITAL                                 
---------------------------------                                 

LIABILITIES:                                                      
                                                                  
    Redemptions payable                                           $    327,498          $    743,243
    Brokerage commissions payable (Note 2)                              58,450               174,332
    Profit shares payable (Note 3)                                      45,748                74,883
    Administrative fees payable (Note 2)                                 1,499               -
                                                                  -------------    ------------------
                                                                  
            Total liabilities                                          433,195               992,458
                                                                  -------------    ------------------
                                                                  
PARTNERS' CAPITAL:                                                
    General Partner (2,990 and 2,990 units)                            356,079               345,379
    Limited Partners (114,856 and 222,604 units)                    13,678,217            25,710,675
                                                                  -------------    ------------------
                                                                  
            Total partners' capital                                 14,034,296            26,056,054
                                                                  -------------    ------------------
                                                                  
                TOTAL                                              $14,467,491           $27,048,512
                                                                  =============    ==================
                                                                  
NET ASSETS VALUE PER UNIT                                         
  (Based on 117,846 and 225,594 Units outstanding)                     $119.09               $115.50
                                                                  =============    ==================

</TABLE> 
See notes to financial statements.

                                      -2-
<PAGE>
 
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
-------------------------------

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                              1996                       1995                       1994
                                                              ----                       ----                       ----
<S>                                                       <C>                          <C>                       <C>  
REVENUES:
    Trading profits (loss):
        Realized                                           $ 1,264,013                 $5,460,869                $(1,405,309)
        Change in unrealized                                (1,945,383)                  (152,635)                  (410,982)
                                                          --------------         ------------------        -------------------

            Total trading results                             (681,370)                 5,308,234                 (1,816,291)

    Interest income (Note 2)                                   782,522                  1,600,013                  2,197,769
                                                          --------------         ------------------        -------------------

            Total revenues                                     101,152                  6,908,247                    381,478
                                                          --------------         ------------------        -------------------

EXPENSES:
    Brokerage commissions (Note 2)                           1,198,690                  2,378,476                  4,458,470
    Profit shares (Note 3)                                      50,339                    524,877                    249,343
    Administrative fees (Note 2)                                30,735                      -                         -
                                                          --------------         ------------------        -------------------

            Total expenses                                   1,279,764                  2,903,353                  4,707,813
                                                          --------------         ------------------        -------------------

INCOME FROM INVESTMENT (Note 6)                                708,715                      -                         -
                                                          --------------         ------------------        -------------------

NET (LOSS) INCOME                                          $  (469,897)                $4,004,894                $(4,326,335)
                                                          ==============         ==================        ===================

NET INCOME (LOSS) PER UNIT:
    Weighted average number of General
      Partner and Limited Partner Units
      outstanding (Note 4)                                     166,173                    293,583                    615,417
                                                               ========                   ========                   =======

    Net (loss) income per weighted average
        General Partner and Limited Partner Unit                $(2.83)                    $13.64                     $(7.03)
                                                                ======                     =======                    =======

</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, 1996, 1995 AND 1994
-------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                          Units of
                                         Partnership                Limited                  General
                                          Interest                 Partners                  Partner                   Total
                                          --------                 --------                  -------                   -----       
<S>                                       <C>                      <C>                       <C>                      <C>      
PARTNERS' CAPITAL,                          1,211,995              $125,336,230              $1,406,604               $126,742,834
  DECEMBER 31, 1993

Organization and initial offering               -                       257,979                   1,519                    259,498
  costs recovery

Redemptions                                  (830,931)              (83,304,712)               (838,143)               (84,142,855)

Net loss                                        -                    (4,285,232)                (41,103)                (4,326,335)
                                       ----------------      --------------------       -----------------      ---------------------


PARTNERS' CAPITAL,                            381,064                38,004,265                 528,877                 38,533,142
  DECEMBER 31, 1994

Redemptions                                  (155,470)              (16,248,910)               (233,072)               (16,481,982)

Net income                                      -                     3,955,320                  49,574                  4,004,894
                                       ----------------      --------------------       -----------------      ---------------------


PARTNERS' CAPITAL,
  DECEMBER 31, 1995                           225,594                25,710,675                 345,379                 26,056,054

Redemptions                                  (107,748)              (11,551,861)                 -                     (11,551,861)

Net (loss) income                               -                      (480,597)                 10,700                   (469,897)
                                       ----------------      --------------------       -----------------      ---------------------


PARTNERS' CAPITAL,
  DECEMBER 31, 1996                           117,846               $13,678,217              $  356,079                $14,034,296
                                       ================      ====================       =================      =====================


</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, 1996, 1995 AND 1994
------------------------------------------------------------------------------


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 FundSM
      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 in 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 (loss) on open contracts in the Statements of Financial
      Condition at the difference between the original contract amount and the
      fair value. The change in net unrealized profit (loss) on open contracts
      from one period to the next is reflected in

                                      -5-
<PAGE>
 
      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.

      Operating Expenses, Organization Costs and Selling Commissions
      --------------------------------------------------------------
   
      The General Partner advanced all organization and initial offering costs
      relating to the Partnership. The Partnership reimbursed the General
      Partner for such costs over a 2-year period in 24 equal monthly
      installments. For financial reporting purposes, the Partnership deducted
      the total organization and initial offering costs of $1,000,000 from
      Partners' capital at inception. For all other purposes, including
      determining the Net Asset Value per Unit for redemption purposes, the
      Partnership deducted organization and offering cost reimbursements only as
      actually paid.

      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.

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

      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, 1996.

      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-denominated assets are held at MLF in cash
      or short-term Treasury bills. The Partnership receives all interest paid
      on such Treasury bills. On the cash held at MLF, the Partnership receives
      interest from Merrill Lynch at rates ranging from .50 of 1% per annum
      below the prevailing 91-day Treasury bill rate up to the full prevailing
      91-day Treasury bill rate. Merrill Lynch 

                                      -6-
<PAGE>
 
      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 available 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 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). Assets
      allocated to trading are 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, 1996,
      1995 and 1994 was approximately $55, $21 and $29, 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 Desk
      (the "F/X Desk") established by MLIP that contacts at least two
      counterparties along with Merrill Lynch International Bank ("MLIB") for
      all of the Partnership's currency trades. All counterparties other than
      MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges
      a service fee equal (at current exchange rates) to approximately $5.00 to
      $12.50 on each purchase or sale of a futures-contract equivalent face
      amount of a foreign currency. No service fees are charged on trades
      awarded to MLIB (which receives a "bid-ask" spread on such trades). MLIB
      is awarded trades only if its price (which includes no service charge) is
      equal to or better than the best price (including the service charge)
      offered by any of the other counterparties contacted.

      The F/X Desk trades on the basis of credit lines provided by a Merrill
      Lynch entity. The Partnership is not required to margin or otherwise
      guarantee its F/X Desk trading.

      Certain of the Partnership's currency trades are executed in the form of
      "exchange of futures for physical" ("EFP") transactions involving MLIB and
      MLF. In these transactions, a spot or forward (collectively referred to as
      "cash") currency position is acquired and exchanged for an equivalent
      futures position on the Chicago Mercantile Exchange's International
      Monetary Market. In its EFP trading, the Partnership acquires 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 these two positions. This
      "differential" 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 MLIB or another Merrill Lynch
      entity.

                                      -7-
<PAGE>
 
      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 Net 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 for the General Partner.

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

      Profit shares 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 the end of each
      calendar quarter 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 during a calendar quarter, 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, 1996, 1995 and 1994
      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, as defined, 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
      than $100 per unit.

6.    INVESTMENT

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

                                      -8-
<PAGE>
 
      At December 31, 1996 the Partnership had an investment in the ML JWH
      Financial and Metals Portfolio L.L.C.

      Total revenues and fees with respect to such investment is set forth as
      follows:

<TABLE> 
<CAPTION> 

                  Total                  Brokerage              Administrative               Profit                Income from
                Revenues                Commissions                  Fees                    Shares                 Investment
         ------------------------  -----------------------  -----------------------  ------------------------  ---------------------

<S>                                <C>                      <C>                      <C>                       <C>      
                $920,605                  $92,634                   $2,377                  $116,879                 $708,715
</TABLE> 

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 trading results by reporting category were as follows:

<TABLE> 
<CAPTION> 
                                                                           Total Trading Results
                                                              -----------------------------------------------
                                                                     1996                          1995
                                                              ------------------           -------------------
<S>                                                           <C>                          <C>      
       Interest Rates and Stock Indices                              $ (11,377)                   $4,906,379
       Commodities                                                    (174,780)                     (839,126)
       Currencies                                                      269,134                     1,441,968
       Energy                                                         (603,378)                      419,051
       Metals                                                         (160,969)                     (620,038)
                                                              ------------------           -------------------

                                                                    $ (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 will 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 

                                      -9-
<PAGE>
 
      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.
      Deleveraged trading involves significant opportunity costs, but is
      effective in controlling the risk of loss.

      Fair Value
      ----------

      The derivative instruments used in the Partnership's trading activities
      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, 1996 and
      1995 were as follows:

<TABLE> 
<CAPTION> 

                                          1996                                                          1995
                  ---------------------------------------------------           ------------------------------------------------- 
                      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                $14,701,885               $  883,752                     $ 179,096,703                $56,850,064
  Commodities                 238,375                  174,760                        14,318,195                  4,314,805
  Currencies                2,315,661                5,025,340                         6,547,272                 20,755,132
  Energy                      129,600                   -                             10,409,141                  1,849,351
  Metals                      205,624                  652,082                         3,153,302                  4,949,099
                   ----------------------     --------------------             ---------------------      ---------------------

                          $17,591,145               $6,735,934                      $213,524,613                $88,718,451
                   ======================     ====================             =====================      =====================
</TABLE> 
      Substantially all of the Partnership's derivative instruments outstanding
      at December 31, 1996, expire within one year.

                                      -10-
<PAGE>
 
The contract/notional value of the exchange-traded and non-exchange-traded open
derivative instrument positions as of December 31, 1996 and 1995 were as
follows:
<TABLE> 
<CAPTION> 

                                   1996                                                           1995
          ---------------------------------------------------------    -----------------------------------------------------------
                   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              $15,736,015                   $2,928,090                      $205,483,343                   $75,005,128
Traded 
Non- 
Exchange 
Traded                  1,855,130                    3,807,844                         8,041,270                    13,713,323
                 ------------------             ------------------              -----------------             ------------------  

                      $17,591,145                   $6,735,934                      $213,524,613                   $88,718,451
                 ==================             ===================             =================             ===================
</TABLE> 

      The average fair value of Partnership's derivative instrument positions
      which were open as of the end of each calendar month during the year ended
      December 31, 1996 and 1995 were as follows:

<TABLE> 
<CAPTION> 
                                     1996                                                          1995
            ---------------------------------------------------------    -----------------------------------------------------------

                   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              $66,308,080                  $40,648,741                      $137,303,534                 $18,139,506
Commodities             4,379,786                    1,232,126                         8,709,133                   3,311,991
Currencies             11,852,984                   14,288,621                        29,404,375                  28,992,505
Energy                  1,947,329                    1,377,394                         3,972,514                   2,644,938
Metals                  2,474,297                    2,816,658                         3,487,022                   6,130,981
                 ------------------             ------------------              -----------------             ------------------  
                      $86,962,476                  $60,363,540                      $182,876,578                 $59,219,921
                 ------------------             ------------------              -----------------             ------------------  
</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

                                      -11-
<PAGE>
 
      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.

      At December 31, 1996 and 1995, $9,513,010 and $20,795,559 of the
      Partnership's assets, respectively, were held in segregated accounts at
      MLF in accordance with Commodity Futures Trading Commission regulations.

      The gross unrealized profit and net unrealized profit (loss) on the
      Partnership's open derivative instrument positions as of December 31, 1996
      and 1995 were as follows:

<TABLE> 
<CAPTION> 


                                                 1996                                                  1995
                              --------------------------------------------    -----------------------------------------------------
                                Gross Unrealized         Net Unrealized              Gross Unrealized             Net Unrealized
                                    Profit                Profit (Loss)                 Profit                     Profit (Loss)
                              --------------------  ----------------------    --------------------------    ------------------------

<S>                           <C>                   <C>                       <C>                           <C>      
      Exchange Traded              $57,600                    $48,583                    $2,644,507                  $2,009,512

      Non-Exchange Traded           26,193                      7,568                        10,261                      (7,978)
                              -------------              -------------             -----------------              ---------------

                                   $83,793                    $56,151                    $2,654,768                  $2,001,534
                              =============              =============             =================              ===============
</TABLE> 

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

      The Partnership, through 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.

8.    SUBSEQUENT EVENTS

      On January 2, 1997 the Partnership acquired an interest in ML Sjo Prospect
      L.L.C. (see Note 6 for a general description of investment).

      Effective February 1, 1997, the Partnership's brokerage commission
      percentage was reduced to .729 of 1% (an 8.75% annual rate) of the
      Partnership's month-end assets allocated to trading.

                                      -12-
<PAGE>
 
                To the best of the knowledge and belief of the 
                undersigned, the information contained in this 
                       report is accurate and complete.



                               James M. Bernard
                            Chief Financial Officer
                    Merrill Lynch Investment Partners Inc.
                              General Partner of
                      The SECTOR Strategy Fund/SM/ V L.P.

                                      -13-