<PAGE>
 
                    THE FUTURES EXPANSION FUND
                    LIMITED PARTNERSHIP
                    (A Delaware Limited Partnership)
                    AND JOINT VENTURE



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


[LOGO] MERRILL LYNCH
<PAGE>
 
To:  The Limited Partners of The Futures Expansion Fund Limited Partnership


The Futures Expansion Fund Limited Partnership (the "Fund" or the "Partnership")
ended its eleventh fiscal year of trading on December 31, 1998 with a Net Asset
Value ("NAV") per Unit of $277.65, representing an increase of 0.70% from the
December 31, 1997 NAV per Unit of $275.73.

We appreciate your continued investment in the Fund and look forward to 1999 and
the trading opportunities it may bring.


                              Sincerely,
                              John R. Frawley, Jr.
                              President
                              Merrill Lynch Investment Partners Inc.
                              (General Partner)


                         Report of the Trading Advisor
                              Millburn Ridgefield
                                        

In 1998, interest rate futures trading was quite profitable, particularly the
Japanese 10-year government bond or "JGB."  The long side of the bond was
profitable earlier in the year as interest rates fell to record low levels and
the short side was profitable in the latter part of the year as interest rates
moved back up.  Long positions in European interest rate futures were also
profitable.  Profitable long positions included German, French, Spanish and
Italian 10-year government bonds.  Short-term Eurodollar trading and U.S. 10-
year Treasury note trading were also profitable.

Currency trading against the U.S. dollar and non-dollar cross-rate trading were
both somewhat unprofitable in 1998.  Yen trading was quite profitable but the
gains were outweighed by losses from European currency trading.

Stock index futures trading was also unprofitable in 1998 with losses from
Japanese stock indices outweighing gains from the Hong Kong Hang Seng and S&P
500 indices.

Metal trading was unprofitable in 1998, primarily due to losses in copper.

Energy trading was profitable in 1998 due to short positions in crude oil,
heating oil, London gasoil and unleaded gasoline.  Natural gas trading was
somewhat unprofitable.

Agricultural commodity trading was narrowly unprofitable with gains from sugar
and corn trading outweighed by losses from coffee, cocoa and cotton trading.



FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
 
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
 -------------------------------------------------

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

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



To the Partners of
 The Futures Expansion Fund Limited Partnership:

We have audited the accompanying consolidated statements of financial condition
of The Futures Expansion Fund Limited Partnership (the "Partnership") and its
joint venture (the "Joint Venture") with Millburn Ridgefield Corporation as of
December 31, 1998 and 1997, and the related consolidated statements of income
and of changes in partners' capital for each of the three years in the period
ended December 31, 1998.  These financial statements are the responsibility of
the Partnership's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Futures Expansion Fund Limited
Partnership and its Joint Venture as of December 31, 1998 and 1997 and the
results of their operations for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP



New York, New York
February 4, 1999
<PAGE>
 
 THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP 
(A Delaware Limited Partnership) AND JOINT VENTURE
--------------------------------------------------

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 
DECEMBER 31,1998 AND 1997
--------------------------------------------------------------------------    






<TABLE> 
<CAPTION> 
                                                                1998                 1997 
                                                            ------------         -----------   

ASSETS                                                   
<S>                                                       <C>                 <C> 
Equity in commodity futures trading accounts:      
  Cash and options premiums                                $  8,505,137         $  9,715,506
  Net unrealized profit on open contracts                       258,842              435,225
Accrued interest (Note 3)                                        30,544               44,081
                                                           ------------         ------------ 
 
    TOTAL                                                  $  8,794,523         $ 10,194,812
                                                           ============         ============
LIABILITIES AND PARTNERS' CAPITAL
 
LIABILITIES:
 Brokerage commissions payable (Note 3)                    $     69,620               80,591
 Profit Shares payable (Note 2)                                 116,259              278,351
 Administrative fees payable (Note 3)                             1,832                2,121
 Redemptions payable                                             47,201              193,011
                                                            -----------         ------------ 
    Total liabilities                                           234,912              554,074
                                                            -----------         ------------ 
 
PARTNERS' CAPITAL:
 General Partner (339 Units and 518 Units)                       94,122              142,826
 Limited Partners (30,490 Units and 34,447 Units)             8,465,489            9,497,912
                                                            -----------          ----------- 
 
     Total partners' capital                                  8,559,611            9,640,738
                                                            -----------          -----------
 
    TOTAL                                                   $ 8,794,523          $10,194,812
                                                            ===========          =========== 
NET ASSET VALUE PER UNIT
(Based on 30,829 Units and 34,965 Units outstanding)             277.65              275.73
                                                           =============        ============ 
</TABLE>

See notes to consolidated financial statements.


                                       2
<PAGE>
 
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
 -------------------------------------------------

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

                                                     1998         1997           1996 
                                                ------------  ------------   ------------
<S>                                             <C>           <C>               <C> 
 REVENUES:
 Trading profit (loss):
  Realized                                       $ 761,007    $ 1,551,671   $ 1,800,104
  Change in unrealized                            (176,383)      (102,280)      (39,401)
                                                -----------   ------------    -----------
 
         Total trading results                     584,624      1,449,391     1,760,703

Interest income (Note 3)                           433,501        470,192       382,717
                                                -----------   ------------    -----------
         Total revenues                          1,018,125      1,919,583     2,143,420
                                                -----------  -------------   ------------

EXPENSES:                                 
 Brokerage commissions (Note 3)                    860,552      1,022,449     1,120,320 
 Profit Shares (Note 2)                            118,954        278,351       206,261
 Administrative fees (Note 3)                       22,646         26,392        24,001
                                                -----------  -------------   ------------
 
                                                    
         Total expenses                          1,002,152      1,327,192     1,350,582
                                                -----------  -------------   ------------

 NET INCOME                                     $   15,973   $    592,391    $  792,838
                                                ===========  =============   ============
 NET INCOME PER UNIT:
  Weighted average number of General Partner        
   and Limited Partner UnitS Outstanding (Note 4)   33,048         36,889        38,474
                                                ===========  ============    ============
  Net income per weighted average                   
   General Partner and Limited                      
   Partner Unit                                 $     0.48   $      16.06    $    20.61
                                                ===========  ============    ============
</TABLE>                                            
See notes to consolidated financial statements.      


                                       3
<PAGE>
 
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
--------------------------------------------------

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL 
FOR THE YEARS ENDED DECEMBER 31,1998, 1997 AND 1996
----------------------------------------------------------------------------    
<TABLE>
<CAPTION>
 
                                        Units    Limited Partners    General Partner      Total
                                      ---------  -----------------  ----------------    ---------    

<S>                                   <C>      <C>                <C>               <C>
 
PARTNERS' CAPITAL,
   DECEMBER 31, 1995                  41,393        $ 9,767,324          $123,779    $ 9,891,103
 Redemptions                          (3,375)          (788,325)                -       (788,325)
 Net income                                -            781,788            11,050        792,838
                                   ------------     --------------       ----------  ------------
 PARTNERS' CAPITAL,
  DECEMBER 31, 1996                   38,018          9,760,787           134,829      9,895,616
 Redemptions                          (3,053)          (847,269)                -       (847,269)
 Net income                                -            584,394             7,997        592,391

 PARTNERS' CAPITAL,
  DECEMBER 31,1997                    34,965          9,497,912           142,826      9,640,738
 Redemptions                          (4,136)        (1,049,658)          (47,442)    (1,097,100)
 Net income                                -             17,235            (1,262)        15,973
                                   ------------     --------------       ----------   -----------

 
PARTNERS' CAPITAL,
 DECEMBER 31,1998                     30,829          8,465,489          $ 94,122     $ 8,559,611
                                   ============      =============       ==========   ===========   
</TABLE>
See notes to consolidated financial statements.


                                       4
<PAGE>
 
THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
 -------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    The Futures Expansion Fund Limited Partnership (the "Partnership") was
    organized under the Delaware Revised Uniform Limited Partnership Act on
    August 13, 1986 and commenced trading activities on January 2, 1987. The
    Partnership, through its joint venture with Millburn Ridgefield Corporation
    (the "Trading Manager"), engages in the speculative trading of futures,
    options on futures and forward contracts on a wide range of commodities.
    Merrill Lynch Investment Partners Inc. ("MLIP" or the "General Partner"), a
    wholly-owned subsidiary of Merrill Lynch Group, Inc. which, in turn, is a
    wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is
    the general partner of the Partnership. Merrill Lynch Futures Inc. ("MLF"),
    an affiliate of Merrill Lynch, is the Joint Venture's commodity broker. MLIP
    has agreed to maintain a General Partner's interest of at least 1% of the
    total capital of the Partnership. MLIP and each Limited Partner share in the
    profits and losses of the Partnership in proportion to their respective
    interests in it.

    The consolidated financial statements include the accounts of the joint
    venture (the "Joint Venture") to which the Partnership has contributed
    substantially all of its available capital, representing a current equity
    interest in the Joint Venture of approximately 97%. The Partnership and the
    Trading Manager share in the profits and losses of the Joint Venture in
    proportion to their respective interests in it, except to the extent of the
    Profit Share. All related transactions between the Partnership and the Joint
    Venture are eliminated in consolidation. References to the Partnership
    include references to the Joint Venture unless the context otherwise
    requires.

    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 Consolidated Statements of
    Financial Condition at the difference between the original contract value
    and the market value (for those commodity interests for which market
    quotations are readily available) or at fair value. The change in unrealized
    loss on open contracts from one period to the next is reflected in change in
    unrealized in the Consolidated Statements of Income.

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

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

    Operating Expenses
    ------------------

    The General Partner pays for all routine operating costs (including legal,
    accounting, printing, postage and similar administrative expenses of the
    Partnership, including the Partnership's share of any such costs incurred by
    the Joint Venture (Note 2). The General Partner receives an administrative
    fee as well as a portion of the brokerage commission paid to MLF by the
    Joint Venture.
 
    Income Taxes
    ------------

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

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

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

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

    A Limited Partner may require the Partnership to redeem some or all of such
    Partner's Units at Net Asset Value as of the close of business on the last
    day of any month upon ten calendar days' notice.

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

    The Partnership will terminate on December 31, 2006, or at an earlier date
    if certain conditions occur, as well as under certain other circumstances as
    set forth in the Limited Partnership Agreement. 

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

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

                                       6
<PAGE>
 
2.  JOINT VENTURE AGREEMENT

    The Partnership and Millburn Partners entered into a Joint Venture Agreement
    whereby Millburn Partners contributed $100,000 to the Joint Venture and the
    Partnership contributed all of its available capital (except for an
    administrative reserve). Subsequently, Millburn Partners assigned its rights
    and obligations under the Joint Venture Agreement to the Trading Manager.
    The Joint Venture Agreement is in effect for successive one-year terms, but,
    in fact, given the single advisor structure of the Joint Venture, the Joint
    Venture and the Partnership would terminate were the Joint Venture Agreement
    not to be renewed. The Joint Venture Agreement was renewed for the year
    ended December 31, 1999. The General Partner is the manager of the Joint
    Venture, while the Trading Manager has sole discretion in determining the
    commodity futures, options on futures and forward trades to be made on its
    behalf.

    Pursuant to the Joint Venture Agreement, the Trading Manager and the
    Partnership share in the profits of the Joint Venture based on equity
    ownership after 20% of annual New Trading Profits, as defined, are allocated
    to the Trading Manager. Losses are allocated to the Trading Manager and the
    Partnership based on equity ownership.

3.  RELATED PARTY TRANSACTIONS

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

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

    The General Partner determined that there may have been a miscalculation in
    the interest credited to the Joint Venture for a period prior to November
    1996 (such period may extend prior to that covered by these financial
    statements). Accordingly, the General Partner credited current and former
    investors who maintained a Merrill Lynch customer account in December 1997
    with interest which was compounded. Former investors who do not maintain a
    Merrill Lynch customer account have been credited as their response forms
    are processed. The total amount of the adjustment was approximately
    $502,000. Since this amount was paid directly to investors by the General
    Partner, it is not reflected in these financial statements. The General
    Partner determined that interest was calculated appropriately since November
    1996.

    Prior to January 1, 1996, the Joint Venture paid brokerage commissions to
    MLF at a flat rate of .993 of 1% (an 11.92% annual rate) of the Joint
    Venture's month-end assets. Effective January 1, 1996, the percentage was
    reduced to .973 of 1% (an 11.67% annual rate) of the Joint Venture's month-
    end assets and the Joint Venture began to pay MLIP a monthly administrative
    fee of .021 of 1% (a .25% annual rate) of the Joint Venture's month-end
    assets (this recharacterization had no economic effect on the Joint
    Venture). Effective February 1, 1997, the Joint Venture's brokerage
    commission percentage was reduced to .792 of 1% (a 9.5% annual rate) of the
    Joint Venture's month-end assets. Month-end assets are not reduced, for
    purposes of calculating brokerage commissions and administrative fees, by
    any accrued commissions, administrative fees, Profit Shares or other fees or
    charges.

                                       7
<PAGE>
 
    MLIP estimates the round-turn equivalent commission rate charged to the
    Joint Venture during the years ended December 31, 1998, 1997 and 1996, was
    approximately $105, $84 and $102, respectively (not including, in
    calculating round-turn equivalents, forward contracts on a futures-
    equivalent basis).

    MLF originally paid the Advisor annual consulting fees of .333 of 1% (a 4%
    annual rate) of the Joint Venture's month-end assets after reduction for a
    portion of the brokerage commissions. Effective January 1, 1997 the annual
    consulting fees were reduced to .167 of 1% (a 2% annual rate) of the Joint
    Venture's month-end assets after reduction for a portion of the brokerage
    commissions.

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

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

4.  WEIGHTED AVERAGE UNITS

    The weighted average number of Units outstanding was computed for purposes
    of disclosing net income per weighted average Unit. The weighted average
    Units outstanding at December 31, 1998, 1997 and 1996 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
    period.

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

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

<TABLE>
<CAPTION>
 
                                                                Total Trading Results
                                                   ---------------------------------------------
<S>                                                 <C>         <C>          <C>
 
                                                      1998            1997              1996        
                                                   ----------      -----------     ------------- 
Interest Rates and Stock Indices                   $ 874,177       $  679,273       $  640,339
Commodities                                          (76,779)          (8,456)        (465,306)
Currencies                                          (434,481)       1,280,992          846,362
Energy                                               428,384           42,962          845,777
Metals                                              (206,677)        (545,380)        (106,469)
                                                   ----------     ------------     ------------- 
                                                   $ 584,624      $ 1,449,391      $ 1,760,703 
                                                   ==========     ============     =============
</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 the market values of the financial instruments or commodities
underlying such derivative instruments frequently result in changes in the
Partnership's net unrealized profit on such derivative instruments as reflected
in the Consolidated Statements of Financial Condition. The Joint Venture's
exposure to market risk is influenced by a number of factors, including the
relationships among such derivative instruments held by the Joint Venture as
well as the volatility and liquidity in the markets in which tne derivative
instruments are traded.

The General Partner has procedures in place intended to control market risk
exposure, although there can be no assurance that they will, in fact, succeed in
doing so. The procedures focus primarily on monitoring the trading of the
Trading Manger, calculating the Net Asset Value of the Joint Venture as of the
close of business on each day and reviewing outstanding positions for over-
concentrations. While the General Partner does not itself intervene in the
markets to hedge or diversify the Joint Venture's market exposure, the General
Partner may urge the Trading Manager to reallocate positions in an attempt to
avoid over-concentrations. However, such interventions are unusual. Except in
cases in which it appears that the Trading Manager has begun to deviate from
past practice and trading policies or to be trading erratically (which has not
occurred to date), the General Partner's basic risk control procedures consist
simply of the ongoing process of Trading Manager monitoring with the market risk
controls being applied by the Trading Manager.


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

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

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

<TABLE> 
<CAPTION> 
                                                       1998                                               1997
                                --------------------------------------------          ------------------------------------------

                                      Commitment to           Commitment to              Commitment to           Commitment to      
                                   Purchase (Futures,        Sell (Futures,            Purchase (Futures,       Sell (Futures,     
                                   Options & Forwards)     Options & Forwards)        Options & Forwards)      Options & Forwards) 
                                   -------------------     -------------------        -------------------      ------------------
<S>                               <C>                      <C>                       <C>                     <C>    
Interest Rates                                                                           
 and Stock Indices                      10,280,548              55,712,777                  33,617,268                16,297,078   
Commodities                                662,344               1,536,435                   1,853,301                 1,608,555 
Currencies                              27,343,241              21,552,087                  16,123,114                24,881,223 
Energy                                      -                    1,179,621                      -                      2,919,411    
Metals                                   2,237,275               4,449,325                     921,166                 3,847,958    
                                   -------------------     -------------------        -------------------      ------------------
                                     $  40,523,408            $  84,430,245              $  52,514,849          $     49,554,225
                                   ===================     ===================        ===================      ================== 
</TABLE> 

 Substantially all of the Joint Venture's derivative financial instruments
 outstanding as of December 31, 1998 expire within one year.

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

<TABLE>
<CAPTION>
 
                               1998                                         1997
            ------------------------------------------------------------------------------------------
                Commitment to        Commitment to         Commitment to          Commitment to
             Purchase (Futures,      Sell (Futures,      Purchase (Futures,       Sell (Futures,
             Options & Forwards)   Options & Forwards)  Options & Forwards       Options & Forwards)
            --------------------   -------------------  --------------------    ----------------------
 <S>          <C>                  <C>                  <C>                     <C>
 
Exchange-
 Traded         $    10,942,892       $   59,121,233           $   36,346,629        $    21,506,634

Non-Exchange-
 Traded         $    29,580,516           25,309,012               16,168,220             28,047,591
                ----------------      ---------------         ---------------        ----------------- 
                $    40,523,408       $   84,430,245           $   52,514,849        $    49,554,225
                ================      ===============         ===============        ================= 

</TABLE>

                                      10

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

                                      


<TABLE> 
<CAPTION> 

                                    1998                                                   1997
                  --------------------------------------------------------------------------------------------------  
                     Commitment to            Commitment to           Commitment to               Commitment to      
                   Purchase (Futures,        Sell (Futures,         Purchase (Futures,           Sell (Futures,       
                   Options & Forwards)     Options & Fowards)       Options & Forwards)        Options & Forwards)     
                                            


<S>                <C>                   <C>                          <C>                       <C>  
Interest Rates
 and Stock Indices  $   29,577,508         $     19,430,638           $     41,346,354         $     24,621,142
Commodities                849,540                1,576,312                  1,878,924                1,911,620
Currencies              44,066,678               44,857,085                 51,748,337               57,472,839
Energy                     825,819                1,616,661                  2,157,602                1,639,384
Metals                   3,156,288                4,100,745                  4,407,862                4,749,545
                    --------------         ----------------           ----------------          ---------------
                    $   78,475,833         $     71,581,441           $    101,539,079          $    90,394,530
                    ==============         ================           ================          ===============

</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 markets until the
   settlement date.

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

   The risks associated with exchange-traded contracts are typically perceived
   to be less than those associated with over-the-counter transactions (non-
   exchange-traded), 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 memebers of the exchange is
   pledged to support the financial integrity of the exchange. In over-the-
   counter transactions, on the other hand, traders must rely solely on the
   credit of their respective individual counterparties. Margins, which may be
   subject to loss in the event of a default, are generally required in exchange
   trading, and counterparties may require margin in the over-the-counter
   markets.


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


                                      11
<PAGE>
 
The gross unrealized profit and the net unrealized profit (loss) on the Joint
Venture's open derivative instrument positions as of December 31, 1998 and 1997
were are as follows:


<TABLE>
<CAPTION>
 
                                                  1998                                        1997
                                ------------------------------------         ----------------------------------
 
                                Gross Unrealized    Net Unrealized           Gross Unrealized    Net Unrealized
                                    Profit           Profit (Loss)               Profit             Profit
 
<S>                     <C>                          <C>                    <C>                 <C> 
Exchange
    Traded                     $   607,814            $   513,270             $  492,147          $  398,368
Non-Exchange
 Traded                            506,983               (254,428)               394,483              36,857
                              ------------            ------------            ----------          ----------    
                              $  1,114,797            $   258,842             $  886,630          $  435,225
                              ============            ============            ==========          ==========
</TABLE>

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

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

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

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


                                 /s/ Di Dario

                                Jo Ann Di Dario
                            Chief Financial Officer
                     Merrill Lynch Investment Partners Inc.
                               General Partner of
                 The Futures Expansion Fund Limited Partnership
                               And Joint Venture

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