<PAGE>





                     THE FUTURES EXPANSION FUND
                     LIMITED PARTNERSHIP
                     (A DELAWARE LIMITED PARTNERSHIP)
                     AND JOINT VENTURE




                     Consolidated Financial Statements for the years ended
                     December 31, 1997, 1996 and 1995 and 
                     Independent Auditors' Report



<PAGE>
 
To:  The Limited Partners of THE FUTURES EXPANSION FUND LIMITED PARTNERSHIP


The Futures Expansion Fund Limited Partnership (the "Fund" or "Partnership")
ended its tenth fiscal year of trading on December 31, 1997 with a Net Asset
Value ("NAV") per Unit of $275.73, representing an increase of 5.93% from the
December 31, 1996 NAV per Unit of $260.29.


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)


                         REPORT OF THE TRADING ADVISOR
                              MILLBURN RIDGEFIELD
                                        

In 1997, the most profitable portfolio sector for the Fund was currencies.  Also
profitable were interest rate, stock index and energy futures trading.
Agricultural commodity trading was flat.  Metal futures trading was the only
portfolio sector where material losses were sustained.


In the currency sector of the portfolio, the major part of the year's profits
came from Japanese yen trading versus the U.S. dollar.  Significant profits also
resulted also resulted from Deutsche mark trading versus the dollar.  Toward the
end of the year, short positions in the Singapore dollar and the Malaysian
ringgit contributed to performance.


In the interest rate sector of the portfolio the most profitable geographic area
was Japan where long positions in Japanese ten-year government bonds and in
Euroyen deposits made a substantial contribution to profits.  Other profitable
positions included Australian, Italian and Spanish 10-year government bonds and
U.S. Treasury 10-year notes.


In the stock index sector of the portfolio, Japan was again the most profitable
area with short positions in the Nikkei and Topix indices making substantial
profit contributions.  Also profitable were the Hong Kong Hang Seng and
Australian All Ordinaries markets.


In the energy markets, profits from natural gas trading outweighed losses from
crude oil, heating oil, London gasoil and unleaded gasoline.


In agricultural commodity trading, corn was flat and wheat was unprofitable,
while in tropical "soft"
<PAGE>
 
commodity trading, profits on long positions in coffee outweighed losses from
London cocoa, London coffee, orange juice and sugar.


In the metals sector of the portfolio, copper, gold and zinc trading were
profitable, but these gains were substantially outweighed by losses from
aluminum and nickel 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>
<CAPTION>
 
TABLE OF CONTENTS
-----------------------------------------------------------------
<S>                                                          <C>
                                                             Page
                                                             ----
 
INDEPENDENT AUDITORS' REPORT                                    1
 
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
 DECEMBER 31, 1997, 1996 AND 1995:
 
 Consolidated Statements of Financial Condition                 2
 
 Consolidated Statements of Income                              3
 
 Consolidated Statements of Changes in Partners' Capital        4
 
 Notes to Consolidated Financial Statements                  5-11
</TABLE>
<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 (a Delaware limited
partnership; the "Partnership") and its joint venture with Millburn Ridgefield
Corporation ( the "Joint Venture") as of December 31, 1997 and 1996, and the
related consolidated statements of income 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, these 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, 1997 and 1996 and the
results of their 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 FUTURES EXPANSION FUND LIMITED PARTNERSHIP
(A Delaware Limited Partnership) AND JOINT VENTURE
 -------------------------------------------------

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                      1997                          1996
                                                                ------------------            ------------------
ASSETS
<S>                                                             <C>                           <C> 
Accrued interest (Note 3)                                                $ 44,081                      $ 35,182
Equity in commodity futures trading accounts:
  Cash and options premiums                                             9,715,506                     9,669,947
  Net unrealized profit on open contracts                                 435,225                       537,505
                                                                ------------------            ------------------

              TOTAL                                                  $ 10,194,812                  $ 10,242,634
                                                                ==================            ==================


LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
  Redemptions payable                                                   $ 193,011                      $ 39,043
  Brokerage commissions payable (Note 3)                                   80,591                        99,580
  Administrative fees payable (Note 3)                                      2,121                         2,133
  Profit Shares payable (Note 2)                                          278,351                       206,262
                                                                ------------------            ------------------

          Total liabilities                                               554,074                       347,018
                                                                ------------------            ------------------

PARTNERS' CAPITAL:
    General Partner (518 Units and 518 Units)                             142,826                       134,829
    Limited Partners (34,447 Units and 37,500 Units)                    9,497,912                     9,760,787
                                                                ------------------            ------------------

          Total partners' capital                                       9,640,738                     9,895,616
                                                                ------------------            ------------------

              TOTAL                                                  $ 10,194,812                  $ 10,242,634
                                                                ==================            ==================

NET ASSET VALUE PER UNIT
(Based on 34,965 and 38,018 Units outstanding)                           $ 275.73                      $ 260.29
                                                                ==================            ==================

See notes to consolidated financial statements.
</TABLE> 




                                      -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, 1997, 1996 AND 1995
------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                            1997                        1996                        1995        
                                                       ----------------            ----------------            ---------------- 
<S>                                                   <C>                          <C>                        <C> 
REVENUES:                                                                                                                       
Trading profit (loss):                                                                                                          
    Realized                                               $ 1,551,671                 $ 1,800,104                 $ 2,689,922  
    Change in unrealized                                      (102,280)                    (39,401)                    405,757  
                                                       ----------------            ----------------            ---------------- 
                                                                                                                                
        Total trading results                                1,449,391                   1,760,703                   3,095,679  
                                                                                                                                
Interest income (Note 3)                                       470,192                     382,717                     468,023  
                                                       ----------------            ----------------            ---------------- 
                                                                                                                                
        Total revenues                                       1,919,583                   2,143,420                   3,563,702  
                                                       ----------------            ----------------            ---------------- 
                                                                                                                                
EXPENSES:                                                                                                                       
    Profit Shares (Note 2)                                     278,351                     206,261                     471,976  
    Brokerage commissions (Note 3)                           1,022,449                   1,120,320                   1,208,671  
    Administrative fees (Note 3)                                26,392                      24,001                           -  
                                                       ----------------            ----------------            ---------------- 
                                                                                                                                
        Total expenses                                       1,327,192                   1,350,582                   1,680,647  
                                                       ----------------            ----------------            ---------------- 
                                                                                                                                
NET INCOME                                                   $ 592,391                   $ 792,838                 $ 1,883,055  
                                                       ================            ================            ================ 
                                                                                                                                
NET INCOME PER UNIT                                                                                                             
    Weighted average number of Units                                                                                            
        outstanding (Note 4)                                    36,889                      38,474                      43,021  
                                                       ================            ================            ================ 
                                                                                                                                
    Net income per weighted average                            $ 16.06                     $ 20.61                     $ 43.77  
       General Partner and Limited                                                                                              
       Partner Unit                                                                                                             
                                                       ================            ================            ================ 
                                                                                                                                
See notes to consolidated financial statements.                                                                                  
</TABLE> 



                                      -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, 1997, 1996 AND 1995
------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                    Units           Limited Partner         General Partner            Total        
                                 ------------      ------------------      ------------------     ----------------  
<S>                                 <C>                 <C>                     <C>                 <C> 
PARTNERS' CAPITAL,                                                                                                  
  DECEMBER 31, 1994                   45,234             $ 8,761,840               $ 101,500          $ 8,863,340   
                                                                                                                    
Redemptions                           (3,841)               (855,292)                      -             (855,292)  
                                                                                                                    
Net income                                 -               1,860,776                  22,279            1,883,055   
                                 ------------      ------------------      ------------------     ----------------  
                                                                                                                    
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   
                                 ============      ==================      ==================     ================   
</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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
------------------------------------------------------------

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  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. (formerly Merrill Lynch 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 an
  affiliate of Merrill Lynch, is its 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%.  All related transactions
  between the Partnership and the Joint Venture are eliminated in consolidation.

  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 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 Consolidated Statements
  of Income.  Fair value is based on quoted market prices on the exchange or
  market on which the contract is traded.

  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


                                      -5-
<PAGE>
 
  as a portion of the brokerage commission 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 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, 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 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
  defined in the Limited Partnership Agreement.

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, 1998.  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,
  subject to the trading limitations outlined in the Joint Venture Agreement.

  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 held at MLF in cash.  On the cash
  held at MLF, the Joint Venture 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
  Joint Venture, from possession of such cash.


                                      -6-
<PAGE>
 
  Merrill Lynch credits the Joint Venture with interest on the Joint Venture's
  non-U.S. dollar-denominated assets based on local short-term rates.  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 has 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 will be credited as their response forms are
  processed.  The total amount of the adjustment is approximately $502,000.
  Since the amount was paid directly to investors by the General Partner, it is
  not reflected in these financial statements.  The General Partner has
  determined that interest has been calculated appropriately since November
  1996.

  The Joint Venture paid brokerage commissions to MLF at a flat rate of .993
  of 1% (an 11.92% annual rate) of the monthly 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 .729 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.

  MLIP estimates the round-turn equivalent commission rate charged to the
  Joint Venture during the years ended December 31, 1997, 1996 and 1995, was
  approximately $ 84, $102 and $120, respectively (not including, in calculating
  round-turn equivalents, forward contracts on a futures-equivalent basis).

  MLF 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.

  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 Advisor, to date, has made little use of
  EFPs.



                                      -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 assets.


  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, 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.  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 revenues 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           $ 679,273             $ 640,339          $ 1,596,343  
  Commodities                                   (8,456)             (465,306)            (115,263) 
  Currencies                                 1,280,992               846,362            1,292,619  
  Energy                                        42,962               845,777              509,756  
  Metals                                      (545,380)             (106,469)            (187,776) 
                                       ----------------     -----------------    ----------------- 
                                           $ 1,449,391           $ 1,760,703          $ 3,095,679  
                                       ================     =================    =================  
</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 underlying 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 Consolidated Statements of
  Financial Condition. The Joint Venture's exposure to market risk is influenced
  by a number of factors, including the relationships among the derivative
  instruments held by the Joint Venture as well as the volatility and liquidity
  in the markets in which the financial 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 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, the General
  Partner's basic risk control procedures consist simply of the ongoing


                                      -8-
<PAGE>
 
  process of Trading Manager monitoring with the market risk controls being
  applied by the Trading Manager.

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

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

  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 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                     $ 33,617,268               $ 16,297,078              $ 44,152,280               $ 7,715,055 
  and Stock  Indices                                                                                                           
Commodities                           1,853,301                  1,608,555                 2,035,313                 1,506,581 
Currencies                           16,123,114                 24,881,223                32,144,464                54,783,905 
Energy                                        -                  2,919,411                 1,991,507                         - 
Metals                                  921,166                  3,847,958                 1,725,155                 3,277,971 
                       -------------------------  ------------------------- -------------------------  ------------------------
                                   $ 52,514,849               $ 49,554,225              $ 82,048,719              $ 67,283,512 
                       =========================  ========================= =========================  ======================== 
</TABLE> 

   Substantially all of the Joint Venture's derivative financial instruments
   outstanding as of  December 31, 1997, expire within one year.

   The contract/notional values of the Joint Venture's open 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 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                 $ 36,346,629                     $ 21,506,634              $ 49,419,307                     $ 10,883,476  
 Non-Exchange-                                                                                                                      
   Traded                   16,168,220                       28,047,591                32,629,412                       56,400,036  
                 ----------------------            ---------------------    ----------------------           ---------------------- 
                          $ 52,514,849                     $ 49,554,225              $ 82,048,719                     $ 67,283,512  
                 ======================            =====================    ======================           ====================== 
</TABLE> 

                                      -9-
<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, 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                  $ 41,346,354                   $ 24,621,142            $ 34,097,774                 $ 25,837,354  
   and Stock  Indices                                                                                                              
 Commodities                        1,878,924                      1,911,620               1,770,860                    1,475,802  
 Currencies                        51,748,337                     57,472,839              56,150,940                   64,659,715  
 Energy                             2,157,602                      1,639,384               2,288,126                      621,942  
 Metals                             4,407,862                      4,749,545               4,654,430                    5,759,826  
                         ---------------------         ----------------------  ----------------------        --------------------- 
                                $ 101,539,079                   $ 90,394,530            $ 98,962,130                 $ 98,354,639   
                         =====================         ======================  ======================        =====================  
</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 members of the exchange is
  pledged to support the financial integrity of the exchange. In over-the-
  counter transactions, on the other hand, traders must rely solely on the
  credit of their respective individual counterparties. Margins, which may be
  subject to loss in the event of a default, are generally required in exchange
  trading, and counterparties may require margin in the over-the-counter
  markets.

  The fair value amounts in the above tables represent the extent of the 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 gain, if any, included on the
  Consolidated Statements of Financial Condition.

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



                                     -10-
<PAGE>
 
  The gross unrealized profit and the net unrealized profit on the Joint
  Venture's open derivative instrument positions as of December 31, 1997 and
  1996 were are as follows:

<TABLE> 
<CAPTION> 
                                           1997                                      1996                 
                          -----------------------------------    --------------------------------------
                            Gross Unrealized    Net Unrealized     Gross Unrealized      Net Unrealized
                                 Profit             Profit              Profit               Profit    
                          -----------------------------------------------------------------------------
<S>                        <C>                  <C>                  <C>                   <C> 
 Exchange-                                                                                                   
   Traded                       $ 492,147          $ 398,368            $ 458,316             $ 325,910      
 Non-Exchange-                                                                                               
   Traded                         394,483             36,857              791,431               211,595      
                          ----------------     --------------    -----------------        -------------      
                                $ 886,630          $ 435,225          $ 1,249,747             $ 537,505      
                          ================     ==============    =================        =============       
</TABLE> 

  The Partnership controls its 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 Futures Expansion Fund Limited Partnership




                                     -11-