<PAGE>
 
                       ML FUTURES INVESTMENTS 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 ML Futures Investments L.P.

ML Futures Investments L.P. (the "Fund" or the "Partnership") ended its eighth
fiscal year of trading on December 31, 1996 with a Net Asset Value ("NAV") per
Unit of $206.16, representing an increase of 5.87% from the December 31, 1995
NAV per Unit of $194.73. During the fiscal year, trading profits were generated
in the interest rate, energy and currency sectors while losses were incurred in
the metals, stock index and agriculture 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>
 
ML FUTURES INVESTMENTS 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 Income                                                         3
                                                                               
 Statements of Changes in Partners' Capital                                   4
                                                                               
 Notes to Financial Statements                                              5-12
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
----------------------------


To the Partners of 
ML Futures Investments L.P.:

We have audited the accompanying statements of financial condition of ML Futures
Investments L.P. (a Delaware limited partnership; the "Partnership") as of
December 31, 1996 and 1995, and the related statements of income 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 ML Futures Investments L.P. 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>
 
ML FUTURES INVESTMENTS L.P.
(A Delaware Limited Partnership)
 ------------------------------
<TABLE> 
<CAPTION> 

STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
--------------------------------------------------------------------------------------------

                                                              1996                 1995
                                                              ----                 ----
ASSETS
------
<S>                                                       <C>                  <C> 
Accrued interest (Note 2)                                 $    60,983          $   115,604
Equity in commodity futures trading accounts:
  Cash and option premiums                                 17,891,525           27,022,835
  Net unrealized profit on open contracts                     163,702            1,522,575
Investment (Note 5)                                         7,519,322               -
Receivable from investment (Note 5)                            50,934               -
                                                        --------------       --------------
                                                                             
      TOTAL                                               $25,686,466          $28,661,014
                                                        ==============       ==============
                                                                             
LIABILITIES AND PARTNERS' CAPITAL                                            
---------------------------------

LIABILITIES:                                                                 
  Redemptions payable                                         170,082              626,446
  Brokerage commissions payable (Note 2)                      145,228              222,831
  Administrative fees payable (Note 2)                          3,773               -
  Profit shares payable (Note 3)                               92,397               -
                                                        --------------       --------------
                                                                             
    Total liabilities                                         411,480              849,277
                                                        --------------       --------------
                                                                             
PARTNERS' CAPITAL:                                                           
                                                                             
 General Partner (1,787 and 1,787 units)                      368,402              347,972
 Limited Partners (120,810 and 141,035 units)              24,906,584           27,463,765
                                                        --------------       --------------
                                                                             
    Total partners' capital                                25,274,986           27,811,737
                                                        --------------       --------------
                                                                             
      TOTAL                                               $25,686,466          $28,661,014
                                                        ==============       ==============
                                                                             
NET ASSET VALUE PER UNIT                                                     
                                                                             
 (Based on 122,597 and 142,822 Units outstanding)             $206.16              $194.73
                                                        ==============       ==============
</TABLE> 
See notes to financial statements.

                                      -2-
<PAGE>
 
ML FUTURES INVESTMENTS L.P.
(A Delaware Limited Partnership)
 ------------------------------
<TABLE> 
<CAPTION> 

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

                                                       1996                    1995                   1994
                                                       ----                    ----                   ----
<S>                                                 <C>                     <C>                    <C> 
REVENUES:
 Trading profit (loss)
  Realized                                          $4,233,931              $5,778,268             $4,020,486
  Change in unrealized                              (1,358,873)               (569,416)              (498,136)
                                                   -------------           ------------           ------------ 
                                                                                                               
    Total trading results                            2,875,058               5,208,852              3,522,350  
                                                                                                               
 Interest income (Note 2)                            1,097,560               1,423,730              1,044,838  
                                                   -------------           ------------           ------------ 
                                                                                                               
    Total revenues                                   3,972,618               6,632,582              4,567,188  
                                                   -------------           ------------           ------------ 
                                                                                                               
EXPENSES:                                                                                                      
 Profit shares (Note 3)                                 194,674                412,897                 739,862 
 Brokerage commissions (Note 2)                       2,422,074              2,942,578               3,027,292 
 Administrative fees (Note 2)                            62,103                  -                       -         
                                                   -------------           ------------           ------------ 
                                                                                                               
    Total expenses                                    2,678,851              3,355,475              3,767,154  
                                                   -------------           ------------           ------------ 
                                                                                                               
INCOME FROM INVESTMENT (Note 5)                          83,713                  -                      -         
                                                   -------------           ------------           ------------ 
                                                                                                               
NET INCOME                                           $1,377,480             $3,277,107             $  800,034  
                                                   =============           ============           ============ 
NET INCOME PER UNIT OF                                                                                         
 PARTNERSHIP INTEREST:                                                                                         
 Weighted average number of Units                                                                              
  outstanding (Note 4)                                  134,302                156,675                177,601  
                                                   =============           ============           ============ 
                                                                 
 Net income per weighted average                                 
  General Partner and Limited                                    
  Partner Unit                                           $10.26                 $20.92                  $4.50
                                                   =============           ============           ============ 
</TABLE> 
See notes to financial statements.

                                      -3-
<PAGE>
 
ML FUTURES INVESTMENTS L.P.
(A Delaware Limited Partnership)
 ------------------------------

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE> 
<CAPTION> 

-----------------------------------------------------------------------------------------------------------
                                                           Limited             General
                                        Units              Partners            Partner           Total
                                     -----------        --------------       ----------       -------------
<S>                                     <C>               <C>                 <C>              <C> 
PARTNERS' CAPITAL,                                                                                          
 DECEMBER 31, 1993                      187,819           $31,434,828         $342,945         $31,777,773  
                                                                                                            
Redemptions                             (19,601)           (3,276,858)           -              (3,276,858) 
                                                                                                            
Net income                                -                   789,918           10,116             800,034  
                                     -----------        --------------       ----------       ------------- 
                                                                                                            
PARTNERS' CAPITAL,                                                                                          
 DECEMBER 31, 1994                      168,218            28,947,888          353,061          29,300,949  
                                                                                                            
Redemptions                             (25,396)           (4,721,921)         (44,398)         (4,766,319) 
                                                                                                            
Net income                                -                 3,237,798           39,309           3,277,107  
                                     -----------        --------------       ----------       ------------- 
                                                                                                            
PARTNERS' CAPITAL,                                                                                          
 DECEMBER 31, 1995                      142,822            27,463,765          347,972          27,811,737  
                                                                                                            
Redemptions                             (20,225)           (3,914,231)           -              (3,914,231) 
                                                                                                            
Net income                                -                 1,357,050           20,430           1,377,480  
                                     -----------        --------------       ----------       ------------- 
                                                                                                            
PARTNERS' CAPITAL,                                                                                          
 DECEMBER 31, 1996                      122,597           $24,906,584         $368,402         $25,274,986  
                                     ===========        ==============       ==========       ============= 
</TABLE>                                        
See notes to financial statements.              

                                      -4-
<PAGE>
 
ML FUTURES INVESTMENTS 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
    ------------
    
    ML Futures Investments L.P. (the "Partnership") was organized under the
    Delaware Revised Uniform Limited Partnership Act on November 14, 1988 and
    commenced trading activities on March 1, 1989. The Partnership 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 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 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 in the Partnership. MLIP and each Limited Partner
    share in the profits and losses of the Partnership in proportion to their
    respective interests in it.
    
    MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
    to manage the Partnership's assets, and allocates and reallocates the
    Partnership's assets among existing, replacement and additional Advisors.
    
    Estimates
    ---------

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

    Commodity futures, options on futures and forward contract transactions are
    recorded on the trade date and open contracts are reflected in net
    unrealized profit (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 change in unrealized in the
    Statements of Income. Fair value is based on quoted market prices on the
    exchange or market on which the contract is traded.
    
    Operating Expenses
    ------------------
  
    MLIP pays for all routine operating costs (including legal, accounting,
    printing, postage and similar administrative expenses) of the Partnership.
    MLIP 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.

                                      -5-

<PAGE>
 
    Income Taxes
    ------------

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

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

    The Partnership will terminate on December 31, 2008 or at an earlier date
    if certain conditions occur, as well as under certain other circumstances,
    as 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 0.50 of 1% per annum below
    the prevailing 91-day Treasury bill rate up to the full prevailing 91-day
    Treasury bill rate. Merrill Lynch 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 rate monthly
    brokerage fee equal to .833 of 1% (a 10% annual rate) of the Partnership's
    month-end Net Assets. Effective January 1, 1996, the percentage was reduced
    to .813 of 1% (a 9.75% annual rate) of the Partnership's month-end assets
    and the Partnership began to pay MLIP a monthly administrative fee of .021
    of 1% (a .25% annual rate) of the Partnership's month-end assets (this
    recharacterization had no economic effect on the Partnership). Month-end
    assets are not reduced for purposes of calculating brokerage commissions and
    administrative fees by any accrued brokerage commissions, administrative
    fees, profit shares 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 $89, $119 and $16, respectively (not including,
    in calculating round-turn equivalents, forward contracts on a futures-
    equivalent basis).

                                      -6-
<PAGE>
 
    MLF pays the Advisors annual Consulting Fees ranging up to 4% of the
    Partnership's average month-end assets allocated to them for management,
    after reduction for a portion of the brokerage commissions.

    The Partnership trades forward contracts through a Foreign Exchange Service
    Desk (the "F/X Desk") established by MLIP, 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 MLIP 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 fee) is equal to or better than
    the best price (including the service fee) 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.

    The Partnership's F/X Desk service fee and EFP differential costs have, to
    date, totaled no more than 0.25 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.
    These Advisory Agreements generally terminate one year after they are
    entered into, subject to certain renewal rights exercisable by the
    Partnership. The Advisors determine the commodity futures 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 MLIP.

    In the case of the Trading LLC, as defined in Note 5, the Trading LLC
    entered into the Advisory Agreement with the Advisor.

    Profit shares, generally ranging from 15% to 25% of any New Trading Profit,
    as defined, recognized by each Advisor considered individually irrespective
    of the overall performance of the Partnership, as of the end of each
    calendar quarter will be paid by the Partnership to each of the Advisors.
    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 of such Units.

                                      -7-
<PAGE>
 
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, 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.  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 based
    upon the Partnership's interest in the Trading LLC. Fair value is equal to
    the market value of the net assets of the Trading LLC. The resulting
    difference between cost and fair value is reflected on the Statements of
    Income as income or loss from investment.

    At December 31, 1996 the Partnership had an investment in the ML Chesapeake
    Diversified L.L.C.

    Total revenues and fees with respect to such investment is set forth as
    follows:
<TABLE>
<CAPTION>  
                                                                                   Income    
            Total          Brokerage        Administrative         Profit           from
           Revenue        Commissions            Fees              Shares        Investment
       --------------  -----------------  -------------------  -------------  ---------------- 
          <S>              <C>              <C>                    <C>           <C> 
          $222,948         $130,335             $3,342             $5,558          $83,713
</TABLE> 

6.  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 Rate and Stock Indices      $2,081,406            $5,512,504
    Commodities                            (242,177)               37,644
    Currencies                              774,656               689,813
    Energy                                1,271,994               452,971
    Metals                               (1,010,821)           (1,484,080)
                                     ---------------       ----------------
    
                                         $2,875,058            $5,208,852
                                     ===============       ================
</TABLE> 

                                      -8-
<PAGE>
 
    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 by the Partnership, calculating the Net Asset
    Value of their respective Partnership accounts as of the close of business
    on each day and reviewing outstanding positions for over-concentrations--
    both on an Advisor-by-Advisor and on an overall Partnership basis. While the
    General Partner does not itself intervene in the markets to hedge or
    diversify the Partnership's market exposure, the General Partner may urge
    Advisors to reallocate positions, or itself reallocate Partnership assets
    among Advisors (although typically only as of the end of a month) in an
    attempt to avoid over-concentrations. However, such interventions are
    unusual. Except in cases in which it appears that an Advisor has begun to
    deviate from past practice or trading policies or to be trading erratically,
    the General Partner's basic risk control procedures consist simply of the
    ongoing process of Advisor monitoring and selection with the market risk
    controls being applied by the Advisors themselves.

    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 Income. 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 Rate                                                               
      and Stock                                                                 
      Indices        $23,233,479          $4,981,659         $233,892,908          $62,165,959
    Commodities          435,505             167,947            8,944,541            1,780,506
    Currencies         4,329,546           8,191,986           22,533,449           23,426,238
    Energy                  -                   -               4,790,522                 -
    Metals             1,788,579           3,100,766            8,506,013            3,974,356
                   --------------     ---------------     ----------------      ---------------
                                                                                
                     $29,787,109         $16,442,358         $278,667,433          $91,347,059
                   ==============     ===============     ================      ===============
</TABLE> 

    Substantially all of the Partnership's derivative instruments outstanding as
    of December 31, 1996, expire within one year.

                                      -9-
<PAGE>
 
    The contract/notional value of the Partnership's open 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 Traded      $23,668,984            $ 7,277,636                $253,233,552               $ 67,844,388
       Non-
        Exchange-Traded       6,118,125              9,164,722                  25,433,881                 23,502,671
                          --------------         ------------------         ---------------          --------------------
                                                                                                
                            $29,787,109            $16,442,358                $278,667,433                $91,347,059
                          ==============         ==================         ===============          ====================
</TABLE> 

    The average fair value of the 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 & Forwar                
                     -------------------  -------------------      -------------------   ------------------              
    <S>              <C>                  <C>                      <C>                   <C>                             
    Interest Rate                                                                                                        
      and Stock                                                                                                          
      Indices            $122,569,950         $56,764,487              $180,800,308            $20,386,155               
    Commodities             5,564,897           1,483,611                 7,173,549              1,204,905               
    Currencies             28,363,350          29,061,432                34,970,478             31,883,215               
    Energy                  2,652,894              41,980                 1,605,552                528,913               
    Metals                 10,444,937           6,273,290                 8,842,427              5,677,989               
                      ----------------     ---------------          ----------------        ---------------              
                                                                                                                         
                         $169,596,028         $93,624,800              $233,392,314            $59,681,177               
                      ================     ===============          ================        ===============        
</TABLE> 

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

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

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

                                      -10-
<PAGE>
 
    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.

    As of December 31, 1996 and 1995, $13,229,366 and $18,809,783 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 the 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                $157,089            $154,714              $1,852,088           $1,527,947
        Traded                                                                          
       Non-                                                                             
        Exchange-                                                                       
        Traded                  119,573               8,988                 160,590               (5,372)
                          --------------     ---------------      ------------------     -----------------
                                                                                         
                               $276,662            $163,702              $2,012,678           $1,522,575
                          ==============     ===============      ==================     =================
</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.

7.  SUBSEQUENT EVENTS

    On January 2, 1997 the Partnership acquired an interest in ML Sjo Prospect
    L.L.C. (see Note 5 for a general description of investments).

    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.

                                      -11-
<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
                           ML Futures Investments L.P.

                                      -12-