**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-K**

 
| **ý****Annual Report Pursuant to Section 13 or 15(d)** |
|------------------------------------------------------------------|
| **of the Securities Exchange Act of 1934**                       |
|                                                             |
| **For the fiscal year ended: December 31,  2005**           |
|                                                             |
| **or**                                                           |
|                                                             |
| **o****Transition Report Pursuant to Section 13**           |
| **or 15(d) of the Securities Exchange Act of  1934**        |

 

**Commission file number:  0-25000**

 

**ML PRINCIPAL PROTECTION L.P.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **13-3750642 (Registrant)** |
|---------------------------------|------------|-----------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer            |
| incorporation or organization)  |       | Identification No.)         |

 

**c/o Merrill Lynch Alternative Investments LLC**

**Princeton Corporate Campus**

**800 Scudders Mill Road – Section 2-G**

**Plainsboro, New Jersey 08536**

(Address of principal executive offices)

 

Registrant’s telephone number, including area code:  **(609) 282-6996**

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

 

Securities registeredpursuant to Section 12(g) of the Act: **LimitedPartnership Units**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer as defined by Rule 405 ofthe Securities Act.

 

Yes  o    No  ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15 (d) of the Act.

 

Yes  o    No  ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes  ý    No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. Check one:

 
|   | Large accelerated filer  o | Accelerated filer  o | Non-accelerated filer  ý |
|--------|--------------------------------------|--------------------------------|-----------------------------------------|

 

Indicate by check markwhether registrant is an accelerated filer (as defined by Rule 12b-2 ofthe Act).

 

Yes  o    No  ý

 

Indicate by check markwhether registrant is a shell company (as defined by Rule 12b-2 of theAct).

 

Yes  o    No  ý

 

As of February 1,2006, limited partnership units with an aggregate value of $10,357,809 wereoutstanding and held by non-affiliates.

 

**Documents Incorporated by Reference**

 

The registrant’s 2005Annual Report and Report of Independent Registered Public Accounting Firm, theannual report to security holders for the fiscal year ended December 31, 2005,is incorporated by reference into Part II, Item and Part IV hereof and filed asan Exhibit herewith. The Annual Report is available free of charge bycontacting Merrill Lynch Alternative Investments Client Services at1-877-465-8435.

 

 

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**MLPRINCIPAL PROTECTION L.P.**

 

ANNUAL REPORT FOR 2005 ON FORM 10-K

 

Table ofContents

 
| PART I   |
|---------------|
|          |   |   |
| Item 1.       | Business | 1 |
|          |   |   |
| Item 1A.      | Risk factors | 7 |
|          |   |   |
| Item 2.       | Properties | 9 |
|          |   |   |
| Item 3.       | Legal Proceedings | 9 |
|          |   |   |
| Item 4.       | Submission of Matters to a Vote of Security  Holders | 9 |
|          |   |   |
| PART II  |
|          |   |   |
| Item 5.       | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 10 |
|          |   |   |
| Item 6.       | Selected Financial Data | 11 |
|          |   |   |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 15 |
|          |   |   |
| Item 7A.      | Quantitative and Qualitative Disclosures  about Market Risk | 20 |
|          |   |   |
| Item 8.       | Financial Statements and Supplementary Data | 21 |
|          |   |   |
| Item 9.       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure | 21 |
|          |   |   |
| Item 9A.      | Controls and Procedures | 21 |
|          |   |   |
| Item 9B.      | Other Information | 21 |
|          |   |   |
| PART III |
|          |   |   |
| Item 10.      | Directors and Executive Officers of the  Registrant | 22 |
|          |   |   |
| Item 11.      | Executive Compensation | 23 |
|          |   |   |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters | 24 |
|          |   |   |
| Item 13.      | Certain Relationships and Related Transactions | 24 |
|          |   |   |
| Item 14.      | Principal Accountant Fees and Services | 25 |
|          |   |   |
| PART IV  |
|          |   |   |
| Item 15.      | Exhibits and Financial Statement Schedules | 26 |

 

i

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##### **PART I**

 

**Item 1:****   Business**

 

(a)           General Developmentof Business:

 

ML Principal Protection L.P. (the “Partnership”) was organized underthe Delaware Revised Uniform Limited Partnership Act on January 3, 1994 andcommenced trading activities on October 12, 1994. The Partnership engagescurrently, through an investment in a limited liability company (see below) inthe speculative trading of a portfolio of futures options on futures andforward contracts on a wide range of commodities. The Partnership’s objectiveis achieving, through speculative trading, substantial capital appreciation,over time.

 

Merrill Lynch Alternative Investments LLC (“MLAI”) is the generalpartner of the Partnership and is a wholly-owned subsidiary of Merrill LynchInvestment Managers LP (“MLIM”) which, in turn, is an indirect wholly-ownedsubsidiary of Merrill Lynch & Co. Inc. (“Merrill Lynch”). Prior to December1, 2005, the general partner of the partnership was Merrill Lynch InvestmentManagers LLC (“MLIM LLC”). Merrill Lynch, Pierce, Fenner & SmithIncorporated (“MLPF&S”), a wholly-owned subsidiary of Merrill Lynch, is thePartnership’s commodity broker.

 

The multi-advisorfunds (the “Multi-Advisor Funds”) sponsored by MLAI allocate their assets to anumber of the same independent advisors (the “Advisors”). MLIM (the predecessorgeneral partner of the Partnership) consolidated the trading accounts of nineof its Multi-Advisor Funds as of June 1, 1998. The consolidation was achievedby having these Multi-Advisor Funds close their existing trading accounts andinvest in ML Multi-Manager Portfolio LLC, a Delaware limited liability company,(“MM LLC”) which opened a single account with each Advisor selected.

 

Effective afterthe close of business on December 31, 2004, MM LLC liquidated and thePartnership invested in Global Horizons I L.P. formerly ML Global Horizons L.P.(“Global Horizons”). Global Horizons is a MLAI managed limited partnership thathas an investment strategy similar to MM LLC.

 

The Units were sold in separate Series, each of which has its own NetAsset Value. All Series trade pursuant to the same Advisor combination, butbecause they begin trading at different times they have different Net AssetValues and may have different percentages of their capital invested in Global Horizons.

 

As of December 31, 2005, the Partnership’s capitalization was$10,232,424 and the Net Asset Value per Series 2005 Unit (the combined initialSeries of Units), originally $1.000 as of January 1, 2005, had fallen to $0.9621.

 

From January 1, 2003 through December 31, 2004, the highest month-endNet Asset Value of a Series A Unit was $1.1504 (February 29, 2004) and the lowest was $1.0196 (March 31, 2003).

 

Through December 31, 2002, the highest month-end Net Asset Value of aSeries A Unit before combination was $151.52 (adding back $29.50 inDistributions) (December 31, 2002) and the lowest was $101.04 (December 31,1994).

 

The Partnership was a “principal protected” commodity pool. MerrillLynch provided the guarantee described below under Item 1(c), “NarrativeDescription of Business — Merrill Lynch’s ‘Principal Protection’ Undertaking tothe Partnership” that all Units of any given Series will have a Net Asset Value— after payment of all fixed-rate annual as well as discretionary distributionson such Units, in the case of Units sold on or prior to May 1, 1997 — of atleast their initial $100 subscription price as of a specified date after theirissuance (the “Principal Assurance Date” for such Series, seven years afterissuance for all outstanding Series sold before May 1, 1997 and five yearsafter issuance for all Series sold thereafter). This guarantee did not preventsubstantial losses, but rather serves only as a form of “stop loss,” limitingthe maximum loss which investors who retain their Units until such Units’Principal Assurance Date can incur. In order to protect Merrill Lynch from anyliability under its guarantee, MLIM LLC imposed substantial opportunity costson the Partnership by deleveraging its trading, retaining a substantial portionof the Partnership’s assets in the Partnership rather than investing suchassets in for allocation to trading. If the Net Asset Value per Unit of aSeries declined to 110% or less of the present value of $100, plus anyfixed-rate annual distributions due on such Series, discounted back from thePrincipal Assurance Date, MLIM LLC would terminate trading with respect to suchSeries altogether in order to ensure that Merrill Lynch incurred no financialobligation to the Partnership under Merrill Lynch’s guarantee of the minimumNet Asset Value per Unit of such Series. The Principal Assurance Dates forSeries A through S came to term on or before December 31, 2004 and were notrenewed. The

 

----

 

above Series Units remainoutstanding, with 100% of their assets allocated to trading, without any “principalprotection” feature and no longer pay annual distributions.

 

(b)           FinancialInformation about Segments:

 

The Partnership’s business constitutes only one segment for financialreporting purposes, i.e*.,* a speculativecommodity pool. The Partnership does not engage in sales of goods or services.

 

(c)           NarrativeDescription of Business:

 

***General***

 

The Partnership traded, through its investment in Global Horizons, infutures, options on futures, and forwards contract in the major sectors of theworld economy with the objective of achieving substantial capital appreciationover time. For the periods presented prior to the close of business on December31, 2004, the Partnership traded its investments through MM LLC.

 

MLAI is the Partnership’s trading manager, with responsibility forselecting Advisors to manage Global Horizon’s assets, allocating andreallocating Global Horizon’s assets among different Advisors.

 

Considered as a whole, the Partnership, through its investment inGlobal Horizons (and former investment in MM LLC), trades in a diversifiedrange of international markets. Certain Advisors considered individually,concentrate primarily on trading in a limited portfolio of markets. Thecomposition of the “sectors” included in the Partnership’s portfolio variessubstantially over time.

 

MLAI may, from time to time, direct certain individual Advisors tomanage their Partnership accounts as if they were managing more equity than theactual capital allocated to them.

 

One of the objectives of the Partnership is to provide diversificationfor a limited portion of the risk segment of the Limited Partners’ portfolios.Commodity pool performance has historically often demonstrated a low degree ofperformance correlation with traditional stock and bond holdings. Since itbegan trading, the Partnership’s returns have, in fact, frequently beennon-correlated with the United States stock and bond markets.

 

2

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***Merrill Lynch’s “Principal Protection”Undertaking to the Partnership***

 

Merrill Lynch agreed to contribute sufficient capital to thePartnership so that it will have adequate funds, after adjusting for allliabilities to third parties, that the Net Asset Value per Unit of each Serieswill be no less than $100 as of the Principal Assurance Date for such Series(after the payment of all distributions, if any, on Units of such Series). Thisguarantee, which is effective with respect to any given Series as of thePrincipal Assurance Date for such Series, is a guarantee only of a return of aninvestor’s initial investment (plus distributions, if any). It is not aguarantee against the loss of the time value of such investment or a guaranteeof profit. The Principal Assurance Dates for Series A through S came to term onor before December 31, 2004, respectively and were not renewed. Currently allUnits have no principal protection feature and no longer pay annualdistributions.

 

***Operation of a Series after its PrincipalAssurance Date***

 

MLAI may determine to dissolve a Series as of its Principal AssuranceDate, to extend the Merrill Lynch guarantee for a certain period of time(resetting the minimum Net Asset Value per Unit of such Series guaranteed byMerrill Lynch) or to continue to operate such Series without a principalprotection feature. Series A through S continue to operate without the “principalprotection” feature.

 

***Consolidation of Series***

 

MLIM LLC aftermaking the previously announced distributions for Series F and prior to the openingof business on January 2, 2003, consolidated those series that had come to termon or before December 31, 2002 (Series A through F and K through N) into a newseries, Series A 2003, with a $1.00 per Unit Net Asset Value. The aggregate NetAsset Value of each investor’s new Units was equal to the aggregate Net AssetValue of their original Units as of December 31, 2002. The consolidation had noeconomic effect on the investors. MLIM LLC contributed $5,499 to thePartnership, the amount necessary due to the effects of rounding, to insure allinvestors received Units equal in value to their original holdings at December31, 2002. The following is a listing of the number of new Series A 2003 Unitseach investor received for each Unit of their original series holding.

 
| ** ** | ** ** | **Number**   | ** ** |
|------------|------------|--------------|------------|
| **Series** | ** ** | **of Units** | ** ** |
| A          |       | 122.021960   |       |
| B          |       | 117.269077   |       |
| C          |       | 115.242141   |       |
| D          |       | 112.085339   |       |
| E          |       | 111.088709   |       |
| F          |       | 104.084994   |       |
| K          |       | 123.799970   |       |
| L          |       | 120.674078   |       |
| M          |       | 122.310644   |       |
| N          |       | 117.973383   |       |

 

Immediately following the distribution announcement and prior to theopening of business on January 2, 2004, Series G, H, and O through R, thoseseries that had come to term on or before December 31, 2003, but after December31, 2002, were consolidated into a new series, Series 2004, with a $1.00 perUnit Net Asset Value. The aggregate Net Asset Value of each investor’s newUnits is equal to the aggregate Net Asset Value of their original Units atDecember 31, 2003. The consolidation had no adverse economic effect on theinvestors. MLIM LLC contributed $314 to the Partnership, the amount necessarydue to the effects of rounding to insure all investors received Units equal invalue to their original holdings at December 31, 2003. The following is a listof the number of new Units each investor received of Series 2004 for each Unitof their original series holding.

 

3

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| ** ** | ** ** | **Number**   | ** ** |
|------------|------------|--------------|------------|
| **Series** | ** ** | **of Units** | ** ** |
| G          |       | 110.859969   |       |
| H          |       | 102.336331   |       |
| O          |       | 129.904347   |       |
| P          |       | 132.546751   |       |
| Q          |       | 122.531124   |       |
| R          |       | 123.779041   |       |

 

Prior to the opening of business on January 2, 2005, Series A 2003,Series 2004 and Series S were consolidated into a new series, Series 2005, witha $1.00 Unit Net Asset Value. The aggregate Net Asset Value of each investor’snew Units is equal to the aggregate Net Asset Value of their original Units atDecember 31, 2004. The consolidation had no adverse economic effect on theinvestors. MLIM LLC contributed $733 to the Partnership, the amount necessarydue to the effects of rounding, to insure that all investors received Unitsequal in value to their original holdings at December 31, 2004. The issuance ofthe new series was exempt from registration pursuant to Section 4(2) of theSecurities Act of 1933. The following is a listing of the number of new Units eachinvestor received of Series 2005 for each Unit of their original seriesholding.

 
| ** ** | ** ** | **Number**   | ** ** |
|------------|------------|--------------|------------|
| **Series** | ** ** | **of Units** | ** ** |
| A 2003     |       | 1.108721     |       |
| 2004       |       | 1.005565     |       |
| S          |       | 125.174168   |       |

 

***Use of Proceeds and Interest Income***

 

Market Sectors.

 

The Partnership trades, through its investment in Global Horizons (andits former investment in MM LLC), in a diversified group of markets under thedirection of multiple independent Advisors. These Advisors can, and do, fromtime to time, materially alter the allocation of their overall tradingcommitments among different market sectors. Except in the case of certaintrading programs which are purposefully limited in the markets which theytrade, there is essentially no restriction on the commodity interests which maybe traded by any Advisor or the rapidity with which an Advisor may alter itsmarket sector allocations.

 

Market Types.

 

The Partnership trades, through its investments in Global Horizons (andits former investment in MM LLC),  on avariety of United States and foreign futures exchanges. Substantially all ofthe Partnership’s off-exchange trading takes place in the highly liquid,institutionally based currency forward markets.

 

*Many of the Partnership’s currency trades are executed inthe spot and forward foreign exchange markets (the “FX Markets”) where thereare no direct execution costs. Instead, the participants, banks and dealers, inthe FX Markets take a “spread” between the prices at which they are prepared tobuy and sell a particular currency and such spreads are built into the pricingof the spot or forward contracts with the Partnership. In its exchange offutures for physical (“EFP”) trading, the Partnership acquires cash currencypositions through banks and dealers. The Partnership pays a spread when itexchanges these positions for futures. This spread reflects, in part, thedifferent settlement dates of the cash and the futures contracts, as well asprevailing interest rates, but also includes a pricing spread in favor of thebanks and dealers, which may include a Merrill Lynch entity.*

 

As in the case of its market sector allocations, the Partnership’scommitments to different types of markets — U.S. and non-U.S., regulated andnon-regulated — differ substantially from time to time as well as over time.

 

4

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Custody of Assets.

 

All of the Partnership’s assets are currently held in customer accountsat MLPF&S.

 

Interest paid by Merrill Lynch on thePartnership’s U.S. Dollar and Non U.S. Dollar Assets 

 

Allof the Partnership’s U.S. dollar assets invested in Global Horizons were maintained at MLPF&S. On assets held inU.S. dollars, Merrill Lynch credited Global Horizons with interest at the prevailing 91-day U.S.Treasury bill rate. Global Horizons wascredited with interest on any of its assets and net gains actually held byMerrill Lynch in non-U.S. dollar currencies at a prevailing local rate receivedby Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excessof the interest, which Merrill Lynch paid to Global Horizons from possession of such assets.

 

Merrill Lynch charged the Partnership through Global Horizons, MerrillLynch’s cost of financing realized and unrealized losses on GlobalHorizons,  non-U.S. dollar-denominatedpositions**.**

 

Prior to the opening of business on January 1, 2005, the Partnershipinvested through MM LLC. MLPF&S’s and Merrill Lynch’s arrangements with MMLLC were similar to the arrangements with Global Horizons as outlined in thepreceding two paragraphs.

 

***Charges***

 

The following table summarizes the charges incurred by the Partnershipduring 2005, 2004, and 2003 allocated from MM LLC.

 
| ** **            | ** ** | **2005**   | ** ** | **2004**         | ** ** | **2003**   | ** ** |
|-----------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **            | ** ** | ** ** | ** ** | **% of Average** | ** ** | ** ** | ** ** | **% of Average** | ** ** | ** ** | ** ** | **% of Average** | ** ** |
| ** **            | ** ** | **Dollar** | ** ** | **Month-End**    | ** ** | **Dollar** | ** ** | **Month-End** | ** ** | **Dollar** | ** ** | **Month-End** | ** ** |
| **Charges**           | ** ** | **Amount** | ** ** | **Net Assets**   | ** ** | **Amount** | ** ** | **Net Assets** | ** ** | **Amount** | ** ** | **Net Assets** | ** ** |
|                  |       |       |       |             |       |       |       |   |   |   |   |   |   |
| Brokerage Commissions |       | $          | 792,797    |             | 6.97       | %          | $          | 974,435 |   | 7.05 | % | $ | 1,166,016 |   | 7.01 | % |
| Administrative Fee    |       | 27,338     |       | 0.24             | %          | 33,581     |       | 0.24 | % | 40,027 |   | 0.24 | % |
| Profit Shares         |       | 55,410     |       | 0.49             | %          | 216,979    |       | 1.57 | % | 437,466 |   | 2.63 | % |
| Total                 |       | $          | 875,545    |             | 7.70       | %          | $          | 1,224,995 |   | 8.86 | % | $ | 1,643,509 |   | 9.88 | % |

 

The Partnership’s average month-end Net Assets during 2005, 2004, and2003 equaled $11,368,154, $13,826,437, and $16,639,849, respectively.

 

During 2005, the Partnership earned directly or primarily through itsinvestment in Global Horizons $353,414 in interest income, or approximately3.11% of the Partnership’s average month-end Net Assets. During 2004 and 2003,the Partnership earned directly or primarily through its investment in MM LLC$173,439 and $180,856 in interest income, or approximately 1.25% and 1.09% ofthe Partnership’s average month-end Net Assets.

 

5

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**Description of Current Charges**

 
| **Recipient**        |   | **Nature  of Payment**    |   | **Amount  of Payment**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|----------------------|--------|---------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| MLPF&S           |   | Brokerage Commissions     |   | A flat-rate monthly commission of up to 0.604 of 1% (a 7.25% annual  rate) of the Partnership’s month-end assets committed to trading.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                 |   |                      |   | During 2005, 2004 and 2003, the Partnership paid round-turn  commissions through its investment in Global Horizons and formerly MM LLC.  The estimated aggregate round turn commission rate for Global Horizons for  the year ended December 31, 2005 was $39. The estimated aggregate round turn  commission rate for MM LLC for the years ended December 31, 2004 and 2003 was  $45 and $53, respectively.                                                                                                                                                  |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| MLPF&S           |   | Use of Partnership assets |   | Merrill Lynch may derive certain economic benefit from the deposit of  certain of the Partnership’s U.S. dollar Available Assets.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| MLAI                 |   | Administrative Fees       |   | The Partnership pays MLAI a monthly administrative fee equal to 0.021  of 1% (a 0.25 of 1% annual rate) of the Partnership’s month-end total assets.  MLAI pays the Partnership’s routine administrative costs.                                                                                                                                                                                                                                                                                                                                     |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Other Counterparties |   | Bid-ask spreads           |   | Bid-ask spreads on forward and related trades.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Advisors             |   | Profit Shares             |   | All Advisors can receive quarterly or annual Profit Shares ranging  from 20% to 25% (depending on the Advisor) of any New Trading Profit achieved  by their Partnership account. Profit Shares are also paid upon the net  reallocation of assets away from an Advisor and the redemption of Units. New  Trading Profit is calculated separately in respect of each Advisor,  irrespective of the overall performance of the Partnership. The Partnership  may pay substantial Profit Shares during periods when it is incurring  significant overall losses. |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Advisors             |   | Consulting Fees           |   | MLPF&S pays the Advisors annual Consulting Fees ranging up to  2.5% of the Partnership’s average month-end assets allocated to them for  management, after reduction for a portion of the brokerage commissions  accrued with respect to such assets.                                                                                                                                                                                                                                                                                                |
|                 |   |                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| MLPF&S; Others   |   | Extraordinary expenses    |   | Actual costs incurred; none paid to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

6

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***Regulation***

 

MLAI, the Advisors and MLPF&S are each subject to regulation by theCommodity Futures Trading Commission (the “CFTC”) and the National FuturesAssociation (“NFA”). Other than in respect of its periodic reportingrequirements under the Securities Exchange Act of 1934, and the registration ofthe Units for continuous public distribution under the Securities Act of 1933,the Partnership itself is generally not subject to regulation by the Securitiesand Exchange Commission (the “SEC”). However, MLAI itself is registered as an “investmentadviser” under the Investment Advisers Act of 1940. MLPF&S is alsoregulated by the SEC and the National Association of Securities Dealers.

 

(i) through (xii) — not applicable.

 

(xiii)  The Partnership has noemployees.

 

 (d)          FinancialInformation about Geographic Areas:

 

The Partnership does not engage in material operations in foreigncountries, nor is a material portion of the Partnership’s revenue derived fromcustomers in foreign countries. However, the Partnership trades through itsinvestment in Global Horizons (and formerly through MM LLC), on a number offoreign commodity exchanges. The Partnership does not engage in the sales ofgoods or services.

 

**Item 1A: RiskFactors**

 

**Past****Performance Not Necessarily Indicative of Future Results**

 

Past performance is not necessarily indicative offuture results. Neither the Advisors’ nor the Partnership’s past performancemay be representative of how they or it, respectively, may trade in the future.

 

**Volatile Markets; Highly Leveraged Trading**

 

Futures and forward trading is highly leveraged, andmarket price levels are volatile and materially affected by unpredictablefactors such as weather and governmental intervention. The combination ofleverage and volatility creates a high degree of risk.

 

**Substantial Charges**

 

The Partnership is subject to substantial charges.

 

The incentive compensation paid to the Advisors isbased on the individual performance of each Advisor, not the overallperformance of the Partnership. Historically, the Partnership has paidsubstantial incentive compensation to certain Advisors during periods when theperformance of the Partnership as a whole was breakeven or unprofitable.

 

**Importance****of General Market Conditions**

 

Overall market or economic conditions — which neitherMLAI (the “General Partner”) nor any Advisor can predict or control — have amaterial effect on performance. Furthermore, such overall conditions canadversely affect the performance of numerous Advisors at or about the sametime, despite their implementing different and independent strategies.Consequently, the multi-Advisor structure of the Partnership does not assurethat its performance will not be adversely affected by future market oreconomic conditions.

 

**Combining Independent Trading Strategies**

 

Combining independent trading strategies involvessubstantial opportunity costs, as one Advisor’s profits are frequently offsetby another Advisor’s losses. Different Advisors often take opposite positionsfor the Partnership, eliminating the profit potential of the combinedpositions.

 

**Systematic****Strategies**

 

Most of the Partnership’s assets have been allocatedsince inception to Advisors which rely on technical, systematic strategies. Thewidespread use of technical trading systems frequently results in numerousmanagers attempting to execute similar trades at or about the same time,altering trading patterns and affecting market liquidity. Furthermore, the

 

7

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profit potential of trend-following systems may bediminished by the changing character of the markets, which may make historicalprice data (on which technical programs are based) only marginally relevant tofuture market patterns.

 

**Discretionary****Strategies**

 

Certain of the Partnership’s Advisors arediscretionary rather than systematic traders. Discretionary trading managersmay be prone to emotionalism and a lack of discipline in their trading. Relyingon subjective trading judgment may produce less consistent results than thoseobtained by more systematic approaches.

 

**Increased****Assets Under Management**

 

There appears to be a tendency for the rates of returnachieved by managed futures advisors to decline as assets under management increase.None of the Advisors has agreed to limit the amount of additional equity whichit may manage, and most of them are at or near their all-time high in assetsunder management.

 

**No Assurance of Advisors’ Continued Services;Competition for Advisors**

 

There is no assurance that any Advisor will be willingor able to continue to provide advisory services to the Partnership. There issevere competition for the services of qualified Advisors, and the Partnershipmay not be able to retain satisfactory replacement or additional Advisors onacceptable terms. The General Partner must allocate Advisor availability amongits different partnerships for which the general partner has authority,including the Partnership, and, accordingly, may not at all times select forthe Partnership those Advisors which the General Partner would otherwisebelieve to be in its best interests.

 

**Changes in Trading Strategy**

 

An Advisor may make certain changes in its tradingstrategies without the knowledge of the General Partner.

 

**Illiquid Markets**

 

Certain positions held by the Partnership may becomeilliquid, preventing an Advisor from acquiring positions otherwise indicated byits strategy or making it impossible for an Advisor to close out positionsagainst which the market is moving.

 

**Trading on Non-U.S. Exchanges**

 

The Advisors trade extensively on non-U.S. exchanges.These exchanges are not regulated by any United States governmental agency. ThePartnership could incur substantial losses trading on foreign exchanges towhich it would not have been subject had the Advisors limited their trading toU.S. markets.

 

The profits and losses derived from trading foreignfutures and options will generally be denominated in foreign currencies;consequently, the Partnership will be subject to a certain degree ofexchange-rate risk in trading such contracts.

 

**The Partnership Could Lose Assets and Have ItsTrading Disrupted Due to the Bankruptcy of Brokers**

 

The Partnership is subject to the risk of its clearingbroker, exchange or clearinghouse insolvency. Partnership assets could be lostor impounded during lengthy bankruptcy proceedings. Were a substantial portionof the Partnership’s capital tied up in a bankruptcy, the General Partner mightsuspend or limit trading, perhaps causing the Partnership to miss significantprofit opportunities. No Partnership managed by the General Partner has everlost any assets due to the bankruptcy or default of a broker, exchange orclearinghouse, but there can be no assurance that this will not happen in the future.

 

8

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**Item 2:****   Properties**

 

The Partnership does not use any physical properties in the conduct ofits business.

 

The Partnership’s offices are the offices of MLAI (Merrill LynchAlternative Investments LLC, Princeton Corporate Campus, 800 Scudders Mill Road- Section 2G, Plainsboro, New Jersey 08536). MLAI performs administrativeservices for the Partnership from MLAI’s offices.

 

**Item 3:****   LegalProceedings**

 

Neither the Partnership MLIM LLC nor MLAI has ever been the subject ofmaterial litigation. Merrill Lynch is the 100% indirect owner of MLAI, MLIM,MLPF&S and all other Merrill Lynch entities involved in the operation ofthe Partnership. Merrill Lynch as well as certain of its subsidiaries andaffiliates have been named as defendants in civil actions, arbitrationproceedings and claims arising out of their respective business activities.Although the ultimate outcome of these actions cannot be predicted at this timeand the results of legal proceedings cannot be predicted with certainty, it isthe opinion of management that the result of these matters will not bematerially adverse to the business operations or financial condition of MLAI orthe Partnership.

 

**Item 4:****   Submission of Matters to aVote of Security Holders**

 

None.

 

9

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##### **PART II**

 

**Item 5:****   Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Securities**

 

Item 5(a)

 

(a)           Market Information:

 

There is no established public trading market for the Units, nor is itanticipated that one will develop. Limited Partners may redeem Units as of theend of each month at Net Asset Value, subject to certain early redemptioncharges. Units redeemed prior to the Principal Assurance Date were not entitledto any benefits under the Merrill Lynch, Inc. guarantee.

 

(b)           Holders:

 

As of December 31, 2005, there were 525 holders of Units, includingMLAI.

 

(c)           Dividends:

 

For Series issued on or prior to May 1, 1997, the Partnership madeannual fixed-rate distributions, payable irrespective of profitability, of$3.50 per Unit. Discretionary distributions of up to 50% of any DistributableNew Appreciation, as defined, recognized as of each twelve-month anniversary ofthe issuance of each Series of Units, subject to an annual limit of 4% of theNet Asset Value per Unit of each Series as of the beginning of the precedingtwelve-month period could also be made. Distributions, whether fixed-rate ordiscretionary, do not reduce the $100 minimum Net Asset Value per Unit assuredto investors as of the Principal Assurance Date for their Series of Units.

 

(d)           Recent Sales of Unregistered Securities;Uses of Proceeds From Registered Securities:

 

Not applicable.

 

As of December 31, 2005, 2004 and 2003, the Partnership had made thefollowing distributions:

 
| ** ** | ** ** | ** ** | **Distribution** | ** ** | **Fixed-Rate**   | ** ** | **Discretionary** | ** ** |
|------------|------------|------------|------------------|------------|------------------|------------|-------------------|------------|
| ** ** | **Series** | ** ** | **Date**         | ** ** | **Distribution** | ** ** | **Distribution**  | ** ** |
|       |       |       |             |       |             |       |              |       |
| 2005       |       |       |             |       |             |       |              |       |
|       | none       |       |             |       |             |       |              |       |
|       |       |       |             |       |             |       |              |       |
| 2004       |       |       |             |       |             |       |              |       |
|       | none       |       |             |       |             |       |              |       |
|       |       |       |             |       |             |       |              |       |
| 2003       |       |       |             |       |             |       |              |       |
|       | Series F   |       | 1/1/2003         |       | $                | 3.50       |              | $          | — |   |
|       | Series G   |       | 4/1/2003         |       | 3.50             |       | —            |       |
|       | Series H   |       | 7/1/2003         |       | 3.50             |       | —            |       |
|            |            |            |                  |            |                  |            |                   |            |  |  |

 

The Partnership does not make any distributions on any Series of Unitissued subsequent to May 1, 1997.

 

(d)           SecuritiesAuthorized for Issuance Under Equity Compensation Plans:

 

Not applicable.

 

Recent Sales of Unregistered Securities; Usesof Proceeds From Registered Securities.

 

Not applicable.

 

10

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Item 5(b)

 

Not applicable.

 

Item 5(c)

 

Not applicable.

 

**Item 6:****   Selected Financial Data**

 

The following selected financial data has been derived from the auditedfinancial statements of the Partnership:

 
| ** **                | ** ** | **For the Year** | ** ** | **For the Year** | ** ** | **For the Year** | ** ** | **For the Year** | ** ** | **For the Year** | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **Ended**        | ** ** | **Ended**        | ** ** | **Ended**        | ** ** | **Ended**        | ** ** | **Ended**        | ** ** |
| ** **                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **Income Statement Data** | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** | **2001**         | ** ** |
|                      |       |             |       |             |       |             |       |             |       |             |       |
| TRADING REVENUES:         |       |             |       |             |       |             |       |             |       |             |       |
|                      |       |             |       |             |       |             |       |             |       |             |       |
| Trading profit (loss)     |       |             |       |             |       |             |       |             |       |             |       |
| Realized                  |       | $                | (22,414    | )                | $          | 1,783,605        |       | $                | 3,053,369  |             | $          | 1,544,945 |   | $ | 2,827,944 |   |
| Change in unrealized      |       | 50,090           |       | (626,506         | )          | (28,995          | )          | 404,007          |       | (1,336,518       | )          |
| Settlement proceeds       |       | —           |       | —           |       | —           |       | 308,142          |       | —           |       |
| Total trading revenues    |       | 27,676           |       | 1,157,099        |       | 3,024,374        |       | 2,257,094        |       | 1,491,426        |       |
|                      |       |             |       |             |       |             |       |             |       |             |       |
| INVESTMENT INCOME:        |       |             |       |             |       |             |       |             |       |             |       |
| Interest                  |       | 353,414          |       | 173,439          |       | 180,856          |       | 364,235          |       | 847,680          |       |
|                      |       |             |       |             |       |             |       |             |       |             |       |
| EXPENSES:                 |       |             |       |             |       |             |       |             |       |             |       |
|                      |       |             |       |             |       |             |       |             |       |             |       |
| Brokerage commissions     |       | 792,797          |       | 974,435          |       | 1,166,016        |       | 1,142,131        |       | 1,351,049        |       |
| Administrative fees       |       | 27,338           |       | 33,581           |       | 40,027           |       | 38,071           |       | 45,035           |       |
| Profit Shares             |       | 55,410           |       | 216,979          |       | 437,466          |       | 273,852          |       | 250,522          |       |
| Total expenses            |       | 875,545          |       | 1,224,995        |       | 1,643,509        |       | 1,454,054        |       | 1,646,606        |       |
| Net Investment Loss       |       | (522,131         | )          | (1,051,556       | )          | (1,462,653       | )          | (1,089,819       | )          | (798,926         | )          |
| Net Income (Loss)         |       | $                | (494,455   | )                | $          | 105,543          |       | $                | 1,561,721  |             | $          | 1,167,275 |   | $ | 692,500 |   |

 

11

----

 
| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **Balance Sheet Data**                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** | **2001**         | ** ** |
|                                   |       |             |       |             |       |             |       |             |       |             |       |
| Aggregate Net Asset Value (All Series) |       | $                | 10,232,424 |             | $          | 13,053,547       |       | $                | 15,441,696 |             | $          | 17,440,562 |   | $ | 21,305,280 |   |
|                                   |       |             |       |             |       |             |       |             |       |             |       |
| Net Asset Value per Unit               |       |             |       |             |       |             |       |             |       |             |       |
|                                   |       |             |       |             |       |             |       |             |       |             |       |
| Series 2005                            |       | $                | 0.9621     |             | n/a        |             | n/a        |             | n/a        |             | n/a        |   |
| Series A 2003                          |       | n/a              |       | $                | 1.1087     |             | $          | 1.1015           |       | n/a              |       | n/a |   |
| Series A                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 122.02     | (2)              | $          | 112.51 | (3) |
| Series B                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 117.26     | (2)              | $          | 111.80 | (3) |
| Series C                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 115.22     | (2)              | $          | 107.78 | (3) |
| Series D                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 112.09     | (2)              | $          | 106.95 | (3) |
| Series E                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 111.09     | (2)              | $          | 108.39 | (3) |
| Series F                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 107.58     | (2)              | $          | 107.16 | (3) |
| Series 2004                            |       | n/a              |       | $                | 1.0056     |             | $          | 110.82           | (1)        | $                | 106.25     | (2) | $ | 105.91 | (3) |
| Series H                               |       | n/a              |       | n/a              |       | $                | 102.33     | (1)              | $          | 101.65           | (2)        | $ | 104.16 | (3) |
| Series K                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 123.67     |             | $          | 117.09 |   |
| Series L                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 120.53     |             | $          | 114.12 |   |
| Series M                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 122.23     |             | $          | 115.73 |   |
| Series N                               |       | n/a              |       | n/a              |       | n/a              |       | $                | 117.85     |             | $          | 111.59 |   |
| Series O                               |       | n/a              |       | n/a              |       | $                | 129.90     |             | $          | 118.17           |       | $ | 111.91 |   |
| Series P                               |       | n/a              |       | n/a              |       | $                | 132.55     |             | $          | 120.55           |       | $ | 114.15 |   |
| Series Q                               |       | n/a              |       | n/a              |       | $                | 122.52     |             | $          | 111.44           |       | $ | 105.53 |   |
| Series R                               |       | n/a              |       | n/a              |       | $                | 123.76     |             | $          | 112.54           |       | $ | 106.57 |   |
| Series S                               |       | n/a              |       | $                | 125.17     |             | $          | 124.76           |       | $                | 113.44     |   | $ | 107.41 |   |

 

----

(1) Net of aggregatedistribution of $28.00 per unit on Series G Units and $28.00 on Series H Units.

 

(2) Net of aggregate distribution of $29.50 per unit on Series A Units,$31.50 on Series B Units, $28.50 on Series C Units, $26.50 on Series D Units,$26.50 on Series E Units, $24.75 on Series F Units, $24.50 on Series G Unitsand $24.50 on Series H Units.

 

(3) Net of aggregate distribution of $29.50 per unit on Series A Units,$28.00 on Series B Units, $25.00 on Series C Units, $23.00 on Series D Units,$23.00 on Series E Units, $21.25 on Series F Units, $21.00 on Series G Unitsand $21.00 on Series H Units.

 

12

----

 

**ML PRINCIPAL PROTECTION L.P.**

**December 31, 2005**

 

*Type of Pool:* Multi-Advisor; Selected Advisor/Publicly-Offered/”Principal Protected”(1)

*Inception of Trading:*   October 12, 1994

*Aggregate Subscriptions*:$164,914,392

*Current Capitalization:*   $10,232,424

*Worst Monthly Drawdown:(2)*   (4.04)% (03/03)

*Worst Peak-to-Valley Drawdown:(3)*   (8.76)% (03/04-09/04)

 

Rates ofReturn are presented on a composite, not a Series-by-Series, basis.

 

**Monthly Rates of Return(4)**

 
| **Month**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| January                        |       | (3.41    | )%         | 0.54     | %          | 3.09     | %          | (2.17    | )%         | (0.32    | )%         |
| February                       |       | 1.08     |       | 3.85     |       | 2.93     |       | (1.90    | )          | 0.92     |       |
| March                          |       | 0.26     |       | (0.15    | )          | (4.04    | )          | 1.21     |       | 3.76     |       |
| April                          |       | (2.81    | )          | (3.51    | )          | 0.62     |       | (0.97    | )          | (2.08    | )          |
| May                            |       | 0.06     |       | (1.28    | )          | 4.95     |       | 1.00     |       | (0.55    | )          |
| June                           |       | 1.21     |       | (3.09    | )          | (1.52    | )          | 2.85     |       | 0.22     |       |
| July                           |       | (1.67    | )          | (0.28    | )          | (1.40    | )          | 1.56     |       | 0.04     |       |
| August                         |       | 1.40     |       | (0.67    | )          | (0.37    | )          | 3.41     |       | 0.61     |       |
| September                      |       | (0.19    | )          | (0.07    | )          | 0.43     |       | 1.29     |       | 0.84     |       |
| October                        |       | (1.15    | )          | 2.38     |       | 2.39     |       | (1.83    | )          | 3.52     |       |
| November                       |       | 1.93     |       | 3.06     |       | (0.08    | )          | (0.27    | )          | (4.00    | )          |
| December                       |       | (0.43    | )          | 0.13     |       | 2.74     |       | 2.41     |       | (0.01    | )          |
|                           |       |     |       |     |       |     |       |     |       |     |       |
| Compound Annual Rate of Return |       | (3.80    | )%         | 0.64     | %          | 9.85     | %          | 6.59     | %          | 2.75     | %          |

 

----

(1) Pursuant to applicable CFTC regulations, a “Multi-Advisor”Partnership is defined as one that allocates no more than 25% of its Assets toany single manager. The Partnership does not currently allocate more than 25%of its Trading Assets to any single Advisor but may do so in the future;consequently, it is referred to as a”Multi-Advisor; Selected Advisor”Partnership. Certain funds, including funds sponsored by MLAI, are structuredso as to guarantee to investors that their investment will be worth no lessthan a specified amount (typically, the initial purchase price) as of a datecertain after the date of investment. The CFTC refers to such funds as “PrincipalProtected.”  The Merrill Lynch Guaranteeand ML- related deleveraging of the Partnership’s trading provides the “PrincipalProtection” feature of the Partnership. The “Principal Protection” feature nolonger applies to Series A through S as of December 31, 2004.

 

(2) Worst Monthly Drawdown represents the largest negative Monthly Rateof Return experienced by the Partnership since January 1, 2001; a Drawdown ismeasured on the basis of month-end Net Asset Value only, and does not reflectintra-month figures.

 

(3) Worst Peak-to-ValleyDrawdown represents the greatest percentage decline from a month-end cumulativeMonthly Rate of Return since January 1, 2001 without such cumulative MonthlyRate of Return being equaled or exceeded as of a subsequent month-end. Forexample, if the Monthly Rate of Return was (1)% in each of January andFebruary, 1% in March and (2)% in April, the Peak-to-Valley Drawdown wouldstill be continuing at the end of April in the amount of approximately (3)%, whereasif the Monthly Rate of Return had been approximately 3% in March, the Peak-to-ValleyDrawdown would have ended as of the end of February at approximately the (2)%level.

 

 (4) Monthly Rate of Return isthe net performance of the Partnership during the month of determination(including interest income and after all expenses accrued or paid) divided bythe total equity of the Partnership as of the beginning of such month.

 

13

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MONTH-END NET ASSET VALUE PER SERIES AUNIT (SERIES A 2003 FOR JANUARY 1, 2003 THROUGH DECEMBER 31, 2004 AND SERIES2005 THEREAFTER)

 
| ** ** | ** ** | **Jan.** | ** ** | **Feb.** | ** ** | **Mar.** | ** ** | **Apr.** | ** ** | **May** | ** ** | **June** | ** ** | **July** | ** ** | **Aug.** | ** ** | **Sept.** | ** ** | **Oct.** | ** ** | **Nov.** | ** ** | **Dec.** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|
| 2001       |       | $        | 112.97     | (c)      | $          | 113.94   | (c)        | $        | 117.81     | (c)     | $          | 115.64   | (c)        | $        | 115.09     | (c)      | $          | 115.36    | (c)        | $        | 115.43     | (c)      | $          | 116.10   | (c)        | $ | 117.02 | (c) | $ | 118.36 | (d) | $ | 112.55 | (d) | $ | 112.51 | (d) |
| 2002       |       | $        | 109.41     | (d)      | $          | 106.60   | (d)        | $        | 108.32     | (d)     | $          | 106.88   | (d)        | $        | 108.25     | (d)      | $          | 112.26    | (d)        | $        | 114.29     | (d)      | $          | 119.93   | (d)        | $ | 121.70 | (d) | $ | 119.18 | (d) | $ | 118.81 | (d) | $ | 122.02 | (d) |
| 2003       |       | $        | 1.0331     |     | $          | 1.0654   |       | $        | 1.0196     |    | $          | 1.0262   |       | $        | 1.0790     |     | $          | 1.0620    |       | $        | 1.0472     |     | $          | 1.0434   |       | $ | 1.0480 |   | $ | 1.0729 |   | $ | 1.0721 |   | $ | 1.1015 |   |
| 2004       |       | $        | 1.1075     |     | $          | 1.1504   |       | $        | 1.1486     |    | $          | 1.1082   |       | $        | 1.0940     |     | $          | 1.0602    |       | $        | 1.0573     |     | $          | 1.0502   |       | $ | 1.0495 |   | $ | 1.0744 |   | $ | 1.1072 |   | $ | 1.1087 |   |
| 2005       |       | $        | 0.9659     |     | $          | 0.9763   |       | $        | 0.9788     |    | $          | 0.9514   |       | $        | 0.9519     |     | $          | 0.9634    |       | $        | 0.9474     |     | $          | 0.9607   |       | $ | 0.9589 |   | $ | 0.9479 |   | $ | 0.9662 |   | $ | 0.9621 |   |

 

----

(c) After reduction for the first, second, third, fourth, fifth andsixth annual distribution and the $3.50 per Series A Unit distribution made onOctober 1, 2001.

 

(d) After reduction for the first, second, third, fourth, fifth, sixthand seventh annual distribution and the $3.50 per Series A Unit distributionmade on October 1, 2002.

 

14

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**Item 7:****   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

***Results of Operations***

 

# *Advisor Selections*

 

The Partnership’s resultsof operations depend on MLAI’s ability to select Advisors and the Advisors’ability to trade profitably. MLAI’s selection procedures and trading leveraginganalysis, as well as the Advisors’ trading methods, are confidential, so thatsubstantially the only available information relevant to the Partnership’sresults of operations is its actual performance record to date. Because of thespeculative nature of its trading, the Partnership’s past performance is notnecessarily indicative of its future results.

 

MLAI has madefrequent changes to both trading asset allocations among Advisors and Advisorcombinations as well as from time to time adjusting the percentage of thePartnership’s assets committed to trading.

 

MLAI’s decision toterminate or reallocate assets among Advisors is based on a combination of numerousfactors. Advisors are, in general, terminated primarily for unsatisfactoryperformance, but other factors – for example, a change in MLAI’s or an Advisor’smarket outlook, apparent deviation from announced risk control policies,excessive turnover of positions, changes in principals, commitment of resourcesto other business activities, etc. — may also have a role in the termination orreallocation decision. The market judgment and experience of MLAI’s principalsis an important factor in its asset allocation decisions.

 

MLAI has notimetable or schedule for making Advisor changes or reallocations, andgenerally makes a medium- to long-term commitment to all Advisors selected.There can be no assurance as to the frequency or number of Advisor changes thatmay take place in the future, or as to how long any of the current Advisorswill continue to manage assets for the Partnership.

 

General

 

A number of theAdvisors are trend following traders, whose programs do not attempt to predictprice movements. No fundamental economic supply or demand analyses are used bythese Advisors, and no macroeconomic assessments of the relative strengths ofdifferent national economies or economic sectors are evaluated. Instead, theprograms apply proprietary computer models to analyzing past market data, andfrom this data alone attempt to determine whether market prices are trending.These traders base their strategies on the theory that market prices reflectthe collective judgment of numerous different traders and are, accordingly, thebest and most efficient indication of market movements. However, there arefrequent periods during which fundamental factors external to the marketdominate prices.

 

If a trend-followingAdvisor’s models identify a trend, they signal positions, which follow it. Whenthese models identify the trend as having ended or reversed, these positionsare either closed out or reversed. Due to their trend-following character,these Advisors’ programs do not predict either the commencement or the end of aprice movement. Rather, their objective is to identify a trend early enough toprofit from it and detect its end or reversal in time to close out thePartnership’s positions while retaining most of the profits made from followingthe trend.

 

In analyzing theperformance of trend-following programs, economic conditions, political events,weather factors, etc. are not directly relevant because only market data hasany input into trading results. Furthermore, there is no direct connectionbetween particular market conditions and price trends. There are so manyinfluences on the markets that the same general type of economic event may leadto a price trend in some cases but not in others. The analysis is furthercomplicated by the fact that the programs are designed to recognize onlycertain types of trends and to apply only certain criteria of when a trend hasbegun. Consequently, even though significant price trends may occur, if thesetrends are not comprised of the type of intra-period price movements, which theprograms are, designed to identify, a trend-following Advisor may miss thetrend altogether.

 

In the case of theAdvisors who implement strategies, which rely more on discretion and marketjudgment, it is not possible to predict, from their performance during pastmarket cycles, how they will respond to future market events.

 

15

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***Performance Summary***

 

This performance summaryis an outline description of how the Partnership performed in the past, not necessarilyany indication of how it will perform in the future. In addition, the generalcauses to which certain price movements are attributed may or may not in facthave caused such movements, but simply occurred at or about the same time.

 

The Advisors, as agroup, are unlikely to be profitable in markets in which such trends do notoccur. Static or erratic prices are likely to result in losses. Similarly,unexpected events (for example, a political upheaval, natural disaster orgovernmental intervention) can lead to major short-term losses, as well asgains.

 

While there can be no assurance that any Advisor will be profitable,under any given market condition, markets in which substantial and sustainedprice movements occur typically offer the best profit potential for thePartnership.

 

*2005*

 

Though an overall loss was realized for the year, the Partnership’soverall trading performance was profitable with trading in metals and stockindices contributing the most profits.

 

Trading in the metals sector posted the most profits for the year. Longpositions in base and precious metals contributed to profits early in the yearbut detracted from performance in the second quarter. Long metal positions inthe third quarter, specifically copper, contributed to profits as global growthincreased speculation that demand and therefore, prices would increase. Metalscontinued their upward trend through the latter part of the year as demandremained strong for base and precious metals.

 

Trading in stock indices posted solid trading profits as well for theyear despite losses posted in the first half of the year. Losses occurred earlyin the year due to a trend reversal from long global equities to short globalequities. Trading in stock indices contributed positively to performance in thesecond half of the year with long positions in global equities contributing themost as global markets rallied. Trading in the Nikkei, DAX and Europeanequities posted strong gains as they rallied at year end.

 

The interest rate sector posted gains for the year primarily due toprofits posted in the first half of the year despite this sector detractingfrom performance for the Partnership in the second half of the year. In thebeginning of the year the interest rate sector was the best performing sectoras the Partnership benefited from long U.S. dollar positions versus the Euroand long Euro and Japanese fixed incomes. Long positions in the ten-year Germanbund also contributed to gains. Mid-year a rally in bond prices attributed tolosses as did long positions in Japanese and European government bonds. Tradingin German bunds further detracted from performance. Gains were posted inOctober primarily due to short exposures to U.S. and European yield curves, asbond prices fell over concerns that the central banks would continue to raiserates; however these profits were not enough to outweigh losses postedthroughout the latter part of the fourth quarter. Interest rates detracted asthe U.S. yield curve inverted, resulting in a challenging environment fortrading managers. Additionally, the market perception that the Federal Reservewould end its interest rate increase sooner rather than later sparked a selloff of the U.S. dollar. Furthermore, many global long-term interest rates movedlower, causing negative returns for select short positions, particularly to theGerman bund and British gilt.

 

Trading in the energy sector also posted gains for the Partnershipdespite the sector detracting from performance in the fourth quarter. Gainswere experienced in the energy sector as the Partnership benefited from longpositions in crude oil and gas as these industries profited. During the secondquarter, crude oil and heating oil declined as crude oil fell in price, whichnegatively impacted trend followers. Trading in the energy sector posted thelargest gains in the third quarter. Long energy positions in the entire energycomplex, as well as a rally in the energy sector due to Hurricane Katrinaattributed to those gains. Natural gas retreated from its record high pricesset in September, negatively impacting trading managers. Natural gas continuedits decline throughout the fourth quarter detracting from performance.

 

Trading in the agricultural sector posted slight losses for thePartnership for the year, with the first and latter part of the yearcontributing to profits and mid-year detracting from performance. During thefirst quarter, gains were experienced from long positions in cattle and hogmarkets. Gains were posted due to coffee, which experienced a lack of supplyand a growing demand. Gains in exposure to hogs and soybeans were not enough tooffset trading losses in other commodities. Long exposure to soymeal furtherattributed to losses. Short exposure to corn and long exposure to London

 

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coffee detracted fromperformance in the third quarter. Agriculture posted small gains at the end ofthe year as long sugar positions rallied due to an expectation of reducedsupplies.

 

Trading in the currency sector posted the largest losses for thePartnership for the year, despite small gains posted in the second quarter.Losses in the beginning of the year were due to a trend reversal from shortU.S. dollar positions to long U.S. dollar positions. Long Japanese yen andSwiss franc positions also experienced losses. With the U.S. Federal Reserveexpressing concern about inflation, investors predicted that interest rates andthe U.S. dollar would rise. This caused losses as investors fled from emergingcurrencies. In the second quarter, long positions in the British pound and theAustralian dollar contributed to gains. Short positions to the British poundand Swiss franc enabled the Partnership to capitalize on trend reversals in themarket in the latter half of the second quarter. China’s revaluation of theyuan caused volatility across the currency markets. The U.S. dollar weakenedbased on higher oil prices and the potential Federal Reserve slowdown inSeptember. British pounds detracted from performance in the foreign sector. TheU.S. dollar rallied against most major currencies, primarily the yen, whichattributed to losses. Higher yielding carry trades reversed causing losses tobe posted as well. The year ended with currencies on the upswing. Short Euro andSwiss franc and long Mexican peso positions contributed to performance.

 

*2004*

 

During 2004 all of thePartnership’s assets were invested in MM LLC. The Partnership received tradingprofits as an investor in MM LLC. The following commentary of 2004 describesthe trading results for MM LLC during the year.

 

The Partnership’s overalltrading performance was successful with trading in the interest rate sectorproving to be the most profitable.

 

The interest rate sector was the most profitable for the Partnership,despite choppy trading conditions early in the year. Long exposure early in theyear to most of the major global yield curves proved to generate positiveresults though overall exposure was light compared to historical exposure. Bondmarkets were fairly range bound during the second quarter however, yields onthe U.S. ten-year note reached their highest levels since July 2002. U.S.Treasury markets reacted to the employment data during the third quarter with astrong sell-off, which caused the sector to reduce the long exposure to changeto a net short bias. The Federal Reserve raised key interest rates by 25 basispoints on September 21st and softer economic data eventually pushed longer-termmaturities higher by the end of the quarter. The U.S. fixed income markets,particularly the front end, reversed their sell-off, which started in November,but rallied during the first week of December, only to reverse that trendduring the last two weeks of the year.

 

The energy sector had the second highest gains for this Partnership.The upward trend in crude oil prices and related products continued in theirsecular bull market trend, in a very volatile fashion. Colder than expectedwinter months in the Northeast and Midwest U.S., instability with Russian suppliers,fears of worldwide terrorism, and active hurricane season in the U.S., allcontributed to keeping prices high throughout the year. The end of the year didsee a pull back from the all time highs in energy prices, due to bothfundamental and technical factors, such as increased stockpiles and speculatorstrading the market.

 

Trading in agricultural commodities posted gains for the Partnership.In the beginning of the year, the USDA cut its forecast of the crop supply forboth soybeans and corn, which sent prices surging. This long term rallycontinued through the second quarter on strong demand from Asia and lowerestimates of supply from South America. Demand from China and diminishingsupplies had kept prices high for quite some time. Small gains were posted inJune, with cotton prices dropping allowing short exposures to generate profits.Corn also posted a significant decline during the month, which caused theportfolio to adjust positions from long to short. The USDA gave a low cropestimate as there were forecasts of an early freeze following a cool summer andslow crop development all surprising the market and posting losses as the shortpositions were covered. Cocoa had a volatile move in November as the politicalsituation in the Ivory Coast deteriorated. The year ended with fundamentalfactors continuing to drive coffee prices higher, reaching over $1 per pound, alevel not seen since July 2000.

 

The metals sector was not profitable for the Partnership. Despite gainsin the first quarter and third quarter, the year was not profitable. The secondquarter generated significant losses in both industrial and precious metals.The U.S. dollar strengthening and the fear of higher interest rates which wouldcurb growth, caused base and precious metals to sell-off. Industrial metals,particularly copper, added to performance in the third quarter while exposureto precious metals contributed a small gain. Copper rallied primarily based onincreasing demand from China and tight supply conditions. The year ended withthe metals sector posting a loss, as gains in long industrials were outweighedby losses in long precious metal exposure. Gold experienced its first declinein six months.

 

17

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Stock indices posted a loss for the Partnership. The market was choppythroughout the year making trading difficult. The Partnership was able torealize some gains in the beginning of the year on long exposure to globalequities from momentum based and fundamental models performing well. However,stock indices posted a loss that exceeded the gains from earlier in the firstquarter. In April, the Japanese Nikkei experienced a sudden deterioration,which sent that market plunging approximately 5% in one day. Losses in the U.S.outweighed moderate gains in some of the international markets late in thethird quarter. However, stock indices posted a strong gain the end of the year,as markets continued the upward trend on positive economic data, a decline inenergy prices and increased overall confidence. Gains were made across theU.S., Asia and Europe.

 

The currency sector was the least profitable for the Partnership. Thecurrency markets continued its long trend of a weakening U.S. dollar. However,trading was very choppy and gains generated in the beginning of the firstquarter were lost. Early U.S. dollar strength reversed towards the end of thefirst quarter and at the quarter’s close the U.S. dollar fell to a four yearlow against the Japanese yen. The U.S. dollar rebounded at the beginning of thesecond quarter only to weaken at the end of the quarter. The currency marketsremained range bound versus the U.S. dollar throughout the third quarter. Theyear ended with the U.S. dollar continuing to decline against various other currencies.

 

*2003*

 

During 2003 all of thePartnership’s assets were invested in MM LLC. The Partnership received tradingprofits as an investor in MM LLC. The following commentary of 2003 describesthe trading results for MM LLC during the year.

 

The Partnership’s overalltrading performance was successful with trading in the currency sector provingto be the most profitable. The Partnership experienced gains in all sectors.

 

The currency sector hadthe most significant gains for the year. The weakening U.S. dollar continued todecline as it has for over a year and the Partnership was well positioned tocapitalize on its U.S. dollar positions against other currencies. The largestgains versus the U.S. dollar during January and February were with theAustralian dollar and Canadian dollar. In March, on hopes that the war withIraq would be short, the U.S. dollar strengthened and returned some of theprofits earned early in the year. The U.S. dollar depreciated against mostmajor currencies throughout most of the second quarter. The currency marketsjudged the developments in the Middle East as negative for the U.S. economy andtrade, and the U.S. dollar sold off against most major currencies. The U.S.dollar continued to weaken significantly during the month of May when TreasurySecretary Snow indicated he was comfortable with current declines and that acheaper U.S. dollar would increase exports. The U.S. dollar strengthenedagainst most major currencies late June, reversing some earlier profits. Duringthe middle of the third quarter, the U.S. dollar appreciated relative to theEuropean currencies. In the fourth quarter the U.S. dollar declined againstother major currencies, as concerns over the widening trade deficits persisted.Gains in trading the Australian dollar and Euro outweighed smaller losses inother markets during the fourth quarter.

 

Trading in stock indicesposted a gain for the year. The market was choppy throughout the year makingtrading difficult. The Partnership was able to realize some gains in January onshort positions as most indices recorded three-month lows. At the beginning ofthe third quarter, the equities were fairly quiet with strong gains beinggenerated in trading global stock indices, primarily the Nikkei 225. During themiddle of the third quarter, the losses in the S&P 500 and Dow Jonesfutures outweighed gains in other markets. However, the Japanese Nikkei was thestrongest performer as it gained over 8% on strong economic numbers. InDecember, a profit was posted as long exposure to global equities from momentumbased models performed well as equities closed the year out with positiveperformance. The main drives to performance in this sector were the DAX and theS&P500.

 

The metals sector wasalso profitable for the year. Gold drove profits in January as it continued itsrun up. The general perception of risks in the financial markets and thegeopolitical situation unfolding was a main driver for the gold market inJanuary. Gold generated losses in March through June as gold’s appeal as a safeinvestment diminished. At the closing of the third quarter, both the industrialand metal complex sectors benefited from increases in valuation. In November,gold rallied and prices reached a six-year high and was one of the main driversof performance for the sector. The year ended with strong physical demand fromAsia accelerating the up trend in base metals, particularly, nickel and copper,which benefited our long exposure to these markets.

 

Interest rate futureswere profitable for the year. Significant gains in February and May as well asin July due to the massive sell-off in bonds, offset losses throughout theremainder of the year. U.S. and European bonds rallied until the beginning ofthe third quarter when the U.S. bond market suffered losses after the U.S.government announced its

 

18

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intentions to borrow a record amount to finance thehuge deficit. European bonds were weaker, but generally outperformed U.S. bondsduring such period. Despite a record $60 billion refunding program in the U.S.,bonds managed a timid recovery after making new lows. Trading conditions remainchoppy in this sector and overall exposure continues to remain low, since noclear trends have emerged at the end of the year.

 

Energy was a profitablesector for the year. In February, the best performing month, natural gas pricesrose nearly 40% in a single day in connection with expected severely coldweather and supply shortages. This helped the Partnership retain profits asprices declined in crude oil and natural gas in March. The markets in April andMay were dominated by the developments in the Middle East, especially OPEC’sreaction to the developments in Iraq. Production was not being resumed asinitially estimated even though the destruction of the oilfields was smallerthan expected. Natural gas was very volatile during June. During the middle ofthe third quarter, crude oil and most of the other energy markets were almostunchanged with high volatility throughout this period. The volatility wasmainly due to the uncertainty in supply and estimates of demand that wereprojected to increase. This was partly offset by expectations of the possibleresumption of oil production by Iraq. Strong gains were generated tradingunleaded gas and crude oil, only to be reversed in September. The year endedwith losses posted in the fourth quarter primarily due to milder weather in theU.S., which lead to a downward trend in natural gas. Prices were volatile afterthe arrest of Saddam Hussein and by a potential increase of OPEC quotas.

 

Trading in agriculturalcommodities posted small gains for the year. Livestock markets were off inFebruary as Russia imposed an import limit to help its domestic production.Sugar was to blame for losses in March as prices reversed and hit a two-monthlow. Gains in April, mainly from soybeans, which rallied due to revisions incrop estimates and weather overseas, were overshadowed by losses in May andJune due to changes in crop estimates and a volatile livestock market. In thebeginning of the third quarter, short exposure in corn generated strong profitsas the U.S. government forecasted a record crop for this year. Supply anddemand continued to drive the cattle market as prices rose sharply in thebeginning of the third quarter. Weather drove prices up due to very little rainin the Midwest, where a substantial portion of the U.S. crops grow. By the endof the third quarter, supply concerns drove the corn and soybean markets due tothe fact the USDA reported a better than expected yield on corn and loweryields on soybeans. The fourth quarter began with posted gains as grain exportdata was very bullish for most grain markets and soybeans. Later in the fourthquarter, the discovery of the first case of mad cow disease contributed to theposting of losses.

 

#### **VariablesAffecting Performance**

 

The principal variables, which determine the net performance of thePartnership, are gross profitability and interest income. Gross profitabilityis, in turn, effected by the percentage of the Partnership’s assets allocatedto trading.

 

Duringall periods set forth under “Selected Financial Data,” the interest rates inmany countries were at unusually low levels. The low interest rates in theUnited States (although higher than in many other countries) negativelyimpacted revenues because interest income is typically a major component of thePartnership’s profitability. In addition, low interest rates are frequentlyassociated with reduced fixed income market volatility, and in static marketsthe Partnership’s profit potential generally tends to be diminished. On theother hand, during periods of higher interest rates, the relativeattractiveness of a high risk investment such as the Partnership may be reducedas compared to high yielding and much lower risk fixed-income investments.

 

The Partnership’s Brokerage Commissions and Administrative Fees are aconstant percentage of the Partnership’s assets allocated to trading and totalassets, respectively. The only Partnership costs (other than the insignificantcurrency trading costs) which are not based on a percentage of the Partnership’sassets (allocated to trading or total) are the Profit Shares payable to theAdvisors on an Advisor-by-Advisor basis. Gross profitability is in turneffected by the percentages of the Partnership’s assets allocated to trading.During periods when Profit Shares are a high percentage of net trading gains,it is likely that there has been substantial performance non-correlation amongthe Advisors (so that the total Profit Shares paid to those Advisors which havetraded profitably are a high percentage, or perhaps even in excess, of thetotal profits recognized, as other Advisors have incurred offsetting losses,reducing overall trading gains but not the Profit Shares paid to the successfulAdvisors) — suggesting the likelihood of generally trendless, non-consensusmarkets.

 

Unlike manyinvestment fields, there is no meaningful distinction in the operation of thePartnership between realized and unrealized profits. Most of the contractstraded by the Partnership are highly liquid and can be closed out at any time.

 

Except in unusual circumstances, factors (e.g. regulatory approvals,cost of goods sold, employee relations and the like) which often materiallyaffect an operating business have virtually no impact on the Partnership.

 

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The Different Series ofUnits

 

During 2005 all Series of Units were invested in Global Horizons I L.P.and were subject to the same method of calculating their fees (prior to theclose of business on December 31, 2004, all Series of Units were invested in MMLLC). Despite these fundamental similarities among the different Series,because the Series begin trading at different times they are likely, as aresult of trading profits and losses, to pay different Profit Shares (althoughto the same group of Advisors) and have different Net Asset Values.

 

Liquidity; CapitalResources

 

The Partnership sells no securities other than the Units. ThePartnership borrows, through Global Horizons, only to a limited extent and onlyon a strictly short-term basis in order to finance losses on non-U.S. dollardenominated trading positions pending the conversion of the Partnership’s U.S.dollar deposits. These borrowings are at a prevailing short-term rate in therelevant currency. They have been immaterial to the Partnership’s operations todate and are expected to continue to be so.

 

Substantially all of the Partnership’s assets are held in cash, throughGlobal Horizons. The Net Asset Value of the Partnership’s cash is not affectedby inflation. However, changes in interest rates could cause periods of strongup or down price trends, during which the Partnership’s profit potentialgenerally increases. Inflation in commodity prices could also generate pricemovements which the strategies might successfully follow.

 

Except in very unusual circumstances, the Partnership should be able toclose out any or all of its open trading positions and liquidate any or all ofits securities holdings quickly and at market prices. This permits an Advisorto limit losses, as well as reduce market exposure on short notice should itsstrategies indicate doing so. In addition, because there generally is a readilyavailable market value for the Partnership’s positions and assets, thePartnership’s monthly Net Asset Value calculations typically are precise, andinvestors need only wait ten business days to receive the full redemptionproceeds of their Units.

 

(The Partnership has no off-balance sheet arrangements or contractualobligations of the type described in Items 303(a)(4) and 303(a)(5) ofRegulation S-K.)

 

**Item 7A:  Quantitative andQualitative Disclosures about Market Risk**

 

Not applicable.

 

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**Item 8:****   Financial Statements andSupplementary Data**

 
| Selected Quarterly Financial Data |
|-----------------------------------|
| ML Principal  Protection L.P.     |

 

Net Income by Quarter

Eight Quarters through December 31, 2005

 
| ** **                 | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                 | ** ** | **2005**    | ** ** | **2005**    | ** ** | **2005**    | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2004**    | ** ** | **2004**    | ** ** | **2004**    | ** ** |
| Total Income               |       | $           | 228,543    |        | $          | 148,164     |       | $           | 30,867     |        | $          | (26,484     | )          | $           | 1,072,523  |        | $          | 153,800 |   | $ | (1,003,314 | ) | $ | 1,107,529 |   |
| Total Expenses             |       | 194,280     |       | 202,112     |       | 226,916     |       | 252,237     |       | 360,335     |       | 287,895     |       | 121,114     |       | 455,651     |       |
| Net Income (Loss)          |       | $           | 34,263     |        | $          | (53,948     | )          | $           | (196,049   | )           | $          | (278,721    | )          | $           | 712,188    |        | $          | (134,095 | ) | $ | (1,124,428 | ) | $ | 651,878 |   |
|                       |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Net Income (Loss) per Unit |       | $           | 0.0032     |        | $          | (0.0047     | )          | $           | (0.0165    | )           | $          | (0.0221     | )          | $           | 0.0588     |        | $          | (0.0107 | ) | $ | (0.0876 | ) | $ | 0.0470 |   |

 

The financial statementsrequired by this Item are included in Exhibit 13.01.

 

The supplementary financial information (“information about oil and gasproducing activities”) specified by Item 302 of Regulation S-K is notapplicable.

 

**Item 9:****   Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

There were no changes inor disagreements with independent auditors on accounting and financialdisclosure.

 

**Item 9A: Controls andProcedures**

 

Merrill LynchAlternative Investments LLC, the General Partner of ML Principal ProtectionL.P., with the participation of the General Partner’s Chief Executive Officerand the Chief Financial Officer, has evaluated the effectiveness of the designand operation of its disclosure controls and procedures with respect to thePartnership as of the end of the period covered by this annual report, and,based on their evaluation, have concluded that these disclosure controls andprocedures are effective. Additionally, there were no significant changes inthe Partnership’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

**Item 9B:  OtherInformation**

 

Not applicable.

 

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**PART III**

 

**Item 10:  Directors and ExecutiveOfficers of the Registrant**

 

10(a) and 10(b) Identification of Managers and Executive Officers:

 

As a limited partnership, the Partnership itself has no officers ordirectors and is managed by MLAI. Trading decisions are made by the Advisors onbehalf of the Partnership. Trading decisions are made by the advisors on behalfof the Partnership. MLAI promotes the Partnership and its controlling person.

 

The managers and executive officers of MLAI and their respectivebusiness backgrounds are as follows.

 
| **Robert M. Alderman**  |   | Chief Executive Officer, President and Manager        |
|-------------------------|--------|-------------------------------------------------------|
|                    |   |                                                  |
| **Steven B. Olgin**     |   | Vice President, Chief Operating Officer and Manager   |
|                    |   |                                                  |
| **Michael L. Pungello** |   | Vice President, Chief Financial Officer and Treasurer |
|                    |   |                                                  |
| **Jeffrey F. Chandor**  |   | Manager                                               |

 

Mr. Alderman was born in 1960. Mr. Robert M. Alderman is ChiefExecutive Officer, President and Manager of MLAI. Mr. Alderman is a ManagingDirector of Merrill Lynch Global Private Client and global head of Retail Salesand Business Management for Alternative Investments. Prior to re-joiningMerrill Lynch and the International Private Client Group in 1999, he was apartner in the Nashville, Tennessee based firm of J.C. Bradford & Co. wherehe was the Director of Marketing, and a National Sales Manager for PrudentialInvestments. Mr. Alderman first joined Merrill Lynch in 1987 where he workeduntil 1997. During his tenure at Merrill Lynch, Mr. Alderman has held positionsin Financial Planning, Asset Management and High Net Worth Services. He receivedhis Master’s of Business Administration from the Carroll School of ManagementBoston College and a Bachelor of Arts from Clark University.

 

Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, ChiefOperating Officer and a Manager of MLAI. He joined MLAI in July 1994 and becamea Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was anassociate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduatedfrom The American University with a Bachelor of Science in Business Administrationand a Bachelor of Arts in Economics. In 1986, he received his Juris Doctor fromthe John Marshall Law School. Mr. Olgin is a member of the Managed FundsAssociation’s Government Relations Committee and has served as an arbitratorfor the National Futures Association. Mr. Olgin is a member of the IllinoisBar.

 

Michael L. Pungello was born in 1957. Mr. Pungello is a Vice President,Chief Financial Officer and Treasurer of MLAI. He was First Vice President andSenior Director of Finance for Merrill Lynch’s Operations, Services andTechnology Group from January 1998 to March 1999. Prior to that, Mr. Pungellospent over 18 years with Deloitte & Touche LLP, and was a partner in theirfinancial services practice from June 1990 to December 1997. He graduated fromFordham University in 1979 with a Bachelor of Science in Accounting andreceived his Master’s of Business Administration in Finance from New YorkUniversity in 1987.

 

Jeffrey F. Chandor was born in 1942. Mr. Chandor isthe Global Sales Director of the General Partner. Mr. Chandor became a Managerof the General Partner on April 1, 2003. He was a Senior Vice President,Director of Sales, Marketing and Research and a Director of Merrill LynchInvestment Partners, Inc., a predecessor to the General Partner. He joinedMerrill Lynch, Pierce, Fenner & Smith Incorporated in 1971 and has servedas the Product Manager of International Institutional Equities, EquityDerivatives and Mortgage-Backed Securities as well as Managing Director ofInternational Sales in the United States, and Managing Director of Sales inEurope. Mr. Chandor holds a Bachelor of Arts degree from Trinity College,Hartford, Connecticut.

 

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As of December 31, 2005, the principals of MLAI had no investment inthe Partnership, and MLAI’S general partner interest in the Partnership wasvalued at $154,642.

 

MLAI acts as the sponsor, general partner or manager to ten publicfutures funds whose units of limited partnership or member interests areregistered under the Securities Exchange Act of 1934: Global Horizons I L.P.,ML Futures Investments L.P., ML JWH Strategic Allocation L.P., ML SelectFutures I L.P, John W. Henry & Co./Millburn L.P., ML Appleton FuturesAccessLLC, ML Aspect FuturesAccess LLC, ML Cornerstone FuturesAccess LLC, ML WintonFuturesAccess LLC, and the Partnership. Because MLAI serves as the sponsor,general partner or manager of each of these funds, the officers and managers ofMLAI effectively manage them as officers and directors of such funds.

 

(c)           Identification ofCertain Significant Employees:

 

None.

 

(d)           Family Relationships:

 

None.

 

(e)           Business Experience:

 

See Item 10(a) and(b) above.

 

(f)            Involvement inCertain Legal Proceedings:

 

None.

 

(g)           Promoters andControl Persons:

 

Not applicable.

 

(h)           AuditCommittee Financial Expert:

 

Not applicable. (Neither the Partnership norMLAI has an audit committee.)

 

Section 16 (a) Beneficial Ownership ReportingCompliance

 

Not Applicable.

 

Code of Ethics:

 

The Partnership has adopted a code of ethics, as of the end of theperiod covered by this report, which applies to the Partnership’s (MLAI’s)principal executive officer and principal financial officer or personsperforming similar functions on behalf of the Partnership. A copy of the codeof ethics is available to any person, without charge, upon request by calling 1-877-465-8435.

 

**Item 11:  ExecutiveCompensation**

 

The managers and officersof MLAI are remunerated by MLAI in their respective positions. The Partnershipdoes not itself have any officers, directors or employees. The Partnership paysBrokerage Commissions to an affiliate of MLAI and Administrative Fees to MLAI.MLAI or its affiliates may also receive certain economic benefits from holdingcertain of the Partnership’s U.S. dollar Assets in offset accounts, asdescribed in Item 1(c) above. The directors and officers receive no othercompensation from the Partnership, and the managers receive no compensation forserving as managers of MLAI. There are no compensation plans or arrangementsrelating to a change in control of either the Partnership or MLAI.

 

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**Item 12:  Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters**

 

(a)           Security Ownershipof Certain Beneficial Owners:

 

Not applicable (The Units are non-voting limited partnership interests.The Partnership is managed by MLAI, its general partner).

 

(b)           Security Ownershipof Management:

 

As of December 31, 2005, MLAI owned 160,738 Units (Unit-equivalentgeneral partnership interests), which was approximately 1.48% of the totalUnits outstanding.

 

(c)           Changesin Control:

 

None.

 

(d)           SecuritiesAuthorized for Issuance Under Equity Compensation Plans:

 

Not applicable.

 

**Item 13:  CertainRelationships and Related Transactions**

 

(a)           Transactions betweenMerrill Lynch and the Partnership

 

All of the serviceproviders to the Partnership, other than the Advisors, are affiliates ofMerrill Lynch. Merrill Lynch negotiated with the Advisors over the level oftheir advisory fees and Profit Shares. However, none of the fees paid by thePartnership to any Merrill Lynch party were negotiated, and they are higherthan would have been obtained in arm’s-length bargaining.

 

The Partnershipindirectly pays Merrill Lynch through MLPF&S and MLAI, substantialBrokerage Commissions and Administrative Fees, respectively, as well as bid-askspreads on forward currency trades. The Partnership also pays MLPF&Sinterest on short-term loans extended by MLPF&S to cover losses on foreigncurrency positions.

 

Within the Merrill Lynchorganization, MLAI is the direct beneficiary of the revenues received bydifferent Merrill Lynch entities from the Partnership. MLAI controls themanagement of the Partnership and serves as its promoter. Although MLAI has notsold any assets, directly or indirectly, to the Partnership, MLAI makessubstantial profits from the Partnership due to the foregoing revenues.

 

No loans have been, areor will be outstanding between MLAI or any of its principals and thePartnership.

 

MLAI paid substantial selling commissions and trailing commissions toMLPF&S for distributing the Units. MLAI is ultimately paid back for theseexpenditures from the revenues it receives from the Partnership.

 

(b)           Certain BusinessRelationships:

 

MLPF&S, an affiliate of MLAI, acts as the principal commoditybroker for the Partnership.

 

In 2005, Global Horizons expensed directly on behalf of thePartnership: (i) Brokerage Commissions of $792,797 to MLPF&S, whichincluded $158,576 in consulting fees earned by the Advisors; and (ii)Administrative Fees of $27,338 to MLIM LLC and MLAI. In addition, MLAI and itsaffiliates may have derived certain economic benefit from possession of thePartnership’s assets, as well as from foreign exchange and EFP trading.

 

See Item 1(c), “Narrative Description of Business — Charges” and “— Descriptionof Current Charges” for a discussion of other business dealings between MLAIaffiliates and the Partnership.

 

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(c)           Indebtedness ofManagement:

 

The Partnership is prohibited from making any loans, to management orotherwise.

 

(d)           Transactionswith Promoters:

 

Not applicable.

 

**Item 14:  Principal AccountantFees and Services**

 

(a)           AuditFees

 

Aggregate fees billed forprofessional services rendered by Deloitte & Touche LLP in connection withthe audit of the Partnership’s financial statements as of and for the yearended December 31, 2005 were $21,500.

 

Aggregate fees billed forthese services for the year ended December 31, 2004 were $23,550.

 

(b)           Audit-Related Fees

 

There were noother audit-related fees billed for the years ended December 31, 2005 or 2004related to the Partnership.

 

(c)           Tax Fees

 

Aggregate feesbilled for professional services rendered by Deloitte Tax LLP in connectionwith the tax compliance, advice and preparation of the Partnership’s, taxreturns for the year ended December 31, 2005 were $152,000.

 

Aggregate feesbilled for these services for the year ended December 31, 2004 were $66,000.

 

(d)           All Other Fees

 

No fees werebilled by Deloitte & Touche LLP, Deloitte Tax LLP or any member firms ofDelloitte Touche Tohmatsu, and their respective affiliates during the yearsended December 31, 2005 or 2004 for any other professional services in relationto the Partnership.

 

Neither the Partnership nor MLAI has an audit committee to pre-approveprincipal accountant fees and services. In lieu of an audit committee, themanagers and the principal financial officer pre-approve all billings prior tothe commencement of the performance of such services.

 

25

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**PART IV**

 

**Item 15:  Exhibits andFinancial Statement Schedules**

 

1.             FinancialStatements (found in Exhibit 13.01):

 
| Report of Independent Registered Public Accounting Firm            |   |
|--------------------------------------------------------------------|--------|
|                                                               |   |
| Statements of Financial Condition as of December 31, 2005 and 2004 |   |
|                                                               |   |
| For the years ended December 31, 2005, 2004 and 2003:              |   |
| Statements of Operations                                           |   |
| Statements of Changes in Partners’ Capital                    |   |
|                                                               |   |
| Financial Data Highlights for the year ended December 31, 2005     |   |
|                                                               |   |
| Notes to Financial Statements                                      |   |

 

2.             FinancialStatement Schedules:

 

Financial statement schedules not included in this Form 10-K have beenomitted for the reason that they are not required or are not applicable or thatequivalent information has been included in the financial statements or notesthereto.

 

3.             Exhibits:

 

The following exhibits are incorporated by reference or are filedherewith to this Annual Report on Form 10-K:

 
| **Designation**   | ** ** | **Description**                                                                                                                                                                                                                                                          |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                                                                                                                     |
| 1.01              |       | Selling Agreement among the Partnership, MLIM LLC, MLPF&S, the  Selling Agent and the Advisors.                                                                                                                                                                      |
|              |       |                                                                                                                                                                                                                                                                     |
| Exhibit 1.01:     |       | Is incorporated herein by reference from Exhibit 1.01 contained in  Amendment No. 1 to the Registration Statement (File No. 33-73914) filed on  July 14, 1994, on Form S-1 under the Securities Act of 1933 (the “Registrant’s  Registration Statement”). |
|              |       |                                                                                                                                                                                                                                                                     |
| 1.01(a)           |       | Form of Selling Agreement Amendment among the Partnership, MLIM LLC,  MLPF&S, the Selling Agent and the Advisors.                                                                                                                                                    |
|              |       |                                                                                                                                                                                                                                                                     |
| Exhibit 1.01(a):  |       | Is incorporated herein by reference from Exhibit 1.01(a) contained in  the Registrant’s report on Form 10-K for the year ended December 31, 2005.                                                                                                                   |
|              |       |                                                                                                                                                                                                                                                                     |
| 3.01(i)           |       | Amended and Restated Limited Partnership Agreement of the  Partnership.                                                                                                                                                                                                  |
|              |       |                                                                                                                                                                                                                                                                     |
| Exhibit 3.01(i):  |       | Is incorporated herein by reference from Exhibit 3.01(ii) contained  in the Registrant’s Registration Statement (as Exhibit A).                                                                                                                                     |
|              |       |                                                                                                                                                                                                                                                                     |
| 3.05(ii)          |       | Amended and Restated Certificate of Limited Partnership of the  Partnership, dated July 27, 1995.                                                                                                                                                                        |
|              |       |                                                                                                                                                                                                                                                                     |
| Exhibit 3.05(ii): |       | Is incorporated herein by reference from Exhibit 3.05(ii) contained  in the Registrant’s report on Form 10-Q for the Quarter Ended June 30, 1995.                                                                                                                   |

 

26

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| 10.01(h)          |   | Form of Advisory Agreement among the Partnership, MLIM LLC,  MLPF&S and each Advisor.                                                          |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                    |
| Exhibit 10.01(h): |   | Is incorporated herein by reference from Exhibit 10.01(h) contained  in the Registrant’s report on Form 10-Q for the Quarter Ended June 30, 1995.  |
|              |   |                                                                                                                                                    |
| 10.02             |   | Form of Consulting Agreement between MLPF&S and each Advisor.                                                                                       |
|              |   |                                                                                                                                                    |
| Exhibit 10.02:    |   | Is incorporated herein by reference from Exhibit 10.02 contained  in the Registrant’s Registration Statement.                                 |
|              |   |                                                                                                                                                    |
| 10.03             |   | Form of Customer Agreement between the Partnership and MLPF&S.                                                                                      |
|              |   |                                                                                                                                                    |
| Exhibit 10.03     |   | Is incorporated herein by reference from Exhibit 10.03 contained in  the Registrant’s Registration Statement (as Exhibit B).                       |
|              |   |                                                                                                                                                    |
| 10.05             |   | Merrill Lynch & Co., Inc. Guarantee.                                                                                                                |
|              |   |                                                                                                                                                    |
| Exhibit 10.05:    |   | Is incorporated herein by reference from Exhibit 10.05 contained in  the Registrant’s Registration Statement (as Exhibit B).                       |
|              |   |                                                                                                                                                    |
| 10.06             |   | Form of Subscription Agreement and Power of Attorney.                                                                                                   |
|              |   |                                                                                                                                                    |
| Exhibit 10.06:    |   | Is incorporated herein by reference from Exhibit 10.06 contained in  the Registrant’s Registration Statement (as Exhibit D).                       |
|              |   |                                                                                                                                                    |
| 10.07(a)          |   | Foreign Exchange Desk Service Agreement, dated July 1, 1993 among  Merrill Lynch International Bank, MLAI, MLPF&S and various MLIM AS LLC  funds.   |
|              |   |                                                                                                                                                    |
| Exhibit 10.07(a): |   | Is incorporated herein by reference from Exhibit 10.07 contained in  the Registrant’s Registration Statement (as Exhibit D).                       |
|              |   |                                                                                                                                                    |
| 10.07(b)          |   | Amendment to Foreign Exchange Desk Service Agreement, dated July 14,  1994, among Merrill Lynch Investment Bank, MLAI, MLPF&S and the  Partnership. |
|              |   |                                                                                                                                                    |
| Exhibit 10.07(b): |   | Is incorporated herein by reference from Exhibit 10.07 contained in  the Registrant’s Registration Statement.                                      |
|              |   |                                                                                                                                                    |
| 10.08             |   | Investment Advisory Contract between MLPF&S, the Partnership, the  Trading Partnership and MLIM LLC.                                                |
|              |   |                                                                                                                                                    |
| Exhibit 10.08:    |   | Is incorporated herein by reference from Exhibit 10.08 contained in  the Registrant’s Registration Statement.                                      |
|              |   |                                                                                                                                                    |
| 10.09(a)          |   | Form of Advisory and Consulting Agreement Amendment among MLIM LLC,  each Advisor, the Partnership and MLPF&S.                                      |
|              |   |                                                                                                                                                    |
| Exhibit 10.09(a): |   | Is incorporated herein by reference from Exhibit 10.09(a) contained  in the Registrant’s report on Form 10-K for the year ended December 31, 1996. |
|              |   |                                                                                                                                                    |
| 10.09(b)          |   | Form of Amendment to the Customer Agreement among the Partnership and  MLPF&S.                                                                      |
|              |   |                                                                                                                                                    |
| Exhibit 10.09(b): |   | Is incorporated herein by reference from Exhibit 10.09(b) contained  in the Registrant’s report on Form 10-K for the year ended December 31, 1996. |

 

27

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| 13.01                    |   | 2005 Annual Report and Report of Independent Registered Public  Accounting Firm.                                                                                                                                                 |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                                                                                                                             |
| Exhibit 13.01:           |   | Is filed herewith.                                                                                                                                                                                                               |
|                     |   |                                                                                                                                                                                                                             |
| 13.01 (a)                |   | 2005 Annual Report of the Independent Registered Public Accounting  Firm the following Trading Limited Liability Company sponsored by MLAI.                                                                                      |
|                     |   |                                                                                                                                                                                                                             |
|                     |   | Global Horizons I L.P.                                                                                                                                                                                                           |
|                     |   |                                                                                                                                                                                                                             |
| Exhibit 13.01(a):        |   | Is filed herewith.                                                                                                                                                                                                               |
|                     |   |                                                                                                                                                                                                                             |
| 28.01                    |   | Prospectus of the Partnership dated January 25, 1996.                                                                                                                                                                            |
|                     |   |                                                                                                                                                                                                                             |
| Exhibit 28.01:           |   | Is incorporated by reference as filed with the Securities and  Exchange Commission pursuant to Rule 424 under the Securities Act of 1933,  Registration Statement (File No. 33-73914) on Form S-1 (effective January 25,  1996). |
|                     |   |                                                                                                                                                                                                                             |
| 31.01 and 31.02          |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                          |
|                     |   |                                                                                                                                                                                                                             |
| Exhibit 31.01 and 31.02: |   | Are filed herewith.                                                                                                                                                                                                              |
|                     |   |                                                                                                                                                                                                                             |
| 32.01 and 32.02          |   | Section 1350 Certifications                                                                                                                                                                                                      |
|                     |   |                                                                                                                                                                                                                             |
| Exhibit 32.01 and 32.02: |   | Are filed herewith.                                                                                                                                                                                                              |

 

28

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | **ML PRINCIPAL PROTECTION L.P.**                  |
|--------|---------------------------------------------------|
|   |                                              |
|   |                                              |
|   | By: **MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC** |
|   | General Partner                                   |
|   |                                              |
|   | By:                                               | /s/Robert M. Alderman |   |
|   | Robert M. Alderman                                |
|   | Chief Executive Officer, President and Manager    |
|   | (Principal Executive Officer)                     |

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, this report has been signed on March 31, 2005 by thefollowing persons on behalf of the Registrant and in the capacities indicated.

 
| **Signature**          | ** ** | **Title**                                    | ** **                                            | **Date** |
|------------------------|------------|----------------------------------------------|-------------------------------------------------------|----------|
|                   |       |                                         |                                                  |     |
| /s/Robert M. Alderman  |       |                                         | Chief Executive Officer, President and Manager        |     | March 31, 2006 |
| Robert M. Alderman     |       | (Principal Executive Officer)                |                                                  |     |
|                   |       |                                         |                                                  |     |
| /s/Steven B. Olgin     |       |                                         | Vice President, Chief Operating Officer and Manager   |     | March 31, 2006 |
| Steven B. Olgin        |       |                                         |                                                  |     |
|                   |       |                                         |                                                  |     |
| /s/Michael L. Pungello |       |                                         | Vice President, Chief Financial Officer and Treasurer |     | March 31, 2006 |
| Michael L. Pungello    |       | (Principal Financial and Accounting Officer) |                                                  |     |
|                   |       |                                         |                                                  |     |
| /s/Jeffrey F. Chandor  |       |                                         | Manager                                               |     | March 31, 2006 |
| Jeffrey F. Chandor     |       |                                         |                                                  |     |
|                        |            |                                              |                                                       |          |  |  |  |  |

 

(Being the principal executive officer, the principal financial andaccounting officer and a majority of the managers of Merrill Lynch InvestmentManagers LLC)

 
| **MERRILL LYNCH ALTERNATIVE INVESTMENTS LLC**  |                  |
|------------------------------------------------|-----------------------|
| General Partner of Registrant                  | March 31, 2006        |
|                                           |                  |
|                                           |                  |
| By:                                            | /s/Robert M. Alderman |   |   |
| Robert M. Alderman                             |                  |
| Chief Executive Officer, President and Manager |                  |
| (Principal Executive Officer)                  |                  |
|                                                |                       |  |  |

 

29

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**ML PRINCIPAL PROTECTION L.P.**

 

 ANNUALREPORT FOR 2005 ON FORM 10-K

 

INDEX TO EXHIBITS

 

**Exhibit**

 
| Exhibit 13.01    |   | 2005 Annual Report and Report of Independent Registered Public  Accounting Firm                                                      |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                 |
| Exhibit 13.01(a) |   | 2005 Annual Report and Report of Independent Registered Public  Accounting Firm Trading Limited Liability Company sponsored by MLAI: |
|             |   | Global Horizons I L.P.                                                                                                               |

 

30

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