<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                   FORM 10-K

               (x) Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

                 For the fiscal year ended: December 31, 1998
                                      or
                 ( ) Transition Report Pursuant to Section 13
                or 15(d) of the Securities Exchange Act of 1934

                       Commission file number: 0-16746

                        ML FUTURES INVESTMENTS II L.P.
             ----------------------------------------------------
            (Exact name of registrant as specified in its charter)

            DELAWARE                                       13-3481305
  -------------------------------                      ------------------- 
  (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                       Identification No.)


                  C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
                       MERRILL LYNCH WORLD HEADQUARTERS
                            WORLD FINANCIAL CENTER
                       SOUTH TOWER, NEW YORK, NY 10080
                    --------------------------------------      
                   (Address of principal executive offices)

      Registrant's telephone number, including area code:  (212) 236-5662

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Limited Partnership
Units

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

                                                            Yes   X     No __
                                                                 --- 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   [X]


Aggregate market value of the voting and non-voting common equity held by non-
affiliates of the registrant:  the registrant is a limited partnership: as of
February 1, 1999, limited partnership units with an aggregate value of
$10,816,138 were outstanding and held by non-affiliates.

                      DOCUMENTS INCORPORATED BY REFERENCE

The registrant's "1998 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1998,
is incorporated by reference into Part II, Item 8 and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
 
                        ML FUTURES INVESTMENTS II L.P.

                      ANNUAL REPORT FOR 1998 ON FORM 10-K


                               Table of Contents
                               -----------------

<TABLE>
<CAPTION>
                                           PART I                                                            PAGE   
                                           ------                                                            ----
<S>                                                                                                          <C>    
Item 1.    Business.......................................................................................     1

Item 2.    Properties.....................................................................................     5

Item 3.    Legal Proceedings..............................................................................     5

Item 4.    Submission of Matters to a Vote of Security Holders............................................     6


                                           PART II
                                           -------

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters..........................     6

Item 6.    Selected Financial Data........................................................................     7

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations..........     9

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.....................................    16

Item 8.    Financial Statements and Supplementary Data....................................................    16

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........    16

                                           PART III
                                           --------

Item 10.   Directors and Executive Officers of the Registrant.............................................    16

Item 11.   Executive Compensation.........................................................................    18

Item 12.   Security Ownership of Certain Beneficial Owners and Management.................................    18

Item 13.   Certain Relationships and Related Transactions.................................................    19

                                           PART IV
                                           -------

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K................................    20
</TABLE> 

                                      -i-
<PAGE>
 
                                    PART I

ITEM 1:  BUSINESS
         --------

     (a)  General Development of Business:
          -------------------------------

          ML Futures Investments II L.P. (the "Partnership") was organized under
the Delaware Revised Uniform Limited Partnership Act on January 20, 1987 and
began trading operations on May 2, 1988. The Partnership made a single offering
of its units of limited partnership interest ("Units"). Units may be redeemed as
of the end of each calendar month. The Partnership engages (currently, through
an investment in a limited liability company, see below) in the speculative
trading of a portfolio of futures, options on futures, forwards and options on
forward contracts and related options in the currencies, interest rates, stock
index, metals, agricultural and energy sectors of the world futures markets. The
Partnership's objective is achieving, through speculative trading, substantial
capital appreciation over time.

          Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") is the general partner of the Partnership and selects and allocates the
Partnership's assets (through the Partnership's investment in ML Multi-Manager
Portfolio LLC ("MM LLC"), among the Advisors, each unaffiliated with MLIP and
each of which trades independently of the others. The Partnership and MM LLC are
referred to throughout this document, either individually and/or collectively,
as the "Fund". Merrill Lynch Futures Inc. (the "Commodity Broker" or "MLF") is
the Partnership's commodity broker. A portion of the Partnership's assets is
held by a commodity broker, other than MLF, to facilitate the trading of a
certain independent advisor. The General Partner is a wholly-owned subsidiary of
Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML&Co."). The Commodity Broker is an indirect 
wholly-owned subsidiary of ML&Co. (ML&Co. and its affiliates are herein 
sometimes referred to as "Merrill Lynch.")

          Prior to October 1, 1996, the Partnership placed assets with the
Trading Advisors by opening individual managed accounts with them. For the
period from October 1, 1996 to May 31, 1998, the Partnership placed assets with
certain of the Trading Advisors through investing in private funds ("Trading
LLCs") sponsored by MLIP, through which the trading accounts of different MLIP-
sponsored funds managed by the same Advisor pursuant to the same strategy were
consolidated. The only members of the Trading LLCs were commodity pools
sponsored by MLIP. Placing assets with an Advisor through investing in a Trading
LLC rather than a managed account had no economic effect on the Partnership,
except to the extent that the Partnership benefited from the Advisor not having
to allocate trades among a number of different accounts (rather than acquiring a
single position for the Trading LLC as a whole). As of June 1, 1998, MLIP
consolidated the trading accounts of nine of its multi-advisor funds (the 
"Multi-Advisor Funds"), including the Partnership. The consolidation was
achieved by having these Multi-Advisor Funds invest in a single Delaware limited
liability company, MM LLC, which opened a single account with each Advisor
selected. MM LLC is managed by MLIP, has no investors other than the Multi-
Advisor Funds and serves solely as the vehicle through which the assets of such
Multi-Advisor Funds are combined in order to be managed through single rather
than multiple accounts. The placement of assets into MM LLC did not change the
operations or fee structure of the Partnership. The administrative authority
over the Partnership, as well as MM LLC, remains with MLIP. The following
disclosures relate to the operation of the Partnership through its investment in
MM LLC.

          As of December 31, 1998, the capitalization of the Fund was
$11,209,662, and the Net Asset Value per Unit, originally $100 as of May 2,
1988, had risen to $187.99. 

          Through December 31, 1998, the highest month-end Net Asset Value per
Unit was $187.99 (December 31, 1998) and the lowest $105.26 (May 31, 1988).

     (b)  Financial Information about Segments:
          ------------------------------------

          The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool." The Partnership does
not engage in sales of goods or services.

     (c)  Narrative Description of Business:
          ---------------------------------

          GENERAL

                                      -1-



<PAGE>
 
          The Fund trades (currently, through its investment in MM LLC) in the
international futures, options on futures, forwards and options on forward
markets with the objective of achieving substantial capital appreciation over
time.

          The General Partner is MM LLC's trading manager with responsibility
for selecting Advisors to manage MM LLC's assets, allocating and reallocating MM
LLC's assets among different Advisors.

          Although considered as a whole, the Partnership (currently, through
its investment in MM LLC) trades in a diversified range of international
markets. Certain of the Trading Advisors, considered individually, concentrate
primarily on trading in a limited portfolio of markets. The composition of the
"sectors" included in the Partnership's portfolios varies substantially over
time.

          MLIP may, from time to time, direct certain individual Advisors to
manage their Fund accounts as if they were managing more equity than the actual
capital allocated to them.

          One of the objectives of the Fund is to provide diversification for a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance has historically demonstrated a low degree of
performance correlation with traditional stock and bond holdings. Since it began
trading, the Fund's returns have, in fact, frequently been significantly non-
correlated (not, however, negatively correlated) with the United States stock
and bond markets.

          USE OF PROCEEDS AND INTEREST INCOME

          Market Sectors.  The Partnership (currently, through its investment in
          --------------
MM LLC) trades in a diversified group of markets under the direction of multiple
independent Advisors. These Advisors can, and do, from time to time, materially
alter the allocation of their overall trading commitments among different market
sectors. Except in the case of certain trading programs which are purposefully
limited in the markets which they trade, there is essentially no restriction on
the commodity interests which may be traded by any Advisor or the rapidity with
which an Advisor may alter its market sector allocations.

          The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or in which market sectors
the Fund's trading may be concentrated at any one time or over time.

          Market Types. The Fund trades (currently through its investment in
          ------------
 MM LLC) on a variety of United States and foreign futures exchanges.
Substantially all of the Fund's off-exchange trading takes place in the highly
liquid, institutionally-based currency forward markets.

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

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

          As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated --differ substantially from time to time as well as over time.

                                      -2-
<PAGE>
 
          The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
which markets the Fund may trade or as to how the Fund's trading may be
concentrated at any one time or over time.

          Custody of Assets. The majority of the Fund's assets are currently
          -----------------
held in customer accounts at Merrill Lynch.

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

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

                         ____________________________

          CHARGES

          The following table summarizes the charges incurred by the Fund during
1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                    1998                     1997                       1996
                      ------------------------------------------------------------------------------------
                                     % 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    
---------------------------------------------------------------------------------------------------------- 
<S>                      <C>         <C>           <C>         <C>              <C>         <C>            
Brokerage                                                                                                  
Commissions              $198,734       1.70%      $595,634        4.37%        $1,418,126       9.48%      
Administrative                                                                                             
Fees                        5,678       0.05%        16,844        0.12%            36,362       0.24%      
Profit Shares                   -       0.00%        10,277        0.08%           326,058       2.18%      
                      ------------------------------------------------------------------------------------ 
Total                    $204,412       1.75%      $622,755        4.57%        $1,780,546      11.90%      
                      ====================================================================================  
</TABLE>

                         ____________________________

          Subsequent to October 1, 1996, Brokerage Commissions, Administrative
Fees and Profit Shares are not representative of the actual amounts paid by the
Fund, because the Fund paid the bulk of these fees as an investor in the Trading
LLCs or MM LLC. See "Description of Current Charges."

          The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the benefits which may be derived by Merrill
Lynch from the deposit of certain of the Fund's U.S. dollar assets in offset
accounts.

                                      -3-
<PAGE>
 
          The Fund's average month-end Net Assets during 1998, 1997 and 1996
equaled $11,668,311, $13,632,115, and $14,965,058, respectively.

          During 1998, 1997 and 1996, the Fund earned $118,183 , $345,022 and
$668,742 in interest income, or approximately 1.01%, 2.53% and 4.47% of the
Fund's average month-end Net Assets.

          Effective January 1, 1996, the 10% per annum Brokerage Commissions
paid by the Fund to MLF were recharacterized as 9.75% per annum Brokerage
Commissions and a 0.25% per annum Administrative Fee paid by the Fund to MLIP.
This recharacterization had no economic effect on the Fund.

          Effective February 1, 1997, the Brokerage Commissions paid by the Fund
were reduced from 9.75% to 8.75% per annum.

                         ____________________________

                        DESCRIPTION OF CURRENT CHARGES


RECIPIENT         NATURE OF PAYMENT           AMOUNT OF PAYMENT
---------         -----------------           -----------------

MLF               Brokerage Commissions       A flat-rate monthly commission of
                                              0.7291 of 1% of the Fund's month-
                                              end assets (an 8.75% annual rate).

                                              During 1998, 1997 and 1996, the
                                              round-turn (each purchase and sale
                                              or sale and purchase of a single
                                              futures contract) equivalent rate
                                              of the Fund's flat-rate Brokerage
                                              Commissions was approximately
                                              $121, $130 and $80, respectively.
                                              The round-turn rates for 1995 and
                                              1996 reflect Brokerage Commissions
                                              at the rate of 9.75% per annum. As
                                              of February 1, 1997, this rate was
                                              reduced to 8.75%.

MLF               Use of Fund assets          Merrill Lynch may derive an
                                              economic benefit from the deposit
                                              of certain of the Fund's U.S.
                                              dollar assets in offset account.

MLIP              Administrative Fees         The Fund pays MLIP a monthly
                                              Administrative Fee equal to
                                              0.020833 of 1% of the Fund's 
                                              month-end assets (0.25% annually).
                                              MLIP pays all of the Fund's
                                              routine administrative costs.

MLIB; Other      Bid-ask  spreads             Bid-ask spreads on forward and 
Counterparties                                related trades.

Trading          Profit Shares                Prior to January 1, 1997, all
Advisors                                      Advisors received quarterly Profit
                                              Shares ranging from 15% to 25%
                                              (depending on the Trading Advisor)
                                              of any New Trading Profit achieved
                                              by the Fund account. As of January
                                              1, 1997, a number of Advisors
                                              agreed to receive only annual
                                              Profit Shares. Profit Shares are
                                              also paid upon redemption of Units
                                              and upon the net reallocation of
                                              assets away from an Advisor. New
                                              Trading Profit is calculated
                                              separately in respect of each
                                              Advisor, irrespective of the
                                              overall performance of the Fund.
                                              The Fund and MM LLC may pay

                                      -4-
<PAGE>
 
                                              substantial Profit Shares during
                                              periods when it is incurring
                                              significant overall losses.

Trading Advisor     Consulting Fees           MLF pays the Advisors annual
                                              Consulting Fees ranging up to 2%
                                              of the Partnership's average 
                                              month-end assets allocated to them
                                              for management, after the
                                              reduction for a portion of
                                              brokerage commissions.

MLF;                Extraordinary expenses    Actual costs incurred; none paid
 Others                                       to date.

                             ____________________

          REGULATION

          The General Partner, the Trading Advisors and the Commodity Broker are
each subject to regulation by the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association. Other than in respect of its
periodic reporting requirements under the Securities Exchange Act of 1934, the
Partnership itself is generally not subject to regulation by the Securities and
Exchange Commission. However, MLIP itself is registered as an "investment
adviser" under the Investment Advisers Act of 1940.

          (i) through (xii) -- not applicable.

          (xiii) The Partnership has no employees.

     (d)  Financial Information about Foreign and Domestic Operations and Export
          ----------------------------------------------------------------------
          Sales:
          -----

          The Partnership trades (through its investment in MM LLC) on a number
of foreign commodity exchanges. The Partnership does not engage in the sales of
goods or services.

ITEM 2: PROPERTIES
        ----------

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

          The Partnership's only place of business is the place of business of
the General Partner (Merrill Lynch World Headquarters, World Financial Center,
South Tower, New York, New York, 10080). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.

ITEM 3: LEGAL PROCEEDINGS
        -----------------

          ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP) -- as well as certain of its subsidiaries and
affiliates have been named as defendants in civil actions, arbitration
proceedings and claims arising out of their respective business activities.
Although the ultimate outcome of these actions cannot be predicted at this time
and the results of legal proceedings cannot be predicted with certainty, it is
the opinion of management that the result of these matters will not be
materially adverse to the business operations or the financial condition of MLIP
or the Fund.

          MLIP itself has never been the subject of any material litigation.

                             ____________________

                                      -5-
<PAGE>
 
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
        ---------------------------------------------------

          The Partnership has never submitted any matter to a vote of its
Limited Partners.

                                    PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
        ---------------------------------------------------------------------

Item 5(a)

     (a)  Market Information:
          ------------------

          There is no public trading market for the Units, nor will one develop.
Rather, Limited Partners may redeem Units as of the end of each month at Net
Asset Value.

     (b)  Holders:
          -------

          As of December 31, 1998, there were 937 holders of Units, including
the General Partner.

     (c)  Dividends:
          ---------

          The Partnership has made no distributions, nor does the General
Partner presently intend to make any distributions in the future.

Item 5(b)

     Not applicable.

                                      -6-
<PAGE>
 
ITEM 6:   SELECTED FINANCIAL DATA
          -----------------------

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

<TABLE>
<CAPTION>
                                 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,            
STATEMENT OF OPERATIONS              1998               1997              1996               1995              1994                
-------------------------------------------------------------------------------------------------------------------------          
<S>                           <C>                 <C>               <C>               <C>                <C>            
Revenues:

Trading (Loss) Profit:
                                                                                                           
     Realized (Loss) Gain     $       (451,217)   $       308,501   $     3,382,048   $     3,732,452    $     1,431,115 
     Change in Unrealized              
     (Loss) Gain                       (68,216)            64,324        (2,025,157)         (120,416)          (270,445) 
                           ----------------------------------------------------------------------------------------------   
Total Trading Results                 (519,433)           372,825         1,356,891         3,612,036          1,160,670 
                           ----------------------------------------------------------------------------------------------   
                                                                                                                         
Interest Income                        118,183            345,022           668,742           806,886            614,734 
                           ----------------------------------------------------------------------------------------------  
     Total Revenues                   (401,250)           717,847         2,025,633         4,418,922          1,775,404 
                           ----------------------------------------------------------------------------------------------  
                                                                                                                         
Expenses:                                                                                                                
     Brokerage Commissions             198,734            595,634         1,418,126         1,622,255          1,764,298 
     Administrative Fees                 5,678             16,844            36,362                 -                  - 
     Profit Shares                           -             10,277           326,058           293,724            380,332 
   -                       ----------------------------------------------------------------------------------------------  
     Total Expenses                    204,412            622,755         1,780,546         1,915,979          2,144,630 
                           ----------------------------------------------------------------------------------------------   
Income from Investments              1,238,572            571,891            37,777                 -                  - 
                           ---------------------------------------------------------------------------------------------- 
Net Income (Loss)             $        632,910    $       666,983   $       282,864   $     2,502,943    $      (369,226) 
                           ==============================================================================================
</TABLE> 
 
<TABLE> 
<CAPTION> 
                                   DECEMBER 31,       DECEMBER 31,      DECEMBER 31,      DECEMBER 31,       DECEMBER 31,         
BALANCE SHEET DATA                    1998               1997              1996              1995               1994              
-------------------------------------------------------------------------------------------------------------------------          
<S>                              <C>                  <C>               <C>               <C>                <C> 
Fund Net Asset Value                 $11,209,662        $12,749,748       $14,296,652       $16,135,438      $16,768,729   
Net Asset Value per Unit             $    187.99        $    177.53       $    169.46       $    166.06        $  141.84    
                                 ----------------------------------------------------------------------------------------
</TABLE>

     The variations in statement of operations line items are primarily due to
investing in Trading LLCs and in MM LLC.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                MONTH-END NET ASSET VALUE PER UNIT
----------------------------------------------------------------------------------------------------------------- 
       Jan.     Feb.     Mar.     Apr.      May     June     July     Aug.     Sept.    Oct.     Nov.     Dec.
----------------------------------------------------------------------------------------------------------------- 
<S>   <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
1994  $136.63  $131.58  $128.36  $127.05  $136.94  $142.63  $139.91  $134.39  $139.23  $140.42  $141.56  $141.84
----------------------------------------------------------------------------------------------------------------- 
1995  $137.22  $137.47  $145.26  $145.14  $154.53  $147.52  $145.50  $150.48  $151.82  $150.72  $155.36  $166.06
----------------------------------------------------------------------------------------------------------------- 
1996  $176.46  $165.47  $171.43  $177.03  $168.65  $163.61  $147.36  $153.84  $155.81  $165.00  $173.89  $169.46
----------------------------------------------------------------------------------------------------------------- 
1997  $173.97  $178.86  $177.05  $174.27  $175.72  $176.05  $182.93  $174.82  $178.29  $173.04  $173.19  $177.53
----------------------------------------------------------------------------------------------------------------- 
1998  $176.25  $176.78  $177.50  $170.80  $173.81  $173.98  $174.22  $183.74  $187.67  $187.09  $187.25  $187.99
-------------------------------------------------------------------------------------------------------------------
</TABLE>

            Pursuant to CFTC policy, monthly performance is presented from
January 1, 1994 even though the Units were outstanding prior to such date.

                                      -7-
<PAGE>
 
                        ML FUTURES INVESTMENTS II L.P.
                               December 31, 1998

 Type of Pool:  Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1)
                      Inception of Trading:  May 2, 1988
                   Aggregate Subscriptions:    $269,810,800
                     Current Capitalization:   $11,209,662
                  Worst Monthly Drawdown/(2)/:  (9.93)%  (7/96)
           Worst Peak-to-Valley Drawdown/(3)/:  (16.76)%  (5/96-7/96)

                                 _____________

            Net Asset Value per Unit, December 31, 1998:   $187.99

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                         MONTHLY RATES OF RETURN/(4)/
---------------------------------------------------------------------------- 
MONTH               1998        1997        1996        1995        1994
---------------------------------------------------------------------------- 
<S>                 <C>         <C>         <C>         <C>         <C>
January             (0.72)%      2.66%       6.26%      (3.26)%     (4.99)%
---------------------------------------------------------------------------- 
February             0.30        2.81       (6.23)        0.18       (3.69)
---------------------------------------------------------------------------- 
March                0.41       (1.01)       3.61         5.66       (2.45)
---------------------------------------------------------------------------- 
April               (3.77)      (1.57)       3.26        (0.08)      (1.02)
---------------------------------------------------------------------------- 
May                  1.76        0.83       (4.73)        6.47        7.78 
---------------------------------------------------------------------------- 
June                 0.10        0.19       (2.99)       (4.54)       4.16 
---------------------------------------------------------------------------- 
July                 0.14        3.91       (9.93)       (1.36)      (1.91)
---------------------------------------------------------------------------- 
August               5.46       (4.43)       4.39         3.42       (3.95)
---------------------------------------------------------------------------- 
September            2.14        1.98        1.28         0.89        3.60 
---------------------------------------------------------------------------- 
October             (0.31)      (2.94)       5.90        (0.72)       0.85 
---------------------------------------------------------------------------- 
November             0.09        0.09        5.39         3.08        0.81 
---------------------------------------------------------------------------- 
December             0.40        2.51       (2.55)        6.89        0.20 
---------------------------------------------------------------------------- 
Compound Annual      
Rate of Return       5.91%       4.78%       2.05%       17.07%     (1.36)%  
----------------------------------------------------------------------------
</TABLE>

     (1)  Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is
defined as one that allocates no more than 25% of its trading assets to any
single manager. As the Fund may allocate more than 25% of its trading assets to
one or more Advisors, it is referred to as a "Selected-Advisor" fund. Certain
funds, including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.

     (2)  Worst Monthly Drawdown represents the largest negative Monthly Rate of
Return experienced since January 1, 1994 by the Fund; a drawdown is measured on
the basis of month-end Net Asset Value only, and does not reflect intra-month
figures.

     (3)  Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1994 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.

     (4)  Monthly Rate of Return is the net performance of the Fund during the
month of determination (including interest income and after all expenses have
been accrued or paid) divided by the total equity of the Fund as of the
beginning of such month .

                                      -8-
<PAGE>
 
ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         -----------------------------------------------------------------------
OF OPERATIONS
-------------

Advisor Selections

            The Fund's results of operations depend on MLIP's ability to select
Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as the Advisors' trading
methods, are confidential, so that substantially the only available information
relevant to the Fund's results of operations is its actual performance record to
date. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.

            MLIP has made and expects to continue making frequent changes to
both trading asset allocations among Advisors and Advisor combinations as well
as from time to time adjusting the percentage of the Fund's assets committed to
trading.

            MLIP's decision to terminate or reallocate assets among Advisors is
based on a combination of numerous factors. Advisors are, in general, terminated
primarily for unsatisfactory performance, but other factors -- for example, a
change in MLIP's or an Advisor's market outlook, apparent deviation from
announced risk control policies, excessive turnover of positions, changes in
principals, commitment of resources to other business activities, etc. -- may
also have a role in the termination or reallocation decision. The market
judgment and experience of MLIP's principals is an important factor in its asset
allocation decisions.

            MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally 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 that may take place in the future, or as to how long any of the
current Advisors will continue to manage assets for the Fund.

General
-------

            A number of the Advisors are trend-following traders, whose programs
do not attempt to predict price movements. No fundamental economic supply or
demand analyses are used by these Advisors, and no macroeconomic assessments of
the relative strengths of different national economies or economic sectors.
Instead, the programs apply proprietary computer models to analyzing past market
data, and from this data alone attempt to determine whether market prices are
trending. These technical traders base their strategies on the theory that
market prices reflect the collective judgment of numerous different traders and
are, accordingly, the best and most efficient indication of market movements.
However, there are frequent periods during which fundamental factors external to
the market dominate prices.

            If a trend-following Advisor's models identify a trend, they signal
positions which follow it. When these models identify the trend as having ended
or reversed, these positions are either closed out or reversed. Due to their
trend-following character, these Advisors' programs do not predict either the
commencement or the end of a price movement. Rather, their objective is to
identify a trend early enough to profit from it and detect its end or reversal
in time to close out the Fund's positions while retaining most of the profits
made from following the trend.

            In analyzing the performance of trend-following programs, economic
conditions, political events, weather factors, etc., are not directly relevant
because only market data has any input into trading results. Furthermore, there
is no direct connection between particular market conditions and price trends.
There are so many influences on the markets that the same general type of
economic event may lead to a price trend in some cases but not in others. The
analysis is further complicated by the fact that the programs are designed to
recognize only certain types of trends and to apply only certain criteria of
when a trend has begun. Consequently, even though significant price trends may
occur, if these trends are not comprised of the type of intra-period price
movements which the programs are designed to identify, a trend-following Advisor
may miss the trend altogether.

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

                                      -9-
<PAGE>
 
Performance Summary
-------------------

            This performance summary is an outline description of how the Fund
performed in the past, not necessarily any indication of how it will perform in
the future. In addition, the general causes to which certain price movements are
attributed may or may not in fact have caused such movements, but simply
occurred at or about the same time.

            The Advisors, as a group, are unlikely to be profitable in markets
in which such trends do not occur. Static or erratic prices are likely to result
in losses. Similarly, unexpected events (for example, a political upheaval,
natural disaster or governmental intervention) can lead to major short-term
losses as well as gains.

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

<TABLE> 
<CAPTION> 
     1998

                                                     Total Trading
                                                        Results
     <S>                                             <C>
     Interest Rates and Stock Indices               $     (132,201)     
     Commodities                                           (23,769)      
     Currencies                                           (367,635)      
     Energy                                                 18,372       
     Metals                                                (14,200)       
                                                    ---------------
                                                    $     (519,433)
                                                    ===============
</TABLE> 

     Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited, and trading was
particularly profitable in positions in Eurodollars, German and Japanese bonds,
and U.S. Treasury notes and bonds. Global investors staged a major flight to
quality, resulting in a significant widening of credit spreads on a global
basis. In October, investors pushed the yields on U.S. Treasury bonds to a 31-
year low. The long bond yield fell about 75 basis points in 1998 as the world
economy slowed more than expected, inflation continued to fall, the anticipated
small U.S. budget deficit turned into substantial surplus, and the Fed lowered
interest rates.

     In energy markets, demand for crude oil in the Middle East was affected by
low oil prices early in the year, and trading resulted in losses. Initially
buoyed on concerns about a U.S.-led military strike against Iraq, crude oil fell
to a nine-year low, as the globally warm winter, the return of Iraq as a
producer and the Asian economic crisis added to OPEC's supply glut problems.
Despite production cuts initiated by OPEC at the end of March, world oil
supplies remained excessive and oil prices stood at relatively low levels
throughout the first half of 1998. Short heating oil positions in the third
quarter proved profitable for the Fund as the market for heating oil prices
dropped to its lowest level in more than a decade. In early December, oil and
natural gas prices dropped sharply, causing continued problems for many emerging
market countries that depend on commodity exports for economic growth and
government financing. These price pressures were mainly due to excessive supply
availability and near-term weather indications that inventories would remain at
more than adequate levels even in the event of a cold Northern Hemisphere
winter. Also, the December U.S. air attack on Iraq failed to cause any damage to
oil pumping and shipping operations, and oil prices fell over 10%.

     Trading results in stock index markets were mixed in early 1998, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In

                                      -10-
<PAGE>
 
particular, Hong Kong's Hang Seng index trended downward during most of the
second quarter and traded at a three-year low. As U.S. equity markets declined
in July and August, the Fund profited from short positions in the S&P 500, most
notably during August, when the index dropped 14.5%. Volatility in September
made for a difficult trading environment in the stock index sector, and the Fund
incurred modest losses, although results remained profitable for the quarter and
the year overall in these markets.

     In currency markets, results early in the year were mixed, but
unprofitable. During the second quarter, strong gains were realized in positions
in the Japanese yen, which weakened during June to an eight-year low versus the
U.S. dollar. Significant gains from Japanese yen trading continued into the
third quarter, and Japan's problems spread to other sectors of the global
economy, causing commodities prices to decline as demand from the Asian
economies weakened. Japan's deepening recession and credit crunch continued
through the fourth quarter, and the Fund achieved gains from long yen positions.

     Gold prices began the year drifting sideways, and continued to weaken
following news in the second quarter of a European Central Bank consensus that
ten to fifteen percent of reserves should be made up of gold bullion, which was
at the low end of expectations. Gold was unable to extend third quarter rallies
or to build any significant upside momentum, resulting in a trendless
environment. This was also the case in the fourth quarter, as gold's cost of
production declined. Also, silver markets remained range-bound, while also
experiencing a significant selloff in November, and aluminum traded at its
lowest levels since 1994, with many aluminum smelters operating at a loss.

     In agricultural commodity markets, 1998 began with strong gains as live
cattle and hog prices trended downward throughout the first quarter. In the
second quarter, although the U.S. soybean crop got off to a good start which
contributed to higher yield expectations and a more burdensome supply outlook,
soybean prices traded in a volatile pattern. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries. The third
quarter resulted in losses as the U.S. soybean crop increased relative to the
USDA's production estimate as a result of timely rains, which contributed to
lower prices. These losses continued into the fourth quarter as the Fund was
caught on the short side of the soybean complex, as the soybean supply surplus
became more manageable following the November 10th USDA reports, causing prices
to gain upward momentum.

<TABLE> 
<CAPTION> 
     1997

                                                      Total Trading
                                                         Results
     <S>                                             <C> 
     Interest Rates and Stock Indices                $       58,472  
     Commodities                                           (159,382) 
     Currencies                                             382,671  
     Energy                                                  41,509  
     Metals                                                  49,555  
                                                     ---------------
                                                     $      372,825   
                                                     ===============   
</TABLE> 

          Trend reversals and extreme market volatility, affected by such
factors as the Asian flu and El Nino, were characteristic of most of 1997.
However, the year proved to be a profitable one overall for the Fund as trends
in several key markets enabled the Trading Advisors to profit despite the
significant obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.

          In currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and two-and-a-
half year highs versus the Deutsche mark and the Swiss franc. However, the
dollar underwent two significant corrections during the year. The first
correction occurred in the Spring against the Japanese yen, due to the G7
finance ministers' determination that a further dollar advance would be counter-
productive to their current goals. From August through mid-November, the dollar
corrected against the Eurocurrencies in advance

                                      -11-
<PAGE>
 
of a well-advertised tightening by the Bundesbank. By mid-December the dollar
had bounced back to new highs against the yen and was rallying against the mark.

          Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor sentiment
was particularly strong in the U.S., where prices on the 30-year Treasury bond
and 10-year Treasury note rose to their highest levels in over two years. This
followed a largely positive economic report delivered by Federal Reserve
Chairman Greenspan in testimony before Congress. Effects of the plunge in the
Hong Kong stock market in late October spread rapidly throughout the world's
financial markets, including global bond markets. After continued volatility in
subsequent months made trading difficult, 1997 interest rate trading ended on a
positive note when U.S. and Japanese bond markets rallied as a flight to safety
from plunging stock markets around the world occurred in December.

          In energy markets, a slump in crude oil prices was characteristic of
its lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas. In December, financial and economic problems in Asia reduced
demand for oil, and, in combination with ample supplies, resulted in crude oil
prices declining once again.

<TABLE> 
<CAPTION> 
     1996

                                                   Total Trading
                                                       Results
     <S>                                          <C>  
     Interest Rates and Stock Indices             $        496,284  
     Commodities                                           (60,267) 
     Currencies                                            978,020  
     Energy                                              1,040,803  
     Metals                                             (1,097,949) 
                                                 -------------------
                                                  $      1,356,891  
                                                 ===================
</TABLE> 
   
          1996 began with the East Coast blizzard, continuing difficulties in
federal budget talks and an economic slowdown having a negative impact on many
markets. The Fund was profitable in January due to strong profits in currency
trading as the U.S. dollar reached a 23-month high against the Japanese yen. In
February, however, the Fund incurred its worst monthly loss due to the sudden
reversals in several strong price trends and considerable volatility in the
currency and financial markets. During March, large profits were taken in the
crude oil and gasoline markets as strong demand continued and talks between the
United Nations and Iraq were suspended. This trend continued into the second
quarter, during which strong gains were also recognized in the agricultural
markets as a combination of drought and excessive rain drove wheat and grain
prices to historic highs. In the late summer and early fall months, the Fund
continued to trade profitably as trending prices in a number of key markets
favorably impacted the Fund's performance. In September heating oil hit a five-
year high on soaring prices in Europe, and the Fund was also able to capitalize
on downward trends in the metals markets. Strong trends in the currency and
global bond markets produced significant gains in October and November, but the
year ended with declining performance as December witnessed the reversal of
several strong upward trends and increased volatility in key markets.

                                      -12-
<PAGE>
 
Variables Affecting Performance
-------------------------------

          The principal variables which determine the net performance of the
Fund are gross profitability and interest income. During all periods set forth
under "Selected Financial Data," the interest rates in many countries were at
unusually low levels. The low interest rates in the United States (although
higher than in many other countries) negatively impacted revenues because
interest income is typically a major component of the Fund's profitability. In
addition, low interest rates are frequently associated with reduced fixed income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished. On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the Fund
may be reduced as compared to high yielding and much lower risk fixed-income
investments.

          The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of the Fund's assets allocated to trading. The only Fund
costs (other than the insignificant currency trading costs) which are not based
on a percentage of the Fund's assets (allocated to trading or total) are the
Profit Shares payable to the Advisors on an Advisor-by-Advisor basis. During
periods when Profit Shares are a high percentage of net trading gains, it is
likely that there has been substantial performance non-correlation among the
Advisors (so that the total Profit Shares paid to those Advisors which have
traded profitably are a high percentage, or perhaps even in excess, of the total
profits recognized, as other Advisors have incurred offsetting losses, reducing
overall trading gains but not the Profit Shares paid to the successful 
Advisors) -- suggesting the likelihood of generally trendless, non-consensus
markets.

          Unlike many investment fields, there is no meaningful distinction in
the operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time.

          Except in unusual circumstances, factors -- regulatory approvals, cost
of goods sold, employee relations and the like -- which often materially affect
an operating business have virtually no impact on the Fund.

Liquidity; Capital Resources
----------------------------

          The Fund sells no securities other than the Units. The Fund borrows
only to a limited extent and only on a strictly short-term basis in order to
finance losses on non-U.S. dollar denominated trading positions pending the
conversion of the Fund's dollar deposits. These borrowings are at a prevailing
short-term rate in the relevant currency. They have been immaterial to the
Fund's operation to date and are expected to continue to be so.

          Substantially all of the Fund's assets are held in cash. The Net Asset
Value of the Fund's cash is not affected by inflation. However, changes in
interest rates could cause periods of strong up or down price trends, during
which the Fund's profit potential generally increases. Inflation in commodity
prices could also generate price movements which the strategies might
successfully follow.

          Substantially all of the Fund's assets are held in cash. Accordingly,
except in very unusual circumstances, the Fund should be able to close out any
or all of its open trading positions and liquidate any or all of its securities
holdings quickly and at market prices. This permits an Advisor to limit losses
as well as reduce market exposure on short notice should its strategies indicate
doing so. In addition, because there is a readily available market value for the
Fund's positions and assets, the Fund's monthly Net Asset Value calculations are
precise, and investors need only wait 10 business days to receive the full
redemption proceeds of their Units.

YEAR 2000 COMPLIANCE INITIATIVE

          As the millennium approaches, Merrill Lynch has undertaken initiatives
to address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two

                                      -13-
<PAGE>
 
numbers of the year are "19". As a result, the year 2000 would be stored as
"00," causing computers to incorrectly interpret the year as 1900. Left
uncorrected, the Y2K problem may cause information technology systems (e.g.,
computer databases) and non-information technology systems (e.g., elevators) to
produce incorrect data or cease operating completely.

          Merrill Lynch believes that it has identified and evaluated its
internal Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. The resource-
intensive renovation phase (as further discussed) of Merrill Lynch's Year 2000
efforts was approximately 95% completed as of January 31, 1999. Merrill Lynch
will focus primarily on completing its renovation and testing and on integration
of the Year 2000 programs of recent acquisitions during the remainder of 1999.
In order to focus attention on the Y2K problem, management has deferred certain
other technology projects: however, this deferral is not expected to have a
material adverse effect on the company's business, results of operations, or
financial condition.

          The failure of Merrill Lynch's technology systems relating to a Y2K
problem would likely have a material adverse effect on the company's business,
results of operations, and financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies, and
other assets. The Y2K problem could also increase Merrill Lynch's exposure to
risk and its need for liquidity.

          In 1995, Merrill Lynch established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks associated
with the Y2K problem, both internal and external. The Year 2000 Compliance
Initiative's efforts to address the risks associated with the Y2K problem have
been organized into six phases: planning, pre-renovation, renovation, production
testing, certification, and integration testing.

          The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and determining
the level of expert knowledge available within Merrill Lynch regarding
particular systems or applications. The pre-renovation phase involved developing
a detailed enterprisewide inventory of applications and systems, identifying the
scope of necessary renovations to each application system, and establishing a
conversion schedule. During the renovation phase, source code is actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase validates that a system can run successfully in a Year 2000
environment. The integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal and
external systems. Finally, as Merrill Lynch continues to implement new systems,
they are also being tested for Year 2000 readiness.

          In 1996 and 1997, as part of the planning and pre-renovation phases,
both plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.

          As part of the production testing and certification phases, Merrill
Lynch has performed, and will continue to perform, both internal and external
Year 2000 testing intended to address the risks from the Y2K problem. As of
January 31, 1999, production testing was approximately 93% completed. In July
1998, Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates in
December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also participated in various other domestic and
international industry tests during 1998.

          Merrill Lynch continues to survey and communicate with third parties
whose Year 2000 readiness is important to the company. Information technology
and non-information technology vendors and service providers

                                      -14-
<PAGE>
 
are contacted in order to obtain their Year 2000 compliance plans. Based on the
nature of the response and the importance of the product or service involved,
Merrill Lynch determines if additional testing is needed. The results of these
efforts are maintained in a database that is accessible throughout the firm.
Third parties that have been contacted include transactional counterparties,
exchanges, and clearinghouses; a process to access and rate their responses has
been developed. This information as well as other Year 2000 readiness
information on particular countries and their political subdivisions will be
used by Merrill Lynch to manage risk resulting from the Y2K problem. Management
is unable at this point to ascertain whether all significant third parties will
successfully address the Y2K problem. Merrill Lynch will continue to monitor
third parties' Year 2000 readiness to determine if additional or alternative
measures are necessary. In connection with information technology and non-
information technology products and services, contingency plans, which are
developed at the business unit level, may include selection of alternative
vendors or service providers and changing business practices so that a
particular system is not needed. In the case of securities exchanges and
clearinghouses, risk mitigation could include the re-routing of business. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation will be successful. The
failure of exchanges, clearing organizations, vendors, service providers,
counterparties, regulators, or others to resolve their own processing issues in
a timely manner could have a material adverse effect on Merrill Lynch's
business, results of operations, and financial condition.

          At year-end 1998, the total estimated expenditures for the entire Year
2000 Compliance Initiative were approximately $425 million, of which
approximately $125 million was remaining. The majority of these remaining
expenditures are expected to cover testing, risk management, and contingency
planning. There can be no assurance that the costs associated with such
remediation efforts will not exceed those currently anticipated by Merrill
Lynch, or that the costs associated with the remediation efforts or the possible
failure of such remediation efforts would not have a material adverse effect on
Merrill Lynch's business, results of operations, or financial condition.

     EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") INITIATIVE

          As of January 1, 1999, the "euro" was adopted as the common legal
currency of participating member states of the EMU. As a consequence of the
introduction of and conversion to the euro, Merrill Lynch was required to make
significant changes to nearly 200 global business systems in order to reflect
the substitution of the euro for the 11 member national currencies and the
European currency unit. The introduction of the euro brings about fundamental
changes in the structure and nature of European financial markets, including the
creation of a unified, more liquid capital market in Europe. As financial
markets in EMU member states converge and local barriers are removed,
competition is expected to increase.

          The introduction of the euro affects all Merrill Lynch facilities that
transact, distribute, or provide custody or recordkeeping for securities or cash
denominated in the currency of a participating member state. Merrill Lynch's
systems or procedures that handle such securities or cash were modified in order
to implement the conversion to the euro. The implementation phase is continuing
into the first quarter of 1999 to resolve any post-conversion issues. The
success of Merrill Lynch's euro conversion efforts was dependent on the euro-
compliance of third parties, such as trading counterparties, financial
intermediaries (e.g., securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors.

          As of the end of the 1998 fiscal year, the total estimated
expenditures associated with the introduction of and conversion to the euro were
approximately $79 million, of which $1 million is remaining to be spent during
the first quarter of 1999 on compliance efforts and project administration.
Management believes that it has identified and evaluated all of the systems and
operational modifications necessary for the conversion to the euro. On January
4, 1999 and since then, Merrill Lynch has conducted normal business operations,
having successfully completed its conversion program. Management does not expect
the introduction of the euro to have a negative effect on its future business,
currency risk, or competitive positioning in the European markets.

                                      -15-
<PAGE>
 
ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
          ----------------------------------------------------------

          Not Applicable.
 
ITEM 8:   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
          -------------------------------------------

          The financial statements required by this Item are included in Exhibit
13.01.

          The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable. The General Partner promoted the
Fund and is its controlling person.

ITEM 9:   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          ---------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

          There were no changes in or disagreements with independent auditors on
accounting or financial disclosure.


                                   PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
          --------------------------------------------------

     10(a) & 10(b)  Identification of Directors and Executive Officers:
                    --------------------------------------------------

          As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
the Trading Advisors on behalf of the Partnership. The General Partner promoted
the Fund and its controlling person.

          The directors and executive officers of MLIP and their respective
business backgrounds are as follows.

JOHN R. FRAWLEY, JR.     Chairman, Chief Executive Officer,
                         President and  Director

JEFFREY F. CHANDOR       Senior Vice President, Director of
                         Sales, Marketing and Research and Director

JO ANN DI DARIO          Vice President, Chief Financial Officer and Treasurer,
                         through April 30, 1999                         

MICHAEL L. PUNGELLO      Vice President, Chief Financial Officer and Treasurer,
                         effective May 1, 1999                         

JOSEPH H. MOGLIA         Director

ALLEN N. JONES           Director

STEPHEN G. BODURTHA      Director

STEVEN B. OLGIN          Vice President, Secretary and
                         Director of Administration

     John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and
has served in various positions, including Retail and Institutional Sales,
Manager of New York Institutional Sales, Director of Institutional Marketing,
Senior Vice President of Merrill Lynch Capital Markets and Director of
International Institutional Sales. Mr. Frawley holds a Bachelor of Science
degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee from its formation in 1990 through its
dissolution in 1994. Mr. Frawley has served four consecutive one-year terms as
Chairman of the Managed Funds Association (formerly, the Managed Futures
Association), a national trade association that represents the managed futures,
hedge funds and fund of funds industry. Mr. Frawley currently serves as a member
of the CFTC's Global Markets Advisory Committee.

                                      -16-
<PAGE>
 
     Jeffrey F. Chandor was born in 1942.  Mr. Chandor is Senior Vice President,
Director of Sales, Marketing and Research and a Director of MLIP.  He joined
MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe.  Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.  Mr. Chandor is serving a
two-year term as a director of the Managed Funds Association.

     Jo Ann Di Dario was born in 1946. Ms. Di Dario is, through April 30, 1999,
Vice President, Chief Financial Officer and Treasurer of MLIP. Before joining
MLIP in May 1998, she was self-employed for one year. From February 1996 to May
1997, she worked as a consultant for Global Asset Management, an international
mutual fund organizer and operator headquartered in London, where she offered
advice on restructuring their back-office operations. From May 1992 to January
1996, she served as a Vice President of Meridian Bank Corporation, a regional
bank holding company. She was responsible for managing the treasury operations
of Meridian Bank Corporation including its wholly-owned subsidiary, Meridian
Investment Company Inc. From September 1991 to May 1992, Ms. Di Dario managed
the Domestic Treasury Operations of First Fidelity Bank, a regional bank. From
January 1991 to September 1991, Ms. Di Dario was self-employed. For the previous
five years, Ms. Di Dario was Vice President, Secretary and Controller of Caxton
Corporation, a Commodity Pool Operator and Commodity Trading Advisor. Her
background includes seven years of public accounting experience, and she
graduated with high honors from Stockton State College with a Bachelor of
Science degree in Accounting.
 
     Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr. Pungello
will become Vice President, Chief Financial Officer and Treasurer of MLIP. He
was First Vice President and Senior Director of Finance for Merrill Lynch's
Operations, Services and Technology Group from January 1998 to March 1999. Prior
to that, Mr. Pungello spent over 18 years with Deloitte & Touche LLP, and was a
partner in their Financial Services practice from June 1990 to December 1997. He
graduated from Fordham University in 1979 with a Bachelor of Science degree in
accounting and received his Master of Business Administration degree in Finance
from New York University in 1987.

     Joseph H. Moglia was born in 1949. Mr. Moglia is a Director of MLIP. In
1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University of
Delaware. He taught at the high school and college level for sixteen years. Mr.
Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Income Institutional Sales, and Director of the Municipal Division.
He is currently Senior Vice President and Director of the Investment Strategy
and Product Group in Merrill Lynch Private Client, and Director of Middle
Markets.

     Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and, from
July 1995 until January 1998, Mr. Jones was also Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.

     Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of MLIP.
In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan University,
Middletown, Connecticut with a Bachelor of Arts degree in Government. From 1980
to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree from
Harvard University, where he also served as Associates Fellow (1985 to 1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of the Structured Investments Group of MLPF&S since 1995.

     Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary
and the Director of Administration of MLIP. He joined MLIP in July 1994 and
became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was
an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated
from The American University with a Bachelor of Science degree in Business
Administration and a Bachelor of Arts degree in Economics. In 1986, he received
his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member
of the Managed Funds Association's Government Relations Committee and has served
as an arbitrator for the NFA. Mr. Olgin is also a member of the Committee on
Futures Regulation of the Association of the Bar of the City of New York.

                                      -17-
<PAGE>
 
     As of December 31, 1998, the principals of MLIP had no investment in the
Fund, and MLIP's general partner interest in the Fund was valued at $128,020.

     MLIP acts as general partner to twelve public futures funds whose units of
limited partnership interest are registered under the Securities Exchange Act of
1934:  The Futures Expansion Fund Limited Partnership, The Growth and Guarantee
Fund L.P., ML Futures Investments L.P., John W. Henry & Co./Millburn L.P., The
S.E.C.T.O.R. Strategy Fund (SM) L.P., The SECTOR Strategy Fund (SM) II L.P., The
SECTOR Strategy Fund (SM) V L.P., The SECTOR Strategy Fund (SM)VI L.P., ML
Global Horizons L.P., ML Principal Protection L.P., ML JWH Strategic Allocation
Fund L.P. and the Fund.  Because MLIP serves as the sole general partner of each
of these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.

     (c)  Identification of Certain Significant Employees:
          -----------------------------------------------

          None.

     (d)  Family Relationships:
          --------------------

          None.

     (e)  Business Experience:
          -------------------

          See Item 10(a)(b) above.

     (f)  Involvement in Certain Legal Proceedings:
          ----------------------------------------

          None.

     (g)  Promoters and Control Persons:
          -----------------------------

          Not applicable.

ITEM 11: EXECUTIVE COMPENSATION
         ----------------------

          The directors and executive officers of the General Partner are
remunerated by the General Partner in their respective positions. The
Partnership does not itself have any officers, directors or employees. The
Partnership pays Brokerage Commissions to an affiliate of the General Partner
and Administrative Fees to the General Partner. The General Partner or its
affiliates may also receive certain economic benefits from holding the Fund's
assets. The directors and officers receive no "other compensation" from the
Partnership, and the directors receive no compensation for serving as directors
of the General Partner. There are no compensation plans or arrangements relating
to a change in control of either the Partnership or the General Partner.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         --------------------------------------------------------------

     (a)  Security Ownership of Certain Beneficial Owners:
          -----------------------------------------------

          As of December 31, 1998, no person or "group" is known to be or have
been the beneficial owner of more than 5% of the Units.

     (b)  Security Ownership of Management:
          --------------------------------

          As of December 31, 1998, the General Partner owned 681 Units (unit-
equivalent general partnership interests), which was less than 2% of the total
Units outstanding.

     (c)  Changes in Control:
          ------------------

          None.

                                      -18-
<PAGE>
 
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

     (a)  Transactions Between Merrill Lynch and the Fund
          -----------------------------------------------

     All of the service providers to the Fund, other than the Advisors, are
affiliates of Merrill Lynch.  Merrill Lynch negotiated with the Advisors over
the level of its advisory fees and Profit Share.  However, none of the fees paid
by the Fund to any Merrill Lynch party were negotiated, and they are higher than
would have been obtained in arm's-length bargaining.

     The Fund pays Merrill Lynch substantial Brokerage Commissions and
Administrative Fees as well as bid-ask spreads on forward currency trades. The
Fund also pays MLF interest on short-term loans extended by MLF to cover losses
on foreign currency positions.

     Within the Merrill Lynch organization, MLIP is the direct beneficiary of
the revenues received by different Merrill Lynch entities from the Fund. MLIP
controls the management of the Fund and serves as its promoter. Although MLIP
has not sold any assets, directly or indirectly, to the Fund, MLIP makes
substantial profits from the Fund due to the foregoing revenues.

     No loans have been, are or will be outstanding between MLIP or any of its
principals and the Fund.

     MLIP pays substantial selling commissions and trailing commissions to
MLPF&S for distributing the Units. MLIP is ultimately paid back for these
expenditures from the revenues it receives from the Fund.

     (b)  Certain Business Relationships:
          ------------------------------

          MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.

          In 1998 the Partnership expensed: (i) Brokerage Commissions of
$198,734 to the Commodity Broker, which included $28,877 in consulting fees
earned by the Trading Advisors; and (ii) Administrative Fees of $5,678 to MLIP.
Through its investments in Trading LLCs and MM LLC, the following fees were
expensed: (i) Brokerage Commissions of $847,510 to the Commodity Broker, which
included $116,248 in consulting fees earned by the Trading Advisors; and (ii)
Administrative Fees of $24,215 to MLIP. In addition, MLIP and its affiliates may
have derived certain economic benefits from possession of the Fund's assets, as
well as from foreign exchange and EFP trading.

          See Item 1(c), "Narrative Description of Business -- Charges" and "--
Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.

     (c)  Indebtedness of Management:
          --------------------------

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

     (d)  Transactions with Promoters:
          ---------------------------

          Not applicable.

                                      -19-
<PAGE>
 
                                    PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
         ---------------------------------------------------------------

 
     (a)1.  Financial Statements (found in Exhibit 13.01):                 Page
            ---------------------------------------------                  ----

            Independent Auditors' Report                                   1
 
            Statements of Financial Condition as of December 31, 
              1998 and 1997                                                2
 
            For the years ended December 31, 1998, 1997 and 1996:
                  Statements of Income                                     3
                  Statements of Changes in Partners' Capital               4
 
            Notes to Financial Statements                                  5-15

     (a)2.  Financial Statement Schedules:
            -----------------------------

            Financial statement schedules not included in this Form 10-K have
been omitted for the reason that they are not required or are not applicable or
that equivalent information has been included in the financial statements or
notes thereto.

     (a)3.  Exhibits:
            --------

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

Designation              Description
-----------              -----------

3.01(a)                  Amended and Restated Limited Partnership Agreement of
                         the Partnership.

Exhibit 3.01(a):         Is incorporated herein by reference from Exhibit
---------------          3.01(a) contained in Amendment No. 1 (as Exhibit A) to
                         the Registration Statement (File No. 33-12645) filed on
                         February 2, 1988, on Form S-1 under the Securities Act
3.01(b)                  of 1933 (the "Registrant's Registration Statement").
                         Partnership Agreement, dated March 1, 1990. 

Exhibit 3.01(b):         Is incorporated by reference from Exhibit 3.01(b)
---------------          contained in the Partnership's report on Form 10 K for
                         the fiscal year ended December 31, 1989.               
                                                                                
 
3.01(c)                  Amendment No. 3 to the Amended and Restated Limited
                         Partnership Agreement, dated June 10, 1992.
 
Exhibit 3.01(c):         Is incorporated by reference from Exhibit 3.01(c)
---------------          contained in the Partnership's report on Form 10 K for
                         the fiscal year ended December 31, 1992.               
                                                                                

3.01(d)                  Amendment No. 4 to the Amended and Restated Limited
                         Partnership Agreement, dated June 18, 1992.
 
Exhibit 3.01(d):         Is incorporated by reference from Exhibit 3.01(d)
---------------          contained in the Partnership's report on Form 10 K for
                         the fiscal year ended December 31, 1992.               
                                                                                

3.01(e)                  Amended and Restated Certificate of Limited Partnership
                         of the Partnership, dated July 27, 1995.

                                      -20-
<PAGE>
 
Exhibit 3.01(e):         Is incorporated herein by reference from Exhibit
---------------          3.01(e) contained in the Registrant's report on Form 
                         10-Q for the Quarter Ended June 30, 1995.             
                         

10.02(a)                 Form of Consulting Agreement between each trading
                         advisor, the Partnership and Merrill Lynch Futures Inc.

Exhibit 10.02(a):        Is incorporated herein by reference from Exhibit
----------------         10.02(a) contained in the Registrant's Registration 
                         Statement.                                           
                         
10.03                    Form of Customer Agreement between the Partnership and
                         Merrill Lynch Futures Inc.

Exhibit 10.03:           Is incorporated herein by reference from Exhibit 10.03
-------------            contained in the Registrant's Registration Statement. 

10.06                    Foreign Exchange Desk Service Agreement, dated July 1,
                         1993 among Merrill Lynch International Bank, Merrill
                         Lynch Investment Partners Inc., Merrill Lynch Futures
                         Inc. and the Fund.

Exhibit 10.06:           Is incorporated herein by reference from Exhibit 10.06
-------------            contained in the Registrant's report on Form 10-K for
                         the year ended December 31, 1996.                     
                        
10.07(a)                 Form of Advisory and Consulting Agreement Amendment
                         among Merrill Lynch Investment Partners Inc., each
                         Advisor, the Fund and Merrill Lynch Futures Inc.

Exhibit 10.07(a):        Is incorporated herein by reference from Exhibit
----------------         10.07(a) contained in the Registrant's report on Form 
                         10-K for the year ended December 31, 1996.     

10.07(b)                 Form of Amendment to the Customer Agreement among the
                         Partnership and MLF.

Exhibit 10.07(b):        Is incorporated herein by reference from Exhibit
----------------         10.07(b) contained in the Registrant's report on Form 
                         10-K for the year ended December 31, 1996.   

10.14(j)                 Form of Advisory Agreement between the Partnership,
                         Merrill Lynch Investment Partners Inc., Merrill Lynch
                         Futures Inc. and each Trading Advisor.

Exhibit 10.14(j):        Is incorporated herein by reference from Exhibit
----------------         10.14(j) contained in the Registrant's report on Form 
                         10-Q for the Quarter Ended June 30, 1995.    
                         

13.01                    1998 Annual Report and Independent Auditors' Report.

Exhibit 13.01:           Is filed herewith.
-------------

13.01(a)                 1998 Annual Reports and Independent Auditors' Reports
                         for the following Trading Limited Liability Companies
                         sponsored by Merrill Lynch Investment Partners Inc. :
                         ML Sjo Prospect L.L.C.
                         ML Chesapeake Diversified L.L.C.
                         ML Multi-Manager Portfolio LLC

Exhibit 13.01(a):        Is incorporated herein by reference from Form 10-K
----------------         (fiscal year ended December 31, 1998) Commission File 
                         number 0-18702 for The S.E.C.T.O.R. Fund (SM) L.P.    
                         (Registration Statement File No. 33-34432 filed on May
                         25, 1990 under the Securities Act of 1933).            

28.01(i)                 Prospectus of the Partnership, dated February 2, 1988.

                                      -21-
<PAGE>
 
Exhibit 28.01(i):        Is incorporated herein by reference as filed with the
----------------         Securities and Exchange Commission pursuant to Rule 424
                         under the Securities Act of 1933, on February 5, 1988.
                         

28.01(ii)                Prospectus of the Partnership dated July 5, 1988.

Exhibit 28.01(iii):      Is incorporated herein by reference as filed with the
                         Securities and Exchange Commission pursuant to Rule 424
                         under the Securities Act of 1933, on July 8, 1988.

     (b)  Report on Form 8-K:
          ------------------

          No reports on Form 8-K were filed during the fourth quarter of 1998.

                                      -22-
<PAGE>
 
                                  SIGNATURES


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

                                   ML FUTURES INVESTMENTS II L.P.

                                   By:  MERRILL LYNCH INVESTMENT PARTNERS INC.
                                           General Partner

                                   By: /s/ John R. Frawley, Jr.
                                      -------------------------
                                       John R. Frawley, Jr.
                                       Chairman, Chief Executive Officer, 
                                       President and Director
                                       (Principal Executive Officer)

          Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1999 by the
following persons on behalf of the Registrant and in the capacities indicated.

<TABLE> 
<CAPTION> 
Signature                     Title                                                            Date
---------                     -----                                                            ----
<S>                           <C>                                                              <C> 
/s/ John R. Frawley, Jr.      Chairman, Chief Executive Officer, President and Director        March 25, 1999
------------------------
John R. Frawley, Jr.          (Principal Executive Officer)
 
/s/ Jo Ann Di Dario           Vice President, Chief Financial Officer, and Treasurer           March 25, 1999
-------------------
Jo Ann Di Dario               (Principal Financial and Accounting Officer)
 
/s/ Jeffrey F. Chandor        Senior Vice President, Director of Sales,                        March 25, 1999
----------------------
Jeffrey F. Chandor            Marketing and Research, and Director
 
/s/ Allen N. Jones            Director                                                         March 25, 1999
------------------
Allen N. Jones
</TABLE>

(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)

MERRILL LYNCH INVESTMENT         General Partner of Registrant    March 25, 1999
 PARTNERS INC.

By: John R. Frawley, Jr.
    --------------------
    John R. Frawley, Jr.

                                      -23-
<PAGE>
 
                        ML FUTURES INVESTMENTS II L.P.

                                1998 FORM 10-K

                               INDEX TO EXHIBITS
                               -----------------


                    Exhibit


Exhibit 13.01       1998 Annual Report and Independent Auditors' Report


                                      -24-