<PAGE>
 
                        ML FUTURES INVESTMENTS II L.P.
                       (A DELAWARE LIMITED PARTNERSHIP)


                   Financial Statements for the years ended
                       December 31, 1997, 1996 and 1995
                       and Independent Auditors' Report
<PAGE>
 
To:  The Limited Partners of ML FUTURES INVESTMENTS II L.P.

ML Futures Investments II L.P. (the "Fund" or "Partnership") ended its tenth
fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV") per
Unit of $177.53, representing an increase of 4.76% from the December 31, 1996
NAV per Unit of $169.46.  During 1997, trading profits were generated in the
interest rate, currency, metals and stock index markets while losses were
incurred in energy and agriculture trading.  (Trading results include that of
the Advisors, as well as, the Trading LLCs (defined in Note 5 to the financial
statements)).

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 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 represently 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.
<PAGE>
 
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting.  From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility.  Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period.  We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.


                                        Sincerely,
                                        John R. Frawley, Jr.
                                        President
                                        MERRILL LYNCH INVESTMENT PARTNERS INC.
                                        (General Partner)

FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
 
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)



TABLE OF CONTENTS
------------------------------------------------------- 
 
                                                   Page
                                                   ----
 
INDEPENDENT AUDITORS' REPORT                          1
 
FINANCIAL STATEMENTS FOR THE YEARS ENDED
     DECEMBER 31, 1997, 1996 AND 1995:
 
     Statements of Financial Condition                2
 
     Statements of Income                             3
 
     Statements of Changes in Partners' Capital       4
 
     Notes to Financial Statements                  5-12
<PAGE>
 
INDEPENDENT AUDITORS' REPORT




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

We have audited the accompanying statements of financial condition of ML Futures
Investments II L.P. (a Delaware limited partnership; the "Partnership") as of
December 31, 1997 and 1996, and the related statements of income and changes in
partners' capital for each of the three years in the period ended December 31,
1997.  These financial statements are the responsibility of the Partnership's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these financial statements present fairly, in all material
respects, the financial position of ML Futures Investments II L.P. as of
December 31, 1997 and 1996, and the results of its operations for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.


DELOITTE & TOUCHE LLP

February 6, 1998
New York, New York
<PAGE>
 
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
-------------------------------

<TABLE> 
<CAPTION> 

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

                                                                        1997                      1996
                                                                 ---------------           ----------------
<S>                                                               <C>                         <C> 
ASSETS

Accrued interest (Note 2)                                              $ 26,760                   $ 43,202
Equity in commodity futures trading accounts:
  Cash and options premiums                                           5,939,906                 10,849,816
  Net unrealized profit on open contracts                                68,216                      3,892
Investments (Note 5)                                                  6,789,050                  3,680,154
Receivable from investments (Note 5)                                     72,626                     39,689
                                                                 ---------------           ----------------

            TOTAL                                                  $ 12,896,558               $ 14,616,753
                                                                 ===============           ================


LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
  Redemptions payable                                                  $ 97,997                  $ 153,870
  Brokerage commissions payable (Note 2)                                 44,153                     88,521
  Profit Shares payable (Note 3)                                          3,398                     75,440
  Administrative fees payable (Note 2)                                    1,262                      2,270
                                                                 ---------------           ----------------

      Total liabilities                                                 146,810                    320,101
                                                                 ---------------           ----------------
 

PARTNERS' CAPITAL:
  General Partner (1,229 Units and 1,229 Units)                         218,182                    208,266
  Limited Partner (70,589 Units and 83,137 Units)                    12,531,566                 14,088,386
                                                                 ---------------           ----------------

      Total partners' capital                                        12,749,748                 14,296,652
                                                                 ---------------           ----------------

            TOTAL                                                  $ 12,896,558               $ 14,616,753
                                                                 ===============           ================

NET ASSET VALUE PER UNIT
(Based on 71,818 and 84,366 outstanding)                               $ 177.53                   $ 169.46
                                                                 ===============           ================
</TABLE> 
See notes to financial statements.

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

<TABLE> 
<CAPTION> 

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------------------------------------------------------------


                                                           1997               1996               1995
                                                       --------------     --------------     --------------
<S>                                                     <C>                <C>                <C> 
REVENUES:
  Trading profits (loss):
    Realized                                               $ 308,501        $ 3,382,048        $ 3,732,452
    Change in unrealized                                      64,324         (2,025,157)          (120,416)
                                                       --------------     --------------     --------------

      Total trading results                                  372,825          1,356,891          3,612,036

    Interest income (Note 2)                                 345,022            668,742            806,886
                                                       --------------     --------------     --------------

      Total revenues                                         717,847          2,025,633          4,418,922
                                                       --------------     --------------     --------------


EXPENSES:
  Profit Shares (Note 3)                                      10,277            326,058            293,724
  Brokerage commissions (Note 2)                             595,634          1,418,126          1,622,255
  Administrative fees (Note 2)                                16,844             36,362                  -
                                                       --------------     --------------     --------------

      Total expenses                                         622,755          1,780,546          1,915,979
                                                       --------------     --------------     --------------

INCOME FROM INVESTMENT (Note 5)                              571,891             37,777                  -
                                                       --------------     --------------     --------------

NET INCOME                                                 $ 666,983          $ 282,864        $ 2,502,943
                                                       ==============     ==============     ==============


NET INCOME PER UNIT OF
  PARTNERSHIP INTEREST:
    Weighted average number of Units
      outstanding (Note 4)                                    78,000             90,860            107,979
                                                       ==============     ==============     ==============

    Net income per weighted average General
      Partner and Limited Partner Unit                        $ 8.55             $ 3.11            $ 23.18
                                                       ==============     ==============     ==============
</TABLE> 
See notes to financial statements.

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

<TABLE> 
<CAPTION> 

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------------------------------------


                                       Units          Limited Partners    General Partner           Total
                                     -----------    ------------------    ----------------     ----------------
<S>                                   <C>            <C>                  <C>                   <C> 
PARTNERS' CAPITAL,
  DECEMBER 31, 1994                     118,219         $ 16,537,685            $ 231,044         $ 16,768,729

Redemptions                             (21,054)          (3,075,946)             (60,288)          (3,136,234)

Net income                                    -            2,469,631               33,312            2,502,943
                                     -----------    -----------------     ----------------     ----------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1995                      97,165           15,931,370              204,068           16,135,438

Redemptions                             (12,799)          (2,121,650)                   -           (2,121,650)

Net income                                    -              278,666                4,198              282,864
                                     -----------    -----------------     ----------------     ----------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1996                      84,366           14,088,386              208,266           14,296,652

Redemptions                             (12,548)          (2,213,887)                   -           (2,213,887)

Net income                                    -              657,067                9,916              666,983
                                     -----------    -----------------     ----------------     ----------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1997                      71,818         $ 12,531,566            $ 218,182         $ 12,749,748
                                     ===========    =================     ================     ================
</TABLE> 
See notes to financial statements.

                                      -4-
<PAGE>
 
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
--------------------------------


NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
------------------------------------------------------------------------

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

ML Futures Investments II L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on January 20, 1987 and
completed its initial public offering of units of limited partnership interest
("Units") on April 28, 1988.  The Partnership commenced trading activities on
May 2, 1988.  The Partnership engages in speculative trading of futures, options
on futures and forward contracts on a wide range of commodities. Merrill Lynch
Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.) ("MLIP"
or the "General Partner"), a wholly-owned subsidiary of Merrill Lynch Group,
Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), is the general partner of the Partnership, and Merrill Lynch
Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its commodity
broker.  MLIP has agreed to maintain a general partner's interest of at least 1%
of the total capital in the Partnership.  MLIP and each Limited Partner share in
the profits and losses of the Partnership in proportion to their respective
interest in it.
 
MLIP selects independent advisors (the "Advisors" or the "Trading
Advisors") to manage the Partnership's assets, and allocates and reallocates the
Partnership's assets among existing, replacement and additional Advisors.

Estimates

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

Revenue Recognition

Commodity futures, options on futures and forward contract transactions are
recorded on the trade date, and open contracts are reflected in the net
unrealized profit on open contracts in the Statements of Financial Condition at
the difference between the original contract value and the fair value.  The
change in net unrealized profit (loss) on open contracts from one period to the
next is reflected in change in unrealized in the Statements of Income.  Fair
value is based on quoted market prices on the exchange or market on which the
contract is traded.

Operating Expenses

MLIP pays all routine operating expenses (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership.

MLIP receives an administrative fee as well as a portion of the brokerage
commissions paid to MLF by the Partnership as reimbursement for the foregoing
expenses.

                                      -5-
<PAGE>
 
Income Taxes

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

Distributions

The Unitholders are entitled to receive, equally per Unit, any distributions
which may be made by the Partnership. No such distributions had been made as of
December 31, 1997.

Redemptions

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

Dissolution of the Partnership

The Partnership will terminate on December 31, 2007, or at an earlier date
if certain conditions occur, as well as under certain circumstances, as set
forth in the Limited Partnership Agreement.

2.  RELATED PARTY TRANSACTIONS

The Partnership U.S. dollar assets are held at MLF.  On the cash held at MLF,
the Partnership receives interest from Merrill Lynch at the prevailing 91-day
U.S. Treasury bill rate.  Merrill Lynch may derive certain economic benefits, in
excess of the interest which Merrill Lynch pays to the Fund, from possession of
such cash.

Merrill Lynch credits the Partnership with interest on the Partnership's
non-U.S. dollar-denominated assets based on local short-term rates.  Merrill
Lynch charges the Partnership Merrill Lynch's cost of financing realized and
unrealized losses on the Partnership's non-U.S. dollar-denominated positions.

The General Partner has determined that there may have been a
miscalculation in the interest credited to the Partnership for a period prior to
November 1996 (such period may extend prior to that covered by these financial
statements).  Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997 with
interest which was compounded.  Former investors who do not maintain a Merrill
Lynch customer account will be credited as their response forms are processed.
The total amount of the adjustment is approximately $594,000.  Since this amount
was paid directly to investors by the General Partner, it is not reflected in
these financial statements.  The General Partner has determined that interest
has been calculated appropriately since November 1996.

The Partnership paid brokerage commissions to MLF at a flat rate of .833 of
1% (a 10% annual rate) of the Partnership's month-end assets.  Effective January
1, 1996, the percentage was reduced to .813 of 1% (a 9.75% annual rate) of the
Partnership's month-end assets and the Partnership began to pay MLIP a monthly
administrative fee of .021 of 1% (a .25% annual rate) of the month-end assets
(this recharacterization had no economic effect on the Partnership).  Effective
February 1, 1997, the Partnership's brokerage commission percentage was reduced
to .729 of 1% (an 8.75% annual rate) of the Partnership's month-end assets.
Month-end assets are not reduced for purposes of calculating brokerage
commissions and administrative fees by any accrued brokerage commissions,
administrative fees, Profit Shares or other fees or charges.

                                      -6-
<PAGE>
 
MLIP estimates that the round-turn equivalent commission rate charged to
the Partnership during the years ended December 31, 1997, 1996 and 1995, was
approximately $130, $80 and $90, respectively (not including, in calculating
round-turn equivalents, forward contracts on a futures-equivalent basis).

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

The Partnership trades forward contracts through a foreign exchange service
desk (the "F/X Desk") established by MLIP.  The F/X Desk gives the Partnership
access to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB").  MLIP or another Merrill Lynch entity charges a
service fee equal to, at current exchange rates, approximately $5.00 to $12.50
on each purchase or sale (not round-turn) of a futures contract-equivalent face
amount of a given currency traded in the forward markets.  No service fees are
charged on trades awarded to MLIB (which receives bid-ask spreads on such
trades).

In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Partnership acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Partnership's other F/X Desk trading.  When the Partnership
exchanges these positions for futures, there is a differential between the
prices of the two positions.  This differential reflects, in part, the different
settlement dates of the cash and the futures contracts and prevailing interest
rates, but also includes a pricing spread in favor of MLIB or another Merrill
Lynch entity. The Advisors, to date, have made little use of EFPs.

The Partnership's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.

3.  AGREEMENTS

The Partnership and the Advisors have each entered into Advisory
Agreements.  These Advisory Agreements generally terminate one year after they
are entered into, subject to certain renewal rights exercisable by the
Partnership.  The Advisors determine the commodity futures and forward contract
trades to be made on behalf of their respective Partnership accounts, subject to
certain Partnership trading policies and to certain rights reserved by MLIP.

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

Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
as defined, recognized by each Advisor, considered individually irrespective of
the overall performance of the Partnership, either as of the end of each
calendar quarter or year, are paid by the Partnership to each Advisor.  Profit
Shares are also paid out in respect of Units redeemed as of the end of interim
months to the extent of the applicable percentage of any New Trading Profit
attributable of such Units.

                                      -7-
<PAGE>
 
4.  WEIGHTED AVERAGE UNITS

The weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit.  The weighted average number of
Units outstanding at December 31, 1997, 1996 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed based
on the respective length of time each was outstanding during the preceding
period.

5.  INVESTMENTS

The Partnership places assets under the management of certain of the
Advisors not through opening managed accounts with them but rather through
investing in a private limited liability company ("Trading LLC") sponsored by
MLIP.  The only members of the Trading LLC are commodity pools sponsored by
MLIP.  The Trading LLC trades under the management of a single Advisor pursuant
to a single strategy and at a uniform degree of leverage.  Placing assets with
an Advisor through investing in a Trading LLC rather than a managed account has
no economic effect on the Partnership, except to the extent that the Partnership
benefits from the Advisor not having to allocate trades among a number of
different accounts (rather than acquiring a single position for the Trading LLC
as a whole).

The investments are reflected in the financial statements at fair value
based upon the Partnership's interest in each Trading LLC.  Fair value is equal
to the market value of the net assets of each Trading LLC.  The resulting
difference between cost and fair value is reflected on the Statements of Income
as income or loss from investments.

As of December 31, 1997 and 1996 the Partnership had investments in the ML
Chesapeake Diversified L.L.C. ("Chesapeake LLC") and ML Sjo Prospect L.L.C ("SJO
LLC") as follows:

                                   1997                 1996
                              ----------------     ----------------

Chesapeake LLC                    $ 3,383,225          $ 3,680,154
SJO LLC                             3,405,825                   -
                              ----------------     ----------------
Total                             $ 6,789,050          $ 3,680,154
                              ================     ================


Total revenues and fees with respect to such investment are set forth as
follows:

<TABLE> 
<CAPTION> 

For the year ended          Total               Brokerage               Administrative              Profit          Income from
December 31, 1997          Revenue             Commissions                   Fees                   Shares          Investments
<S>                    <C>                   <C>                       <C>                     <C>                 <C> 
                                     
Chesapeake LLC         $   663,146            $ 317,350                    $  8,977              $ 68,234               $ 268,585
SJO LLC                    670,202              320,343                       9,063                37,490                 303,306
                       ------------           ----------                  ----------            ----------             -----------
Total                  $ 1,333,348            $ 637,693                    $ 18,040             $ 105,724               $ 571,891
                       ============           ==========                  ==========            ==========             ===========
<CAPTION> 
                             
                                     
For the year ended          Total               Brokerage               Administrative              Profit          Income from
December 31, 1996          Revenue             Commissions                   Fees                   Shares           Investment
<S>                    <C>                   <C>                       <C>                     <C>                 <C> 
                                     
Chesapeake LLC         $   105,002            $  63,652                    $  1,632             $   1,941               $  37,777
                       ============           ==========                  ==========            ==========             ===========
</TABLE> 

                                      -8-
<PAGE>
 
Condensed statements of financial condition as of December 31, 1997 and 1996 and
statements of income for the years ended December 31, 1997 and 1996 for
Chesapeake LLC and SJO LLC are set forth as follows:

<TABLE> 
<CAPTION> 
                                                   1997                         1996
                                    -----------------------------------  ------------------
                                       Chesapeake            SJO            Chesapeake
                                           LLC               LLC                LLC
                                    ------------------ ----------------  ------------------
<S>                                   <C>               <C>                 <C>  
Assets                                   $ 17,195,182     $ 21,240,207        $ 21,273,568
                                    ================== ================  ==================
                                                                          
Liabilities                                 $ 704,681      $ 2,058,617           $ 579,289
Members' Capital                           16,490,501       19,181,590          20,694,279
                                    ------------------ ----------------  ------------------

Total                                    $ 17,195,182     $ 21,240,207        $ 21,273,568
                                    ================== ================  ==================

Revenues                                  $ 3,480,490      $ 3,903,267           $ 608,594

Expenses                                    2,055,125        2,144,078             382,949
                                    ------------------ ----------------  ------------------

Net Income                                $ 1,425,365      $ 1,759,189           $ 225,645
                                    ================== ================  ==================
</TABLE> 

6.  FAIR VALUE AND OFF-BALANCE SHEET RISK

The Partnership trades futures, options on futures and forward contracts in
interest rates, stock indices, commodities, currencies, energy and metals.  The
Partnership's total trading results by reporting category for the years ended
December 31, 1997, 1996 and 1995 were as follows:


                                                Total Trading Results
                           ----------------------------------------------------
                               1997               1996               1995
                           --------------     --------------     --------------
Interest Rates and              
  Stock Indices                 $ 58,472          $ 496,284        $ 3,053,438
Commodities                     (159,382)           (60,267)           164,606
Currencies                       382,671            978,020          1,104,325
Energy                            41,509          1,040,803            476,395
Metals                            49,555         (1,097,949)        (1,186,728)
                           --------------     --------------     --------------
                               $ 372,825        $ 1,356,891        $ 3,612,036
                           ==============     ==============     ==============


Market Risk

Derivative financial instruments involve varying degrees of off-balance sheet
market risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or market values of the financial instruments or
commodities underlying such derivative instruments frequently result in changes
in the Partnership's unrealized profit (loss) on such derivative instruments as
reflected in the Statements of Financial Condition.  The Partnership's exposure
to market risk is influenced by a number of factors, including the relationships
among derivative instruments held by the Partnership as well as the volatility
and liquidity of the markets in which the derivative instruments are traded.

                                      -9-
<PAGE>
 
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing so.
The procedures focus primarily on monitoring the trading of the Advisors
selected from time to time for the Partnership, calculating the Net Asset Value
of the Advisors' respective Partnership accounts as of the close of business on
each day and reviewing outstanding positions for over-concentrations - both on
an Advisor-by-Advisor and on an overall Partnership basis.  While the General
Partner does not itself intervene in the markets to hedge or diversify the
Partnership's market exposure, the General Partner may urge Advisors to
reallocate positions, or itself reallocate Partnership assets among Advisors
(although typically only as of the end of a month) in an attempt to avoid over-
concentrations.  However, such interventions are unusual.  Except in cases in
which it appears that an Advisor has begun to deviate from past practice and
trading policies or to be trading erratically, the General Partner's basic risk
control procedures consist simply of the ongoing process of Advisor monitoring
and selection, with the market risk controls being applied by the Advisors
themselves.

Fair Value

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

The contract/notional values of open contracts as of December 31, 1997 and 1996
were as follows:

<TABLE> 
<CAPTION> 
                                                  1997                                                  1996
                         --------------------------------------------------      -----------------------------------------------
                             Commitment to               Commitment to              Commitment to             Commitment to
                           Purchase (Futures,            Sell (Futures,           Purchase (Futures,          Sell (Futures,
                             Options & Forwards)         Options & Forwards)        Options & Forwards)    Options & Forwards)
                         -------------------------------------------------------------------------------------------------------
<S>                         <C>                        <C>                          <C>                       <C> 
Interest Rates and                 
  Stock Indices                    $  5,031,192               $    742,619               $         -                $         -
Commodities                              26,500                    253,889                          -                         -
Currencies                           11,161,667                 15,160,081                  4,983,334                 8,047,276
Energy                                        -                    456,740                          -                         -
Metals                                        -                     58,575                    203,772                   203,772
                         -----------------------      ---------------------      ---------------------     ---------------------
                                   $ 16,219,359               $ 16,671,904               $  5,187,106               $ 8,251,048
                         =======================      =====================      =====================     =====================
</TABLE> 

Substantially all of the Partnership's derivative instruments outstanding at
December 31, 1997, expire  within one year.

                                      -10-
<PAGE>
 
The contract/notional values of the Partnership's open exchange-traded and non-
exchange-traded open derivative instrument positions as of December 31, 1997 and
1996 were as follows:

<TABLE> 
<CAPTION> 
                                             1997                                                    1996
                        ----------------------------------------------          ---------------------------------------------
                          Commitment to              Commitment to                Commitment to             Commitment to
                        Purchase (Futures,           Sell (Futures,             Purchase (Futures,         Sell (Futures,
                           Options & Forwards)         Options & Forwards)        Options & Forwards)    Options & Forwards)
                        -----------------------------------------------------------------------------------------------------
<S>                     <C>                        <C>                            <C>                        <C> 
Exchange-
  Traded                       $ 5,419,491                $ 4,112,608                 $         -               $         -
Non-Exchange-
  Traded                        10,799,868                 12,559,296                    5,187,106                 8,251,048
                        -------------------        -------------------          -------------------      --------------------
                              $ 16,219,359               $ 16,671,904                  $ 5,187,106               $ 8,251,048
                        ===================        ===================          ===================      ====================
</TABLE> 

The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the years ended December 31, 1997 and 1996 were as follows:

<TABLE> 
<CAPTION> 
                                                 1997                                                 1996
                         -------------------------------------------------    --------------------------------------------------
                             Commitment to              Commitment to             Commitment to               Commitment to
                          Purchase (Futures,           Sell (Futures,          Purchase (Futures,            Sell (Futures,
                            Options & Forwards)        Options & Forwards)        Options & Forwards)      Options & Forwards)
                         -------------------------------------------------------------------------------------------------------
<S>                          <C>                         <C>                      <C>                        <C> 
Interest Rates and                 
    Stock  Indices                 $ 6,524,597                $ 2,675,877              $ 63,801,511                $ 29,975,829
Commodities                            316,417                    237,959                 7,411,870                     670,528
Currencies                           6,866,705                  9,184,590                 9,913,048                  12,448,727
Energy                                 279,102                    249,165                 2,537,389                     613,726
Metals                                 117,033                    178,938                 9,385,390                   2,926,264
                         ----------------------     ----------------------    ----------------------      ----------------------
                                  $ 14,103,854               $ 12,526,529              $ 93,049,208                $ 46,635,074
                         ======================     ======================    ======================      ======================
</TABLE> 

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

Credit Risk

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

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

                                      -11-
<PAGE>
 
The Partnership also has credit risk because the sole counterparty or broker
with respect to most of the Partnership's assets is MLF.

The gross unrealized profit and net unrealized profit on the Partnership's
open derivative instrument positions as December 31, 1997 and 1996 were as
follows:

<TABLE> 
<CAPTION> 
                                       1997                                        1996
                       ----------------------------------       ------------------------------------
                         Gross Unrealized      Net Unrealized     Gross Unrealized    Net Unrealized
                              Profit               Profit              Profit            Profit
                       -----------------------------------------------------------------------------
<S>                       <C>                 <C>                  <C>                <C> 
Exchange-
  Traded                     $ 69,448           $ 59,134            $       -               $     -
Non-Exchange-
  Traded                      286,112              9,082               59,798                 3,892
                       ---------------       ------------       --------------        --------------
                            $ 355,560           $ 68,216            $  59,798               $ 3,892
                       ===============       ============       ==============        ==============
</TABLE> 

The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.

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


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


                          /s/ Michael A. Karmelin

                              Michael A. Karmelin
                            Chief Financial Officer
                    Merrill Lynch Investment Partners Inc.
                              General Partner of
                        ML Futures Investments II L.P.

                                      -12-