Exhibit 13.1
                                                                  ------------




                       PROFUTURES DIVERSIFIED FUND, L.P.

                                 ANNUAL REPORT

                               December 31, 2005

<PAGE>

                         NATIONAL FUTURES ASSOCIATION


                            Chicago, Illinois 60606



                                Commodity Pool:

                       PROFUTURES DIVERSIFIED FUND, L.P.



               Annual Report Pursuant to Part 4 of Chapter I of
                  Title 17 of the Code of Federal Regulations


                     For the year ended December 31, 2005








                           Commodity Pool Operator:

                               ProFutures, Inc.
                        11719 Bee Cave Road, Suite 200
                              Austin, Texas 78738
                                (800) 348-3601

<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.



                            ----------------------

                               TABLE OF CONTENTS

                            ----------------------


                                                                        PAGES
                                                                        -----

Affirmation of the Commodity Pool Operator                                1

Report of Independent Registered Public Accounting Firm                   2

Report of Independent Registered Public Accounting Firm                   3

Financial Statements

    Statements of Financial Condition                                     4

    Condensed Schedules of Investments                                    5

    Statements of Operations                                              6

    Statements of Changes in Partners' Capital (Net Asset Value)          7

    Notes to Financial Statements                                       8 - 12

<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                  AFFIRMATION OF THE COMMODITY POOL OPERATOR

                                ---------------









To the best of the knowledge and belief of the undersigned, the information
contained in the Annual Report for the year ended December 31, 2005 is
accurate and complete.





                                    /s/ GARY D. HALBERT
                                    ---------------------------------
                                    Gary D. Halbert, President
                                    ProFutures, Inc.
                                    PROFUTURES DIVERSIFIED FUND, L.P.



                                     - 1 -
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Partners
ProFutures Diversified Fund, L.P.

We have audited the accompanying statement of financial condition of
ProFutures Diversified Fund, L.P., including the condensed schedule of
investments, as of December 31, 2005, and the related statements of operations
and changes in partners' capital (net asset value) for the year ended December
31, 2005. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Partnership is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProFutures Diversified Fund,
L.P. as of December 31, 2005, and the results of its operations and the
changes in its net asset values for the year ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States
of America.


/s/ KBA Group LLP
Dallas, Texas
March 8, 2006



                                     - 2 -
<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            -------------------------------------------------------


To the Partners
ProFutures Diversified Fund, L.P.


We have audited the accompanying statement of financial condition of
ProFutures Diversified Fund, L.P., including the condensed schedule of
investments, as of December 31, 2004, and the statements of operations and
changes in partners' capital (net asset value) for the years ended December
31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Partnership is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Partnership's internal
control over financial reporting. Accordingly, we express no such opinion. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of ProFutures Diversified Fund,
L.P. as of December 31, 2004, and the results of its operations and the
changes in its net asset values for the years ended December 31, 2004 and
2003, in conformity with U.S. generally accepted accounting principles.


                                 /s/ ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.


Hunt Valley, Maryland
March 24, 2005



                                     - 3 -
<PAGE>

<TABLE>
<CAPTION>
                                            PROFUTURES DIVERSIFIED FUND, L.P.
                                            STATEMENTS OF FINANCIAL CONDITION
                                               December 31, 2005 and 2004

                                                  --------------------


                                                                                 2005                        2004
                                                                                 ----                        ----
<S>                                                                      <C>                          <C>
ASSETS
    Equity in broker trading accounts
        Cash                                                             $          22,398,315        $        23,446,968
        Option premiums paid                                                            23,550                          0
        Unrealized gain (loss) on open contracts                                     (761,849)                    513,916
                                                                         ----------------------       --------------------

                Deposits with broker                                                21,660,016                 23,960,884

    Cash                                                                                 2,648                     13,007
    Cash deposits in forward trading collateral accounts                            10,674,912                  9,084,727
    Unrealized (loss) on open forward currency contracts                             (326,881)                  (279,320)
                                                                         ----------------------       --------------------

                Total assets                                             $          32,010,695        $        32,779,298
                                                                         ======================       ====================

LIABILITIES
    Accounts payable                                                     $              51,071        $            32,176
    Commissions and other trading fees
        on open contracts                                                               40,880                     18,294
    Incentive fees payable                                                             296,921                    114,258
    Management fees payable (includes $98,289 and $101,471
        payable to the General Partner at December 31, 2005 and
        2004, respectively)                                                            280,502                    285,660
    Redemptions payable                                                                400,683                    247,257
                                                                         ----------------------       --------------------

                Total liabilities                                                    1,070,057                    697,645
                                                                         ----------------------       --------------------

PARTNERS' CAPITAL (Net Asset Value)
    General Partner - 187 and 225 units outstanding
        at December 31, 2005 and 2004                                                  560,244                    607,384
    Limited Partners - 10,147 and 11,657 units
        outstanding at December 31, 2005 and 2004                                   30,380,394                 31,474,269
                                                                         ----------------------       --------------------

                Total partners' capital
                    (Net Asset Value)                                               30,940,638                 32,081,653
                                                                         ----------------------       --------------------

                                                                         $          32,010,695        $        32,779,298
                                                                         ======================       ====================

                                                See Accompanying Notes.
</TABLE>



                                     - 4 -
<PAGE>

<TABLE>
<CAPTION>
                                          PROFUTURES DIVERSIFIED FUND, L.P.
                                          CONDENSED SCHEDULES OF INVESTMENTS
                                              December 31, 2005 and 2004

                                                   ---------------

                                                               2005                                 2004
                                                  --------------------------------    ---------------------------------

                                                                      % of Net                             % of Net
                                                       Value         Asset Value           Value         Asset Value
                                                   -------------       -------          ------------       -------
<S>                                                <C>                 <C>              <C>                <C>
Agricultural                                       $    119,327         0.38%           $     7,095         0.02%
Currency                                                (35,303)       (0.11)%               58,110         0.18%
Energy                                                  (93,005)       (0.30)%              (26,157)       (0.08)%
Interest rate                                           293,053         0.95%                95,860         0.30%
Metal                                                15,167,433        49.01%               112,468         0.35%
Stock index                                             (26,086)       (0.08)%              349,027         1.09%
                                                   -------------       -------          ------------       -------

Total long futures contracts                         15,425,419        49.85%               596,403         1.86%
                                                   -------------       -------          ------------       -------

Agricultural                                            (89,987)       (0.29)%              (39,719)       (0.12)%
Currency                                                (30,428)       (0.10)%              (13,726)       (0.04)%
Energy                                                  (33,372)       (0.11)%               20,802         0.06%
Interest rate                                           185,871         0.60%                26,762         0.08%
Metal                                               (16,231,246)      (52.45)%              (76,877)       (0.24)%
Stock index                                              16,694         0.05%                   271         0.00%
                                                   -------------       -------          ------------       -------

Total short futures contracts                       (16,182,468)      (52.30)%              (82,487)       (0.26)%
                                                   -------------       -------          ------------       -------

Total futures contracts                            $   (757,049)       (2.45)%          $   513,916         1.60%
                                                   =============       =======          ============       =======

Agricultural options                               $      5,550         0.02%           $         0            0%
Energy options                                           13,200         0.04%                     0            0%
                                                   -------------       -------          ------------       -------

Total purchased options on futures contracts       $     18,750         0.06%           $         0            0%
                                                   =============       =======          ============       =======

Long forward currency contracts                    $   (333,740)       (1.08)%          $   495,257         1.54%

Short forward currency contracts                          6,859         0.02%              (774,577)       (2.41)%
                                                   -------------       -------          ------------       -------

Total forward currency contracts                   $   (326,881)       (1.06)%          $  (279,320)       (0.87)%
                                                   =============       =======          ============       =======


                                               See accompanying notes.
</TABLE>



                                     - 5 -
<PAGE>

<TABLE>
<CAPTION>
                                                   PROFUTURES DIVERSIFIED FUND, L.P.
                                                       STATEMENTS OF OPERATIONS
                                          For the Years Ended December 31, 2005, 2004 and 2003

                                                            ---------------

                                                                  2005                      2004                      2003
                                                                  ----                      ----                      ----
<S>                                                        <C>                       <C>                       <C>
TRADING GAINS (LOSSES)
    Gain (loss) from futures trading
        Realized                                           $        6,184,059        $        6,744,693        $        7,100,121
        Change in unrealized                                      (1,275,765)               (1,502,106)                 (316,950)
        Brokerage commissions                                     (1,141,416)                 (856,269)                 (870,743)
                                                           -------------------       -------------------       -------------------

                Gain from futures trading                           3,766,878                 4,386,318                 5,912,428
                                                           -------------------       -------------------       -------------------

    Realized gain from investment in physical
    commodities                                                       580,729                         -                         -
                                                           -------------------       -------------------       -------------------

    Gain (loss) from forward currency trading
        Realized                                                    1,320,214                   805,336                 1,353,380
        Change in unrealized                                         (47,561)                 (882,202)                   602,882
                                                           -------------------       -------------------       -------------------

                Gain (loss) from forward currency trading           1,272,653                  (76,866)                 1,956,262
                                                           -------------------       -------------------       -------------------

                Total trading gains                                 5,620,260                 4,309,452                 7,868,690
                                                           -------------------       -------------------       -------------------

NET INVESTMENT INCOME (LOSS)
    Income
        Interest income                                               882,295                   442,893                   352,209
                                                           -------------------       -------------------       -------------------

    Expenses
        Incentive fees                                                849,102                 1,138,118                 1,456,891
        Management fees (includes $1,201,191, $1,050,783
           and $1,026,367 charged by the General Partner
           for the years ended December 31, 2005, 2004
           and 2003,respectively)                                   2,118,910                 2,160,170                 2,130,952
        Operating expenses                                            268,468                   202,142                   170,722
                                                           -------------------       -------------------       -------------------

                Total expenses                                      3,236,480                 3,500,430                 3,758,565
                                                           -------------------       -------------------       -------------------

                Net investment (loss)                             (2,354,185)               (3,057,537)               (3,406,356)
                                                           -------------------       -------------------       -------------------

                NET INCOME                                 $        3,266,075        $        1,251,915        $        4,462,334
                                                           ===================       ===================       ===================

NET INCOME PER GENERAL
    AND LIMITED PARTNER UNIT
        (based on weighted average number of
        units outstanding during the year of
        11,174, 12,454 and 13,669, respectively)           $           292.29        $           100.52        $           326.46
                                                           ===================       ===================       ===================

INCREASE IN NET ASSET VALUE
    PER GENERAL AND LIMITED
    PARTNER UNIT                                           $           294.10        $           101.44        $           324.44
                                                           ===================       ===================       ===================

                                                        See accompanying notes.
</TABLE>



                                     - 6 -
<PAGE>

<TABLE>
<CAPTION>
                                                   PROFUTURES DIVERSIFIED FUND, L.P.
                                     STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
                                         For the Years Ended December 31, 2005, 2004 and 2003

                                                            ---------------


                                           Total                                      Partners' Capital
                                         Number of           ---------------------------------------------------------------------
                                           Units                  General                 Limited                   Total
                                    --------------------     -------------------    --------------------     ---------------------
<S>                                 <C>                      <C>                    <C>                      <C>
Balances at December 31, 2002                    14,129              $  511,577            $ 31,618,764              $ 32,130,341

Net income for the year
    ended December 31, 2003                                              72,987               4,389,347                 4,462,334

Redemptions                                     (1,188)                       -             (2,966,994)               (2,966,994)
                                    --------------------     -------------------    --------------------     ---------------------

Balances at December 31, 2003                    12,941                 584,564              33,041,117                33,625,681

Net income for the year
    ended December 31, 2004                                              22,820               1,229,095                 1,251,915

Redemptions                                     (1,059)                       -             (2,795,943)               (2,795,943)
                                    --------------------     -------------------    --------------------     ---------------------

Balances at December 31, 2004                    11,882                 607,384              31,474,269                32,081,653

Net income for the year
    ended December 31, 2005                                              52,860               3,213,215                 3,266,075

Redemptions                                     (1,548)               (100,000)             (4,307,090)               (4,407,090)
                                    --------------------     -------------------    --------------------     ---------------------

Balances at December 31, 2005                    10,334      $          560,244     $        30,380,394      $         30,940,638
                                    ====================     ===================    ====================     =====================


                                                         Net Asset Value Per Unit
                                    --------------------------------------------------------------------

                                                                December 31,
                                           2005                     2004                   2003
                                    --------------------     -------------------    --------------------

                                    $          2,994.02      $         2,699.92     $          2,598.48
                                    ====================     ===================    ====================
</TABLE>



                            See accompanying notes.



                                     - 7 -
<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                         NOTES TO FINANCIAL STATEMENTS

                                ---------------


Note 1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          -----------------------------------------------------------

          A.   General Description of the Partnership

               ProFutures Diversified Fund, L.P. (the Partnership) is a
               Delaware limited partnership which operates as a commodity
               investment pool. The Partnership engages in the speculative
               trading of futures contracts, physical commodities and
               interbank forward currency contracts.

          B.   Regulation

               As a registrant with the Securities and Exchange Commission,
               the Partnership is subject to the regulatory requirements under
               the Securities Act of 1933 and the Securities Exchange Act of
               1934. As a commodity investment pool, the Partnership is
               subject to the regulations of the Commodity Futures Trading
               Commission, an agency of the United States (U.S.) government
               which regulates most aspects of the commodity futures industry;
               rules of the National Futures Association, an industry
               self-regulatory organization; and the requirements of commodity
               exchanges, Futures Commission Merchants (brokers), and
               interbank market makers through which the Partnership trades.

          C.   Method of Reporting

               The Partnership's financial statements are presented in
               accordance with accounting principles generally accepted in the
               United States of America, which require the use of certain
               estimates made by the Partnership's management.

               For purposes of both financial reporting and calculation of
               redemption value, Net Asset Value per Unit is calculated by
               dividing Net Asset Value by the total number of units
               outstanding.

          D.   Futures and Forward Currency Contracts

               Transactions are accounted for on the trade date. Gains or
               losses are realized when contracts are liquidated. Unrealized
               gains or losses on open contracts (the difference between
               contract trade price and market price) are reflected in the
               statement of financial condition as a net gain or loss, as
               there exists a right of offset of unrealized gains or losses in
               accordance with Financial Accounting Standards Board
               Interpretation No. 39 - "Offsetting of Amounts Related to
               Certain Contracts." Any change in net unrealized gain or loss
               from the preceding period is reported in the statement of
               operations.

          E.   Physical Commodities

               Physical commodities are stated at the market price on the
               valuation date. Transactions are recorded on the trade date.
               Realized gains and losses from physical commodity transactions
               are determined using the identified cost method. Any change in
               net unrealized gain or loss from the preceding period is
               reported in the statement of operations. Storage fees, sales
               commissions and delivery charges are reflected as an adjustment
               to cost or proceeds at the time of the transaction.

          F.   Brokerage Commissions

               Brokerage commissions include other trading fees and are
               charged to expense when contracts are opened.



                                     - 8 -
<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                ---------------

Note 1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          -----------------------------------------------------------
          (CONTINUED)
          ----------

          G.   Income Taxes

               The Partnership prepares calendar year U.S. and applicable
               state information tax returns and reports to the partners their
               allocable shares of the Partnership's income, expenses and
               trading gains or losses.

          H.   Foreign Currency Transactions

               The Partnership's functional currency is the U.S. dollar;
               however, it transacts business in currencies other than the
               U.S. dollar. Assets and liabilities denominated in currencies
               other than the U.S. dollar are translated into U.S. dollars at
               the rates in effect at the date of the statement of financial
               condition. Income and expense items denominated in currencies
               other than the U.S. dollar are translated into U.S. dollars at
               the rates in effect during the period. Gains and losses
               resulting from the translation to U.S. dollars are reported in
               income currently.

          I.   Statements of Cash Flows

               The Partnership has elected not to provide statements of cash
               flows as permitted by Statement of Financial Accounting
               Standards No. 102 - "Statement of Cash Flows - Exemption of
               Certain Enterprises and Classification of Cash Flows from
               Certain Securities Acquired for Resale."

Note 2.   GENERAL PARTNER
          ---------------

          The General Partner of the Partnership is ProFutures, Inc., which
          conducts and manages the business of the Partnership. The Agreement
          of Limited Partnership requires the General Partner to contribute to
          the Partnership an amount in the aggregate equal to at least the
          greater of (i) 3% of the aggregate initial capital contributions of
          all partners or $100,000, whichever is less, or (ii) 1% of the
          aggregate initial capital contributions of all partners.

          The Agreement of Limited Partnership also requires that the General
          Partner maintain in the aggregate a net worth at least equal to (i)
          the lesser of $250,000 or 15% of the aggregate initial capital
          contributions of any limited partnerships for which it acts as
          general partner and which are capitalized at less than $2,500,000;
          and (ii) 10% of the aggregate initial capital contributions of any
          limited partnerships for which it acts as general partner and which
          are capitalized at greater than $2,500,000.

          Effective October 22, 2004, ProFutures, Inc. has a callable stock
          subscription agreement with Man Financial Inc. (MFI), the
          Partnership's broker, whereby MFI has subscribed to purchase (up to
          $7,000,000, subject to conditions set forth in the stock
          subscription agreement dated October 22, 2004) the number of shares
          of common stock of ProFutures, Inc. necessary to maintain the
          General Partner's net worth requirements. Prior to October 22, 2004,
          ProFutures, Inc. had a callable stock subscription agreement with
          ABN AMRO Incorporated (ABN), the Partnership's prior broker, whereby
          ABN had subscribed to purchase (up to $7,000,000, subject to the
          conditions set forth in the stock subscription agreement as amended
          effective May 20, 2002) the number of shares of common stock of
          ProFutures, Inc. necessary to maintain the General Partner's net
          worth requirements.



                                    - 9 -
<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                ---------------

Note 2.   GENERAL PARTNER (CONTINUED)
          ---------------------------

          The Partnership pays the General Partner a monthly management fee of
          1/4 of 1% (3% annually) of month-end Net Asset Value. Effective
          October 16, 2004, the Partnership pays the General Partner an
          additional monthly management fee of .0625% (.75% annually) of the
          Partnership's month-end Net Asset Value for consulting services
          rendered to the Partnership.

          Total management fees earned by ProFutures, Inc. for the years ended
          December 31, 2005, 2004 and 2003 were $1,201,191, $1,050,783 and
          $1,026,367, respectively. Management fees payable to ProFutures,
          Inc. as of December 31, 2005 and 2004 were $98,289 and $101,471,
          respectively.

Note 3.   CONSULTANTS
          -----------

          On October 25, 2004, the Partnership entered into a consulting
          agreement effective November 1, 2004, with Altegris Investments,
          Inc. (Altegris), whereby Altegris will recommend the selection and
          termination of the Partnership's trading advisors and the allocation
          and reallocation of the Partnership's assets. Pursuant to the
          consulting agreement, Altegris receives a monthly consulting fee
          equal to .0208% (.25% annually) of the Partnership's month-end Net
          Asset Value. The consulting fee (included in management fees in the
          statement of operations) earned by Altegris totaled $89,079 for the
          year ended December 31, 2005.

          Prior to October 15, 2004, Kenmar Global Strategies Inc. (Kenmar)
          assisted the General Partner in making decisions about which
          commodity trading advisors to hire, the allocations among the
          advisors and the day-to-day monitoring and risk management of the
          Partnership's trading activities. Kenmar received a monthly
          management fee of 1/12 of 1% (1% annually) of month-end Net Asset
          Value. Effective October 15, 2004, ProFutures, Inc. terminated the
          consulting agreement between Kenmar and the Partnership.
          Accordingly, Kenmar was paid a pro rated monthly management fee for
          the period October 1, 2004 through October 15, 2004. Management fees
          earned by Kenmar totaled $266,317 and $342,122 for the years ended
          December 31, 2004 and 2003, respectively.

Note 4.   COMMODITY TRADING ADVISORS
          --------------------------

          The Partnership has trading advisory contracts with several
          commodity trading advisors to furnish investment management services
          to the Partnership. The trading advisors receive management fees
          ranging from 1% to 2% annually of Allocated Net Asset Value (as
          defined in each respective trading advisory contract). In addition,
          the trading advisors receive quarterly incentive fees ranging from
          20% to 25% of Trading Profits (as defined). Total management fees
          earned by the trading advisors amounted to $837,640, $829,419 and
          $762,463 for the years ended December 31, 2005, 2004 and 2003,
          respectively.

Note 5.   DEPOSITS WITH BROKER
          --------------------

          The Partnership deposits funds with MFI (ABN prior to October 2004)
          to act as broker, subject to Commodity Futures Trading Commission
          regulations and various exchange and broker requirements. Margin
          requirements are satisfied by the deposit of cash with such broker.
          Accordingly, assets used to meet margin and other broker or
          regulatory requirements are partially restricted. The Partnership
          earns interest income on its assets deposited with the broker.



                                    - 10 -
<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                ---------------

Note 6.   SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
          --------------------------------------------

          Investments in the Partnership were made by subscription agreement,
          subject to acceptance by the General Partner. The Partnership's most
          recent offering of Units of Limited Partnership Interest terminated
          on April 30, 1995.

          The Partnership is not required to make distributions, but may do so
          at the sole discretion of the General Partner. A Limited Partner may
          request and receive redemption of units owned, subject to
          restrictions in the Agreement of Limited Partnership.

Note 7.   TRADING ACTIVITIES AND RELATED RISKS
          ------------------------------------

          The Partnership engages in the speculative trading of U.S. and
          foreign futures contracts, physical commodities and forward currency
          contracts (collectively, "derivatives"). The Partnership is exposed
          to both market risk, the risk arising from changes in the market
          value of the contracts, and credit risk, the risk of failure by
          another party to perform according to the terms of a contract.

          Purchase and sale of futures contracts and physical commodities
          requires margin deposits with the broker. Additional deposits may be
          necessary for any loss on contract value. The Commodity Exchange Act
          requires a broker to segregate all customer transactions and assets
          from such broker's proprietary activities. A customer's cash and
          other property (for example, U.S. Treasury bills) deposited with a
          broker are considered commingled with all other customer funds
          subject to the broker's segregation requirements. In the event of a
          broker's insolvency, recovery may be limited to a pro rata share of
          segregated funds available. It is possible that the recovered amount
          could be less than total cash and other property deposited.

          For derivatives, risks arise from changes in the market value of the
          contracts. Theoretically, the Partnership is exposed to a market
          risk equal to the notional contract value of futures and forward
          currency contracts purchased and unlimited liability on such
          contracts sold short. The Partnership is also exposed to market risk
          on physical commodities equal to the market value of physical
          commodities owned.

          The Partnership has a portion of its assets on deposit with a
          financial institution in connection with its trading of forward
          currency contracts and its cash management activities. In the event
          of a financial institution's insolvency, recovery of Partnership
          assets on deposit may be limited to account insurance or other
          protection afforded such deposits. Since forward currency contracts
          are traded in unregulated markets between principals, the
          Partnership also assumes the risk of loss from counterparty
          nonperformance.

          The General Partner has established procedures to actively monitor
          market risk and minimize credit risk, although there can be no
          assurance that it will, in fact, succeed in doing so. The General
          Partner's basic market risk control procedures consist of
          continuously monitoring the trading activity of the various
          commodity trading advisors, with the actual market risk controls
          being applied by Altegris (Kenmar prior to October 15, 2004), as a
          consultant, and the advisors themselves. The General Partner seeks
          to minimize credit risk primarily by depositing and maintaining the
          Partnership's assets at financial institutions and brokers which the
          General Partner believes to be creditworthy. The Limited Partners
          bear the risk of loss only to the extent of the market value of
          their respective investments and, in certain specific circumstances,
          distributions and redemptions received.



                                    - 11 -
<PAGE>

                       PROFUTURES DIVERSIFIED FUND, L.P.
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                ---------------

Note 8.   INDEMNIFICATIONS
          ----------------

          In the normal course of business, the Partnership enters into
          contracts and agreements that contain a variety of representations
          and warranties and which provide general indemnifications. The
          Partnership's maximum exposure under these arrangements is unknown,
          as this would involve future claims that may be made against the
          Partnership that have not yet occurred. The Partnership expects the
          risk of any future obligation under these indemnifications to be
          remote.

Note 9.   FINANCIAL HIGHLIGHTS
          --------------------

          The following information presents per unit operating performance
          data and other supplemental financial data for the years ended
          December 31, 2005, 2004 and 2003. This information has been derived
          from information presented in the financial statements.

<TABLE>
<CAPTION>
                                                                                2005           2004           2003
                                                                                ----           ----           ----
           Per Unit Performance
           (for a unit outstanding throughout the entire year)
           ---------------------------------------------------
           <S>                                                                <C>            <C>             <C>
           Net asset value per unit at beginning of year                      $2,699.92      $2,598.48       $2,274.04
                                                                            ------------   ------------    ------------
           Income (loss) from operations:
                Total trading gains (1)                                          504.78         346.95          573.64
                Net investment (loss) (1)                                       (210.68)       (245.51)        (249.20)
                                                                            ------------   ------------    ------------
                      Total income from operations                               294.10         101.44          324.44
                                                                            ------------   ------------    ------------
           Net asset value per unit at end of year                            $2,994.02      $2,699.92       $2,598.48
                                                                            ============   ============    ============
           Total Return                                                           10.89 %         3.90 %         14.27 %
                                                                            ============   ============    ============
           Supplemental Data

           Ratios to average net asset value:
                Expenses prior to incentive fees                                   7.60 %         7.19 %          6.83 %
                Incentive fees                                                     2.70 %         3.47 %          4.33 %
                                                                            ------------   ------------    ------------
                      Total expenses                                              10.30 %        10.66 %         11.16 %
                                                                            ============   ============    ============
                Net investment (loss) (2)                                         (4.79)%        (5.85)%         (5.79)%
                                                                            ============   ============    ============
</TABLE>

          Total returns are calculated based on the change in value of a unit
          during the year. An individual partner's total returns and ratios
          may vary from the above total returns and ratios based on the
          timing of redemptions.


          ------------------------
          (1)  The net investment (loss) per unit is calculated by dividing
               the net investment (loss) by the average number of units
               outstanding during the year. Total trading gains is a balancing
               amount necessary to reconcile the change in net asset value per
               unit with the other per unit information. Such balancing amount
               may differ from the calculation of total trading gains per unit
               due to the timing of trading gains and losses during the year
               relative to the number of units outstanding.
          (2)  Excludes incentive fees.



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