ML GLOBAL HORIZONS LP
10-K405, 1999-03-30
REAL ESTATE INVESTMENT TRUSTS
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<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

                                   FORM 10-K

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

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

                       Commission file number:  0-23240

                            ML GLOBAL HORIZONS L.P.
            ------------------------------------------------------        
            (Exact name of registrant as specified in its charter)

             DELAWARE                                            13-3716393    
   -------------------------------                          --------------------
   (State or other jurisdiction of                          (I.R.S. Employer
   incorporation or organization)                           Identification No.)

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

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


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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes   X    No ___
                                           ---

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

Aggregate market value of the voting and non-voting common equity held by non-
affiliates: the registrant is a limited partnership; as of February 1, 1999,
limited partnership units with an aggregate value of $99,416,215 were
outstanding and held by non-affiliates.

                      DOCUMENTS INCORPORATED BY REFERENCE

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

                      ANNUAL REPORT FOR 1998 ON FORM 10-K

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

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

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

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

Item 4.  Submission of Matters to a Vote of Security Holders......................................   5


                                     PART II
                                     -------

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

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................  14

Item 8.  Financial Statements and Supplementary Data..............................................  18

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....  18


                                     PART III
                                     --------

Item 10. Directors and Executive Officers of the Registrant.......................................  19

Item 11. Executive Compensation...................................................................  21

Item 12. Security Ownership of Certain Beneficial Owners and Management...........................  21

Item 13. Certain Relationships and Related Transactions...........................................  21


                                     PART IV
                                     -------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................  23
</TABLE> 


                                      -i-
<PAGE>
 
                                    PART I

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

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

             ML Global Horizons L.P. (the "Partnership" or the "Fund") was
organized under the Delaware Revised Uniform Limited Partnership Act on May 11,
1993 and began trading operations on January 4, 1994. The Partnership trades in
the international futures and forward markets under the direction of multiple
independent professional advisors (the "Trading Advisors" or the "Advisors")
applying proprietary strategies. The Fund's objective is to achieve, through
speculative trading, substantial capital appreciation over time.

             Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP"), organized in 1986, acts as the general partner of the Partnership and
allocates the Fund's assets among Advisors unaffiliated with MLIP, each of which
trades independently of the others. Merrill Lynch Futures Inc. (the "Commodity
Broker" or "MLF") is the Partnership's commodity broker. The General Partner is
a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The Commodity
Broker is an indirect wholly-owned subsidiary of ML&Co. ML&Co and its affiliates
are herein sometimes referred to as "Merrill Lynch".

             When the Fund is offering its units of limited partnership interest
("Units"), it receives and processes subscriptions, on a continuous basis
throughout each month. Investors whose subscriptions are accepted during a month
are admitted to the Fund as Limited Partners as of the beginning of the
immediately following month, acquiring Units at the Net Asset Value per Unit as
of the date of admission. Investors' customer securities accounts are debited in
the amount of their subscriptions on a single monthly settlement date within
approximately five business days of the issuance of the Units.

             As of December 31, 1998, the capitalization of the Fund was
$104,435,611, and the Net Asset Value per Unit, originally $100 as of January 4,
1994, had risen to $163.42.

             Through December 31, 1998, the highest month-end Net Asset Value
per Unit was $163.42 (December, 1998) and the lowest $97.36 (February, 1994).

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

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

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

             GENERAL

             The Fund trades in the international futures, options on futures
and forward markets with the objective of achieving substantial capital
appreciation over time.

             The Fund's assets are allocated and reallocated by MLIP to the
trading management of independent Trading Advisors applying proprietary
strategies in numerous markets.

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

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

             USE OF PROCEEDS AND INTEREST INCOME

                                      -1-
<PAGE>
 
             Subscription Proceeds.  MLIP pays from its own funds the selling
             ---------------------
commissions relating to the sale of the Units. Accordingly, 100% of the proceeds
of Unit sales are received in cash by the Partnership and available for use in
its speculative trading. In such trading, the Fund's assets are used as security
for and to pay the Partnership's trading losses, as well as any expenses and
redemptions. The primary use of the proceeds of the sale of the Units is to
permit the Advisors to trade on a speculative basis in a wide range of different
futures, forwards and options on futures markets on behalf of the Partnership.
While being used for this purpose, the Partnership's assets are also generally
available to earn interest, as more fully described below.  The Fund's last 
offering of Units was through March 31, 1998, for trading effective April 1, 
1998.

             Market Sectors.  The Partnership trades in a diversified group of
             --------------  
markets under the direction of multiple independent Advisors. These Advisors
can, and do, from time to time, materially alter the allocation of their overall
trading commitments among different market sectors. There is, essentially, no
restriction on the commodity interests which may be traded by any Advisor or the
rapidity with which an Advisor may alter its market sector allocations.

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

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

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

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

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

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

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

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

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

                                      -2-
<PAGE>
 
                             ____________________ 


          CHARGES

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

<TABLE> 
<CAPTION> 
                                          1998                           1997                         1996
                           ----------------------------------------------------------------------------------------------
                                              % of Average                    % of Average                 % of Average 
                                 Dollar        Month-End         Dollar        Month-End       Dollar        Month-End  
        Charges                  Amount        Net Assets        Amount        Net Assets      Amount        Net Assets 
- -------------------------------------------------------------------------------------------------------------------------
<S>                           <C>             <C>              <C>            <C>           <C>            <C>           
Brokerage                     
Commissions                   $  8,970,371        7.44%        $ 7,727,226       7.19%      $ 6,646,004          7.55%
Administrative Fee                 309,323        0.25%            266,456       0.25%           57,091          0.06%
Profit Shares                    3,920,850        3.25%          1,666,616       1.55%        1,808,020          2.05%
Incentive Override                 153,883        0.13%            289,162       0.27%          834,271          0.95%
                              -------------------------------------------------------------------------------------------
Total                         $ 13,354,427       11.07%        $ 9,949,460       9.26%      $ 9,345,386         10.61%
                              ===========================================================================================
</TABLE> 

                             ____________________ 

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

          The Fund's average month-end Net Assets during 1998, 1997 and 1996
equaled $120,645,332, $107,466,882, and $87,987,052, respectively. 

          During 1998, 1997 and 1996, the Fund earned $6,051,782, $5,278,840 and
$3,978,137 in interest income, or approximately 5.02%, 4.91% and 4.52%, of the
Fund's average month-end Net Assets.

          Effective October 1, 1996, the 7.50% per annum Brokerage Commissions
paid by the Fund to MLF were recharacterized as 7.25% per annum Brokerage
Commissions and a 0.25% per annum Administrative Fee paid by the Fund to MLIP.
This recharacterization had no economic effect on the Fund. 

                                      -3-
<PAGE>
 
                        DESCRIPTION OF CURRENT CHARGES

<TABLE> 
<CAPTION> 
  RECIPIENT            NATURE OF PAYMENT            AMOUNT OF PAYMENT                                  
  ---------            -----------------            -----------------                                  
<S>                    <C>                          <C>                                                
MLF                    Brokerage Commissions        A flat-rate monthly commission of 0.6041 of 1% of  
                                                    the Fund's month-end assets (a 7.25% annual rate). 
                                                                                                       
                                                    During 1998, 1997 and 1996, the round-turn (each   
                                                    purchase and sale or sale and purchase of a single 
                                                    futures contract) equivalent rate of the Fund's    
                                                    flat-rate Brokerage Commissions was approximately  
                                                    $62, $98, and $74, respectively.                   
                                                                                                       
MLF                    Use of Fund assets           Merrill Lynch may derive an economic benefit from  
                                                    the deposit of certain of the Fund's U.S. dollar   
                                                    assets in accounts maintained at MLF.              
                                                                                                       
                                                                                                       
MLIP                   Administrative Fees          The Fund pays MLIP a monthly Administrative Fee    
                                                    equal to 0.020833 of 1% of the Fund's month-end    
                                                    assets (0.25% annually). MLIP pays all of the      
                                                    Fund's routine administrative costs.               
                                                                                                       
MLIB; Other            Bid-ask spreads              Bid-ask spreads on forward and related trades.     
Counterparties                                                                                         
                                                                                                       
MLIP                   Annual Incentive             Paid by the Fund as a whole on an annual basis and 
                       Overrides                    by reduction of the Net Asset Value of Units when  
                                                    redeemed. The Incentive Override equals 10% of any 
                                                    Net New Gain (as defined). Units may generate Net  
                                                    New Gain and be subject to paying an Incentive     
                                                    Override even though the Net Asset Value per Unit  
                                                    has declined below the purchase price of such      
                                                    Units.                                             
                                                                                                       
Trading Advisors       Profit Shares                Prior to January 1, 1997, all Advisors received    
                                                    quarterly Profit Shares ranging from 15% to 25%    
                                                    (depending on the Trading Advisor) of any New      
                                                    Trading Profit achieved by their Fund account. As  
                                                    of January 1, 1997, a number of Advisors agreed to 
                                                    receive only annual Profit Shares. Profit Shares   
                                                    are also paid upon redemption of Units and upon    
                                                    the reallocation of assets away from an Advisor. 
                                                    New Trading Profit is calculated separately in
                                                    respect of each Advisor, irrespective of the
                                                    overall performance of the Fund. The Fund may
                                                    pay substantial Profit Shares during periods
                                                    when it is incurring significant overall
                                                    losses.
                                                                                                       
Trading Advisors       Consulting fees              MLF pays the Advisors annual Consulting Fees       
                                                    generally ranging up to 2% of the Partnership's    
                                                    average month-end assets allocated to them for     
                                                    management, after reduction for a portion of the   
                                                    brokerage commissions.                             
                                                                                                       
MLF;                   Extraordinary expenses       Actual costs incurred; none paid to date.          
  Others
</TABLE> 

                             _____________________

                                      -4-
<PAGE>
 
          REGULATION

               The General Partner, the Trading Advisors and the Commodity
Broker are each subject to regulation by the Commodity Futures Trading
Commission (the "CFTC") and the National Futures Association. Other than in
respect of its periodic reporting requirements under the Securities Exchange Act
of 1934, and the registration of the Units for continuous public distribution
under the Securities Act of 1933, the Partnership itself is generally not
subject to regulation by the Securities and Exchange Commission. However, MLIP
itself is registered as an "investment adviser" under the Investment Advisers
Act of 1940.

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

               (xiii)  The Partnership has no employees.

          (d)  Financial Information about Geographic Areas
               --------------------------------------------

               The Partnership trades, from the United States, on a number of
foreign commodity exchanges. The Partnership does not engage in the sales of
goods or services.

ITEM 2:  PROPERTIES
         ----------
                   
               The Partnership does not use any physical properties in the
conduct of its business.

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

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

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

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

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

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

                                    PART II

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

  Item 5(a)

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

         There is no established public trading market for the Units, nor will
         one develop. Rather, Limited Partners may purchase or redeem Units as
         of the end of each month at Net Asset Value, subject to certain early
         redemption charges.

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

         As of December 31, 1998, there were 4,751 holders of Units, including
         the General Partner.

                                      -5-
<PAGE>
 
  (c)    Dividends:
         ---------

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

  Item 5(b)

         Not applicable.

ITEM 6:  SELECTED FINANCIAL DATA
         -----------------------

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

<TABLE> 
<CAPTION> 
                                     FOR THE YEAR      FOR THE YEAR      FOR THE YEAR      FOR THE YEAR          FOR THE PERIOD 
                                         ENDED            ENDED              ENDED             ENDED          FROM JANUARY 4, 1994 
                                     DECEMBER 31,      DECEMBER 31,      DECEMBER 31,      DECEMBER 31,          TO DECEMBER 31,
INCOME STATEMENT DATA                    1998              1997              1996              1995                   1994 
- ------------------------------------------------------------------------------------------------------------------------------------

<S>                               <C>                  <C>               <C>               <C>                <C> 
Revenues:                                                                                
                                                                                         
Trading Profits                                                                          
     Realized Gain                 $       17,962,463  $     6,111,341   $     20,458,327  $      17,455,764  $          453,726
     Change in Unrealized                                                                                                        
     (Loss) Gain                           (4,718,157)       6,329,441         (3,294,990)           299,233           5,331,556 
                                  -----------------------------------------------------------------------------------------------
     Total Trading Results                 13,244,306       12,440,782         17,163,337         17,754,997           5,785,282
                                  -----------------------------------------------------------------------------------------------
                                                                                         
Interest Income                             6,051,782        5,278,840          3,978,137          3,786,925           1,972,722
                                  -----------------------------------------------------------------------------------------------
                                                                                         
     Total Revenues                        19,296,088       17,719,622         21,141,474         21,541,922           7,758,004
                                  -----------------------------------------------------------------------------------------------
                                                                                         
Expenses:                                                                                
     Brokerage Commissions                  8,970,371        7,727,226          6,646,004          5,723,755           3,859,267
     Profit Shares                          3,920,850        1,666,616          1,808,020          1,492,857           1,103,649
     Administrative Fees                      309,323          266,456             57,091                  -                   -
     Incentive Override                       153,883          289,162            834,271            965,454              41,867
     Total Expenses                        13,354,427        9,949,460          9,345,386          8,182,066           5,004,783
                                  -----------------------------------------------------------------------------------------------
Net Income                         $        5,941,661  $     7,770,162   $     11,796,088  $      13,359,856  $        2,753,221
                                  ===============================================================================================
</TABLE> 

<TABLE> 
<CAPTION> 
BALANCE SHEET DATA            DECEMBER 31, 1998  DECEMBER 31, 1997   DECEMBER 31, 1996   DECEMBER 31, 1995    DECEMBER 31, 1994 *
- ---------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                <C>                 <C>                 <C>                  <C> 
Fund Net Asset Value          $ 104,435,611      $ 134,044,365        $ 84,173,541       $ 89,140,493        $ 67,078,533
Net Asset Value per Unit      $      163.42      $      153.86        $     142.95       $     124.35        $     104.08
                              ===================================================================================================
</TABLE> 

*Balance Sheet Data is based on redemption values which differs immaterially
from Net Asset Values as determined under Generally Accepted Accounting
Principals ("GAAP") due to the treatment of organizational and initial offering
cost reimbursements.

                               ________________

                                      -6-
<PAGE>
 
<TABLE> 
<CAPTION> 
- -----------------------------------------------------------------------------------------------------------------------------
                                                MONTH-END NET ASSET VALUE PER UNIT
- -----------------------------------------------------------------------------------------------------------------------------
          Jan.      Feb.     Mar.      Apr.      May      June      July      Aug.     Sept.     Oct.      Nov.      Dec.
- -----------------------------------------------------------------------------------------------------------------------------
<S>       <C>      <C>       <C>       <C>      <C>       <C>       <C>       <C>      <C>       <C>       <C>       <C> 
   1994   $ 98.60  $ 97.36   $ 98.60   $ 98.99  $102.25   $104.98   $102.64   $100.63  $102.16   $104.27   $103.89   $104.08
- -----------------------------------------------------------------------------------------------------------------------------
   1995   $101.22  $106.76   $116.51   $118.56  $121.04   $120.69   $116.88   $116.54  $115.14   $115.01   $117.18   $124.35
- -----------------------------------------------------------------------------------------------------------------------------
   1996   $125.91  $117.82   $119.43   $128.54  $123.56   $127.71   $123.72   $124.28  $128.97   $138.94   $146.22   $142.95
- -----------------------------------------------------------------------------------------------------------------------------
   1997   $146.53  $151.84   $152.92   $149.41  $146.53   $146.46   $155.70   $148.90  $149.80   $147.06   $148.57   $153.86
- -----------------------------------------------------------------------------------------------------------------------------
   1998   $154.11  $155.99   $156.90   $148.38  $148.82   $148.13   $146.66   $154.13  $157.43   $159.62   $162.62   $163.42
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

The Net Asset Value per Unit varies, until December 31, 1995, from how it would
be calculated for purposes of GAAP, due to the amortization of organizational
and initial offering costs.

                                      -7-
<PAGE>


                           ML GLOBAL HORIZONS L.P.
                               December 31, 1998
Type of Pool:  Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
                    Inception of Trading:   January 4, 1994
                   Aggregate Subscriptions:    $174,343,595
                    Current Capitalization:   $104,435,611
                  Worst Monthly Drawdown/(2)/:   (6.42)%  (2/96)
            Worst Peak-to-Valley Drawdown/(3)/:  (6.52)%  (4/98-7/98)

                                ______________

            Net Asset Value per Unit, December 31, 1998:   $163.42

<TABLE> 
<CAPTION> 
     -----------------------------------------------------------------------------------
                                    MONTHLY RATES OF RETURN(4)
     -----------------------------------------------------------------------------------
     MONTH                           1998        1997        1996       1995       1994
     -----------------------------------------------------------------------------------
     <S>                            <C>         <C>        <C>        <C>         <C> 
     January                         0.16%       2.50%      1.25%     (2.74)%     (1.40)%
     -----------------------------------------------------------------------------------
     February                        1.22        3.62      (6.42)      5.48       (1.26)
     -----------------------------------------------------------------------------------
     March                           0.58        0.71       1.37       9.13        1.28
     -----------------------------------------------------------------------------------
     April                          (5.43)      (2.30)      7.63       1.76        0.40
     -----------------------------------------------------------------------------------
     May                             0.30       (1.93)     (3.87)      2.09        3.29
     -----------------------------------------------------------------------------------
     June                           (0.46)      (0.05)      3.35      (0.29)       2.67
     -----------------------------------------------------------------------------------
     July                           (0.99)       6.31      (3.12)     (3.15)      (2.23)
     -----------------------------------------------------------------------------------
     August                          5.09       (4.37)      0.45      (0.29)      (1.96)
     -----------------------------------------------------------------------------------
     September                       2.14        0.60       3.77      (1.21)       1.52
     -----------------------------------------------------------------------------------
     October                         1.39       (1.83)      7.73      (0.11)       2.06
     -----------------------------------------------------------------------------------
     November                        1.88        1.03       5.24       1.89       (0.37)
     -----------------------------------------------------------------------------------
     December                        0.49        3.56      (2.24)      6.12        0.18
     -----------------------------------------------------------------------------------
     Compound Annual                 
     Rate of Return                  6.22%       7.61%     14.96%     19.48%       4.08%
     -----------------------------------------------------------------------------------
</TABLE> 

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

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

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

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

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

        OPERATIONAL OVERVIEW; ADVISOR SELECTIONS

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

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

               MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. In particular, MLIP has to date made significantly fewer
reallocations of trading assets and adjustments in the Advisor combinations for
the Fund than in the case of many of MLIP's multi-advisor funds. However, there
can be no assurance as to the frequency or number of Advisor changes that may
take place in the future, or as to how long any of the current Advisors will
continue to manage assets for the Partnership.

        RESULTS OF OPERATIONS

               General. MLIP believes that multi-advisor futures funds should be
               -------
regarded as medium- to long-term (i.e., three to five year) investments, but it
is difficult to identify trends in the Fund's operations and virtually
impossible to make any predictions regarding future results based on the results
to date. An investment in the Fund may be less successful over a longer than a
shorter period.

               Markets with sustained price trends tend to be more favorable to
managed futures investments than whipsaw, choppy markets, but (i) this is not
always the case, (ii) it is impossible to predict when price trends will occur
and (iii) different Advisors are affected differently by trending markets as
well as by particular types of trends.

               MLIP attempts to control credit risk in the Fund's futures,
forward and options trading by trading only through MLF. MLF acts solely as a
broker or counterparty to the Fund's trades; it does not advise with respect to,
or direct, any such trading.

               MLIP attempts to control the market risk inherent in the Fund's
trading by MLIP's multi-advisor strategy and Trading Advisor selections. MLIP
reviews the positions acquired by the Advisors on a daily basis in an effort to
determine whether the overall positions of the Fund may have become what MLIP
analyzes as being excessively concentrated in a limited number of markets -- in
which case MLIP may, as of the next month-end or quarter-end, adjust the Fund's
Advisor combination and/or allocations so as to attempt to reduce the risk of
such over-concentration occurring in the future.

               MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized); however,
MLIP has not done so, to date, and does not presently intend to do so.

                                      -9-
<PAGE>
 
         PERFORMANCE SUMMARY

         1998


                                                  Total Trading
                                                     Results

          Interest Rates                          $ 13,700,880
          Stock Indices                             (1,850,085)
          Commodities                                 (113,534)
          Currencies                                 2,224,110
          Energy                                     4,392,566
          Metals                                    (5,109,631)
                                                  -------------
                                                  $ 13,244,306
                                                  =============

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

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

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

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

               Trading results in stock index markets were also mixed in early
1998, despite a strong first-quarter performance by the U.S. equity market as
several consecutive weekly gains were recorded with most market averages setting
new highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded 

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

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

          1997

                                                  Total Trading
                                                     Results

          Interest Rates                           $ 3,934,415
          Stock Indices                                (59,105)
          Commodities                                1,154,857
          Currencies                                 6,017,661
          Energy                                    (4,302,025)
          Metals                                     5,694,979
                                                  -------------
                                                  $ 12,440,782
                                                  =============

               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 representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC

                                      -11-
<PAGE>
 
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.

          1996

                                                   Total Trading
                                                       Results

          Interest Rates                           $ 9,760,028 
          Stock Indices                             (2,898,534)
          Commodities                               (1,260,126)
          Currencies                                 6,729,908 
          Energy                                     3,648,527 
          Metals                                     1,183,534 
                                                  -------------
                                                  $ 17,163,337 
                                                  =============

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

LIQUIDITY; CAPITAL RESOURCES

               The Fund borrows only to a limited extent and only on a strictly 
short-term basis in order to finance losses on non-U.S. dollar denominated
trading positions pending the conversion of the Fund's dollar deposits. These
borrowings are at a prevailing short-term rate in the relevant currency. They
have been immaterial to the Fund's operation to date and are expected to
continue to be so.

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

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

        YEAR 2000 COMPLIANCE INITIATIVE

               As the millennium approaches, Merrill Lynch has undertaken
initiatives to address the Year 2000 problem (the "Y2K problem"). The Y2K
problem is the result of a widespread programming technique that causes computer
systems to identify a date based on the last two numbers of a year, with the
assumption that the first two numbers of the year are "19". As a result, the
year 2000 would be stored as "00," causing computers to incorrectly interpret
the year as 1900. Left uncorrected, the Y2K problem may cause information
technology systems (e.g., computer databases) and non-information technology
systems (e.g., elevators) to produce incorrect data or cease operating
completely.

                                      -12-
<PAGE>
 
          Merrill Lynch believes that it has identified and evaluated its
internal Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. The resource-
intensive renovation phase (as further discussed) of Merrill Lynch's Year 2000
efforts was approximately 95% completed as of January 31, 1999. Merrill Lynch
will focus primarily on completing its renovation and testing and on integration
of the Year 2000 programs of recent acquisitions during the remainder of 1999.
In order to focus attention on the Y2K problem, management has deferred certain
other technology projects: however, this deferral is not expected to have a
material adverse effect on the company's business, results of operations, or
financial condition.

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

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

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

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

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

          Merrill Lynch continues to survey and communicate with third parties
whose Year 2000 readiness is important to the company. Information technology
and non-information technology vendors and service providers are contacted in
order to obtain their Year 2000 compliance plans. Based on the nature of the
response and the importance of the product or service involved, Merrill Lynch
determines if additional testing is needed. The results of these efforts are
maintained in a database that is accessible throughout the firm. Third parties
that have been contacted include transactional counterparties, exchanges, and
clearinghouses; a process to access and rate their responses has been developed.
This information as well as other Year 2000 readiness information on particular
countries and their political subdivisions will be used by Merrill Lynch to
manage risk resulting from the Y2K problem. Management is unable at this point
to ascertain whether all significant third parties will successfully address the
Y2K problem. Merrill Lynch will continue to monitor third parties' Year 2000
readiness to determine if additional or alternative measures are necessary. In
connection with information technology and non-information technology products
and services, contingency plans,

                                      -13-
<PAGE>
 
which are developed at the business unit level, may include selection of
alternative vendors or service providers and changing business practices so that
a particular system is not needed. In the case of securities exchanges and
clearinghouses, risk mitigation could include the re-routing of business. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation will be successful. The
failure of exchanges, clearing organizations, vendors, service providers,
counterparties, regulators, or others to resolve their own processing issues in
a timely manner could have a material adverse effect on Merrill Lynch's
business, results of operations, and financial condition.

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

     EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") INITIATIVE
     -------------------------------------------------------

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

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

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

Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ---------------------------------------------------------- 

INTRODUCTION


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

          The Fund is a speculative commodity pool. Unlike an operating company,
the risk of market sensitive instruments traded by it is integral, not
incidental, to the Fund's main line of business.

          Market movements result in frequent changes in the fair market value
of the Fund's open positions and, consequently, in its earnings and cash flow.
The Fund's market risk is influenced by a wide variety of factors, including the
level and volatility of interest rates, exchange rates, equity price levels, the
market value of financial instruments and contracts, the diversification effects
among the Fund's open positions and the liquidity of the markets in which it
trades.

          The Fund, under the direction of its Trading Advisors, rapidly
acquires and liquidates both long and short positions in a wide range of
different markets. Consequently, it is not possible to predict how a possible
future market scenario will affect performance, and the Fund's past performance
is not necessarily indicative of its future results.

                                      -14-
<PAGE>
 
          Value at Risk is a measure of the maximum amount which the Fund could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Fund's speculative trading and the recurrence in the markets
traded by the Fund of market movements far exceeding expectations could result
in actual trading or non-trading losses far beyond the indicated Value at Risk
or the Fund's experience to date (i.e., "risk of ruin"). In light of the 
foregoing as well as the risks and uncertainties intrinsic to all future 
projections, the inclusion of the quantification in this section should not be 
considered to constitute any assurance or representations that the Fund's 
losses in any market sector will be limited to Value at Risk or by the Fund's 
attempt to manage market risk.

QUANTIFYING THE FUND'S TRADING VALUE AT RISK

          Quantitative Forward-Looking Statements
          ---------------------------------------

          The following quantitative disclosures regarding the Fund's market
risk exposures contain "forward-looking statements" within the meaning of the
safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of historical
fact.

          The Fund's risk exposure in the various market sectors traded by the
Advisors is quantified below in terms of Value at Risk. Due to the Fund's mark-
to-market accounting, any loss in the fair value of the Fund's open positions is
directly reflected in the Fund's earnings (realized or unrealized) and cash flow
(at least in the case of exchange-traded contracts in which profits and losses
on open positions are settled daily through variation margin).

          Exchange maintenance margin requirements have been used by the Fund as
the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum loss in the fair value of any given
contract incurred in 95% - 99% of the one-day time periods included in the
historical sample (generally approximately one year) researched for purposes of
establishing margin levels. Maintenance margin levels are established by dealers
and exchanges using historical price studies as well as an assessment of current
market volatility and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation.

          In the case of market sensitive instruments which are not exchange-
traded (almost exclusively currencies in the case of the Fund), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.

          The fair value of the Fund's futures and forward positions does not
have any optionality component. However, certain of the Advisors trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option.

          100% positive correlation in the different positions held in each
market risk category has been assumed. Consequently, the margin requirements
applicable to the open contracts have been aggregated to determine each trading
category's aggregate Value at Risk. The diversification effects resulting from
the fact that the Fund's positions are rarely, if ever, 100% positively
correlated have not been reflected. 

                                      -15-
<PAGE>
 
THE FUND'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS

          The following table indicates the trading Value at Risk associated
with the Fund's open positions by market category as of December 31, 1998. As of
December 31, 1998, the Fund's total capitalization was $104,435,611.

                           DECEMBER 31, 1998

                                               PERCENT OF TOTAL
MARKET SECTOR           VALUE AT RISK           CAPITALIZATION
- -------------           -------------           --------------

Interest Rates          $  1,485,947                      1.42%
Stock Indices              1,788,496                      1.71
Commodities                  492,438                       .47
Currencies                 3,022,541                      2.90
Energy                       578,300                       .55
Metals                       620,947                       .60
                        ------------            --------------
TOTAL                   $  7,988,669                      7.65%
                        ============            ==============



MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK

          The face value of the market sector instruments held by the Fund is
typically many times the applicable maintenance margin requirement (maintenance
margin requirements generally ranging between approximately 1% and 10% of
contract face value) as well as many times the capitalization of the Fund. The
magnitude of the Fund's open positions creates a "risk of ruin" not typically
found in most other investment vehicles. Because of the size of its positions,
certain market conditions unusual, but historically recurring from time to time
- -- could cause the Fund to incur severe losses over a short period of time. The
foregoing Value at Risk table -- as well as the past performance of the Fund --
gives no indication of this "risk of ruin."

NON-TRADING RISK

          Foreign Currency Balances; Cash on Deposit with MLF

          The Fund has non-trading market risk on its foreign cash balances not
needed for margin. However, these balances (as well as the market risk they
represent) are immaterial.

          The Fund also has non-trading market risk on the approximately 90% 95%
of its assets which are held in cash at MLF. The value of this cash is not
interest rate sensitive, but there is cash flow risk in that if interest rates
decline so will the cash flow generated on these monies. This cash flow risk is
immaterial.

QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES

          The following qualitative disclosures regarding the Fund's market risk
exposures -- except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Fund manages its primary market risk
exposures -- constitute forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act. The
Fund's primary market risk exposures as well as the strategies used and to be
used by MLIP and the Advisors for managing such exposures are subject to
numerous uncertainties, contingencies and risks, any one of which could cause
the actual results of the Fund's risk controls to differ materially from the
objectives of such strategies. Government interventions, defaults and
expropriations, illiquid markets, the emergence of dominant fundamental factors,
political upheavals, changes in historical price relationships, an influx of new
market participants, increased regulation and many other factors could result in
material losses as well as in material changes to the risk exposures and the
risk management strategies of the Fund. There can be no assurance that the
Fund's current market exposure and/or risk management strategies will not change
materially or that any such strategies will be effective in either the short- or
long-term. Investors must be prepared to lose all or substantially all of their
investment in the Fund.

                                      -16-
<PAGE>
 
          The following were the primary trading risk exposures of the Fund as
of December 31, 1998, by market sector.

          INTEREST RATES. Interest rate risk is the principal market exposure of
          --------------  
the Fund. Interest rate movements directly affect the price of derivative
sovereign bond positions held by the Fund and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the Fund's
profitability. The Fund's primary interest rate exposure is to interest rate
fluctuations in the United States and the other G-7 countries. However, the Fund
also takes positions in the government debt of smaller nations -- e.g., New
Zealand and Australia. The General Partner anticipates that G-7 interest rates
will remain the primary market exposure of the Fund for the foreseeable future.

          CURRENCIES. The Fund trades in a large number of currencies. However,
          ----------    
the Fund's major exposures have typically been in the dollar/yen, dollar/mark
and dollar/pound positions. The General Partner does not anticipate that the
risk profile of the Fund's currency sector will change significantly in the
future, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies. The
currency trading Value at Risk figure includes foreign margin amounts converted
into U.S. dollars with an incremental adjustment to reflect the exchange rate
risk of maintaining Value at Risk in a functional currency other than dollars.

          STOCK INDICES. The Fund's primary equity exposure is to G-7 equity
          ------------- 
index price movements. As of December 31, 1998, the Fund's primary exposures
were in the S&P 500, Financial Times (England), Nikkei (Japan) and DAX (Germany)
stock indices. The General Partner anticipates little, if any, trading in non-G-
7 stock indices. The Fund is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.

          METALS. The Fund's primary metals market exposure is to fluctuations
          -------
in the price of gold and silver. Although certain of the Advisors will from time
to time trade base metals such as aluminum, copper and tin, the principal market
exposures of the Fund have consistently been in the precious me etals, gold and
silver (and, to an extent, platinum). The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Fund.

          COMMODITIES. The Fund's primary commodities exposure is to
          ----------- 
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Soybeans, grains and orange juice accounted for
the substantial bulk of the Fund's commodities exposure as of December 31, 1998.
In the past, the Fund has had material market exposure to live cattle and
hogbellies and may do so again in the future. However, the General Partner
anticipates that the Advisors will maintain an emphasis on soybeans, grains and
orange juice, in which the Fund has historically taken its largest positions.

          ENERGY. The Fund's primary energy market exposure is to gas and oil
          ------
price movements, often resulting from political developments in the Middle East.
Although the Advisors trade natural gas to a limited extent, oil is by far the
dominant energy market exposure of the Fund. Oil prices are currently depressed,
but they can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.

QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE

          The following were the only non-trading risk exposures of the Fund as
of December 31, 1998.

          FOREIGN CURRENCY BALANCES. The Fund's primary foreign currency
          -------------------------
balances are in Japanese yen, German marks, British pounds and French francs.
The Fund has de minimis exchange rate exposure on these balances.

          U.S. DOLLAR BALANCES. The Fund holds its U.S. dollars in cash at MLF.
          --------------------
The Fund has immaterial cash-flow, interest-rate risk on its cash on deposit
with MLF.

                                      -17-
<PAGE>
 
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE

     Trading Risk

               The General Partner has procedures in place intended to control
market risk exposure, although there can be no assuran nce that they, in fact,
succeed in doing so. These procedures focus primarily on monitoring the trading
of the Advisors selected from time to time for the Fund, and reviewing
outstanding positions for over-concentrations ? both on an Advisor-by-Advisor
an???? d on an overall Fund basis. While MLIP does not itself intervene in the
markets to hedge or diversify the Fund's market exposure, MLIP 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.

               At the Advisor level, each Advisor applies its own risk
management policies to its trading. These policies generally limit the total
exposure that may be taken per "risk unit" of assets under management. In
addition, many Advisors follow diversification guidelines (often formulated in
terms of the maximum margin which they will commit to positions in any one
contract or group of related contracts), as well as imposing "stop-loss" points
at which open positions must be closed out. Occasionally, Advisors will limit
the market exposure of their Fund account through acquiring put or call options
which "collar" the risk of open positions. However, because of the typically
high degree of liquidity in the markets traded by the Fund and the expense of
acquiring options, most Advisors rely simply on stop-loss policies, requiring
the liquidation of positions once losses of a certain magnitude have been
incurred.

               Certain Advisors treat their risk control policies as strict
rules; others only as general guidelines for controlling risk.

     Non-Trading Risk

               The Fund controls the non-trading exchange rate risk of its
foreign currency balances by regularly converting these balances back into
dollars (no less frequently than twice a month, and more frequently if a
particular foreign currency balance becomes unusually high).

               The Fund has cash flow interest rate risk on its cash on deposit
with MLF in that declining interest rates would cause the income from such cash
to decline. However, a certain amount of cash or cash equivalents must be held
by the Fund in order to facilitate margin payments and pay expenses and
redemptions. MLIP does not take any steps to limit the cash flow risk on its
cash held on deposit at MLF.

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         -------------------------------------------

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

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

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

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

                                      -18-
<PAGE>
 
                                   PART III

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

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

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

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

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

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

JO ANN DI DARIO            Vice President, Chief Financial Officer and 
                           Treasurer, through April 30, 1999
                        
MICHAEL L. PUNGELLO        Vice President, Chief Financial Officer and 
                           Treasurer, effective May 1, 1999

JOSEPH H. MOGLIA           Director

ALLEN N. JONES             Director

STEPHEN G. BODURTHA        Director

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


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

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

               Jo Ann Di Dario was born in 1946. Ms. Di Dario is, through April
30, 1999, Vice President, Chief Financial Officer and Treasurer of MLIP. Before
joining MLIP in May 1998, she was self-employed for one year. From February 1996
to May 1997, she worked as a consultant for Global Asset Management, an
international mutual fund organizer and operator headquartered in London, where
she offered advice on restructuring their back-office operations. From May 1992
to January 1996, she served as a Vice President of Meridian Bank Corporation, a
regional bank holding company. She was responsible for managing the treasury
operations of Meridian Bank Corporation including its wholly-owned subsidiary,
Meridian Investment Company Inc. From September 1991 to May 1992, Ms. Di Dario
managed the Domestic Treasury Operations of First Fidelity Bank, a regional
bank. From January 1991 to September 1991, Ms. Di Dario was self-employed. For
the previous five years, Ms. Di Dario was Vice President, Secretary and
Controller of Caxton Corporation, a Commodity Pool Operator and Commodity
Trading Advisor. Her background includes seven

                                      -19-
<PAGE>
 
years of public accounting experience, and she graduated with high honors from
Stockton State College with a Bachelor of Science degree in Accounting.
 
               Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello will become Vice President, Chief Financial Officer and Treasurer of
MLIP. He was First Vice President and Senior Director of Finance for Merrill
Lynch's Operations, Services and Technology Group from January 1998 to March
1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche
LLP, and was a partner in their Financial Services practice from June 1990 to
December 1997. He graduated from Fordham University in 1979 with a Bachelor of
Science degree in accounting and received his Master of Business Administration
degree in Finance from New York University in 1987.

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

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

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

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

               As of December 31, 1998, the principals of MLIP owned Units with
an aggregate Net Asset Value of approximately $104,458 and MLIP's general
partner interest in the Fund was valued at approximately $1,356,079.

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

          (c)  Identification of Certain Significant Employees:
               -----------------------------------------------
               
                    None.

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

                    None.

                                      -20-
<PAGE>
 
          (e)  Business Experience:
               -------------------

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

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

                    None.

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

                    Not applicable.

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

               The directors and officers of the General Partner are remunerated
by the General Partner in their respective positions. The Partnership does not
itself have any officers, directors or employees. The Partnership pays Brokerage
Commissions to an affiliate of the General Partner and Incentive Overrides and
Administrative Fees to the General Partner. The General Partner or its
affiliates may also receive certain economic benefits from holding the Fund's
dollar assets in offset accounts, as described in Item 1(c) above. The directors
and officers receive no "other compensation" from the Partnership, and the
directors receive no compensation for serving as directors of the General
Partner. There are no compensation plans or arrangements relating to a change in
control of either the Partnership or the General Partner.

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

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

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

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

               As of December 31, 1998, the following officers of the General
Partner beneficially owned the following number of Units:

                                           Number of       Percent
               Name of Beneficial Owner   Units Owned      of Class
               ------------------------   -----------      --------
               John R. Frawley, Jr.       590             Less than 1%
               Jeffrey Chandor             50             Less than 1%

               As of December 31, 1998, the General Partner owned 8,298 Units
(unit-equivalent general partnership interests), which was approximately 1% of
the total Units outstanding.

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

               None.

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

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

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

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

                                      -21-
<PAGE>
 
cover losses on foreign currency positions.

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

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

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

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

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

               In 1998 the Partnership expensed: (i) Brokerage Commissions of
$8,970,371, which included $1,880,112 in consulting fees earned by the Trading
Advisors; (ii) Administrative Fees of $309,323 to MLIP; and (iii) Incentive
Overrides of $153,883 to MLIP. In addition, MLIP and its affiliates may have
derived certain economic benefits from possession of the Fund's assets, as well
as from foreign exchange and EFP trading.

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

               The fact that MLIP receives incentive compensation from the
Partnership (which is an unusual fee arrangement for MLIP) could cause MLIP to
manage the Partnership in a more speculative and "risky" fashion than MLIP
otherwise would.

          (c)  Indebtedness of Management:
               --------------------------
          
               The Partnership is prohibited from making any loans, to
management or otherwise.

          (d)  Transactions with Promoters:
               ---------------------------
               Not applicable.

                                      -22-
<PAGE>
 
                                    PART IV

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

<TABLE> 
<CAPTION> 
          (a)1.    Financial Statements (found in Exhibit 13.01):                                       Page
                   ---------------------------------------------                                        ----
                   <S>                                                                                  <C> 
                   Independent Auditors' Report                                                           1

                   Statements of Financial Condition as of December 31, 1998 and 1997                     2

                   For the years ended December 31, 1998, 1997 and 1996:
                              Statements of Income                                                        3
                              Statements of Changes in Partners' Capital                                  4

                   Notes to Financial Statements                                                       5-12
</TABLE> 

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

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

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

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

Designation              Description
- -----------              -----------
1.01                     Selling Agreement among the Partnership, the General
                         Partner, Merrill Lynch Futures, the Selling Agent and
                         the Trading Advisors.

Exhibit 1.01:            Is incorporated herein by reference from Exhibit 1.01 
- ------------             contained in Amendment No. 1 to the Registration  
                         Statement (File No. 33-62998) filed on September 10,
                         1993, on Form S-1 under the Securities Act of 1933 
                         (the  "Registrant's Registration Statement").  

3.01(i)                  Amended and Restated Certificate of Limited Partnership
                         of the Registrant, dated August 25, 1994.

Exhibit 3.01(i):         Is incorporated herein by reference from Exhibit
- ---------------          3.01(i) contained in the Registrant's Registration 
                         Statement.                                          
                        
3.01(ii)                 Amended and Restated Limited Partnership Agreement of
                         the Partnership. 

Exhibit 3.01(ii):        Is incorporated herein by reference from Exhibit
- ----------------         3.01(ii) contained in the Registrant's Registration 
                         Statement (as Exhibit A).                            

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

Exhibit 3.02(iii):       Is incorporated by reference from Exhibit 3.02(iii)
- -----------------        contained in the Registrant's report on Form 10-Q for 
                         the Quarter Ended June 30, 1995.                       

10.01(d)                 Form of Advisory Agreement between the Partnership,
                         Merrill Lynch Investment Partners Inc., Merrill Lynch
                         Futures Inc. and prospective trading advisors.

Exhibit 10.01(d):        Is incorporated by reference from Exhibit 10.01(d)
- ----------------         contained in the Registrant's report on Form 10-Q for
                         the Quarter Ended June 30, 1995.                      
                        

                                      -23-
<PAGE>
 
10.02                    Form of Consulting Agreement between each trading
                         advisor, the Partnership and Merrill Lynch Futures Inc.

Exhibit 10.02:           Is incorporated herein by reference from Exhibit 10.02
- -------------            contained in the Registrant's Registration Statement. 

10.03                    Form of Customer Agreement between the Partnership and
                         Merrill Lynch Futures Inc.

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

10.05                    Form of Subscription Agreement and Power of Attorney.

Exhibit 10.05:           Is incorporated herein by reference from Exhibit 10.05
- -------------            contained the Registrant's Registration Statement (as 
                         Exhibit D). 
                         
10.06                    Foreign Exchange Desk Service Agreement, dated July 1,
                         1993 among Merrill Lynch International Bank, Merrill
                         Lynch Investment Partners Inc., Merrill Lynch Futures
                         Inc. and the Fund.

Exhibit 10.06:           Is incorporated herein by reference from Exhibit 10.06
- -------------            contained in Amendment No. 1 to the Registration 
                         Statement. 

10.07                    Form of Advisory and Consulting Agreement Amendment
                         among Merrill Lynch Investment Partners Inc., each
                         Advisor, the Fund and Merrill Lynch Futures Inc.

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

13.01                    1998 Annual Report and Independent Auditors' Report.

Exhibit 13.01:           Is filed herewith.
- -------------
28.01                    Prospectus of the Partnership dated December 6, 1995. 

Exhibit 28.01:           Is incorporated by reference as filed with the
- -------------            Securities and Exchange Commission pursuant to Rule 424
                         under the Securities Act of 1933, Registration         
                         Statement (File No. 33-88994) on Form S-1, effective   
                         December 6, 1995).            
                        

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

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

                                      -24-
<PAGE>
 
                                  SIGNATURES


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

                                   ML GLOBAL HORIZONS L.P.

                                   By:  MERRILL LYNCH INVESTMENT PARTNERS INC.
                                        General Partner

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


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

<TABLE> 
<CAPTION> 
Signature                     Title                                                            Date
- ---------                     -----                                                            ----
<S>                           <C>                                                              <C> 
/s/ John R. Frawley, Jr.      Chairman, Chief Executive Officer, President and Director        March 25, 1999
- --------------------------    (Principal Executive Officer)
John R. Frawley, Jr.          

/s/ Jo Ann Di Dario           Vice President, Chief Financial Officer, and Treasurer           March 25, 1999
- --------------------------    (Principal Financial and Accounting Officer)
Jo Ann Di Dario               

/s/ Jeffrey F. Chandor        Senior Vice President, Director of Sales,                        March 25, 1999
- --------------------------    Marketing and Research, and Director
Jeffrey F. Chandor            

/s/ Allen N. Jones            Director                                                         March 25, 1999
- --------------------------
Allen N. Jones
</TABLE> 

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

<TABLE> 
<S>                                     <C>                                     <C> 
MERRILL LYNCH INVESTMENT                General Partner of Registrant           March 25, 1999 
 PARTNERS INC.

By: /s/ John R. Frawley, Jr.
    ---------------------------
    John R. Frawley, Jr.
</TABLE> 

                                      -25-
<PAGE>
 
                            ML GLOBAL HORIZONS L.P.

                                1998 FORM 10-K

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

                    Exhibit
                    -------

Exhibit 13.01       1998 Annual Report and Independent Auditors' Report

                                      -26-

<PAGE>
 
                   ML GLOBAL HORIZONS L.P.
                   (A Delaware Limited Partnership)


                   Financial Statements for the years ended
                   December 31, 1998, 1997 and 1996 And
                   Independent Auditors' Report



[LOGO] MERRILL LYNCH
<PAGE>
 
To: The Limited Partners of ML Global Horizons L.P.

ML Global Horizons L.P. (the "Fund" or the "Partnership") ended its fifth fiscal
year of trading on December 31, 1998 with a Net Asset Value ("NAV") per Unit of
$163.42, representing an increase of 6.21% from the December 31, 1997 NAV per
Unit of $153.86. During 1998, trading profits were generated in the interest
rate, energy and currency markets while losses were incurred in metals, stock
index and agricultural trading.

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

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

In currency markets, results early in the year were mixed, although marginally
profitable. During the second quarter, strong gains were realized in positions
in the Japanese yen, which weakened during June to an eight-year low versus the
U.S. dollar. Significant gains from Japanese yen trading continued into the
third quarter, and Japan's problems spread to other sectors of the global
economy, causing commodities prices to decline as demand from the Asian
economies weakened. Japan's deepening recession and credit crunch continued
through the fourth quarter, and the Fund achieved gains from long yen positions.
<PAGE>
 
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter of a European Central Bank consensus that ten to
fifteen percent of reserves should be made up of gold bullion, which was at the
low end of expectations. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.

Trading results in stock index markets were also mixed in early 1998, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a
three-year low. As U.S. equity markets declined in July and August, the Fund
profited from short positions in the S&P 500, most notably during August, when
the index dropped 14.5%. Volatility in September made for a difficult trading
environment in the stock index sector, and the Fund incurred modest losses,
although results remained profitable for the quarter and the year overall in
these markets

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

Despite a year of unprecedented volatility in key global markets, we were
pleased with the Fund's ability to generate a profit by trading both the long
and short side of a variety of markets, demonstrating its value as an element of
diversification in an investor's portfolio. We look forward to 1999 and the
opportunities it may present.

                                        Sincerely,
                                        John R. Frawley, Jr.
                                        President
                                        Merrill Lynch Investment Partners Inc.
                                        (General Partner)
<PAGE>
 
FOR THE EXCLUSIVE USE OF INVESTORS IN ML GLOBAL HORIZONS L.P. THIS ANNUAL REPORT
IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. AN
OFFER CAN ONLY BE MADE BY THE PROSPECTUS, AS SUPPLEMENTED, WHICH CONTAINS
IMPORTANT INFORMATION CONCERNING RISK FACTORS, PERFORMANCE AND OTHER MATERIAL
ASPECTS OF THE FUND, TOGETHER WITH SUMMARY FINANCIAL INFORMATION CURRENT WITHIN
60 DAYS. THE PROSPECTUS MUST BE READ CAREFULLY BEFORE ANY DECISION WHETHER TO
INVEST IS MADE. THIS ANNUAL REPORT MUST NOT BE REPRODUCED OR DISTRIBUTED IN ANY
MANNER. FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                           Page
                                                                           ----
<S>                                                                    <C> 
INDEPENDENT AUDITORS' REPORT                                                  1
                                                                       
FINANCIAL STATEMENTS FOR THE YEARS ENDED                               
 DECEMBER 31, 1998, 1997 AND 1996:                                     
                                                                       
 Statements of Financial Condition                                            2
                                                                       
 Statements of Income                                                         3
                                                                       
 Statements of Changes in Partners' Capital                                   4
                                                                       
 Notes to Financial Statements                                             5-12
</TABLE> 
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
- ----------------------------



To the Partners of ML Global Horizons L.P.:

We have audited the accompanying statements of financial condition of ML Global
Horizons L.P. (the "Partnership") as of December 31, 1998 and 1997, and the
related statements of income and of changes in partners' capital for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Global Horizons L.P. as of December 31,
1998 and 1997, and the results of its operations for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.



DELOITTE & TOUCHE LLP


New York, New York
February 4, 1999
<PAGE>
 

ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                                                               1998           1997
                                                          -------------   -------------
ASSETS
<S>                                                      <C>             <C> 
Equity in commodity futures trading accounts:
    Cash and option premiums                              $ 106,424,609   $ 127,759,932
    Net unrealized profit on open contracts                   3,947,083       8,665,240
Accrued interest (Note 2)                                       407,106         572,654
                                                          -------------   -------------

                TOTAL                                     $ 110,778,798   $ 136,997,826
                                                          =============   =============

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES:
    Brokerage commissions payable (Note 2)                $     669,289   $     825,958
    Profit Shares payable (Note 3)                            1,197,683       1,196,823
    Administrative fees payable (Note 2)                         23,079          28,540
    Redemptions payable                                       4,299,253         612,978
    Incentive Override payable (Note 2)                         153,883         289,162
                                                          -------------   -------------

            Total liabilities                                 6,343,187       2,953,461
                                                          -------------   -------------
PARTNERS' CAPITAL:
    General Partner (8,298 Units and 10,194 Units)            1,356,079       1,568,439
    Limited Partners (630,758 Units and 873,830 Units)      103,079,532     134,446,411
    Subscriptions receivable (0 Units and 12,807 Units)            --        (1,970,485)
                                                          -------------   -------------

            Total partners' capital                         104,435,611     134,044,365
                                                          -------------   -------------

                TOTAL                                     $ 110,778,798   $ 136,997,826
                                                          =============   =============
NET ASSET VALUE PER UNIT
(Based on 639,056 and 871,217 Units Outstanding)          $      163.42   $      153.86
                                                          =============   =============

</TABLE> 

See notes to financial statements.

                                      -2-
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                          1998              1997           1996
                                                      -------------   -------------   -------------
                                                       
<S>                                                    <C>             <C>             <C>    
 REVENUES:
     Trading profit (loss):
        Realized                                      $ 17,962,463    $  6,111,341   $ 20,458,327
        Change in unrealized                            (4,718,157)      6,329,441     (3,294,990)
                                                      -------------   -------------   -------------
            Total trading results                       13,244,306      12,440,782     17,163,337

    Interest income (Note 2)                             6,051,782       5,278,840      3,978,137
                                                      -------------   -------------   -------------
            Total revenues                              19,296,088      17,719,622     21,141,474
                                                      -------------   -------------   -------------

EXPENSES:
    Brokerage commissions (Note 2)                       8,970,371       7,727,226      6,646,004
    Profit Shares (Note 3)                               3,920,850       1,666,616      1,808,020
    Administrative fees (Note 2)                           309,323         266,456         57,091
    Incentive Override (Note 2)                            153,883         289,162        834,271
                                                      -------------   -------------   -------------
            Total expenses                              13,354,427       9,949,460      9,345,386
                                                      -------------   -------------   -------------
NET INCOME                                            $  5,941,661    $  7,770,162   $ 11,796,088
                                                      =============   =============  ==============
NET INCOME PER UNIT:
    Weighted average number of General Partner
     and Limited Partner Units outstanding (Note 4)        797,778         707,741        695,455
                                                      =============   =============  ==============

     Net income per weighted average General
       Partner and Limited Partner Unit               $       7.45    $      10.98   $      16.96
                                                      =============   =============  ==============


</TABLE>

See notes to financial statements.


                                      -3-
<PAGE>
 

ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
- -------------------------------

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>

 
                                                  Limited           General          Subscriptions
                                Units             Partners          Partner           Receivable                  Total
                            --------------      ---------------  ---------------     ---------------         --------------
<S>                        <C>                  <C>              <C>             <C>                 <C>    
PARTNERS' CAPITAL,
  DECEMBER 31, 1995            716,827         $  91,708,172     $   1,052,896     $  (3,620,575)            $  89,140,493

Subscriptions                  135,271            13,149,821            56,936         3,620,575                16,827,332

Redemptions                   (263,273)          (33,590,372)             --              --                   (33,590,372)

Net income                        --              11,621,500           174,588            --                    11,796,088
                            --------------      ---------------  -------------    ---------------             -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1996            588,825            82,889,121         1,284,420            --                    84,173,541

Subscriptions                  343,963            51,177,808           177,071            --                    51,354,879

Subscriptions receivable       (12,807)                  --               --          (1,970,485)               (1,970,485)

Redemptions                    (48,764)           (7,283,732)             --              --                    (7,283,732)

Net income                        --               7,663,214           106,948            --                     7,770,162
                            --------------      ---------------  --------------    ----------------           -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1997            871,217           134,446,411         1,568,439        (1,970,485)              134,044,365
 
Subscriptions                   43,666             6,798,138             8,766            --                     6,806,904

Subscriptions receivable        12,807                 --                 --          1,970,485                  1,970,485

Redemptions                   (288,634)          (44,030,662)         (297,142)           --                   (44,327,804)

Net income                        --               5,865,645            76,016            --                     5,941,661
                            --------------      ---------------  --------------    ----------------           -------------

PARTNERS' CAPITAL,
  DECEMBER 31, 1998            639,056         $ 103,079,532     $   1,356,079    $       --                 $ 104,435,611
                            ==============     ===============   ==============     ================         ==============

</TABLE>

See notes to financial statements.

                                      -4-
<PAGE>
 
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
 ------------------------------

NOTES TO FINANCIAL STATEMENTS

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Organization
   ------------

   ML Global Horizons L.P. (the "Partnership") was organized as an open-end fund
   under the Delaware Revised Uniform Limited Partnership Act on May 11, 1993
   and commenced trading activities on January 4, 1994. The Partnership engages
   in the speculative trading of futures, options on futures and forward
   contracts on a wide range of commodities. When available for investment, the
   Partnership issues units of limited partnership interest ("Units") at Net
   Asset Value as of the beginning of each month. Merrill Lynch 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. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill
   Lynch, is the Partnership's commodity broker. MLIP has agreed to maintain a
   general partner's interest of at least 1% of the total capital in the
   Partnership. MLIP and each Limited Partner share in the profits and losses of
   the Partnership in proportion to their respective interests in it.

   MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
   to manage the Partnership's assets, and allocates and reallocates the
   Partnership's assets among existing, replacement and additional Advisors.

   Estimates
   ---------

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

   Revenue Recognition
   -------------------

   Commodity futures, options on futures and forward contract transactions are
   recorded on the trade date and open contracts are reflected in net unrealized
   profit on open contracts in the Statements of Financial Condition at the
   difference between the original contract value and the market value (for
   those commodity interests for which market quotations are readily available)
   or at fair value. The change in unrealized (loss) profit on open contracts
   from one period to the next is reflected in change in unrealized in the
   Statements of Income.

                                      -5-
<PAGE>
 
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 dates of the Statements 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 total trading results currently.

Operating Expenses and Selling Commissions 
- ------------------------------------------

MLIP pays for all routine operating costs (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership,
including the costs of the ongoing offering of the Units. MLIP receives an
administrative fee as well as a portion of the brokerage commissions paid to MLF
by the Partnership.

No selling commissions have been or are paid directly by Limited Partners. All
selling commissions are paid by MLIP.

Income Taxes
- ------------

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

Distributions
- -------------

The Unitholders are entitled to receive, equally per Unit, any distributions
which may be made by the Partnership. No such distributions had been made as of
December 31, 1998.

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. Units redeemed on or
prior to the end of the twelfth full month after issuance are assessed an early
redemption charge of 3% of their Net Asset Value as of the date of redemption.
If an investor acquires Units at more than one time, such Units are treated on a
"first-in, first-out" basis for purposes of determining whether redemption
charges are applicable.

Dissolution of the Partnership
- ------------------------------

The Partnership will terminate on December 31, 2023 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.

Recently Issued Accounting Pronouncements
- -----------------------------------------

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The General Partner does not
believe that the Statement will have a significant effect on the financial
statements of the Partnership.

                                      -6-
<PAGE>
 
2. RELATED PARTY TRANSACTIONS

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

   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 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 have been credited as their response forms are processed.
   The total amount of the adjustment was approximately $1,003,000. Since this
   amount was paid directly to investors by the General Partner, it is not
   reflected in these financial statements. The General Partner determined that
   interest was calculated appropriately since November 1996.

   Prior to January 1, 1996, the Partnership paid brokerage commissions to MLF
   at a flat monthly rate of .625 of 1% (a 7.5% annual rate) of the
   Partnership's month-end assets. Effective October 1, 1996, this percentage
   was reduced to .604 of 1% (a 7.25% annual rate) and the Partnership began to
   pay MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of
   the Partnership's month-end assets (this recharacterization had no economic
   effect on the Partnership). Month-end assets are not reduced, for purposes of
   calculating brokerage commissions and administrative fees, by any accrued
   brokerage commissions, administrative fees, Profit Shares, Incentive
   Overrides or other fees or charges.

   MLIP estimates that the round-turn equivalent commission rate charged to the
   Partnership during the years ended December 31, 1998, 1997 and 1996 was
   approximately $62, $98 and $74, respectively (not including, in calculating
   round-turn equivalents, forward contracts on a futures-equivalent basis).

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

   The Partnership paid to MLIP an Incentive Override equal to 10% of the Net
   New Gain, as defined, as of December 31, 1998, 1997 and 1996 and will do so
   as of each subsequent December 31 in respect of any Net New Gain then
   outstanding. Such payments are also made to MLIP from the redemption value of
   Units redeemed as of the end of interim months during a year, to the extent
   of any Net New Gain attributable to such Units when redeemed.

   The methods by which Incentive Overrides are calculated may result in certain
   disproportionate allocations of such fees and possible equity dilution among
   Partners purchasing Units at different times.

                                      -7-
<PAGE>
 
   Many of the Partnership's currency trades are executed in the spot and
   forward foreign exchange markets (the "FX Markets") where there are no direct
   execution costs. Instead, the participants, banks and dealers, including
   Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
   between the prices at which they are prepared to buy and sell a particular
   currency and such spreads are built into the pricing of the spot or forward
   contracts with the Partnership. The General Partner anticipates that some of
   the Partnership's foreign currency trades will be executed through MLIB, an
   affiliate of the General Partner. MLIB has discontinued the operation of the
   foreign exchange service desk, which included seeking multiple quotes from
   counterparties unrelated to MLIB for a service fee and trade execution.

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

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, options on futures and forward
   contract trades to be made on behalf of their respective Partnership
   accounts, subject to certain trading policies and to certain rights reserved
   by MLIP.

   Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
   as defined, recognized by each Advisor considered individually, irrespective
   of the overall performance of the Partnership, as of either the end of each
   calendar quarter or year and upon the net reallocation of assets away from an
   Advisor, 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 to
   such Units.

   The methods by which Profit Share is calculated may result in certain
   disproportionate allocations of such fees and possible equity dilution among
   Partners purchasing Units at different times.

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, 1998, 1997 and 1996 equals the Units
   outstanding as of such date, adjusted proportionately for Units sold and
   redeemed based on the respective length of time each was outstanding during
   the year.

                                      -8-
<PAGE>
 
5. 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, 1998, 1997 and 1996 were as follows:


                             Total Trading Results
                  -----------------------------------------------
                      1998            1997               1996
                  ------------    -------------     -------------
Interest Rates    $ 13,700,880    $ 3,934,415       $ 9,760,028
Stock Indices       (1,850,085)       (59,105)       (2,898,534)
Commodities           (113,534)     1,154,857        (1,260,126)
Currencies           2,224,110      6,017,661         6,729,908
Energy               4,392,566     (4,302,025)        3,648,527
Metals              (5,109,631)     5,694,979         1,183,534
                  ------------    -------------     -------------
                  $ 13,244,306    $12,440,782       $17,163,337
                  ============    =============     =============

   Market Risk
   -----------

   Derivative instruments involve varying degrees of off-balance sheet market
   risk, and changes in the level or volatility of interest rates, foreign
   currency exchange rates or the market values of the financial instruments or
   commodities underlying such derivative instruments frequently result in
   changes in the Partnership's net unrealized profit 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
   such derivative instruments are traded.

   The General Partner has procedures in place intended to control market risk
   exposure, although there can be no assurance that they will, in fact, succeed
   in doing so. These procedures focus primarily on monitoring the trading of
   the Advisors selected from time to time by 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 or trading policies or to be trading erratically,
   the General Partner's basic risk control procedures consist simply of the
   ongoing process of Advisor monitoring and selection, with the market risk
   controls being applied by the Advisors themselves.

                                      -9-
<PAGE>
 
   Fair Value
   ----------

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

   The contract/notional values of open contracts as of December 31, 1998 and
   1997 were as follows:


<TABLE> 
<CAPTION> 

                                           1998                                                           1997
                       ------------------------------------------------           ------------------------------------------------ 
                          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          $207,976,407                  $238,348,493                      $361,262,091                $216,261,891
Stock Indices             29,600,742                     7,780,773                         3,671,625                   9,837,452
Commodities               24,172,934                    25,312,669                        32,721,460                  39,980,310
Currencies               205,313,175                   201,659,534                        71,377,618                 290,360,085
Energy                     2,515,538                     8,005,502                               --                   12,218,655
Metals                       535,695                    11,919,683                        28,496,076                  51,889,407
                     ---------------------        ---------------------            ---------------------     ---------------------
                        $470,114,491                  $493,026,654                      $497,528,870                $620,547,800
                     =====================        =====================            =====================     =====================

</TABLE>


   Substantially all of the Partnership's derivative instruments outstanding at
   December 31, 1998 expire within one year.

   The contract/notional values of the Partnership's open exchange-traded and
   non-exchange-traded derivative instrument positions as of December 31, 1998
   and 1997 were as follows:

<TABLE>
<CAPTION>

                                                1998                                                       1997
                          --------------------------------------------                ---------------------------------------------
                             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             $324,691,745               $338,000,470                     $435,918,287              $484,549,200
Non-Exchange-Traded          145,422,746                155,026,184                       61,610,583               135,998,600
                          -------------------       ------------------               -------------------       -------------------
                            $470,114,491               $493,026,654                     $497,528,870              $620,547,800
                          ===================       ==================               ===================       ===================  
        
</TABLE>


                                      -10-
<PAGE>
 
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, 1998 and 1997 were as follows:


<TABLE>
<CAPTION>
                                         1998                                               1997
                    --------------------------------------------------------------------------------------------------
                        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           $484,051,166          $204,220,124                 $355,706,292              $163,790,120
Stock Indices              19,654,747             8,701,191                   16,261,720                10,889,808
Commodities                35,596,122            51,072,651                   35,250,135                19,213,817
Currencies                178,348,477           192,740,868                   93,524,652               185,718,360
Energy                      4,133,644            11,337,474                    5,554,722                 5,244,100
Metals                     29,211,602            31,676,334                   30,160,151                39,147,176
                     -------------------   ------------------        ---------------------    ------------------------
                         $750,995,758          $499,748,642                 $536,457,672              $424,003,381
                     ===================   ===================       =====================    ========================
</TABLE>


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

                                      -11-
<PAGE>
 
The gross unrealized profit and net unrealized profit on the Partnership's open
derivative instrument positions as of December 31, 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
                                      1998                                        1997
                        ---------------------------------        -----------------------------------
                            Gross               Net                   Gross               Net
                         Unrealized         Unrealized              Unrealized         Unrealized
                            Profit              Profit               Profit              Profit
                        ----------------   --------------        -----------------   ---------------      
<S>                     <C>                <C>                    <C>                <C> 
Exchange-Traded         $ 7,385,648         $ 3,775,404             $10,018,862         $ 7,627,618
Non-Exchange Traded       1,874,047             171,679               2,824,800           1,037,622
                        ----------------   --------------        -----------------   ---------------      
                        $ 9,259,695         $ 3,947,083             $12,843,662         $ 8,665,240
                        ================   ==============        =================   ===============
</TABLE>


The Partnership has credit risk in respect of its counterparties and brokers,
but attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.

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 (which includes a netting arrangement), 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/ Di Dario


                                Jo Ann Di Dario
                            Chief Financial Officer
                    Merrill Lynch Investment Partners Inc.
                              General Partner of
                            ML Global Horizons L.P.
                                     

                                      -12-

<TABLE> <S> <C>

<PAGE>
<ARTICLE> BD
       
<S>                             <C>                     <C>
<PERIOD-TYPE>                   12-MOS                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1998             DEC-31-1997
<PERIOD-START>                             JAN-01-1998             JAN-01-1997
<PERIOD-END>                               DEC-31-1998             DEC-31-1997
<CASH>                                               0                       0
<RECEIVABLES>                              110,778,798             136,997,826
<SECURITIES-RESALE>                                  0                       0
<SECURITIES-BORROWED>                                0                       0
<INSTRUMENTS-OWNED>                                  0                       0
<PP&E>                                               0                       0
<TOTAL-ASSETS>                             110,778,798             136,997,826
<SHORT-TERM>                                         0                       0
<PAYABLES>                                   6,343,187               2,953,461
<REPOS-SOLD>                                         0                       0
<SECURITIES-LOANED>                                  0                       0
<INSTRUMENTS-SOLD>                                   0                       0
<LONG-TERM>                                          0                       0
                                0                       0
                                          0                       0
<COMMON>                                             0                       0
<OTHER-SE>                                 104,435,611             134,044,365
<TOTAL-LIABILITY-AND-EQUITY>               110,778,798             136,997,826
<TRADING-REVENUE>                           13,244,306              12,440,782
<INTEREST-DIVIDENDS>                         6,051,782               5,278,840
<COMMISSIONS>                                8,970,371               7,727,226
<INVESTMENT-BANKING-REVENUES>                        0                       0
<FEE-REVENUE>                                        0                       0
<INTEREST-EXPENSE>                                   0                       0
<COMPENSATION>                                       0                       0
<INCOME-PRETAX>                              5,941,661               7,770,162
<INCOME-PRE-EXTRAORDINARY>                   5,941,661               7,770,162
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                 5,941,661               7,770,162
<EPS-PRIMARY>                                     7.45                   10.98
<EPS-DILUTED>                                     7.45                   10.98
        

</TABLE>

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