CITIGROUP FAIRFIELD FUTURES FUND LP II
2005  Period from March 15, 2004 (commencement of trading operations) to December 31, 2004   Realized and unrealized trading gains (losses), net of brokerage commissions (including clearing fees) of $81,307 and $43,268, respectively  $                (10,381,586 )   $                (345 )    Interest income    2,043,979      503,409        $                (8,337,607 )   $ 503,064     Net loss before Allocation to Special Limited Partner  $                (10,506,006 )   $                (800,732 )    Allocation to Special Limited Partner  $                (10,961 )   $ —     Net loss available for pro rata distribution to partners   $                (10,495,045 )   $                (800,732 )    Decrease in Net Asset Value per Redeemable Unit  $                (109.61 )   $                (92.36 )    Total assets  $ 80,751,541    $ 86,472,888                Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.   Overview The Partnership aims to achieve substantial capital appreciation through speculative trading in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals. The Partnership may employ futures, options on futures, and forward, spot and swap contracts in those markets. 11     The General Partner manages all business of the Partnership. The General Partner has delegated its responsibility for the investment of the Partnership's assets to Graham. The General Partner employs a team of approximately 20 professionals whose primary emphasis is on attempting to maintain quality control among the advisors to the Partnerships operated or managed by the General Partner. A full-time staff of due diligence professionals use propriety technology and on-site evaluations to monitor new and existing futures money managers. The accounting and operations staff provide processing of trading activity and reporting to limited partners and regulatory authorities. In selecting the Advisor for the Partnership, the General Partner considered past performance, trading style, volatility of markets traded and fee requirements. Responsibilities of the General Partner include:       •  due diligence examinations of the Advisor;         •  selection, appointment and termination of the Advisor;         •  negotiation of the management agreement; and         •  monitoring the activity of the Advisor.   In addition, the General Partner prepares the books and records and provides the administrative and compliance services that are required by law or regulation from time to time in connection with operation of the Partnership. These services include the preparation of required books and records and reports to limited partners, government agencies and regulators; computation of net asset value; calculation of fees; effecting subscriptions, redemptions and limited partner communications; and preparation of offering documents and sales literature. The General Partner shall seek the best prices and services available in its commodity futures brokerage transactions. The General Partner reviews at least annually, the brokerage rates charged to commodity pools similar to the Partnership to determine that the brokerage fee the Partnership pays is competitive with other rates. The K4 Program was developed in 1998 and commenced trading operations in January 1999. The K4 Program uses a mathematical model to identify certain price patterns that have very specific characteristics indicating that there is a high probability that a significant directional move will occur. The K4 Program will normally enter or exit a position only when a significant price and volatility spike takes place. K4 will normally maintain a neutral position in 50% of the markets in the portfolio. The K4 Program trades in approximately 65 markets including foreign exchange, global interest rates, stock index futures, agricultural futures, metals and energy. In addition to the K4 Program, as of December 31, 2005, Graham trades the following futures programs: its Global Diversified Program, the Graham Selective Trading Program, the Proprietary Matrix Program and the Fed Policy Program. Graham's success depends to a great extent upon the occurrence of market conditions favorable to its trading strategy. Factors such as lack of major price trends or increased governmental control of, or participation in, the markets, may reduce Graham's ability to trade profitably in the future. As a managed futures partnership, the Partnership's performance is dependent upon the successful trading of the Partnership's Advisor to achieve the Partnership's objectives. It is the business of the General Partner to monitor the Advisor's performance to assure compliance with the Partnership's trading policies and to determine if the Advisor's performance is meeting the Partnership's objectives. Based on 2005 results, the General Partner continues to believe the Advisor and the trading of the K4 Program have met the Partnership's objectives and expects to continue to allocate the Partnership's assets to the Advisor and this program unless otherwise indicated. (a)    Liquidity. The Partnership does not engage in sales of goods or services. Its only assets are its equity in its commodity futures trading account, consisting of cash and cash equivalents, net unrealized appreciation (depreciation) on open futures contracts and interest receivable. Because of the low margin deposits  12      normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. Such substantial losses could lead to a material loss in liquidity. To minimize this risk relating to low margin deposits, the Partnership follows certain trading policies, including:       (i)  The Partnership invests its assets only in commodity interests that the Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisor believes will permit it to enter and exit trades without noticeably moving the market.         (ii)  An Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Partnership's net assets allocated to that Advisor.         (iii)  The Partnership may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged.         (iv)  The Partnership does not employ the trading technique commonly known as "pyramiding", in which the speculator uses unrealized profits on existing positions as margin for the purchases or sale of additional positions in the same or related commodities.         (v)  The Partnership does not utilize borrowings except short-term borrowings if the Partnership takes delivery of any cash commodities.         (vi)  The Advisor may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Partnership. The term "spread" or "straddle" describes a commodity futures trading strategy involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets and in which the trader expects to earn a profit from a widening or narrowing of the difference between the prices of the two contracts.         (vii)  The Partnership will not permit the churning of its commodity trading account. The term "churning" refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, driven by the desire to generate commission income.   In the normal course of business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments include forwards, futures, options and swaps, whose values are based upon an underlying asset, index or reference rate, and generally represent future commitments to exchange currencies or cash flows, or to purchase or sell other financial instruments at specified terms at specified future dates, or, in the case of derivative commodity interests, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards, swaps and certain options. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract. Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized  13      in the statement of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's assets is CGM. The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions. (See also "Item 8. Financial Statements and Supplementary Data" for further information on financial instrument risk included in the notes to the financial statements.) Other than the risks inherent in commodity futures and swaps trading, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the General Partner may, in its discretion, cause the Partnership to cease trading operations and liquidate all open positions under certain circumstances including a decrease in Net Asset Value per Redeemable Unit to less than $400 as of the close of business on any business day. (b)    Capital resources. (i)    The Partnership has made no material commitments for capital expenditures. (ii)    The Partnership's capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be predicted. Market moves in commodities are dependent upon fundamental and technical factors which the Advisors may or may not be able to identify, such as changing supply and demand relationships, weather, government agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. Partnership expenses consist of, among other things, commissions, advisory fees and administrative fees. The level of these expenses is dependent upon the level of trading and the ability of the Advisors to identify and take advantage of price movements in the commodity markets, in addition to the level of Net Assets maintained. In addition, the amount of interest income payable by CGM is dependent upon interest rates over which the Partnership has no control. No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem his Redeemable Units at their Net Asset Value as of the last day of a month on 10 days' notice to the General Partner. For the purpose of a redemption, any accrued liability for reimbursement of offering and organization expenses for the Initial Offering Period will not reduce Net Asset Value per Redeemable Unit. There is no fee charged to limited partners in connection with redemptions. For the year ended December 31, 2005, 31,098.2836 Redeemable Units were redeemed totaling $25,005,536. For the period from March 15, 2004 (commencement of trading operations) to December 31, 2004, 13,171.2716 Redeemable Units were redeemed totaling $11,200,216. For the year ended December 31, 2005, there were additional sales of 35,516.6365 Redeemable Units totaling $29,158,000 and 100.0000 Redeemable Units totaling $90,764 of Special Limited Partner Interest. For the period from March 15, 2004 (commencement of trading operations) to December 31, 2004, there were additional sales of 73,868.1002 Redeemable Units totaling $64,502,000 and General Partner contributions representing 438.0407 Unit equivalents totaling $395,000. (c)    Results of Operations. For the year ended December 31 2005, the Net Asset Value per Redeemable Unit decreased 12.1% from $907.64 to $798.03. For the period March 15, 2004 (commencement of trading operations) through December 31, 2004, the Net Asset Value Per Redeemable Unit decreased 9.2% from $1,000.00 (less offering adjustment of $2.60) to $907.64. 14     The Partnership experienced a net trading loss of $6,519,298 before brokerage commissions and related fees in 2005. Losses were primarily attributable to the trading of commodity futures in currencies, energy, grains, U.S. interest rates and non-U.S. interest rates and livestock and were partially offset by gains in metals, softs and indices. The year 2005 was characterized by several events that made it extraordinarily difficult for the advisor's program to trade successfully and to retain profits when earned. Nearly all sectors experienced these conditions with the currency and interest rate markets generating the greatest losses for the partnership. The tone for the year was set in January and continued through the next three months. Over the first four months of the year, the partnership's net asset value per unit was down 14% and managed to crawl back to a negative 12 percent by year-end. After a prolonged decline in 2004, the U.S. dollar defied expectations for further weakness and rallied in January resulting in substantial losses at the beginning of the new year. While the dollar strengthened through the second and third quarters providing some profits, interest rate markets became treacherous as the U.S. Fed's mixed signals to the marketplace combined with strength in global interest rates made the U.S. interest rate markets choppy resulting in losses for the advisor's program. Crude oil and natural gas prices increased throughout the year dramatically reaching their peaks post Hurricanes Katrina and Rita. These markets provided extended trending patterns for the partnership's advisors and resulted in minor profits for the partnership. Profitable trading over the last half of the year in precious and base metals trading was able to offset losses incurred earlier in the year in the these markets. Of particular note was the price of gold which rose to over $500 an ounce by the end of the year. Base metals such as zinc, copper and aluminum also experienced substantial price increases as global demand and speculative trading spurred prices. In financial markets, foreign stock market indices were the most profitable sector for the partnership for the year as a resurging Japanese economy and positive political news in Europe propelled these markets out of long-term doldrums. While some recovery of profits did occur in the last four months of the year, the reversal of the U.S. dollar's year-long rise in late December and along with the collapse in natural gas prices and resulted in the Fund's net asset value per unit ending the year down approximately 12.1%. The Partnership experienced a net trading gain of $2,225,177 before brokerage commissions and related fees in 2004. Gains were primarily attributable to the trading of commodity futures in currencies, energy, grains, non-U.S. interest rates, livestock and indices and were partially offset by losses in U.S. interest rates, metals and softs. Trading results for 2004 can be described in three distinct periods: the first three months of the year produced positive results of nearly 8% with trends carrying over from late 2003, the next five months which saw trend disruptions and produced losses of over 24%, and the period September through December which experienced a recovery period with profits of over 17% but from a lower base. Overall, the Partnership ended the year essentially flat with a decline of approximately 1.3% in the net asset value per unit. The results for the year were heavily influenced by two historic trends: the decline in the value of the U.S. dollar versus major currencies and the run-up in the price of crude oil to over $50 a barrel. 2004 started strongly with many of the trends from late 2003 continuing into early 2004. Notably lower interest rates in both U.S. and other major countries fostered strong global economic growth and pressured commodity prices. These resulted in upward trends in many sectors, especially energy, metals and grains and provided profitable trading opportunities for the Partnership's advisor. These trends persisted into early March when economic indicators in the U.S. and China suggested rising inflation and markets reversed with higher interest rates, collapsing commodity prices and the dollar reversal. This began a protracted period of tentative and conflicting trends across many sectors. As expected in the nature of trend-following, the strength of profitable trends is often followed by temporary but often severe periods of losses. April though August was such a period the Partnership's advisor adjusted positions from what had been profitable, long-term trends to choppy, directionless and volatile markets. Particularly treacherous and thus unprofitable was trading in currencies, U.S. and Asian interest rates and  15      global stock indices while energy and grains provided some offsetting profits. The fundamental economic concerns hanging over these markets were further exacerbated by the uncertainty surrounding the tightly contested U.S. presidential election. With 2004 looking dismal going into the fall, the price of crude oil resumed its climb to $50 a barrel brought on by a deteriorating security situation in Iraq, Saudi Arabia political turmoil, and renewed threats of terrorism. Long positions in the energy sector provided profits to the Partnership through the end of the third quarter and into the beginning of the fourth quarter. Later in the fourth quarter the U.S. dollar resumed its slide toward $1.40 to the euro, base metals prices rose and interest rates declined all generally favorable to the advisor's positions. Global stock markets in particular surged along with declining interest rates which produced a profitable December for the Partnership. During the fourth quarter 2004, the Partnership's advisor recovered much of the earlier period's losses and ended the year with a net slight decline in net asset value per unit. (d)    Operational Risk  The Partnership is directly exposed to market risk and credit risk, which arise in the normal course of its business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace. Such risks include:  Operational/Settlement Risk — the risk of financial and opportunity loss and legal liability attributable to operational problems, such as inaccurate pricing of transactions, untimely trade execution, clearance and/or settlement, or the inability to process large volumes of transactions. The Partnership is subject to increased risks with respect to its trading activities in emerging market securities, where clearance, settlement, and custodial risks are often greater than in more established markets.  Technological Risk — the risk of loss attributable to technological limitations or hardware failure that constrain the Partnership's ability to gather, process, and communicate information efficiently and securely, without interruption, to customers, among Redeemable Units within the Partnership, and in the markets where the Partnership participates.  Legal/Documentation Risk — the risk of loss attributable to deficiencies in the documentation of transactions (such as trade confirmations) and customer relationships (such as master netting agreements) or errors that result in noncompliance with applicable legal and regulatory requirements.  Financial Control Risk — the risk of loss attributable to limitations in financial systems and controls. Strong financial systems and controls ensure that assets are safeguarded, that transactions are executed in accordance with management's authorization, and that financial information utilized by management and communicated to external parties, including the Partnership's Redeemable Unit holder, creditors, and regulators, is free of material errors. (e)    Critical Accounting Policies. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statement of financial condition at fair value on the last business day of the period, which represents market value for those commodity interests for which market quotations are readily available or other measures of fair value deemed appropriate by management of the General Partner for those commodity interests and foreign currencies for which market quotations are not readily available, including dealer quotes for swaps and certain option contracts. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates  16      prevailing on the last business day of the period. Realized gains (losses) and changes in unrealized values on commodity interests and foreign currencies are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests. Foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting dates, is included in the statement of financial condition. Realized gains (losses) and changes in unrealized values on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur and are included in the statement of income and expenses and partners' capital. The General Partner believes that the accounting policies that will be most critical to the Partnership's financial condition and results of operations relate to the valuation of the Partnership's positions. The majority of the Partnership's positions will be exchange-traded futures contracts, which will be valued daily at settlement prices published by the exchanges. If applicable, the Partnership's spot and forward foreign currency contracts will also be valued at published daily settlement prices or at dealers' quotes. The General Partner expects that under normal circumstances substantially all of the Partnership's assets will be valued by objective measures and without difficulty. Item 7A.    Quantitative and Qualitative Disclosures About Market Risk. Introduction The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Partnership's assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business. The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of Partnership assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law. Market movements result in frequent changes in the fair market value of the Partnership's open positions and, consequently, in its earnings and cash flow. The Partnership'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 Partnership's open positions and the liquidity of the markets in which it trades. The Partnership 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 particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results. Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership'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 representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk. Quantifying the Partnership's Trading Value at Risk The following quantitative disclosures regarding the Partnership's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such  17      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 (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period). The Partnership's risk exposure in the various market sectors traded by the Advisor is quantified below in terms of Value at Risk. Due to the Partnership's mark-to-market accounting, any loss in the fair value of the Partnership's open positions is directly reflected in the Partnership's earnings (realized or unrealized). Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%–99% of any one-day intervals. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component which is not relevant to Value at Risk. In the case of market sensitive instruments which are not exchange traded (almost exclusively currencies in the case of the Partnership), 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 Partnership's futures and forward positions does not have any optionality component. However, the Advisor may 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. Where this instrument is a futures contract, the futures margin, and where this instrument is a physical commodity, the futures-equivalent maintenance margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership in almost all cases fluctuate to a lesser extent than those of the underlying instruments. In quantifying the Partnership's Value at Risk, 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 simply been added to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership's positions are rarely, if ever, 100% positively correlated have not been reflected. 18     The Partnership's Trading Value at Risk in Different Market Sectors The following table indicates the trading Value at Risk associated with the Partnership's open positions by market category as of December 31, 2005, and the highest, lowest and average value at any point during the year and the average value for the twelve months ended December 31, 2005. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. As of December 31, 2005, the Partnership's total capitalization was $75,446,274. December 31, 2005                               Market Sector  Value at Risk  % of Total Capitalization  High Value at Risk  Low Value at Risk  AverageValue at Risk*   Currencies:                                      – Over-the-counter Contracts  $ 1,247,319      1.65 %   $ 3,136,089    $ 255,496    $ 1,331,948     Energy    88,200      0.12 %     1,265,000      7,500      279,008     Grains    17,062      0.02 %     134,300      6,300      43,797     Interest rates U.S.    162,592      0.21 %     914,600      8,192      320,443     Interest rates Non-U.S.    428,362      0.57 %     1,701,335      75,501      525,027     Livestock    6,400      0.01 %     15,200      6,400      11,467     Metals                                      – Exchange Traded Contracts    7,500      0.01 %     126,000      7,500      41,889     – Over-the-counter Contracts    140,444      0.19 %     1,522,004      59,200      452,938     Softs    98,587      0.13 %     281,922      29,000      118,835     Indices    1,857,365      2.46 %     5,410,046      174,053      2,231,316     Total  $ 4,053,831      5.37 %                                                  * Annual average based on month-end value at risk   As of December 31, 2004, the Partnership's total capitalization was $81,709,052. December 31, 2004                               Market Sector  Value at Risk  % of TotalCapitalization  HighValue at Risk  LowValue at Risk  AverageValue at Risk*   Currencies                                      – Over-the-counter Contracts  $ 2,125,017      2.60 %   $ 2,914,108    $ 161,093    $ 865,475     Energy    459,400      0.56 %     871,900      25,500      470,440     Grains    20,900      0.03 %     208,325      14,300      89,678     Interest rates U.S.    445,450      0.54 %     1,092,100      53,145      674,384     Interest rates Non-U.S.    768,496      0.94 %     2,486,582      69,123      1,072,300     Livestock    11,200      0.01 %     275,704      4,800      8,800     Metals                                      – Exchange Traded Contracts    144,000      0.18 %     145,500      21,000      103,875     – Over-the-counter Contracts    781,650      0.96 %     1,163,339      8,800      219,597     Indices    4,819,357      5.90 %     5,514,877      177,373      1,574,357     Total  $ 9,633,770      11.79 %                                                  * Annual average based on month-end value at risk   Material Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (margin requirements generally range between 2% and 15% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership'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 Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table — as well as the past performance of the Partnership — give no indication of this "risk of ruin." 19     Non-Trading Risk The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial. Materiality as used in this section, "Qualitative and Quantitative Disclosures About Market Risk," is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Partnership's market sensitive instruments. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Partnership's market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership 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 Partnership's primary market risk exposures as well as the strategies used and to be used by the General Partner and the Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership'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 management strategies of the Partnership. There can be no assurance that the Partnership'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 Partnership. The following were the primary trading risk exposures of the Partnership as of December 31, 2005, by market sector.  Interest Rates. Interest rate movements directly affect the price of the futures positions held by the Partnership 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 Partnership's profitability. The Partnership's primary interest rate exposure is to interest rate fluctuations in the United States and the other G-8 countries. However, the Partnership also takes futures positions on the government debt of smaller nations — e.g., Australia.  Currencies. The Partnership's currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. 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 inherent to the dollar-based Partnership in expressing Value at Risk in a functional currency other than dollars.  Stock Indices. The Partnership's primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Partnership are limited to futures on broadly based indices. As of December 31, 2005, the Partnership's primary exposures were in the EUREX and Chicago Mercantile Exchange stock indices. The General Partner anticipates little, if any, trading in non-G-8 stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices. (Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being "whipsawed" into numerous small losses.)  Metals. The Partnership's primary metal market exposure is to fluctuations in the price of copper, aluminum and nickel.  Softs. The Partnership's primary commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Cocoa, cotton and coffee accounted for the substantial bulk of the Partnership's commodity exposure as of December 31, 2005. 20      Energy. The Partnership's primary energy market exposure is to natural gas and oil price movements, often resulting from political developments in the Middle East. Oil prices 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 Partnership as of December 31, 2005.  Foreign Currency Balances. The Partnership's primary foreign currency balances are in Japanese yen, Euro dollar and Canadian dollars. The Advisor regularly converts foreign currency balances to U.S. dollars in an attempt to control the Partnership's non-trading risk. Qualitative Disclosures Regarding Means of Managing Risk Exposure The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. The General Partner monitors the Partnership's performance and the concentration of its open positions, and consults with the Advisor concerning the Partnership's overall risk profile. If the General Partner felt it necessary to do so, the General Partner could require the Advisor to close out individual positions as well as enter certain positions traded on behalf of the Partnership. However, any such intervention would be a highly unusual event. The General Partner primarily relies on the Advisor's own risk control policies while maintaining a general supervisory overview of the Partnership's market risk exposures. The Advisor applies its own risk management policies to its trading. The Advisor often follows diversification guidelines, margin limits and stop loss points to exit a position. The Advisor's research of risk management often suggests ongoing modifications to its trading programs. As part of the General Partner's risk management, the General Partner periodically meets with the Advisor to discuss its risk management and to look for any material changes to the Advisor's portfolio balance and trading techniques. The Advisor is required to notify the General Partner of any material changes to its programs. 21     Item 8.    Financial Statements and Supplementary Data. Citigroup Fairfield Futures Fund L.P. II INDEX TO FINANCIAL STATEMENTS                  Page Number   Oath or Affirmation   F-2   Report of Independent Registered Public Accounting Firm  F-3   Statements of Financial Condition at December 31, 2005 and 2004   F-4   Condensed Schedules of Investments at December 31, 2005 and 2004  F-5 – F-6   Statements of Income and Expenses for the year ended December 31, 2005 and the period March 15, 2004 (commencement of trading operations) to December 31, 2004  F-7   Statements of Changes in Partners' Capital for the year ended December 31, 2005 and the period March 15, 2004 (commencement of trading operations) to December 31, 2004  F-8   Statements of Cash Flows for the year ended December 31, 2005 and the period March  15, 2004 (commencement of trading operations) to December 31, 2004  F-9   Notes to Financial Statements   F-10 – F-13   Selected Unaudited Quarterly Financial Data  F-14        F-1     To the Limited Partners ofCitigroup Fairfield Futures Fund L.P. II To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.                       By:   Daniel R. McAuliffe, Jr.         Chief Financial Officer and Director        Citigroup Managed Futures LLC        General Partner, Citigroup Fairfield         Futures Fund L.P. II        Citigroup Managed Futures LLC 731 Lexington Avenue25th FloorNew York, N.Y. 10022212-559-2011    F-2     Report of Independent Registered Public Accounting Firm To the Partners ofCitigroup Fairfield Futures Fund L.P. II: We have audited the accompanying statements of financial condition of Citigroup Fairfield Futures Fund L.P. II (the ‘‘Partnership’’), including the condensed schedules of investments, as of December 31,  2005 and 2004, and the related statements of income and expenses, changes in partners’ capital, and cash flows for the year ended December  31,  2005 and the period March 15,  2004 (commencement of trading operations) to December 31,  2004. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Citigroup Fairfield Futures Fund L.P. II as of December  31,  2005 and 2004, and the results of its operations, changes in its partners’ capital, and its cash flows for the year ended December  31,  2005 and the period March  15,  2004 (commencement of trading operations) to December  31,  2004, in conformity with U.S. generally accepted accounting principles.                  New York, New YorkMarch 13, 2006 F-3     Citigroup Fairfield Futures Fund L.P. IIStatements of Financial ConditionDecember 31, 2005                      2005  2004   Assets:                 Equity in commodity futures trading account:                 Cash (restricted $4,363,860 and $10,590,831, in 2005 and 2004, respectively) (Note 3c)  $ 77,422,488    $ 81,389,833     Net unrealized appreciation on open futures positions    —      1,408,251     Unrealized appreciation on open forward contracts    3,298,568      3,660,825          80,721,056      86,458,909     Interest receivable (Note 3c)    30,485      13,979        $ 80,751,541    $ 86,472,888                       Liabilities and Partners' Capital:                 Liabilities:                 Net unrealized depreciation on open futures positions   $ 78,814    $ —     Unrealized depreciation on open forward contracts    2,216,527      2,493,982     Accrued expenses:                 Commissions (Note 3c)    299,840      320,073     Management fees (Note 3b)    132,652      141,481     Administrative fees (Note 3a)    33,163      35,370     Professional fees    55,799      120,136     Other    3,358      16,409     Due to CGM for offering costs (Note 6)    10,451      48,573     Redemptions payable (Note 5)    2,474,663      1,587,812          5,305,267      4,763,836     Partners' Capital (Notes 1 and 5):                 General Partner, 724.0407 Unit equivalents outstanding in 2005 and 2004    577,858      657,168     Special Limited Partner, 100.0000 Redeemable Units of Limited Partnership Interest outstanding in 2005    79,803      —     Limited Partners, 93,717.1815 and 89,298.8286 Redeemable Units of Limited Partnership Interest outstanding in 2005 and 2004    74,788,613      81,051,884          75,446,274      81,709,052        $ 80,751,541    $ 86,472,888          See accompanying notes to financial statements. F-4     Citigroup Fairfield Futures Fund L.P. IICondensed Schedule of InvestmentsDecember 31, 2005                      Fair Value  % of Partners'Capital   Futures Contracts Purchased                                   Grains  $                (1,063 )     (0.00)* %    Interest Rates Non-U.S.    90,201      0.12     Interest Rates U.S.    (34,076 )     (0.05 )    Indices    25,032      0.03     Livestock    (6,181 )     (0.01 )    Metals    (8,050 )     (0.01 )    Softs    35,291      0.05     Total futures contracts purchased    101,154      0.13                       Futures Contracts Sold                                   Energy    14,530      0.02     Grains    (26,835 )     (0.04 )    Indices    6,272      0.01     Interest Rates Non-U.S.    13,507      0.02     Interest Rates U.S.    (94,103 )     (0.13 )    Softs    (93,339 )     (0.12 )    Total futures contracts sold    (179,968 )     (0.24 )                      Unrealized Appreciation on Forward Contracts                                   Currencies    1,104,499      1.46     Metals    2,194,069      2.91     Total unrealized appreciation on forward contracts    3,298,568      4.37                       Unrealized Depreciation on Forward Contracts                                   Currencies    (749,945 )     (0.99 )    Metals    (1,466,582 )     (1.94 )    Total unrealized depreciation on forward contracts    (2,216,527 )     (2.93 )    Total fair value  $  1,003,227      1.33 %         Percentages are based on Partners' capital unless otherwise indicated       * Due to Rounding   See accompanying notes to financial statements. F-5     Citigroup Fairfield Futures Fund L.P. IICondensed Schedule of InvestmentsDecember 31, 2004                      Fair Value  % of Partners'Capital   Futures Contracts Purchased                                   Interest Rates Non-U.S.  $ 146,737      0.18 %    Interest Rates U.S.    251,442      0.31     Indices    940,064      1.15     Livestock    (5,160 )     (0.01 )    Metals    (87,350 )     (0.11 )    Softs    (20,422 )     (0.03 )    Total futures contracts purchased    1,225,311      1.49                       Futures Contracts Sold                                   Energy    177,928      0.22     Grains    (23,961 )     (0.03 )    Indices    5,880      0.01     Interest Rates U.S.    23,093      0.03     Total futures contracts sold    182,940      0.23                       Unrealized Appreciation on Forward Contracts                                   Currencies    2,770,355      3.39     Metals    890,470      1.09     Total unrealized appreciation on forward contracts    3,660,825      4.48                       Unrealized Depreciation on Forward Contracts                                   Currencies    (1,228,227 )     (1.50 )    Metals    (1,265,755 )     (1.55 )    Total unrealized depreciation on forward contracts    (2,493,982 )     (3.05 )                      Total fair value  $  2,575,094      3.15 %         Percentages are based on Partners' capital unless otherwise indicated See accompanying notes to financial statements. F-6     Citigroup Fairfield Futures Fund L.P. IIStatements of Income and Expensesfor the year ended December 31, 2005 and the period March 15, 2004(commencement of trading operations)to December 31, 2004                      2005  2004   Income:                 Net gains (losses) on trading of commodity interests:                 Realized losses on closed positions and foreign currencies  $                (4,947,431 )   $                (349,918 )    Change in unrealized gains (losses) on open positions    (1,571,867 )     2,575,094          (6,519,298 )     2,225,176     Interest income (Note 3c)    2,043,979      503,409        $                (4,475,319 )   $ 2,728,585     Expenses:                 Brokerage commissions including clearing fees of $81,307 and $43,268 in 2005 and 2004, respectively (Note  3c)    3,862,288      2,225,521     Management fees (Note 3b)    1,626,147      932,381     Administrative fees (Note 3a)    406,535      233,094     Professional fees    125,492      120,136     Other expenses    10,225      18,185          6,030,687      3,529,317     Net loss  $                (10,506,006 )   $                (800,732 )    Net loss per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent (Notes 1 and 5)  $                (109.61 )   $                (92.36 )         See accompanying notes to financial statements. F-7     Citigroup Fairfield Futures Fund L.P. IIStatement of Changes in Partners' Capitalfor the year ended December 31, 2005 and the period March 15, 2004(commencement of trading operations)to December 31, 2004                              LimitedPartners  Special Limited Partner  GeneralPartner  Total   Initial capital contributions, 1 Unit of Limited Partnership Interest and General Partner's contribution representing 1 Unit equivalent   $ 1,000    $ —    $ 1,000    $ 2,000     Proceeds from offering of 28,601 Units of Limited Partnership Interest, and General Partner's contribution representing 285 Unit equivalents (Note 1)    28,601,000      —      285,000      28,886,000     Offering costs (Note 6)     (74,250 )     —      (750 )     (75,000 )    Opening Partnership capital for operations     28,527,750      —      285,250      28,813,000     Sale of 73,868.1002 Units of Limited Partnership Interest and General Partner's contribution representing 438.0407 Unit equivalents     64,502,000      —      395,000      64,897,000     Redemption of 13,171.2716 Units of Limited Partnership Interest     (11,200,216 )     —      —      (11,200,216 )    Net loss     (777,650 )     —      (23,082 )     (800,732 )    Partners' capital at December 31, 2004   $ 81,051,884    $ —    $ 657,168    $ 81,709,052     Sale of 35,516.6365 Units of Limited Partnership Interest and 100.0000 Redeemable Units of Special Limited Partner Interest    29,158,000      90,764      —      29,248,764     Redemption of 31,098.2836 Units of Limited Partnership Interest     (25,005,536 )     —      —      (25,005,536 )    Net loss     (10,415,735 )     (10,961 )     (79,310 )     (10,506,006 )    Partners' capital at December 31, 2005  $ 74,788,613    $ 79,803    $ 577,858    $ 75,446,274           Net asset value per Redeemable Unit:                2004  $ 907.64     2005  $ 798.03          See accompanying notes to financial statements. F-8     Citigroup Fairfield Futures Fund L.P. IIStatement of Cash Flowsfor the year ended December 31, 2005 and the period March 15, 2004(commencement of trading operations)to December 31, 2004                      2005  2004   Cash flows from operating activities:                 Net loss  $                (10,506,006 )   $                (800,732 )    Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                 Changes in operating assets and liabilities:                 (Increase) decrease in restricted cash    6,226,971      (10,590,831 )    (Increase) decrease in net unrealized appreciation on open futures positions    1,408,251      (1,408,251 )    (Increase) decrease in unrealized appreciation on open forward contracts    362,257      (3,660,825 )    (Increase) decrease in interest receivable    (16,506 )     (13,979 )    Increase (decrease) in net unrealized appreciation on open futures positions    78,814      —     Increase (decrease) in unrealized depreciation on open forward contracts    (277,455 )     2,493,982     Accrued expenses:                 Increase (decrease) in commissions    (20,233 )     320,073     Increase (decrease) in management fees    (8,829 )     141,481     Increase (decrease) in administrative fees    (2,207 )     35,370     Increase (decrease) in professional fees    (64,337 )     120,136     Increase (decrease) in other     (13,051 )     16,409     Net cash provided by (used in) operating activities    (2,832,331 )     (13,347,167 )    Cash flows from financing activities:                 Proceeds from additions – Limited Partners    29,158,000      93,104,000     Proceeds from additions – Special Limited Partner    90,764      —     Proceeds from additions – General Partner    —      681,000     Payments for offering costs     (38,122 )     (26,427 )    Payments for redemptions – Limited Partners    (24,118,685 )     (9,612,404 )    Net cash provided by (used in) financing activities    5,091,957      84,146,169     Net change in cash    2,259,626      70,799,002     Unrestricted cash, at beginning of period    70,799,002      —     Unrestricted cash, at end of period  $ 73,058,628    $ 70,799,002           See accompanying notes to financial statements.  F-9     Citigroup Fairfield Futures Fund L.P. II Notes to Financial Statements 1.    Partnership Organization: Citigroup Fairfield Futures Fund L.P. II (the "Partnership") is a limited partnership which was organized on December 18, 2003 under the partnership laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options and forward contracts. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. Between January 12, 2004 (commencement of the offering period) and March 12, 2004, 28,601 redeemable units of Limited Partnership Interest ("Redeemable Units") and 285 Units of General Partnership Interest were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until March 15, 2004 at which time they were remitted to the Partnership for trading. The Partnership was authorized to sell 200,000 Redeemable Units of Limited Partnership Interest during its initial offering period. The Partnership privately and continuously offers Redeemable Units. Citigroup Managed Futures LLC acts as the general partner (the "General Partner") of the Partnership. The Partnership's commodity broker is Citigroup Global Markets Inc. ("CGM"). CGM is an affiliate of the General Partner. The General Partner is wholly owned by Citigroup Global Markets Holdings Inc. ("CGMHI") which is the sole owner of CGM. CGMHI is a wholly owned subsidiary of Citigroup Inc. The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of their initial capital contribution and profits, if any, net of distributions. The Partnership will be liquidated upon the first to occur of the following: December 31, 2023; the net asset value of a Redeemable Unit decreases to less than $400 per Redeemable Unit as of a close of any business day; a decline in net assets after trading commences to less than $1,000,000; or under certain other circumstances as defined in the Limited Partnership Agreement. 2.    Accounting Policies:       a.  All commodity interests (including derivative financial instruments and derivative commodity instruments) are used for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded in the statements of financial condition at fair value on the last business day of the year, which represents market value for those commodity interests for which market quotations are readily available. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing on the last business day of the year. Realized gains (losses) and changes in unrealized gains (losses) on open positions are recognized in the period in which the contract is closed or the changes occur and are included in net gains (losses) on trading of commodity interests.         b.  Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnership's income and expenses.         c.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.   3.    Agreements:       a.  Limited Partnership Agreement:           The General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. The Partnership will pay the General Partner a monthly administrative fee in return for its services to the Partnership equal    F-10     Citigroup Fairfield Futures Fund L.P. II Notes to Financial Statements          to .5/12 of 1% (0.5% per year) of month-end Net Assets of the Partnership. Month-end Net Assets, for the purpose of calculating administrative fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of redemptions and incentive fees. This fee may be increased or decreased at the discretion of the General Partner.         b.  Management Agreement:           The General Partner, on behalf of the Partnership, has entered into a Management Agreement with Graham Capital Management L.P. ("Graham") (the "Advisor"), a registered commodity trading advisor. The Advisor is not affiliated with the General Partner or CGM and is not responsible for the organization or operation of the Partnership. The Partnership pays the Advisor a monthly management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets allocated to the Advisor. The Advisor is a Special Limited Partner of the Partnership and receives a quarterly Profit Share allocation to its capital account in the Partnership equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned on behalf of the Partnership during each Calendar year in the form of Special Limited Partner Units. Month-end Net Assets, for the purpose of calculating management fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of redemptions.         c.  Customer Agreement:           The Partnership has entered into a Customer Agreement which provides that the Partnership will pay CGM a monthly brokerage fee equal to 9/24 of 1% (4.5% per year) of month-end Net Assets, as defined, in lieu of brokerage commissions on a per trade basis. Month-end Net Assets, for the purpose of calculating commissions are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of accrued expenses and redemptions payable. The Partnership will pay for National Futures Association fees as well as exchange, clearing, user, give-up and floor brokerage fees. CGM will pay a portion of brokerage fees to its financial consultants who have sold Redeemable Units in this Partnership. All of the Partnership's assets are deposited in the Partnership's account at CGM. The Partnership's cash is deposited by CGM in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. At December 31, 2005 and 2004, the amount of cash held for margin requirements was $4,363,860 and $10,590,831, respectively. CGM has agreed to pay the Partnership interest on 80% of the average daily equity maintained in cash in its account during each month at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. The Customer Agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses. The Customer Agreement may be terminated upon notice by either party.   4.    Trading Activities: The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity interests. The results of the Partnership's trading activities are shown in the statement of income and expenses. All of the commodity interests owned by the Partnership are held for trading purposes. The average fair value for the year ended December 31, 2005 and during the period from March 15, 2004 (commencement of trading operations) to December 31, 2004, based on a monthly calculation, was $395,806 and $972,065, respectively. 5.    Distributions and Redemptions: Distributions of profits, if any, will be made at the sole discretion of the General Partner and at such times as the General Partner may decide. A limited partner may require the Partnership to redeem their Redeemable Units at their Net Asset Value as of the last day of each month on 10 days notice to the General Partner. No fee will be charged for redemptions. F-11     Citigroup Fairfield Futures Fund L.P. II Notes to Financial Statements 6.    Offering and Organization Costs: Offering and organization costs of $75,000 relating to the issuance and marketing of the Partnership's Redeemable Units offered were initially paid by CGM. These costs have been recorded as due to CGM in the statement of financial condition. These costs are being reimbursed to CGM by the Partnership in 24 monthly installments (together with interest at the prime rate quoted by JPMorgan Chase & Co.). As of December 31, 2005 and 2004, $64,549 and $26,428, respectively of these costs have been reimbursed to CGM by the Partnership. In addition, the Partnership has recorded interest expense of $1,137 and $1,941 through December 31, 2005 and 2004, respectively, which is included in other expenses. The remaining liability for these costs due to CGM of $10,451 (exclusive of interest charges) will not reduce Net Asset Value per Redeemable Unit for any purpose other than financial reporting, including calculation of advisory and brokerage fees and the redemption value of Redeemable Units. 7.    Financial Highlights: Changes in the Net Asset Value per Redeemable Unit of Partnership interest for the year ended December 31, 2005 and the period March 15, 2004 (commencement of trading operations) to December  31, 2004, is as follows:                      2005  2004   Net realized and unrealized losses*  $                (108.27 )   $                (77.15 )    Interest income    20.18      7.00     Expenses**    (21.52 )     (19.61 )    Decrease for the period    (109.61 )     (89.76 )    Net asset value per Redeemable Unit, beginning of period    907.64      1,000.00     Offering cost adjustment    —      (2.60 )    Net asset value per Redeemable Unit, end of period  $ 798.03    $ 907.64     Redemption/subscription value per Redeemable Unit versus net asset value per Redeemable Unit    .07      0.52     Redemption/subscription value per Redeemable Unit, end of period***  $ 798.10    $ 908.16                *  Includes brokerage commissions         **  Excludes brokerage commissions         ***  For the purpose of a redemption/subscription, any remaining accrued liability for reimbursement of offering costs will also not reduce redemption/subscription net asset value per redeemable units.                        2005  2004****   Ratios to Average Net Assets:                 Net investment loss*****    (5.0 )%     (6.8 )%    Total expenses    7.6 %     7.9 %    Total return    (12.1 )%     (9.2 )%                 ****  Ratios to average net assets are annualized.           *****  Interest income less total expenses            The above ratios may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners' share of income, expenses and average net assets. F-12     Citigroup Fairfield Futures Fund L.P. II Notes to Financial Statements 8.    Financial Instrument Risks: In the normal course of its business the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash flows, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter ("OTC"). Exchange traded instruments are standardized and include futures and certain option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract. Market risk is the potential for changes in the value of the financial instruments traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk with respect to exchange traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Partnership's risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statements of financial condition and not represented by the contract or notional amounts of the instruments. The Partnership has credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership's assets is CGM. The General Partner monitors and controls the Partnership's risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions. The majority of these instruments mature within one year of December 31, 2005. However, due to the nature of the Partnership's business, these instruments may not be held to maturity. F-13     Selected unaudited quarterly financial data for the year ended December 31, 2005 and the period March 15, 2004 (commencement of trading operatings) to December 31, 2004 is summarized below:                              For the period from October 1, 2005 to December 31, 2005  For the period from July 1, 2005 to September 30, 2005  For the period from April 1, 2005 to June 30, 2005  For the period from January 1, 2005 to March 31, 2005   Net realized and unrealized trading gains (losses) net of brokerage commissions and clearing fees plus interest income  $                (75,016 )   $ 2,559,827    $                (3,152,963 )   $                (7,669,455 )    Net Income (loss)  $                (640,348 )   $ 2,018,519    $                (3,676,487 )   $                (8,207,690 )    Increase (decrease) in Net Asset Value per Redeemable Unit  $                (7.06 )   $ 19.64    $                (37.27 )   $                (84.92 )                                      For the period from  October 1, 2004 to December 31, 2004  For the period from  July 1, 2004 to September 30, 2004  For the period from  April 1, 2004 to June 30, 2004  For the period from March 15, 2004(commencement of trading operations) to  March 31, 2004   Net realized and unrealized trading gains (losses) net of brokerage commissions and clearing fees plus interest income  $ 8,950,693    $                (1,822,215 )   $                (6,416,841 )   $                (208,572 )    Net Income (loss)  $ 8,403,862    $                (2,243,179 )   $                (6,715,548 )   $                (245,867 )    Increase (decrease) in Net Asset Value per Redeemable Unit  $ 93.89    $                (33.11 )   $                (142.03 )   $                (11.11 )         F-14     PART III Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None Item 9A.    Controls and Procedures. Based on their evaluation of the Partnership's disclosure controls and procedures as of year end the Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective. There were no significant changes in the Partnership's internal controls or in other factors that could significantly affect such controls subsequent to the date of their evaluation as of year end. Item 10.    Directors and Executive Officers of the Registrant. The Partnership has no officers or directors and its affairs are managed by its General Partner, Citigroup Managed Futures LLC. Investment decisions are made by Graham Capital Management Inc. The Partnership has not adopted a code of ethics that applies to officers because it has no officers. Item 11.    Executive Compensation. The Partnership has no directors or officers. Its affairs are managed by Citigroup Managed Futures LLC, its General Partner. CGM, an affiliate of the General Partner, is the commodity broker for the Partnership and receives brokerage commissions for such services, as described under "Item 1. Business." Brokerage commissions and clearing fees of $3,862,288 were earned for the year ended December 31, 2005. Management fees of $1,626,147 were earned by the Advisor for the year ended December 31, 2005. Administrative fees of $406,535 were earned by the General Partner for the year ended December 31, 2005. Item 12.    Security Ownership of Certain Beneficial Owners and Management. (a)    Security ownership of certain beneficial owners. As of February 28, 2006, one beneficial owner who is neither a director nor executive officer owns more than five percent (5%) of the outstanding Redeemable Units issued by the Registrant.                       Title of Class  Name and Address of Beneficial Owner  Amount and Nature of Beneficial Ownership  Percent of Class   Redeemable Units of Limited Partnership Interest  International Mission BoardSouthern Baptist ConventionMr. David SteversonP.O. Box 6767Richmond VA 23230-0767  5,071.9125 Redeemable Units  5.5%        (b)    Security ownership of management. Under the terms of the Limited Partnership Agreement, the Partnership's affairs are managed by the General Partner. The General Partner owns Units of general partnership interest equivalent to 724.0407 Units (0.8%) of Limited Partnership Interest as of December 31, 2005. Principals who own Redeemable Units of the Partnership: *David J. Vogel                      18 Redeemable Units (c)    Changes in control. None. Item 13.    Certain Relationship and Related Transactions. Citigroup Global Markets Inc. and Citigroup Managed Futures LLC would be considered promoters for purposes of item 404(d) of Regulation S-K. The nature and the amounts of compensation each promoter will receive, if any, from the Partnership are set forth under "Item 1. Business" and "Item 11. Executive Compensation." 22
PART IV Item 15.    Exhibits and Financial Statement Schedules.       (a) (1)   Financial Statements:   Statements of Financial Condition at December 31, 2005 and 2004. Condensed Schedules of Investments at December 31, 2005 and 2004. Statements of Income and Expenses for the year ended December 31, 2005 and for the period from March 15, 2004 (commencement of trading operations) to December 31, 2004. Statements of Changes in Partners' Capital for the year ended December 31, 2005 and for the period March 15, 2004 (commencement of trading operations) to December 31, 2004. Statements of Cash Flows for the year ended December 31, 2005 and for the period March 15, 2004 (commencement of trading operations) to December 31, 2004. Notes to Financial Statements.       (2)   Exhibits:   3.1 – Limited Partnership Agreement (filed as Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 3.2 – Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 10.1 – Customer Agreement between the Partnership and CGM (filed as Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 10.2 – Subscription Agreement (filed as Exhibit 10.2 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 10.3 – Escrow Instructions relating to escrow of subscription funds (filed as Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 10.4 – Management Agreement among the Partnership, the General Partner and Graham Capital Management (filed as Exhibit 10.4 to the Registration Statement on Form S-1 (File No. 333-24923) and incorporated herein by reference). 10.5 – Letter extending the Management Agreement between the General Partner and Graham Capital Management L.P. for 2004 (previously filed). 10.6 – Letter extending the Management Agreement between the General Partner and Graham Capital Management L.P. for 2005 (filed herein). 16.1 – Letter from PricewaterhouseCoopers LLP (previously filed). The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by reference Exhibit 31.1 – Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) Exhibit 31.2 – Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director) 24     Exhibit 32.1 – Section 1350 Certification (Certification of President and Director) Exhibit 32.2 – Section 1350 Certification (Certification of Chief Financial Officer and Director) Supplemental Information To Be Furnished With Reports Filed Pursuant To Section 15(d) Of The Act by Registrants Which Have Not Registered Securities Pursuant To Section 12 Of the Act. Annual Report to Limited Partners No proxy material has been sent to Limited Partners. 25     SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 30th day of March 2006. Citigroup Fairfield Futures Fund L.P. II       By:  /s/ Citigroup Managed Futures LLC  (General Partner)         By:  /s/ David J. Vogel  David J. Vogel, President & Director   Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.               /s/ David J. Vogel  /s/ Shelley Ullman   David J. Vogel  Shelley Ullman   President and Director  Director   /s/ Daniel R. McAuliffe, Jr.  /s/ Jennifer Magro   Daniel R. McAuliffe, Jr.  Jennifer Magro   Chief Financial Officer and  Director   Director      /s/ Maureen O'Toole  /s/ Jerry Pascucci   Maureen O'Toole  Jerry Pascucci   Director  Director      /s/ Ihor Rakowsky      Ihor Rakowsky      Secretary and Director        27         GRAPHIC 2 html_95833daniel.jpg GRAPHIC  begin 644 html_95833daniel.jpg M_]C_X``02D9)1@`!`0$!(`$@``#__@`V($EM86=E(&=E;F5R871E9"!B>2!' M3E4@1VAO``$``P`#``,!```````````` M!P@)`0(&`P0%"O_$`#40``$$`P`"`@`$!`0%!0````4#!`8'`0((`!$)(1(4 M,5$3%19!%V%QD0J!P>'P(B2AL?'_V@`(`0$``#\`_OX\>/'CQX\>/'CQX\>/ M'CQX\>/'CQY#M]W[4/,543"[KTG0:NJQ@K!)](I0;V<;(I;.W:`T4*&CV#=X M6/2*0%W;('&8P!8$I#)3S]@$!#7Y1XW;;U@XL[>DG6LMO"-2;F&WN:\U:C54 MCBS:Y2,/TE\V@5PB946B1B20.-E"ANGIIHUB3M^=JF>*IS./!#<3)&462YS( MUG('0_>W)?*Y\1$+MN0-')P<#NY*.KR/@IG9ME;Q(>FZ5?S5U6]5QN;3H;!6 M&K%YA]."D?91)HHT=I6'4=*U!\A5#3FH;=X68LZTE5XQ=. 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II         •  Smith Barney Diversified Futures Fund L.P.         •  Salomon Smith Barney Diversified 2000 Futures Fund L.P.         •  AURORA 2001         •  AURORA III         •  Salomon Smith Barney Fairfield Futures Fund L.P.         •  Citigroup Diversified Futures Fund L.P.         •  Citigroup Fairfield Futures Fund L.P. II         •  Alera 100         •  Alera Portfolio Spc   Please acknowledge receipt of this modification by signing one copy of this letter and returning it to the attention of Mr. Daniel McAuliffe at the address above or fax to 212-793-1986. If you have any questions I can be reached at 212-559-5043. Very truly yours, CITIGROUP MANAGED FUTURES LLC       By:  /s/ Daniel R. McAuliffe, Jr.                  Daniel R. McAuliffe, Jr. Chief Financial Officer and Director         By:  /s/ Paul Sedlack       Print Name: Paul Sedlack      DRMcA/sr         EX-31.1 6 file003.htm CERTIFICATION         Exhibit 31.1 CERTIFICATION I, David J. Vogel, certify that:       1.  I have reviewed this Annual Report on Form 10-K of Citigroup Fairfield Futures Fund L.P. II (the "registrant");         2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;         3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;         4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:         a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;         b)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and         c)  disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and         5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):         a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and         b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.      Date: March 30, 2006                     /s/ David J. Vogel                                    David J. Vogel Citigroup Managed Futures LLC President and Director            EX-31.2 7 file004.htm CERTIFICATION         Exhibit 31.2 CERTIFICATION I, Daniel R. McAuliffe, Jr., certify that:       1.  I have reviewed this Annual Report on Form 10-K of Citigroup Fairfield Futures Fund L.P. II (the "registrant");         2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;         3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;         4.  The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:         a)  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this report is being prepared;         b)  evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and         c)  disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and         5.  The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):         a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and         b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.      Date:   March 30, 2006                                                         /s/ Daniel R. McAuliffe, Jr.                            Daniel R. McAuliffe, Jr. Citigroup Managed Futures LLC Chief Financial Officer and Director            EX-32.1 8 file005.htm CERTIFICATION         Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citigroup Fairfield Futures Fund L.P. II (the "Partnership") on Form 10-K for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David J. Vogel, President and Director of Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ David J. Vogel             David J. Vogel Citigroup Managed Futures LLC President and Director March 30, 2006             Date          EX-32.2 9 file006.htm CERTIFICATION         Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citigroup Fairfield Futures Fund L.P. II (the "Partnership") on Form 10-K for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and Director of Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.  /s/ Daniel R. McAuliffe, Jr.                              Daniel R. McAuliffe, Jr. Citigroup Managed Futures LLC Chief Financial Officer and Director  March 30, 2006                                                   Date         -----END PRIVACY-ENHANCED MESSAGE-----