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

For the transition period from                  to
                             Commission file number 0-14217


                          ML VENTURE PARTNERS II, L.P.
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             (Exact name of registrant as specified in its charter)


Delaware                                                            13-3324232
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(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

World Financial Center, North Tower     NewYork,New York            10281-1326
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(Address of principal executive offices)                           (Zip Code)

Registrant's telephone number, including area code:  (212) 449-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                 Name of each exchange on which registered
       None                                                     None

Securities registered pursuant to Section 12(g) of the Act:

                      Units of Limited Partnership Interest
------------------------------------------------------------------------------
                                (Title of class)


<PAGE>


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]

As of March 16, 1999,  119,636 units of limited  partnership  interest ("Units")
were held by  non-affiliates of the registrant.  There is no established  public
trading market for such Units.





                       DOCUMENTS INCORPORATED BY REFERENCE


Portions of the  Prospectus  of the  Registrant  dated  February  10,  1987,  as
supplemented by a supplement  thereto dated April 21, 1987, are  incorporated by
reference in Part I and Part II hereof.



<PAGE>


                                     PART I

Item 1.       Business.

Formation

ML Venture  Partners  II, L.P.  (the  "Partnership"  or the  "Registrant")  is a
Delaware limited partnership organized on February 4, 1986. The General Partners
of  the  Partnership  consist  of  four  individuals  (the  "Individual  General
Partners") and MLVPII Co., L.P. (the  "Managing  General  Partner"),  a New York
limited partnership in which Merrill Lynch Venture Capital Inc. (the "Management
Company")  is  the  general  partner.  The  Management  Company  is an  indirect
subsidiary  of Merrill  Lynch & Co.,  Inc. and an  affiliate  of Merrill  Lynch,
Pierce,  Fenner & Smith Incorporated  ("Merrill Lynch").  DLJ Capital Management
Corporation (the "Sub-Manager"), an affiliate of Donaldson, Lufkin and Jenrette,
Inc., is the sub-manager pursuant to a sub-management  agreement,  dated May 23,
1991,  among the  Partnership,  the Managing  General  Partner,  the  Management
Company and the Sub-Manager.

The Partnership  operates as a business development company under the Investment
Company Act of 1940. The Partnership's investment objective is to seek long-term
capital  appreciation  from its portfolio of venture  capital  investments.  The
Partnership considers this activity to constitute the single industry segment of
venture capital investing.

Through Merrill Lynch, the Partnership publicly offered 120,000 units of limited
partnership interest (the "Units") at $1,000 per Unit. The Units were registered
under the Securities  Act of 1933 pursuant to a  Registration  Statement on Form
N-2 (File No.  33-3220)  which was declared  effective on February 10, 1987. The
Partnership  held its initial and final  closings on March 31, 1987 and June 10,
1987, respectively.  A total of 120,000 Units were accepted at such closings and
the additional  limited  partners (the "Limited  Partners") were admitted to the
Partnership.

The information set forth under the captions "Risk and Other Important  Factors"
(pages 8 through 11), "Investment Objective and Policies" (pages 14 through 16),
"Venture  Capital  Operations"  (pages 17 through 20) and "Portfolio  Valuation"
(pages 27 and 28) in the prospectus of the Partnership  dated February 10, 1987,
filed with the Securities and Exchange  Commission pursuant to Rule 424(b) under
the Securities Act of 1933, as supplemented by a supplement  thereto dated April
21, 1987 and filed pursuant to Rule 424(c) under the Securities Act of 1933 (the
"Prospectus"), is incorporated herein by reference.

The Venture Capital Investments

The Partnership  has fully invested the net proceeds  received from the offering
of Units and will not make investments in any new portfolio companies.  However,
the  Partnership  may make  additional  follow-on  investments  in its remaining
portfolio  companies.  As of December 31,  1998,  the  Partnership's  investment
portfolio  consisted of 12 active  investments  with a cost of $10,197,685 and a
fair  value of  $14,970,273.  During  the year  ended  December  31,  1998,  the
Partnership liquidated certain portfolio investments,  realizing a net return of
$649,639. Following is a detail of portfolio activity during 1998:


o    In June 1998,  in a non-cash  transaction,  the  Partnership  exchanged its
     warrant to purchase  59,166 common shares of  Brightware,  Inc. at $.80 per
     share for 27,611 shares of Brightware common stock.

o    On May 18,  1998,  Biocircuits  Corporation  announced  that it ceased  all
     ordinary business and began to liquidate its remaining assets. As a result,
     the Partnership  wrote-off the remaining  $1,488,884 cost of its investment
     in Biocircuits as of June 30, 1998.

o    During  1998,   the   Partnership   received  three   liquidating   in-kind
     distributions  from Sanderling  Biomedical,  L.P.:  93,745 common shares of
     Depotech Corp.,  Inc.,  72,800 common shares and 62,400 preferred shares of
     ReGen  Biologics,  Inc.,  and 21,632  common  shares and 134,674  preferred
     shares of Stereotaxis,  Inc. The Depotech shares were  subsequently sold by
     the Partnership in November 1998 for $136,878, resulting in a realized gain
     of $79,822. Additionally, the Partnership received a final liquidating cash
     distribution   of  $325,567  from   Sanderling  in  February   1999.   This
     distribution  was accrued as of December 31,  1998.  The  Partnership  also
     recorded a realized  loss of $775,338  during 1998 to reflect the write-off
     of the unreturned cost of its Sanderling investment.

o    During 1998, the Partnership  received $187,194,  plus interest of $13,069,
     from the sale of options in connection  with its investment in HCTC/SPTHOR.
     Because it is anticipated  that no further funds will be received from this
     investment,  the  Partnership  wrote-off it's remaining cost of $169,150 in
     HCTC during 1998.

As of December 31, 1998, the Partnership had invested a total of $116,532,996 in
its  portfolio  of  venture  capital  investments.  From its  inception  through
December  31,  1998,  the  Partnership  had  fully or  partially  liquidated  or
wrote-off  investments  with an  aggregate  cost  basis of  $106,335,311.  These
liquidated  investments  returned a total of  $217,614,116  to the  Partnership,
resulting in a realized  gain of  $111,278,805.  Additionally,  the  Partnership
earned  interest  and  dividend  income  from its  venture  capital  investments
totaling $4,257,765 from inception to December 31, 1998.

Termination

The  Managing   General  Partner  is  working  toward  the  termination  of  the
Partnership  as soon as  practical,  with  the  goal of  maximizing  returns  to
partners. In July 1997, the Individual General Partners voted to extend the term
of the Partnership  for an additional  two-year  period.  The Partnership is now
scheduled  to  terminate no later than  December  31,  1999.  In  addition,  the
Individual General Partners have the right to extend the term of the Partnership
for an additional  two-year  period if they  determine that such extension is in
the best interest of the Partnership.

Competition

The  Partnership  encounters  competition  from other  entities  having  similar
investment objectives,  including other entities affiliated with Merrill Lynch &
Co., Inc.  Primary  competition  for venture  capital  investments has been from
venture capital partnerships, venture capital affiliates of large industrial and
financial   companies,   small   business   investment   companies  and  wealthy
individuals.  Competition  has also been from foreign  investors  and from large
industrial  and  financial  companies  investing  directly  rather than  through
venture capital  affiliates.  The Partnership was frequently a co-investor  with
other professional  venture capital investors and these relationships  generally
had expanded the Partnership's access to investment opportunities.  As discussed
above, the Partnership will not make any new portfolio investments.

Employees

The Partnership has no employees.  The Partnership  Agreement  provides that the
Managing General Partner,  subject to the supervision of the Individual  General
Partners,  manages and controls the Partnership's  venture capital  investments.
The  Management  Company  performs,  or  arranges  for  others to  perform,  the
management  and  administrative  services  necessary  for the  operation  of the
Partnership  and  is  responsible  for  managing  the  Partnership's  short-term
investments.  The  Sub-Manager,  subject to the  supervision  of the  Management
Company  and  Individual  General  Partners,  provides  management  services  in
connection with the Partnership's venture capital investments and investments of
the Partnership in unaffiliated venture capital funds.

Item 2.       Properties.

The Partnership does not own or lease physical properties.

Item 3.       Legal Proceedings.

The Partnership is not a party to any material pending legal proceedings.

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

No matter was submitted  during the fourth quarter of the fiscal year covered by
this report to a vote of security holders.

                                     PART II

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

The  information  with  respect to the market for the Units set forth  under the
subcaption  "Substituted  Limited Partners" on pages 30 and 31 of the Prospectus
is  incorporated   herein  by  reference.   An  established  public  market  for
Registrant's  Units does not now exist,  and it is not  anticipated  that such a
market will develop in the future.  Accordingly,  accurate information as to the
market  value of a Unit at any  given  date is not  available.  The  approximate
number of holders of Units as of March 16, 1999 was 12,696. The Managing General
Partner  and the  Individual  General  Partners  of the  Partnership  also  hold
interests in the Partnership.

Merrill Lynch has implemented  guidelines pursuant to which it reports estimated
values of limited partnership  interests  originally sold by Merrill Lynch (such
as  Registrant's  Units)  two times  per year.  Such  estimated  values  will be
provided to Merrill Lynch by independent  valuation  services based on financial
and other  information  available to the  independent  services on (i) the prior
August 15th for reporting on December  year-end and  subsequent  client  account
statements through the following May's month-end client account statements,  and
on (ii) the prior March 31st for  reporting  on June  month-end  and  subsequent
client  account   statements  through  the  November  month-end  client  account
statements of the same year.

The Managing General Partner's estimate of net asset value of the Partnership as
of December 31, 1998 is $117 per Unit,  including an assumed  allocation  of net
unrealized appreciation of investments.  The Managing General Partner's estimate
of net asset value as set forth above  reflects  the value of the  Partnership's
underlying  assets  remaining  at  year-end,  whereas the value  provided by the
independent  services  reflects the  estimated  value of the  Partnership  Units
themselves  based on information  that was available on the prior August 15th as
stated above. The estimated value provided by the independent valuation services
and the  Registrant's  current  net asset  value are not market  values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their  Units.  In  addition,  Unit  holders may not  realize the  independent
estimated  value or the  Registrant's  current net asset  value  amount upon the
liquidation of Registrant.

Cash Distributions

Cash distributions paid or accrued during the periods covered by this report and
cumulative  cash  distributions  to Partners from  inception of the  Partnership
through December 31, 1998 are listed below:
<TABLE>

                                                        Managing           Individual                                   Per
                                                         General           General         Limited    $1,000
Distribution Date                                        Partner           Partners        Partners                 Unit 
------------------------------------------------    ------------------     -------- ---------------         -------------
<S>                   <C> <C>                       <C>                    <C>            <C>                        <C>       
Inception to December 31, 1995                      $     8,632,165        $   3,160      $       94,800,000         $      790
January 12, 1996                                          2,336,106              400              12,000,000                100
April 26, 1996                                            3,377,898              600              18,000,000                150
July 29, 1996                                             4,238,951              640              19,200,000                160
October 11, 1996                                          2,547,571              400              12,000,000                100
July 11, 1997                                             2,590,089              640              19,200,000                160
October 16, 1997                                            411,084              260               7,800,000                 65
January 26, 1999 (accrued)                                  314,632              140               4,200,000                 35
                                                    ---------------        ---------      ------------------         ----------

Cumulative totals as of December 31, 1998           $    24,448,496        $   6,240      $      187,200,000         $    1,560
                                                    ===============        =========      ==================         ==========
</TABLE>


<PAGE>


Item 6.       Selected Financial Data.

($ In Thousands, Except For Per Unit Information)
<TABLE>

                                                                           Years Ended December 31,
                                                           1998           1997            1996           1995           1994   
                                                       -----------     -----------    -----------    -----------    -----------

<S>                                                    <C>             <C>            <C>            <C>            <C>        
Net Realized (Loss) Gain on Investments                $    (2,166)    $    15,606    $    46,879    $    41,368    $    18,593

Net Change in Unrealized Appreciation
   of Investments                                              765          (5,873)       (25,245)        12,661        (29,444)

Net  (Decrease) Increase in Net Assets
   Resulting from Operations                                (1,554)          9,786         20,947         54,512        (11,668)

Cash Distributions to Partners                               4,515          30,002         59,366         57,572         17,600

Cumulative Cash Distributions to Partners                  211,655         207,140        177,138        117,772         60,200

Total Assets                                                20,359          21,919         42,268         95,045         83,796

Net Unrealized Appreciation of Investments                   4,773           4,008          9,880         35,125         22,464

Cost of Portfolio Investments purchased                          -             474            207          2,741          2,428

Cumulative Cost of Portfolio Investments                   116,533         116,533        116,059        115,851        113,110

PER UNIT OF LIMITED
PARTNERSHIP INTEREST:

Net Realized (Loss) Gain on Investments                   $    (14)        $   103        $   309          $ 273       $    135

Net (Decrease) Increase in Net Assets
   Resulting from Operations                                   (10)             64            137            358            (79)

Cash Distributions                                              35             225            410            400            135

Cumulative Cash Distributions                                1,560         1,525          1,300            890         490

Net Unrealized Appreciation of Investments                      32              26             65            232            148

Net Asset Value, including Net Unrealized
   Appreciation of Investments                                 117             162            323            596            638

</TABLE>


<PAGE>


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


Liquidity and Capital Resources

As  of  December  31,  1998,  the  Partnership  held  $4,488,454  in  short-term
investments   with  maturities  of  less  than  one  year  and  $423,675  in  an
interest-bearing  cash account.  For the years ended December 31, 1998, 1997 and
1996, the Partnership  earned interest from such investments  totaling $280,896,
$638,556  and  $979,803,  respectively.  Interest  earned in future  periods  is
subject to  fluctuations  in  short-term  interest  rates and changes in amounts
available  for  investment  in  such  securities.  Funds  needed  to  cover  the
Partnership's  future  operating  expenses  and  follow-on  investments  will be
obtained from the Partnership's existing cash reserves,  from interest and other
investment  income  and  from  proceeds  received  from  the  sale of  portfolio
investments.

The  Managing   General  Partner  is  working  toward  the  termination  of  the
Partnership  as soon as  practical,  with  the  goal of  maximizing  returns  to
partners. In July 1997, the Individual General Partners voted to extend the term
of the Partnership  for an additional  two-year  period.  The Partnership is now
scheduled  to  terminate no later than  December  31,  1999.  In  addition,  the
Individual General Partners have the right to extend the term of the Partnership
for an additional  two-year  period if they  determine that such extension is in
the best  interest of the  Partnership.  The  Partnership  will not make any new
portfolio  investments.  Generally,  net  proceeds  received  from  the  sale of
portfolio investments are distributed to Partners as soon as practicable,  after
an adequate  reserve for  operating  expenses and follow-on  investments  in the
remaining portfolio companies.

Subsequent  to the end of the year, on January 26, 1999 the  Partnership  made a
cash distribution to partners totaling $4,514,772,  including $4,200,000, or $35
per Unit,  to limited  partners of record on December  31,  1998.  The  Managing
General Partner received  $314,632 and the Individual  General Partners received
$140.  Cumulative  cash  distributions  to  partners as of  December  31,  1998,
including the accrued  distribution  paid in January 1999,  total  $211,654,736,
including  $187,200,000  to the  limited  partners,  or $1,560 per $1,000  Unit,
$24,448,496 to the Managing General Partner and $6,240 to the Individual General
Partners.

Results of Operations

For the year ended  December 31, 1998, the  Partnership  had a net realized loss
from  operations of $2,319,244.  For the years ended December 31, 1997 and 1996,
the  Partnership  had a net realized  gain from  operations of  $15,659,055  and
$46,191,360,  respectively.  Net  realized  gain  or  loss  from  operations  is
comprised of 1) net realized gain or loss from portfolio  investments and 2) net
investment  income or loss  (interest,  dividend and other income less operating
expenses).

Realized  Gains and  Losses  from  Portfolio  Investments  - For the year  ended
December 31, 1998, the  Partnership  had a $2,166,356 net realized loss from its
portfolio investments.  During 1998, Sanderling  Biomedical,  L.P. completed the
liquidation of its remaining portfolio investments, resulting in the termination
of  Sanderling  in  December  1998.  The  Partnership,  which had an 80% limited
partnership   interest  in  Sanderling,   received  three  in-kind   liquidating
distributions  and a $325,567 cash distribution from Sanderling during 1998. The
in-kind  distributions  included 93,745 shares of Depotech Corp.  Inc., a public
company.  The  Partnership  sold its shares of  Depotech  in  November  1998 for
$136,878, resulting in a realized gain of $79,822. The Partnership also realized
a loss of $775,338  during 1998  resulting  from the write-off of the unreturned
cost of its Sanderling  investment.  Also during 1998, the Partnership  received
$187,194 plus interest of $13,069 from Horizon Cellular Telephone Company, L.P.,
representing  the  final  payments  relating  to the  sale of the  Partnership's
investment in Horizon.  These final payments and the corresponding  write-off of
the unreturned cost of the Partnership's investment in Horizon resulted in a net
realized  loss of  $18,044  for 1998.  Finally,  during  1998,  the  Partnership
realized a loss of $1,488,884 from the write-off of its remaining  investment in
Biocircuits Corporation,  which ceased operations during the year. See Note 6 of
Notes to  Financial  Statements  for a summary  of  liquidations  by  investment
completed during 1998.

For the year ended  December 31, 1997,  the  Partnership  had a $15,605,512  net
realized  gain from its  portfolio  investments.  During 1997,  the  Partnership
liquidated  portfolio  investments,   including  positions  in  several  of  its
publicly-traded  securities,  for $30,571,957,  realizing a gain of $22,400,099.
This gain was offset by a $6,794,587  realized loss,  resulting from the partial
write-off of the Partnership's  investments in Biocircuits  Corporation,  Clarus
Medical  Systems,  Inc.,  Neocrin Company,  Inc. and Horizon Cellular  Telephone
Company,  L.P.  See Note 6 of Notes to  Financial  Statements  for a summary  of
liquidations by investment completed during 1997.

For the year ended  December 31, 1996,  the  Partnership  had a $46,879,092  net
realized gain from its portfolio investments.  During 1996, the Partnership sold
positions  in  several  of  its  publicly-traded   securities  for  $56,853,362,
realizing a gain of  $47,763,001.  This gain was offset by an $883,909  realized
loss,  resulting  from the write-off of 80% of the  Partnership's  investment in
I.D.E. Corporation.

Investment  Income and  Expenses - For the year ended  December  31,  1998,  the
Partnership had a net investment  loss of $152,888.  For the year ended December
31, 1997, the Partnership had net investment  income of $53,543 and for the year
ended December 31, 1996, the  Partnership had a net investment loss of $687,732.
The reduced net  investment  income for 1998  compared to 1997  resulted  from a
decrease  in  investment  income of $409,615  partially  offset by a decrease of
$203,184 in operating  expenses.  The decline in investment  income was due to a
$357,660  decrease in interest income from short-term  investments and a $51,955
decrease in interest,  dividend and other income from portfolio  investments for
1998  compared  to  1997.  The  decline  in  interest   income  from  short-term
investments primarily resulted from a decrease in funds available for investment
in such  securities  during 1998  compared to 1997.  The  decrease in  interest,
dividend and other income from portfolio  investments  primarily resulted from a
$37,754  decrease in dividend income  relating to the sale of the  Partnership's
investment in Borg-Warner  Automotive,  Inc., which was fully liquidated  during
the first quarter of 1997. The decline in operating  expenses primarily resulted
from  reduced   management   fees,  as  discussed  below,  and  a  reduction  in
professional  fees and mailing and printing  expenses  incurred  during the 1998
period.  Such reduced operating expenses reflect the decreased level of activity
as the Partnership proceeds to liquidate its remaining portfolio investments.

The increase in net  investment  income for 1997 compared to 1996 was the result
of a $1,560,580  reduction in operating expenses which was partially offset by a
$819,305  decrease in  investment  income for 1997.  The  decrease in  operating
expenses during 1997 primarily was  attributable to the $1.0 million  litigation
settlement expensed in 1996 relating to the Partnership's investment in In-Store
Advertising,  Inc.  The  additional  $560,580  decrease  in  operating  expenses
includes a decrease in the management fee, as discussed  below,  and a reduction
to  professional  fees and mailing and printing  expenses  incurred during 1997.
Such reduced  operating  expenses reflect the decreased level of activity as the
Partnership  proceeds to liquidate  its remaining  investments.  The decrease in
investment income for 1997 compared to 1996 was comprised of a $478,058 decrease
in interest  and  dividend  income  from  portfolio  investments  and a $341,247
decrease in interest from short-term investments. Interest income from portfolio
investments   decreased  by  $303,166  resulting  from  the  reduced  amount  of
interest-bearing debt securities held by the Partnership during 1997 compared to
the amount of such securities held during 1996. Dividend income also declined by
$174,892  primarily  due  to  the  sale  of  the  Partnership's   investment  in
Borg-Warner  Automotive,  Inc., as discussed above. The decline in interest from
short-term investments resulted primarily from a decrease in funds available for
investment in such  securities  during the year ended December 31, 1997 compared
to the same period in 1996.

The  Management  Company is responsible  for the  management and  administrative
services necessary for the operation of the Partnership.  The Management Company
receives  a  management  fee at an  annual  rate of 2.5%  of the  gross  capital
contributions to the Partnership, reduced by selling commissions, organizational
and offering  expenses paid by the  Partnership,  return of capital and realized
capital  losses,  with a minimum annual fee of $200,000.  Such fee is determined
and payable quarterly. The management fee for the years ended December 31, 1998,
1997 and 1996, was $200,000, $282,686 and $686,493, respectively. The decline in
the management fee for the years presented reflects the continued liquidation of
the Partnership's remaining portfolio investments and subsequent distribution to
partners.  The management fee and other  operating  expenses are paid with funds
provided  from  operations.  Funds  provided  from  operations  for the  periods
presented  were  obtained from interest  received from  short-term  investments,
interest and other income from portfolio  investments and proceeds from the sale
of certain portfolio investments.

Unrealized Gains and Losses and Changes in Unrealized  Appreciation of Portfolio
Investments - During the year ended December 31, 1998, the  Partnership  reduced
the fair value of its  portfolio of  investments  on a net basis by  $1,209,743.
Additionally  during 1998, a net $1,974,768 was transferred from unrealized loss
to realized loss relating to portfolio  investments  liquidated and  written-off
during  1998,  as  discussed  above.  As a result,  unrealized  appreciation  of
investments increased by $765,025 for 1998.

During the year ended  December 31, 1997,  the  Partnership  increased  the fair
value of its portfolio of investments on a net basis by $1,200,665. Additionally
during 1997, a net $7,073,490 was  transferred  from unrealized gain to realized
gain  relating to portfolio  investments  sold and  written-off  during 1997, as
discussed above. As a result, unrealized appreciation of investments was reduced
by $5,872,825 for 1997.

During the year ended  December 31, 1996,  the  Partnership  increased  the fair
value of its portfolio of investments on a net basis by $4,876,621. Additionally
during 1996, a net  $30,121,417 of unrealized  gain was  transferred to realized
gain  relating to portfolio  investments  sold and  written-off  during 1996, as
discussed above. As a result, unrealized appreciation of investments was reduced
by $25,244,796 for 1996.

Net Assets - Changes to net assets  resulting from operations are comprised
of 1) net realized gain or loss from operations and 2) changes to net unrealized
appreciation or depreciation of portfolio investments.

For the year ended  December  31, 1998,  the  Partnership  had a $1,554,219  net
decrease in net assets  resulting from  operations,  comprised of the $2,319,244
net realized loss from operations  partially offset by the $765,025  increase in
unrealized  appreciation  of investments  for the year. As of December 31, 1998,
the Partnership's net assets were $15,638,202,  down $6,068,991 from $21,707,193
as of December  31, 1997.  This  decrease is the result of the  $4,514,772  cash
distribution  to  partners,  which was accrued as of  December  31, 1998 and the
$1,554,219 decrease in net assets from operations for 1998.

For the year ended  December  31, 1997,  the  Partnership  had a $9,786,230  net
increase in net assets resulting from  operations,  comprised of the $15,659,055
net  realized  gain  from  operations  offset  by  the  $5,872,825  decrease  in
unrealized  appreciation  of investments  for the year. As of December 31, 1997,
the Partnership's net assets were $21,707,193, down $20,215,843 from $41,923,036
as of December 31, 1996.  This decrease is the result of the $30,002,073 of cash
distributions paid to partners during 1997 exceeding the $9,786,230  increase in
net assets from operations for 1997.

For the year ended  December 31, 1996,  the  Partnership  had a $20,946,564  net
increase in net assets resulting from  operations,  comprised of the $46,191,360
net realized gain from operations  partially offset by the $25,244,796  decrease
in unrealized appreciation of investments for 1996. As of December 31, 1996, the
Partnership's net assets were $41,923,036,  down $38,419,496 from $80,342,532 as
of December  31, 1995.  This  decrease  resulted  from the  $59,366,060  of cash
distributions,   accrued  or  paid  to  partners  during  1996,   exceeding  the
$20,946,564 net increase in net assets resulting from operations for 1996.

Gains and losses from  investments are allocated to partners'  capital  accounts
when realized, in accordance with the Partnership Agreement (see Note 3 of Notes
to Financial  Statements).  However,  for purposes of calculating  the net asset
value per unit of limited partnership interest,  net unrealized  appreciation of
investments  has been included as if the net  unrealized  appreciation  had been
realized  and  allocated  to  the  limited   partners  in  accordance  with  the
Partnership  Agreement.  Pursuant to such  calculation,  the net asset value per
$1,000 Unit as of December 31, 1998,  1997 and 1996,  was $117,  $162, and $323,
respectively.

Year 2000 Issue - The Year 2000 ("Y2K")  concern  arose  because  many  existing
computer  programs  use only the last two digits to refer to a year.  Therefore,
these computer  programs do not properly  recognize a year that begins with "20"
instead of "19".  If not  corrected,  many computer  applications  could fail or
create  erroneous  results.  The impact of the Y2K concern on the  Partnership's
operations is currently being assessed.

The Management Company is responsible to provide or arrange for the provision of
administrative services necessary to support the Partnership's  operations.  The
Management  Company has  arranged  for Palmeri Fund  Administrators,  Inc.  (the
"Administrator")  to provide certain  administrative and accounting services for
the  Partnership,  including  maintenance  of  the  books  and  records  of  the
Partnership,  maintenance of the limited partner database, issuance of financial
reports and tax  information  to limited  partners and  processing  distribution
payments  to  limited  partners.  Fees  charged  by the  Administrator  are paid
directly by the Management Company.

The  Administrator  is currently  assessing  its computer  hardware and software
systems,  specifically as they relate to the operations of the  Partnership.  As
part of this  investigation  of potential Y2K problems,  the  Administrator  has
contracted  with an outside  computer  service  provider  to examine  all of the
Administrator's computer hardware and software applications, to identify any Y2K
concerns.  This  review and  evaluation  is in  process  and is  expected  to be
completed by May 1999. If Y2K problems are identified,  the  Administrator  will
purchase,  install and test the  necessary  software  patches  and new  computer
hardware to ensure that all of its  computer  systems  are Y2K  compliant.  This
correction phase, if required, is expected to be completed by September 1999.

Additionally, the Administrator has contacted the outside service providers used
to assist the Administrator or the Management Company with the administration of
the Partnership's  operations to ascertain whether these entities are addressing
the Y2K issue within  their own  operation.  There can be no guarantee  that the
Administrator's systems or that systems of other companies providing services to
the Partnership will be corrected in a timely manner.

Since the Partnership  does not own any equipment and all of its  administrative
needs  are  provided  by the  Management  Company,  any  costs  relating  to the
investigation   and   correction  of  potential   Y2K  problems   affecting  the
Partnership's  operations will be incurred by the Administrator,  the Management
Company or the outside service providers.  Therefore, the Management Company and
the Managing  General  Partner do not expect the  Partnership to incur any costs
relating to the investigation or correction of Y2K concerns.

Finally the Y2K issue is a global concern that my affect all business  entities,
including  the  Partnership's  portfolio  companies.   The  General  Partner  is
continuing  to  assess  the  impact  of Y2K  concerns  affecting  its  portfolio
companies.  However, the extent to which any potential Y2K problems could affect
the  valuations  of these  companies  is  presently  unknown.  At the time  that
specific Y2K problems are identified,  if any, the Managing General Partner will
take  such  issues  into  consideration  in  adjusting  the  fair  value  of the
Partnership's portfolio investments.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The  Partnership  is subject to market risk arising from changes in the value of
its portfolio  investments,  short-term  investments and  interest-bearing  cash
equivalents,  which may result from  fluctuations  in interest  rates and equity
prices.  The  Partnership has calculated its market risk related to its holdings
of these  investments  based on changes  in  interest  rates and  equity  prices
utilizing  a  sensitivity  analysis.  The  sensitivity  analysis  estimates  the
hypothetical  change in fair values, cash flows and earnings based on an assumed
10% change  (increase  or  decrease)  in interest  rates and equity  prices.  To
perform the  sensitivity  analysis,  the assumed 10% change is applied to market
rates  and  prices  on  investments  held by the  Partnership  at the end of the
accounting period.

The  Partnership's   portfolio  investments  had  an  aggregate  fair  value  of
$14,970,273  as of December 31, 1998.  An assumed 10% decline from this December
31, 1998 fair value,  including  an assumed 10% decline of the per share  market
prices  of the  Partnership's  publicly-traded  securities,  would  result  in a
reduction  to the  fair  value of such  investments  and an  unrealized  loss of
$1,497,027.

As of December 31, 1998, the Partnership held short-term  investments consisting
of  three  separate  discounted  commercial  paper  instruments  with  remaining
maturities of 20 days or less. These  short-term  investments were carried at an
aggregate  amortized  cost of $4,488,454 as of December 31, 1998. An assumed 10%
increase in the market interest rates of such short-term investments held by the
Partnership  as of December  31,  1998,  would result in a reduction to the fair
value of such  investments  and an  unrealized  loss which is  considered  to be
immaterial.

Market risk relating to the  Partnership's  interest-bearing  cash  equivalents\
 held as of December 31, 1998 is considered to be
immaterial.


<PAGE>



Item 8.       Financial Statements and Supplementary Data.


                          ML VENTURE PARTNERS II, L.P.
                                      INDEX

Independent Auditors' Report

Balance Sheets as of December 31, 1998 and 1997

Schedule of Portfolio Investments as of December 31, 1998

Schedule of Portfolio Investments as of December 31, 1997

Statements of Operations for the years ended December 31, 1998, 1997 and 1996

Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996

Statements of Changes in Partners' Capital for the years ended December 31, 
1996, 1997 and 1998

Notes to Financial Statements

NOTE - All other  schedules  are omitted  because of the  absence of  conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.



<PAGE>


INDEPENDENT AUDITORS' REPORT


ML Venture Partners II, L.P.:

We have audited the accompanying  balance sheets of ML Venture Partners II, L.P.
(the  "Partnership"),  including the schedules of portfolio  investments,  as of
December  31, 1998 and 1997,  and the related  statements  of  operations,  cash
flows,  and  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. Our procedures included
confirmation of securities owned at December 31, 1998 and 1997 by correspondence
with the custodian;  where  confirmation  was not possible,  we performed  other
audit  procedures.  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 Venture Partners II, L.P. as of December
31,  1998 and 1997,  and the results of its  operations,  its cash flows and the
changes in its partners' capital for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

As explained in Note 2, the financial  statements  include  securities valued at
$14,970,273  and  $16,497,000  as of December  31, 1998 and 1997,  respectively,
representing  96% and 76% of net assets,  respectively,  whose  values have been
estimated by the  Sub-Manager  under the  supervision of the Individual  General
Partners   and  the  Managing   General   Partner  in  the  absence  of  readily
ascertainable  market  values.  We  have  reviewed  the  procedures  used by the
Sub-Manager  in arriving at its  estimate of value of such  securities  and have
inspected underlying  documentation,  and, in the circumstances,  we believe the
procedures are reasonable and the documentation appropriate. However, because of
the  inherent  uncertainty  of  valuation,  those  estimated  values  may differ
significantly  from the values that would have been used had a ready  market for
the securities existed, and the differences could be material.


Deloitte & Touche LLP

New York, New York
March 24, 1999


<PAGE>


ML VENTURE PARTNERS II, L.P.
BALANCE SHEETS
As of December 31,
<TABLE>


                                                                                                1998                 1997      
                                                                                          ----------------     ----------------
ASSETS

Portfolio investments, at fair value (cost $10,197,685 as of
<S>      <C> <C>      <C>                        <C> <C>                               <C>                  <C>             
December 31, 1998 and $13,013,680 as of December 31, 1997)                             $     14,970,273     $     17,021,243
Short-term investments, at amortized cost                                                        4,488,454            2,979,552
Cash and cash equivalents                                                                          423,675            1,918,335
Receivable from liquidated securities                                                              475,435                    -
Accrued interest receivable                                                                          1,291                    -
                                                                                          ----------------     ----------------
TOTAL ASSETS                                                                              $     20,359,128     $     21,919,130
                                                                                          ================     ================

LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
Cash distribution payable                                                                 $      4,514,772     $              -
Accounts payable and accrued expenses                                                               85,874              144,890
Due to Management Company                                                                          100,410               41,349
Due to Independent General Partners                                                                 19,870               25,698
                                                                                          ----------------     ----------------
   Total liabilities                                                                             4,720,926              211,937
                                                                                          ----------------     ----------------

Partners' Capital:
Managing General Partner                                                                           652,777            1,416,952
Individual General Partners                                                                            341                  543
Limited Partners (120,000 Units)                                                                10,212,496           16,282,135
Unallocated net unrealized appreciation of investments                                           4,772,588            4,007,563
                                                                                          ----------------     ----------------
   Total partners' capital                                                                      15,638,202           21,707,193
                                                                                          ----------------     ----------------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                                   $     20,359,128     $     21,919,130
                                                                                          ================     ================
</TABLE>



See notes to financial statements


<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1998
<TABLE>

                                                                       Initial Investment
Company / Position                                                            Date                 Cost              Fair Value
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Borg-Warner Security Corporation* (A)
<C>                                                                             <C>           <C>               <C>            
500,000 shares of Common Stock                                            Sept. 1988          $    2,500,000    $     7,031,250
-------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc. (B)
   171,650 shares of Common Stock                                         May 1995                    43,565            257,475
   Warrants to purchase 38,737 shares of Common Stock
     at $.40 per share, expiring on 4/19/99                                                            1,138             42,611
-------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
179,028 shares of Preferred Stock                                         Jan. 1991                1,000,548            895,152
Warrants to purchase 14,043 shares of Common Stock
   at $.05 per share, expiring between 3/7/00 and 7/3/00                                                   0                  0
Warrants to purchase 2,826 shares of Preferred Stock
   at $5.00 per share, expiring on 3/7/00                                                                  0                  0
-------------------------------------------------------------------------------------------------------------------------------
CoCensys, Inc. (A)
152,507 shares of Common Stock                                            Feb. 1989                  192,504             30,978
-------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc. (A)
60,000 shares of Common Stock                                             May 1992                    12,000            249,000
-------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.* (A)
809,704 shares of Common Stock                                            Dec. 1991                2,986,023          3,815,731
-------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock                                            Mar. 1988                  227,000                  0
-------------------------------------------------------------------------------------------------------------------------------
Neocrin Company
48,429 shares of Preferred Stock                                          June 1991                  363,378                  0
-------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.* (A)
425,236 shares of Common Stock                                            Sept. 1988               2,452,226          1,743,464
Warrants to purchase 6,062 shares of Common Stock
   at $5.40 per share, expiring on 6/30/00                                                                 0                  0
-------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corporation(A)
62,500 shares of Common Stock                                             Feb. 1990                  241,639            232,813
Options to purchase 27,969 shares of Common Stock
   at $1.42 per share, expiring on 10/31/01                                                                0             64,469
-------------------------------------------------------------------------------------------------------------------------------
ReGen Biologics, Inc.(C)
72,800 shares of Common Stock                                             Apr. 1991                      364            263,900
62,400 shares of Preferred Stock                                                                     114,400            226,200
-------------------------------------------------------------------------------------------------------------------------------
Stereotaxis, Inc. (C)
21,632 shares of Common Stock                                             Apr. 1990                      216             16,224
134,674 shares of Preferred Stock                                                                     62,684            101,006
-------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments                                                                   $   10,197,685    $    14,970,273
                                                                                              ---------------------------------
</TABLE>



<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
As of December 31, 1998

<TABLE>

Supplemental Information: Liquidated Portfolio Investments(F)

                                                      Liquidation                              Realized
Company                                                  Date               Cost              Gain (Loss)                Return
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>                   <C>                 <C>            
Allez, Inc.                                           1992            $     1,781,320       $   (1,781,320)     $             0
Amdahl Corporation (Key Computer)                     1989                    729,742            1,837,787            2,567,529
Aqua Group, Inc.                                      1990                  2,000,000           (1,999,999)                   1
BBN Advanced Computer Partners, L.P.                  1990                    868,428             (864,028)               4,400
BBN Integrated Switch Partners, L.P.                  1990-1992             5,022,380           (4,822,797)             199,583
Biocircuits Corporation(D)                            1997-1998             2,653,751           (2,653,751)                   0
Borg-Warner Automotive, Inc.                          1994-1997             2,500,000           14,628,202           17,128,202
Business Depot, Ltd.                                  1994                  1,214,184            1,539,476            2,753,660
CellPro, Incorporated                                 1994-1996             1,560,944           15,999,505           17,560,449
Children's Discovery Centers of America, Inc.         1995                  2,000,259             (236,187)           1,764,072
Clarus Medical Systems                                1997                  1,388,620           (1,388,620)                   0
Communications International, Inc.                    1992-1994             1,819,332           (1,819,331)                   1
Computer-Aided Design Group                           1990-1991             1,131,070           (1,131,069)                   1
Corporate Express, Inc.                               1994-1997             2,987,912           25,499,494           28,487,406
Data Recording Systems, Inc.                          1988                  1,615,129           (1,499,999)             115,130
Eckerd Corporation                                    1995                    857,004            2,019,272            2,876,276
Elantec, Inc.                                         1993-1997             1,412,118            2,105,168            3,517,286
Everex Systems, Inc.                                  1991-1992               750,000              447,606            1,197,606
-------------------------------------------------------------------------------------------------------------------------------
Hoffman & Company, L.P.                               1993                     40,000              (40,000)                   0
-------------------------------------------------------------------------------------------------------------------------------
Home Express, Inc.                                    1995                  1,822,751           (1,822,751)                   0
-------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.(E)           1996-1998             3,678,926            1,702,626            5,381,552
-------------------------------------------------------------------------------------------------------------------------------
IDE Corporation                                       1996                    883,909             (883,909)                   0
IDEC Pharmaceuticals Corporation                      1994-1997             4,261,036            8,377,068           12,638,104
Inference Corporation                                 1995-1996               849,362            3,280,433            4,129,795
-------------------------------------------------------------------------------------------------------------------------------
In-Store Advertising, Inc.                            1992                  2,259,741           (2,259,741)                   0
InteLock Corporation                                  1992                  1,254,125           (1,251,274)               2,851
Komag, Incorporated                                   1991-1995             2,365,237            4,477,842            6,843,079
Ligand Pharmaceuticals Inc.                           1992-1996             1,414,435            4,227,245            5,641,680
</TABLE>


<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1998
<TABLE>

                                                      Liquidation                              Realized
Company                                                  Date               Cost              Gain (Loss)                Return
<S>                                                   <C>             <C>                   <C>                 <C>            
Magnesys                                              1989            $     1,440,997       $   (1,412,049)     $        28,948
Meteor Message Corporation                            1990                  1,501,048           (1,501,047)                   1
-------------------------------------------------------------------------------------------------------------------------------
Micro Linear Corporation                              1994-1995             1,120,300            2,897,886            4,018,186
-------------------------------------------------------------------------------------------------------------------------------
Mobile Telecommunications
   Technologies Corporation                           1995                  1,558,155            3,439,923            4,998,078
-------------------------------------------------------------------------------------------------------------------------------
Neocrin Company                                       1996-1997             3,840,560           (3,840,560)                   0
OccuSystems, Inc.                                     1994-1996             2,657,000            9,353,722           12,010,722
Ogle Resources, Inc.                                  1993                  1,974,286           (1,974,186)                 100
-------------------------------------------------------------------------------------------------------------------------------
Pandora Industries, Inc.                              1990                  2,060,139           (2,060,138)                   1
-------------------------------------------------------------------------------------------------------------------------------
Pyxis Corporation                                     1993                    634,598            7,169,424            7,804,022
-------------------------------------------------------------------------------------------------------------------------------
Raytel Medical Corp.                                  1996-1997             1,807,664            4,370,155            6,177,819
R-Byte Inc.                                           1992-1994             1,991,098             (443,566)           1,547,532
Regeneron Pharmaceuticals, Inc.                       1991-1995             2,678,135           30,203,091           32,881,226
Research Applications, Inc.                           1994                    100,000             (100,000)                   0
Ringer Corporation                                    1991-1994             3,029,652           (2,208,012)             821,640
S & J Industries                                      1991-1992             1,600,150           (1,555,149)              45,001
Sanderling Biomedical, L.P.(C)                        1995-1998             1,629,832            1,248,545            2,878,377
Saxpy Computer Corporation                            1988                  2,000,000           (2,000,000)                   0
SDL, Inc.                                             1993-1996             4,757,265           10,502,531           15,259,796
SF2 Corporation                                       1991-1994             2,193,293           (1,856,570)             336,723
Shared Resource Exchange, Inc.                        1990-1994               999,999             (999,998)                   1
Special Situations, Inc.                              1988                    215,000             (187,175)              27,825
Storage Technology Corporation                        1990                  2,174,000            1,466,802            3,640,802
-------------------------------------------------------------------------------------------------------------------------------
Target Vision, Inc.                                   1992-1995             1,500,000           (1,253,750)             246,250
-------------------------------------------------------------------------------------------------------------------------------
TCOM Systems, Inc.                                    1990-1992             4,715,384           (4,711,536)               3,848
-------------------------------------------------------------------------------------------------------------------------------
Telecom USA, Inc.                                     1989                  5,000,000            3,361,778            8,361,778
Touch Communications Incorporated                     1991                  1,119,693           (1,119,693)                   0
Viasoft, Inc.                                         1995-1996               915,348            2,801,429            3,716,777

</TABLE>


<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
December 31, 1998
<TABLE>

                                                                                                 Net
                                                                            Cost            Realized Gain            Return    
<S>                                                                   <C>                   <C>                <C>             
Totals from Liquidated Portfolio Investments                          $   106,335,311       $  111,278,805     $    217,614,116
                                                                      =========================================================

                                                                                            Combined Net               Combined
                                                                                           Unrealized and            Fair Value
                                                                            Cost            Realized Gain            and Return

Totals from Active & Liquidated Portfolio Investments                 $   116,532,996       $  116,051,393     $    232,584,389
                                                                      =========================================================
</TABLE>


(A)  Public company

(B)  In June 1998,  in a non-cash  transaction,  the  Partnership  exchanged its
     warrant to purchase  59,166 common shares of  Brightware,  Inc. at $.80 per
     share for 27,611 shares of Brightware common stock.

(C)  During  1998,   the   Partnership   received  three   liquidating   in-kind
     distributions  from Sanderling  Biomedical,  L.P.:  93,745 common shares of
     Depotech Corp.,  Inc.,  72,800 common shares and 62,400 preferred shares of
     ReGen  Biologics,  Inc.,  and 21,632  common  shares and 134,674  preferred
     shares of Stereotaxis,  Inc. The Depotech shares were  subsequently sold by
     the Partnership in November 1998 for $136,878, resulting in a realized gain
     of $79,822. Additionally, the Partnership received a final liquidating cash
     distribution  of $325,567 from Sanderling in February 1999. The Partnership
     also  recorded a  realized  loss of  $775,338  during  1998 to reflect  the
     write-off of the unreturned cost of its Sanderling investment.

(D)  On May 18,  1998,  Biocircuits  Corporation  announced  that it ceased  all
     ordinary business and began to liquidate its remaining assets. As a result,
     the Partnership  wrote-off the remaining  $1,488,884 cost of its investment
     in Biocircuits as of June 30, 1998.

 (E) During 1998, the Partnership  received $187,194,  plus interest of $13,069,
     from the sale of options in connection  with its investment in HCTC/SPTHOR.
     Because it is anticipated  that no further funds will be received from this
     investment,  the  Partnership  wrote-off it's remaining cost of $169,150 in
     HCTC during 1998.

(F)  Amounts  provided  for  "Supplemental  Information:   Liquidated  Portfolio
     Investments"  are cumulative from inception  through December 31, 1998. See
     Note 6 of Notes to Financial  Statements for portfolio  investments sold or
     written- off during 1998.


* May be deemed  an  affiliated  person of the  Partnership  as  defined  in the
Investment Company Act of 1940.


See notes to financial statements.


<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS
As of December 31, 1997
<TABLE>

                                                                       Initial Investment
Company / Position                                                            Date                 Cost              Fair Value
Biocircuits Corporation*(A)
<S>                                                                           <C>             <C>               <C>            
   401,734 shares of Common Stock                                         May 1991            $      468,051    $       175,759
   2,000,000 shares of Preferred Stock                                                             1,000,000            218,750
   Warrants to purchase 166,667 shares of Common Stock
     at $.75 per share, expiring 1/2/99                                                               20,833                  0
-------------------------------------------------------------------------------------------------------------------------------
Borg-Warner Security Corporation*(A)
500,000 shares of Common Stock                                            Sept. 1988               2,500,000          6,609,375
-------------------------------------------------------------------------------------------------------------------------------
Brightware, Inc.
   144,039 shares of Common Stock                                         May 1995                    39,579            216,059
   Warrants to purchase 38,737 shares of Common Stock
     at $.40 per share, expiring on 4/19/99                                                            1,138             42,611
   Warrants to purchase 59,166 shares of Common Stock
     at $.80 per share, expiring on 6/10/98                                                            3,986             41,416
-------------------------------------------------------------------------------------------------------------------------------
Clarus Medical Systems, Inc.*
179,028 shares of Preferred Stock                                         Jan. 1991                1,000,548            895,152
Warrants to purchase 14,043 shares of Common Stock
   at $.05 per share, expiring between 3/7/00 and 7/3/00                                                   0                  0
Warrants to purchase 2,826 shares of Preferred Stock
   at $5.00 per share, expiring on 3/7/00                                                                  0                  0
-------------------------------------------------------------------------------------------------------------------------------
CoCensys, Inc.(A)
152,507 shares of Common Stock                                            Feb. 1989                  192,504            524,243
-------------------------------------------------------------------------------------------------------------------------------
Corporate Express, Inc. (A)
60,000 shares of Common Stock                                             May 1992                    12,000            618,000
-------------------------------------------------------------------------------------------------------------------------------
Diatide, Inc.*(A)
809,704 shares of Common Stock                                            Dec. 1991                2,986,023          4,802,557
-------------------------------------------------------------------------------------------------------------------------------
Horizon Cellular Telephone Company, L.P.:
   SPTHOR Corporation
   10% Promissory Note due 3/26/98                                        May 1992                     5,073              5,073
   5.67% Bridge Loan                                                                                   9,271              9,271
   34.5 shares of Common Stock                                                                       154,806            154,806
-------------------------------------------------------------------------------------------------------------------------------
I.D.E. Corporation
113,322 shares of Common Stock                                            Mar. 1988                  227,000                  0
-------------------------------------------------------------------------------------------------------------------------------
Neocrin Company*
48,429 shares of Preferred Stock                                          June 1991                  363,378                  0
-------------------------------------------------------------------------------------------------------------------------------
Photon Dynamics, Inc.*(A)
425,236 shares of Common Stock                                            Sept. 1988               2,452,226          1,148,135
Warrants to purchase 6,062 shares of Common Stock
   at $5.40 per share, expiring on 6/30/00                                                                 0                  0
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>


<PAGE>


ML VENTURE PARTNERS II, L.P.
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
As of December 31, 1997
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                                                       Initial Investment
Company / Position                                                            Date                 Cost              Fair Value

Raytel Medical Corporation(A)
<C>                                                                            <C>            <C>               <C>            
62,500 shares of Common Stock                                             Feb. 1990           $      241,639    $       581,250
Options to purchase 27,969 shares of Common Stock
   at $1.42 per share, expiring on 10/31/01                                                                0            220,396
-------------------------------------------------------------------------------------------------------------------------------
Sanderling Biomedical, L.P.*
80% Limited Partnership interest                                          May 1988                 1,335,625            758,390
-------------------------------------------------------------------------------------------------------------------------------
Total Portfolio Investments                                                                   $   13,013,680    $    17,021,243
                                                                                              ---------------------------------

Supplemental Information: Liquidated Portfolio Investments(B)

                                                                                             Net Realized
                                                                           Cost                  Gain               Return     
Totals from Liquidated Portfolio Investments                          $   103,519,316       $  113,445,161     $    216,964,477
                                                                      =========================================================

                                                                                            Combined Net               Combined
                                                                                           Unrealized and            Fair Value
                                                                            Cost            Realized Gain            and Return

Totals from Active & Liquidated Portfolio Investments                 $   116,532,996       $  117,452,724     $    233,985,720

                                                                     =========================================================
</TABLE>

(A)  Public company

(B)  Amounts  provided  for  "Supplemental  Information:   Liquidated  Portfolio
     Investments" are cumulative from inception through December 31, 1997.


* May be deemed  an  affiliated  person of the  Partnership  as  defined  in the
Investment Company Act of 1940.



See notes to financial statements.



<PAGE>


ML VENTURE PARTNERS II, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31,
<TABLE>


                                                                               1998               1997               1996      
                                                                         ---------------     ---------------    ---------------

INVESTMENT INCOME AND EXPENSES


   Income:

<S>                                                                      <C>                 <C>               <C>             
   Interest from short-term investments                                  $       280,896     $       638,556   $        979,803
   Interest and other income from portfolio investments                           13,069              27,270            330,436
   Dividend income                                                                     -              37,754            212,646
                                                                         ---------------     ---------------   ----------------
   Total investment income                                                       293,965             703,580          1,522,885
                                                                         ---------------     ---------------   ----------------

   Expenses:

   Management fee                                                                200,000             282,686            686,493
   Professional fees                                                              78,590             140,089            175,434
   Mailing and printing                                                           77,897             126,589            220,877
   Independent General Partners' fees                                             82,500              91,800            107,100
   Custodial fees                                                                  2,198                 373             13,930
   Miscellaneous                                                                   5,668               8,500              6,783
   Litigation settlement                                                               -                   -          1,000,000
                                                                         ---------------     ---------------   ----------------
   Total investment expenses                                                     446,853             650,037          2,210,617
                                                                         ---------------     ---------------   ----------------

NET INVESTMENT (LOSS) INCOME                                                    (152,888)             53,543           (687,732)

Net realized (loss) gain from portfolio investments                           (2,166,356)         15,605,512         46,879,092
                                                                         ---------------     ---------------   ----------------

NET REALIZED (LOSS) GAIN FROM OPERATIONS                                      (2,319,244)         15,659,055         46,191,360

Change in unrealized appreciation of investments                                 765,025          (5,872,825)       (25,244,796)
                                                                         ---------------     ---------------   ----------------

NET (DECREASE) INCREASE IN NET ASSETS
   RESULTING FROM OPERATIONS                                             $    (1,554,219)    $     9,786,230   $     20,946,564
                                                                         ===============     ===============   ================

</TABLE>

See notes to financial statements.


<PAGE>


ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
<TABLE>


                                                                               1998               1997                1996     
                                                                         ---------------     ---------------   ----------------

CASH FLOWS (USED FOR) PROVIDED FROM
   OPERATING ACTIVITIES

<S>                                                                      <C>                 <C>               <C>              
Net investment (loss) income                                             $      (152,888)    $        53,543   $       (687,732)

Adjustments  to  reconcile  net  investment  (loss)  income to cash  (used  for)
   provided from operating activities:

(Increase) decrease in accrued interest receivable                                (1,291)             49,442            820,735
(Increase) decrease in accrued interest from short-term
   investments                                                                    (8,895)             19,695            (10,369)
Decrease in payables                                                              (5,783)           (133,258)           (21,176)
                                                                         ----------------    ---------------   ----------------
Cash (used for ) provided from operating activities                             (168,857)            (10,578)           101,458
                                                                         ---------------     ---------------   ----------------

CASH FLOWS (USED FOR) PROVIDED FROM
   INVESTING ACTIVITIES

Net (purchase) return of short-term investments                               (1,500,007)          1,487,155         12,893,395
Cost of portfolio investments purchased                                                -            (474,255)          (207,111)
Deposits released from escrow                                                          -                   -            184,502
Net proceeds from the sale of portfolio investments                              174,204          28,190,298         59,663,087
Repayment of investments in notes                                                      -           2,381,659            727,447
                                                                         ---------------     ---------------   ----------------
Cash (used for) provided from investing activities                            (1,325,803)         31,584,857         73,261,320
                                                                         ---------------     ---------------   ----------------

CASH FLOWS USED FOR FINANCING ACTIVITIES

Cash distributions paid to Partners                                                    -         (30,002,073)       (73,702,566)
                                                                         ---------------         -----------   ----------------

(Decrease) increase in cash and cash equivalents                              (1,494,660)          1,572,206           (339,788)
Cash and cash equivalents at beginning of year                                 1,918,335             346,129            685,917
                                                                         ---------------     ---------------   ----------------

CASH AND CASH EQUIVALENTS AT END
   OF YEAR                                                               $       423,675     $     1,918,335   $        346,129
                                                                         ===============     ===============   ================

</TABLE>

See notes to financial statements.

<PAGE>




ML VENTURE PARTNERS II, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1996, 1997 and 1998
<TABLE>

                                                                                              Unallocated
                                         Managing        Individual                         Net Unrealized
                                          General          General           Limited        Appreciation of
                                          Partner         Partners          Partners          Investments           Total      
<S>                    <C> <C>         <C>                <C>           <C>                 <C>                <C>             
Balance as of December 31, 1995        $   1,471,685      $ 1,457       $   43,744,206      $   35,125,184     $     80,342,532
Cash distributions accrued               (10,164,420)      (1,640)         (49,200,000)                  -          (59,366,060)
Net investment income (loss)                 100,653          (26)            (788,359)                  -             (687,732)
Net realized gain on investments           9,750,851        1,238           37,127,003                   -           46,879,092
Change in unrealized
   appreciation on investments                     -            -                    -         (25,244,796)         (25,244,796)
                                       -------------      -------       --------------      --------------     ----------------
Balance as of December 31, 1996            1,158,769        1,029           30,882,850(A)        9,880,388           41,923,036
Cash distributions paid or accrued        (3,001,173)        (900)         (27,000,000)                  -          (30,002,073)
Net investment income                         13,410            2               40,131                   -               53,543
Net realized loss on investments           3,245,946          412           12,359,154                   -           15,605,512
Change in unrealized
   appreciation on investments                     -            -                    -          (5,872,825)          (5,872,825)
                                       -------------      -------       --------------      --------------     ----------------
Balance as of December 31, 1997            1,416,952          543           16,282,135(A)        4,007,563           21,707,193
Cash distribution - accrued                 (314,632)        (140)          (4,200,000)                  -           (4,514,772)
Net investment income (loss)                   1,059           (5)            (153,942)                  -             (152,888)
Net realized loss on investments            (450,602)         (57)          (1,715,697)                  -           (2,166,356)
Change in unrealized
   appreciation on investments                     -            -                    -             765,025              765,025
                                       -------------      -------       --------------      --------------     ----------------
Balance as of December 31, 1998        $     652,777      $   341       $   10,212,496(A)   $    4,772,588     $     15,638,202
                                       =============      =======       ==============      ==============     ================

</TABLE>

(A)  The net asset value per unit of limited partnership interest,  including an
     assumed allocation of net unrealized appreciation of investments, was $117,
     $162,  and $323 as of  December  31,  1998,  1997 and  1996,  respectively.
     Cumulative cash  distributions  paid, or payable,  to limited partners from
     inception to December 31, 1998,  1997 and 1996 totaled  $1,560,  $1,525 and
     $1,300 per Unit, respectively.

See notes to financial statements


<PAGE>


ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS


1.     Organization and Purpose

ML  Venture  Partners  II,  L.P.  (the  "Partnership")  is  a  Delaware  limited
partnership  formed on February 4, 1986.  MLVPII Co., L.P., the managing general
partner  of  the  Partnership  (the  "Managing  General   Partner"),   and  four
individuals (the "Individual  General Partners") are the general partners of the
Partnership.  The general  partner of MLVPII Co.,  L.P. is Merrill Lynch Venture
Capital Inc. (the "Management Company"), an indirect subsidiary of Merrill Lynch
& Co., Inc. DLJ Capital Management Corporation (the "Sub-Manager"),  an indirect
subsidiary of Donaldson,  Lufkin & Jenrette,  Inc.,  is the  sub-manager  of the
Partnership,  pursuant to a sub-management agreement among the Partnership,  the
Management Company, the Managing General Partner and the Sub-Manager.

The Partnership's  objective is to achieve  long-term capital  appreciation from
its portfolio of venture capital investments in new and developing companies and
other special  investment  situations.  The  Partnership  does not engage in any
other business or activity.  The Managing  General Partner is working toward the
ultimate  termination of the  Partnership,  with an emphasis on liquidating  the
remaining  assets as soon as practical  with the goal of  maximizing  returns to
Partners. In July 1997, the Individual General Partners voted to extend the term
of the Partnership  for an additional  two-year  period.  The Partnership is now
scheduled  to  terminate no later than  December  31,  1999.  In  addition,  the
Individual General Partners have the right to extend the term of the Partnership
for an additional  two-year  period if they  determine that such extension is in
the best interest of the Partnership.

2.     Significant Accounting Policies

Valuation of Investments - Short-term  investments are carried at amortized cost
which approximates  market.  Portfolio  investments are carried at fair value as
determined  quarterly by the Sub-Manager under the supervision of the Individual
General  Partners  and  the  Managing   General  Partner.   The  fair  value  of
publicly-held  portfolio  securities  is adjusted to the closing  public  market
price for the last trading day of the accounting  period  discounted by a factor
of 0% to 50% for sales restrictions.  Factors considered in the determination of
an  appropriate  discount  include,  underwriter  lock-up  or Rule  144  trading
restrictions,  insider status where the Partnership  either has a representative
serving  on  the  company's  Board  of  Directors  or  is  greater  than  a  10%
shareholder,  and other liquidity  factors such as the size of the Partnership's
position  in a given  company  compared  to the  trading  history  of the public
security.   Privately-held  portfolio  securities  are  carried  at  cost  until
significant  developments  affecting the portfolio  company  provide a basis for
change in  valuation.  The fair value of private  securities  is  adjusted 1) to
reflect  meaningful  third-party  transactions  in the  private  market or 2) to
reflect  significant  progress or slippage in the  development  of the company's
business  such that cost is no longer  reflective  of fair  value.  As a venture
capital investment fund, the Partnership's  portfolio investments involve a high
degree of business and financial risk that can result in substantial losses. The
Sub-Manager   considers  such  risks  in  determining  the  fair  value  of  the
Partnership's portfolio investments.


<PAGE>


ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued

Use of 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  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Investment  Transactions - Investment  transactions  are recorded on the accrual
method.  Portfolio  investments  are  recorded on the trade  date,  the date the
Partnership  obtains an  enforceable  right to demand the  securities or payment
therefor.  Realized  gains and  losses on  investments  sold are  computed  on a
specific identification basis.

Income Taxes - No provision  for income taxes has been made since all income and
losses are  allocable  to the partners for  inclusion  in their  respective  tax
returns.  The Partnership's net assets for financial  reporting  purposes differ
from its net assets for tax purposes. Net unrealized appreciation of investments
of  approximately  $4.8 million as of December 31, 1998,  which was recorded for
financial statement purposes, was not recognized for tax purposes. Additionally,
from inception to December 31, 1998,  timing  differences of approximately  $6.4
million  have  been  deducted  on the  Partnership's  financial  statements  and
syndication  costs  relating to the selling of Units totaling $11.3 million were
charged to partners' capital on the financial statements. These amounts have not
been deducted or charged against partners' capital for tax purposes.

Statements of Cash Flows - The Partnership  considers its interest-bearing  cash
account to be cash equivalents.

Reclassifications  -  Certain  reclassifications  have  been  made to the  prior
periods' financial statements to conform with the current period's presentation.

3.     Allocation of Partnership Profits and Losses

The  Partnership  Agreement  provides that the Managing  General Partner will be
allocated,  on a cumulative basis over the life of the  Partnership,  20% of the
Partnership's aggregate investment income and net realized gains and losses from
venture capital  investments,  provided that such amount is positive.  All other
gains and  losses  of the  Partnership  are  allocated  among  all the  Partners
(including  the Managing  General  Partner) in  proportion  to their  respective
capital  contributions  to the  Partnership.  From its inception to December 31,
1998,  the  Partnership  had a $115.5 million net realized gain from its venture
capital  investments,  which  includes  interest and other income from portfolio
investments totaling $4.3 million.

4.     Related Party Transactions

The  Management  Company  performs,  or  arranges  for  others to  perform,  the
management  and  administrative  services  necessary  for the  operation  of the
Partnership  and  receives a  management  fee at the annual  rate of 2.5% of the
gross capital contributions to the Partnership,  reduced by selling commissions,
organizational   and  offering   expenses  paid  by  the  Partnership,   capital
distributed  and realized  capital losses with a minimum annual fee of $200,000.
Such fee is determined and payable quarterly.


<PAGE>


ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued

5.     Independent General Partners' Fees

As  compensation  for services  rendered to the  Partnership,  each of the three
Independent   General   Partners   receives   $20,000   annually  in   quarterly
installments,  $1,500 for each meeting of the General  Partners  attended or for
each other  meeting,  conference or engagement  in connection  with  Partnership
activities at which attendance by an Independent General Partner is required and
$1,500 for each audit  committee  meeting  attended ($500 if an audit  committee
meeting  is  held  on the  same  day as a  meeting  of the  Independent  General
Partners).

6.       Portfolio Investments

Portfolio  investments  liquidated  during the years ended December 31, 1998 and
1997, are shown below:
<TABLE>

                                                                                               Realized
Company                                                  Shares Sold          Cost            Gain (Loss)           Return    
------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
<S>                                                                     <C>                 <C>                <C>            
Biocircuits Corporation - partial write-off                    n/a      $    1,488,884      $   (1,488,884)    $             0
Depotech Corp., Inc. (Sanderling)                           93,745              57,056              79,822             136,878
HCTC Investment, L.P. - sale of options                        n/a                   0             187,194             187,194
HCTC Investment, L.P. - partial write-off                      n/a             169,150            (169,150)                  0
Sanderling Biomedical, L.P. - liquidation                      n/a           1,100,905            (775,338)            325,567
                                                                        --------------      --------------     ---------------
Total                                                                   $    2,815,995      $   (2,166,356)    $       649,639
                                                                        ==============      ==============     ===============

Year ended December 31, 1997:
Biocircuits Corporation - partial write-off                    n/a      $    1,164,867      $   (1,164,867)    $             0
Borg-Warner Automotive, Inc.                               251,694           1,258,470           8,381,410           9,639,880
Clarus Medical Systems, Inc. - partial write-off               n/a           1,388,620          (1,388,620)                  0
Corporate Express, Inc.                                    120,755              24,150           2,561,946           2,586,096
Elantec, Inc.                                               23,245              60,437              32,945              93,382
Graham Fields International (Sanderling)                     4,645             113,964             (50,960)             63,004
IDEC Pharmaceuticals Corporation                           477,233           4,043,645           8,594,459          12,638,104
HCTC Investment, L.P. - sale of options                        n/a                   0           2,085,252           2,085,252
HCTC / SPTHOR  - note repayment                                n/a           2,381,659                   0           2,381,659
HCTC Investment, L.P. - partial write-off                      n/a             400,670            (400,670)                  0
Neocrin Company - partial write-off                            n/a           3,840,430          (3,840,430)                  0
Raytel Medical Corporation                                  37,500             144,983                   0             144,983
Vical, Inc.  (Sanderling)                                   59,685             144,550             795,047             939,597
                                                                        --------------      --------------    ----------------
Total                                                                   $   14,966,445      $   15,605,512    $     30,571,957
                                                                        ==============      ==============    ================

</TABLE>

<PAGE>


ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued

7.   Cash Distributions

Cash  distributions  paid or accrued during the periods presented and cumulative
cash  distributions  to  partners  from  inception  of the  Partnership  through
December 31, 1998 are listed below:
<TABLE>

                                                        Managing           Individual                                   Per
                                                         General           General         Limited    $1,000
Distribution Date                                        Partner           Partners        Partners                 Unit 
------------------------------------------------    ------------------     -------- ---------------         -------------
<S>                   <C> <C>                       <C>                    <C>            <C>                        <C>       
Inception to December 31, 1995                      $     8,632,165        $   3,160      $       94,800,000         $      790
January 12, 1996                                          2,336,106              400              12,000,000                100
April 26, 1996                                            3,377,898              600              18,000,000                150
July 29, 1996                                             4,238,951              640              19,200,000                160
October 11, 1996                                          2,547,571              400              12,000,000                100
July 11, 1997                                             2,590,089              640              19,200,000                160
October 16, 1997                                            411,084              260               7,800,000                 65
January 26, 1999 (accrued)                                  314,632              140               4,200,000                 35
                                                    ---------------        ---------      ------------------         ----------

Cumulative totals as of December 31, 1998           $    24,448,496        $   6,240      $      187,200,000         $    1,560
                                                    ===============        =========      ==================         ==========
</TABLE>

8.     Short-Term Investments
<TABLE>

As of December 31, 1998 and 1997, the Partnership had short-term  investments in
commercial paper as detailed below.
                                                           Maturity          Purchase          Amortized            Value at
Issuer                                          Yield        Date              Price             Cost               Maturity

December 31, 1998:

<S>                                            <C>          <C>  <C>    <C>                 <C>                <C>             
Amoco Managers Acceptance Corp.                5.58%        1/12/99     $     1,485,818     $     1,497,211    $      1,500,000

Star Marketers Acceptance Corp.                5.45%        1/19/99           1,487,510           1,495,685           1,500,000

Park Avenue Receivables Corp.                  5.33%        1/20/99           1,481,789           1,495,558           1,500,000
                                                                        ---------------     ---------------    ----------------
Total as of December 31, 1998                                           $     4,455,117     $     4,488,454    $      4,500,000
                                                                        ===============     ===============    ================

December 31, 1997:

International Lease Finance                    5.55%        1/15/98     $     1,480,344     $     1,496,532    $      1,500,000

National Rule                                  5.66%        3/13/98           1,474,766           1,483,020           1,500,000
                                                                        ---------------     ---------------    ----------------

Total as of December 31, 1997                                           $     2,955,110     $     2,979,552    $      3,000,000
                                                                        ===============     ===============    ================

</TABLE>


<PAGE>


ML VENTURE PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS, continued

9.     Litigation Settlement

During  1996,  the  Partnership  settled  an  action  in which it was named as a
defendant,  along  with  other  entities  and  individuals,  in  respect  of its
ownership of securities of In-Store Advertising,  Inc. ("ISA"). The action was a
purported class action suit wherein the plaintiffs,  who purchased shares of ISA
in its July 19, 1990 initial public offering through  November 8, 1990,  alleged
violations  under certain sections of the Securities Act of 1933, the Securities
Exchange Act of 1934 and common law. The plaintiffs  sought  rescission of their
purchases  of ISA common  stock  together  with  damages and  certain  costs and
expenses.   In  connection  with  the  settlement,   the  Partnership  delivered
$1,000,000  into escrow on  September  20, 1996,  representing  its share of the
settlement agreement. On December 18, 1996, the court entered an order approving
the settlement and dismissing the action against the  Partnership  and the other
defendants involved in the settlement.  Additionally,  the Partnership  incurred
legal expenses totaling approximately $246,000 related to the litigation.

10.    Classification of Portfolio Investments

As of December 31, 1998, the Partnership's investments in portfolio companies 
were categorized as follows:
<TABLE>
                                                                                               % of
Type of Investments                                  Cost               Fair Value          Net Assets*
-------------------                             --------------        ---------------       -----------
<S>                                             <C>                   <C>                     <C>   
Common Stock and Warrants                       $    8,656,675        $    13,747,915         87.91%
Preferred Stock                                      1,541,010              1,222,358          7.82%
                                                --------------        ---------------        -------
Total                                           $   10,197,685        $    14,970,273         95.73%
                                                ==============        ===============         ======

Country/Geographic Region
Midwestern U.S.                                 $    3,575,448        $     8,292,632         53.03%
Western U.S.                                         3,409,214              2,861,910         18.30%
Eastern U.S.                                         3,213,023              3,815,731         24.40%
                                                --------------        ---------------         ------
Total                                           $   10,197,685        $    14,970,273         95.73%
                                                ==============        ===============         ======

Industry
Business Services                               $    2,512,000        $     7,280,250         46.55%
Biotechnology                                        3,356,191              4,454,039         28.48%
Semiconductors/Electronics                           2,452,226              1,743,464         11.15%
Medical Devices and Services                         1,605,565              1,192,434          7.63%
Computer Hardware/Software                             271,703                300,086          1.92%
                                                --------------        ---------------        -------
Total                                           $   10,197,685        $    14,970,273         95.73%
                                                ==============        ===============         ======
</TABLE>

* Percentage of net assets is based on fair value.



<PAGE>


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

None
                                    PART III

Item 10.      Directors and Executive Officers of the Registrant.

The Partnership

GENERAL PARTNERS

The General Partners of the Partnership  consist of the four Individual  General
Partners  and the  Managing  General  Partner.  The five  General  Partners  are
responsible  for  the  management  and  administration  of the  Partnership.  As
required by the  Investment  Company Act of 1940 (the "1940 Act"), a majority of
the General  Partners are individuals  who are not  "interested  persons" of the
Partnership  as defined in the 1940 Act. In 1987,  the  Securities  and Exchange
Commission  (the "SEC")  issued an order  declaring  that the three  Independent
General Partners of the Partnership (the "Independent General Partners") are not
"interested  persons"  of the  Partnership  as defined in the 1940 Act solely by
reason of their being general partners of the Partnership.

The Individual  General  Partners have full authority over the management of the
Partnership  and provide overall  guidance and  supervision  with respect to the
operations  of the  Partnership  and perform the various  duties  imposed on the
directors  of  business  development  companies  by the 1940 Act. In addition to
general fiduciary duties, the Individual  General Partners,  among other things,
supervise the management arrangements of the Partnership.

     The Managing General Partner,  subject to the supervision of the Individual
General  Partners,  has  authority to provide,  or arrange for the provision of,
management  services in connection with the venture  capital  investments of the
Partnership.  The general  partner of the  Managing  General  Partner is Merrill
Lynch Venture Capital Inc. (the "Management Company"). The Management Company is
an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co.").

Individual General Partners
Dr. Steward S. Flaschen (1)
592 Weed Street
New Canaan, Connecticut 06840
Age 72
Individual General Partner since 1987
Units of the Partnership beneficially owned as of  March 16, 1999 - None (3)
         President of Flaschen & Davies,  a management  consulting  firm,  since
         1986;  Corporate  Senior Vice  President  and member of the  Management
         Policy Board of ITT Corporation from 1982 to 1986 and General Technical
         Director from 1969 to 1986; Chairman of Telco Systems Inc. from 1990 to
         1998;  Chairman of TranSwitch  Corp. from 1989 to present;  Director of
         Sipex Corp. from 1996 to present.

Jerome Jacobson (1)
4200 Massachusetts Avenue, N.W.
Washington, D.C. 20016
Age 77
Individual General Partner since 1987
Units of the Partnership beneficially owned as of March 16, 1999 - None (3)
         President of Economic Studies Inc., an economic  consulting firm, since
         1984;  Vice Chairman and a director of the Burroughs  Corporation  from
         1980 to 1984; Director of Datawatch Inc.

William M. Kelly (1)
40 Wall Street
New York, New York 10005
Age 55
Individual General Partner since 1991
Units of the Partnership beneficially owned as of March 16, 1999 - None (3)
         Managing Associate of Lingold Associates, since 1980; Vice President of
         National  Aviation and  Technology  Company,  a  registered  investment
         company,  from 1977 to 1980;  Director  of First  Eagle Fund of America
         since 1998 and First Eagle International Fund from 1994 to present.

Kevin K. Albert (2)
World Financial Center
North Tower
New York, New York 10281-1326
Age 46
Individual General Partner since 1990
Units of the Partnership beneficially owned as of March 16, 1999 - None (3)
         Director and President of the Management Company;  Managing Director of
         Merrill Lynch Investment Banking Division ("MLIBK") since 1988.

(1)  Independent  General  Partner  and  member  of  the  Audit  Committee.  (2)
Interested person of the Partnership as defined by the 1940 Act.
(3)  Messrs.  Flaschen and Jacobson have each contributed  $1,000 to the capital
     of the Partnership.  Messrs.  Kelly and Albert succeeded to the interest of
     prior  Individual  General  Partners  who each  contributed  $1,000  to the
     capital of the Partnership.

The Management Company

Merrill Lynch  Venture  Capital Inc. (the  "Management  Company")  serves as the
Partnership's  management company and performs,  or arranges for the performance
of, the management and  administrative  services necessary for the operations of
the  Partnership  pursuant  to a  management  agreement  dated May 23, 1991 (the
"Management  Agreement").  The  Management  Company has served as the management
company for the Partnership since the Partnership commenced operations in 1987.

The  Management  Company is a  wholly-owned  subsidiary of ML Leasing  Equipment
Corp.,  which  is an  indirect  subsidiary  of  Merrill  Lynch & Co.,  Inc.  The
Management  Company,  which was  incorporated  under Delaware law on January 25,
1982, maintains its principal office at North Tower, World Financial Center, New
York, New York 10281-1326.

On  May  23,  1991,  the  limited   partners  of  the  Partnership   approved  a
sub-management  agreement among the  Partnership,  the Management  Company,  the
Managing   General  Partner  and  DLJ  Capital   Management   Corporation   (the
"Sub-Manager").   Under  the  terms  of  such  sub-management   agreement,   the
Sub-Manager  agreed to  provide,  subject  to the  supervision  of the  Managing
General Partner,  the Management  Company and the Individual  General  Partners,
certain  of the  management  services  previously  provided  by  the  Management
Company.  Due  to  certain   transactions   involving  The  Equitable  Companies
Incorporated,  the indirect parent of the Sub-Manager,  a substantially  similar
sub-management  agreement (the  "Sub-Management  Agreement") was approved by the
limited partners of the Partnership at their 1992 annual meeting held on May 26,
1992.

The Management  Company has arranged for Palmeri Fund  Administrators,  Inc., an
independent  administrative services company, to provide administrative services
to the  Partnership.  Fees for such services are paid directly by the Management
Company.

     The following table sets forth information  concerning the directors of the
Management Company and the executive officers of the Management Company involved
with the  Partnership.  Information  concerning  Kevin K.  Albert,  Director and
President of the  Management  Company,  is set forth under  "General  Partners -
Individual General Partners". The address of Mr. Caruso, Mr. Cohen and Ms. Herte
is South Tower, World Financial Center, New York, New York 10080.

James V. Caruso
Executive Vice President and Director
Age 47
Officer or Director since 1998
         Director of MLIBK,  joined  Merrill Lynch in January  1975.  Mr. Caruso
         manages the  Investment  Banking  Group  Corporate  Accounting,  master
         Leases  and  off  Balance  Sheet  accounting  functions  as well as the
         Controller's area of the Partnership Analysis and Finance Group.

David  G. Cohen
Vice President and Director
Age 36
Officer or Director since 1997
         Vice President of MLIBK, joined Merrill Lynch in 1987.


<PAGE>


Diane T. Herte
Vice President and Treasurer
Age 38
Officer or Director since 1995
         Vice  President of MLIBK since 1996 and  previously  an Assistant  Vice
         President  of Merrill  Lynch & Co.  Corporate  Credit Group since 1992,
         joined  Merrill Lynch in 1984.  Ms.  Herte's  responsibilities  include
         controllership   and   financial   management   functions  for  certain
         partnerships and other entities for which subsidiaries of Merrill Lynch
         are the general partner, manager or administrator

The directors of the Management  Company will serve as directors  until the next
annual  meeting of  stockholders  and until  their  successors  are  elected and
qualify.  The officers of the Management Company will hold office until the next
annual  meeting of the Board of  Directors of the  Management  Company and until
their successors are elected and qualify.

There are no family  relationships  among any of the Individual General Partners
of the Partnership and the officers and directors of the Management Company.

DLJ Capital Management Corporation - The Sub-Management Company

DLJ Capital Management Corporation (the "Sub-Manager"),  a Delaware corporation,
is an indirect  wholly-owned  subsidiary of Donaldson,  Lufkin & Jenrette,  Inc.
("DLJ"),  a holding  company  which  through  its  subsidiaries  engages  in the
following  activities:  investment  banking,  merchant banking,  public finance,
trading,  distribution  and research.  The  Sub-Manager  maintains its principal
office at 277 Park Avenue, New York, New York 10172.

The Sub-Manager is a wholly-owned  subsidiary of DLJ Capital  Corporation  ("DLJ
Capital").  DLJ  Capital,  which  was  founded  in  1969,  has  established  ten
institutional  venture capital funds ("Sprout Funds") and several smaller funds,
with total  committed  capital of over $1.6 billion.  Six of such  institutional
funds,  with capital  exceeding  $1.5 billion,  are currently  operating.  As of
December 31, 1998,  DLJ  Capital's  most recent  limited  partnership  is Sprout
Capital VIII,  L.P.,  which was established in 1998 with an excess of 72 percent
of its $750 million  capital  provided by  participants in earlier Sprout Funds.
DLJ Capital's principal office is located at 277 Park Avenue, New York, New York
10172,  and it  maintains  additional  offices  in Menlo  Park,  California  and
Deerfield, Illinois.

The following table sets forth information  concerning the directors,  principal
executive  officers  and other  officers of the  Sub-Manager.  Unless  otherwise
noted,  the address of each such person is 277 Park Avenue,  New York,  New York
10172.

Richard E. Kroon
President, Chief Executive Officer and Director
Age 56
Officer or Director since 1977
         Managing General Partner of Sprout Group, the venture capital affiliate
of DLJ since 1981.

Janet A. Hickey
Senior Vice President
Age 53
Officer or Director since 1985
         General Partner of Sprout Group since 1985; Vice President and Manager
           of Venture Capital  Division of General  Electric
         Investment Corp. from 1970 to 1985.

Keith B. Geeslin(1)
Senior Vice President
Age 45
Officer or Director since 1984
         General Partner of Sprout Group since 1986.

Dr. Robert E. Curry(1)
Vice President
Age 52
Officer or Director since 1991
         President  and  Director of the  Management  Company from 1989 to 1991;
         Managing  Director  of MLIBK  from 1990 to 1991;  President  of Merrill
         Lynch R&D Management  Inc. ("ML R&D") from 1990 to 1991, Vice President
         of ML R&D from 1984 to 1990 and  Director  of ML R&D from 1987 to 1991;
         General Partner of Sprout Group since 1991.

Robert Finzi(1)
Vice President
Age 45
Officer or Director since 1991
         Vice President of the  Management  Company from 1985 to 1991;  
          Associate with Menlo Ventures from 1983 to 1984;  General
         Partner of Sprout Group since 1991.

Anthony F. Daddino
Vice President and Director
Age 58
Officer or Director since 1989
         Director, Executive Vice President and Chief Financial Officer of DLJ.

Marjorie S. White
Secretary, Treasurer and Director
Age 45
Officer  or Director since 1997 Vice President and Secretary of DLJ.

(1)   The address of these officers is 3000 Sand Hill Road, Menlo Park, 
          California 94025.


<PAGE>


The Managing General Partner

MLVPII Co.,  L.P.  (the  "Managing  General  Partner") is a limited  partnership
organized  on  February  4, 1986  under  the laws of the State of New York.  The
Managing General Partner  maintains its principal  office at North Tower,  World
Financial  Center,  New York, New York 10281-1326.  The Managing General Partner
has  acted  as the  managing  general  partner  of  the  Partnership  since  the
Partnership commenced operations.  The Managing General Partner is engaged in no
other activities at the date hereof.

The  general  partner of the  Managing  General  Partner is the  Management
Company.  The  limited  partners of the  Managing  General  Partner  include DLJ
Capital Management  Corporation  ("DLJ"),  Dr. Robert E. Curry and Robert Finzi.
Messrs.  Curry and  Finzi  are  currently  officers  of DLJ and were  previously
officers of the Management Company.

The Partnership  Agreement  obligates the Managing General Partner to contribute
cash to the capital of the  Partnership so that the Managing  General  Partner's
capital  contribution  at all  times  will be equal to one  percent  (1%) of the
aggregate capital contributions of all partners of the Partnership. The Managing
General Partner has contributed $1,212,162 to the capital of the Partnership.

Item 11.      Executive Compensation.

Compensation - The Partnership  currently pays each Independent  General Partner
an annual fee of $20,000 in quarterly  installments plus $1,500 for each meeting
of  the  Individual  General  Partners  attended  or  for  each  other  meeting,
conference  or engagement in  connection  with  Partnership  activities at which
attendance by the Individual  General Partner is required.  The Partnership pays
all actual  out-of-pocket  expenses incurred by the Independent General Partners
relating to  attendance  at such  meetings.  The  Independent  General  Partners
receive  $1,500 for each  meeting of the Audit  Committee  attended  unless such
committee meeting is held on the same day as a meeting of the Individual General
Partners.  In such case, the Independent  General Partners receive $500 for each
meeting of the Audit Committee  attended.  For the year ended December 31, 1998,
the aggregate fees paid by the Partnership to the Independent  General  Partners
totaled $82,500.

Allocations  and  Distributions  - Profits  and  losses of the  Partnership  are
determined and allocated as of the end of and within sixty days after the end of
each calendar year. If the aggregate of the  investment  income and net realized
capital  gains  and  losses  from  venture  capital   investments  is  positive,
calculated on a cumulative  basis over the life of the Partnership  through such
year,  the  Managing  General  Partner is  allocated  investment  income and net
realized capital gains or losses from venture capital  investments for such year
so that,  together with all  investment  income and gains and losses  previously
allocated to the Managing General Partner,  it has received 20% of the aggregate
of such income and gains  calculated on a cumulative  basis over the life of the
Partnership  through  such year.  Such  allocation  is referred to herein as the
"Managing General Partner's Allocation" and is applicable only to the investment
income and net realized  capital gains and losses resulting from venture capital
investments.  The Partnership's investment income and net realized capital gains
and losses in excess of the Managing General Partner's  Allocation and all other
profits and losses,  including interest or other income on funds not invested in
venture capital investments, are allocated among all the Partners (including the
Managing General Partner) in proportion to their capital contributions.  Cash or
other assets  otherwise  distributable  to the Managing  General Partner are not
distributed to the Managing  General Partner to the extent that the net realized
gains allocated to the Managing General Partner are offset by an amount equal to
20% of the net unrealized losses of the Partnership.

For its fiscal year ended December 31, 1998, the  Partnership had a net realized
loss of $2,166,356 from the liquidation of certain portfolio  investments.  On a
cumulative  basis,  from  inception to December 31, 1998,  the  Partnership  had
$115,536,570  of net realized gains and investment  income from its portfolio of
venture capital investments.  No cash distributions were paid by the Partnership
during  1998.  Subsequent  to the end of the year,  on  January  26,  1999,  the
Partnership made a cash distribution to partners totaling $4,514,772,  including
$4,200,000, or $35 per Unit, to Limited Partners of record on December 31, 1998.
The Managing  General  Partners  received  $314,632 and the  Individual  General
Partners received $140.

Management Fee - Pursuant to the Management Agreement,  the Partnership pays the
Management  Company a  management  fee at the  annual  rate of 2.5% of the gross
capital  contributions  to the  Partnership  (net  of  selling  commissions  and
organizational  and  offering  expenses  paid by the  Partnership),  reduced  by
capital  distributed to the Partners and realized capital losses, with a minimum
annual fee of  $200,000.  Such fee is payable  quarterly  based on the  adjusted
capital contributions,  as described above, at the end of the preceding calendar
quarter.  As described  previously,  the  Management  Company has entered into a
Sub-Management  Agreement  with DLJ,  pursuant to which the  Management  Company
compensates DLJ for management  services.  For the year ended December 31, 1998,
management fees incurred by the Partnership to the Management Company aggregated
$200,000.

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

Reference  is  made  to  Item  10  "Individual   General  Partners"   concerning
information with respect to security ownership.

As of March 16, 1999, no person or group is known by the  Partnership  to be the
beneficial  owner of more than 5 percent  of the Units.  Mark Clein and  Stephen
Warner,  limited partners of the Managing  General Partner,  own an aggregate of
134  Units  of  the  Partnership  and  Merrill  Lynch  Pierce  Fenner  &  Smith,
Incorporated  owns 230 Units. The Individual  General Partners and the directors
and officers of the Management Company do not own any Units.

The Partnership is not aware of any arrangement which may, at a subsequent date,
result in a change of control of the Partnership.

Item 13.      Certain Relationships and Related Transactions.

Kevin K.  Albert,  a Director  and  President  of the  Management  Company and a
Managing  Director of Merrill Lynch  Investment  Banking  Group ("ML  Investment
Banking"),  joined  Merrill  Lynch in 1981.  James V.  Caruso,  a  Director  and
Executive  Vice  President  of  the  Management  Company  and a  Director  of ML
Investment Banking,  joined Merrill Lynch in 1975. David G. Cohen,  Director and
Vice President of the  Management  Company and a Vice President of ML Investment
Banking,  joined  Merrill Lynch in 1987.  Diane T. Herte,  a Vice  President and
Treasurer  of the  Management  Company  and a Vice  President  of ML  Investment
Banking,  joined Merrill Lynch in 1984. Messrs.  Albert,  Caruso,  Cohen and Ms.
Herte are involved with certain other entities  affiliated with Merrill Lynch or
its affiliates.


<PAGE>


                                     PART IV


Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)           1.    Financial Statements

                     Balance Sheets as of December 31, 1998 and 1997

                     Schedule of Portfolio Investments as of December 31, 1998

                     Schedule of Portfolio Investments as of December 31, 1997

                     Statements of Operations for the years ended December 31,
                     1998, 1997 and 1996

                     Statements of Cash Flows for the years ended December 31,
                     1998, 1997 and 1996

                     Statements of Changes in Partners' Capital for the years
                     ended December 31, 1996, 1997 and 1998

                    Notes to Financial Statements

              2.    Exhibits

                    (3)   (a)  Amended and Restated  Certificate of Limited  
                    Partnership of the Partnership,  dated as of January 12,
                    1987. (1)

                    (3)  (b)  Amended  and  Restated   Certificate   of  Limited
                    Partnership of the Partnership, dated July 27, 1990.
                               (2)

                    (3)   (c)  Amended and  Restated  Certificate  of Limited 
                     Partnership  of the  Partnership,  dated March 25,1991. (3)

                    (3)   (d)  Amended and  Restated  Agreement of Limited  
                         Partnership  of the  Partnership,  dated as of May 4,
                               1987. (4)

                    (3)   (e)  Amendment No. 1 dated February 14, 1989 to 
                         Amended and Restated  Agreement of Limited  Partnership
                               of the Partnership. (5)

                    (3)   (f)  Amendment No. 2 dated July 27, 1990 to 
                              Amended and Restated  Agreement of Limited  
                              Partnership  of  the Partnership. (2)

                    (3)   (g)  Amendment No. 3 dated March 25, 1991 to 
                              Amended and Restated  Agreement of Limited
                                Partnership of the Partnership. (3)
                   
                     (3)   (h)  Amendment  No. 4 dated May 23, 1991 to Amended
                          and Restated  Agreement of Limited  Partnership  of
                               the Partnership. (6)

                    (10)  (a)  Management  Agreement dated as of May 23, 1991
                          among the Partnership,  Management  Company and the
                               Managing General Partner. (6)

                    (10)  (b)  Form of Sub-Management  Agreement among the
                          Partnership,  Management Company, the Managing General
                               Partner and the Sub-Manager. (8)

                    (27)       Financial Data Schedule.

                    (28)       Prospectus of the Partnership  dated February 10,
                               1987  filed  with  the  Securities  and  Exchange
                               Commission  pursuant  to Rule  424(b)  under  the
                               Securities  Act of  1933,  as  supplemented  by a
                               supplement  thereto  dated  April 21,  1987 filed
                               pursuant to Rule 424(c) under the  Securities Act
                               of 1933. (7)

(b)                 No reports on Form 8-K have been filed since the  beginning
                      of the last quarter of the period for which this
                    report is filed.

(1)    Incorporated  by  reference to the  Partnership's  Annual  Report on 
        Form 10-K for the year ended  December 31, 1988 filed
       with the Securities and Exchange Commission on March 27, 1989.

(2)    Incorporated  by reference to the  Partnership's  Quarterly  Report on 
       Form 10-Q for the quarter ended  September 30, 1990
       filed with the Securities and Exchange Commission on November 14, 1990.

(3)    Incorporated  by  reference to the  Partnership's  Annual  Report on 
          Form 10-K for the year ended  December 31, 1990 filed
       with the Securities and Exchange Commission on March 28, 1991.

(4)    Incorporated  by reference to the  Partnership's  Quarterly  Report on 
          Form 10-Q for the quarter ended June 30, 1987 filed
       with the Securities and Exchange Commission on August 14, 1987.

(5)    Incorporated by reference to the  Partnership's  Quarterly  Report on 
          Form 10-Q for the quarter ended March 31, 1989 filed
       with the Securities and Exchange Commission on May 15, 1989.

(6)    Incorporated  by reference to the  Partnership's  Quarterly  Report on 
          Form 10-Q for the quarter ended June 30, 1991 filed
       with the Securities and Exchange Commission on August 14, 1991.

(7)    Incorporated by reference to the  Partnership's  Quarterly  Report on 
          Form 10-Q for the quarter ended March 31, 1987 filed
       with the Securities and Exchange Commission on May 15, 1987.

(8)    Incorporated  by  reference to the  Partnership's  Annual  Report on
           Form 10-K for the year ended  December 31, 1992 filed
       with the Securities and Exchange Commission on March 26, 1993.


<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 on the 31st day of March
1999.


         ML VENTURE PARTNERS II, L.P.


         /s/   Kevin K. Albert                            
By:      Kevin K. Albert
         Individual General Partner


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on the 31st day of March 1999.



By:      MLVPII Co., L.P.                     By:     /s/   Steward S. Flaschen

         its Managing General Partner                 Steward S. Flaschen
                                                      Individual General Partner
By:      Merrill Lynch Venture Capital Inc.         ML Venture Partners II, L.P.
         its General Partner


By:      /s/   Kevin K. Albert                    By:     /s/   Jerome Jacobson
         ---------------------------------   ---------------------------------
         Kevin K. Albert                                     Jerome Jacobson
         President                                Individual General Partner
         (Principal Executive Officer)           ML Venture Partners II, L.P.


By:      /s/   Diane T. Herte                    By:     /s/   William M. Kelly
         Diane T. Herte                                        William M. Kelly
         Vice President and Treasurer                 Individual General Partner
       (Principal Financial and Accounting Officer)  ML Venture Partners II,L.P.


By:      /s/ David G. Cohen                               
         David G. Cohen
         Vice President