UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended December 31, 1997

                         Commission File Number 0-17383

                          ML-LEE ACQUISITION FUND II, L.P.
      (Exact name of registrant as specified in its Governing Instruments)

           Delaware                                 04-3028398
(State or other jurisdiction            (IRS Employer Identification No.)
of incorporation or organization)

                             World Financial Center
                            South Tower - 23rd Floor
                          New York, New York 10080-6123
              (Address of principal executive offices and zip code)

Registrant's telephone number, including area code:  (212) 236-7339

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

        Title of each Class        Name of each exchange on which registered
               None                               Not Applicable

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

                        Units of Limited Partnership Interest
                                (Title of class)

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 a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Aggregate  market value of voting  securities held by  non-affiliates:  Not
Applicable.

Documents  Incorporated  by  Reference:   Portions  of  the  Prospectus  of  the
Registrant  dated  September  6, 1989,  filed with the  Securities  and Exchange
Commission pursuant to Rule 497(b), are incorporated by reference in Parts I, II
and III hereof.


<PAGE>


                                   Part I
Item l. Business

        Formation

        ML-Lee  Acquisition  Fund  II,  L.P.  ("Fund  II")  (formerly  T.H.  Lee
Acquisition  Fund II,  L.P.) was  formed  along  with  ML-Lee  Acquisition  Fund
(Retirement  Accounts) II, L.P. the ("Retirement Fund" collectively  referred to
as the "Funds") and the Certificates of Limited Partnership were filed under the
Delaware  Revised  Uniform  Limited  Partnership  Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.

     Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the  supervision  of  the  Individual  General  Partners,   is  responsible  for
overseeing and monitoring Fund II's investments. The Managing General Partner is
a Delaware  limited  partnership  in which ML  Mezzanine  II Inc. is the general
partner and Thomas H. Lee Advisors  II, L.P.  (the  "Investment  Adviser" to the
Funds) is the limited  partner.  The Individual  General  Partners are Vernon R.
Alden,  Joseph L.  Bower and  Stanley  H.  Feldberg  (the  "Independent  General
Partners")  and  Thomas  H.  Lee.  ML  Fund   Administrators   Inc.  (the  "Fund
Administrator") is an indirect  wholly-owned  subsidiary of Merrill Lynch & Co.,
Inc. and is responsible for the day-to-day administrative services necessary for
the operations of Fund II.

     Fund II elected to operate  as a  business  development  company  under the
Investment Company Act of 1940, as amended ("Investment Company Act"). Fund II's
primary   investment   objective  is  to  provide  current  income  and  capital
appreciation potential by investing in privately structured,  friendly leveraged
buyouts and other  leveraged  transactions.  Fund II pursued  this  objective by
investing primarily in subordinated debt and related equity securities issued in
conjunction  with  the  "mezzanine   financing"  of  friendly  leveraged  buyout
transactions,  leveraged  acquisitions and  recapitalizations.  Fund II may also
invest in "bridge  investments"  if it is believed that such  investments  would
facilitate the  consummation  of a mezzanine  financing.  Fund II considers this
activity  to  constitute  a  single  industry  segment  of  mezzanine  financing
investing.

     Fund  II  invested  substantially  all of its  net  proceeds  in  Mezzanine
Investments  consisting of high-yield  subordinated  debt and/or preferred stock
linked with an equity  participation,  of middle market  companies in connection
with friendly  leveraged  acquisitions,  recapitalizations  and other  leveraged
financings.  Fund II's  Mezzanine  Investments  typically were issued in private
placement  transactions  which are generally subject to certain  restrictions on
sales  thereby  limiting  their  liquidity.  Fund II was  fully  invested  as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on  investments and exclusive of amounts
available for  reinvestment).  The  reinvestment  period for various  amounts of
capital proceeds  received during the last twelve months of Fund II's investment
period terminated at various times through December 18, 1993.

     The Funds  offered an aggregate of 1 million  units of limited  partnership
interest  ("Units")  at  $1,000  per  Unit  with  the  Securities  and  Exchange
Commission pursuant to a Registration Statement on Form N-2 (File No. 33-25816),
effective  September 6, 1989. The information  under the heading "Risk and Other
Important  Factors",   "Estimated  Use  of  Proceeds",   "Mezzanine  Financing",
"Investment  Objectives  and  Policies"  and  "Conflicts  of  Interest"  in  the
Prospectus  dated  September  6, 1989,  filed with the  Securities  and Exchange
Commission  pursuant  to Rule  497(b)  under  the  Securities  Act of 1933  (the
"Prospectus"), is incorporated herein by reference.

     The offering of Units  commenced  on September 6, 1989.  On November 10 and
December 20, 1989 and January 5, 1990,  Fund II had its first,  second and third
closings,  respectively,  at which time the Managing  General  Partner  admitted
additional  Limited  Partners to Fund II  representing  221,745 Units of limited
partnership   interest.   The  additional   Limited   Partners'   total  capital
contributions were $205,114,126,  which excludes discounts allowed of $3,119,607
and is net of sales  commissions and advisory fees of $13,511,267.  The Managing
General  Partner's  aggregate  contribution  was $500,000.  Thomas H. Lee, as an
Individual General Partner,  contributed  $50,000. For their services as selling
agent, Fund II paid sales commissions to Merrill Lynch, Pierce, Fenner and Smith
Incorporated  ("MLPF&S") in the amount of $10,800,450 (exclusive of discounts of
$2,504,250). In addition, Fund II paid a financial advisory fee to MLPF&S in the
amount of $2,710,817 (exclusive of discounts of $615,357).


<PAGE>
     Mezzanine and Bridge Investments

     At December  31, 1997,  Fund II had  outstanding  a total of $42.6  million
invested in Mezzanine  Investments  representing  $34.2 million Managed and $8.4
million Non-Managed portfolio  investments.  At December 31, 1997, there were no
Bridge  Investments  outstanding  for the  Funds.  The  Funds  co-invest  in all
Mezzanine and Bridge  Investments,  allocating such investments in proportion to
their capital available for investment.

     Fund II's reinvestment period ended on December 21, 1993 and,  accordingly,
no new  investments  were  made  after  that  date  other  than the  funding  of
investments which were committed to prior to that date.

     REVIEW OF INVESTMENTS IN MANAGED COMPANIES
     ------------------------------------------

     The following is a brief  description of the companies in Fund II's Managed
Company portfolio at December 31, 1997:

     Anchor Advanced Products, Inc. ("Anchor")
     ----------------------------------------

     Anchor is a large  manufacturer  of  toothbrushes  and  cosmetic  packaging
products.   Anchor  holds  a  major  share  of  the  U.S.  market  for  contract
manufacturing  of  toothbrushes,  supplying  many  of the  brand  marketers.  In
addition,  Anchor has a strong  position in key areas of the cosmetic  packaging
market,  including nail polish  brushes,  mascara  packages and  applicators and
lipstick packaging  products.  This investment is valued at cost at December 31,
1997.

     On March 19, 1998 Fund II and  Affiliates of the Thomas H. Lee Company sold
their remaining  holdings in Anchor.  Pursuant to this  transaction Fund II sold
410,677 shares of Anchor Common Stock for approximately  $1.6 Million ($4.00 per
share) and recognized a gain of $247,000.

     On April 2, 1997,  Anchor  completed a  recapitalization  pursuant to which
Anchor issued  $100,000,000  aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization").  As part of the
Recapitalization,  Anchor  repaid  substantially  all of its  outstanding  debt,
including all accrued  interest and any premiums in connection  therewith.  As a
result,  Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by Fund II, together with all accrued interest and prepayment  premiums for
an aggregate of $14.5 million.

     Immediately prior to the Recapitalization,  Fund II owned 162,967 shares of
the common stock of Anchor  Holdings,  Inc.,  the parent of Anchor.  Immediately
after the consummation of the  Recapitalization,  Fund II exercised its warrants
to purchase  common stock (at an exercise price of $9.50 per share) and acquired
an additional  247,710  shares of common stock,  bringing its total  holdings of
common  stock to  410,677  shares.  In  connection  with  the  Recapitalization,
Holdings paid a dividend to all holders of Holdings common stock of record as of
April 2, 1997, in the amount of $19.02 per share (the "Anchor  Dividend").  As a
result of such dividend,  the Fund received $7.8 million, of which approximately
32% or $2.5 million was returned to partners as return of capital.

     Big V Supermarkets, Inc. ("Big V")
     ---------------------------------

     Big V is a regional  supermarket retailer in the Northeastern United States
doing  business  under the  ShopRite  name.  Big V  currently  operates  several
supermarkets  principally  in the Hudson  Valley  region of New York State.  The
investment in Big V is valued at cost at December 31, 1997.

    Cinnabon International, Inc. ("Cinnabon") (formerly Restaurants Unlimited)
     -------------------------------------------------------------------------

     Cinnabon  operates and  franchises a national  chain of specialty  cinnamon
roll bakeries in more than 250  locations,  operating  under the Cinnabon  World
Famous  Cinnamon  Rolls brand name. The investment in Cinnabon is valued at cost
at December 31, 1997.

     Cole National Corp. ("Cole")
     ---------------------------

     Cole was founded in 1944 as a provider of key duplication  services.  Since
then,  Cole  has  grown  as  a  retailer  and  operates  three  separate  retail
subsidiaries:  Cole Vision,  Things  Remembered  and Cole Key. The investment in
Cole is valued at cost at December 31, 1997.
<PAGE>

     First Alert, Inc. ("First Alert")
     --------------------------------

     First Alert is a designer and manufacturer of residential  smoke detectors,
fire extinguishers,  portable  rechargeable lights and other security and safety
products.  As of December 31, 1997 Fund II owned 2,058,474 shares of First Alert
common stock.

     On February  28,  1998,  First Alert and  Sunbeam  Corporation  ("Sunbeam")
executed a definitive  merger agreement  whereby Sunbeam will acquire all of the
outstanding  shares of First Alert Common Stock for  approximately  $175 million
($5.25 per share) by means of a tender  offer (the "Tender  Offer"),  and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, Fund II tendered all of its shares of First Alert Common Stock
and expects to receive  proceeds of  approximately  $10.8 million.  The per Unit
amount to be distributed to Fund II's Limited  Partners from this transaction is
not  determinable  at this time.  Any  distribution  of these net  Distributable
Capital  Proceeds  after  the  payment  of  expenses  and the  establishment  of
reserves,  as  provided  for  in  Fund  II's  Partnership  Agreement,   will  be
distributed  to Limited  Partners of record as of the date of the  expiration of
this Tender Offer,  which is scheduled to be on April 2, 1998, unless the Tender
Offer is extended.

     The fair  market  value of this  investment  as  determined  by the closing
market  price  at  December  31,  1997  is $4.4  million  which  reflects  total
unrealized appreciation of $1.1 million.

     Hills Stores Company ("Hills")
     -----------------------------

     Hills is an operator of discount  department  stores in the  Northeast  and
Midwest and offers a broad  selection  of  merchandise  at everyday  low prices,
targeted  primarily  at the female  shopper.  The closing  market  price of this
investment  at  December  31,  1997  reflects  $1.5  million  of net  unrealized
depreciation,  bringing  the  aggregate  net  unrealized  depreciation  to $33.1
million through December 31, 1997.

     Playtex Products, Inc. ("Playtex")
     ---------------------------------

     Playtex  manufactures  and sells  feminine  hygiene and  nursery  products,
household  rubber  gloves,   toothbrushes  and  Jhirmack  and  LaCoupe  haircare
products.  The fair market value of this investment as determined by the closing
market  price  at  December  31,  1997  is $3.5  million  which  reflects  total
unrealized depreciation of $1.8 million.

     Stanley Furniture Company, Inc. ("Stanley")
     ------------------------------------------

     Stanley  Furniture  designs,  manufactures and markets furniture and fabric
products.

     During February 1997, Fund II sold 272 shares of Stanley  Furniture for $24
per share and received total proceeds of $6,528 and recognized a gain of $3,105.
On June 30, 1997,  Fund II entered into a stock purchase  agreement with Stanley
Furniture  whereby  Fund II sold 6,281 shares of Stanley  Furniture  for $20 per
share.  Fund II received  total  proceeds of $125,620  and  recognized a gain of
$46,582.  On November 18, 1997,  Fund II sold 3,460 shares of Stanley  Furniture
for $25 per share.  Fund II received  total proceeds of $86,500 and recognized a
gain of $42,961.

     On January 6, 1998, Fund II sold its remaining  holdings of common stock in
Stanley Furniture Company, Inc. The common stock was sold pursuant to a Form S-3
Registration  Statement,  which was filed by Stanley on  December  22,  1997 and
declared  effective by the  Securities  and Exchange  Commission on December 23,
1997. In connection  with the sale,  Fund II sold its remaining  3,461 shares of
common stock and received net proceeds of $93,447 or $27 per share.

     The fair  market  value of this  investment  as  determined  by the closing
market price at December 31, 1997 is $96,475  which  reflects  total  unrealized
appreciation of $52,923.

<PAGE>

     REVIEW OF INVESTMENTS IN NON-MANAGED COMPANIES
     ----------------------------------------------

     The  following  is a  brief  description  of the  companies  in  Fund  II's
Non-Managed Company portfolio during the year ended December 31, 1997:

     BioLease, Inc. ("BioLease")
     --------------------------

     BioLease provides built-to-suit  wet-laboratory space in the Boston area to
a  consortium  of emerging  growth  bio-technology  companies  sponsored  by the
venture capital funds managed by Health Care Investment  Corporation.  Fund II's
investment  in  BioLease  Common  Stock  was  written  down  to  zero,  and  the
Subordinated Notes wre written down to approximately 50% of par value during the
year ending December 31, 1997. These writedowns resulted in total net unrealized
depreciation of $412,000 through December 31, 1997.

     Fitz and Floyd Corporation
     --------------------------

     On April 11, 1997 the Bankruptcy  Court confirmed a plan of  Reorganization
for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $2.4
million  was made in Fitz and  Floyd and Fund II  received  a $2.4  million  12%
subordinated note. Additionally,  Fund II exchanged the $12.6 million adjustable
notes,  which Fund II previouslly held, for Series A Preferred Stock and Class A
Common Stock in Fitz and Floyd. No gain or loss was recorded on the transaction.
The fair market  value of this  investment  at December 31, 1997 is $5.4 million
which reflects total unrealized depreciation of $9.6 million.

     Fitz & Floyd is the maker of fine china  dinnerware  and  ceramic  giftware
whose products are retailed through leading  specialty and department stores and
catalogs throughout the U.S. and Canada.


     FLA. Orthopedics, Inc.
     ---------------------

     As of December 31, 1997,  Fund II has valued its  remaining  investment  in
FLA.  Orthopedics,  Inc.  at  zero,  which  resulted  in  cumulative  unrealized
depreciation of $1.5 million.

     Soretox
     -------

     Soretox,  through its  wholly-owned  subsidiary  Stablex Canada Inc., is an
inorganic hazardous waste management company operating in Eastern Canada and the
Northeastern  United States.  Fund II is currently not accruing interest on this
investment and wrote down its investment in the Stablex Jr. Subordinated Note at
zero during the year ended December 31, 1997. The  Retirement  Fund's  valuation
reflects total  unrealized  depreciation of  approximately  $4.0 million through
December 31, 1997.

     Competition

     Fund II has completed its investment  period and its  reinvestment  program
and,  therefore,  will no longer have to compete for investments.  A majority of
the portfolio companies are participating in extremely competitive businesses.

     Employees

     Fund  II  has  no  employees.   The  Investment  Adviser,  subject  to  the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls  Fund II's  investments.  The Managing  General  Partner is
responsible  for  managing  the  Temporary  Investments  of Fund  II.  The  Fund
Administrator   performs   administrative   services   for  Fund  II.  The  Fund
Administrator is a subsidiary of Merrill Lynch & Co, Inc., the parent of MLPF&S.

Item 2. Properties

        Fund II does not own or lease any physical properties.
<PAGE>
Item 3. Legal Proceedings

     On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited  Partner from the  Retirement  Fund each  commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who  purchased  limited  partnership  interests  in the
Funds  between  November  10, 1989 and January 5, 1990,  against the Funds,  the
Managing  General  Partner,  the  Individual  General  Partners,  the Investment
Adviser  to the  Funds and  certain  named  affiliates  of such  persons.  These
actions,  alleging  that the  defendants  made  material  misrepresentations  or
omitted material  information in the offering materials for the Funds concerning
the investment  purposes of the Funds,  were  consolidated by the court on March
31, 1992,  and a  consolidated  complaint was filed by the plaintiffs on May 14,
1992. In April 1993,  plaintiffs filed an amended complaint,  adding claims that
certain transactions by the Funds were prohibited by the federal securities laws
applicable to the Funds and their affiliates under the Investment Company Act of
1940,  as amended.  The  amended  complaint  also named the Funds'  counsel as a
defendant.  Defendants moved to dismiss the amended  complaint,  and, by Opinion
and Order dated March 31, 1994, the Court granted in part and denied in part the
motions to dismiss.  Additionally,  by its March 31, 1994 Opinion and Order, the
Court certified the case as a class action, and ordered plaintiffs to replead by
filing a new  complaint  reflecting  the  Court's  rulings.  On April 15,  1994,
plaintiffs  served and filed a new complaint,  which  defendants moved to strike
for not conforming to the Court's  ruling.  On August 3, 1994, the Court granted
defendants'  motion to strike the new complaint.  Plaintiffs  thereafter filed a
revised second amended complaint dated September 26, 1994.  Factual discovery in
this litigation has concluded,  although plaintiffs have made application to the
Court for  permission to conduct  additional  fact  discovery.  The parties have
conducted  expert  discovery,  the conclusion of which is subject to the Courts'
decision on a pending  matter.  The  defendants in this action  believe that the
remaining  claims are  without  merit,  although  whether or not the  plaintiffs
prevail, the Funds may be obligated to indemnify and advance litigation expenses
to certain of the defendants under the terms and conditions of various indemnity
provisions in the Funds'  Partnership  Agreements  and separate  indemnification
agreements,  and the  amount  of such  indemnification  and  expenses  could  be
material.  Fund II has advanced  amounts to the  indemnified  parties based upon
amounts which are deemed  reimbursable  in accordance  with the  indemnification
provisions and has included these amounts in Legal and Professional Fees. In the
opinion of legal counsel,  the outcome of this case is not  determinable at this
time.

     On August 9, 1994, the same two Limited  Partners as noted in the preceding
paragraph  commenced  another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership  interests in the Funds on November 4, 1993,  against the Funds, the
Managing  General  Partners,  the Individual  General  Partners,  the Investment
Adviser to the Funds and certain named  affiliates  of such persons.  Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the  common  law in  connection  with the sale by certain of the
defendants  of shares of common stock of Snapple  Beverage  Corp.  in a November
1993 secondary  offering and seek actual and punitive  damages and an accounting
in connection therewith. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original  complaint was pending,  plaintiffs filed an amended complaint alleging
additional  violations  of the  Investment  Company  Act of 1940 and  common law
arising out of the secondary offering. The plaintiffs moved for summary judgment
on  certain of these  claims.  On  October  13,  1995,  the  defendants  in this
litigation  each filed briefs in opposition  to  plaintiffs  motion and moved to
dismiss the amended  complaint.  By an Opinion  dated March 30, 1996,  the Court
denied  plaintiffs'  motion for partial summary  judgment.  By order of the same
date, and without  opposition by defendants,  the Court  certified the case as a
class action. Defendants also filed separate motions to dismiss, which the Court
denied  by an  order  dated  June 30,  1996.  The  parties  are now  engaged  in
discovery.  Whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity  provisions in the Funds'  Partnership
Agreements  and  separate  indemnification  agreements.  In the opinion of legal
counsel, the outcome of this case is not determinable at this time.
<PAGE>

     On November  27,  1995,  one Limited  Partner  from Fund II and one Limited
Partner  from the  Retirement  Fund filed a putative  class action in the United
States District Court for the District of Delaware, purportedly on behalf of all
persons  or  entities  who owned  Units in the Funds  between  April 5, 1991 and
November  27,  1995,  against  the Funds,  the  Managing  General  Partner,  the
Individual  General Partners,  the Investment  Adviser to the Funds, and certain
named  affiliates  of such  persons.  The  complaint  contends  that  the  Funds
improperly  advanced  legal  fees  and  litigation  costs to the  defendants  in
connection with three previously  filed lawsuits.  The plaintiffs are seeking an
accounting,   rescissory  or  actual  damages,  punitive  damages,   plaintiffs'
litigation costs and attorneys fees,  pre-judgment and  post-judgment  interest,
and an injunction barring the defendants from further  indemnifying  themselves.
The defendants in this action believe that the claims are without merit and have
moved to  dismiss  the  case.  On  December  18,  1996,  the  Court  denied  the
defendants'  motion to dismiss.  Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements  signed by the  defendants,  in the  opinion  of legal  counsel,  the
outcome of this case is not determinable at this time.

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

        No matters were  submitted to a vote of the Limited  Partners of Fund II
during the fourth quarter of the year ended December 31, 1997.
<PAGE>

                                   Part II

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

     There is no  established  trading  market  for the Units.  The  Partnership
Agreement contains  restrictions that are intended to prevent the development of
a public market.  Accordingly,  accurate  information as to the market values of
Units at any given date is not available.

     The  approximate  number of Unit  holders as of  January 1, 1998,  the last
effective  date of transfer  (as  described  below),  was 11,132.  The  Managing
General  Partner and Thomas H. Lee as an  Individual  General  Partner also hold
general partnership interests in Fund II.

        Effective  November  9,  1992,  Merrill  Lynch,  Pierce,  Fenner & Smith
Incorporated  ("Merrill Lynch" or "MLPF&S") introduced a new limited partnership
secondary  service  through  Merrill  Lynch's  Limited   Partnership   Secondary
Transaction  Department  ("LPSTD").  This service  assists Merrill Lynch clients
wishing to buy or sell limited partnership interests, but does not represent an
established trading market for the Units.

     MLPF&S provids  estimated  values of limited  partnerships and other direct
investments  reported on client  account  statements  and no longer  reports the
general  partner's  estimate  of  limited  partnership  net asset  value to Unit
holders. Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests  originally  sold by MLPF&S  (such as Fund II's Units) are provided by
independent  valuation  services.   MLPF&S  clients  may  contact  their  MLPF&S
Financial  Consultants or telephone the number provided to them on their account
statements  to  obtain a  general  description  of the  methodology  used by the
independent  valuation  services to  determine  their  estimates  of value.  The
estimated values provided by the independent services and the Fund's current net
asset value as estimated by the general  partner 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 Fund II's current net asset value upon the liquidation of the
Fund's assets over its remaining life.

     Fund II distributes  Distributable  Cash from Investments and Distributable
Capital Proceeds in accordance with the terms of the Partnership Agreement.

     Pursuant to the Partnership Agreement, transfers of Units are recognized on
the first day of the fiscal quarter after which the Managing General Partner has
been duly notified of a transfer pursuant to the Partnership Agreement.  Until a
transfer is recognized, the limited partner of record (i.e. the transferor) will
continue  to  receive  all the  benefits  and  burdens  of  ownership  of  Units
(including allocations of profit and loss and distributions), and any transferee
will have no rights to  distributions  of sale  proceeds  generated  at any time
prior to the recognition of the transfer and assignment.

     Accordingly,   Distributable  Cash  from  Investments  for  a  quarter  and
Distributable Capital Proceeds from sales after transfer or assignment have been
entered  into,  but before such  transfer and  assignment  is  recognized by the
Managing  General  Partner,  will  be  payable  to the  transferor  and  not the
transferee.

        Cash Distributions

     Fund II has made quarterly  distributions including both Distributable Cash
from Investments and  Distributable  Capital  Proceeds.  See Item 7 Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity  and Capital  Resources  - the  information  in which is  incorporated
herein by reference.

<PAGE>
<TABLE>
<CAPTION>
Item 6.  Selected Financial Data
Supplemental Information Schedule
<S>                                     <C>               <C>                <C>                  <C>              <C>

Selected Financial Data
                                                                      For the Years Ended December 31,
TOTAL FUND INFORMATION:                         1997                1996               1995               1994                1993
                                            -------------     --------------    ----------------    ---------------   -------------

Net Investment Income                         $ 8,426,190     $  11,023,166       $ 4,146,846       $  7,816,305      $   4,967,971

Net Realized Gain on Sales of Investments          92,648         5,894,176         8,372,906         63,853,148         13,201,921

Net Change in (Depreciation) Appreciation
    on Investments                             (6,129,993)      (15,723,691)      (30,559,313)      (100,354,280)        80,586,157

Cash Distributions to Partners   (a)           26,672,357        49,261,781        29,490,761        101,901,964         31,187,989

Net Assets                                     46,832,011        71,115,538       119,183,669        166,713,991        297,300,782

Cost of Mezzanine Investments                  91,989,046       103,597,216       135,797,397        144,603,700        148,865,244

Total Assets                                   47,105,834        71,678,160       120,346,488        167,805,653        299,130,035


PER UNIT OF LIMITED PARTNERSHIP INTEREST:

Investment Income                             $     36.43       $     50.33       $     32.05       $      49.88       $      52.20

Expenses                                            (7.79)           (15.11)           (19.71)            (19.70)
(29.85)
                                              -----------       -----------       -----------       ------------       ------------
Net Investment Income                         $     28.64       $     35.22       $     12.34       $      30.18       $      22.35
                                              ===========       ===========       ===========       ============       ============

Net Realized Gain on Sales of
  Investments                                 $       .42       $     14.47       $     34.23       $     225.61       $      59.39

Net Change in (Depreciation) Appreciation
  on Investments                                   (27.58)           (70.73)          (137.47)           (451.45)            362.52

Cash Distributions                          (a)    106.00            192.87 (b)        112.31 (b)         413.35             140.30

Cumulative Cash Distributions                    1,158.68          1,052.68            859.81             747.50             334.15

Net Asset Value                                    209.93            314.44            528.63             730.09           1,339.10


(a)  Includes $17,293,893 million or $77.99 per Limited Partnership Unit return
     of Capital from the sale of Portfolio Investments during 1997.

(b)  Certain   amounts  from  prior  quarters  have  been  restated  to  reflect
     adjustments made in 1997.  See Notes 10 and 13 to the Financial  Statements
     for further information.

</TABLE>

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

Liquidity & Capital Resources

     Capital  contributions  from the Limited  Partners and the General Partners
totaled  $222,295,000 in the public offering of ML-Lee Acquisition Fund II, L.P.
("Fund II"), the final closing for which was held on December 20, 1989.

     At December 31, 1997,  Fund II had  outstanding  a total (at cost) of $91.9
million invested in Mezzanine  Investments  representing $68 million Managed and
$23.9 million  Non-Managed  portfolio  investments.  The remaining proceeds were
invested in Temporary  Investments  primarily comprised of commercial paper with
maturities less than one month.

     Fund  II  invested  substantially  all of its  net  proceeds  in  Mezzanine
Investments,  consisting of high-yield  subordinated debt and/or preferred stock
linked with an equity  participation,  of middle market  companies in connection
with friendly  leveraged  acquisitions,  recapitalizations  and other  leveraged
financings.  Fund II's  Mezzanine  Investments  typically were issued in private
placement  transactions  which are generally subject to certain  restrictions on
sales  thereby  limiting  their  liquidity.  Fund II was  fully  invested  as of
December 20, 1992, which was within 36 months from the date of the final closing
(after including the reserve for follow-on  investments and exclusive of amounts
available for  reinvestment).  The  reinvestment  period for various  amounts of
capital proceeds  received during the last twelve months of Fund II's investment
period terminated at various times through December 18, 1993.

     As provided by the Partnership  Agreement,  the Managing General Partner of
Fund II is entitled to receive an incentive  distribution ("MGP  Distributions")
after Limited Partners have received their Priority Return of 10% per annum. The
Managing  General Partner is required to defer a portion of any MGP Distribution
earned  from the sale of  portfolio  investments  in excess  of 20% of  realized
capital  gains,  net realized  capital losses and  unrealized  depreciation,  in
accordance with the Partnership Agreement (the "Deferred  Distribution Amount").
Any Deferred  Distribution  Amount is distributable to the Partners  pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from  distributable cash from operations are instead
payable to the Managing General Partner until the Deferred  Distribution  Amount
is paid. As of December 31, 1997 there is no outstanding  Deferred  Distribution
Amount.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on  investments  of $24.9 million for Fund II. As of March 19, 1998,  the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores,  Ghirardelli
Holdings  and  Anchor  Advanced  Products.  Additionally,  $8.29  million of the
reserve has been  returned to the  partners.  The level of the reserve was based
upon an analysis  of  potential  follow-on  investments  in  specific  portfolio
companies  that may become  necessary to protect or enhance  Fund II's  existing
investment.

     All net proceeds from the sale of Mezzanine Investments received by Fund II
in the future will be distributed to its partners unless applied to or set aside
for expenses.

     The  proportion  of  distributions  provided by net  investment  income has
decreased from prior years due primarily to increased  sales and  redemptions of
Mezzanine  Investments and the resulting  decrease in investment income as those
holdings cease to generate  interest income. It is expected that the majority of
future cash  distributions  to Limited  Partners will almost entirely be derived
from recovered capital and gains, from asset sales, if any, which are subject to
market conditions and are inherently  unpredictable as to timing. Assuming there
are no asset sales in a  particular  quarter,  Limited  Partners are expected to
receive only small amounts of net distributable  cash, which are estimated to be
less than one dollar per Limited  Partnership  Unit each quarter.  Distributions
therefore  are expected to vary  significantly  in amount and may not be made in
every quarter.
<PAGE>

Investment in High-Yield Securities

     Fund II  invested  primarily  in  subordinated  debt  and  preferred  stock
securities   ("High-Yield   Securities"),   generally   linked  with  an  equity
participation,  issued in conjunction with the mezzanine  financing of privately
structured,   friendly  leveraged  acquisitions,   recapitalizations  and  other
leveraged  financings.  High-Yield  Securities  are  debt and  preferred  equity
securities that are unrated or are rated by Standard & Poor's  Corporation as BB
or lower and by Moody's  Investor  Services,  Inc. as Ba or lower.  Risk of loss
upon default by the issuer is significantly  greater with High-Yield  Securities
than  with  investment  grade  securities  because  High-Yield   Securities  are
generally unsecured and are often subordinated to other creditors of the issuer.
Also,  these  issuers  usually  have high  levels of  indebtedness  and are more
sensitive  to adverse  economic  conditions,  such as  recession  or  increasing
interest rates,  than  investment  grade issuers.  Most of these  securities are
subject to resale  restrictions and generally there is no quoted market for such
securities.

     Although Fund II cannot eliminate the risks associated with its investments
in High-Yield Securities,  it has established risk management policies.  Fund II
subjected each prospective  investment to rigorous  analysis and made only those
investments  that were  recommended by the Investment  Advisor and that met Fund
II's  investment  guidelines or that had otherwise been approved by the Managing
General Partner and the Independent General Partners. Fund II's investments were
measured  against  specified Fund II investment and performance  guidelines.  To
limit the  exposure of Fund II's capital in any single  issuer,  Fund II limited
the  amount of its  investment  in a  particular  issuer.  Fund II's  Investment
Adviser also continually  monitors portfolio  companies in order to minimize the
risks associated with its investments in High-Yield Securities.

     Certain  issuers  of  Securities  held by Fund II (First  Alert,  Hills and
Playtex) have registered their equity securities in public  offerings.  Although
the  equity  securities  of the same  class  presently  held by Fund II were not
registered in these offerings,  Fund II has the ability under Rule 144 under the
Securities Act of 1933 to sell publicly traded equity  securities held by it for
at least one year on the open  market,  subject to the volume  restrictions  set
forth  in  that  rule.  The  Rule  144  volume  restrictions  generally  are not
applicable to equity securities of non-affiliated  companies held by Fund II for
at least two years.  In certain cases,  Fund II has agreed not to make any sales
of  equity  securities  for a  specified  hold-back  period  following  a public
offering.

     The  Investment   Adviser  reviews  each  portfolio   company's   financial
statements quarterly.  In addition, the Investment Adviser routinely reviews and
discusses  financial and operating  results with the  company's  management  and
where  appropriate,   attends  board  of  director  meetings.   In  some  cases,
representatives  of the Investment  Adviser,  acting on behalf of the Funds (and
affiliated investors where applicable), serve as one or more of the directors on
the  boards  of  portfolio  companies.  Fund II may,  from  time to  time,  make
follow-on investments to the extent necessary to protect or enhance its existing
investments.
<PAGE>
Results of Operations

Investment Income and Expenses

     The investment  income from  operations for the year consists  primarily of
interest and discount  income earned on the investment of Mezzanine  Investments
and short-term money market instruments.

     For the year ended  December 31,  1997,  Fund II had  investment  income of
$10.2 million,  as compared to $14.4 million and $8.5 million for the comparable
years ended 1996 and 1995, respectively.  The decrease in 1997 investment income
as compared to 1996 is due to the sale of income producing  portfolio  companies
in 1997, as well as  recognition  of previously  unrecorded  interest  income of
payment-in-kind  securities  totalling  $7.2 million  related to the sale of CST
Office Products,  Inc. in March of 1996. The increase in 1996 investment  income
from 1995 is due primarily to the  recognition of interest income related to the
sale of CST Office Products, Inc. in the first quarter of 1996.

     Major  expenses for the period  consisted of  Investment  Advisory Fees and
Fund Administration Fees.

     The  Investment   Adviser  and  Fund   Administrator   both  receive  their
compensation on a quarterly basis.  The total  Investment  Advisory Fees paid by
Fund II to the Investment  Adviser for the years ended  December 31, 1997,  1996
and 1995  were  $759,160,  $988,882  and $1.5  million,  respectively,  and were
calculated  at an annual rate of 1.0% of assets under  management  (net offering
proceeds reduced by cumulative capital  reductions and realized losses),  with a
minimum annual amount of $1.2 million for Fund II and the  Retirement  Fund on a
combined basis. The decrease in Investment  Advisory Fees are a direct result of
sales of  investments,  returns of capital  distributed to partners and realized
losses on investments.

     Beginning in November of 1997,  the Fund  Administration  Fee changed to an
annual  amount of  $400,000  for Fund II and the  Retirement  Fund on a combined
basis,  plus 100% of all  reimbursable  expenses (as defined below)  incurred by
Fund II.  Actual  out-of-pocket  expenses  ("reimbursable  expenses")  primarily
consist of printing,  audit,  tax  preparation and custodian fees. For the years
ended December 31, 1997, 1996 and 1995, Fund II incurred $140,157,  $139,158 and
$125,816, respectively, in reimbursable expenses.

     The Fund  Administration  Fees paid to the Fund Administrator for the years
ended  December 31, 1996 and 1995 were  calculated at an annual rate of 0.45% of
the excess of net offering  proceeds,  less 50% of capital reductions and 50% of
realized losses. The decrease in Fund  Administration  Fees were a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on  investments.  For the years ended  December 31, 1997,  1996 and 1995,
Fund Administration Fees were $569,224, $675,250 and $798,478, respectively.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund  Administrator,  for the period ending  November 10, 1997, a portion of the
actual out-of-pocket  expenses incurred in connection with the administration of
Fund II was reimbursable to the Fund Administrator.

     Legal and Professional Fees were incurred in connection with the litigation
proceedings  as described in Note 11 to the Financial  Statements.  Professional
fees for the years ended December 31, 1997,  1996 and 1995 were  $152,000,  $1.3
million and $1.7 million, respectively. These expenses are attributable to legal
fees incurred and advanced on behalf of  indemnified  defendants as well as fees
incurred  directly by Fund II in connection with the  aforementioned  litigation
proceedings.

     For the year ended December 31, 1997, Fund II had net investment  income of
$8.4  million as  compared  to $11  million for the same period in 1996 and $4.1
million for the same period in 1995. The decrease in 1997 net investment  income
as  compared  to  1996  is  due to  the  recognition  of  interest  income  from
payment-in-kind  securities related to the sale of CST Office Products, Inc., in
March of 1996. The increase in 1996 net investment income as compared to 1995 is
primarily   attributable  to  interest  income  in  1996  from   payment-in-kind
securities related to the sale of CST Office Products, Inc.

Net Assets

     Fund II's net  assets  decreased  by $24.3  million  during  the year ended
December 31, 1997, due to the payment of cash distributions to partners of $26.7
million ($18.4 million of the cash distributions paid was return of capital from
the sales of portfolio  investments)  and net  unrealized  depreciation  of $6.1
million,  partially offset by net investment income of $8.4 million and realized
gains of $92,648 from the sales of Mezzanine Investments.
<PAGE>
Unrealized Appreciation and Depreciation on Investments

     For the year ended  December  31,  1997,  Fund II recorded  net  unrealized
depreciation  of  $6.1  million  of  which  $3.3  million  was  related  to  net
depreciation in market value of publicly  traded  securities held as of December
31, 1997. This compares to net unrealized depreciation of $15.7 million for 1996
of which  $12.5  million  was  related to net  depreciation  in market  value of
publicly traded securities.  Fund II's cumulative net unrealized depreciation on
investments as of December 31, 1997 totaled $49.4 million.

     For the year ended  December  31,  1995,  Fund II recorded  net  unrealized
depreciation of $30.6 million of which $22.7 million was related to net
unrealized  depreciation  in market  value of publicly  traded  securities.

     Fund II's valuation of the common stock of First Alert, Hills,  Playtex and
Stanley Furniture reflect their closing market prices at December 31, 1997.

     The  Managing  General  Partner  and  the  Investment  Adviser  review  the
valuation  of  Fund  II's  portfolio  investments  that  do not  have a  readily
ascertainable  market value on a quarterly  basis with final  approval  from the
Individual General Partners.  Portfolio  investments are valued at original cost
plus  accrued  value in the case of original  issue  discount  or  deferred  pay
securities. Such investments will be revalued if there is an objective basis for
doing so at a different price.  Investments will be written down in value if the
Managing   General  Partner  and  Investment   Adviser  believe  adverse  credit
developments  of a significant  nature require a write-down of such  securities.
Investments  will be written up in value only if there has been an  arms'-length
third party transaction to justify the increased valuation.

     Approximately  51% of Fund  II's  investments  (at cost)  are  invested  in
private placement securities for which there are no ascertainable market values.
Although  the Managing  General  Partner and  Investment  Adviser use their best
judgment in estimating the fair value of these  investments,  there are inherent
limitations in any estimation  technique.  Therefore,  the fair value  estimates
presented  herein are not  necessarily  indicative  of the amount  which Fund II
could realize in a current transaction.

     The First Alert,  Hills,  Playtex and Stanley Furniture  securities held by
Fund II are restricted  securities under the SEC's Rule 144 and can only be sold
under that rule in a registered public offering or pursuant to an exemption from
the registration requirement. In addition, resale in some cases is restricted by
lockup or other  agreements.  Fund II may be  considered  an  affiliate of First
Alert and Stanley Furniture under the SEC's Rule 144 and, therefore,  any resale
of  securities  of those  companies,  under  Rule 144,  is limited by the volume
limitations in that rule.  Accordingly,  the values referred to in the financial
statements for the remaining First Alert,  Hills,  Playtex and Stanley Furniture
securities  held by Fund II do not  necessarily  represent  the  prices at which
these securities could currently be sold.

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1997.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time,  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.

     For  additional  information  please  refer  to  Supplemental  Schedule  of
Unrealized Appreciation and Depreciation - Schedule 2.

Realized Gains and Losses

     For the year ended December 31, 1997, Fund II recorded  realized gains from
investments  of $92,648 as  compared to $5.9  million  and $8.4  million for the
years  ended   December  31,  1996  and  1995,   respectively.   For  additional
information,  please refer to the  Supplemental  Schedule of Realized  Gains and
Losses - Schedule 1.
<PAGE>
Cash Distributions

     On February 2, 1998, the Individual  General  Partners  approved the fourth
quarter  1997  cash  distribution  which  represents  net  investment  income of
$372,822  from  Mezzanine  Investments,  net  investment  income of $22,982 from
Temporary  Investments and Net  Distributable  Capital proceeds from the sale of
Stanley  Furniture of $87,067  (which  includes a return of capital of $44,106).
The total amount distributed to Limited Partners was $370,314 or $1.67 per Unit,
which was paid on February 13, 1998.  The Managing  General  Partner  received a
total of $2,764  with  respect to its  interest  in Fund II and  $112,010 in MGP
Distributions.  Thomas H. Lee, as an Individual  General  Partner,  received $84
with respect to his interest in Fund II.

     Additionally,  on  February  2,  1998,  the  Independent  General  Partners
approved a cash  distribution to Limited  Partners  consisting of a repayment by
the Managing  General Partner of $328,183  representing an overpayment of an MGP
distribution  with respect to a transaction  effected  during the quarter ending
December 31, 1995, and to pay Fund II Limited Partners  interest on such amount.
This  distribution  totaling $1.67 per Unit was distributed on Febuary 13, 1998,
to Limited Partners of record at December 31, 1997.

     Because most of Fund II's debt holdings were  previously  sold or redeemed,
remaining  portfolio  interest income expected to be received by Fund II may not
be  sufficient  to cover Fund II's  expenses  in the  future.  As a result,  any
interest  income  received  will be used to pay Fund II expenses  and may not be
available for distribution. The majority of future cash distributions to Limited
Partners will be derived from recovered  capital and gains, from asset sales, if
any,  which are  dependent  upon future  market  conditions  and  therefore  are
inherently  unpredictable.  Cash  distributions,  therefore,  are likely to vary
significantly in amount and may not be made in every quarter.

     Should Limited  Partner's decide to sell their Units, any such sale will be
recorded  on the  books  and  records  of  Fund  II  quarterly,  only  upon  the
satisfactory  completion and acceptance of Fund II's transfer  documents.  There
can be no assurances  that such  transfer will be effected  before any specified
date. Additionally,  pursuant to the Partnership Agreement,  until a transfer is
recognized,  the Limited  Partner of record (i.e. the transferor) is entitled to
receive all the benefits and burdens of ownership of Units,  and any  transferee
has no rights to distributions  of sale proceeds  generated at any time prior to
the recognition of the transfer and assignment. Accordingly,  Distributable Cash
from  Investments for a quarter and  Distributable  Capital  Proceeds from sales
after  transfer or assignment  have been entered into,  but before such transfer
and  assignment is  recognized,  would be payable to the  transferor and not the
transferee.
<PAGE>
<TABLE>
<CAPTION>
Cash Distributions

     The following  table  represents  distributions  approved by the Individual
General Partners of ML-Lee  Acquisition Fund II, L.P. since inception  (November
10, 1989):

<S>                     <C>             <C>             <C>      <C>        <C>                <C>
                             Total        Limited                 Per Unit      Managing                  Individual
                          Distributed    Partners      Per        Return of     General      Incentive      General
                            Cash(a)       Amount       Unit        Capital       Partner       Fee(b)       Partner
                        ------------  ------------   --------    ----------   -----------    ----------   ----------

Fourth Quarter 1989       $1,224,768    $1,221,692   $   6.27       $     -     $  2,796      $      -       $   280
First Quarter 1990         3,776,596     3,767,253      17.00             -        8,494             -           849
Second Quarter 1990        4,943,920     4,751,996      21.43             -       11,120       179,692         1,112
Third Quarter 1990         3,487,811     3,479,179      15.69             -        7,847             -           785
Fourth Quarter 1990        6,045,031     5,705,499      25.73             -       13,598       324,574         1,360
First Quarter 1991         2,889,835     2,882,685      13.00             -        6,500             -           650
Second Quarter 1991        4,216,058     4,205,629      19.56             -        9,481             -           948
Third Quarter 1991         2,936,520     2,929,252      13.21             -        6,607             -           661
Fourth Quarter 1991        3,438,901     3,430,395      15.47             -        7,733             -           773
First Quarter 1992         3,599,446     3,590,052      16.19             -        8,584             -           810
Second Quarter 1992        3,829,652     3,820,667      17.23             -        8,124             -           861
Third Quarter 1992         2,905,394     2,898,207      13.07             -        6,534             -           653
Fourth Quarter 1992        3,027,660     3,020,167      13.62             -        6,812             -           681
First Quarter 1993        21,642,642    21,589,093      97.36         85.75       48,681             -         4,868
Second Quarter 1993        1,442,695     1,439,125       6.49             -        3,245             -           325
Third Quarter 1993         5,074,991     5,062,438      22.83          2.45       11,412             -         1,141
Fourth Quarter 1993       11,803,865    11,774,660      53.10          1.33       26,550             -         2,655
First Quarter 1994        16,087,488    16,047,686      72.37         59.42       36,184             -         3,618
Second Quarter 1994        4,214,710     4,204,285      18.96         12.24        9,477             -           948
Third Quarter 1994         1,298,201     1,294,991       5.84          3.42        2,918             -           292
Snapple Distribution
 on 12/15/94              68,497,700    58,336,675     263.08          9.70      164,845     9,979,695        16,485
Fourth Quarter 1994          375,092       241,702       1.09             -          543       132,793            54
EquiCredit Distribution
 on 2/14/95                7,276,582     6,359,647      28.68          2.68       16,826       898,426         1,683
First Quarter 1995         6,731,899     5,505,928      24.83         23.77       12,418     1,212,311         1,242
Second Quarter 1995        3,477,482     2,084,403       9.40           .57        6,215     1,386,242           622
Third Quarter 1995         2,019,088     1,124,247       5.07          4.50        2,536       892,051           254
Sun Pharmaceuticals
 Distribution on 12/11/95  9,610,616     9,587,798(c)   43.24         37.42       20,744             - (c)     2,074
Fourth Quarter 1995          333,445       166,765(c)     .75             -          752       165,853 (c)        75
CST Distribution
 on 5/03/96               25,825,311    21,023,644(c)   94.81         63.04       47,165     4,749,785 (c)     4,717
First Quarter 1996         1,766,006     1,263,947       5.70             -        2,849       498,925           285
Ghirardelli Distribution
 on 5/03/96                9,409,746     9,386,466      42.33         32.57       21,164             -         2,116
Second Quarter 1996       11,494,950    10,745,763      48.46         20.09       24,229       722,535         2,423
Third Quarter 1996           432,323       181,831        .82             -          410       250,041            41
Fourth Quarter 1996        1,833,044     1,226,250       5.53          5.04        2,764       603,754           276
First Quarter 1997           696,267        79,828        .36           .01          180       616,241            18
Anchor Distribution
 on 5/15/97               19,963,238    18,158,698      81.89         66.06       40,946     1,759,500         4,095
Second Quarter 1997        3,203,136     2,818,379      12.71          7.43        6,353       377,769           635
Third Quarter 1997         1,304,854     1,221,815       5.51          4.49        2,757        80,006           276
Fourth Quarter 1997          483,244       370,314       1.67           .20          836       112,010            84
                       -------------  ------------  ---------      --------    ---------   -----------      --------
Totals                 $ 282,620,207  $256,999,051  $1,160.35      $ 442.18    $ 617,229   $24,942,203      $ 61,725
                       =============  ============  =========      ========    =========   ===========      ========

(a)  Distributions are paid no later than 45 days after the end of each quarter.

(b)  MGP Distributions to the Managing General Partner are the result of Limited
     Partners achieving cumulative Priority Returns on Mezzanine Investments, in
     accordance with the Partnership Agreement.

(c)  Certain   amounts  from  prior  quarters  have  been  restated  to  reflect
     adjustments made in 1997.  See Notes 10 and 13 to the Financial  Statements
     for further information.

</TABLE>
<PAGE>
Item 8.    Financial Statements and Supplementary Data


                        ML-LEE ACQUISITION FUND II, L.P.


                                TABLE OF CONTENTS


Report of Independent Accountants

Statements of Assets,  Liabilities and Partners' Capital
    As of December 31, 1997 and December 31, 1996

Statements of Operations
    For the Years Ended December 31, 1997, 1996 and 1995

Statements of Changes in Net Assets
    For the Years Ended December 31, 1997, 1996 and 1995

Statements of Cash Flows
    For the Years Ended December 31, 1997, 1996 and 1995

Statements of Changes in  Partners' Capital
    For the Years Ended December 31, 1997, 1996 and 1995

Schedule of Portfolio Investments - December 31, 1997

Notes to Financial Statements

Supplementary Schedule of Realized Gains and Losses - Schedule 1

Supplementary Schedule of Unrealized Appreciation and Depreciation - Schedule 2



<PAGE>

                       Report of Independent Accountants



To the General and Limited Partners of ML-Lee Acquisition Fund II, L.P.

        In our opinion, the accompanying  statements of assets,  liabilities and
partners'  capital,  including  the schedule of portfolio  investments,  and the
related  statements of operations,  of changes in net assets, of cash flows, and
of changes in partners'  capital present fairly, in all material  respects,  the
financial  position of ML-Lee Acquisition Fund II, L.P. (the "Fund") at December
31,  1997 and 1996,  and the results of its  operations,  the changes in its net
assets, its cash flows, and the changes in its partners' capital for each of the
three years in the period ended December 31, 1997, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility  of the Fund's  management;  our  responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  financial  statements in  accordance  with  generally  accepted
auditing  standards  which require that we plan and perform the audits 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits,  which  included  confirmation  of  securities  at December  31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received,  provide a reasonable
basis for the opinion expressed above.

     The financial  statements  include  securities,  valued at  $42,646,000  at
December 31, 1997 (91.1% of net assets), whose values have been estimated by the
Managing  General  Partner and the Investment  Adviser (with the approval of the
Independent  General  Partners) in the absence of readily  ascertainable  market
values,  as  further  described  in Note 2.  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 to the financial
statements.

        Our audits were  conducted  for the purpose of forming an opinion on the
basic financial  statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional  analysis and are not a
required  part  of the  basic  financial  statements.  These  schedules  are the
responsibility of the Fund's  management.  Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial  statements
and, in our opinion,  are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.








PRICE WATERHOUSE LLP




New York, New York
March 19, 1998

<PAGE>
<TABLE>
<CAPTION>

                        ML-LEE ACQUISITION FUND II, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)

<S>                                                                             <C>                   <C>
                                                                        December 31, 1997   December 31, 1996
                                                                         ---------------    ---------------

ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
    Managed Companies (amortized cost $68,023
      at December 31, 1997 and $81,990 at December 31, 1996)             $        34,206    $        51,516
    Non-Managed Companies (amortized cost $23,967
      at December 31, 1997 and $21,608 at December 31, 1996)                       8,440              8,865
    Temporary Investments, at amortized cost (cost $3,612
      at December 31, 1997 and $10,199 at December 31, 1996)                       3,627             10,217
Cash (of which $115 is restricted at December 31, 1996)                              245                125
Accrued Interest and Other Receivables - Note  2                                     257                951
Due from Affiliate  - Note 10                                                        328                 --
Prepaid Expenses                                                                       4                  4
                                                                         ---------------    ---------------
TOTAL ASSETS                                                             $        47,107    $        71,678
                                                                         ===============    ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                  $           100    $           159
    Reimbursable Administrative Expenses Payable - Note 8                             11                 45
    Independent General Partners' Fees Payable - Note 9                               12                 33
    Deferred Interest Income - Note 2                                                151                326
                                                                         ---------------    ---------------
Total Liabilities                                                                    274                563
                                                                         ---------------    ---------------

Partners' Capital - Note 2
    Individual General Partner                                                        15                 19
    Managing General Partner                                                         266              1,368
    Limited Partners (221,745 Units)                                              46,552             69,728
                                                                         ---------------    ---------------
Total Partners' Capital                                                           46,833             71,115
                                                                         ---------------    ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                  $        47,107    $        71,678
                                                                         ===============    ===============


                  See the Accompanying Notes to Financial Statements.


</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                            STATEMENTS OF OPERATIONS
                             (DOLLARS IN THOUSANDS)

<S>                                                             <C>          <C>          <C>
                                                                      For the Years Ended December 31,
                                                                    ---------    ---------    ---------
                                                                         1997         1996         1995
                                                                    ---------    ---------    ---------
INVESTMENT INCOME - Notes 2,4,6:
Interest                                                            $   4,354    $  13,462        7,523
Discount and Dividend Income                                            5,803          920        1,004
                                                                    ---------    ---------    ---------
    TOTAL INCOME                                                       10,157       14,382        8,527
                                                                    ---------    ---------    ---------
EXPENSES:
Investment Advisory Fee - Note 7                                          759          989        1,537
Fund Administration Fee - Note 8                                          570          675          798
Legal and Professional Fees                                               152        1,345        1,651
Reimbursable Administrative Expenses - Note 8                             140          139          126
Independent General Partners' Fees and Expenses - Note 9                  106          207          263
Insurance Expense                                                           4            4            5
                                                                    ---------    ---------    ---------
    TOTAL EXPENSES                                                      1,731        3,359        4,380
                                                                    ---------    ---------    ---------

NET INVESTMENT INCOME                                                   8,426       11,023        4,147
                                                                    ---------    ---------    ---------
Net Realized Gain on Investments - Note 4 and Schedule 1                   93        5,895        8,373
                                                                    ---------    ---------    ---------
Net Change in Unrealized Depreciation on Investments:
Note 5 and Schedule 2
  Publicly Traded Securities                                           (3,342)     (13,952)     (22,693)
  Nonpublic Securities                                                 (2,788)      (1,772)      (7,867)
                                                                    ---------    ---------    ---------
SUBTOTAL                                                               (6,130)     (15,724)     (30,560)
                                                                    ---------    ---------    ---------
NET INCREASE (DECREASE) IN NET ASSETS
   RESULTING FROM OPERATIONS                                            2,389        1,194      (18,040)
Less:  Earned MGP Distributions to Managing General Partner            (2,078)      (5,366)      (2,162)
                                                                    ---------    ---------    ---------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
  DISTRIBUTION TO ALL PARTNERS                                      $     311    $  (4,172)   $ (20,202)
                                                                    =========    =========    =========


               See the Accompanying Notes to Financial Statements

</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                       STATEMENTS OF CHANGES IN NET ASSETS
                             (DOLLARS IN THOUSANDS)

<S>                                                       <C>             <C>            <C>
                                                                 For the Years Ended December 31,
                                                               ---------    ---------    ---------
                                                                    1997         1996         1995
                                                               ---------    ---------    ---------

FROM OPERATIONS:

Net Investment Income                                          $   8,426    $  11,023    $   4,147

Net Realized Gain on Investments                                      93        5,895        8,373

Net Change in Unrealized  Depreciation
  From Investments                                                (6,130)     (15,724)     (30,560)
                                                               ---------    ---------    ---------

Net Increase (Decrease) in Net Assets
  Resulting from Operations                                        2,389        1,194      (18,040)

Cash Distributions to Partners                                   (26,671)     (49,262)     (29,491)
                                                               ---------    ---------    ---------

Total Decrease                                                   (24,282)     (48,068)     (47,531)

NET ASSETS:

Beginning of Year                                                 71,115      119,183      166,714
                                                               ---------    ---------    ---------

End of Period                                                  $  46,833    $  71,115    $ 119,183
                                                               =========    =========    =========


               See the Accompanying Notes to Financial Statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 ML-LEE ACQUISITION FUND II, L.P.
                                    STATEMENTS OF CASH FLOWS
                                     (DOLLARS IN THOUSANDS)

<S>                                                                       <C>           <C>             <C>
                                                                                 For the Years Ended December 31,
                                                                              ---------    ---------    ---------
                                                                                   1997         1996         1995
                                                                              ---------    ---------    ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                     $  10,677    $  15,268        7,650
  Legal and Professional Fees                                                      (207)      (1,549)      (1,363)
  Investment Advisory Fee                                                          (759)        (989)      (1,537)
  Fund Administration Fee                                                          (570)        (675)        (799)
  Independent General Partners' Fees and Expenses                                  (128)        (240)        (242)
  Reimbursable Administrative Expenses                                             (174)        (151)        (156)
  (Purchase) Sale of Temporary Investments, Net                                   6,588         (175)       8,321
  Purchase of Portfolio Companies                                                (2,420)          --       (1,635)
  Proceeds from Sales of Portfolio Company Investments                           14,117       37,901       19,256
  Insurance Expense                                                                  (4)          (4)          (4)
                                                                              ---------    ---------    ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                        27,120       49,386       29,491
                                                                              ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                (27,000)     (49,262)     (29,491)
                                                                              ---------    ---------    ---------
NET CASH APPLIED TO FINANCING ACTIVITIES                                        (27,000)     (49,262)     (29,491)
                                                                              ---------    ---------    ---------
  Net Increase in Cash                                                              120          124           --
  Cash at Beginning of Year                                                         125            1            1
                                                                              ---------    ---------    ---------
CASH AT END OF PERIOD                                                         $     245    $     125    $       1
                                                                              =========    =========    =========

                                      RECONCILIATION OF NET INVESTMENT INCOME
                                   TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Net Investment Income                                                         $   8,426    $  11,023    $   4,147
                                                                              ---------    ---------    ---------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  (Increase) Decrease in Investments                                             18,195       32,015       17,569
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivable                                               520          702         (878)
  (Decrease) Increase in Legal and Professional Fees Payable                        (59)        (204)         291
  (Decrease) Increase in Reimbursable Administrative Expenses Payable               (34)         (12)         (31)
  (Decrease) Increase in Independent General Partners' Fees Payable                 (21)         (33)          20
  Net Realized Gain on Sales of Investments                                          93        5,895        8,373
                                                                              ---------    ---------    ---------
TOTAL ADJUSTMENTS                                                                18,694       38,363       25,344
                                                                              ---------    ---------    ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                     $  27,120    $  49,386    $  29,491
                                                                              =========    =========    =========




               See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)

<S>                                                              <C>           <C>            <C>                <C>
                                                              Individual       Managing
                                                               General         General        Limited
                                                               Partner         Partner        Partners        Total
                                                            --------------  --------------  -------------  ------------

For the Twelve Months Ended December 31, 1995
Partners' Capital at January 1, 1995                            $      40       $   4,780      $ 161,894      $166,714
Allocation of Net Investment Income                                     1           1,410          2,736         4,147
Allocation of Net Realized Gain on Investments                          1             780          7,592         8,373
Allocation of Net Change in Unrealized
  Depreciation From Investments                                        (7)            (69)       (30,484)      (30,560)
Cash Distributions to Partners                                         (6)         (4,969)       (24,516)      (29,491)
                                                                ---------       ---------      ---------      --------
Partners' Capital at December 31, 1995                          $      29       $   1,932      $ 117,222      $119,183
                                                                =========       =========      =========      ========

For the Twelve Months Ended December 31, 1996
Partners' Capital at January 1, 1996                            $      29       $   1,932      $ 117,222      $119,183
Allocation of Net Investment Income                                     2           3,211          7,810        11,023
Allocation of Net Realized Gain on Investments                          1           2,684          3,210         5,895
Allocation of Net Change in Unrealized
  Depreciation From Investments                                        (3)            (35)       (15,686)      (15,724)
Cash Distributions to Partners                                        (10)         (6,424)       (42,828)      (49,262)
                                                                ---------       ---------      ---------      --------
Partners' Capital at December 31, 1996                          $      19       $   1,368      $  69,728      $ 71,115
                                                                =========       =========      =========      ========

For the Twelve Months Ended December 31, 1997
Partners' Capital at January 1, 1997                            $      19       $   1,368      $  69,728      $ 71,115
Allocation of Net Investment Income                                     2           2,073          6,351         8,426
Allocation of Net Realized Gain on Investments                          -               -             93            93
Allocation of Net Change in Unrealized
  Depreciation From Investments                                        (1)            (14)        (6,115)       (6,130)
Cash Distributions to Partners                                         (5)         (3,161)       (23,505)      (26,671)
                                                                ---------       ---------      ---------      --------
Partners' Capital at December 31, 1997 - Notes 2,3              $      15       $     266      $  46,552      $ 46,833
                                                                =========       =========      =========      ========


                       See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                               DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)


 Principal                                                                                                   Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
 <S>               <C>                                                                <C>        <C>         <C>       <C>
                   MEZZANINE INVESTMENTS
                   MANAGED COMPANIES

                   ANCHOR ADVANCED PRODUCTS, INC. (b) - Notes 4, 13
410,677 Shares     Anchor Holdings Inc., Common Stock (d)                              04/30/90  $  1,396   $  1,396
                   $5,867  11.67 Sr. Sub. Note
                   $7,822  17.50 Jr. Sub. Note
                   Purchased 4/30/90                      $13,689
                   Repaid 4/02/97                         $13,689
                   Realized Gain                          $     -
                   162,967 Shares Common Stock
                   Purchased 4/30/90                      $ 1,548
                   Exercised 247,710 Warrants 4/2/97      $ 2,354
                   Return of Capital Proceeds
                     from the Anchor Dividend             $(2,506)
                   Cost Basis of Equity                   $ 1,396                                ------------------------------
                                                                                                    1,396      1,396       3.02
                                                                                                 ------------------------------

                   BIG V SUPERMARKETS, INC. (b)
$13,037            Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c)       12/27/90    13,037     13,037
117,333 Shares     Big V Holding Corp., Common Stock(d)                                12/27/90     4,107      4,107
                   (16.6% of fully diluted common equity) (h)                                    ------------------------------
                                                                                                   17,144     17,144      37.05
                                                                                                 ------------------------------

                   CINNABON INTERNATIONAL, INC.
                   (formerly Restaurants Unlimited)
$6,044             Cinnabon, 11% Subordinated Note due 06/30/02(c)                     06/03/94     6,044      6,044
391,302 Warrants   Cinnabon, Common Stock Warrants(d)                                  06/03/94         0          0
                    (2.1% of fully diluted common equity) (h)                                    ------------------------------
                                                                                                    6,044      6,044      13.06
                                                                                                 ------------------------------

                   COLE NATIONAL CORPORATION
13,161 Warrants    Cole National Corporation, Common Stock Purchase Warrants(d)        09/26/90         0          0
                   (0.0% of fully diluted common equity assuming exercise
                   of warrants) (h)
                   $1,393 13% Sr. Secured Bridge Note
                   Purchased 09/25/90                     $ 1,393
                   Repaid 11/15/90                        $ 1,393
                   Realized Gain                          $     0
                                                                                                 ------------------------------
                                                                                                        0          0       0.00
                                                                                                 ------------------------------
2,058,474 Shares   FIRST ALERT, INC., (b) - Notes 5,13
                   First Alert, Inc., Common Stock(a)(d)                                07/31/92    3,320      4,374
                     (8.1% of fully diluted common equity)(h)
                      $10,198 12.5% Sub. Note
                      Purchased 07/31/92                  $10,198
                      Repaid 03/28/94                     $10,198
                      Realized Gain                       $     0
                                                                                                 ------------------------------
                                                                                                    3,320      4,374       9.45
                                                                                                 ------------------------------

</TABLE>
            See the Accompanying Notes to the Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                             DECEMBER 31, 1997
                           (DOLLARS IN THOUSANDS)


Principal                                                                                                   Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
    <S>              <C>                                                                 <C>        <C>         <C>       <C>
                  HILLS STORES COMPANY - Note 5
458,432 Shares    Hills Stores Company, Common Stock(a)(d)                            04/03/90   $ 30,246    $ 1,433
62,616 Shares     Hills Stores Company, Common Stock(a) (d)                           08/21/95      4,530        195
                   (4.1% of fully diluted common equity) (h)                                     --------------------------------
                                                                                                   34,776      1,628         3.52
                                                                                                 --------------------------------

                  PLAYTEX PRODUCTS, INC. (b) - Note 5
343,726 Shares    Playtex Products, Inc., Common Stock(a)(d)                          03/29/90      5,299      3,523
                    (.6% of fully diluted common equity)(h)
                    $7,333 15% Subordinated Note
                    Purchased 03/29/90                      $7,333
                    Sold 09/28/90                           $7,349
                    Realized Gain                           $   16
                    84,870 Shares Common Stock
                    Purchased 03/29/90                      $  282
                    Sold 12/20/91                           $  328
                    Realized Gain                           $   46
                    $7,334 15% Subordinated Note
                    Purchased 03/29/90                      $7,334
                    Sold 02/01/93                           $7,327
                    Realized Loss                           $   (7)
                    Total Net Realized Gain                 $   55
                                                                                                 --------------------------------
                                                                                                    5,299      3,523         7.61
                                                                                                 --------------------------------
                  STANLEY FURNITURE COMPANY, INC. (b) - Notes 4,5,13
3,461 Shares      Stanley Furniture Company, Inc., Common Stock(a)(d)                 06/30/91         44         97
                    (.3% of the fully diluted common equity)(h)
                    9,631 Shares Common Stock
                    Purchased 6/30/91                      $  121
                    Sold 8,375 Shares 11/13/96             $  127
                    Sold 1,256 Shares 12/13/96             $   19
                    Realized Gain                          $   25
                    Purchased 272 Shares 6/30/91           $    4
                    Sold 2/7/97                            $    7
                    Realized Gain                          $    3
                    Purchased 6,281 Shares 6/30/91         $   79
                    Sold 6/30/97                           $  126
                    Realized Gain                          $   47
                    Purchased 3,460 Shares 6/30/91         $   44
                    Sold 11/18/97                          $   87
                    Realized Gain                          $   43
                    Total Net Realized Gain                $  118
                                                                                                 --------------------------------
                                                                                                       44         97         0.21
                                                                                                 --------------------------------
                  TOTAL INVESTMENT IN MANAGED COMPANIES                                          $ 68,023   $ 34,206        73.92
                                                                                                 ================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                             DECEMBER 31, 1997
                           (DOLLARS IN THOUSANDS)


Principal                                                                                                   Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
    <S>              <C>                                                                 <C>        <C>         <C>       <C>

                  NON-MANAGED COMPANIES

                  BIOLEASE, INC.- Note 5
$784              BioLease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94   $   676     $  392
96.56 Shares      BioLease, Inc., Common Stock (d)                                     06/08/94        94          -
10,014 Warrants   Biotransplant, Inc., Common Stock Purchase Warrants(d)               06/08/94        14         14
                                                                                                  -------------------------------
                                                                                                      784        406          .88
                                                                                                  -------------------------------

                  FITZ AND FLOYD -Notes 4,5
$2,420            Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (c)                        04/11/97     2,420      2,420
 8,470 Shares     Fitz and Floyd, Series A Preferred Stock (d)                         04/11/97    12,619      3,024
                   1,324,508 Shares Common Stock
                   Purchased various                      $    20
                   Surrendered May 1996                   $     -
                   Realized Loss                          $   (20)
                   $10,281  Sr. Sub. Note
                   $2,419  Sr. Sub. Note
                   Purchased various                      $12,619
                   Exchanged 04/14/97
                   8,470 Sh Series A Preferred Stock and
                   51,245 Shares Common Stock             $12,619
                   Realized Gain                          $     0
                   Total Realized Loss                    $   (20)                                -------------------------------
                                                                                                   15,039      5,444        11.76
                                                                                                  -------------------------------

                  FLA. ORTHOPEDICS, INC. - Notes 5,6
 19,366 Shares    FLA. Holdings, Inc. Series B Preferred Stock(d)                      08/02/93     1,513          -
  3,822 Warrants  FLA. Holdings, Inc. Common Stock Purchase Warrants(d)                08/02/93         -          -
                   $4,842 12.5% Subordinated Note
                   Purchased 08/02/93                     $ 4,842
                   Surrendered 08/16/96                   $     0
                   Realized Loss                          $(4,842)
                   121,040 Common Stock
                   Purchased 08/02/93                     $ 1,513
                   Exchanged 08/02/96
                   19,366 Series B Preferred Stock        $ 1,513
                   Realized Gain                          $     0
                   Total Realized Loss                    $(4,842)
                                                                                                  -------------------------------
                                                                                                    1,513          -         0.00
                                                                                                  -------------------------------

See the Accompanying Notes to Financial Statements.
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                              DECEMBER 31, 1997
                           (DOLLARS IN THOUSANDS)


 Principal                                                                                                  Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
<S>                <C>                                                                  <C>        <C>         <C>       <C>
                  SORETOX - Notes 5,6
$3,503            Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g)            06/29/95  $  3,503     $ 2,590
$3,128            Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g)        06/29/95     3,128           0
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants                     12/06/91         0           0
                                                                                                -----------------------------
                                                                                                   6,631       2,590     5.60
                                                                                                -----------------------------
                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                    $ 23,967     $ 8,440    18.24
                                                                                                =============================

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                 Various     28,808      24,483    52.91
                   Preferred Stock, Common Stock, Warrants and Stock Rights           Various     63,182      18,163    39.25
                                                                                                -----------------------------
                   TOTAL MEZZANINE INVESTMENTS                                                  $ 91,990     $42,646    92.16
                                                                                                =============================

                  TEMPORARY INVESTMENTS

                  COMMERCIAL PAPER
$ 3,132           General Electric Corp. 5.81% due 1/5/98                             12/04/97     3,116       3,130
$   497           Clipper Receivables, 5.97% due 1/2/98                               12/18/97       496         497
                                                                                                -----------------------------
                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                             3,612       3,627     7.84
                                                                                                -----------------------------
                  TOTAL TEMPORARY INVESTMENTS                                                   $  3,612    $  3,627     7.84
                                                                                                -----------------------------
                  TOTAL INVESTMENT PORTFOLIO                                                    $ 95,602    $ 46,273   100.00%
                                                                                                =============================


(a)     Publicly traded class of securities.
(b)     Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c)     Restricted security.
(d)     Restricted non-income producing equity security.
(e)     Represents original cost and excludes accretion of discount of $33 for Mezzanine Investments
        and $15 for Temporary Investments.
(f)     Inclusive of receipt of payment-in-kind securities.
(g)     Non-accrual investment status.
(h)     Percentages of Common Equity have not been audited by Price Waterhouse LLP.

See the Accompanying Notes to Financial Statements.
</TABLE>

<PAGE>
                         ML-LEE ACQUISITION FUND II, L.P.
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

1.      Organization and Purpose

     ML-Lee Acquisition Fund II, L.P. ("Fund II") (formerly T.H. Lee Acquisition
Fund II,  L.P.) was  formed  along  with  ML-Lee  Acquisition  Fund  (Retirement
Accounts)  II, L.P.  (the  "Retirement  Fund";  collectively  referred to as the
"Funds")  and the  Certificates  of Limited  Partnership  were  filed  under the
Delaware  Revised  Uniform  Limited  Partnership  Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.

     Mezzanine Investments II, L.P. (the "Managing General Partner"), subject to
the  supervision  of  the  Individual  General  Partners,   is  responsible  for
overseeing and monitoring of Fund II's investments. The Managing General Partner
is a Delaware  limited  partnership in which ML Mezzanine II Inc. is the general
partner and Thomas H. Lee  Advisors  II,  L.P.,  the  Investment  Adviser to the
Funds, is the limited  partner.  The Individual  General  Partners are Vernon R.
Alden,  Joseph L.  Bower and  Stanley  H.  Feldberg  (the  "Independent  General
Partners") and Thomas H. Lee.

     Fund II  elected to operate as a business  development company under the
Investment  Company Act of 1940.  Fund II's primary  investment  objective is to
provide  current  income and capital  appreciation  potential  by  investing  in
privately-structured,   friendly   leveraged   buyouts   and   other   leveraged
transactions.   Fund  II  pursues  this  objective  by  investing  primarily  in
subordinated  debt and related equity  securities issued in conjunction with the
"mezzanine  financing"  of friendly  leveraged  buyout  transactions,  leveraged
acquisitions and leveraged recapitalizations. Fund II may also invest in "bridge
investments"  if it is  believed  that such  investments  would  facilitate  the
consummation of a mezzanine financing.

     As  described  in the  Prospectus,  Fund II will  terminate  no later  than
January 5, 2000,  subject to the right of the  Individual  General  Partners  to
extend the term for up to one  additional  two-year  period  and one  additional
one-year period if it is in the best interest of Fund II. Fund II will then have
five additional years to liquidate its remaining investments.

2.      Significant Accounting Policies

Basis of Accounting

        For financial reporting purposes,  the records of Fund II are maintained
using the  accrual  method of  accounting.  For  federal  income  tax  reporting
purposes,   the  results  of  operations  are  adjusted  to  reflect   statutory
requirements arising from book to tax differences.  The preparation of financial
statements in accordance with generally accepted accounting  principles requires
management  to make  estimates  and  assumptions  that  affect the  amounts  and
disclosures in the financial statements. Actual reported results could vary from
these estimates.

Valuation of Investments

        Securities for which market  quotations are readily available are valued
by reference to such market  quotation  using the last trade price (if reported)
or the  last  bid  price  for the  period.  For  securities  without  a  readily
ascertainable  market value  (including  securities  restricted as to resale for
which a corresponding  publicly traded class exists),  fair value is determined,
on a quarterly  basis,  in good faith by the  Managing  General  Partner and the
Investment  Adviser with final approval from the Individual  General Partners of
Fund II. For privately issued securities in which Fund II typically invests, the
fair value of an  investment is its original cost plus accrued value in the case
of original issue discount or deferred pay securities.  Such investments will be
revalued  if there is an  objective  basis  for doing so at a  different  price.
Investments  will be written down in value if the Managing  General  Partner and
Investment  Adviser believe adverse credit  developments of a significant nature
require a write-down of such securities. Investments will be written up in value
only if there has been an  arms'-length  third party  transaction to justify the
increased  valuation.  Although  the  Managing  General  Partner and  Investment
Adviser  use  their  best  judgment  in  estimating  the  fair  value  of  these
investments,  there  are  inherent  limitations  in  any  estimation  technique.
Therefore,  the  fair  value  estimates  presented  herein  are not  necessarily
indicative of the amount which Fund II could  realize in a current  transaction.
Future  confirming  events will also affect the  estimates of fair value and the
effect of such events on the estimates of fair value could be material.
<PAGE>
     Temporary  Investments  with  maturities of less than 60 days are stated at
amortized cost, which approximates market.

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1997.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since that time,  and because the portfolio  investments  of companies
whose  equity is publicly  traded are valued at the last price at  December  31,
1997,  the current  estimated fair value of these  investments  may have changed
significantly since that point in time.

Interest Receivable on Investments

     Investments  generally will be placed on non-accrual status in the event of
a default  (after the  applicable  grace  period  expires) or if the  Investment
Adviser and the Managing  General Partner  determine that there is no reasonable
assurance of collecting interest.

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by Fund II's portfolio  companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal  amounts of such securities.  As of December 31, 1997 and December 31,
1996,  Fund II had in its portfolio of investments  $441,900 of  payment-in-kind
notes  which   excludes  $2.5  million  and  $1.1  million,   respectively,   of
payment-in-kind  notes received from notes placed on non-accrual  status.  As of
December  31,  1997 and  December  31,  1996,  Fund II had in its  portfolio  of
investments $29,059 of payment-in-kind equity securities.

Investment Transactions

     Fund II records investment  transactions on the date on which it obtains an
enforceable right to demand the securities or payment therefor.  Fund II records
Temporary Investment transactions on the trade date.

     Realized  gains and losses on  investments  are  determined on the basis of
specific identification for accounting and tax purposes.

Sales and Marketing Expenses, Offering Expenses and Sales Commissions

     Sales  commissions  and selling  discounts  were  allocated to the specific
partners' accounts in which they were applied.  Sales and marketing expenses and
offering  expenses were allocated  between the Funds in proportion to the number
of Units issued by each fund and to the partners in  proportion to their capital
contributions.

Deferred Interest Income

     All fees  received  by Fund II upon the  funding  of  Mezzanine  or  Bridge
Investments  are  treated as deferred  interest  income and  amortized  over the
maturity of such investments.

Partners' Capital

     Partners' Capital  represents Fund II's equity divided in proportion to the
Partners'  Capital  Contributions  and does not represent the Partners'  Capital
Accounts.  Profits and losses,  as defined in the  Partnership  Agreement,  when
realized,  are allocated in accordance  with the  provisions of the  Partnership
Agreement summarized in Note 3.
<PAGE>
3.      Allocations of Profits and Losses

     Pursuant  to  the  Partnership   Agreement,   all  profits  from  Temporary
Investments generally will be allocated 99.75% to the Limited Partners, 0.23% to
the  Managing  General  Partner  and 0.02% to the  Individual  General  Partner.
Profits from Mezzanine Investments will, in general, be allocated as follows:

    first, if the capital  accounts of any partners have negative  balances,  to
    such  partners in  proportion  to the  negative  balances  in their  capital
    accounts until the balances of all such capital accounts equal zero,

    second,  99.75%  to the  Limited  Partners,  0.23% to the  Managing  General
    Partner and 0.02% to the Individual  General Partner until the sum allocated
    to the Limited Partners equals any previous losses allocated together with a
    cumulative  Priority  Return of 10% on the average daily amount in Mezzanine
    Investments, and any outstanding Compensatory Payments,

    third,  69.75% to the  Limited  Partners,  30.225% to the  Managing  General
    Partner and 0.025% to the  Individual  General  Partner  until the  Managing
    General Partner has received 20.281% of the total profits allocated,

    thereafter,  79.75% to the Limited Partners, 20.225% to the Managing General
    Partner and 0.025% to the Individual General Partner.

     Losses will be allocated in reverse order of profits  previously  allocated
and thereafter  99.75% to the Limited  Partners,  0.23% to the Managing  General
Partner and 0.02% to the Individual General Partner.

4.      Investment Transactions

     During February 1997, Fund II sold 272 shares of Stanley  Furniture for $24
per share and received total proceeds of $6,528 and recognized a gain of $3,105.
On June 30, 1997,  Fund II entered into a stock purchase  agreement with Stanley
Furniture  whereby  Fund II sold 6,281 shares of Stanley  Furniture  for $20 per
share.  Fund II received  total  proceeds of $125,620  and  recognized a gain of
$46,582.  On November 18, 1997,  Fund II sold 3,460 shares of Stanley  Furniture
for $25 per share.  Fund II received  total proceeds of $86,500 and recognized a
gain of $42,961.

     On April 2, 1997,  Anchor  completed a  recapitalization  pursuant to which
Anchor issued  $100,000,000  aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization").  As part of the
Recapitalization,  Anchor  repaid  substantially  all of its  outstanding  debt,
including all accrued  interest and any premiums in connection  therewith.  As a
result,  Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by Fund II, together with all accrued interest and prepayment  premiums for
an aggregate of $14.5 million.

     Immediately prior to the Recapitalization,  Fund II owned 162,967 shares of
the common stock of Anchor  Holdings,  Inc.,  the parent of Anchor.  Immediately
after the consummation of the  Recapitalization,  Fund II exercised its warrants
to purchase  common stock (at an exercise price of $9.50 per share) and acquired
an additional  247,710  shares of common stock,  bringing its total  holdings of
common  stock to  410,677  shares.  In  connection  with  the  Recapitalization,
Holdings paid a dividend to all holders of Holdings common stock of record as of
April 2, 1997, in the amount of $19.02 per share (the "Anchor  Dividend").  As a
result of such dividend,  the Fund received $7.8 million, of which approximately
32% or $2.5 million was returned to partners as return of capital.

     On April 11, 1997 the Bankruptcy  Court confirmed a plan of  Reorganization
for Fitz & Floyd. As a result, on April 14, 1997, a follow-on investment of $2.4
million  was made in Fitz and  Floyd and Fund II  received  a $2.4  million  12%
subordinated note. Additionally,  Fund II exchanged the $12.6 million adjustable
notes,  which Fund II previouslly held, for Series A Preferred Stock and Class A
Common Stock in Fitz and Floyd. No gain or loss was recorded on the trasaction.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of December 31, 1997, the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores,  Ghirardelli
Holdings  and  Anchor  Advanced  Products.  Additionally,  $8.29  million of the
reserve has been  returned to the  partners.  The level of the reserve was based
upon an analysis  of  potential  follow-on  investments  in  specific  portfolio
companies  that may become  necessary to protect or enhance  Fund II's  existing
investment.

     Because  Fund  II  primarily   invested  in  high-yield  private  placement
securities,  the risk of loss upon  default  by an issuer is  greater  than with
investment  grade  securities  because   high-yield   securities  are  generally
unsecured and are often  subordinated  to other  creditors of the issuer.  Also,
high-yield  issuers  usually  have higher  levels of  indebtedness  and are more
sensitive to adverse economic conditions.
<PAGE>
     Although Fund II cannot eliminate the risks associated with its investments
in high-yield securities,  it has procedures in place to continually monitor the
risks associated with its investments under a variety of market conditions.  Any
potential  Fund II loss would  generally  be limited  to its  investment  in the
portfolio company as reflected in the portfolio of investments.

     Should bankruptcy proceedings commence,  either voluntarily or by action of
the court against a portfolio  company,  the ability of Fund II to liquidate the
position or collect proceeds from the action may be delayed or limited.

5.   Unrealized Appreciation and Depreciation of Investments

     Fund II's valuation of the Common Stock of First Alert, Hills,  Playtex and
Stanley reflects their closing market prices at December 31, 1997.

     For information,  please refer to the  Supplemental  Schedule of Unrealized
Appreciation and Depreciation - Schedule 2.

6.   Non-Accrual of Investments

     In accordance with Fund II's Accounting  Policy,  the following  securities
have been on non-accrual status since the date indicated:

    - Florida Orthopedics, Inc., on January 1, 1995.
    - Stablex Canada, Inc., on June 29, 1995.

7.    Investment Advisory Fee

     The  Investment  Adviser  provides  the   identification,   management  and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds,  the Investment  Adviser  receives a quarterly fee at the
annual rate of 1% of assets under  management (net offering  proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1.2  million  for Fund II and the  Retirement  Fund on a  combined  basis.  The
Investment  Advisory  Fee is  calculated  and paid  quarterly,  in  advance.  In
addition,  the  Investment  Adviser  receives  95% of  the  benefit  of any  MGP
Distributions  paid to the Managing General Partner (see Note 10). For the years
ended December 31, 1997, 1996 and 1995, Fund II paid $759,160, $988,882 and $1.5
million, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II,
L.P.

8.   Fund Administration Fees and Expenses

     As compensation for its services,  ML Fund  Administrators  Inc. (the "Fund
Administrator";  an affiliate of the  Managing  General  Partner) is entitled to
receive  from the Funds an  Administration  Fee and  reimbursement  for  certain
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Funds
("reimbursable  expenses").  The Fund  Administration Fee is calculated and paid
quarterly, in advance, by each Fund. For the years ended December 31, 1997, 1996
and 1995, Fund II paid $569,224,  $675,250 and $798,478,  respectively,  in Fund
Administration Fees.

     Beginning in November of 1997,  the Fund  Administration  Fee changed to an
annual  amount of  $400,000  for Fund II and the  Retirement  Fund on a combined
basis,  plus 100% of all reimbursable  expenses incurred by Funds . Reimbursable
expenses  primarily  consist of printing,  audit,  tax preparation and custodian
fees.  For the years ended  December 31, 1997,  1996 and 1995,  Fund II incurred
$140,157, $139,158 and $125,816, respectively, in reimbursable expenses.

     For the  period  ending  November  1997,  the Fund  Administration  Fee was
calculated at an annual amount of the greater of $500,000 or 0.45% of the excess
of net  offering  proceeds  less 50% of capital  reductions  and 50% of realized
losses plus a portion of reimbursable expenses incurred by Fund II.

     In addition,  ML Mezzanine II Inc., an affiliate of the Fund  Administrator
and  Merrill  Lynch  &  Co.,Inc.,   receives  5%  of  the  benefit  of  any  MGP
Distributions paid to the Managing General Partner (see Note 10).
<PAGE>
9.   Independent  General  Partners' Fees and Expenses

     As compensation for their services,  each Independent  General Partner will
receive a combined annual fee of $40,000  (payable  quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus  reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed annually.  For the years
ended December 31, 1997, 1996 and 1995,  Independent  General Partners' Fees and
Expenses were $106,069, $207,269 and $262,832, respectively.

10.     Related Party Transactions

     Fund  II's  investments  generally  were  made as  co-investments  with the
Retirement  Fund. In addition,  certain of the Mezzanine  Investments and Bridge
Investments  which were made by Fund II  involve  co-investments  with  entities
affiliated  with the  Investment  Adviser.  Such  co-investments  are  generally
prohibited  absent exemptive relief from the Securities and Exchange  Commission
(the "Commission").  As a result of these affiliations and Fund II's expectation
of engaging in such  co-investments,  the Funds together with ML-Lee Acquisition
Fund,  L.P.,  sought  an  exemptive  order  from the  Commission  allowing  such
co-investments,   which  was   received  on   September   1,  1989.   Fund  II's
co-investments in Managed Companies,  and in certain cases its co-investments in
Non-Managed Companies, typically involve the entry by the Funds and other equity
security  holders into  stockholders'  agreements.  While the provisions of such
stockholders'  agreements  vary,  such  agreements may include  provisions as to
corporate  governance,  registration  rights,  rights  of  first  offer or first
refusal,  rights to participate in sales of securities to third parties,  rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.

     Thomas H. Lee  Company,  a sole  proprietorship  owned by Thomas H. Lee, an
Individual  General  Partner  of  Fund  II and an  affiliate  of the  Investment
Advisor,  typically performs certain  management  services for Managed Companies
and  receives  management  fees in  connection  therewith,  usually  pursuant to
written  agreements with such companies.  In addition,  certain of the portfolio
companies  have  contractual  or other  relationships  pursuant to which they do
business with one another.

     Merrill  Lynch,  Pierce,  Fenner  &  Smith  Incorporated  ("MLPF&S")  is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio  companies of the Funds,  which may include investment banking
services,  broker/dealer  services  and  economic  forecasting,  and  receive in
consideration   therewith   various  fees,   commissions   and   reimbursements.
Furthermore,  MLPF&S  and its  affiliates  or  investment  companies  advised by
affiliates of MLPF&S may, from time to time,  purchase or sell securities issued
by portfolio  companies of the Funds in connection with its ordinary  investment
operations.

     As provided by the Partnership  Agreement,  the Managing General Partner of
Fund II is entitled to receive an incentive  distribution ("MGP  Distributions")
after Limited Partners have received their Priority Return of 10% per annum. The
Managing  General Partner is required to defer a portion of any MGP Distribution
earned  from the sale of  portfolio  investments  in excess  of 20% of  realized
capital  gains,  net realized  capital losses and  unrealized  depreciation,  in
accordance with the Partnership Agreement (the "Deferred  Distribution Amount").
This Deferred  Distribution  Amount is distributable to the Partners pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from  distributable cash from operations are instead
payable to the Managing General Partner until any Deferred  Distribution  Amount
is paid.

     During 1997,  Fund II paid the  Individual  General  Partner  distributions
totaling $5,300 and Managing General Partner  distributions  totaling $3,490,271
(which  includes  $3,437,271  of MGP  Distributions  as  defined  above).  As of
December 31,  1997,  the  Managing  General  Partner has earned a total of $24.9
million  in MGP  Distributions,  none of which is  deferred  in  payment  to the
Managing  General  Partner  as a Deferred  Distribution  amount  (the  "Deferred
Distribution")  at this time, in accordance with the Partnership  Agreement.  To
the  extent  not  payable  to  the  Managing  General   Partner,   any  Deferred
Distribution  is distributed to the Partners  pro-rata in accordance  with their
capital  contributions,  and certain amounts otherwise later payable to Partners
from  distributable  cash from operations would instead be payable solely to the
Managing General Partner until the Deferred Distribution amount is paid in full.
<PAGE>
     Fund II has  recorded a  receivable  of $328,183  or $1.48 per Unit,  which
represents an amount due from the Managing General Partner at December 31, 1997.
This amount is a correction  of an MGP  Distribution  made on December 11, 1995,
with respect to a transaction effected at that time.

     The  Managing  General  Partner  has  repaid  the  amount to Fund II,  plus
interest, all of which was distributed to Limited Partners along with the fourth
quarter  distribution made on February 13, 1998 to Limited Partners of record as
of December 31, 1997. See Note 13 for further information.

11.     Litigation

    On February 3, 1992 and February 5, 1992, respectively, one Limited Partner
from Fund II and one Limited  Partner from the  Retirement  Fund each  commenced
class actions in the US District Court for the District of Delaware, purportedly
on behalf of all persons who  purchased  limited  partnership  interests  in the
Funds  between  November  10, 1989 and January 5, 1990,  against the Funds,  the
Managing  General  Partner,  the  Individual  General  Partners,  the Investment
Adviser  to the  Funds and  certain  named  affiliates  of such  persons.  These
actions,  alleging  that the  defendants  made  material  misrepresentations  or
omitted material  information in the offering materials for the Funds concerning
the investment  purposes of the Funds,  were  consolidated by the court on March
31, 1992,  and a  consolidated  complaint was filed by the plaintiffs on May 14,
1992. In April 1993,  plaintiffs filed an amended complaint,  adding claims that
certain transactions by the Funds were prohibited by the federal securities laws
applicable to the Funds and their affiliates under the Investment Company Act of
1940,  as amended.  The  amended  complaint  also named the Funds'  counsel as a
defendant.  Defendants moved to dismiss the amended  complaint,  and, by Opinion
and Order dated March 31, 1994, the Court granted in part and denied in part the
motions to dismiss.  Additionally,  by its March 31, 1994 Opinion and Order, the
Court certified the case as a class action, and ordered plaintiffs to replead by
filing a new  complaint  reflecting  the  Court's  rulings.  On April 15,  1994,
plaintiffs  served and filed a new complaint,  which  defendants moved to strike
for not conforming to the Court's  ruling.  On August 3, 1994, the Court granted
defendants'  motion to strike the new complaint.  Plaintiffs  thereafter filed a
revised second amended complaint dated September 26, 1994.  Factual discovery in
this litigation has concluded,  although plaintiffs have made application to the
Court for  permission to conduct  additional  fact  discovery.  The parties have
conducted  expert  discovery,  the conclusion of which is subject to the Courts'
decision on a pending  matter.  The  defendants in this action  believe that the
remaining  claims are  without  merit,  although  whether or not the  plaintiffs
prevail, the Funds may be obligated to indemnify and advance litigation expenses
to certain of the defendants under the terms and conditions of various indemnity
provisions in the Funds'  Partnership  Agreements  and separate  indemnification
agreements,  and the  amount  of such  indemnification  and  expenses  could  be
material.  Fund II has advanced  amounts to the  indemnified  parties based upon
amounts which are deemed  reimbursable  in accordance  with the  indemnification
provisions and has included these amounts in Legal and Professional Fees. In the
opinion of legal counsel,  the outcome of this case is not  determinable at this
time.

     On August 9, 1994, the same two Limited  Partners as noted in the preceding
paragraph  commenced  another putative class action in the US District Court for
the District of Delaware, purportedly on behalf of all persons who owned limited
partnership  interests in the Funds on November 4, 1993,  against the Funds, the
Managing  General  Partners,  the Individual  General  Partners,  the Investment
Adviser to the Funds and certain named  affiliates  of such persons.  Plaintiffs
allege that the defendants violated certain provisions of the Investment Company
Act of 1940 and the  common  law in  connection  with the sale by certain of the
defendants  of shares of common stock of Snapple  Beverage  Corp.  in a November
1993 secondary  offering and seek actual and punitive  damages and an accounting
in connection therewith. Defendants' motion to dismiss this complaint was denied
on December 29, 1995. On August 4, 1995, while defendants' motion to dismiss the
original  complaint was pending,  plaintiffs filed an amended complaint alleging
additional  violations  of the  Investment  Company  Act of 1940 and  common law
arising out of the secondary offering. The plaintiffs moved for summary judgment
on  certain of these  claims.  On  October  13,  1995,  the  defendants  in this
litigation  each filed briefs in opposition  to  plaintiffs  motion and moved to
dismiss the amended  complaint.  By an Opinion  dated March 30, 1996,  the Court
denied  plaintiffs'  motion for partial summary  judgment.  By order of the same
date, and without  opposition by defendants,  the Court  certified the case as a
class action. Defendants also filed separate motions to dismiss, which the Court
denied  by an  order  dated  June 30,  1996.  The  parties  are now  engaged  in
discovery.  Whether or not the plaintiffs prevail, the Funds may be obligated to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity  provisions in the Funds'  Partnership
Agreements  and  separate  indemnification  agreements.  In the opinion of legal
counsel, the outcome of this case is not determinable at this time.
<PAGE>
     On November  27,  1995,  one Limited  Partner  from Fund II and one Limited
Partner  from the  Retirement  Fund filed a putative  class action in the United
States District Court for the District of Delaware, purportedly on behalf of all
persons  or  entities  who owned  Units in the Funds  between  April 5, 1991 and
November  27,  1995,  against  the Funds,  the  Managing  General  Partner,  the
Individual  General Partners,  the Investment  Adviser to the Funds, and certain
named  affiliates  of such  persons.  The  complaint  contends  that  the  Funds
improperly  advanced  legal  fees  and  litigation  costs to the  defendants  in
connection with three previously  filed lawsuits.  The plaintiffs are seeking an
accounting,   rescissory  or  actual  damages,  punitive  damages,   plaintiffs'
litigation costs and attorneys fees,  pre-judgment and  post-judgment  interest,
and an injunction barring the defendants from further  indemnifying  themselves.
The defendants in this action believe that the claims are without merit and have
moved to  dismiss  the  case.  On  December  18,  1996,  the  Court  denied  the
defendants'  motion to dismiss.  Although the defendants believe the advancement
of legal fees and litigation costs was properly made pursuant to indemnification
agreements  signed by the  defendants,  in the  opinion  of legal  counsel,  the
outcome of this case is not determinable at this time.

12.  Income Taxes (Statement of Financial Accounting Standards  No. 109)

     No  provision  for income taxes has been made because all income and losses
are  allocated to Fund II's  partners  for  inclusion  in their  respective  tax
returns.

     Pursuant  to the  Statement  of  Financial  Accounting  Standards  No.  109
Accounting  for Income Taxes,  Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial  statements.  As of December 31, 1997,  the tax basis of Fund II's
assets are greater  than the amounts  reported in the  financial  statements  by
$49.9 million. This difference is attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.

13.     Subsequent Events

     On February 2, 1998, the Individual  General  Partners  approved the fourth
quarter  1997  cash  distribution  which  represents  net  investment  income of
$372,822  from  Mezzanine  Investments,  net  investment  income of $22,982 from
Temporary  Investments and Net  Distributable  Capital proceeds from the sale of
Stanley  Furniture of $87,067  (which  includes a return of capital of $44,106).
The total amount distributed to Limited Partners was $370,314 or $1.67 per Unit,
which was paid on February 13, 1998.  The Managing  General  Partner  received a
total of $2,764  with  respect to its  interest  in Fund II and  $112,010 in MGP
Distributions.  Thomas H. Lee, as an Individual  General  Partner,  received $84
with respect to his interest in Fund II.

     Additionally,  on  February  2,  1998,  the  Independent  General  Partners
approved a cash  distribution to Limited  Partners  consisting of a repayment by
the Managing  General Partner of $328,183  representing an overpayment of an MGP
distribution  with respect to a transaction  effected  during the quarter ending
December 31, 1995, and to pay Fund II Limited Partners  interest on such amount.
This  distribution  totaling $1.67 per Unit was distributed on Febuary 13, 1998,
to Limited Partners of record at December 31, 1997.

     On January 6, 1998, Fund II sold its remaining  holdings of common stock in
Stanley Furniture Company, Inc. The common stock was sold pursuant to a Form S-3
Registration  Statement,  which was filed by Stanley on  December  22,  1997 and
declared  effective by the  Securities  and Exchange  Commission on December 23,
1997. In connection  with the sale,  Fund II sold its remaining  3,461 shares of
common stock and received net proceeds of $93,447 or $27 per share.

     On February  28,  1998,  First Alert and  Sunbeam  Corporation  ("Sunbeam")
executed a definitive  merger agreement  whereby Sunbeam will acquire all of the
outstanding  shares of First Alert Common Stock for  approximately  $175 million
($5.25 per share) by means of a tender  offer (the "Tender  Offer"),  and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, Fund II tendered all of its shares of First Alert Common Stock
and expects to receive  proceeds of  approximately  $10.8 million.  The per Unit
amount to be distributed to Fund II's Limited  Partners from this transaction is
not  determinable  at this time.  Any  distribution  of these net  Distributable
Capital  Proceeds  after  the  payment  of  expenses  and the  establishment  of
reserves,  as  provided  for  in  Fund  II's  Partnership  Agreement,   will  be
distributed  to Limited  Partners of record as of the date of the  expiration of
this Tender Offer,  which is scheduled to be on April 2, 1998, unless the Tender
Offer is extended.

     On March 19, 1998 Fund II and  Affiliates of the Thomas H. Lee Company sold
their remaining  holdings in Anchor.  Pursuant to this  transaction Fund II sold
410,677 shares of Anchor Common Stock for approximately  $1.6 Million ($4.00 per
share) and recognized a gain of $247,000.

<PAGE>
<TABLE>
<CAPTION>

                                                         SCHEDULE 1
                                               ML-LEE ACQUISITION FUND II, L.P.
                                    SUPPLEMENTARY SCHEDULE OF REALIZED GAINS AND LOSSES
                                             FOR THE YEAR ENDED DECEMBER 31, 1997
                                                   (DOLLARS IN THOUSANDS)

<S>                                                  <C>              <C>          <C>            <C>
                                                     Principal Amount/     Investment          Net           Realized
SECURITY                                             Number of Shares         Cost           Proceeds           Gain
-----------------------------                        ----------------      ----------        --------        ----------

Stanley Furniture Company Inc.
     Common Stock                                               272           $    3           $    6           $    3

Stanley Furniture Company Inc.
     Common Stock                                             6,281               79              126               47

Stanley Furniture Company Inc.
     Common Stock                                             3,460               44               87               43
                                                             ------           ------           ------           ------

TOTAL REALIZED GAIN                                                           $  126           $  219           $   93
                                                                              ======           ======           ======




</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                                                   SCHEDULE 2
                                       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                                                           ML-LEE ACQUISITION II, L.P.
                                                   FOR THE PERIOD ENDED DECEMBER 31, 1997
                                                              (DOLLARS IN THOUSANDS)
<S>                             <C>       <C>     <C>                <C>          <C>        <C>        <C>      <C>          <C>
                                                            Total
                                                          Unrealized
                                                         Appreciation
                                                        (Decpreciation)           Unrealized Appreciation/(Depreciation) For
                                  Investment     Fair   at December 31,                                                       1992
SECURITY                                Cost    Value        1997       1997      1996       1995       1994        1993    & Prior
                                   ---------   --------    ---------  --------  ---------   -------   -------     -------   -------

PUBLICLY TRADED/UNDERLYING
  SECURITY PUBLICLY TRADED:

First Alert, Inc.
  Common Stock *                   $   3,320   $  4,374  $   1,054   $ (2,573)  $(10,807)  $(12,351)  $  26,785   $    --    $  --

Hills Stores Company
  Common Stock *                      34,776      1,628    (33,148)    (1,498)    (2,019)    (5,722)        189     (24,098)    --

Playtex Products, Inc.
  Common Stock *                       5,299      3,523     (1,776)       773        172        129      (2,522)     (1,092)   764

Stanley Furniture
  Common Stock *                          43         97         54        (44)       204        (46)        (78)         18     --
                                                          --------   --------   --------   --------   ---------   --------- -------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                      $ (33,816)  $ (3,342)  $(12,450)  $(17,990)  $  24,374   $ (25,172) $ 764
                                                         ---------   --------   --------   --------   ---------   --------- -------


NON PUBLIC SECURITIES:
Fitz and Floyd
  Preferred Stock *                $  12,619   $  3,024  $  (9,596)  $     63   $ (6,614)  $ (3,025)  $     (20)  $      --  $  --

Biolease
  Common Stock*                           94         --        (94)       (94)        --         --          --          --     --
  Subordinated Notes*                    709        391       (318)      (318)        --         --          --          --     --

FLA. Orthopedics, Inc.
  Preferred  Stock*                    1,513         --     (1,513)        --         --         --      (1,513)         --     --
  Subordinated Note                       --         --         --         --      4,842     (4,842)         --          --     --

Soretox
  Subordinated Notes*                  6,631      2,590     (4,041)    (2,439)        --         --      (1,602)         --     --
                                                          --------   --------   --------    -------   ---------   --------- -------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM NON PUBLIC
  SECURITIES                                             $ (15,562)  $  (2,788) $ (1,772)  $ (7,867)  $  (3,135)  $      --  $  --
                                                         ---------   ---------  --------   --------   ---------   --------- -------


Revearsal of Unrealized Appreciation/
  (Depreciation) For Investments
   Sold prior to 1997                                           --          --    (1,502)    (4,703)   (121,593)    105,758  22,040
NET UNREALIZED APPRECIATION                              ---------   ---------  --------   --------   ---------   --------- -------
  (DEPRECIATION)                                         $ (49,378)  $  (6,130) $(15,724)  $(30,560)  $(100,354)  $  80,586 $22,804
                                                         =========   =========  ========   ========   =========    ======== =======
</TABLE>
        * Restricted Security.

<PAGE>


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

        None.


                                    PART III

Item 10.     Directors and Executive Officers of the Registrant

     The five General Partners of Fund II are responsible for the management and
administration of Fund II and have the same positions and responsibilities  with
respect  to the  Retirement  Fund.  The  General  Partners  of  Fund  II and the
Retirement Fund consist of four Individual  General  Partners:  Vernon R. Alden,
Joseph L. Bower,  Stanley H.  Feldberg  (the  "Independent  General  Partners"),
Thomas H. Lee and Mezzanine  Investments II, L.P., the Managing General Partner.
Pursuant to exemptive  orders issued by the Securities and Exchange  Commission,
each  Independent  General  Partner is not an "interested  person" of Fund II as
such term is defined in the Investment Company Act of 1940.

Individual General Partners

     The Individual  General  Partners  provide overall guidance and supervision
with respect to the operations of Fund II and perform the various duties imposed
on the directors of business development companies by the Investment Company Act
of 1940. The Individual  General Partners supervise the Managing General Partner
and must, with respect to any Mezzanine Investment transactions,  either certify
that it meets Fund II  investment  guidelines  or  specifically  approve it as a
non-Guideline  Investment  or  Bridge  Investment.   Fund  II's  investment  and
reinvestment  period  expired in December,  1993, and the only  investments  now
permitted  are  Follow  On  Investments  in  existing  portfolio  companies.  In
addition,  if a  Portfolio  Company's  performance  is in  default of a material
provision  of a  lending  agreement  or has a ratio of  operating  cash  flow to
current cash fixed charges for its four most recent fiscal quarters of less than
or equal to 1.1 to 1, the Independent  General  Partners are required to approve
any changes in the terms of or sale of such Portfolio Company.

     Messrs.  Alden,  Bower,  Feldberg and Lee have served as Individual General
Partners of Fund II and the Retirement Fund since 1989. Each Individual  General
Partner  shall hold  office  until his  removal or  withdrawal  pursuant  to the
provisions of Fund II's Partnership Agreement.

     Mr.  Alden,  age  75,  Individual   General  Partner  of  Fund  II,  ML-Lee
Acquisition  Fund, L.P. ("Lee I") and the Retirement Fund; and together with the
Fund II, the "New Funds";  and together  with Lee I, the  "Funds").  Director of
Digital Equipment  Corporation,  Intermet Corporation and Sonesta  International
Hotels Corporation. Chairman of the Japan Society of Boston, Trustee Emeritus of
the Boston  Symphony  Orchestra  and the Boston  Museum of Science and  Honorary
Consul General of the Royal Kingdom of Thailand.

     Mr. Bower,  age 59,  Individual  General Partner of the Funds.  Donald Kirk
David Professor of Business  Administration.  Harvard University Graduate School
of  Business  Administration.  Faculty  member  since  1963.  Director  of Anika
Research,  Inc.,  Brown  Group,  Inc.,  New America  High Income  Fund,  Sonesta
International  Hotels  Corporation  and The Lincoln  Foundation.  Trustee of the
DeCordova & Dana Museum and Park and the New England Conservatory of Music.

     Mr. Feldberg,  age 73, Individual General Partner of the Funds. Director of
Waban Inc. Trustee of Brandeis University.
<PAGE>
     Mr. Lee, age 54, Individual  General Partner of the Funds.  Chairman of the
Investment  Adviser of the Funds  since  1987;  Chairman  of the  Administrative
General Partner of the Investment Adviser to the new Funds since 1989;  Chairman
of the  Administrative  General  Partner of Thomas H. Lee Equity  Partners  L.P.
since 1989.  Chairman  of the  Administrative  General  Partner of Thomas H. Lee
Equity Fund III, L.P. since 1996. Founder of the Thomas H. Lee Company (the "Lee
Company") and its President since 1974. Director of Autotote Corporation, Finlay
Enterprises Inc., First Security Services  Corporation,  First Security Services
Corporation,  Signature  Brands USA,  Livent,  Inc.,  Miller Import  Corporation
Playtex Products, Inc., Sondik Supply Corporation and Vail Resorts, Inc. Trustee
of Brandeis University (Vice Chairman),  Museum of Fine Arts (Boston),  the Wang
Center for the Performing Arts, Boston's Beth Israel Hospital  (Treasurer),  NYU
Medical  Center and the  Whitney  Museum of  American  Art.  Overseer  of Boston
Symphony Orchestra and New England  Conservatory of Music,  Member of the Dean's
Council,  Faculty of Arts and Sciences and an Executive  Committee Member of the
Committee on University  and an Executive  Committee  Member of the Committee on
University Resources at Harvard University; Member of the Corporation of Belmont
Hill School.

The Investment Adviser

     The  Investment  Adviser,  pursuant to an investment  management  agreement
among  the  Investment  Adviser,  the  Thomas H. Lee  Company  and Fund II dated
November  10,  1989,  is  responsible  for the  identification,  management  and
liquidation of Mezzanine  Investments and Bridge  Investments for the Retirement
Fund. The Investment Adviser received an Investment Advisory Fee in compensation
for these services outlined in Note 7 to the Financial Statements.

     Certain  officers of the Lee Company have been  designated  as trustees and
executive officers of T. H. Lee Mezzanine II, the administrative general partner
of the Investment Adviser.

                                    Title

         Thomas H. Lee              Chairman, Trustee

         John W. Childs             President, Trustee

         Thomas R. Shepherd         Executive Vice President

         David V. Harkins           Senior Vice President, Trustee

         C. Hunter Boll             Vice President

         Scott A. Schoen            Vice President

         Wendy L. Masler            Treasurer, Clerk

        Information concerning Mr. Lee is set forth above.

     John W. Childs, age 56, is the founder of J.W. Childs Associates,  L.P. Mr.
Childs, was Managing Director of the Thomas H. Lee Company ("Lee Company"), from
1987 to 1995.  Mr.  Childs also serves as President and Trustee of Thomas H. Lee
Advisors I ("Advisors I"), the investment advisor to Fund I.

     Mr. Shepherd,  age 68, is a Managing  Director of the Thomas H. Lee Company
since 1986. Mr. Shepherd is currently a director of General Nutrition Companies,
Inc.,  Signature Brands USA Inc. and Rayovac  Corporation.  He is Executive Vice
President of Thomas H. Lee Advisors I and T.H. Lee Mezzanine II.

     Mr. Harkins,  age 57, has been a Managing Director of the Lee Company since
1986 and the Chairman of National Dentex  Corporation since 1983. Mr. Harkins is
a Senior  Vice  President  and  Trustee of  Advisors I. He also is a director of
National Dentex Corporation, Stanley Furniture Corp. and First Alert, Inc.

     Mr.  Boll,  age 42, has served as a Managing  Director  of the Lee  Company
since 1991. From 1986 to 1991 he served as a Vice President of the Lee Company.

     Mr.  Schoen,  age 39, has served as a Managing  Director of the Lee Company
since 1991.  From 1986 to 1990 he served as a Vice President of the Lee Company.
Mr.  Schoen is a Vice  President of Advisors I. Mr. Schoen is also a Director of
First Alert,  Inc.,  Signature  Brands USA Inc.  Rayovac  Corporation,  Syratech
Corporation and Anchor Advanced Products, Inc.

     Ms.  Masler,  age 44, has been Treasurer of the Lee Company since 1984. Ms.
Masler is also Treasurer and Clerk of Advisors I.
<PAGE>

The Managing General Partner

        The  Managing  General  Partner  is a  limited  partnership  in which ML
Mezzanine II Inc. is the sole general partner and the Investment  Adviser is the
limited partner. The Managing General Partner is responsible for the supervision
of the Retirement Fund's investments.

        The executive officers of ML Mezzanine II Inc. are as follows:

                                    Title

         Kevin K. Albert            Chairman and President

         Robert Aufenanger          Executive Vice President, Director

         James V. Caruso            Executive Vice President, Director

         Rosalie Y. Goldberg        Vice President, Director

         Audrey L. Bommer           Vice President, Treasurer

         Roger F. Castoral, Jr.     Vice President, Assistant Treasurer


     Kevin Albert,  age 45, a Vice President and a Managing  Director of Merrill
Lynch Investment Banking Group ("ML Investment Banking") joined Merrill Lynch in
1981. Mr. Albert works in the Equity Private  Placement Group and is involved in
structuring  and  placing  a  diversified  array of  private  equity  financings
including common stock, preferred stock, limited partnership interests and other
equity-related  securities.  Mr.  Albert is also a director ML Media  Management
Inc.  ("ML  Media"),  an affiliate of the managing  general  partner and a joint
venturer of Media Managemnt Partners,  the general partner of ML Media Partners,
L.P.; a director of ML Film  Entertainment Inc. ("ML Film"), an affiliate of the
managing  general partner of the general partner of ML Delphi Premier  Partners,
L.P.; a director of ML Opportunity  Management Inc. ("ML Opportunity"),  a joint
venturer in Media  Opportunity  Management  Partners,  the general partner of ML
Media  Opportunity  Partners,  L.P.;  a  director  of  ML  Mezzanine  Inc.  ("ML
Mezzanine"), a director of Merrill Lynch Venture Capital Inc. ("ML Venture"), an
affiliate of the managing  general  partner and general  partner of the managing
general  partner  of ML  Venture  Partners  I, L.P.  ("Venture  I"),  ML Venture
Partners II, L.P.  ("Venture  II"),  and ML Oklahoma  Venture  Partners  Limited
Partnership;  a director of Merrill Lynch R&D  Management  Inc. ("ML R&D"),  the
general  partner of the general  partner of ML  Technology  Ventures,  L.P.  Mr.
Albert also serves as an  independent  general  partner of Venture I and Venture
II.

     Robert  Aufenanger,  age  44,  a Vice  President  of  Merrill  Lynch  & Co.
Corporate Credit and a Director of the Partnership Management Department, joined
Merrill Lynch in 1980. Mr. Aufenanger is responsible for the ongoing  management
of the  operations of the  equipment,  real estate and project  related  limited
partnerships for which  subsidiaries of ML Leasing  Equipment Corp., and Merrill
Lynch,  Hubbard Inc.,  affiliates of Merrill Lynch,  are general  partners.  Mr.
Aufenanger is also a director of ML Opportunity Management Inc., MLH Real Estate
Inc., ML Film, ML Venture, ML R&D, ML Mezzanine, and ML Media.
<PAGE>
     James V.  Caruso,  age 46, a Director in the  Investment  Banking  Group of
Merrill Lynch & Co joined Merrill Lynch in 1975. Since June 1992, Mr. Caruso has
served as Manager of Merrill Lynch's Partnership  Analysis & Finance Department,
which  is  responsible  for  accounting  and  the  ongoing   administration  and
operations  of more  than 150  investment  limited  partnerships  as well as the
Merrill Lynch affiliated  entities that manage or administer such  partnerships.
He serves as a director of ML  Mezzanine,  and KECALP Inc.,  an affiliate of the
MGP and general partner.

     Rosalie Y.  Goldberg,  age 60,  serves as Vice  President of Merrill  Lynch
Private Client,  Manager of the Special  Investments  Group,  Vice President and
Director  of  ML  Mezzanine  Inc.  and  Director  of  MLL  Antiquities  and  MLL
Collectibles. Ms. Goldberg joined Merrill Lynch & Co. in 1975.

     Audrey L.  Bommer,  age 31,  serves  as Vice  President  in the  Investment
Banking  Group of ML & Co.  and  joined  the firm in 1994.  She  serves  as Vice
President  and  Treasurer  of ML Mezzanine  Inc.  and ML Mezzanine  II, Inc. Ms.
Bommer manages all accounting,  financial reporting and administrative functions
in the Merrill Lynch Partnership Analysis and Finance Department.

     Roger F. Castoral,  Jr., age 30, joined Merrill Lynch Investment Banking in
1995 and serves as Vice  President,  Assistant  Treasurer and  controller to the
funds.  Mr. Castoral is responsible for financial  reporting and fund accounting
in the Merrill Lynch Partnership  Analysis and Finance  Department and serves as
Vice President and Assistant Treasurer of ML-Mezzanine.

The Fund Administrator

     ML Fund  Administrators  Inc., a Delaware  corporation  and a subsidiary of
Merrill Lynch & Co.,  Inc., is responsible  for the provision of  administrative
services  necessary  for the  operation  of the  Funds.  The Fund  Administrator
receives Fund Administration Fees as compensation for these services as outlined
in Note 8 to the Financial Statements.

     The Fund  Administrator  is responsible  for the day-to-day  administrative
affairs of the Funds and for the management of the accounts of Limited Partners.
The Fund  Administrator  also  provides the Funds,  at the Fund  Administrator's
expense,  with office space,  facilities,  equipment and personnel  necessary to
carry out its obligations under the Administrative Services Agreement.

Item 11.   Executive Compensation

     The  information  with respect to  compensation  of the Individual  General
Partners set forth under the caption  "Management  Arrangements - the Individual
General  Partners" in the  Prospectus  pages 73 - 74 is  incorporated  herein by
reference.  Fund II paid Independent General Partners,  Mr. Alden, Mr. Bower and
Mr.  Feldberg  $78,684  collectively  for their services as Independent  General
Partners in 1997.

     The  information  with respect to the allocation and  distribution  of Fund
II's  profits  and losses to the  Managing  General  Partner set forth under the
caption  "Distributions  and Allocations - Allocations of Profits and Losses" in
the Prospectus pages 86 - 87 is incorporated  herein by reference.  The Managing
General Partner received  distributions of $3,490,271 during 1997, including MGP
Distributions  of $3,437,271 that it  distributed,  $3,265,407 to the Investment
Adviser and $171,864 to ML Mezzanine II Inc.

     The information with respect to the Investment  Advisory Fee payable to the
Investment  Adviser (and  distributions  from the Managing  General Partner) set
forth under the caption  "Management  Arrangements - Description of the Advisory
Agreement" in the Prospectus pages 74 - 75 is incorporated  herein by reference.
Pursuant  to the  Investment  Advisory  Agreement,  Fund II paid the  Investment
Adviser $759,160 with respect to 1997.

     The information with respect to the Fund  Administration  Fees and Expenses
payable  to the Fund  Administrator  set  forth  under the  caption  "Management
Arrangements  - The  Fund  Administrator"  in the  Prospectus  pages  72 - 73 is
incorporated  herein  by  reference.  Pursuant  to the  Administrative  Services
Agreement, Fund II paid the Fund Administrator a total of $743,298 in 1997.
<PAGE>
Item 12.   Security Ownership of Certain Beneficial Owners and Management

     Fund II is aware of the following persons who are beneficial owners of more
than five  percent  of its Units of  limited  partnership  interest,  based upon
Axhedules 13D and 13G filed with the  Securities  and Exchange  Commission and a
review of Fund II's records.

                                    Amount of         Percent of Units of the
 Name and Address                   Benificial        Fund Beneficially Owned
of Beneficial Owner                 Ownership            at January 1, 1998
-------------------                 ----------        ------------------------

Yale University                       20,954                      9.4%
Investment Office
230 Prospect Street
New Haven, CT  06511

Farallon Capital Partners, L.P.       21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Tinicum Partners, L.P.                21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Thomas F. Steyer                      21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Fleur E. Fairman                      21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

David I. Cohen                        21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Joseph F. Downes                      21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Jason M. Fish                         21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

William F. Mellin                     21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Meridee A. Moore                      21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111

Eric M. Ruttenberg                    21,341(1)                  10.0%
Farallon Capital Managment, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA 94111
<PAGE>
(1)  By reason of Rule  13d-5  under the  Securities  Exchange  Act of 1934,  as
     amended (the "Exchange Act"), Farallon Capital Partners, L.P., a California
     limited partnership ("FCP"), and Tinicum Partners, L.P., a New York limited
     partnership ("Tinicum"),  each may be deemed to own 21,341 Units of limited
     partnership  interest  beneficially owned at January 1, 1998 as a result of
     the  direct  ownership  by FCP of 16,722  such Units and as a result of the
     direct ownerhip by Tinicum of 4,619 such Units.  FCP and Tinicum,  however,
     consider their beneficial interest to be limited to their direct ownership.
     In addition,  by reason of Rule 13d-3 under the Exchange  Act,  each of the
     general partners of FCP and RTinicum,  Thomas F. ASteyer, Fleur E. Fairman,
     David I.  Cohen,,  Joseph F.  Downes,  Jason M. Fish,  William  F.  Mellin,
     Meridee A. Moore and Eric M. Ruttenberg,  may be deemed to own beneficailly
     the Units of limited partnship interst by FCP and Tinicum.

                              Amount of
     Name of                  Beneficial            Percent of Units
  Beneficial Owner            Ownership                 of Class
---------------------------------------------------------------------

Vernon R. Alden                50 Units                    *
Jospeh L. Bower                  None                      *
Stanley H. Feldberg            25 Units                    *
Thomas H. Lee                    None                      *

General Partnes and Officers as a Group

* Less than one percent.

     There exists no arrangement known to Fund II, the execution of which may at
a subsequent date, result in a change of control of Fund II.

Item 13.   Certain Relationships and Related Transactions

     Fund  II's  investments  generally  are  made as  co-investments  with  the
Retirement Fund's. In addition,  certain of the Mezzanine Investments and Bridge
Investments which were made by Fund II may involve  co-investments with entities
affiliated  with the  Investment  Adviser.  Such  co-investments  are  generally
prohibited  absent exemptive relief from the Securities and Exchange  Commission
(the "Commission").  As a result of these affiliations and Fund II's expectation
of engaging in such  co-investments,  Fund II together with the Retirement  Fund
and Fund I,  sought  an  exemptive  order  from  the  Commission  allowing  such
co-investments,   which  was   received  on   September   1,  1989.   Fund  II's
co-investments in Managed Companies,  and in certain cases its co-investments in
Non-Managed Companies, typically involve the entry by the Funds and other equity
security  holders into  stockholders'  agreements.  While the provisions of such
stockholders'  agreements  vary,  such  agreements may include  provisions as to
corporate  governance,  registration  rights,  rights  of  first  offer or first
refusal,  rights to participate in sales of securities to third parties,  rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.

     Thomas H. Lee  Company,  a sole  proprietorship  owned by Thomas H. Lee, an
Individual  General  Partner  of  Fund  II and an  affiliate  of the  Investment
Adviser,  typically performs certain  management  services for Managed Companies
and receives management fees in connection therewith usually pursuant to written
agreements with such companies.  Of the total of eight Managed Companies held by
the Funds at December 31, 1997, 5 paid  management fees to Thomas H. Lee Company
ranging from  $110,000 to $180,000 for the fiscal year ended  December 31, 1997.
In addition,  certain of the Managed  Companies  may have  contractual  or other
relationships pursuant to which they do business with one another.

     Merrill  Lynch,  Pierce,  Fenner  &  Smith  Incorporated  ("MLPF&S")  is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio  companies of the Funds,  which may include investment banking
services,  broker/dealer  services  and economic  forecasting,  and pension plan
services and receives in consideration  therewith various fees,  commissions and
reimbursements.  The  aggregate  revenue  received by MLPF&S and its  affiliates
during 1997 for providing such services to Managed  Companies in which the Funds
have a material interest was not in excess of $100,000.  Furthermore, MLPF&S and
its affiliates or investment companies advised by affiliates of MLPF&S may, from
time to time,  purchase or sell securities issued by portfolio  companies of the
Funds in connection with their ordinary investment operations.
<PAGE>
     During 1997, Fund II paid Managing General Partner  distributions  totaling
$3,490,271  (which  included  $3,437,271 of MGP  Distributions  and $53,000 with
respect to its  interest in Fund II). Of this MGP  Distribution  amount,  95% or
$3,265,407  was paid to the  Investment  Adviser and the  remaining 5% totalling
$171,864  was paid to ML Mezzanine  II Inc.  The  Managing  General  Partner has
earned a total of $24.9 million in MGP Distributions  none of which was deferred
in payment to the Managing  General  Partner at December 31, 1997, as a Deferred
Distribution Amount in accordance with the Partnership  Agreement.  Any Deferred
Distribution Amount is distributable to the Partners pro-rata in accordance with
their capital  contributions,  and certain  amounts  otherwise  later payable to
Limited Partners from distributable cash from operations will instead be payable
to the Managing General Partner until the Deferred  Distribution  Amount is paid
in full.

Anchor Products

     On March 19, 1998 Fund II and  Affiliates of the Thomas H. Lee Company sold
their remaining  holdings in Anchor.  Pursuant to this  transaction Fund II sold
410,677 shares of Anchor Common Stock for approximately  $1.6 Million ($4.00 per
share) and recognized a gain of $247,000.

     On April 2, 1997,  Anchor  completed a  recapitalization  pursuant to which
Anchor issued  $100,000,000  aggregate principal amount of Senior Notes due 2004
and entered into a new credit facility (the "Recapitalization").  As part of the
Recapitalization,  Anchor  repaid  substantially  all of its  outstanding  debt,
including all accrued  interest and any premiums in connection  therewith.  As a
result,  Anchor repaid the Senior Subordinated Note and Junior Subordinated Note
held by Fund II, together with all accrued interest and prepayment  premiums for
an aggregate of $14.5 million.

     Immediately prior to the Recapitalization,  Fund II owned 162,967 shares of
the common stock of Anchor  Holdings,  Inc.,  the parent of Anchor.  Immediately
after the consummation of the  Recapitalization,  Fund II exercised its warrants
to purchase  common stock (at an exercise price of $9.50 per share) and acquired
an additional  247,710  shares of common stock,  bringing its total  holdings of
common  stock to  410,677  shares.  In  connection  with  the  Recapitalization,
Holdings paid a dividend to all holders of Holdings common stock of record as of
April 2, 1997, in the amount of $19.02 per share (the "Anchor  Dividend").  As a
result of such dividend,  the Fund received $7.8 million, of which approximately
32% or $2.5 million was returned to partners as return of capital.

First Alert

     On February  28,  1998,  First Alert and  Sunbeam  Corporation  ("Sunbeam")
executed a definitive  merger agreement  whereby Sunbeam will acquire all of the
outstanding  shares of First Alert Common Stock for  approximately  $175 million
($5.25 per share) by means of a tender  offer (the "Tender  Offer"),  and assume
all of the debt of First Alert. Pursuant to the Tender Offer, which was executed
on March 6, 1998, Fund II tendered all of its shares of First Alert Common Stock
and expects to receive  proceeds of  approximately  $10.8 million.  The per Unit
amount to be distributed to Fund II's Limited  Partners from this transaction is
not  determinable  at this time.  Any  distribution  of these net  Distributable
Capital  Proceeds  after  the  payment  of  expenses  and the  establishment  of
reserves,  as  provided  for  in  Fund  II's  Partnership  Agreement,   will  be
distributed  to Limited  Partners of record as of the date of the  expiration of
this Tender Offer,  which is scheduled to be on April 2, 1998, unless the Tender
Offer is extended.

     As of  December  31,  1997,  Fund  II,  the  Retirement  Fund,  and the Lee
Affiliates hold 2,058,474,  2,281,524 and 10,081,808  shares,  respectively,  of
First Alert common stock,  representing 8.1%, 8.9% and 39.5%,  respectively,  of
its common equity.

     David V.  Harkins,  Scott A. Schoen and Anthony J. DiNovi,  officers of the
Investment Adviser to the Funds, serve as directors of First Alert.

Playtex Products, Inc.

     As of December 31, 1997,  Fund II, the Retirement  Fund, Fund I and the Lee
Affiliates  hold 343,726,  183,560,  1,406,204  and 2,249,307  shares of Playtex
Products common stock,  respectively.  Fund II, the Retirement  Fund, Fund I and
the Lee  Affiliates  own,  respectively,  .6%,  .3%, 2.6% and 4.2% of the common
equity of Playtex.

     Thomas H. Lee,  who is an  Individual  General  Partner of the Funds and an
officer of the Investment Adviser, serves as a director of Playtex.
<PAGE>

Stanley Furniture

     On  January  6, 1998 Fund II and  affiliates  of the  Thomas H Lee  Company
including  Retirement Fund and Fund I, (the "Lee Affiliates",  and together with
the Fund, the ("Selling  Stockholders")  sold their remaining holdings of common
stock in Stanley Furniture. The common stock of each of the Selling Stockholders
was sold  pursuant  to a Form S-3  Registration  Statement,  which  was filed by
Stanley on December  22,  1997 and  declared  effective  by the  Securities  and
Exchange  Commission on December 23, 1997. In connection  with the sale, Fund II
sold its  remaining  3,461  shares of common  stock and received net proceeds of
$93,447 or $27 per share.

     During February 1997, Fund II sold 272 shares of Stanley  Furniture for $24
per share and received total proceeds of $6,528 and recognized a gain of $3,105.
On June 30, 1997,  Fund II entered into a stock purchase  agreement with Stanley
Furniture  whereby  Fund II sold 6,281 shares of Stanley  Furniture  for $20 per
share.  Fund II received  total  proceeds of $125,620  and  recognized a gain of
$46,582.  On November 18, 1997,  Fund II sold 3,460 shares of Stanley  Furniture
for $25 per share.  Fund II received  total proceeds of $86,500 and recognized a
gain of $42,961.

     As of December 31, 1997,  Fund II, the Retirement  Fund, Fund I and the Lee
Affiliates held 3,461, 2,773, 400,719 and 6,248 shares, respectively, of Stanley
Furniture representing .3%, .3%, 16% and .4, respectively, of its common equity.

<PAGE>

                                     PART IV

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

         (a)  Financial Statements, Financial Statement Schedules and Exhibits

         Exhibits

 3.1     Amended and Restated Certificate     Incorporated by reference
         of Limited Partnership, dated as     to Exhibit 3.1 to
         of August 25, 1989                   registrant's Registration
                                              Statement on Form N-2
                                              number 33-25816.

 3.2     Amended and Restated Agreement of    Incorporated by reference
         Limited Partnership, dated           to Exhibit 3.2. to
         November 10, 1989 Amendment No. 1,   registrant's Annual Report
         dated January 30, 1990.              of Form 10-K for the year
                                              ending December 31, 1989.

10.1     Investment Advisory Agreement,       Incorporated by reference
         dated November 10, 1989 by and       to Exhibit 10.1 to
         between Registrant, Thomas H. Lee    registrant's Annual Report
         Advisors II, L.P. and Thomas H.      of Form 10-K for the year
         Lee Company.                         ended December 31, 1991.

10.2     Custodian Agreement, dated           Incorporated by reference
         November 10, 1989, by and between    to Exhibit 10.2 to
         Registrant and State Street Bank     registrant's Annual Report
         and Trust Company.                   of Form 10-K for the year
                                              ended December 31, 1991.

10.3     Administrative Services Agreement,   Incorporated by reference
         dated November 10, 1989 by and       to Exhibit 10.3 to
         between Registrant and ML Fund       registrant's Annual Report
         Administrators Inc.                  of Form 10-K for the year
                                              ended December 31, 1991.

27       Financial Data Schedule for the      Filed Herewith.
         year ended December 31, 1996

28       Pages 21-91 of the Prospectus        Incorporated by reference
         dated September 6,1989, filed        to Exhibit 28 to
         pursuant to  Rule 497(b) under the   registrant's Annual Report
         Securities Act of 1933.              of Form 10-K for the year
                                              ended December 31, 1991.

         (b) Forms 8-K
             None.



<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 30th day of March,
1998.


                                   ML-LEE ACQUISITION FUND
                                   (RETIREMENT ACCOUNTS) II, L.P.

                             By:   Mezzanine Investments II, L.P.
                                   Managing General Partner

                             By:   ML Mezzanine II Inc.,
                                   its General Partner



                                   /s/ Kevin K. Albert
Dated:  March 30, 1998             Kevin K. Albert
                                   President, ML Mezzanine II Inc.,
                                   General Partner of Mezzanine
                                   Investments II, L.P., the Managing
                                   General Partner




<PAGE>


      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 in the capacities indicated on the 30th day of March, 1998.


Signature                    Title


/s/ Kevin K. Albert          ML Mezzanine II Inc.
Kevin K. Albert              President and Director
                             (Principal Executive Officer of Registrant)

/s/ Vernon R. Alden          Individual General Partner
Vernon R. Alden              ML-Lee Acquisition Fund
                                (Retirement Accounts) II, L.P.

/s/ Audrey Bommer            ML Mezzanine II Inc.
Audrey Bommer                Vice President and Treasurer
                             (Principal Financial Officer of Registrant)

/s/  Joseph L. Bower         Individual General Partner
Joseph L. Bower              ML-Lee Acquisition Fund
                                (Retirement Accounts) II, L.P.

/s/ Roger F. Castoral, Jr.   ML Mezzanine II Inc.
Roger F. Castoral, Jr.       Vice President and Assistant Treasurer
                             (Principal Accounting Officer of Registrant)

/s/ Stanley H. Feldberg      Individual General Partner
Stanley H. Feldberg          ML-Lee Acquisition Fund
                               (Retirement Accounts) II, L.P.

/s/ Thomas H. Lee            Individual General Partner
Thomas H. Lee                ML-Lee Acquisition Fund
                                (Retirement Accounts) II, L.P.



<PAGE>


                                   SIGNATURES


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


                                   ML-LEE ACQUISITION FUND
                                   (RETIREMENT ACCOUNTS) II, L.P.

                             By:    Mezzanine Investments II, L.P.
                                    Managing General Partner

                             By:    ML Mezzanine II Inc.,
                                    its General Partner




Dated:  March 30, 1998              Kevin K. Albert
                                    President, ML Mezzanine II Inc.,
                                    General Partner of Mezzanine
                                    Investments II, L.P., the Managing
                                    General Partner



<PAGE>



      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 in the capacities indicated on the 30th day of March, 1998.


Signature                      Title


_____________________          ML Mezzanine II, Inc.
Kevin K. Albert                President and Director
                               (Principal Executive Officer of Registrant)

_____________________          Individual General Partner
Vernon R. Alden                ML-Lee Acquisition Fund
                                  (Retirement Accounts) II, L.P.

_____________________          ML Mezzanine II Inc.
Audrey Bommer                  Vice President and Treasurer
                               (Principal Financial Officer of Registrant)

______________________         Individual General Partner
Joseph L. Bower                ML-Lee Acquisition Fund
                                  (Retirement Accounts) II, L.P.

_____________________          ML Mezzanine II Inc.
Roger F. Castoral, Jr.         Vice President and Assistant Treasurer
                               (Principal Accounting Officer of Registrant)

_____________________          Individual General Partner
Stanley H. Feldberg            ML-Lee Acquisition Fund
                                  (Retirement Accounts) II, L.P.

_____________________          Individual General Partner
Thomas H. Lee                  ML-Lee Acquisition Fund
                                  (Retirement Accounts) II, L.P.