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, 1996

                         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 has 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, 1996,  Fund II had  outstanding a total of (at cost) $103.6
million invested in Mezzanine  Investments  representing $82 million Managed and
$21.6 million  Non-Managed  portfolio  investments.  At December 31, 1996, 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 SOLD DURING 1996

     CST Office Products Corp. ("CST")

     CST is a  provider  of stock  computer  forms  to the  resale  market.  CST
operates  several  manufacturing  plants  throughout  the  U.S.,  which  produce
business forms and related office products.  On March 22, 1996, Fund II sold its
entire investment in CST and realized a gain of $4.3 million and recognized $7.2
million of interest  income for payment in kind notes  previously  classified as
non-accrual.  Net Distributable  proceeds of $94.33 per Unit were distributed on
May 3, 1996 to Limited Partners of record as of the date of such sale.

     Ghirardelli Holdings Company ("Ghirardelli")

     Ghirardelli  is a marketer  of premium  chocolate  products.  Ghirardelli's
products are sold through a variety of  distribution  channels  including  three
company-owned  retail shops,  two of which are located in Ghirardelli  Square, a
prominent  San  Francisco  landmark.  

     On April 1, 1996,  Fund II sold its entire  investment in Ghirardelli to an
investor  group  comprised of the Chief  Executive  Officer of  Ghirardelli  and
certain  other  investors.  Fund II  realized  a gain of  $2.3  million  on this
transaction.  Net Distributable  proceeds of $42.33 per Unit were distributed on
May 3, 1996 to Limited Partners of record as of the date of such sale.


     National Tobacco Company

     National Tobacco Company is a producer of loose-leaf chewing tobacco in the
United States whose product is primarily sold under the Beech-Nut brand name. On
May 17, 1996, Fund II sold its entire investment in National Tabocco Company and
received net proceeds of $5.2  million.  Fund II realized a gain of $1.3 million
on this transaction.

     Petco Animal Supplies, Inc. ("Petco")

     Petco is a leading  retailer  of premium pet food and  supplies,  operating
more stores than any other  specialty pet food and supply retailer in the United
States. 

     On April 4, 1996, Petco filed a registration  statement with the Securities
and Exchange  Commission for an offering of 5 million shares of Common Stock. Of
the 5  million  shares  offered,  2.6  million  were  offered  by Petco  and the
remaining  shares were offered by certain current  stockholders,  including Fund
II. The offering was effected on April 30, 1996, and on this date,  Fund II sold
its entire  investment  in Petco,  which  consisted of 175,238  shares of Common
Stock. Fund II realized a gain of $2.9 million on the sale.

<PAGE>

     REVIEW OF INVESTMENTS IN MANAGED COMPANIES

     The following is a brief  description of the companies in Fund II's Managed
Company portfolio during the year ended December 31, 1996:

     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,
1996.

     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, 1996.

     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, 1996.

     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. Fund II owns 2,058,474 shares of First Alert common stock. The closing
market  price at December 31, 1996  reflects  unrealized  depreciation  of $10.8
million  for the year ended  December  31,  1996,  bringing  the  aggregate  net
unrealized appreciation through December 31, 1996 to $3.6 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.  Fund II  recorded  net  unrealized
depreciation of approximately $2.0 million on this investment for the year ended
December  31, 1996.  The closing  market  price of this  investment  reflects an
aggregate net unrealized  depreciation  of  approximately  $31.7 million through
December 31, 1996.

     Playtex Products, Inc. ("Playtex")

     Playtex  manufactures  and sells  feminine  hygiene and  nursery  products,
household  rubber  gloves,   toothbrushes  and  Jhirmack  and  LaCoupe  haircare
products. Fund II's year-end valuation of this investment reflects approximately
$172,000 of  unrealized  appreciation  recorded for the year ended  December 31,
1996 and $2.5 million of cumulative net unrealized depreciation through December
31, 1996.

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

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

     On November  13, 1996,  Stanley  Furniture  completed a public  offering of
1,000,000  shares of common stock at $16.00 per share.  Following  the offering,
Stanley  purchased  a total of  150,000  shares  from the  selling  shareholders
including Fund II at the same price per share.  Pursuant to these  transactions,
Fund II sold a total of 9,631 shares of Stanley Furniture common stock for a net
price of $15.12 per share.  Fund II received  total  proceeds  of  $145,621  and
recognized a gain of approximately $25,000.

     Based upon the closing bid price at December 31, 1996,  Fund II's valuation
of Stanley  Furniture  reflects an  aggregate  of  approximately  $98,000 in net
unrealized appreciation through December 31, 1996.

     During  February 1997,  Fund II sold an  additional  272  shares of Stanley
common stock  pursuant to the provisions of Rule 144 under the Securities Act of
1933, as amended. Total proceeds from the sale were approximately $6,528.
<PAGE>
     Cinnabon International, Inc. ("Cinnabon") (formerly Restaurants Unlimited)

     On  August  7,  1996,  Restaurants  Unlimited,  Inc sold  its full  service
restaurant  business  division  to a company  owned and  controlled  by  certain
members of the Company's  management group. As part of the agreement to sell the
restaurant  division,  the  Company  agreed to change its name from  Restaurants
Unlimited, Inc., to Cinnabon and agreed to modify the terms of its Class A and B
Preferred  Stock,  resulting  in the  buyer of the  restaurant  division  having
indirect  responsibility  for  payment of  one-third  of the  obligation  to the
preferred  stockholders.  Proceeds from the sale of approximately  $24.5 million
were used to pay down Cinnabon's then existing bank debt.

     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, 1996.

     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, 1996:

     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.  The
investment in BioLease is valued at amoritized cost at December 31, 1996.

     Fitz and Floyd Corporation ("FFSC")

     During 1996, FFSC filed a voluntary  petition for protection  under Chapter
11 of the US Bankruptcy  Code.  Fund II has  surrendered  its equity holdings in
FFSC, which resulted in a realized loss of approximately $20,000. As of December
31, 1996,  Fund II wrote down the Senior  Adjustable Rate Notes to $3.0 million,
which  resulted in  aggregate  unrealized  depreciation  of $9.7 million on this
investment. See Note 4 to the financial statements for more information.

     FLA. Orthopedics, Inc. 

     FLA.  Orthopedics,   headquartered  in  Miami,  manufactures,  markets  and
distributes  production in two major lines of business:  ergonomically  designed
safety products and orthopedic soft goods. On August 2, 1996 Fund II surrendered
its 12.5%  subordinate  note and exchanged all common equity for preferred stock
and new common stock purchase warrants.  Fund II realized a loss of $4.8 million
on the note surrendered.

     As of December 31, 1996,  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.  Fund II's year end valuation reflects total unrealized depreciation
of approximately $1.6 million through December 31, 1996.

     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  professional  fees. In the opinion
of legal council, 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
council, the outcome of this case is not determinable at this time.

     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 council,  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, 1996.
<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, 1997,  the last
effective  date of transfer  (as  described  below),  was 11,566.  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.

     Beginning  with  the  December  1994  client  account  statements,   MLPF&S
implemented   new   guidelines  for  providing   estimated   values  of  limited
partnerships and other direct investments reported on client account statements.
As a result, MLPF&S no longer reports the General Partner's estimates of limited
partnership net asset value to Unit holders. Pursuant to such MLPF&S guidelines,
estimated  values for limited  partnership  interests  originally sold by MLPF&S
(such as Fund  II's  Units)  will be  provided  two  times per year to MLPF&S by
independent  services.  These  estimated  values will be based on financial  and
other information available to the independent services on the prior August 15th
for  reporting on December  year-end  client  account  statements  and month-end
account  statements  through  May  of the  following  year,  and on  information
available to the services on March 31st for  reporting on June through  November
MLPF&S client  account  statements of the same year.  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 Fund II'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
Fund II'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  transferred  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.  Fund II's ability to make
future cash distributions is restricted.  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:                         1996               1995               1994                1993            1992
                                            -------------     --------------    ----------------    ---------------   -------------

Net Investment Income                       $  11,023,166       $ 4,146,846       $  7,816,305       $   4,967,971    $  11,835,023

Net Realized Gain on Sales of Investments       5,894,176         8,372,906         63,853,148          13,201,921        1,102,509

Net Change in (Depreciation) Appreciation  
    on Investments                            (15,723,691)      (30,559,313)      (100,354,280)         80,586,157       38,881,428

Cash Distributions to Partners   (a)           49,261,781        29,490,761        101,901,964          31,187,989       13,773,393

Net Assets                                     71,115,538       119,183,669        166,713,991         297,300,782      229,732,722

Cost of Mezzanine Investments                 103,597,216       135,797,397        144,603,700         148,865,244      150,751,778

Total Assets                                   71,678,160       120,346,488        167,805,653         299,130,035      231,416,644


PER UNIT OF LIMITED PARTNERSHIP INTEREST:

Investment Income                           $       50.33       $     32.05       $      49.88       $       52.20     $      73.49

Expenses                                           (15.11)           (19.71)            (19.70)             (29.85)          (20.25)
                                            -------------       -----------       ------------       -------------     ------------
Net Investment Income                       $       35.22       $     12.34       $      30.18       $       22.35     $      53.24
                                            =============       ===========       ============       =============     ============

Net Realized Gain on Sales of               
  Investments                               $       14.47       $     34.23       $     225.61       $       59.39     $       4.96

Net Change in (Depreciation) Appreciation
  on Investments                                   (70.73)          (137.47)           (451.45)             362.52           174.91

Cash Distributions                                 193.14 (a)        110.56             413.35              140.30            61.96

Cumulative Cash Distributions                    1,051.20            858.06             747.50              334.15           193.85

Net Asset Value                                    314.44            528.63             730.09            1,339.10         1,035.14


(a)  Includes  $25.7  million or $115.70 per limited  partnership  Unit return of capital 
     from the sale of portfolio investments during 1996.


     See Cash Distributions Schedule for additional information including return of capital.

</TABLE>

<PAGE>


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

Liquidity & Capital Resources

     As of December 31, 1996,  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.  Net  proceeds  available  for  investment  by Fund II as of
December  31, 1996 were  $137,973,085,  after  adjusting  for returns of capital
distributed to partners, volume discounts, sales commissions and organizational,
offering, sales and marketing expenses.

     At December 31, 1996,  Fund II had  outstanding  a total of $103.6  million
invested in Mezzanine Investments representing (at cost) $82 million Managed and
$21.6 million  Non-Managed  portfolio  investments.  The remaining proceeds were
invested in Temporary  Investments  primarily comprised of commercial paper with
maturities of 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 after Limited Partners
have  received  their  Priority  Return of 10% per annum.  The Managing  General
Partner is required to defer a portion of any incentive fee 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 the Deferred  Distribution  Amount is paid in
full. As of March 20, 1997, there is a Deferred  Distribution Amount owed to the
Managing General Partner of $867,350.

     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 31, 1997 the
reserve  balance was reduced to $8.9  million due to  follow-on  investments  in
Petco  Animal  Supplies,  FFSC,  Inc.,  Fine  Clothing,  Inc.,  Hills Stores and
Ghirardelli  Holdings.  Additionally  $6.29  million  of the  reserve  has  been
returned to the partners during 1995 and $1 million was returned to the partners
as part of the 1996 fourth  quarter  distribution  that was made on February 14,
1997. 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.  During 1996, the Independent General
Partners have approved an additional  follow-on investment in FFSC, Inc. of $2.4
million, which has not beed funded as of March 20, 1997.

     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 or follow-on investments.
<PAGE>
     The  proportion  of  distributions  provided by net  investment  income has
decreased  significantly  from prior years, due primarily to increased sales and
redemptions  of Mezzanine  Investments  and a resulting  decrease in  investment
income as those  holdings  cease to generate  interest  income.  Pursuant to the
terms of the  Partnership  Agreement,  all net investment  income from Mezzanine
Investments  will be  distributed  to the  Managing  General  Partner  until the
Managing  General Partner  receives an amount equal to any outstanding  Deferred
Distribution Amount. Given these circumstances, it is expected that the majority
of future cash distributions to Limited Partners will almost entirely be derived
from gains and recovered  capital from asset sales,  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  from  Temporary  Investments,
estimated to be less than one dollar per Limited  Partnership  Unit each quarter
for  the  next  few  years.   Distributions   therefore  are  expected  to  vary
significantly in amount and may not be made in every quarter.

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  and implemented  risk management
policies. Fund II subjected each prospective investment to rigorous analysis and
made only those investments that were recommended by the Investment  Adviser 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  High-Yield  Securities  held by Fund II (First  Alert,
Hills, Playtex and Stanley Furniture) 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 two years 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 three 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 period consists  primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.

     For the year ended  December 31,  1996,  Fund II had  investment  income of
$14.4 million, as compared to $8.5 million for the same period in 1995 and $12.9
million for the same period in 1994. The increase in 1996 investment income from
1995  is  due  to  the  recognition  of  interest  income  from  payment-in-kind
securities related to the sale of CST Office Products, Inc. The decrease in 1995
investment  income  from 1994 is due  primarily  to the  decline  in short  term
interest rates and the decrease in Temporary  Investments  held by Fund II after
distributions of return of capital to limited partners during 1995.

     Major  expenses for the period  consisted of Legal and  Professional  Fees,
Investment   Advisory   Fees,   Fund   Administration   Fees  and   Reimbursable
Administrative Expenses.

     Legal and Professional Fees were primarily  incurred in connection with the
litigation  proceedings  as  described in Note 11 to the  Financial  Statements.
Legal and Professional fees for the years ended December 31, 1996, 1995 and 1994
were $1.3 million, $1.7 million and $2 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
litigation proceedings described in Note 11 to the Financial Statements.

     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, 1996,  1995
and 1994 were $988,882,  $1.5 million and $1.7 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. These decreases in Investment  Advisory Fees are a direct result
of the sales of  investments,  returns of capital  distributed  to partners  and
realized losses on investments.

     The Fund  Administration Fees paid to the Fund Administrator by Fund II for
the years ended  December 31, 1996,  1995 and 1994 were  $675,250,  $798,478 and
$835,643,  respectively,  and 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. These decreases in Fund Administration Fees are a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on investments.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund  Administrator,  effective  November  10,  1993,  a portion  of the  actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is  reimbursable  to  the  Fund  Administrator.  Actual  out-of-pocket  expenses
("reimbursable  expenses") primarily consist of printing, audit, tax preparation
and custodian  fees. For the years ended December 31, 1996,  1995 and 1994, Fund
II incurred  $139,158,  $125,816 and  $275,079,  respectively,  in  reimbursable
expenses.

     For the year ended December 31, 1996, Fund II had net investment  income of
$11  million as  compared  to $4.1  million for the same period in 1995 and $7.8
million for the same period in 1994. The increase in net investment  income from
1995  to  1996 is the  result  of  additional  payment-in-kind  interest  income
recorded upon the sale of CST in the first quarter of 1996 and lower  Investment
Advisory,  Fund Administration and Legal and Professional Fees recorded in 1996.
The  decrease  in 1995 as compared to 1994 net  investment  income is  primarily
attributable  to a decrease in income from Mezzanine  Investments  and Temporary
Investments partially offset by lower expenses, primarily Legal and Professional
Fees.

Net Assets

     Fund II's net  assets  decreased  by $48.1  million  during  the year ended
December 31, 1996, due to the payment of cash distributions to partners of $49.3
million($25.7  million of the cash distributions paid was return of capital from
the sales of portfolio  investments)  and net unrealized  depreciation  of $15.7
million,  partially offset by net investment  income of $11 million and realized
gains of $5.9 million from the sales of Mezzanine Investments.
<PAGE>
Unrealized Appreciation and Depreciation on Investments

     For the year ended  December  31,  1996,  Fund II recorded  net  unrealized
depreciation  of $15.7  million  of  which  $12.5  million  was  related  to net
depreciation in market value of publicly  traded  securities held as of December
31,  1996.  The  unrealized  depreciation  can be  attributed  primarily  to the
decrease in value of First Alert and Hills Stores  Company at December 31, 1996,
as well as the  reversal of  unrealized  appreciation  of Petco upon the sale of
Petco Securities held by Fund II. This compares to a net unrealized depreciation
of $30.6 million at December 31, 1995, of which $22.7 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, 1996 totaled $43.2
million.

     For the year ended  December  31,  1994,  Fund II recorded  net  unrealized
depreciation  of $100.3  million  of which  $96.5  million  was  related  to net
unrealized  depreciation  in market  value of publicly  traded  securities.  The
decrease can be attributed primarily to the reversal of unrealized  appreciation
from the sale of Snapple Beverage Corp.

     Fund II's valuation of the common stock of First Alert, Hills,  Playtex and
Stanley Furniture reflect their closing market prices at December 31, 1996.

     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  53% 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,  Stanley Furniture and Playtex  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  pursuant to Rule 144 under the  Securities  Act of
1933 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, 1996.  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 the Supplemental  Schedule of
Unrealized Appreciation and Depreciation - Schedule 2.

Realized Gains and Losses

     For the year ended  December 31, 1996,  Fund II had net realized gains from
investments  of $5.9 million as compared to $8.4  million and $63.9  million for
the years  ended  December  31,  1995 and  1994,  respectively.  For  additional
information,  please refer to the  Supplemental  Schedule of Realized  Gains and
Losses - Schedule 1.

Cash Distributions

     On February 3, 1997, the Individual  General  Partners  approved the fourth
quarter  1996  cash  distribution  totalling  $1,833,044  which  represents  net
investment income of $603,179 from Mezzanine Investments, $84,245 from Temporary
Investments  and Net  Distributable  Capital  proceeds  from the sale of Stanley
Furniture  of  $145,620  (which  includes  a return  of  capital  of  $121,192).
Additionally,  $1 million of the  reserve  for  follow-on  investments  has been
returned to the partners.  The total amount  distributed to Limited Partners was
$1,226,250 or $5.53 per Unit,  which was paid on February 14, 1997. The Managing
General Partner  received a total of $2,764 with respect to its interest in Fund
II and  $603,754 in  incentive  distributions.  Thomas H. Lee, as an  Individual
General Partner, received $276 with respect to his interest in Fund II.
<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     9,200,200      41.49         37.42       20,744       387,598         2,074
Fourth Quarter 1995          333,445       332,618       1.50             -          752             -            75
CST Distribution
 on 5/03/96               25,825,311    20,917,206      94.33         63.04       47,165     4,856,223         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
                       -------------  ------------  ---------      --------    ---------   -----------      --------
Totals                 $ 256,969,468  $234,021,834  $1,056.73      $ 363.99    $ 566,157   $22,324,860(c)   $ 56,617
                       =============  ============  =========      ========    =========   ===========      ========

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

(b)    Incentive distribution to the Managing General Partner for exceeding the
       cumulative Priority Return on Mezzanine Investments to Limited Partners.

(c)    Subsequent to the  Distribution  paid on February 14, 1997,  there was a
       Deferred  Distribution  Amount  outstanding  of  $867,350  or $3.91 per  Limited
       Partner Unit that is payable to the Managing General  Partner.  This amount will
       be paid to the Managing General Partner from certain future  Distributable  Cash
       from Operations until the Deferred Distribution Amount is paid in full.
</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, 1996 and December 31, 1995

Statements of Operations 
    For the Years Ended  December 31, 1996, 1995 and 1994

Statements of  Changes in Net Assets
    For the Years Ended December 31, 1996, 1995 and 1994

Statements of Cash Flows 
    For the Years Ended December 31, 1996, 1995 and 1994

Statements of Changes in Partners' Capital
    For the Years Ended December 31, 1996, 1995 and 1994

Schedule of Portfolio Investments - December 31, 1996

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,  1996 and 1995,  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, 1996, 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, 1996 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  $60,380,895  at
December 31, 1996 (84.9% 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. We have reviewed the procedures used by
the Managing  General  Partner and the  Investment  Adviser in arriving at their
estimate  of value and have  inspected  underlying  documentation,  and,  in the
circumstances,  we believe the procedures  are reasonable and the  documentation
appropriate.  However,  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 20, 1997
execpt as to Note 13 which is as of March 26, 1997
<PAGE>
<TABLE>
<CAPTION>

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

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

ASSETS:
Investments - Notes 2,4,5
  Portfolio Investments at fair value
    Managed Companies (amortized cost $81,990
      at December 31, 1996 and $105,477 at December 31, 1995)                 $   51,516      $   88,955
    Non-Managed Companies (amortized cost $21,608
      at December 31, 1996 and $30,341 at December 31, 1995)                       8,865          19,340
    Temporary Investments, at amortized cost (cost $10,199
      at December 31, 1996 and $10,024 at December 31, 1995)                      10,217          10,042
Cash (of which $115 is restricted at December 31, 1996)                              125               1
Accrued Interest Receivable - Note 2                                                 951           2,005
Prepaid Expenses                                                                       4               4
                                                                              ----------      ----------
TOTAL ASSETS                                                                  $   71,678      $  120,347
                                                                              ==========      ==========

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                       $      159      $      363
    Reimbursable Administrative Expenses Payable - Note 8                             45              57
    Independent General Partners' Fees Payable - Note 9                               33              66
    Deferred Interest Income - Note 2                                                326             678
                                                                              ----------      ----------
Total Liabilities                                                                    563           1,164
                                                                              ----------      ----------

Partners' Capital - Note 2
    Individual General Partner                                                        19              29
    Managing General Partner                                                       1,368           1,932
    Limited Partners (221,745 Units)                                              69,728         117,222
                                                                              ----------      ----------
Total Partners' Capital                                                           71,115         119,183
                                                                              ----------      ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                       $   71,678      $  120,347
                                                                              ==========      ==========


                  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 Year Ended December 31,

                                                                                      1996          1995       1994
                                                                                   ---------    ---------    ---------
INVESTMENT INCOME - Notes 2,4,6:
Interest                                                                           $  13,462    $   7,523    $  11,395
Discount and Dividend Income                                                             920        1,004        1,522
                                                                                   ---------    ---------    ---------
    TOTAL INCOME                                                                      14,382        8,527       12,917
                                                                                   ---------    ---------    ---------
EXPENSES:
Investment Advisory Fee - Note 7                                                         989        1,537        1,700
Fund Administration Fee - Note 8                                                         675          798          836
Reimbursable Administrative Expenses - Note 8                                            139          126          275
Legal and Professional Fees                                                            1,345        1,651        2,051
Independent General Partners' Fees and Expenses - Note 9                                 207          263          184
Insurance Expense                                                                          4            5            5
Amortization of Deferred Organization Expenses Note 2                                     --           --           50
                                                                                   ---------    ---------    ---------
    TOTAL EXPENSES                                                                     3,359        4,380        5,101
                                                                                   ---------    ---------    ---------

NET INVESTMENT INCOME                                                                 11,023        4,147        7,816
                                                                                   ---------    ---------    ---------   
Net Realized Gain on Investments - Note 4 and Schedule 1                               5,895        8,373       63,853              
Net Change in Unrealized Depreciation                                              ---------    ---------    --------- 
  on Investments: Note 5 and Schedule 2
  Publicly Traded Securities                                                         (13,952)     (22,693)     (96,537)
  Nonpublic Securities                                                                (1,772)      (7,867)      (3,817)
                                                                                   ---------    ---------    ---------
SUBTOTAL                                                                             (15,724)     (30,560)    (100,354)
NET INCREASE (DECREASE) IN NET ASSETS                                              ---------    ---------    ---------
   RESULTING FROM OPERATIONS                                                           1,194      (18,040)     (28,685)
Less:  Incentive Fees Earned by Managing General Partner                              (5,366)      (2,162)     (14,773)
                                                                                   ---------    ---------    ---------
NET DECREASE AVAILABLE FOR PRO-RATA
  DISTRIBUTION TO ALL PARTNERS                                                     $  (4,172)   $ (20,202)   $ (43,458)
                                                                                   =========    =========    =========


               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 Year Ended December 31,

                                                         1996              1995             1994
                                                      ---------         ---------        ---------
FROM OPERATIONS:

Net Investment Income                                  $  11,023        $   4,147        $   7,816

Net Realized Gain on Investments                           5,895            8,373           63,853
 
Net Change in Unrealized  Depreciation
  From Investments                                       (15,724)         (30,560)        (100,354)
                                                       ---------         ---------        ---------

Net Increase (Decrease) in Net Assets
  Resulting from Operations                                1,194          (18,040)         (28,685)

Cash Distributions to Partners                           (49,262)         (29,491)        (101,902)
                                                       ---------        ---------        ---------

Total Decrease                                           (48,068)         (47,531)        (130,587)

NET ASSETS:

Beginning of Year                                        119,183          166,714          297,301
                                                       ---------        ---------        ---------

End of Period                                          $  71,115        $ 119,183        $ 166,714
                                                       =========        =========        =========


               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 Year December 31,
                                                                                   1996         1995         1994
                                                                                ---------    ---------    ---------
Increase  (Decrease)  in Cash and Cash  Equivalents
  CASH FLOWS  FROM  OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                       $  15,268    $   7,650    $  13,218
  Legal and Professional Fees                                                      (1,549)      (1,363)      (2,161)
  Investment Advisory Fee                                                            (989)      (1,537)      (1,700)
  Fund Administration Fee                                                            (675)        (799)        (836)
  Independent General Partners' Fees and Expenses                                    (240)        (242)        (222)
  Reimbursable Administrative Expenses                                               (151)        (156)        (187)
  (Purchase) Sale of Temporary Investments, Net                                      (175)       8,321       24,728
  Proceeds from Sales of Portfolio Company Investments                             37,901       19,256       80,364
  Purchase of Portfolio Company Investments                                            --       (1,635)     (11,358)
  Insurance Expense                                                                    (4)          (4)          (4)
  Closing Fees Received                                                                --           --           60
                                                                                ---------    ---------    ---------
    Net Cash Provided by Operating Activities                                      49,386       29,491      101,902
                                                                                ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                  (49,262)     (29,491)    (101,902)
                                                                                ---------    ---------    ---------
    Net Cash Applied to Financing Activities                                      (49,262)     (29,491)    (101,902)
                                                                                ---------    ---------    ---------
  Net Increase in Cash                                                                124           --           --
  Cash at Beginning of Year                                                             1            1            1
                                                                                ---------    ---------    ---------
   Cash at End of Year                                                          $     125    $       1    $       1
                                                                                =========    =========    =========

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


Net Investment Income                                                           $  11,023    $   4,147    $   7,816
                                                                                ---------    ---------    ---------
Adjustments to Reconcile Net Investment Income to
  Net Cash Provided by Operating Activities:
  Decrease in Investments                                                          32,015       17,569       30,370
  (Increase) Decrease in Accrued Interest,
    Dividend and Discount Receivable                                                  702         (878)         301
  Decrease in Prepaid Expenses                                                         --           --           15
  (Decrease) Increase in Legal and Professional Fees Payable                         (204)         291         (109)
  (Decrease) Increase in Reimbursable Administrative Expenses Payable                 (12)         (31)          88
  (Decrease) Increase in Independent General Partners' Fees Payable                   (33)          20          (39)
  Amortization of Deferred Organization Expenses                                       --           --           50
  Increase in Deferred Closing Fees                                                  ` --           --           60
  Decrease in Option Payable                                                           --           --         (503)
  Net Realized Gain on Sales of Investments                                         5,895        8,373       63,853
                                                                                ---------    ---------    ---------
Total Adjustments                                                                  38,363       25,344       94,086
                                                                                ---------    ---------    ---------
Net Cash Provided by Operating Activities                                       $  49,386    $  29,491    $ 101,902
                                                                                =========    =========    =========

               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
                                                                   ----------     ---------       -----------       -----------
Notes 2 and 3
For the Year Ended December 31, 1994
Partners' Capital at January 1, 1994                                $      71     $     291       $   296,939       $   297,301
Allocation of Net Investment Income                                         2         1,122             6,692             7,816
Allocation of Net Realized Gain on Investments                             14        13,812            50,027            63,853
Allocation of Net Change in Unrealized Depreciation
  From Investments                                                        (23)         (225)         (100,106)         (100,354)
Cash Distributions to Partners                                            (24)      (10,220)          (91,658)         (101,902)
                                                                    ---------     ---------       -----------       -----------
Partners' Capital at December 31, 1994                              $      40     $   4,780       $   161,894       $   166,714
                                                                    =========     =========       ===========       ===========

For the Year 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                        (7)          (69)          (30,484)          (30,560)
  From Investments       
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 Year 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
                                                                    =========     =========       ===========        ==========


                       See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                December 31, 1996
                             (DOLLARS IN THOUSANDS)
                                                                           
   Principal                                                                                                  Fair      % Of
    Amount                                                                           Investment Investment   Value      Total
Shares/Warrants         Investment                                                      Date       Cost(e)  (Note 2)   Investments
<S>               <C>                                                                <C>        <C>         <C>       <C>
                   MEZZANINE INVESTMENTS
                   MANAGED COMPANIES

                   ANCHOR ADVANCED PRODUCTS, INC. (b)
$5,867             Anchor Advanced Products, Inc., Sr. Sub. Nt.11.67% due 04/30/00(c)  04/30/90 $  5,867   $  5,867
$7,822             Anchor Advanced Products, Inc., Jr. Sub. Nt.17.5% due 04/30/00(c)   04/30/90    7,822      7,822
162,967 Shares     Anchor Holdings Inc., Common Stock (d)                              04/30/90    1,548      1,548
247,710 Warrants   Anchor Holdings Inc., Common Stock Purchase Warrants(d)             04/30/90        0          0
                     (26.1% of fully diluted common equity assuming exercise                    ------------------------------
                       of warrants) (i)                                                           15,237     15,237      21.58
                                                                                                ------------------------------  
                   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) (i)                                 ------------------------------
                                                                                                  17,144     17,144      24.28
                                                                                                ------------------------------    
                   COLE NATIONAL CORPORATION
1,341 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)(i)
                   $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) Note 5
                   First Alert, Inc., Common Stock(a)(d)                               07/31/92    3,320      6,947
                     (8.1% of fully diluted common equity) (i)
                      $ 10,198 12.5% Sub. Note
                      Purchased 07/31/92                    $10,198
                      Repaid 03/28/94                       $10,198
                      Realized Gain                         $     0                             ------------------------------  
                                                                                                   3,320      6,947       9.84
                                                                                                ------------------------------  
                  HILLS STORES COMPANY - Notes 4,5
458,432 Shares    Hills Stores Company, Common Stock(a)(d)                             04/03/90   30,246      2,750
62,616 Shares     Hills Stores Company, Common Stock(a)(d)                             08/21/95    4,530        376
                    (4.1% of fully diluted common equity) (i)                                   ------------------------------
                                                                                                  34,776      3,126       4.43
                                                                                                ------------------------------  
                  PLAYTEX PRODUCTS, INC. (b) - Note 5
343,726 Shares    Playtex Products, Inc., Common Stock(a)(d)                           03/29/90    5,299      2,750
                    (.6%  of  fully  diluted   common  equity)  (i)
                    $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      2,750      3.90
                                                                                                -----------------------------   
                  CINNABON INTERNATIONAL, INC. (formerly Restaurants Unlimited)
$6,044            Restaurants Unlimited, 11% Subordinated Note due 06/30/02(c)        06/03/94     6,044      6,044
391,302 Warrants  Restaurants Unlimited, Common Stock Warrants(d)                     06/03/94         0          0
                    (2.1% of fully diluted common equity) (i)                                   -----------------------------
                                                                                                   6,044      6,044      8.56 
                                                                                                -----------------------------  
                  STANLEY FURNITURE COMPANY, INC. (b) - Notes 4, 5
13,474 Shares     Stanley Furniture Company, Inc., Common Stock(a)(d)                 06/30/91       170        268
                    (0.4% of fully diluted common equity) (i)
                    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                                  ----------------------------
                                                                                                     170        268     0.38
                                                                                                ----------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES                                                           $ 81,990   $ 51,516    72.97
                                                                                                ============================  
               See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                December 31, 1996
                             (DOLLARS IN THOUSANDS)

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

                  BIOLEASE, INC.
$784              Biolease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94  $    676      $ 704
96.56 Shares      BioLease, Inc., Common Stock (d)                                     06/08/94        94         94
10,014 Warrants   Biotransplant, Inc., Common Stock Purchase Warrants(d)               06/08/94        14         14
                                                                                                 -----------------------------  
                                                                                                      784        812      1.15
                                                                                                 -----------------------------  
                  FITZ AND FLOYD - Notes 4,5,6
$10,281           FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g)          03/31/93    10,266      2,448
$ 2,419           FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g)          07/30/93     2,414        576
                     1,324,508 Shares Common Stock
                     Purchased Various            $  20
                     Surrendered May 1996             -
                     Realized Loss                $ (20)                                         -----------------------------  
                                                                                                   12,680      3,024      4.28
                                                                                                 -----------------------------  
                  FLA. ORTHOPEDICS, INC. - Notes 4,5
19,366 Shares     FLA. Holdings, Inc. Series B Preferred Stock (d)                     08/02/93     1,513          0
 3,822 Warrants   FLA. Holdings, Inc. Common Stock Purchase Warrants(d)                08/02/93         0          0
                     $4,842  12.5 Sub. Note
                     Purchased 8/02/93            $ 4,842
                     Surrendered 8/02/96          $     -
                     Realized Loss                $(4,842)                                       -----------------------------  
                                                                                                    1,513          0      0.00
                                                                                                 -----------------------------  
                  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      2,439
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants                      12/06/91         0          0
                                                                                                 -----------------------------  
                                                                                                    6,631      5,029      7.13
                                                                                                 -----------------------------  
                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                      $21,608      8,865     12.56
                                                                                                 =============================  

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                  Various     52,757     41,527     58.82
                   Preferred Stock, Common Stock, Warrants and Stock Rights            Various     50,841     18,854     26.71
                                                                                                 -----------------------------  

                   TOTAL MEZZANINE INVESTMENTS                                                   $103,598   $ 60,381     85.53
                                                                                                 =============================  
                   TEMPORARY INVESTMENTS

                   COMMERCIAL PAPER
$ 4,650            State Street Clipper Receivable, 5.46% due 1/02/97                 12/17/96      4,639      4,649   
$   614            Ford Motor Credit Company, 5.55% due 01/06/97                      12/20/96        612        613
$ 4,960            Ford Motor Credit Company, 5.62%, due 01/08/97                     12/24/96      4,948      4,955
                                                                                                 -----------------------------  

                   TOTAL INVESTMENT IN COMMERCIAL PAPER                                            10,199     10,217     14.47
                                                                                                 -----------------------------  

                   TOTAL TEMPORARY INVESTMENTS                                                     10,199     10,217     14.47
                                                                                                 -----------------------------  

                   TOTAL INVESTMENT PORTFOLIO                                                    $113,797   $ 70,598    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 $28 for
        Mezzanine Investments and $18 for Temporary Investments.
    (f) Inclusive of receipt of payment-in-kind securities.
    (g) Non-accrual investment status.
    (h) Non-income producing equity security.
    (i) 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, 1996

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 has 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, 1996.  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,
1996,  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, 1996 and December 31,
1995,  Fund  II had in its  portfolio  of  investments  $441,900  and  $751,907,
respectively,  of  payment-in-kind  notes which  excludes  $1.1 million and $7.6
million,  respectively,  of payment-in-kind  notes received from notes placed on
non-accrual  status.  As of December 31, 1996 and December 31, 1995, Fund II had
in its  portfolio  of  investments  $29,059 and $2.3  million  respectively,  of
payment-in-kind equity securities.

Deferred Organization Expenses

     Organization  costs of  $292,128  for Fund II were  fully  amortized  as of
November 10, 1994.

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

     On March 22,  1996,  by means of merger of Lee-CST  Holding  Corp.  with an
unaffilated  third  party,  Fund II sold its  entire  investment  in CST  Office
Products  ("CST")  for total  proceeds  of $26.5  million.  Fund II  received an
aggregate  of $21.1  million for the $6.4  million  principal  amount 12% senior
subordinated  note, the $6.4 million  principal  amount 18% junior  subordinated
note,  approximately  $7.5  million in  principal  amount of 15% payment in kind
subordinated  notes issued with respect  thereto,  plus all outstanding  accrued
interest on these notes. Additionally, Fund II received $2.6 million, or $16 per
share,  for its common  stock and $2.8  million,  or $15.99  per share,  for its
common  stock  purchase  warrants.  Fund II realized a gain of $4.3  million and
additional interest income of $7.2 million for the payment-in-kind  subordinated
notes that were previously classified as non-accrual.

     On April 4, 1996, Petco filed a registration  statement with the Securities
and Exchange  Commission for an offering of 5 million shares of Common Stock. Of
the 5  million  shares  offered,  2.6  million  were  offered  by Petco  and the
remaining  shares were offered by certain current  stockholders,  including Fund
II. The offering was effected on April 30, 1996, and on this date,  Fund II sold
its entire  investment  in Petco,  which  consisted of 175,238  shares of Common
Stock. Fund II realized a gain of $2.9 million on the sale.

     On April  1,  1996,  Fund II sold  its  entire  investment  in  Ghirardelli
Holdings  Corp.  ("Ghirardelli")  to an investor  group  comprised  of the Chief
Executive  Officer of Ghirardelli and certain other investors.  Fund II received
net proceeds from the sale of $9.6 million,  which  consisted of $4.9 million as
prepayment  for  the  13%  Subordinated  Note  (including   $77,607  of  accrued
interest), $3.2 million for the common stock (of which $114,730 is proceeds held
in escrow)  and $1.5  million  for the  preferred  stock  (including  $26,475 of
accrued dividends). The sale resulted in a realized gain of $2.3 million to Fund
II.
<PAGE>
     Operating   performance  at  Fitz  &  Floyd  Corp.  ("FFSC"),   has  fallen
substantially below plan. On March 29, 1996, FFSC filed a voluntary petition for
protection under Chapter 11 of the United States  Bankruptcy Code, and continues
operating the business as debtor-in-possession. In May 1996, Fund II surrendered
its common stock in FFSC and realized a loss of $20,000.  The Investment Adviser
is working to implement a plan of joint reorganization for FFSC.

     On May 17, 1996,  pursuant to a Redemption  and  Repurchase  Agreement with
National  Tobacco  Company,  a Non-Managed  Company in Fund II's portfolio,  and
certain existing lenders, Fund II received net proceeds of $5.2 million from the
repayment and  redemption of its investment in National  Tobacco.  In connection
with the Agreement,  National Tobacco prepaid the Subordinated  Notes,  plus all
accrued and unpaid interest,  and redeemed the partnership  interest in National
Tobacco  held by Fund II. Fund II  recognized  a gain of $1.3  million  from the
transaction.

     On August 2, 1996,  Fund II entered into a Stock  Purchase  and  Settlement
Agreement with Florida  Orthopedics Inc. and various other affiliated  entities.
In  connection  with  this  agreement,   Fund  II  (I)  surrrendered  its  12.5%
subordinated  note and, (II)  exchanged all of its common stock and common stock
purchase  warrants for the issuance of new preferred equity and new common stock
purchase  warrants.  Fund II realized a loss of $4.8 million on the subordinated
note surrendered.

     On November  13, 1996,  Stanley  Furniture  completed a public  offering of
1,000,000  shares of common stock at $16.00 per share.  Following  the offering,
Stanley  purchased  a total of  150,000  shares  from the  selling  shareholders
including Fund II at the same price per share.  Pursuant to these  transactions,
Fund II sold a total of 9,631 shares of Stanley Furniture common stock for a net
price of $15.12 per share.  Fund II received  total  proceeds  of  $145,621  and
recognized a gain of approximately $25,000.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. Following the fourth quarter
1996 Cash  Distribution  made on February  14,  1997,  the  reserve  balance was
reduced to $8.9 million due to follow-on  investments in Petco Animal  Supplies,
FFSC,  Inc.,  Fine  Clothing,  Inc.,  Hills  Stores  and  Ghirardelli  Holdings.
Additionally,  $6.29 million of the reserve was returned to the partners  during
1995 and $1 million was returned to partners on February 14, 1997.  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.  During 1996, the Independent  General  Partners
have approved an additional follow on investment in FFSC,Inc.  for $2.4 million,
which has not been funded as of March 20, 1997.

        Because  Fund II  primarily  invests  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.

        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.
<PAGE>
5.   Unrealized Appreciation and Depreciation of Investments

     For the year ended  December  31,  1996,  Fund II recorded  net  unrealized
depreciation  of $15.7  million  of  which  $12.5  million  was  related  to net
depreciation in market value of publicly  traded  securities held as of December
31,  1996.  The  unrealized  depreciation  can be  attributed  primarily  to the
decrease in value of First Alert and Hills Stores  Company at December 31, 1996,
as well as the reversal of unrealized appreciation of Petco from the sale of the
Petco securities held by Fund II. This compares to a net unrealized depreciation
of $30.6  million at December 31, 1995 of which $22.7 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, 1996 totaled $43.2
million

     For the year ended  December  31,  1994,  Fund II recorded  net  unrealized
depreciation  of $100.3  million  of which  $96.5  million  was  related  to net
unrealized depreciation in market value of publicly traded securities.

     For additional  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:

        FFSC, Inc. on January 1, 1994.
        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.  For the
years ended  December  31,  1996,  1995 and 1994,  Fund II paid  $988,882,  $1.5
million and $1.7 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 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.  In addition,  ML Mezzanine II Inc.,  an affiliate of the Fund
Administrator and of Merrill Lynch & Co. Inc., receives 5% of the benefit of any
MGP  Distributions  paid to the Managing General Partner (see Note 10). The Fund
Administration Fee is calculated and paid quarterly, in advance, by each fund in
proportion  with the net  offering  proceeds.  For the years ended  December 31,
1996, 1995 and 1994, Fund II paid $675,250, $798,478 and $835,643, respectively,
in Fund Administration Fees.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund  Administrator,  effective  November  10,  1993,  a portion  of the  actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is being reimbursed to the Fund  Administrator.  Actual  out-of-pocket  expenses
("reimbursable  expenses") primarily consist of printing, audit, tax preparation
and custodian fees. For the year ended December 31, 1996, 1995 and 1994, Fund II
incurred  $139,158,  $125,816  and  $275,079,   respectively,   in  reimbursable
expenses.

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 and
compensation for each of the Independent  General Partners is reviewed  annually
by the Individual General Partners.  For the years ended December 31, 1996, 1995
and 1994, Fund II incurred  $207,269,  $262,832 and $184,280,  respectively,  in
Independent General Partners' Fees and Expenses.
<PAGE>
10.     Related Party Transactions

     Fund  II's  investments  generally  are  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
Adviser,  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.

     During 1996, Fund II paid Managing General Partner  distributions  totaling
$6,424,293  (which included  $6,327,724 of incentive  distributions  and $96,569
with respect to its interest in Fund II). Of this incentive distribution amount,
95% or  $6,011,338  was paid to the  Investment  Adviser  and the  remaining  5%
totaling  $316,386 was paid to ML Mezzanine II Inc. The Managing General Partner
earned a total of $22.8 million in incentive  distributions,  of which  $867,350
was  deferred  in  payment  to  the  Managing  General  Partner  as  a  Deferred
Distribution Amount in accordance with the Partnership Agreement.  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 will instead be payable
to the Managing General Partner until the Deferred  Distribution  Amount is paid
in full.
<PAGE>
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  professional  fees. In the opinion
of legal council, 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
council, 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 council,  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, 1996,  the tax basis of Fund II's
assets are greater  than the amounts  reported in the  financial  statements  by
$44.1  million.  This  difference is primarily  attributable  to net  unrealized
depreciation and  appreciation on investments  which has not been recognized for
tax purposes.

13. Subsequent Events

     On February 3, 1997, the Individual  General  Partners  approved the fourth
quarter  1996  cash  distribution   totaling  $1,833,044  which  represents  net
investment income of $603,179 from Mezzanine Investments, $84,245 from Temporary
Investments  and Net  Distributable  Capital  Proceeds  from the sale of Stanley
Furniture  of  $145,620  (which  includes  a return  of  capital  of  $121,192).
Additionally,  $1 million of the  reserve  for  follow-on  investments  has been
returned to the partners.  The total amount  distributed to Limited Partners was
$1,226,250 or $5.53 per Unit,  which was paid on February 14, 1997. The Managing
General Partner  received a total of $2,764 with respect to its interest in Fund
II and  $603,754 in  incentive  distributions.  Thomas H. Lee, as an  Individual
General Partner, received $276 with respect to his interest in Fund II.

     Anchor Advanced Products, Inc. ("Anchor") is in the process of completing a
bond  financing  pursuant  to Rule 144A  under the  Securities  Act of 1933,  as
amended.  On March 26, 1997, the Investment  Adviser  informed the fund that the
pricing terms of the bond  financing had been  established.  If the financing is
completed,  the proceeds of the bond financing and related  transactions will be
used to repay substantially all of Anchor's  outstanding debt (including accrued
interest and  premiums,  if any),  and to pay a dividend on the capital stock of
Anchor   Holdings,    Inc.,   the   parent   of   Anchor   (collectively,    the
"Recapitalization"). The Fund's share of this dividend, assuming exercise of the
warrants as  discussed  below,  will be $7.8  milion.  The  Recapitalization  is
expected to be consummated  during the first week of April,  1997. In connection
with  the  Recapitalization,  the Fund  anticipates  that it will  exercise  its
warrants to purchase common stock of Anchor Holdings, Inc. at $9.50 per share.
<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, 1996
                                                         (DOLLARS IN THOUSANDS)

<S>                                                       <C>                <C>          <C>              <C>

                                                           Principle Amount/   Investment                     Realized
SECURITY                                                   Number of Shares       Cost       Net Proceeds        Gain
                                                           ----------------   ------------   ------------   ------------

CST Office Products, Inc. 
`                    Common Stock                                   162,949   $      1,304   $      2,607   $      1,303
                     Notes                                     $     12,710         12,710         12,837            127
                     Warrants                                       177,207             --          2,834          2,834


Ghirardelli Chocolate 
                     Notes                                     $      4,672          4,672          4,854            182
                     Common Stock                                   540,892          1,168          3,167          1,999
                     Preferred Stock                                 14,016          1,402          1,505            103


Petco
                     Common Stock                                   175,238          1,915          4,794          2,879


FFSC, Inc.
                     Common Stock                                 2,542,337             20              -            (20)


National Tobacco
                     Notes                                     $      3,618          3,618          4,843          1,225
                     Partnership Interest                      $        234            234            314             80


Florida Orthopedics
                     Subordinated Note                         $      4,842          4,842             --         (4,842)


Stanley Furniture
                     Common Stock                                     9,631            121            146             25


                                                                              ------------   ------------   ------------
                                                                              $     32,006   $     37,901   $      5,895
                                                                              ============   ============   ============


</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                   SCHEDULE 2
       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                         ML-LEE ACQUISITION FUND II, L.P
                     FOR THE PERIOD ENDED DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)
<S>                           <C>        <C>     <C>             <C>       <C>         <C>        <C>       <C>       <C>
                                                           Total
                                                         Unrealized
                                                        Appreciation         
                                   Investment    Fair (Depreciation)       Unrealized Appreciation/ (Depreciation) For       1991
SECURITY                               Cost      Value Dec. 31, 1996   1996       1995        1994        1993       1992   & Prior
---------------------------------  --------   --------   --------   ---------   ---------   ---------   ---------   ------  -------
PUBLICLY TRADED SECURITIES:

First Alert, Inc. 
  Common Stock *                    $ 3,320   $  6,947   $  3,627   $ (10,807)  $ (12,351)  $  26,785   $      --   $   --  $    --

Hills Stores Company
  Common Stock *                      34,776      3,126    (31,650)     (2,019)     (5,722)        189     (24,098)      --       --

Playtex Products, Inc. 
  Common Stock *                      5,299      2,750     (2,549)        172         129      (2,522)     (1,092)      --      764

Stanley
  Common Stock *                        170        268         98         204         (46)        (78)         18       --       --
                                                         --------   ---------   ---------   ---------   ---------   ------  -------
TOTAL UNREALIZED APPRECIATION                            $(30,474)  $ (12,450)  $ (17,990)  $  24,374   $ (25,172)  $   --  $   764
  (DEPRECIATION) FROM PUBLICLY                           --------   ---------   ---------   ---------   ---------   ------  -------
  TRADED SECURITIES

NON PUBLIC SECURITIES:

FFSC, Inc.
  Common Stock                      $    --   $     --     $   --   $      20   $      --   $     (20)  $      --   $   --  $    --
  Adjusted Rate Senior Note *        12,680      3,024     (9,659)     (6,634)     (3,025)         --          --       --       -- 

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

Stablex Canada Inc. 
  Subordinated Notes*                 6,631      5,029     (1,602)         --          --      (1,602)         --       --       --
                                                        
TOTAL UNREALIZED APPRECIATION                            
  (DEPRECIATION) FROM NON PUBLIC                         --------   ---------   ---------   ---------   ---------   ------  -------
   SECURITIES                                            $(12,774)  $  (1,772)  $  (7,867)  $  (3,135)  $      --   $   --  $    --
                                                         --------   ---------   ---------   ---------   ---------   ------  -------
                                      
Reversal of Unrealized
  Appreciation/(Depreciation)
  For Investments Sold
Sold in 1996

Petco
Common Stock                       $     --     $   --   $     --   $  (1,502)  $   1,951   $    (449)  $      --   $   --  $    --

Sold Prior to 1996
   Various                               --         --         --          --      (6,654)   (121,144)    105,758   38,881  (16,841)

Total Unrealized
  Appreciation/(Depreciation)                            --------   ---------   ---------   ---------   ---------   ------  -------
  for Investments sold:                                        --      (1,502)     (4,703)   (121,593)    105,758   38,881  (16,841)
                                                         --------   ---------   ---------   ---------   ---------   ------  ------- 
NET UNREALIZED APPRECIATION
  (DEPRECIATION)                                         $(43,248)  $ (15,724)  $ (30,560)  $(100,354)  $  80,586  $38,881 $(16,077)
                                                         ========   =========   =========   =========   =========  ======= ========
</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

     Fund II

     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 Fund II's  investment  in 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 74, is a director of Colgate - Palmolive  Company,  Digital
Equipment  Corporation,  Intermet  Corporation and Sonesta  International Hotels
Corporation.  Mr. Alden also serves as Chairman of the Japan  Society of Boston,
Trustee  Emeritus  of the Boston  Symphony  Orchestra  and the Boston  Museum of
Science and Honorary Counsel General of the Royal Kingdom of Thailand. Mr. Alden
has also served as an Individual  General  Partner of ML-Lee  Acquisition  Fund,
L.P. ("Fund I") since its inception in 1987.

     Mr.  Bower,  age  58,  is the  Donald  Kirk  David  Professor  of  Business
Administration   at  the  Harvard   University   Graduate   School  of  Business
Administration.  He has served as a faculty member of the University since 1963.
Mr. Bower is also a director of Anika  Research,  Inc.,  Brown Group,  Inc., New
America High Income  Fund,  Sonesta  International  Hotels  Corporation  and The
Lincoln  Foundation.  Mr. Bower serves as trustee of the DeCordova & Dana Museum
and Park and the New England Conservatory of Music. Mr. Bower has also served as
an Individual General Partner of Fund I since its inception in 1987.

     Mr. Feldberg, age 72, is director of Waban Inc. He also serves as a Trustee
of Brandeis  University.  Mr. Feldberg has also served as an Individual  General
Partner of Fund I since its inception in 1987.

<PAGE>
     Mr. Lee,  age 53,  founded the Thomas H. Lee Company in 1974 and since that
time has served as its Chief Executive  Officer.  Mr. Lee also is Chairman and a
Trustee of Thomas H. Lee Advisors I and Thomas H. Lee  Advisors  II,  L.P.,  the
respective investment advisers to Fund I and the Funds, is an Individual General
Partner of THL Equity Advisors Limited  Partnership,  the investment  adviser to
Thomas  H.  Lee  Equity   Partners,   L.P.  which   participates  in  equity  or
equity-related  investments  of certain  companies  acquired  by the  respective
funds. In addition,  Mr. Lee has also served as an Individual General Partner of
Fund I since its  inception  in 1987.  In  addition,  Mr.  Lee is an  Individual
General Partner of the Equity Advisors III Limited  Partnership,  the Investment
Advisor to Thomas H. Lee Equity Fund III, L.P.

     From 1966  through  1974,  Mr. Lee was with First  National  Bank of Boston
where he directed  the bank's high  technology  lending  group and became a Vice
President  in 1973.  Prior to 1966,  Mr.  Lee was a  Securities  Analyst  in the
institutional research department of L.F. Rothschild in New York. Mr. Lee serves
as a director of Autotote  Corporation,  Finlay Enterprises Inc., Health o meter
Products,  Inc., First Security Services Corporation,  Livent Inc, Miller Import
Corporation, Vail Resorts, Inc. and Playtex Products Inc.

     Mr. Lee is a trustee of Brandeis University (Vice Chairman), Museum of Fine
Arts  (Boston),  the Wang Center for the Performing  Arts,  Boston's Beth Israel
Hospital (Treasurer) and the Whitney Muuseum of American Art. Mr. Lee is also an
overseer of Boston Symphony  Orchestra and New England  Conservatory of Music, a
member of the Dean's Council and an Executive  Committee Member of the Committee
on University Resources at Harvard University and a 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 Fund II. 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.
<PAGE>

     John W. Childs, age 55, is the founder of J.W. Childs Associates,  L.P. Mr.
Childs,  was a Senior  Managing  Director  of the  Thomas H. Lee  Company  ("Lee
Company"), from 1987 to 1995. For the 17 years prior to joining the company, Mr.
Childs was with the  Prudential  Insurance  Company of America where he was most
recently  Senior  Managing  Director in charge of the Capital  Markets Group. In
that position he was  responsible  for  Prudential's  approximately  $77 billion
fixed income portfolio, including all of the Capital Markets Group's investments
in leveraged  acquisitions.  Mr. Child's past  positions at Prudential  include,
from 1982 to 1984,  Senior Vice  President  of  PruCaptial,  Inc.,  a Prudential
subsidiary;  from  1981  to  1982,  Vice  President,   responsible  for  private
placements of the Capital  Markets Group;  and from 1980 to 1981, Vice President
in  Corporate  Finance  of the  Capital  Markets  Group.  Mr.  Childs  serves as
President and Trustee of Thomas H. Lee Advisors I ("Advisors I"), the investment
advisor to Fund I. Mr.  Childs also serves as Chairman of the Jane Coffin Childs
Fund for medical research.

     Mr. Shepherd, age 67, has been engaged as a consultant to the Thomas H. Lee
Company  since  1986 and is  currently  a Managing  Director.  Mr.  Shepherd  is
currently  a  director  of General  Nutrition  Companies,  Inc.,  Health o meter
Products, Inc. and Rayovac Corporation. He is Executive Vice President of Thomas
H. Lee  Advisors I and T.H.  Lee  Mezzanine  II.  Previously,  Mr.  Shepherd was
Chairman  of  Amerace  Corporation  from  1986  to  1988  and  President  of GTE
(Sylvania)  Lighting  Products Group from 1983 to 1986. Mr.  Shepherd  served as
President of North American Philips Commercial Electronics Corporation from 1981
to 1983 and from 1979 to 1981,  he served as Senior Vice  President  and general
manager of GTE Entertainment Products Group.

     Mr. Harkins,  age 56, has been a Managing Director of the Lee Company since
1986 and the Chairman of National  Dentex  Corporation  since 1983. He served as
President of Massachusetts  Capital  Corporation and Masscap Investment Company,
Inc. from 1976 to 1983, and as President of First American  Investment  Company,
Inc. from 1982 to 1983.  Mr.  Harkins is a Senior Vice  President and Trustee of
Advisors I. He also is a director of Kevlin  Microwave  Corp.,  National  Dentex
Corporation, Stanley Furniture Corp. and First Alert, Inc.

     Mr.  Boll,  age 41, 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.
Prior to joining  the Lee  Company,  he worked as a  consultant  with The Boston
Consulting  Group from 1984 to 1986,  and was  Assistant  Vice  President of the
Energy and Minerals  Division of Chemical Bank from 1977 to 1982.  Mr. Boll is a
Vice President of Advisors I and a director of Stanley  Furniture  Corp.,  Petco
Animal Supplies, Inc. and Big V Supermarkets, Inc.

     Mr.  Schoen,  age 38, 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.
Prior to joining the Lee  Company he was an  Associate  in the  Private  Finance
Department  of  Goldman,  Sachs & Co.  from 1984 to 1986.  Mr.  Schoen is a Vice
President  of Advisors I. Mr.  Schoen is also a Director of First  Alert,  Inc.,
Health o meter Products,  Inc. and LaSalle Reinsurance Ltd., Rayovac Corporation
and Anchor Advanced Products, Inc.

     Ms. Masler,  age 43, has been Treasurer of the Lee Company since 1984. From
1981 to 1984 she was employed by Paine Webber Properties  Incorporated and prior
to that she was a Senior  Auditor  with  Touche  Ross & Co.  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 Fund
II'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 44, 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,
LP.; a director of ML Film  Entertainment  Inc. ("ML Film"), an affiliate of the
managing general  partner,  the general partners of Delphi Film Associates IV, V
and ML Delphi Premier  Partners,  L.P.; a director of ML Opportunity  Management
Inc.  ("ML  Opportunity"),  a joint  venture  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  43,  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 45, 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  partnership 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 the general partner.

     Rosalie Y.  Goldberg,  age 59,  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 30, joined ML Investment  Banking in 1994 and serves
as Treasurer and Chief Financial  Officer to the Funds. Ms. Bommer,  manages all
accounting,  financial  reporting  and  administrative  functions in the Merrill
Lynch  Partnership  Analysis  and  Finance  Department.  She also serves as Vice
President and Treasurer of ML Mezzanine.

     Roger F. Castoral,  Jr., age 29, 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 is also
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 each $27,492,  for their services in 1996 as  Independent  General
Partners.

     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  $6,424,295  with respect to 1996,
including Incentive Distributions of $6,327,724 that it distributed,  $6,011,338
to the Investment Adviser and $316,386 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 $988,882 with respect to 1996.

     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 $826,407 in 1996.
<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
Schedules 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 of Beneficial     Beneficial     Fund Beneficially Owned
             Owner                   Ownership        at January 1, 1997

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

Farallon Capital Partners, L.P.       20,569(1)               9.3%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Tinicum Partners, L.P.                20,569(1)               9.3%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Thomas F. Steyer                      20,569(1)               9.3%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Fleur E. Fairman                      20,569(1)               9.3%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

David I. Cohen                        20,569(1)               9.3%
Farallon Capital Management,Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Joseph F. Downes                      20,569(1)               9.3%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Jason M. Fish                         20,569(1)               9.3%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

William F. Mellin                     20,569(1)               9.3%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Meridee A. Moore                      20,569(1)               9.3%
Farallon Capital Management, Inc.
One Maritime Plaza, Suite 1325
San Francisco, CA  94111

Eric M. Ruttenberg                    20,569(1)               9.3%
Farallon Capital Management, 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
          20,569  Units of limited partnership  interest  beneficially  owned at
          January 1, 1997 as a result of the direct  ownership  by FCP of 15,950
          such Units and as a result of the direct ownership 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  Tinicum,   Thomas F. Steyer,  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
          beneficially  the Units  of limited  partnership  interest by  FCP and
          Tinicum.

                                        Amount of
              Name of                   Beneficial     Percent of Units of
         Beneficial Owner                 Ownership             Class         
------------------------------------
Vernon R. Alden                          50 Units               *
Joseph L. Bower                            None                 *
Stanley H. Feldberg                      25 Units               *
Thomas H. Lee                              None                 *

General Partners 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. 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,  1996,  six paid  management  fees to Thomas H. Lee
Company ranging from $120,000 to $270,000 for the fiscal year ended December 31,
1996. In addition,  certain of the Managed  Companies have  contractual or other
relationships pursuant to which they do business with one another.
<PAGE>
     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,   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 1996 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.

     During  1996,  the  Fund II paid  Managing  General  Partner  distributions
totaling $6,424,295,  (which included $6,327,724 of incentive  distributions and
$96,569 with respect to its interest in Fund II). Of this incentive distribution
amount,  95% or $6,011,338 was paid to the Investment  Adviser and the remaining
5% totaling  $316,386 was paid to ML  Mezzanine  II Inc.  The  Managing  General
Partner  earned a total of  $22,791,959  in Incentive Fees of which $867,350 was
deferred in payment to the Managing  General Partner as a Deferred  Distribution
Amount in accordance with the Partnership  Agreement.  To the extent not payable
to  the  Managing  General  Partner,   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 will instead be payable to the Managing
General Partner until the Deferred Distribution Amount is paid in full.

CST Office Products, Inc.

     On  March  22,  1996,  Fund II sold its  entire  investment  in CST  Office
Products, Inc. See Note 4 to the Financial Statements for further information.

First Alert

     As of  December  31,  1996,  Fund  II,  the  Retirement  Fund  and  the Lee
Affiliates hold 2,058,474,  2,281,524 and 10,102,268  shares,  respectively,  of
First Alert common stock, representing 8.1%, 8.9%, and 39.6%,  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.

Ghirardelli

     On April 1, 1996,  Fund II sold its entire  investment in Ghirardelli to an
investor  group  comprised of the Chief  Executive  Officer of  Ghirardelli  and
certain  other  investors.  See Note 4 to the Financial  Statements  for further
information.

Petco Animal Supplies, Inc.

     On April 4, 1996, Petco filed a registration  statement with the Securities
and Exchange  Commission for an offering of 5 million shares of Common Stock. Of
the 5  million  shares  offered,  2.6  million  were  offered  by Petco  and the
remaining  shares were offered by certain current  stockholders,  including Fund
II. The  offering  was  effected  on April 30,  1996 and Fund II sold its entire
investment  in Petco,  which  consisted  of 175,238  shares of Common  Stock and
received net proceeds of $4,794,457 or $27.36 per share. Fund II realized a gain
of $2,879,333 on the sale.

     C. Hunter Boll, an officer of the Investment Adviser to Fund I, Fund II and
the Retirement Fund, serves as a director of Petco.

Playtex Products, Inc.

     As of December 31, 1996,  Fund II holds  343,726  shares of common stock of
Playtex and the Retirement Fund holds 183,560 shares of Playtex common stock. In
addition,  Fund I holds  1,406,204  shares of Playtex  common  stock and the Lee
Affiliates hold 2,249,307 shares. Fund II, Retirement Fund, Fund I and the other
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 Company, Inc.

     On November  13, 1996,  Stanley  Furniture  completed a public  offering of
1,000,000 shares of its common stock at $16.00 per share. These shares were sold
by Fund II, the Retirement Fund, Fund I and the Lee Affiliates. In the offering,
Fund II, the Retirement Fund, Fund I and the Lee Affiliates,  respectively, sold
8,375,  6,710,  969,788 and 14,330 shares of Stanley  Common  Stock,  generating
proceeds  of  $126,630,  $101,455,  $14.7  million and  $216,670,  respectively.
Following the  offering,  Stanley  purchased a total of 150,000  shares from the
selling  stockholders  for the  same  net  price  per  share.  Pursuant  to this
transaction, Stanley purchased 1,256, 1,006, 145,468 and 2,529 shares of Stanley
Common  Stock from the Fund,  Fund II the  Retirement  Fund,  Fund I and the Lee
Affiliates, respectively,  generating proceeds of $18,990, $15,210, $2.2 million
and $38,238,  respectively.  As of December 31,  1996,  Fund II, the  Retirement
Fund,  Fund  I and  the  Lee  Affiliates,  respectively,  held  13,474,  10,795,
1,560,296 and 24,437 shares of Stanley Common Stock.

     During  February  1997,  Fund II, the Retirement  Fund,  Fund I and the Lee
Affiliates respectively, sold 272, 218, 31,515, and 495 shares of Stanley Common
Stock  pursuant to the  provisions of Rule 144 under the Securities Act of 1933,
as  amended,  generating  proceeds  of $6,528,  $5,232,  $756,335  and  $11,880,
respectively.

<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 of    Incorporated by reference
        Limited Partnership, dated as of       to Exhibit 3.1 to
        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 November    to Exhibit 3.2. to
        10, 1989 Amendment No. 1, dated        registrant's Annual Report
        January 30, 1990.                      of Form 10-K for the year
                                               ending December 31, 1989.

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

10.2    Custodian Agreement, dated November    Incorporated by reference
        10, 1989, by and between Registrant    to Exhibit 10.2 to
        and State Street Bank and Trust        registrant's Annual Report
        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 year   Filed herewith.
        ended December 31 1995.

28      Pages 21-91 of the Prospectus dated    Incorporated by reference
        September 6,1989, filed pursuant to    to Exhibit 28 to
        Rule 497(b) under the Securities Act   registrant's Annual Report
        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 27th day of March,
1997.

                               ML-LEE ACQUISITION FUND 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 27, 1997                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 27th day of March, 1997.

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 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 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         General Partner
Stanley H. Feldberg             ML-Lee Acquisition Fund II, L.P.

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

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

                               By:    ML Mezzanine II Inc.
                                      its General Partner




Dated:  March 27, 1997                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 27th day of March, 1997.

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 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 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 II, L.P.


____________________           Individual General Partner
Thomas H. Lee                  ML-Lee Acquisition Fund II, L.P.