UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q
             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                       For the Period Ended September 30, 1997

                         Commission File Number 0-17383

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

                 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: None.

Name on each exchange on which registered: 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 .

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


<PAGE>
                         PART I - FINANCIAL INFORMATION

                        ML-LEE ACQUISITION FUND II, L.P.

                                TABLE OF CONTENTS

Part I.  Financial Information

Item 1.  Financial Statements


Statements of Assets, Liabilities and Partners'
  Capital as of September 30, 1997 and December 31, 1996

Statements of  Operations - For the Three and Nine Months 
   Ended  September  30, 1997 and 1996

Statements of Changes in Net Assets - For the Nine Months Ended
 September 30, 1997 and 1996

Statements of Cash Flows - For the Nine Months Ended
 September 30, 1997 and 1996

Statement of Changes in Partners' Capital at September 30, 1997

Schedule of Portfolio Investments - September 30, 1997

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation and
Depreciation - Schedule 2


Item 2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations


Part II.  Other Information

<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)
<S>                                                                   <C>                       <C>
                                                                            (Unaudited)
                                                                       September 30, 1997       December 31, 1996
                                                                      --------------------      -----------------

ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
    Managed Companies (amortized cost $68,066
      at September 30, 1997 and $81,990 at December 31, 1996)                   $   36,671          $     51,516
    Non-Managed Companies (amortized cost $23,967
      at September 30, 1997 and $21,608 at December 31, 1996)                        8,439                 8,865
    Temporary Investments, at amortized cost (cost $4,434
      at September 30, 1997 and $10,199 at December 31, 1996)                        4,443                10,217
Cash (of which $115 is restricted at December 31, 1996)                                  1                   125
Accrued Interest Receivable - Note 2                                                   616                   951
Prepaid Expenses                                                                        --                     4
                                                                                ----------          ------------
TOTAL ASSETS                                                                    $   50,170          $     71,678
                                                                                ==========          ============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                         $      145          $        159
    Reimbursable Administrative Expenses Payable Note 8                                 50                    45
    Independent General Partners' Fees Payable - Note 9                                 22                    33
    Deferred Interest Income - Note 2                                                  162                   326
                                                                                ----------          ------------
Total Liabilities                                                                      379                   563
                                                                                ----------          ------------
Partners' Capital - Note 2
    Individual General Partner                                                          15                    19
    Managing General Partner                                                           289                 1,368
    Limited Partners (221,745 Units)                                                49,487                69,728
                                                                                ----------          ------------
Total Partners' Capital                                                             49,791                71,115
                                                                                ----------          ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                         $   50,170          $     71,678
                                                                                ==========          ============



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

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

<S>                                                             <C>               <C>                <C>             <C>
                                                              For the Three Months Ended             For the Nine Months Ended
                                                            -------------     -------------      -------------      -------------
                                                            September 30,     September 30,      September 30,      September 30,
                                                                1997             1996               1997                 1996
                                                            -------------     -------------      -------------      -------------
INVESTMENT INCOME - Notes 2,4,6:
Interest                                                    $         855     $       1,238      $       3,663      $      12,270
Discount and Dividend Income                                           77               204              5,746                783
                                                            -------------     -------------      -------------      -------------
    TOTAL INCOME                                                      932             1,442              9,409             13,053
                                                            -------------     -------------      -------------      -------------
EXPENSES:
Investment Advisory Fee - Note 7                                      164               238                582                756
Fund Administration Fee - Note 8                                      150               167                470                510
Legal and Professional Fees                                            --               236                 99              1,207
Reimbursable Administrative Expenses - Note 8                          50                33                129                100
Independent General Partners' Fees and Expenses - Note 9               19                20                 95                173
Insurance Expense                                                       2                 1                  4                  3
                                                            -------------     -------------      -------------      -------------
    TOTAL EXPENSES                                                    385               695              1,379              2,749
                                                            -------------     -------------      -------------      -------------

NET INVESTMENT INCOME                                                 547               747              8,030             10,304
Net Realized Gain on Investments - Note 4 and Schedule 1               --            (4,842)                50              5,890
Net Change in Unrealized Appreciation (Depreciation)
  on Investments: Note 5 and Schedule 2
  Publicly Traded Securities                                        1,125             2,875               (920)            (7,961)
  Nonpublic Securities                                               (412)            4,842             (2,788)            (1,792)
                                                            -------------     -------------      -------------      -------------
SUBTOTAL                                                              713             7,717             (3,708)            (9,753)

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS                1,260             3,622              4,372              6,441
Less: Earned Incentive Distribution to
   Managing General Partner                                           (80)               --             (2,834)            (5,366)
                                                            -------------     -------------      -------------      -------------
NET INCREASE AVAILABLE FOR PRO-RATA
  DISTRIBUTION TO ALL PARTNERS                              $       1,180     $       3,622      $       1,538      $       1,075
                                                            =============     =============      =============      =============


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)
                                  (UNAUDITED)

<S>                                                         <C>                       <C>
                                                                  For the Nine Months Ended
                                                            --------------------------------------
                                                            September 30,             September 30,
                                                                1997                      1996
                                                            ------------              ------------

FROM OPERATIONS:

Net Investment Income                                       $      8,030              $     10,304

Net Realized Gain on Investments                                      50                     5,890

Net Change in Unrealized  Depreciation From Investments           (3,708)                   (9,753)
                                                            ------------              ------------
Net Increase in Net Assets Resulting from Operations               4,372                     6,441

Cash Distributions to Partners                                   (25,696)                  (48,829)
                                                            ------------              ------------
Total Decrease                                                   (21,324)                  (42,388)

NET ASSETS:

Beginning of Year                                                 71,115                   119,183
                                                           -------------              ------------
End of Period                                              $      49,791              $     76,795
                                                           =============              ============



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

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

<S>                                                                             <C>                     <C>
                                                                         For the Nine Months Ended
                                                                      --------------------------------
                                                                      September 30,      September 30,
                                                                          1997               1996
                                                                      -------------      -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                             $       8,746      $      13,890
  Legal and Professional Fees                                                  (108)            (1,394)
  Investment Advisory Fee                                                      (582)              (756)
  Fund Administration Fee                                                      (471)              (510)
  Independent General Partners' Fees and Expenses                              (107)              (202)
  Reimbursable Administrative Expenses                                         (124)              (124)
  (Purchase) Sale of Temporary Investments, Net                               5,766               (261)
  Follow On Investment                                                       (2,420)                --
  Proceeds from Sales of Portfolio Company Investments                       14,872             38,319
                                                                      -------------      -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                    25,572             48,962
                                                                      -------------      -------------
CASH FLOWS APPLIED TO FINANCING ACTIVITIES:
  Cash Distributions to Partners                                            (25,696)           (48,829)
                                                                      -------------      -------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                    (25,696)           (48,829)
                                                                      -------------      -------------
  Net Increase in Cash                                                         (124)               133
  Cash at Beginning of Year                                                     125                  1
                                                                      -------------      -------------
CASH AT END OF PERIOD                                                 $           1      $         134
                                                                      =============      =============

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

Net Investment Income                                                 $       8,030      $      10,304
                                                                      -------------      -------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  Decrease in Investments                                                    18,172             32,167
  (Increase) Decrease in Accrued Interest,
    Dividend and Discount Receivable                                           (664)               838
  Decrease in Prepaid Expenses                                                    4                  4
  Decrease in Legal and Professional Fees Payable                               (14)              (188)
  (Decrease) Increase in Reimbursable Administrative Expenses Payable             5                (24)
  Decrease in Independent General Partners' Fees Payable                        (11)               (29)
  Net Realized Gain on Sales of Investments                                      50              5,890
                                                                      -------------      -------------
TOTAL ADJUSTMENTS                                                            17,542             38,658
                                                                      -------------      -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                             $      25,572      $      48,962
                                                                      =============      =============

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

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

For the Three Months Ended September 30, 1997
Partners' Capital at January 1, 1997                             $       19      $    1,368      $   69,728      $   71,115
Allocation of Net Investment Income                                       2           2,337           5,691           8,030
Allocation of Net Realized Gain on Investments                           --              --              50              50
Allocation of Net Change in Unrealized
  Depreciation From Investments                                          (1)             (8)         (3,699)         (3,708)
Cash Distributions to Partners                                           (5)         (3,408)        (22,283)        (25,696)
                                                                 ----------      ----------      ----------      ----------
Partners' Capital at September 30, 1997                          $       15      $      289      $   49,487      $   49,791
                                                                 ==========      ==========      ==========      ==========


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


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                               September 30, 1997
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

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

                   ANCHOR ADVANCED PRODUCTS, INC. (b) - Note 4
410,677 Shares     Anchor Holdings Inc., Common Stock (d)                              04/30/90  $  1,396   $  1,396 
                   $5,867  11.67 Sr. Sub. Note
                   $7,822  17.50 Jr. Sub. Note
                   Purchased 4/30/90                      $13,689 
                   Repaid 4/02/97                         $13,689
                   Realized Gain                          $     -
                   162,967 Shares Common Stock
                   Purchased 4/30/90                      $ 1,548
                   Excersise 247,710 Warrants 4/2/97      $ 2,354  
                   Return of Capital Proceeds
                     from the Anchor Dividend             $(2,506)
                   Cost Basis of Equity                   $ 1,396                                ------------------------------
                                                                                                    1,396      1,396       2.82
                                                                                                 ------------------------------

                   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)                                        ------------------------------
                                                                                                   17,144     17,144      34.60
                                                                                                 ------------------------------ 

                   CINNABON INTERNATIONAL, INC.
                   (formerly Restaurants Unlimited)
$6,044             Cinnabon, 11% Subordinated Note due 06/30/02(c)                     06/03/94     6,044      6,044
391,302 Warrants   Cinnabon, Common Stock Warrants(d)  06/03/94                        06/03/94         0          0
                    (2.1% of fully diluted common equity)                                         ------------------------------
                                                                                                    6,044      6,044      12.20
                                                                                                 ------------------------------

                   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)
                   $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      6,175
                     (8.1% of fully diluted common equity)
                      $ 10,198 12.5% Sub. Note
                      Purchased 07/31/92                  $10,198
                      Repaid 03/28/94                     $10,198
                      Realized Gain                       $     0
                                                                                                 ------------------------------
                                                                                                    3,320      6,175      12.46
                                                                                                 ------------------------------ 

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


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                             September 30, 1997
                           (DOLLARS IN THOUSANDS)
                                (UNAUDITED)

Principal                                                                                                   Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
    <S>              <C>                                                                 <C>        <C>         <C>       <C>
                  HILLS STORES COMPANY - Note 5
458,432 Shares    Hills Stores Company, Common Stock(a)(d)                            04/03/90   $ 30,246    $ 1,977
62,616 Shares     Hills Stores Company, Common Stock(a)(h)                            08/21/95      4,530        270
                   (4.1% of fully diluted common equity)                                         --------------------------------
                                                                                                   34,776      2,247         4.53
                                                                                                 -------------------------------- 

                  PLAYTEX PRODUCTS, INC. (b) - Note 5
343,726 Shares    Playtex Products, Inc., Common Stock(a)(d)                          03/29/90      5,299      3,480
                    (.6% of fully diluted common equity)
                    $7,333 15% Subordinated Note
                    Purchased 03/29/90                      $7,333
                    Sold 09/28/90                           $7,349
                    Realized Gain                           $   16
                    84,870 Shares Common Stock
                    Purchased 03/29/90                      $  282
                    Sold 12/20/91                           $  328
                    Realized Gain                           $   46
                    $7,334 15% Subordinated Note
                    Purchased 03/29/90                      $7,334
                    Sold 02/01/93                           $7,327
                    Realized Loss                           $   (7)
                    Total Net Realized Gain                 $   55
                                                                                                 --------------------------------
                                                                                                    5,299      3,480         7.02
                                                                                                 --------------------------------
                  STANLEY FURNITURE COMPANY, INC. (b) - Notes 4,5,13
6,921 Shares      Stanley Furniture Company, Inc., Common Stock(a)(d)                 06/30/91         87        185 
                    (.3% of the fully diluted common equity)
                    9,631 Shares Common Stock
                    Purchased 6/30/91                      $  121
                    Sold 8,375 Shares 11/13/96             $  127
                    Sold 1,256 Shares 12/13/96             $   19
                    Realized Gain                          $   25
                    Purchased 272 Shares 6/30/91           $    4
                    Sold 2/7/97                            $    7
                    Realized Gain                          $    3
                    Purchased 6,281 Shares 6/30/91         $   79
                    Sold 6/30/97                           $  126
                    Realized Gain                          $   47
                    Total Net Realized Gain                $   75
                                                                                                 --------------------------------
                                                                                                       87        185         0.37
                                                                                                 --------------------------------
                  TOTAL INVESTMENT IN MANAGED COMPANIES                                          $ 68,066   $ 36,671        74.00
                                                                                                 ================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                             September 30, 1997
                           (DOLLARS IN THOUSANDS)
                                (UNAUDITED)

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

                  NON-MANAGED COMPANIES

                  BIOLEASE, INC.- Note 5
$784              BioLease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94   $   676     $  392
96.56 Shares      BioLease, Inc., Common Stock (d)                                     06/08/94        94          0
10,014 Warrants   Biotransplant, Inc., Common Stock Purchase Warrants(d)               06/08/94        14         14
                                                                                                  -------------------------------
                                                                                                      784        406          .82
                                                                                                  -------------------------------

                  FITZ AND FLOYD -Notes 4,5
$2,420            Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (c)                        04/15/97     2,420      2,420
 8,470 Shares     Fitz and Floyd, Series A Preferred Stock (d)                         04/15/97    12,619      3,023
51,425 Shares     Fitz and Floyd, Common Stock (d)                                     04/15/97         0          0
                   1,324,508 Shares Common Stock
                   Purchased various                      $    20   
                   Surrendered May 1996                   $     -                                  
                   Realized Loss                          $   (20)
                   $10,281  Sr. Sub. Note
                   $2,419  Sr. Sub. Note
                   Purchased various                      $12,679
                   Exchanged 04/11/97
                   8,470 Sh Series A Preferred Stock and       
                   51,245 Shares Common Stock             $12,679
                   Realized Gain                          $     0
                   Total Realized Loss                    $   (20)                                -------------------------------   
                                                                                                   15,039      5,443        10.99
                                                                                                  -------------------------------

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

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


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                              September 30, 1997
                           (DOLLARS IN THOUSANDS)
                                (UNAUDITED)

 Principal                                                                                                  Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
<S>                <C>                                                                  <C>        <C>         <C>       <C>
                  SORETOX - Notes 5,6
$3,503            Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g)            06/29/95  $  3,503     $ 2,590
$3,128            Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g)        06/29/95     3,128           0 
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants                     06/29/95         0           0
                                                                                                -----------------------------  
                                                                                                   6,631       2,590     5.22
                                                                                                -----------------------------
                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                    $ 23,967     $ 8,439    17.03
                                                                                                =============================

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                 Various     28,808      24,483    49.40
                   Preferred Stock, Common Stock, Warrants and Stock Rights           Various     63,225      20,627    41.63
                                                                                                -----------------------------
                   TOTAL MEZZANINE INVESTMENTS                                                  $ 92,033     $45,110    91.03
                                                                                                =============================

                  TEMPORARY INVESTMENTS

                  COMMERCIAL PAPER
$ 4,126           Ford Motor Credit Corp. 5.47% due 10/01/97                          09/19/97     4,117       4,126
$   317           Ford Motor Credit Corp. 5.57% due 10/01/97                          09/25/97       317         317
                                                                                                -----------------------------
                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                             4,434       4,443     8.97
                                                                                                -----------------------------   
                  TOTAL TEMPORARY INVESTMENTS                                                   $  4,434    $  4,443     8.97
                                                                                                -----------------------------
                  TOTAL INVESTMENT PORTFOLIO                                                    $ 96,467    $ 49,553   100.00%
                                                                                                =============================   


(a)     Publicly traded class of securities.
(b)     Represents investment in affiliates as defined in the Investment Company Act of 1940.
(c)     Restricted security.
(d)     Restricted non-income producing equity security.
(e)     Represents original cost and excludes accretion of discount of $33 for Mezzanine Investments
        and $9 for Temporary Investments.
(f)     Inclusive of receipt of payment-in-kind securities.
(g)     Non-accrual investment status.
(h)     Non-income producing equity security.

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


<PAGE>

                               ML-LEE ACQUISITION FUND II, L.P.
                                NOTES TO FINANCIAL STATEMENTS
                                     September 30, 1997
                                         (UNAUDITED)


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";  together with Fund II 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.

     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.

     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 such extension 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.

     Temporary  Investments  with  maturities of less than 60 days are stated at
amortized cost, which approximates market.
<PAGE>

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1997.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time, and because  investments of companies  whose equity is
publicly  traded are valued at the last price at September 30, 1997, the current
estimated fair value of these investments may have changed  significantly  since
that point in time.

Interest Receivable on Investments

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by Fund II's portfolio  companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal  amounts of such securities.  As of September 30, 1997, Fund II had in
its portfolio of investments  $441,900 of payment-in-kind  notes, which excludes
$1.8 million of payment-in-kind  notes received from notes placed on non-accrual
status and $29,059 of payment-in-kind equity.

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.

Interim Financial Statements

     The financial  information  included in this interim report as of September
30, 1997 and for the period then ended has been prepared by  management  without
an audit by independent certified public accountants. The results for the period
ended  September 30, 1997 are not  necessarily  indicative of the results of the
operations  expected for the year and reflect  adjustments,  all of a normal and
recurring  nature,  necessary  for the fair  presentation  of the results of the
interim period.  In the opinion of Mezzanine  Investments II, L.P., the Managing
General  Partner of Fund II,  all  necessary  adjustments  have been made to the
aforementioned  financial information for a fair presentation in accordance with
generally accepted accounting principles.
<PAGE>
3.  Allocations of Profits and Losses

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

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

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

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

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

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

4.  Investment Transactions

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

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

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

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

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of November 14, 1997, the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores,  Ghirardelli
Holdings  and  Anchor  Advanced  Products.  Additionally,  $8.29  million of the
reserve has been  returned to the  partners.  The level of the reserve was based
upon an analysis  of  potential  follow-on  investments  in  specific  portfolio
companies  that may become  necessary to protect or enhance  Fund II's  existing
investment.

     Because  Fund  II  primarily   invested  in  high-yield  private  placement
securities,  the risk of loss upon  default  by an issuer is  greater  than with
investment  grade  securities  because   high-yield   securities  are  generally
unsecured and are often  subordinated  to other  creditors of the issuer.  Also,
high-yield  issuers  usually  have higher  levels of  indebtedness  and are more
sensitive to adverse economic conditions.

     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  nine  months  ended  September  30,  1997,  Fund II  recorded  net
unrealized depreciation of $3,707,926 as compared to net unrealized depreciation
of $9,752,935  for the same period in 1996. As of September 30, 1997,  Fund II's
cumulative net unrealized depreciation on investments totaled $46,954,876.

     For the three  months  ended  September  30,  1997,  Fund II  recorded  net
unrealized  appreciation of $713,280 as compared to net unrealized  appreciation
of  $7,716,095  recorded  for the  comparable  period  in 1996.  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 notes have
been on non-accrual status since the date indicated:

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

7.  Investment Advisory Fee

     The  Investment  Adviser  provides  the   identification,   management  and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds,  the Investment  Adviser  receives a quarterly fee at the
annual rate of 1% of assets under  management (net offering  proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1.2  million  for Fund II and the  Retirement  Fund on a  combined  basis.  The
Investment  Advisory  Fee is  calculated  and paid  quarterly,  in  advance.  In
addition,  the  Investment  Adviser  receives  95% of  the  benefit  of any  MGP
Distributions  paid to the Managing  General Partner (see Note 10). For the nine
months ended  September  30, 1997 and 1996,  Fund II paid $582,001 and $756,219,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II, L.P. For
the three months ended  September  30, 1997 and 1996,  Fund II paid $164,431 and
$237,985, respectively, in Investment Advisory Fees.

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 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 nine months ended September
30, 1997 and 1996,  Fund II paid  $470,514 and $509,713,  respectively,  in Fund
Administration  Fees.  For the three months ended  September  30, 1997 and 1996,
Fund II paid $150,185 and $166,734, 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, audits, tax preparation
and custodian  fees. For the nine months ended September 30, 1997 and 1996, Fund
II incurred $129,074 and $99,847,  respectively,  in reimbursable  expenses. For
the three months ended September 30, 1997 and 1996, Fund II incurred $50,281 and
$33,000, respectively, in reimbursable expenses.

     Beginning in November 1997, the Fund  Administration Fee will be calculated
at an  annual  amount  of  $400,000  for  Fund II and the  Retirement  Fund on a
combined basis, plus 100% of all reimbursable expenses incurred by the Fund.
     
9. Independent General Partners' Fees and Expenses

     As compensation for their services,  each Independent  General Partner will
receive a combined annual fee of $40,000  (payable  quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus  reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed  annually.  For the nine
months ended September 30, 1997 and 1996,  Independent General Partners Fees and
Expenses for Fund II totalled $95,695 and $172,591,  respectively. For the three
months ended September 30, 1997, Fund II incurred $19,302 in Independent General
Partners Fees and Expenses as compared to $19,480 for the same period in 1996.
<PAGE>

10. Related Party Transactions

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

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

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

     During the nine month period ending  September  30, 1997,  Fund II paid the
Individual  General Partner  distributions  totaling $5,024 and Managing General
Partner   distributions   totaling  $3,407,508  (which  includes  $3,357,265  of
incentive  fees).  As of September 30, 1997,  the Managing  General  Partner has
earned a total of $24.8 million in MGP Incentive Fees, none of which is deferred
in payment to the Managing  General  Partner as a Deferred  Distribution  amount
(the "Deferred  Distribution",) at this time, in accordance with the Partnership
Agreement.  To the  extent not  payable to the  Managing  General  Partner,  any
Deferred Distribution is distributed to the Partners pro-rata in accordance with
their capital  contributions,  and certain  amounts  otherwise  later payable to
Partners from distributable cash from operations would instead be payable solely
to the Managing General Partner until the Deferred  Distribution  amount is paid
in full.
<PAGE>
    
11. Litigation

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

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

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 attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.

13. Subsequent Events

     On November 3, 1997, the  Individual  General  Partners  approved the Third
Quarter 1997 cash distribution totalling $1,304,854 which consisted of Return of
the Reserve for Follow-On  Investments  of $1,000,000,  Distributable  Cash from
Temporary   Investments  of  $39,959  and  Distributable   Cash  from  Mezzanine
Investments of $264,895.  The total amount to be distributed to Limited Partners
is  $1,221,815  or $5.51 per Unit.  The  Managing  General  Partner will receive
$2,757,  in  proportion  to  its  capital  contribution  and  $80,006  as an MGP
distribution. Thomas H. Lee, as an Individual General Partner, will receive $276
which represents his interest in Fund II. This cash distribution will be paid on
November 14, 1997.

     On November 11, 1997, Stanley Furniture Company announced the repurchase of
a total of 413,201 shares of its Common Stock from Fund II and affiliates of the
Thomas H. Lee Company,  including the Retirement Fund and the ML Lee Acquisition
Fund, L.P. for $25 per share.  As a result,  Fund II is expected to sell a total
of 3,460 shares and receive  proceeds of $86,500.  Fund II will continue to hold
3,461 shares subsequent to this repurchase.  Net Distributable Proceeds from the
sale will be distributed  to Limited  Partners of record as of the closing date,
which is expected to be in November 1997.
<PAGE>
<TABLE>
<CAPTION>
                                             SCHEDULE 1
                                  ML-LEE ACQUISITION FUND II, L.P.
                        SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
                              FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1997
                                      (DOLLARS IN THOUSANDS)
                                            (UNAUDITED)

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

                                                                 Par Value or       Original                          Realized
SECURITY                                                       Number of Shares         Cost      Net Proceeds            Gain
-----------------------------------------------                ----------------   ----------      ------------      ----------

For the 3 Months Ended March 31, 1997
-----------------------------------------------

Stanley Furniture
     Common Stock                                                           272   $        4        $        7      $        3
-----------------------------------------------                                   ----------       -----------      ----------
Total for the 3 Months Ended March 31, 1997                                                4                 7               3
-----------------------------------------------                                   ----------       -----------      ----------
For the 3 Months Ended June 30, 1997

Stanley Furniture
     Common Stock                                                         6,281           79               126              47
-----------------------------------------------                                   ----------       -----------      ----------
Total for the 3 Months Ended June 30, 1997                                                79               126              47
-----------------------------------------------                                   ----------       -----------      ----------
Total for the 9 Months Ended September 30, 1997                                   $       83       $       133      $       50
===============================================                                   ==========       ===========      ==========   






</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                   SCHEDULE 2
                                         ML-LEE ACQUISITION FUND II, L.P.
                           SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                                        FOR THE PERIOD ENDED SEPTEMBER 30, 1997
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

<S>                                    <C>        <C>       <C>               <C>               <C>               <C>
                                                                       Unrealized     Unrealized      
                                                                      Appreciation/  Appreciation/    Total             Total 
                                                                     (Depreciation) (Depreciation)  Unrealized       Unrealized
                                                                     for the Three  for the Nine  Appreciation/     Appreciation/
                                                  Investment    Fair  months ended   months ended (Depreciation)at (Depreciation) at
SECURITY                                                Cost   Value  September 30,  September 30,  December 31,    September 30,
                                                                           1997           1997          1996             1997
------------------------------------------------------------------------------------------------------------------------------------
PUBLICLY TRADED SECRITIES

First Alert
  Common Stock*                                   $  3,320   $  6,175      $  386      $   (772)     $  3,627      $  2,855

Hills Stores
  Common Stock*                                     34,776      2,247         456          (879)      (31,650)      (32,529)

Playtex
  Common Stock*                                      5,299      3,480         258           730        (2,549)       (1,819)

Stanley
  Common Stock*                                         87        185          25             1            98            99
                                                                           ------      --------      --------      --------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                                        $1,125      $   (920)     $(30,474)     $(31,394)
                                                                           ------      --------      --------      --------
NON PUBLIC SECURITIES:

Biolease
  Common Stock*                                   $     94   $     --      $  (94)     $    (94)     $     --      $    (94)
  Subordinated Notes*                                  676        392        (318)         (318)           --          (318)

Fitz and Floyd
  Common Stock*                                     12,619      3,024          --            63        (9,659)       (9,596)

FLA. Orthopedics, Inc. 
  Preferred Stock*                                   1,513         --          --            --        (1,513)       (1,513)

Sortex 
  Subordinated Notes*                                6,631      2,590          --        (2,439)       (1,602)       (4,041)
                                                                           ------      --------      --------     ---------
TOTAL UNREALIZED DEPRECIATION 
  FROM NON PUBLIC SECURITIES                                               $ (412)     $ (2,788)     $(12,774)    $ (15,562)
                                                                           ------      --------      --------     ---------
TOTAL NET UNREALIZED APPRECIATION
  (DEPRECIATION)                                                           $  713      $ (3,708)     $(43,248)    $ (46,956)
                                                                           ======      ========      ========     =========


* Restricted Securities



</TABLE>
<PAGE>



     Item 2.  Management's  Discussion  and Analysis of Financial  Condition and
              Results of Operations

Liquidity & Capital Resources

     As of September 30, 1997, Fund II had a total of $92.0 million  invested in
Mezzanine  Investments  representing  $68.0  million  Managed and $24.0  million
Non-Managed  portfolio  investments.  These  investments  were  financed  by net
offering  proceeds and debt financing.  This represents a $11.6 million decrease
versus the total  invested in  Mezzanine  Investments  at  December  31, 1996 of
$103.6  million.  The decrease in  investments is due primarily to the sales and
redemptions of Portfolio Investments.

     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.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of November 14, 1997, the
remaining reserve balance was $3.1 million due to follow-on investments in Petco
Animal Supplies, Fitz and Floyd, Fine Clothing, Inc., Hills Stores,  Ghirardelli
Holdings  and  Anchor  Advanced  Products.  Additionally,  $8.29  million of the
reserve has been  returned to the  partners.  The level of the reserve was based
upon an analysis  of  potential  follow-on  investments  in  specific  portfolio
companies  that may become  necessary to protect or enhance  Fund II's  existing
investment.

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

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

Investment in High-Yield Securities

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

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

     Certain issuers of Securities held by Fund II (First Alert, Hills,  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 one year on the open market,  subject to the
volume  restrictions  set forth in that rule.  The Rule 144 volume  restrictions
generally are not applicable to equity  securities of  non-affiliated  companies
held by Fund II for at least two years. In certain cases, Fund II has agreed not
to make  any  sales  of  equity  securities  for a  specified  hold-back  period
following a public offering.

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

Results of Operations

Investment Income and Expenses

     The investment income from operations for the quarter 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 nine months ended September 30, 1997, Fund II had investment income
of  $9,409,199  as compared  to  $13,052,729  for the same  period in 1996.  The
decrease of $3,643,530 in 1997  investment  income as compared to 1996 is due to
the sale of income  producing  portfolio  companies,  as well as  recognition of
previously  unrecorded interest income of payment-in-kind  securities  totalling
$7.2 million related to the sale of CST Office Products, Inc. in March of 1996.

     Major  expenses for the period  consisted of  Investment  Advisory Fees and
Fund Administration Fees.
<PAGE>
    
     The  Investment   Adviser  and  Fund   Administrator   both  receive  their
compensation  on a quarterly  basis.  The  Investment  Advisory  Fee paid to the
Investment  Adviser for the nine months  ended  September  30, 1997 and 1996 was
$582,001 and  $756,219,  respectively,  and was  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
$1,200,000 for Fund II and the Retirement Fund on a combined basis. The decrease
in the  Investment  Advisory Fee is  primarily  the result of returns of capital
distributed to Limited  Partners.  For the three months ended September 30, 1997
and 1996,  Investment Advisory Fees paid to the Investment Adviser were $164,431
and $237,985, respectively.

     The Fund  Administration  Fee paid to the Fund  Administrator  for the nine
months  ended   September   30,  1997  and  1996  was  $470,514  and   $509,713,
respectively, and was 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.
For the three months ended September 30, 1997 and 1996, the Fund  Administration
Fee paid to the Fund Administrator was $150,185 and $166,734, respectively.

     Beginning in November of 1997, the Fund  Administration  Fee will change to
an annual amount of $400,000 for Fund II and the  Retirement  Fund on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by the
Fund.

     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, audits, tax preparation
and custodian  fees. For the nine months ended September 30, 1997 and 1996, Fund
II incurred  reimbursable expenses $129,074 and $99,847,  respectively.  For the
three months ended  September  30, 1997 and 1996,  Fund II incurred  $50,281 and
$33,000, respectively, in reimbursable expenses.
    
     For the nine months ended  September 30, 1997,  Fund II had net  investment
income of $8,029,619 as compared to $10,303,854 for the same period in 1996. The
decrease of $2,274,235 in 1997 net investment  income as compared to 1996 is due
to the recognition of interest income from payment-in-kind securities related to
the sale of CST Office  Products,  Inc., in March of 1996,  partially  offset by
lower  Legal and  Professional  Fees and  Investment  Advisory  Fees.  Legal and
Professional  Fees were lower in 1997 than in 1996  partially due to a rebate of
approximately  $287 thousand  pertaining to legal fees paid by Fund II on behalf
of Fitz and Floyd pertaining to the Plan of Reorganization.

     For the three months ended  September 30, 1997,  Fund II had net investment
income of $546,994 as  compared  to  $747,064  for the same period in 1996.  The
decrease in 1997 net investment income is due to sales of income generating debt
securities  partially  offset by lower  Investment  Advisory  Fees and Legal and
Professional Fees.

Net Assets

     Fund II's net assets decreased by $21,324,305  during the nine months ended
September  30,  1997 due to the  payment of cash  distributions  to  partners of
$25,695,686 and net unrealized  depreciation of $3,707,926,  partially offset by
realized  gains  from the  sale of  Mezzanine  Investments  of  $49,688  and net
investment income of $8,029,619.  This compares to the decrease in net assets of
$42,388,527  for the nine months ended  September  30, 1996  resulting  from the
payment of cash  distributions  to partners of  $48,829,459  and net  unrealized
depreciation  of  $9,752,935,  partially  offset  by net  investment  income  of
$10,303,854 and realized gains from investments of $5,890,013.

Unrealized Appreciation and Depreciation on Investments

     For the  nine  months  ended  September  30,  1997,  Fund II  recorded  net
unrealized depreciation of $3,707,926 as compared to net unrealized depreciation
of $9,752,935  for the same period in 1996. As of September 30, 1997,  Fund II's
cumulative net unrealized depreciation on investments totaled $46,954,876.

     For the three  months  ended  September  30,  1997,  Fund II  recorded  net
unrealized  appreciation of $713,280 as compared to net unrealized  appreciation
of  $7,716,095  recorded  for the  comparable  period  in 1996.  For  additional
information,   please  refer  to  the   Supplemental   Schedule  of   Unrealized
Appreciation and Depreciation - Schedule 2.

     Fund II's valuation of the Common Stock of First Alert, Hills,  Playtex and
Stanley Furniture reflect their closing market prices at September 30, 1997.
<PAGE>

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

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

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1997.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time,  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.

Realized Gains and Losses

     For the nine months  ended  September  30,  1997,  Fund II had net realized
gains  from  the  sale of  Mezzanine  Investments  of  $49,688  as  compared  to
$5,890,013 for the same period in 1996.

     For the quarter  ended  September 30, 1997,  Fund II had no realized  gains
from investments. For the comparable period in 1996, Fund II had a realized loss
of $4,841,600.  For  additional  information,  please refer to the  Supplemental
Schedule of Realized Gains and Losses - Schedule 1.

Cash Distributions

     On November 3, 1997, the  Individual  General  Partners  approved the Third
Quarter 1997 cash distribution totalling $1,304,854 which consisted of Return of
the Reserve for Follow-On  Investments  of $1,000,000,  Distributable  Cash from
Temporary   Investments  of  $39,959  and  Distributable   Cash  from  Mezzanine
Investments of $264,895.  The total amount to be distributed to Limited Partners
is  $1,221,815  or $5.51 per Unit.  The  Managing  General  Partner will receive
$2,757,  in  proportion  to  its  capital  contribution  and  $80,006  as an MGP
distribution. Thomas H. Lee, as an Individual General Partner, will receive $276
which represents his interest in Fund II. This cash distribution will be paid on
November 14, 1997.

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

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

     Items 1 - 5 are  herewith  omitted as the  response  to all items is either
none or not applicable.

     Item 6. Exhibits and Reports on Form 8-K
     (a) Exhibits:

     Exhibit 27 - Financial Data Schedule for the quarter ending 
                  September 30, 1997.

     (b) Reports on form 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 this 12th day of
November, 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


Dated: November 12, 1997      /s/  Audrey Bommer
                              Audrey Bommer
                              Vice President and Treasurer
                              (Chief Financial Officer)


Dated: November 12, 1997      /s/  Roger F. Castoral, Jr.
                              Roger F. Castoral, Jr.
                              Vice President and Assistant Treasurer
                              (Principal Accounting Officer)

<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 this 12th day of
November, 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




Dated: November 12, 1997
                                  Audrey Bommer
                                  Vice President and Treasurer
                                  (Chief Financial Officer)



Dated: November 12, 1997
                                  Roger F. Castoral, Jr.
                                  Vice President and Assistant Treasurer
                                  (Principal Accounting Officer)