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, 1996

                         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, 1996 and December 31, 1995

Statements of  Operations - For the Three and Nine Months  Ended  September  30,
 1996 and 1995

Statements of Changes in Net Assets - For the Nine Months Ended
 September 30, 1996 and 1995

Statements of Cash Flows - For the Nine Months Ended
 September 30, 1996 and 1995

Statement of Changes in Partners' Capital at September 30, 1996

Schedule of Portfolio Investments - September 30, 1996

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>
                                                                                  September 30, 1996        December 31, 1995
                                                                                    ----------------        -----------------

ASSETS:
Investments - Notes 2,4,5
  Portfolio Investments at fair value
    Managed Companies (amortized cost $82,111
      at September 30, 1996 and $105,477 at December 31, 1995)                      $         57,629        $          88,955
    Non-Managed Companies (amortized cost $21,628
      at September 30, 1996 and $30,341 at December 31, 1995)                                  8,862                   19,340
    Temporary Investments, at amortized cost (cost $9,679
      at September 30, 1996 and $10,024 at December 31, 1995)                                  9,687                   10,042
Cash (of which $115 is restricted at September 30, 1996)                                         134                        1
Accrued Interest Receivable - Note 2                                                           1,072                    2,005
Prepaid Expenses                                                                                   -                        4
                                                                                    ----------------        -----------------
TOTAL ASSETS                                                                        $         77,384        $         120,347
                                                                                    ================        =================

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                             $            175        $            363
    Reimbursable Administrative Expenses Payable - Note 8                                         33                      57
    Independent General Partners' Fees Payable - Note 9                                           37                      66
    Deferred Interest Income - Note 2                                                            344                     678
                                                                                    ----------------        ----------------
Total Liabilities                                                                                589                   1,164
                                                                                    ----------------        ----------------

Partners' Capital - Note 2
    Individual General Partner                                                                    21                      29
    Managing General Partner                                                                   1,630                   1,932
    Limited Partners (221,745 Units)                                                          75,144                 117,222
                                                                                    ----------------        ----------------
Total Partners' Capital                                                                       76,795                 119,183
                                                                                    ----------------        ----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                             $         77,384        $        120,347
                                                                                    ================        ================

</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,
                                                                  1996              1995               1996                 1995
                                                              ------------      ------------        -----------        ------------
INVESTMENT INCOME - Notes 2,4,6:
Interest                                                      $      1,238      $      1,765        $    12,270        $      5,097
Discount and Dividend Income                                           204               215                783                 765
                                                              ------------      ------------        -----------        ------------
    TOTAL INCOME                                                     1,442             1,980             13,053               5,862
                                                              ------------      ------------        -----------        ------------
EXPENSES:
Investment Advisory Fee - Note 7                                       238               374                756               1,157
Fund Administration Fee - Note 8                                       167               197                510                 600
Legal and Professional Fees                                            236               614              1,207               1,003
Reimbursable Administrative Expenses - Note 8                           33                10                100                  90
Independent General Partners' Fees and Expenses - Note 9                20                42                173                 122
Insurance Expense                                                        1                 1                  3                   4
                                                                ----------      ------------        -----------        ------------
    TOTAL EXPENSES                                                     695             1,238              2,749               2,976
                                                                ----------      ------------        -----------        ------------

NET INVESTMENT INCOME                                                  747               742             10,304               2,886
Net Realized Gain (Loss) on Investments - Note 4 
  and Schedule 1                                                    (4,842)                -              5,890               7,081
Net Change in Unrealized Appreciation (Depreciation)
  on Investments: Note 5 and Schedule 2
  Publicly Traded Securities                                         2,875            (4,668)            (7,961)             (7,220)
  Nonpublic Securities                                               4,842                 -             (1,792)             (2,421)
                                                                ----------      ------------        -----------        ------------
SUBTOTAL                                                             7,717            (4,668)            (9,753)             (9,641)
NET INCREASE (DECREASE) IN NET ASSETS
   RESULTING FROM OPERATIONS                                         3,622            (3,926)             6,441                 326
Less:  Incentive Fee Earned by Managing General Partner                  -              (892)            (5,366)             (2,938)
                                                                ----------      ------------        -----------        ------------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
  DISTRIBUTION TO ALL PARTNERS                                  $    3,622      $     (4,818)       $     1,075        $     (2,612)
                                                                ==========      ============        ===========       =============

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

<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, 
                                                                              1996                         1995
                                                                         ---------------             ---------------

FROM OPERATIONS:

Net Investment Income                                                    $        10,304             $         2,886

Net Realized Gain on Investments                                                   5,890                       7,081

Net Change in Unrealized  Depreciation
  From Investments                                                                (9,753)                     (9,641)
                                                                         ---------------             ---------------

Net Increase in Net Assets
  Resulting from Operations                                                        6,441                         326

Cash Distributions to Partners                                                   (48,829)                    (17,861)
                                                                         ---------------             ---------------

Total Decrease                                                                   (42,388)                    (17,535)

NET ASSETS:

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

End of Period                                                            $        76,795             $       149,179
                                                                         ===============             ===============

</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, 
                                                                                      1996                    1995
                                                                                ---------------         --------------
Increase in Cash and Cash Equivalents CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                       $       13,890          $        5,746
  Legal and Professional Fees                                                           (1,394)                   (570)
  Investment Advisory Fee                                                                 (756)                 (1,157)
  Fund Administration Fee                                                                 (510)                   (600)
  Independent General Partners' Fees and Expenses                                         (202)                   (144)
  Reimbursable Administrative Expenses                                                    (124)                   (156)
  (Purchase) Sale of Temporary Investments, Net                                           (261)                  6,731
  Proceeds from Sales of Portfolio Company Investments                                  38,319                   9,646
  Purchase of Portfolio Company Investments                                                  -                  (1,635)
                                                                                --------------          --------------
    Net Cash Provided by Operating Activities                                           48,962                  17,861
                                                                                --------------          --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                       (48,829)                (17,861)
                                                                                --------------          --------------
    Net Cash Applied to Financing Activities                                           (48,829)                (17,861)
                                                                                --------------          --------------
  Net Increase in Cash                                                                     133                       -
  Cash at Beginning of Year                                                                  1                       1
                                                                                --------------          --------------
   Cash at End of Year                                                          $          134          $            1
                                                                                ==============          ==============

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

Net Investment Income                                                           $       10,304          $        2,886
                                                                                --------------          --------------
Adjustments to Reconcile Net Investment Income to
  Net Cash Provided by Operating Activities:
  Decrease in Investments                                                               32,167                   7,659
  (Increase) Decrease in Accrued Interest and Dividend Receivables                         838                    (116)
  Decrease in Prepaid Expenses                                                               4                       3
  (Decrease) Increase in Legal and Professional Fees Payable                              (188)                    369
  Decrease in Reimbursable Administrative Expenses Payable                                 (24)                      -
  Decrease in Independent General Partners' Fees Payable                                   (29)                    (21)
  Net Realized Gain on Sales of Investments                                              5,890                   7,081
                                                                                --------------          --------------
Total Adjustments                                                                       38,658                  14,975
                                                                                --------------          --------------
Net Cash Provided by Operating Activities                                       $       48,962          $       17,861
                                                                                ==============          ==============

</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 Nine Months Ended September 30, 1996
Partners' Capital at January 1, 1996                           $    29       $   1,932       $ 117,222        $119,183
Allocation of Net Investment Income                                  2           2,826           7,476          10,304
Allocation of Net Realized Gain on Investments                       1           3,068           2,821           5,890
Allocation of Net Change in Unrealized
  Depreciation From Investments                                     (2)            (22)         (9,729)         (9,753)
Cash Distributions to Partners                                      (9)         (6,174)        (42,646)        (48,829)
                                                               =======       =========       =========        ========
Partners' Capital at September 30, 1996                        $    21       $   1,630       $  75,144        $ 76,795
                                                               =======       =========       =========        ========

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









<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                               SEPTEMBER 30, 1996
                             (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)
$5,867             Anchor Advanced Products, Inc., Sr. Sub. Nt.11.67% due 04/30/00(c)  04/30/90 $   5,867   $  5,867
$7,822             Anchor Advanced Products, Inc., Jr. Sub. Nt.17.5% due 04/30/00(c)   04/30/90     7,822      7,822
162,967 Shares     Anchor Holdings Inc., Common Stock (d)                              04/30/90     1,548      1,548
247,710 Warrants   Anchor Holdings Inc., Common Stock Purchase Warrants(d)             04/30/90         0          0
                     (26.1% of fully diluted common equity assuming exercise
                       of warrants)                                                                15,237     15,237      20.00

                   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      22.51

                   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     12,094
                     (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     12,094      15.88

                   HILLS STORES COMPANY - Note 5
458,432 Shares     Hills Stores Company, Common Stock(a)(d)                             04/03/90   30,246      3,266
62,616 Shares      Hills Stores Company, Common Stock(a)(h)                             08/21/95    4,530        446
                     (4.6% of fully diluted common equity)                                         34,776      3,712       4.87



</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, 1996
                           (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>
                  PLAYTEX PRODUCTS, INC. (b) - Note 5
343,726 Shares    Playtex Products, Inc., Common Stock(a)(d)                          03/29/90   $  5,299   $  3,008
                    (.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      3,008         3.95
                  RESTAURANTS UNLIMITED
$6,044            Restaurants Unlimited, 11% Subordinated Note due 06/30/02(c)         06/03/94     6,044      6,044
391,302 Warrants  Restaurants Unlimited, Common Stock Warrants(d)  06/03/94            06/03/94         0          0
                  (2.1% of fully diluted common equity)                                             6,044      6,044         7.93

                  STANLEY FURNITURE COMPANY, INC. (b) - Note 5,13
23,105 Shares     Stanley Furniture Company, Inc.,
                    Common Stock(a)(d)                                                 06/30/91       291        390
                    (0.4% of fully diluted common equity)
                                                                                                      291        390         0.51

                  TOTAL INVESTMENT IN MANAGED COMPANIES                                          $ 82,111   $ 57,629        75.65

                  NON-MANAGED COMPANIES

                  BIOLEASE, INC.
$784              BioLease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94   $   676     $  701
96.56 Shares      BioLease, Inc., Common Stock (d)                                     06/08/94        94         94
10,014 Warrants   Biotransplant, Inc., Common Stock Purchase Warrants(d)               06/08/94        14         14
                                                                                                      784        809         1.06

                  FITZ AND FLOYD/SYLVESTRI -Notes 5,6
$10,281           FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g)          03/31/93    10,266      2,448
$ 2,419           FFSC, Inc., Adjustable Rate Sr. Sub. Nt. due 03/31/03(c)(g)          07/30/93     2,414        576
1,511,856 Shares  FF Holding Co., Common Stock (d)                                     03/31/93        15          0
514,636 Shares    FF Holding Co., Common Stock (d)                                     07/30/93         5          0
515,845 Shares    FF Holding Co., Common Stock (d)                                     12/22/94         0          0
                                                                                                   12,700      3,024         3.97
                  FLA. ORTHOPEDICS, INC. - Notes 4,5
 19,366 Shares    FLA. Holdings, Inc. Series B Preferred Stock(d)                      08/02/93     1,513          0
  3,822 Warrants  FLA. Holdings, Inc. Common Stock Purchase Warrants(d)                08/02/93         0          0
                       $4,842 12.5% 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
                                                                                                    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, 1996
                           (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       2,439
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants                     06/29/95         0           0
                                                                                                   6,631       5,029     6.60

                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                    $ 21,628     $ 8,862    11.63

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                 Various     57,599      41,524    54.51
                   Preferred Stock, Common Stock, Warrants and Stock Rights           Various     46,140      24,967    32.77

                   TOTAL MEZZANINE INVESTMENTS                                                  $103,739     $66,491    87.28

                  TEMPORARY INVESTMENTS

                  COMMERCIAL PAPER
$   450           General Electric Credit Corp, 4.95% due 10/01/96                    09/19/96       449         450
$   400           Americann General Finance Corp., 5.10% due 10/01/96                 09/26/96       400         400
$ 8,850           American General Finance Corp., 5.30%, due 10/11/96                 09/26/96     8,830       8,837


                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                             9,679       9,687    12.72

                  TOTAL TEMPORARY INVESTMENTS                                                      9,679       9,687    12.72

                  TOTAL INVESTMENT PORTFOLIO                                                    $113,418    $ 76,178   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 $25 for Mezzanine Investments
        and $8 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, 1996
                                         (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 it is in the best interest
of Fund II. Following such time periods, Fund II will 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, 1996.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time, and because  investments of companies  whose equity is
publicly  traded are valued at the last price at Septeber 30, 1996,  the current
estimated fair value of these investments may have changed  significantly  since
that point in time.

Interest Receivable on Investments

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by Fund II's portfolio  companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal amounts of such securities.  As of September 30, 1996 and December 31,
1995,  Fund  II has in its  portfolio  of  investments  $441,900  and  $751,907,
respectively,  of payment-in-kind  notes which excludes $734,702 and $7,637,720,
respectively, of payment-in-kind notes received from notes placed on non-accrual
status.  As of September  30, 1996 and  December  31,  1995,  Fund II has in its
portfolio   of   investments   $29,059   and   $2,293,457,    respectively,   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,  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, 1996 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, 1996 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
Partners and 0.02% to the Individual General Partner.

4.  Investment Transactions

     On March 22,  1996,  by means of merger of Lee-CST  Holding  Corp.  with an
unaffilated  third  party,  Fund II sold its  entire  investment  in CST  Office
Products  ("CST")  for total  proceeds  of $26.5  million.  Fund II  received an
aggregate  of $21.1  million  for the  $6,355,000  principal  amount  12% senior
subordinated note, the $6,355,000 principal amount 18% junior subordinated note,
approximately   $7.5  million  in  principal  amount  of  15%  payment  in  kind
subordinated  notes issued with respect  thereto,  plus all outstanding  accrued
interest on these notes. Additionally, Fund II received $2.6 million, or $16 per
share,  for its common  stock and $2.8  million,  or $15.99  per share,  for its
common  stock  purchase  warrants.  Fund II realized a gain of $4.3  million and
additional interest income of $7.2 million for the payment-in-kind  subordinated
notes that were previously classified as non-accrual.

     On March 20, 1996,  Petco Animal  Supplies  announced a 3-for-2 stock split
effective April 15, 1996. On April 4, 1996, Petco filed a registration statement
with the Securities and Exchange  Commission for an offering of 3,333,333 shares
of Common Stock, which was adjusted to 5 million shares as a result of the stock
split. Of the 5 million  post-split shares offered,  2.6 million were offered by
Petco and the  remaining  shares were offered by certain  current  stockholders,
including  Fund II. The offering was effected on April 30, 1996 and Fund II sold
its entire  investment  in Petco,  which  consisted of 175,238  shares of Common
Stock and  received  net  proceeds of  $4,794,457  or $27.36 per share.  Fund II
realized a gain of $2,879,333 on the sale.

     On April  1,  1996,  Fund II sold  its  entire  investment  in  Ghirardelli
Holdings  Corp.  ("Ghirardelli")  to an investor  group  comprised  of the Chief
Executive  Officer of Ghirardelli and certain other investors.  Fund II received
net proceeds  from the sale of  $9,628,915,  which  consisted of  $4,931,815  as
prepayment  for  the  13%  Subordinated  Note  (including   $77,607  of  accrued
interest),  $3,166,847  for the common stock (of which $114,730 is proceeds held
in escrow) and $1,530,253 for the preferred stock (including  $26,475 of accrued
dividends). The sale resulted in a realized gain of $2,283,302 to Fund II.

     On May 17, 1996,  pursuant to a Redemption  and  Repurchase  Agreement with
National  Tobacco  Company,  a Non-Managed  Company in Fund II's portfolio,  and
certain existing  lenders,  Fund II received net proceeds of $5,218,585 from the
repayment and  redemption of its investment in National  Tobacco.  In connection
with the Agreement,  National Tobacco prepaid the Subordinated  Notes,  plus all
accrued and unpaid interest,  and redeemed the partnership  interest in National
Tobacco  held by Fund  II.  Fund II  recognized  a gain of  $1,304,801  from the
transaction.

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

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on  investments  of $24.9  million for Fund II. As of September 30, 1996,
the reserve balance was reduced to $9.9 million due to follow-on  investments of
$285  in  Petco  Animal  Supplies,  $2.4  million  in Fitz  and  Floyd/Silvestri
Corporation,  $240,060 in Fine Clothing,  Inc., $4.5 million in Hills Stores and
$1.6 million in Ghirardelli Holdings. Additionally, $6.29 million of the reserve
was  returned to the partners  during  1995.  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. As of August 8, 1996, the Independent General Partners have approved
retention of the reserve at its current level.

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

        Although  Fund  II  cannot  eliminate  the  risks  associated  with  its
investments in high-yield securities,  it has procedures in place to continually
monitor  the risks  associated  with its  investments  under a variety of market
conditions.  Any  potential  Fund II loss  would  generally  be  limited  to its
investment  in  the   portfolio   company  as  reflected  in  the  portfolio  of
investments.

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

5.  Unrealized Appreciation and Depreciation of Investments

     For the  nine  months  ended  September  30,  1996,  Fund II  recorded  net
unrealized depreciation of $9,752,935 as compared to net unrealized depreciation
of $9,640,975  for the same period in 1995. As of September 30, 1996,  Fund II's
cumulative net unrealized depreciation on investments totaled $37,276,197.

     For the three  months  ended  September  30,  1996,  Fund II  recorded  net
unrealized appreciation of $7,716,095 as compared to net unrealized depreciation
of  $4,668,098  recorded  for the  comparable  period  of 1995.  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:

    - Fitz and Floyd/Sylvestri Corporation on January 1, 1994.
    - Stablex Canada, Inc., on June 29, 1995.

7.  Investment Advisory Fee

     The  Investment  Adviser  provides  the   identification,   management  and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds,  the Investment  Adviser  receives a quarterly fee at the
annual rate of 1% of assets under  management (net offering  proceeds reduced by
cumulative  capital  reductions),  with a minimum annual fee of $1.2 million for
Fund II and the Retirement Fund on a combined basis. The Investment Advisory Fee
is calculated and paid quarterly in advance. For the nine months ended September
30,  1996 and 1995,  Fund II paid  $756,219  and  $1,156,833,  respectively,  in
Investment Advisory Fees to Thomas H. Lee Advisors II, L.P. For the three months
ended  September  30,  1996  and  1995,  Fund II  paid  $237,985  and  $373,533,
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.  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, 1996 and 1995,  Fund II paid  $509,713 and $599,851,  respectively,  in Fund
Administration  Fees.  For the three months ended  September  30, 1996 and 1995,
Fund II paid $166,734 and $197,233, respectively, in Fund Administration Fees.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund Administrator,  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, 1996 and 1995, Fund II incurred  $99,847 and $90,182,
respectively, in reimbursable expenses. For the three months ended September 30,
1996  and  1995,  Fund  II  incurred  $33,000  and  $10,048,   respectively,  in
reimbursable expenses.


9. Independent General Partners' Fees and Expenses

     As compensation for their services,  each Independent  General Partner will
receive a combined annual fee of $40,000  (payable  quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus  reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed  annually.  For the nine
months  ended  September  30,  1996 and  1995,  Fund II  incurred  $172,591  and
$122,394,  respectively, in Independent General Partners' Fees and Expenses. For
the  three  months  ended  September  30,  1996,  Fund II  incurred  $19,480  in
Independent  General  Partners  Fees and Expenses as compared to $41,911 for the
same period in 1995.

10. Related Party Transactions

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

    Thomas H. Lee  Company,  a sole  proprietorship  owned by Thomas H. Lee,  an
Individual  General  Partner  of  Fund  II and an  affiliate  of the  Investment
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, 1996,  Fund II paid the
Individual  General Partner  distributions  totaling $9,616 and Managing General
Partner   distributions   totaling  $6,173,845  (which  includes  $6,077,683  of
incentive  fees).  As of September 30, 1996,  the Managing  General  Partner has
earned a total of $22.8 million in MGP  Incentive  Fees of which $1.5 million is
deferred in payment to the Managing  General Partner as a deferred  distribution
amount (the "Deferred  Distribution  Amount") in accordance with the Partnership
Agreement.  To the extent not  payable to the  Managing  General  Partner,  this
Deferred  Distribution  Amount  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.

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  motion.  The  defendants in this action  believe that the
remaining  claims are  without  merit,  although  whether or not the  plaintiffs
prevail, the Funds may be obligated to indemnify and advance litigation expenses
to certain of the defendants under the terms and conditions of various indemnity
provisions in the Funds'  Partnership  Agreements  and separate  indemnification
agreements,  and the  amount  of such  indemnification  and  expenses  could  be
material.  Fund II has advanced  amounts to the  indemnified  parties based upon
amounts which are deemed  reimbursable  in accordance  with the  indemnification
provisions and has included these amounts in  professional  fees. 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. The outcome of this case is
not determinable at this time.

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

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

    No provision  for income taxes has been made since 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.  Generally,  the  tax  basis  of  Fund  II's  assets
approximate  the amortized  cost amounts  reported in the financial  statements.
This amount is computed  annually and as of December 31, 1995,  the tax basis of
Fund II's assets are less than the amounts reported in the financial  statements
by  $25,133,719.  This  difference is primarily  attributable  to net unrealized
appreciation on investments which has not been recognized for tax purposes.


13. Subsequent Events

     On October 15, 1996 Stanley  Furniture  Company,  Inc. filed a registration
statement  with the Securities  and Exchange  Commission  relating to a proposed
secondary offering of 2.4 million shares of its common stock (plus an additional
358,902 shares subject to the  underwriters'  over-allotment  option,)  whereby,
Fund II and certain  affiliates of the Thomas H. Lee Company would have sold all
of their shares.  The registration  statement has not yet become effective.  The
Registration  statement was declared  effective on November 7, 1996. On November
13, 1996,  the offering was amended to an aggregate of 1,150,000  shares,  which
includes 150,000 shares subject to the underwriters'  over-allotment  option. If
the underwriters do not exercise the  over-allotment  option,  Stanley Furniture
has agreed to purchase  such shares from the selling  shareholders.  Pursuant to
this offering, Fund II will sell a total of 9,631 shares.
 
     On November 5, 1996, the  Individual  General  Partners  approved the Third
Quarter 1996 cash distribution totalling $432,322 which consisted of $183,244 of
net income from temporary investments and $249,078 of net investment income from
Mezzanine  Investments  during  the  third  quarter.  The  total  amount  to  be
distributed  to Limited  Partners  is $181,831  or $.82 per Unit.  The  Managing
General Partner will receive $410,  which represents its interest in Fund II and
$250,041 in performance  incentive fees. Thomas H. Lee, as an Individual General
Partner,  will receive $41 which  represents  his interest in Fund II. This cash
distribution is expected to be paid on November 14, 1996.
<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, 1996
                                      (DOLLARS IN THOUSANDS)
                                            (UNAUDITED)

<S>                                                   <C>                    <C>               <C>              <C>
                                                            Par Value/        Investment                         Realized
SECURITY                                              Number of Shares              Cost       Net Proceeds     Gain(Loss)
---------------------------------------------------   ----------------       -----------       ------------      --------

FOR THE THREE MONTHS ENDED MARCH 31, 1996

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

---------------------------------------------------                          -----------       ------------      --------
TOTAL FOR THE THREE MONTHS ENDED MARCH 31, 1996                              $    14,014       $     18,278      $  4,264
---------------------------------------------------                          -----------       ------------      --------

FOR THE THREE MONTHS ENDED JUNE 30, 1996

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

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

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

---------------------------------------------------                          -----------       ------------      --------
TOTAL FOR THE THREE MONTHS ENDED JUNE 30, 1996                               $    13,009       $     19,477      $  6,468
---------------------------------------------------                          -----------       ------------      --------

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996

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

---------------------------------------------------                          -----------       ------------      --------
TOTAL FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996                          $     4,842       $          -      $ (4,842)
---------------------------------------------------                          -----------       ------------      --------
TOTAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996                           $    31,865       $     37,755      $  5,890
---------------------------------------------------                          ===========       ============      ========



</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, 1996
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

<S>                                    <C>        <C>       <C>               <C>               <C>               <C>
                                                        Total Unrealized  Total Unrealized
                                                            Appreciation/   Appreciation/
                                                           (Depreciation)  (Depreciation)   Total Unrealized      Total Unrealized
                                                           for the three    for the nine        Appreciation/        Appreciation/
SECURITY                                                   months ended     months ended       (Depreciation)       (Depreciation)
                                      Investment     Fair  September 30,   September 30,         December 31,        September 30,
                                            Cost    Value        1996            1996                 1995                 1996
--------------------------------------   -------  --------    ---------     -----------         -------------       --------------
PUBLICLY TRADED/UNDERLYING
  SECURITY PUBLICLY TRADED:

First Alert
  Common Stock *                         $ 3,320  $ 12,093    $  3,860      $    (5,661)        $      14,434       $        8,773
Hills Stores
  Common Stock *                          34,776     3,712        (912)          (1,433)              (29,631)             (31,064)
Playtex
  Common Stock *                           5,299     3,008        (214)             430                (2,721)              (2,291)
Stanley
  Common Stock *                             291       390         141              205                  (106)                  99
                                                              --------      -----------         -------------       --------------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                           $  2,875      $    (6,459)        $     (18,024)      $      (24,483)
                                                              --------      -----------         -------------       --------------

NON PUBLIC SECURITIES:
Fitz and Floyd/Sylvestri
  Common Stock *                              20         -           -                -                   (20)                 (20)
  Adjustable Rate Senior Note *           10,679     3,024           -           (6,634)               (3,025)              (9,659)
FLA. Orthopedics, Inc.
  Common Stock*                            1,513         -           -                -                (1,513)              (1,513)
  Subordinated Note                            -         -       4,842            4,842                (4,842)                   -
Stablex Canada Inc.
  Subordinated Notes*                      6,631     5,029           -                -                (1,602)              (1,602)
                                                              --------      -----------         -------------       --------------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM NON PUBLIC
  SECURITIES                                                     4,842      $    (1,792)        $     (11,002)      $      (12,794)
                                                              --------      -----------         -------------       --------------
REVERSAL OF UNREALIZED DEPRECIATION/
   APRECIATION FROM SECURITIES SOLD:
Petco
   Common Stock                                -         -           -           (1,502)                1,502                    -
                                                              --------      -----------         -------------       --------------
NET UNREALIZED APPRECIATION
  (DEPRECIATION)                                              $  7,717      $    (9,753)        $     (27,524)      $      (37,277)
                                                              ========      ===========         =============       ==============
* Restricted security.

</TABLE>
<PAGE>



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


Liquidity & Capital Resources

     As of September 30, 1996,  capital  contributions from the Limited Partners
and the General Partners  totaled  $222,295,000 in the public offering of ML-Lee
Acquisition  Fund II, L.P.  ("Fund II"), the final closing for which was held on
December 20, 1989.  Net proceeds  which were available for investment to Fund II
as of  September  30, 1996 were  $114,430,667,  after  adjusting  for returns of
capital to partners,  volume discounts,  sales  commissions and  organizational,
offering, sales and marketing expenses.


     At September  30, 1996,  Fund II had  outstanding  a total of  $103,738,673
invested  in  Mezzanine   Investments   representing   $82,111,052  Managed  and
$21,627,621  Non-Managed  portfolio  investments.  The  remaining  proceeds were
invested in Temporary  Investments comprised of commercial paper with maturities
of less than one month.

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

     Upon the  consummation  of the sale of Snapple  Common  Stock in  December,
1994, Fund II received proceeds of approximately $68 million. As provided by the
Partnership  Agreement,  the  Managing  General  Partner  of  Fund  II  received
incentive fees from this  transaction  to the extent certain  returns of capital
and priority returns were achieved. The Managing General Partner was entitled to
an incentive MGP distribution of approximately  $14.8 million,  $4.86 million of
which was  deferred  in payment  (the  "Deferred  Distribution  Amount")  to the
Managing  General  Partner in accordance with the  Partnership  Agreement.  This
Deferred  Distribution  Amount  was  distributed  to the  Partners  pro-rata  in
accordance with their capital  contributions and amounts otherwise later payable
to Limited Partners from distributable cash from operations were instead payable
to the Managing General Partner until the Deferred  Distribution Amount was paid
in full. As a result of prior transactions that generated net distributable cash
proceeds and Deferred  Distribution  Amounts,  the Deferred  Distribution Amount
owed to the  Managing  General  Partner  subsequent  to the  November  14,  1996
distribution is $1.5 million.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on  investments  of $24.9  million for Fund II. As of September 30, 1996,
the reserve balance was reduced to $9.9 million due to follow-on  investments of
$285  in  Petco  Animal  Supplies,  $2.4  million  in Fitz  and  Floyd/Silvestri
Corporation,  $240,060 in Fine Clothing,  Inc., $4.5 million in Hills Stores and
$1.6 million in Ghirardelli Holdings. Additionally, $6.29 million of the reserve
was  returned to the partners  during  1995.  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. As of August 8, 1996, the Independent General Partners have approved
retention of the reserve at its current level.

     On February 6, 1996, the New York State Supreme Court,  County of New York,
issued a decision in Winston v. Mezzanine  Investments et al., L.P. No. 28657/91
(the "Winston Litigation"), opining that the incentive distributions made to the
managing  general  partner of ML-Lee  Acquisition  Fund, L.P. (Fund I") had been
incorrectly  calculated under Fund I's Amended and Restated Agreement of Limited
Partnership   and  that,   under  what  the  Court  concluded  was  the  correct
methodology,  the  managing  general  partner of Fund I had been  overpaid.  The
defendants in the Winston  Litigation have stated that they intend to appeal the
decision. If the methodology adopted by the Court in the Winston Litigation were
affirmed  on appeal and were  applied to Fund II,  the  incentive  distributions
heretofore paid by Fund II to the Fund II Managing General Partner may have been
understated and the computation of such incentive distribution may be subject to
adjustment  on a  retroactive  and going  forward  basis.  Whether the  Managing
General  Partner  has,  in  fact,  been  underpaid  and the  amount  of any such
underpayment,  depends  upon the  future  performance  of Fund II,  whether  the
decision in the Winston Litigation is affirmed and whether it is applied to Fund
II. Fund II believes it has sufficient funds to pay any additional  amounts that
could be payable to the Managing General Partner in such regard.

     Operating performance at Fitz & Floyd/Silvestri,  Corp. ("Fitz & Floyd"), a
Non-Managed Company in Fund II's portfolio, has fallen substantially below plan.
On March 29, 1996, Fitz & Floyd filed a voluntary  petition for protection under
Chapter 11 of the United States  Bankruptcy  Code,  and continues  operating the
business as debtor-in-possession. While in Chapter 11, Fitz & Floyd divested its
Silvestri Division and used the proceeds to pay down the pre-petition balance on
its revolving line of credit.  Subsequently,  Syratech Corporation, the acquirer
of the Silvestri  Division,  agreed to finance the necessary credit  enhancement
requested by the Company's provider of debtor-in-possession  financing.  Fund II
obtained bankruptcy court authority to exercise its rights under a pledge of the
stock of Fitz & Floyd.  Subsequently,  an officer of the Investment  Advisor was
appointed the sole director of Fitz & Floyd. The Investment  Advisor is Chairman
of the  unsecured  creditors  committee  and is working to  implement  a plan of
reorganization.

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

        The proportion of  distributions  provided by net investment  income has
dropped  significantly  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.  Pursuant to the
terms of the  Partnership  Agreement,  all net investment  income from Mezzanine
Investments  will be  distributed  to the  Managing  General  Partner  until the
Managing  General Partner  receives an amount equal to any outstanding  Deferred
Distribution Amount. Given these circumstances, it is expected that the majority
of future cash distributions to Limited Partners will almost entirely be derived
from gains and recovered  capital from asset sales,  which are subject to market
conditions and are inherently  unpredictable as to timing. Assuming there are no
asset sales in a particular  quarter,  Limited  Partners are expected to receive
only small  amounts of net  distributable  cash,  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.

Investment in High-Yield Securities

    Fund  II  invests   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  Adviser and
that met Fund II's investment  guidelines or that had otherwise been approved by
the Managing  General Partner and the Independent  General  Partners.  Fund II's
investments were measured  against  specified Fund II investment and performance
guidelines.  To limit the  exposure of Fund II's  capital in any single  issuer,
Fund II limited the amount of its investment in a particular  issuer.  Fund II's
Investment  Adviser also continually  monitors  portfolio  companies in order to
minimize the risks associated with its investments in High-Yield Securities.

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

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

Investment Income and Expenses

    The investment income from operations for the 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, 1996, Fund II had investment income
of  $13,052,729,  as compared  to  $5,861,519  for the same period in 1995.  The
increase of $7,191,210 in 1996  investment  income as compared to 1995 is due to
the recognition of interest income from  payment-in-kind  securities  related to
the sale of CST Office Products, Inc.

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

     Legal and Professional Fees were primarily  incurred in connection with the
litigation  proceedings  as  described in Note 11 to the  Financial  Statements.
Legal and  Professional  Fees for the nine months ended  September  30, 1996 and
1995  were   $1,207,323  and  $1,003,338,   respectively.   These  expenses  are
attributable  to legal  fees  incurred  and  advanced  on behalf of  indemnified
defendants as well as fees incurred  directly by Fund II in connection  with the
aforementioned litigation proceedings. Legal and Professional Fees for the three
months  ended   September   30,  1996  and  1995  were  $236,353  and  $612,814,
respectively.

     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, 1996 and 1995 was
$756,219 and $1,156,833,  respectively,  and was calculated at an annual rate of
1.0% of assets under  management  (net offering  proceeds  reduced by cumulative
capital reductions),  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. Additionally, in accordance with a Court approved settlement in August
1995, Fund II is required,  for Investment  Advisory Fee and Fund Administration
Fee  calculation  purposes  only,  to consider a realized  loss on the  original
investment in Hills Stores. The loss is calculated as the difference between the
original cost of the Hills Note that was held by Fund II and the market value of
Hills stock as of August 10, 1995. For the three months ended September 30, 1996
and 1995,  Fund II paid  $237,985  and  $373,533,  respectively,  in  Investment
Advisory Fees.

     The Fund  Administration  Fee paid to the Fund  Administrator  for the nine
months  ended   September   30,  1996  and  1995  was  $509,713  and   $599,851,
respectively, and was calculated at an annual rate of 0.45% of the excess of net
offering proceeds,  less 50% of capital  reductions.  For the three months ended
September 30, 1996 and 1995,  Fund II paid $166,734 and $197,233,  respectively,
in Fund Administration Fees.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund Administrator,  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, 1996 and 1995, Fund II incurred reimbursable expenses
of $99,847 and $90,182,  respectively. For the quarters ended September 30, 1996
and 1995, reimbursable expenses totaled $33,000 and $10,048, respectively.

     For the nine months ended  September 30, 1996,  Fund II had net  investment
income of $10,303,854 as compared to $2,885,370 for the same period in 1995. The
increase of $7,418,484 in 1996 net investment  income as compared to 1995 is due
to the recognition of interest income from payment-in-kind securities related to
the sale of CST Office  Products,  Inc. For the three months ended September 30,
1996, Fund II had net investment  income of $747,064 as compared to $742,273 for
the same period in 1995.
<PAGE>
Net Assets

     Fund II's net assets decreased by $42,388,527  during the nine months ended
September  30,  1996,  due to the payment of cash  distributions  to partners of
$48,829,459 and net unrealized  depreciation of $9,752,935,  partially offset by
realized  gains from the sale of Mezzanine  Investments  of  $5,890,013  and net
investment income of $10,303,854. This compares to the decrease in net assets of
$17,535,749  for the nine months ended  September  30, 1996  resulting  from the
payment of cash  distributions  to partners of  $17,861,057  and net  unrealized
depreciation  of  $9,640,975,  partially  offset  by net  investment  income  of
$2,885,370 and realized gains from investments of $7,080,913.

Unrealized Appreciation and Depreciation on Investments

     For the  nine  months  ended  September  30,  1996,  Fund II  recorded  net
unrealized depreciation of $9,752,935 compared to net unrealized depreciation of
$9,640,975  for the same period in 1995.  As of September  30,  1996,  Fund II's
cumulative net unrealized depreciation on investments totaled $37,276,197.

     For the three  months  ended  September  30,  1996,  Fund II  recorded  net
unrealized appreciation of $7,716,095 as compared to net unrealized depreciation
of  $4,668,098  recorded  for the  comparable  period in 1995.  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, 1996.

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

        A  substantial  number of Fund II's  assets  (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 (in part),  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, 1996.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time,  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.
<PAGE>
Realized Gains and Losses

     For the nine months  ended  September  30,  1996,  Fund II had net realized
gains from the sale of  Mezzanine  Investments  of  $5,890,013  as  compared  to
$7,080,913 for the same period in 1995.

     For the three months ended  September 30, 1996,  Fund II had a net realized
loss from  investments of $4,841,600.  No realized gains or losses were recorded
for the comparable period in 1995. For additional  information,  please refer to
the Supplemental Schedule of Realized Gains and Losses - Schedule 1.

Cash Distributions

     On November 5, 1996, the  Individual  General  Partners  approved the Third
Quarter 1996 cash distribution totalling $432,322 which consisted of $183,244 of
net income from temporary investments and $249,078 of net investment income from
Mezzanine  Investments  during  the  third  quarter.  The  total  amount  to  be
distributed  to Limited  Partners  is $181,831  or $.82 per Unit.  The  Managing
General Partner will receive $410,  which represents its interest in Fund II and
$250,041 in performance  incentive fees. Thomas H. Lee, as an Individual General
Partner,  will receive $41 which  represents  his interest in Fund II. This cash
distribution is expected to be paid on November 14, 1996.

<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,
1996.

     (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 14th day of
November, 1996.

                        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 14, 1996       /s/  Audrey Bommer
                               Audrey Bommer
                               Vice President and Treasurer
                               (Chief Financial Officer)


Dated: November 14, 1996       /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 14th day of
November, 1996.

                      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 14, 1996
                          Audrey Bommer
                          Vice President and Treasurer
                          (Chief Financial Officer)




Dated: November 14, 1996
                          Roger F. Castoral, Jr.
                          Vice President and Assistant Treasurer
                          (Principal Accounting Officer)