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 March 31, 1997

                         Commission File Number 0-17383

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act: None.

           Name on each exchange on which registered: Not Applicable

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

                      Units of Limited Partnership Interest
                                (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No .

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


<PAGE>
                         PART I - FINANCIAL INFORMATION

                        ML-LEE ACQUISITION FUND II, L.P.

                                TABLE OF CONTENTS

Part I.  Financial Information

Item 1.  Financial Statements


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

Statements of Operations - For the Three
  Months Ended March 31, 1997 and 1996

Statements of Changes in Net Assets -
  For the Three Months Ended March 31, 1997 and 1996

Statements of Cash Flows - For the Three Months
  Ended March 31, 1997 and 1996

Statement of Changes in Partners' Capital at
  March 31, 1997

Schedule of Portfolio Investments - March 31, 1997

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation
 and Depreciation - Schedule 2

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

Part II.  Other Information


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

ASSETS:
Investments - Notes 2,4,5
Portfolio Investments at fair value
    Managed Companies (amortized cost $81,986
      at March 31, 1997 and $81,990 at December 31, 1996)                         $     50,552         $          51,516
    Non-Managed Companies (amortized cost $21,608
      at March 31, 1997 and at December 31, 1996)                                        6,429                     8,865
    Temporary Investments, at amortized cost (cost $9,084
      at March 31, 1997 and $10,199 at December 31, 1996)                                9,100                    10,217
Cash (of which $115 is restricted at March 31, 1997 and December 31, 1996)                 116                       125
Accrued Interest Receivable - Note 2                                                       937                       951
Prepaid Expenses                                                                             2                         4
                                                                                  ------------         -----------------
TOTAL ASSETS                                                                      $     67,136         $          71,678
                                                                                  ============         =================

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                           $         67         $             159
    Reimbursable Administrative Expenses Payable Note 8                                     36                        45
    Independent General Partners' Fees Payable - Note 9                                     36                        33
    Deferred Interest Income - Note 2                                                      308                       326
                                                                                  ------------         -----------------
Total Liabilities                                                                          447                       563
                                                                                  ------------         -----------------

Partners' Capital - Note 2
    Individual General Partner                                                              18                        19
    Managing General Partner                                                               755                     1,368
    Limited Partners (221,745 Units)                                                    65,916                    69,728
                                                                                  ------------         -----------------
Total Partners' Capital                                                                 66,689                    71,115
                                                                                  ------------         -----------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                           $     67,136         $          71,678
                                                                                  ============         =================



See the Accompanying Notes to Financial Statements.

</TABLE>

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

<S>                                                                               <C>                  <C>
                                                                                          For the Three Months Ended
                                                                                  ---------------        ---------------
                                                                                   March 31, 1997         March 31, 1996
                                                                                  ---------------        ---------------
INVESTMENT INCOME - Notes 2,4,6:
Interest                                                                          $         1,186        $         9,692
Discount and Dividend Income                                                                  130                    207
                                                                                  ---------------        ---------------
    TOTAL INCOME                                                                            1,316                  9,899
                                                                                  ---------------        ---------------
EXPENSES:
Investment Advisory Fee - Note 7                                                              204                    254
Fund Administration Fee - Note 8                                                              158                    170
Legal and Professional Fees                                                                    99                    550
Reimbursable Administrative Expenses - Note 8                                                  26                      6
Independent General Partners' Fees and Expenses - Note 9                                       25                     92
Insurance Expense                                                                               1                      1
                                                                                  ---------------        ---------------
    TOTAL EXPENSES                                                                            513                  1,073
                                                                                  ---------------        ---------------

NET INVESTMENT INCOME                                                                         803                  8,826
Net Realized Gain on Investments - Note 4 and Schedule 1                                        3                  4,264
Net Change in Unrealized Depreciation on Investments: Note 5 and Schedule 2
  Publicly Traded Securities                                                                 (960)                (1,094)
  Nonpublic Securities                                                                     (2,439)                (6,634)
                                                                                  ---------------        ---------------
   SUBTOTAL                                                                                (3,399)                (7,728)
NET INCREASE (DECREASE) IN NET ASSETS
   RESULTING FROM OPERATIONS                                                               (2,593)                 5,362
Less:  Incentive Fee Earned by Managing General Partner                                        --                 (1,302)
                                                                                  ---------------        ---------------
NET INCREASE (DECREASE) AVAILABLE FOR PRO-RATA
  DISTRIBUTION TO ALL PARTNERS                                                    $        (2,593)       $         4,060
                                                                                  ===============        ===============


See the Accompanying Notes to Financial Statements.

</TABLE>

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

<S>                                                                              <C>                      <C>
                                                                                          For the Three Months Ended
                                                                                  ---------------          ---------------
                                                                                  March 31, 1997            March 31, 1996
                                                                                  ---------------          ---------------

FROM OPERATIONS:

Net Investment Income                                                             $           803          $         8,826

Net Realized Gain on Investments                                                                3                    4,264

Net Change in Unrealized Depreciation From Investments                                     (3,399)                  (7,728)
                                                                                  ---------------          ---------------

Net Increase (Decrease) in Net Assets Resulting from Operations                            (2,593)                   5,362

Cash Distributions to Partners                                                             (1,833)                    (333)
                                                                                  ---------------          ---------------

Total Increase (Decrease)                                                                  (4,426)                   5,029

NET ASSETS:

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

End of Period                                                                     $        66,689          $       124,212
                                                                                  ===============          ===============



See the Accompanying Notes to Financial Statements.

</TABLE>


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

<S>                                                                              <C>                    <C>
                                                                                       For the Three Months Ended
                                                                                  ---------------        ---------------
                                                                                   March 31, 1997         March 31, 1996
                                                                                  ---------------        ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                         $         1,312        $        10,589
  Legal and Professional Fees                                                                (191)                  (765)
  Investment Advisory Fee                                                                    (204)                  (254)
  Fund Administration Fee                                                                    (158)                  (170)
  Independent General Partners' Fees and Expenses                                             (22)                  (118)
  Reimbursable Administrative Expenses                                                        (35)                   (35)
  (Purchase) Sale of Temporary Investments, Net                                             1,115                (27,267)
  Proceeds from Sales of Portfolio Company Investments                                          7                 18,353
                                                                                  ---------------        ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                   1,824                    333
                                                                                  ---------------        ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                           (1,833)                  (333)
                                                                                  ---------------        ---------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                                   (1,833)                  (333)
                                                                                  ---------------        ---------------
  Net Decrease in Cash                                                                         (9)                    --
  Cash at Beginning of Year                                                                   125                      1
                                                                                  ---------------        ---------------
CASH AT END OF PERIOD                                                             $           116        $             1
                                                                                  ===============        ===============

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

Net Investment Income                                                             $           803        $         8,826
                                                                                  ---------------        ---------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  (Increase) Decrease in Investments                                                        1,118                (13,178)
  (Increase) Decrease in Accrued Interest, Dividend and Discount Receivable                    (4)                   690
  Decrease in Prepaid Expenses                                                                  2                      1
  Decrease in Legal and Professional Fees Payable                                             (92)                  (216)
  Decrease in Reimbursable Administrative Expenses Payable                                     (9)                   (28)
  (Decrease) Increase in Independent General Partners' Fees Payable                             3                    (26)
  Net Realized Gain on Sales of Investments                                                     3                  4,264
                                                                                  ---------------        ---------------
TOTAL ADJUSTMENTS                                                                           1,021                 (8,493)
                                                                                  ---------------        ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                         $         1,824        $           333
                                                                                  ===============        ===============




See the Accompanying Notes to Financial Statements.

</TABLE>


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

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

For the Three Months Ended March 31, 1997
Partners' Capital at January 1, 1997                                $       19       $    1,368        $   69,728        $   71,115
Allocation of Net Investment Income                                         --                2               801               803
Allocation of Net Realized Gain on Investments                              --               --                 3                 3
Allocation of Net Change in Unrealized
  Depreciation From Investments                                             (1)              (8)           (3,390)           (3,399)
Cash Distributions to Partners                                              --             (607)           (1,226)           (1,833)
                                                                    ----------       ----------        ----------        ----------
Partners' Capital at March 31, 1997                                 $       18       $      755        $   65,916        $   66,689
                                                                    ==========       ==========        ==========        ==========






See the Accompanying Notes to Financial Statements.

</TABLE>


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

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

                   ANCHOR ADVANCED PRODUCTS, INC. (b) - Note 13
$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
                     (26.5% of fully diluted common equity assuming exercise                    ------------------------------
                       of warrants)                                                               15,237     15,237      23.06
                                                                                                ------------------------------
                   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
                     (17.0% of fully diluted common equity)                                     ------------------------------
                                                                                                  17,144     17,144      25.94
                                                                                                ------------------------------
                   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      5,918
                     (8.3% 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      5,918       8.96
                                                                                                ------------------------------
                  HILLS STORES COMPANY - Note 5
458,432 Shares    Hills Stores Company, Common Stock(a)(d)                             04/03/90   30,246      1,948
62,616 Shares     Hills Stores Company, Common Stock(a)(d)                             08/21/95    4,530        266
                    (5.1% of fully diluted common equity)                                       ------------------------------
                                                                                                  34,776      2,214       3.35
                                                                                                ------------------------------
                  PLAYTEX PRODUCTS, INC. (b) - Note 5
343,726 Shares    Playtex Products, Inc., Common Stock(a)(d)                           03/29/90    5,299      3,738
                    (.7%  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      3,738      5.66
                                                                                                -----------------------------
                  CINNABON INTERNATIONAL, INC. (formerly Restaurants Unlimited)
$6,044            Restaurants Unlimited, 11% Subordinated Note due 06/30/02(c)        06/03/94     6,044      6,044
391,302 Warrants  Restaurants Unlimited, Common Stock Warrants(d)                     06/03/94         0          0
                    (2.1% of fully diluted common equity)                                       -----------------------------
                                                                                                   6,044      6,044      9.15
                                                                                                -----------------------------
                  STANLEY FURNITURE COMPANY, INC. (b) - Note 4
13,202 Shares     Stanley Furniture Company, Inc., Common Stock(a)(d)                 06/30/91       166        257
                    (0.3% of fully diluted common equity)
                    Purchased 6/30/91                   $    4
                    Sold 2/7/97                         $    7
                    Realized Gain                       $    3
                                                                                                ----------------------------
                                                                                                     166        257     0.39
                                                                                                ----------------------------
TOTAL INVESTMENT IN MANAGED COMPANIES                                                           $ 81,986   $ 50,552    76.51
                                                                                                ============================

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

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

                  BIOLEASE, INC.
$784              Biolease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94  $    676      $ 707
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        815      1.23
                                                                                                 -----------------------------
                  FITZ AND FLOYD - Note 5,6,13
$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
                                                                                                 -----------------------------
                                                                                                   12,680      3,024      4.58
                                                                                                 -----------------------------
                  FLA. ORTHOPEDICS, INC. - Note 5
19,366 Shares     FLA. Holdings, Inc. Series B Preferred Stock (d)                     08/02/93     1,513          0
 3,822 Warrants   FLA. Holdings, Inc. Common Stock Purchase Warrants(d)                08/02/93         0          0
                     $4,842  12.5 Sub. Note
                     Purchased 8/02/93                $ 4,842
                     Surrendered 8/02/96              $     -
                     Realized Loss                    $(4,842)
                     121,040 Common Stock
                     Purchased 08/02/93               $ 1,513
                     Exchanged 08/06/96
                     19,366 Series B Preferred Stock  $ 1,513
                     Realized Gain                    $     0
                     Total Realized Loss              $(4,842)                                   -----------------------------
                                                                                                    1,513          0     0.00
                                                                                                 -----------------------------
                  SORETOX - Notes 5,6
$3,503            Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g)             06/29/95     3,503      2,590
$3,128            Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g)         06/29/95     3,128          0
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants                      12/06/91         0          0
                                                                                                 -----------------------------
                                                                                                    6,631      2,590      3.92
                                                                                                 -----------------------------
                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                      $21,608      6,429      9.73
                                                                                                 =============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                MARCH 31, 1997
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

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

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                  Various     52,757     39,091     59.16
                   Preferred Stock, Common Stock, Warrants and Stock Rights            Various     50,837     17,890     22.07
                                                                                                 -----------------------------

                   TOTAL MEZZANINE INVESTMENTS                                                   $103,594   $ 56,981     86.23
                                                                                                 =============================
                   TEMPORARY INVESTMENTS

                   COMMERCIAL PAPER
$ 7,195            Ford Motor Credit Company, 5.33% due 04/03/97                      03/19/97      7,179      7,193
$ 1,909            American General Corp., 5.63%, due 04/08/97                        03/27/97      1,905      1,907
                                                                                                 -----------------------------

                   TOTAL INVESTMENT IN COMMERCIAL PAPER                                             9,084      9,100     13.77
                                                                                                 -----------------------------

                   TOTAL TEMPORARY INVESTMENTS                                                      9,084      9,100     13.77
                                                                                                 -----------------------------

                   TOTAL INVESTMENT PORTFOLIO                                                    $112,678  $  66,081    100.00%
                                                                                                 =============================



    (a) Publicly traded class of securities.
    (b) Represents investment in affiliates as defined in the Investment Company Act of 1940.
    (c) Restricted security.
    (d) Restricted non-income producing equity security.
    (e) Represents  original cost and excludes  accretion of discount of $33 for
        Mezzanine Investments and $16 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
                                      March 31, 1997
                                        (UNAUDITED)


1.  Organization and Purpose

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

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

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

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

2.  Significant Accounting Policies

Basis of Accounting

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

Valuation of Investments

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

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

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

Interest Receivable on Investments

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

Payment-In-Kind Securities

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

Investment Transactions

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

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

Sales and Marketing Expenses, Offering Expenses and Sales Commissions

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

Deferred Interest Income

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

Partners' Capital

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

Interim Financial Statements


        The financial  information  included in this interim  report as of March
31, 1997 and for the period then ended has been prepared by  management  without
an audit by independent certified public accountants. The results for the period
ended  March 31,  1997 are not  necessarily  indicative  of the  results  of the
operations  expected for the year and reflect  adjustments,  all of a normal and
recurring  nature,  necessary  for the fair  presentation  of the results of the
interim period.  In the opinion of Mezzanine  Investments II, L.P., the Managing
General  Partner of Fund II,  all  necessary  adjustments  have been made to the
aforementioned  financial information for a fair presentation in accordance with
generally accepted accounting  principles.

<PAGE>
3. Allocations of Profits and Losses

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

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

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

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

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

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

4.  Investment Transactions

     During February 1997, Fund II sold 272 shares of Stanley  Furniture for $24
per share.  Fund II received  total  proceeds of $6,528 and recognized a gain of
$3,105.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on  investments  of $24.9 million for Fund II. As of March 31, 1997,  the
remaining reserve balance was $8.9 million due to follow-on investments in Petco
Animal  Supplies,  Fitz and  Floyd,  Fine  Clothing,  Inc.,  Hills  Stores,  and
Ghirardelli  Holdings.  Additionally,  $7.29  million  of the  reserve  has been
returned to the partners. The level of the reserve was based upon an analysis of
potential follow-on  investments in specific portfolio companies that may become
necessary to protect or enhance Fund II's existing investment.  During 1996, the
Independent General Partners approved an additional follow-on investment in Fitz
and Floyd of $2.4  million  which was  funded  in April  1997.  (See Note 13 for
further information).

     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 three months ended March 31, 1997,  Fund II recorded net unrealized
depreciation  of $3.4  million (of which  $959,793 is  attributable  to publicly
traded securities)  compared to net unrealized  depreciation of $7.7 million for
the same  period  in 1996.  As of March  31,  1997,  Fund  II's  cumulative  net
unrealized depreciation on investments totaled $46.6 million.

     For  additional  information,  please refer to the  Schedule of  Unrealized
Appreciation and Depreciation - Schedule 2.
<PAGE>

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 on January 1, 1994.
    - FLA. Orthopedics, Inc., on January 1, 1995.
    - Stablex Canada, Inc., on June 29, 1995.

7.  Investment Advisory Fee

     The  Investment  Adviser  provides  the   identification,   management  and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds,  the Investment  Adviser  receives a quarterly fee at the
annual rate of 1% of assets under  management (net offering  proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1.2  million  for Fund II and the  Retirement  Fund on a  combined  basis.  The
Investment  Advisory  Fee is  calculated  and paid  quarterly,  in  advance.  In
addition,  the  Investment  Adviser  receives  95% of  the  benefit  of any  MGP
Distributions  paid to the Managing General Partner (see Note 10). For the three
months  ended  March 31,  1997 and 1996,  Fund II paid  $203,953  and  $254,070,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.

8.  Fund Administration Fees and Expenses

     As compensation for its services,  ML Fund  Administrators  Inc. (the "Fund
Administrator";  an affiliate of the  Managing  General  Partner) is entitled to
receive  from the Funds an annual  amount of the greater of $500,000 or 0.45% of
the excess of net offering  proceeds less 50% of capital  reductions  and 50% of
realized  losses.  In addition,  ML Mezzanine II Inc.,  an affiliate of the Fund
Administrator  and Merrill  Lynch & Co.,Inc.,  receives 5% of the benefit of any
MGP  Distributions  paid to the Managing General Partner (see Note 10). The Fund
Administration Fee is calculated and paid quarterly, in advance, by each Fund in
proportion with the net offering proceeds.  For the three months ended March 31,
1997  and  1996,  Fund II paid  $157,943  and  $170,354,  respectively,  in Fund
Administration Fees.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund  Administrator,  effective  November  10,  1993,  a portion  of the  actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is being reimbursed to the Fund  Administrator.  Actual  out-of-pocket  expenses
("reimbursable expenses") primarily consist of printing, audits, tax preparation
and custodian  fees. For the three months ended March 31, 1997 and 1996, Fund II
incurred $25,810 and $6,403, respectively, in reimbursable expenses.

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

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 three
months  ended March 31, 1997 and 1996,  Fund II  incurred  $25,374 and  $91,537,
respectively, in Independent General Partners' Fees and Expenses.

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.
<PAGE>

    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.

     In the first quarter of 1997,  Fund II paid the Individual  General Partner
distributions  totaling $276 and Managing General Partner distributions totaling
$606,519.  As of March 31, 1997, the Managing General Partner has earned a total
of $22.8 million in MGP Incentive  Fees of which $251,108 is deferred in payment
to the Managing General Partner as a Deferred Distribution amount (the "Deferred
Distribution") in accordance with the Partnership  Agreement.  To the extent not
payable  to  the  Managing  General  Partner,   this  Deferred  Distribution  is
distributed  to  the  Partners   pro-rata  in  accordance   with  their  capital
contributions,  and certain  amounts  otherwise  later  payable to Partners from
distributable  cash from  operations  would  instead  be  payable  solely to the
Managing General Partner until the Deferred Distribution amount is paid in full.

11. Litigation

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

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

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

<PAGE>


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

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

     Pursuant  to the  Statement  of  Financial  Accounting  Standards  No.  109
Accounting  for Income Taxes,  Fund II is required to disclose any difference in
the tax basis of Fund II's assets and liabilities versus the amounts reported in
the financial  statements.  As of December 31, 1996,  the tax basis of Fund II's
assets are greater  than the amounts  reported in the  financial  statements  by
$44.1 million. This difference is attributable to net unrealized depreciation on
investments which has not been recognized for tax purposes.

13. Subsequent Events

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

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

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

     On April 29,  1997,  the  Individual  General  Partners  approved the first
quarter  1997  cash   distribution   totaling   $696,497  which  represents  net
distributable  capital  proceeds of $6,528 from the sale of Stanley common stock
(which includes return of capital of $3,423),  net investment income of $616,242
from Mezzanine  Investments and $73,727 income from Temporary  Investments.  The
total amount  distributed to the Limited  Partners was $79,920 or $.36 per Unit,
which was distributed on May 15, 1997. The Managing  General Partner  received a
total  of  $180  with  respect  to its  interest  in  Fund  II and  $616,241  in
performance  incentive fees.  Thomas H. Lee, as an Individual  General  Partner,
received $18 with respect to his interest in Fund II.

     On April 29, 1997, the Individual  General Partners also approved a special
cash  distribution  totaling  $19,963,009  million  with  respect  to a  capital
transaction effected on April 2, 1997 in connection with Fund II's investment in
Anchor Holdings,  Inc. and related  dividends paid on April 2, 1997. The special
distribution is comprised of Net  Distributable  Capital Proceeds of $14,683,411
(all of which is return  of  capital)  and  distributable  cash  from  mezzanine
investments of $5,279,598.  The total amount  distributed to Limited Partners of
record as of the effective  date of such sale was $81.89 per Unit.  The Managing
General  Partner  received a cash  distribution  of $40,946  with respect to its
interest in Fund II and $1,759,500 in performance incentive fees. Thomas H. Lee,
as an Independent General Partner,  received $4,095 representing his interest in
Fund II.

<PAGE>
<TABLE>
<CAPTION>
                                            SCHEDULE 1
                                 ML-LEE ACQUISITION FUND II, L.P.
                        SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
                               FOR THE 3 MONTHS ENDED MARCH 31, 1997
                                      (DOLLARS IN THOUSANDS)
                                            (UNAUDITED)

<S>                                                            <C>                 <C>            <C>                 <C>
                                                                                    Original                            Realized
SECURITY                                                        Number of Shares        Cost          Net Proceeds          Gain
                                                                ----------------    --------          ------------      --------
Stanley Furniture
      Common Stock                                                           272    $      4          $          7      $      3
                                                                                    --------          ------------      --------
                                                                                    $      4          $          7      $      3
                                                                                    ========          ============      ========




</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                   SCHEDULE 2
                                         ML-LEE ACQUISITION FUND II, L.P.
                           SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                                       FOR THE PERIOD ENDED MARCH 31, 1997
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

<S>                                           <C>             <C>           <C>                   <C>                  <C>
                                                                          Unrealized
                                                                          Appreciation         Total Unrealized     Total Unrealized
                                                                     (Depreciation) for the     Appreciation/        Appreciation/
                                         Investment        Fair        Three Months Ended     (Depreciation) at    (Depreciation) at
SECURITY                                    Cost           Value         March 31, 1997        December 31, 1996     March 31, 1997
                                         --------        --------        ---------------        ---------------     ---------------

PUBLICLY TRADED SECURITIES:

First Alert, Inc.
  Common Stock                            $  3,320        $  5,918        $      (1,029)       $       3,627        $         2,598

Hills Stores Company
 Common Stock                               34,776           2,214                 (912)             (31,650)               (32,562)

Playtex Products, Inc.
  Common Stock                               5,299           3,738                  988               (2,549)                (1,561)

Stanley
  Common Stock                                 166             257                   (7)                  98                     91

                                                                          -------------        -------------        ---------------
TOTAL UNREALIZED DEPRECIATION
 FROM PUBLICLY TRADED SECURITIES                                          $        (960)       $     (30,474)       $       (31,434)
                                                                          -------------        -------------        ---------------

NON PUBLIC SECURITIES:

Fitz and Floyd
  Adj Rate Sr Subordinated Notes          $ 12,679           3,024                   --               (9,659)                (9,659)

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

Stablex Canada Inc.
  Subordinated Notes*                        6,631           2,590               (2,439)              (1,602)                (4,041)

                                                                          -------------        -------------        ---------------
TOTAL UNREALIZED DEPRECIATION FROM
 NON PUBLIC SECURITIES                                                    $      (2,439)       $     (12,774)       $       (15,213)
                                                                          -------------        -------------        ---------------

NET UNREALIZED DEPRECIATION                                               $      (3,399)       $     (43,248)       $       (46,647)
                                                                          =============        =============        ===============

*  Restricted Securities

</TABLE>
<PAGE>



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


Liquidity & Capital Resources

     As of March 31, 1997,  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 March 31, 1997 were $120.9 million, after adjusting for returns of capital
to partners, volume discounts,  sales commissions and organizational,  offering,
sales and marketing expenses.

     At March 31, 1997, Fund II had outstanding a total of $103,593,794 invested
in  Mezzanine  Investments  representing  $81,986,438  Managed  and  $21,607,356
Non-Managed  portfolio  investments.  The  remaining  proceeds  were invested in
Temporary Investments primarily comprised of commercial paper with maturities of
less than two months.

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

     As provided by the Partnership  Agreement,  the Managing General Partner of
Fund II is entitled to receive an incentive  distribution after Limited Partners
have  received  their  Priority  Return of 10% per annum.  The Managing  General
Partner is required to defer a portion of any incentive fee earned from the sale
of  portfolio  investments  in  excess of 20% of  realized  capital  gains,  net
realized  capital losses and  unrealized  depreciation,  in accordance  with the
Partnership  Agreement  (the  "Deferred  Distribution  Amount").  This  Deferred
Distribution Amount is distributable to the Partners pro-rata in accordance with
their capital  contributions,  and certain  amounts  otherwise  later payable to
Limited Partners from  distributable cash from operations are instead payable to
the Managing  General  Partner until the Deferred  Distribution  Amount is paid.
Subsequent  to the  cash  distributions  made  on May  15,  1997,  the  Deferred
Distribution Amount of $251,108 has been paid in full.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on  investments  of $24.9  million for Fund II. As of May 15,  1997,  the
reserve  balance was reduced to $6.5  million (of which $2.4 million was made in
April,  1997) due to follow-on  investments in Petco Animal  Supplies,  Fitz and
Floyd,   Fine  Clothing,   Inc.,   Hills  Stores,   and  Ghirardelli   Holdings.
Additionally,  $7.29  million of the reserve has been  returned to the partners.
The level of the  reserve  was based upon an  analysis  of  potential  follow-on
investments in specific portfolio companies that may become necessary to protect
or enhance Fund II's existing investment.

     All net proceeds from the sale of Mezzanine Investments received by Fund II
in the future will be distributed to its partners unless applied to or set aside
for expenses 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 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 two years. In certain cases, Fund II has agreed not
to make  any  sales  of  equity  securities  for a  specified  hold-back  period
following a public offering.

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

Results of Operations

Investment Income and Expenses

    The investment income from operations for the quarter consists  primarily of
interest and discount income earned on the investment of proceeds from partners'
contributions in Mezzanine Investments and short-term money market instruments.

     For the three months ended March 31, 1997, Fund II had investment income of
$1,315,661,  as compared to $9,898,813 for the same period in 1996. The decrease
in 1997  investment  income as compared to 1996 is due to the the sale of income
producing portfolio companies,  as well as recognition of previously  unrecorded
interest income of payment-in-kind  securities totalling $7.2 million related to
the sale of CST Office Products, Inc. in March of 1996.

        Major expenses for the period consisted of 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 three months ended March 31, 1997 and 1996
were $99,294 and $550,035,  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.

     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 quarter  ended March 31, 1997 and 1996 was  $203,953
and  $254,070,  respectively,  and was  calculated  at an annual rate of 1.0% of
assets under  management (net offering  proceeds  reduced by cumulative  capital
reductions and realized losses),  with a minimum annual amount of $1,200,000 for
Fund II and the  Retirement  Fund  on a  combined  basis.  The  decrease  in the
Investment   Advisory  Fee  is  primarily  the  result  of  returns  of  capital
distributed to Limited Partners.

     The Fund  Administration Fee paid to the Fund Administrator for the quarter
ended March 31, 1997 and 1996 was $157,943 and $170,354,  respectively,  and was
calculated  at an annual rate of 0.45% of the excess of net  offering  proceeds,
less 50% of capital reductions and 50% of realized losses.
<PAGE>
     Beginning in November of 1997, the Fund  Administration  Fee will change to
an annual amount of $400,000 for Fund II and the  Retirement  Fund on a combined
basis, plus 100% of all reimbursable expenses (as defined below) incurred by the
Fund.

     Pursuant to the  administrative  services agreement between Fund II and the
Fund  Administrator,  effective  November  10,  1993,  a portion  of the  actual
out-of-pocket expenses incurred in connection with the administration of Fund II
is  reimbursable  to  the  Fund  Administrator.  Actual  out-of-pocket  expenses
("reimbursable expenses") primarily consist of printing, audits, tax preparation
and custodian  fees. For the quarter ended March 31, 1997 and 1996,  Fund II had
reimbursable expenses of $25,810 and $6,403, respectively.

     For the three  months  ended  March 31,  1997,  Fund II had net  investment
income of $802,239 as compared to  $8,825,346  for the same period in 1996.  The
decrease  in  1997  net  investment  income  as  compared  to 1996 is due to the
recognition in 1996 of interest income from  payment-in-kind  securities related
to the sale of CST Office Products, Inc.

Net Assets

     Fund II's net assets  decreased  by $4.4  million  during the three  months
ended March 31, 1997,  due to the payment of cash  distributions  to partners of
$1,833,047 and net unrealized depreciation of $3.4 milllion, partially offset by
realized gains from the sale of Stanley Furniture common stock of $3,105 and net
investment  income of $802,239.  This  compares to the increase in net assets of
$5.0  million  for the three  months  ended March 31,  1996  resulting  from the
payment  of cash  distributions  to  partners  of  $333,445  and net  unrealized
depreciation of $7.7 millin,  partially offset by net investment  income of $8.8
million and realized gains from investments of $4.3 million.

Unrealized Appreciation and Depreciation on Investments

     For the three months ended March 31, 1997,  Fund II recorded net unrealized
depreciation  of $3.4  millin (of which  $959,793  is  attributable  to publicly
traded securities)  compared to net unrealized  depreciation of $7.7 million for
the same  period  in 1996.  As of March  31,  1997,  Fund  II's  cumulative  net
unrealized depreciation on investments totaled $46.6 million.

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

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

     Approximately  58% of Fund  II's  investments  (at cost)  are  invested  in
private placement securities for which there are no ascertainable market values.
Although  the Managing  General  Partner and  Investment  Adviser use their best
judgment in estimating the fair value of these  investments,  there are inherent
limitations in any estimation  technique.  Therefore,  the fair value  estimates
presented  herein are not  necessarily  indicative  of the amount  which Fund II
could realize in a current transaction.

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

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

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


Realized Gains and Losses

     For the three months ended March 31, 1997,  Fund II had net realized  gains
from the sale of Stanley  common stock of $3,105 as compared to $4.3 million for
the same period in 1996.

    For additional  information,  please refer to the  Supplemental  Schedule of
Realized Gains and Losses - Schedule 1.

Cash Distributions

     On April 29,  1997,  the  Individual  General  Partners  approved the first
quarter  1997  cash   distribution   totaling   $696,497  which  represents  net
distributable  capital  proceeds of $6,528 from the sale of Stanley common stock
(which includes return of capital of $3,423),  net investment income of $616,242
from Mezzanine  Investments and $73,727 income from Temporary  Investments.  The
total amount  distributed to the Limited  Partners was $79,920 or $.36 per Unit,
which was distributed on May 15, 1997. The Managing  General Partner  received a
total  of  $180  with  respect  to its  interest  in  Fund  II and  $616,241  in
performance  incentive fees.  Thomas H. Lee, as an Individual  General  Partner,
received $18 with respect to his interest in Fund II.

     On April 29, 1997, the Individual  General Partners also approved a special
cash  distribution  totaling  $19,963,009  million  with  respect  to a  capital
transaction effected on April 2, 1997 in connection with Fund II's investment in
Anchor Holdings,  Inc. and related  dividends paid on April 2, 1997. The special
distribution is comprised of Net  Distributable  Capital Proceeds of $14,683,411
(all of which is return  of  capital)  and  distributable  cash  from  mezzanine
investments of $5,279,598.  The total amount  distributed to Limited Partners of
record as of the effective  date of such sale was $81.89 per Unit.  The Managing
General  Partner  received a cash  distribution  of $40,946  with respect to its
interest in Fund II and $1,759,500 in performance incentive fees. Thomas H. Lee,
as an Independent General Partner,  received $4,095 representing his interest in
Fund II.



<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 March 31,
         1997.

     (b) Reports on form 8-K:           Form 8-K dated April 2, 1997
                                        Filed May 2, 1997 related to 
                                        Recapitalization of Anchor Holdings
                                        Inc. and Anchor Advanced Products Inc.



<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 15th day of
May, 1997.

                        ML-LEE ACQUISITION FUND II, L.P.

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

                        By: ML Mezzanine II Inc.,
                            its General Partner


Dated: May 15, 1997       /s/  Audrey Bommer
                               Audrey Bommer
                               Vice President and Treasurer
                               (Chief Financial Officer)


Dated: May 15, 1997       /s/  Roger F. Castoral, Jr.
                               Roger F. Castoral, Jr.
                               Vice President and Assistant Treasurer
                               (Principal Accounting Officer)









<PAGE>

                           SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 15th day of
May, 1997.

                      ML-LEE ACQUISITION FUND II, L.P.

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

                      By: ML Mezzanine II Inc.,
                          its General Partner




Dated: May 15, 1997
                          Audrey Bommer
                          Vice President and Treasurer
                          (Chief Financial Officer)




Dated: May 15, 1997
                          Roger F. Castoral, Jr.
                          Vice President and Assistant Treasurer
                          (Principal Accounting Officer)