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

                       For the Period Ended September 30, 1998

                         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 - 14th Floor
                          New York, New York 10080-6123
              (Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (212) 236-6562.

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

           Name on each exchange on which registered: Not Applicable

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

                      Units of Limited Partnership Interest
                                (Title of class)

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

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


<PAGE>
                         PART I - FINANCIAL INFORMATION

                        ML-LEE ACQUISITION FUND II, L.P.

                                TABLE OF CONTENTS

Part I.  Financial Information

Item 1.  Financial Statements


Statements of Assets, Liabilities and Partners'
  Capital as of September 30, 1998 and December 31, 1997

Statements of Operations - For the Three and Nine
  Months Ended September 30, 1998 and 1997

Statements of Changes in Net Assets -
  For the Nine Months Ended September 30, 1998 and 1997

Statements of Cash Flows -
  For the Nine Months Ended September 30, 1998 and 1997

Statement of Changes in Partners' Capital at September 30, 1998

Schedule of Portfolio Investments - September 30, 1998

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation
 and Depreciation - Schedule 2

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

Part II.  Other Information


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)
<S>                                                                             <C>                   <C>
                                                                                     (Unaudited)
                                                                                 September 30, 1998       December 31, 1997
                                                                                 ------------------       -----------------

Assets:

Investments - Notes 2,4,5
  Portfolio Investments at fair value
    Managed Companies (amortized cost $57,964
      at September 30, 1998 and $68,022 at December 31, 1997)                            $    24,360             $   34,206
    Non-Managed Companies (amortized cost $23,967
      at September 30, 1998 and at December 31, 1997)                                          8,440                  8,440
    Temporary Investments, at amortized cost (cost $3,147
      at September 30, 1998 and $3,612 at December 31, 1997)                                   3,148                  3,627
Cash                                                                                             224                    245
Accrued Interest & Other Receivable - Note 2                                                     336                    257
Due from Affiliate - Note 10                                                                      --                    328
Prepaid Expenses                                                                                   1                      4
                                                                                          ----------             ----------  
Total Assets                                                                              $   36,509             $   47,107
                                                                                          ==========             ==========

Liabilities and Partners' Capital:

Liabilities
    Legal and Professional Fees Payable                                                   $       75             $      100
    Reimbursable Administrative Expenses Payable Note 8                                           82                     11
    Independent General Partners' Fees Payable - Note 9                                           22                     12
    Deferred Interest Income - Note 2                                                            118                    151
                                                                                          ----------             ----------
Total Liabilities                                                                                297                    274
                                                                                          ----------             ----------

Partners' Capital - Note 2
    Individual General Partner                                                                    13                     15
    Managing General Partner                                                                     889                    266
    Limited Partners (221,745 Units)                                                          35,310                 46,552
                                                                                          ----------             ----------  
Total Partners' Capital                                                                       36,212                 46,833
                                                                                          ----------             ----------
Total Liabilities and Partners' Capital                                                   $   36,509             $   47,107
                                                                                          ==========             ==========


          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         For the Nine Months Ended
                                                            -------------    -------------     -------------     ------------- 
                                                            September 30,    September 30,     September 30,     September 30, 
                                                                 1998             1997              1998              1997    
                                                            -------------    -------------     -------------     ------------- 
Investment Income - Notes 2,4,6:
  Interest                                                 $         573     $         855     $       1,726     $       3,663
  Discount, Dividend & Other Income                                   76                77               290             5,746
                                                            -------------    -------------     -------------     ------------- 
    Total Income                                                     649               932             2,016             9,409
                                                            -------------    -------------     -------------     ------------- 
Expenses:
  Investment Advisory Fee - Note 7                                   156               164               508               582
  Fund Administration Fee - Note 8                                    55               150               167               470
  Reimbursable Administrative Expenses - Note 8                       87                50               273               129
  Legal and Professional Fees                                         68                --               255                99
  Independent General Partners' Fees and Expenses - Note 9            20                19                74                95
  Insurance Expense                                                    1                 2                 3                 4
                                                            -------------    -------------     -------------     ------------- 
    Total Expenses                                                   387               385             1,280             1,379
                                                            -------------    -------------     -------------     ------------- 
Net Investment Income                                                262               547               736             8,030
Net Realized Gain on Investments - Note 4 and Schedule 1              --                --             7,028                50
Net Change in Unrealized Appreciation (Depreciation)
  on Investments: Note 5 and Schedule 2
  Publicly Traded Securities                                      (1,823)            1,125               212              (920)
  Nonpublic Securities                                                --              (412)               --              (2,788)
                                                            -------------    -------------     -------------     ------------- 
  Subtotal                                                        (1,823)              713               212            (3,708)
Net Increase (Decrease) in Net Assets
   Resulting form Operations                                      (1,561)            1,260             7,976             4,372
                                                            -------------    -------------     -------------     ------------- 
Less:  Earned MGP Distributions to Managing General Partner           --               (80)             (945)           (2,834)
                                                            -------------    -------------     -------------     ------------- 
Net Increase (Decrease) Available For Pro-Rata
  Distribution to All Partners                              $     (1,561)    $       1,180     $       7,031     $       1,538
                                                            =============    =============     =============     =============

See the Accompanying Notes to Financial Statements 

</TABLE>

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

<S>                                                                         <C>                  <C>
                                                                                    For the Nine Months Ended
                                                                             --------------     --------------
                                                                             September 30,       September 30,
                                                                                  1998               1997 
                                                                             --------------     --------------

From Operations:
   Net Investment Income                                                     $          736     $        8,030
   Net Realized Gain on Investments                                                   7,028                 50
   Net Change in Unrealized Appreciation
     (Depreciation) from Investments                                                    212             (3,708)
                                                                             --------------     --------------
   Net Increase in Net Assets
     Resulting from Operations                                                        7,976              4,372
   Cash Distributions to Partners                                                   (18,597)           (25,696)
                                                                             --------------     --------------
   Total Decrease                                                                   (10,621)           (21,324)
Net Assets:
   Beginning of Year                                                                 46,833             71,115
                                                                             --------------     --------------
   End of Period                                                             $       36,212     $       49,791
                                                                             ==============     ==============

              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 Nine Months Ended
                                                                    -------------    -------------
                                                                    September 30,    Septmeber 30,
                                                                         1998             1997
                                                                    -------------    -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows From Operating Activities:
  Interest, Dividends, Discount and Other Income                    $       1,960    $       8,746
  Legal and Professional Fees                                                (280)            (108)
  Investment Advisory Fee                                                    (508)            (582)
  Fund Administration Fee                                                    (167)            (471)
  Independent General Partners' Fees and Expenses                             (64)            (107)
  Reimbursable Administrative Expenses                                       (202)            (124)
  (Purchase) Sale of Temporary Investments, Net                               466            5,766
  Purchase of Follow On Investments                                          --             (2,420)
  Proceeds from Sales of Portfolio Company Investments                     17,085           14,872
                                                                    -------------    -------------
Net Cash Provided by Operating Activities                                  18,290           25,572
                                                                    -------------    -------------
Cash Flows from Financing Activities:
  Cash Distributions to Partners                                          (18,311)         (25,696)
                                                                    -------------    -------------
Net Cash Applied to Financing Activities                                  (18,311)         (25,696)
                                                                    -------------    -------------
  Net Decrease in Cash                                                        (21)            (124)
  Cash at Beginning of Year                                                   245              125
                                                                    -------------    -------------
Cash at End of Period                                               $         224    $           1
                                                                    =============    =============

                         Reconciliation of Net Investment Income
                        to Net Cash Provided by Operating Activities


  Net Investment Income                                             $         736    $       8,030
                                                                    -------------    -------------
Adjustments to Reconcile Net Investment Income
  to Net Cash Provided by Operating Activities
  Decrease in Investments                                                  10,523           18,172
  Increase in Accrued Interest,
    Dividend and Discount Receivable                                          (56)            (664)
   Decrease in Prepaid Expenses                                                 3                4
  Decrease in Legal and Professional Fees Payable                             (25)             (14)
  Increase in Reimbursable Administrative Expenses Payable                     71                5
  (Decrease) Increase in Independent General Partners' Fees Payable            10              (11)
  Net Realized Gain on Sales of Investments                                 7,028               50
                                                                    -------------    -------------
Total Adjustments                                                          17,554           17,542
                                                                    -------------    -------------
Net Cash Provided by Operating Activities                           $      18,290    $      25,572
                                                                    =============    =============


              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 Nine Months Ended September 30, 1998
Partners' Capital at January 1, 1998                                $     15    $    266    $ 46,552    $ 46,833
Allocation of Net Investment Income                                       --          44         692         736
Allocation of Net Realized Gain on Investments                             2       1,039       5,987       7,028
Allocation of Net Change in Unrealized
  Depreciation From Investments                                           --           1         211         212
Cash Distributions to Partners                                            (4)       (461)    (18,132)    (18,597)
                                                                    --------    --------    --------    --------       
Partners' Capital at September 30, 1998                             $     13    $    889    $ 35,310    $ 36,212
                                                                    ========    ========    ========    ======== 

See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                               September 30, 1998
                             (DOLLARS IN THOUSANDS)
                                 (UNAUDITED)


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

                   BIG V SUPERMARKETS, INC. (b)
$13,037            Big V Supermarkets, Inc., Sr. Sub. Nt. 14.14% due 03/15/01(c)       12/27/90  $ 13,037   $ 13,037
117,333 Shares     Big V Holding Corp., Common Stock(d)                                12/27/90     4,107      4,107
                   (16.6% of fully diluted common equity)                                        ------------------------------
                                                                                                   17,144     17,144      47.69
                                                                                                 ------------------------------
                   CINNABON INTERNATIONAL, INC. - Notes 6, 13
                   (formerly Restaurants Unlimited)
$6,044             Cinnabon, 13% Subordinated Note due 06/30/02(c)(g)                  06/03/94     6,044      6,044
391,302 Warrants   Cinnabon, Common Stock Warrants(d)                                  06/03/94         0          0
                    (2.1% of fully diluted common equity)                                        ------------------------------
                                                                                                    6,044      6,044      16.81
                                                                                                 ------------------------------
                   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
                                                                                                 ------------------------------
                  HILLS STORES COMPANY - Note 5
458,432 Shares    Hills Stores Company, Common Stock(a)(d)                            04/03/90     30,246      1,031
62,616 Shares     Hills Stores Company, Common Stock(a)(d)                            08/21/95      4,530        141
                   (4.1% of fully diluted common equity)                                         ------------------------------
                                                                                                   34,776      1,172       3.26
                                                                                                 ------------------------------

                  TOTAL INVESTMENT IN MANAGED COMPANIES                                          $ 57,964   $ 24,360      67.76
                                                                                                 ==============================
</TABLE>

See the Accompanying Notes to Financial Statements.

<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                             September 30, 1998
                           (DOLLARS IN THOUSANDS)
                              (UNAUDITED)


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

                  NON-MANAGED COMPANIES

                  BIOLEASE, INC.- Note 5
$784              BioLease, Inc., 13% Sub. Nt. due 06/06/04 (c)                        06/08/94   $   676     $  392
96.56 Shares      BioLease, Inc., Common Stock (d)                                     06/08/94        94          -
10,014 Warrants   Biotransplant, Inc., Common Stock Purchase Warrants(d)               06/08/94        14         14
                                                                                                  -------------------------------
                                                                                                      784        406         1.13
                                                                                                  -------------------------------

                  FITZ AND FLOYD - Note 5
$2,420            Fitz and Floyd, 12% Sub. Nt. due 04/15/04 (c)                        04/11/97     2,420      2,420
 8,470 Shares     Fitz and Floyd, Series A Preferred Stock (d)                         04/11/97    12,619      3,024
51,425 Shares     Fitz and Floyd, Common Stock (d)                                     04/11/97        --         -- 
                   1,324,508 Shares Common Stock
                   Purchased various                      $    20
                   Surrendered May 1996                   $     0
                   Realized Loss                          $   (20)
                   $10,281  Sr. Sub. Note
                   $2,419  Sr. Sub. Note
                   Purchased various                      $12,619
                   Exchanged 04/11/97
                   8,470 Sh Series A Preferred Stock and
                   51,425 Shares Common Stock             $12,619
                   Realized Gain                          $     0
                   Total Realized Loss                    $   (20)                                -------------------------------
                                                                                                   15,039      5,444        15.14
                                                                                                  -------------------------------

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

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


<PAGE>
<TABLE>
<CAPTION>
                        ML-LEE ACQUISITION FUND II, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                              September 30, 1998
                           (DOLLARS IN THOUSANDS)
                                (UNAUDITED)


 Principal                                                                                                  Fair      % Of
   Amount/                                                                            Investment Investment  Value      Total
   Shares         Investment                                                            Date       Cost(e)  (Note 2)  Investments
<S>                <C>                                                                  <C>        <C>         <C>       <C>
                  SORETOX - Notes 5,6
$3,503            Stablex Canada, Inc., Sub. Nt. 10% due 06/30/07(c)(f)(g)            06/29/95  $  3,503     $ 2,590
$3,128            Stablex Canada, Inc., Jr. Sub. Nt. 11% due 06/30/09(c)(f)(g)        06/29/95     3,128           0
2,004 Warrants    Seaway TLC, Inc. Common Stock Purchase Warrants(d)                  12/06/91         0           0
                                                                                                -----------------------------
                                                                                                   6,631       2,590     7.21
                                                                                                -----------------------------
                   TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                    $ 23,967     $ 8,440    23.48
                                                                                                =============================

                   SUMMARY OF MEZZANINE INVESTMENTS
                   Subordinated Notes                                                 Various     28,808      24,483    68.10
                   Preferred Stock, Common Stock and Warrants                         Various     53,123       8,317    23.14
                                                                                                -----------------------------
                   TOTAL MEZZANINE INVESTMENTS                                                  $ 81,931     $32,800    91.24
                                                                                                =============================

                  TEMPORARY INVESTMENTS

                  COMMERCIAL PAPER
$ 3,150           Ford Motor Credit, 5.35% due 10/5/98                                 9/28/98     3,147       3,148
                                                                                                -----------------------------
                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                             3,147       3,148     8.76
                                                                                                -----------------------------
                  TOTAL TEMPORARY INVESTMENTS                                                   $  3,147    $  3,148     8.76
                                                                                                -----------------------------
                  TOTAL INVESTMENT PORTFOLIO                                                    $ 85,078    $ 35,948   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 $1 for Temporary Investments.
(f)     Inclusive of receipt of payment-in-kind securities.
(g)     Non-accrual investment status.

See the Accompanying Notes to Financial Statements.

</TABLE>
<PAGE>
                              ML-LEE ACQUISITION FUND II, L.P.
                                NOTES TO FINANCIAL STATEMENTS
                                      September 30, 1998
                                        (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";  collectively  referred to as the
"Funds")  and the  Certificates  of Limited  Partnership  were  filed  under the
Delaware  Revised  Uniform  Limited  Partnership  Act on September 23, 1988. The
Funds' operations commenced on November 10, 1989.

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

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

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

2.  Significant Accounting Policies

Basis of Accounting

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

Valuation of Investments

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

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

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1998.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since that time,  and because the portfolio  investments  of companies
whose equity is publicly  traded are valued at the last price at  September  30,
1998,  the current  estimated fair value of these  investments  may have changed
significantly since that point in time.

Interest Receivable on Investments

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by Fund II's portfolio  companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal amounts of such securities.  As of September 30, 1998 and December 31,
1997,  Fund II has in its portfolio of investments  $441,900 of  payment-in-kind
debt securities.  As of September 30, 1998 and December 31, 1997, Fund II has in
its portfolio of investments $29,059 of payment-in-kind equity securities.

Investment Transactions

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

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

Sales and Marketing Expenses, Offering Expenses and Sales Commissions

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

Deferred Interest Income

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

Partners' Capital

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

Interim Financial Statements

     The financial  information included in this report as of September 30, 1998
and for the period then ended has been prepared by  management  without an audit
by independent  cetified  public  accountants.  The results for the period ended
September  30,  1998  are  not  necessarily  indicative  of the  results  of the
operations  expected for the year and reflect  adjustments,  all of a normal and
recurring  nature,  necessary  for the fair  presentation  of the results of the
interim period.  In the opinion of Mezzanine  Investments II, L.P., the Managing
General  Partner of Fund II,  all  necessary  adjustments  have been made to the
aforementioned  financial information for a fair presentation in accordance with
generally accepted accounting principles.
<PAGE>

3. Allocations of Profits and Losses

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

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

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

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

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

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

4.  Investment Transactions

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

     On March 2, 1998, Sunbeam Corporation and First Alert executed a definitive
merger agreement whereby Sunbeam agreed to acquire all of the outstanding shares
of First  Alert for $175  million  or $5.25 per  share and  assume  all of First
Alert's debt.  Pursuant to this transaction Fund II tendered all of their shares
of First  Alert  and  received  proceeds  of $10.8  million.  Net  Distributable
Proceeds of $48.62 per unit were distributed to Limited Partners of record as of
the date of the closing of this transaction, April 2, 1998.

     On March 19, 1998 Fund II and  affiliates of the Thomas H. Lee Company sold
their  remaining  holdings  in  Anchor  Advanced  Products.   Pursuant  to  this
transaction Fund II sold 410,677 shares of Anchor Common Stock for approximately
$1.6 Million ($4.00 per share) and recognized a gain of $247,192.

     On May 27, 1998,  Playtex  Products Inc.,  ("Playtex"),  completed a public
offering  in the  international  markets of  approximately  4 million  shares of
Common Stock at a net price of $13.215 per share (the  "Playtex  Offering").  Of
the 4 million shares offered,  approximately  3.8 million shares were offered by
affiliates  of the  Thomas  H. Lee  Company,  including  Fund II. As part of the
Playtex Offering,  Fund II sold its remaining investment in Playtex,  consisting
of approximately  343,726 shares of Common Stock.  Fund II received  proceeds of
$4.5 million and recognized a loss on the sale of  approximately  $756,000.  Net
Distributable  Proceeds were distributed to Limited Partners of record as of May
27, 1998. 

     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  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  securities
have been on non-accrual status since the date indicated:

    - Cinnabon International on January 1, 1998. 
      (Cinnabon was sold on October 16, 1998.  See Note 13 for more information)
    - Florida Orthopedics, Inc., on January 1, 1995.
    - Stablex Canada, Inc., on June 29, 1995.

7.  Investment Advisory Fee

     The  Investment  Adviser  provides  the   identification,   management  and
liquidation of portfolio investments for the Funds. As compensation for services
rendered to the Funds,  the Investment  Adviser  receives a quarterly fee at the
annual rate of 1% of assets under  management (net offering  proceeds reduced by
cumulative capital reductions and realized losses), with a minimum annual fee of
$1.2  million  for Fund II and the  Retirement  Fund on a  combined  basis.  The
Investment  Advisory  Fee is  calculated  and paid  quarterly,  in  advance.  In
addition,  the  Investment  Adviser  receives  95% of  the  benefit  of any  MGP
Distributions  paid to the Managing  General Partner (see Note 10). For the nine
months ended  September  30, 1998 and 1997,  Fund II paid $508,241 and $582,001,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors II, L.P.

8.  Fund Administration Fees and Expenses

     As compensation for its services,  ML Fund  Administrators  Inc. (the "Fund
Administrator";  an affiliate of the  Managing  General  Partner) is entitled to
receive  from the Funds an  Administration  Fee and  reimbursement  for  certain
out-of-pocket expenses incurred by the Fund Administrator on behalf of the Funds
("reimbursable  expenses").  The Fund  Administration Fee is calculated and paid
quarterly,  in advance,  by each Fund.  For the nine months ended  September 30,
1998  and  1997,  Fund II paid  $166,500  and  $470,514,  respectively,  in Fund
Administration Fees.

     Beginning in November of 1997,  the Fund  Administration  Fee changed to an
annual  amount of  $400,000  for Fund II and the  Retirement  Fund on a combined
basis,   plus  100%  of  all   reimbursable   expenses   incurred  by  the  Fund
Administrator.  Reimbursable expenses primarily consist of printing,  audit, tax
preparation and custodian fees. For the nine months ended September 30, 1998 and
1997,  Fund II incurred  $273,088 and $129,074,  respectively,  in  reimbursable
expenses.

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

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

9. Independent General Partners' Fees and Expenses

     As  compensation  for their  services,  each  Independent  General  Partner
receives a combined annual fee of $40,000 (payable  quarterly) from the Funds in
addition to a $1,000 fee for each meeting attended ($500 if a meeting is held on
the same day as a committee meeting of the General Partners) plus  reimbursement
for any out-of-pocket expenses incurred. Fees and expenses are allocated between
the Funds in proportion to the number of units issued by each fund. Compensation
for each of the Individual General Partners is reviewed  annually.  For the nine
months ended September 30, 1998 and 1997, Fund II incurred  $73,994 and $95,695,
respectively, in Independent General Partners' Fees and Expenses.
<PAGE>

10. Related Party Transactions

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

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

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

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

     For the nine months ending  September 30, 1998, Fund II paid the Individual
General  Partner  distributions  totaling  $3,942 and Managing  General  Partner
distributions totaling $544,167 (which includes $504,751 of MGP Incentive Fees).
As of September 30, 1998, the Managing General Partner has earned a total of $26
million in MGP Incentive  Fees of which  $560,397 was deferred in payment to the
Managing General Partner as a Deferred  Distribution  Amount.  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.
<PAGE>

11. Litigation

     On April 10, 1998,  Fund II and the Retirement Fund and (together with Fund
II,  "the  Funds")  the parties to Fund II and the  Retirement  Fund  Securities
Litigation  No.  92-60(JJF)  Seidel,  et al v. Thomas H. Lee, et al, No.  94-422
(JJF) and Seidel,  et al v. Thomas H. Lee, et al, No. 95-724 (JJF),  three class
actions  brought on behalf of limited  partners of the Funds,  filed with United
States District Court for the District of Delaware,  a Stipulation of Settlement
preliminarily settling these actions.

     The  settlement,  which was  approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Funds, the
Funds'  Investment  Adviser and certain of its  affiliates,  the Funds' Managing
General Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Although defendants continue to deny all liability
in these actions,  defendants, other than the Funds, have agreed to provide cash
of $16  million  and  certain  other  considerations  to members of the class to
settle the claims asserted in these actions. In addition,  certain affiliates of
Thomas H. Lee, a General Partner of the Funds,  have agreed to provide up to $14
million for  purchases of the Funds'  limited  partnership  units  pursuant to a
liquidity option to be offered to eligible class members.  The settelment became
effective on August 24, 1998.  Defendants continue to deny all liability in this
action.

     The Funds have advanced legal expenses  incurred by certain  defendants and
has  included  such  expenses in Legal and  Professional  Fees in the  Financial
Statements.

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

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

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

13. Subsequent Events

     On October 27, 1998, the  Individual  General  Partners  approved the third
quarter 1998 cash distribution  consisting of Distributable  Cash from Temporary
Investments  of $46,384 and  Distributable  Cash from  Mezzanine  Investments of
$195,512.  The  distribution  is as  follows:  a cash  distribution  to  Limited
Partners  in the  amount of $.21 per Unit,  a cash  distribution  of $106 to the
Managing  General  Partner in  proportion  to its Capital  Contribution,  a cash
distribution of $195,512 to the Managing  General Partner as an MGP Distribution
and a cash  distribution  of $11  to  Thomas  H.  Lee as an  Individual  General
Partner, all such distributions to be payable on or before November 16, 1998, in
accordance with the Partnership Agreement.

     On October 16, 1998, Cinnabon International,  Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises,  Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger").  Pursuant to the Merger, Fund II received proceeds of $6.9
million.  In connection with the Cinnabon sale, the Individual  General Partners
approved a  distribution  consisting of Net  Distributable  Capital  Proceeds of
$6,928,824  which includes Return of Capital of $6,044,341.  The distribution is
as  follows:  a cash  distribution  to  Limited  Partners  of  record  as of the
effective  date  of  such  sale  in  the  amount  of  $28.69  per  Unit,  a cash
distribution  of $14,345 to the Managing  General  Partner in  proportion to its
Capital  Contribution,  a cash  distribution of $551,180 to the Managing General
Partner as a MGP Distribution and a cash distribution of $1,435 to Thomas H. Lee
as an Individual  General  Partner,  all such  distributions to be payable on or
before Novemeber 16, 1998, in accordance with the Partnership Agreement.
<PAGE>
<TABLE>
<CAPTION>
                                            SCHEDULE 1
                                 ML-LEE ACQUISITION FUND II, L.P.
                        SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
                               FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                      (DOLLARS IN THOUSANDS)
                                            (UNAUDITED)

<S>                                                            <C>          <C>            <C>            <C>
                                                       Par Value or         Investment            Net          Realized
SECURITY                                             Number of Shares          Cost            Proceeds      Gain/(Loss)
                                                     ----------------    ---------------    ------------   -------------
For the Three Months Ended March 31, 1998

Stanley Furniture Company Inc. 
     Common Stock                                              3,461         $      44         $     94           $    50

Anchor Advanced Products, Inc. 
     Common Stock                                            410,677             1,396             1,643              247
                                                                             ---------         ---------          -------
Total for the Three Months Ended March 31, 1998                                  1,440             1,737              297
                                                                             ---------         ---------          -------
For the Three Months Ended June 30, 1998

First Alert, Inc. 
     Common Stock                                          2,058,474             3,320            10,807            7,487

Playtex Products, Inc. 
     Common Stock                                            343,726             5,298             4,542             (756)
                                                                             ---------         ---------          -------
Total for the Three Months Ended June 30, 1998                                   8,618            15,349            6,731
                                                                             ---------         ---------          -------
Total for the Nine Months Ended September 30, 1998                              10,058            17,086            7,028
                                                                             =========         =========          =======

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

                                                   SCHEDULE 2
                                         ML-LEE ACQUISITION FUND II, L.P.
                           SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                                       FOR THE PERIOD ENDED September 30, 1998
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

<S>                                           <C>             <C>           <C>                   <C>                  <C>
                                                                      Unrealized       Unrealized      
                                                                    Appreciation/   Appreciation/       Total            Total
                                                                   (Depreciation)   (Depreciation)    Unrealized        Unrealized 
                                                                   for the Three     for the Six    Appreciation/    Appreciation/ 
                                                                    Months Ended    Months Ended   (Depreciation)   (Depreciation)
                                           Investment      Fair     September 30,   September 30,  at December 31,  at September 30,
SECURITY                                      Cost        Value         1998            1998              1997             1998 
--------------------------------          -----------    ------   ---------------  --------------  --------------   -------------
Publicly Traded:

Hills Stores Company
  Common Stock *                         $     34,776   $   1,172       $ (1,823)    $       (456)   $    (33,148)   $    (33,604)
                                                                        --------     ------------    ------------    ------------
Total Unrealized Depreciation
  from Publicly Traded Securities                                         (1,823)            (456)        (33,148)        (33,604)
                                                                        --------     ------------    ------------    ------------
Non Public Securities:

Fitz and Floyd
  Preferred Stock *                            12,619       3,024             --               --          (9,596)         (9,596)

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

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

Soretox
  Subordinated Notes*                           6,631       2,590             --               --          (4,041)         (4,041)
                                                                        --------     ------------    ------------    ------------ 
Total Unrealized Depreciation
  from Non Public Securities                                                  --               --         (15,562)        (15,562)
                                                                        --------     ------------    ------------    ------------

Reversal of Unrealized Appreciation
  (Depreciation) from Securities Sold:

First Alert, Inc. 
  Common Stock                                      --         --             --           (1,054)          1,054              --

Playtex Products, Inc. 
  Common Stock                                      --         --             --            1,776          (1,776)             --

Stanley Furniture
  Common Stock                                      --         --             --              (54)             54              --
                                                                        --------     ------------    ------------    ------------
Total Unrealized Appreciation
  (Depreciation) from Securities Sold                                         --              668            (668)             --
                                                                        --------     ------------    ------------    ------------
Net Unrealized Appreciation (Depreciation)                             $  (1,823)    $        212    $    (49,378)   $    (49,166)
                                                                       =========     ============    ============    ============


*  Restricted Security


See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations

Liquidity & Capital Resources

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

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

     As provided by the Partnership  Agreement,  the Managing General Partner of
Fund II is entitled to receive an incentive  distribution ("MGP  Distributions")
after Limited Partners have received their Priority Return of 10% per annum. The
Managing  General Partner is required to defer a portion of any MGP Distribution
earned  from the sale of  portfolio  investments  in excess  of 20% of  realized
capital  gains,  net realized  capital losses and  unrealized  depreciation,  in
accordance with the Partnership Agreement (the "Deferred  Distribution Amount").
Any Deferred  Distribution  Amount is distributable to the Partners  pro-rata in
accordance with their capital contributions, and certain amounts otherwise later
payable to Limited Partners from  distributable cash from operations are instead
payable to the Managing General Partner until the Deferred  Distribution  Amount
is paid.  As of  September  30,  1998 there is Deferred  Distribution  Amount of
$560,397 that is payable to the MGP.

     On August 6, 1991, the Independent  General Partners approved a reserve for
follow-on investments of $24.9 million for Fund II. As of November 13, 1998, the
remaining reserve balance was $3.1 million due to follow-on  investments in both
Managed and Non-Managed Portfolio Companies.  Additionally, $8.29 million of the
reserve has been  returned to the  partners.  The level of the reserve was based
upon an analysis  of  potential  follow-on  investments  in  specific  portfolio
companies  that may become  necessary to protect or enhance  Fund II's  existing
investment.

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

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

    On October 16, 1998, Cinnabon International,  Inc. ("Cinnabon") completed a
Plan of Merger with AFC Enterprises,  Inc. ("AFC") whereby AFC acquired Cinnabon
by Merger ("Merger").  Pursuant to the Merger, Fund II received proceeds of $6.9
million.

Investment in High-Yield Securities

     Fund II  invested  primarily  in  subordinated  debt  and  preferred  stock
securities   ("High-Yield   Securities"),   generally   linked  with  an  equity
participation,  issued in conjunction with the mezzanine  financing of privately
structured,   friendly  leveraged  acquisitions,   recapitalizations  and  other
leveraged  financings.  High-Yield  Securities  are  debt and  preferred  equity
securities that are unrated or are rated by Standard & Poor's  Corporation as BB
or lower and by Moody's  Investor  Services,  Inc. as Ba or lower.  Risk of loss
upon default by the issuer is significantly  greater with High-Yield  Securities
than  with  investment  grade  securities  because  High-Yield   Securities  are
generally unsecured and are often subordinated to other creditors of the issuer.
Also,  these  issuers  usually  have high  levels of  indebtedness  and are more
sensitive  to adverse  economic  conditions,  such as  recession  or  increasing
interest rates,  than  investment  grade issuers.  Most of these  securities are
subject to resale  restrictions and generally there is no quoted market for such
securities.
<PAGE>
     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  registered  their  equity
securities in public offerings. Although the equity securities of the same class
presently  held by Fund II were not registered in these  offerings,  Fund II has
the ability  under Rule 144 under the  Securities  Act of 1933 to sell  publicly
traded  equity  securities  held by it for at least one year on the open market,
subject to the volume  restrictions  set forth in that rule. The Rule 144 volume
restrictions generally are not applicable to equity securities of non-affiliated
companies held by Fund II for at least two years. In certain cases,  Fund II has
agreed  not to make any sales of equity  securities  for a  specified  hold-back
period following a public offering.

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

Results of Operations

Investment Income and Expenses

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

     For the nine months ended September 30, 1998, Fund II had investment income
of  $2,015,568,  as compared  to  $9,409,199  for the same  period in 1997.  The
decrease  in 1998  investment  income as compared to 1997 is due to the sales of
income producing portfolio companies.  Additionally, as of January 1, 1998, Fund
II began receiving payment-in-kind  securities in lieu of interest which reduced
the amount of interest  income  recognized by Fund II for the nine months ending
September 30, 1998.

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

     The  Investment   Adviser  and  Fund   Administrator   both  receive  their
compensation  on a quarterly  basis.  The  Investment  Advisory  Fee paid to the
Investment  Adviser for the nine months  ended  September  30, 1998 and 1997 was
$508,241 and $582,001 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 $1.2 million
for  Fund II and the  Retirement  Fund on a  combined  basis.  The  decrease  in
Investment Advisory Fees are a direct result of sales of investments, returns of
capital distributed to partners and realized losses on investments.

     Beginning in November of 1997,  the Fund  Administration  Fee changed to an
annual  amount of  $400,000  for Fund II and the  Retirement  Fund on a combined
basis,  plus 100% of all  reimbursable  expenses (as defined below)  incurred by
Fund II.  Actual  out-of-pocket  expenses  ("reimbursable  expenses")  primarily
consist of printing,  audit,  tax  preparation  and custodian fees. For the nine
months  ended  September  30,  1998 and  1997,  Fund II  incurred  $273,088  and
$129,074,  respectively,  in reimbursable  expenses.  For the three months ended
September 30, 1998 and 1997  reimbursable  expenses totaled $87,428 and $50,281,
respectively.
<PAGE>

     The Fund  Administration Fees paid to the Fund Administrator for the period
ending  November  10,  1997 were  calculated  at an annual  rate of 0.45% of the
excess of net  offering  proceeds,  less 50% of  capital  reductions  and 50% of
realized losses. The decrease in Fund  Administration  Fees were a direct result
of sales of investments, returns of capital distributed to partners and realized
losses on  investments.  For the nine months ended  September 30, 1998 and 1997,
Fund Administration Fees were $166,500 and $470,514, respectively. For the three
months ended  September 30, 1998 and 1997, the Fund  Administration  Fee paid to
the Fund Administrator was $55,500 and $150,185, repectively.

     Legal and Professional Fees were primarily  incurred in connection with the
litigation  proceedings  as  described in Note 11 to the  Financial  Statements.
Legal and  Professional  fees for the nine months ended  September  30, 1998 and
1997 were $254,801 and $98,662, respectively. These expenses are attributable to
legal fees incurred and advanced on behalf of indemnified  defendants as well as
fees  incurred  directly  by  Fund  II in  connection  with  the  aforementioned
litigation proceedings.

     For the nine  months  ended  September  30,  1998 and 1997  Fund II had net
investment income of $735,764 and $8,029,619, respectively. The decrease in 1998
as compared to 1997 net investment income is due to the sale of income producing
portfolio companies, partially offset by lower Investment Advisory Fees. For the
three months ended  September  30, 1998,  Fund II had net  investment  income of
$261,087 as compared to $546,994 for the same period in 1997.

Net Assets

     Fund II's net assets  decreased  by $10.6  million  during the nine  months
ended September 30, 1998, due to cash  distributions  to partners of $18,597,125
partially  offset by net  unrealized  appreciation  of $212,518,  net investment
income of $735,764 and realized gains from the sale of portfolio  investments of
$7,027,580. This compares to the decrease in net assets of $21.3 million for the
nine  months  ended  September  30,  1997  resulting  from the  payment  of cash
distributions  to partners of  $25,695,686  and net unrealized  depreciation  of
$3,707,926 million,  partially offset by net investment income of $8,029,619 and
realized gains from investments of $49,688.

Unrealized Appreciation and Depreciation on Investments

     Fund II's valuation of the Common Stock of Hills reflect its closing market
prices at September 30, 1998.

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

     Approximately  96%  of  Fund  II's  investments  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.

     Certain  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.
Accordingly,  the  values  referred  to in  the  financial  statements  for  the
remaining  Hills  securities  do not  necessarily  represent the prices at which
these securities could currently be sold.
<PAGE>
     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1998.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time,  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.

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

Realized Gains and Losses

     For the nine months  ended  September  30,  1998,  Fund II had net realized
gains from the sale of  portfolio  investments  of  $7,027,580  as  compared  to
$49,688 for the same period in 1997. For the quarters  ended  September 30, 1998
and 1997 Fund II had no realized gains from investments.

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

Cash Distributions

     On October 27, 1998, the  Individual  General  Partners  approved the third
quarter 1998 cash distribution  consisting of Distributable  Cash from Temporary
Investments  of $46,384 and  Distributable  Cash from  Mezzanine  Investments of
$195,512.  The  distribution  is as  follows:  a cash  distribution  to  Limited
Partners  in the  amount of $.21 per Unit,  a cash  distribution  of $106 to the
Managing  General  Partner in  proportion  to its Capital  Contribution,  a cash
distribution of $195,512 to the Managing  General Partner as an MGP Distribution
and a cash  distribution  of $11  to  Thomas  H.  Lee as an  Individual  General
Partner, all such distributions to be payable on or before November 16, 1998, in
accordance with the Partnership Agreement.

     In addition,  in connection with the Cinnabon sale on October 16, 1998, the
Individual   General  Partners   approved  a  distribution   consisting  of  Net
Distributable Capital Proceeds of $6,928,824 which includes Return of Capital of
$6,044,341.  The  distribution  is as follows:  a cash  distribution  to Limited
Partners of record as of the effective date of such sale in the amount of $28.69
per Unit,  a cash  distribution  of $14,345 to the Managing  General  Partner in
proportion to its Capital  Contribution,  a cash distribution of $551,180 to the
Managing General Partner as a MGP Distribution and a cash distribution of $1,435
to Thomas H. Lee as an Individual General Partner,  all such distributions to be
payable on or before  Novemeber  16, 1998, in  accordance  with the  Partnership
Agreement.

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

     Item 1.  Legal Proceedings 


     On April 10, 1998,  Fund II and the Retirement Fund and (together with Fund
II,  "the  Funds")  the parties to Fund II and the  Retirement  Fund  Securities
Litigation  No.  92-60(JJF)  Seidel,  et al v. Thomas H. Lee, et al, No.  94-422
(JJF) and Seidel,  et al v. Thomas H. Lee, et al, No. 95-724 (JJF),  three class
actions  brought on behalf of limited  partners of the Funds,  filed with United
States District Court for the District of Delaware,  a Stipulation of Settlement
preliminarily settling these actions.

     The  settlement,  which was  approved by the Court at a hearing on July 16,
1998, provides for dismissal with prejudice of all claims against the Funds, the
Funds'  Investment  Adviser and certain of its  affiliates,  the Funds' Managing
General Partner and certain of its affiliates, the Funds' counsel and the Funds'
Independent General Partners. Although defendants continue to deny all liability
in these actions,  defendants, other than the Funds, have agreed to provide cash
of $16  million  and  certain  other  considerations  to members of the class to
settle the claims asserted in these actions. In addition,  certain affiliates of
Thomas H. Lee, a General Partner of the Funds,  have agreed to provide up to $14
million for  purchases of the Funds'  limited  partnership  units  pursuant to a
liquidity option to be offered to eligible class members.  The settelment became
effective on August 24, 1998.  Defendants continue to deny all liability in this
action.

     Items 2 - 5 are  herewith  omitted as the  response  to all items is either
none or not applicable.



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

         Exhibit 27 - Financial Data Schedule for the quarter ending 
         September 30, 1998.

     (b) Reports on form 8-K:          8-K Filed September 23, 1998
                                       Regarding Cinnabon Merger

                                       8-K Filed September 29, 1998
                                       Regarding Cinnabon Merger


<PAGE>
                           SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 12th day of
November, 1998.

                               ML-LEE ACQUISITION FUND II, L.P.

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

                           By: ML Mezzanine II Inc.,
                               its General Partner


Dated: November 12, 1998       /s/  Robert Remick
                               Robert Remick
                               Vice President and Treasurer
                               (Chief Financial 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 __th day of
November, 1998.
          
                              ML-LEE ACQUISITION FUND II, L.P.

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

                          By: ML Mezzanine II Inc.,
                              its General Partner




Dated: November 12, 1998      ____________________________
                              Robert Remick
                              Vice President and Treasurer
                              (Chief Financial Officer)