UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 1997

                         Commission File Number 0-15669

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

         Delaware                                  13-3426817
(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 of 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>
                          ML-LEE ACQUISITION FUND, L.P.

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements

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

Statements of  Operations - For the Three and Six Months Ended
  June 30, 1997 and 1996

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

Statements of Cash Flows - For the Six Months Ended
  June 30, 1997 and 1996

Statement of Changes in Partners' Capital - June 30, 1997

Schedule of Portfolio Investments - June 30, 1997

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation and
  Depreciation - Schedule 2

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


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Item 6.  Exhibits and Reports on Form 8-K

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


<S>                                                                     <C>             <C>
                                                                          (Unaudited)   December 31,
                                                                        June 30, 1997       1996
                                                                         ------------   ------------

ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
    Managed Companies (amortized cost $83,960 at June 30,
         1997 and $93,468 at December 31, 1996)                          $     72,688   $     86,067
    Non-Managed Companies (amortized cost $9,597 at June 30,
         1997 and at December 31, 1996)                                         7,327          6,183
    Temporary Investments, at amortized cost (cost $17,879 at
         June 30, 1997 and $4,040 at December 31, 1996)                        17,883          4,047
Cash                                                                               --             10
Prepaid Loan Fees - Notes 2, 4                                                    693          1,022
Prepaid Expenses and Other Receivables                                              3            307
                                                                         ------------   ------------
TOTAL ASSETS                                                             $     98,594   $     97,636
                                                                         ============   ============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                  $        322   $        122
    Reimbursable Administrative Expenses Payable                                  192            103
    Independent General Partner Expenses Payable                                   41             23
                                                                         ------------   ------------
Total Liabilities                                                                 555            248
                                                                         ------------   ------------
Partners' Capital - Note 2
    Managing General Partner                                                    1,324          1,317
    Limited Partners (487,489 Units)                                           96,715         96,071
                                                                         ------------   ------------
Total Partners' Capital                                                        98,039         97,388
                                                                         ------------   ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                  $     98,594   $     97,636
                                                                         ============   ============

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






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

<S>                                                              <C>              <C>              <C>             <C>
                                                                 For the Three Months Ended        For the Six Months Ended
                                                                 --------------------------        ------------------------
                                                                   June 30,        June 30,        June 30,        June 30,
                                                                     1997            1996            1997            1996
                                                                 ----------        --------        --------        --------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                         $      301        $    359        $    596        $    656
Discount                                                                 46             492              93           1,244
Dividend & Other Income                                                  --              --               6             167
                                                                 ----------        --------        --------        --------
    TOTAL INCOME                                                        347             851             695           2,067
                                                                 ----------        --------        --------        --------
EXPENSES:
Investment Advisory Fee - Note 5                                        297             456             594             936
Fund Administration Fee - Note 6                                         75              75             150             149
Loan Fees - Notes 2, 4                                                  175             175             347             348
Independent General Partners' Fees and Expenses - Note 7                118              33             171             100
Legal and Professional Fees                                             416             582             648             969
Reimbursable Administrative Expenses - Note 6                           191             210             261             210
Insurance Expense                                                         2               2               4               4
                                                                 ----------        --------        --------        --------
    TOTAL EXPENSES                                                    1,274           1,533           2,175           2,716
                                                                 ----------        --------        --------        --------
NET INVESTMENT LOSS                                                    (927)           (682)         (1,480)           (649)
NET REALIZED GAIN ON INVESTMENTS -
     NOTE 8 AND SCHEDULE 1                                            5,434          24,445           5,795          61,575
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                                   (3,012)        (23,960)         (2,728)        (98,356)
        Nonpublic Securities                                             --          (8,462)             --          61,219
                                                                 ----------        --------        --------        --------
             Subtotal                                                (3,012)        (32,422)         (2,728)        (37,137)
                                                                 ----------        --------        --------        --------
NET INCREASE (DECREASE) IN NET ASSETS
  RESULTING FROM OPERATIONS                                      $    1,495        $ (8,659)       $  1,587        $ 23,789
                                                                 ==========        ========        ========        ========

</TABLE>
See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                       STATEMENTS OF CHANGES IN NET ASSETS
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

<S>                                                                          <C>                <C>
                                                                                For the Six Months Ended
                                                                             ------------------------------
                                                                               June 30,           June 30,
                                                                                 1997               1996
                                                                             -----------        -----------
FROM OPERATIONS:

Net Investment Income (Loss)                                                 $    (1,480)       $      (649)

Net Realized Gain on Investments                                                   5,795             61,575

Net Change in Unrealized Depreciation on Investments                              (2,728)           (37,137)
                                                                             -----------        -----------

Net Increase in Net Assets Resulting from Operations                               1,587             23,789

Cash Distributions to Partners                                                      (936)          (174,334)
                                                                             -----------        -----------

Total Increase (Decrease)                                                            651           (150,545)

NET ASSETS:

Beginning of Period                                                               97,388            254,353
                                                                             -----------        -----------

End of Period                                                                $    98,039        $   103,808
                                                                             ===========        ===========

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

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

<S>                                                                         <C>                <C>
                                                                                For the Six Months Ended
                                                                            --------------------------------
                                                                            June 30, 1997      June 30, 1996
                                                                            -------------      -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                   $         997      $       1,903
  Investment Advisory Fee                                                            (594)              (936)
  Fund Administration Fee                                                            (150)              (149)
  Legal and Professional Fees                                                        (457)              (679)
  Loan Fees and Expenses                                                               (9)                (8)
  Independent General Partners' Fees and Expenses                                    (153)              (110)
  (Purchase) Sale of Temporary Investments, Net                                   (13,838)             1,779
  Reimbursable Administrative Expenses                                               (173)              (148)
  Proceeds from Sale of Portfolio Company Investments                              15,303            170,654
                                                                            -------------      -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                             926            172,306
                                                                            -------------      -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                     (936)          (174,334)
                                                                            -------------      -------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                             (936)          (174,334)
                                                                            -------------      -------------
  Net Decrease in Cash                                                                (10)            (2,028)
  Cash at Beginning of Period                                                          10              6,054
                                                                            -------------      -------------
CASH AT END OF PERIOD                                                       $          --      $       4,026
                                                                            =============      =============

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

Net Investment Loss                                                         $      (1,480)     $        (649)
                                                                            -------------      -------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT LOSS
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  (Increase) Decrease in Investments                                               (4,331)           107,483
  Decrease in Receivable for Investments Sold                                          --              3,376
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivables                                                302               (164)
  Decrease in Prepaid Expenses                                                        333                444
  Increase (Decrease) in Independent General Partner Fees Payable                      18                (10)
  Increase in Reimbursable Administrative Expenses Payable                             88                 62
  Increase in Legal and Professional Fees Payable                                     201                189
  Net Realized Gain on Investments                                                  5,795             61,575
                                                                            -------------      -------------
TOTAL ADJUSTMENTS                                                                   2,406            172,955
                                                                            -------------      -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                   $         926      $     172,306
                                                                            =============      =============

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


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

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


For the Six Months Ended June 30, 1997
Partners' Capital at January 1, 1997                     $     1,317        $    96,071        $    97,388
Allocation of Net Investment Loss                                (14)            (1,466)            (1,480)
Allocation of Net Realized Gain on Investments                    58              5,737              5,795
Allocation of Net Change in Unrealized Depreciation              (27)            (2,701)            (2,728)
Cash Distributions to Partners                                   (10)              (926)              (936)
                                                         -----------        -----------        -----------
Partners' Capital at June 30, 1997                       $     1,324        $    96,715        $    98,039
                                                         ===========        ===========        ===========




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

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

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

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)            12/31/87   $ 10,810  $10,810
$267                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    03/31/93        267      267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93        276      276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93        286      286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93        293      293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91        502      502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92     11,000   11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87      1,951    1,951
15,228.43 Warrants  Alliance International Group, Common Stock Purchase Warrants(d)        03/28/89          -(i)     -(i)
62,700 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        04/22/91          -        -
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        12/31/92          -        - 
50,000 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)         various          -(i)     -(i) 
                      (52.5% of fully diluted common equity assuming exercise
                       of warrants) 
                      19,200 Shares Common Stock
                      Purchased 12/31/87                 $    149
                      Sold  01/30/89 - 9,600 Shares      $    107
                      Sold  01/02/90 - 9,600 Shares      $    147                                     ------------------------------
                      Realized Gain                      $    105                                       25,385   25,385        25.93
                                                                                                      ------------------------------

                    BEEFAMERICA, INC. (a) (e) - Notes 9,10
$14,000             BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g)     09/09/88     14,000    5,800
$10,000             BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g)      09/09/88     10,000    4,200
                      $1,072 15% Sub. Nt.
                      Purchased 09/9/88                  $  1,072
                      Redeemed 02/20/92                  $  1,072
                      Realized Gain                      $      0
                      Preferred Stock
                      Purchased 09/9/88                  $  2,700
                      Redeemed 02/20/92                  $  2,700
                      Realized Gain.                     $      0
                      $41,997 15.5% Sr.Sub Interim Nt
                      Purchased 09/9/88                  $ 20,000
                      $80,951 15% Sub Nt
                      Purchased 09/9/88                  $ 38,928
                      Exchanged 03/29/96 for
                      Cash Proceeds                      $ 26,000
                      10% Sr Pref Stk                    $ 14,000
                      4% Jr Pref Stk                     $ 10,000
                      Realized Loss                      $ (8,928)
                      5661.11 Shares Class A Pref. Stk
                      Purchased 04/10/91                 $ 40,050
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $(40,050)
                      51,000 Shares Common Stk
                      Purchased various                  $  2,000
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $ (2,000)                                    ------------------------------
                      Total Net Realized Loss            $(50,978)                                      24,000   10,000        10.21
                                                                                                      ------------------------------

            

See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                             JUNE 30, 1997 
                                                        (DOLLARS IN THOUSANDS)
                                                              (CONTINUED)         
  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
 
                    CELEBRITY, INC. - Note 9
 5,770 Shares       Celebrity, Inc. Common Stock(b)(j)                                     06/16/92   $     75  $    18
                      (0.2% of fully diluted common equity)
                      5,769 Shares of Common Stock
                      Purchased 06/16/92                 $     75
                      Sold 09/29/93                      $     75 
                      Realized Gain                      $      0
                      5,769 Shares of Common Stock
                      Purchased 06/16/92                 $     75
                      Sold 09/19/94                      $     75
                      Realized  Gain                     $      0
                      5,769  Shares of Common Stock
                      Purchased 06/16/92                 $     75
                      Sold 09/19/95                      $     75
                      Realized Gain                      $      0
                      5,769 Shares of Common Stock
                      Purchased 06/16/92                 $     75
                      Sold 9/21/96                       $     75
                      Realized Gain                      $      0                                     ------------------------------
                      Total Realized Gain                $      0                                           75       18         0.02
                                                                                                      ------------------------------


                    CHADWICK-MILLER, INC. (a) - Notes 9,10,14
  15,406 Warrants   CMI Holding Corp., Preferred Stock Purchase Warrants (d)               12/16/88     12,916        -
  39,487 Warrants   CMI Holding Corp., Common Stock Purchase Warrants (d)                   Various      3,736        -
                      (7.5% of fully diluted common equity)
                      35,161 Shares Common Stock
                      Purchased  06/30/93                $    352
                      Sold 09/03/93                      $    352
                      Realized Gain                      $      0
                      $5,000 Senior Note
                      Purchased  12/16/88                $  5,000
                      Sold  11/23/94                     $  5,000
                      Realized Gain                      $      0
                      189,996 Shares Preferred Stock
                      192,933 Shares Common Stock 
                      100,000 Common Stock Warrants
                      Purchased Various                  $ 16,652
                      Exchanged July 15, 1996
                      15,406 Preferred Stock Warrants 
                      39,487 Common Stock Warrants       $ 16,652
                      Realized Gain                      $      0                                     ------------------------------
                      Total Realized Gain                $      0                                       16,652        -         0.00
                                                                                                      -----------------------------

See the Accompanying Notes to Financial Statements.

</TABLE>


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

  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                    COLE NATIONAL CORPORATION
567 Warrants        Cole National Corporation, Common Stock Purchase Warrants(d)           09/26/90   $      -  $     -
                      (0.0% of fully diluted common equity 
                      assuming exercise of warrants)
                      $589 Senior Bridge Note
                      Purchased 09/25/90                 $    589
                      Sold 11/15/90                      $    589                                     ------------------------------
                      Realized Gain                      $      0                                            -        -         0.00
                                                                                                      ------------------------------
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(j)                             12/28/88      3,255   13,183
                      (2.6%  of  fully  diluted  common equity) 
                      $19,285 15% Subordinated  Notes
                      Purchased   12/28/88               $ 19,285
                      Sold 06/30/89                      $ 19,285
                      Realized  Gain                     $      0
                      3,214,000 Shares Preferred Stock
                      Purchased 12/28/88                 $  3,214
                      Sold 06/30/89                      $  3,214
                      Realized  Gain                     $      0
                      2,571,314 Shares Common Stock
                      Purchased  12/28/88                $  1,286
                      Sold 06/30/89                      $  1,286
                      Realized Gain                      $      0
                      $11,250 15% Subordinated Note
                      Purchased  12/28/88                $ 11,250
                      Sold 09/28/90                      $ 11,275
                      Realized Gain                      $     25
                      2,571,314 Shares Common Stock
                      Purchased  12/28/88                $  1,286
                      Sold 09/28/90                      $ 10,512
                      Realized  Gain                     $  9,226
                      347,209 Shares Common Stock
                      Purchased  12/28/88                $    174
                      Sold  12/20/91                     $  1,343
                      Realized Gain                      $  1,169
                      $71,251 15% Subordinated Notes
                      Purchased  12/28/88                $ 71,251
                      Sold 02/01/93                      $ 71,181
                      Realized Loss                      $    (70)                                    ------------------------------
                      Total Net Realized Gain            $ 10,350                                        3,255   13,183        13.47
                                                                                                      ------------------------------



See the Accompanying Notes to Financial Statements.

</TABLE>


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

  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                    SIGNATURE BRANDS, INC. (a) - Note 9
                    (formerly HEALTH O METER PRODUCTS, INC.)  
952,500 Shares      Health o meter Products, Inc., Common Stock (d)(j)                     04/28/88   $  1,270  $ 3,394
610,553 Shares      Health o meter Products, Inc., Common Stock (d)(j)                     08/17/94      3,282    2,175
                      (14.7% of fully diluted common equity)
                      $16,000 14.50% Subordinated Note
                      Purchased 04/28/88                 $ 16,000
                      Sold 03/24/92                      $ 16,000
                      Realized Gain                      $      0
                      187,500 Shares of Common Stock
                      Purchased 04/28/88                 $    250
                      Sold 03/30/92                      $  2,441
                      Realized Gain                      $  2,191                                     ------------------------------
                      Total Realized Gain                $  2,191                                        4,552    5,569         5.69
                                                                                                      ------------------------------



                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9
  801,437 Shares    Stanley Furniture Co., Inc., Common Stock(d)(h)(j)                      Various     10,041   18,533           
                      (16% of fully diluted common equity)                    
                      $2,000 Loan participation
                      Purchased 03/12/92                 $  2,000
                      Repaid 04/05/93                    $  2,000
                      Realized Gain                      $      0                          
                      Purchased Various                  $ 13,973
                      Sold  11/13/96                     $ 14,664
                      Sold   12/13/96                    $  2,199
                      Realized Gain                      $  2,890                       
                      Purchased Various                  $    395
                      Sold 02/07/97                      $    756
                      Realized Gain                      $    361
                      Purchased Various                  $  9,113 
                      Sold 06/30/97                      $ 14,547
                      Realized Gain                      $  5,434                                     ------------------------------
                      Total Net Realized Gain            $  8,685                                       10,041   18,533        18.93
                                                                                                      ------------------------------

         

                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN MANAGED COMPANIES                                             $ 83,960  $72,688        74.25
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                               ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      JUNE 30, 1997
                                                  (DOLLARS IN THOUSANDS)
                                                       (CONTINUED) 
  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                   NON-MANAGED COMPANIES

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(d)                                    11/24/87        250        -
  1,430 Shares      Homeland Holding Corp., Common Stock(d)                                08/10/90        440        -
  1,506 Warrants    Homeland Holding Corp., Common Stock
                    Purchase Warrants (d)                                                  10/02/96          -        -
                      $5,000 15.5% Subordinated Notes
                      Purchased 11/24/87                 $  5,000
                      Sold 09/15/88                      $  5,075
                      Realized Gain                      $     75 
                                                                                                      ------------------------------
                                                                                                           690        -         0.00
                                                                                                      ------------------------------

                    TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares       TLC Beatrice Int'l Holdings., Inc., Common Stock(d)                    11/30/87         26       26
                      $8,500 13% Subordinated Notes
                      Purchased 11/30/87                 $  8,500
                      Sold 08/18/88                      $  8,500                                     ------------------------------
                      Realized Gain                      $      0                                           26       26         0.03
                                                                                                      ------------------------------

                    WALTER INDUSTRIES, INC. - Note 9
435,569 Shares      Walter Industries, Inc., Common Stock(b)(j)                            01/07/88      8,877    7,296
326 Shares          Walter Industries, Inc., Common Stock (b)(j)                           09/13/95          -        5
                      $12,000 17% Note
                      Purchased  1/7/88                  $ 12,000
                      Exchanged  12/1/95
                      for $490,000 cash and 
                      435,569 Common Stock and
                      $2,527 12.19%  Senior Note
                      Realized  Gain                     $      0
                      $2,527 12.19% Senior Note
                      Received 12/1/95                   $  2,527
                      Sold 12/15/95                      $  2,527
                      Realized Gain                      $      0
                      Total Realized Gain                $      0                                     ------------------------------
                                                                                                         8,877    7,301        7.46
                                                                                                      ------------------------------

                    MAGELLAN HEALTH SERVICES, INC. - Note 9
                    (formerly CHARTER MEDICAL CORPORATION)  
40,000 Warrants     Charter Medical Corp. Common Stock Purchase Warrants(d)                09/01/88          4        -
                      $5,000 14% Subordinated Notes
                      Purchased 09/01/88                 $  5,000
                      Sold 12/05/88                      $  5,000                                     ------------------------------
                      Realized Gain                      $      0                                            4        -         0.00
                                                                                                      ------------------------------


                    TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                            9,597    7,327         7.49
                                                                                                      ==============================
                    SUMMARY OF MEZZANINE INVESTMENTS
                    Subordinated Notes                                                                $ 11,932  $11,932        12.19
                    Preferred Stock                                                                     35,502   21,502        21.96
                    Common Stock and Warrants                                                           46,123   46,581        47.59
                                                                                                      ------------------------------
                    TOTAL MEZZANINE INVESTMENTS                                                       $ 93,557  $80,015        81.74
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                       JUNE 30, 1997
                                                    (DOLLARS IN THOUSANDS)
                                                          (CONTINUED) 

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

                    TIME DEPOSITS

$14,844             State Street Repurchase Agreement 5.25% due 7/01/97                    06/30/97   $ 14,844  $14,846             
                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN TIME DEPOSITS                                                   14,844   14,846        15.16

                    COMMERCIAL PAPER

$3,037              Ford Motor Credit Corp., 5.46% due 07/01/97                            06/26/97      3,035    3,037
                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN COMMERCIAL PAPER                                                 3,035    3,037         3.10
                                                                                                      ------------------------------
                    TOTAL TEMPORARY INVESTMENTS                                                         17,879   17,883        18.26
                                                                                                      ------------------------------
                    TOTAL INVESTMENT PORTFOLIO                                                        $111,436  $97,898       100.00
                                                                                                      ==============================



(a)  Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b)  Non-income producing security.
(c)  Restricted security.
(d)  Restricted non-income producing security.
(e)  Issuers of which the Fund, as of June 30, 1997, owned more than 25% of
     the voting securities and which therefore were presumed to be controlled by
     the Fund under the Investment Company Act of 1940 as of such date.
(f)  Represents original cost and excludes accretion of discount of $4 for Temporary Investments.
(g)  Non-accrual investment status.
(h)  Inclusive of receipt of payment-in-kind securities.
(i)  Represents an amount of less than one thousand dollars.
(j)  Publicly traded class of securities.

See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>

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

1.  Organization and Purpose

    ML-Lee Acquisition Fund, L.P. (the "Fund") was formed and the Certificate of
Limited  Partnership  was  filed  under the  Delaware  Revised  Uniform  Limited
Partnership Act on April 1, 1987. The Fund's operations commenced on October 19,
1987.

     The Managing General Partner,  subject to the supervision of the Individual
General  Partners,  is  responsible  for  overseeing  and  monitoring the Fund's
investments.  Mezzanine Investments, L.P. (the "Managing General Partner"), is a
limited  partnership  in which  ML  Mezzanine  Inc.,  an  indirect  wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general  partner,  and Thomas H.
Lee Advisors I (the "Investment Adviser"), an affiliate of Thomas H. Lee, 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.

    The Fund has elected to operate as a business  development company under the
Investment Company Act of 1940. Its primary  investment  objective is to provide
current income and long-term  capital  appreciation  by investing in "Mezzanine"
securities  consisting  primarily  of  Subordinated  Debt  and  Preferred  Stock
combined  with an equity  participation  issued  in  connection  with  leveraged
acquisitions  or  other  leveraged  transactions  which  management  of the Fund
believes offer significant possibilities for return.

     The  Fund  will  terminate  June  15,  1998,  subject  to the  right of the
Individual General Partners to extend the term for up to one additional two-year
period  and one  additional  one-year  period if such  extension  is in the best
interest  of the  Fund.  Following  such  time  periods  the Fund will have five
additional years to liquidate its remaining investments.

2.  Significant Accounting Policies

Basis of Accounting

    For financial  reporting  purposes,  the records of the Fund 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.

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
the Fund. For privately issued  securities in which the Fund 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 the Fund could realize in a current transaction.

     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 June 30,
1997. Although the Managing General Partner and Investment Adviser are not aware
of any  factors  not  disclosed  herein  that  would  significantly  affect  the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time and, especially in light of the fact that the portfolio
investments of companies  whose equity is publicly traded are valued at the last
price  available at June 30,  1997,  the current  estimated  fair value of these
investments may have changed significantly since that point in time.

Interest Receivable on Investments

    Investments generally will be placed on non-accrual status in the event of a
default (after 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 the Fund'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 June 30, 1997 and December 31, 1996,
the Fund had in its  portfolio of  investments  $1.2 million of  payment-in-kind
debt securities.  As of June 30, 1997 and December 31, 1996, the Fund had in its
portfolio of investments $6.5 million of payment-in-kind equity securities.

Investment Transactions

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

Deferred Interest Income

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

Loan Facility and Advisory Fees

    Loan Facility and Advisory Fees are being  amortized over the life (7 years)
of the Facility commencing in August, 1991.

Partners' Capital

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


<PAGE>

Interim Financial Statements

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

3.  Allocation of Profits and Losses

    Pursuant  to  the   Partnership   Agreement,   all  profits  from  Temporary
Investments  generally are  allocated 99% to the Limited  Partners and 1% to the
Managing  General Partner.  Profits from Mezzanine  Investments are, in general,
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% to the Limited  Partners and 1% to the Managing 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  balance of Mezzanine  securities,  and any  outstanding  Compensatory
    Payments,

    third,  69% to the Limited  Partners and 31% to the Managing General Partner
    until the Managing  General  Partner has  received 21% of the total  profits
    allocated,

    thereafter,  79% to the Limited  Partners and 21% to the  Managing  General
    Partner.

    Losses will be allocated in reverse  order of profits  previously  allocated
and  thereafter  99% to the  Limited  Partners  and 1% to the  Managing  General
Partner.

4.  Leverage

     The Fund entered into an amended credit  agreement,  dated as of August 13,
1991 (the "Credit  Facilities"),  with a lending group led by the First National
Bank of Chicago ("First Chicago"), which provided the Fund with a maximum credit
facility of $140 million. The Credit Facilities consisted of a $100 million term
loan and a $40 million  secured  revolving  credit line. In October of 1993, the
Fund amended the credit  agreement  enabling it to make  prepayments of the term
loan at any time and without any  corresponding  reduction to the revolving line
of  credit.  As a result of  paydowns  of the term loan the  Fund's  outstanding
balance was paid in full as of March 29, 1994 to reduce the Credit Facilities to
$7.5 million,  all of which is available at June 30, 1997. The Credit Facilities
will mature on July 31, 1998. In connection with the Credit Facilities, the Fund
has pledged its debt and equity portfolio securities to its lenders.

<PAGE>

    In connection  with the Credit  Facilities,  the Fund incurred the following
loan fees:

    Nonrecurring  loan advisory and loan  facility  fees of  $4,441,580, paid to
    First  Chicago  in  1991 in  connection  with  the  creation  of the  credit
    facility,  which are being  amortized over the life of the credit  facility.
    The amount expensed for the six months ended June 30, 1997 was $316,132.

    An annual Loan  Administration  Fee of $25,000 for the administration of the
    credit facility.  The amount expensed for the six months ended June 30, 1997
    was $12,398.

    An  Unused  Commitment  Fee of 1/2 of 1% per  annum  of the  unused  line of
    credit.  The  amount  expensed  for the six months  ended June 30,  1997 was
    $18,750.

     For the six months ended June 30, 1997 and 1996, the Fund incurred $347,280
     and $347,783, respectively, in total loan fees.

5.  Investment Advisory Fee

     The  Investment  Adviser  provides for the  identification,  management and
liquidation of investments for the Fund. As compensation  for services  rendered
to the Fund, 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,  plus outstanding bank borrowing as specified in the Fund's
Partnership Agreement),  with a minimum annual fee of $1,200,000. The Investment
Advisory Fee is calculated and paid  quarterly,  in advance.  For the six months
ended June 30, 1997 and 1996, the Fund paid $593,717 and $936,297, respectively,
in  Investment  Advisory  Fees to Thomas H. Lee Advisors I. For the three months
ended June 30, 1997 and 1996, the Fund paid $297,026 and $456,045, respectively,
in Investment Advisory Fees.

6.  Fund Administration Fees & Expenses

     ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and  administrative  services
necessary for the management of the Fund.  Beginning  October 19, 1995, the Fund
Administration  Fee  changed to an annual  fee of  $300,000  plus  out-of-pocket
expenses  incurred  by the Fund  Administrator,  as  described  below.  The Fund
Administration Fee is paid quarterly,  in advance. For the six months ended June
30, 1997 and 1996,  the Fund paid $150,000 and $149,335,  respectively,  in Fund
Administration Fees. For the three months ended June 30, 1997 and 1996, the Fund
paid $75,000 in Fund Administration Fees.

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative  expenses  incurred.  For the six months  ended June 30, 1997 and
1996,  reimbursable expenses totalled $261,320 and $210,231,  respectively.  For
the three months ended June 30, 1997, reimbursable expenses totalled $191,581.

<PAGE>

7.  Independent General Partners' Fees

    As  compensation  for  services  rendered  to the  Fund,  each of the  three
Independent   General   Partners   receives   $40,000   annually  in   quarterly
installments,  $1,000 for each  meeting of the  General  Partners  attended  and
$1,000 for each committee  meeting attended ($500 if a committee meeting is held
on the same day as a meeting of the General Partners) plus reimbursement for any
legal and out-of-pocket expenses.

     For the six months ended June 30, 1997 and 1996, the Fund incurred $170,598
and $100,020,  respectively, in Independent General Partners' Fees and Expenses.
For the three months ended June 30, 1997 and 1996, Independent General Partners'
Fees and Expenses totalled $117,653 and $33,315, respectively.

8.  Investment Transactions

     During February 1997, the Fund sold 31,515 shares of Stanley  Furniture for
$24 per share.  The Fund received  total  proceeds of $756,335 and  recognized a
gain of $361,480.

     On June 27,  1997,  the Fund  along  with  affiliates  of the Thomas H. Lee
Company entered into a Stock Purchase  Agreement (the  "Agreement") with Stanley
Furniture Company, Inc. ("Stanley"),  a managed company in the Fund's portfolio.
Pursuant to the  Agreement,  Stanley  purchased an aggregate  750,000  shares of
Stanley  Common  Stock  from the  Selling  Stockholders  for $20 per  share.  In
connection with the sale, the Fund sold 727,344 shares and received  proceeds of
$14,546,880. The Fund recognized a gain of $5,433,911 on this transaction.

     At June  30,  1997,  the Fund had a total  of  $93.6  million  invested  in
Mezzanine  Investments  representing  $84.0  million  Managed  and $9.6  million
Non-Managed portfolio investments.

     For the six months  ended June 30,  1997,  the  proceeds  from the sales of
investments  resulted  in net  realized  gains  of  $5,795,391.  For  additional
information,  please refer to the  Supplemental  Schedule of Realized  Gains and
Losses - Schedule 1.

     Because  the  Fund  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  the  Fund  cannot   eliminate  its  risks   associated  with  its
investments in high-yield securities,  it has procedures in place to continually
monitor  its risks  associated  with its  investments  under a variety of market
conditions. Any potential Fund loss would generally be limited to its investment
in the portfolio company reflected in the portfolio of investments.  See Note 11
for information concerning commitments and guarantees.

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

9.  Unrealized Appreciation and Depreciation of Investments

     For the six months ended June 30, 1997,  the Fund  recorded net  unrealized
depreciation  of  $2,727,632.  As  of  this  date,  the  Fund's  cumulative  net
unrealized depreciation on investments totalled $13,542,098.

     For the three months ended June 30, 1997,  the Fund recorded net unrealized
depreciation  of  $3,011,659.  For additional  information,  please refer to the
Supplemental Schedule of Unrealized Appreciation and Depreciation - Schedule 2.

10. Non-Accrual of Investments

     In accordance  with the Fund's  Accounting  Policy,  the  following  equity
securities have been on non-accrual status since the date indicated:

         -  BeefAmerica, Inc. on July 1, 1990
         -  Chadwick Miller on July 1, 1993

11. Commitments and Guarantees

    On January 20, 1992,  the Fund entered into a commitment  to guarantee up to
$150,480 to support an  obligation  of a  subsidiary  of Alliance  International
Group, Inc. The amount of such guarantee  represents the Fund's pro-rata portion
of a $600,000  aggregate  additional  advance  provided by the senior  lender of
Alliance.
<PAGE>
12. Litigation

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was  denied.  Thereafter,  Deloitte  &  Touche  filed a  petition  for a writ of
Certiorari with South Carolina Supreme Court,  which was granted.  On August 11,
1997, the South Carolina Supreme Court affirmed in part and reversed in part the
rulings by the Court of  Appeals  reversing  summary  judgement  for  Deloitte &
Touche.

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors  in  interest  (the  "Class"),  against the Fund's  Managing  General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates.  The complaint alleged that the defendants breached the Fund's
Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court  found  that the MGP  Distributions  for the  fourth  quarter  of 1989
through the fourth  quarter of 1990 were paid in  violation  of the  Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff  class of $6,627,752 of excessive  distributions,  plus interest.  The
Court's  decision  dismissed  Merrill Lynch & Co., Inc. and MLPF&S  because they
were not  parties to the  Partnership  Agreement.  On June 13,  1996,  the Court
amended its  decision,  dismissing  ML Mezzanine,  Inc.,  the corporate  general
partner  of the  Fund's  MGP  because  it was  not a  party  to the  Partnership
Agreement.  On July 25, 1996, judgment was entered against remaining  Defendants
in the amount of $10,399,505.  The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision.  Thereafter,  the parties agreed to settle this action with certain of
the remaining  defendents  paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement,  ordered notice to be mailed to the
Class,  and scheduled a final hearing to approve the  settlement  and plantiffs'
council's  application for attorney's fees, for September 15, 1997. The Fund has
advanced litigation expenses to the indemnified parties based upon amounts which
are deemed  reimbursable in accordance with the  indemnification  provisions and
has included these amounts in Legal and Professional Fees.
<PAGE>
     On October 14, 1993, a Limited Partner commenced a putative class action in
the U.S.  District Court for the District of Delaware,  purportedly on behalf of
all persons who  purchased  limited  partnership  interests  in the Fund between
August 12, 1987 and the date of filing of the  complaint,  against the Fund, the
Managing  General  Partner,  the  Individual  General  Partners,  the Investment
Adviser to the Fund and certain named  affiliates  of such persons.  As amended,
the complaint  alleges that the  defendants  operated the Fund, and caused it to
make certain  investments,  for the benefit of some or all of the  defendants at
the expense of the Fund's Limited  Partners in breach of  defendants'  fiduciary
and  contractual  duties to the  Limited  Partners,  thereby  violating  federal
securities laws  applicable to the Fund and its affiliates  under the Investment
Company Act of 1940, as amended,  as well as Delaware  state law. By Order dated
September 30, 1994 and Opinion dated October 14, 1994, the court granted in part
and  denied  in part  defendants'  motion  to  dismiss  the  amended  complaint,
dismissing plaintiff's claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the Investment
Company Act of 1940. The plaintiff  thereafter filed a second amended  complaint
on November 3, 1995 raising  additional  allegations in connection  with certain
transactions by the Fund, and alleging that  defendants  violated the Investment
Company  Act of 1940 and  Delaware  state law.  In its Order and  Opinion  dated
December 30, 1996, the court granted in part and denied in part the  defendants'
motion to dismiss  the second  amended  complaint  holding  that a number of new
claims and  theories  asserted  by  plaintiffs  are  dismissed  as  time-barred.
Plaintiffs have moved for  reconsideration  of the Court's Order.  The plaintiff
seeks an  accounting,  rescission,  rescissory  or actual  damages and  punitive
damages. Plaintiffs have moved to certify the case as a class action. Defendants
have  opposed  that motion  which is  currently  pending  before the Court.  The
defendants  in this  action  believe  that  the  claims  in the  second  amended
complaint  are  without  merit.  Whether or not the  plaintiff  prevails  on any
remaining claims,  the Fund 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  Fund's   Partnership   Agreement  and  separate
indemnification agreements, and the amounts of such indemnification and expenses
could be material.  In the opinion of legal counsel, the outcome of this case is
not determinable at this time. The Fund has incurred  litigation  expenses which
are recorded in Legal and Professional Fees.

     On August 2,  1996,  an action  was  commenced  against  General  Nutrition
Companies,  Inc.  ("GNC"),  its  officers,  directors  and certain of its former
shareholders,  including the Fund, in the United States  District  Court for the
Western  District  of  Pennsylvania.  Plaintiffs  assert  that GNC is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
1-501(a) of the Pennsylvania  Securities Act, arising out of allegedly false and
misleading  statements  in the  prospectus  and  registration  statement for the
February 7, 1996 public  offering of GNC common  stock,  and for  violations  of
Section  10  (b)  of  the   Securities   Exchange  Act  of  1934  and  negligent
misrepresentation   arising  out  of  allegedly  false  and  misleading   public
statements  during the period from the public  offering  through  May 28,  1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the  underwriters  for the public  offering,  are
liable for certain of such  violations of the federal and state  securities laws
and/or  control  person  liability  in  connection   therewith,   and  negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly  on behalf of all  persons,  other than  defendants,  who  purchased
shares of GNC common stock during the proposed class action period from February
7, 1996  through  May 28,  1996.  The  defendants  filed a motion to dismiss the
action  in its  entirety  on  December  2,  1996,  which  motion is still in its
briefing  stages.  The defendants in this action believe that the claims against
them are without  merit.  In the opinion of legal  counsel,  the outcome of this
case is not determinable at this time.

<PAGE>

13. Related Party Transactions

    Certain of the Mezzanine  Investments and Bridge Investments which were made
by the Fund 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  the  Fund's   expectation   of   engaging   in  such
co-investments,  the Fund sought an exemptive order from the Commission allowing
such  co-investment,  which was received on September  23, 1987.  An  additional
exemptive order allowing  co-investment  with ML-Lee  Acquisition  Fund II, L.P.
("Fund  II")  and  ML-Lee  Acquisition  Fund  (Retirement   Accounts)  II,  L.P.
("Retirement  Fund") was received from the  Commission on September 1, 1989. The
Fund's investments in Managed Companies, and in certain cases its investments in
Non-Managed Companies,  typically involve the entry by the Fund 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 the Fund  and an  affiliate  of the  Investment
Adviser,  typically performs certain  management  services for Managed Companies
and  receives  management  fees in  connection  therewith,  usually  pursuant to
written  agreements with such companies.  In addition,  certain of the Portfolio
Companies  have  contractual  or other  relationships  pursuant to which they do
business with one another.

    Merrill  Lynch,  Pierce,  Fenner  &  Smith  Incorporated  ("MLPF&S")  is  an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio  companies of the Fund, 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 Fund in connection with their ordinary investment
operations.

     For the three and six  month  period  ended  June 30,  1997,  the Fund paid
$69,739 and $172,978,  respectively,  to the Fund Administrator for reimbursable
expenses. (Please refer to Note 6 for further information).

     For the six  month  period  ending  June 30,  1997 and 1996,  the  Managing
General  Partner  received  cash  distributions  in the  amount  of  $9,356  and
$1,743,361,  respectively,  representing  its 1% interest  in the Fund.  For the
three months ended June 30, 1997 and 1996, the Managing General Partner received
cash distributions totalling $2,832 and $672,053, respectively.

<PAGE>

14. Reserves

     In February  1993,  the Fund  established a $15 million  reserve to provide
funds for follow-on  investments  and to pay expenses.  As of June 30, 1997, the
reserve  balance  was reduced to  approximately  $3.1  million due to  follow-on
investments  in CMI Holding  Corp.,  Diet Center  Inc.,  Duro-Test  Corporation,
Signature Brands and Petco.  Additionally,  $1.4 million of the reserve has been
returned to partners  of the Fund,  a payment of $2.9  million was made to First
Chicago to pay down the Fund's loan and  approximately  $40,000 has been used to
fund quarterly expenses.

15. 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 the Fund's  partners for  inclusion  in their  respective  tax
returns.

     Pursuant  to  Statement  of  Financial   Accounting  Standards  No.  109  -
Accounting for Income Taxes,  the Fund is required to disclose any difference in
the tax basis of the Fund's assets and liabilities  versus the amounts  reported
in the  financial  statements.  As of December  31,  1996,  the tax basis of the
Fund's  assets are  greater  than than the  amounts  reported  in the  financial
statements  by $1.6  million.  This  difference  is  primarily  attributable  to
unrealized  depreciation  on investments  which has not been  recognized for tax
purposes.

16. Subsequent Events

     On August 1, 1997,  the  Individual  General  Partners  approved the second
quarter 1997 cash  distribution  totalling  $14,181,503,  which  consists of net
distributable  proceeds,  after fund expenses,  of $14,149,666  from the sale of
Stanley  common stock (of which  $8,924,511 is return of capital) and $31,837 of
net income from temporary  investments.  The total amount distributed to Limited
Partners  was  $14,039,683  or $28.80 per Unit.  The  Managing  General  Partner
received  $141,820,  representing  its  1%  interest  in  the  Fund.  This  cash
distribution was paid on August 14, 1997.

<PAGE>
<TABLE>
<CAPTION>
                                                   SCHEDULE 1
                                         ML-LEE ACQUISITION FUND, L.P.
                                SUPPLEMENTAL SCHEDULE OF REALIZED GAINS (LOSSES)
                                   FOR THE 3 AND 6 MONTHS ENDED JUNE 30, 1997
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

<S>                                                                         <C>             <C>            <C>            <C>
                                                                              Number Of       Original            Net     Realized
SECURITY                                                                         Shares           Cost       Proceeds         Gain
-----------------------------------------------                             -----------     ----------     ----------     --------
For the Three Months Ended March 31, 1997

Stanley Furniture Inc. 
    Common Stock                                                                 31,515     $      395     $      756     $    361

-----------------------------------------------                                             ----------     ----------     --------
Total For the Three Months Ended March 31, 1997                                             $      395     $      756     $    361
-----------------------------------------------                                             ----------     ----------     --------
For the Three Months Ended June 30, 1997

Stanley Furniture Inc. 
    Common Stock                                                                727,344     $    9,113     $   14,547     $  5,434
-----------------------------------------------                                             ----------     ----------     --------
Total For the Three Months Ended June 30, 1997                                              $    9,113     $   14,547     $  5,434
-----------------------------------------------                                             ----------     ----------     --------
Total For the Six Months Ended June 30, 1997                                                $    9,508     $   15,303     $  5,795
===============================================                                             ==========     ==========     ========



See the Accompanying Notes to Financial Statements 
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                   SCHEDULE 2
                          ML-LEE ACQUISITION FUND, L.P.
        SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                      FOR THE PERIOD ENDED JUNE 30, 1997
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

<S>                                    <C>           <C>            <C>              <C>             <C>              <C>
                                                                       Unrealized      Unrealized         Total           Total
                                                                      Appreciation    Appreciation     Unrealized       Unrealized
                                                                     (Depreciation)  (Depreciation)   Appreciation     Appreciation 
                                                                      for the Three   for the Six    (Depreciation)   (Depreciation)
                                        Investment         Fair       Months Ended    Months Ended   at December 31,    at June 30,
SECURITY                                   Cost           Value      June 30, 1997   June 30, 1997         1996            1997
-----------------------------------     ----------      ----------   -------------   -------------      ----------      ----------

PUBLICLY TRADED SECURITIES

Celebrity
  Common Stock*                         $       75      $       18      $       (2)     $       (3)     $      (54)     $      (57)

Signature Brands
  Common Stock*                              4,552           5,569             (98)         (2,833)          3,849           1,016

Playtex
  Common Stock*                              3,255          13,183          (2,109)          1,935           7,993           9,928

Stanley
  Common Stock*                             10,041          18,533          (2,165)         (2,970)         11,462           8,492

Walter
  Common Stock                               8,877           7,301           1,362           1,143          (2,720)         (1,577)
                                                                        ----------      ----------      ----------      ----------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                                     $   (3,012)     $   (2,728)     $   20,530      $   17,802
                                                                        ----------      ----------      ----------      ----------

NONPUBLIC SECURITIES:

BAOC Acquisition
  Jr. and Sr.Preferred Stock                24,000          10,000      $       --      $       --      $  (14,000)     $  (14,000)

Chadwick-Miller, Inc. 
  Common Stock*                              3,736              --              --              --          (3,736)         (3,736)
  Preferred Stock                           12,916              --              --              --         (12,916)        (12,916)

Magellan Health Service 
  Common Stock Warrants*                         4              --              --              --              (4)             (4)

SWO Holdings Corporation
  Common Stock*                                690              --              --              --            (690)           (690)
                                                                        ----------      ----------      ----------      ----------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM
  NONPUBLIC SECURITIES                                                  $       --      $       --      $  (31,346)     $  (31,346)
                                                                        ----------      ----------      ----------      ----------


 TOTAL NET UNREALIZED APPRECIATION                                      $   (3,012)     $   (2,728)     $  (10,816)     $  (13,544)
   (DEPRECIATION)                                                       ==========      ==========      ==========      ==========


*   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

     As of June 30,  1997,  the Fund had a total of $93.6  million  invested  in
Mezzanine Investments.  These investments were financed by net offering proceeds
and debt  financing.  This  represents a $9.5 million  decrease versus the total
invested in Mezzanine  Investments at December 31, 1996 of $103.1  million.  The
decrease  in  investments  is due  primarily  to the  sales and  redemptions  of
Portfolio  Investments.  The Fund's Mezzanine  Investments consist of high-yield
subordinated debt and/or preferred stock linked with an equity  participation in
middle market companies  typically issued in private placement  transactions and
are usually  subject to  restrictions  on the transfer or sale of the  security,
thereby limiting their liquidity.

     During the six months ended June 30, 1997,  the fund received no additional
debt  securities in lieu of cash interest  payments  ("payment-in-kind").  As of
June  30,  1997  and  December  31,  1996,  the  Fund  had in its  portfolio  of
investments $1.2 million of payment-in-kind  debt securities and $6.5 million of
payment-in-kind equity securities.

     On  August  13,  1991,  the Fund  completed  a  refinancing  of its  credit
agreement with a lending group led by The First National Bank of Chicago ("First
Chicago"). The new agreement provided the Fund with a maximum credit facility of
$140 million, consisting of a $100 million term loan and a $40 million revolving
credit line, both maturing on July 31, 1998. The Fund has pledged  substantially
all of its  securities  to secure  repayment  of this  facility.  The  agreement
generally provided for mandatory  prepayments,  and a permanent reduction in the
credit  facility,  equal to the lesser of cost or cash  proceeds in the event of
the sale or other cash disposition of Mezzanine Investments.

     On  October  29,  1993,  the Fund  amended  its Credit  Facility  Agreement
enabling the Fund to make  prepayments  of the term loan at any time and without
any  corresponding  reduction  to the  revolving  credit  line.  As a result  of
paydowns of the term loan, the Fund's  outstanding term loan was paid in full as
of March 29, 1994.  Additionally,  the Fund's  remaining credit line was further
amended to reduce the commitments thereunder to $7.5 million, which is availavle
to the Fund as of June 30, 1997.

     The Fund is now in its tenth year of operation.  Because all but one of the
Fund's debt  investments  were previously  sold or redeemed,  interest and other
income  expected to be received by the Fund may not be  sufficient  to cover the
Fund's expenses. As a result, future cash distributions to Limited Partners will
be mostly  derived  from  capital  proceeds  and gains  resulting  from sales of
securities.  The amount and timing of asset sales are dependent on future market
conditions and therefore are inherently  unpredictable.  Generally, the proceeds
generated  from  the  sale of the  Fund's  investments  will be  distributed  to
partners  only after  payment of  obligations  of the Fund,  or for  appropriate
reserves.  To fund the anticipated cash flow shortfall in the near future and to
maintain adequate reserves for possible follow-on investments and expenses,  the
Fund  reserved $15 million of the proceeds  received from the Playtex notes sale
in  February,  1993.  A  portion  of the  reserve  was  used to  make  follow-on
investments in American  Health  Companies,  Duro-Test  Corp.,  Chadwick-Miller,
Health o meter and Petco.  Approximately  $1.4  million of the  reserve has been
returned to partners of the Fund.  In addition,  $2.9 million was utilized  from
the reserve to pay down a portion of the First  Chicago  loan on January 6, 1994
and approximately  $40,000 has been used to fund quarterly expenses.  The Fund's
reserve  balance as of June 30, 1997 was  approximately  $3.1 million  which has
been  invested  in  temporary  investments.  As  of  the  last  meeting  of  the
Independent  General Partners on June 11, 1997, the Independent General Partners
have approved retention of the reserve at its current level.

<PAGE>

Investment in High-Yield Securities

     The Fund  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 have no quoted market price.

     Although  the  Fund  cannot   eliminate  the  risks   associated  with  its
investments  in  High-Yield  Securities,  it  has  established  risk  management
policies.  The Fund subjected each prospective  investment to rigorous  analysis
and made only those investments that were recommended by the Investment  Adviser
and  that met the  Fund's  investment  guidelines  or that  had  otherwise  been
approved by the Managing General Partner and the Independent  General  Partners.
Fund investments were measured against specified Fund investment and performance
guidelines.  To limit the exposure of the Fund's  capital in any single  issuer,
the Fund limits the amount of its investment in a particular  issuer. The Fund'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 the Fund (Celebrity, Playtex, Stanley
Furniture  and  Signature  Brands) have  registered  their equity  securities in
public  offerings.  Although the equity  securities of the same class  presently
held by the Fund (except Celebrity Inc., Stanley Furniture and Signiture Brands)
were not registered in these offerings,  the Fund 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 the
Fund for at least two years.  The Fund in  certain  cases 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 Fund (and
affiliated investors where applicable), serve as one or more of the directors on
the  boards  of  portfolio  companies.  The Fund 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

     For the six  months  ended  June  30,  1997  and  1996,  the Fund had a net
investment loss of $1,480,716 and $649,191,  respectively.  The total investment
income earned on investments for the six months ended June 30, 1997 was $694,408
of which $595,700 was earned from Mezzanine  Investments and $98,708, was earned
from Temporary Investments. For the same period in 1996, total investment income
earned on investments was $2,067,193 of which $823,279 was earned from Mezzanine
Investments and $1,243,914 was earned from Temporary Investments.

 <PAGE>
 
     The increase in the net investment  loss for the six months ending June 30,
1997 versus the  comparative  period in 1996  reflects a decrease in  investment
income  generated from  mezzanine  investments  which have been sold,  partially
offset by lower Investment  Advisory Fees and Legal and Professional Fees. Short
term discount income was substantially  greater for the first six months in 1996
stemming from the proceeds received from the sale of GNC.

     Major  expenses for the period ending June 30, 1997 consisted of Investment
Advisory Fees, Legal and Professional Fees, Loan Fees and Reimbursable expenses.

     The Investment Advisor receive its compensation on a quarterly basis. Total
Investment Advisory Fees paid to the Investment Adviser for the six months ended
June 30, 1997 was $593,717  compared with $936,297 for the six months ended June
30,  1996.  The  fee is  calculated  at an  annual  rate of 1% of  assets  under
management, subject to certain reductions as specified in the Fund's Partnership
Agreement with a minimum  annual payment of $1,200,000.  The decrease in 1997 as
compared  to 1996  Investment  Advisory  Fee is a  direct  result  of  sales  of
investments,  returns of capital to partners and realized losses on investments.
For the three months ended June 30, 1997 and 1996, Investment Advisory Fees paid
to the Investment Adviser were $297,026 and $456,045, respectively.

     Legal and  Professional  Fees paid by the Fund  consist  primarily of legal
fees incurred in conjunction  with litigation.  Legal and Professional  Fees for
the six  months  ended  June 30,  1997  and 1996  were  $648,006  and  $968,501,
respectively.  For the three  months  ended  June 30,  1997 and 1996,  Legal and
Professional  Fees were  $416,226 and $581,677,  respectively.  This decrease is
attributable to the decrease in legal expenses incurred and advanced by the Fund
in  connection  with  the  litigation  described  in  Note  12 to the  Financial
Statements.

     Loan fees  consist  of fees on the unused  portion of the Fund's  facility,
loan  administration  fees,  amortization of the loan advisory and facility fees
and various miscellaneous fees attributable to the facility.  For the six months
ended  June 30,  1997  and  1996,  the  Fund  incurred  $347,280  and  $347,783,
respectively,  in total loan fees. Loan fees for the three months ended June 30,
1997 and 1996 totalled $174,652 and $175,127, respectively.

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative  expenses  incurred.  For the six months  ended June 30, 1997 and
1996,  reimbursable expenses totalled $261,320 and $210,231,  respectively.  For
the three months ended June 30, 1997, reimbursable expenses totalled $191,581.

     
<PAGE>
Net Assets

     The Fund's net assets  increased  by $651,459  during the six months  ended
June  30,  1997,  due  to net  realized  gains  of  $5,795,392  offset  by a net
investment  loss of $1,480,716,  net unrealized  depreciation  of $2,727,632 and
cash distributions of $935,585.

     The Fund's  valuation of the common Stock of Celebrity,  Signature  Brands,
Playtex,  Stanley Furniture and Walter  Industries  reflect their closing market
price at June 30, 1997.

     The  Signature,  Playtex  and  Stanley  securities  held  by the  Fund  are
restricted  securities under the Securities and Exchange  Commission'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.  The Fund may be
considered  an  affiliate of Signature  Brands and Stanley  Furniture  under the
Securities  and Exchange  Commission's  Rule 144, and  therefore,  any resale of
Signature  or  Stanley  Furniture  securities  under  Rule 144 is limited by the
volume  limitations  in that rule.  Accordingly,  the values  referred to in the
financial  statements for Signature,  Playtex and Stanley  Furniture  securities
held by the  Fund  do not  necessarily  represent  the  prices  at  which  these
securities could currently be sold.

Unrealized Appreciation and Depreciation and Non-Accrual of Investments

     For the six months ended June 30, 1997,  the Fund  recorded net  unrealized
depreciation  of  $2,727,632  as compared to a net  unrealized  appreciation  of
$37,138,581  for the same  period  in  1996.  As of June 30,  1997,  the  Fund's
cumulative net unrealized depreciation on investments totalled $13,542,098.  The
increase in unrealized depreciation during the six months ended June 30, 1997 is
primarily the result of the reversal of unrealized  appreciation  from the sales
of Stanley. For the three months ended June 30, 1997 and 1996, the Fund recorded
net  unrealized  depreciation  of  $3,011,659  as  compared  to  net  unrealized
appreciation of $32,422,883 for the same period in 1996.

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

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

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

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

     The net  realized  gains on  investments  for the six months ended June 30,
1997 was $5,795,392  compared to net realized gains of $61,575,041  for the same
period in 1996.  For the three months ended June 30, 1997,  the Fund  realized a
gain of  $5,433,911  as  compared  to  $24,445,188  in  realized  gains  for the
comparable period in 1996.

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

Cash Distributions

     On August 1, 1997,  the  Individual  General  Partners  approved the second
quarter 1997 cash  distribution  totalling  $14,181,503,  which  consists of net
distributable  proceeds,  after Fund expenses,  of $14,149,666  from the sale of
Stanley  common stock (of which  $8,924,511 is return of capital) and $31,837 of
net income from temporary  investments.  The total amount distributed to Limited
Partners  was  $14,039,683  or $28.80 per Unit.  The  Managing  General  Partner
received  $141,820,  representing  its  1%  interest  in  the  Fund.  This  cash
distribution was paid on August 14, 1997.

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

     Should you decide to sell you Units, please be aware that such sale will be
recorded  on the  books  and  records  of the  Fund  quarterly,  only  upon  the
satisfactory  completion and acceptance of the Fund'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 October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors  in  interest  (the  "Class"),  against the Fund's  Managing  General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates.  The complaint alleged that the defendants breached the Fund's
Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court  found  that the MGP  Distributions  for the  fourth  quarter  of 1989
through the fourth  quarter of 1990 were paid in  violation  of the  Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff  class of $6,627,752 of excessive  distributions,  plus interest.  The
Court's  decision  dismissed  Merrill Lynch & Co., Inc. and MLPF&S  because they
were not  parties to the  Partnership  Agreement.  On June 13,  1996,  the Court
amended its  decision,  dismissing  ML Mezzanine,  Inc.,  the corporate  general
partner  of the  Fund's  MGP  because  it was  not a  party  to the  Partnership
Agreement.  On July 25, 1996, judgment was entered against remaining  Defendants
in the amount of $10,399,505.  The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision.  Thereafter,  the parties agreed to settle this action with certain of
the remaining  defendents  paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement,  ordered notice to be mailed to the
Class,  and scheduled a final hearing to approve the  settlement  and plantiffs'
council's  application for attorney's fees, for September 15, 1997. The Fund has
advanced litigation expenses to the indemnified parties based upon amounts which
are deemed  reimbursable in accordance with the  indemnification  provisions and
has included these amounts in Legal and Professional Fees.


     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 ended June 30, 1997

(b) Registrant Filed Forms 8-K with respect to the following:

     Sale of Stanley Filed June 27, 1997

<PAGE>
                           SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 14th day of
August, 1997.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner


Dated:  August 14, 1997    /s/ Audrey Bommer
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)

Dated:  August 14, 1997    /s/ Roger F. Castoral, Jr.
                           Roger F. Castoral, Jr.
                           Assistant Treasurer
                           (Principal Accounting Officer)


<PAGE>

                           SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 14th day of
August, 1997.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner


Dated:  August 14, 1997
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)

Dated:  August 14, 1997
                           Roger F. Castoral, Jr.
                           Assistant Treasurer
                           (Principal Accounting Officer)