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 March 31, 1998

                         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 March 31, 1998 and December 31, 1997                          

Statements of Operations - For the Three Months Ended
  March 31, 1998 and 1997                                           

Statements of Changes in Net Assets - For the Three Months Ended
  March 31, 1998 and 1997                                             

Statements of Cash Flows - For the Three Months Ended
  March 31, 1998 and 1997                                            

Statement of Changes in Partners' Capital - March 31, 1998         

Schedule of Portfolio Investments - March 31, 1998                   

Notes to Financial Statements                                        

Supplemental Schedule of Realized Gains and Losses - Schedule 1    

Supplemental Schedule of Unrealized Appreciation and
  Depreciation - Schedule 2                                       

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


                           PART II - OTHER INFORMATION

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>
                                                                                 March 31, 1998         December 31, 1997
                                                                                 --------------         -----------------

ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
    Managed Companies (cost $24,459 at March 31,
         1998 and $53,480 at December 31, 1997)                                 $        33,588           $        35,227
    Non-Managed Companies (cost $720 at March 31,
         1998 at December 31, 1997)                                                          36                        26
    Temporary Investments, at amortized cost (cost $13,626 at
         March 31, 1998 and $4,040 at December 31, 1997)                                 13,654                    18,125
Cash                                                                                          5                         1
Prepaid Loan Fees - Notes 2, 4                                                              221                       384
Prepaid Expenses                                                                              4                         6
Receivable for Investment Sold                                                            1,075                     3,926
                                                                                ---------------           ---------------
TOTAL ASSETS                                                                    $        48,583           $        57,695
                                                                                ===============           ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                         $            81           $           110
    Reimbursable Administrative Expenses Payable                                            133                       116
    Independent General Partner Expenses Payable                                             29                        23
                                                                                ---------------           ---------------
Total Liabilities                                                                           243                       249
                                                                                ---------------           ---------------
Partners' Capital - Note 2
    Managing General Partner                                                                827                       918
    Limited Partners (487,489 Units)                                                     47,513                    56,528
                                                                                ---------------           ---------------
Total Partners' Capital                                                                  48,340                    57,446
                                                                                ---------------           ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                         $        48,583           $        57,695
                                                                                ===============           ===============

</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>  
                                                                                 For the Three Months Ended
                                                                                ------------       --------------
                                                                                March 31,1998      March 31, 1997
                                                                                ------------       --------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                                        $          6         $        295
Discount                                                                                 196                   47
Dividend & Other Income                                                                    1                    6
                                                                                ------------         ------------
    TOTAL INCOME                                                                         203                  348
                                                                                ------------         ------------
EXPENSES:
Investment Advisory Fee - Note 5                                                         300                  297
Fund Administration Fee - Note 6                                                          75                   75
Loan Fees - Notes 2, 4                                                                   173                  172
Independent General Partners' Fees and Expenses - Note 7                                  40                   53
Legal and Professional Fees                                                               --                  232
Reimbursable Administrative Expenses - Note 6                                            133                   70
Insurance Expense                                                                          2                    2
                                                                                ------------         ------------
    TOTAL EXPENSES                                                                       723                  901
                                                                                ------------         ------------
NET INVESTMENT LOSS                                                                     (520)                (553)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
     NOTE 8 AND SCHEDULE 1                                                           (17,202)                 361
NET CHANGE IN UNREALIZED APPRECIATION 
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                                                     6,392                  284
        Nonpublic Securities                                                          21,000                    0
                                                                                ------------         ------------
             Subtotal                                                                 27,392                  284
                                                                                ------------         ------------
NET INCREASE IN NET ASSETS
   RESULTING FROM OPERATIONS                                                    $      9,670         $         92
                                                                                ============         ============


See the Accompanying Notes to Financial Statements.

</TABLE>


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

<S>                                                                           <C>            <C>   
                                                                               For the Three Months Ended
                                                                              ------------    ------------
                                                                              March 31, 1998  March 31, 1997
                                                                              ------------    ------------
FROM OPERATIONS:

Net Investment Income (Loss)                                                  $       (520)   $       (553)

Net Realized Gain (Loss) on Investments                                            (17,201)            361

Net Change in Unrealized Appreciation (Depreciation) on Investments                 27,392             284
                                                                              ------------    ------------

Net Increase in Net Assets Resulting from Operations                                 9,670              92

Cash Distributions to Partners                                                     (18,776)           (650)
                                                                              ------------    ------------

Total Decrease                                                                      (9,106)           (558)

NET ASSETS:

Beginning of Period                                                                 57,446          97,388
                                                                              ------------    ------------

End of Period                                                                 $     48,340    $     96,830
                                                                              ============    ============




See the Accompanying Notes to Financial Statements.

</TABLE>


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

<S>                                                                             <C>                   <C>   
                                                                                       For the Three Months Ended
                                                                                ------------           -------------
                                                                                March 31, 1998         March 31, 1997
                                                                                --------------         --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                       $        238             $        356
  Investment Advisory Fee                                                               (300)                    (297)
  Fund Administration Fee                                                                (75)                     (75)
  Legal and Professional Fees                                                            (28)                    (307)
  Loan Fees and Expenses                                                                 (10)                      (9)
  Independent General Partners' Fees and Expenses                                        (33)                     (34)
  (Purchase) Sale of Temporary Investments, Net                                        4,435                      358
  Reimbursable Administrative Expenses                                                  (117)                    (103)
  Proceeds from Sale of Portfolio Company Investments                                 14,670                      756
                                                                                ------------             ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                             18,780                      645
                                                                                ------------             ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                     (18,776)                    (650)
                                                                                ------------             ------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                             (18,776)                    (650)
                                                                                ------------             ------------
  Net Increase (Decrease) in Cash                                                          4                       (5)
  Cash at Beginning of Period                                                              1                       10
                                                                                ------------             ------------
CASH AT END OF PERIOD                                                           $          5             $          5
                                                                                ============             ============

               RECONCILIATION OF NET INVESTMENT INCOME (LOSS) TO
                    NET CASH PROVIDED BY OPERATING ACTIVITIES

Net Investment Income (Loss)                                                    $       (520)            $       (553)
                                                                                ------------             ------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  Decrease in Investments                                                             33,456                      753
  Increase in Receivable for Investments Sold                                          2,851                       --
  Decrease in Accrued Interest,
     Dividend and Discount Receivables                                                    36                        8
  Decrease in Prepaid Expenses                                                           165                      166
  Increase in Independent General Partner Fees Payable                                     6                       19
  Increase (Decrease) in Reimbursable Administrative Expenses Payable                     17                      (33)
  Decrease in Legal and Professional Fees Payable                                        (29)                     (76)
  Net Realized Gain (Loss) on Investments                                            (17,202)                     361
                                                                                ------------             ------------
TOTAL ADJUSTMENTS                                                                     19,300                    1,198
                                                                                ------------             ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                       $     18,780             $        645
                                                                                ============             ============
</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 Three Months Ended March 31, 1998
Partners' Capital at January 1, 1998                                           $     918         $  56,528         $   57,446
Allocation of Net Investment Loss                                                     (5)             (515)              (520)
Allocation of Net Realized Loss on Investments                                      (172)          (17,029)           (17,202)
Allocation of Net Change in Unrealized Appreciation                                  274            27,118             27,392
Cash Distributions to Partners                                                      (188)          (18,588)           (18,776)
                                                                               ---------         ---------         ----------
Partners' Capital at March 31, 1998                                            $     827         $  47,513         $   48,340
                                                                               =========         =========         ==========


</TABLE>


See the Accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                           March 31, 1998
                                                       (DOLLARS IN THOUSANDS)
                                                             

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

                    CHADWICK-MILLER, INC. - Notes 9,12
  15,406 Warrants   CMI Holding Corp., Preferred Stock Purchase Warrants (b)(e)            12/16/88   $ 12,916   $    -
  39,487 Warrants   CMI Holding Corp., Common Stock Purchase Warrants (b)(e)                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
                                                                                                      -----------------------------

                    COLE NATIONAL CORPORATION (g)
5,563 Warrants      Cole National Corporation, Common Stock Purchase Warrants(b)           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) - Notes 9, 14
1,406,204 Shares    Playtex Products, Inc., Common Stock(b)(g)                             12/28/88      3,255   20,742
                      (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   20,742        43.87
                                                                                                      ------------------------------

              See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                         ML-LEE ACQUISITION FUND, L.P.
                                                       SCHEDULE OF PORTFOLIO INVESTMENTS
                                                                March 31, 1998
                                                            (DOLLARS IN THOUSANDS)
                                                                  (CONTINUED)

                                                                                                                   Fair         % Of
                                                                                         Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                    SIGNATURE BRANDS USA, INC. (a) - Notes 8, 9,14
                    (formerly HEALTH O METER PRODUCTS, INC.)
952,500 Shares      Signature Brands USA, Inc., Common Stock (b)(g)                        04/28/88   $  1,270  $ 7,828
610,553 Shares      Signature Brands USA, Inc., Common Stock (b)(g)                        08/17/94      3,282    5,018
                      (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   12,846        27.17
                                                                                                      ------------------------------

                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN MANAGED COMPANIES                                             $ 24,459  $33,588        71.04
                                                                                                      ==============================


                    NON-MANAGED COMPANIES

                    SWO HOLDINGS CORPORATION - Notes 9,14
250,000 Shares      SWO Holdings Corp., Common Stock(b)                                    11/24/87        250        -
  1,430 Shares      Homeland Holding Corp., Common Stock(b)(g)                             08/10/90        440       10
  1,506 Warrants    Homeland Holding Corp., Common Stock                                   08/10/90          -        -
                    Purchase Warrants (b)                                                  
                      $5,000 15.5% Subordinated Notes
                      Purchased 11/24/87                    $5,000
                      Sold 09/15/88                         $5,075
                      Realized Gain                         $   75 
                      185,048 Shares Common Stock
                      Purchased 8/10/90                     $  440
                      Exchanged 10/2/96
                      1,430 Shares Common Stock             $  440
                      1,506 Common Stock Purchase Warrants  $    0
                      Realized Gain                         $    0                  
                      Total Realized Gain                   $   75  

                                                                                                      ------------------------------
                                                                                                           690       10         0.02
                                                                                                      ------------------------------

                    TLC BEATRICE INTERNATIONAL HOLDINGS, INC. - Note 14
25,500 Shares       TLC Beatrice Int'l Holdings., Inc., Common Stock(b)                    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         0.06
                                                                                                      ------------------------------


                    MAGELLAN HEALTH SERVICES, INC. - Notes 9,14
                    (formerly CHARTER MEDICAL CORPORATION)
 2,067 Warrants     Magellan Health Services, Inc., Common Stock Purchase Warrants(b)      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                                              720       36         0.08
                                                                                                      ==============================
                    SUMMARY OF MEZZANINE INVESTMENTS

                    Common Stock and Warrants                                                           25,179   33,624        71.12
                                                                                                      ------------------------------
                    TOTAL MEZZANINE INVESTMENTS                                                       $ 25,179  $33,624        71.12
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                       March 31, 1998
                                                    (DOLLARS IN THOUSANDS)
                                                          (CONTINUED)

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

                    COMMERCIAL PAPER

$  4,415            Ford Motor Credit Corp., 5.53% due 4/2/98                          3/18/98        $  4,404  $ 4,414         9.34
$  9,240            IBMC, 5.51% due 4/1/98                                             3/19/98           9,222    9,240        19.54
                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN COMMERCIAL PAPER                                                13,626   13,654        28.88
                                                                                                      ------------------------------
                    TOTAL TEMPORARY INVESTMENTS                                                         13,626   13,654        28.88
                                                                                                      ------------------------------
                    TOTAL INVESTMENT PORTFOLIO                                                        $ 38,805  $47,278       100.00
                                                                                                      ==============================



(a)  Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b)  Restricted non-income producing security.
(c)  Issuers of which the Fund, as of December 31, 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.
(d)  Represents original cost and excludes accretion of discount of $28 for Temporary Investments.
(e)  Non-accrual investment status.
(f)  Inclusive of receipt of payment-in-kind securities.
(g)  Publicly traded class of securities.
 

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

<PAGE>

                      ML-LEE ACQUISITION FUND, L.P.
                      NOTES TO FINANCIAL STATEMENTS
                            MARCH 31, 1998
                               (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 term of the Fund will expire on 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 expiration of the term, the Fund will have
five  additional  years to liquidate its remaining  investments.  At the meeting
held on February 12, 1998, the Individual General Partners indicated that it was
likely  they  would  elect to  extend  the  term of the  Fund for an  additional
two-year period.  At that meeting,  the Individual  General  Partners  expressed
their  intention to vote on the matter at their  meeting  scheduled  for June 5,
1998.

     On April 15, 1998,  Playtex  Products Inc. filed a  registration  statement
pursuant to which the Fund intends to sell all of its remaining  interest in the
Company. The Fund owns 1,406,204 shares of Playtex Products,  Inc. Common Stock.
If the Playtex Products, Inc. transaction is consummated prior to June 15, 1998,
and/or  the  Individual  General  Partners  are  otherwise  satisfied  with  the
arrangements  for  disposition of the Fund's  remaining  assets,  the Individual
General Partners may elect not to extend the term of the Fund.

     Between March 31, 1998 and the expiration date of the term of the Fund, the
Investment Adviser will continue to manage the Fund's remaining investments with
a view towards maximizing value,  whenever possible.  In the event that the term
of the Fund is not extended because the Playtex Products,  Inc.  transaction has
been  consummated and the Individual  General  Partners are otherwise  satisfied
with the  arrangements  for  disposition  of the Fund's  remaining  assets,  the
Management  Agreement will not be amended as discussed in Note 5 and will expire
according to its original terms.

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

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of March 31,
1998. Although the Managing General Partner and Investment Adviser are not aware
of any  factors  not  disclosed  herein  that  would  significantly  affect  the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time and, 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 March 31, 1998,  the current  estimated  fair value of these
investments may have changed significantly since that point in time.

Interest Receivable on Investments

     Investments  generally will be placed on non-accrual status in the event of
a default (after  applicable grace period expires) or if the Investment  Adviser
and the Managing General Partner determine that there is no reasonable assurance
of collecting interest. As of March 31, 1998, there are no portfolio investments
generating interest income to the Fund.

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 March 31, 1998 and  December  31,
1997,  the Fund had in its portfolio of investments $3 million and $3.7 million,
respectively 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.

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.   Profits  and  losses,  when  realized,  are
allocated  in  accordance  with  the  provisions  of the  Partnership  Agreement
summarized in Note 3.

<PAGE>
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.  As a result of paydowns of the term loan the Fund's
outstanding  balance was paid in full as of March 29,  1994.  Additionally,  the
Credit  Facilities  were reduced to $7.5  million,  all of which is available at
December  31,  1997.  The Credit  Facilities  will mature on July 31,  1998.  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 three months ended March 31, 1998 was $157,194.

     An annual Loan  Administration Fee of $25,000 for the administration of the
     credit facility.  The amount expensed for the three months ended March 31, 
     1998 was $6,164.

     An  Unused  Commitment  Fee of 1/2 of 1% per  annum of the  unused  line of
     credit.  The amount  expensed  for the three  months  ended  March 31, 1998
     was $9,375.

     For the three  months  ended  March 31,  1998 and 1997,  the Fund  incurred
     $172,733 and $172,629, respectively, in total loan fees.
<PAGE>
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 $1.2 million. The Investment Advisory Fee is paid quarterly,  in advance. For
the three  months  ended March 31,  1998 and 1997,  the Fund paid  $300,000  and
$296,691, respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I.

     The Investment  Adviser has discussed with the Managing General Partner and
with the Independent General Partners the need for continued  investment service
during the liquidation of the Fund's investments and during any extension period
currently being considered,  and the level of appropriate  management fee during
any such extension.  Following those discussions, the Investment Adviser and the
Fund have agreed to amend the Management Agreement,  reducing the management fee
payable  thereunder  commencing  July 1, 1998 to  $250,000  per  annum,  payable
quarterly in advance,  plus all actual  out-of-pocket  expenses  incurred by the
Investment  Adviser in  connection  with the Fund  (other than  compensation  of
employees of the Investment Adviser).  Such out-of-pocket  expenses would be for
any third-party fees for consultation with counsel, accountants or other experts
in connection with the Investment Adviser's duties to the Fund.

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 is calculated at 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 three months ended
March  31,  1998  and  1997,  the  Fund  paid  $75,000,  respectively,  in  Fund
Administration Fees.

     In accordance with the Partnership  Agreement,  the Fund  Administrator  is
being  reimbursed  by the  Fund for 100% of  administrative  expenses  incurred.
Actual  out-of-pocket  expenses  ("reimbursable  expenses") primarily consist of
printing, audits, tax preparation and custodian fees. For the three months ended
March 31, 1998 and 1997,  reimbursable  expenses  totalled $133,055 and $69,739,
respectively.

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.  Compensation  for the  Independent  General
Partners is reviewed annually by the Individual General Partners.

     For the three  months  ended  March 31,  1998 and 1997,  the Fund  incurred
$39,532 and $52,945,  respectively,  in Independent  General  Partners' Fees and
Expenses.

8.  Investment Transactions
     
     On January  6, 1998 the Fund and  affiliates  of the Thomas H. Lee  Company
(the "Lee  Affiliates"),  together with the Fund,  the ("Selling  Stockholders")
sold their  remaining  holdings of common stock in Stanley.  The common stock of
each of the Selling  Stockholders  was sold pursuant to a Form S-3  Registration
Statement,  which  was  filed by  Stanley  on  December  22,  1997 and  declared
effective by the  Securities  and Exchange  Commission  on December 23, 1997. In
connection  with the sale, the Fund sold its remaining  400,719 shares of common
stock and received net proceeds of $10.8  million or $27 per share.  On February
12,  1998,  the  Independent  General  Partners  established  a reserve of $1.65
million  from  these   proceeds  to  pay  future   expenses  of  the  Fund.  Net
Distributable  Capital  Proceeds  from the sale,  as defined in the  Partnership
Agreement,  of $9.2  million  or $18.63  per Unit were  distributed  to  Limited
Partners of record as of January 6, 1998.
<PAGE>

     On March 3, 1998,  the Fund sold its remaining  investment in  BeefAmerica,
consisting of 14,000 shares Sr.  Preferred Stock and 10,000 shares Jr. Preferred
Stock (the  "Securities"),  for $1 million to Lajara II LLC, a limited Liability
Company owned by the Management of BeefAmerica  Operating Company.  The proceeds
consist of a $1 million  Promissory Note payable to the Fund on or before May 2,
1998.  The  Securities  have been pledged to secure the obligation of Lajara II,
LLC under the Promissory Note. The Fund recognized a loss of $23 million.

     For the three months ended March 31, 1998,  the proceeds  from the sales of
investments  resulted in net  realized  losses of  $17,201,622.  For  additional
information,  please refer to the  Supplemental  Schedule of Realized  Gains and
Losses - Schedule 1.

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

     Although  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.

     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.
<PAGE>
9.  Unrealized Appreciation and Depreciation of Investments

     For the three months ended March 31, 1998, the Fund recorded net unrealized
appreciation of $27.4 million.  As of March 31, 1998, the Fund's  cumulative net
unrealized appreciation on investments totalled $8.4 million.

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

10. Litigation

     On April 10,  1998,  the  parties  to Seidel v.  Thomas H. Lee,  et al, No.
93-494 (JJF), a putative  class action brought on behalf of limited  partners of
the Fund,  filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.

     The proposed settlement,  which is subject to Court approval,  provides for
dismissal with  prejudice of all claims against the Fund, the Fund's  Investment
Advisor and certain of its affiliates,  the Fund's Managing  General Partner and
certain  of  its  affiliates,  and  the  Fund's  Independent  General  Partners.
Defendants, other than the Fund, have agreed to provide cash of $2.5 million and
certain  other  considerations  to settle the claims  asserted  in this  action.
Defendants  continue to deny all liability in this action.  On May 4, 1998,  the
Court  granted  preliminary  approval to the  Settlement  and  scheduled a final
hearing to consider the Settlement for July 16, 1998.

11. 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.

     In the first quarter of 1998, the Managing  General  Partner  received cash
distributions  in the amount of  $187,779  representing  its 1%  interest in the
Fund.
<PAGE>

12. Reserves

     In February  1993,  the Fund  established a $15 million  reserve to provide
funds for follow-on  investments and to pay expenses.  On February 12, 1998, the
Independent General Partners approved an additional reserve of $1.65 million for
Fund expenses.  This reserve was established from the proceeds received from the
sale of Stanley  Furniture Common Stock in January 1998 to fund anticipated cash
shortfalls in the future.  As of March 31, 1998, the aggregate  reserve  balance
has been reduced to approximately $4.1 million due to follow-on investments, pay
downs of the Fund's loan, cash  distributions to Limited Partners and payment of
Fund expenses.

13. 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 the  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 March 31, 1998, the tax basis of the Fund's
assets are greater than the amounts reported in the financial statements by $4.9
million.  This difference is primarily  attributable to unrealized  appreciation
and depreciation  recorded on investments  which has not been recognized for tax
purposes.

14. Subsequent Events

     On  February  28,  1998,  Signature  Brands  USA  and  Sunbeam  Corporation
("Sunbeam")  executed a definitive merger agreement whereby Sunbeam acquired all
the outstanding  shares of Signature  Brands USA Common Stock for  approximately
$250 million ($8.25 per share) by means of a tender offer (the "Tender  Offer"),
and assumed all the debt of Signature Brands USA.  Pursuant to the Tender Offer,
the Fund  tendered  all its shares of  Signature  Brands  USA  Common  Stock and
received  proceeds of  approximately  $13  million.  Net  Distributable  Capital
Proceeds of $26.19 per Unit were  distributed  on April 23, 1998,  to the Fund's
Limited  Partners  of record as of April 2, 1998,  the  expiration  date of this
Tender Offer.

     On  April  7,  1998,  the  Individual  General  Partners  approved  a  cash
distribution totaling  $22,069,967.  The distribution includes Net Distributable
Capital  Proceeds of $9,174,764,  which includes Return of Capital of $5,020,650
from the sale of Stanley  Furniture.  A cash distribution to Limited Partners in
the amount of $18.63 per Unit and a cash  distribution  to the Managing  General
Partner of $91,748 in proportion to its Capital  Contribution,  were distributed
on April 23, 1998.

     On  April  7,  1998,  the  Individual  General  Partners  approved  a  cash
distribution  from the sale of Signature  Brands USA on April 2, 1998, as to Net
Distributable Capital Proceeds of $12,896,283,  which includes Return of Capital
of $4,551,722.  A cash  distribution to Limited Partners in the amount of $26.19
per Unit and a cash  distribution to the Managing General Partner of $128,963 in
proportion to its Capital Contribution, were distributed on April 23, 1998.

     On April 7, 1998,  pursuant to Rule 144 of the  Securities Act of 1993, the
Fund sold 25,500 shares of TLC Beatrice  International Holdings common stock for
$1.3  million  or $51.25  per  share.  The Fund will  recognize  a gain of $1.28
million on the sale, and net Distributable  Capital Proceeds will be distributed
to Limited Partners of record as of April 7, 1998.

     On April 15, 1998  Playtex  filed a  registration  statement  covering  all
shares of the common stock owned by the Fund,  Fund II, the Retirement  Fund and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no  assurance  that such  offering  will be  consummated  or that the selling
stockholders,  including the Fund,  will be able to sell all of their  remaining
shares of Playtex common stock in such offering.

     On May 4, 1998,  the Fund sold 2,067  common  stock  purchase  warrants  of
Magellan Health Services for $5,168. Additionally,  the Fund sold its investment
of 1,430 shares of Homeland  Holdings  common stock and 1,506 Homeland  Holdings
common stock purchase warrants and received aggregate  proceeds of $11,102.  The
Fund will  recognize a loss from the sale of Homeland  Holdings  common stock of
$429,689.
<PAGE>
<TABLE>
<CAPTION>
                                                   SCHEDULE 1
                                         ML-LEE ACQUISITION FUND, L.P.
                                SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
                                      FOR THE 3 MONTHS ENDED MARCH 31, 1998
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

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


                                        Number of             Investment                            Realized
SECURITY                             Shares/Principal            Cost         Net Proceeds       Gain/(Loss)
------------------------------       -----------------       ------------     ------------       ------------


Stanley Furniture Company Inc. 
    Common Stock                              400,719           $  5,021           $ 10,819           $   5,798


BeefAmerica Incorporated
  Jr. and Sr.Preferred Stock                   24,000             24,000              1,000             (23,000)
                                                                --------           --------           --------- 

Total For the Three Months
 Ended March 31, 1998                                           $ 29,021           $ 11,819           $ (17,202)
                                                                ========           ========           ========= 



</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                  SCHEDULE 2
                                                        ML-LEE ACQUISITION FUND, L.P.
                                       SUPPLEMENTAL SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                                                       FOR THE PERIOD ENDED MARCH 31, 1998
                                                            (DOLLARS IN THOUSANDS)
                                                                  (UNAUDITED)

<S>                                          <C>             <C>          <C>                <C>                <C>          
                                                                         Unrealized
                                                                        Appreciation       
                                                                       (Depreciation)      Total Unrealized       Total Unrealized
                                                                          For the           Appreciation            Appreciation
                                            Investment       Fair       Three Months      (Depreciation) at      (Depreciation) at
SECURITY                                       Cost          Value     March 31, 1998      December 31, 1997       March 31, 1998
----------------------------------------   -----------    -----------    -----------       -----------------     -----------------
PUBLICLY TRADED SECURITIES

Signature Brands USA
  Common Stock*                                  4,552         12,846    $     6,203            $     2,091           $     8,294

Playtex
  Common Stock*                                  3,255         20,742          6,328                 11,159           $    17,487

SWO Holdings Corporation
  SWO Holdings Common Stock*                       250             --             --                   (250)                 (250)
  Homeland Holdings Common Stock*                  440             10             10                   (440)                 (430)
                                                                         -----------            -----------           -----------

TOTAL UNREALIZED APPRECIATION
  FROM PUBLICLY TRADED SECURITIES                                        $    12,541            $    12,560           $    25,101
                                                                         -----------            -----------           -----------

NONPUBLIC SECURITIES:

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)
                                                                         -----------            -----------           -----------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM
  NONPUBLIC SECURITIES                                                   $        --            $   (16,656)          $   (16,656)
                                                                         -----------            -----------           -----------

Revearsal of Unrealized Appreciation
  (Depreciation) for Investments Sold

Stanley (1)
  Common Stock                                                           $    (6,149)           $     6,149           $      --

BeefAmerica Incorporated
  Jr. and Sr.Preferred Stock  (2)                                             21,000                (21,000)                 --
                                                                         -----------            -----------           -----------

Total Unrealized Appreciation/(Depreciation)
  for Investments Sold:                                                  $    14,851            $   (14,851)          $      --
                                                                         -----------            -----------           -----------

 Net Unrealized Appreciation (Depreciation)                              $    27,392            $   (18,947)          $     8,445
                                                                         ===========            ===========           ===========

*   Restricted Security.

(1)  Publiclty Traded Security
(2)  Non-public Security
</TABLE>


<PAGE>

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

Liquidity & Capital Resources

     As of March  31,  1998,  the Fund had a total of $25.2  million  (at  cost)
invested  in  Mezzanine  Investments.  These  investments  were  financed by net
offering  proceeds and debt financing.  This represents a $29.0 million decrease
versus the total invested in Mezzanine Investments at December 31, 1997 of $54.2
million.  The decrease in investments is due to the sale in the first quarter of
1998 of Stanley Furniture and BeefAmerica,  Inc. The Fund's remaining  Mezzanine
Investments  consist of common  stock and  warrants 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.

     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.  The
agreement provided the Fund with a maximum of $140 million, consisting of a $100
million term loan and a $40 million revolving credit line, both maturing on July
31, 1998 (the Credit  Facility).  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.  As of March 31, 1998, the Fund had the
entire $7.5 million credit line available.

     The term of the Fund will expire on 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 expiration of the term, the Fund will have
five  additional  years to liquidate its remaining  investments.  At the meeting
held on February 12, 1998, the Individual General Partners indicated that it was
likely  they  would  elect to  extend  the  term of the  Fund for an  additional
two-year period.  At that meeting,  the Individual  General  Partners  expressed
their  intention to vote on the matter at their  meeting  scheduled  for June 5,
1998.

     On April 15, 1998,  Playtex  Products Inc. filed a  registration  statement
pursuant to which the Fund intends to sell all of its remaining  interest in the
Company. The Fund owns 1,406,204 shares of Playtex Products,  Inc. Common Stock.
If the Playtex Products, Inc. transaction is consummated prior to June 15, 1998,
and/or  the  Individual  General  Partners  are  otherwise  satisfied  with  the
arrangements  for  disposition of the Fund's  remaining  assets,  the Individual
General Partners may elect not to extend the term of the Fund.

     Between March 31, 1998 and the expiration date of the term of the Fund, the
Investment Adviser will continue to manage the Fund's remaining investments with
a view towards maximizing value,  whenever possible.  In the event that the term
of the Fund is not extended because the Playtex Products,  Inc.  transaction has
been  consummated and the Individual  General  Partners are otherwise  satisfied
with the  arrangements  for  disposition  of the Fund's  remaining  assets,  the
Management  Agreement will not be amended as discussed in Note 5 and will expire
according to its original terms.

     Because  all of the Fund's  debt  investments  have been sold or  redeemed,
income expected to be received by the Fund is not 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,  along with  distributions  to  partners  and to pay down the First
Chicago  loan on January 6, 1994.  As of the last  meeting on February 12, 1998,
the  Independent  General  Partners had approved an additional  reserve of $1.65
million  which has been  reserved  from the proceeds  received  from the sale of
Stanley  Furniture in January 1998.  This reserve has been  established  to fund
anticipated cash shortfalls in the future.  The Fund's aggregate reserve balance
as of $4.1 million has been invested in temporary investments.
<PAGE>
Investment in High-Yield Securities

     The Fund originally  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.

     Although  the  Fund  cannot   eliminate  the  risks   associated  with  its
investments in High-Yield  Securities,  it 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 limited
the  amount of its  original  investment  in a  particular  issuer.  The  Fund's
Investment Adviser also continually  monitors remaining  portfolio  companies in
order to  minimize  the risks  associated  with its  investments  in  High-Yield
Securities.

     Certain  issuers of  securities  held by the Fund  (Playtex  and  Signature
Brands  USA) have  registered  their  equity  securities  in  public  offerings.
Although  the equity  securities  of the same class  presently  held by the Fund
(except  Signature Brands USA) 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 two years on the open market,
subject to the volume  restrictions  set forth in that rule. The Rule 144 volume
restrictions generally are not applicable to equity securities of non-affiliated
companies  held by the Fund for at least three 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.
<PAGE>
Results of Operations

Investment Income and Expenses

     For the three months ended March 31,  1998,  the Fund had a net  investment
loss of $520,021 as compared to a net  investment  loss of $552,667 for the same
period in 1997. The total investment  income earned on investments for the three
months ended March 31, 1998 was $203,395 of which all was earned from  Temporary
Investments.  For the same period in 1997,  total  investment  income  earned on
investments was $348,206 of which $300,998 was earned from Mezzanine Investments
and $47,208 was earned from Temporary Investments.

     The major  expense for the period  consisted of Investment  Advisory  Fees,
Fund Administration fees, Loan Fees and Reimbursable Administration Expenses.

     The Investment Adviser and Fund Administrator receive their compensation on
a quarterly basis. Total Investment Advisory Fees paid to the Investment Adviser
for the three months ended March 31, 1998 was $300,000  compared  with  $296,691
for the three months ended March 31, 1997.  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 Investment  Adviser has discussed with the Managing General Partner and
with the Independent General Partners the need for continued  investment service
during the liquidation of the Fund's investments and during any extension period
currently being considered,  and the level of appropriate  management fee during
any such extension.  Following those discussions, the Investment Adviser and the
Fund have agreed to amend the Management Agreement,  reducing the management fee
payable  thereunder  commencing  July 1, 1998 to  $250,000  per  annum,  payable
quarterly in advance,  plus all actual  out-of-pocket  expenses  incurred by the
Investment  Adviser in  connection  with the Fund  (other than  compensation  of
employees of the Investment Adviser).  Such out-of-pocket  expenses would be for
any third-party fees for consultation with counsel, accountants or other experts
in connection with the Investment Adviser's duties to the Fund.

     Beginning October 19, 1995, in accordance with Partnership  Agreement,  the
Fund  Administration  Fee  changed  to an annual  fee of  $300,000  plus 100% of
Reimbursable Administrative Expenses (accounting,  printing, tax preparation and
other administrative services) incurred by the Fund Administrator. For the three
months ended March 31, 1998 and 1997, the Fund  Administration  Fee was $75,000.
For the same period,  Reimbursable Administration Expenses totalled $133,055 and
$69,739, respectively.

     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.  Loan fees for the
three  months  ended March 31, 1998 and 1997  totalled  $172,733  and  $172,629,
respectively.
<PAGE>
Net Assets
  
     The Fund's net assets decreased by $9,105,118 during the three months ended
March 31, 1998, due to a net investment loss of $520,021, partialy offset by net
realized  losses of $17,201,622  and net unrealized  appreciation of $27,392,260
and cash distributions of $18,775,735.

Unrealized Appreciation and Depreciation and Non-Accrual of Investments

     For the three months ended March 31, 1998, the Fund recorded net unrealized
appreciation  of  $27,392,260  as compared  to net  unrealized  appreciation  of
$284,027 for the same period in 1997. On March 31, 1998,  the Fund's  cumulative
net unrealized appreciation on investments totalled $8,445,074.

     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 any 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.

     As of March 31, 1998,  approximately  43.6% of the Fund's  investments  are
invested in private  placement  securities for which there are no  ascertainable
market values.  Although the Managing General Partner and Investment Adviser use
their best judgment in estimating the fair value of these investments, there are
inherent  limitations in any  estimation  technique.  Therefore,  the fair value
estimates  presented  herein are not necessarily  indicative of the amount which
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 March
31, 1998.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time;  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.

     The Fund's  valuation of the common stock of Signature  Brands USA, Playtex
and Homeland Holdings reflect their closing market price at March 31, 1998.

     The  Signature  Brands  USA and  Playtex  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 USA pursuant to Rule 144, under the
securities  act  of  1933  and  therefore,   any  resale  of  Signature   Brands
USAsecurities under Rule 144, is limited by the volume limitations in that rule.
Accordingly,  the  values  referred  to in  the  financial  statements  for  the
Signature Brands USA and Playtex  securities held by the Fund do not necessarily
represent the prices at which these securities could currently be sold. See Note
14 of the Financial Statements.

     On  February  28,  1998,  Signature  Brands  USA  and  Sunbeam  Corporation
("Sunbeam")  executed a definitive merger agreement whereby Sunbeam acquired all
the outstanding  shares of Signature  Brands USA Common Stock for  approximately
$250 million ($8.25 per share) by means of a tender offer (the "Tender  Offer"),
and assumed all the debt of Signature Brands USA.  Pursuant to the Tender Offer,
which  was  executed  on March 6,  1998,  the Fund  tendered  all its  shares of
Signature  Brands USA Common Stock and received  proceeds of  approximately  $13
million. Net Distributable  Capital Proceeds of $26.19 per Unit were distributed
on April 23, 1998, to the Fund's Limited Partners of record as of April 2, 1998,
the expiration date of this Tender Offer.

    On April 15, 1998  Playtex  filed a  registration  statement  covering  all
shares of the common stock owned by the Fund,  Fund II, the Retirement  Fund and
the Lee Affiliates pursuant to an underwritten public offering. Such offering is
expected to be consummated during the second quarter of 1998; however, there can
be no  assurance  that such  offering  will be  consummated  or that the selling
stockholders,  including the Fund,  will be able to sell all of their  remaining
shares of Playtex common stock in such offering.

         As overall economic,  market and business conditions improve, the sales
and profit levels of some of the Fund's  companies have increased,  resulting in
higher valuations for some of the Fund's equity investments.

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

     The net realized loss on investments  sold for the three months ended March
31, 1998 was  $17,201,622  compared to a net  realized  gain of $361,480 for the
same period in 1997.

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

Cash Distributions

     On  April  7,  1998,  the  Individual  General  Partners  approved  a  cash
distribution totaling  $22,069,967.  The distribution includes Net Distributable
Capital  Proceeds of $9,174,764,  which includes Return of Capital of $5,020,650
from the sale of Stanley  Furniture.  A cash distribution to Limited Partners in
the amount of $18.63 per Unit and a cash  distribution  to the Managing  General
Partner of $91,748 in proportion to its Capital  Contribution,  were distributed
on April 23, 1998.

    On  April  7,  1998,  the  Individual  General  Partners  approved  a  cash
distribution  from the sale of Signature  Brands USA on April 2, 1998, as to Net
Distributable Capital Proceeds of $12,896,283,  which includes Return of Capital
of $4,551,722.  A cash  distribution to Limited Partners in the amount of $26.19
per Unit and a cash  distribution to the Managing General Partner of $128,963 in
proportion to its Capital Contribution, were distributed on April 23, 1998.

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

     Should a Limited  Partner  decide to sell his Units,  any 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 April 10,  1998,  the  parties  to Seidel v.  Thomas H. Lee,  et al, No.
93-494 (JJF), a putative  class action brought on behalf of limited  partners of
the Fund,  filed with United States District Court for the District of Delaware,
a Stipulation of Settlement preliminarily settling the action.

     The proposed settlement,  which is subject to Court approval,  provides for
dismissal with  prejudice of all claims against the Fund, the Fund's  Investment
Advisor and certain of its affiliates,  the Fund's Managing  General Partner and
certain  of  its  affiliates,  and  the  Fund's  Independent  General  Partners.
Defendants, other than the Fund, have agreed to provide cash of $2.5 million and
certain  other  considerations  to settle the claims  asserted  in this  action.
Defendants  continue to deny all liability in this action.  On May 4, 1998,  the
Court  granted  preliminary  approval to the  Settlement  and  scheduled a final
hearing to consider the Settlement for July 16, 1998.

     Items 2 - 4 are  herewith  omitted as the  response  to all items is either
none or not applicable.

Item 5. Other Information

     As of April 10, 1998,  John W. Childs resigned as the President and Trustee
of the Investment  Adviser to the Fund. In addition,  Mr. Childs transferred his
Shares in the Investment  Adviser to a limited  liability company of which he is
the sole  member.  At such  time,  David V.  Harkins,  formerly  the  Investment
Adviser's Senior Vice President,  was appointment as President. Mr. Harkins will
remain a Trustee of the Investment Adviser. In addition,  C. Hunter Boll, a Vice
President of the  Investment  Adviser,  was appointed as a trustee.  At the same
time,  Mr.  Childs also  resigned his  position of  President of the  Investment
Adviser to Fund II and the ML-Lee Acquisition Fund (Retirement Account) II, L.P.


Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

     Exhibit 27  - Financial Data Schedule for the first quarter ended
     March 31, 1998.

(b) Reports on form 8-K:           Form 8-K dated January 6, 1998
                                   Filed January 27, 1998 related to 
                                   Sale of Stanley Furniture

                                   Form 8-K dated February 28, 1998
                                   Filed March 17, 1998 related to
                                   Signature Brands & BeefAmerica  

                                   Form 8-K dated and filed April 10, 1998
                                   related to settlement of litigation


<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
May, 1998.


                       ML-LEE ACQUISITION FUND, L.P.

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

                       By:  ML Mezzanine Inc.,
                       its General Partner


Dated: May 14, 1998    /s/ Audrey Bommer
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)

<PAGE>

                           SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 14th day of
May, 1998.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                                its General Partner


Dated: May 14, 1998        
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)