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, 1997

                         Commission File Number 0-15669

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

         Delaware                                  13-3426817
(State or other jurisdiction           (IRS Employer Identification No.)
of incorporation or organization)

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

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

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

     Name of each  exchange  on  which  registered:  Not  Applicable  Securities
registered pursuant to Section 12(g) of the Act:

                      Units of Limited Partnership Interest
                                (Title of class)

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

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


<PAGE>
                          ML-LEE ACQUISITION FUND, L.P.

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION

                                                                     
Item 1.  Financial Statements

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

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

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

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

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

Schedule of Portfolio Investments - March 31, 1997                   

Notes to Financial Statements                                        

Supplemental Schedule of Realized Gains and Losses - Schedule 1    

Supplemental Schedule of Unrealized Appreciation and
  Depreciation - Schedule 2                                       

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


                           PART II - OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K                           


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

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

ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
    Managed Companies (amortized cost $93,073 at March 31,
         1997 and $93,468 at December 31, 1996)                                   $        86,174       $        86,067
    Non-Managed Companies (amortized cost $9,597 at March 31,
         1997 and at December 31, 1996)                                                     5,965                 6,183
    Temporary Investments, at amortized cost (cost $3,682 at
         March 31, 1997 and $4,040 at December 31, 1996)                                    3,688                 4,047
Cash                                                                                            5                    10
Prepaid Loan Fees - Notes 2, 4                                                                858                 1,022
Prepaid Expenses and Other Receivables                                                        298                   307
                                                                                  ---------------       ---------------
TOTAL ASSETS                                                                      $        96,988       $        97,636
                                                                                  ===============       ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                           $            46       $           122
    Reimbursable Administrative Expenses Payable                                               70                   103
    Independent General Partner Expenses Payable                                               42                    23
                                                                                  ---------------       ---------------
Total Liabilities                                                                             158                   248
                                                                                  ---------------       ---------------
Partners' Capital - Note 2
    Managing General Partner                                                                1,311                 1,317
    Limited Partners (487,489 Units)                                                       95,519                96,071
                                                                                  ---------------       ---------------
Total Partners' Capital                                                                    96,830                97,388
                                                                                  ---------------       ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                           $        96,988       $        97,636
                                                                                  ===============       ===============

</TABLE>

                            See the Accompanying Notes to Financial Statements.


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

<S>                                                                           <C>                <C>  
                                                                                       For the Three Months Ended
                                                                                  ---------------       ---------------
                                                                                   March 31, 1997        March 31, 1996   
                                                                                  ---------------       ---------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                                          $           295       $           297
Discount                                                                                       47                   752
Dividend & Other Income                                                                         6                   167
                                                                                  ---------------       ---------------
    TOTAL INCOME                                                                              348                 1,216
                                                                                  ---------------       ---------------
EXPENSES:
Investment Advisory Fee - Note 5                                                              297                   480
Fund Administration Fee - Note 6                                                               75                    74
Loan Fees - Notes 2, 4                                                                        172                   173
Independent General Partners' Fees and Expenses - Note 7                                       53                    67
Legal and Professional Fees                                                                   232                   387
Reimbursable Administrative Expenses - Note 6                                                  70                    --
Insurance Expense                                                                               2                     2
                                                                                  ---------------       ---------------
    TOTAL EXPENSES                                                                            901                 1,183
                                                                                  ---------------       ---------------
NET INVESTMENT INCOME (LOSS)                                                                 (553)                   33
NET REALIZED GAIN (LOSS) ON INVESTMENTS - NOTE 8 AND SCHEDULE 1                               361                37,130
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                                                            284               (74,396)
        Nonpublic Securities                                                                   --                69,681
                                                                                  ---------------       ---------------
             Subtotal                                                                         284                (4,715)
                                                                                  ---------------       ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS                              $            92       $        32,448
                                                                                  ===============       ===============


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, 1997         March 31, 1996
                                                                                  ---------------        ---------------
FROM OPERATIONS:
Net Investment Income (Loss)                                                      $          (553)       $            33
Net Realized Gain on Investments                                                              361                 37,130
Net Change in Unrealized Appreciation (Depreciation) on Investments                           284                 (4,715)
                                                                                  ---------------        ---------------
Net Increase (Decrease) in Net Assets Resulting from Operations                                92                 32,448
Cash Distributions to Partners                                                               (650)              (107,129)
                                                                                  ---------------        ---------------
Total Decrease                                                                               (558)               (74,681)

NET ASSETS:
Beginning of Period                                                                        97,388                254,353
                                                                                  ---------------        ---------------
End of Period                                                                     $        96,830        $       179,672
                                                                                  ===============        ===============




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, 1997         March 31, 1996
                                                                                  ---------------        ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                         $           356        $         1,064
  Investment Advisory Fee                                                                    (297)                  (480)
  Fund Administration Fee                                                                     (75)                   (74)
  Legal and Professional Fees                                                                (307)                  (235)
  Loan Fees and Expenses                                                                       (9)                    (8)
  Independent General Partners' Fees and Expenses                                             (34)                   (68)
  (Purchase) Sale of Temporary Investments, Net                                               358                  1,746
  Reimbursable Administrative Expenses                                                       (103)                   (62)
  Proceeds from Sale of Portfolio Company Investments                                         756                102,790
                                                                                  ---------------        ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                     645                104,673
                                                                                  ---------------        ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                             (650)              (107,129)
                                                                                  ---------------        ---------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                                     (650)              (107,129)
                                                                                  ---------------        ---------------
  Net Decrease in Cash                                                                         (5)                (2,456)
  Cash at Beginning of Period                                                                  10                  6,054
                                                                                  ---------------        ---------------
CASH AT END OF PERIOD                                                             $             5        $         3,598
                                                                                  ===============        ===============

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

Net Investment Income (Loss)                                                      $          (553)       $            33
                                                                                  ---------------        ---------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  Decrease in Investments                                                                     753                 90,030
  (Increase) Decrease in Receivable for Investments Sold                                       --                (22,624)
  (Increase) Decrease in Accrued Interest, Dividend and Discount Receivables                    8                   (152)
  Decrease in Prepaid Expenses                                                                166                    276
  Increase (Decrease) in Independent General Partner Fees Payable                              19                     (1)
  Decrease in Reimbursable Administrative Expenses Payable                                    (33)                   (62)
  Increase (Decrease) in Legal and Professional Fees Payable                                  (76)                    43
  Net Realized Gain on Investments                                                            361                 37,130
                                                                                  ---------------        ---------------
TOTAL ADJUSTMENTS                                                                           1,198                104,640
                                                                                  ---------------        ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                         $           645        $       104,673
                                                                                  ===============        ===============


</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, 1997
Partners' Capital at January 1, 1997                                               $    1,317         $   96,071         $   97,388
Allocation of Net Investment Loss                                                          (6)              (547)              (553)
Allocation of Net Realized Gain on Investments                                              4                357                361
Allocation of Net Change in Unrealized Appreciation                                         3                281                284
Cash Distributions to Partners                                                             (7)              (643)              (650)
                                                                                   ----------         ----------         ----------
Partners' Capital at March 31, 1997                                                $    1,311         $   95,519         $   96,830
                                                                                   ==========         ==========         ==========


</TABLE>


See the Accompanying Notes to Financial Statements.





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

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

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)            12/31/87   $10,810    $10,810
$267                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    03/31/93       267        267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93       276        276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93       286        286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93       293        293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91       502        502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92    11,000     11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87     1,951      1,951
15,228.43 Warrants  Alliance International Group, Common Stock Purchase Warrants(d)        03/28/89         0(i)       0(i)
62,700 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        04/22/91         0          0
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        12/31/92         0          0 
50,000 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)         various         0(i)       0(i) 
                     (52.5% of fully diluted common equity assuming exercise
                       of warrants) 
                      19,200 Shares Common Stock
                      Purchased 12/31/87                 $149
                      Sold  01/30/89 - 9,600 Shares      $107
                      Sold  01/02/90 - 9,600 Shares      $147                                          ---------------------------- 
                      Realized Gain                      $105                                          25,385     25,385      26.49
                                                                                                       ---------------------------- 

                   BEEFAMERICA, INC. (a) (e) - Note 9
$14,000            BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g)      09/09/88    14,000      5,800
$10,000            BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g)       09/09/88    10,000      4,200
                      $1,072 15% Sub. Nt.
                      Purchased 09/9/88                 $  1,072
                      Redeemed 02/20/92                 $  1,072
                      Realized Gain                     $      0
                      Preferred Stock
                      Purchased 09/9/88                 $  2,700
                      Redeemed 02/20/92                 $  2,700
                      Realized Gain.                    $      0
                      $41,997 15.5% Sr.Sub Interim Nt
                      Purchased 09/9/88                 $ 20,000
                      $80,951 15% Sub Nt
                      Purchased 09/9/88                 $ 38,928
                      Exchanged 03/29/96 for
                      Cash Proceeds                     $ 26,000
                      10% Sr Pref Stk                   $ 14,000
                      4% Jr Pref Stk                    $ 10,000
                      Realized Loss                     $ (8,928)
                      5661.11 Shares Class A Pref. Stk
                      Purchased 04/10/91                $ 40,050
                      Value at restructuring 3/29/96    $      0
                      Realized Loss                     $(40,050)
                      51,000 Shares Common Stk
                      Purchased various                 $  2,000
                      Value at restructuring 3/29/96    $      0
                      Realized Loss                     $ (2,000)                                      ----------------------------
                      Total Net Realized Loss           $(50,978)                                      24,000     10,000      10.44
                                                                                                       ---------------------------- 

            

See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                             MARCH 31, 1997 
                                                        (DOLLARS IN THOUSANDS)

 
  Principal                                                                                                   Fair         % Of
   Amount                                                                     Investment    Investment        Value        Total
Shares/Warrants       Investment                                                 Date         Cost (f)       (Note 2)   Investments
<S>             <C>                                                          <C>           <C>             <C>           <C>
                  CELEBRITY, INC. - Note 9
 5,770 Shares     Celebrity, Inc. Common Stock(b)                             06/16/92        $    75        $   20
                    (0.1% of fully diluted common equity)
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/29/93                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/19/94                         $    75
                    Realized  Gain                        $     0
                    5,769  Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/19/95                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 9/21/96                          $    75
                    Realized Gain                         $     0                                ---------------------------------
                    Total Realized Gain                   $     0                                   75            20          0.02
                                                                                                 --------------------------------- 


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

See the Accompanying Notes to Financial Statements.

</TABLE>


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


  Principal                                                                                                Fair    % Of
   Amount                                                                         Investment  Investment  Value    Total
Shares/Warrants          Investment                                                  Date       Cost (f)  (Note 2) Investments
<S>                 <C>                                                           <C>          <C>      <C>      <C>
                   COLE NATIONAL CORPORATION
567 Warrants       Cole National Corporation, Common Stock Purchase Warrants(d)    09/26/90    $     0    $    0
                     (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         0      0.00
                                                                                                 -------------------------


                  SIGNATURE BRANDS, INC. 
                   (formerly HEALTH O METER PRODUCTS, INC.) (a) - Note 9
952,500 Shares    Health o meter Products, Inc., Common Stock (d)(k)               04/28/88      1,270     3,453
610,553 Shares    Health o meter Products, Inc., Common Stock (d)(k)               08/17/94      3,282     2,213
                    (16.5% of fully diluted common equity)
                    $16,000 14.50% Subordinated Note
                    Purchased 04/28/88                    $16,000
                    Sold 03/24/92                         $16,000
                    Realized Gain                         $     0
                    187,500 Shares of Common Stock
                    Purchased 04/28/88                    $   250
                    Sold 03/30/92                         $ 2,441
                    Realized Gain                         $ 2,191                                -------------------------
                    Total Realized Gain                   $ 2,191                                4,552     5,666      5.91
                                                                                                 -------------------------



See the Accompanying Notes to Financial Statements.

</TABLE>


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


  Principal                                                                                              Fair      % Of
   Amount                                                                     Investment   Investment    Value      Total
Shares/Warrants         Investment                                               Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                         <C>          <C>        <C>         <C>
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(j)                  12/28/88   $  3,255     $15,292
                      (2.7%  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      15,292           15.96
                                                                                          -------------------------------------

                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9
1,528,781 Shares    Stanley Furniture Co., Inc., Common Stock(d)(h)(j)         Various       19,154      29,811
                      (30.4% of fully diluted common equity)
                      $2,000 Loan participation
                      Purchased 03/12/92                    $ 2,000
                      Repaid 04/05/93                       $ 2,000
                      Realized Gain                         $     0                          
                      1,115,256 Shares Common Stock
                      Purchased Various                     $13,973
                      Sold  11/13/96                        $14,664
                      Sold  12/13/96                        $ 2,199
                      Realized Gain                         $ 2,890                       
                      Purchased Various                     $   395
                      Sold   2/07/97                        $   756
                      Realized Gain                         $   361                       -------------------------------------
                      Total Net Realized Gain               $ 3,251                          19,154      29,811           31.11
                                                                                          -------------------------------------

         

                                                                                          -------------------------------------
                      TOTAL INVESTMENT IN MANAGED COMPANIES                               $  93,073    $ 86,174           89.93
                                                                                          =====================================


See the Accompanying Notes to Financial Statements.

</TABLE>

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

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

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(d)                        11/24/87        250          0
  1,430 Shares      Homeland Holding Corp., Common Stock(d)                    08/10/90        440          0
  1,506 Warrants    Homeland Holding Corp., Common Stock
                      Purchase Warrants (d)                                    10/02/96          0          0
                      $5,000 15.5% Subordinated Notes
                      Purchased 11/24/87                    $5,000
                      Sold 09/15/88                         $5,075
                      Realized Gain                         $   75 
                                                                                          -------------------------------
                                                                                               690          0       0.00
                                                                                          -------------------------------

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

                  WALTER INDUSTRIES, INC. - Note 9
435,569 Shares    Walter Industries, Inc., Common Stock(b)(j)                  01/07/88      8,877      5,935
326 Shares        Walter Industries, Inc., Common Stock (b)(j)                 09/13/95          0          4
                     $12,000 17% Note
                     Purchased  1/7/88             $ 12,000
                     Exchanged  12/1/95
                     for $490,000 cash and 
                     435,569 Common Stock and
                     $2,527 12.19%  Senior Note
                     Realized  Gain                $      0
                     $2,527 12.19% Senior Note
                     Received 12/1/95              $  2,527
                     Sold 12/15/95                 $  2,527
                     Realized Gain                 $      0
                     Total Realized Gain           $      0                               -------------------------------
                                                                                             8,877      5,939        6.19
                                                                                          -------------------------------

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


                  TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                  9,597      5,965        6.22
                                                                                          ===============================
                  SUMMARY OF MEZZANINE INVESTMENTS
                  Subordinated Notes                                                      $ 11,932   $ 11,932       12.45
                  Preferred Stock                                                           35,502     21,502       22.44
                  Common Stock and Warrants                                                 55,236     58,705       61.26
                                                                                          -------------------------------
                  TOTAL MEZZANINE INVESTMENTS                                             $102,670   $ 92,139       96.15
                                                                                          ===============================


See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                       MARCH 31, 1997
                                                    (DOLLARS IN THOUSANDS)


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

                  COMMERCIAL PAPER
$2,640            Ford Motor Credit Corp., 5.33% due 04/03/97                 03/19/97   $  2,634   $  2,639
$1,050            American General Corp., 5.63% due 04/08/97                  03/27/97      1,048      1,049
                                                                                         -------------------------------
                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                      3,682      3,688        3.85
                                                                                         ------------------------------- 

                  TOTAL TEMPORARY INVESTMENTS                                            $  3,682   $  3,688        3.85
                                                                                         -------------------------------

                  TOTAL INVESTMENT PORTFOLIO                                             $106,352   $ 95,827      100.00%
                                                                                         ===============================



(a)  Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b)  Non-income producing security.
(c)  Restricted security.
(d)  Restricted non-income producing security.
(e)  Issuers of which the Fund, as of March 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.
(f)  Represents original cost and excludes accretion of discount of $6 for Temporary Investments.
(g)  Non-accrual investment status.
(h)  Inclusive of receipt of payment-in-kind securities.
(i)  Represents an amount of less than one thousand dollars.
(j)  Publicly traded class of securities.

See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>

                      ML-LEE ACQUISITION FUND, L.P.
                      NOTES TO FINANCIAL STATEMENTS
                            MARCH 31, 1997
                               (UNAUDITED)

1.  Organization and Purpose

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

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

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

     The Fund will terminate upon the liquidation of all Fund investments but no
later  than  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 it is in the best interest of the Fund. The Fund
has five years more to liquidate its remaining investments.

2.  Significant Accounting Policies

Basis of Accounting

    For financial  reporting  purposes,  the records of the Fund are  maintained
using the  accrual  method of  accounting.  For  Federal  income  tax  reporting
purposes,   the  results  of  operations  are  adjusted  to  reflect   statutory
requirements arising from book to tax differences.

Valuation of Investments

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

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

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

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal  amounts of such  securities.  As of March 31, 1997 and  December  31,
1996,   the  Fund  had  in  its  portfolio  of   investments   $1.2  million  of
payment-in-kind debt securities. As of March 31, 1997 and December 31, 1996, the
Fund had in its portfolio of investments $6.5 million of payment-in-kind  equity
securities.

Investment Transactions

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

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

Loan Facility and Advisory Fees

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

Partners' Capital

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

Interim Financial Statements

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

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

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

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

4.  Leverage

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

    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, 1997 was $157,193.

    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,
    1997 was $6,165.

    An  Unused  Commitment  Fee of 1/2 of 1% per  annum  of the  unused  line of
    credit. The expense for the three months ended March 31, 1997 was $9,271.

     For the three  months  ended  March 31,  1997 and 1996,  the Fund  incurred
$172,629 and $172,656, 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% of assets under management (net offering  proceeds,  reduced by cumulative
capital  reductions,  plus outstanding bank borrowing as specified in the Fund's
Partnership  Agreement),  with  a  minimum  annual  fee  of  $1.2  million.  The
Investment  Advisory Fee is calculated and paid quarterly,  in advance.  For the
three months ended March 31, 1997 and 1996, the Fund paid $296,691 and $480,252,
respectively, in Investment Advisory Fees to Thomas H. Lee Advisors I.

6.  Fund Administration Fees & Expenses

     ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and  administrative  services
necessary for the management of the Fund.  Beginning  October 19, 1995, the Fund
Administration  Fee  changed to an annual  fee of  $300,000  plus  out-of-pocket
expenses  incurred  by the  Fund  Administrator, as  described  below.  The Fund
Administration  Fee is paid  quarterly,  in advance.  For the three months ended
March 31, 1997 and 1996,  the Fund paid $75,000 and $74,335,  respectively,  in
Fund  Administration  Fees.  

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative expenses incurred.

7.  Independent General Partners' Fees

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

     For the three  months  ended  March 31,  1997 and 1996,  the Fund  incurred
$52,945 and $66,705,  respectively,  in Independent  General  Partners' Fees and
Expenses.

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

     At March 31,  1997,  the Fund had a total of  $102.7  million  invested  in
Mezzanine  Investments  representing  $93.1  million  Managed  and $9.6  million
Non-Managed portfolio investments.

     For the three months ended March 31, 1997,  the proceeds  from the sales of
investments  resulted  in  net  realized  gains  of  $361,480.   For  additional
information,  please refer to the  Supplemental  Schedule of Realized  Gains and
Losses - Schedule 1.

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

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

    Should bankruptcy  proceedings commence,  either voluntarily or by action of
the court against a portfolio company,  the ability of the Fund to liquidate the
position or collect proceeds from the action may be delayed or limited.
<PAGE>
9.  Unrealized Appreciation and Depreciation of Investments

     For the three months ended March 31, 1997, the Fund recorded net unrealized
appreciation  of  $284,027.  As of March 31, 1997,  the  Fund's  cumulative  net
unrealized depreciation on investments totalled $10,530,439.

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

10. Non-Accrual of Investments

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

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

11. Commitments and Guarantees

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

12. Litigation

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

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

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

    Certain of the Mezzanine  Investments and Bridge Investments which were made
by the Fund involve  co-investments with entities affiliated with the Investment
Adviser.  Such  co-investments are generally  prohibited absent exemptive relief
from the Securities and Exchange Commission (the  "Commission").  As a result of
these   affiliations   and  the  Fund's   expectation   of   engaging   in  such
co-investments,  the Fund sought an exemptive order from the Commission allowing
such  co-investment,  which was received on September  23, 1987.  An  additional
exemptive order allowing  co-investment  with ML-Lee  Acquisition  Fund II, L.P.
("Fund  II")  and  ML-Lee  Acquisition  Fund  (Retirement   Accounts)  II,  L.P.
("Retirement  Fund") was received from the  Commission on September 1, 1989. The
Fund's investments in Managed Companies, and in certain cases its investments in
Non-Managed Companies,  typically involve the entry by the Fund and other equity
security  holders into  stockholders'  agreements.  While the provisions of such
stockholders'  agreements  vary,  such  agreements may include  provisions as to
corporate  governance,  registration  rights,  rights  of  first  offer or first
refusal,  rights to participate in sales of securities to third parties,  rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions and preemptive rights.

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

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

     In the first quarter of 1997, the Managing  General  Partner  received cash
distributions in the amount of $6,524 representing its 1% interest in the Fund.

14. Reserves

     In February  1993,  the Fund  established a $15 million  reserve to provide
funds for follow-on  investments and to pay expenses.  As of March 31, 1997, the
reserve  balance  was reduced to  approximately  $3.1  million due to  follow-on
investments  in CMI Holding  Corp.,  Diet Center  Inc.,  Duro-Test  Corporation,
Health o meter and Petco.  Additionally,  $1.4  million of the  reserve has been
returned to partners of the Fund and a payment of $2.9 million was made to First
Chicago to pay down the Fund's loan.

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

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

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

16. Subsequent Events

     On April 29,  1997,  the  Individual  General  Partners  approved the first
quarter  1997  cash  distribution  totalling  $285,576,  which  consists  of net
distributable  proceeds,  after  fund  expenses,  of  $252,319  from the sale of
Stanley common stock (of which $386,609 is return of capital) and $33,257 of net
income from  temporary  investments.  The total  amount  distributed  to Limited
Partners was $282,744 or $.58 per Unit. The Managing  General  Partner  received
$2,832,  representing  its 1% interest in the Fund. This cash  distribution  was
paid on May 15, 1997.

<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, 1997
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

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


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

Stanley Furniture Inc. 
    Common Stock                                31,515       $      395         $     756          $     361
                                                             ----------         ---------          ---------
                                                             $      395         $     756          $     361
                                                             ==========         =========          =========    
</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, 1997
                                                            (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 Ended   (Depreciation) at    (Depreciation) at
SECURITY                                         Cost           Value     March 31, 1997      December 31, 1996      March 31, 1997
-----------------------------------          ------------       -------   ----------------    -----------------    -----------------
PUBLICLY TRADED SECURITIES

Celebrity
  Common Stock*                                  $    75       $     20         $      (1)         $      (54)        $       (55)
Signiture Brands
  Common Stock*                                    4,552          5,666            (2,735)              3,849               1,114
Playtex
  Common Stock*                                    3,255         15,292             4,044               7,993              12,037
Stanley
  Common Stock*                                   19,154         29,811              (805)             11,462              10,657
Walter
  Common Stock                                     8,877          5,938              (219)             (2,720)             (2,939)
                                                                                ---------          ----------         -----------
TOTAL UNREALIZED APPRECIATION
  FROM PUBLICLY TRADED SECURITIES                                               $     284          $   20,530         $    20,814
                                                                                ---------          ----------         -----------

NONPUBLIC SECURITIES:

BeefAmerica Incorporated
  Jr. and Sr.Preferred Stock                      24,000         10,000                --          $ (14,000)         $   (14,000)
  
Chadwick-Miller, Inc. 
  Common Stock Purchase Warrants*                  3,736             --                --             (3,736)              (3,736)
  Preferred Stock Purchase Warrants*              12,916             --                --            (12,916)             (12,916)

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

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

 NET UNREALIZED APPRECIATION \ (DEPRECIATION)                                   $     284          $ (10,816)         $   (10,532)
                                                                                =========          =========          ===========
</TABLE>
*  Restricted Security.

See the Accompanying Notes to Financial Statements.
<PAGE>

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

Liquidity & Capital Resources

     As of March  31,  1997,  the Fund had a total of $102.7  million  (at cost)
invested  in  Mezzanine  Investments.  These  investments  were  financed by net
offering proceeds and debt financing. This represents a $394,854 decrease versus
the total  invested in  Mezzanine  Investments  at  December  31, 1996 of $103.1
million.  The decrease in investments is due to the sale in the first quarter of
1997  of  Stanley  Furniture.   The  Fund's  Mezzanine  Investments  consist  of
high-yield  subordinated  debt  and/or  preferred  stock  linked  with an equity
participation in middle market companies  typically issued in private  placement
transactions  and are usually subject to restrictions on the transfer or sale of
the security, thereby limiting their liquidity.

     During  the  three  months  ended  March 31,  1997,  the Fund  received  no
additional    debt    securities   in   lieu   of   cash    interest    payments
("payment-in-kind").  As of March 31, 1997,  the Fund had in its portfolio  $1.1
million of  payment-in-kind  debt securities and $6.5 million of payment-in-kind
equity securities.

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

     On  October  29,  1993,  the Fund  amended  its Credit  Facility  Agreement
enabling the Fund to make  prepayments  of the term loan at any time and without
any  corresponding  reduction  to the  revolving  credit  line.  As a result  of
paydowns of the term loan, the Fund's  outstanding term loan was paid in full as
of March 29, 1994.  Additionally,  the Fund's  remaining credit line was further
amended to reduce the commitments thereunder to $7.5 million, which is availavle
to the Fund as of March 31, 1997.

     The Fund is now in its tenth year of operation.  Because all but one of the
Fund's debt  investments  were previously  sold or redeemed,  interest and other
income  expected to be received by the Fund may not be  sufficient  to cover the
Fund's expenses. As a result, future cash distributions to Limited Partners will
be mostly  derived  from  capital  proceeds  and gains  resulting  from sales of
securities.  The amount and timing of asset sales are dependent on future market
conditions and therefore are inherently  unpredictable.  Generally, the proceeds
generated  from  the  sale of the  Fund's  investments  will be  distributed  to
partners  only after  payment of  obligations  of the Fund,  or for  appropriate
reserves.  To fund the anticipated cash flow shortfall in the near future and to
maintain adequate reserves for possible follow-on investments and expenses,  the
Fund  reserved $15 million of the proceeds  received from the Playtex notes sale
in  February,  1993.  A  portion  of the  reserve  was  used to  make  follow-on
investments in American  Health  Companies,  Duro-Test  Corp.,  Chadwick-Miller,
Health o meter and Petco.  Approximately  $1.4  million of the  reserve has been
returned to partners of the Fund.  In addition,  $2.9 million was utilized  from
the reserve to pay down a portion of the First  Chicago loan on January 6, 1994.
The Fund's reserve balance as of March 31, 1997 was  approximately  $3.1 million
which has been invested in temporary investments.  As of the last meeting of the
Independent  General  Partners on February 25,  1997,  the  Independent  General
Partners have approved retention of the reserve at its current level.
<PAGE>
Investment in High-Yield Securities

     The Fund  invested  primarily  in  subordinated  debt and  preferred  stock
securities   ("High-Yield   Securities"),   generally   linked  with  an  equity
participation,  issued in conjunction with the Mezzanine  financing of privately
structured,   friendly  leveraged  acquisitions,   recapitalizations  and  other
leveraged  financings.  High-Yield  Securities  are  debt and  preferred  equity
securities that are unrated or are rated by Standard & Poor's  Corporation as BB
or lower and by Moody's  Investor  Services,  Inc. as Ba or lower.  Risk of loss
upon default by the issuer is significantly  greater with High-Yield  Securities
than  with  investment  grade  securities  because  High-Yield   Securities  are
generally unsecured and are often subordinated to other creditors of the issuer.
Also,  these  issuers  usually  have high  levels of  indebtedness  and are more
sensitive  to adverse  economic  conditions,  such as  recession  or  increasing
interest rates,  than  investment  grade issuers.  Most of these  securities are
subject to resale restrictions and have no quoted market price.

    Although the Fund cannot eliminate the risks associated with its investments
in High-Yield Securities,  it has established risk management policies. The Fund
subjected each prospective  investment to rigorous  analysis and made only those
investments  that were  recommended by the  Investment  Adviser and that met the
Fund's investment guidelines or that had otherwise been approved by the Managing
General Partner and the Independent  General  Partners.  Fund  investments  were
measured against specified Fund investment and performance guidelines.  To limit
the  exposure of the Fund's  capital in any single  issuer,  the Fund limits the
amount of its investment in a particular  issuer.  The Fund's Investment Adviser
also  continually  monitors  portfolio  companies in order to minimize the risks
associated with its investments in High-Yield Securities.

     Certain issuers of securities held by the Fund (Celebrity, Playtex, Stanley
Furniture  and  Signiture  Brands) have  registered  their equity  securities in
public  offerings.  Although the equity  securities of the same class  presently
held by the Fund (except Celebrity Inc., Stanley Furniture and Signiture Brands)
were not registered in these offerings,  the Fund has the ability under Rule 144
under the Securities Act of 1933 to sell publicly traded equity  securities held
by it for at least  three  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,  1997,  the Fund had a net  investment
loss of $552,667 as  compared to net  investment  income of $33,236 for the same
period in 1996. The total investment  income earned on investments for the three
months  ended March 31,  1997 was  $348,206  of which  $300,998  was earned from
Mezzanine Investments and $47,208 was earned from Temporary Investments. For the
same  period  in  1996,  total  investment  income  earned  on  investments  was
$1,216,115 of which $463,848 was earned from Mezzanine  Investments and $752,267
was earned from Temporary Investments.

     The decrease in net investment income for the three months ending March 31,
1997 versus the  comparative  period in 1996  reflects a decrease in  investment
income generated from mezzanine investments which have been sold since March 31,
1996,  partially  offset  by  lower  Investment  Advisory  Fees  and  Legal  and
Professional  Fees. Short term discount income was substantially  greater in the
first quarter of 1996 stemming from the proceeds received from the sale of GNC.

    Major  expenses for the period ending March 31, 1997 consisted of Investment
Advisory Fees and Legal and Professional Fees.

     Legal and  Professional  fees paid by the Fund  consist  primarily of legal
fees incurred in conjunction  with litigation.  Legal and Professional  fees for
the three  months  ended March 31,  1997 and 1996 were  $229,495  and  $386,824,
respectively.  This  decrease is  attributable  to the  decrease  in  litigation
expenses  incurred  and  legal  fees  required  to be  advanced  by the  Fund in
connection with the litigation described in Note 12 to the Financial Statements.

     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, 1997 was $296,691  compared  with  $480,252
for the three months ended March 31, 1996.  The fee is  calculated  at an annual
rate  of 1% of  assets  under  management,  subject  to  certain  reductions  as
specified in the Fund's  Partnership  Agreement with a minimum annual payment of
$1,200,000. The decrease in 1997 as compared to 1996 Investment Advisory Fees is
a direct  result of sales of  investments,  returns of capital to  partners  and
realized losses on investments.

     The  Fund   Administration  Fee  is  $300,000  per  year  plus  all  actual
out-of-pocket  expenses incurred on behalf of the Fund by the Fund Administrator
(excluding  compensation for the executive officers of the Fund  Administrator),
but in no event  exceeding,  in  aggregate,  the annual  amount of $2.0 million.
Out-of-pocket  Fund  expenses  consist  of  accounting,  audits,  printing,  tax
preparation and other administrative  services. The Fund Administration Fee paid
to the Fund  Administrator  for the three  months ended March 31, 1997 and March
31, 1996 was $75,000 and $74,335, 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, 1997 and 1996  totalled  $172,629  and  $172,656,
respectively.
<PAGE>
Net Assets

     The Fund's net assets  decreased by $557,169  during the three months ended
March  31,  1997,  due to net  realized  gains of  $361,480  and net  unrealized
appreciation  of $284,027  offset by a net investment  loss of $552,667 and cash
distributions of $650,009.

     The Fund's  valuation of the common Stock of Celebrity,  Signiture  Brands,
Playtex,  Stanley Furniture and Walter  Industries  reflect their closing market
price at March 31, 1997.

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

Unrealized Appreciation and Depreciation and Non-Accrual of Investments

     For the three months ended March 31, 1997, the Fund recorded net unrealized
appreciation  of  $284,027  as  compared  to  net  unrealized   depreciation  of
$4,715,698 for the same period in 1996. On March 31, 1997, the Fund's cumulative
net unrealized depreciation on investments totalled $10,530,439. 

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

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

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

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

     The net realized gain on investments  sold for the three months ended March
31, 1997 was $361,480  compared to a net realized  gain of  $37,129,853  for the
same period in 1996.

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

Cash Distributions

     On April 29,  1997,  the  Individual  General  Partners  approved the first
quarter  1997  cash  distribution  totalling  $283,218,  which  consists  of net
distributable  proceeds,  after  fund  expenses,  of  $249,961  from the sale of
Stanley common stock (of which $386,609 is return of capital) and $33,257 of net
income from  temporary  investments.  The total  amount  distributed  to Limited
Partners was $280,386 or $.58 per Unit. The Managing  General  Partner  received
$2,832,  representing  its 1% interest in the Fund. This cash  distribution  was
paid on May 15, 1997.

<PAGE>
Part II - Other Information

     Items 1 - 5 are  herewith  omitted as the  response  to all items is either
none or not applicable.

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

     Exhibit 27  - Financial Data Schedule for the first quarter ended
     March 31, 1997.


<PAGE>
                           SIGNATURES

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


                       ML-LEE ACQUISITION FUND, L.P.

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

                       By:  ML Mezzanine Inc.,
                       its General Partner


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

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



<PAGE>

                           SIGNATURES

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


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                                its General Partner


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

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