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 September 30, 1997

                         Commission File Number 0-15669

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

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

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

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

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

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

                      Units of Limited Partnership Interest
                                (Title of class)

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

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

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

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements and Supplementary Data

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

Statements of Operations - For the Three and Nine Months
 Ended September 30, 1997 and 1996

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

Statements of Cash Flows - For the Nine Months Ended
  September 30, 1997 and 1996

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

Schedule of Portfolio Investments - September 30, 1997

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation and
  Depreciation - Schedule 2



                          PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

Item 6.   Exhibits and Reports on Form 8-K

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


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

ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
    Managed Companies (amortized cost $83,885 at September 30,
         1997 and $93,468 at December 31, 1996)                       $        77,020     $        86,067
    Non-Managed Companies (amortized cost $9,597 at September 30,
         1997 and at December 31, 1996)                                         8,716               6,183
    Temporary Investments, at amortized cost (cost $8,834 at
         September 30, 1997 and $4,040 at December 31, 1996)                    8,841               4,047
Cash                                                                                1                  10
Prepaid Loan Fees - Notes 2, 4                                                    551               1,022
Prepaid Expenses and Other Receivables                                            300                 307
Receivable for Investment Sold                                                     75                --
                                                                      ---------------     ---------------
TOTAL ASSETS                                                          $        95,504     $        97,636
                                                                      ===============     ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                               $           170     $           122
    Reimbursable Administrative Expenses Payable                                  141                 103
    Independent General Partner Expenses Payable                                   45                  23
                                                                      ---------------     ---------------
Total Liabilities                                                                 356                 248
                                                                      ---------------     ---------------
Partners' Capital - Note 2
    Managing General Partner                                                    1,295               1,317
    Limited Partners (487,489 Units)                                           93,853              96,071
                                                                      ---------------     ---------------
Total Partners' Capital                                                        95,148              97,388
                                                                      ---------------     ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                               $        95,504     $        97,636
                                                                      ===============     ===============


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






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

<S>                                                        <C>                 <C>                <C>              <C>
                                                               For the Three Months Ended        For the Nine Months Ended
                                                             ------------     ------------     ------------     ------------
                                                             September 30,    September 30,    September 30,    September 30,
                                                                1997              1996             1997              1996
                                                             ------------      ------------    ------------     ------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                    $        306     $        487      $        902     $      1,143
Discount                                                             141               72               234            1,316
Dividend & Other Income                                            6,000             --               6,006              167
                                                            ------------      -----------      ------------      -----------
    TOTAL INCOME                                                   6,447              559             7,142            2,626
                                                            ------------      -----------      ------------      -----------
EXPENSES:
Investment Advisory Fee - Note 5                                     300               97               894            1,033
Fund Administration Fee - Note 6                                      75               75               225              224
Loan Fees - Notes 2, 4                                               175              176               524              524
Independent General Partners' Fees and Expenses - Note 7              42               55               213              155
Legal and Professional Fees                                          217              478               865            1,447
Reimbursable Administrative Expenses - Note 6                        141              102               402              312
Insurance Expense                                                      3                2                 7                6
                                                            ------------      -----------      ------------      -----------
    TOTAL EXPENSES                                                   953              985             3,130            3,701
                                                            ------------      -----------      ------------      -----------
NET INVESTMENT INCOME                                              5,494             (426)            4,012           (1,075)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
     NOTE 8 AND SCHEDULE 1                                            --             (773)            5,795           60,802
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
     Publicly Traded Securities                                    5,797           15,006             3,070          (83,350)
     Nonpublic Securities                                             --              879                --           62,098
                                                            ------------      -----------      ------------      -----------
             Subtotal                                              5,797           15,885             3,070          (21,252)
                                                            ------------      -----------      ------------      -----------
NET INCREASE (DECREASE) IN NET ASSETS
   RESULTING FROM OPERATIONS                                $     11,291     $     14,686      $     12,877     $     38,475
                                                            ============      ===========      ============     ============


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


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

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

Net Investment Income (Loss)                                     $      4,012      $     (1,075)

Net Realized Gain on Investments                                        5,795            60,802

Net Change in Unrealized Appreciation 
  (Depreciation) on Investments                                         3,070           (21,252)
                                                                 ------------      ------------

Net Increase (Decrease) in Net Assets
   Resulting from Operations                                           12,877            38,475

Cash Distributions to Partners                                        (15,117)         (178,362)
                                                                 ------------      ------------

Total Increase (Decrease)                                              (2,240)         (139,887)

NET ASSETS:

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

End of Period                                                    $     95,148      $    114,466
                                                                 ============      ============




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



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

<S>                                                                             <C>                         <C>
                                                                                        For the Nine Months Ended
                                                                                ---------------          ---------------
                                                                             September 30, 1997        September 30, 1996
                                                                                ---------------          ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                       $         1,141          $         2,167
  Investment Advisory Fee                                                                  (894)                  (1,033)
  Fund Administration Fee                                                                  (225)                    (224)
  Legal and Professional Fees                                                              (815)                  (1,123)
  Loan Fees and Expenses                                                                    (53)                     (42)
  Independent General Partners' Fees and Expenses                                          (191)                    (144)
  (Purchase) Sale of Temporary Investments, Net                                          (4,793)                   2,327
  Reimbursable Administrative Expenses                                                     (365)                    (381)
  Proceeds from Sale of Portfolio Company Investments                                    21,303                  170,761
                                                                                ---------------          ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                                15,108                  172,308
                                                                                ---------------          ---------------
CASH FLOWS APPLIED TO FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                        (15,117)                (178,362)
                                                                                ---------------          ---------------
NET CASH APPLIED TO FINANCING ACTIVITIES                                                (15,117)                (178,362)
                                                                                ---------------          ---------------
  Net Increase (Decrease) in Cash                                                            (9)                  (6,054)
  Cash at Beginning of Period                                                                10                    6,054
                                                                                ---------------          ---------------
CASH AT END OF PERIOD                                                           $             1          $            --
                                                                                ===============          ===============

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

Net Investment Income (Loss)                                                    $         4,012          $        (1,075)
                                                                                ---------------          ---------------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  (Increase) Decrease in Investments                                                     10,790                  108,984
  (Increase) Decrease in Receivable for Investments Sold                                    (75)                   3,302
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivables                                                   (6,000)                    (460)
  (Increase) Decrease in Prepaid Expenses                                                   478                      588
  Increase (Decrease) in Independent General Partner Fees Payable                            22                       11
  Increase (Decrease) in Reimbursable Administrative Expenses Payable                        38                      (70)
  Increase (Decrease) in Legal and Professional Fees Payable                                 48                      226
  Net Realized Gain on Investments                                                        5,795                   60,802
                                                                                ---------------          ---------------
TOTAL ADJUSTMENTS                                                                        11,096                  173,383
                                                                                ---------------          ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                       $        15,108          $       172,308
                                                                                ===============          ===============


</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 Nine Months Ended September 30, 1997
Partners' Capital at January 1, 1997                                       $   1,317         $  96,071         $   97,388
Allocation of Net Investment Loss                                                 40             3,972              4,012
Allocation of Net Realized Gain on Investments                                    58             5,737              5,795
Allocation of Net Change in Unrealized Appreciation                               31             3,039              3,070
Cash Distributions to Partners                                                  (151)          (14,966)           (15,117)
                                                                           ---------         ---------         ----------
Partners' Capital at September 30, 1997                                    $   1,295         $  93,853         $   95,148
                                                                           =========         =========         ==========





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

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

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

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Notes 11, 16
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)(h)         12/31/87   $ 10,810  $10,810
$267                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    03/31/93        267      267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93        276      276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93        286      286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93        293      293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91        502      502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92     11,000   11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87      1,951    1,951
15,228.43 Warrants  Alliance International Group, Common Stock Purchase Warrants(d)        03/28/89          -(i)     -(i)
62,700 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        04/22/91          -        -
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        12/31/92          -        - 
50,000 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)         various          -(i)     -(i) 
                      (52.5% of fully diluted common equity assuming exercise
                       of warrants) 
                      19,200 Shares Common Stock
                      Purchased 12/31/87                 $    149
                      Sold  01/30/89 - 9,600 Shares      $    107
                      Sold  01/02/90 - 9,600 Shares      $    147                                     ------------------------------
                      Realized Gain                      $    105                                       25,385   25,385        26.84
                                                                                                      ------------------------------

                    BEEFAMERICA, INC. (a) (e) - Notes 9,10
$14,000             BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g)     09/09/88     14,000    5,800
$10,000             BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g)      09/09/88     10,000    4,200
                      $1,072 15% Sub. Nt.
                      Purchased 09/9/88                  $  1,072
                      Redeemed 02/20/92                  $  1,072
                      Realized Gain                      $      0
                      Preferred Stock
                      Purchased 09/9/88                  $  2,700
                      Redeemed 02/20/92                  $  2,700
                      Realized Gain.                     $      0
                      $41,997 15.5% Sr.Sub Interim Nt
                      Purchased 09/9/88                  $ 20,000
                      $80,951 15% Sub Nt
                      Purchased 09/9/88                  $ 38,928
                      Exchanged 03/29/96 for
                      Cash Proceeds                      $ 26,000
                      10% Sr Pref Stk                    $ 14,000
                      4% Jr Pref Stk                     $ 10,000
                      Realized Loss                      $ (8,928)
                      5661.11 Shares Class A Pref. Stk
                      Purchased 04/10/91                 $ 40,050
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $(40,050)
                      51,000 Shares Common Stk
                      Purchased various                  $  2,000
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $ (2,000)                                    ------------------------------
                      Total Net Realized Loss            $(50,978)                                      24,000   10,000        10.57
                                                                                                      ------------------------------

            

              See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                             SEPTEMBER 30, 1997 
                                                        (DOLLARS IN THOUSANDS)
                                                              (CONTINUED)         
  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>

                    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 Senior Note
                      Purchased  12/16/88                $  5,000
                      Sold  11/23/94                     $  5,000
                      Realized Gain                      $      0
                      189,996 Shares Preferred Stock
                      192,933 Shares Common Stock 
                      100,000 Common Stock Warrants
                      Purchased Various                  $ 16,652
                      Exchanged July 15, 1996
                      15,406 Preferred Stock Warrants 
                      39,487 Common Stock Warrants       $ 16,652
                      Realized Gain                      $      0                                     ------------------------------
                      Total Realized Gain                $      0                                       16,652        -         0.00
                                                                                                      -----------------------------

                    COLE NATIONAL CORPORATION
567 Warrants        Cole National Corporation, Common Stock Purchase Warrants(d)           09/26/90          -        -
                      (0.0% of fully diluted common equity 
                      assuming exercise of warrants)
                      $589 Senior Bridge Note
                      Purchased 09/25/90                 $    589
                      Sold 11/15/90                      $    589                                     ------------------------------
                      Realized Gain                      $      0                                            -        -         0.00
                                                                                                      ------------------------------
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(k)                             12/28/88      3,255   14,238
                      (2.6%  of  fully  diluted  common equity) 
                      $19,285 15% Subordinated  Notes
                      Purchased   12/28/88               $ 19,285
                      Sold 06/30/89                      $ 19,285
                      Realized  Gain                     $      0
                      3,214,000 Shares Preferred Stock
                      Purchased 12/28/88                 $  3,214
                      Sold 06/30/89                      $  3,214
                      Realized  Gain                     $      0
                      2,571,314 Shares Common Stock
                      Purchased  12/28/88                $  1,286
                      Sold 06/30/89                      $  1,286
                      Realized Gain                      $      0
                      $11,250 15% Subordinated Note
                      Purchased  12/28/88                $ 11,250
                      Sold 09/28/90                      $ 11,275
                      Realized Gain                      $     25
                      2,571,314 Shares Common Stock
                      Purchased  12/28/88                $  1,286
                      Sold 09/28/90                      $ 10,512
                      Realized  Gain                     $  9,226
                      347,209 Shares Common Stock
                      Purchased  12/28/88                $    174
                      Sold  12/20/91                     $  1,343
                      Realized Gain                      $  1,169
                      $71,251 15% Subordinated Notes
                      Purchased  12/28/88                $ 71,251
                      Sold 02/01/93                      $ 71,181
                      Realized Loss                      $    (70)                                    ------------------------------
                      Total Net Realized Gain            $ 10,350                                        3,255   14,238        15.05
                                                                                                      ------------------------------

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

  Principal                                                                                                        Fair         % Of
   Amount                                                                                Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                    SIGNATURE BRANDS USA, INC. (a) - Note 9
                    (formerly HEALTH O METER PRODUCTS, INC.
952,500 Shares      Signature Brands USA, Inc., Common Stock (d)(k)                        04/28/88   $  1,270  $ 3,631
610,553 Shares      Signature Brands USA, Inc., Common Stock (d)(k)                        08/17/94      3,282    2,328
                      (14.7% of fully diluted common equity)
                      $16,000 14.50% Subordinated Note
                      Purchased 04/28/88                 $ 16,000
                      Sold 03/24/92                      $ 16,000
                      Realized Gain                      $      0
                      187,500 Shares of Common Stock
                      Purchased 04/28/88                 $    250
                      Sold 03/30/92                      $  2,441
                      Realized Gain                      $  2,191                                     ------------------------------
                      Total Realized Gain                $  2,191                                        4,552    5,959         6.30
                                                                                                      ------------------------------



                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9, 16
  801,437 Shares    Stanley Furniture Co., Inc., Common Stock(d)(h)(k)                      Various     10,041   21,438           
                      (16% of fully diluted common equity)                    
                      $2,000 Loan participation
                      Purchased 03/12/92                 $  2,000
                      Repaid 04/05/93                    $  2,000
                      Realized Gain                      $      0                          
                      Purchased Various                  $ 13,973
                      Sold  11/13/96                     $ 14,664
                      Sold   12/13/96                    $  2,199
                      Realized Gain                      $  2,890                       
                      Purchased Various                  $    395
                      Sold 02/07/97                      $    756
                      Realized Gain                      $    361
                      Purchased Various                  $  9,113 
                      Sold 06/30/97                      $ 14,547
                      Realized Gain                      $  5,434                                     ------------------------------
                      Total Net Realized Gain            $  8,685                                       10,041   21,438        22.67
                                                                                                      ------------------------------

         

                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN MANAGED COMPANIES                                             $ 83,885  $77,020        81.43
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.

</TABLE>

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

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

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

                    WALTER INDUSTRIES, INC. - Note 9
435,569 Shares      Walter Industries, Inc., Common Stock(b)(k)                            01/07/88      8,877    8,684
326 Shares          Walter Industries, Inc., Common Stock (b)(k)                           09/13/95          -        6
                      $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    8,690         9.19
                                                                                                      ------------------------------

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


                    TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                            9,597    8,716         9.22
                                                                                                      ==============================
                    SUMMARY OF MEZZANINE INVESTMENTS
                    Subordinated Notes                                                                $ 11,932  $11,932        12.62
                    Preferred Stock                                                                     35,502   21,502        22.73
                    Common Stock and Warrants                                                           46,048   52,303        55.30
                                                                                                      ------------------------------
                    TOTAL MEZZANINE INVESTMENTS                                                       $ 93,482  $85,737        90.65
                                                                                                      ==============================


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

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

                    COMMERCIAL PAPER

$ 2,835             Ford Motor Credit Corp., 5.57% due 10/01/97                            09/25/97   $  2,832  $ 2,835         3.00
$ 6,008             American General Corp., 5.62% due 10/03/97                             09/26/97      6,002    6,006         6.35
                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN COMMERCIAL PAPER                                                 8,834    8,841         9.35
                                                                                                      ------------------------------
                    TOTAL TEMPORARY INVESTMENTS                                                          8,834    8,841         9.35
                                                                                                      ------------------------------
                    TOTAL INVESTMENT PORTFOLIO                                                        $102,316  $94,578       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 December 31, 1996, 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 $7 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 underlying class of securities.
(k)  Publicly traded class of securities.

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

<PAGE>
                      ML-LEE ACQUISITION FUND, L.P.
                      NOTES TO FINANCIAL STATEMENTS
                           SEPTEMBER 30, 1997
                              (UNAUDITED)

1.  Organization and Purpose

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

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

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

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

2.  Significant Accounting Policies

Basis of Accounting

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

Valuation of Investments

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

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

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1997.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time and, especially in light of the fact that the portfolio
investments of companies  whose equity is publicly traded are valued at the last
price available at September 30, 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 September 30, 1997 and December 31,
1996,   the  Fund  had  in  its  portfolio  of   investments   $1.1  million  of
payment-in-kind debt securities. As of September 30, 1997 and December 31, 1996,
the Fund had in its  portfolio of  investments  $6.5 million of  payment-in-kind
equity securities.

Investment Transactions

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

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

Deferred Interest Income

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

Loan Facility and Advisory Fees

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

Partners' Capital

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

Interim Financial Statements

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

3. Allocation of Profits and Losses

     Pursuant  to  the  Partnership   Agreement,   all  profits  from  Temporary
Investments  generally are  allocated 99% to the Limited  Partners and 1% to the
Managing  General Partner.  Profits from Mezzanine  Investments are, in general,
allocated as follows:

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

    second,  99% to the Limited  Partners and 1% to the Managing General Partner
    until the sum allocated to the Limited  Partners  equals any previous losses
    allocated  together with a cumulative  Priority Return of 10% on the average
    daily  balance of Mezzanine  securities,  and any  outstanding  Compensatory
    Payments,

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

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

    Losses will be allocated in reverse  order of profits  previously  allocated
and  thereafter  99% to the  Limited  Partners  and 1% to the  Managing  General
Partner.
<PAGE>
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.  Additionally,  the  Credit
Facilities were reduced to $7.5 million,  all of which is available at September
30, 1997. The Credit Facilities will mature on July 31, 1998. In connection with
the  Credit  Facilities,  the Fund has  pledged  its  remaining  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 nine  months  ended  September  30,  1997 was
    $476,819.

    An annual Loan  Administration  Fee of $25,000 for the administration of the
    credit facility. The amount expensed for the nine months ended September 30,
    1997 was $18,631.

    An  Unused  Commitment  Fee of 1/2 of 1% per  annum  of the  unused  line of
    credit.  The  amount  expensed  for the nine months ended September 30, 1997
    was $28,229.

     For the nine months ended  September  30, 1997 and 1996,  the Fund incurred
$523,679 and $524,347, respectively, in total loan fees.

5.  Investment Advisory Fee

     The  Investment  Adviser  provides for the  identification,  management and
liquidation of investments for the Fund. As compensation  for services  rendered
to the Fund, the Investment  Adviser receives a quarterly fee at the annual rate
of 1% of assets under management (net offering  proceeds,  reduced by cumulative
capital  reductions,  plus outstanding bank borrowing as specified in the Fund's
Partnership Agreement),  with a minimum annual fee of $1,200,000. The Investment
Advisory Fee is calculated and paid quarterly,  in advance.  For the nine months
ended  September  30,  1997 and 1996,  the Fund paid  $893,717  and  $1,033,443,
respectively,  in Investment  Advisory Fees to Thomas H. Lee Advisors I. For the
three  months  ended  September  30, 1997 and 1996,  the Fund paid  $300,000 and
$97,146, respectively, in Investment Advisory Fees.

6.  Fund Administration Fees & Expenses

     ML Fund Administrators Inc. (the "Fund Administrator") (an affiliate of the
Managing General Partner) performs the operational and  administrative  services
necessary for the management of the Fund.  Beginning  October 19, 1995, the Fund
Administration Fee is calculated at an annual fee of $300,000 plus out-of-pocket
expenses  incurred  by the Fund  Administrator,  as  described  below.  The Fund
Administration  Fee is paid  quarterly,  in advance.  For the nine months  ended
September 30, 1997 and 1996, the Fund paid $225,000 and $224,335,  respectively,
in Fund  Administration  Fees. For the three months ended September 30, 1997 and
1996, the Fund paid $75,000 in Fund Administration Fees.

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative  expenses incurred.  Actual out-of-pocket expenses ("reimbursable
expenses") primarily consist of printing,  audits, tax preparation and custodian
fees.  For the nine  months  ended  September  30,  1997 and 1996,  reimbursable
expenses  totalled  $402,544 and  $311,430,  respectively.  For the three months
ended September 30, 1997, reimbursable expenses totalled $141,224.

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 nine months ended  September  30, 1997 and 1996,  the Fund incurred
$212,890 and $154,523,  respectively,  in Independent General Partners' Fees and
Expenses.  For the three months ended  September 30, 1997 and 1996,  Independent
General Partners' Fees and Expenses totalled $42,292 and $54,502, respectively.
<PAGE>

8.  Investment Transactions

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

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

     At September 30, 1997,  the Fund had a total of $93.5  million  invested in
Mezzanine  Investments  representing  $83.9  million  Managed  and $9.6  million
Non-Managed portfolio investments.

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

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

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

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

9.  Unrealized Appreciation and Depreciation of Investments

     For the nine  months  ended  September  30,  1997,  the Fund  recorded  net
unrealized  appreciation of $3,069,555.  As of this date, the Fund's  cumulative
net unrealized depreciation on investments totalled $7,744,911.

     For the three  months  ended  September  30,  1997,  the Fund  recorded net
unrealized appreciation of $5,797,187. 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  its
pro-rata  portion,  up to $150,480 to support an  obligation  of a subsidiary of
Alliance  International  Group,  Inc.  On  October 3, 1997,  the  guarantee  was
released. See Note 16 for more information.
<PAGE>
12. Litigation

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was  denied.  Thereafter,  Deloitte  &  Touche  filed a  petition  for a writ of
Certiorari with South Carolina Supreme Court,  which was granted.  On August 11,
1997, the South Carolina Supreme Court affirmed in part and reversed in part the
rulings by the Court of  Appeals  reversing  summary  judgement  for  Deloitte &
Touche.  In order to avoid the  expense and  uncertainty  of trial and not as an
admission of any liability to the Fund on Deloitte's part, Deloitte on September
26, 1997,  paid the Fund $6 million  under a Settlement  Agreement.  These Funds
approximately $12.18 per Unit, will be distributed to Limited Partners of record
as of September 26, 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  (the  "Class"),  against the Fund's  Managing  General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates.  The complaint alleged that the defendants breached the Fund's
Partnership Agreement in 1990 by causing the Fund to pay $7,554,855 in incentive
compensation to the MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
the Court  found  that the MGP  Distributions  for the  fourth  quarter  of 1989
through the fourth  quarter of 1990 were paid in  violation  of the  Partnership
Agreement and as a result, held the General Partners liable for repayment to the
plaintiff  class of $6,627,752 of excessive  distributions,  plus interest.  The
Court's  decision  dismissed  Merrill Lynch & Co., Inc. and MLPF&S  because they
were not  parties to the  Partnership  Agreement.  On June 13,  1996,  the Court
amended its  decision,  dismissing  ML Mezzanine,  Inc.,  the corporate  general
partner  of the  Fund's  MGP  because  it was  not a  party  to the  Partnership
Agreement.  On July 25, 1996, judgment was entered against remaining  Defendants
in the amount of $10,399,505.  The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision.  Thereafter,  the parties agreed to settle this action with certain of
the remaining  defendents  paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement,  ordered notice to be mailed to the
Class,  and scheduled a final hearing to approve the  settlement  and plantiffs'
council's  application for attorney's fees, for September 15, 1997. On September
15, 1997,  the Court held a final  hearing,  at which it approved the settlement
and signed a Final Order dismissing the action, which released the class' claims
against  the  defendents.  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. On September 30,
1997,  Plainfiff's motion was denied without  prejudice.  The plaintiff seeks an
accounting,  rescission,  rescissory  or actual  damages and  punitive  damages.
Plaintiffs  have moved to certify the case as a class  action.  Defendants  have
opposed that motion which is currently  pending before the Court. The defendants
in this  action  believe  that the claims in the second  amended  complaint  are
without merit.  Whether or not the plaintiff  prevails on any remaining  claims,
the Fund may be  obligated  to  indemnify  and  advance  litigation  expenses to
certain of the defendants  under the terms and  conditions of various  indemnity
provisions  in the Fund's  Partnership  Agreement  and separate  indemnification
agreements,  and the  amounts  of such  indemnification  and  expenses  could be
material.  In the  opinion  of legal  counsel,  the  outcome of this case is not
determinable at this time. The Fund has incurred  litigation  expenses which are
recorded in Legal and Professional Fees.

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

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

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

     For the nine month period ending  September 30, 1997 and 1996, the Managing
General  Partner  received  cash  distributions  in the amount of  $151,176  and
$1,783,628,  respectively,  representing  its 1% interest  in the Fund.  For the
three months ended  September 30, 1997 and 1996,  the Managing  General  Partner
received cash distributions totalling $141,820 and $40,267, respectively.

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 September 30, 1997,
the reserve balance was reduced to  approximately  $2.7 million due to follow-on
investments  in CMI Holding  Corp.,  Diet Center  Inc.,  Duro-Test  Corporation,
Signature Brands and Petco.  Additionally,  $1.4 million of the reserve has been
returned to  partners,  $2.9  million was paid to First  Chicago to pay down the
Fund's loan and approximately $295,000 has been used to fund quarterly expenses.

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

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

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

     On August 27, 1997, ML-Lee  Acquisition  Fund, L.P. (the "Fund"),  together
with certain other  stockholders  including  affiliates of Thomas H. Lee Company
(the "Selling  Stockholders"),  entered into a Stock Purchase Agreement pursuant
to  which  the  Selling  Stockholders  agreed  to  sell  all of the  issued  and
outstanding  Common  Stock of  Alliance  International  Group,  Inc.,  a Georgia
corporation  ("Alliance")  and a Managed  Company of the Fund , to an  unrelated
third   party  for   approximately   $7.8   million  or  $7.78  per  share  (the
"Transaction").  In  addition,  immediately  prior  to the  consummation  of the
Transaction,  Alliance  redeemed all of the outstanding  shares of the Company's
Preferred  Stock,  and payed accrued but unpaid  dividends with respect thereto.
Also, Alliance's outstanding  indebtedness was repaid in full, including accrued
and unpaid  interest.  The Transaction was completed on October 3, 1997.

     As  a  result  of  these  transactions,   the  Fund  received  proceeds  of
approximately  $30.9 million or $62.75 per Unit. These proceeds are comprised of
$11.9 million for repayment of  indebtedness  (including  all accrued and unpaid
interest), and $18.9 million for the Common and Preferred Stock held by the Fund
(which includes approximately $5.5 million of preferred dividends). In addition,
the Fund's outstanding  guarantee of Alliance debt, as discribed in Note 11, was
released.  Net  Distributable  proceeds of $62.75 per Unit were  distributed  to
Limited Partners of record as of October 3, 1997.

     On November 3, 1997,  the  Individual  General  Partners  approved a fourth
quarter cash distribution,  with respect to the capital transaction  effected on
October 3, 1997, in connection with the Fund's investment in Alliance, as to Net
Distributable  Capital  Proceeds  from the sale of Alliance of $30.9 million (of
which $21.4  million is return of  capital)  distributable  cash from  Mezzanine
Investments of $9.5 million,  a cash  distribution to Limited Partners of record
as of the  effective  date of such sale in the  amount of $62.75  per Unit and a
cash  distribution to the Managing  General Partner of $308,980 in proportion to
its Capital  Contribution,  all such  distributions will be paid on November 14,
1997.

     On November 3, 1997, the  Individual  General  Partners  approved the third
quarter 1997 cash distribution totalling $5,997,616 which consists of a realized
gain pursuant to the Settlement  Agreement with Deloitte and Touche. See Note 12
for more information. The total amount to be distributed to Limited Partners was
$5,937,616 or 12.18 per Unit. The Managing General Partner will receive $60,000,
in proportion to its capital  contribution.  This cash distribution will be paid
on November 14, 1997 to Limited Partners of record as of September 30, 1997.

     On November 11, 1997, Stanley Furniture Company announced the repurchase of
a total of 413,201  shares of its Common Stock from the Fund and  affiliates  of
the Thomas H. Lee Company for $25 per share.  As a result,  the Fund is expected
to sell a total of 400,718 shares and receive  proceeds of $10 million or $20.34
per Unit.  The Fund will  continue to hold  400,719  shares  subsequent  to this
repurchase.  Net  Distributable  Proceeds from the sale will be  distributed  to
Limited  Partners of record as of the closing  date,  which is expected to be in
November 1997.


<PAGE>
<TABLE>
<CAPTION>
                                                   SCHEDULE 1
                                         ML-LEE ACQUISITION FUND, L.P.
                                SUPPLEMENTAL SCHEDULE OF REALIZED GAINS (LOSSES)
                                FOR THE 3 AND 9 MONTHS ENDED SEPTEMBER 30, 1997
                                             (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

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

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

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

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



See the Accompanying Notes to Financial Statements 
</TABLE>

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

<S>                                <C>       <C>       <C>                <C>               <C>              <C>
                                                            Unrealized           Unrealized
                                                          Appreciation          Appreciation
                                                         (Depreciation)        (Depreciation)  Total Unrealized     Total Unrealized
                                                         for the three          for the Nine     Appreciation/       Appreciation/
                                    Investment  Fair      Months Ended          Months Ended   (Depreciation) at   (Depreciation) at
SECURITY                              Cost     Value   September 30, 1997 September 30, 1997   December 31, 1996  September 30, 1997
----------------------------------  --------- -------- ------------------ ------------------   -----------------  ------------------

PUBLICLY TRADED SECURITIES:

Signature Brands USA
  Common Stock*                      $ 4,552   $ 5,959         $     390        $     (2,442)        $    3,849          $    1,407

Playtex
  Common Stock*                        3,255    14,238             1,055               2,990              7,993              10,983

Stanley Furniture
  Common Stock*                       10,041    21,438             2,905                 (65)            11,462              11,397

Walter Industries
  Common Stock                         8,877     8,691             1,390               2,533             (2,720)               (186)
                                                               ---------        ------------         ----------          ----------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                            $   5,740        $      3,016         $   20,584          $   23,601
                                                               ---------        ------------         ----------          ----------
NONPUBLIC SECURITIES:

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

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

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

SWO Holdings Corporation
  Common Stock*                          690         -                 -                   -               (690)               (690)
                                                               ---------        ------------         ----------         -----------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM 
   NONPUBLIC SECURITIES 
                                                               $       -        $          -         $  (31,346)        $   (31,346)
                                                               ---------        ------------         ----------         -----------
REVERSAL OF UNREALIZED DEPRECIATION
   FROM SECURITIES SOLD

Celebrity
   Common Stock*                                               $      57        $         54         $      (54)        $         - 
                                                               ---------        ------------         ----------         -----------

TOTAL NET UNREALIZED APPRECIATION
   (DEPRECIATION)                                              $   5,797        $      3,070         $  (10,816)        $    (7,745)
                                                               =========        ============         ==========         ===========


*  Restricted securities.

</TABLE>
<PAGE>

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

Liquidity & Capital Resources

     As of September 30, 1997, the Fund had a total of $93.5 million invested in
Mezzanine Investments.  These investments were financed by net offering proceeds
and debt  financing.  This  represents a $9.6 million  decrease versus the total
invested in Mezzanine  Investments at December 31, 1996 of $103.1  million.  The
decrease  in  investments  is due  primarily  to the  sales and  redemptions  of
Portfolio  Investments.  The Fund's Mezzanine  Investments consist of high-yield
subordinated debt and/or preferred stock linked with an equity  participation in
middle market companies  typically issued in private placement  transactions and
are usually  subject to  restrictions  on the transfer or sale of the  security,
thereby limiting their liquidity.

     During the nine months  ended  September  30,  1997,  the fund  received no
additional    debt    securities   in   lieu   of   cash    interest    payments
("payment-in-kind").  As of September  30, 1997 and December 31, 1996,  the Fund
had in its  portfolio  of  investments  $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 this  facility.  

     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,  all of which is
available to the Fund as of September 30, 1997.

     The  Fund is now in its  eleventh  year of  operation.  Because  all of the
Fund's debt  investments  have been 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, if any,  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,  $2.7 million was utilized  from
the reserve to pay down a portion of the First  Chicago  loan on January 6, 1994
and  approximately  $295 has been used to fund  quarterly  expenses.  The Fund's
reserve balance as of November 14, 1997 was approximately $2.7 million which has
been invested in temporary investments.

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.
<PAGE>

     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 (Playtex,  Stanley Furniture
and  Signature  Brand USA) have  registered  their equity  securities  in public
offerings.  Although the equity  securities of the same class  presently held by
the Fund (except Stanley  Furniture and Signiture Brands) were not registered in
these  offerings,  the Fund has the ability under Rule 144 under the  Securities
Act of 1933 to sell publicly  traded equity  securities  held by it for at least
one year on the open  market,  subject to the volume  restrictions  set forth in
that rule.  The Rule 144 volume  restrictions  generally  are not  applicable to
equity securities of non-affiliated  companies held by the Fund for at least two
years.  The Fund in  certain  cases has  agreed  not to make any sales of equity
securities for a specified hold-back period following a public offering.

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

Results of Operations

Investment Income and Expenses

     For the nine months  ended  September  30, 1997 and 1996,  the Fund had net
investment  income  of  $4,011,802  as  compared  to a net  investment  loss  of
$1,075,273  for the same period in 1996.  The total  income  earned for the nine
months ended September 30, 1997 was $7,141,490 of which $901,122 was earned from
Mezzanine  Investments  and  $240,368  was earned  from  Temporary  Investments.
Additionally,  $6 million  dollars was received in a  settlement  agreement as a
result of a lawsuit  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.  For the
same  period  in  1996,  total  investment  income  earned  on  investments  was
$2,626,135  of which  $1,309,904  was  earned  from  Mezzanine  Investments  and
$1,316,231 was earned from Temporary Investments.

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

     The Investment  Advisor  receives its  compensation  on a quarterly  basis.
Total  Investment  Advisory  Fees paid to the  Investment  Adviser  for the nine
months ended  September 30, 1997 was $893,717  compared with  $1,033,443 for the
nine months ended September 30, 1996. The fee is calculated at an annual rate of
1% of assets under management, subject to certain reductions as specified in the
Fund's  Partnership  Agreement with a minimum annual payment of $1,200,000.  The
decrease in fees is a direct result of sales of investments,  returns of capital
to partners  and  realized  losses on  investments.  For the three  months ended
September 30, 1997 and 1996,  Investment  Advisory  Fees paid to the  Investment
Adviser were $300,000 and $97,146, respectively.

     Legal and  Professional  Fees paid by the Fund  consist  primarily of legal
fees incurred in conjunction  with litigation.  Legal and Professional  Fees for
the nine months ended  September 30, 1997 and 1996 were $864,566 and $1,446,985,
respectively.  For the three months ended September 30, 1997 and 1996, Legal and
Professional  Fees were  $216,561 and $478,484,  respectively.  This decrease is
attributable to the decrease in legal expenses incurred and advanced by the Fund
in  connection  with  the  litigation  described  in  Note  12 to the  Financial
Statements.

     Loan fees  consist  of fees on the unused  portion of the Fund's  facility,
loan  administration  fees,  amortization of the loan advisory and facility fees
and various miscellaneous fees attributable to the facility. For the nine months
ended  September  30, 1997 and 1996,  the Fund  incurred  $523,679 and $524,347,
respectively, in total loan fees. Loan fees for the three months ended September
30, 1997 and 1996 totalled $176,398 and $174,564, respectively.

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative  expenses incurred.  For the nine months ended September 30, 1997
and 1996,  reimbursable  expenses totalled $402,544 and $311,430,  respectively.
For the three months ended  September 30, 1997 and 1996,  reimbursable  expenses
totalled $141,224 and $101,199, respectively.
<PAGE>

Net Assets

     The Fund's net assets decreased by $2,240,339  during the nine months ended
September  30, 1997 due to net  realized  gains of  $5,795,392,  net  investment
income of $4,011,802,  net unrealized  appreciation of $3,069,555 offset by cash
distributions of $15,117,088.

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

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

Unrealized Appreciation and Depreciation and Non-Accrual of Investments

     For the nine  months  ended  September  30,  1997,  the Fund  recorded  net
unrealized   appreciation   of  $3,069,555  as  compared  to  a  net  unrealized
depreciation  of  $21,251,814  for the same period in 1996.  As of September 30,
1997, the Fund's cumulative net unrealized  depreciation on investments totalled
$7,744,911. The increase in unrealized appreciation during the nine months ended
September  30, 1997 is primarily  the result of the increase in value of Playtex
and  Walter  common  stock  offset in part by a decrease  in value of  Signature
Brands common stock. For the three months ended September 30, 1997 and 1996, the
Fund  recorded net  unrealized  appreciation  of  $5,797,187  as compared to net
unrealized appreciation of $15,886,767 for the same period in 1996.

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

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

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

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

Realized Gains and Losses

     The net realized gains on investments  for the nine months ended  September
30, 1997 was $5,795,392  compared to net realized  gains of $60,801,746  for the
same period in 1996. For the three months ended September 30, 1997, the Fund did
not realize any gains or losses.  For the  comparable  period in 1996,  the Fund
realized a loss of $773,295.

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

Cash Distributions

     On November 3, 1997,  the  Individual  General  Partners  approved a fourth
quarter cash distribution,  with respect to the capital transaction  effected on
October 3, 1997, in connection with the Fund's investment in Alliance, as to Net
Distributable  Capital  Proceeds  from the sale of Alliance of $30.9 million (of
which $21.4  million is return of  capital)  distributable  cash from  Mezzanine
Investments of $9.5 million,  a cash  distribution to Limited Partners of record
as of the  effective  date of such sale in the  amount of $62.75  per Unit and a
cash  distribution to the Managing  General Partner of $308,980 in proportion to
its Capital  Contribution,  all such  distributions will be paid on November 14,
1997.

     On November 3, 1997, the  Individual  General  Partners  approved the third
quarter 1997 cash distribution totalling $5,997,616 which consists of a realized
gain pursuant to the Settlement  Agreement with Deloitte and Touche. See Note 12
for more information.  The total amount to be distributed to Limited Partners is
$5,937,616 or 12.18 per Unit. The Managing General Partner will receive $60,000,
in proportion to its capital  contribution.  This cash distribution will be paid
on November 14, 1997 to Limited Partners of record as of September 30, 1997.

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

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


<PAGE>
Part II - Other Information

   Item 1.  Legal Proceedings

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was  denied.  Thereafter,  Deloitte  &  Touche  filed a  petition  for a writ of
Certiorari with South Carolina Supreme Court,  which was granted.  On August 11,
1997, the South Carolina Supreme Court affirmed in part and reversed in part the
rulings by the Court of  Appeals  reversing  summary  judgement  for  Deloitte &
Touche.  In order to avoid the  expense and  uncertainty  of trial and not as an
admission of any liability to the Fund on Deloitte's part, Deloitte on September
26, 1997,  paid the Fund $6 million  under a Settlement  Agreement.  These Funds
approximately $12.18 per Unit, will be distributed to Limited Partners of record
as of September 26, 1997.



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

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits:

     Exhibit 27 - Financial  Data Schedule for the quarter  ended  September 30,
1996.

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

          Deloitte Settlement      Filed September 26, 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 13th day of
November, 1997.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner


Dated:  November 13, 1997  /s/ Audrey Bommer
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)




Dated:  November 13, 1997  /s/ Roger F. Castoral, Jr.
                           Roger F. Castoral, Jr.
                           Vice President and Assistant Treasurer
                           (Principal Accounting Officer)



<PAGE>

                           SIGNATURES

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


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner




Dated:  November 13, 1997  ____________________________
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)





Dated:  November 13, 1997  ____________________________
                           Roger F. Castoral, Jr.
                           Vice President and Assistant Treasurer
                           (Principal Accounting Officer)