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, 1996

                         Commission File Number 0-15669

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

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

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

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

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

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

                      Units of Limited Partnership Interest
                                (Title of class)

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

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









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

                                TABLE OF CONTENTS


                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements

Statements of Assets, Liabilities and Partners' Capital
  as of September 30, 1996 and December 31, 1995

Statements of Operations - For the Three and Nine Months Ended September 30,
  1996 and 1995

Statements of Changes in Net Assets - For the Nine Months
  Ended September 30, 1996 and 1995

Statements of Cash Flows - For the Nine Months Ended
  September 30, 1996 and 1995

Statement of Changes in Partners' Capital - September 30, 1996

Schedule of Portfolio Investments - September 30, 1996

Notes to Financial Statements

Supplemental Schedule of Realized Gains and Losses - Schedule 1

Supplemental Schedule of Unrealized Appreciation and
  Depreciation - Schedule 2

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


                           PART II - OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K









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


<S>                                                                                    <C>                     <C>
                                                                                       September 30, 1996          December 31,
                                                                                            (Unaudited)               1995
                                                                                        ---------------         ---------------
ASSETS:
Investments - Notes 2, 8, 9
  Portfolio Investments at fair value
    Managed Companies (amortized cost $107,441 at September 30,
         1996 and $214,099 at December 31, 1995)                                        $       102,651         $       229,416
    Non-Managed Companies (amortized cost $9,597 at September 30,
         1996 and at December 31, 1995)                                                           5,638                   6,782
    Temporary Investments, at amortized cost (cost $5,030 at
         September 30, 1996 and $7,357 at December 31, 1995)                                      5,038                   7,370
Cash (of  which $6,049 is restricted at December 31, 1995) - Note 8                                   -                   6,054
Prepaid Loan Fees - Notes 2, 4                                                                    1,189                   1,661
Prepaid Expenses and Other Receivables                                                              301                     116
Receivable for Investments Sold                                                                      75                   3,377
                                                                                        ---------------         ---------------
TOTAL ASSETS                                                                            $       114,892         $       254,776
                                                                                        ===============         ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                                 $           286         $            60
    Reimbursable Administrative Expenses Payable                                                    101                     171
    Independent General Partner Expenses Payable                                                     39                      28
    Deferred Interest Income - Note 2                                                                 -                     164
                                                                                        ---------------         ---------------
Total Liabilities                                                                                   426                     423
                                                                                        ---------------         ---------------
Partners' Capital - Note 2
    Managing General Partner                                                                          -                     884
    Limited Partners (487,489 Units)                                                            114,466                 253,469
                                                                                        ---------------         ---------------
Total Partners' Capital                                                                         114,466                 254,353
                                                                                        ---------------         ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                                 $       114,892         $       254,776
                                                                                        ===============         ===============
</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, 
                                                                     1996              1995              1996             1995
                                                                -------------     -------------     -------------    -------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                        $         487     $         537     $       1,143    $       3,503
Discount                                                                   72               521             1,316            1,251
Dividend & Other Income                                                     -               168               167              594
                                                                -------------     -------------     -------------    -------------
    TOTAL INCOME                                                          559             1,226             2,626            5,348
                                                                -------------     -------------     -------------    -------------
EXPENSES:
Investment Advisory Fee - Note 5                                           97               691             1,033            2,197
Fund Administration Fee - Note 6                                           75               410               224            1,259
Loan Fees - Notes 2, 4                                                    176               188               524              555
Independent General Partners' Fees and Expenses - Note 7                   55                49               155              268
Legal and Professional Fees                                               478               166             1,447            1,403
Reimbursable Administrative Expenses - Note 6                             102                 -               312                - 
Insurance Expense                                                           2                 2                 6                7
                                                                -------------     -------------     -------------    -------------
 TOTAL EXPENSES                                                           985             1,506             3,701            5,689
                                                                -------------     -------------     -------------    -------------
NET INVESTMENT LOSS                                                      (426)             (280)           (1,075)            (341)
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
     NOTE 8 AND SCHEDULE 1                                               (773)           84,715            60,802          112,849
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                                     15,006           (59,741)          (83,350)         (19,709)
        Nonpublic Securities                                              879              (385)           62,098          (10,453)
                                                                -------------     -------------     -------------    -------------
             Subtotal                                                  15,885           (60,126)          (21,252)         (30,162)
                                                                -------------     -------------     -------------    -------------
NET INCREASE IN NET ASSETS
   RESULTING FROM OPERATIONS                                    $      14,686     $      24,309     $      38,475    $      82,346
                                                                =============     =============     =============    =============
</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,
                                                                                          1996                       1995
                                                                                    --------------              -------------
FROM OPERATIONS:
Net Investment Loss                                                                 $       (1,075)             $        (341)
Net Realized Gain on Investments                                                            60,802                    112,849
Net Change in Unrealized Depreciation on Investments                                       (21,252)                   (30,162)
                                                                                    --------------              -------------
Net Increase in Net Assets Resulting from Operations                                        38,475                     82,346
Cash Distributions to Partners                                                            (178,362)                  (186,329)
                                                                                    --------------              -------------
Total Decrease                                                                            (139,887)                  (103,983)
NET ASSETS:
Beginning of Period                                                                        254,353                    356,699
                                                                                    --------------              -------------
End of Period                                                                       $      114,466              $     252,716
                                                                                    ==============              =============
</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
                                                                                    --------------------------------------
Increase (Decrease) in Cash and Cash Equivalents                                    September 30,            September 30,    
                                                                                         1996                     1995   
                                                                                    -------------            -------------
CASH FLOWS  FROM  OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                           $       2,167            $       5,826
  Investment Advisory Fee                                                                  (1,033)                  (2,197)
  Fund Administration Fee                                                                    (224)                  (1,259)
  Legal and Professional Fees                                                              (1,123)                  (1,530)
  Loan Fees and Expenses                                                                      (42)                    (100)
  Independent General Partners' Fees and Expenses                                            (144)                    (260)
  (Purchase) Sale of Temporary Investments, Net                                             2,327                    5,281 
  Reimbursable Administrative Expenses                                                       (381)                       -
  Proceeds from Sale of Portfolio Company Investments                                     170,761                  180,272
                                                                                    -------------            -------------
    Net Cash Provided by Operating Activities                                             172,308                  186,033
                                                                                    -------------            -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                         (178,362)                (186,329)
                                                                                    -------------            -------------
  Net Cash Applied to Financing Activities                                               (178,362)                (186,329) 
                                                                                    -------------            -------------
  Net Decrease in Cash                                                                     (6,054)                    (296)
                                                                                    -------------            -------------
  Cash at Beginning of Period                                                               6,054                    3,442
                                                                                    -------------            -------------
   Cash at End of Period                                                            $           -            $       3,146
                                                                                    =============            =============

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

Net Investment Loss                                                                 $      (1,075)           $        (341)
                                                                                    -------------            -------------
Adjustments to Reconcile Net Investment Loss
    to Net Cash Provided by Operating Activities:
  Decrease in Investments                                                                 108,984                   71,552 
  Decrease in Receivable for Investments Sold                                               3,302                    1,152
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivables                                                       (460)                     477
  Decrease in Prepaid Expenses                                                                588                      479 
  Increase (Decrease) in Independent General Partner Fees Payable                              11                       (8)
  Decrease in Reimbursable Administrative Expenses Payable                                    (70)                       -
  Increase (Decrease) in Legal and Professional Fees Payable                                  226                     (127)   
  Net Realized Gain on Investments                                                         60,802                  112,849
                                                                                    -------------            -------------
Total Adjustments                                                                         173,383                  186,374 
                                                                                    -------------            -------------
Net Cash Provided by Operating Activities                                           $     172,308            $     186,033 
                                                                                    =============            =============
</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, 1996
Partners' Capital at January 1, 1996                   $        884         $    253,469        $   254,353
Allocation of Net Investment Loss                               (20)              (1,055)            (1,075)
Allocation of Net Realized Gain on Investments                1,132               59,670             60,802
Allocation of Net Change in Unrealized Depreciation            (212)             (21,040)           (21,252)
Cash Distributions to Partners                               (1,784)            (176,578)          (178,362)
                                                       ------------         ------------        -----------
Partners' Capital at September 30, 1996                $          -         $    114,466        $   114,466
                                                       ============         ============        ===========


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

<PAGE>
<TABLE>
<CAPTION>
                                              ML-LEE ACQUISITION FUND, L.P.
                                            SCHEDULE OF PORTFOLIO INVESTMENTS
                                                     SEPTEMBER 30, 1996
                                                   (DOLLARS IN THOUSANDS)
                                                       (UNAUDITED)
  Principal                                                                                                         Fair        % Of
   Amount/                                                                               Investment Investment     Value       Total
   Shares           Investment                                                                 Date   Cost (f)  (Note 2) Investments
<S>                 <C>                                                                    <C>        <C>        <C>     <C>
                    MEZZANINE INVESTMENTS
                    MANAGED COMPANIES

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)            12/31/87   $10,810    $10,810
$267                Alliance International Group, Def. Int. Note 10% due 03/30/97(c)(h)    03/31/93       267        267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93       276        276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93       286        286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93       293        293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91       502        502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92    11,000     11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87     1,951      1,951
15,228.43 Warrants  Alliance International Group, Common Stock Purchase Warrants(d)        03/28/89         0 (i)      0(i)
62,700 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        04/22/91         0          0
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        12/31/92         0          0
50,000 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)         various         0 (i)      0(i)
                      (52.5% of fully diluted common equity assuming exercise of warrants) 
                      19,200  Shares Common Stock
                      Purchased  12/31/87               $    149
                      Sold  01/30/89-9,600 Shares       $    107
                      Sold  01/02/90-9,600 Shares       $    147
                      Realized Gain                     $    105                                       25,385     25,385      22.40


                    BEEFAMERICA, INC. (a) (e) - Notes 8,9
$14,000             BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g)     09/09/88    14,000      5,800
$10,000             BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g)      09/09/88    10,000      4,200
                      $1,072 15% Sub. Nt.
                      Purchased 09/9/88                 $  1,072
                      Redeemed 02/20/92                 $  1,072
                      Realized Gain                     $      0
                      Preferred Stock
                      Purchased 09/9/88                 $  2,700
                      Redeemed 02/20/92                 $  2,700
                      Realized Gain.                    $      0
                      $41,997 15.5% Sr.Sub Interim Nt
                      Purchased 09/9/88                 $ 20,000
                      $80,951 15% Sub Nt
                      Purchased 09/9/88                 $ 38,928
                      Exchanged 03/29/96 for
                      Cash Proceeds                     $ 26,000
                      10% Sr Pref Stk                   $ 14,000
                      4% Jr Pref Stk                    $ 10,000
                      Realized Loss                     $ (8,928)
                      5661.11 Shares Class A Pref. Stk
                      Purchased 04/10/91                $ 40,050
                      Value at restructuring 3/29/96    $      0
                      Realized Loss                     $(40,050)
                      51,000 Shares Common Stk
                      Purchased various                 $  2,000
                      Value at restructuring 3/29/96    $      0
                      Realized Loss                     $ (2,000)
                      Total Net Realized Loss           $(50,978)                                      24,000     10,000       8.82

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

<PAGE>
<TABLE>
<CAPTION>
                                         ML-LEE ACQUISITION FUND, L.P.
                                      SCHEDULE OF PORTFOLIO INVESTMENTS
                                            SEPTEMBER 30, 1996
                                          (DOLLARS IN THOUSANDS)
                                                (UNAUDITED)

  Principal                                                                                                    Fair          % Of
   Amount/                                                                   Investment     Investment        Value         Total
   Shares         Investment                                                       Date       Cost (f)      (Note 2)  Investments
<S>               <C>                                                         <C>           <C>            <C>        <C>
                  CELEBRITY, INC. - Note 9
 5,770 Shares     Celebrity, Inc. Common Stock(b)(k)                           06/16/92        $    75        $   20
                    (0.2% of fully diluted common equity)
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/29/93                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75 
                    Sold 09/19/94                         $    75 
                    Realized  Gain                        $     0
                    5,769  Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/19/95                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 9/21/96                          $    75
                    Realized Gain                         $     0 
                    Total Realized Gain                   $     0                                   75            20          0.02

                   CHADWICK-MILLER, INC. (a)(e) - Notes 8,9,10
  15,406 Warrants  CMI Holding Corp., Preferred Stock Purchase Warrants (d)    12/16/88         12,916         1,000
  39,487 Warrants  CMI Holding Corp., Common Stock Purchase Warrants (d)        Various          3,736             -
                    (63.6% of fully diluted common equity)
                    35,161 Shares Common Stock
                    Purchased 06/30/93                    $   352
                    Sold 09/03/93                         $   352
                    Realized Gain                         $     0
                    $5,000,000 Senior Note
                    Purchased 12/16/88                    $ 5,000
                    Sold 11/23/94                         $ 5,000
                    Realized Gain                         $     0
                    189,996 Shares Preferred Stock
                    192,933 Shares Common Stock
                    100,000 Common Stock Warrants
                    Purchased Various                     $16,652
                    Exchanged July 15, 1996
                    15,406 Preferred Stock Warrants
                    39,487 Common Stock Warrants          $16,652
                    Realized Gain                         $     0                    
                    Total Realized Gain                   $     0                               16,652         1,000           .88

                  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


                  HEALTH O METER PRODUCTS, INC. (a)  Notes 9,14
952,500 Shares    Health o meter Products, Inc., Common Stock (d)(k)           04/28/88          1,270         5,358
610,553 Shares    Health o meter Products, Inc., Common Stock (d)(k)           08/17/94          3,282         3,434
                    (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         8,792          7.76


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

<PAGE>
<TABLE>
<CAPTION>
                                       ML-LEE ACQUISITION FUND, L.P.
                                    SCHEDULE OF PORTFOLIO INVESTMENTS
                                          SEPTEMBER 30, 1996
                                        (DOLLARS IN THOUSANDS)
                                              (UNAUDITED)

  Principal                                                                                                     Fair           % Of
   Amount/                                                                    Investment      Investment       Value          Total
   Shares           Investment                                                      Date        Cost (f)    (Note 2)    Investments
<S>                 <C>                                                         <C>              <C>        <C>               <C>
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(k)                  12/28/88        $  3,255     $12,304
                      (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      12,304          10.86

                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Note 9,16
2,675,552 Shares    Stanley Furniture Co., Inc., Common Stock(d)(h)(k)           Various          33,522      45,150
                      (50.2% of fully diluted common equity)
                      $2,000 Loan participation
                      Purchased 03/12/92                    $ 2,000
                      Repaid 04/05/93                       $ 2,000
                      Realized Gain                         $     0                               33,522      45,150          39.84

                    TOTAL INVESTMENT IN MANAGED COMPANIES                                       $107,441    $102,651          90.58
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                       ML-LEE ACQUISITION FUND, L.P.
                                    SCHEDULE OF PORTFOLIO INVESTMENTS
                                           SEPTEMBER 30, 1996
                                         (DOLLARS IN THOUSANDS)
                                              (UNAUDITED)

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

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

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(d)                         11/24/87             250           -
185,048 Shares      Homeland Holding Corp., Common Stock(d)                     08/10/90             440           -
                      $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          0.02

                    WALTER INDUSTRIES, INC. - Note 9
435,569 Shares      Walter Industries, Inc., Common Stock(b)(k)                 01/07/88           8,877       5,608
326 Shares          Walter Industries, Inc., Common Stock (b)(k)                09/13/95               -           4
                      (formerly  Hillsborough  Holdings  Corporation)
                      $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                        $     -
                      $2,527 12.19% Senior Note
                      Received 12/1/95                      $ 2,527
                      Sold     12/15/95                     $ 2,527
                      Realized Gain                         $     -
                                                                                                   8,877       5,612          4.95

                    TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                   $  9,597    $  5,638          4.97

                    SUMMARY OF MEZZANINE INVESTMENTS
                    Subordinated Notes                                                            11,932      11,932         10.53
                    Preferred Stock                                                               48,418      22,502         19.86
                    Common Stock and Warrants                                                     56,688      73,855         65.16
                    TOTAL MEZZANINE INVESTMENTS                                                 $117,038    $108,289         95.55

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

<PAGE>
<TABLE>
<CAPTION>
                                        ML-LEE ACQUISITION FUND, L.P.
                                     SCHEDULE OF PORTFOLIO INVESTMENTS
                                           SEPTEMBER 30, 1996
                                         (DOLLARS IN THOUSANDS)
                                              (UNAUDITED)

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

                    TIME DEPOSIT
$    999            State Street Repurchase Agreement, 2.75% due 10/01/96      09/30/96        $    999      $    999        
                                                                                               --------      --------      
                    TOTAL INVESTMENT IN TIME DEPOSITS                                               999           999          .88 
  
                    COMMERCIAL PAPER
$    590            General Electric Credit Corp., 5.42%, due  10/09/96        09/24/96             589           589          .52
$  3,450            Ford Motor Credit Corp., 5.32% due 10/01/96                09/16/96           3,442         3,450         3.05
                                                                                               --------      --------       ------ 
                    TOTAL INVESTMENT IN COMMERCIAL PAPER                                          4,031         4,039         3.57
                                                                                               --------      --------       ------  
                    TOTAL TEMPORARY INVESTMENTS                                                $  5,030      $  5,038         4.45
                                                                                               --------      --------       ------
                    TOTAL INVESTMENT PORTFOLIO                                                 $122,068      $113,327       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 September 30, 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 $8 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, 1996
                              (UNAUDITED)

1.  Organization and Purpose

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

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

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

     The Fund will terminate upon the liquidation of all Fund investments but no
later  than  June 15,  1998,  subject  to the  right of the  Individual  General
Partners  to extend the term for up to one  additional  two-year  period and one
additional one-year period if it is in the best interest of the Fund.  Following
such time  periods the Fund will have five  additional  years to  liquidate  its
remaining investments.

2.  Significant Accounting Policies

Basis of Accounting

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

Valuation of Investments

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

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

 <PAGE>

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment Adviser as of September
30, 1996.  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, 1996, the current estimated fair value of these
investments may have changed significantly since that point in time.

Interest Receivable on Investments

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal amounts of such securities.  As of September 30, 1996 and December 31,
1995, the Fund had in its portfolio of investments $1,122,216 of payment-in-kind
debt securities. As of September 30, 1996 and December 31, 1995, the Fund had in
its portfolio of investments $6,485,801 of payment-in-kind equity securities.

Investment Transactions

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

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

Deferred Interest Income

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

Loan Facility and Advisory Fees

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

Partners' Capital

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


<PAGE>

Interim Financial Statements

     The financial  information  included in this interim report as of September
30, 1996 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, 1996 are not  necessarily  indicative of the results of the
operations  expected for the year and reflect  adjustments,  all of a normal and
recurring  nature,  necessary  for the fair  presentation  of the results of the
interim  period.  In the opinion of Mezzanine  Investments,  L.P.,  the Managing
General  Partner of the Fund,  all necessary  adjustments  have been made to the
aforementioned  financial information for a fair presentation in accordance with
generally accepted accounting principles.

3. Allocation of Profits and Losses

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

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

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

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

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

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

4.  Leverage

     The Fund entered into a 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  Facility  enabling it to make  prepayments  of the term
loan at any time and without any  corresponding  reduction to the revolving line
of credit.  The Credit  Facility has been  further  amended to reduce the Credit
Facilities to $7.5 million, all of which is available at September 30, 1996. The
Credit Facilities will mature on July 31, 1998. Loan advances bear interest at a
floating  rate equal to the greater of prime plus 1% or the  federal  funds rate
plus 1.5%. The Fund paid down the term loan during the first quarter of 1994. In
connection with the Credit Facilities,  the Fund has pledged its debt and equity
portfolio securities to its lenders.

<PAGE>

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

     Nonrecurring  loan advisory and loan  facility  fees of $4,441,580  paid to
First  Chicago in 1991 in connection  with the creation of the credit  facility,
which are being  amortized  over the life of the  credit  facility.  The  amount
expensed for the nine months ended September 30, 1996 was $478,566.

     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,
1996 was $18,725.

     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, 1996 was
$27,056.  

     For the nine months ended  September  30, 1996 and 1995,  the Fund incurred
$524,347 and $555,145, 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, 1996 and 1995,  the Fund paid  $1,033,443  and  $2,197,065,
respectively,  in Investment  Advisory Fees to Thomas H. Lee Advisors I. For the
three  months  ended  September  30,  1996 and 1995,  the Fund paid  $97,146 and
$690,976, 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.  For the period from October 19, 1991
to October 19, 1995,  the Fund  Administrator  received  from the Fund an annual
amount equal to the greater of $400,000 or 0.45% of the Net  Proceeds  Available
for  Investments  subject  to  certain  reductions  as  specified  in the Fund's
Partnership Agreement.  On October 19, 1995, the Fund Administration Fee changed
to an annual fee of $300,000 plus  out-of-pocket  expenses  incurred by the Fund
Administrator as described below. The Fund Administration Fee is paid quarterly,
in advance. For the nine months ended September 30, 1996 and 1995, the Fund paid
$224,335 and  $1,259,424,  respectively,  in Fund  Administration  Fees. For the
three  months  ended  September  30,  1996 and 1995,  the Fund paid  $75,000 and
$410,498, respectively, in Fund Administration Fees.

     For the period ending October 19, 1995, the Fund's expenses for accounting,
audits,   printing,   tax   preparation   and  other   administrative   services
("out-of-pocket  expenses")  (excluding  the costs of bonding and  extraordinary
legal  expenses)  were  paid by the Fund  Administrator.  For the  period  since
October  19,  1995,  in  accordance  with the  Partnership  Agreement,  the Fund
Administrator  is being  reimbursed  by the  Fund for 100% of the  out-of-pocket
expenses  incurred.  For the  nine  months  ended  September  30,  1996 the Fund
incurred $311,430 in reimbursable out-of-pocket expenses.

<PAGE>

7.  Independent General Partners' Fees

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

     For the nine months ended  September  30, 1996 and 1995,  the Fund incurred
$154,523 and $267,567,  respectively,  in Independent General Partners' Fees and
Expenses.  For the three  months  ended  September  30, 1996 and 1995,  the Fund
incurred $54,502 and $48,913,  respectively,  in Independent  General Partners'
Fees  and  Expenses.

8.  Investment  Transactions

     On  February 7, 1996,  the  Securities  and  Exchange  Commission  declared
effective a Registration  Statement  filed by GNC in connection with the sale of
17,994,176  shares of GNC Common Stock,  including  1,635,834  shares which were
sold  pursuant  to the  underwriters'  over-allotment  option.  Of such  shares,
16,358,342  were offered by certain selling  shareholders of GNC,  including the
Fund and the 1,635,834 subject to the underwriters'  over-allotment  option were
sold by GNC.  The Fund sold its  entire  remaining  investment  in GNC for total
proceeds  of $101.7  million or  $20.7475  per share and  realized a gain of $88
million. 
     
     On  February  22,  1996,  the Fund  sold its  remaining  investment  in SFX
Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants,
to Sillerman  Communications  Management  Corporation for net proceeds of $14.50
per share which resulted in a gain of $125,672 to the Fund.

     On March 29,  1996,  BeefAmerica,  Inc.  ("BeefAmerica"),  entered  into an
agreement  whereby  BeefAmerica  sold all of the  capital  stock of  BeefAmerica
Operating Company,  Inc.("Opco"),  to BAOC Acquisition, Inc. ("BAOC"), a company
owned by the  President of Opco and certain other  investors.  Opco was the sole
operating  asset of  BeefAmerica.  As a result of such sale,  the Fund, as chief
creditor of BeefAmerica,  received cash proceeds of $26 million,  $10 million in
Junior  Preferred  Stock of BAOC, and $14 million in Senior  Preferred  Stock of
BAOC,  all of  which  was  received  on  April  1,  1996  in  exchange  for  all
subordinated notes held by the Fund.  Although a realized loss of $50.98 million
was recorded,  the Fund reversed the  unrealized  depreciation  totaling  $90.98
million on the investment  that was recorded prior to this  transaction.  Please
refer to the Supplemental Schedule of Unrealized Appreciation and Depreciation -
Schedule 2.
     
     In  connection  with the sale of Omega  Wire in the first  quarter of 1995,
$1,144,086  of proceeds to the Fund from the sale were held in escrow.  On April
5, 1996 the Fund  received the Omega  Escrow  Proceeds,  plus accrued  interest,
totalling $1,205,748

     On March 20, 1996,  Petco Animal  Supplies  announced a 3-for-2 stock split
effective April 15, 1996. On April 4, 1996 Petco filed a registration  statement
with the Securities and Exchange  Commission for an offering of 3,333,333 shares
of Common Stock, which was adjusted to 5 million shares as a result of the stock
split. Of the 5 million  post-split shares offered,  2.6 million were offered by
Petco and the  remaining  shares were offered by certain  current  stockholders,
including  the Fund.  The  offering  was effected on April 30, 1996 and the Fund
sold its entire  investment  in Petco which  consisted  of  1,472,622  shares of
Common Stock and received net proceeds  from the sale of  $40,290,965  or $27.36
per share which were  distributed to Limited Partners on June 11, 1996. The Fund
realized a gain of $24,445,187 on the sale.
<PAGE>
     In connection with the financial restructuring of Chadwick-Miller,  Inc. on
November 23, 1994, and its holding  company,  CMI Holding  Corp.,  the Fund's $5
million  14.75% Senior Note was redeemed.  The net proceeds were $5 million,  of
which $3.1 million of such proceeds were  classified as restricted cash and held
in escrow. However, an additional financial restructuring of Chadwick Miller was
completed in July 1996 and the Fund  received  all proceeds  held in escrow plus
accrued  interest and exchanged all Common and Preferred  Stock and Common Stock
Purchase  Warrants  held for 39,487  Common Stock  Purchase  Warrants and 15,406
Preferred  Stock  Purchase  Warrants.  No  gain or loss  was  recognized  on the
transaction.

     On  November  1, 1995,  pursuant  to an  Agreement  and Plan of Merger (the
"Agreement"),   Duro-Test  Corporation  effected  a  merger  pursuant  to  which
Duro-Test  was  acquired by a third party for  approximately  $33  million.  Net
proceeds to the Fund were $4.6 million of which $1.7 million was  classified  as
restricted  cash  and  held in  escrow.  At June 30,  1996,  the  Fund  reserved
approximately   $880,000  of  the  escrow   proceeds  to  allow  for   potential
indemnification costs covered in the agreement.  On September 30, 1996, the Fund
received escrow proceeds totalling $985,679 resulting in an additional  realized
loss of $773,295 on this investment.

     At September  30, 1996,  the Fund had a total of  $117,037,106  invested in
Mezzanine   Investments   representing   $107,440,663   Managed  and  $9,596,443
Non-Managed portfolio investments. For the nine months ended September 30, 1996,
the proceeds  from the sales of  investments  resulted in net realized  gains of
$60,801,746.  For  additional  information,  please  refer  to the  Supplemental
Schedule of Realized Gains and Losses - Schedule 1.

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

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

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

9.  Unrealized Appreciation and Depreciation of Investments

     For the nine  months  ended  September  30,  1996,  the Fund  recorded  net
unrealized  depreciation of $21,251,814.  As of such date, the Fund's cumulative
net unrealized  depreciation on investments totalled  $8,748,380.  For the three
months ended  September 30, 1996, the Fund recorded net unrealized  appreciation
of $15,886,767.  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  investments
have been on non-accrual status since the date indicated:

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

11. Commitments and Guarantees

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

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

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors in interest, against the Fund's Managing General Partner,  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
Managing  General Partner 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 Merrill Lynch,  Pierce,
Fenner & Smith  Incorporated,  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 Managing  General
Partner  because it was not a party to the  Partnership  Agreement.  On July 25,
1996,  judgement  was  entered  against  remaining  Defendants  in the amount of
$10,399,505.  The remaining  Defendants have filed a Notice of Appeal on October
4, 1996,  and expect to have a hearing on their appeal in 1997.  The Fund may be
obligated to  indemnity  and advance  litigation  expenses to one or more of the
defendants under the terms and conditions of various indemnity provisions of the
Fund's Partnership Agreement and separate indemnification  agreements.  The Fund
has advanced  litigation  expenses to the indemnified parties based upon amounts
which are deemed reimbursable in accordance with the indemnification  provisions
and has included these amounts in Legal and Professional Fees.

     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. Defendants have moved to dismiss the
second  amended  complaint,  which  motion is pending.  The  plaintiff  seeks an
accounting,  rescission,  rescissory  or actual  damages and  punitive  damages.
Plaintiffs  have moved to certiify 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 and have moved to  dismiss  them.  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.  The outcome of this case is not determinable at
this time.  The Fund has  incurred  litigation  expenses  which are  recorded in
professional fees.
<PAGE>

     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  in this action  believe that the
claims  against  them  are  without  merit.  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.

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

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

     For the three and nine month period ended September 30, 1996, the Fund paid
$233,019 and $381,256,  respectively, to the Fund Administrator for reimbursable
out-of-pocket expenses. (Please refer to Note 6 for further information).

     For the nine  months  ending  September  30,  1996 and 1995,  the  Managing
General  Partner  received cash  distributions  in the amount of $1,783,628  and
$1,863,310,  respectively,  representing  its 1% interest  in the Fund.  For the
three months ended  September 30, 1996 and 1995,  the Managing  General  Partner
received cash distributions totalling $40,267 and $1,340,575, respectively.
<PAGE>

14. Reserves

     In February  1993,  the Fund  established a $15,055,806  reserve to provide
funds for follow-on  investments and to pay expenses.  As of September 30, 1996,
the reserve  balance was reduced to $3,139,607  due to follow-on  investments in
CMI Holding Corp., Diet Center Inc., Duro-Test  Corporation,  Health o meter and
Petco of $2,250,000,  $441,861,  $2,617,805,  $3,281,722 and $529, respectively,
along with a distribution  to partners in the second quarter of 1993 of $424,264
and a payment of $2,900,018 to First Chicago to pay down the Fund's loan.

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

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

    Pursuant to Statement of Financial Accounting Standards No. 109 - Accounting
for Income  Taxes,  the Fund is required to disclose any  difference  in the tax
basis of the Fund's assets and  liabilities  versus the amounts  reported in the
financial statements.  Generally, the tax basis of the Fund's assets approximate
the amortized cost amounts reported in the financial statements.  This amount is
computed  annually  and as of  December  31,  1995,  the tax basis of the Fund's
assets  are less  than the  amounts  reported  in the  financial  statements  by
$4,799,251. This difference is primarily attributable to unrealized depreciation
on investments which has not been recognized for tax purposes.

16. Subsequent Events

     On November 5, 1996, the  Individual  General  Partners  approved the Third
Quarter 1996 cash distribution totalling $709,056,  which consists of $1,060,679
as return of capital, $69,390 of net income from temporary investments offset by
a net investment  loss of $421,013 from Mezzanine  Investments  during the third
quarter.  The total amount to be distributed to Limited  Partners is $701,984 or
$1.44 per Unit. The Managing  General Partner will receive $7,072,  representing
its 1% interest in the Fund.  This cash  distribution  is expected to be paid on
November 14, 1996.

     On October 15, 1996 Stanley  Furniture  Company,  Inc. filed a registration
statement  with the Securities  and Exchange  Commission  relating to a proposed
secondary offering of 2.4 million shares of its common stock (plus an additional
358,902 shares subject to the underwriters' over-allotment option,) whereby, the
Fund and certain  affiliates of the Thomas H. Lee Company would have sold all of
their shares.  The Registration  statement was declared effective on November 7,
1996.  On  November  13,  1996,  the  offering  was amended to an  aggregate  of
1,150,000  shares,  which includes  150,000 shares subject to the  underwriters'
over-allotment  option.  If the underwriters do not exercise the  over-allotment
option,  Stanley  Furniture  has agreed to purchase such shares from the selling
shareholders. Pursuant to this offering, the Fund will sell a total of 1,115,256
shares at a gross offering price of $16 per share..
 
<PAGE>
<TABLE>
<CAPTION>
                               SCHEDULE 1
                       ML-LEE ACQUISITION FUND, L.P.
           SUPPLEMENTAL SCHEDULE OF REALIZED GAINS AND LOSSES
              FOR THE NINE MONTHS ENDED SEPTEMBER  30, 1996
                          (DOLLARS IN THOUSANDS)
                                (UNAUDITED)

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

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

FOR THE THREE MONTHS ENDED MARCH 31, 1996

General Nutrition Companies, Inc.
  Common Stock                                                4,903,766       $   13,759        $    101,741         $    87,982

BeefAmerica, Inc.
  Subordinated Notes (a)                                     $  122,948           58,928              26,000  (b)        (32,928)
  Preferred Stock                                              5,661.11           40,050              24,000             (16,050)
  Common Stock                                                   51,000            2,000                   -              (2,000)

SFX Broadcasting, Inc.
  Common Stock Options                                            8,667                -                 126                 126

---------------------------------------------------                           ----------        ------------         -----------
TOTAL FOR THE THREE MONTHS ENDED MARCH 31, 1996                               $  114,737        $    151,867         $    37,130
---------------------------------------------------                           ----------        ------------         -----------

FOR THE THREE MONTHS ENDED JUNE 30, 1996

Petco Animal Supplies, Inc.
  Common Stock                                                1,472,622       $   15,846        $     40,291         $    24,445

---------------------------------------------------                           ----------        ------------         -----------
TOTAL FOR THE THREE MONTHS ENDED JUNE 30, 1996                                $   15,846        $     40,291         $    24,445
---------------------------------------------------                           ----------        ------------         -----------

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996

Durotest
  Proceeds Held in Escrow                                                          1,759                 986                (773)

---------------------------------------------------                           ----------        ------------         -----------
TOTAL FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996                                1,759                 986                (773) 
---------------------------------------------------                           ----------        ------------         -----------
TOTAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996                            $  132,342        $    193,144         $    60,802
===================================================                           ==========        ============         ===========


(a)  Includes all BeefAmerica Payment-in-kind Notes.
(b)  Net  proceeds include cash proceeds of $26 million and $24 million
     face amount of Senior and Junior Preferred Stock in BAOC Acquisition, Inc.
     (See Note 8 to the 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, 1996
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<S>                                <C>       <C>       <C>                <C>               <C>              <C>
                                                            Unrealized           Unrealized
                                                          Appreciation          Appreciation
                                                         (Depreciation)        (Depreciation)  Total Unrealized     Total Unrealized
                                                               for the               for the       Appreciation/       Appreciation/
                                    Investment  Fair    3 Months Ended        9 Months Ended   (Depreciation) at   (Depreciation) at
SECURITY                              Cost     Value   September 30, 1996 September 30, 1996   December 31, 1995  September 30, 1996
----------------------------------  --------- -------- ------------------ ------------------   -----------------  ------------------

PUBLICLY TRADED SECURITIES:
Celebrity
  Common Stock*                      $    75   $    20         $      43        $         29         $      (84)         $      (55)
Health o meter
  Common Stock*                        4,552     8,792                 -               3,126              1,114               4,240
Playtex
  Common Stock*                        3,255    12,304              (879)              1,757              7,292               9,049
Stanley
  Common Stock*                       33,522    45,150            16,388              23,746            (12,118)             11,628
Walter
  Common Stock                         8,877     5,611              (546)               (110)            (3,156)             (3,266)
                                                               ---------        ------------         ----------          ----------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                            $  15,006        $     28,548         $   (6,952)         $   21,596
                                                               ---------        ------------         ----------          ----------
NONPUBLIC SECURITIES:

BeefAmerica Inc.
  Preferred Stock                    $24,000  $ 10,000         $       -        $    (14,000)        $        -          $  (14,000)
  Senior Subordinated Note                 -         -                 -              10,000            (10,000)                  -
  Subordinated Notes                       -         -                 -              38,928            (38,928)                  -
  Preferred Stock                          -         -                 -              40,050            (40,050)                  -
  Common Stock                             -         -                 -               2,000             (2,000)                  -

Chadwick-Miller, Inc.
  Common Stock*                        3,736         -                 -              (1,929)            (1,807)             (3,736)
  Preferred Stock                     12,916     1,000                 -             (11,916)                 -             (11,916)

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

SWO Holdings Corporation
  Common Stock*                          250         -                 -                (595)               345                (250)

Homeland Holding 
  Common Stock*                          440         -                 -                (440)                 -                (440)
                                                               ---------        ------------         ----------         -----------
 TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM NONPUBLIC SECURITIES                     $       -        $     62,098         $  (92,444)        $   (30,346)
                                                               ---------        ------------         ----------         -----------
REVERSAL OF UNREALIZED APPRECIATION/
  (DEPRECIATION) FOR INVESTMENTS SOLD:
General Nutrition Companies, Inc.
  Common Stock                             -         -                 -             (99,028)            99,028                   -
Petco
  Commom Stock                             -         -                 -             (12,870)            12,870                   - 
Duro-Test Corporation
  Escrow Proceeds                          -         -               879                   -                  -                   -
                                                               ---------        ------------         ----------         ----------- 
TOTAL REVERSAL OF UNREALIZED 
  APPRECIATION/(DEPRECIATION)                                  $     879        $   (111,898)        $  111,898         $         -
    FOR INVESTMENTS SOLD:                                      ---------        ------------         ----------         -----------
TOTAL NET UNREALIZED APPRECIATION
   (DEPRECIATION)                                              $  15,885        $    (21,252)        $   12,502         $    (8,750)
                                                               =========        ============         ==========         ===========
*  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, 1996, the Fund had a total of $117,037,106  invested in
Mezzanine Investments,  which includes any payment-in-kind  securities received.
These  investments  were financed by net offering  proceeds and debt  financing.
This  represents a $106,657,440  decrease versus the total invested in Mezzanine
Investments at December 31, 1995 of $223,694,546. 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,  1996,  the Fund  received no
additional    debt    securities   in   lieu   of   cash    interest    payments
("payment-in-kind"). As of September 30, 1996 and December 31,1995, the Fund had
in its portfolio $1,122,216 of payment-in-kind debt securities and $6,485,801 of
payment-in-kind equity securities.

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

     On October 29,  1993,  the Fund  entered  into an  amendment  to its credit
agreement enabling the Fund to make prepayments of the term loan at any time and
without any  corresponding  reduction to the revolving credit line. In addition,
due to sales of securities, the Fund made a series of mandatory loan paydowns in
the first quarter of 1994, aggregating $3,394,004.  The Fund's maximum available
credit  facility has been reduced to $7.5 million due to loan  paydowns from the
sales of Mezzanine Investments and further amendments to the credit agreement.

     The  Fund is now in its  tenth  year of  operation.  Because  a  number  of
investments  have  already  been repaid or sold,  cash  dividends  and  interest
expected  to be  received  by the Fund in the near  future  might  not cover the
Fund's  expenses.  Distribution  from  operations  in the future,  if any,  will
therefore be minimal.  Future cash  distributions  to Limited  Partners  will be
mostly  derived  from  capital  proceeds  and  gains  resulting  from  sales  of
securities.  The amount and timing of asset sales are dependent on future market
conditions  and  therefore  are   inherently   unpredictable.   Generally,   net
distributable proceeds generated from the sale of the Fund's investments will be
distributed  to partners  only after  application  of the  original  cost of the
investments,  and in some  cases  an  additional  amount,  to repay  the  Funds'
outstanding  loan if any,  or to  replenish  the  Fund's  reserve.  To fund  the
anticipated  cash flow  shortfall  in the near future and to  maintain  adequate
reserves for possible follow-on  investments,  the Fund had reserved $15,055,806
of the  proceeds  received  from the Playtex  notes sale in  February,  1993.  A
portion of the  reserve  was used to make  follow-on  investments  of  $441,861,
$2,617,805,   $2,250,000,   $3,281,722  and  $529  in  Diet  Center,  Duro-Test,
Chadwick-Miller,   Health  o  meter  and  Petco,  respectively,   along  with  a
distribution to partners in the second quarter of 1993 of $424,264. In addition,
$2,900,018  was  utilized  from the  reserve  to  paydown a portion of the First
Chicago loan on January 6, 1994. The Fund's reserve  balance as of September 30,
1996 was $3,139,607.  The Fund has invested its remaining  $3,139,607 reserve in
Temporary  Investments.  As of August 8, 1996, the Independent  General Partners
have approved retention of the reserve at its current level.
<PAGE>

Investment in High-Yield Securities

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

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

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

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

Results of Operations

Investment Income and Expenses

     For the nine months ended  September 30, 1996 and 1995,  the Fund had a net
investment  loss of $1,075,273 as compared to a net investment  loss of $340,338
for the same period in 1995. The total  investment  income earned on investments
for the nine months ended September 30, 1996 was $2,626,135 of which  $1,309,904
was earned from Mezzanine  Investments  and $1,316,231 was earned from Temporary
Investments.  For the same period in 1995,  total  investment  income  earned on
investments  was  $5,348,099  of which  $4,096,646  was  earned  from  Mezzanine
Investments and $1,251,453 was earned from Temporary Investments. 

<PAGE>
 
     The increase in the 1996 net investment  loss versus the  comparative  1995
loss is  primarily  the result of the decrease in income  producing  investments
held by the Fund, partially offset by the decrease in expenses.

     For the three months ended  September 30, 1996 and 1995, the Fund had a net
investment  loss of $426,082,  as compared to a net investment  loss of $279,263
for the same period in 1995. The total  investment  income earned on investments
for the three months ended September 30, 1996 was $558,942 of which $486,538 was
earned  from  Mezzanine  Investments  and  $72,404  was  earned  from  Temporary
Investments.  For the same period in 1995,  total  investment  income  earned on
investments   was  $1,225,766  of  which  $704,947  was  earned  from  Mezzanine
Investments and $520,819 was earned from Temporary Investments.

     Major  expenses  for the period  ending  September  30, 1996  consisted  of
Investment  Advisory Fees, Legal and Professional Fees, Fund Administration Fees
and Reimbursable Expenses.

     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,  1996  and  1995  were  $1,446,985  and
$1,402,131,  respectively.  For the three  months ended  September  30, 1996 and
1995, Legal and Professional Fees were $478,484 and $165,587, respectively. 

     The Investment Adviser and Fund Administrator receive their compensation on
a quarterly basis. Total Investment Advisory Fees paid to the Investment Adviser
for the nine months  ended  September  30,  1996 was  $1,033,443  compared  with
$2,197,065  for the nine months ended  September 30, 1995. 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  1996  as  compared  to 1995
Investment Advisory 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,  1996  and  1995,  Investment  Advisory  Fees  paid to the
Investment Adviser were $97,146 and $690,976, respectively.

     The Fund  Administration  Fees paid to the Fund  Administrator for the nine
months ended  September 30, 1996 and  September  30, 1995 totalled  $224,335 and
$1,259,424, respectively. For the nine months ended September 30, 1996, the Fund
Administration  Fee was  calculated  at an annual rate of 0.45% of net  offering
proceeds reduced by one-half of the realized loss and  distributions of capital.
For the three months ended September 30, 1996 and 1995, the Fund  Administration
Fee was $75,000 and $410,498, respectively.

     Beginning October 19, 1995, the calculation of the Fund  Administration Fee
changed to the sum of $300,000 per year plus all actual  out-of-pocket  expenses
incurred on behalf of the Fund by the Fund Administrator (excluding compensation
for  the  executive  officers  of  the  Fund  Administrator),  but  in no  event
exceeding, in aggregate,  the annual amount of $2.0 million.  Out-of-pocket Fund
expenses  consist of accounting,  audits,  printing,  tax  preparation and other
administrative  services.  For the nine months ended September 30, 1996 the Fund
incurred $311,430 in administrative reimbursable out-of-pocket expenses.
   
     Loan fees  consist of fees  incurred  on the  unused  portion of the Fund's
Credit Facility, loan administration fees, amortization of the loan advisory and
facility  fees and  various  miscellaneous  fees.  Loan fees for the nine months
ended September 30, 1996 and 1995 totalled $524,347 and $555,145,  respectively.
The decrease of $30,798 for the nine months ended  September 30, 1996 versus the
same period in 1995 is primarily due to  reductions of the Credit  Facilities as
described  in Note 4 to the  Financial  Statements.  For the three  months ended
September 30, 1996 and 1995, Loan fees were $176,564 and $187,661, respectively.
<PAGE>
Net Assets

     The Fund's net assets  decreased  by  $139,887,235  during the nine  months
ended  September 30, 1996, due to net realized gains of $60,801,746  offset by a
net investment  loss of $1,075,273,  net unrealized  depreciation of $21,251,814
and cash distributions of $178,361,894.

     The Fund's  valuation  of the Common  Stock of  Celebrity,  Health o meter,
Playtex,  Stanley Furniture and Walter  Industries  reflect their closing market
price at September 30, 1996.

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

Unrealized Appreciation and Depreciation and Non-Accrual of Investments

     For the nine  months  ended  September  30,  1996,  the Fund  recorded  net
unrealized   depreciation   of   $21,251,814   as  compared  to  net  unrealized
depreciation  of  $30,162,528  recorded  for the  same  period  in  1995.  As of
September  30,  1996,  the Fund's  cumulative  net  unrealized  depreciation  on
investments totalled $8,748,380. The unrealized depreciation recorded during the
nine months ended  September 30, 1996 is primarily the result of the reversal of
unrealized  appreciation  from the sales of GNC and Petco  partly  offset by the
reversal of unrealized  depreciation from the BeefAmerica transaction (described
in Note 8 to the Financial Statements). For the three months ended September 30,
1996 and 1995, the Fund recorded net unrealized  appreciation  of $15,886,767 as
compared to net unrealized  depreciation  of $60,126,558  for the same period in
1995.

    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.





<PAGE>

    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, 1996.  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 gain on  investments  for the nine months ended  September
30, 1996 was $60,801,746  compared to net realized gains of $112,848,806 for the
same period in 1995.  For the three months ended  September  30, 1996,  the Fund
realized a loss of $773,295 as compared to $84,714,947 in realized gains for the
comparable period in 1995.


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

Cash Distributions

     On November 5, 1996, the  Individual  General  Partners  approved the Third
Quarter 1996 cash distribution totalling $709,056,  which consists of $1,060,679
as return of capital, $69,390 of net income from temporary investments offset by
a net investment  loss of $421,013 from Mezzanine  Investments  during the third
quarter.  The total amount to be distributed to Limited  Partners is $701,984 or
$1.44 per Unit. The Managing  General Partner will receive $7,072,  representing
its 1% interest in the Fund.  This cash  distribution  is expected to be paid on
November 14, 1996.

     On  July  29,  1996,  the  Individual  General  Partners  approved  a  cash
distribution  totalling  $4,027,927,  which  consists of $3,145,727 as return of
capital  from the release of escrow  proceeds  during the third  quarter of 1996
related to the sale of Chadwick  Miller,  $377,115 of net income from  temporary
investments  and $505,085 of net investment  income from  Mezzanine  Investments
during the second quarter.  The total amount distributed to Limited Partners was
$3,987,660 or $8.18 per Unit, of which $6.45 per Unit was distributed to Limited
Partners of record as of July 1, 1996 and $1.73 will be  distributed  to Limited
Partners of record as of April 1, 1996. The Managing  General  Partner  received
$40,267,  representing  its 1% interest in the Fund. This cash  distribution was
paid on August 14, 1996.

<PAGE>
Part II - Other Information

   Item 1.  Legal Proceedings

     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  entitled  Klein et al. v. General  Nutrition
Companies, Inc. et. al., Civil Action No. 96-1455. 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  in this action  believe that the
claims  against  them  are  without  merit.  The  outcome  of  this  case is not
determinable at this time.

   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: None


























<PAGE>
                           SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 14th day of
November, 1996.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner


Dated:  November 14, 1996  /s/ Audrey Bommer
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)

Dated:  November 14, 1996  /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 14th day of
November, 1996.


                           ML-LEE ACQUISITION FUND, L.P.

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

                           By:  ML Mezzanine Inc.,
                           its General Partner


Dated:  November 14, 1996
                           Audrey Bommer
                           Vice President and Treasurer
                           (Chief Financial Officer)

Dated:  November 14, 1996
                           Roger F. Castoral, Jr.
                           Vice President and Assistant Treasurer
                           (Principal Accounting Officer)