<PAGE>

                                          1

                       U. S. SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549
                                     FORM 10-KSB



(MARK ONE)

                [ X ]  ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
                     FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

              [    ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)


                            COMMISSION FILE NUMBER 1-7335

                                 LEE PHARMACEUTICALS
                                 -------------------
                    (Name of small business issuer in its charter)

              CALIFORNIA                              95-2680312
              ----------                              ----------
    (State or other jurisdiction of    (I.R.S. Employer Identification No.)
    incorporation or organization)

    1444 SANTA ANITA AVENUE, SOUTH EL MONTE, CALIFORNIA      91733
    ---------------------------------------------------      -----
         (Address of principal executive offices)          (Zip code)


                      ISSUER'S TELEPHONE NUMBER:  (818) 442-3141
                                             ----------------

            SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT

                                                 Name of Each Exchange
    Title of Each Class                           on Which Registered
    -------------------                          ---------------------

    Common stock, par value $.10              American Stock Exchange, Inc.
    per share


SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT:  NONE

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
    ---  ----
    ---  ----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [ X ]

State issuer's revenues for its most recent fiscal year:  $8,118,000 Gross

As of the close of business on November 29, 1996, the aggregate market value of
Lee Pharmaceuticals common stock held by nonaffiliates was $571,121.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.  Common stock, par value $.10;
4,135,162 shares outstanding as of the close of business on November 29, 1996.

DOCUMENTS INCORPORATED BY REFERENCE:  NONE

<PAGE>

                                          2

                                        PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

   Lee Pharmaceuticals is engaged in the research, development, purchase,
manufacture, and marketing of consumer personal care products and professional
dental products, all of which are targeted for the improved well-being of the
human body.  The Company's business is directed to two main areas:  (a) the
development and marketing of a range of consumer products including nail
extenders and strengtheners, depilatories, feminine hygiene products and
over-the-counter drug items and (b) the manufacture and sale of materials and
supplies for use in the professional dental health field.  For all years
presented, revenues, operating results and identifiable assets of the consumer
products group were in excess of 90% of total company operations.

   Lee Pharmaceuticals' executive offices are located at 1444 Santa Anita
Avenue, South El Monte, California 91733, and its telephone number is (818)
442-3141. The Company  was incorporated in April 1971 as a California
corporation.

CONSUMER PRODUCTS SEGMENT

   The Company's consumer products line consists primarily of a variety of
artificial fingernail extenders and related fingernail products.  In addition,
the Company manufactures and sells hair removal and related feminine products,
antacid tablets, nasal care products, infant items and a variety of
over-the-counter drug products.  The Company's product lines have been developed
internally, particularly in the case of fingernail products, and by outside
product line acquisitions.

   In fiscal years 1993 and 1994, the research and development capability of Lee
Pharmaceuticals generated several new product entries, including Lee Press-On
Body Tattoos, Lee Brush-On Nail Bleach, Lee Nail Whitener and the Lee Fancy
Fingers Nail Jewelry Kit.  In addition, the consumer products line of the
Company was further diversified by the acquisition of seven products from other
manufacturers, including six over-the-counter drug products and Sundance, a line
of aloe vera skin care products.

   In fiscal year 1995, the research and development capability of Lee
Pharmaceuticals generated several new product entries, including a new product
line -- Lee Press-On Nails - Professional Salon Style in fourteen high fashion
nail colors plus a nail extender product line known as Lee Elegant Edge Nail Tip
kits.  In addition, there was further diversification of the Company's consumer
products line by the acquisition of products from other manufacturers, including
aloe vera skin care products, a line of men's after shave lotions, infant care
items and additional over-the-counter drug products.

   In fiscal 1996, the research and development capability of Lee
Pharmaceuticals generated new product entries primarily in the nail care
category-specifically eight new colors of Lee Press On Nails in trendy,
fashionable colors.  In addition, two holiday displays-Lee Halloween Fun Press
On Nails and Lee Holiday Elegance-Christmas, were developed.  Lee
Pharmaceuticals expanded it's personal care category of products through two
acquisitions.  On February 15, 1996, Lee acquired the Breath-Gard-TM- breath
tablets from Sundance Healthcare Products, Inc. in Valencia, California.  On
September 20, 1996, Lee Pharmaceuticals  acquired the full line of
Aquafilter-Registered Trademark- Cigarette Holders from the Aquafilter
Corporation, Ft. Lauderdale, FL.  The acquisition of this well recognized
filtration system and its assimilation into the Lee Pharmaceuticals marketing
and distribution program is intended to be an important contribution to the
Company's growth in 1997 and beyond.

   In fiscal 1997 to date, the Company purchased two oral care brands from 
Lactona Corporation for $175,000 including inventory valued at approximately 
$30,000.  Also, in fiscal 1997, the Company purchased twenty-eight (28) 
brands including ointments, nutritional supplements, vitamins, analgesics, 
and various over-the-counter (OTC) brands from Roberts Laboratories, Inc. 
for $1,168,089.  

DOMESTIC CONSUMER PRODUCTS MARKETING

   Consumer products are sold nationally, principally through major retail drug,
food and discount department store chains.  Retail distribution is primarily
accomplished through a network of independent general merchandise sales
representatives.  All lines are advertised in a variety of media, including
television, magazines and newspapers.

CONSUMER PRODUCTS COMPETITION

   The Consumer Products Division of Lee Pharmaceuticals operates in a highly
competitive environment.  In the area of fingernail extension, Lee
Pharmaceuticals competes with five to six companies, some of which are larger
companies with greater financial resources.

   Competition in the depilatory product category is intense, with competitors
even more numerous than in the artificial fingernail field.  The acquisition of
Zip Wax and Bikini Bare brands of hair removal products has given Lee
Pharmaceuticals two brands in this category.

<PAGE>

                                          3

   Lee Pharmaceuticals continues to expand its product line via a combination of
acquisitions and in-house research and development activity.  The consumer
products line was historically dominated by nail extension, nail treatment, and
nail decor products, but it now includes depilatory products, wax hair removal
products, feminine deodorant products, a nail biting deterrent product, nasal
care items, over-the-counter drug products, skin care products, men's fragrance
products, and tobacco accessory products.  The Company's consumer products line
today is no longer restricted solely to the cosmetics business.

REGULATION OF CONSUMER PRODUCTS

   The Company's consumer products are regulated by the Food and Drug
Administration.  The regulations deal principally with consumer safety and with
the effectiveness of the products for the purposes for which they are proposed
to be used.  For many years, the cosmetic regulations were applied only in cases
of adulteration or misbranding.  Under the Fair Packaging and Labeling Act
(1966), the FDA has moved to require new labeling data as to ingredients in
cosmetics.

   The Company believes that all its cosmetic products are manufactured and sold
in compliance with the laws of each state and that no pre-marketing clearance of
its products is required from any state.  The Company maintains a comprehensive
data file on each of its consumer products and believes that it would be able to
apply for any required clearances expeditiously if data were ever required for
its cosmetic products.

   To the extent the Company's products are marketed in foreign countries,
foreign laws are applicable as well as FDA regulations which control export of
cosmetics.  To date, where regulations have been established by foreign
ministries of health which differ from those established in the United States,
the Company has been able to make acceptable substitutions.  As a result,
marketing of the products has not been significantly impeded by foreign
regulations.

   Material Safety Data Sheets (MSDS) are available on all its consumer finished
products.  The MSDS's are supplied to the Company's customers upon request.

   All products for export shipped by air or sea which contain listed hazardous
materials meet United Nations Standards as of January 1991.  The requirements
are based on the U.N.'s performance-oriented packaging (POP) specifications
found in the "Transport of Dangerous Goods" commonly called "The Orange Book".

DENTAL PRODUCTS SEGMENT

   From its inception in 1971 through 1996, the Company at various times
introduced dental products designed to satisfy specific material or supply
requirements of the practicing dental professional and of the orthodontic and
endodontic specialist.

   Its dental product line consists of a variety of restorative materials
(filling materials, core build up materials), splints, orthodontic brackets,
Maryland bridge adhesives, and enamel and dentin bonding materials and related
products.

   In 1991, the Company licensed the right to certain patents and technology
developed by the American Dental Association Health Foundation through research
it sponsored at the Paffenbarger Center for Excellence in Dental Research at the
National Institute of Technology and Standards for fabricating dental inserts
and inlays of special formulas of beta quartz.  The Company has been marketing
nine shapes and sizes, and is now introducing twenty-six more sizes and shapes
which are intended to offer the dentist several new classes of restorations
between amalgam and composite restorations on the one hand, and laboratory
inlays on the other hand.  These new beta quartz designs are intended to permit
the dentist to prepare inlays in one visit, directly at the chairside, without
the need for time consuming impressions, or the need for expensive laboratory
work.

DENTAL MARKETING IN THE UNITED STATES

   The Company markets its dental, orthodontic and endodontic products in the
United States through telephone solicitation, direct mail, advertisement in
trade journals, attendance at conventions, and dental dealers.  The Company
plans and executes its own marketing programs, prepares its own technical
literature, produces its own clinical and marketing films, and regularly
displays its dental products at conventions throughout the country.

DENTAL MARKETING OUTSIDE THE UNITED STATES

   The Company markets dental products outside the United States through foreign
dental distributors who either solicit individual dentists and orthodontists and
sell the Company's products to them directly for use in the treatment of their
patients, or sell through local dealers whom they engage to sell the Company's
products on their behalf.  The Company plans and executes its own international
marketing programs and regularly displays its dental products at international
conventions.

DENTAL COMPETITION

   The dental preventive and restorative materials industry is highly
competitive, and the Company's market share in the total industry is
insignificant.  The Company competes with larger corporations which have greater
financial resources and believes other companies may enter this field.  The
Company's principal competitors are 3M Dental Division, Kerr, Dentsply, and
Unitek.  The principal methods of competition are in the area of product
marketing performance, technical assistance provided to the customer, and price.

<PAGE>

                                          4

REGULATION OF DENTAL PRODUCTS

FOOD AND DRUG ADMINISTRATION

   Dental materials are classified as devices under the Medical Device
Amendments of 1976 to the Federal Food, Drug and Cosmetic Act.

   All the dental device products marketed by the Company were registered as
devices with the FDA at the mandatory time (December 31, 1977).  All new devices
marketed after May 28, 1976, must be processed under the FDA premarketing
notification regulation (510 k) for determination of equivalency to preenactment
devices, or the product must be submitted as a new device which requires
providing considerable extra test data.

   The Safe Medical Devices Act (SMDA) became law on November 28, 1990,
requiring all serious injuries and serious illness contributed to or caused by
medical devices to be reported to distributors, manufacturers and the FDA.  SMDA
also requires all premarket submissions to the FDA to contain adequate
information on safety and effectiveness.

   As required by the FDA, the Company observes certain procedures and policies
in the manufacture, quality control, and after-sale monitoring of performance
for its products.  Although the various criteria to be used by the FDA in
regulating devices have not been finalized, the Company believes that all of its
products and procedures comply with all current and anticipated device
regulations.  Over half the Company's products fall into the FDA's Class II
classification which requires that those products must meet certain performance
standards.  The Company believes that all affected products meet all current
performance standards.

   For those products placed in Class II, final marketing approval from the FDA
is contingent on final acceptance of the Panel's findings and on development of
standards (in large part being done by the American Dental Association).  It is
expected that, based upon current available information, most of the Company's
products will meet the standards currently anticipated; for the products that do
not meet the standards, the Company will have to submit adequate data directly
to the FDA.  Failure to gain approval by the FDA could impede the marketing of
these devices to the point of removal from the market until such time as
clearance is obtained.

OTHER GOVERNMENTAL REGULATIONS

   To the extent the Company's products are marketed in foreign countries, the
Company believes it has complied with the laws of such countries, and with the
FDA regulations which control export of devices. It is anticipated that
compliance with the FDA regulations will ensure compliance also with applicable
foreign laws and regulations, although certain foreign countries could develop
more restrictive laws and regulations that could impede the Company's ability to
market its dental products in foreign countries.

   The Company believes that all its dental products are manufactured and sold
in compliance with the laws of each state and country to whom the Company
exports and that no premarketing clearance of its products is required from any
state.

DEPARTMENT OF TRANSPORTATION

   The Materials Transportation Bureau administers the Hazardous Materials
Regulation, effective July 7, 1975.  It has been ascertained that those dental
products and components marketed by the Company which fall within the provisions
of the regulations are brought into compliance by proper labeling and/or filing
for exemptions.  The Company believes that it is in full compliance with all
bureau regulations applicable to its products and that compliance with these
regulations will not significantly impede the marketing of its products.


                              APPLICABLE TO ALL SEGMENTS

FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

                                               YEAR ENDED SEPTEMBER 30
                                            ----------------------------
                                              1996       1995     1994
                                              ----       ----     ----
                                              (000)      (000)    (000)
    United States export sales
     (except Canada)......................  $  834    $ 1,161   $  781

RESEARCH PROGRAM

   The Company conducts a research program to enhance its present products 
and to develop new products.  The members of the research staff devote a 
majority of their time to development of new products and to production in 
the areas of quality control and technical assistance.  As needed, clinical 
research on products is also done under contract with dental schools and 
clinics.  The Company follows the policy of expensing all research and 
development costs when incurred.  During the years ended September 30, 1996, 
1995, and 1994, the Company spent approximately $178,000, $186,000, and 
$289,000, respectively, on research activities relating to the development of 
new products or the improvement of existing products.  The recent Company 
trend has been in the direction of brand acquisitions rather than extensive 
internal research and development.  Effective July 1996 the Company 
eliminated it's internal research and development department, and decided 
that future testing and research, that cannot be absorbed by its quality 
assurance and production control departments, will be placed outside the 
Company.

<PAGE>

                                          5


RAW MATERIALS

   The raw materials used by the Company in the manufacture of most of its
dental and consumer products are obtained from commercial sources where they are
presently available in sufficient quantities and are refined by the Company as
needed for use in its products.  The Company generally carries sufficient
amounts of raw materials inventory to meet the delivery requirements of
customers.

PATENTS AND TRADEMARKS

   The Company has adopted the policy of making patent disclosures on its
products and of filing applications for patents on the products or on aspects of
their manufacture or use when appropriate.  The Company owns forty U.S. patents,
and owns the rights in a number of other U. S. patent applications pending. A
U.S. patent on sculptured nails has been granted.  There are currently ten
foreign patents held by the Company.  In addition, one design patent has been
granted for a nail buffer and for artificial nails.  There is no assurance that
any of the patent applications will be granted or that, if granted, the Company
will be afforded any competitive advantages thereby.  The Company believes that,
while patent protection is desirable in certain areas, it is not essential;
therefore, certain foreign patents have been abandoned as not necessary to the
interest of the Company.  In addition to the forty patents noted above, which
apply to dental and consumer products, the Company has been assigned three U.S.
patents which relate to general epoxy chemistry.  Two of these may be used by
the Epoxylite Corporation for other than medical and dental products without the
payment of any royalty or other consideration.  United States trademarks for the
major dental products have been granted.  Additional trademarks for other
products have been applied for, both in the U. S. and in foreign countries.
Trademarks for certain minor products, or in countries with minor market
potential, have been abandoned as not necessary to the interest of the Company.

   The Company has the right to use the name "Epoxylite" in connection with the
marketing and sale of its medical and dental products and owns the trademark
"Epoxylite" in medical and dental categories.  The Epoxylite Corporation owns
the trademark "Epoxylite" in all other categories.  The trademark "Epoxylite" is
registered for medical and dental classifications in the U.S., Canada, Mexico,
England, France, and numerous other countries.  The Company owns, or
applications are pending for, trademarks for the names under which each of its
principal products is marketed.

CURRENT REGULATORY REGISTRATION

   The Company is registered with the federal and State of California FDA
agencies as a manufacturer and distributor of Drugs, Medical Devices and
Cosmetics.  The Company is also registered as a waste generator with the
Environmental Protection Agency (EPA).

ENVIRONMENTAL PROTECTION REGULATION AND LITIGATION

   The Company believes that its manufacturing facilities are operated in
compliance with all federal, state and local provisions regulating the discharge
of materials into the environment or otherwise relating to the protection of the
environment.

   The Company owns a manufacturing facility located in South El Monte,
California.  The California Regional Water Quality Control Board (The "RWQCB"),
has alleged that the soil and shallow groundwater at the site are contaminated.
On August 12, 1991, the Board issued a "Cleanup and Abatement Order" directing
the Company to conduct further testing and cleanup the site.  The Company did
not complete the testing, and in June, 1992, the RWQCB requested that the EPA
evaluate the contamination and take appropriate action.  At the EPA's request,
Ecology & Environment, Inc. conducted an investigation of soil and groundwater
on the Company's property.  Ecology & Environment Inc.'s Final Site Assessment
Report, which was submitted to the EPA in June 1994, did not rule out the
possibility that some of the contamination originated on-site, and resulted from
either past or current operations on the property.  While the Company may be
liable for all or part of the costs of remediating the contamination on its
property, the remediation cost is not known at this time.  The EPA has not taken
any further action in this matter, but may do so in the future.

   The Company and nearby property owners are in the process of engaging a
consultant to perform a site investigation with respect to soil and shallow
groundwater contamination.  Based upon proposals received to date, the Company
currently estimates the cost to perform the site investigation to be $175,000.
Accordingly, while recognizing it may be jointly and severally liable for the
entire cost, the accompanying financial statements include the proportionate
amount ($87,500) which the Company believes is its liability for a site
investigation.

   The tenants of nearby properties upgradient have sued the Company alleging
that hazardous materials from the Company's property caused contamination on the
properties leased by the tenants.  The Company does not believe there is any
basis for the allegations and is vigorously defending the lawsuit.  The case
name is del ray industrial enterprises, inc. v. ROBERT MALONE, ET AL., Los
Angeles County Superior Court, Northwest District, commenced August 21, 1991.
In this action, the plaintiff alleges environmental contamination by defendants
of its property, and seeks a court order preventing further contamination and
monetary damages.  The Company does not believe there is any basis for the
allegations and is vigorously defending the lawsuit.

<PAGE>

                                          6

   The Company's South El Monte manufacturing facility is also located over a
large area of possibly contaminated regional groundwater which is part of the
San Gabriel Valley Superfund site.  The Company has been notified that it is a
potentially responsible party ("PRP") for the contamination.  The cost of any
cleanup of the groundwater is not known at this time.  In September 1992 EPA
announced that the levels of contamination in the Whittier Narrows area of the
Superfund site were sufficiently low and that it was not planning a cleanup at
this time, but rather would continue to monitor the groundwater for an
indefinite period.  The Company's property is adjacent to the Whittier Narrows
area.  Except as described above, it is not clear what action the EPA will take
with respect to the Company's property.

   In August 1995 the Company was informed that the EPA entered into an
Administrative Order on Consent with Cardinal Industrial Finishes ("Cardinal")
for a PRP lead remedial investigation and feasibility study (the "Study") which,
the EPA states, will both characterize the extent of groundwater contamination
in South El Monte and analyze alternatives to control the spread of
contamination.  The Company and others have entered into the South El Monte
Operable Unit Site Participation Agreement with Cardinal pursuant to which,
among other things, Cardinal will contract with an environmental firm to conduct
the Study.  The Study is anticipated to take eighteen to twenty-four months.
The Company's share of the cost of the Study is currently $15,000 which has been
accrued for in the accompanying financial statements during fiscal year 1995.

   The City of South El Monte, the city in which the Company has it's
manufacturing facility, is located in the San Gabriel Valley.  The San Gabriel
Valley has been declared a Superfund site.  The 1995 Water Quality Control Plan
issued by the California Regional Water Quality Control Board states that the
primary groundwater basin pollutants in the San Gabriel Valley are volatile
organic compounds from industry, nitrates from subsurface sewage disposal and
past agricultural activities.  In addition, the Plan noted that hundreds of
underground storage tanks leaking gasoline and other toxic chemicals have
existed in the San Gabriel Valley.  The California Department of Toxic Substance
Control have declared large areas of the San Gabriel Valley to be
environmentally hazardous and subject to cleanup work.

   The Company believes the City of South El Monte does not appear to be located
over any of the major plumes.  However, the EPA recently announced it is
studying the possibility that, although the vadose soil and groundwater, while
presenting cleanup problems, there may be a contamination by DNAPs (dense
non-aqueous phase liquids), i.e., "sinkers", usually chlorinated organic
cleaning solvents.  The EPA has proposed to drill six "deep wells" throughout
the City of South El Monte at an estimated cost of $1,400,000.  The EPA is
conferring with SEMPOA (South El Monte Property Owners Association) as to cost
sharing on this project.  SEMPOA has obtained much lower preliminary cost
estimates.  The outcome cost and exact scope of this are unclear at this time.


   The Securities and Exchange Commission has issued a formal order of
investigation concerning certain matters, including the Company's environmental
liabilities.  The Company is cooperating with the investigation.

   The Company has been seeking reimbursement of cleanup costs from its
insurance carriers.  One carrier has paid certain amounts towards cleanup costs
that may be incurred by buying back its policy and legal fees actually incurred.
The Company continues to seek reimbursement from other carriers, although no
such other payments have been received or agreed to, and there can be no
assurances that any such payments will be received.  Some carriers have denied
liability for costs, based on their review and analysis of the insurance
policies, the history of the site, the nature of the claims, and current court
decisions in such cases.

   Currently, the Company does not have any reliable information on the likely
cleanup costs of its property.  Thus, it cannot determine the extent, if any, of
its share of liability for any such cleanup costs.

OTHER REGULATIONS

   During the last several years, several state, local and federal agencies have
finalized or proposed regulations relating to hazardous materials. These include
Los Angeles County Hazardous Materials Business Plan, California and federal
OSHA "right to know" laws, EPA "community right to know" laws and Extremely
Hazardous Substance Regulations, Los Angeles County's program for monitoring and
closing underground tanks, the California Safe Drinking and Toxic Enforcement
Act of 1986 (Prop 65), California Connelly-Sterling Toxic Hot Spots Information
Act  and AQMD's New Source of Carcinogenic Air Contaminants (Rule 1401).  The
Company believes it is in compliance with these regulations that are in effect
and is anticipating it will be in compliance with those of these acts yet to be
finalized.

   The Internal Standards Organization in September 1996 released specifications
(ISO 14000) for companies to use as guidelines in reducing worldwide
contamination and improving on recycling operations.  The Company believes that
demonstrating that the Company meets these specifications is good citizenship
and also in time will be necessary for international trade.  The Company is
proceeding to apply for an ISO 14000 rating.

EMPLOYEES

   The Company's work force of 75 presently includes 22 permanent employees,
both salaried and hourly, and 53 personnel leased through employment agencies.

OTHER

   The Company is not dependent upon any one supplier for any important raw
material item.  Most raw material items are commodities and readily available in
the market.  In most instances, the Company utilizes two or more suppliers to
furnish raw materials as needed.  Sources are believed to be sufficient to
satisfy current and anticipated needs.

<PAGE>

                                          7


   Demand for the Company's principal product line is not seasonal.  The
depilatory line of products is, however, generally seasonal, with demand
significantly higher during the spring and summer months.

   Although the Company does not believe that it is dependent upon any one
customer or distributor, a customer accounted for 11% and 7% of the Company's
net revenues during fiscal 1996 and 1995, respectively.  No other customer
accounted for 10% or more of the Company's net revenues for those fiscal years.

   Backlog is not a significant factor in the Company's business.  Most orders
are filled immediately and in any event, are cancelable under certain
conditions.  There are no material contracts with distributors.

   Consumer Products Division returns must include proof of purchase, sales
receipt and a written explanation of the reason for the return.  The Company
generally provides credits for replacement of product, however, on occasion it
may provide a cash refund.

   In addition, discontinued or overstocked items may be returned once the
customer receives a computer printed "return authorization" and "shipping
labels" for full case stock of factory fresh product to be sent freight prepaid
to the Company's warehouse.  The customer will not receive credit for additional
merchandise that may have been added to the return.  Also, the Company issues a
damaged merchandise allowance of 1/2 of 1% visibly deducted on each and every
invoice from the total net value of that invoice in lieu of accepting returns of
damaged merchandise.  Finally, only 20% of the original merchandise order of
custom packed assortments is subject to return.

   The Company's sales return policy for the Dental Division, is as follows:
"products returned to Lee Pharmaceuticals for credit must be sent postage paid
and within 90 days of purchase".  Defective merchandise can be replaced free of
charge at any time prior to the date of expiration.  Excessively used or
improperly stored merchandise is not eligible for replacement.

<PAGE>

                                          8

ITEM 2.  DESCRIPTION OF PROPERTIES.

   The Company occupies, through ownership or lease, seven buildings on
contiguous lots in South El Monte, California. The Company owns the following:

                        APPROXIMATE
                          SQUARE
ADDRESS                   FOOTAGE           USAGE
-------                   -------           -----

1428 Santa Anita Avenue   12,000            Chemical processing and filling

   The Company leases the following:

<TABLE>
<CAPTION>
                               APPROXIMATE  AGGREGATE     LEASE
                                 SQUARE     ANNUAL    EXPIRATION
ADDRESS                         FOOTAGE     RENTAL        DATE            USAGE
-------                        -----------  ---------  ----------         -----
<S>                          <C>          <C>        <C>             <C>
1434 Santa Anita Avenue          11,000     $52,812   11/30/2000     Inventory control, purchasing, personnel, data processing,
                                                                     accounting offices and dental production/shipping

1460 Santa Anita Avenue (1)      15,000      64,728   11/30/2000     Executive January 15, 1996, the building was subleased.

1470 Santa Anita Avenue (2)       8,000      43,056   11/30/2000     Effective July 16, 1996, the building was subleased.
1500 Santa Anita Avenue          18,000      85,884   11/30/2000     Warehouse, consumer packaging operations, injection molding
                                                                     and corrugated printing
1516 Santa Anita Avenue          18,000      87,960   11/30/2000     Sales/marketing offices, consumer shipping, and warehouse

1444 Santa Anita Avenue (3)      10,000      66,744   11/30/2005     Executive office, research facility, quality control and
                                                                     bottle printing
1427 Lidcombe Avenue              6,000      28,134   11/30/2000     Maintenance and chemical processing (rear building)

1425 Lidcombe Avenue              6,000      28,134   11/30/2000     Chemical processing and packaging
1445 Lidcombe Avenue (3) (4)      8,000      62,652   11/30/2005     Effective November 8, 1995, the building was subleased on a
                                                                     one-year agreement.
                                                                     The gross monthly rental income is $3,678.

</TABLE>

(1) The Company entered into a sublease agreement, effective January 15, 1996,
    which expires November 30, 2000.  The gross annual rental income is
    $57,250.  The tenant occupies 13,000 square feet of the total 15,000 square
    footage.  In June 1998 the sublessee will commence occupancy of the entire
    15,000 square footage and the monthly rent will be adjusted accordingly.
    The sublease includes a cost of living adjustment in June 1998.

(2) The Company entered into a sublease agreement, effective July 16, 1996,
    which expires November 30, 2000.  The gross annual rental income is
    $39,312.  In July 1998 the sublease will be adjusted from $3,276 per month
    to $3,360 per month.

(3) This property is treated as a sale leaseback agreement between the Company
    and one of its directors (former Chairman).  The monthly lease payments
    were set at the prevailing rates in the area at the time the leases were
    written.  The buildings were bought by Ronald G. Lee, President, from Dr.
    Henry L. Lee, former Chairman, in December 1995.

(4) The gross monthly rental income is $3,678.  The Company will continue to
    sublease the building until the owner can locate a buyer.

    All of the Company's business segments use the properties owned or leased
    by the Company except for 1470 Santa Anita Avenue (subleased effective July
    16, 1996), 1460 Santa Anita Avenue (subleased effective January 15, 1996),
    and 1445 Lidcombe Avenue (subleased effective November 8, 1995).

    The Company has a right of first refusal to acquire most of the buildings
    which it leases.

    The Company believes that its existing facilities are adequate to enable it
    to continue to produce its products at their present volume together with
    any moderate increases thereto.

<PAGE>

                                          9


ITEM 3.  LEGAL PROCEEDINGS.

   In the ordinary course of its business, the Company is involved from time to
time in litigation.  In the opinion of management of the Company none of the
litigation currently pending will have a material effect on its business or
financial condition.  See Item I - "Applicable to all segments - Environmental
protection regulation and litigation" (including the SEC formal investigation)
for additional information concerning certain litigation and an investigation by
the Securities and Exchange Commission.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

   Not applicable.
<PAGE>

                                          10

                                       PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.

   Lee Pharmaceuticals' Common Stock has been traded on the American Stock
Exchange since October 24, 1973.  During January 1996 the Company's Common Stock
was delisted from the American Stock Exchange (AMEX) and was no longer traded on
the AMEX.  The Company did not meet the guidelines for continued listing of the
Company's Common Stock on the American Stock Exchange.  Effective January 25,
1996, the Company's Common Stock commenced trading on the electronic
over-the-counter bulletin board under the trading symbol LPHM.  For the two most
recent fiscal years, its shares have closed at high and low trading prices as
follows:

                        QTR             HIGH           LOW
         FY 1996        1Q          $  .6875       $  .2500
                        2Q             .4375          .0625
                        3Q             .2500          .0938
                        4Q             .2000          .1400
         FY 1995        1Q          $  .9375       $  .4375
                        2Q            1.0000          .5000
                        3Q             .6875          .4375
                        4Q             .8750          .5000

   There were approximately 851 shareholders of record of the Company's Common
Stock as of the close of business on September 30, 1996.

   The Company has not paid any cash dividends and has no present intention of
paying cash dividends in the foreseeable future.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.


FISCAL YEARS ENDED SEPTEMBER 30, 1996, AND SEPTEMBER 30, 1995

   Net revenues decreased during fiscal 1996 by $2,202,000 or 24% when compared
to fiscal 1995.  The decrease in net revenues was the result of lower sales
volume of the Company's nail extender products and depilatories.  An overall
decline in the artificial nail volume and continued customer consolidations by
the retailers is the cause for the reduced sales volume.  The reduction in net
revenues was marginally offset by sales of the Company's newly acquired
over-the-counter brands.  The new brand acquisitions accounted for approximately
4% of the total net revenues for fiscal 1996.  The Company's sales returns
increased $267,000 or 29% when comparing fiscal years 1996 and 1995.  This
increase was attributed to continued customer consolidations by the retailer
industry and change in the retailers planogram with fewer SKU's (stock keeping
units) of the Company's product being carried.

   As noted under "Description of Business - Consumer Products Segment" the
Company has pursued a policy of diversifying its product line and has
increasingly emphasized lower priced products.

   Cost of sales as a percentage of gross revenues decreased during fiscal 1996
when compared to fiscal year 1995.  The decreased cost of sales percentage (40%
versus 47%) is the result of the utilization of less direct labor manpower, the
Company's ability to consolidate it's production facilities (reducing the
overall occupied facility square footage by 32%) since August 1995, and a lesser
charge for inventory obsolescence in the fourth quarter for fiscal 1996 versus
1995 of $77,000 and $355,000, respectively.  This accounts for an additional 7%
reduction since the Company's fiscal year 1995 filed report.  The above cost of
sales decrease (40% versus 47%) was partially offset by higher costs associated
with the disposition of excess and obsolete inventory.

   Selling and advertising expenses decreased $971,000 or 24% when comparing
fiscal years 1996 and 1995.  The cost reductions occurred in several major
expense classifications, namely: (1) decrease in payroll and related fringe
benefits due to cutbacks of personnel, (2) decline in advertising promotion
costs, and (3) lower manufacturer representative commissions (lower sales
volume).

   Research and development expenses decreased $8,000 or 4% to $178,000 for 
1996, as compared to $186,000 during fiscal 1995.  A reduction in personnel 
and related fringe benefit costs explains the reduction in expenditures.  The 
recent Company trend has been in the direction of brand acquisitions rather 
than extensive internal research and development.  Effective July 1996 the 
Company eliminated it's internal research and development department, and 
decided that future testing and research, that cannot be absorbed by its 
quality assurance and production control departments, will be placed outside 
the Company.

<PAGE>

                                          11

   General and administrative expenses remained constant when comparing fiscal
year 1996 and 1995.  When comparing fiscal year 1996 and 1995, the following key
expense categories decreased due to their non recurring nature such as; an
environmental cleanup accrual ($102,500) and a write-off of an affiliate
receivable ($83,000).  The above reduction in expenses were offset primarily by
increases in higher payroll and related fringe benefits ($98,000), legal
expenses ($32,000) and loan fees related to the Company's renewal of a note
payable to the bank regarding a real estate loan and the Company's accounts
receivable financing and security agreement ($16,000).

   Interest expense increased $18,000 or 5% when comparing fiscal years 1996 and
1995.  The increase was attributed to the Company's new accounts receivable
financing arrangement effective May 21, 1996.  The minimum interest expense per
month was $3,000.

   Gain on sale of buildings relates to the sale leaseback arrangement since
1991 whereby the Company is realizing a constant deferred gain over the lease
term.

LIQUIDITY AND CAPITAL RESOURCES

   Working capital was $395,000 at September 30, 1996, as compared with
$1,260,000 at September 30, 1995.  The decrease in working capital of $865,000
was primarily due to an increase in current liabilities of $510,000 (basically
new borrowings and unpaid product brand acquisitions) and a decrease in current
assets of $355,000 primarily due to a decrease in accounts receivable and
inventories.  The ratio of current assets to current liabilities was 1.1 to 1 at
September 30, 1996, and 1.3 to 1 at September 30, 1995, a decline of .2 to 1.

   In comparing fiscal years 1996 and 1995, accounts receivable turnover
declined (5.8 versus 8.1) primarily due to the extended number of days credit
sales remained uncollected.  Accounts payable as a percentage of total costs and
expenses increased (22% versus 16%) due basically to the extended payment terms
with some of the Company's vendors.

   Customer consolidations, as expected, materialized in fiscal 1996 and will,
no doubt, continue in fiscal 1997.  Management continues to face lower retail
store inventory levels and expanded computerization (EDI - electronic data
interchange) in the field.

   The Company has an accumulated deficit of $5,775,000.  The Company's
recurring losses from operations and inability to generate sufficient cash flow
from normal operations to meet its obligations as they came due raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue in existence is dependent upon future
developments, including achieving a level of profitable operations sufficient to
enable it to meet its obligations as they become due.

   In order to increase its working capital, the Company reduced it's occupied
facility square footage by 7% since July 1996 by subleasing the vacated
facility.  The sublease agreement expires in November 30, 2000, which is the
same expiration date of the Company's master lease.  This transaction will
reduce the Company's annual rent expense by approximately $39,300.  The Company
has continued to reduce it's inventory of slow moving items at a price below the
listed sales price and scrapping excess inventory items in light of the reduced
facility square footage.  The effective reduction in inventory was $342,000
($162,000 actual) plus $180,000 brand acquisition inventory acquired in
September 1996 which was not available for shipment until October 1996.
Effective May 21, 1996, the Company obtained accounts receivable financing
whereby 65% of the eligible domestic accounts receivable, not to exceed
$1,000,000, can be financed.  The financing is secured by accounts receivable,
equipment, inventories, and certain other assets.  Also, the Company was
successful in renegotiating it's real estate loan ($289,000) which was to mature
in March 1996.  The new maturity date is March 2001.  The loan is being
amortized on a ten (10) year basis.

   The Company does not believe that inflation had a significant impact on its
operations during fiscal years 1996 and 1995.


ITEM 7.  FINANCIAL STATEMENTS.
 
<TABLE>
<CAPTION>
                                                                                    PAGE
INDEX TO FINANCIAL STATEMENTS                                                      NUMBER
<S>                                                                               <C>

Independent Auditor's Report                                                         12

Financial Statements:

    Balance sheet as of September 30, 1996                                           13

    Statements of operations for each of the years in the two-year period
    ended September 30, 1996                                                         14

    Statements of changes in stockholders' equity (deficiency) for each of
    the years in the two-year period ended September 30, 1996                        15

    Statements of cash flows for each of the years in the two-year period
    ended September 30, 1996                                                         16

    Notes to financial statements                                                  17-24

</TABLE>

   All schedules not filed or included herein are omitted either because they
are not applicable or not required, or the required information is included in
the financial statements or notes thereto.

<PAGE>

                                          12

                                    GEORGE BRENNER

                             CERTIFIED PUBLIC ACCOUNTANT
                          9300 WILSHIRE BOULEVARD, SUITE 480
                           BEVERLY HILLS, CALIFORNIA 90212

                             Independent Auditor's Report


Board of Directors
Lee Pharmaceuticals
South El Monte, California

I have audited the accompanying balance sheet of Lee Pharmaceuticals as of
September 30, 1996 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended September 30, 1996.  These financial statements are the
responsibility of the Company's management.  My responsibility is to express an
opinion on these financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Lee Pharmaceuticals as of September
30, 1996, and the results of its operations and its cash flows for each of the
years in the two-year period ended September 30, 1996, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As more fully described in Note 1 to
the financial statements, the Company's recurring losses from operations and
inability to generate sufficient cash flow from normal operations raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Notes 1 and
15.  The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.

As discussed in Note 10 to the financial statements, the Company is involved in
various matters involving environmental cleanup issues.  The Company is
presently planning and/or participating in remedial cost studies and has made
the appropriate provision in the financial statements for the cost of these
studies.  However, the ultimate outcome of these matters cannot presently be
determined.  Accordingly, no provision for any loss that may result from the
resolution of these matters has been made in the accompanying financial
statements.

                                  Very truly yours,

                                  GEORGE BRENNER

                                  George Brenner, CPA

December 10, 1996
Beverly Hills, California

<PAGE>

                                          13


                                 LEE PHARMACEUTICALS

                                    BALANCE SHEET

                                  SEPTEMBER 30, 1996


<TABLE>
<CAPTION>
                                    ASSETS
<S>                                                                                           <C>
CURRENT ASSETS:
    Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $      13,000
    Accounts receivable, less allowance for doubtful accounts of $170,000
       and sales returns allowance of $295,000 (Note 5A) . . . . . . . . . . . . . . . .            1,112,000
    Due from related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               73,000
    Inventories (Notes 3 and 5A) . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,298,000
    Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              755,000
    Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              395,000
                                                                                                -------------
       TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            4,646,000
                                                                                                -------------

Property, plant and equipment, at cost (Notes 5 and 9):
    Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               49,000
    Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              204,000
    Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            6,515,000
    Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              346,000
                                                                                                -------------
                                                                                                    7,114,000
    Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .            6,543,000
                                                                                                -------------
       NET PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . .              571,000
                                                                                                -------------
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization
    of $3,481,000 (Notes 4, 5A, and 8) . . . . . . . . . . . . . . . . . . . . . . . . .            2,798,000
                                                                                                -------------
TOTAL .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $   8,015,000
                                                                                                -------------
                                                                                                -------------

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
    Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $      72,000
    Notes payable, other (Note 5). . . . . . . . . . . . . . . . . . . . . . . . . . . .              717,000
    Current portion - royalty agreements . . . . . . . . . . . . . . . . . . . . . . . .              736,000
    Current portion - note payable related party (Note 7). . . . . . . . . . . . . . . .               70,000
    Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            1,644,000
    Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              599,000
    Due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              348,000
    Deferred income (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               65,000
                                                                                                -------------
       TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .            4,251,000

LONG-TERM NOTES PAYABLE TO RELATED PARTIES (Note 7). . . . . . . . . . . . . . . . . . .            3,239,000
LONG-TERM PAYABLE - royalty agreements, less current portion $736,000. . . . . . . . . .              781,000
LONG-TERM NOTES PAYABLE, other (Note 8). . . . . . . . . . . . . . . . . . . . . . . . .              300,000
LONG-TERM NOTES PAYABLE TO BANKS (Note 9). . . . . . . . . . . . . . . . . . . . . . . .              377,000
DEFERRED INCOME (Note 6).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              207,000
                                                                                                -------------
       TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            9,155,000
                                                                                                -------------

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' DEFICIENCY (Notes 11 and 13):
    Common stock, $.10 par value; authorized 7,500,000 shares;
       issued and outstanding, 4,135,162 shares. . . . . . . . . . . . . . . . . . . . .              413,000
    Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            4,222,000
    Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (5,775,000)
                                                                                                -------------
       TOTAL STOCKHOLDERS' DEFICIENCY. . . . . . . . . . . . . . . . . . . . . . . . . .           (1,140,000)
                                                                                                -------------
TOTAL .  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $   8,015,000
                                                                                                -------------
                                                                                                -------------

</TABLE>

       The accompanying notes are an integral part of the financial statements.

<PAGE>

                                          14

                                 LEE PHARMACEUTICALS

                               STATEMENTS OF OPERATIONS

                          FOR THE YEARS ENDED SEPTEMBER 30,

 

<TABLE>
<CAPTION>
                                                                        1996           1995
                                                                        ----           ----
<S>                                                                <C>            <C>

GROSS REVENUES . . . . . . . . . . . . . . . . . . . . . . . . .   $  8,118,000   $ 10,053,000
    Less:  Sales returns, discounts and allowances                   (1,181,000)      (914,000)
                                                                   ------------   ------------

NET REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . .      6,937,000      9,139,000
                                                                   ------------   ------------

COSTS AND EXPENSES:
    Cost of sales. . . . . . . . . . . . . . . . . . . . . . . .      3,228,000      4,762,000
    Selling and advertising. . . . . . . . . . . . . . . . . . .      3,106,000      4,077,000
    General and administrative . . . . . . . . . . . . . . . . .      1,087,000      1,110,000
    Research and development . . . . . . . . . . . . . . . . . .        178,000        186,000
                                                                   ------------   ------------

TOTAL COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . .      7,599,000     10,135,000
                                                                   ------------   ------------

OPERATING  LOSS. . . . . . . . . . . . . . . . . . . . . . . . .       (662,000)      (996,000)
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . .       (381,000)      (363,000)
GAIN ON SALE OF BUILDINGS AND OTHER (Note 6) . . . . . . . . . .         65,000         65,000
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .          8,000         12,000
                                                                   ------------   ------------

NET LOSS (Note 12) . . . . . . . . . . . . . . . . . . . . . . .   $   (970,000)  $ (1,282,000)
                                                                   ------------   ------------
                                                                   ------------   ------------

PER  SHARE:
    Net loss (Note 2). . . . . . . . . . . . . . . . . . . . . .   $       (.23)  $       (.31)
                                                                   ------------   ------------
                                                                   ------------   ------------

</TABLE>




       The accompanying notes are an integral part of the financial statements.

<PAGE>

                                          15



                                 LEE PHARMACEUTICALS

              STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

                          FOR THE YEARS ENDED SEPTEMBER 30,


<TABLE>
<CAPTION>
                                       Common Stock                             Retained
                                        ------------            Additional      Earnings
                                  Number of                       Paid-in     (Accumulated
                                    Shares         Amount         Capital        Deficit)       Total
                                  ----------     ----------     -----------    -----------      -----
<S>                             <C>           <C>            <C>            <C>             <C>
Balance at September 30, 1994      4,135,162   $    413,000   $  4,222,000   $ (3,523,000)  $  1,112,000

Net loss                                                                       (1,282,000)    (1,282,000)
                                 -----------   ------------   ------------   ------------   ------------

Balance at September 30, 1995      4,135,162        413,000      4,222,000     (4,805,000)      (170,000)

Net loss                                                                         (970,000)      (970,000)
                                 -----------   ------------   ------------   ------------   ------------

Balance at September 30, 1996      4,135,162   $    413,000   $  4,222,000   $ (5,775,000)  $ (1,140,000)
                                 -----------   ------------   ------------   ------------   ------------
                                 -----------   ------------   ------------   ------------   ------------

</TABLE>




       The accompanying notes are an integral part of the financial statements.
<PAGE>

                                          16


                                 LEE PHARMACEUTICALS

                               STATEMENTS OF CASH FLOWS

                          FOR THE YEARS ENDED SEPTEMBER 30,
 
<TABLE>
<CAPTION>
                                                                                   1996             1995
                                                                                   ----             ----
<S>                                                                         <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $   (970,000)      $  (1,282,000)
                                                                             ------------       -------------
    Adjustments to reconcile net loss to net
     cash provided by operating activities:
    Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        162,000             249,000
    Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . .        950,000             245,000
    (Decrease) in deferred income  . . . . . . . . . . . . . . . . . . . .        (65,000)            (65,000)
    (Gain) on disposal of property, plant and equipment. . . . . . . . . .         (9,000)            (19,000)
Change in operating assets and liabilities:
    Decrease (increase) in accounts receivable . . . . . . . . . . . . . .        219,000            (398,000)
    (Increase) in due from related party . . . . . . . . . . . . . . . . .        (73,000)
    Decrease in inventories. . . . . . . . . . . . . . . . . . . . . . . .        162,000             962,000
    (Increase) decrease in other current assets. . . . . . . . . . . . . .        (63,000)            278,000
    Increase in accounts payable . . . . . . . . . . . . . . . . . . . . .          8,000             358,000
    (Decrease) increase in due to related parties. . . . . . . . . . . . .        (40,000)            223,000
    (Decrease) in customer advances and deposits . . . . . . . . . . . . .                            (26,000)
    (Decrease) in accrued salaries and wages . . . . . . . . . . . . . . .                            (48,000)
    Increase (decrease) in other accrued liabilities . . . . . . . . . . .        144,000            (170,000)
    (Decrease) increase in accrued royalties . . . . . . . . . . . . . . .         (7,000)             83,000
                                                                             ------------       -------------
    Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . .      1,388,000           1,672,000
                                                                             ------------       -------------
       Net cash provided by operating activities . . . . . . . . . . . . .        418,000             390,000
                                                                             ------------       -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Additions to property, plant and equipment . . . . . . . . . . . . . .       (146,000)            (98,000)
    Proceeds from sale of equipment. . . . . . . . . . . . . . . . . . . .          9,000              26,000
    Acquisition of product brands. . . . . . . . . . . . . . . . . . . . .       (622,000)           (552,000)
                                                                             ------------       -------------

       Net cash (used in) investing activities . . . . . . . . . . . . . .       (759,000)           (624,000)
                                                                             ------------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from (payments on) bank loans . . . . . . . . . . . . . . . .         88,000              (7,000)
    (Payments on) proceeds from notes payable to related party . . . . . .        (37,000)            193,000
    Proceeds from notes payable-other. . . . . . . . . . . . . . . . . . .        852,000              65,000
    (Decrease) in long-term royalty agreements . . . . . . . . . . . . . .       (744,000)
    Increase in bank overdraft . . . . . . . . . . . . . . . . . . . . . .         72,000
                                                                             ------------       -------------
       Net cash provided by (used in) financing activities . . . . . . . .        231,000             251,000
                                                                             ------------       -------------

NET (DECREASE) INCREASE IN CASH. . . . . . . . . . . . . . . . . . . . . .       (110,000)             17,000
Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . .        123,000             106,000
                                                                             ------------       -------------

Cash, end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $     13,000       $     123,000
                                                                             ------------       -------------
                                                                             ------------       -------------

           SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
    Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $    270,000       $     138,000
                                                                             ------------       -------------
                                                                             ------------       -------------


Acquisition of product brands:
    Fair value of assets acquired. . . . . . . . . . . . . . . . . . . . .   $    922,000       $     628,000
    Fair value of liabilities incurred . . . . . . . . . . . . . . . . . .       (300,000)            (76,000)
                                                                             ------------       -------------

       Net cash payments . . . . . . . . . . . . . . . . . . . . . . . . .   $    622,000       $     552,000
                                                                             ------------       -------------
                                                                             ------------       -------------

</TABLE>


       The accompanying notes are an integral part of the financial statements.

<PAGE>

                                          17

                                 LEE PHARMACEUTICALS
                            NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF BUSINESS

         The Company manufactures and markets consumer products to national and
         regional retailers of varying financial strength.  The Company also
         manufactures and sells dental products to dental service providers
         principally in the United States.  For all years presented, sales,
         operating results and identifiable assets of the consumer products
         group were in excess of 87% of total company operations.

         CONTINUED EXISTENCE

         The financial statements have been prepared assuming that the Company
         will continue as a going concern.  The Company has an accumulated
         deficit of $5,775,000.  The Company's recurring losses from operations
         and inability to generate sufficient cash flow from normal operations
         to meet its obligations as they came due raise substantial doubt about
         the Company's ability to continue as a going concern.  The Company's
         ability to continue in existence is dependent upon future
         developments, including obtaining additional financing and achieving a
         level of profitable operations sufficient to enable it to meet its
         obligations as they become due.  Management's plans in regard to these
         matters are described in Note 15 - "Subsequent Events."  The financial
         statements do not include any adjustments to reflect the possible
         future effects on the recoverability and classification of assets or
         the amounts and classification of liabilities that may result from the
         possible inability of the Company to continue as a going concern.

         INVENTORIES

         Inventories are stated at the lower of average cost or market using
         the first-in, first-out method.

         DEPRECIATION AND AMORTIZATION

         Property, plant and equipment are depreciated using the straight-line
         method over estimated useful lives of three to ten years for machinery
         and equipment and building improvements and thirty-one years for the
         building.  Leasehold improvements are amortized over the shorter of
         the estimated useful lives of the assets or the related lease term.

         Royalties are amortized ($792,000 per year) over the maximum period of
         the royalty agreement.  All other intangibles are amortized ($158,000
         per year) over estimated useful lives which range from six (6) to
         forty (40) years..

         ENVIRONMENTAL EXPENDITURES

         Environmental expenditures that relate to an existing condition caused
         by past operations, and which do not contribute to current or future
         revenue generation, are expensed.  The Company's proportionate share
         of the liabilities are recorded when environmental remediation and/or
         cleanups are probable, and the costs can be reasonably estimated.
         Management believes that the amount accrued at September 30, 1995 for
         remedial cost studies ($102,500) is adequate based on current
         information available.  Consequently, no additional provision has been
         recorded in fiscal year 1996.  See Note 10 - "Assessment for
         environmental cleanup."

         MAJOR CUSTOMER


         The Company had one major customer with sales volume approximating 11%
         and 7% of the Company's net revenues for the years ending September
         30, 1996, and 1995, respectively.  The amount due from the customer
         was $249,000 and $118,000 at September 30, 1996, and 1995,
         respectively, and is included in accounts receivable in these
         financial statements.

         CONCENTRATION OF CREDIT RISK

         Financial instruments which potentially subject the Company to
         concentrations of credit risk consist of cash and trade receivables.
         The Company places its cash with high credit quality financial
         institutions.  At times such investments may be in excess of the FDIC
         limit.  In regards to trade receivables, the risk is limited due to
         the large number of customers comprising the customer base, and the
         dispersion in different industries and geographies.  Generally, the
         Company does not require collateral for its trade receivables.

         INCOME TAXES

         Income taxes are provided based on earnings reported for financial
         statement purposes.  In accordance with FASB Statement No. 109, the
         asset and liability method requires the recognition of deferred tax
         liabilities and assets for the expected future tax consequences of
         temporary differences between tax basis and financial reporting basis
         of assets and liabilities.

<PAGE>

                                          18

         USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that effect the reported amounts of assets and
         liabilities and disclosures of contingent assets and liabilities at
         the date of the financial statements and the reported amounts of
         revenues and expenses during the reporting period.  Actual results
         could differ from those estimates.

NOTE 2 - NET LOSS PER SHARE

         Net loss per share is based on the weighted average number of common
         shares outstanding which were 4,135,162 in 1996 and 1995.  Common
         stock equivalents (common stock options) for fiscal 1996 and 1995 were
         not considered in the net loss per share computations since the effect
         was anti-dilutive.

NOTE 3 - INVENTORIES

         Inventories consist of the following at September 30, 1996:

                   Raw materials . . . . . . . . . . .     $    1,989,000
                   Work-in-process . . . . . . . . . .            364,000
                   Finished goods. . . . . . . . . . .            474,000
                                                           --------------
                                                                2,827,000
                   Allowance for obsolescence . . . .             529,000
                                                           --------------
                   Total . . . . . . . . . . . . . . .     $    2,298,000
                                                           --------------
                                                           --------------

NOTE 4 - INTANGIBLE ASSETS

         The Company acquired certain product lines in 1996 (See Note 14) and
         prior years.  Certain amounts related to these acquisitions were
         allocated to intangible assets.  Included in intangible and other
         assets at September 30, 1996, are the following intangible assets:

                   Goodwill . . . . . . . . . . . . . .    $    1,373,000
                   Covenants not to compete . . . . . .         1,972,000
                   Trademark . . . . . . . . . . . . .            322,000
                   Royalty agreements . . . . . . . . .         2,286,000
                   Other . . . . . . . . . . . . . . .            326,000
                                                           --------------
                   Total . . . . . . . . . . . . . . .          6,279,000
                   Less:  accumulated amortization . .         (3,481,000)
                                                           --------------
                   Intangibles - Net . . . . . . . . .     $    2,798,000
                                                           --------------
                                                           --------------

NOTE 5 - NOTES PAYABLE, OTHER - CURRENT

         A.   Note payable to bank (accounts
              receivable financing), secured
              by accounts receivable, equipment,
              inventories, and certain other
              assets, maximum revolving advance
              is $1,000,000 (based on domestic
              accounts receivable as defined in
              the agreement), requires minimum
              monthly interest of $3,000, interest
              rate is 8% above the prime rate.  The
              agreement is for a term of two years
              from May 1996 and is renewable for
              successive one year periods
              thereafter.                                  $      388,000

         B.   Note payable to seller on
              acquisition of product brand as
              follows: $50,000 due on each of
              November 1, 1996, December 1, 1996,
              January 2, 1997, and January 10,
              1997, and $100,000 due on April 1,
              1997, plus interest at the rate of
              8.25% is payable on the above
              principal payments.  All amounts
              payable to seller by buyer after the
              closing date are personally guaranteed
              by the Company's Chairman.                          300,000

         C.   Note payable unsecured, bearing
              interest at bank's prime rate
              (8.25% at September 30, 1996,
              maturing January 1997).                              10,000

D.       Notes payable other                                       19,000
                                                           --------------
                                                           $      717,000
                                                           --------------
                                                           --------------

NOTE 6 - RELATED PARTY TRANSACTIONS

         In 1991 the Company sold and leased back two of its operating
         facilities in a transaction with its former Chairman.  An initial gain
         was recognized and a deferred gain was recorded which is to be
         amortized over the term of the two leases which expire November 2000.
         The amount of deferred gain realized during 1996 and 1995 was $65,000.

<PAGE>

                                          19

         The amounts of rents paid to related parties were $133,000 and
         $147,000 for September 30, 1996, and 1995, respectively.

         During the fiscal year ending September 30, 1996, the total interest
         expensed to related parties (Note 7) was $281,000 out of which
         $270,000 was paid and $329,000 was accrued as of September 30, 1996,
         in addition to other accruals of $19,000.

         During the fiscal year ending September 30, 1995, the total interest
         expensed to related parties (Note 7) was $291,000 out of which $66,000
         was paid and $318,000 was accrued as of September 30, 1995.

         The Company's primary agent for purchasing television advertising was
         Western International Media Corp. (WIMC) whose President and Chief
         Executive Officer, Dennis F. Holt, was a Director of the Company
         during fiscal year 1995 and resigned in October 1995.  Television
         advertising expenses to WIMC were $204,000 for the year ended
         September 30, 1995.

NOTE 7 - NOTES PAYABLE - RELATED PARTIES

         A.   Notes payable to related parties,
              unsecured, bearing interest at bank's
              prime rate (8.25% at September 30, 1996),
              maturing January 2005.                       $       90,000

         B.   Note payable to officer, unsecured,
              bearing interest at bank's prime rate
              (8.25% at September 30, 1996), principal
              is maturing and accrued interest is
              payable in January 2005.                            193,000

         C.   Note payable to officer, unsecured, bearing
              interest at bank's prime rate (8.25% at
              September 30, 1996), principal is maturing
              and accrued interest is payable in
              January 2005.                                       150,000

         D.   Note payable to officer, unsecured, bearing
              interest at bank's prime rate (8.25% at
              September 30, 1996), principal is maturing
              and accrued interest is payable in January
              2005.                                               371,000

         E.   Notes payable to related party, secured by
              product brand, bearing interest at bank's
              prime rate (8.25% at September 30, 1996),
              principal is maturing and accrued interest
              is payable in January 2005.                         400,000

         F.   Note payable to related party, secured by
              assets of the Company (secondary position)
              bearing interest at bank's prime rate
              (8.25% at September 30, 1996), and
              principal payable based on a twelve (12)
              year fully amortized schedule commencing
              March 15, 1997.                                   1,440,000

         G.   Notes payable to officer, secured by
              product brand, bearing interest at bank's
              prime rate (8.25% at September 30, 1996),
              principal is maturing and accrued
              interest is payable in January 2005.                250,000

         H.   Note payable to officer, secured by
              product brand, bearing interest at bank's
              prime rate (8.25% at September 30, 1996),
              principal is maturing and accrued interest
              is payable in January 2005.                         100,000

         I.   Note payable to officer, unsecured,
              bearing interest at bank's prime rate
              (8.25% at September 30, 1995), principal
              is maturing and accrued interest is payable
              in July 1998.                                        65,000

         J.   Note payable to officer, unsecured,
              (8.25% at September 30, 1996), principal
              is maturing and accrued interest is
              payable in January 2005.                            250,000
                                                           --------------

                                                           $    3,309,000
              Less current portion                                (70,000)
                                                           --------------
                                                           $    3,239,000
                                                           --------------
                                                           --------------


         In connection with the sale of two buildings by the former Chairman to
         the current Chairman, certain notes were exchanged between the two
         parties and an early note payment of $27,000 was made to the current
         Chairman.

<PAGE>

                                          20

         At September 30, 1996, the Company was committed to the following
         minimum principal payments.

                                         MINIMUM
                YEAR ENDING             PRINCIPAL
                SEPTEMBER 30,            PAYMENT

                   1997           $       70,000
                   1998                  185,000
                   1999                  120,000
                   2000                  120,000
                   2001                  120,000
                 Thereafter            2,694,000
                                  --------------
                   Total          $    3,309,000
                                  --------------
                                  --------------

NOTE 8 - NOTES PAYABLE, OTHER - NONCURRENT

         A.   Note payable secured by product
              brand, bearing interest at 15%,
              interest payable monthly, maturing
              December 1997.  The note was modified
              from its original maturity date of
              July 1996.                                   $       50,000


         B.   Note payable secured by product
              brand, bearing interest at 15%,
              interest payable monthly, maturing
              December 1997.  The note was modified
              from its original maturity date of
              July 1996.                                           50,000


         C.   Note payable secured by product
              brands, bearing interest at 15%,
              interest payable monthly, maturing
              December 1997.  The note was modified
              from its original maturity date of
              July 1996.                                          100,000

         D.   Note payable secured by product
              brands, bearing interest at 15%,
              interest payable monthly, maturing
              December 1997.                                      100,000
                                                           --------------

                                                           $      300,000
                                                           --------------
                                                           --------------

NOTE 9 - NOTE PAYABLE TO BANKS

         A.   Notes payable to bank, secured
              by a deed on land and building,
              requires monthly payments of $4,200,
              including interest at the bank's
              reference rate plus 4%, maturing
              March 2001.                                  $      272,000

         B.   Note payable to bank, secured by
              production equipment related to a
              product brand acquisition, requires
              monthly payments of $2,750, including
              interest at the bank's prime rate plus
              8%, maturing May 1998.                              100,000

         C.   Note payable to bank, other                           5,000
                                                           --------------
                                                           $      377,000
                                                           --------------
                                                           --------------

NOTE 10- COMMITMENTS AND CONTINGENCIES

         LEASE COMMITMENTS

         At September 30, 1996, the Company was committed to its Chairman and
         to others under noncancelable operating leases for land and buildings
         requiring minimum annual rentals as follows:

                YEAR ENDING
                SEPTEMBER 30,      OTHERS        CHAIRMAN

                   1997      $    391,000   $    129,000
                   1998           391,000        129,000
                   1999           391,000        129,000
                   2000           391,000        129,000
                   2001            65,000        129,000
                Thereafter              -        540,000
                             ------------   ------------

         Total               $  1,629,000   $  1,185,000
                             ------------   ------------
                             ------------   ------------

<PAGE>

                                          21

         Generally, the leases provide that maintenance, insurance and a
         portion of property taxes are to be paid by the Company.  The Company
         also has a right of first refusal to acquire most of the buildings
         which it leases.  The Company's rental expense for the years ended
         September 30, 1996, and 1995, was $523,000 and $552,000, respectively.

         Some of the above leases are subleased to other companies.  Two of the
         three subleases are long term with annual rental revenues as follows:

                YEAR ENDING        SUBLEASE
                SEPTEMBER 30,      REVENUES

                   1997           $    96,500
                   1998                96,800
                   1999                97,600
                   2000                97,600
                   2001                16,300
                                  -----------

         Total                    $   404,800
                                  -----------
                                  -----------

         ASSESSMENT FOR ENVIRONMENTAL CLEANUP

              The Company owns a manufacturing facility located in South El
         Monte, California.  The California Regional Water Quality Control
         Board (The "RWQCB"), has alleged that the soil and shallow groundwater
         at the site are contaminated.  On August 12, 1991, the Board issued a
         "Cleanup and Abatement Order" directing the Company to conduct further
         testing and cleanup the site.  The Company did not complete the
         testing, and in June 1992 the RWQCB requested that the EPA evaluate
         the contamination and take appropriate action.  At the EPA's request,
         Ecology & Environment, Inc. conducted an investigation of soil and
         groundwater on the Company's property.  Ecology & Environment Inc.'s
         Final Site Assessment Report, which was submitted to the EPA in June
         1994, did not rule out the possibility that some of the contamination
         originated on-site, and resulted from either past or current
         operations on the property.  While the Company may be liable for all
         or part of the costs of remediating the contamination on its property,
         the remediation cost is not known at this time.  The EPA has not taken
         any further action in this matter, but may do so in the future.

         The Company and nearby property owners are in the process of engaging
         a consultant to perform a site investigation with respect to soil and
         shallow groundwater contamination.  Based upon proposals received to
         date, the Company currently estimates the cost to perform the site
         investigation to be $175,000.  Accordingly, while recognizing it may
         be jointly and severally liable for the entire cost, the financial
         statements as of September 30, 1995, recognized the proportionate
         amount ($87,500) which the Company believes is its liability for a
         site investigation.

         The tenants of nearby properties upgradient have sued the Company
         alleging that hazardous materials from the Company's property caused
         contamination on the properties leased by the tenants.  The case name
         is DEL RAY INDUSTRIAL ENTERPRISES, INC. v. ROBERT MALONE, ET AL., Los
         Angeles County Superior Court, Northwest District, commenced August
         21, 1991.  In this action, the plaintiff alleges environmental
         contamination by defendants of its property, and seeks a court order
         preventing further contamination and monetary damages.  The Company
         does not believe there is any basis for the allegations and is
         vigorously defending the lawsuit.

         The Company's South El Monte manufacturing facility is also located
         over a large area of possibly contaminated regional groundwater which
         is part of the San Gabriel Valley Superfund site.  The Company has
         been notified that it is a potentially responsible party ("PRP") for
         the contamination.  The cost of cleanup of the groundwater is not
         known at this time.  In September 1992 EPA announced that the levels
         of contamination in the Whittier Narrows area of the Superfund site
         were sufficiently low and that it was not planning a cleanup at this
         time, but rather would continue to monitor the groundwater for an
         indefinite period.  The Company's property is adjacent to the Whittier
         Narrows area.  Except as described above, it is not clear what action
         the EPA will take with respect to the Company's property.

         In August 1995 the Company was informed that the EPA entered into an
         Administrative Order on Consent with Cardinal Industrial Finishes
         ("Cardinal") for a PRP lead remedial investigation and feasibility
         study (the "Study") which, the EPA states, will both characterize the
         extent of groundwater contamination in South El Monte and analyze
         alternatives to control the spread of contamination.  The Company and
         others have entered into the South El Monte Operable Unit Site
         Participation Agreement with Cardinal pursuant to which, among other
         things, Cardinal will contract with an environmental firm to conduct
         the Study.  The Study is anticipated to take eighteen to twenty-four
         months.  The Company's share of the cost of the Study is currently
         $15,000 and was accrued for in the financial statements as of
         September 30, 1995.

         The City of South El Monte, the city in which the Company has it's
         manufacturing facility, is located in the San Gabriel Valley.  The San
         Gabriel Valley has been declared a Superfund site.  The 1995 Water
         Quality Control Plan issued by the California Regional Water Quality
         Control Board states that the primary groundwater basin pollutants in
         the San Gabriel Valley are volatile organic compounds from industry,
         nitrates from subsurface sewage disposal and past

<PAGE>

                                          22

         agricultural activities.  In addition, the Plan noted that hundreds of
         underground storage tanks leaking gasoline and other toxic chemicals
         have existed in the San Gabriel Valley.  The California Department of
         Toxic Substance Control have declared large areas of the San Gabriel
         Valley to be environmentally hazardous and subject to cleanup work.

         The Company believes the City of South El Monte does not appear to be
         located over any of the major plumes.  However, the EPA recently
         announced it is studying the possibility that, although the vadose
         soil and groundwater, while presenting cleanup problems, there may be
         a contamination by DNAPs (dense non-aqueous phase liquids), i.e.,
         "sinkers", usually chlorinated organic cleaning solvents.  The EPA has
         proposed to drill six "deep wells" throughout the City of South El
         Monte at an estimated cost of $1,400,000.  The EPA is conferring with
         SEMPOA (South El Monte Property Owners Association) as to cost sharing
         on this project.  SEMPOA has obtained much lower preliminary cost
         estimates.  The outcome cost and exact scope of this are unclear at
         this time.

         The Securities and Exchange Commission has issued a formal order of
         investigation concerning certain matters, including the Company's
         environmental liabilities.  The Company is cooperating with the
         investigation.

         The Company has been seeking reimbursement of cleanup costs from its
         insurance carriers.  One carrier has paid certain amounts towards
         cleanup costs that may be incurred by buying back its policy and legal
         fees actually incurred.  The Company continues to seek reimbursement
         from other carriers, although no such other payments have been
         received or agreed to, and there can be no assurances that any such
         payments will be received.  Some carriers have denied liability for
         costs, based on their review and analysis of the insurance policies,
         the history of the site, the nature of the claims, and current court
         decisions in such cases.

         Currently, the Company does not have any reliable information on the
         likely cleanup costs of its property.  Thus, it cannot determine the
         extent, if any, of its share of liability for any such cleanup costs.

NOTE 11- STOCK OPTIONS

         Under the Company's 1985 Employee Incentive Stock Option Plan, as
         amended, common stock options may be granted to officers and other key
         employees for the purchase of up to a total of 580,000 shares of
         common stock of the Company at a price per share equal to its fair
         market value on the date of grant.  Options expire five years from the
         date of grant, are contingent upon continued employment and become
         exercisable in equal installments during each of the three years
         beginning eighteen months after the date of grant.

         The following table sets forth the number of shares under option and
         the related option prices at September 30, 1995, and 1996:

                                                              OPTION PRICE RANGE
                                                      NUMBER       PER SHARE

         Outstanding at September 30, 1994 . . . . .   572,000  $1.25 -- $4.13
              Granted . . . . . . . . . . . . . . .    165,000  $0.50
              Canceled . . . . . . . . . . . . . . .  (270,000) $1.25 -- $2.07
                                                     ---------

         Outstanding at September 30, 1995 . . . . .   467,000  $0.50 -- $1.31
              Canceled . . . . . . . . . . . . . . .  (261,500) $0.50 -- $1.3125
                                                     ---------

         Outstanding at September 30, 1996 . . . . .   205,500  $0.50 -- $1.3125
                                                     ---------
                                                     ---------

         At September 30, 1996, 61,000 shares are eligible to be exercised.  No
         additional options can be granted under this plan.

         The 1987 Stock Option Plan was adopted by the Board of Directors on
         January 4, 1988, and was approved by the Company's shareholders on
         March 8, 1988.  This Stock Option Plan provides for the granting of
         options to the Company's outside directors for the purchase of a total
         of 50,000 shares of common stock of the Company at a price per share
         equal to the fair market value on the date of grant.  Options expire
         five years from the date of grant and become exercisable in equal
         installments during each of the three years beginning eighteen months
         after the date of grant.

         At September 30, 1996, options to purchase 16,600 shares were
         outstanding and 8,000 shares are eligible to be exercised at a price
         of $1.31 per share.

NOTE 12- INCOME TAXES


         As of September 30, 1996, the Company had net operating loss (NOL)
         carryforwards of approximately $6,770,000 for Federal and $3,920,000
         for California which for tax purposes can be used to offset future
         Federal and California income taxes.  The differences in the state
         carryforwards relate primarily to the treatment of loss carryforwards
         and depreciation of property, plant and equipment.  The carryforwards
         expire from 2005 through 2011.  The Company has provided an allowance
         for the entire amount of the deferred asset applicable to the NOL.

<PAGE>

                                          23

NOTE 13- EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

         The Company established an Employee Stock Ownership Plan and Trust
         ("Plan") effective December 1, 1985.  The Plan is a tax-qualified
         employee stock ownership plan which is designed to invest primarily in
         the common stock of the Company for the benefit of the employees and
         their beneficiaries.

         The benefits provided by the Plan are paid for entirely by the
         Company.  The Company contributions are used to purchase the common
         stock of the Company which is credited to the individual accounts
         maintained for each participant.  For each twelve-consecutive-month
         period of employment, employees receive a one-year period of service
         credit.  After three years of service employees have a 20% vested
         interest in their accounts under the Plan, increasing at a rate of 20%
         per year with full vesting occurring at seven years of service.

         The Plan consists of a stock bonus plan, ("Plan A") and a money
         purchase pension plan, ("Plan B").  Under Plan A, the Company's Board
         of Directors annually determines the amount to be contributed to the
         Plan.  The contribution by the Company for any single plan year
         (October 1 through September 30) cannot exceed fifteen percent (15%)
         of the total compensation paid to Plan participants for the year.
         Plan B requires an automatic contribution equal to ten percent (10%)
         of participant compensation each Plan Year.  The Company did not make
         any contributions (expense) related to Plan A for the year ending
         September 30, 1996, or  September 30, 1995.

         Effective June 30, 1993, Plan B was terminated; therefore, there was
         no contribution under Plan B  for the year ended September 30, 1996,
         or for the period October 1, 1994, through September 30, 1995.  All
         participants under Plan B became 100% vested on July 1, 1993, due to
         the termination of Plan B.

         Effective September 30, 1995, Plan A was terminated.  All participants
         under Plan A became 100% vested on September 30, 1995, due to the
         termination of Plan A.

         In November 1996 the Company received its final determination letter
         from the Internal Revenue Service.  During fiscal 1997 all
         participants account balances will be distributed by the Company.

NOTE 14- ACQUISITIONS

         On June 15, 1995, the Company purchased certain assets of the Brush 'n
         Floss-Registered Trademark- product which is a patented device to
         facilitate tooth flossing from Sundance Healthcare Products, Inc. for
         approximately $24,000 cash.  The purchase price ($24,000) includes a
         $20,000 prepayment of a five year royalty which is being expensed
         monthly commencing July 1995.

         On June 30, 1995, the Company purchased certain assets of the Baby
         Gasz-TM- and Baby Gumz-TM- brand of baby products from Reinhard Labs,
         Inc. for approximately $73,000 cash.  The Company signed a consulting
         agreement whereby the Company prepaid the three (3) year consulting
         fee ($60,000) which is included in the $73,000 purchase price.  The
         consulting fee is expensed monthly commencing July 1, 1995, through
         June 30, 1998.  The original royalty agreement was for a period of
         five (5) years, commencing July 1, 1995, and based on 10% of net
         sales.  The royalty payments are payable thirty (30) days after each
         calendar quarter.  The Company bought out all future royalty
         obligations and any other claims Reinhard Labs, Inc. had in July 1996
         for $13,000.

         On August 10, 1995, the Company purchased certain assets of the
         XS-Registered Trademark- line of hangover relief/over indulgence
         products from Barnett Laboratories, Inc. for approximately $129,000.
         In addition, the Company signed a consulting agreement to pay Barnett
         Laboratories, Inc. $75,000.  The Company is required to remit $5,000
         per month, commencing on September 1, 1995, plus accrued interest at
         10%.  The payments will continue for the next fifteen (15) months.
         The royalty agreement covers a period of sixty-four and two-thirds (64
         2/3) months, commencing August 10, 1995, and is payable thirty (30)
         days after each quarter.  The royalty agreement is based on 25% of net
         sales.

         On September 20, 1996, the Company purchased certain assets of the
         Aquafilter line of disposable cigarette filters from Aquafilter
         Corporation, a wholly owned subsidiary of Scott's Liquid Gold Inc.,
         for $800,000.  The Company remitted $500,000 at closing.  Payments of
         $50,000 are due on each of November 1, 1996, December 1, 1996, January
         2, 1997, and January 10, 1997, plus $100,000 due on April 1, 1997,
         plus accrued interest at 8.25%.  All amounts payable to the Seller by
         the Company (Buyer) after closing date are personally guaranteed by
         the Company's Chairman.

NOTE 15- SUBSEQUENT EVENTS (UNAUDITED)

         In order to increase its working capital, the Company developed the
         following financial plan.  The Company has taken steps to conserve
         cash by further reducing its occupied facility square footage by 7%
         since July 1996.  Effective July 16, 1996, the Company agreed to
         sublease an 8,000 square foot facility.  The sublease agreement
         expires November 30, 2000.  The total annual gross rental income
         (before the Company's rent expense) is approximately $39,000.  Also,
         the Company will continue its review to further reduce the amount of
         working capital tied up in inventory.  The Company will be 
         manufacturing internally all of its newly acquired brands to the 
         extent possible.

<PAGE>

                                          24


NOTE 16- FOURTH QUARTER RESULTS

         The Company's unaudited operating loss for the fourth quarter, ended
         September 30, 1996, was $542,000.  The $542,000 loss was related to:
         (1) increased inventory obsolescence allowance of $77,000, (2)
         increased allowance for return merchandise of $50,000, and (3) lower
         sales volume.  In the first three quarters the Company averaged over
         $2,000,000 in gross revenues per quarter.  However, during the fourth
         quarter, gross revenues were approximately $1,700,000 or a more than
         15% reduction in gross sales volume from the prior three (3) quarters.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE.

   As previously reported in a Current Report on Form 8-K, on September 27,
1995, the Board of Directors of Lee Pharmaceuticals authorized, effective
September 27, 1995, (1) the termination of the engagement of Meir & Meir as
independent auditors for Lee Pharmaceuticals for the fiscal year ended September
30, 1995 and (2) the engagement of Jeffery, Corrigan & Shaw, 245 South Los
Robles Avenue, Suite 400, Pasadena, California 91101-2894, as independent
auditors for Lee Pharmaceuticals for fiscal 1995.  Jeffery, Corrigan & Shaw was
engaged as the Company's principal independent auditors on September 29, 1995.

   During the fiscal year ended September 30, 1994 and through September 27,
1995 there were no disagreements with Meir & Meir on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Meir &
Meir would have caused them to make reference in connection with their report to
the subject matter.  The Company had been informed by Meir & Meir that
information had come to their attention that made them conclude that the scope
of the audit should be expanded to include an expert opinion regarding the
environmental issues the Company is involved with.  The finding of such expert
may materially impact the fairness or reliability of the previously issued audit
reports or the underlying financial statements, or the financial statements to
be issued covering the fiscal periods subsequent to the date of the most recent
audited financial statements (including information that might preclude the
issuance of an unqualified report).  The request by Meir & Meir to include the
expert opinion in the fiscal 1995 audit was not the basis for the Company's
change in independent accountants.

   Prior to such firm's engagement, Jeffery, Corrigan & Shaw was not consulted
by the Company (or anyone acting on its behalf) regarding (1) either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Lee Pharmaceuticals' financial statements or (2) any matter that was either the
subject of a "disagreement" of a "reportable event" as such terms are defined in
Regulation S-K promulgated by the Securities and Exchange Commission.

   As previously reported in a Current Report on Form 8-K, on October 27, 1995,
the Board of Directors of Lee Pharmaceuticals authorized, effective October 27,
1995, (1) the termination of the engagement of Jeffery, Corrigan & Shaw as
independent auditors for Lee Pharmaceuticals for the fiscal year ended September
30, 1995 and (2) the engagement of George Brenner, CPA, 9300 Wilshire Boulevard,
Suite 480, Beverly Hills, California 90212, as independent auditor for Lee
Pharmaceuticals for fiscal 1995.  George Brenner, CPA was engaged as the
Company's principal independent auditor on October 27, 1995.

   In connection with its activities for the period September 27, 1995, (the
date Jeffery, Corrigan & Shaw was engaged), through October 27, 1995, there were
no disagreements on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Jeffrey, Corrigan & Shaw would have caused them
to make reference in connection with their report to the subject matter.
Jeffrey, Corrigan & Shaw was unable to proceed with the audit engagement because
of its failure to obtain the insurance it believed was necessary.

   Prior to such firm's engagement, George Brenner, CPA was not consulted by the
Company (or anyone acting on its behalf) regarding (1) either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on Lee Pharmaceuticals'
financial statements or (2) any matter that was either the subject of a
"disagreement" of a "reportable event" as such terms are defined in Regulation
S-K promulgated by the Securities and Exchange Commission.
<PAGE>

                                       25

                                    PART III


     ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
               COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.

   Directors are elected to serve until the next annual stockholders' meeting or
until their respective successors have been elected and qualified or as
otherwise provided in the bylaws.  Set forth below for the current directors and
executive officers are their ages, principal occupations during the past five
years, and the period during which they have served as a director or officer of
the Company.

<TABLE>
<CAPTION>

                                                     A DIRECTOR
                                POSITIONS HELD       OR OFFICER              PRINCIPAL OCCUPATION
NAME                   AGE      WITH COMPANY         SINCE                   DURING THE PAST FIVE YEARS (1)
<S>                    <C>    <C>                    <C>              <C>
Dr. Henry L. Lee        70     Director                 1971          Chairman of the Board of Lee Pharmaceuticals thru
                                                                      April 1995 when he retired, available as a consultant,
                                                                      currently a Director of the Company

Ronald G. Lee           44     President, Chairman      1977          President and since April 1995, Chairman of the Board
                               and Director                           of the Company

Michael L. Agresti      54     Vice President -         1977          Vice President - Finance, Treasurer and Secretary Finance,
                               Treasurer and                          of the Company
                               Secretary

William M. Caldwell IV  49     Director                 1987          President of Union Jack Group, a merchant
                                                                      banking firm
</TABLE>

     (1) None of the companies named, other than the Company, is a parent,
subsidiary or other affiliate of the Company.

FAMILY RELATIONSHIPS

     Ronald G. Lee is the son of Dr. Henry L. Lee.

<PAGE>

                                       26

ITEM 10.  EXECUTIVE COMPENSATION.

   The following table sets forth information with respect to remuneration paid
by the Company to the executive officers of the Company with total annual salary
and bonus of at least $100,000 for services in all capacities while acting as
officers and directors of the Company during the fiscal years ended September
30, 1996, 1995, and 1994.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                         LONG TERM
                                                                        COMPENSATION
                                       ANNUAL COMPENSATION                 AWARDS
                                    ------------------------------    ---------------
NAME AND                                             OTHER ANNUAL                            ALL OTHER
PRINCIPAL POSITION         YEAR     SALARY ($)    COMPENSATION ($)      OPTIONS (#)      COMPENSATION ($)
------------------         ----     ----------    ----------------      -----------      ----------------
<S>                        <C>      <C>           <C>                  <C>              <C>
Ronald G. Lee              1996     179,624             2,382 (1)             --                   -- (4)
  President, Chairman      1995     178,595             5,734 (1)         80,000(2)                -- (4)
  (since April 26, 1995)   1994     206,244             3,884 (1)         55,000(2)              1,909(4)
  & Director

Theo. H. Dettlaff, Vice    1996     118,224                 --                --                   -- (5)
  President, President     1995     167,575                 --            51,500(3)                -- (5)
  of Consumer Products     1994     185,791                 --            55,000(3)              2,728(5)
  Division & Director (6)

</TABLE>


(1)  Includes reimbursement of medical and dental expenses not covered by the
     Company's insurance plan of $2,382, $5,081, and $713, respectively, in
     1996, 1995, and 1994 and non cash fringe benefits of $653 and $3,171,
     respectively, in 1995 and 1994.
(2)  The Company granted 80,000 stock options on May 8, 1995, which had an
     option price of $.50 at the date of grant and 55,000 stock options on
     January 24, 1994, which had an option price of $1.31 at the date of grant.
(3)  The Company granted 51,500 stock options on May 8, 1995, which had an
     option price of $.50 at the date of grant and 55,000 stock options on
     January 24, 1994, which had an option price of $1.31 at the date of grant.
(4)  Amount represents the fair market value of Company shares purchased and/or
     forfeitures in the Company's Employee Stock Ownership Plan and Trust of $0
     in 1996, $0 in 1995, and $349 in 1994 and life insurance policy with an
     annual premium of $0 in 1996, $0 in 1995, and $1,560 in 1994.
(5)  Amount represents the fair market value of Company shares purchased and/or
     forfeitures in the Company's Employee Stock Ownership Plan and Trust of $0
     in 1996, $0 in 1995, and $311 in 1994 and life insurance policy with an
     annual premium of $0 in 1996, $0 in 1995, and $2,417 in 1994.
(6)  He ceased being an officer and director of the Company in March 1996.

     Each of the directors of the Company who is not employed by the Company  
     receives a director's fee of $750 for each quarter and $500 for each     
     meeting of the Board of Directors attended, except Dr. Henry L. Lee.  As 
     holder of the honorary title of Founder Chairman Dr. Lee waived his fees.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES


                          NUMBER OF UNEXERCISED OPTIONS
                             AT FISCAL YEAR END (#)
                          -----------------------------
NAME                        EXERCISABLE/UNEXERCISABLE
----                      -----------------------------
Ronald G. Lee                 36,666/98,334

<PAGE>

                                       27

                     EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

     The Company established an Employee Stock Ownership Plan and Trust ("Plan")
effective December 1, 1985.  The Plan is a tax-qualified employee stock
ownership plan which is designed to invest primarily in the common stock of the
Employer for the benefit of the employees and their beneficiaries.

     The benefits provided by the Plan are paid for entirely by the Employer.
The Employer contributions are used to purchase the common stock of the
Employer, which is credited to the individual accounts maintained for each
participant.  In addition to providing an opportunity for employees to
participate in the Employer's growth through stock ownership and to provide
funds for employees' retirement, the Plan is designed to be available as a
technique of corporate finance to the Employer.

     All employees who had completed at least a six-month period of service with
the Employer as of the effective date of this Plan (December 1, 1985) became
participants in the Plan as of such date.  Every other employee will become a
participant in the Plan as of the first day of the month coinciding with or next
following the date upon which he completes a six-month period of service
provided that he is employed by the Employer on such date.

     The Employer makes contributions only on behalf of the participants who are
employed by it on the last day of each Plan year, September 30.  Contributions
made on behalf of the employees will not be taxable to them until the time
benefits are actually paid to them.

     Effective October 1, 1989, the Plan consists of two (2) parts:  Plan A, a
stock bonus plan, and Plan B, a money purchase pension plan.  The Company's
Board of Directors determines the amount to be contributed annually to Plan A up
to a maximum of fifteen percent (15%) participant compensation for the Plan year
(October 1 through September 30).  The contribution under Plan B is a non-
discretionary amount equal to ten percent (10%) of participant compensation for
the Plan year.  The contribution by the Company to the Trust for any single Plan
year cannot exceed twenty-five percent (25%) of the total compensation paid to
Plan participants for the year.

     Company contributions are allocated to each Participant's Company
Contribution Account in the proportion that his compensation for the Plan year
bears to the total compensation paid to all participants for the Plan year.
Forfeitures which arise under Plan A are allocated to the accounts of the other
participants at the end of the Plan year during which the forfeitures arise due
to termination of employment in the same manner as Company contributions are
allocated.  Forfeitures which arise under Plan B are used to offset the
Company's required contribution under Plan B.

     The term "vested" as applied in the context of employee benefit plans
refers to that portion of a participant's accounts which has become
nonforfeitable because the participant has accrued a certain number of period-
of-service credits.  If a participant reaches normal retirement age (age 65),
becomes permanently disabled, dies or retires at age 65, his interest in his
accounts becomes immediately 100% vested, i.e. nonforfeitable.

     The Plan has been amended to conform with the requirements of the Tax
Reform Act of 1986 and effective October 1, 1989, the vesting schedule of the
Plan is as follows:

          PERIOD OF SERVICE             VESTED PERCENTAGE

          Less than 3 years                       0%
          3 years                                20%
          4 years                                40%
          5 years                                60%
          6 years                                80%
          7 years                               100%

     The following tabulation shows the interest in the Plan and vesting
percentages of the officers who are named in the Cash Compensation Table and all
executive officers as a group as of September 30, 1996.

                                   INTEREST IN THE PLAN
                       SHARES OF          CASH              VESTED
NAME                 COMMON STOCK        AMOUNT           PERCENTAGE

Ronald G. Lee            46,427           $163               100%
All executive officers   67,333           $238               100%
 as a group (2 persons)

     Effective July 1, 1993, the plan was amended for a second time.  On June
30, 1993, Plan B was terminated; therefore, all participants became 100% vested,
in Plan B only, effective July 1, 1993.  No contribution was made to Plan A or B
for the period October 1, 1993, through September 30, 1994.

     Effective September 30, 1995, Plan A was terminated.  All participants
under Plan A became 100% vested on September 30, 1995, due to the termination of
Plan A.  No contribution was made to Plan A or B for fiscal year 1995 or 1996.
In connection with the termination of Plan A, the Company wrote off the Employee
Stock Ownership Plan and Trust receivable as of September 30, 1995.

In November 1996 the Company received its final determination letter from the
Internal Revenue Service.  During fiscal 1997 all participants account balances
will be distributed by the Company.

<PAGE>

                                       28

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

   The following table sets forth the persons who, as of November 30, 1996, were
known to the Company to be beneficial owner of more than five percent of the
Company's Common Stock:
<TABLE>
<CAPTION>

                          NAME AND ADDRESS               AMOUNT AND NATURE    PERCENTAGE
      TITLE OF CLASS      OF BENEFICIAL OWNER         OF BENEFICIAL OWNERSHIP  OF CLASS
      <S>                 <C>                         <C>                     <C>
       Common Stock       Ronald G. Lee               343,342 shares (1) (2)      8%
                          1444 Santa Anita Avenue
                          South El Monte, CA 91733

       Common Stock       Dr. Henry L. Lee            292,334 shares (1)          7%
                          1444 Santa Anita Avenue
                          South El Monte, CA 91733
</TABLE>


(1)    Includes 28,000 shares of the Company's common stock which Dr. Lee holds
       as trustee for the benefit of certain family   members.  He has the right
       to vote such shares but otherwise disclaims beneficial ownership.

       The following table sets forth the ownership of the Company's Common
Stock by its directors and its named executive officers and all executive
officers and directors as a group.

<TABLE>
<CAPTION>

                          NAME AND ADDRESS               AMOUNT AND NATURE    PERCENTAGE
      TITLE OF CLASS      OF BENEFICIAL OWNER         OF BENEFICIAL OWNERSHIP  OF CLASS
      <S>                 <C>                         <C>                     <C>

       Common Stock       Ronald G. Lee               343,342 (1) (2)            8%
       Common Stock       Dr. Henry L. Lee            292,334 (3)                7%
       Common Stock       William M. Caldwell IV        7,733 (2)                *
       Common Stock       All officers and directors
                           as a group (4 persons)     691,433 (1) (2)           17%

</TABLE>

(1)  Includes shares held under the Plan.
(2)  Includes shares subject to options exercisable at or within 60 days after
     December 31, 1996.
(3)  Includes 28,000 shares of the Company's common stock which Dr. Lee holds as
     trustee for the benefit of certain family    members.  He has the right to
     vote such shares but otherwise disclaims beneficial ownership.
 *   Less than 1%


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

   The Company's primary agent for purchasing television advertising was Western
International Media Corp. (WIMC) whose President and Chief Executive Officer,
Dennis F. Holt, was a Director of the Company during fiscal year 1995 and
resigned in October 1995.  Television advertising expenses to WIMC were $204,000
for the year ended September 30, 1995.  Western International Media Corp.
realized a commission of approximately $19,000 from the purchase of such time
during fiscal year ended September 30, 1995.  In addition, Mr. Holt received a
direct remuneration from the Company of $2,000 during fiscal year 1995 as a 
Director's fee.

   The information regarding borrowings from and sale and leaseback transactions
between the Company and it's Chairman of the Board which is contained in Item 6
and Note 6 of Notes to Financial Statements is incorporated herein by this
reference.


<PAGE>

                                       29


 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

 (a) Exhibits.  The following exhibits have been or are being filed herewith,
     and are numbered in accordance with Item 601 of Regulation S-B:

     The following exhibits are filed herewith:

          10.24     -    Secured promissory note dated September 17, 1996,
                         between Lee Pharmaceuticals and Preferred Business
                         Credit, Inc.

          10.25     -    Promissory notes evidencing advances made by the
                         Registrant

          10.26     -    Promissory notes which were amended in July 1996
                         evidencing advances made to the Registrant

          10.27     -    Sublease dated November 22, 1995, for the premises
                         located at 1460 Santa Anita Avenue, South El Monte,
                         California

          10.28     -    Sublease dated June 11, 1996, for the premises located
                         at 1470 Santa Anita Avenue, South El Monte, California

          10.29     -    Lease dated December 1, 1995, for the premises located
                         at 1444 Santa Anita Avenue, South El Monte, California

          10.30     -    Lease dated December 1, 1995, for the premises located
                         at 1445 Lidcombe Avenue, South El Monte, California


     The following exhibits have previously been filed by the Company:

            3.1     -    Articles of Incorporation, as amended (1)

            3.4     -    By-laws, as amended December 20, 1977 (2)

            3.5     -    Amendment of By-laws effective March 14, 1978 (2)

            3.6     -    Amendment to By-laws effective November 1, 1980 (3)

           10.1     -    Qualified Stock Option Plan  including forms of 
                         grant (4)

           10.2     -    1985 Employee Incentive Stock Option Plan (5)

           10.3     -    Description of bonus agreements between the Registrant 
                         and its officers (2)

           10.4     -    Lease dated December 1, 1990, for the premises located 
                         at 1470 Santa Anita Avenue, South El Monte, 
                         California (6)

           10.5     -    Lease dated April 16, 1990, for the premises located at
                         1425 and 1427 Lidcombe Avenue, South El Monte, 
                         California (6)

           10.6     -    Lease dated April 16, 1990, for the premises located at
                         1434 Santa Anita Avenue, South El Monte, California (6)

           10.7     -    Lease dated April 16, 1990, for the premises located at
                         1460 Santa Anita Avenue, South El Monte, California (6)

           10.8     -    Lease dated April 16, 1990, for the premises located at
                         1457 Lidcombe, South El Monte, California (6)

           10.9     -    Lease dated April 16, 1990, for the premises located at
                         1500 Santa Anita Avenue, South El Monte, California (6)

          10.10     -    Lease dated April 16, 1990, for the premises located at
                         1516 Santa Anita Avenue, South El Monte, California (6)

          10.11     -    Lease dated March 1, 1991, for the premises located at 
                         1444 Santa Anita Avenue, South El Monte, California (6)

          10.12     -    Lease dated March 1, 1991, for the premises located at 
                         1445 Lidcombe Avenue, South El Monte, California (7)


<PAGE>

                                       30

          10.13     -    Promissory notes which were amended in September 1992
                         evidencing advances by the Registrant's officers and
                         directors (8)

          10.14     -    Promissory notes which were amended in September 1994
                         evidencing advances by the Registrant's officers and
                         directors (9)

          10.15     -    Promissory notes evidencing advances made to the
                         Registrant's officers and directors (9)

          10.16     -    Promissory notes evidencing advances made to the 
                         Registrant (9)

          10.17     -    Promissory notes which were amended in January 1995
                         evidencing advances by the Registrant's officers and
                         directors (10)

          10.18     -    Promissory notes evidencing advances made by the
                         Registrant's officers and directors (10)

          10.19     -    Promissory notes which were amended in July 1995 
                         evidencing advances made to the Registrant (10)

          10.20     -    Royalty agreement dated August 31, 1994, between Lee
                         Pharmaceuticals and The Fleetwood Company, regarding a 
                         brand acquisition (10)

          10.21     -    Royalty agreement dated October 4, 1988, between Lee
                         Pharmaceuticals and Roberts Proprietaries, Inc. 
                         regarding a brand acquisition (10)

          10.22     -    Note payable to bank dated April 26, 1996, between Lee
                         Pharmaceuticals and San Gabriel Valley Bank, secured by
                         the deed on land and building (11)

          10.23     -    Loan and security agreement dated May 21, 1996, between
                         Lee Pharmaceuticals and Preferred Business Credit, Inc.
                         regarding a revolving credit facility financing (11)

  (1)     Filed as an Exhibit of the same number with the Company's Form S-1
          Registration Statement filed with the Securities and Exchange
          Commission on February 5, 1973, (Registrant No. 2-47005), and
          incorporated herein by reference.

  (2)     Filed as Exhibits 3.4, 3.5 and 13.18 with the Company's Form 10-K
          Annual Report for the fiscal year ended September 30, 1978, filed with
          the Securities and Exchange Commission in December 1978 and
          incorporated herein by reference.

  (3)     Filed as an Exhibit of the same number with the Company's Form 10-K
          Annual Report for the fiscal year ended September 30, 1979, filed with
          the Securities and Exchange Commission in December 1979 and
          incorporated herein by reference.

  (4)     Filed as Exhibit 5.1 with the Company's Form 10-K Annual Report for
          the fiscal year ended September 30, 1973, filed with the Securities
          and Exchange Commission in December 1973 and incorporated herein by
          reference.

  (5)     Filed as Exhibits 13.27 and 13.28 with the Company's Form 10-K Annual
          Report for the fiscal year ended  September 30, 1986, filed with the
          Securities and Exchange Commission in December 1986 and incorporated
          herein by reference.

  (6)     Filed as Exhibit 13.31 with the Company's Form 10-K Annual Report for
          the fiscal year ended September 30, 1990, filed with the Securities
          and Exchange Commission in December 1990 and incorporated herein by
          reference.

  (7)     Filed as Exhibit 13.32 with the Company's Form 10-K Annual Report for
          the fiscal year ended September 30, 1991, filed with the Securities
          and Exchange Commission in December 1991 and incorporated herein by
          reference.

  (8)     Filed as Exhibit 13.33 with the Company's Form 10-K Annual Report for
          the fiscal year ended September 30, 1992, filed with the Securities
          and Exchange Commission in December 1992 and incorporated herein by
          reference.

  (9)     Filed as Exhibits 10.14, 10.15, and 10.16 with the Company's Form 10-
          KSB Annual Report for the fiscal year ended September 30, 1994, filed
          with the Securities and Exchange Commission in December 1994 and
          incorporated herein by reference.


<PAGE>


                                       31


  (10)    Filed as Exhibits 10.17, 10.18, 10.19, 10.20, and 10.21 with the
          Company's Form 10-KSB Annual Report for the fiscal year ended
          September 30, 1995, filed with the Securities and Exchange Commission
          in December 1995 and incorporated herein by reference.

  (11)    Filed as Exhibits 10.1 and 10.2 with the Company's Form 10-QSB
          Quarterly Report for the nine months ended June 30, 1996, filed with
          the Securities and Exchange Commission in August 1996 and incorporated
          herein by reference.

(b)    Reports on Form 8-K:

       None








<PAGE>

                                       32


                                   SIGNATURES

     In accordance with 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.

                                LEE PHARMACEUTICALS


     Date:  December 20, 1996           RONALD G. LEE
      --------------------------        -----------------------------------
                                        Ronald G. Lee
                                        Chairman of the Board



     In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.



     Date:  December 20, 1996           RONALD G. LEE
         ----------------------         -----------------------------------
                                        Ronald G. Lee
                                        Chairman of the Board
                                        (Principal Executive Officer) and
                                        Director

     Date:  December 20, 1996           HENRY L. LEE, JR.
         ----------------------         -----------------------------------
                                        Henry L. Lee, Jr.
                                        Director

     Date:  December 20, 1996           WILLIAM M. CALDWELL IV
         ----------------------         -----------------------------------
                                        William M. Caldwell IV
                                        Director

     Date:  December 20, 1996           MICHAEL L. AGRESTI
         ----------------------         -----------------------------------
                                        Michael L. Agresti
                                        Vice President - Finance
                                        (Principal Financial and Accounting
                                        Officer)