<PAGE>

                       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
                       FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

                [   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                             SECURITIES EXCHANGE ACT OF 1934


                            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:  (626) 442-3141
                                                  --------------


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

                                                  Name of Each Exchange
            Title of Each Class                    on Which Registered
            -------------------                   ---------------------
                   None



SECURITIES REGISTERED UNDER SECTION 12 (g) OF THE EXCHANGE ACT:  Common stock,
par value $.10 per share
 
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:  $9,675,000 Gross

As of the close of business on November 28, 1997, the aggregate market value of
Lee Pharmaceuticals common stock held by nonaffiliates was $795,560.

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 28, 1997.

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 (626) 
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, 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. During fiscal 1997 Lee Lip-Ex Lip Balms were internally 
developed.  The Lip-Ex line includes three lip balms and six glossy flavored 
lip balms.

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.

     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, a nail biting deterrent product, nasal care items, 
over-the-counter drug products, skin care products, men's fragrance products, 
tobacco accessory products, and lip balms.  The Company's consumer products 
line today is no longer restricted solely to the cosmetics business.

<PAGE>
                                          3

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 1997, 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 has introduced 
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.  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 
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.

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.

<PAGE>
                                          4

     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.  In those countries 
which ban use of certain ingredients, the Company has reformulated certain of 
its products to meet the specifications of that particular country.

     There is generally world wide movement to increase and/or streamline the 
regulations controlling medical devices.  The twenty two countries in Europe 
have consolidated their regulations into a joint code referred to as ISO 
9000. This code regulates the manufacture and distribution of medical devices 
in Europe.  One of the provisions of the code is that the company maintain a 
quality control system very much like the FDA system, but with some 
differences. It appears that these differences are being negotiated so that 
both regulations will be equivalent.

     Prior to this time, the Company generally had to apply to each 
individual country to obtain permission to sell in that country.  With the 
consolidated regulations, a company needs only to apply to one.  At the 
moment all test data needed for an application must be generated in Europe or 
validated in Europe. The resolution of differences between the FDA and the 
ISO 9000 regulations will probably result in U.S. data being accepted in 
Europe, and vice versa.  Whether this consolidation will apply to 
prescription drugs is uncertain.

     The Company has elected to process applications for sale of three of its 
major dental brands in Europe.  These brands will be labeled with CE markings 
indicating their clearance for sale.  The Company has been assisted in this 
program by the California Manufacturing Technology Center, a program of the 
State of California and the U.S. Department of Commerce.

     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
                                             -----------------------
                                             1997     1996     1995
                                             ----     ----     ----
                                             (000)    (000)    (000)
       United States export sales
         (except Canada) . . . . . . . . . $  827   $  834   $1,161

<PAGE>
                                          5

RESEARCH PROGRAM

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 its 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.  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, 1997, 1996, and 1995, the Company spent approximately $0,
$178,000, and $186,000, respectively, on research activities relating to the
development of new products or the improvement of existing products.  

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 a license to manufacture and sell two dental products from the
American Dental Association Health Research Foundation, which operates a dental
research facility in the complex of the National Institute of Standards and
Technology.  The Company has made considerable investment in further developing
this product and has been issued one patent (December 15, 1997) and has two more
pending.

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")
ordered the Company in 1988 and 1989 to investigate the contamination on its
property (relating to soil and groundwater contamination).  The Company engaged
a consultant who performed tests and reported to the then Chairman of the
Company.  On August 12, 1991, the RWQCB issued a "Cleanup and Abatement Order"
directing the Company to conduct further testing and cleanup the site.  In
October 1991, the Company received from an environmental consulting firm an
estimate of $465,200 for investigation and cleanup costs.  The Company believed
that this estimate was inconclusive and overstated the contamination levels. 
The Company believes that subsequent investigations will support the Company's
conclusions about that estimate.  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.  The Company may be liable for all or part of the
costs of remediating the contamination on its property.  The EPA has not taken
any further action in this matter, but may do so in the future.

     The Company and nearby property owners have engaged a consultant to 
perform a site investigation with respect to soil and shallow groundwater 
contamination. 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.

<PAGE>
                                          6

     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.

     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.  In 1995, 
the Company was informed that the EPA estimated the cleanup costs for the 
South El Monte's portion of the San Gabriel Valley Superfund site to be $30 
million.  The Company's potential share of such amount has not been 
determined.  Superfund PRPs are jointly and severally liable for superfund 
site costs, and are responsible for negotiating among themselves the 
allocation of the costs based on, among other things, the outcome of 
environmental investigation.

     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 its 
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 Company has received a report from Geomatrix Consultants, Inc., 
dated December 1, 1997 (the "Report"), containing a site assessment to 
evaluate the impact of volatile organic compounds on the soil and groundwater 
at the Lidcombe and Santa Anita Avenue site located in South El Monte, 
California (which includes the Company's facilities).  The Report has been 
submitted to the RWQCB for its comments and response.  While the Report 
appears to indicate generally low concentrations of tetrachloroethene, 
trichloaethene and trichloroethane, until the comments and response of the 
RWQCB have been received and analyzed, no determination can be made as to 
what, if any, cleanup will be required by the Company or what, if any, 
additional environmental costs the Company may incur. The Company is 
optimistic that since the sources of these chemicals appear to be upgradient 
from the Company facilities as a result of the most recent testing done in 
1997, the cleanup of those sources should materially reduce any cleanup costs 
of the Company, an engineering position that the Company has maintained for 
years.

     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.

     The total amount of environmental investigation and cleanup costs that 
the Company may incur with respect to the foregoing is not known at this 
time. However, based upon information available to the Company at this time, 
the Company has expensed a total of $261,000, of which $126,000 were legal 
fees, since 1991 for environmental investigation and cleanup costs.  The 
actual costs could differ materially from the amounts expensed for 
environmental investigation and cleanup costs to date.

     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.

<PAGE>

                                          7

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 101 presently includes 29 permanent 
employees, both salaried and hourly, and 72 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.

     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 14% and 11% of the 
Company's net revenues during fiscal 1997 and 1996, 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.

     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        10,000          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, personnel, data processing, 
                                                                              accounting offices and dental production/shipping
1460 Santa Anita Avenue (1)       15,000      64,728**       11/30/2000       Effective 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, purchasing, consumer 
                                                                              shipping, and warehouse
1444 Santa Anita Avenue (3)       10,000      67,302*        11/30/2005       Executive office, consumer production,
                                                                              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      63,177*        11/30/2005       Effective November 8, 1995, the building was 
                                                                              subleased on a one-year agreement.  Subsequent
                                                                              to November 1996, the subleasee is on a month
                                                                              to month agreement with a 45-day advance
                                                                              notice to relocate.
                                                                              The gross monthly rental income is $3,676.

</TABLE>


*    Revised biannually for consumer price index change.
**   Can be revised biannually for consumer price index change, but has not been
     adjusted, by the owner, on December 1, 1992, December 1, 1994 or 
     December 1, 1996.

(1)  The Company entered into a sublease agreement, effective January 15, 
     1996, which expires November 30, 2000.  The gross annual rental income 
     is $66,395.  In April 1997 the subleasee commenced occupancy of the entire
     15,000 square footage (previously occupied 13,000 square feet).  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 $3,676. 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.

<PAGE>
                                          9


    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.

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.

   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 1997        1Q     $  .2200        $ .1400
                                  2Q        .2000          .1500
                                  3Q        .3200          .2500
                                  4Q        .3250          .2500
                   FY 1996        1Q     $  .6875        $ .2500
                                  2Q        .4375          .0625
                                  3Q        .2500          .0938
                                  4Q        .2000          .1400

   There were approximately 812 shareholders of record of the Company's 
Common Stock as of the close of business on September 30, 1997.

   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, 1997, AND SEPTEMBER 30, 1996

   Net revenues increased during fiscal 1997 by $1,878,000 or 27% when 
compared to fiscal 1996. The increase in net revenues was the result of sales 
of the newly acquired brand acquisitions. The newly acquired brand 
acquisitions accounted for $2,272,000 or 26% of the Company's total net 
revenues. The aforementioned sales volume increase was partially offset by a 
decline in the overall nail extender products (approximately 15%). Also, the 
Company's sales returns decreased approximately $321,000 or 27% when 
comparing fiscal years 1997 and 1996. The lower sales returns during the 
current fiscal year was the result of fewer returns related to the nail 
extender category. This was due to the continued decline in the nail products 
sales volume. The Company's retail customers have continued to change their 
planograms, where they are stocking fewer SKU's (stock keeping units) of the 
Company's products.
   
   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 was constant (40%) when 
comparing fiscal years 1997 and 1996. The constant (40%) cost of sales 
percentage was due to several factors such as; (1) a favorable product mix, 
(2) continued utilization of less direct labor manpower, and (3) ability to 
manufacture recently acquired brands in-house thereby capturing more 
manufacturing overhead. Also, the Company has been able to continue 
experiencing the benefits of the consolidated production facilities (reducing 
the overall occupied facility square footage by 32%) since August 1995. The 
above favorable explanations were somewhat offset by non-recurring freight 
charges related to the transporting of inventory and equipment (to the 
Company) related to acquired brands, and an increase in manufacturing labor 
dollars as a result of two (September 1996 and March 1997) hourly rate 
increases in the minimum wage.
  
   Selling and advertising expenses increased $267,000 or 9% when comparing 
fiscal years 1997 and 1996. The increases in expenses were mainly due to the 
following factors; (1) an increase in the bad debt allowance account 
($80,000) with no recurring entry in fiscal 1996, (2) an increase in the 
amortization expense (approximately $435,000) related to acquisitions by the 
Company during October 1996, (3) an increase in temporary (agency) help 
payroll ($55,000), and (4) a write off of the impairment of goodwill 
($26,000). The above category expense increases were partially offset by a 
decrease in advertising expense ($89,000), a non-recurring "special 
allowance" ($126,000) which was awarded to a key customer in fiscal 1996, 
overall lower salaries, wages and commissions plus related fringe benefits 
($62,000) and lesser royalty expense ($50,000).
   
   Research and development expenses decreased $178,000 when comparing fiscal 
year 1997 versus 1996. The Company trend over the last fifteen (15) months 
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 increased $39,000 or 4% when comparing 
fiscal years 1997 and 1996. This increase was due to higher salaries and 
wages, the result of employee new hires, plus various rate increases 
($85,000) which was partially offset (decrease) by management's decision not 
to renew its Directors and Officers insurance coverage ($50,000).
   
   Interest expense increased $169,000 or 44% when comparing fiscal years 
1997 and 1996. The higher interest expense was attributed to the increased 
borrowings from the Company's asset based financing lender and a higher prime 
interest rate (from 8.25% to 8.5%) charged on various notes payable.
   
   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 $114,000 at September 30, 1997, as compared with 
$395,000 at September 30, 1996. The decrease in working capital of $281,000 
was primarily due to an increase in current liabilities of $224,000 
(basically increased notes payable (current portion) as a result of newly 
acquired product brands and an increase in other accrued liabilities) and a 
decrease in current assets of $57,000 primarily due to a decline in 
inventory. The ratio of current assets to current liabilities was 1.0 to 1 at 
September 30, 1997, and 1.1 to 1 at September 30, 1996.
   
   In comparing fiscal years 1997 and 1996, accounts receivable turnover 
increased (7.3 versus 5.8) primarily due to the Company's reduction in 
extended credit terms. Accounts payable as a percentage of total costs and 
expenses decreased (12% in fiscal 1997 versus 22% in fiscal 1996) due to 
improved timely payments to vendors plus payment of several non-recurring 
commitments the result of better cash flow from accounts receivable 
collections.
   
   Customer consolidations, as expected, materialized in fiscal 1997 and may 
continue in fiscal 1998. 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 $5,746,000.  The Company's past 
recurring losses and current nominal profit from operations and inability to 
generate sufficient cash flow from normal operations to meet its obligations 
as they come 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 retaining current financing 
and achieving a level of profitable operations sufficient to enable it to 
meet its obligations as they become due.
   
   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 (refer to above comment on cost 
of sales). The overall reduction in inventory was $318,000. 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. Effective July 1997, the rate of eligible domestic accounts 
receivable was favorably increased from 65% to 70%. The financing is secured 
by accounts receivable, equipment, inventories, and certain other assets.
   
   The Company does not believe that inflation had a significant impact on 
its operations during fiscal years 1997 and 1996.

ITEM 7.       FINANCIAL STATEMENTS.

                                                                         PAGE
INDEX TO FINANCIAL STATEMENTS                                           NUMBER
Independent Auditor's Report                                              12 

Financial Statements:

     Balance sheet as of September 30, 1997                               13 

     Statements of operations for each of the years in the
     two-year period ended September 30, 1997                             14 

     Statements of changes in stockholders' equity (deficiency)for each
     of the years in the two-year period ended September 30, 1997         15 

     Statements of cash flows for each of the years in the two-year
     period ended September 30, 1997                                      16 

     Notes to financial statements                                      17-25

     
   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, 1997 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, 1997. 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, 1997, and the results of its operations and its cash flows for 
each of the years in the two-year period ended September 30, 1997, 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 past losses from 
operations, its current nominal profit, 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, "Commitments and Contingencies - Assessment for 
environmental cleanup," the Company is attempting to quantify its cleanup 
cost liability, however, the ultimate outcome of this liability cannot 
presently be determined.

                                                                        
                                               GEORGE BRENNER

                                               George Brenner, CPA
December 9, 1997
Beverly Hills, California

<PAGE>

                                          13

                                 LEE PHARMACEUTICALS 
                                           
                                    BALANCE SHEET
                                           
                                  SEPTEMBER 30, 1997
                                           
                                        ASSETS
CURRENT ASSETS:
   Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $   26,000
   Accounts receivable, less allowance for doubtful accounts 
      of $39,000 and sales returns allowance of $161,000. . . . .     1,303,000
   Due from related party . . . . . . . . . . . . . . . . . . . .       108,000
   Inventories. . . . . . . . . . . . . . . . . . . . . . . . . .     1,980,000
   Prepaid royalties. . . . . . . . . . . . . . . . . . . . . . .       660,000
   Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .       425,000
   Other current assets . . . . . . . . . . . . . . . . . . . . .        87,000
                                                                     ----------
      TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . .     4,589,000
                                                                     ----------
Property, plant and equipment, at cost:
   Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        49,000
   Building . . . . . . . . . . . . . . . . . . . . . . . . . . .       204,000
   Machinery and equipment. . . . . . . . . . . . . . . . . . . .     5,986,000
   Leasehold improvements . . . . . . . . . . . . . . . . . . . .       369,000
                                                                     ----------
                                                                      6,608,000
   Less accumulated depreciation and amortization . . . . . . . .     6,091,000
                                                                     ----------
      NET PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . .       517,000
                                                                     ----------
INTANGIBLE AND OTHER ASSETS, net of accumulated amortization 
   of $4,869,000. . . . . . . . . . . . . . . . . . . . . . . . .     2,804,000
                                                                     ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $7,910,000
                                                                     ----------
                                                                     ----------

                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
   Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . .    $  209,000 
   Notes payable, other . . . . . . . . . . . . . . . . . . . . .       716,000 
   Current portion - notes payable, other (long-term) . . . . . .       273,000
   Current portion - royalty agreements . . . . . . . . . . . . .       667,000 
   Current portion - note payable related party . . . . . . . . .       255,000 
   Accounts payable . . . . . . . . . . . . . . . . . . . . . . .     1,020,000 
   Accrued royalties. . . . . . . . . . . . . . . . . . . . . . .       458,000 
   Other accrued liabilities. . . . . . . . . . . . . . . . . . .       407,000 
   Due to related parties . . . . . . . . . . . . . . . . . . . .       405,000 
   Deferred income. . . . . . . . . . . . . . . . . . . . . . . .        65,000 
                                                                     ----------
      TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . .     4,475,000 
                                                                     
LONG-TERM NOTES PAYABLE TO RELATED PARTIES. . . . . . . . . . . .     3,064,000 
LONG-TERM PAYABLE - royalty agreements, less current portion         
 $667,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . .       121,000 
LONG-TERM NOTES PAYABLE, other. . . . . . . . . . . . . . . . . .     1,219,000 
DEFERRED INCOME . . . . . . . . . . . . . . . . . . . . . . . . .       142,000 
                                                                     ----------
      TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . .     9,021,000
                                                                     ----------
COMMITMENTS AND CONTINGENCIES                                        
                                                                     
STOCKHOLDERS' DEFICIENCY:                                            
   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. . . . . . . . . . . . . . . . . . . . . .    (5,746,000)
                                                                     ---------- 
   TOTAL STOCKHOLDERS' DEFICIENCY . . . . . . . . . . . . . . . .   (1,111,000)
                                                                     ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $7,910,000
                                                                    ----------
                                                                    ----------

                                                                      
       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>
                                                                                               1997                1996
                                                                                               ----                ----
<S>                                                                                         <C>                 <C> 
GROSS REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $9,675,000          $8,118,000     
   Less:  Sales returns, discounts and allowances. . . . . . . . . . . . . . . . . .          (860,000)         (1,181,000) 
                                                                                            ----------          ----------
NET REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         8,815,000           6,937,000     
                                                                                            ----------          ----------
COSTS AND EXPENSES:
   Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3,820,000           3,228,000     
   Selling and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         3,373,000           3,106,000     
   General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,126,000           1,087,000     
   Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . .                               178,000     
                                                                                            ----------          ----------
TOTAL COSTS AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         8,319,000           7,599,000     
                                                                                            ----------          ----------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           496,000            (662,000)    
INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          (550,000)           (381,000)    
GAIN ON SALE OF BUILDINGS AND OTHER. . . . . . . . . . . . . . . . . . . . . . . . .            65,000              65,000     
OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            18,000               8,000     
                                                                                            ----------          ----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $   29,000          $ (970,000)    
                                                                                            ----------          ----------
                                                                                            ----------          ----------
PER  SHARE:
   Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $      .01          $     (.23)
                                                                                            ----------          ----------
                                                                                            ----------          ----------
</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, 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)

Net income                                                                         29,000          29,000
                                       ---------  ----------   ----------    ------------     -----------
Balance at September 30, 1997          4,135,162  $  413,000   $4,222,000    $ (5,746,000)    $(1,111,000)
                                       ---------  ----------   ----------    ------------     -----------

</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>
                                                                                               1997                1996
                                                                                          -------------      ---------------
<S>                                                                                       <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $      29,000       $     (970,000)
                                                                                          -------------      ---------------
 Adjustments to reconcile net income (loss) to net
  cash provided by operating activities:
 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             113,000              162,000
 Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,416,000              950,000
 (Decrease) in deferred income  . . . . . . . . . . . . . . . . . . . . . . . . . .             (65,000)             (65,000)
 (Gain) on disposal of property, plant and equipment. . . . . . . . . . . . . . . .             (17,000)              (9,000)
 
Change in operating assets and liabilities:
 (Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . . . .            (191,000)             219,000
 (Increase) in due from related party . . . . . . . . . . . . . . . . . . . . . . .             (35,000)             (73,000)
 Decrease in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             318,000              162,000
 (Increase) in other current assets . . . . . . . . . . . . . . . . . . . . . . . .             (22,000)             (63,000)
 (Decrease) in notes payable-other. . . . . . . . . . . . . . . . . . . . . . . . .            (150,000)                  --
 (Decrease) increase in accounts payable. . . . . . . . . . . . . . . . . . . . . .            (624,000)               8,000
 Increase (decrease) in due to related parties. . . . . . . . . . . . . . . . . . .              57,000              (40,000)
 Increase in other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . .             266,000              144,000
 (Decrease) in accrued royalties. . . . . . . . . . . . . . . . . . . . . . . . . .             (69,000)              (7,000)
                                                                                          -------------      ---------------
 Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             997,000            1,388,000
                                                                                          -------------      ---------------

      Net cash provided by operating activities . . . . . . . . . . . . . . . . . .           1,026,000              418,000
                                                                                          -------------      ---------------   

CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . .             (77,000)            (146,000)
 Proceeds from sale of equipment. . . . . . . . . . . . . . . . . . . . . . . . . .              17,000                9,000
 Acquisition of product brands. . . . . . . . . . . . . . . . . . . . . . . . . . .            (260,000)            (622,000)
                                                                                          -------------      ---------------
      
      Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . .            (320,000)            (759,000)
                                                                                          -------------      ---------------   

CASH FLOWS FROM FINANCING ACTIVITIES:
 (Payments on) proceeds from bank loans . . . . . . . . . . . . . . . . . . . . . .             (63,000)              88,000
 
 Proceeds from (payments on) notes payable to related party . . . . . . . . . . . .                  --              (37,000)
 (Payments on) proceeds from notes payable-other. . . . . . . . . . . . . . . . . .            (107,000)             852,000
 (Decrease) in long-term royalty agreements . . . . . . . . . . . . . . . . . . . .            (660,000)            (744,000)
 Increase in bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . .             137,000               72,000
                                                                                          -------------      ---------------
      Net cash (used) provided by financing activities. . . . . . . . . . . . . . .            (693,000)             231,000
                                                                                          -------------      ---------------

NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . .              13,000             (110,000)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              13,000              123,000
                                                                                          -------------      ---------------

Cash, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $      26,000       $       13,000
                                                                                          -------------      ---------------
                                                                                          -------------      ---------------

                                             SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                                                                      
Cash paid during the year for:
 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $     524,000       $      270,000
                                                                                          -------------      ---------------
                                                                                          -------------      ---------------
Acquisition of product brands:
 Fair value of assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . .       $   1,403,000       $      922,000
 Fair value of liabilities incurred . . . . . . . . . . . . . . . . . . . . . . . .          (1,143,000)            (300,000)
                                                                                          -------------      ---------------
      Net cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       $     260,000       $      622,000
                                                                                          -------------      ---------------
                                                                                          -------------      ---------------
</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 91% of total company operations.
                    
          CONTINUED EXISTENCE
                    
          The financial statements have been prepared assuming the Company will
          continue as a going concern.  The Company has an accumulated deficit
          of $5,746,000.  The Company's past recurring losses and current
          nominal profit from operations and inability to generate sufficient
          cash flow from normal operations to meet its obligation 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 retaining current
          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 of 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 ($808,000 per year) over the maximum period of
          the royalty agreement.  All other intangibles are amortized ($582,000
          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 still adequate based on current
          information available.  Consequently, no additional provision has been
          recorded in fiscal year 1997 or 1996.  See Note 10 - "Assessment for
          environmental cleanup."
     
          MAJOR CUSTOMER
     
          The Company had one major customer with sales volume approximating 14%
          and 11% of the Company's net revenues for the years ending September
          30, 1997, and 1996, respectively.  The amount due from the customer
          was $542,000 and $249,000 at September 30, 1997, and 1996,
          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.
     
          USE OF ESTIMATES
     
          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and 

<PAGE>

                                      18

          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 INCOME (LOSS) PER SHARE
     
          Net profit per share for fiscal 1997 and net loss per share for fiscal
          1996 are based on 4,135,162 common shares outstanding.  Common stock
          equivalents (common stock options) were not considered in the earnings
          per share calculation since the effect was immaterial.
   
NOTE 3 -  INVENTORIES
          
          Inventories consist of the following at September 30, 1997:
          
                  Raw materials . . . . . . . . . . . .        $  1,952,000
                  Work-in-process . . . . . . . . . . .             292,000
                  Finished goods. . . . . . . . . . . .             298,000
                                                               ------------
                                                                  2,542,000
                  Allowance for obsolescence. . . . . .             562,000
                                                               ------------
                  Total . . . . . . . . . . . . . . . .        $  1,980,000
                                                               ------------
                                                               ------------
   
NOTE 4 -  INTANGIBLE AND OTHER ASSETS
     
          The Company acquired certain product lines in 1997 (See Note 14) and
          prior years.  Certain amounts related to these acquisitions were
          allocated to intangible assets.  Included in intangible assets at
          September 30, 1997, are the following:

<TABLE>
<CAPTION>
                                                                                  Amortization
                                                                   Cost          period (years)
                  <S>                                          <C>                    <C>
                  Goodwill. . . . . . . . . . . . . . .        $  1,583,000           4 - 40    
                  Covenants not to compete. . . . . . .           2,640,000           1 -  5
                  Trademark . . . . . . . . . . . . . .             322,000                5
                  Royalty agreements. . . . . . . . . .           2,802,000           4 -  6
                  Other . . . . . . . . . . . . . . . .             326,000           2 -  3
                                                               ------------
                  Total . . . . . . . . . . . . . . . .           7,673,000
                  Less:  accumulated amortization . . .          (4,869,000)
                                                               ------------
                  Intangibles - Net . . . . . . . . . .        $  2,804,000
                                                               ------------
                                                               ------------
</TABLE>

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.         $491,000
          
          B.   Note payable to seller on acquisition of product
               brand payable in one installment of $7,000, plus
               interest, on October 8, 1997, and eleven equal
               monthly installments of $8,000, plus interest,
               ending on September 8, 1998.  The interest rate 
               is the highest prime rate during the period.  
               The interest rate at September 30, 1997, was 8.5%     95,000
          
          C.   Note payable to bank, secured by production 
               equipment related to a product brand acquisition, 
               requires monthly payments of $5,500, including 
               interest at the bank's prime rate plus 8%, 
               maturing May 1998.                                   128,000
          
          D.   Notes Payable Other                                    2,000
                                                               ------------
                                                               $    716,000
                                                               ------------
                                                               ------------

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 1997 and 1996 was $65,000.
     
     The amounts of rents paid to related parties were $133,000 and $133,000 for
     September 30, 1997, and 1996, respectively.

<PAGE>

                                      19
     
     During the fiscal year ending September 30, 1997, the total interest
     expensed to related parties (Note 7) was $275,000 out of which $188,000 was
     paid and $405,000 was accrued as of September 30, 1997.
     
     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.
     
     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.

NOTE 7 -  NOTES PAYABLE - RELATED PARTIES

     A.   Notes payable to related parties, unsecured, bearing 
          interest at bank's prime rate (8.5% at September 
          30, 1997), maturing January 2005.                          $   90,000
     
     B.   Note payable to officer, unsecured, bearing interest at
          bank's prime rate (8.5% at September 30, 1997), 
          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 (8.5% at September 30, 1997), 
          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 (8.5% at September 30, 1997),
          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 (8.5%
          at September 30, 1997), 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 (8.5% at September 30, 1997), 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 (8.5% at
          September 30, 1997), 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 (8.5% at
          September 30, 1997), 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 (8.5% at September 30, 1997),
          principal is maturing and accrued interest is payable
          in July 1998.                                                  65,000
     
     J.   Note payable to officer, unsecured, bearing interest
          at bank's prime rate (8.5% at September 30, 1997),
          principal is maturing and accrued interest is payable
          in January 2005.                                              250,000
     
     K.   Note payable to officer, unsecured, bearing interest
          at bank's prime rate (8.5% at September 30, 1997),
          maturing January 2005.                                         10,000
                                                                    -----------
                                                                     $3,319,000
          Less current portion                                         (255,000)
                                                                    -----------
                                                                     $3,064,000
                                                                    -----------
                                                                    -----------
     
     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.
     

NOTE 8 -  NOTES PAYABLE, OTHER - NONCURRENT
     
     A.   Note payable secured by product brand, bearing interest 
          at 15%, interest payable monthly, maturing December 1998. 
          The note was further modified from its original maturity 
          date of July 1996. Effective November 1, 1997, the 
          interest rate will be 20%.                                 $   50,000

<PAGE>
                                       20

<TABLE>
<CAPTION>

<S>                                                                            <C>
     B.   Note payable secured by product brand, bearing interest at 15%, 
          interest payable monthly, maturing December 1998. The note was
          further modified from its original maturity date of July 1996. 
          Effective November 1, 1997, the interest rate will be 20%.                 50,000
     
     C.   Note payable secured by product brands, bearing interest at 15%, 
          interest payable monthly, maturing December 1998. The note was 
          further modified from its original maturity date of July 1996. 
          Effective November 1, 1997, the interest rate will be 20%.                100,000
     
     D.   Note payable secured by product brand, bearing interest at 20%, 
          interest payable monthly, maturing November 1998.                         100,000
     
     E.   Note payable secured by product brand, bearing interest at 15%,
          interest payable monthly, maturing December 1998. The note was
          modified from its original maturity date of October 1996. Effective
          November 1, 1997, the interest rate will be 20%.                           50,000
     
     F.   Note payable secured by product brands, bearing interest at 15%,
          interest payable monthly, maturing December 1998. The note was
          modified from its original maturity date of February 1997. Effective
          November 1, 1997, the interest rate will be 20%.                          100,000
     
     G.   Note payable to seller on acquisition of product brand payable in
          equal monthly installments of $3,000 principal and interest until 
          September 16, 1999.  The balance of unpaid principal and accrued 
          interest is payable on October 16, 1999. The interest rate is the 
          highest prime rate during any payment period. The interest rate at 
          September 30, 1997, was 8.5%.                                             71,000
     
     H.   Note payable to seller on acquisition of product brands (28) payable
          in equal monthly installments of $19,751, plus interest, until 
          October 1, 2000, with any unpaid balance payable November 1, 2000.  
          The interest rate is the highest prime rate during the previous month.  
          The interest rate at September 30, 1997, was 8.5%.                       711,000
     
     I.   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. The note is 
          guaranteed by the President and former Chairman.                         260,000
                                                                               -----------
                                                                                 1,492,000
          Less current portion                                                    (273,000)
                                                                               -----------
                                                                               $ 1,219,000
                                                                               -----------
                                                                               -----------
</TABLE>

NOTE 9 -  LONG-TERM DEBT MATURITIES
          
     At September 30, 1997, the Company was committed to the following minimum
     principal payments.
            
            YEAR ENDING     RELATED
           SEPTEMBER 30,    PARTIES                OTHERS
   
               1998    $    255,000         $     281,000
               1999         120,000               730,000
               2000         120,000               245,000
               2001         120,000               236,000
               2002         120,000                     -
            Thereafter    2,584,000                     -
                       ------------          ------------
               Total   $  3,319,000         $   1,492,000
                       ------------          ------------
                       ------------          ------------

NOTE 10 - COMMITMENTS AND CONTINGENCIES
   
     LEASE COMMITMENTS
   
     At September 30, 1997, the Company was committed to its Chairman and to
     others under noncancelable operating leases for land and buildings
     requiring minimum annual rentals as follows:
   
<PAGE>

                                       21

            YEAR ENDING    
           SEPTEMBER 30,     OTHERS             CHAIRMAN
   
               1998      $    391,000        $    134,000
               1999           391,000             134,000
               2000           391,000             134,000
               2001            65,000             134,000
               2002                 -             134,000
            Thereafter              -             293,000
                         ------------        ------------
               Total     $  1,238,000        $    963,000
                         ------------        ------------
                         ------------        ------------

     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, 1997, and 1996,
     was $521,000 and $523,000, 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
     
               1998      $     96,800
               1999            97,600
               2000            97,600
               2001            16,300
                         ------------
               Total     $    308,300
                         ------------
                         ------------
   
     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") ordered the Company in 1998 and 1989 to investigate the 
     contamination on its property (relating to soil and groundwater 
     contamination). The Company engaged a consultant who performed tests 
     and reported to the then Chairman of the Company. On August 12, 1991,
     the RWQCB issued a "Cleanup and Abatement Order" directing the Company
     to conduct further testing and cleanup the site. In October 1991, the
     Company received from an environmental consulting firm an estimate
     of $465,200 for investigation and cleanup costs. The Company believed
     that this estimate was inconclusive and overstated the contamination
     levels. The Company believes that subsequent investigations will support
     the Company's conclusions about that estimate. 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. The Company may be liable for all or part of the costs
     of remediating the contamination on its property. The EPA has not taken
     any further action in this matter, but may do so in the future.

     The Company and nearby property owners have engaged a consultant to
     perform a site investigation with respect to soil and shallow groundwater
     contamination. The Company currently estimates the cost to perform the 
     site investigation to be $175,000. Accordingly, while reorganizing 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. In 1995, the Company was informed that the EPA
     estimated the cleanup costs for the South El Monte's portion of the
     San Gabriel Valley Superfund site to be be $30 million. The Company's
     potential share of such amount has not been determined. Superfund
     PRPs are jointly and severally liable for superfund site costs, and
     are responsible for negotiating among themselves the allocation of the
     costs based on, among other things, the outcome of environmental 
     investigation.



<PAGE>

                                       22

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 its 
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 Company has received a report from Geomatrix Consultants, Inc., dated 
December 1, 1997 (the "Report"), containing a site assessment to evaluate the 
impact of volatile organic compounds on the soil and groundwater at the 
Lidcombe and Santa Anita Avenue site located in South El Monte, California 
(which includes the Company's facilities). The Report has been submitted to 
the RWQCB for its comments and response. While the Report appears to indicate 
generally low concentrations of tetrachloroethene, trichloaethene and 
trichloroethane, until the comments and response of the RWQCB have been 
received and analyzed, no determination can be made as to what, if any, 
cleanup will be required by the Company or what, if any, additional 
environmental costs the Company may incur. The Company is optimistic that 
since the sources of these chemicals appear to be upgradient from the Company 
facilities as a result of the most recent testing done in 1997, the cleanup 
of those sources should materially reduce any cleanup costs of the Company, 
an engineering position that the Company has maintained for years.

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.

The total amount of environmental investigation and cleanup costs that the 
Company may incur with respect to the foregoing is not known at this time. 
However, based upon information available to the Company at this time, the 
Company has expensed a total of $261,000, of which $126,000 were legal fees, 
since 1991 for environmental investigation and cleanup costs. The actual 
costs could differ materially from the amounts expensed for environmental 
investigation and cleanup costs to date.

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.

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, 1996, and 1997:

<TABLE>
<CAPTION>
                                                                OPTION PRICE RANGE
                                                      NUMBER         PER SHARE

<S>                                                  <C>          <C>
     Outstanding at September 30, 1995............    467,000     $0.50 -- $1.3125
          Canceled................................   (261,500)    $0.50 -- $1.3125
                                                   ----------
     Outstanding at September 30, 1996, and 1997      205,500     $0.50 -- $1.3125
                                                   ----------
                                                   ----------
</TABLE>

<PAGE>

                                       23

     At September 30, 1997, 130,000 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, 1997, options to purchase 16,600 shares were outstanding
     and 13,300 shares are eligible to be exercised at an average price of 
     $1.21 per share. No additional options can be granted under this plan.
          
     The 1997 Employee Incentive Stock Option Plan was adopted by the Board of
     Directors on January 20, 1997, and was approved by the Company's
     shareholders on March 11, 1997. The Employee Incentive Stock Option Plan
     provides for the granting of options to selected officers and key 
     employees of the Company for the purchase of a total of 980,000 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.
     
     Only incentive stock options may be granted under the Employee Incentive
     Stock Option Plan. The price per share of the shares subject to each
     option shall not be less than 100% of the fair market value of such stock
     on the date the stock option is granted. Stock options shall not be
     exercisable until one and one-half years from the date of grant. 
     Commencing eighteen (18), thirty (30), and forty-two (42) months,
     respectively, after the date of grant, an option may be exercised to the
     extent of one third of the total number of shares to which it relates. 
     Upon a change in control of the Company (as defined), all stock options
     granted to any optionee will become fully exercisable. Any stock option
     granted to an employee who at the time the option is granted, owns stock
     representing more than ten percent (10%) of the total combined voting 
     power of all classes of stock of the Company, will be granted at a price 
     equal to one hundred and ten percent (110%) of the fair market value 
     determined as of the date the stock option is granted.  The Employee 
     Incentive Stock Option Plan will expire on December 31, 2006.
     
     The following table sets forth the number of shares under option and the
     related option price at September 30, 1997:
     
                                                              OPTION PRICE RANGE
                                                      NUMBER       PER SHARE
     
     Outstanding at September 30, 1996.............     -0-  
          Granted..................................   768,000     $.16 -- $.176
                                                    --------- 
     Outstanding at September 30, 1997.............   768,000     $.16 -- $.176
                                                    --------- 
                                                    --------- 

          
     As of September 30, 1997, there were no shares exercisable under the 1997
     Employee Incentive Stock Option Plan, and there were 212,000 shares 
     available for future grant under the 1997 Employee Incentive Stock Option
     Plan.
     
     The 1997 Stock Option Plan was adopted by the Board of Directors on 
     January 20, 1997, and was approved by the Company's shareholders on March 
     11, 1997. This Stock Option Plan provides for the granting of options to
     the Company's outside directors for the purchase of a total of 150,000 
     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.
     
     Only nonqualified stock options may be granted under the 1997 Stock Option
     Plan. The price per share of the shares subject to each option shall not
     be less than 100% of the fair market value of such stock on the date the
     stock option is granted. Stock options shall not be exercisable until one
     and one-half years from the date of grant. Commencing eighteen (18),
     thirty (30) and forty-two (42) months, respectively, after the date of
     grant, an option may be exercised to the extent of one third of the total
     number of shares to which it relates. Upon a change in control of the
     Company (as defined), all stock options granted to any optionee will 
     become fully exercisable. The 1997 Stock Option Plan will expire on
     December 31, 2006.
     
     The following table sets forth the number of shares under option and the
     related option price at September 30, 1997:
     
                                                             OPTION PRICE RANGE
                                                    NUMBER        PER SHARE
     
     Outstanding at September 30, 1996..........      -0-  
          Granted...............................    150,000         $.16
                                                 ----------   
     Outstanding at September 30, 1997..........    150,000         $.16
                                                 ----------   
                                                 ----------   

<PAGE>
     
                                       24

     There were no shares exercisable under the 1997 Stock Option Plan as of
     September 30, 1997.  There are no shares available for future grant under
     the plan as of September 30, 1997.
          

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 of which $55,000 was carried forward to offset 
     1997 taxable income. 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.
     
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 have been distributed by the Company except for a few former
     participants account balances of less than $100.00 in the aggregate.
   
NOTE 14 - ACQUISITIONS
     
     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.
     
     On October 16, 1996, the Company purchased certain assets of the
     Vince-Registered Trademark- mouthwash rinse and Perma-Grip-Registered
     Trademark- denture adhesive line from Lactona Corporation for $175,000. 
     The Company remitted $75,000 at closing and is required to make monthly
     payments of $3,000, including interest at prime, commencing November 16,
     1996, and ending September 16, 1999.  Lastly, one final payment of any
     remaining principal and accrued interest is payable on October 16, 1999.
     
     On October 21, 1996, the Company purchased certain assets from Roberts
     Laboratories for $1,048,089.  The Company remitted $100,000 at closing and
     is required to make monthly payments of $19,751 plus interest at prime
     beginning November 1, 1996, and ending October 1, 2000.  In addition, the
     Company purchased certain inventories from Roberts Laboratories for
     $193,000.
     
     On September 8, 1997, the Company purchased certain assets of the
     Klutch-Registered Trademark- denture adhesive powder line from I. Putnam,
     Inc. for $320,000.  The Company remitted $225,000 at closing and is
     required to make one payment of $7,000 plus interest, and eleven equal
     monthly payments of $8,000, plus interest at the prime rate.  In addition,
     the Company purchased certain inventories from I. Putnam, Inc., for 
     $51,063 at closing.     
     
<PAGE>
     
                                       25

NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)

     The Company has improved from a prior year loss of $970,000 to a nominal
     profit of $29,000 (approximately $1,000,000 change).  The Company believes
     the profit trend plus the programs currently in effect, inventory reduction
     and manufacturing internally (to the extent possible) its newly acquired
     brands should generate sufficient cash to meet its obligations.

NOTE 16 - FOURTH QUARTER RESULTS
   
     The Company's unaudited operating profit for the fourth quarter, ended
     September 30, 1997, was $67,000.  The $67,000 profit was related to: (1)
     higher than normal sales volume, and (2) slightly lower general and
     administrative expenses.  However, the preceding was somewhat offset by
     increased sales and marketing expenses, due to new hires, during the fourth
     quarter.  In the first three quarters the Company averaged over $2,300,000
     in gross revenues per quarter.  However, during the fourth quarter, gross
     revenues were approximately $2,800,000 or a more than 22% increase in the
     average 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 Jeffery, Corrigan & Shaw 
would have caused them to make reference in connection with their report to 
the subject matter. Jeffery, 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>
                                      26

                                   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         71    Director                1971           Chairman of the Board of Lee
                                                                      Pharmaceuticals through April 1995 
                                                                      when he retired, available as a 
                                                                      consultant, currently a Director of 
                                                                      the Company

Ronald G. Lee            45    President, Chairman     1977           President and since April 1995,
                               and Director                           Chairman of the Board
                                                                      of the Company

Michael L. Agresti       55    Vice President -        1977           Vice President - Finance,
                               Finance, Treasurer and                 Treasurer and Secretary
                               Secretary                              of the Company

William M. Caldwell IV   50    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>

                                       27

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, 1997, 1996, and 1995. 


<TABLE>
<CAPTION>

                          SUMMARY COMPENSATION TABLE
                                                                       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               1997      220,616        5,617 (1)         568,000 (2)      --
  President, Chairman       1996      179,624        2,382 (1)              --          --
  (since April 26, 1995)    1995      178,595        5,734 (1)          80,000 (2)      --
  & Director


Theo. H. Dettlaff, Vice     1997           --           --                  --          --
  President, President      1996      118,224           --                  --          --
  of Consumer Products      1995      167,575           --                  --          --
  Division & Director (3)

</TABLE>

  (1) Includes reimbursement of medical and dental expenses not covered by the 
      Company's insurance plan of $5,617, $2,382, and $5,081, respectively, in 
      1997, 1996, and 1995 and non cash fringe benefits of $653 in 1995.

  (2) The Company granted 568,000 stock options on March 12, 1997 which had an 
      option price of $.176 at the date of grant and 80,000 stock options on 
      May 8, 1995, which had an option price of $.50 at the date of grant.

  (3) Mr. Dettlaff 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                                81,666/621,334


<PAGE>

                                       28

                    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.

     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 have been distributed by the Company except for a few former 
participants account balances of less than $100.00 in the aggregate.

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

     The following table sets forth the persons who, as of November 30, 1997, 
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                      728,783 shares              18%
                     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.


<PAGE>

                                      29

     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.

                     NAME OF                   AMOUNT AND NATURE      PERCENTAGE
     TITLE OF CLASS  BENEFICIAL OWNER       OF BENEFICIAL OWNERSHIP    OF CLASS

     Common Stock    Ronald G. Lee                  728,783 (1)         18%
     Common Stock    Dr. Henry L. Lee               292,334 (2)          7%
     Common Stock    William M. Caldwell IV          13,267 (1)          *
     Common Stock    All officers and directors
                      as a group (4 persons)      1,097,144 (1)(2)      27%

(1)  Includes shares subject to options exercisable at or within 60 days after
     December 31, 1997.
(2)  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.
   
   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> 

                                      30

 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:

             10.33  -  Promissory note which was amended in October 1997 
                       evidencing advances made to the Registrant

             10.34  -  Promissory notes which were amended (modified) in 
                       December 1997 evidencing advances made to the Registrant

             10.35  -  Modification of loan and security agreement dated 
                       September 10, 1997, between Lee Pharmaceuticals and 
                       Preferred Business Credit, Inc.

             10.36  -  Promissory note which was amended in February 1997
                       evidencing advances made to the Registrant

             10.37  -  Secured promissory note dated October 21, 1996, between 
                       Lee Pharmaceuticals and Roberts Laboratories, Inc.

          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)

             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)

<PAGE>

                                      31

             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)

             10.24  -  Secured promissory note dated September 17, 1996, between
                       Lee Pharmaceuticals and Preferred Business Credit, 
                       Inc. (12)

             10.25  -  Promissory notes evidencing advances made by the
                       Registrant (12)

             10.26  -  Promissory notes which were amended in July 1996
                       evidencing advances made to the Registrant (12)

             10.27  -  Sublease dated November 22, 1995, for the premises
                       located at 1460 Santa Anita Avenue, South El Monte, 
                       California (12)

             10.28  -  Sublease dated June 11, 1996, for the premises located 
                       at 1470 Santa Anita Avenue, South El Monte, 
                       California (12)

             10.29  -  Lease dated December 1, 1995, for the premises located at
                       1444 Santa Anita Avenue, South El Monte, California (12)

             10.30  -  Lease dated December 1, 1995, for the premises located at
                       1445 Lidcombe Avenue, South El Monte, California (12)

             10.31  -  1997 Employee Incentive Stock Option Plan (13)

             10.32  -  1997 Stock Option Plan (13)


     (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.



<PAGE>

                                      32

     (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.

    (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 10.22 and 10.23 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.

    (12)  Filed as exhibits 10.24, 10.25, 10.26, 10.27, 10.28, 10.29, and 10.30
          with the Company's Form 10-KSB Annual Report for the fiscal year ended
          September 30, 1996, filed with the Securities and Exchange Commission 
          in December 1996 and incorporated herein by reference.

    (13)  Included as an attachment to the Company's definitive Proxy Statement
          to shareholders for the meeting dated March 11, 1997 and incorporated 
          herein by reference.

 (b) Reports on Form 8-K:

     None


<PAGE>

                                        33

                                    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 23, 1997              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 23, 1997           RONALD G. LEE
     ----------------------------   --------------------------------------------
                                    Ronald G. Lee
                                    Chairman of the Board
                                    (Principal Executive Officer) and Director

Date:   DECEMBER 23, 1997           HENRY L. LEE, JR.
     ----------------------------   --------------------------------------------
                                    Henry L. Lee, Jr.
                                    Director

Date:   DECEMBER 23, 1997           WILLIAM M. CALDWELL IV
     ----------------------------   --------------------------------------------
                                    William M. Caldwell IV
                                    Director

Date:   DECEMBER 23, 1997           MICHAEL L. AGRESTI
     ----------------------------   --------------------------------------------
                                    Michael L. Agresti
                                    Vice President - Finance
                                    (Principal Financial and Accounting Officer)