<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                   FORM 10-QSB


[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
        For the quarterly period ended June 30, 1999
                                       -------------

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934
        For the transition period from               to
                                       -------------    -------------


                      Commission file number: 1-7335
                                              ------

                             LEE PHARMACEUTICALS
      -----------------------------------------------------------------
      (Exact name of small business issuer as specified 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)

                                 (626) 442-3141
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

                                      N/A
              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

        As of June 30, 1999 there were outstanding 4,135,162 shares of common
stock of the registrant.

     Transitional Small Business Disclosure Format (check one): Yes      No  X
                                                                    ---     ---

<PAGE>

                               LEE PHARMACEUTICALS
                                  BALANCE SHEET
                                  JUNE 30, 1999
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

            ASSETS
<S>                                                       <C>        <C>
Cash                                                                 $    4

Accounts and notes receivable (net of allowances: $233)                 476

Due from related party                                                  225

Inventories:
     Raw materials                                       $1,779
     Work in process                                        247
     Finished goods                                         415
                                                         ------
     Total inventories                                                2,441

Other current assets                                                    461
                                                                    -------
     Total current assets                                             3,607

Property, plant and equipment (less
     accumulated depreciation and
     amortization: $6,268)                                              439

Goodwill and other assets (net of
     accumulated amortization: $6,431)                                3,743
                                                                    -------
            TOTAL                                                    $7,789
                                                                    -------
                                                                    -------
</TABLE>

                       See notes to financial statements.

<PAGE>

                               LEE PHARMACEUTICALS
                                  BALANCE SHEET
                                  JUNE 30, 1999
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

            LIABILITIES
<S>                                                                <C>
Bank overdraft                                                    $   136
Note payable to bank                                                1,148
Notes payable, other                                                1,352
Current portion - royalty agreements                                   41
Current portion - note payable related party                          465
Accounts payable                                                    1,224
Other accrued liabilities                                             542
Environmental cleanup liability                                       365
Due to related parties                                                565
Deferred income                                                        65
                                                          ---------------
         Total current liabilities                                  5,903
                                                          ---------------

Long-term notes payable to related parties                          2,642
                                                          ---------------

Long-term notes payable, other                                      1,199
                                                          ---------------

Long-term notes payable to bank                                       195
                                                          ---------------

Environmental cleanup liability - Casmalia Site                       374
                                                          ---------------

Deferred income                                                        27
                                                          ---------------

            COMMITMENTS AND CONTINGENCIES

            STOCKHOLDERS' EQUITY

Common stock, $10 per value; authorized, 7,500,00 shares;
    issued and outstanding, 4,135,162 shares.                         413

Additional paid-in capital                                          4,222

Accumulated deficit                                               (7,186)
                                                          ---------------

         Total stockholders' equity                               (2,551)
                                                          ---------------

            TOTAL                                                $  7,789
                                                          ---------------
                                                          ---------------
</TABLE>

                       See notes to financial statements.

<PAGE>

                               LEE PHARMACEUTICALS

                            STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                    FOR THE THREE MONTHS                FOR THE NINE MONTHS
                                                       ENDED JUNE 30,                     ENDED JUNE 30,
                                                   1999              1998             1999              1998
                                               -------------    -------------     -------------    -------------
                                                (UNAUDITED)       (UNAUDITED)      (UNAUDITED)       (UNAUDITED)

<S>                                            <C>              <C>               <C>              <C>
Gross revenues                                 $      2,034     $      2,166      $      6,803     $      7,017
Less:    Sales returns                                 (156)            (199)             (416)            (556)
         Cash discounts and others                      (25)             (18)              (62)             (59)
                                               ------------     ------------       ------------    ------------

Net revenues                                          1,853            1,949             6,325            6,402
                                               ------------     ------------       ------------    ------------

Costs and expenses:

       Cost of sales                                    775              968             2,738            2,848
       Selling and advertising expense                  645              901             2,184            2,690
       General and administrative expense               348              537               995            1,321
       Interest expense                                 173              156               547              456
                                               ------------     ------------       ------------    ------------

Total costs and expenses                              1,941            2,562             6,464            7,315
                                               ------------     ------------       ------------    ------------

Loss from operations                                    (88)            (613)             (139)            (913)

Other income                                             28               18                62               54
                                               ------------     ------------       ------------    ------------

Net loss before extraordinary item                      (60)            (595)              (77)            (859)

Extraordinary loss related to Casmalia
       Disposal Site Cleanup                             --               --              (374)              --
                                               ------------     ------------       ------------    ------------

Net loss                                       $        (60)    $       (595)      $      (451)    $       (859)
                                               ------------     ------------       ------------    ------------
                                               ------------     ------------       ------------    ------------

Per share:

       Net loss per share before
          extraordinary loss                   $       (.01)    $       (.14)      $      (.02)     $      (.20)

       Extraordinary loss                                --               --              (.09)              --
                                               ------------     ------------       ------------    ------------

       Net loss                                $       (.01)    $       (.14)      $      (.11)     $      (.20)
                                               ------------     ------------       ------------    ------------
                                               ------------     ------------       ------------    ------------
</TABLE>

                                        See notes to financial statements.

<PAGE>

                               LEE PHARMACEUTICALS
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                      FOR THE NINE MONTHS
                                                                                         ENDED JUNE 30,
                                                                                      1999              1998
                                                                                  -------------    -------------
                                                                                  (UNAUDITED)       (UNAUDITED)
<S>                                                                               <C>              <C>
Cash flows from operating activities:
   Net loss...................................................................    $        (451)   $        (859)
     Loss from extraordinary item.............................................              374               --
                                                                                  -------------    -------------
   Net loss before extraordinary item.........................................              (77)            (859)
                                                                                  -------------    -------------
   Adjustments to reconcile net (loss) to net
    cash used in operating activities:
   Depreciation...............................................................              102               93
   Amortization of intangables................................................              640              701
   (Decrease) in deferred income..............................................              (49)             (49)
   (Gain) on disposal of property, plant, and equipment.......................              (13)              (5)
Change in operating assets and liabilities:
   Decrease in accounts receivable............................................              418              565
   (Increase ) in due from related party......................................             (167)            (135)
   (Increase) in inventories .................................................             (319)            (148)
   Decrease in other current assets...........................................               42              520
   Increase (decrease) in accounts payable....................................              166              (12)
   Increase in accounts payable related party.................................               91               75
   Increase (decrease) in notes payable, other................................              687              (48)
   Increase in accrued liabilities-environmental cleanup......................               76              201
   Increase in other accrued liabilities......................................              159              254
   (Decrease) in accrued royalities...........................................             (363)            (856)
                                                                                  -------------    -------------
   Total adjustments..........................................................            1,470            1,156
                                                                                  -------------    -------------
     Net cash provided by operating activities................................            1,393              297
                                                                                  -------------    -------------

Cash flows from investing activities:
   Additions to property, plant, and equipment................................              (57)             (61)
   Proceeds from sale of equipment............................................               13                5
   Acquisitions of product brands.............................................           (1,350)             (70)
   Increase in long-term deposits.............................................               --              (12)
                                                                                  -------------    -------------
     Net cash (used in) investing activities..................................           (1,394)            (138)
                                                                                  -------------    -------------

Cash flows from financing activities:
   (Payments on) bank loans...................................................              (22)             (14)
   (Payments on) notes payable to related party...............................              (14)              (4)
   (Payments on) proceeds from notes payable, other...........................              (51)               3
   (Decrease) in long-term royalty agreements.................................               --              (96)
   Increase (decrease) in bank overdraft......................................               50              (65)
                                                                                  -------------    -------------
     Net cash (used in) financing activities..................................              (37)            (176)
                                                                                  -------------    -------------

Net (decrease) in cash........................................................              (38)             (17)
Cash, beginning of year.......................................................               42               26
                                                                                  -------------    -------------

Cash end of period............................................................    $           4    $           9
                                                                                  -------------    -------------
                                                                                  -------------    -------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:
   Interest...................................................................    $         461    $         394
                                                                                  -------------    -------------
                                                                                  -------------    -------------
Acquisitions of product brands:
   Fair value of assets acquired..............................................    $       2,217    $          70
   Fair value of liabilities incurred.........................................             (867)              --
                                                                                  -------------    -------------
     Net cash payments........................................................    $       1,350    $          70
                                                                                  -------------    -------------
                                                                                  -------------    -------------
</TABLE>

                       See notes to financial statements.

<PAGE>

     NOTES TO FINANCIAL INFORMATION

1.   Basis of presentation:

     The accompanying balance sheet as of June 30, 1999, and the statements of
     operations and cash flows for the periods ended June 30, 1999, and 1998,
     have not been audited by independent accountants but reflect all
     adjustments, consisting of any normal recurring adjustments, which are, in
     the opinion of management, necessary to a fair statement of the results for
     such periods. The results of operations for the nine months ended June 30,
     1999, are not necessarily indicative of results to be expected for the year
     ending September 30, 1999.

     Certain information and footnote disclosure normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been omitted pursuant to the requirements of the Securities
     and Exchange Commission, although the Company believes that the disclosures
     included in these financial statements are adequate to make the information
     not misleading.

     The financial statements should be read in conjunction with the financial
     statements and notes thereto included in the Company's annual report on
     Form 10-KSB for the fiscal year ended September 30, 1998.

     The Company is involved in various matters involving environmental cleanup
     issues. SEE "Item 2. Management's Discussion and Analysis or Plan of
     Operations" and Note 10 of Notes to Financial Statements included in the
     Company's Form 10-KSB for the fiscal year ended September 30, 1998. The
     ultimate outcome of these matters cannot presently be determined.
     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.

     The Company accrued a $374,000 charge in the first quarter of fiscal 1999
     with respect to a possible environmental cleanup liability related to the
     Casmalia Disposal Site. The Company will be filing for relief from this
     obligation under the financial hardships option in the EPA's response form
     "Instructions for Applying for Financial Review," consequently, the
     $374,000 accrual is presented as a long-term liability.

2.   Continued existence:

     The accompanying financial statements have been prepared assuming that the
     Company will continue as a going concern. The Company's recurring past
     losses from operations and inability to generate sufficient cash flow from
     normal operations raise substantial doubt about its ability to continue as
     a going concern. 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.

3.   Net income (loss) per share:

     Net income (loss) per share is based on the weighted average number of
     shares of common stock outstanding during the periods presented. Common
     stock equivalents (common stock options) are not included in these
     calculations where their effect on net income per share is anti-dilutive.
     The weighted average number of shares was 4,135,162 for all periods
     presented.

4.   Note payable to bank:

     Effective April 26, 1996, the Company renewed its real estate loan with the
     bank. The note payable to the bank, secured by deed on land and building,
     requires a monthly payment of $4,200 including interest at the bank's
     reference rate plus 4%, maturing March 2001. At June 30, 1999, the interest
     rate was 12%. The note is guaranteed by the former Chairman of the Company
     and the Company's President.

<PAGE>

5.   Line of credit:

     Effective May 21, 1998, the Company renewed its accounts receivable
     financing, maturing May 2000, whereby 75% of the eligible domestic accounts
     receivable, not to exceed $1,100,000 less amounts loaned on inventory, not
     to exceed $400,000, can be advanced. The agreement may be renewable for
     successive one year periods thereafter. Also, the agreement requires
     minimum monthly interest of $3,000 with an interest rate of 5% above Bank
     of America's prime rate. The new financing agreement includes a $400,000
     term loan on inventory which is incorporated in the working capital line of
     credit above. The term loan requires monthly payments of $11,110 with an
     interest rate of 6% above Bank of America's prime rate. Additionally, there
     is a separate $440,000 term loan on the Company's equipment. The financing
     is secured by a security interest in all of the Company's assets and
     requires monthly payments of $11,800 including interest at Bank of
     America's prime rate plus 6%.

6.   Acquisition:

     On February 17, 1998, the Company purchased certain assets of the
     PAIN-A-LAY -Registered Trademark- throat spray line from Medtech
     Laboratories, Inc. for $70,000. The Company is required to make five
     payments of $14,000 each plus interest at 10% starting 61 days after the
     close. In addition, the Company purchased for cash inventory valued at
     $27,764.

     On September 28, 1998, the Company purchased certain assets of the
     EVAC-U-GEN-Registered Trademark- brand of laxatives from Walker, Corp. &
     Co., Inc. for $234,000. The Company remitted $100,000 at closing and is
     required to make monthly payments of $5,300, plus interest, beginning
     November 25, 1998 and ending September 25, 2001. This note is personally
     guaranteed by the Company's Chairman. The interest rate is equal to the
     highest prime rate during any one period. In addition, the Company
     purchased certain inventories from Walker, Corp. & Co., Inc. for $54,500 at
     closing.

     On October 1, 1998, the Company purchased certain assets of the
     Cheracol-Registered Trademark- cough syrup, Comhist-Registered Trademark-
     decongestant tablets and Entuss-Registered Trademark- expectorant product
     lines from Roberts Pharmaceutical Corporation for $684,934. The Company
     remitted $600,000 at closing and is required to make monthly payments of
     $3,538, plus interest at prime, commencing January 1, 1999, and ending
     November 1, 2000. In addition, the Company purchased certain inventory for
     $150,800 for which the Company is required to make monthly payments of
     $6,283, plus interest at prime, commencing January 1, 1999, and ending
     November 1, 2000. By mutual consent, the buyer and seller, in March, 1999
     reduced the purchase price to $666,863 and the monthly payments were
     adjusted from $3,538 to $2,786. The maturity date is unchanged.

     On December 1, 1998, the Company purchased certain assets of seven
     over-the-counter products from Numark Laboratories, Inc. for $430,000 of
     which $100,000 was inventory. The Company remitted the full $430,000 at
     closing.

     On April 23, 1999, the Company purchased certain assets of the Lady
     Esther-Registered Trademark-, facial cream and powder product line from
     Numark Laboratories, Inc. for $220,000. The Company remitted $220,000 at
     closing. In addition, the Company purchased certain inventory for $169,000.

     On June 29, 1999, the Company purchased certain assets of the
     Take-Off-Registered Trademark-, pre-moistened makeup remover cloths product
     line from Premier Consumer Products, Inc. and Advanced Polymer Systems,
     Inc. for $1,000,000. The Company remitted $200,000 at closing and is
     required to make monthly payments of $32,000 plus interest at prime
     commencing September 15, 1999 and ending September 15, 2001. In addition,
     the Company purchased certain inventory for approximately $70,000.

7.   Non-cash transaction:

     In March 1999 a non-cash transaction was recorded whereby $193,000 in prior
     cash advances, to a related party, was offset against a long-term note, of
     the same amount, due to the same related party.

<PAGE>

ITEM 2.

     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

     MATERIAL CHANGES IN RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999,
     AND JUNE 30, 1998

     Gross revenues for the three months ended June 30, 1999, were $2,034,000, a
     decrease of approximately $132,000 or 6% from the comparable three months
     ended June 30, 1998. The decrease in gross revenues was due to the reduced
     sales revenues of the nail category products, WATE-ON-Registered Trademark-
     and Lee-Registered Trademark- Lip-Ex-TM-. The decrease in sales revenues
     was partially offset by volume generated from recently acquired brands such
     as EVAC-U-GEN-Registered Trademark-, Cheracol-Registered Trademark-,
     Comhist-Registered Trademark-, and Entuss-Registered Trademark- plus seven
     new over-the-counter items purchased from Numark Laboratories. The newly
     acquired brands accounted for approximately $290,000 of gross revenues.

     Net revenues decreased approximately $96,000 or 5% for the three months
     ended June 30, 1999, as compared to the three months ended June 30, 1998.
     The change in net revenues was due to the same explanations discussed
     above. The Company's sales returns decreased approximately $43,000 or 22%
     when comparing fiscal years 1999 and 1998, due mainly to lower returns of
     the depilatory category and nail extender products.

     Cost of sales as a percentage of gross revenues was 38% for the three
     months ended June 30, 1999, compared to 45% for the three months ended June
     30, 1998. The lower cost of sales percentage was due to the change in
     product mix and fewer temporary personnel utilized in the
     production/assembly process. The Company has also benefited from the
     economy of longer production runs.

     Selling and advertising expenses decreased $256,000 or 28% when comparing
     the three months ended June 30, 1999, with the three months ended June 30,
     1998. The decrease in expenses was mainly due to the following factors; 1)
     finalization of a minimum royalty due ($125,000 per quarter) on a brand
     acquisition which ended on September 30, 1998, 2) lower commissions
     ($28,000) due to fewer sales representatives and lower commission rates, 3)
     reduced salary and related fringe benefits plus associated travel and
     entertainment expenses because of one less outside salesman ($68,000), 4)
     the finalization of royalty due on several other brand acquisitions
     ($12,000) and 5) less media-print advertising expense ($8,000). The above
     major decreases were somewhat offset by increases in; 1) amortization
     expense ($23,000) the result of recent brand acquisitions and 2) products
     liability insurance ($4,000) due to an increase in coverage limits.

     General and administrative expenses decreased $189,000 or 35% when
     comparing the three months ended June 30, 1999, with the three months ended
     June 30, 1998. The decrease in expenses was mainly due to the following
     factors; 1) lower salaries and wages plus related fringe benefits the
     result of fewer personnel ($32,000), 2) reduced legal expenses ($21,000),
     3) a reduction in consulting services expense ($23,000), 4) no comparative
     audit loan fee regarding possible outside financing ($12,500), and 5) one
     time accrual for the Monterey Park waste site cleanup ($79,000) plus an
     additional environmental cleanup accrual of $122,000. The above significant
     decreases were partially offset by an increase in management information
     systems (MIS) consulting services ($25,000) related to Year 2000 readiness.

     Interest expense increased $17,000 or 11% when comparing the three months
     ended June 30, 1999, with the three months ended June 30, 1998. The
     increase was due to increased borrowings from the Company's asset based
     financing lender. This was somewhat offset by lower private borrowings and
     a decrease in the prime rate, 7.75% versus 8.5% at June 30, 1999 and June
     30, 1998, respectively related to certain borrowings which are tied to
     prime.

     MATERIAL CHANGES IN RESULTS OF OPERATIONS NINE MONTHS ENDED JUNE 30, 1999,
     AND JUNE 30, 1998

     Gross revenues for the nine months ended June 30, 1999, were $6,803,000 a
     decrease of approximately $214,000 or 3% from the comparable nine months
     ended June 30, 1998. The decease in gross revenues was due to the decline
     in volume generated from depilatories, Aquafilter-Registered Trademark-,
     Lee-Registered Trademark- Lip-Ex-TM- and the nail extender category of
     products. The decreased sales volume was partially offset by the sales
     revenues generated from the newly acquired brands such as
     EVAC-U-GEN-Registered Trademark-, Cheracol-Registered Trademark-,
     Comhist-Registered Trademark-, and Entuss-Registered Trademark- plus seven
     new over-the-counter items purchased from Numark Laboratories.

<PAGE>

     Net revenues for the nine months ended June 30, 1999 were $6,325,000 a
     decrease of $77,000 or 1% from the comparable nine months ended June 30,
     1998. The sales returns were lower ($140,000 or 25%) during the nine months
     period ended June 30, 1999, versus June 30, 1998. This was the result of
     lower returns of the nail extender products, depilatory category and
     several over-the-counter brands.

     Cost of sales as a percentage of gross revenues for the nine months ended
     June 30, 1999, as compared to the nine months ended June 30, 1998, was 40%
     versus 41% respectively. The lower cost of sales percentage for the nine
     months ended June 30, 1999, compared to June 30, 1998 was due to a
     favorable product mix and the economy of longer production runs.

     Selling and advertising expenses decreased $506,000 or 19% when comparing
     the nine months ended June 30, 1999, with the nine months ended June 30,
     1998. The decreased expenses were basically due to; 1) finalization of a
     minimum royalty due ($375,000 for nine months) on a brand acquisition which
     ended September 30, 1998, 2) lower commissions ($94,000) due to fewer
     manufacturer representatives and lower commission rates, 3) the
     finalization of royalty due on several other brand acquisitions ($28,000),
     and 4) reduced salary and related fringe benefits plus associated travel
     and entertainment expenses because of one less salesman ($32,000). The
     above major decreases were partially offset by increases in; 1)
     amortization expense ($56,000) the result of recent brand acquisitions, and
     2) products liability insurance ($41,000) due to an increase in coverage
     limits.

     General and administrative expenses decreased $326,000 or 25% when
     comparing the nine months ended June 30, 1999, with the nine months ended
     June 30, 1998. The decrease was principally due to the same factors as
     listed when comparing the three months ended June 30, 1999, versus the
     comparable period ended June 30, 1998.

     Interest expense increased $77,000 or 16% when comparing the nine months
     ended June 30, 1999, with the nine months ended June 30, 1998. The increase
     was due to increased borrowings from the Company's asset based financing
     lender. This was somewhat offset by a decrease in the prime rate, 7.75%
     versus 8.5% at June 30, 1999 and June 30, 1998, respectively related to
     certain private borrowings which are tied to prime.

     LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1999, working capital was a negative $2,296,000 compared with a
     negative $719,000 as of September 30, 1998. The ratio of current assets to
     current liabilities was .6 to 1 at June 30, 1999, and .8 to 1 at September
     30, 1998. The increase in the Company's negative working capital was
     primarily due to an increase in current liabilities of $1,372,000
     (basically an increase in the current portion of notes payable as a result
     of newly acquired product brands, an increase in the current portion of
     notes payable as a result of private borrowings and an increase in the
     environmental cleanup liability) and a decrease in current assets of
     $205,000 primarily due to a decrease in accounts receivable and other
     current assets.

     The Company has an accumulated deficit of $7,186,000. The Company's past
     recurring losses and the second quarter 1999's profit and fiscal 1997's
     nominal profit from operations and inability to generate sufficient cash
     flow from normal operations to meet its obligations as they came due raise
     substantial doubt about the Company's ability to continue as a going
     concern. The Company's ability to continue in existence is dependent upon
     future developments, including retaining current financing and achieving a
     level of profitable operations sufficient to enable it to meet its
     obligations as they become due.

     YEAR 2000 READINESS

     Most companies have computer systems that use two digits to identify a year
     in the date field (e.g. "98" for 1998). These systems must be modified to
     handle turn-of-the century calculations. If not corrected, systems failures
     or miscalculations could occur, potentially causing disruptions of
     operations, including, among other things, the inability to process
     transactions, send invoices, or engage in other normal business activities.
     This creates potential risk for all companies, even if their own computer
     systems are Year 2000 compliant.

<PAGE>

     In 1998, the Company initiated a comprehensive review of its computer
     systems to identify processes that could be adversely affected by Year 2000
     issues. In addition, the Company identified computer application systems
     that required modification or replacement.

     The Company will be required to modify or replace certain portions of its
     software so that its systems will function properly with respect to dates
     in the Year 2000 and thereafter. The Company has upgraded its existing
     computer system hardware and software and has solicited the assistance of a
     software reengineering company specializing in services to resolve the Year
     2000 problem to remediate non-compliant code in existing applications and
     systems. The Company is also utilizing internal resources to reprogram or
     replace and test the software for Year 2000 modifications.

     The Company has an ongoing program of communicating with suppliers and
     vendors to determine the extent to which those companies are addressing
     Year 2000 compliance issues. There can be no assurance that the Company
     will be able to develop a contingency plan that will adequately address
     issues that may arise in the Year 2000.

     In 1999, a contingency plan will be developed in the event key or critical
     suppliers or vendors are unable to meet the Year 2000 compliance. If
     needed, such steps as identifying alternative suppliers and vendors will be
     addressed. The timeframe for completing or documenting contingency plans
     has not been finalized.

     The Company estimates that the cost of remediation will be less than
     $100,000. The remediation costs include internal labor costs, as well as
     fees and expenses paid to outside contractors specifically associated with
     programming and purchased hardware and upgraded software.

     The Company's Year 2000 plans, including costs, preparation for testing,
     and completion schedules (by October 1999), are based on management's best
     estimates. These estimates were derived using assumptions of future events
     including third party input, availability of qualified personnel, and other
     factors.

     Based on currently available information, management does not believe that
     the Year 2000 matters discussed above will have a material adverse impact
     on the Company's financial condition or results of operations; however,
     because of the uncertainties in this area, no assurances can be given in
     this regard.

     ENVIRONMENTAL MATTERS

     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. The Company resisted further
     work on its property until the property upgradient was tested in greater
     detail since two "apparent source" lots had not been tested. 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
     for the reasons listed above as well as "financial constraints". 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, in consort with their comprehensive
     general liability (CGL) carriers, have engaged a consultant to perform a
     site investigation with respect to soil and shallow groundwater
     contamination over the entire city block. The CGL carriers provided
     $290,000 in funding which paid for the $220,000 study, $20,000 in legal
     fees for project oversight, and a $50,000 balance in the operating fund.
     Earlier the Company had accrued $87,500 as its proportionate share of the
     earlier quote of $175,000. Since that time, the overall scope of the
     project was increased to

<PAGE>

     $205,000 plus $15,000 for waste water disposal, bringing the total to the
     above listed $220,000. The $87,500 accrual was not spent on this project
     (as the entire cost was borne by the CGL carriers), but remains on the
     books as an accrual against the cost of remediation of the same site that
     was included in the study.

     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
     $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 of 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 has been completed
     but the final program has not been reported. 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 and other property owners engaged Geomatrix Consultants, Inc.,
     to do a survey of vadose soil and shallow groundwater in the "hot spots"
     detected in the previous studies. Geomatrix issued a report dated December
     1, 1997 (the "Report"), on 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 indicated generally low concentrations of tetrachloroethene,
     trichloaethene and trichloroethane in the groundwater of the upgradient
     neighbor. The Report was submitted to the RWQCB for its comments and
     response. A meeting with the parties and RWQCB was held on February 10,
     1998. The RWQCB had advised companies that vadose soil contamination is
     minimal and requires no further action. However, there is an area of
     shallow groundwater which has a higher than desired level of chlorinated
     solvents, and the RWQCB requested a proposed work plan be submitted by
     Geomatrix. Geomatrix has submitted a

<PAGE>

     "Focused Feasibility Study" which concludes that there are five possible
     methods for cleanup. The most expensive are for a pump and sewer
     remediation which would cost between $1,406,000 and $1,687,000. The Company
     is actively exploring the less expensive alternative remediation methods,
     of which the two proposed alternatives range in cost between $985,000 and
     $1,284,000. Accordingly, the Company has taken the average of the two
     amounts ($985,000 and $1,284,000) as the total amount of estimated cost.
     Since there are four economic entities involved, the Company's best
     estimate at this time, in their judgment, would be that their forecasted
     share would be 25% or $284,000 less the liability already recognized on the
     books of $162,000 thereby requiring an additional $122,000 liability.
     Accordingly, the Company recorded an additional accrual of $122,000 in the
     third quarter of fiscal 1998. The $122,000 accrual is in addition to the
     $79,000 accrual for the Monterey Site as will be explained in the following
     paragraph. The $79,000 accrual, in the third quarter of fiscal 1998,
     related to the Monterey Site is not included in the $284,000 figure above.
     No assurances can be given that any of the alternative remediation methods
     will be feasible or that the actual cost to the Company of the remediation
     will not exceed the amount of the Company's current accruals of $284,000
     (which includes the $122,000 charge to income in the third quarter of
     fiscal 1998).

     Without any prior correspondence or inkling of the Company's potential
     liability, the EPA has recently informed the Company that the Company may
     have potential liability for the ongoing remediation of Operating
     Industries, Inc. (as they have gone out of business) Landfill Superfund
     Site in Monterey Park, California (the "Monterey Site"). The Monterey Site
     is a 190 acre landfill that operated from 1948 to 1984, in which the
     Company disposed of non toxic pH balanced waste water on six occasions
     between 1974 and 1978. Over 4,000 companies have been identified as having
     contributed waste to the Monterey Site. The EPA has offered to settle the
     Company's potential liability with respect to the Monterey Site for a cost
     to the Company of $79,233. The Company accrued a $79,000 charge in the
     third quarter of fiscal 1998 with respect to this possible liability. The
     Company has elected to file for relief from these obligations under the
     financial hardship option in the EPA's response form.

     The Company was recently notified by the EPA that the Company may have
     potential liability for waste material it disposed of at the Casmalia
     Disposal Site ("Site") located on a 252-acre parcel in Santa Barbara
     County, California. The Site was operational from 1973 to 1989 and over
     10,000 separate parties disposed of waste there. The EPA stated that
     federal, state and local governmental agencies along with the numerous
     private entities that used the Site for waste disposal will be expected to
     pay their share as part of this settlement. The U.S. EPA is also pursuing
     the owner(s)/operator(s) of the Site to pay for Site remediation. The EPA
     has a settlement offer to the Company with respect to the Site for a cost
     of $373,950. The Company accrued a $374,000 charge in the first quarter of
     fiscal 1999 with respect to this possible liability. The Company has
     elected to file for relief from these obligations under the financial
     hardships option in the EPA's response form "Instructions for Applying for
     Financial Review."

     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 since 1988 a total of $860,000, of which $89,000 were
     legal fees, exclusive of legal fees expended in connection with the SEC
     environmental investigation. The actual costs could differ materially from
     the amounts expensed for environmental investigation and cleanup costs to
     date.

<PAGE>

                           PART II - OTHER INFORMATION

Item 1.       Legal Proceedings

The information set forth under Part I, Item 2, "Management's Discussion and
Analysis or Plan of Operations-Environmental Matters" is incorporated herein by
reference. SEE ALSO "Legal Proceedings" in the Company's Form 10-KSB for the
fiscal year ended September 30, 1998.

Item 6.       Exhibits

             3.1  -  Articles of Incorporation, as amended (1)

             3.4  -  By-laws, as amended December 20, 1997 (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 -  Asset Purchase and Sale Agreement dated June 29, 1999,
                     between Lee Pharmaceuticals (Buyer) and Premier Consumer
                     Products, Inc. (Seller) and Advanced Polymer Systems,
                     Inc., regarding a brand acquisition

             10.2 -  Promissory note evidencing advance made to the Registrant

             27   -  Financial Data Schedule

              (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 and 3.5 with the Company's Form 10-K
                   Annual Report for the fiscal year ended September 30, 1978,
                   filed with the Securities and Exchange Commission 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
                   and incorporated herein by reference.

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Securities Exchange Acts of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.


                                                   LEE PHARMACEUTICALS
                                                   -------------------
                                                       (Registrant)




Date:  August 9, 1999                                 RONALD G. LEE
       --------------                    ------------------------------------
                                                      Ronald G. Lee
                                         Chairman of the Board, President and
                                         Chief Financial and Accounting Officer