<PAGE>

                         SECURITIES AND EXCHANGE COMMISSION

                               Washington, DC  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, 1998   
                               -------------------------------------------------

                                         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)

     Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

Yes  X     No  
   -----     -----

     As of June 30, 1998, there were outstanding 4,135,162 shares of common
stock of the registrant.

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

<PAGE>

                                                                     FORM 10-QSB
                                       
                             LEE PHARMACEUTICALS
                                BALANCE SHEET
                                JUNE 30, 1998
                            (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>

<S>                                                          <C>         <C>
ASSETS
Cash                                                                      $    9

Accounts and notes receivable (net of allowances: $171)                      738

Due from related party                                                       243

Inventories:
     Raw materials                                           $  1,620
     Work in process                                              273
     Finished goods                                               235
                                                             --------
     Total inventories                                                     2,128

Other current assets                                                         652
                                                                         -------
     Total current assets                                                  3,770

     Property, plant and equipment (less
     accumulated depreciation and
     amortization: $6,158)                                                   485
     
     Goodwill and other assets (net of
     accumulated amortization: $5,571)                                     2,187
                                                                         -------
     TOTAL                                                               $ 6,442
                                                                         -------
                                                                         -------
</TABLE>

                                          
                         See notes to financial statements.


<PAGE>

                                                                     FORM 10-QSB

                                          
                                LEE PHARMACEUTICALS 
                                   BALANCE SHEET
                                   JUNE 30, 1998
                               (DOLLARS IN THOUSANDS)
                                    (UNAUDITED)
     
<TABLE>

<S>                                                                   <C>
LIABILITIES
     
Bank overdraft                                                        $     144
Note payable to bank                                                          8
Notes payable, other                                                        933
Current portion - royalty agreements                                        269
Current portion - note payable related party                                345
Accounts payable                                                          1,008
Accrued liabilities - environmental cleanup                                 288
Other accrued liabilities                                                   576
Due to related parties                                                      480
Deferred income                                                              65
                                                                       --------
     Total current liabilities                                            4,116
     
Long-term notes payable to related parties                                2,970
     
Long-term notes payable, other                                              970
     
Long-term notes payable to bank                                             238
     
Long-term payable-royalty agreements, less current portion $269              25

Deferred income                                                              93
                                                                       --------
     Total liabilities                                                    8,412
                                                                       --------
     COMMITMENTS AND CONTINGENCIES
     
STOCKHOLDERS' DEFICIENCY
     
Common stock, $.10 par value; authorized, 7,500,00 shares;
     issued and outstanding, 4,135,162 shares                               413

Additional paid-in capital                                                4,222

Accumulated deficit                                                      (6,605)
                                                                       --------
     Total stockholders' deficiency                                      (1,970)
                                                                       --------
     TOTAL                                                             $  6,442
                                                                       --------
                                                                       --------

</TABLE>

                         See notes to financial statements.


<PAGE>

                                                                     FORM 10-QSB
                                          
                                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,
                                                      1998          1997            1998           1997
                                                  -----------   ------------    -----------    -----------
                                                   UNAUDITED)    (UNAUDITED)    (UNAUDITED)    (UNAUDITED)
<S>                                               <C>            <C>            <C>            <C>
Gross revenues                                    $    2,166     $    2,415     $    7,017     $    6,860
Less:     Sales returns                                 (199)          (158)          (556)          (503)
          Cash discounts and others                      (18)           (20)           (59)           (85)
                                                  ----------     ----------     ----------     ----------
Net revenues                                           1,949          2,237          6,402          6,272
                                                  ----------     ----------     ----------     ----------

Costs and expenses:

          Cost of sales                                  968            910          2,848          2,674
          Selling and advertising expense                901            866          2,690          2,405
          General and administrative expense             693            470          1,777          1,270
                                                  ----------     ----------     ----------     ----------
Total costs and expenses                               2,562          2,246          7,315          6,349
                                                  ----------     ----------     ----------     ----------
(Loss) from operations                                  (613)            (9)          (913)           (77)

Other income                                              18             19             54             65
                                                  ----------     ----------     ----------     ----------
Net income (loss)                                 $     (595)    $       10     $     (859)    $      (12)
                                                  ----------     ----------     ----------     ----------
                                                  ----------     ----------     ----------     ----------
Per share:
          Net income (loss)                       $     (.14)    $      .00     $     (.20)    $      .00
                                                  ----------     ----------     ----------     ----------
                                                  ----------     ----------     ----------     ----------
</TABLE>


                         See notes to financial statements.


<PAGE>

                                                                     FORM 10-QSB
                                          
                                LEE PHARMACEUTICALS 
                              STATEMENTS OF CASH FLOWS
                               (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                  FOR THE NINE MONTHS
                                                                                     ENDED JUNE 30,
                                                                                   1998           1997
                                                                                -----------    ----------
                                                                                (UNAUDITED)    (UNAUDITED)
<S>                                                                             <C>            <C>
Cash flows from operating activities:
   Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $     (859)    $      (12)
                                                                                ----------     ----------
   Adjustments to reconcile net loss to net
    cash provided by operating activities:
   Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              93             83
   Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . .             701          1,035
   (Decrease) in deferred income . . . . . . . . . . . . . . . . . . . . .             (49)           (49)
   (Gain) on disposal of property, plant, and equipment. . . . . . . . . .              (5)           (16)
Change in operating assets and liabilities:
   Decrease in accounts receivable . . . . . . . . . . . . . . . . . . . .             565            203
   (Increase) in due from related party. . . . . . . . . . . . . . . . . .            (135)           (21)
   (Increase) decrease in inventories  . . . . . . . . . . . . . . . . . .            (148)           166
   Decrease (increase) in other current assets . . . . . . . . . . . . . .             520            (62)
   (Decrease) in accounts payable. . . . . . . . . . . . . . . . . . . . .             (12)          (448)
   Increase (decrease) in account payable related party. . . . . . . . . .              75            (50)
   Increase in notes payable related party . . . . . . . . . . . . . . . .              90
   (Decrease) increase in notes payable, other . . . . . . . . . . . . . .             (48)            45
   Increase in accrued liabilities - environmental cleanup . . . . . . . .             201               
   Increase in other accrued liabilities . . . . . . . . . . . . . . . . .             256            133
   (Decrease) in accrued royalties . . . . . . . . . . . . . . . . . . . .            (856)           (76)
                                                                                ----------     ----------
   Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,248            943
                                                                                ----------     ----------
     Net cash provided by operating activities . . . . . . . . . . . . . .             389            931
                                                                                ----------     ----------
Cash flows from investing activities:
   Additions to property, plant, and equipment . . . . . . . . . . . . . .             (61)          (111)
   Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . .               5             16
   Acquisition of product brands . . . . . . . . . . . . . . . . . . . . .             (70)        (1,092)
   Increase in long-term deposits. . . . . . . . . . . . . . . . . . . . .             (12)              
                                                                                ----------     ----------
     Net cash (used in) investing activities . . . . . . . . . . . . . . .            (138)        (1,187)
                                                                                ----------     ----------

Cash flows from financing activities:
   (Payments on) bank loans. . . . . . . . . . . . . . . . . . . . . . . .             (14)           (61)
   (Payments on) proceeds from notes payable to related party. . . . . . .             (94)            80
   Proceeds from notes payable, other. . . . . . . . . . . . . . . . . . .               3            633
   (Decrease) in long-term royalty agreements. . . . . . . . . . . . . . .             (96)          (495)
   (Decrease) increase in bank overdraft . . . . . . . . . . . . . . . . .             (65)           114
                                                                                ----------     ----------
     Net cash (provided by) used in financing activities . . . . . . . . .            (266)           271
                                                                                ----------     ----------

Net (decrease) increase in cash. . . . . . . . . . . . . . . . . . . . . .             (17)            15
Cash, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . .              26             13
                                                                                ----------     ----------

Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . .      $        9     $       28
                                                                                ----------     ----------
                                                                                ----------     ----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
   Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $      394     $      428
                                                                                ----------     ----------
                                                                                ----------     ----------

Acquisition of product brands:
   Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . .      $       70     $    1,497
   Fair value of liabilities incurred. . . . . . . . . . . . . . . . . . .                            405
                                                                                ----------     ----------
     Net cash payments . . . . . . . . . . . . . . . . . . . . . . . . . .      $       70     $    1,092
                                                                                ----------     ----------
                                                                                ----------     ----------
</TABLE>

                          See notes to financial statements.


<PAGE>

                                                                     FORM 10-QSB

     NOTES TO FINANCIAL INFORMATION
     
1.   Basis of presentation:

     The accompanying balance sheet as of June 30, 1998, and the statements of
     operations and cash flows for the periods ended June 30, 1998, and 1997,
     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,
     1998, are not necessarily indicative of results to be expected for the year
     ending September 30, 1998.

     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, 1997.

     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, 1997.  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.

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 continued as
     a going concern.

3.   Net loss per share:

     Net 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 loss 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 Bank of
     America's base rate plus 4%, maturing March 2001.  At June 30, 1998, the
     interest rate was 12.5%.  The note is guaranteed by the former Chairman of
     the Company and the Company's President.

5.   Line of credit:

     During May of 1998, the Company renewed its revolving credit facility.  It
     is a two-year agreement maturing in May 2000.  The total revolving line of
     credit facility is $1,100,000, including a $400,000 loan secured by the
     Company's inventory at a rate of prime plus 6%.  Additionally, an equipment
     loan of $400,000 at a rate of prime plus 6% was made available.  The
     accounts receivable revolving credit facility is at a rate of prime plus
     5%.  The renewed interest rate is lower by 3% from the initial revolving
     credit facility agreement.  The equipment loan is amortized over 48 months
     with a balloon payment on May 21, 2000.  There is no prepayment penalty on
     either the equipment or inventory loan.  The accounts receivable line of
     credit could be paid off after May 20, 1999, with a 90 day advance notice 

<PAGE>

                                                                     FORM 10-QSB

     and $15,000 prepayment penalty.   The accounts receivable line of credit
     plus the inventory and equipment loans, in the aggregate, are subject to a
     minimum interest of $3,000 per month. The new loan agreement is personally
     guaranteed by the Company's president.

6.   Acquisitions:

     On October 16, 1996, the Company purchased certain assets from Lactona
     Corporation for $175,000 including inventory valued at approximately
     $30,000.  The Company remitted $75,000 at closing.  Payments of $3,000,
     including interest, are due the 16th of each month starting November 1996
     and ending September 1999 and any remaining amount on October 16, 1999. 
     Interest is to be computed at the highest prime rate during the payment
     period.  The highest prime rate was 8.25% on March 16, 1997.

     On October 21, 1996, the Company purchased certain assets from Roberts
     Laboratories, Inc. for $1,168,089.  The Company remitted $100,000 at
     closing.  Payments of $19,752 are due on the first of each month starting
     November 1, 1996, and ending on October 1, 2000.  Any remaining unpaid
     balance is due on November 1, 2000.  Interest shall be paid at the highest
     prime rate during the preceding month.

     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.

     On February 17, 1998, the Company purchased certain assets of the
     Painalay-Registered Trademark- throat spray line from Medtech 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.

ITEM 2.

     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

     MATERIAL CHANGES IN RESULTS OF OPERATIONS
     THREE MONTHS ENDED JUNE 30, 1998, AND JUNE 30, 1997

     Gross revenues for the three months ended June 30, 1998, were $2,166,000, a
     decrease of approximately $249,000 or 10% from the comparable three months
     ended June 30, 1997.  The decrease in gross revenues was due to the decline
     in volume generated from the depilatories, nail products, oral rinse 
     powder, and the 28 items (acquired in October 1996) which includes 
     ointments, nutritional supplements, vitamins, analgesics and various 
     over-the-counter brands.  On the other hand, the above decreases in 
     sales volume were partially offset by increases in sales volume of 
     Lee-Registered Trademark-Lip-Ex-TM-, lip balm plus the added sales of the 
     newly acquired Klutch-Registered Trademark- and Painalay-Registered 
     Trademark- brands.

     Net revenues decreased approximately $288,000 or 13% for the three months
     ended June 30, 1998, as compared to the three months ended June 30, 1997. 
     The change in net revenues was due to the same explanation of the decrease
     in gross revenues discussed above.  In addition, the sales returns
     increased $41,000 or 26% when comparing the three months ended June 30,
     1998 and 1997.  The higher sales returns during the current quarter are
     attributable to the higher than normal level of returns related to the
     depilatory category.

     Cost of sales as a percentage of gross revenues was 45% for the quarter
     ended June 30, 1998, compared to 38% for the quarter ended June 30, 1997. 
     The cost of sales percentage was higher due to increased raw material
     purchases (normal quantity reordered, per purchase order, was tripled for
     certain high turnover items), increased manufacturing labor dollars as a
     result of two (September 1997 and March 1998) hourly rate increase
     increases (15%) in minimum wages and sale of some slow moving finished
     goods at lower than normal margins.

     Selling and advertising expenses increased $35,000 or 4% when comparing the
     three months ended June 30, 1998, with the three months ended June 30,
     1997.  The increases in expenses were mainly due to the following factors;
     (1) an increase in the amortization expense (approximately $13,000), and
     (2) an increase in salaries and wages plus related fringe benefits 
     ($88,000) as a result of new hires


<PAGE>

                                                                     FORM 10-QSB

     which included the addition of two outside salesmen, and higher related
     travel and entertainment expenses.  The above increases were partially
     offset by a decrease in the Company's co-operative advertising costs of
     approximately $53,000 when comparing the quarters ended June 30, 1998 and
     1997.

     General and administrative expenses increased when comparing the quarters
     ended June 30, 1998 and 1997.  The increase of $223,000 or 47% was the
     result of; (1) employee new hires (salary and wages) plus related fringe
     benefits, (2) an accrual of $79,000 (non-recurring) related to the Monterey
     Park waste site cleanup, (3) an accrual of $122,000 related to the
     Company's best estimate of its share of the remediation costs as described
     under "Environmental Matters," and (4) increased interest expense of
     approximately $28,000 as a result of increased borrowings from the
     Company's asset based financing lender.

     MATERIAL CHANGES IN RESULTS OF OPERATIONS
     NINE MONTHS ENDED JUNE 30, 1998, AND JUNE 30, 1997

     Gross revenues for the nine months ended June 30, 1998, were $7,017,000, an
     increase of approximately $157,000  or 2% from the comparable nine months
     period ended June 30, 1997.  The increase in gross revenues was due to the
     volume generated from the recently acquired brands such as: 
     Klutch-Registered Trademark- and Painalay-Registered Trademark-, plus the
     in-house product Lee-Registered Trademark- Lip-Ex-TM-, and the depilatory
     category.  The above increased sales volume was partially offset by reduced
     sales revenues of the nail category products.  Net revenues for the nine
     months ended June 30, 1998, were $6,402,000, an increase of $130,000 or 2%
     from the comparable nine months period ended June 30, 1997.  The reasons
     for higher sales returns during the nine months period ended June 30, 1998,
     versus June 30, 1997, was due to a higher level of returns related to the
     depilatory category which was offset in-part by lower nail extender product
     returns.

     Cost of sales as a percentage of gross revenues for the nine months ended
     June 30, 1998, as compared to the nine months period ended June 30, 1997,
     was 41% versus 39%, respectively.  The slightly higher cost of sales
     percentage for the nine months ended June 30, 1998, compared to June 30,
     1997, is due to the product mix in addition to the explanation above
     regarding the material changes for the three months ended June 30, 1998,
     versus 1997.

     Selling and advertising expenses increased $285,000 or 12% when comparing
     the nine months ended June 30, 1998, with the nine months ended June 30,
     1997.  The increased expenses were primarily due to:  (1) an increase in
     the amortization expense, (2) an increase in salaries and wages plus fringe
     benefits, the result of new hires which includes two outside salesmen, and
     higher related travel and entertainment expenses, (3) higher manufacture
     representative commissions, (4) higher product samples expense related to
     the new brand acquisitions, and (5) increased freight costs.  The
     aforementioned increased expenses were offset, in part, by a decrease in
     the cooperative advertising and print media advertising costs.

     General and administrative expenses increased $507,000 or 40% when
     comparing the nine months ended June 30, 1998, with the nine months ended
     June 30, 1997.  This significant increase was principally due to; (1)
     employee new hires (salary and wages) plus related fringe benefits, (2) an
     accrual of $79,000 (non-recurring) related to the Monterey Park waste site
     cleanup, (3) an accrual of $122,000 related to the Company's best estimate
     of its share of the remediation costs as described under "Environmental
     Matters," (4) increased interest expense of approximately $64,000 as a
     result of increased borrowings from the Company's asset based financial
     lender, and (5) slightly higher supplies and printing costs.

     LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 1997, working capital was $114,000 and at June 30, 1998,
     the working capital was a negative $346,000, thus a decrease of $460,000. 
     The ratio of current assets to current liabilities was .9 to 1 at June 30,
     1998, and 1.0 to 1 at September 30, 1997.  The decrease in working capital
     of $460,000 (from a positive $114,000 to a negative $346,000) was basically
     due to a decrease in accounts receivable, prepaid royalties, and an
     increase in environmental cleanup cost liability.

     The Company has an accumulated deficit of $6,605,000.  The Company's
     recurring losses from operations and inability to generate sufficient cash
     flow from normal operations to meet its obligations as they came due raise
     substantial doubt about the Company's ability to continue as a going
     concern.  The Company's ability to continue in existence is dependent upon
     future developments, including retaining current financing and achieving a
     level of profitable operations sufficient to enable it to meet its
     obligations as they become due.


<PAGE>

                                                                     FORM 10-QSB

     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 re mediating 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 (GLC) 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 $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
     comprehensive general liability 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

<PAGE>

                                                                     FORM 10-QSB

     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 "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 for this quarter).

     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 forwarded this proposal to its environmental counsel for their
     review of the Company's available options.

     The Company continues to seek reimbursement from various CGL carriers,
     although 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 since 1988 a total of $486,000, 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.


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                                                                     FORM 10-QSB

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, 1997.

Item 6.   Exhibits

          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     -      Modification of loan and security agreement dated May
                         21, 1996, between Lee Pharmaceuticals and Preferred
                         Business Credit, Inc. regarding a revolving credit
                         facility financing.

         10.2     -      Modification of secured promissory note dated August
                         29, 1997, between Lee Pharmaceuticals and Preferred
                         Business Credit, Inc.

         10.3     -      Secured promissory note dated May 15, 1998, between Lee
                         Pharmaceuticals and Preferred Business Credit, Inc.

         10.4     -      Continuing guaranty dated May 15, 1998, between Lee
                         Pharmaceuticals and Preferred Business Credit, Inc.

           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>

                                                                     FORM 10-QSB


                                     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 3, 1998                                   Ronald G. Lee
     ------------------                      ----------------------------------
                                                        Ronald G. Lee
                                             President (Chief Executive Officer
                                                and Chief Financial Officer)