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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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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 March 31, 2001
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

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LEE PHARMACEUTICALS(Exact name of small business issuer as specified in its charter)

California(State or other jurisidiction of incorporation or organization)

95-2680312(I.R.S Employer Identification No.)1444 Santa Anita Avenue, South El Monte, California(Address of principal executive offices)

91733(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)

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As
of March 31, 2001 there were outstanding 4,135,162 shares of common stock of the registrant.

Transitional
Small Business Disclosure Format (check one):
Yes / /  No /x/

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LEE PHARMACEUTICALS  BALANCE SHEET  MARCH 31, 2001  (Dollars in thousands)  (Unaudited)

|ASSETS                                                                                 |                      |  |  
|-------------------------------------------------------------------------------------- | -------------------- |  | -
|Cash                                                                                   |                      |  |  
|Accounts and notes receivable (net of allowances: $466)                                |                      |  |  
|Inventories (net of reserves: $550)                                                    |                      |  |  
|                                                                                       | Raw materials        |  | $
|                                                                                       | Work in process      |  |  
|                                                                                       | Finished goods       |  |  
|                                                                                       |                      |  |  
|                                                                                       | Total inventories    |  |  
|Other current assets                                                                   |                      |  |  
|                                                                                       |                      |  |  
|                                                                                       | Total current assets |  |  
|Property, plant and equipment (less accumulated depreciation and amortization: $5,087) |                      |  |  
|Intangibles and other assets (net of accumulated amortization: $7,804)                 |                      |  |  
|                                                                                       |                      |  |  
|                                                                                       | TOTAL                |  |  
|                                                                                       |                      |  |  

See
notes to financial statements.

2

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LEE PHARMACEUTICALS  BALANCE SHEET  MARCH 31, 2001  (Dollars in thousands)  (Unaudited)

|LIABILITIES                                                                                         |                            
|--------------------------------------------------------------------------------------------------- | ---------------------------
|Bank overdraft                                                                                      |                            
|Notes payablebank                                                                                  |                            
|Current portionnotes payable, other                                                                |                            
|Current portionnote payable related party                                                          |                            
|Accounts payable                                                                                    |                            
|Other accrued liabilities                                                                           |                            
|Environmental cleanup liability                                                                     |                            
|Due to related parties                                                                              |                            
|                                                                                                    |                            
|                                                                                                    | Total current liabilities  
|                                                                                                    |                            
|Long-term notes payable to related parties                                                          |                            
|                                                                                                    |                            
|Long-term notes payable, other                                                                      |                            
|                                                                                                    |                            
|Environmental cleanup liabilityCasmalia Site                                                       |                            
|                                                                                                    |                            
|                                                                                                    | Total liabilities          
|                                                                                                    |                            
|COMMITMENTS AND CONTINGENCIES                                                                       |                            
|STOCKHOLDERS' (DEFICIT)                                                                             |                            
|Common stock, $.10 par value; authorized, 7,500,00 shares; issued and outstanding, 4,135,162 shares |                            
|Additional paid-in capital                                                                          |                            
|Accumulated (deficit)                                                                               |                            
|                                                                                                    |                            
|                                                                                                    | Total stockholders' deficit
|                                                                                                    |                            
|                                                                                                    |                            
|                                                                                                    |                            

See
notes to financial statements.

3

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LEE PHARMACEUTICALS  STATEMENTS OF OPERATIONS  (Dollars in thousands, except per share amounts)  (Unaudited)

|                              |                                    | For the Three Months
Ended March 31, |       | For the Six Months
Ended March 31, |  
|----------------------------- | ---------------------------------- | ------------------------------------ | ----- | ---------------------------------- | -
|
|Gross revenues                |                                    | $                                    | 2,920 |                                    | $
|Less: Sales returns           |                                    |                                      | (449  | )                                  |  
|Cash discounts and others     |                                    |                                      | (18   | )                                  |  
|                              |                                    |                                      |       |                                    |  
|Net revenues                  |                                    |                                      | 2,453 |                                    |  
|                              |                                    |                                      |       |                                    |  
|Costs and expenses:           |                                    |                                      |       |                                    |  
|                              | Cost of sales                      |                                      |       | 1,237                              |  
|                              | Selling and advertising expense    |                                      |       | 691                                |  
|                              | General and administrative expense |                                      |       | 288                                |  
|                              | Interest expense                   |                                      |       | 219                                |  
|                              |                                    |                                      |       |                                    |  
|Total costs and expenses      |                                    |                                      | 2,435 |                                    |  
|                              |                                    |                                      |       |                                    |  
|Income (loss) from operations |                                    |                                      | 18    |                                    |  
|Other income                  |                                    |                                      | 2     |                                    |  
|                              |                                    |                                      |       |                                    |  
|Net income                    |                                    | $                                    | 20    |                                    | $
|                              |                                    |                                      |       |                                    |  
|Per share:                    |                                    |                                      |       |                                    |  
|                              | Net income                         |                                      | $     | .01                                |  
|                              |                                    |                                      |       |                                    |  

See
notes to financial statements.

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LEE PHARMACEUTICALS  STATEMENTS OF CASH FLOWS  (Dollars in thousands)  (Unaudited)

|                                                   |                                                                                   | For the Six Months
Ended March 31,        |   
|-------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | --
|
|Cash flows from operating activities:              |                                                                                   |                                           |   
|                                                   | Net income                                                                        |                                           | $ 
|                                                   |                                                                                   |                                           |   
|                                                   | Adjustments to reconcile net income to net cash provided by operating activities: |                                           |   
|                                                   | Depreciation                                                                      |                                           |   
|                                                   | Amortization of intangibles                                                       |                                           |   
|                                                   | (Decrease) in deferred income                                                     |                                           |   
|                                                   | (Gain) loss on disposal of property, plant, and equipment                         |                                           |   
|Change in operating assets and liabilities:        |                                                                                   |                                           |   
|                                                   | (Increase) in accounts receivable                                                 |                                           |   
|                                                   | Increase in allowance for doubtful accounts and sales returns and allowances      |                                           |   
|                                                   | (Increase) in inventories                                                         |                                           |   
|                                                   | (Increase) in deposits                                                            |                                           |   
|                                                   | (Increase) decrease in other current assets                                       |                                           |   
|                                                   | Increase in accounts payable and accrued liabilities                              |                                           |   
|                                                   | Increase in due to related partiesaccrued interest                               |                                           |   
|                                                   | (Decrease) increase in accrued royalties                                          |                                           |   
|                                                   |                                                                                   |                                           |   
|                                                   | Total adjustments                                                                 |                                           |   
|                                                   |                                                                                   |                                           |   
|                                                   |                                                                                   | Net cash provided by operating activities |   
|                                                   |                                                                                   |                                           |   
|Cash flows from investing activities:              |                                                                                   |                                           |   
|                                                   | Additions to property, plant, and equipment                                       |                                           |   
|                                                   | Proceeds from sale of equipment                                                   |                                           |   
|                                                   | Acquisition of product brands                                                     |                                           |   
|                                                   | Increase in non-current deposit                                                   |                                           |   
|                                                   |                                                                                   |                                           |   
|                                                   |                                                                                   | Net cash (used in) investing activities   |   
|                                                   |                                                                                   |                                           |   
|Cash flows from financing activities:              |                                                                                   |                                           |   
|                                                   | Proceeds from notes payable to related party                                      |                                           |   
|                                                   | (Payments on) notes payable to related party                                      |                                           |   
|                                                   | Decrease in due from related party                                                |                                           |   
|                                                   | Increase (decrease) in notes payable                                              |                                           |   
|                                                   | Proceeds from notes payable, other                                                |                                           |   
|                                                   | Payments on notes payable, other                                                  |                                           |   
|                                                   | (Decrease) increase in bank overdraft                                             |                                           |   
|                                                   |                                                                                   |                                           |   
|                                                   |                                                                                   | Net cash (used in) financing activities   |   
|                                                   |                                                                                   |                                           |   
|Net increase in cash                               |                                                                                   |                                           | 17
|Cash, beginning of year                            |                                                                                   |                                           | 12
|                                                   |                                                                                   |                                           |   
|Cash, end of year                                  |                                                                                   | $                                         | 29
|                                                   |                                                                                   |                                           |   
|Supplemental disclosures of cash flow information: |                                                                                   |                                           |   
|Cash paid during the year for:                     |                                                                                   |                                           |   
|                                                   | Interest                                                                          |                                           | $ 
|                                                   |                                                                                   |                                           |   
|                                                   | Taxes                                                                             |                                           | $ 
|                                                   |                                                                                   |                                           |   
|Non cash financing and investing activity:         |                                                                                   |                                           |   
|Acquisition of product brands:                     |                                                                                   |                                           |   
|                                                   | Fair value of assets acquired                                                     |                                           | $ 
|                                                   | Fair value of liabilities incurred                                                |                                           |   
|                                                   |                                                                                   |                                           |   
|                                                   |                                                                                   | Net cash payments                         |   
|                                                   |                                                                                   |                                           |   

See notes to financial statements.

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Notes to Financial Information

The
condensed interim financial statements included herein have been prepared by Lee Pharmaceuticals without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

These
statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the information
contained herein. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended September 30, 2000. The Company follows the same accounting policies in preparation of interim reports.

Results
of operations for the interim periods may not be indicative of annual results.

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 11 of Notes to Financial Statements included in the Company's Form 10-KSB for the fiscal year ended September 30, 2000. 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
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Although the Company experienced nominal net income in fiscal
years 1997 and 2000 and to date in 2001, past recurring losses and inability to generate sufficient cash flow from normal operations to meet its obligations as they become due, 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.

The
Company has a simple capital structure, and there were no changes under the SFAS 128 methodology to the previously reported earnings (loss) per share amounts for any of the
fiscal years. Basic earnings per share under SFAS 128 were computed using the weighted average number of shares outstanding of 5,194,496 in March 2001 and 4,936,328 in March 2000.
Differences in the weighted average number of shares outstanding for purposes of computing diluted earnings per share were due to the inclusion of the dilutive effect of stock options previously
granted. These differences in the weighted average number of shares outstanding for the calculation of basic and diluted earnings per share resulted in no differences in the earnings per share.

On
November 15, 1999, the Company purchased certain assets of the product lines from U.S. Dermatologics, Inc. which includes Cope®, a tension headache relief
tablet, and Astring-o-Sol®, a concentrated mouthwash, for $400,000. The Company has remitted $200,000 at closing and is required

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to make twenty-four equal monthly installments of $8,000 plus interest at a rate equal to the highest prime rate (published in the Wall Street Journal) during the preceding month
commencing January 25, 2000 and ending on December 25, 2001, and a final payment of all remaining principal due on January 25, 2002. Included in the above purchase price was
certain inventories valued at approximately $60,000.

On
January 31, 2000, the Company purchased certain assets of the product Serutan®, toasted granules, a bulk-forming laxative, for $60,000 cash. Included
in the purchase price was certain inventories valued at approximately $6,000.

On
October 30, 2000, the Company purchased certain assets of the Sloans® liniment temporary pain relief product from C.B. Fleet Co., Inc. for $50,000 plus
approximately $600 of inventory. The Company remitted the full $50,000 at closing.

On
February 12, 2001, the Company purchased certain assets of the Black Draught® laxative product line from The Monticello Companies, Inc., for $185,000.
This amount includes approximately $37,000 of inventory and was remitted in full at closing.

In
January 2000, non-cash transactions were recorded whereby $115,000 in prior cash advances to related parties were prepaid and offset against
long-term notes of the same amount, due to the same related parties.

As
of March 31, 2001, the Company had net operating loss (NOL) carryforwards of approximately $10,000,000 for Federal and $3,000,000 for California which for tax purposes can
be used to offset future Federal and California income taxes. The differences in the state carryforwards relate primarily to the treatment of loss carryforwards and depreciation of property, plant and
equipment. The Federal carryforwards expire from 2005 through 2020; California expires from 2000 through 2005. The Company has provided an allowance for the entire amount of the deferred asset
applicable to the NOL.

Effective
February 20, 2001, the Company renewed its accounts receivable financing, maturing May 2003, whereby 75% of the eligible domestic accounts receivable, not to
exceed the greater of $1,400,000 or $1,400,000 less amounts advanced on inventory can be advanced. The agreement is renewable for successive one year periods thereafter. Also, the agreement requires
minimum monthly interest of $3,000 with an interest rate of 8% above Union Bank of California's prime rate. The financing agreement includes a $300,000 term loan on inventory which is incorporated in
the working capital line of credit above. The inventory term loan requires monthly payments of $5,000 with an interest rate of 8% above Union Bank of California's prime rate. Additionally, there is a
separate $400,000 term loan on the Company's equipment. This financing is secured by a security interest in all of the Company's assets and requires monthly payments of $10,000 plus interest at Union
Bank of California's prime rate plus 8%. The continuing personal guarantee by the Company's President, of obligations of the Company, remains in force.

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

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In
May 2001 the Company sold one of it's product brands for $375,000 cash. In addition, approximately $20,000 related inventory was sold.

In
May 2001, notes payable and related interest totaling $352,000, from a prior brand acquisition, was settled for $270,000 cash.

Item 2.



Material Changes in Results of Operations
Three Months Ended March 31, 2001, and March 31, 2000

Gross revenues for the three months ended March 31, 2001, were $2,920,000, an increase of approximately $194,000 or 7% from the comparable three months
ended March 31, 2000. The increase in gross revenues was principally due to the significant increase ($307,000) in sales of the Lee® Lip-Ex line of
products. In addition, the Company reported sales volume increases in Nosebetter® and the various personal care category of brands. These accounted for approximately $124,000 in increases.
The above increases were offset by reductions in sales of Aquafilter® ($39,000), depilatories ($53,000) and other over-the-counter items ($137,000).

Net
revenues increased approximately $14,000 for the three months ended March 31, 2001 as compared to the three months ended March 31, 2000. The change in net revenues
was due to the same explanations discussed above and a sales return increase of approximately $183,000 or 69% when comparing fiscal years 2001 and 2000. The sales return increase was due to the
discontinuance of one of the Company's SKU's (stock keeping unit) at the retail store level, and change in the retail customers planograms and personal returns.

Cost
of sales as a percentage of gross revenues was 42% for the three months ended March 31, 2001 compared to 44% for the comparative three months period ended March 31,
2000. The lower cost of sales percentage was due to a favorable product mix along with longer and more efficient production runs. The above was somewhat offset by increased direct labor costs
($34,000) needed to meet the higher sales orders.

Selling
and advertising expenses decreased $44,000 or 6% when comparing the three months ended March 31, 2001, with the three months ended March 31, 2000. The decrease
in expenses was mainly due to lower amortization expense ($99,000) because of the expiration of the write-off period related to prior product brand acquisitions. This decrease was offset
by increases associated with cooperative advertising expenses ($24,000) and increased salary and wages plus fringe benefits ($32,000).

General
and administrative expenses were constant when comparing the three months ended March 31, 2001 versus March 31, 2000.

Interest
expense decreased $4,000 or 2% when comparing the three months ended March 31, 2001, with the three months ended March 31, 2000.

Material Changes in Results of Operations
Six Months Ended March 31, 2001, and March 31, 2000

Gross revenues for the six months ended March 31, 2001, were $5,083,000, a decrease of approximately $180,000 or 3% from the comparable six months ended
March 31, 2000. The decrease in gross revenues was due to the lower sales volume generated by Aquafilter®, Take-Off® depilatories, and other
over-the-counter items. The above decreases were partially offset by the higher sales

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revenues from Nosebetter® ($88,000), the newly acquired brands of Cope® and Astring-o-Sol® ($59,000) and the continued growth of the
Lee® Lip-Ex line of products ($459,000).

Net
revenues for the six months ended March 31, 2001 were $4,495,000, a decrease of $266,000 or 6% from the comparable six months ended March 31, 2000. The change in net
revenues was principally due to the same explanations discussed above. The Company's sales returns increased approximately $89,000 or 19% when comparing fiscal years 2001 and 2000, due to the
discontinuance of one of the Company's SKU's (stock keeping unit) at the retail store level, a change in the retail customers planograms along with seasonal returns.

Cost
of sales as a percentage of gross revenues for the six months ended March 31, 2001, as compared to the six months ended March 31, 2000, was 44% versus 43%
respectively. The slightly higher cost of sales percentage was due to the increase ($17,000) in depreciation expense the result of the capitalization of equipment subsequent to March 2000 and
higher direct labor costs ($21,000) required to meet the higher sales orders.

Selling
and advertising expenses decreased $181,000 or 12% when comparing the six months ended March 31, 2001, with the six months ended March 31, 2000. The decrease in
expenses was principally due to reduced cooperative advertising expense ($65,000), less royalty expenses ($29,000) and lower amortization expense ($175,000) because of the finalization of several
write-off periods associated with prior product brand acquisitions. The above decreases were offset by increases in freight costs ($20,000), increased salary and wages plus fringe benefits
($53,000), and higher travel and entertainment costs ($27,000).

General
and administrative expenses decreased $46,000 or 8% when comparing the six months ended March 31, 2001, with the six months ended March 31, 2000. This decrease
was principally due to the following factors; 1) lower management information systems (MIS) consulting services related to Year 2000 readiness, 2) nonrecurring loan fees associated
with the Company's assets based financing lender and 3) reduced travel and entertainment expenses. These decreases were partially offset by increases in the Company's rent expense related to
the leases.

Interest
expense decreased $18,000 or 4% when comparing the six months ended March 31, 2001, with the six months ended March 31, 2000. This decrease was due to the lower
borrowings from the Company's asset based financing lender.



At March 31, 2001, working capital was a negative $2,164,000 compared with a negative $2,332,000 as of September 30, 2000. The ratio of current
assets to current liabilities was .7 to 1 at March 31, 2001, and .6 to 1 at September 30, 2000. The decrease in the Company's negative working capital was primarily due to increases in
inventory and deposits.

The
Company has an accumulated deficit of $7,230,000. Although the Company experienced nominal net income in fiscal years 1997 and 2000 and to date in 2001, past recurring losses and
inability to generate sufficient cash flow from normal operations to meet its obligations as they become due, raise substantial doubt about the Company's ability to continue as a going concern. The
Company's ability to continue in existence is dependent upon future developments, including retaining current financing and achieving a level of profitable operations sufficient to enable it to meet
its obligations as they become due.



The Company 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

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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, 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 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 isDel 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 entered into the South El Monte Operable Unit Site Participation Agreement with Cardinal pursuant to which, among other things, Cardinal contracted with an
environmental firm to conduct the Study. The Study has been completed. The Company's share of the cost of the Study was $15,000 and was accrued for in the financial statements as of
September 30, 1995. The South El

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Monte Operable Unit (SEMOU) participants developed four remedial alternatives. The capital cost of the four alternatives range from $0 (no action) up to $3.49 million. The estimated annual
operating cost for the four alternatives range from $0 (no action) to $770,300. Over a 30-year period, the total cost of the four alternatives range from $0 (no action) up to
$13.05 million. The EPA prefers an alternative which estimates the capital cost up to $3.08 million, the annual operating cost at $.48 million, and the 30-year period
total cost up to approximately $9.09 million. The selection of the actual alternative implemented is subject to public comment. At the present time, the Company does not know what its share of
the cost may be, if any. Therefore, no additional accrual has been recognized as a liability on the Company's books. The Company requested that the EPA conduct an
"ability-to-pay evaluation" to determine whether the Company is entitled to an early settlement of this matter based upon a limited ability to pay costs associated with site
investigation and remediation. In August 2000, the EPA informed the Company that it does not qualify for an early settlement at this time.

The
EPA has informed the Company that it has learned that the intermediate zone groundwater contamination in the western portion of the SEMOU has migrated further west and has now
impacted the City of Monterey Park and Southern California Water Company production wells. The EPA stated that the City of Monterey Park Water Department, San Gabriel Valley Water Company and Southern
California Water Company are planning to build treatment facilities for their wells. The EPA stated that these three water purveyors contacted some of the SEMOU PRPs, other than the Company, to seek
funding to develop groundwater treatment facilities for the contaminated wells. A group of these PRPs calling themselves the "South El Monte Cooperative Group" has been formed and purportedly has
reached a general agreement with the water purveyors to fund the development of treatment facilities and use the water purveyors' wells in an attempt to contain the groundwater contamination to meet
EPA's goals. At this time, the EPA has not reviewed or approved any specific plan to address contamination at the purveyor wells, nor has the EPA compromised its right to recover response costs from
any person who is legally responsible for contamination within the SEMOU. As of the date of this report, the Company has not been contacted by the South El Monte Cooperative Group in respect to its
participation in any proposed cleanup activity. As a result, the Company is not able to determine what contribution, if any, it may be assessed in connection with this cleanup activity.

By
letter dated November 13, 2000, the Company was notified that the City of Monterey Park, San Gabriel Valley Water Company and Southern California Water Company intend to
bring suit under the Safe Drinking Water and Toxic Enforcement Act of 1986 alleging that the Company has knowingly released volatile organic compounds in the soil and shallow groundwater beneath the
Company's property between at least on or before November 8, 1996 and the present and has failed to promptly clean up all of the contamination. As of the date of this report, the Company has
not been served with this lawsuit.

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 has 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 has 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

11

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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. 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 $287,000 less the liability already recognized on the books of $165,000 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 $287,000 figure above. In April 2000, the Company received a
Notice of Violation from the RWQCB. The Notice of Violation states that the Company and other property owners were required to submit a groundwater remedial action plan by November 1, 1999, and
that the RWQCB has been advised that the Company and the other property owners were unable to submit the required remedial action plan because the Company and the other property owners could not agree
on the allocation of financial responsibility to prepare the action plan. The RWQCB stated that it will no longer encourage the cooperative approach among the Company and the other property owners in
completing the cleanup requirements and will pursue appropriate measures, including when necessary, enforcement actions. The RWQCB states that it may impose civil liability penalties of up to $1,000
per day from November 1, 1999 for failure to file the action plan. In light of these events, no assurances can be given that the cleanup costs and possible penalties will not
exceed the amount of the Company's current accruals of $287,000 (which includes the $122,000 charge to income in the third quarter of fiscal 1998).

In
July 2000, the property owners formed the Lidcombe & Santa Anita Avenue Work Group (LSAAW) in response to the RWQCB request for the preparation of an action plan. The
LSAAW submitted a Focused Feasibility Study to the RWQCB for their review and approval of the selected remedial action method for the site. After receiving RWQCB approval, LSAAW obtained three cost
proposals to implement the RWQCB approved pump and treat remedial method. According to these cost proposals, the lowest estimated costs for an assumed five (5) years of pump and treat
remediation is $600,000. This cost is lower than the previous cost proposed work plan, discussed above, from Geomatrix Consultants, Inc. The capital costs including contingencies are
approximately $300,000. The LSAAW is hopeful the Water Quality Authority (WQA) is willing and able to reauthorize its grant for one-half (1/2) of the capital costs of its remediation
system construction not to exceed $150,000. It is estimated at this time that the reserves for the Company's share of this cost proposal are adequate since its prior accrual was based on the higher
cost estimate from Geomatrix.

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Without any prior correspondence or inkling of the Company's potential liability, the EPA 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. On June 30, 2000, the EPA informed the Company that the EPA believed the Company is able to pay the full settlement cost, but offered to reduce the amount of the settlement
to $75,271. The Company is in the process of responding to this letter.

The
Company was 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. The Company, the EPA and certain PRPs have entered into an agreement tolling the applicable statutes of limitation. The Company was recently notified by the EPA that their
request for a waiver, due to financial hardship, was "partially granted." Improvements in the bidding process has lowered the Company's estimated share down to
$245,000 (from $374,000) and of that, the EPA was requesting that the Company pay $113,000, as a result of their findings on the application for waiver due to financial hardship. The Company is
considering the EPA's request.

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.

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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, 2000.

Item 4.  Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the registrant occurred on March 13, 2001. At that meeting, the following directors were elected:

VOTESDirectorFOR

WITHHELDDr. Henry L. Lee

3,406,407

101,367Ronald G. Lee

3,406,607

101,167William M. Caldwell IV

3,404,607

103,167


|                                                                                                                   |  | VOTES    
|------------------------------------------------------------------------------------------------------------------ |  | ---------
|
|The amendment to the Bylaws to reduce the authorized number of directors to not less than three nor more than five |  | 1,983,530

|                                                                                           |  | VOTES    
|------------------------------------------------------------------------------------------ |  | ---------
|
|The appointment of Caldwell, Becker, Dervin, Petrick & Co., L.L.P. as independent auditors |  | 3,428,139

Item 6.  The following exhibits are filed herewith:

|10.1 |  |  |  | Promissory note evidencing advance made to the Registrant                                                                                                                                           
|---- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2 |  |  |  | Loan and security agreement dated February 20, 2001, between Lee Pharmaceuticals and Preferred Business Credit, Inc., regarding a revolving credit facility financing                               
|10.3 |  |  |  | Secured promissory note dated February 20, 2001, regarding equipment, between Lee Pharmaceuticals and Preferred Business Credit, Inc.                                                               
|10.4 |  |  |  | Secured promissory note dated February 20, 2001, regarding inventory, between Lee Pharmaceuticals and Preferred Business Credit, Inc.                                                               
|10.5 |  |  |  | Sublease dated March 9, 2001, for the premises located at 1470 Santa Anita Avenue, So. El Monte, California                                                                                         
|10.6 |  |  |  | Sublease guaranty dated March 9, 2001, for the premises located at 1470 Santa Anita Avenue, So. El Monte, California, between Jing Jing Long (guarantor) and Lee Pharmaceuticals, Inc. (sublandlord)

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The
following exhibits have previously been filed by the Company:

|3.1 |  |  |  | Articles of Incorporation, as amended (1)          
|--- |  | - |  | ---------------------------------------------------
|3.4 |  |  |  | By-laws, as amended December 20, 1997 (2)          
|3.5 |  |  |  | Amendment of By-laws effective March 14, 1978 (2)  
|3.6 |  |  |  | Amendment to By-laws effective November 1, 1980 (3)

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SIGNATURE

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: May 11, 2001 |  | By:                            

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