<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-QSB


[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the quarterly period ended DECEMBER 31, 2000

                                       OR

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

For the transition period from _____________________ to _____________________







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

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

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

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

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

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

         As of December 31, 2000, 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
                                DECEMBER 31, 2000
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<S>                                                       <C>             <C>
         ASSETS
Cash                                                                      $   30

Accounts and notes receivable (net of allowances: $270)                      723
Inventories (net of reserves: $511)
         Raw materials                                    $1,775
         Work in process                                     194
         Finished goods                                      456
                                                          ------
         Total inventories                                                 2,425

Other current assets                                                         545
                                                                          ------
         Total current assets                                              3,723
                                                                          ------

Property, plant and equipment (less
  accumulated depreciation and
  amortization: $5,051)                                                      526

Intangibles and other assets (net of
  accumulated amortization: $7,688)                                        2,942
                                                                          ------

         TOTAL                                                            $7,191
                                                                          ======
</TABLE>

                       See notes to financial statements.

<PAGE>

                                                                     FORM 10-QSB

                               LEE PHARMACEUTICALS
                                  BALANCE SHEET
                                DECEMBER 31, 2000
                             (DOLLARS IN THOUSANDS)
                                   (UNAUDITED)
<TABLE>
<S>                                                                     <C>
        LIABILITIES

Bank overdraft                                                          $   123
Notes payable - bank                                                        837
Current portion - notes payable, other                                    1,867
Current portion - note payable related party                                580
Accounts payable                                                            744
Other accrued liabilities                                                   713
Environmental cleanup liability                                             366
Due to related parties                                                      770
                                                                        -------

         Total current liabilities                                        6,000
                                                                        -------

Long-term notes payable to related parties                                2,281
                                                                        -------

Long-term notes payable, other                                            1,151
                                                                        -------

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

         Total liabilities                                                9,806
                                                                        -------


         COMMITMENTS AND CONTINGENCIES


         STOCKHOLDERS' (DEFICIT)

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)                                                    (7,250)
                                                                        -------

Total stockholders' deficit                                              (2,615)
                                                                        -------

TOTAL                                                                   $ 7,191
                                                                        =======
</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
                                                   ENDED DECEMBER 31,
                                                ------------------------
                                                   2000         1999
                                                -----------  -----------
                                                (UNAUDITED)  (UNAUDITED)
<S>                                             <C>          <C>
Gross revenues                                    $ 2,163    $ 2,537
Less: Sales returns                                   (99)      (193)
      Cash discounts and others                       (22)       (22)
                                                  -------    -------

Net revenues                                        2,042      2,322
                                                  -------    -------
Costs and expenses:
     Cost of sales                                  1,002      1,068
     Selling and advertising expense                  595        732
     General and administrative expense               258        305
     Interest expense                                 202        216
                                                  -------    -------

Total costs and expenses                            2,057      2,321
                                                  -------    -------

(Loss) income from operations                         (15)         1

Other income                                           24         17
                                                  -------    -------

Net income                                        $     9    $    18
                                                  =======    =======
Per share:

     Basic income                                 $   .00    $   .00
                                                  =======    =======
</TABLE>

                       See notes to financial statements.

<PAGE>
                                                                     FORM 10-QSB

                               LEE PHARMACEUTICALS
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                               FOR THE THREE MONTHS
                                                                                ENDED DECEMBER 31,
                                                                             ------------------------
                                                                                2000         1999
                                                                             -----------  -----------
                                                                             (UNAUDITED)  (UNAUDITED)
<S>                                                                             <C>          <C>
Cash flows from operating activities:
  Net income ............................................................       $   9        $  18
                                                                                -----        -----
  Adjustments to reconcile net income to
   net cash provided by operating activities:
  Depreciation ..........................................................          43           35
  Amortization of intangibles ...........................................         136          220
  (Decrease) in deferred income .........................................         (11)         (16)
  (Gain) on disposal of property, plant, and equipment ..................          (1)           -
Change in operating assets and liabilities:
  Decrease (increase) in accounts receivable ............................         449          (97)
  (Decrease) increase in allowance for doubtful accounts
           and sales returns and allowances .............................         (75)           2
  (Increase) in inventories .............................................        (138)         (76)
  (Increase) decrease in deposits .......................................          (8)          17
  (Increase) decrease in other current assets ...........................         (43)          28
  Increase in accounts payable and accrued liabilities ..................         107           48
  Increase in due to related parties - accrued interest .................          37           54
  (Decrease) in accrued royalties .......................................          (9)         (26)
                                                                                -----        -----
  Total adjustments .....................................................         487          189
                                                                                -----        -----
           Net cash provided by operating activities ....................         496          207
                                                                                -----        -----
Cash flows from investing activities:
  Additions to property, plant, and equipment ...........................         (33)        (106)
  Proceeds from sale of equipment .......................................           1            -
  Acquisition of product brands .........................................         (50)        (140)
  Increase in non-current deposit .......................................         (11)           -
                                                                                -----        -----
           Net cash (used in) investing activities ......................         (93)        (246)
                                                                                -----        -----
Cash flows from financing activities:
  Proceeds from notes payable to related party ..........................          39            -
  (Payments on) notes payable to related party ..........................        (102)           -
  Decrease in due from related party ....................................          25            1
  (Decrease) in notes payable ...........................................        (156)          (6)
  Proceeds from notes payable, other ....................................         350          200
  Payments on notes payable, other ......................................        (314)        (189)
  (Decrease) increase in bank overdraft .................................        (227)          35
                                                                                -----        -----
           Net cash (used in) provided by financing activities ..........        (385)          41
                                                                                -----        -----
Net increase in cash ...................................................           18            2
Cash, beginning of year ................................................           12            4
                                                                                -----        -----
Cash, end of year ......................................................        $  30        $   6
                                                                                =====        =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
  Interest ..............................................................       $ 135        $ 174
                                                                                =====        =====
  Taxes .................................................................       $   -        $   -
                                                                                =====        =====
NON CASH FINANCING AND INVESTING ACTIVITY:
Acquisition of product brands:
  Fair value of assets acquired .........................................       $  50        $ 340
  Fair value of liabilities incurred ....................................           -         (200)
                                                                                -----        -----
           Net cash payments ............................................       $  50        $ 140
                                                                                =====        =====
</TABLE>

                       See notes to financial statements.
<PAGE>

                                                                     FORM 10-QSB

NOTES TO FINANCIAL INFORMATION

1.       Basis of presentation:

         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 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.

2.       Continued existence:

         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, past
         recurring losses and inability to generate sufficient cash flow from
         normal operations to meet its obligations as they became due, raises
         substantial doubt about its ability to continue as a going concern. The
         financial statements do not include any adjustments to reflect the
         possible future effects on the recoverability and classification of
         assets or the amounts and classification of liabilities that may result
         from the possible inability of the Company to continue as a going
         concern.

3.       Earnings per share:

         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 December 2000 and
         4,936,328 in December 1999. 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.

4.       Acquisitions:

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

<PAGE>
                                                                     FORM 10-QSB

         On January 31, 2000, the Company purchased certain assets of the
         product Serutan-Registered Trademark-, 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-Registered Trademark- liniment temporary pain relief product
         from C.B. Fleet Co., Inc. for $50,000 plus less than $10,000 of
         inventory. The Company remitted the full $50,000 at closing. The
         amount of inventory will be determined at a later date.

5.       Related party transactions:

         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.

6.       Income taxes:

         As of December 31, 2000, 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.

ITEM 2.

         MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         MATERIAL CHANGES IN RESULTS OF OPERATIONS
         THREE MONTHS ENDED DECEMBER 31, 2000, AND DECEMBER 31, 1999

         Gross revenues for the three months ended December 31, 2000, were
         $2,163,000, a decrease of approximately $374,000 or 15% from the
         comparable three months ended December 31, 1999. The decrease in
         gross revenues was attributed to lower sales volume of existing
         brands such as Take-Off-Registered Trademark- ($204,000), the
         depilatories ($170,000), Aquafilter-Registered Trademark-($63,000)
         and other over-the-counter items ($135,000). These decreases were
         offset by higher sales volume of the Lee-Registered Trademark-
         Lip-Ex(TM) line of products ($151,000) and the added sales of the
         newly acquired brands ($85,000).

         Net revenues decreased approximately $280,000 or 12% for the three
         months ended December 31, 2000, as compared to the three months ended
         December 31, 1999. The change in net revenues was due to the sales
         volume explanations discussed above. The Company's sales returns
         decreased approximately $94,000 or 49% when comparing the three months
         ended December 31, 2000 and 1999. The decrease in sales returns was a
         result of lower product returns pertaining to prescription drug items
         experienced during the quarter ended December 31, 2000 as compared to
         December 31, 1999.

         Cost of sales as a percentage of gross revenues were 46% for the three
         months ended December 31, 2000, compared to 42% for the three months
         ended December 31, 1999. The higher cost of sales percentage was due to
         a change in product mix and lower priced commodity-type goods with an
         accompanying higher cost of goods attached to them, thereby generating
         lower gross margins on sales of these related products. In addition,
         the Company incurred higher raw material purchases ($24,000) and
         increased depreciation expense ($12,000) due to the purchase of new
         equipment.

         Selling and advertising expenses decreased $137,000 or 19% when
         comparing the three months ended December 31, 2000, with the three
         months ended December 31, 1999. The decrease in expenses was mainly due
         to the following factors; 1) lower amortization expense ($76,000) due
         to the expiration of the write-off period related to prior product
         brand acquisitions, and 2) reduced cooperative advertising costs
         ($89,000). The above decreases were offset by increases in convention
         expenses ($12,000), higher consulting services ($5,000), and increased
         salary and wages plus related fringe benefits ($20,000).
<PAGE>

                                                                     FORM 10-QSB

         General and administrative expenses decreased $47,000 or 15% when
         comparing the three months ended December 31, 2000, with the three
         months ended December 31, 1999. The decrease in expenses was mainly due
         to the following factors; 1) lower management information systems (MIS)
         consulting services related to Year 2000 readiness ($13,000), 2)
         reduced supply expenses ($14,000), 3) nonrecurring loan fees associated
         with the Company's asset based financing lender ($4,000), and 4) a
         reduction in temporary help expenses ($5,000).

         Interest expense decreased $14,000 or 6% when comparing the three
         months ended December 31, 2000, with the three months ended December
         31, 1999. The decrease was due to reduced borrowings from the Company's
         asset based financing lender and related parties. This action was
         partially offset by a higher prime interest rate (9.5% vs. 8.5%)
         related to certain borrowings which are tied to prime.

         LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2000, working capital was a negative $2,277,000
         compared with a negative $2,332,000 as of September 30, 2000. The ratio
         of current assets to current liabilities was .6 to 1 at December 31,
         2000, and September 30, 2000. The decrease in the Company's negative
         working capital was primarily due to increases in inventory and other
         current assets, as well as decreases in accounts payable and the
         current portion of notes payable - other (the result of decreased
         private loans and notes regarding prior brand acquisitions along with
         lower borrowings from the Company's asset based financing lender).

         The Company has an accumulated deficit of $7,250,000. Although the
         Company experienced nominal net income in fiscal years 1997 and 2000,
         past recurring losses and inability to generate sufficient cash flow
         from normal operations to meet its obligations as they became due,
         raises 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.

         ENVIRONMENTAL MATTERS

         The Company owns a manufacturing facility located in South El Monte,
         California. The California Regional Water Quality Control Board (The
         "RWQCB") ordered the Company in 1988 and 1989 to investigate the
         contamination on its property (relating to soil and groundwater
         contamination). The Company engaged a consultant who performed tests
         and reported to the then Chairman of the Company. The Company resisted
         further work on its property until the property upgradient was tested
         in greater detail since two "apparent source" lots had not been tested.
         On August 12, 1991, the RWQCB issued a "Cleanup and Abatement Order"
         directing the Company to conduct further testing and cleanup the site.
         In October 1991, the Company received from an environmental consulting
         firm an estimate of $465,200 for investigation and cleanup costs. The
         Company believed that this estimate was inconclusive and overstated the
         contamination levels. The Company believes that subsequent
         investigations will support the Company's conclusions about that
         estimate. The Company did not complete the testing for the reasons
         listed above as well as "financial constraints". In June 1992, the
         RWQCB requested that the EPA evaluate the contamination and take
         appropriate action. At the EPA's request, Ecology & Environment, Inc.
         conducted an investigation of soil and groundwater on the Company's
         property. Ecology & Environment Inc.'s Final Site Assessment Report,
         which was submitted to the EPA in June 1994, did not rule out the
         possibility that some of the contamination originated on-site, and
         resulted from either past or current operations on the property. The
         Company may be liable for all or part of the costs of remediating the
         contamination on its property. The EPA has not taken any further action
         in this matter, but may do so in the future.

         The Company and nearby property owners, in consort with their
         comprehensive general liability (CGL) carriers, 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.

<PAGE>

                                                                     FORM 10-QSB

         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 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 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.

<PAGE>

                                                                     FORM 10-QSB

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

         The Company believes the City of South El Monte does not appear to be
         located over any of the major plumes. However, the EPA 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 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.

<PAGE>

                                                                     FORM 10-QSB

         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.

         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.

<PAGE>

                                                                     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, 2000.

Item 6.  The following exhibits are filed herewith:

         10.1 - Sublease dated September 14, 2000, for the premises located at
                1460 Santa Anita Avenue, South El Monte, California

         10.2 - Sublease guaranty dated September 14, 2000, for the premises
                located at 1460 Santa Anita Avenue, South El Monte, California

         10.3 - Promissory note evidencing advance made to the Registrant


         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)

         (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:   FEBRUARY 13, 2001                           RONALD G. LEE
     -----------------------              --------------------------------------
                                                    Ronald G. Lee
                                          Chairman of the Board, President and
                                          Chief Financial and Accounting Officer