UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the Fiscal Year Ended December 31, 1995

                         Commission File Number 0-15669

                          ML-LEE ACQUISITION FUND, L.P.
      (Exact name of registrant as specified in its Governing Instruments)

              Delaware                            13-3426817
   (State or other jurisdiction        (IRS Employer Identification No.)
  of incorporation or organization)

                             World Financial Center
                            South Tower - 23rd Floor
                          New York, New York 10080-6123
              (Address of principal executive offices and zip code)


Registrant's telephone number, including area code:  (212) 236-7339


Securities  registered  pursuant to Section  12(b) of the Act: None Name of each
exchange on which registered:  Not Applicable  Securities registered pursuant to
Section 12(g) of the Act:

                      Units of Limited Partnership Interest
                                (Title of class)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___.

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Documents  Incorporated by Reference:  Pages 15-33, 47-50 of the Prospectus
of the Registrant  dated August 12, 1987, filed with the Securities and Exchange
Commission pursuant to Rule 424(b), as supplemented by supplements dated May 12,
1988,  May 13,  1988 and May 25,  1988 filed with the  Securities  and  Exchange
Commission pursuant to Rule 497(d), are incorporated by reference in Parts I and
II hereof.

     Portions  of the  definitive  Proxy  Statement  relating to the 1996 Annual
Meeting of Limited  Partners of the Registrant are  incorporated by reference in
Part III hereof.  To be filed with the  Commission not later than 120 days after
Registrant's  fiscal year end.  Aggregate market value of voting securities held
by non-affiliates: Not Applicable.


<PAGE>


                                     Part I

Item l.       Business.

Formation

     ML-Lee  Acquisition  Fund,  L.P.  (the  "Fund"  or the  "Registrant")  is a
Delaware limited partnership organized on April 1, 1987. Mezzanine  Investments,
L.P. (the "Managing  General  Partner") and four  individuals  (the  "Individual
General Partners") act as the General Partners of the Fund. The Managing General
Partner is a limited  partnership  organized  under Delaware law by ML Mezzanine
Inc.,  as sole general  partner,  and Thomas H. Lee Advisors I (the  "Investment
Adviser"),   as  sole  limited  partner.   ML  Mezzanine  Inc.  is  an  indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc. and an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"). The Investment Adviser is
a  Massachusetts  business  trust  controlled  by  Thomas  H.  Lee,  one  of the
Individual General Partners. The other Individual General Partners are Vernon R.
Alden,  Joseph L.  Bower and  Stanley  H.  Feldberg  (the  "Independent  General
Partners").

     The Fund has elected to operate as a business development company under the
Investment  Company Act of 1940.  Its primary  objective  is to provide  current
income and long-term capital appreciation by investing in "mezzanine" securities
consisting  primarily of subordinated  debt and preferred stock combined with an
equity participation  issued in connection with leveraged  acquisitions or other
recapitalizations.  The Fund  considers  this  activity to  constitute  a single
industry segment of mezzanine financing investing.

     The Fund publicly offered, through MLPF&S, up to 1 million units of limited
partnership interest (the "Units") at $1,000 per Unit. The Units were registered
under the Securities  Act of 1933 pursuant to a  Registration  Statement on Form
N-2 (File No.  33-13394)  which was declared  effective on August 12, 1987.  The
information  set forth under the headings  "Risk and Other  Important  Factors",
"Mezzanine  Financing"  and  "Investment  Objective  and  Policies"  on pages 15
through 33 and  "Conflicts of Interest" on pages 47 through 50 in the prospectus
of the Fund  dated  August 12,  1987,  filed with the  Securities  and  Exchange
Commission  pursuant  to Rule  424(b)  under  the  Securities  Act of  1933,  as
supplemented  by  supplements  dated May 12, 1988, May 13, 1988 and May 25, 1988
filed with the Securities and Exchange  Commission  pursuant to Rule 497(d) (the
"Prospectus"), is incorporated herein by reference.

Mezzanine and Bridge Investments

     The Fund  commenced  operations  on  October  19,  1987 and  completed  its
Investment  Period on June 15,  1991.  As of  December  31,  1995,  the Fund had
outstanding  a  total  of  $223,694,546   invested  in  Mezzanine   Investments,
representing   $214,098,103   Managed  and  $9,596,443   Non-Managed   portfolio
investments. As of December 31, 1995, there were no Bridge Investments
outstanding.

     REVIEW OF INVESTMENTS IN MANAGED COMPANIES

     Celebrity, Inc.


     Celebrity,  Inc. is a large  supplier  of high  quality  artificial  floral
products  selling  primarily  to craft store chains and to other  retailers  and
wholesale florists.


     On September 19, 1995, the Fund sold 5,769 shares of Celebrity, Inc. Common
Stock for $75,000. Based upon the closing market price at December 29, 1995, the
Fund has recorded  $65,627 of unrealized  appreciation  on its remaining  equity
holding in  Celebrity,  Inc. for the year ended  December  31, 1995.  The Fund's
year-end  valuation  reflects an aggregate  unrealized  depreciation  of $83,829
through 1995.




<PAGE>


     Duro-Test Corporation

     On  November  1, 1995,  pursuant  to an  Agreement  and Plan of Merger (the
"Agreement"),   Duro-Test  Corporation  effected  a  merger  pursuant  to  which
Duro-Test was acquired by a third party for approximately $33 million.  Proceeds
received by the Fund from this merger were $4.6 million of which $1.8 million is
held in escrow in accordance  with the  Agreement for potential  indemnification
costs  of the  surviving  company.  The  Fund  realized  a loss  on the  sale of
Duro-Test of $34 million.

     General Nutrition Companies, Inc. ("GNC")

     GNC is a nationwide  specialty retailer of vitamin and mineral supplements,
personal care, fitness and other  health-related  products.  The Fund's year-end
valuation of GNC reflects unrealized  depreciation of $26.6 million for the year
ended  December  31,  1995 and an  aggregate  of $99  million in net  unrealized
appreciation through December 31, 1995.

     On  February  7,  1996 the  Securities  and  Exchange  Commission  declared
effective a Registration  Statement  Filed by GNC in connection with the sale of
up to 17,994,176  shares of GNC Common Stock,  including  1,635,834 shares which
were sold pursuant to the underwriters'  over-allotment  option. Of such shares,
16,358,342  were offered by certain selling  shareholders of GNC,  including the
Fund, and the 1,635,834 subject to the underwriters'  over-allotment option were
offered  by GNC.  In  connection  with the  offering  the Fund  sold its  entire
remaining  investment  in GNC for net  proceeds of $101  million or $20.7475 per
share and realized a gain of $87.9  million.  These proceeds will be distributed
to Limited Partners on or about March 29, 1996.

     In connection the public offering of 20 million shares of GNC Common Stock,
(the "GNC Offering") on July 19, 1995, the Fund sold 6,040,424  shares of common
stock at a net price per share of $16.8875  (all share amounts and prices herein
have been  adjusted to reflect a 2-for-1  stock split which  occurred on October
17, 1995).  The Fund also sold 846,908 common stock  purchase  warrants at a net
price per  warrant  of  $14.3875  (the net  price  per share  less the $2.50 per
warrant exercise price).  Proceeds from the sales totaled over $114 million with
an  original  cost of $29.5  million and  resulted  in  realized  gains of $84.7
million.  Following  that GNC Offering,  the Fund converted all of its remaining
GNC Convertible Subordinated Notes into common stock.

     Health o meter Products, Inc. ("Health o meter")

     Health o meter  is a  manufacturer  of a  comprehensive  line of  consumer,
medical,  office and food service scales and equipment  under the Health o meter
and Pelouze brand names, as well as related  measuring  instruments and personal
care  products.  Mr. Coffee,  a wholly-owned  subsidiary of Health o meter and a
manufacturer  of automatic  drip coffee makers in the United  States,  offers an
extensive line of automatic drip coffee makers, coffee filters,  accessories and
other kitchen counter-top appliances.

     As of December 31, 1995, the Fund holds 1,563,053  shares of Health o meter
common stock which represents 15.4% of the outstanding common equity.

     Based upon the  closing  price at  December  29,  1995,  the Fund  recorded
unrealized  depreciation of $293,073 on its equity  investment in Health o meter
for the year ended  December 31,  1995.  The Fund's  year-end  valuation of this
investment reflects an aggregate of approximately $1.1 million in net unrealized
appreciation through December 31, 1995.

     Petco Animal Supplies, Inc. ("Petco")

     Petco is a  specialty  retailer  of pet food and  supplies.  Based upon the
closing  market  price at December 29,  1995,  the Fund has recorded  unrealized
appreciation of  approximately  $16.1 million on its equity holding for the year
ended  December  31,  1995.  The Fund's year end  valuation  of this  investment
reflects  an  aggregate  of  approximately   $12.9  million  in  net  unrealized
appreciation through December 31, 1995.

     On April 27, 1995, the Fund sold 1,009,638 shares of common stock(including
shares  sold as a result  of the  exercise  of the  underwriters'  overallotment
option) to the public in connection with a public offering. The Fund sold 51% of
its equity  holdings and received  proceeds of $19.9 million which resulted in a
gain of $3.6 million on the sale.

<PAGE>


     Playtex Products Inc. ("Playtex")

     Playtex manufactures and sells feminine hygiene products, nursery products,
household  rubber  gloves,  toothbrushes,  and  Jhirmack  and  LaCoupe  haircare
products.  Based upon the closing  market price at December  29, 1995,  the Fund
recorded approximately $528,000 of unrealized depreciation in 1995 on its equity
holdings in Playtex.  The Fund's year-end valuation of this investment  reflects
an  aggregate  of  approximately  $7.3  million of net  unrealized  appreciation
through December 31, 1995.

     Stanley Furniture Company, Inc. ("Stanley Furniture")

     Stanley  Furniture  designs,  manufactures and markets furniture and fabric
products. Based upon the closing market price at December 29, 1995, the Fund has
recorded  unrealized  depreciation of  approximately  $5.4 million on its equity
holdings in Stanley  Furniture for the year ended  December 31, 1995. The Fund's
valuation  of this  investment  reflects an  aggregate  of  approximately  $12.1
million in net unrealized depreciation through December 31, 1995.

     Alliance International Group, Inc. ("Alliance")

     Alliance  is a producer of light  gauge and  porcelain  enamel on steel for
wiring and building  surface and building product  applications.  As of December
31, 1995, the investment in Alliance is valued at cost.

     BeefAmerica, Inc.

     BeefAmerica, Inc. is an integrated beef packing company operating slaughter
and fabrication processing facilities in Nebraska. The Fund's year-end valuation
of  this  investment  reflects  unrealized  depreciation  of  approximately  $91
million.  The Fund currently is not accruing  interest on this  investment.  The
Fund  had   established  a  total  of  $8  million  in  letters  of  credit  for
BeefAmerica's  senior  lenders.  Of the $8 million,  $4 million was cancelled in
January 1995 and the remaining $4 million was cancelled on February 28, 1996.

     Chadwick-Miller, Inc. ("CMI")

     CMI operates full-line retail book stores under the Lauriat's and the Royal
Discount  Books  names,  through  its  subsidiaries  Chadwick-Miller,  Inc.  and
Lauriat, Inc.

     The Fund's year-end  valuation of this investment  reflects an aggregate of
approximately $1.8 million of unrealized depreciation through December 31, 1995.

     On November 23, 1994, in connection  with the  financial  restructuring  of
Chadwick-Miller,  Inc. and its holding  company,  CMI Holding Corp.,  the Fund's
$5,000,000  14.75%  Senior Note was  redeemed.  The  proceeds  received  were $5
million,  however,  as of December  31,  1995,  $3.1  million is  classified  as
restricted  cash and remains held in escrow until certain  leasing  consents are
obtained from store landlords.

     Cole National Corporation ("Cole")

     Cole was founded in 1944 as a provider of key duplication  services.  Since
then,  Cole has grown as a retailer and as of December 31, 1995,  operates three
separate retail subsidiaries:  Cole Vision,  Things Remembered and Cole Key. The
investment in Cole is valued at cost as of December 31, 1995.

     Omega Wire, Inc.

     In the first quarter of 1995, the Fund sold its entire  investment in Omega
Wire, Inc. and received total proceeds of $41.1 million of which $1.1 million is
being held in escrow at December  31,  1995.  The Fund  recognized a gain on the
sale of $25.8 million.

     REVIEW OF INVESTMENTS IN NON-MANAGED PORTFOLIO COMPANIES

     The following is a brief description of companies in the Fund's Non-Managed
Company portfolio:



<PAGE>


     Magellan Health Services, Inc. (formerly Charter Medical Corporation)

     Magellan Health Services,  Inc. is a leading hospital management company in
the United States.  The Fund's year-end  valuation of this  investment  reflects
unrealized depreciation of $4,000.


     Chiat/Day Advertising

     On January 26, 1995, the Fund sold its 14.25% Chiat/Day  Acquisition,  Inc.
Senior Subordinated Note, plus accrued interest, for $5,390,850,  which resulted
in a realized loss of $49,981 to the Fund.

     Walter Industries, Inc. (formerly Hillsborough Holdings Corporation)

     Walter  Industries Inc.  offers a diversified  line of products and related
services   for   eight   broad   business   areas    including    home-building,
mortgage-related  financing,  and building and  industrial  products.  In March,
1995,  the  bankruptcy  court  judge  confirmed  the  reorganization   plan  for
Hillsborough  Holding  Corporation,  which  emerged  from  bankruptcy  as Walter
Industries,  Inc. As a result,  the Fund  exchanged  its $12  million  principal
amount of  Subordinated  Debt for  $490,000  in cash,  435,569  shares of Common
Stock,  and a 12.19%  Senior Note in the  principal  amount of  $2,527,000  from
Walter  Industries  (all of which are considered  the  "qualified  securities").
Subsequent to receiving the qualified securities,  the Fund sold the Senior Note
for proceeds of $2.6 million.  All cash proceeds received in connection with the
Hillsborough  reorganization  plan and the sale of the Senior Note have  reduced
the cost  basis of the  remaining  investment  held by the Fund.  Based upon the
closing market price at December 29, 1995, the Fund recorded $2.9 million of net
unrealized  appreciation  on its equity holdings for the year ended December 31,
1995. This investment reflects an aggregate net unrealized  depreciation of $3.2
million through December 31, 1995.

     SFX Broadcasting, Inc.

     SFX Broadcasting, Inc. was formed to acquire and operate the existing radio
station  businesses  of Command and Capstar  Communication,  Inc.  Through these
acquisitions, SFX owns several radio stations.

     On February 22, 1996, the Fund sold its entire remaining  investment in SFX
Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants,
to Sillerman Communications  Management Corporation for net proceeds of $125,672
or $14.50 per share or a gain of $125,672 to the Fund.

     In December,  1995, the Fund sold 26,000 of SFX  Broadcasting,  Inc. common
stock and received  proceeds of $743,875  which  resulted in a realized  loss of
$4.1 million.

     SWO Holdings Corporation

     SWO  Holdings  Corporation  is  an  operator  of  supermarkets  located  in
Oklahoma, southern Kansas and Amarillo, Texas.

     The Fund's year-end valuation reflects $345,000 of unrealized  appreciation
based upon the value of the common stock in the rights  offering by SWO Holdings
on August 13, 1990.

     TLC Beatrice International Holdings, Inc.

     TLC Beatrice  International  Holdings,  Inc. is a U.S.-based  international
food  business  with  operations  or  significant  equity  interests  in several
operating companies. This investment is valued at cost as of December 31, 1995.

Competition

     The Fund has  completed  its  investment  and  reinvestment  program and no
longer has to compete for  investments.  However,  a majority  of the  portfolio
companies are participating in extremely competitive businesses.




<PAGE>


Employees

     The  Fund  has  no  employees.  The  Investment  Adviser,  subject  to  the
supervision of the Managing General Partner and the Individual General Partners,
manages and controls the Fund's  investments.  ML Fund  Administrators Inc. (the
"Fund Administrator")  performs  administrative  services for the Fund. The Fund
Administrator  is a  subsidiary  of  Merrill  Lynch & Co.,  Inc.,  the parent of
MLPF&S.

Item 2.  Properties

         The Fund does not own or lease any physical properties.

Item 3.  Legal Proceedings

     On March 9, 1989, a number of franchisees of Diet Center,  Inc. initiated a
suit in San Francisco  Superior Court challenging Diet Center's 50 cent increase
in the Continuing  License Fee which is paid by all franchisees on a per dieter,
per day basis.  Plaintiffs alleged that all defendants  (including the Fund, its
Investment Adviser and Thomas H. Lee) conspired to finance the leveraged buy-out
of Diet Center's corporate parent, American Health Companies Inc., by wrongfully
increasing the License Fee. Plaintiffs  subsequently filed an amended fraudulent
conveyance  count. On January 27, 1995 Judge Baxter of the San Francisco Supreme
Court  issued a written  opinion  after trial in which she ruled in favor of all
defendants  (including,  the Fund, its Investment  Adviser and Thomas H. Lee) on
plaintiffs'  allegation that the leveraged buy-out of American Health Companies,
Inc.  was a  constructively  fraudulent  conveyance.  The Court  had  previously
granted  summary  judgment to the Fund,  the Thomas H. Lee Company and Thomas H.
Lee on plaintiffs' other allegations  against those defendants.  On May 1, 1995,
the  parties  entered  into a  "Settlement  Agreement"  pursuant  to  which  the
plaintiffs withdrew their appeals and the defendants, including the Fund, agreed
not to seek to  recover  from  plaintiffs  the  defendants'  costs  incurred  in
connection with the litigation.  This settlement agreement became effective June
1, 1995.

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and rewarded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
is pending.

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors in interest, against the Fund's Managing General Partner,  Individual
General  Partners,  Investment  Adviser  and  certain of their  affiliates.  The
complaint alleges that the defendants breached the Fund's Partnership  Agreement
in 1990 by causing the Fund to pay $7,554,855 in incentive  compensation  to the
Managing General Partner with respect to that year. The complaint seeks monetary
damages in the amount of $7,554,855,  together with interest,  and other relief.
The  defendants  believe  that the claim is without  merit and sought to have it
dismissed. The court denied the defendants' motion for summary judgment, and the
defendants  filed  an  interlocutory  appeal  to the  New  York  Supreme  Court,
Appellate Division, which was denied. Thereafter,  defendants moved to decertify
the class and that motion was denied. A trial was held in late January, 1995.

<PAGE>

     The Fund may be obligated to indemnify and advance  litigation  expenses to
one or  more of the  defendants  under  the  terms  and  conditions  of  various
indemnity   provisions  of  the  Fund's   Partnership   Agreement  and  separate
indemnification  agreements.  The Fund has advanced  litigation  expenses to the
indemnified  parties  based  upon  amounts  which  are  deemed  reimbursable  in
accordance with the indemnification provisions and has included these amounts in
professional  fees.  The Court  found that th MGP  Distributions  for the fourth
quarter of 1989 through the fourth quarter of 1990 were paid in violation of the
Limite d Partnership Agreement and as a result, held the General Partners and ML
Mezzanine Inc. and Merrill Lynch, Pierce,  Fenner & Smith Incorporated  beliable
for repayment to the plaintiff  class of $6,627,752 of excessive  distributions,
plus  interest.  The Court's  decision  dismissed  Merrill Lynch & Co., Inc. and
Merrill Lynch, Peirce, Fenner & Smith Incorporated because they were not parties
to the Fund's Limited Partnership  Agreemnt.  On February 21, 1996, ML Mezzanine
Inc.  moved  to  amend  the  Court's  decision  to  dimiss  it.  Defendants  are
condidering  the impact of the  Court's  decision on the  administration  of the
Fund.  Defendants time to appeal the decision has not yet expired and defendants
intend to appeal.  The Fund filed an 8-K on March 4, 1996 disclosing the Court's
decision.

     On October 14, 1993, a Limited Partner commenced a putative class action in
the U.S.  District Court for the District of Delaware,  purportedly on behalf of
all persons who  purchased  limited  partnership  interests  in the Fund between
August 12, 1987 and the date of filing of the  complaint,  against the Fund, the
Managing  General  Partner,  the  Individual  General  Partners,  the Investment
Adviser to the Fund and certain named  affiliates  of such persons.  As amended,
the complaint  alleges that the  defendants  operated the Fund, and caused it to
make certain  investments,  for the benefit of some or all of the  defendants at
the expense of the Fund's Limited  Partners in breach of  defendants'  fiduciary
and  contractual  duties to the  Limited  Partners,  thereby  violating  federal
securities laws  applicable to the Fund and its affiliates  under the Investment
Company Act of 1940, as amended,  as well as Delaware  state law. By Order dated
September 30, 1994 and Opinion dated October 14, 1994, the court granted in part
and  denied  in part  defendants'  motion  to  dismiss  the  amended  complaint,
dismissing plaintiff's claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the Investment
Company Act of 1940. The plaintiff  thereafter filed a second amended  complaint
on November 3, 1995 raising  additional  allegations in connection  with certain
transactions by the Fund, and alleging that  defendants  violated the Investment
Company Act of 1940 and Delaware  state law. The plaintiff  seeks an accounting,
rescission, rescissory or actual damages and punitive damages. The defendants in
this action  believe that the claims are without merit and have moved to dismiss
them.  Whether or not the plaintiff  prevails on any remaining claims,  the Fund
may be obligated to indemnify and advance litigation  expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Fund's Partnership Agreement and separate  indemnification  agreements,  and the
amounts of such  indemnification and expenses could be material.  The outcome of
this case is not  determinable  at this time.  The Fund has incurred  litigation
expenses which are recorded in professional fees.

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

         No matters were submitted to a vote of the Limited Partners of the Fund
during the fourth quarter of the year ended December 31, 1995.


<PAGE>

                                     Part II


Item 5.  Market for Registrant's Common Equity and Related
              Stockholder Matters

         There is no established  trading market for the Units.  The Partnership
Agreement contains  restrictions that are intended to prevent the development of
a public market.  Accordingly,  accurate  information as to the market values of
Units at any given date is not available.

         The  approximate  number of  holders  of Units as of March 15,  1996 is
37,849.  The Managing  General Partner also holds a general partner  interest in
the Fund.


         Effective November 9, 1992, MLPF&S introduced a new limited partnership
secondary  service  through  Merrill  Lynch's  Limited   Partnership   Secondary
Transaction  Department  ("LPSTD").  This service  assists Merrill Lynch clients
wishing to buy or sell limited partnership interests, but does not represent an
established trading market for the Units.


     Since  December  1994,  MLPF&S  implemented  new guidelines for valuing and
reporting limited  partnership  investments on client account  statements.  As a
result,  the Managing General Partner's  estimate is no longer reported on these
statements,  although the Managing  General  Partner may continue to provide its
estimate of net asset value in reports to Unit holders.  Pursuant to such MLPF&S
guidelines,  estimated values for limited partnership  interests originally sold
by  MLPF&S  (such as Units in the Fund) are  provided  to MLPF&S by  independent
valuation services.  Commencing this year, such estimated values will be updated
two times per year.  The  estimated  values will be based on financial and other
information  available to the independent  services on the prior August 15th for
reporting on December  year-end  client account  statements,  and on information
available to the services on March 31st for reporting on June  month-end  MLPF&S
client account statements.  The Managing General Partner's estimate of net asset
value as set forth in the Fund's  year-end  financial  statements  reflects  the
value of the Fund's  underlying assets remaining at fiscal year end, whereas the
value provided by the independent  services  reflects the estimated value of the
Units  themselves  based on  information  that was available on the prior August
15th.  MLPF&S clients may contact their Merrill Lynch  Financial  Consultants or
telephone the number  provided to them on their  account  statements to obtain a
general  description  of  the  methodology  used  by the  independent  valuation
services to determine their estimated values,  provided the independent services
are not market  values and Unit  holders  may not be able to sell their Units or
realize the amounts shown on their MLPF&S  statements  upon a sale. In addition,
Unit holders may not realize the amount shown on their account  statements  upon
the liquidation of the Fund over its remaining life. <PAGE>

         The  Fund   distributes   Distributable   Cash  from   Investments  and
Distributable  Capital  Proceeds in accordance with the terms of the Partnership
Agreement.

         Pursuant  to  the  Partnership   Agreement,   transfers  of  Units  are
recognized  on the first day of the  fiscal  quarter  after  which the  Managing
General Partner has been duly notified of a transfer pursuant to the Partnership
Agreement.  Until a transfer is recognized,  the limited partner of record (i.e.
the  transferor)  will  continue  to receive  all the  benefits  and  burdens of
ownership of Units (including allocations of profit and loss and distributions),
and any  transferee  will have no rights to  distributions  on sale  proceeds or
distributable  cash  from  investments  generated  at  any  time  prior  to  the
recognition of the transfer and assignment.


         Accordingly,  distributable  cash from  investments  for a quarter  and
distributable  sale proceeds from sales after  transfer or assignment  have been
entered  into,  but before such  transfer and  assignment  is  recognized by the
Managing  General  Partner,  will  be  payable  to the  transferor  and  not the
transferee.


Cash Distributions


     The Fund has made quarterly  distributions,  including  both  Distributable
Cash from Investments and Distributable Capital Proceeds.

     As set forth in Item 7.  Managemnt's  Discussion  and Analysis of Financial
Condition  and results of  Operations  - Liquidity  and Capital  Resources - the
information  contained in which is incorporated by reference herein,  the Fund's
ability to make future  distributions  is  restricted  by the factors  described
therin. 



<PAGE>



Item 6. Selection Financial Data



                                                            For the Years Ended
<TABLE>
<S>                                <C>                <C>                  <C>                 <C>                 <C>
Supplemental Information          December 31, 1995   December 31, 1994    December 31, 1993   December 31, 1992   December 31, 1991
Schedule
  Selected Financial Data

TOTAL FUND INFORMATION:

Net Investment Income (Loss)         $ (1,155,421)        $  9,305,007     $    125,500         $    13,891,693       $  16,246,365

Net Realized Gains (Losses) on
  Investments                          75,808,138          (37,008,074)      69,148,273             (15,434,983)        (26,350,790)

Net Change in Unrealized
  Appreciation(Depreciation) on
  Investments                           9,920,766            9,271,721       91,162,444              16,629,394         (58,552,654)

Cash Distributions to Partners    (a) 186,920,065           43,760,745       56,612,752              24,010,059          19,473,314

Net Assets                            254,353,413          356,699,995      418,892,086             315,068,621         323,992,576
Cost of Mezzanine Investments         223,694,546          336,632,272      387,857,896             471,148,771         532,663,181
Total Assets                          254,776,082          357,777,636      431,723,973             382,150,325         435,135,846
Outstanding Loan Payable                       --                   --        9,594,004              62,235,603         105,633,246

PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income                    $      11.68         $      37.10     $      21.65         $         57.75       $       77.00
Expenses                                   (14.03)              (18.20)          (21.39)                 (29.53)             (44.00)
                                     ------------         ------------     ------------         ---------------       --------------
Net Investment Income (Loss)                (2.35)               18.90              .26                   28.22               33.00
                                     ============         ============     ============         ===============       ==============
Net Realized Gains (Losses) on
  Investments                        $     153.95        $      (75.16)    $     140.43         $        (31.35)      $      (53.51)

Net Change in Unrealized
  Appreciation (Depreciation)               20.15                18.83           185.13                   33.77             (118.91)

Cash Distributions (b)          (a)        379.60                88.87           114.97                   48.76               38.36

Net Asset Value                            519.95               727.79           854.10                  643.25              661.37

</TABLE>

(a)      Includes  $60,444,234 or $123.99 per Limited Partnership Unit return of
         capital  from the  sales  of GNC,  Omega  Wire,  Petco,  Chiat  Day and
         Celebrity, Inc.

(b)      See the Cash  Distributions  Schedule  on  pages 15 and 16 for  further
         information including returns of capital for years prior to 1995.



<PAGE>


Item 7.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations

Liquidity & Capital Resources


         As of  December  31,  1995,  the  Fund  had  a  total  of  $223,694,546
(including $1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind
equity which excludes  Subordinated Notes placed on non-accrual status) invested
in  Mezzanine  Investments,  representing  $214,098,103  Managed and  $9,596,443
Non-Managed  portfolio  investments.  These  investments  were  financed  by net
offering  proceeds and debt financing.  This represents a $112,937,726  decrease
versus the total at December  31, 1994 of  $336,632,272.  The  decrease in gross
assets  is due  primarily  to sales  and  redemptions  partially  offset  by the
recognition  of prior  years'  payment-in-kind  income  relating to Petco Animal
Supplies and the follow-on  investments in Health o meter.  The Fund's Mezzanine
Investments  consist of  high-yield  subordinated  debt and/or  preferred  stock
linked with an equity  participation in middle market companies typically issued
in private placement transactions and are usually subject to restrictions on the
transfer or sale of the security, thereby limiting their liquidity.


     On  August  13,  1991,  the Fund  completed  a  refinancing  of its  credit
agreement with a lending group led by The First National Bank of Chicago ("First
Chicago"). The new agreement provided the Fund with a maximum Credit Facility of
$140 million, consisting of a $100 million term loan and a $40 million revolving
credit line, both maturing on July 31, 1998. The Fund has pledged  substantially
all of its  securities  to secure  repayment  of this  facility.  The  agreement
generally provides for mandatory  prepayments,  and a permanent reduction in the
Credit  Facility,  equal to the lesser of cost or cash  proceeds in the event of
the sale or other cash disposition of Mezzanine Investments.


     On October 29,  1993,  the Fund  entered  into an  amendment  to its Credit
Agreement enabling the Fund to make prepayments of the term loan at any time and
without any corresponding reduction to the revolving credit line. As a result of
paydowns  of  the  term  loan  and  mandatory  loan  paydowns  due to  sales  of
securities,  all of which  took place in the first  quarter of 1994,  the Fund's
outstanding  term loan was paid in full as of March 29,  1994.  On  December  1,
1995, the Fund's Credit  Facility was further  amended to reduce the commitments
thereunder to $10 million.  The Fund had utilized $4 million to support a letter
of credit established for Beef America,  Inc., however, the letter of credit was
cancelled  February 28, 1996. As of March 15, 1996,  the Fund had the entire $10
million credit facility available.


     The Fund is now in its ninth year of operation.  Because many of the Fund's
debt  investments  were  previously  sold or redeemed,  and two of the remaining
portfolio companies are unable to pay current interest to the Fund, interest and
other income  expected to be received by the Fund may not be sufficient to cover
the Fund's expenses.  As a result, future cash distributions to Limited Partners
will be mostly derived from capital  proceeds and gains  resulting from sales of
securities.  The amount and timing of asset sales are dependent on future market
conditions and therefore are inherently  unpredictable.  Generally, the proceeds
generated  from  the  sale of the  Fund's  investments  will be  distributed  to
partners  only after  payment of  obligations  of the Fund,  or for  appropriate
reserves.  To fund the anticipated cash flow shortfall in the near future and to
maintain adequate reserves for possible follow-on investments and expenses,  the
Fund  reserved $15 million of the proceeds  received from the Playtex notes sale
in  February,  1993.  A  portion  of the  reserve  was  used to  make  follow-on
investments of $444,861,  $2.6 million, $2.25 million, $3.28 million and $529 in
American Health Companies, Duro-Test Corp., Chadwick-Miller,  Health o meter and
Petco, respectively, along with a distribution to partners in the second quarter
of 1993 of $424,264. In addition,  $2.9 million was utilized from the reserve to
paydown a portion of the First  Chicago  loan on  January  6,  1994.  The Fund's
reserve  balance as of  December  31,  1995 was  reduced to  approximately  $3.1
million which has been invested in temporary  investments.  As of March 6, 1996,
the Independent  General Partners have approved  retention of the reserve at its
current level.




<PAGE>


Investment in High-Yield Securities


     The  Fund  invests  primarily  in  subordinated  debt and  preferred  stock
securities   ("High-Yield   Securities"),   generally   linked  with  an  equity
participation,  issued in conjunction with the mezzanine  financing of privately
structured,   friendly  leveraged  acquisitions,   recapitalizations  and  other
leveraged  financings.  High-Yield  Securities  are  debt and  preferred  equity
securities that are unrated or are rated by Standard & Poor's  Corporation as BB
or lower and by Moody's  Investor  Services,  Inc. as Ba or lower.  Risk of loss
upon default by the issuer is significantly  greater with High-Yield  Securities
than  with  investment  grade  securities  because  High-Yield   Securities  are
generally unsecured and are often subordinated to other creditors of the issuer.
Also,  these  issuers  usually  have high  levels of  indebtedness  and are more
sensitive  to adverse  economic  conditions,  such as  recession  or  increasing
interest rates,  than  investment  grade issuers.  Most of these  securities are
subject to resale restrictions and have no quoted market price.


     Although  the  Fund  cannot   eliminate  the  risks   associated  with  its
investments  in  High-Yield  Securities,  it  has  established  risk  management
policies.  The Fund subjected each prospective  investment to rigorous  analysis
and made only those investments that were recommended by the Investment  Adviser
and  that met the  Fund's  investment  guidelines  or that  had  otherwise  been
approved by the Managing General Partner and the Independent  General  Partners.
Fund investments were measured against specified Fund investment and performance
guidelines.  To limit the exposure of the Fund's  capital in any single  issuer,
the Fund limits the amount of its investment in a particular  issuer. The Fund's
Investment  Adviser also continually  monitors  portfolio  companies in order to
minimize the risks associated with its investments in High-Yield Securities.


     Certain issuers of securities held by the Fund (Celebrity,  Petco, Playtex,
Stanley Furniture and Health o meter) have registered their equity securities in
public  offerings.  Although the equity  securities of the same class  presently
held by the Fund (except Celebrity Inc.,  Stanley Furniture and, in part, Health
o meter) were not registered in these offerings,  the Fund has the ability under
Rule  144  under  the  Securities  Act of 1933 to sell  publicly  traded  equity
securities held by it for at least two years on the open market,  subject to the
volume  restrictions  set forth in that rule.  The Rule 144 volume  restrictions
generally are not applicable to equity  securities of  non-affiliated  companies
held by the Fund for at least three years.  The Fund in certain cases has agreed
not to make any sales of equity  securities  for a  specified  hold-back  period
following a public offering.


     The  Investment   Adviser  reviews  each  portfolio   company's   financial
statements quarterly.  In addition, the Investment Adviser routinely reviews and
discusses  financial and operating  results with the company's  management  and,
where  appropriate,   attends  board  of  director  meetings.   In  some  cases,
representatives  of the  Investment  Adviser,  acting on behalf of the Fund (and
affiliated investors where applicable), serve as one or more of the directors on
the boards of portfolio companies. The Fund may from time to time make follow-on
investments  to  the  extent  necessary  to  protect  or  enhance  its  existing
investments.


Results of Operations


Investment Income and Expenses


     For the year ended December 31, 1995, the Fund had net investment loss from
operations of $1,155,421  as compared to a net  investment  income of $9,305,007
and  $125,500  for the same  periods in 1994 and 1993,  respectively.  The total
investment income earned on investments for the year ended December 31, 1995 was
$5,751,535  of which  $4,412,491  was  earned  from  Mezzanine  Investments  and
$1,339,044 was earned from Temporary  Investments.  For the same period in 1994,
total  investment   income  earned  on  investments  was  $18,265,190  of  which
$17,764,759  was earned from Mezzanine  Investments and $500,431 was earned from
Temporary Investments.

<PAGE>


     For the same period in 1993, total investment  income earned on investments
was  $10,658,679 of which  $9,824,113 was earned from Mezzanine  Investments and
$834,566 was earned from Temporary Investments.



     The decrease in net investment  income for the year ended December 31, 1995
versus the comparative  period in 1994 reflects the decrease in income producing
securities held by the Fund in 1995, primarily due to the sale of the Omega Wire
subordinated  debt and the  conversion of all GNC  subordinated  notes to common
stock. However, this decrease was offset by lower Investment Advisory Fees, Fund
Administration Fees and Legal and Professional fees recorded in 1995.


     The increase in net investment  income for the year ended December 31, 1994
versus the  comparative  period in 1993 reflected the  recognition of previously
unrecorded  interest,  dividend and discount income related to Petco (a security
placed on  non-accrual  status on January 1, 1991) recorded in the first quarter
of 1994. In addition, the increase in net investment income was partially due to
lower interest expense,  Investment  Advisory Fees, Fund Administration Fees and
Loan fees recorded in 1994.


     Major  expenses for the period  consisted of the  Investment  Advisory Fee,
Legal and Professional fees and Fund Administration Fees and Expenses.


     The Investment Adviser and Fund Administrator receive their compensation on
a quarterly  basis.  The total  Investment  Advisory Fee paid to the  Investment
Adviser for the year ended  December  31,  1995 was  $2,770,934,  compared  with
$3,652,538  for the year ended  December  31, 1994 and  $4,059,408  for the year
ended December 31, 1993. The fee is calculated at an annual rate of 1% of Assets
Under  Management,  subject to certain  reductions  as  specified  in the Fund's
Partnership  Agreement  with a minimum  annual  payment  of $1.2  million.  This
decrease  in 1995 as  compared to 1994 and 1993  Investment  Advisory  Fees is a
direct result of the reductions in outstanding borrowings, sales of investments,
returns of capital to partners and realized losses on investments.


     Legal and  Professional  fees paid by the Fund  consist  primarily of legal
fees incurred in  conjunction  with the Fund's  litigation.  For the years ended
December 31, 1995, 1994 and 1993, legal and  professional  fees were $1,584,381,
$2,338,418 and $1,679,890, respectively. This decrease is primarily attributable
to the  decrease  in  litigation  expenses  incurred  by the Fund to support its
claims and defending  allegations  against various parties as well as legal fees
required to be advanced by the Fund in connection with the litigation  described
in Note 12 to the Financial Statements.


     Total Fund  Administration fees paid to the Fund Administrator for the year
ended December 31, 1995 were $1,330,212. For the period ending October 19, 1995,
Fund  Administration  Fees were  calculated  at an  annual  rate of 0.45% of net
offering  proceeds  reduced  by  one-half  of the sum of  returns  of capital to
partners and realized  losses on  investments,  with a minimum annual payment of
$400,000.  Beginning October 19, 1995, the Fund Administration Fee changed to an
annual fee of $300,000,  plus 100% of actual out-of-pocket  expenses incurred by
the Fund  Administrator,  as noted below.  For the years ended December 31, 1994
and  1993,  the  Fund   Administration   Fee  was  $1,843,907  and   $1,874,739,
respectively.  This decrease in Fund  Administration  Fees reflects  adjustments
relating to a return of capital  and  realized  losses  recorded in 1995 and the
change in the Fund Administration fee to $300,000 per annum.

     For the period ending October 19, 1995, the Fund's expenses for accounting,
audits,   printing,   tax   preparation   and  other   administrative   services
("out-of-pocket  expenses")  (excluding  the costs of bonding and  extraordinary
legal expenses) were paid by the Fund Administrator. Beginning October 19, 1995,
in  accordance  with  Partnership  Agreement,  the Fund  Administrator  is being
reimbursed by the Fund for 100% of the out-of-pocket  expenses  incurred.  Total
out-of-pocket expenses incurred by the Fund were $171,150.

     Loan fees  consist  of fees on the unused  portion of the Fund's  facility,
loan  administration  fees,  amortization of the loan advisory and facility fees
and various  miscellaneous fees attributable to the facility.  Loan fees for the
years ended December 31, 1995,  1994 and 1993 totaled  $738,029,  $772,593,  and
$922,876  respectively.  This  decrease in 1995 as compared to the 1994 and 1993
loan fees is the result of reductions in the Credit Facility.

<PAGE>

Net Assets

     The Fund's  net  assets  decreased  by  $102,346,582  during the year ended
December 31, 1995  primarily due to net  investment  loss of $1,155,421 and cash
distributions  to partners of $186,920,065  ($61,054,782  of cash  distributions
distributed  in  1995  was  return  of  capital  from  the  sales  of  portfolio
investments) offset by additional net unrealized appreciation of $9,920,766, and
net realized gains of $75,808,138.

     The  Fund's  net  assets  decreased  by  $62,192,091  during the year ended
December 31, 1994 primarily due to cash distributions to partners of $43,760,745
($4,046,615 of the cash distributions paid were return of capital from the sales
of Mezzanine  Investments)  and net  realized  losses of  $37,008,074  partially
offset  by  additional  net  unrealized   appreciation  of  $9,271,721  and  net
investment income of $9,305,007.

     The Fund's  net  assets  increased  by  $103,823,465  during the year ended
December 31, 1993  primarily due to additional net  unrealized  appreciation  of
$91,162,444,  net realized  gain of  $69,148,273  and net  investment  income of
$125,500  partially  offset by cash  distributions  to partners  of  $56,612,752
($18,224,991  of the of cash  distributions  distributed  in 1993 was  return of
capital from the sales of portfolio investments).


Unrealized Appreciation and Depreciation on Investments

     For the year ended  December 31,  1995,  the Fund  recorded net  unrealized
appreciation  of  $9.9  million  of  which  $11.9  million  was  related  to net
unrealized depreciation in market value of publicly  traded/underlying  publicly
traded  securities held by the Fund at December 31, 1995. The Fund's  cumulative
net  unrealized  appreciation  on investments at December 31, 1995 totaled $12.5
million. This compares to a net unrealized appreciation of $9.3 million of which
$39.2  million was related to net  unrealized  appreciation  in market  value of
publicly  traded/underlying  publicly  traded  securities for the same period in
1994.  For the year ended  December 31, 1993,  the Fund recorded net  unrealized
appreciation  of $91.1  million  of which  $113.6  million  was  related  to net
appreciation in market value of publicly traded securities.

     The Managing General Partner and Investment Adviser review the valuation of
the Fund's portfolio investments that do not have a readily ascertainable market
value on a  quarterly  basis with final  approval  from the  Individual  General
Partners.  Portfolio  Investments are valued at original cost plus accrued value
in the  case of  original  issue  discount  or  deferred  pay  securities.  Such
investments  will be revalued if there is an  objective  basis for doing so at a
different  price.  Investments  will be  written  down in value if the  Managing
General Partner and Investment Adviser believe adverse credit  developments of a
significant nature require a write-down of such securities.  Investments will be
written  up in  value  only if  there  has  been  an  arms'-length  third  party
transaction to justify the increased valuation.

     A majority of the Fund's assets (at cost) are invested in private placement
securities  for which there are no  ascertainable  market  values.  Although the
Managing  General  Partner and  Investment  Adviser  use their best  judgment in
estimating the fair value of these investments,  there are inherent  limitations
in any  estimation  technique.  Therefore,  the fair value  estimates  presented
herein are not necessarily indicative of the amount which the Fund could realize
in a current transaction.

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1995.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time;  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.


     The Fund's valuation of the common stock of Celebrity,  Inc., GNC, Health o
meter,  Petco,  Playtex,  Stanley Furniture and Walter Industries  reflect their
closing market price at December 31, 1995. <PAGE>

     The GNC  Inc.,  Health  o  meter,  Petco,  Playtex  and  Stanley  Furniture
securities held by the Fund are restricted  securities  under the Securities and
Exchange  Commission's  Rule  144 and can only be sold  under  that  rule,  in a
registered  public  offering,  or pursuant to an exemption from the registration
requirement.  In addition, resale in some cases is restricted by lockup or other
agreements.  The Fund may be  considered  an  affiliate  of  Health o meter  and
Stanley Furniture under the Securities and Exchange's Commission's Rule 144, and
therefore,  any resale of Health o meter or Stanley  Furniture  securities under
Rule 144 is limited by the volume  limitations  in that rule.  Accordingly,  the
values  referred to in the financial  statements for the remaining GNC, Health o
meter, Petco,  Playtex and Stanley Furniture  securities held by the Fund do not
necessarily  represent the prices at which these  securities  could currently be
sold.

         As overall economic,  market and business conditions improve, the sales
and profit levels of some of the Fund's  companies have increased,  resulting in
higher  valuations  for some of the Fund's equity  investments.  This has led to
higher values in those equity investments, primarily GNC. Subsequent to December
31,  1995,  the Fund sold its  remaining  investment  in GNC and all  unrealized
appreciation  on the GNC investment  was reversed.  See Note 16 to the Financial
Statements for further information.


         For additional  information,  please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 on pages 47-48).



Realized Gains and Losses


         Net realized gains on investments  for the year ended December 31, 1995
was $75,808,174 compared to a net realized loss of $37,008,074 in 1994 and a net
realized gain of $69,148,273 for 1993.


         For additional  information,  please refer to the Supplemental Schedule
of Realized Gains and Losses (Schedule 1 - page 46).



 Cash Distributions



     On February 8, 1996, the Individual  General  Partners  approved the fourth
quarter  1995  cash  distribution   totalling  $5,391,914,   which  consists  of
$6,722,994 return of capital from the sale of Mezzanine Investments, and $76,626
of net investment income from Temporary Investments,  offset by a net investment
loss of $1,407,706 for Mezzanine  Investments.  The total amount  distributed to
Limited Partners was representing  $5,338,005,  or $10.95 per Unit. The Managing
General Partner received $53,909 in proportion toits 1% interest in the Fund.
The distributions were made on February 14, 1996.



<PAGE>


<TABLE>
<CAPTION>

Cash Distributions
     The following  table  represents  distributions  approved by the Individual
General Partners of ML-Lee  Acquisition Fund, L.P. since inception  (October 19,
1987):

<S>                        <C>              <C>             <C>                 <C>            <C>
                              Total                                               Managing
                           Distributed          Limited Partners                   General        Incentive
                              Cash*           Amount        Per Unit**             Partner         Fee***
Fourth Quarter 1987        $   2,577,304   $   2,551,531      $    6.14         $     25,773    $         -
First Quarter 1988             6,328,879       6,266,217          14.80               62,662              -
Second Quarter 1988            7,495,858       7,420,899          16.50               74,959              -
Third Quarter 1988            14,228,737      14,086,450          29.45              142,287              -
Fourth Quarter 1988           13,788,416      13,074,454          26.82              137,884        576,078
First Quarter 1989            16,291,215      15,034,161          30.84              162,929      1,094,125
Second Quarter 1989           15,374,977      13,771,564          28.25              153,740      1,449,673
Third Quarter 1989            36,416,661      28,292,735          58.64              364,164      7,759,762
Fourth Quarter 1989           19,252,214      13,284,076          27.25              192,558      5,775,580
First Quarter 1990            10,119,121       7,180,713          14.73              101,197      2,837,211
Second Quarter 1990            5,270,048       3,636,668           7.46               52,690      1,580,690
Third Quarter 1990            12,467,001       9,783,904          20.07              124,649      2,558,448
Fourth Quarter 1990            7,138,368       6,488,478          13.31               71,384        578,506
First Quarter 1991             1,496,932       1,481,967           3.04               14,965              -
Second Quarter 1991            5,298,352       5,245,382          10.76               52,970              -
Third Quarter 1991             5,539,662       5,484,251          11.25               55,411              -
Fourth Quarter 1991            6,829,769       6,761,472          13.87               68,297              -
First Quarter 1992             9,611,889       9,515,786          19.52               96,103              -
Second Quarter 1992            5,997,616       5,937,616          12.18 (a)           60,000              -
Third Quarter 1992             1,570,785       1,555,090           3.19               15,695              -
Fourth Quarter 1992            1,989,335       1,969,456           4.04               19,879              -
First Quarter 1993            18,170,064      17,988,344          36.90 (b)          181,720              -
Second Quarter 1993            5,086,627       5,035,761          10.33 (c)           50,866              -
Third Quarter 1993            31,366,725      31,053,049          63.70              313,676              -
Fourth Quarter 1993           29,052,375      28,761,851          59.00              290,524              -
First Quarter 1994             8,001,724       7,921,696          16.25 (d)           80,028              -
Second Quarter 1994            1,083,292       1,072,476           2.20 (e)           10,816              -
Third Quarter 1994             5,623,355       5,567,124          11.42 (f)           56,231              -
Fourth Quarter 1994            7,602,855       7,526,830          15.44 (g)           76,025              -
First Quarter 1995            44,671,712      44,225,002          90.72 (h)          446,710              -
Second Quarter 1995           19,863,955      19,665,306          40.34 (i)          198,649              -
Special GNC
  Distribution on
  August 14, 1995            114,190,626     113,048,699         231.90 (j)        1,141,927              -
Third Quarter 1995               590,917         584,987           1.20                5,930              -
Fourth Quarter 1995            5,391,914       5,338,005          10.95 (k)           53,909
                           -------------   -------------      ---------         ------------    -----------
Totals                     $ 495,779,280   $ 466,612,000      $  962.46         $  4,957,207    $24,210,073
                           =============   =============      =========         ============    ===========
</TABLE>


<PAGE>


*     Distributions are paid no later than 45 days after the end of each
      quarter.

**    For periods prior to Third  Quarter 1988,  the amount shown is for the 1st
      closing participants only. Subsequent closings' amounts as to such periods
      will vary.

***   Incentive distribution payable to the Investment Adviser for exceeding the
      cumulative  priority  return of 10% on  Mezzanine  Investments  to Limited
      Partners.

(a)   Includes  $10.37 per unit  return of  capital  from the sale of Mohawk and
      Health o meter Notes.

(b)   Includes $36.15 per unit return of capital from the sale of Playtex
      Notes.

(c)   Includes $0.86 per unit return of capital from the sale of Playtex Notes.

(d)   Includes  $6.52 per unit  return of  capital  from the sale of GNC  Common
      Stock and Petco Notes.

(e)   Includes  $1.22 per unit return of capital from the sale of  International
      Business Interiors Notes and Warrants.

(f)   Includes $0.48 per unit return of capital from the sales of Celebrity
      Inc. Common Stock, Stone Savannah River Pulp & Paper Corp. Common Stock
      and Healthtrust, Inc. Common Stock Purchase Warrants.  The Healthtrust
      and Stone Savannah sales occurred in the Fourth Quarter.

(g)   Includes $5.04 per unit return of capital from the sales of GNC
      Common Stock,  Filene's Basement Common Stock, Chadwick Miller
      Notes, International Business Interiors Common Stock and Miramar Marine


(h)   Includes  $41.20  per unit  return of  capital  from  sales of Omega  Wire
      Subordinated Notes and Common Stock, Chiat Day Notes and Hillsborough
      Holdings Common Stock.

(i)   Includes  $17.13 per unit return of capital  from the sale of Petco Common
      Stock.

(j)   Includes  $59.60 per unit  return of  capital  from the sale of GNC Common
      Stock.

(k)   Includes  $13.65  per unit  return of capital  from the sale of  Duro-Test
      Equity, Walter Industries Notes and SFX Broadcasting Common Stock.


<PAGE>


Item 8.       Financial Statements and Supplementary Data





                          ML-LEE ACQUISITION FUND, L.P.


                                TABLE OF CONTENTS


Report of Independent Accountants

Statements of Assets,  Liabilities and Partners' Capital As of December 31, 1995
   and December 31, 1994

Statements of Operations
   For the Years Ended December 31, 1995, December 31, 1994 and
   December 31, 1993

Statements of Changes in Net Assets
   For the Years Ended December 31, 1995, December 31, 1994 and
   December 31, 1993

Statements of Cash Flows
   For the Years Ended December 31, 1995, December 31, 1994 and
   December 31, 1993

Statements of Changes in Partners' Capital
   For the Years Ended December 31, 1995, December 31, 1994 and
   December 31, 1993

Schedule of Portfolio Investments - December 31, 1995

Notes to Financial Statements

Supplementary Schedule of Realized Gains and Losses (Schedule 1)

Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)



<PAGE>

Report of Independent Accountants

March 15, 1996

To the General and Limited Partners of
ML-Lee Acquisition Fund L.P.

     In our opinion,  the  accompanying  statements of assets,  liabilities  and
partners'  capital,  including  the schedule of portfolio  investments,  and the
related  statements of operations,  of changes in net assets, of cash flows, and
of changes in partners'  capital present fairly, in all material  respects,  the
financial  position of ML-Lee Acquisition Fund L.P. (the "Fund") at December 31,
1995 and 1994, and the results of its operations, the changes in its net assets,
its cash flows,  and the changes in its partners'  capital for each of the three
years in the period ended  December  31,  1995,  in  conformity  with  generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility  of the Fund's  management;  our  responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  financial  statements in  accordance  with  generally  accepted
auditing  standards  which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits,  which  included  confirmation  of  securities  at December  31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations were not received,  provide a reasonable
basis for the opinion expressed above.

     The financial  statements  include  securities,  valued at  $230,410,487 at
December 31, 1995 (90.6% of net assets), whose values have been estimated by the
Managing  General  Partner and the Investment  Adviser (with the approval of the
Independent  General  Partners) in the absence of readily  ascertainable  market
values,  as further described in Note 2. We have reviewed the procedures used by
the Managing  General  Partner and the  Investment  Adviser in arriving at their
estimate  of value and have  inspected  underlying  documentation,  and,  in the
circumstances,  we believe the procedures  are reasonable and the  documentation
appropriate.  However,  those estimated values may differ significantly from the
values that would have been used had a ready market for the securities  existed,
and the differences could be material to the financial statements.

     Our  audits  were  conducted  for the  purpose of forming an opinion on the
basic financial  statements taken as a whole. The schedule of realized gains and
losses (Schedule 1) and the schedule of unrealized appreciation and depreciation
(Schedule 2) are presented for the purpose of additional  analysis and are not a
required  part  of the  basic  financial  statements.  These  schedules  are the
responsibility of the Fund's  management.  Such schedules have been subjected to
the auditing procedures applied in our audits of the basic financial  statements
and, in our opinion,  are fairly stated in all material respects when considered
in relation to the basic financial statements taken as a whole.

PRICE WATERHOUSE LLP
New York, New York




<PAGE>




<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)

<S>                                                     <C>                      <C>
                                                        December 31, 1995       December 31, 1994

ASSETS:
Investments - Notes 2,8,9
  Portfolio Investments at fair value
   Managed Companies (cost $214,099 at
     December 31, 1995 and $313,930 at
     December 31, 1994)                                     $    229,416          $     326,672
   Non-Managed Companies (cost $9,597 at
     December 31, 1995 and $22,703 at
     December 31, 1994)                                            6,782                 12,542
   Temporary Investments, at amortized cost
     (cost $7,357 at December 31, 1995 and
     $10,498 at December 31, 1994)                                 7,370                 10,511
Cash (of which $6,049 is restricted at
      December 31, 1995, and $3,442 is
      restricted at December 31, 1994)                             6,054                  3,442
Accrued Interest Receivable - Note 2                                  --                  1,077
Prepaid Loan Fees - Notes 2,4                                      1,661                  2,299
Prepaid Expenses and Other Receivables                               116                      7
Receivable for Investments Sold                                    3,377                  1,227
                                                            ------------          -------------
TOTAL ASSETS                                                $    254,776          $     357,777
                                                            ============          =============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities

  Legal and Professional Fees Payable                       $         60          $         284
  Reimbursable Administrative Expenses Payable                       171                     --
  Independent General Partner Expenses Payable                        28                     21
  Deferred Interest Income - Note 2                                  164                    773

                                                            ------------          -------------
Total Liabilities                                                    423                  1,078
                                                            ------------          -------------     
Partners' Capital - Note 2
Managing General Partner                                             884                  1,908
Limited Partners (487,489 Units)                                 253,469                354,791
                                                            ------------          -------------
Total Partners' Capital                                          254,353                356,699
                                                            ------------          -------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                     $    254,776          $     357,777
                                                            ============          =============

</TABLE>

              See the Accompanying Notes to Financial Statements.


<PAGE>


<TABLE>
<CAPTION>
                                           ML-LEE ACQUISITION FUND, L.P.
                                             STATEMENTS OF OPERATIONS
                                               (DOLLARS IN THOUSANDS)

                                           For the Years Ended December 31,
<S>                                       <C>                <C>               <C>
                                               1995               1994             1993
                                        --------------       -------------     -----------
INVESTMENT INCOME - NOTES 2,8,10:
Interest                                  $     3,804          $    14,683      $   8,640
Discount                                        1,339                  498            830
Dividend and Other Income                         609                3,084          1,189
                                          -----------          -----------      ---------
    TOTAL INCOME                                5,752               18,265         10,659
                                          -----------          -----------      ---------
EXPENSES:
Investment Advisory Fee - Note 5                2,771                3,652          4,059
Fund Administration Fee - Note 6                1,330                1,844          1,875
Legal and Professional Fees                     1,584                2,338          1,680
Loan Fees - Notes 2,4                             738                  773            923
Independent General Partners' Fees
 and Expenses - Note 7                            304                  285            242
Reimbursable Administrative Expenses
 - Note 6                                         171                   --             --
Insurance Expense                                   9                   10             10
Interest Expense - Note 4                          --                   58          1,711
Valuation Expenses                                 --                   --             33
                                          -----------          -----------      ---------
    TOTAL EXPENSES                              6,907                8,960         10,533
                                          -----------          -----------      ---------  
NET INVESTMENT (LOSS) INCOME                   (1,155)               9,305            126
NET REALIZED GAIN (LOSS) ON
 INVESTMENTS - Note 8 and Schedule 1           75,808              (37,008)        69,148

NET CHANGE IN UNREALIZED
 APPRECIATION (DEPRECIATION) ON
 INVESTMENTS- Note 9 and Schedule 2
  Publicly Traded Securities                   (7,571)             (39,245)       113,646
  Nonpublic Securities                         17,492               48,516        (22,484)
                                          -----------          -----------      ---------   
        Subtotal                                9,921                9,271         91,162
NET INCREASE (DECREASE) IN NET ASSETS     -----------          -----------      ---------
  RESULTING FROM OPERATIONS               $    84,574          $   (18,432)     $ 160,436
                                          ===========          ===========      =========

</TABLE>



                  See the Accompanying Notes to Financial Statements.


<PAGE>


<TABLE>
<CAPTION>

                             ML-LEE ACQUISITION FUND, L.P.
                          STATEMENTS OF CHANGES IN NET ASSETS
                                (DOLLARS IN THOUSANDS)

                                        For the Years Ended December 31,
  <S>                                   <C>          <C>          <C>
                                           1995         1994         1993
                                        ---------    ---------    ---------
FROM OPERATIONS:


Net Investment Income (Loss)            $  (1,155)   $   9,305    $     126

Net Realized Gain (Loss) on
  Investments                              75,808      (37,008)      69,148

Net Change in Unrealized Appreciation
  (Depreciation) from Investments           9,921        9,271       91,162
                                        ---------    ---------    ---------

Net Increase (Decrease) in Net Assets
  Resulting from Operations                84,574      (18,432)     160,436

Cash Distributions to Partners           (186,920)     (43,761)     (56,613)
                                        ---------    ---------    ---------

Total Increase (Decrease)                (102,346)     (62,193)     103,823

NET ASSETS:                             

Beginning of Period                       356,699      418,892      315,069
                                        ---------    ---------    ---------
End of Year                             $ 254,353    $ 356,699    $ 418,892
                                        =========    =========    =========


</TABLE>

                 See the Accompanying Notes to Financial Statements.

<PAGE>


<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                            STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                          For the Years Ended December 31,
<S>                                     <C>          <C>          <C>
                                           1995         1994         1993
                                        ---------    ---------    ---------
Increase in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount      $   6,219    $  11,098    $  11,393
Income
  Investment Advisory Fee                  (2,771)      (3,652)      (4,059)
  Interest Expense                             --          (58)      (1,711)
  Fund Administration Fees                 (1,330)      (1,844)      (1,875)
  Legal and Professional Fees              (1,911)      (2,181)      (1,818)
  Loan Fees and Expenses                     (116)         (73)        (285)
  Independent General Partners' Fees         (296)        (294)        (224)
and Expenses
  Sale of Temporary Investments, Net        3,141       20,643      (30,698)
  Proceeds from Sale of Portfolio         186,596       39,502      143,482
                                        ---------     --------    ---------
Company Investments
  Purchase of Portfolio Company                --       (6,344)      (4,950)
Investments
                                        ---------    ---------    ---------
Net Cash Provided by Operating            189,532       56,797      109,255
Activities                              ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of Borrowings, Net                --       (9,594)     (52,642)
  Cash Distributions to Partners         (186,920)     (43,761)     (56,613)
                                        ---------    ---------    ---------
    Net Cash Applied to Financing        (186,920)     (53,355)    (109,255)
Activities
                                        ---------    ---------    ---------
  Net Increase in Cash                      2,612        3,442           --
  Cash at Beginning of Period               3,442           --           --
                                        ---------    ---------    ---------
    Cash at End of Period               $   6,054    $   3,442    $      --
                                        =========    =========    =========

                 RECONCILIATION OF NET INVESTMENT INCOME (LOSS)
                  TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Net Investment Income(Loss)             $  (1,155)   $   9,305    $     126
                                        ---------    ---------    ---------
Adjustments to Reconcile Net Investment
 Income (Loss) to Net Cash Provided by
 Operating Activities:

  Decrease in Investments                 116,079       79,085       53,694
  (Increase) Decrease in Receivable for
    Investments Sold                       (2,150)      13,781      (15,008)
  (Increase) Decrease in Accrued
Interest                                      466       (7,167)         735
    and Discount Receivables
  Decrease in Prepaid Expenses                530          684          640
  Decrease in Option Payable                   --       (2,057)          --
  Increase in Independent General
    Partner Fees Payable                        7            3            6
  Increase in Reimbursable
    Administrative Expenses Payable           171           --           --

  Increase (Decrease) in Legal and
    Professional Fees Payable                (224)         171          (86)

  Net Realized Gain (Loss) on              75,808      (37,008)      69,148
    Investments
                                        ---------    ---------    ---------
    Total Adjustments                     190,687       47,492      109,129
                                        ---------    ---------    ---------
Net Cash Provided by Operating          $ 189,532    $  56,797    $ 109,255
  Activities                            =========    =========    =========
</TABLE>

               See the Accompanying Notes to Financial Statements.


<PAGE>


<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)
<S>                                          <C>                   <C>           <C>
                                                  Managing                           Limited
                                              General Partner       Partners          Total
                                              ----------------   --------------   ------------
For the Years Ended December 31, 1995,
December 31, 1994, and December 31, 1993

Partners' Capital at December 31, 1992          $    1,492         $  313,577     $  315,069

Allocation of Net Investment Income                      2                124            126
Allocation of Net Realized Gain on                     691             68,457         69,148
Investments
Allocation of Net Change in                            911             90,251         91,162
Unrealized Appreciation
Cash Distributions to Partners                        (566)           (56,047)       (56,613)
                                                ----------         ----------     ----------

Partners' Capital at December 31, 1993          $    2,530         $  416,362     $  418,892

Allocation of Net Investment Income                     93              9,212          9,305
Allocation of Net Realized Loss on                    (370)           (36,638)       (37,008)
Investments
Allocation of Net Change in                             93              9,178          9,271
Unrealized Appreciation
Cash Distributions to Partners                        (438)           (43,323)       (43,761)
                                                ----------         ----------     ----------

Partners' Capital at December 31, 1994          $    1,908         $  354,791     $  356,699

Allocation of Net Investment Loss                      (12)            (1,143)        (1,155)
Allocation of Net Realized Gain on                     758             75,050         75,808
Investments
Allocation of Net Change in                             99              9,822          9,921
Unrealized Appreciation
Cash Distributions to Partners                      (1,869)          (185,051)      (186,920)
                                                ----------         ----------     ----------  
Partners' Capital at December 31, 1995          $      884         $  253,469     $  254,353
                                                ==========         ==========     ==========
</TABLE>


               See the Accompanying Notes to Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)

  Principal                                                                                                      Fair    % Of
   Amount/                                                                               Investment Investment   Value    Total
   Shares           Investment                                                             Date      Cost (f)   (Note 2) Investments
<S>                 <C>                                                                    <C>        <C>        <C>     <C>
                    MEZZANINE INVESTMENTS
                    MANAGED COMPANIES

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)            12/31/87   $10,810    $10,810
$267                Alliance International Group, Def. Int. Note 10% due 03/30/97(c)(h)    03/31/93       267        267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93       276        276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93       286        286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93       293        293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91       502        502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92    11,000     11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87     1,951      1,951
15,228.43 Warrants  Alliance International Group, Common Stock Purchase Warrants(d)        03/28/89         0          0(i)
62,700 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        04/22/91         0          0
657,614.21 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        12/31/92         0          0
50,000 Warrants     Alliance International Group, Common Stock Purchase Warrants(d)        various          0          0(i)
                     (52.5% of fully diluted common equity assuming  exercise of
                     warrants) (l)
                     19,200 Shares Common Stock 
                     Purchased 12/31/87              $149
                     Sold  01/30/89-9,600 Shares     $107
                     Sold  01/02/90-9,600 Shares     $147
                     Realized Gain                   $105                                              25,385     25,385      10.42


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                                    Fair      % Of
   Amount/                                                                              Investment Investment  Value     Total
   Shares        Investment                                                                Date     Cost (f) (Note 2) Investments
<S>               <C>                                                                   <C>        <C>      <C>        <C>
                 BEEFAMERICA, INC. (a) (e) - Notes 9,10,11
$41,997          BeefAmerica, Inc., Sr. Sub. Interim Note 15.5% due 09/30/98(c)(g)(h)    09/09/88  $20,000   $10,000
$80,951          BeefAmerica, Inc., Sub. Note 15% due 09/30/98 (c)(g)(h)                 09/09/88   38,928         0
5,661.11 Shares  BeefAmerica, Inc., Class A Redeemable Preferred Stock(d)                04/10/91   40,050         0
51,000 Shares    BeefAmerica, Inc., Common Stock (d)                                     various     2,000         0
1 Warrant        BeefAmerica, Inc., Common Stock Purchase Warrant(d)                     09/09/88        0         0(i)
                  (59% of fully diluted common equity assuming exercise of warrants)(l)
                  $1,072 15% Sub. Nt.
                  Purchased 09/9/88                     $1,072
                  Redeemed 02/20/92                     $1,072
                  Realized Gain                         $    0
                  Preferred Stock
                  Purchased 09/9/88                     $2,700
                  Redeemed 02/20/92                     $2,700
                  Realized Gain.                        $    0
                  Total Realized Gain                   $    0                                     100,978    10,000       4.10


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                         Fair       % Of
   Amount/                                                         Investment    Investment        Value        Total
   Shares      Investment                                             Date         Cost (f)         (Note 2)   Investments
<S>             <C>                                                   <C>           <C>             <C>           <C>
               CELEBRITY, INC. - Note 9
11,539 Shares  Celebrity, Inc. Common Stock(b)(k)                    06/16/92      $   150        $   66
                 (0.2% of fully diluted common equity)(l)
                 5,769 Shares of Common Stock
                 Purchased  06/16/92                   $75
                 Sold 09/29/93                         $75
                 Realized Gain                         $ 0
                 5,769  Shares of Common Stock 
                 Purchased  06/16/92                   $75
                 Sold 09/19/94                         $75 
                 Realized  Gain                        $ 0
                 5,769  Shares Common  Stock
                 Purchased 06/16/92                    $75
                 Sold 09/19/95                         $75
                 Realized Gain                         $ 0
                 Total Realized Gain                   $ 0                             150            66          0.03


               See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                                   Fair        % Of
   Amount/                                                                    Investment    Investment        Value       Total
   Shares         Investment                                                    Date         Cost (f)         (Note 2)   Investments
<S>                <C>                                                          <C>           <C>             <C>         <C>
                  CHADWICK-MILLER, INC. (a)(e) - Notes 8,9,10,14

189,996 Shares    CMI Holding Corp., Preferred Stock(a) (d)(g)                 12/16/88    $  12,916         $  12,916
192,933 Shares    CMI Holding Corp., Common Stock (d)                          Various         3,736             1,929
100,000 Warrants  CMI Holding Corp., Common Stock Warrants (d)                 Various             0                 0

                    (63.6% of fully diluted common equity)(l)
                    35,161 Shares Common Stock
                    Purchased 06/30/93                    $  352
                    Sold 09/03/93                         $  352
                    Realized Gain                         $    0
                    $5,000,000 Senior Note
                    Purchased 12/16/88                    $5,000
                    Sold 11/23/94                         $5,000
                    Realized Gain                         $    0
                    Total Realized Gain                   $    0                              16,652            14,845       6.09


               See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                                Fair    % Of
   Amount/                                                                         Investment  Investment  Value    Total
   Shares          Investment                                                        Date       Cost (f)  (Note 2) Investments
<S>                 <C>                                                               <C>          <C>      <C>      <C>
                   COLE NATIONAL CORPORATION
567 Warrants       Cole National Corporation, Common Stock Purchase Warrants(d)    09/26/90    $     0    $    0
                     (0.0% of fully diluted common equity assuming exercise
                     of warrants)
                     $589 Senior Bridge Note
                     Purchased 09/25/90                    $589
                     Sold 11/15/90                         $589
                     Realized Gain                         $  0                                      0         0      0.00


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                                     Fair    % Of
   Amount/                                                                            Investment  Investment    Value    Total
   Shares         Investment                                                            Date       Cost (f)   (Note 2) Investments
<S>                <C>                                                                  <C>         <C>         <C>       <C>
                  GENERAL NUTRITION COMPANIES, INC. (a) Notes 8,9,16
107,118   Shares  General Nutrition Cos., Inc. Common Stock(d)(k)(m)                  08/21/89    $   523    $  2,464
2,049,180 Shares  General Nutrition Cos.,Inc. Common Stock (d)(k)(m)                  11/21/91     10,000      47,131
2,747,468 Shares  General Nutrition Cos., Inc., Common Stock (d)(k)                    Various      3,236      63,192
                    (5.3% of fully  diluted  common  equity)(l)
                    938,612  Common Stock
                    Purchased  various                       $ 1,900 
                    Sold Shares various 1993                 $17,154
                    Realized Gain                            $15,254
                    866,842 Common Stock 
                    Purchased various                        $ 1,626 
                    Sold Shares various 1994                 $12,272 
                    Realized Gain                            $10,646 
                    846,908 Common Stock Purchase Warrants
                    Purchased  Various                       $     0
                    Sold July 19, 1995                       $12,185 
                    Realized Gain                            $12,185
                    $29,477 7.5% Junior Convertible
                       Subordinated Note
                    Purchased 8/29/89                       $ 29,477
                    Converted to 6,040,424 Shares Common
                      Stock Various 1995
                    Sold July 19, 1995                      $102,007
                    Realized Gain                           $ 72,530
                    Total Realized Gain                     $110,615                              $13,759    $112,787       46.31


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments

<S>                <C>                                                           <C>          <C>        <C>         <C>
                  HEALTH O METER PRODUCTS, INC. (a)  Notes 9,14

952,500 Shares    Health o meter Products, Inc., Common Stock (d)(k)           04/28/88     $ 1,270   $ 3,453
610,553 Shares    Health o meter Products, Inc., Common Stock (b)(k)           08/17/94       3,282     2,213

                    (14.7% of fully diluted common equity)(l)
                    $16,000 14.50% Subordinated Note
                    Purchased 04/28/88                    $16,000
                    Sold 03/24/92                         $16,000
                    Realized Gain                         $     0
                    187,500 Shares of Common Stock
                    Purchased 04/28/88                    $   250
                    Sold 03/30/92                         $ 2,441
                    Realized Gain                         $ 2,191

                    Total Realized Gain                   $ 2,191                             4,552     5,666       2.33


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                        <C>         <C>       <C>          <C>
                  PETCO ANIMAL SUPPLIES, INC. (a)(e) - Notes 8,9,14
981,748 Shares    Petco Animal Supplies, Inc. Common Stock(d)(k)              Various     $15,846   $  28,716

                    (11.0% of fully diluted common equity)(l)
                    $269 14% Sr. Bridge Note
                    Purchased 11/19/90                     $   269
                    Repaid 04/19/91                        $   269
                    Realized Gain                          $     0
                    $98 14% Sr. Bridge Note
                    Purchased 11/28/90                     $    98
                    Repaid 04/19/91                        $    98
                    Realized Gain                          $     0
                    $2,397 12.65% Sr. Sub. Note
                    Purchased various                      $ 2,397
                    Repaid 03/27/94                        $ 2,397
                    Realized Gain                          $     0
                    1,009,638 Shares Common Stock
                    Purchased various                      $16,296
                    Sold  1,009,638 Shares various 1995    $19,902
                    Realized Gain                          $ 3,606

                    Total Realized Gain                    $ 3,606                        15,846      28,716         11.79


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                         <C>          <C>        <C>         <C>
                    PLAYTEX PRODUCTS, INC. (d) (k) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(k)                12/28/88     $ 3,255     $ 10,547
                      (2.6% of  fully  diluted  common  equity)(l)
                      $19,285  15% Subordinated   Notes
                      Purchased   12/28/88                        $ 19,285 
                      Sold 06/30/89                               $ 19,285
                      Realized  Gain                              $      0
                      3,214,000  Shares Preferred Stock
                      Purchased 12/28/88                          $  3,214
                      Sold 06/30/89                               $  3,214 
                      Realized  Gain                              $      0
                      2,571,314  Shares  Common  Stock
                      Purchased  12/28/88                         $  1,286 
                      Sold 06/30/89                               $  1,286
                      Realized Gain                               $      0
                      $11,250 15% Subordinated Note
                      Purchased  12/28/88                         $ 11,250
                      Sold 09/28/90                               $ 11,275
                      Realized Gain                               $     25
                      2,571,314 Shares  Common  Stock 
                      Purchased  12/28/88                         $  1,286
                      Sold 09/28/90                               $ 10,512
                      Realized  Gain                              $  9,226
                      347,209  Shares Common  Stock
                      Purchased  12/28/88                         $    174
                      Sold  12/20/91                              $  1,343
                      Realized Gain                               $  1,169
                      $71,251 15% Subordinated Notes
                      Purchased  12/28/88                         $ 71,251
                      Sold 02/01/93                               $ 71,181
                      Realized Loss                               $    (70)
                      Total Net Realized Gain                     $ 10,350                    3,255       10,547           4.33


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                         <C>        <C>        <C>         <C>
                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Note 9
2,675,552 Shares    Stanley Furniture Co., Inc., Common Stock(b)(h)(k)         Various     $ 33,522    $ 21,404
                      (50.2% of fully diluted common equity)(l)
                      $2,000 Loan participation
                      Purchased 03/12/92                    $2,000
                      Repaid 04/05/93                       $2,000
                      Realized Gain                         $    0                           33,522      21,404      8.79

                      TOTAL INVESTMENT IN MANAGED COMPANIES                                $214,099    $229,416     94.19

                      NON-MANAGED COMPANIES

                    MAGELLAN HEALTH SERVICES, INC.
                   (formerly CHARTER MEDICAL CORPORATION) - Note 9
40,000 Warrants     Charter Medical Corp. Common Stock Purchase Warrants(d)   09/01/88            4           0
                      $5,000 14% Subordinated Notes
                      Purchased 09/01/88                    $5,000
                      Sold 12/05/88                         $5,000
                      Realized Gain                         $    0                                4           0      0.00


                     SFX BROADCASTING, INC. - Note 8,9,16
8,667 Option Shares  SFX Broadcasting Co. Common Stock Option(b)(j)           10/07/93            0           0
                     26,000 shares of Common Stock

                     Purchased 12/16/88                    $  4,880
                        Sold various December 1995         $    744
                        Realized Loss                      $ (4,136)
                                                                                                  0           0      0.00

               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      DECEMBER 31, 1995
                                                    (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                         <C>         <C>         <C>         <C>

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(d)                        11/24/87    $   250     $  595
185,048 Shares      Homeland Holding Corp., Common Stock(d)                    08/10/90        440        440
                      $5,000 15.5% Subordinated Notes
                      Purchased 11/24/87                   $5,000
                      Sold 09/15/88                        $5,075
                      Realized Gain                        $   75                              690      1,035        0.42

                    TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares       TLC Beatrice Int'l Holdings., Inc., Common Stock(d)        11/30/87         26         26
                      $8,500 13% Subordinated Notes
                      Purchased 11/30/87                    $8,500
                      Sold 08/18/88                         $8,500
                      Realized Gain                         $    0                              26         26        0.01


               See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      DECEMBER 31, 1995
                                                    (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                           <C>          <C>        <C>         <C>

                  WALTER INDUSTRIES, INC. - Note 8,9
435,569 Shares    Walter Industries, Inc., Common Stock(d)(k)                  01/07/88    $  8,877     $  5,717
326 Shares        Walter Industries, Inc., Common Stock (d)(k)                 09/13/95           0            4
                    (formerly  Hillsborough  Holdings  Corporation)
                     $12,000 17% Note
                     Purchased  1/7/88             $ 12,000
                     Exchanged  12/1/95 for        $490,000
                     cash 435,569
                     common stock                  $  2,527
                     12.19%  Senior Note
                     Realized  Gain                $      0 
                     $2,527 12.19% Senior Note
                     Received 12/1/95              $  2,527 
                     Sold 12/15/95                 $  2,527 
                     Realized Gain                 $      0

                                                                                              8,877        5,721     2.35

                  TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                $  9,597     $  6,782     2.78

                  SUMMARY OF MEZZANINE INVESTMENTS
                  Subordinated Notes                                                         70,861       21,932     9.00
                  Preferred Stock                                                            64,468       24,418    10.03
                  Common Stock and Warrants                                                  88,367      189,848    77.94
                  TOTAL MEZZANINE INVESTMENTS                                              $223,696     $236,198    96.97


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      DECEMBER 31, 1995
                                                    (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount/                                                                    Investment   Investment    Value      Total
   Shares         Investment                                                    Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                           <C>          <C>        <C>         <C>
                  TEMPORARY INVESTMENTS

                  COMMERCIAL PAPER
$2,920            Prudential Funding Corp., 5.77% due 01/05/96                12/06/95   $  2,906   $  2,918
$4,454            Ford Motor Credit Corp. 5.75% due 01/02/96                  12/29/95      4,451      4,452

                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                      7,357      7,370        3.03

                  TOTAL TEMPORARY INVESTMENTS                                            $  7,357   $  7,370        3.03

                  TOTAL INVESTMENT PORTFOLIO                                             $231,053   $243,568      100.00%


(a)  Represents investments in Affiliates as defined in the Investment Company
     Act of 1940.
(b)  Non-income producing security.
(c)  Restricted security.
(d)  Restricted non-income producing security.
(e)  Issuers of which the Fund, as of December 31, 1995, owned more than 25% of
     the voting  securities and which  therefore were presumed to be controlled
     by the Fund under the Investment Company Act of 1940 as of such date.
(f)  Represents original cost and excludes accretion of discount of $18,207 for
     Temporary Investments.
(g)  Non-accrual investment status.
(h)  Inclusive of receipt of payment-in-kind securities.
(i)  Represents an amount of less than one thousand dollars.
(j)  Publicly traded underlying class of securities.
(k)  Publicly traded class of securities.
(l)  Percentages  of Common  Equity  ownership  have not been  audited by Price
     Waterhouse LLP.
(m)  All remaining convertable subordinated notes weere converted to common 
     stock subsequent to July 19, 1995.

               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>


                          ML-LEE ACQUISITION FUND, L.P.
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1995


1.       Organization and Purpose

         ML-Lee   Acquisition  Fund,  L.P.  (the  "Fund")  was  formed  and  the
Certificate of Limited  Partnership was filed under the Delaware Revised Uniform
Limited  Partnership  Act on April 1, 1987. The Fund's  operations  commenced on
October 19, 1987.

     Mezzanine  Investments,  L.P. (the "Managing General Partner"),  subject to
the  supervision  of  the  Individual  General  Partners,   is  responsible  for
overseeing and monitoring the Fund's  investments.  The Managing General Partner
is a limited  partnership in which ML Mezzanine  Inc., an indirect  wholly-owned
subsidiary of Merrill Lynch & Co., Inc., is the general  partner,  and Thomas H.
Lee Advisors I (the "Investment Adviser"), an affiliate of Thomas H. Lee, is the
limited partner.  The Individual General Partners are Vernon R. Alden, Joseph L.
Bower and Stanley H. Feldberg (the "Independent General Partners") and Thomas H.
Lee.

         The Fund has elected to operate as a business development company under
the  Investment  Company Act of 1940.  Its primary  investment  objective  is to
provide  current  income and  long-term  capital  appreciation  by  investing in
"Mezzanine"  securities  consisting primarily of Subordinated Debt and Preferred
Stock combined with an equity  participation issued in connection with leveraged
acquisitions  or  other  leveraged  transactions  which  management  of the Fund
believes offer significant possibilities for return.

         As  stated  in  the  Prospectus,  the  Fund  will  terminate  upon  the
liquidation of all Fund investments but no later than June 15, 1998,  subject to
the right of the  Individual  General  Partners to extend the term for up to one
additional  two-year  period and one additional  one-year period if it is in the
best interest of the Fund.  The Fund has an  additional  five years to liquidate
its remaining investments.

2.       Significant Accounting Policies


Basis of Accounting



         For  financial  reporting  purposes,   the  records  of  the  Fund  are
maintained  using the  accrual  method of  accounting.  For  federal  income tax
reporting purposes,  the results of operations are adjusted to reflect statutory
requirements arising from book to tax differences.  The preparation of financial
statements in accordance with generally accepted accounting  principles requires
management  to make  estimates  and  assumptions  that  affect the  amounts  and
disclosures in the financial statements. Actual reported results could vary from
these estimates.

Valuation of Investments



     Securities for which market  quotations are readily available are valued by
reference to such market quotation,  using the last trade price (if reported) or
the  last  bid  price  for  the  period.   For  securities   without  a  readily
ascertainable  market value  (including  securities  restricted as to resale for
which a corresponding  publicly traded class exists),  fair value is determined,
on a quarterly  basis,  in good faith by the  Managing  General  Partner and the
Investment  Adviser with final approval from the Individual  General Partners of
the Fund. For privately issued  securities in which the Fund typically  invests,
the fair value of an  investment  is its original cost plus accrued value in the
case of original issue  discount or deferred pay  securities.  Such  investments
will be  revalued  if there is an  objective  basis for doing so at a  different
price. Investments will be written down in value if the Managing General Partner
and Investment  Adviser  believe  adverse credit  developments  of a significant
nature require a write-down of such  securities.  Investments will be written up
in value  only if there has been an  arms'-length  third  party  transaction  to
justify the  increased  valuation.  Although  the Managing  General  Partner and
Investment Adviser use their best judgment in estimating the fair value of these
investments,  there  are  inherent  limitations  in  any  estimation  technique.
Therefore,  the  fair  value  estimates  presented  herein  are not  necessarily
indicative of the amount which the Fund could realize in a current  transaction.
Future  events  will also affect the  estimates  of fair value and the effect of
such events on the estimates of fair value could be material.

<PAGE>



         Temporary  Investments  with maturities of less than 60 days are stated
at amortized cost, which approximates market.


         The  information  presented  herein is based on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1995.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued since that time; and especially in light of the fact that the portfolio
investments of companies  whose equity is publicly traded are valued at the last
price available at December 31, 1995, the current  estimated fair value of these
investments may have changed significantly since that point in time.


Interest Receivable on Investments


         Investments generally will be placed on non-accrual status in the event
of a default  (after  applicable  grace  period  expires)  or if the  Investment
Adviser and the Managing  General Partner  determine that there is no reasonable
assurance of collecting interest.


Payment-In-Kind Securities




         All  payment-in-kind  securities  received  in lieu  of  cash  interest
payments by the Fund's  portfolio  companies  are  recorded at face value (which
approximates  accrued interest),  unless the Investment Adviser and the Managing
General  Partner  determine that there is no reasonable  assurance of collecting
the full  principal  amounts of such  securities.  As of  December  31, 1995 and
December 31, 1994, the Fund has in its portfolio of  investments  $1,122,216 and
$4,098,017,  respectively, of payment-in-kind notes, which excludes subordinated
notes  placed on  non-accrual  status.  As of December 31, 1995 and December 31,
1994, the Fund has in its portfolio of investments  $6,485,801 and  $13,801,666,
respectively, of payment-in-kind equity.

Investment Transactions


         The  Fund  records  investment  transactions  on the  date on  which it
obtains an enforceable right to demand the securities or payment  therefor.  The
Fund records Temporary Investment transactions on the trade date.


         Realized gains and losses on investments are determined on the basis of
specific identification for accounting and tax purposes.


Deferred Interest Income


         All fees  received by the Fund upon the funding of  Mezzanine or Bridge
Investments  are  treated as deferred  interest  income and  amortized  over the
maturity of such investments.


Loan Facility and Advisory Fees


         Loan  Facility and Advisory Fees are being  amortized  over the life (7
years) of the Facility commencing in August, 1991.


Partners' Capital


         Partners' Capital represents the Fund's equity divided by the Partners'
Capital  Contributions  and does not represent the Partners'  Capital  Accounts.
Profits and losses,  when  realized,  will be allocated in  accordance  with the
provisions of the Partnership Agreement summarized in Note 3.




<PAGE>


3.       Allocation of Profits and Losses


         Pursuant  to the  Partnership  Agreement,  all profits  from  Temporary
Investments  generally  will be allocated 99% to the Limited  Partners and 1% to
the Managing  General  Partner.  Profits from  Mezzanine  Investments  will,  in
general, be allocated as follows:


         first, if the capital accounts of any partners have negative  balances,
         to such  partners  in  proportion  to the  negative  balances  in their
         capital  accounts until the balances of all such capital accounts equal
         zero,


         second,  99% to the Limited  Partners  and 1% to the  Managing  General
         Partner  until the sum  allocated  to the Limited  Partners  equals any
         previous losses allocated together with a cumulative Priority Return of
         10% on the average daily investments in mezzanine  securities,  and any
         outstanding Compensatory Payments,


         third,  69% to the Limited  Partners  and 31% to the  Managing  General
         Partner  until the  Managing  General  Partner has  received 21% of the
         total profits allocated,


     thereafter,  79% to the Limited  Partners and 21% to the  Managing  General
Partner.


         Losses  will be  allocated  in  reverse  order  of  profits  previously
allocated  and  thereafter  99% to the Limited  Partners  and 1% to the Managing
General Partner.


4.       Leverage



     The Fund  entered into an amended and  restated a credit  agreement,  dated
August 13, 1991,  with a lending group led by the First National Bank of Chicago
("First Chicago") which provided the Fund with a maximum credit facility of $140
million.  The Credit  Facility  consisted  of a $100 million term loan and a $40
million  revolving  line of credit.  In October of 1993,  the Fund  amended  the
credit  agreement  enabling it to make  prepayments of the term loan at any time
and without any  corresponding  reduction to the  revolving  line of credit.  On
December 1, 1995, the credit  agreement was further amended to reduce the Credit
Facility to $10  million.  The amount  available  at December 31, 1995 under the
Credit  Facility  was  $6  million,  due  to  a  $4  million  letter  of  credit
attributable  to the investment in  BeefAmerica,  Inc. This letter of credit was
cancelled  on February 28, 1996,  bringing the total  facility  available to the
Fund back to $10 million. The Credit Facility will mature on July 31, 1998. Loan
advances  bear interest at a floating rate equal to the greater of prime plus 1%
or the federal funds rate plus 1.5%.  For the years ended  December 31, 1994 and
1993,  the Fund  incurred  $57,756,  and  $1,710,606  respectively,  in interest
expense. The Fund did not incur any interest expense in 1995. In connection with
the  Credit  Facility,  the Fund has  pledged  its  debt  and  equity  portfolio
securities to its lenders.


<PAGE>

         With respect to the Credit  Facility,  the Fund  incurred the following
loan fees:


         Nonrecurring loan advisory and loan facility fees of $4,441,580 paid to
         First  Chicago in 1991 in  connection  with the  creation of the Credit
         Facility,  which  are  being  amortized  over  the  life of the  Credit
         Facility.  The total  amortization  during the twelve months ended 1995
         was $619,605


         An annual Loan  Administration Fee of $25,000 for the administration of
the Credit Facility.


         Unused  Commitment  Fees of  $75,179,  which are equal to 1/2 of 1% per
annum of the unused line of credit.


         For the years ended  December  31,  1995,  1994 and 1993,  the Fund has
incurred $738,029, $772,593 and $922,876, respectively, in loan fees.

         For additional information relating to leverage see Note 11.


5.       Investment Advisory Fee

         The Investment Adviser provides for the identification,  management and
liquidation of investments for the Fund. As compensation  for services  rendered
to the Fund, the Investment  Adviser receives a quarterly fee at the annual rate
of 1% of assets under management (net offering  proceeds,  reduced by cumulative
capital  reductions,  plus outstanding bank borrowing as specified in the Fund's
Partnership  Agreement),  with  a  minimum  annual  fee  of  $1.2  million.  The
Investment  Advisory Fee is calculated and paid quarterly,  in advance.  For the
years  ended  December  31,  1995,  1994 and  1993,  the Fund  paid  $2,770,934,
$3,652,538,  and $4,059,408 respectively,  in Investment Advisory Fees to Thomas
H. Lee Advisors I.


6.       Fund Administration Fee and Expenses


         ML Fund Administrators Inc. (the "Fund Administrator"), an affiliate of
the Managing  General  Partner,  performs  the  operational  and  administrative
services  necessary  for the  management of the Fund.  As  compensation  for its
services,  the Fund Administrator is entitled to receive from the Fund an annual
amount equal to the greater of $400,000 or 0.45% of the Net  Proceeds  Available
for  Investments  subject  to  certain  reductions  as  specified  in the Fund's
Partnership  Agreement.  Beginning October 19, 1995, the Fund Administration Fee
changed  to an annual  amount  equal to  $300,000  plus  out-of-pocket  expenses
incurred by the Fund  Administrator as discussed below. The Fund  Administration
Fee is calculated and paid quarterly,  in advance.  For the years ended December
31, 1995, 1994, and 1993, the Fund paid $1,330,212,  $1,843,907,  and $1,874,739
respectively, in Fund Administration Fees.

         For the  period  ending  October  19,  1995,  the Fund's  expenses  for
accounting,  audits, printing, tax preparation and other administrative services
("out-of-pocket  expenses")  (excluding  the costs of bonding and  extraordinary
legal expenses) were paid by the Fund Administrator. Beginning October 19, 1995,
in  accordance  with  Partnership  Agreement,  the Fund  Administrator  is being
reimbursed by the Fund for 100% of the out-of-pocket  expenses  incurred.  Total
out-of-pocket expenses incurred by the Fund were $171,150.

<PAGE>


7.       Independent General Partners' Fees and Expenses


         As  compensation  for services  rendered to the Fund, each of the three
Independent   General   Partners   receives   $40,000   annually  in   quarterly
installments,  $1,000 for each  meeting of the  General  Partners  attended  and
$1,000 for each committee  meeting attended ($500 if a committee meeting is held
on the same day as a meeting of the General Partners) plus reimbursement for any
legal and  out-of-pocket  expenses.  Compensation  for the  Independent  General
Partners is reviewed annually by the Individual General Partners.


         For the years ended December 31, 1995, 1994 and 1993, the Fund incurred
$303,527, $284,682, and $242,459, respectively, in Independent General Partners'
Fees and Expenses.


8.       Investment Transactions

     On November 23, 1994, in connection  with the  financial  restructuring  of
Chadwick-Miller,  Inc. and its holding  company,  CMI Holding Corp.,  the Fund's
$5,000,000  14.75%  Senior Note was  redeemed.  The  proceeds  received  were $5
million,  however,  as of December  31,  1995,  $3.1  million is  classified  as
restricted  cash and remains held in escrow until certain  leasing  consents are
obtained from store landlords.

     On January 26, 1995, the Fund sold its 14.25% Chiat/Day  Acquisition,  Inc.
Senior Subordinated Note, plus accrued interest, for $5,390,850,  which resulted
in a realized loss of $49,981 to the Fund.

     In March, 1995, a bankruptcy court judge confirmed the reorganization  plan
for Hillsborough  Holding  Corporation,  which emerged from bankruptcy as Walter
Industries,  Inc. As a result,  the Fund  exchanged  its $12  million  principal
amount of  Subordinated  Debt for  $490,000  in cash,  435,569  shares of Common
Stock,  and a 12.19%  Senior Note in the  principal  amount of  $2,527,000  from
Walter  Industries  (all of which are considered  the  "qualified  securities").
Subsequent  to  receiving  the  qualified  securities,  the Fund sold the 12.19%
Senior  Note for  proceeds  of $2.6  million.  All  cash  proceeds  received  in
connection with the Hillsborough  reorganization plan and the sale of the Senior
Note have reduced the cost basis of the remaining investment held by the Fund.


         In the first  quarter of 1995,  the Fund sold its entire  investment in
Omega Wire,  Inc. and  received  total  proceeds of $41.1  million of which $1.1
million is being held in escrow at December 31, 1995. The Fund recognized a gain
of the sale of $25.8 million.

     On April 27, 1995, Petco completed a public offering of  approximately  3.6
million  shares of Common Stock (the "Petco  Offering") at a net price of $19.71
per share. Of the shares sold,  approximately 2.4 million shares were offered by
Petco  and   approximately   1.2  million  were  offered  by  certain   existing
shareholders,  including the Fund. As part of the Petco Offering,  the Fund sold
1,009,638  shares  (including  shares  sold as a result of the  exercise  of the
underwriters' overallotment option on May 26, 1995), representing 51% percent of
its Petco  holdings.  The Fund received  proceeds of $19,902,489  and realized a
gain of $3,606,557 on the sale of such stock.


     In connection  with the public  offering of 20 million shares of GNC Common
Stock,  together with a 15% overallotment option to the underwriters on July 19,
1995, the Fund sold 6,040,424 shares of common stock at a net price per share of
$16.8875  (all share  amounts and prices  herein have been adjusted to reflect a
2-for-1  stock split which  occurred  on October 17,  1995).  The Fund also sold
846,908  common stock  purchase  warrants at a net price per warrant of $14.3875
(the net price per share less the $2.50 per warrant  exercise  price).  Proceeds
from the sales  totaled over $114 million with an original cost of $29.5 million
and resulted in realized  gains of $84.7  million.  Following that GNC offering,
the Fund converted all of its remaining GNC Convertible  Subordinated Notes into
Common Stock.  On February 7, 1996, GNC effected an additional  public  offering
pursuant to which the Fund sold its entire remaining investment in GNC. See Note
16 for further information.

<PAGE>

     On November  1, 1995,  pursuant to an  Agreement  and Plan of Merger,  (the
"Agreement") Duro-Test Corporation effected a merger pursuant to which Duro-test
was acquired by a third party for approximately  $33 million.  Proceeds received
by the Fund from this merger were $4.6 million of which $1,758,974 is being held
in escrow in accordance with the Agreement for potential  indemnification costs.
The Fund realized a loss on the investment of $34,048,501.


         In December,  1995,  the Fund sold its common stock  investment  in SFX
Broadcasting,  Inc.  and received  proceeds of $743,875  resulting in a realized
loss of $4,136,253.


     For the year ended  December 31, 1995,  the net proceeds  from the sales of
Mezzanine Investments aggregated  $187,601,779.  This resulted in a net realized
gain of $75,808,174  from  investments  during the year ended December 31, 1995.
For  additional  information,  please  refer  to the  Supplemental  Schedule  of
Realized Gains and Losses (Schedule 1 - page 46).

         At December 31, 1995, the Fund had a total of  $223,694,546  (including
$1,122,216 of  payment-in-kind  notes and $6,485,801 of  payment-in-kind  equity
which  excludes  subordinated  notes placed on non-accrual  status)  invested in
Mezzanine   Investments,   representing   $214,098,103  Managed  and  $9,596,443
Non-Managed portfolio investments.


         The Fund invests primarily in high-yield private placement  securities,
and  therefore,  the risk of loss upon default by an issuer is greater than with
investment  grade  securities  because   high-yield   securities  are  generally
unsecured and are often  subordinated  to other  creditors of the issuer.  Also,
high-yield  issuers  usually  have higher  levels of  indebtedness  and are more
sensitive to adverse economic conditions.


         Although  the Fund  cannot  eliminate  the  risks  associated  with its
investments  in  high-yield  securities,  it has  procedures in place to monitor
continually the risks associated with its investments  under a variety of market
conditions. Any potential Fund loss would generally be limited to its investment
in the portfolio company reflected in the portfolio of investments.  See Note 11
for information concerning commitments and guarantees.


         Should bankruptcy proceedings commence, either voluntarily or by action
of the court against a portfolio  company,  the ability of the Fund to liquidate
its position or collect proceeds may be delayed or limited.


9.       Unrealized Appreciation and Depreciation of Investments



         For the year ended  December 31, 1995, the Fund recorded net unrealized
appreciation   of   $9,920,766  of  which  $11.9  million  was  related  to  net
depreciation  in market  value of  publicly  traded/underlying  publicly  traded
securities  still held by the Fund at December 31, 1995.  The Fund's  cumulative
net  unrealized  depreciation  on investments at December 31, 1995 totaled $12.5
million.  This compares to a net unrealized  appreciation of $9,271,721 of which
$39,243,395  was  related  to net  depreciation  in  market  value  of  publicly
traded/underlying  publicly traded securities at December 31, 1994. For the year
ended  December  31, 1994,  the Fund  recorded net  unrealized  appreciation  of
$91,162,444  of which  $113,645,986  was related to net  appreciation  in market
value  of  publicly  traded   securities.   The  changes  in  appreciation   and
depreciation  were  attributed  primarily to the  fluctuation in market value of
GNC Common Stock.


         For additional  information,  please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2 on pages 47-48).

<PAGE>


10.      Non-Accrual of Investments



         In  accordance  with  the  Fund's  Accounting   Policy,  the  following
securities have been on non-accrual status since the date indicated:



         -  BeefAmerica, Inc. on July 1, 1990.
         -  Chadwick-Miller, Inc. on January 1, 1993.

11.      Commitments and Guarantees



         On October 12, 1989, the Fund  established a $4 million  standby letter
of credit  issued to Citibank as security  for part of its loan to  BeefAmerica,
Inc. On February 28, 1996, this letter of credit was cancelled.


         On January 20, 1992, the Fund entered into a commitment to guarantee up
to $150,480 to support an obligation  of a subsidiary of Alliance  International
Group, Inc. The amount of such guarantee  represents the Fund's pro-rata portion
of a $600,000  aggregate  additional  advance  provided by the senior  lender of
Alliance.

12.    Litigation


              On March 9, 1989, a number of  franchisees  of Diet  Center,  Inc.
initiated a suit in San Francisco  Superior Court  challenging  Diet Center's 50
cent increase in the Continuing  License Fee which is paid by all franchisees on
a per dieter, per day basis.  Plaintiffs alleged that all defendants  (including
the Fund,  its  Investment  Adviser and Thomas H. Lee)  conspired to finance the
leveraged buy-out of Diet Center's  corporate parent,  American Health Companies
Inc., by wrongfully increasing the License Fee. Plaintiffs subsequently filed an
amended fraudulent conveyance count. On January 27, 1995 Judge Baxter of the San
Francisco  Supreme Court issued a written opinion after trial in which she ruled
in favor of all defendants  (including,  the Fund,  its  Investment  Adviser and
Thomas H. Lee) on plaintiffs'  allegation that the leveraged buy-out of American
Health Companies, Inc. was a constructively fraudulent conveyance. The Court had
previously  granted summary  judgment to the Fund, the Thomas H. Lee Company and
Thomas H. Lee on plaintiffs' other allegations against those defendants.  On May
1, 1995, the parties entered into a "Settlement Agreement" pursuant to which the
plaintiffs withdrew their appeals and the defendants, including the Fund, agreed
not to seek to  recover  from  plaintiffs  the  defendants'  costs  incurred  in
connection with the litigation.  This settlement agreement became effective June
1, 1995.


    On September 7, 1991, the Fund brought suit in the Court of Common Pleas for
the County of Greenville, South Carolina against Deloitte & Touche in connection
with Deloitte & Touche's audit  opinions on the financial  statements of Emb-Tex
Corporation,  formerly an  operating  subsidiary  of a portfolio  company of the
Fund.  The Fund contends that the value of Emb-Tex  Corporation's  inventory and
operating income were substantially overstated in its financial statements.  The
Fund  seeks  actual and  punitive  damages  in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
is pending.

<PAGE>

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors in interest, against the Fund's Managing General Partner,  Individual
General  Partners,  Investment  Adviser  and  certain of their  affiliates.  The
complaint alleges that the defendants breached the Fund's Partnership  Agreement
in 1990 by causing the Fund to pay $7,554,855 in incentive  compensation  to the
Managing General Partner with respect to that year. The complaint seeks monetary
damages in the amount of $7,554,855,  together with interest,  and other relief.
The  defendants  believe  that the claim is without  merit and sought to have it
dismissed. The court denied the defendants' motion for summary judgment, and the
defendants  filed  an  interlocutory  appeal  to the  New  York  Supreme  Court,
Appellate Division, which was denied. Thereafter,  defendants moved to decertify
the class and that motion was denied.  A trial was held in late  January,  1995.
The Fund may be obligated to indemnify and advance litigation expenses to one or
more of the  defendants  under the terms and  conditions  of  various  indemnity
provisions  of the Fund's  Partnership  Agreement  and separate  indemnification
agreements. The Fund has advanced litigation expenses to the indemnified parties
based  upon  amounts  which  are  deemed  reimbursable  in  accordance  with the
indemnification provisions and has included these amounts in professional fees.
Please see Note 16 for further information.

    On October 14, 1993, a Limited Partner  commenced a putative class action in
the U.S.  District Court for the District of Delaware,  purportedly on behalf of
all persons who  purchased  limited  partnership  interests  in the Fund between
August 12, 1987 and the date of filing of the  complaint,  against the Fund, the
Managing  General  Partner,  the  Individual  General  Partners,  the Investment
Adviser to the Fund and certain named  affiliates  of such persons.  As amended,
the complaint  alleges that the  defendants  operated the Fund, and caused it to
make certain  investments,  for the benefit of some or all of the  defendants at
the expense of the Fund's Limited  Partners in breach of  defendants'  fiduciary
and  contractual  duties to the  Limited  Partners,  thereby  violating  federal
securities laws  applicable to the Fund and its affiliates  under the Investment
Company Act of 1940, as amended,  as well as Delaware  state law. By Order dated
September 30, 1994 and Opinion dated October 14, 1994, the court granted in part
and  denied  in part  defendants'  motion  to  dismiss  the  amended  complaint,
dismissing plaintiff's claims with respect to several investments as time-barred
and dismissing all claims for aiding and abetting liability under the Investment
Company Act of 1940. The plaintiff  thereafter filed a second amended  complaint
on November 3, 1995 raising  additional  allegations in connection  with certain
transactions by the Fund, and alleging that  defendants  violated the Investment
Company Act of 1940 and Delaware  state law. The plaintiff  seeks an accounting,
rescission, rescissory or actual damages and punitive damages. The defendants in
this action  believe that the claims are without merit and have moved to dismiss
them.  Whether or not the plaintiff  prevails on any remaining claims,  the Fund
may be obligated to indemnify and advance litigation  expenses to certain of the
defendants under the terms and conditions of various indemnity provisions in the
Fund's Partnership Agreement and separate  indemnification  agreements,  and the
amounts of such  indemnification and expenses could be material.  The outcome of
this case is not  determinable  at this time.  The Fund has incurred  litigation
expenses which are recorded in professional fees.




<PAGE>



13.      Related Party Transactions


         Certain of the Mezzanine  Investments and Bridge Investments which were
made by the  Fund  involve  co-investments  with  entities  affiliated  with the
Investment  Adviser.   Such  co-investments  are  generally   prohibited  absent
exemptive relief from the Securities and Exchange Commission (the "Commission").
As a result of these affiliations and the Fund's expectation of engaging in such
co-investments,  the Fund sought an exemptive order from the Commission allowing
such  co-investment,  which was received on September  23, 1987.  An  additional
exemptive order allowing  co-investment  with ML-Lee  Acquisition  Fund II, L.P.
("Fund  II")  and  ML-Lee  Acquisition  Fund  (Retirement   Accounts)  II,  L.P.
("Retirement  Fund") was received from the  Commission on September 1, 1989. The
Fund's investments in Managed Companies, and in certain cases its investments in
Non-Managed Companies,  typically involve the entry by the Fund and other equity
security  holders into  stockholders'  agreements.  While the provisions of such
stockholders'  agreements  vary,  such  agreements may include  provisions as to
corporate  governance,  registration  rights,  rights  of  first  offer or first
refusal,  rights to participate in sales of securities to third parties,  rights
of majority stockholders to compel minority stockholders to participate in sales
of securities to third parties, transfer restrictions, and preemptive rights.

         Thomas H. Lee Company, a sole proprietorship owned by Thomas H. Lee, an
Individual  General  Partner  of the Fund  and an  affiliate  of the  Investment
Adviser,  typically performs certain  management  services for Managed Companies
and  receives  management  fees in  connection  therewith,  usually  pursuant to
written  agreements with such companies.  In addition,  certain of the Portfolio
Companies  have  contractual  or other  relationships  pursuant to which they do
business with one another.

         Merrill Lynch,  Pierce,  Fenner & Smith  Incorporated  ("MLPF&S") is an
affiliate of the Managing General Partner. MLPF&S and certain of its affiliates,
in the ordinary course of their business, perform various financial services for
various portfolio  companies of the Fund, which may include  investment  banking
services,  broker/dealer  services  and  economic  forecasting,  and  receive in
consideration   therewith   various  fees,   commissions   and   reimbursements.
Furthermore,  MLPF&S  and its  affiliates  or  investment  companies  advised by
affiliates of MLPF&S may, from time to time,  purchase or sell securities issued
by portfolio  companies of the Fund in connection with their ordinary investment
operations.


         During 1995 the Managing General Partner received cash distributions in
the amount of $1,869,241 representing its 1% interest in the Fund.


14.      Reserves


     In February  1993,  the Fund  established a $15 million  reserve to provide
funds for follow-on  investments  and to pay expenses.  As of December 31, 1995,
the reserve balance was reduced to  approximately  $3.1 million due to follow-on
investments in CMI Holding Corp.,  Diet Center Inc.,  Duro-Test,  Health o meter
and Petco of $2.3  million,  $444,861,  $2.6  million,  $3.3  million  and $529,
respectively,  along with a  distribution  to partners in the second  quarter of
1993 of $424,264 and a payment of $2.9 million to First  Chicago to pay down the
Fund's loan.

15.      Income Taxes (Statement of Financial Accounting Standards No. 109)

       No provision for income taxes has been made because all income and losses
are  allocated to the Fund's  partners for  inclusion  in their  respective  tax
returns.

         Pursuant to the  Statement of Financial  Accounting  Standards  No. 109
Accounting for Income Taxes,  the Fund is required to disclose any difference in
the tax basis of the Fund's assets and liabilities  versus the amounts  reported
in the  financial  statements.  Generally,  the tax basis of the  Fund's  assets
approximate  the amortized  cost amounts  reported in the financial  statements.
This amount is computed  annually and as of December 31, 1995,  the tax basis of
the Fund's assets are less than the amounts reported in the financial statements
by  $4,799,251.   This  difference  is  primarily   attributable  to  unrealized
appreciation  and  depreciation  recorded  on  investments  which  has not  been
recognized for tax purposes.



<PAGE>


16.      Subsequent Events


     As  discussed  in Note 12, one  Limited  Partner in the Fund,  brought as a
class action suit  against  Mezzanine  Investments,  L.P.,  the Fund's  Managing
General Partner (the "MGP");  ML Mezzanine Inc., the MGP's general partner;  the
Fund's four  Individual  General  Partners;  and Merrill  Lynch & Co.,  Inc. and
Merrill Lynch, Pierce,  Fenner & Smith Incorporated,  affiliates of ML Mezzanine
Inc.,  claiming  that  defendants  had breached the Fund's  Amended and Restated
Agreement  of Limited  Partnership  (the  "Limited  Partnership  Agreement")  by
incorrectly  computing the priority return to Limited  Partners under the Fund's
Limited  Partnership  Agreement and improperly  paying  incentive  distributions
("MGP Distributions") to the Fund's MGP.

     The Court found that the MGP  Distributions  for the fourth quarter of 1989
through  the  fourth  quarter  of 1990 were  paid in  violation  of the  Limited
Partnership  Agreement  and  as a  result,  held  the  General  Partners  and ML
Mezzanine  Inc.  liable for  repayment to the  plaintiff  class of $6,627,752 of
excessive  distributions,  plus interest. The Court's decision dismissed Merrill
Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated because
they were not parties to the Fund's Limited Partnership  Agreement.  On February
21, 1996, ML Mezzanine Inc.  moved to amend the Court's  decision to dismiss it.
Defendants'  are  considering  the  impact  of  the  Court's   decision  on  the
administration of the Fund.  Defendants' time to appeal the decision has not yet
expired and defendants  intend to appeal.  The Fund filed a form 8-K on March 4,
1996 disclosing the Court's decision.

     On  February 7, 1996,  the  Securities  and  Exchange  Commission  declared
effective a Registration  Statement  Filed by GNC in connection with the sale of
up to 17,994,176  shares of GNC Common Stock,  including  1,635,834 shares which
were sold pursuant to the Underwriters'  over-allotment  option. Of such shares,
16,358,342  were offered by certain selling  shareholders of GNC,  including the
Fund, and the 1,635,834 subject to the Underwriters'  over-allotment option were
offered by GNC. The Fund sold its entire  remaining  investment in GNC for total
proceeds  of $101  million or  $20.7475  per share and  realized a gain of $87.9
million.  These  proceeds will be  distributed  to Limited  Partners on or about
March 29, 1996.

     On February 8, 1996, the Individual  General  Partners  approved the fourth
quarter 1995 cash distribution totalling $5,391,914 which consists of $6,722,994
return of capital  from the sale of  Mezzanine  Investments  and  $76,626 of net
investment income from Temporary Investments, offset by a net investment loss of
$1,407,706 for Mezzanine  Investments.  The total amount  distributed to Limited
Partners  was  $5,338,005,  or $10.95 per Unit.  The  Managing  General  Partner
received $53,909 in proportion to its 1% interest in the Fund. The distributions
were made on February 14, 1996.

     On February 22, 1996, the Fund sold its entire remaining  investment in SFX
Broadcasting Inc., consisting of 8,667 shares of common stock purchase warrants,
to Sillerman  Communications  Management  Corporation for net proceeds of $14.50
per share which resulted in a gain of $125,672 to the Fund.



<PAGE>
<TABLE>
<CAPTION>

                                   SCHEDULE 1
                          ML-LEE ACQUISITION FUND, L.P.

                SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
                      FOR THE YEAR ENDED DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)

<S>                                           <C>               <C>             <C>          <C>
SECURITY                                       Number of         Investment     Proceeds     Gain/(Loss)
                                             Shares/Principal                                   Cost


Chiat/Day, Inc. Advertising
    Sr. Subordinated Note                      $    5,000        $   5,000      $  4,950     $    (50)

Hillsborough Holdings Corporation
    Common Stock                                   20,568              103            17          (86)

Omega Wire, Inc.
    Sr. Subordinated Note                      $   15,000           15,000        15,900          900
    Common Stock                                   80,000              320        25,227       24,907

Petco Animal Supplies Inc.
    Common Stock                                1,009,638           16,296        19,903        3,607

General Nutrition Companies, Inc.
    Jr. Convertible Subordinated Note          $   29,477           29,477       102,007       72,530
    Common Stock Purchase Warrants                423,454               --        12,185       12,185

Celebrity, Inc.
    Common Stock                                    5,769               75            75           --

Duro-Test Corporation
    Preferred Stock                                26,178            2,618         2,618           --
    Common Stock                                6,153,420           36,045         1,996      (34,049)

SFX Broadcasting, Inc.
    Common Stock                                   26,000            4,880           744       (4,136)


Total for the Twelve Months ended                                ---------     ---------     ---------
December 31, 1995                                                $ 109,814     $ 185,622     $  75,808     
                                                                 =========     =========     =========
</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                   SCHEDULE 2
                          ML-LEE ACQUISITION FUND, L.P.
       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                     FOR THE PERIOD ENDED DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)
<S>                                <C>          <C>     <C>           <C>        <C>          <C>         <C>         <C>

                                                       Total Unrealized
                                                         Appreciation           Unrealized Appreciation (Depreciation) for
                                                        (Depreciation)
                                    Investment    Fair    December 31  December 31 December 31 December 31 December 31  December 31,
SECURITY                               Cost       Value      1995         1995        1994       1993        1992       1991 & Prior
-----------------------------------  --------   --------   --------     --------    -------    --------    --------    --------

PUBLICLY TRADED/UNDERLYING
  SECURITY PUBLICLY TRADED:

Celebrity, Inc.
  Common Stock*                       $    150   $     66   $    (84)   $     65    $     47    $   (188)   $     (8)   $     --

General Nutrition Companies, Inc.
  Common Stock                          13,759    112,787     99,028     (16,426)     (7,993)    123,447          --          --
  Warrants                                  --         --         --     (10,163)        212       9,951

Health o meter 
  Common Stock*                          4,552      5,666      1,114         293      (5,291)         --       6,112          --


Petco Animal Supplies, Inc.
  Common Stock                          15,846     28,716     12,870      16,137      (3,267)         --          --          --

Playtex Products, Inc.
  Common Stock                           3,255     10,547      7,292         528     (10,319)     (4,466)         --      21,549

Stanley Furniture Company
  Preferred Stock                           --         --         --                                          13,000     (13,000)
  Common Stock                          33,522     21,404    (12,118)     (5,351)     (9,030)     15,263      (9,400)     (3,600)

Walter Industries, Inc.
  Subordinated Note                         --         --         --       6,000          --          --          --      (6,000)
  Common Stock                           8,877      5,721     (3,156)     (3,053)         --          --          --        (103)
                                                             -------     -------    --------    --------    --------    --------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED/UNDERLYING SECURITIES
  PUBLICLY TRADED                                          $ 104,946   $ (11,970)  $(35,641)   $ 144,007     $ 9,704    $ (1,154)
                                                           ---------   ---------   --------    ---------     -------    --------
NONPUBLIC SECURITIES:

BeefAmerica Inc.
  
  Senior Subordinated Note            $ 20,000   $ 10,000   $(10,000)         --         --    $ (10,000)          --   $     --
  Subordinated Notes                    38,928         --    (38,928)         --         --      (20,000)     (18,928)        --
  Preferred Stock                       40,050         --    (40,050)         --         --           --          (50)   (40,000)
  Common Stock                           2,000         --     (2,000)         --         --           --           --     (2,000)

Chadwick-Miller, Inc.
  Common Stock                          16,652     14,845     (1,807)         --         --       (1,807)          --         --

</TABLE>

<PAGE>


<TABLE>
<CAPTION>
                                   SCHEDULE 2
                          ML-LEE ACQUISITION FUND, L.P.
       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                     FOR THE PERIOD ENDED DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>     <C>           <C>          <C>            <C>         <C>          <C>

                                                      Total Unrealized
                                                       Appreciation             Unrealized Appreciation (Depreciation) for
                                                      (Depreciation)
                                  Investment     Fair  December 31, December 31, December 31, December 31, December 31, December 31,
SECURITY                             Cost       Value     1995        1995           1994          1993        1992     1991 & Prior
--------------------------------   --------    -------  --------    --------      --------      --------    --------    --------

NONPUBLIC SECURITIES (continued):
Magellan Health Service

  Common Stock Warrants            $      4    $     --     $     (4)     $     --   $      --      $  --     $     (4)     $    --


SWO Holdings Corporation

  Common Stock                          250         595          345            --          --         --           --          345

                                                            --------      --------    --------    -------      --------    --------

TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM
  NONPUBLIC SECURITIES                                      $(92,444)     $     --   $      --   $(31,807)    $(18,982)   $(41,655)
                                                            --------      --------    --------    --------    --------    -------- 


Unrealized Appreciation/(Depreciation)
  for Investments Sold:


Sold in 1995:

   Omega Wire, Inc.                      --          --           --       (12,971)         --         --           --      12,971

   SFX Broadcasting, Inc.                --          --           --         4,399         143     (4,542)          --          --

   Duro-Test Corporation                 --          --           --        30,463      (3,711)        --       (5,000)    (21,752)

Sold Prior to 1995

   Various                                                        --            --      48,480    (16,496)      30,907     (62,891)


Total Unrealized Appreciation/
                                                            --------      --------    --------   --------     --------   ---------
  (Depreciation) for Investments Sold                             --      $ 21,891    $ 44,912   $(21,038)    $ 25,907   $ (71,672)


 Net Unrealized Appreciation (Depreciation)                $  12,502      $  9,921    $  9,271    $91,162     $ 16,629   $(114,481)
                                                           =========      ========    ========    =======     ========    =========

*   Underlying security publicly traded.
</TABLE>


<PAGE>


Item 9.  Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure

         None.
                                    PART III


Item 10. Directors and Executive Officers of the Registrant


The Fund

         The  information  set forth  under the  caption  "Election  of  General
Partners" in the Fund's  definitive  proxy statement in connection with the 1996
Annual Meeting of Limited  Partners to be filed with the Securities and Exchange
Commission  pursuant to Regulation 14A under the Securities Exchange Act of 1934
(the "Proxy Statement") is incorporated herein by reference.

Individual General Partners

         The  Individual   General   Partners   provide  overall   guidance  and
supervision  with  respect to the  operations  of the Fund and will  perform the
various duties imposed on the directors of business development companies by the
Investment Company Act.

         The  information  set forth  under the  caption  "Election  of  General
Partners - Individual  General  Partners" in the Proxy Statement is incorporated
herein by reference.

The Investment Adviser

         The Investment Adviser,  pursuant to an investment management agreement
among the  Investment  Adviser,  the  Thomas H. Lee  Company  and the Fund dated
September  14,  1987,  as  amended,   is  responsible  for  the  identification,
management and liquidation of Mezzanine Investments for the Fund.

         The information set forth under the caption "The Management  Agreement"
in the Proxy Statement is incorporated herein by reference.

The Managing General Partner

         The  Managing  General  Partner  is a limited  partnership  in which ML
Mezzanine  Inc. is the sole general  partner and Thomas H. Lee Advisors I is the
limited partner. The Managing General Partner is responsible for the supervision
of the Fund's investments.

         The  information  set forth  under the  caption  "Election  of  General
Partners  - Managing  General  Partner -  Information  concerning  the  Managing
General Partner" in the Proxy Statement is incorporated herein by reference.

The Fund Administrator

         The Fund Administrator,  provides administrative services necessary for
the  operations of the Fund  pursuant to an  Administrative  Services  Agreement
between the Fund and the Fund Administrator, dated June 30, 1989.

         The  information  set forth  under the  caption  "Election  of  General
Partners  -  Managing   General  Partner  -  Information   concerning  the  Fund
Administrator" in the Proxy Statement is incorporated herein by reference.
<PAGE>

Item 11. Executive Compensation

         The information with respect to compensation of the Individual  General
Partners set forth under the caption  "Election of General Partners - Individual
General Partners -- Compensation" in the Proxy Statement is incorporated  herein
by reference.

         The information  with respect to the allocation and distribution of the
Fund's  profits and losses to the Managing  General  Partner set forth under the
caption   "Election  of  General   Partners  -  Managing   General   Partner  --
Distributions" in the Proxy Statement is incorporated herein by reference.

         The information with respect to the Fund  Administration Fee payable to
the Fund Administrator set forth under the caption "Election of General Partners
Managing General Partner -- The Fund  Administrator  Fee" in the Proxy Statement
is incorporated herein by reference.

         The  information  with  respect to the  Management  Fee  payable to the
Investment  Advisor (and  distributions  from the Managing  General Partner) set
forth  under the caption  "The  Management  Agreement - Terms of the  Management
Agreement -- Management Fee" in the Proxy  Statement is  incorporated  herein by
reference.

Item 12. Security Ownership of Certain Beneficial Owners and
                Management

         The  information  concerning  the security  ownership of the Individual
General Partners set forth under the caption  "Individual  General Partners" and
certain Limited Partners under the caption "Introduction" in the Proxy Statement
is incorporated herein by reference.

         There exists no  arrangement  known to the Fund, the operation of which
may at a subsequent date result in a change of control of the Fund.

Item 13. Certain Relationships and Related Transactions

         The  information set forth under the captions  "Certain  Transactions",
"Election of General  Partners -- Managing  General Partner" and "The Management
Agreement" in the Proxy Statement is incorporated herein by reference.


<PAGE>


                                     PART IV

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K.

        (a)     Financial Statements, Financial Statement Schedules and Exhibits

                Financial Statements and Financial Statement Schedules

See Item 8.  "Financial Statements and Supplementary Data-Table of Contents"

<TABLE>
           Exhibits
<S>        <C>                                      <C>
 3.1       Amended and Restated Certificate of      Incorporated by reference to Exhibit
           Limited Partnership, dated as of July    3.1 to Registrant's Annual Report on
           8, 1987.                                 Form 10-K for the year ended December
                                                    31, 1987.

 3.2.1     Amended and Restated Agreement of        Incorporated by reference to Exhibit
           Limited Partnership, dated October 19,   3.2 to Registrant's Annual Report on
           1987 as amended by Amendment No. 1,      Form 10-K for the year ended December
           dated as of November 23, 1987,           31, 1987.
           Amendment
           No. 2 dated as of December 2, 1987.

 3.2.2     Amendment No. 3, dated May 12, 1988      Incorporated by reference to Exhibit
 3.2.3     and Amendment No. 4, dated November      3.2.2 and Exhibit 3.2.3, respectively,
           15, 1988                                 to Registrant's Annual Report on Form
                                                    10-K for the year ended December 31,
                                                    1988.

 3.2.4     Amendment No. 5, dated May 5, 1989 and   Incorporated by reference to Exhibit
           Amendment No. 6, dated June 30, 1989.    3.2.4 to Registrant's Annual Report on
                                                    Form 10-K for the year ended
                                                    December 31, 1989.

10.1.1     Management Agreement, dated September    Incorporated by reference to Exhibit
           14, 1987 by and between Registrant,      10.1.1 to Registrant's Annual Report on
           Thomas H. Lee Advisors, Inc. and         Form 10-K for the year ended December
           Thomas H. Lee                            31, 1987.

</TABLE>
<PAGE>
<TABLE>

<S>        <C>                                      <C>
10.1.2     Amendment to Management Agreement,       Incorporated by reference to Exhibit
           dated March 18, 1988.                    10.1.2 to Registrant's Annual Report on
                                                    Form 10-K for the year ended
                                                    December 31, 1987.

10.1.3     Notification of Transfer of Limited      Incorporated by reference to Exhibit
           Partnership Interest, dated December     10.1.3 to Registrant's Annual Report on
           29, 1988, given by Thomas H. Lee         Form 10-K for the year ended December
           Advisors, Inc., as Transferor and        31, 1988.
           Thomas H. Lee Advisors I, as
           Transferee, to Mezzanine Investments,
           L.P.

10.1.4     Waiver, Acknowledgment and Consent,      Incorporated by reference to Exhibit
           dated December 29, 1988, of ML           10.1.4 to Registrant's Annual Report on
           Mezzanine Inc.                           Form 10-K for the year ended December
                                                    31, 1988.

10.1.5     Instrument of Assignment and             Incorporated by reference to Exhibit
           Assumption of Management Agreement,      10.1.5 to Registrant's Annual Report on
           dated as of December 29, 1988, among     Form 10-K for the year ended December
           Registrant, Thomas H. Lee Advisors I     31, 1988.
           and Thomas H. Lee Company.

10.2       Demand Note,  dated  September 9,        Incorporated by reference to
           1988, given by  Registrant,              Exhibit 10.2 to  Registrant's
           as Borrower, to The First  National      Current  Report on  Form 8-K            
           Bank of Chicago,  as Payee.              filed with the Commission on
                                                    September 27, 1988.   
              
           

10.3.1     Third Amended  Restated  Pledge          Incorporated by reference to Exhibit
           Agreement, dated August 13, 1991,        10.3.1 to Registrant's Current Report on
           between  the Registrant and the First    Form 8-K filed with the Commission on
           National Bank of Chicago, as agent for   August 26, 1991.
           the Lenders.
</TABLE>

<PAGE>


<TABLE>
<S>        <C>                                      <C>
10.3.2     Amended  Restated  Custodian  Contract,  Incorporated by reference to Exhibit
           dated  August 13,  1991,  between  the   10.3.2 to Registrant's current report
           Registrant and State Street Bank.        Form 8-K filed with the Commission
                                                    on August 26, 1991.

10.4.1     Amended and Restated Credit Agreement,   Incorporated by reference to Exhibit
           dated August 13, 1991, between the       10.4.1 to Registrant's on Form 8-K filed
           Registrant, certain listed financial     with the Commission on August 26, 1991.
           instructions and the First National
           Bank of Chicago, as Agent.

10.4.2     Amendment No. 1 to Credit Agreement,     Incorporated by reference to Exhibit
           dated February 8, 1993, among the        10.4.2 to Registrant's Annual Report on
           Registrant, certain listed financial     Form 10-K for the year ended December
           institutions and the First National      31, 1992.
           Bank of Chicago, as Agent.

10.4.3     Amendment No. 2 to Credit Agreement,     Incorporated by reference to Exhibit
           dated February 9, 1993, among the        10.4.3 to Registrant's Annual Report on
           Registrant, certain listed financial     Form 10-K for the year ended December
           institutions and the First National      31, 1992.
           Bank of Chicago, as Agent.

10.4.4     Amendment No. 3 to Credit Agreement,     Incorporated by reference to Exhibit
           dated May 21, 1993 among the             10.4.4 to Registrant's Annual Report on
           Registrant, certain listed financial     Form 10-K for the year ended December
           institutions and the First National      31, 1993.
           Bank of Chicago, as Agent.

10.4.5     Amendment No. 4 to Credit Agreement,     Incorporated by reference to Exhibit
           dated October 29, 1993 among the         10.4.5 to Registrant's Annual Report on
           Registrant, certain listed financial     Form 10-K for the year ended December
           institutions and the First National      31, 1993.
           Bank of Chicago, as Agent.

10.4.6     Amendment No. 5 to Credit Agreement,     Incorporated by reference to Exhibit
           dated February 14, 1994 among the        10.4.6 to Registrant's Annual Report on
           Registrant certain listed financial      Form 10-K for the year ended December
           institutions and the First National      31, 1994.
           Bank of Chicago, as Agent.

10.4.7     Fee Letter dated February 7, 1994        Incorporated by reference to Exhibit
           among the Registrant and the First       10.4.7 to Registrant's Annual Report on
           National Bank of Chicago, as Agent.      Form 10-K for the year ended December
                                                    31, 1994.

10.4.8     Amendment No. 6 to Credit Agreement,     Filed herewith.
           dated December 1, 1995 among the 
           Registrant,  and the First National
           Bank of Chicago, as Agent.
</TABLE>

<PAGE>


<TABLE>
<S>      <C>                                       <C>
10.5     Administrative Services Agreement,        Incorporated by reference to Exhibit
         dated June 30, 1989, by and between       10.5 to Registrant's Annual Report on
         Registrant and ML Fund Administrators     Form 10-K for the year ended December
         Inc.                                      31, 1987.

99       Pages 15 through 57 of Prospectus dated   Incorporated  by reference to
         August 12, 1987, filed pursuant to Rule   Exhibit 99 to  Registrant's Annual
         424(b) under the Securities Act of 1933.  Report on Form 10-K for the year
                                                   ended December 31, 1987.

27       Financial Data Schedule for the year      Filed Herewith.
         ended December 31, 1995.

(b)      - Registrant Filed Forms 8-K with
         respect to the following:
         1)  Sale of Common Stock in
             General Nutrition Company             Filed February 15, 1996.

         2)  Court's Decision in Winston
             v. Mezzanine Investments, L.P.        Filed March 4, 1996.

</TABLE>

<PAGE>


                                   SIGNATURES



Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Registrant  has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 27th day of March 1996.


                                        ML-LEE ACQUISITION FUND, L.P.

                                        By:      Mezzanine Investments, L.P.
                                                 Managing General Partner

                                        By:      ML Mezzanine Inc.
                                                 its General Partner




                                        /s/ Kevin K. Albert
                                        --------------------------------
Dated:  March 27, 1996                  Kevin K. Albert
                                        President, ML Mezzanine, Inc.
                                        a General Partner of Mezzanine
                                        Investments, L.P., the Managing
                                        General Partner




<PAGE>


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities indicated on the 27th day of March, 1996.


              Signature                            Title


/s/ Kevin K. Albert                 ML Mezzanine Inc.
Kevin K. Albert                     President and Director
                                    (Principal Executive Officer of Registrant)

/s/ Vernon R. Alden                 Individual General Partner
Vernon R. Alden                     ML-Lee Acquisition Fund, L.P.

/s/ Audrey L. Bommer                ML Mezzanine Inc.
Audrey L. Bommer                    Vice President and Treasurer
                                    (Principal Financial Officer of Registrant)

/s/ Joseph L. Bower                 Individual General Partner
Joseph L. Bower                     ML-Lee Acquisition Fund, L.P.

/s/ Roger F. Castoral, Jr.          ML Mezzanine Inc.
Roger F. Castoral, Jr.              Assistant Treasurer
                                    (Principal Accounting Officer of Registrant)

/s/ Stanley H. Feldberg             Individual General Partner
Stanley H. Feldberg                 ML-Lee Acquisition Fund, L.P.


/s/ Thomas H. Lee                   Individual General Partner
Thomas H. Lee                       ML-Lee Acquisition Fund, L.P.


<PAGE>


                                   SIGNATURES



Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Registrant  has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 27th day of March 1996.


                                          ML-LEE ACQUISITION FUND, L.P.

                                          By:      Mezzanine Investments, L.P.
                                                   Managing General Partner

                                          By:      ML Mezzanine Inc.
                                                   its General Partner





Dated:  March 27, 1996                    --------------------------------
                                          Kevin K. Albert
                                          President, ML Mezzanine, Inc.
                                          a General Partner of Mezzanine
                                          Investments, L.P., the Managing
                                          General Partner



<PAGE>


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities indicated on the 27th day of March, 1996.


              Signature                           Title


______________________              ML Mezzanine Inc.
Kevin K. Albert                     President and Director
                                    (Principal Executive Officer of Registrant)

______________________              Individual General Partner
Vernon R. Alden                     ML-Lee Acquisition Fund, L.P.

______________________              ML Mezzanine Inc.
Audrey Bommer                       Vice President and Treasurer
                                    (Principal Financial Officer of Registrant)

______________________              Individual General Partner
Joseph L. Bower                     ML-Lee Acquisition Fund, L.P.

______________________              ML Mezzanine Inc.
Roger F. Castoral, Jr.              Assistant Treasurer
                                    (Principal Accounting Officer of Registrant)

______________________              Individual General Partner
Stanley H. Feldberg                 ML-Lee Acquisition Fund, L.P.

______________________              Individual General Partner
Thomas H. Lee                       ML-Lee Acquisition Fund, L.P.



                                  EXIBIT 10.4.8
                 WAIVER AND AMENDMENT NO. 6 TO CREDIT AGREEMENT



         This Waiver and Amendment No. 6 to Credit Agreement  ("Amendment 6") is
dated as of December 1, 1995 and is made by and among ML-Lee  Acquisition  Fund,
L.P., a Delaware limited  partnership  (the "Company"),  each of the undersigned
Lenders and The First  National Bank of Chicago,  individually  and as agent for
the Lenders.


                                 R E C I T A L S

         A. The parties hereto are party to a certain Credit  Agreement dated as
of August 13, 1991 (as amended, the "Credit  Agreement").  Each capitalized term
used but not otherwise  defined  herein shall have the meaning  ascribed to such
term in the Credit Agreement.

         B.  The parties hereto desire to further amend the Credit Agreement.

         NOW,  THEREFORE,  in  consideration  of the mutual execution hereof and
other good and valuable  consideration,  the Agent, the Lenders signatory hereto
and the Company agree as follows:

     1.  Amendments.  On the  Effective  Date (as  defined  below),  the  Credit
Agreement shall be amended as follows:

         A. The  definition of Collateral  Coverage Test set fourth in Article 1
of the Credit Agreement shall be deleted in its entirety and the following shall
be inserted in substitution therefor:

                  "Collateral   Coverage   Test"   means,   on   any   date   of
         determination,  that the ratio of (a)  Appraised  Value of the Eligible
         Assets to (b) the outstanding balance of the Obligations exceeds 5.0 to
         1.0.

         B. The definition of Total  Interest  Expense set forth in Article 1 of
the Credit Agreement shall be deleted in its entirety and the following shall be
inserted in substitution therefor:

                  "Total  Interest  Expense"  means,  with respect to any fiscal
         quarter of the Company,  the aggregate amount of all interest  expenses
         paid or payable by the  Company  during or with  respect to such fiscal
         quarter,   as  determined  in  accordance  with  Agreement   Accounting
         Principles.

     C. Section 6.18 shall be deleted in its entirety and the following shall be
inserted in substitution therefor:

                  6.18.  Asset  Coverage.  The Company  shall (a) not permit the
         asset coverage for all  borrowings of the Company,  after giving effect
         to the borrowing of the full amount of the Aggregate Commitment,  to be
         less than the minimum  amount  required  under  applicable  federal and
         state laws and regulations  promulgated thereunder (including,  without
         limitation, Regulation U, Regulation G and Regulation X of the Board of
         Governors of the Federal Reserve System) or under any  authorization of
         any state administrator  regarding the sale of partnership interests in
         the  Company,  and (b)  maintain at all times a ratio of (I)  aggregate
         Value of all of the Company's  Eligible Assets, to (ii) the outstanding
         principal  balance of the obligations,  of greater than or equal to 4.0
         to 1.0.

     D. The text of Section 6.19 shall be deleted in its entirety and the phrase
"Intentionally Omitted" shall be inserted in substitution therefor.

         E.  Notwithstanding  anything to the  contrary  contained in the Credit
Agreement,  the Agent,  the Lenders and the Company hereby agree that,  from and
after  December 1, 1995,  the Revolving  Loan  Commitment of all Revolving  Loan
Lenders shall be reduced to Ten Million Dollars ($10,000,000) in the aggregate.



<PAGE>



                  2. Waiver.  The Agent and the Lenders hereby waive,  effective
as of September 30, 1995, all Defaults or Unmatured  Defaults existing under the
Credit  Agreement or the other Loan  Documents as of the date hereof as a result
of the  Company's  failure,  as of  September  30,  1995,  to  comply  with  the
provisions of Section 6.19 of the Credit Agreement  (prior to the  effectiveness
of the  Amendment  No. 6)  requiring  that at least fifty  percent  (50%) of the
Appraised Value of the Pledged Collateral be comprised of the Appraised Value of
subordinated  notes, cash and Cash  Equivalents;  provided,  however,  that this
waiver shall not be construed as a continuing  waiver of compliance  with any of
the other terms of the Credit  Agreement or any other Loan  Document and nothing
contained  herein  shall be deemed to  constitute  a waiver of any other term or
condition contained in the Credit Agreement or any other Loan Document.

                  3. Representations and Warranties.  The Company represents and
warrants  that:  (a)  the  execution,  delivery  and  performance  by it of this
Amendment No. 6 has been duly authorized by all necessary partnership action and
that this  Amendment  No. 6 is a legal,  valid  and  binding  obligation  of the
Company  enforceable  against it in  accordance  with its  terms,  except as the
enforcement  thereof  may  be  subject  to (I)  the  effect  of  any  applicable
bankruptcy,  insolvency,  reorganization,  moratorium  or similar law  affecting
creditors' rights generally,  and (ii) general  principles of equity (regardless
of whether such  enforcement is sought in a proceeding in equity or at law); and
(b) after  giving  effect to the  execution  of  Amendment  No. 6, no Default or
Unmatured Default has occurred and is continuing.

     4.  Conditions.  This  Amendment  No. 6 shall  become  effective  only upon
receipt by the Agent (with sufficient  copies for the Lenders) of the following,
each in form and substance  satisfactory  to the Agent,  and after the following
conditions shall have been satisfied:

     A. Amendment No. 6 executed by the Agent,  each of the Required Lenders and
the Company.

                  B.  Partnership  resolutions  adopted  by  Mezzanine  and  the
         Individual  General Partners (as defined in the Partnership  Agreement)
         of  the  Company,  authorizing  the  execution  and  delivery  of  this
         Amendment No. 6 by ML Mezzanine on behalf of Mezzanine on behalf of the
         Company, certified by a duly authorized officer of ML Mezzanine.

     C. Receipt of such other documents as the Agent,  any Lender or its counsel
may have reasonably requested.

The date upon  which  all of the above  conditions  have been  satisfied  is the
"Effective  Date." Upon the occurrence of the Effective Date, this Amendment No.
6 shall be deemed to have become effective as of the date first written above.

                  5. Failure of Conditions. In the event that the Effective Date
shall not have occurred on or before  December 31, 1995, then (a) this Amendment
No. 6 shall be of no further force or effect, and (b) the Credit Agreement,  the
Exhibits and Schedules thereto and the Notes, and all rights and remedies of the
Agent and the Lenders in respect thereof shall be unaltered and unaffected as if
this Amendment No. 6 had never been entered into.

                  6. Effect of Amendment. Upon execution of this Amendment No. 6
and the occurrence of the Effective Date, each reference in the Credit Agreement
to "this Agreement,"  "hereunder,"  "hereof," "herein," or words of like import,
and each  reference to the Credit  Agreement in any of the other Loan  Documents
shall mean and be reference to the Credit Agreement as amended hereby. Except as
specifically set forth above, the Credit  Agreement,  the Exhibits and Schedules
thereto and the Notes shall  remain  unaltered  and in full force and effect and
the respective terms, conditions or covenants thereof are hereby in all respects
ratified and confirmed.

     7.  Counterparts.  This  Amendment  No. 6 may be  executed in any number of
counterparts and by different parties hereto in separate  counterparts,  each of
which when so executed and  delivered  shall be deemed to be an original and all
of which taken together shall constitute one instrument.


<PAGE>




     8.  Governing  Law. This Amendment No. 6 shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of Illinois, but giving effect to federal laws applicable to national banks.



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Amendment No. 6 to be executed by their duly  authorized  representatives  as of
the date first written above.



                          ML-LEE ACQUISITION FUND, L.P.



                                          By:  MEZZANINE INVESTMENTS, L.P.,
                                          its Managing General Partner


                                          By: ML MEZZANINE, INC.,
                                          its General Partner


                                          By:  /s/____Audrey L. Bommer_____

                                          Title: __________________________


                                          THE FIRST NATIONAL BANK OF
                                          CHICAGO, Individually and as Agent



                                          By:  /s/_________________________

                                          Title: __________________________