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, 1997

                         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 1997 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,  1997,  the Fund had a
total value of $35.3  million  invested in Mezzanine  Investments,  representing
$35.2  million  Managed and $26,000  Non-Managed  portfolio  investments.  As of
December 31, 1997, there were no Bridge Investments outstanding.

     REVIEW OF INVESTMENTS SOLD DURING 1997

     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.

     On August 27,  1997,  the Fund  together  with certain  other  stockholders
including  affiliates  of Thomas H. Lee Company  (the  "Selling  Stockholders"),
entered  into  a  Stock  Purchase   Agreement  pursuant  to  which  the  Selling
Stockholders  agreed to sell all of the issued and  outstanding  Common Stock of
Alliance to an unrelated third party for approximately $7.8 million or $7.78 per
share (the "Transaction"). In addition, immediately prior to the consummation of
the  Transaction,  Alliance  redeemed  all  of  the  outstanding  shares  of the
Company's  Preferred  Stock,  and paid accrued but unpaid dividends with respect
thereto. Also, Alliance's outstanding indebtedness was repaid in full, including
accrued and unpaid interest. The Transaction was completed on October 3, 1997.

     As  a  result  of  these  transactions,   the  Fund  received  proceeds  of
approximately  $30.9 million or $62.75 per Unit. These proceeds are comprised of
$11.9 million for repayment of  indebtedness  (including  all accrued and unpaid
interest), and $18.9 million for the Common and Preferred Stock held by the Fund
(which includes approximately $5.5 million of preferred dividends). In addition,
the Fund's outstanding  guarantee of Alliance debt, as discribed in Note 11, was
released.  Net  Distributable  proceeds of $62.75 per Unit were  distributed  to
Limited Partners of record as of October 3, 1997.

     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  21,  1997,  the Fund  sold its  remaining  5,769  shares  of
Celebrity, Inc. Common Stock for $75,000.
<PAGE>
     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.

     Pursuant to Rule 144 under the  Securities  Act of 1933,  the Fund sold its
435,895 shares of Walter  Industries Inc. Common Stock during the fourth quarter
of 1997.  The Fund received  total proceeds of $8,964,717 and realized a gain of
$88,188.

     REVIEW OF INVESTMENTS IN MANAGED COMPANIES
     ------------------------------------------

     BeefAmerica, Inc. ("BeefAmerica")
     --------------------------------

     On March 3, 1998,  the Fund sold its remaining  investment in  BeefAmerica,
consisting of 14,000 shares Sr.  Preferred Stock and 10,000 shares Jr. Preferred
Stock (the  "Securities"),  for $1 million to Lajara II LLC, a limited Liability
Company owned by the Management of BeefAmerica  Operating Company.  The proceeds
consist of a $1 million  Promissory Note payable to the Fund on or before May 2,
1998.  The  Securities  have been pledged to secure the obligation of Lajara II,
LLC under the Promissory Note. The Fund will recognize a loss of $23 million.

     BeefAmerica is an integrated beef packing company  operating  slaughter and
fabrication  processing  facilities  in Nebraska.  The Fund's  valuation of this
investment  reflects a writedown to $3 million at December  31,  1997,  bringing
total net unrealized  depreciation of approximately $21 million through December
31, 1997.

     Chadwick-Miller, Inc. ("CMI")
     ----------------------------

     CMI operates full-line retail book stores under the Encore, Lauriat and the
Royal Discount Books names.

     The Fund's  valuation of this  investment  at zero  reflects  aggregate net
unrealized  depreciation of  approximately  $16.6 million  through  December 31,
1997.

     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, 1997,  operates three
separate retail subsidiaries:  Cole Vision,  Things Remembered and Cole Key. The
investment in Cole is valued at zero as of December 31, 1997.

     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  31, 1997,  the Fund
recorded approximately $3.2 million of net unrealized  appreciation for the year
ended December 31, 1997 on its equity  holdings in Playtex.  The Fund's year-end
valuation  of this  investment  reflects an  aggregate  of  approximately  $11.2
million of net unrealized appreciation through December 31, 1997.

     Signature Brands USA (formerly Health o meter Products, Inc.)
     ------------------------------------------------------------

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

     On  February  28,  1998,  Signature  Brands  USA  and  Sunbeam  Corporation
("Sunbeam")  executed a definitive merger agreement whereby Sunbeam will acquire
all  the   outstanding   shares  of  Signature   Brands  USA  Common  Stock  for
approximately  $250  million  ($8.25 per share) by means of a tender  offer (the
"Tender Offer"),  and assume all the debt of Signature  Brands USA.  Pursuant to
the Tender Offer, which was executed on March 6, 1998, the Fund tendered all its
shares of Signature  Brands USA Common Stock and expects to receive  proceeds of
approximately $13 million. The Fund estimates that the maximum net Distributable
Capital  Proceeds  per Unit  will be  $26.19.  Any  distribution  of  these  net
Distributable   Capital   Proceeds   after  the  payment  of  expenses  and  the
establishment of reserves, as provided for in the Fund's Partnership  Agreement,
will be distributed  to the Fund's Limited  Partners of record as of the date of
the expiration of this Tender Offer,  which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.
<PAGE>
     As of December 31, 1997, the Fund held 1,563,053 shares of Signature Brands
USA common stock which represents 14.7% of the outstanding common equity.

     Based upon the closing  price at December 31, 1997,  the Fund  recorded net
unrealized  depreciation  of $1.8 million on its equity  investment in Signature
Brands USA for the year ended December 31, 1997. The Fund's  year-end  valuation
of this investment  reflects an aggregate of  approximately  $2.1 million in net
unrealized appreciation through December 31, 1997.

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

     During  February  1997,  the Fund sold 31,515 shares of Stanley for $24 per
share.  The Fund received  total  proceeds of $756,335 and  recognized a gain of
$361,480.

     On June 27,  1997,  the Fund  along  with  affiliates  of the Thomas H. Lee
Company entered into a Stock Purchase  Agreement (the "Agreement") with Stanley.
Pursuant to the  Agreement,  Stanley  purchased an aggregate  750,000  shares of
Stanley  Common  Stock  from the  Selling  Stockholders  for $20 per  share.  In
connection with the sale, the Fund sold 727,344 shares and received  proceeds of
$14,546,880. The Fund recognized a gain of $5,433,911 on this transaction.

     On November  11,  1997,  Stanley  announced  the  repurchase  of a total of
413,201 shares of Common Stock from the Fund and Affiliates of the Thomas H. Lee
Co. for $25 per share. As a result,  the Fund sold a total of 400,718 shares and
received  proceeds of $10 million or $20.34 per Unit,  which were distributed to
Limited Partners of record as of November 11, 1997.

     On January  6, 1998 the Fund and  affiliates  of the  Thomas H Lee  Company
including  ML-Lee   Acquisition  Fund  II,  L.P.  and  ML-Lee  Acquisition  Fund
(Retirement  Accounts)  II, L.P.  (the "Lee  Affiliates",  and together with the
Fund, the ("Selling Stockholders") sold their remaining holdings of common stock
in  Stanley.  The  common  stock of each of the  Selling  Stockholders  was sold
pursuant  to a Form S-3  Registration  Statement,  which was filed by Stanley on
December  22,  1997  and  declared  effective  by the  Securities  and  Exchange
Commission on December 23, 1997. In connection  with the sale, the Fund sold its
remaining  400,719  shares of common  stock and  received  net proceeds of $10.8
million or $27 per share. On February 12, 1998, the Independent General Partners
established  a reserve  of $1.65  million  from  these  proceeds  to pay  future
expenses of the Fund.  Net  Distributable  Capital  Proceeds  from the sale,  as
defined in the Partnership Agreement, of $9.2 million or $18.63 per Unit will be
distributed to Limited Partners of record as of January 6, 1998.

     Based upon the closing  market  price at December  31,  1997,  the Fund has
recorded net  unrealized  depreciation  for the year ended  December 31, 1997 of
approximately   $5.3  million  on  its  remaining  equity  holdings  in  Stanley
Furniture.  The  Fund's  year-end  valuation  of  this  investment  reflects  an
aggregate of  approximately  $6.1 million net  unrealized  appreciation  through
December 31, 1997.


     REVIEW OF INVESTMENTS IN NON-MANAGED PORTFOLIO COMPANIES
     --------------------------------------------------------

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

     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 through December 31, 1997.

     SWO Holdings Corporation
     ------------------------

     SWO  Holdings  Corporation  is  an  operator  of  supermarkets  located  in
Oklahoma,  southern Kansas and Amarillo, Texas. The Fund's valuation at December
31, 1997 reflects net unrealized  depreciation of $690,000  through December 31,
1997.
<PAGE>

     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, 1997.

Competition

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

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 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  (the  "Class"),  against the Fund's  Managing  General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates.  The complaint alleged 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 MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
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  Partnership
Agreement and as a result, held the General Partners 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 MLPF&S  because they
were not  parties to the  Partnership  Agreement.  On June 13,  1996,  the Court
amended its  decision,  dismissing  ML Mezzanine,  Inc.,  the corporate  general
partner  of the  Fund's  MGP  because  it was  not a  party  to the  Partnership
Agreement.  On July 25, 1996, judgment was entered against remaining  Defendants
in the amount of $10,399,505.  The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision.  Thereafter,  the parties agreed to settle this action with certain of
the remaining  defendants  paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement,  ordered notice to be mailed to the
Class,  and scheduled a final hearing to approve the settlement and  plaintiffs'
counsel's  application for attorney's fees, for September 15, 1997. On September
15, 1997,  the Court held a final  hearing,  at which it approved the settlement
and signed a Final Order dismissing the action, which released the class' claims
against the  defendants.  The Fund paid  litigation  expenses to the indemnified
parties based upon amounts which are deemed  reimbursable in accordance with the
indemnification  provisions  of the  Partnership  Agreement  and included  these
amounts in Legal and Professional Fees.
<PAGE>
     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.  In its Order and  Opinion  dated
December 30, 1996, the court granted in part and denied in part the  defendants'
motion to dismiss  the second  amended  complaint  holding  that a number of new
claims and  theories  asserted  by  plaintiffs  are  dismissed  as  time-barred.
Plaintiffs have moved for reconsideration of the Court's Order. On September 30,
1997,  Plaintiff's motion was denied without  prejudice.  The plaintiff seeks an
accounting,  rescission,  rescissory  or actual  damages and  punitive  damages.
Plaintiffs  have moved to certify the case as a class  action.  Defendants  have
opposed that motion which is currently  pending before the Court. The defendants
in this  action  believe  that the claims in the second  amended  complaint  are
without merit.  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.  In the  opinion  of legal  counsel,  the  outcome of this case is not
determinable at this time. The Fund has incurred  litigation  expenses which are
recorded in Legal and Professional Fees.

     On August 2,  1996,  an action  was  commenced  against  General  Nutrition
Companies,  Inc.  ("GNC"),  its  officers,  directors  and certain of its former
shareholders,  including the Fund, in the United States  District  Court for the
Western  District  of  Pennsylvania.  Plaintiffs  assert  that GNC is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
1-501(a) of the Pennsylvania  Securities Act, arising out of allegedly false and
misleading  statements  in the  prospectus  and  registration  statement for the
February 7, 1996 public  offering of GNC common  stock,  and for  violations  of
Section  10  (b)  of  the   Securities   Exchange  Act  of  1934  and  negligent
misrepresentation   arising  out  of  allegedly  false  and  misleading   public
statements  during the period from the public  offering  through  May 28,  1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the  underwriters  for the public  offering,  are
liable for certain of such  violations of the federal and state  securities laws
and/or  control  person  liability  in  connection   therewith,   and  negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly  on behalf of all  persons,  other than  defendants,  who  purchased
shares of GNC common stock during the proposed class action period from February
7, 1996 through May 28, 1996. After the defendants filed a motion to dismiss the
action  in  its  entirety,  the  plaintiffs  filed  an  amended  complaint.  The
defendants  thereafter  filed a motion to dismiss the amended  complaint  in its
entirety,  which  motion has been fully  briefed and is  awaiting  action by the
Court.  The  defendants in this action  believe that the claims against them are
without merit. In the opinion of legal counsel,  the outcome of this case is not
determinable at this time.

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, 1997.
<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 Unit  holders as of  January 1, 1998,  the last
effective  date of transfer  (as  described  below),  was 34,786.  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.

     MLPF&S provides  estimated values of limited  partnerships and other direct
investments  reported on client  account  statements  and no longer  reports the
general  partner's  estimate  of  limited  partnership  net asset  value to Unit
holders. Pursuant to MLPF&S guidelines, estimated values for limited partnership
interests  originally  sold by MLPF&S (such as the Fund's Units) are provided by
independent  valuation  services.   MLPF&S  clients  may  contact  their  MLPF&S
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  estimates  of value.  The
estimated values provided by the independent services and the Fund's current net
asset value as estimated by the general  partner are not market  values and Unit
holders may not be able to sell their Units or realize either amount upon a sale
of their  Units.  In  addition,  Unit  holders may not  realize the  independent
estimated  value or the Fund's  current net asset value upon the  liquidation of
the Fund's assets over its remaining life.

         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 Capital 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.  The Fund's ability to
make future distributions is restricted.

     As set forth in Item 7.  Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  - Liquidity  and Capital  Resources - the
information contained is incorporated herein by reference.
<PAGE>
<TABLE>
<S>                                <C>                <C>                  <C>                 <C>                 <C>
Item 6. Selected Financial Data

                                                                    For the Years Ended
Supplemental Information               December 31, 1997  December 31, 1996  December 31, 1995  December 31, 1994  December 31, 1993
Schedule
  Selected Financial Data

TOTAL FUND INFORMATION:

Net Investment Income (Loss)            $  9,323,884        $ (1,411,814)      $ (1,155,421)        $  9,305,007     $    125,500

Net Realized Gains (Losses) on
  Investments                             10,880,887          63,695,316         75,808,138          (37,008,074)      69,148,273
Net Change in Unrealized
  Appreciation(Depreciation) on
  Investments                             (8,132,721)        (23,317,903)         9,920,766            9,271,721       91,162,444

Cash Distributions to Partners     (a)    52,013,619         195,931,182        186,920,065           43,760,745       56,612,752

Net Assets                                57,446,269          97,387,831        254,353,413          356,699,995      418,892,086
Cost of Mezzanine Investments             54,199,296         103,063,947        223,694,546          336,632,272      387,857,896
Total Assets                              57,695,443          97,635,860        254,776,082          357,777,636      431,723,973
Outstanding Loan Payable                          --                  --                 --                   --        9,594,004

PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income                       $      26.66        $       6.21       $      11.68         $      37.10     $      21.65
Expenses                                       (7.72)              (9.08)            (14.03)              (18.20)          (21.39)
                                        ------------        ------------       ------------         ------------     ------------
Net Investment Income (Loss)                   18.94               (2.87)             (2.35)               18.90              .26
                                        ============        ============       ============         ============     ============
Net Realized Gains (Losses) on
  Investments                           $      22.10        $     129.35       $     153.95        $      (75.16)    $     140.43

Net Change in Unrealized
  Appreciation (Depreciation)                 (16.52)             (51.46)             20.15                18.83           185.13

Cash Distributions                 (a)        105.63              397.90             379.60                88.87           114.97
Cumulative Cash Distributions               1,455.04            1,349.41             951.51               571.91           483.04

Net Asset Value                               115.96              197.07             519.95               727.79           854.10

</TABLE>

(a)      Includes  $31,452,790 or $64.52 per Limited Partnership Unit return of
         capital  from cash distributed during 1997.

         See the Cash  Distributions  Schedule for further information.
<PAGE>


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

Liquidity & Capital Resources

     As of December 31, 1997, the Fund had a total of (at cost) $54.2 (including
$3.7  million of  payment-in-kind  equity)  invested in  Mezzanine  Investments,
representing $53.5 Managed and $719,914 Non-Managed portfolio investments. These
investments  were  financed by net offering  proceeds and debt  financing.  This
represents  a $48.9  million  decrease  versus the total at December 31, 1996 of
$103.1  million.  The decrease in assets is due to sales and  redemptions of the
Fund's  investments  during 1997. The Fund's  Mezzanine  Investments  originally
consisted 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 were usually subject to restrictions on the transfer
or sale of the security,  thereby limiting their liquidity. The Fund's remaining
Mezzanine Investments currently consist of common and preferred equity.

     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.  The
agreement provided the Fund with a maximum of $140 million, consisting of a $100
million term loan and a $40 million revolving credit line, both maturing on July
31, 1998 (the Credit Facility).

     As a result of paydowns of the term loan, the Fund's  outstanding term loan
was paid in full as of March 29, 1994. Additionally, the Fund's remaining credit
line was further amended to reduce the  commitments  thereunder to $7.5 million.
As of  March  20,  1998,  the Fund  had the  entire  $7.5  million  credit  line
available.

     Because all but one of the Fund's debt  investments were previously sold or
redeemed,  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 in American Health Companies,
Duro-Test Corp.,  Chadwick-Miller,  Signature Brands USA and Petco, along with a
distributions to partners totalling $1.4 million. In addition,  $2.9 million was
utilized  from the  reserve to pay down a portion of the First  Chicago  loan on
January 6, 1994.  As of the last meeting on February 12, 1998,  the  Independent
General Partners have approved an additional  reserve of $1.65 million which has
been reserved from the proceeds  received from the sale of Stanley  Furniture in
January  1998.  This  reserve  has been  established  to fund  anticipated  cash
shortfalls in the future.  The Fund's  reserve  balance as of March 19, 1998 was
approximately $4.4 million which has been invested in temporary investments.
<PAGE> 
Investment in High-Yield Securities

     The Fund originally  invested  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.

     Although  the  Fund  cannot   eliminate  the  risks   associated  with  its
investments in High-Yield  Securities,  it 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 limited
the  amount of its  original  investment  in a  particular  issuer.  The  Fund's
Investment Adviser also continually  monitors remaining  portfolio  companies in
order to  minimize  the risks  associated  with its  investments  in  High-Yield
Securities.

     Certain  issuers of  securities  held by the Fund  (Playtex  and  Signature
Brands  USA) have  registered  their  equity  securities  in  public  offerings.
Although  the equity  securities  of the same class  presently  held by the Fund
(except  Signature Brands USA) 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

     The total  investment  income  earned  on  investments  for the year  ended
December  31,  1997  was  $13,127,105,  of which  $12,510,356  was  earned  from
Mezzanine  Investments and $616,749 was earned from Temporary  Investments.  The
total  investment  income earned on investments  for the year ended December 31,
1996 was $3,061,608,  of which $1,611,001 was earned from Mezzanine  Investments
and $1,450,607 was earned from Temporary Investments.
<PAGE>
     For the same period in 1995, total investment  income earned on investments
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 year ended December 31, 1997,  the Fund had net  investment  income
from operations of $9,323,884 as compared to a net investment loss of $1,411,814
and $1,155,421 for the same periods in 1996 and 1995, respectively. The increase
in net  investment  income for the year ended  December 31, 1997 compared to the
year ended  December  31, 1996 is the result of an  increase in dividend  income
received in  connection  with the sale of Alliance  (see Note 8 to the financial
statements).  Additionally,  $6 million of settlement  proceeds were received in
1997 pursuant to an agreement with Deloitte and Touche.  During the twelve month
period  ending  December 31, 1997,  the Fund held one  security  that  generated
interest  income.  However,  the  reduction in interest  income  during 1997 was
partially offset by a reduction of Fund expenses;  primarily Investment Advisory
Fees and Legal and Professional Fees.

     The decrease in net  investment  loss for the year ended  December 31, 1996
versus the  comparative  period in 1995  reflects  the  decrease  in  Investment
Advisory Fees and Fund  Administration  Fees partically  offset by a decrease in
investment  income  received  by the Fund due to the  sale of  income  producing
securities in 1995.

     Major  expenses for the period  consisted of  Investment  Advisory Fees and
Legal and Professional Fees.

     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,  1997 was  $1,193,717,  compared  with
$1,282,991  for the year ended  December  31, 1996 and  $2,770,934  for the year
ended December 31, 1995. 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 1997 as  compared to 1996 and 1995  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, 1997,  1996 and 1995,  legal and  professional  fees were $854,470,
$1,559,223 and $1,584,381, 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, 1997,  1996 and 1995 were $300,000,  $299,335 and $1,330,212,
respectively.  In accordance with Partnership  Agreement,  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.  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.  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.

     Beginning  October 19, 1995, 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 for the years ended  December 31, 1997,  1996 and
1995 were $519,134, $414,544, and $171,150,  respectively. For the period ending
October 19, 1995,  the Fund's  expenses for  accounting,  audit,  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.

     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, 1997,  1996 and 1995  totaled  $700,249,  $701,021 and
$738,029,  respectively.  This decrease in 1997 as compared to the 1996 and 1995
loan fees is the result of reductions in the Credit Facility.

<PAGE>
Net Assets

     The  Fund's  net  assets  decreased  by  $39,941,569  during the year ended
December 31, 1997 due to additional net unrealized  depreciation  of $8,132,721,
net  realized  gains of  $10,880,887  and net  investment  income of  $9,323,884
partially offset by cash  distributions to partners of $52,013,619  ($31,452,790
of the cash  distributions  distributed  in 1997 was return of capital  from the
sales of portfolio investments).

     The Fund's  net  assets  decreased  by  $156,965,582  during the year ended
December  31,  1996  due  to  net   investment   loss  of  $1,411,814  and  cash
distributions  to partners of $195,931,182  ($72,697,537  of cash  distributions
distributed  in  1996  was  return  of  capital  from  the  sales  of  portfolio
investments) and additional net unrealized  depreciation of $23,317,903,  offset
by net realized gains of $63,695,316.

     The Fund's  net  assets  decreased  by  $102,346,582  during the year ended
December  31,  1995  due to  cash  distributions  to  partners  of  $186,920,065
($61,054,782  of the cash  distributions  paid were  return of capital  from the
sales of Mezzanine  Investments) and net realized losses of $1,155,421 partially
offset by additional net unrealized  appreciation of $9,920,766 and net realized
gains of $75,808,138.

Unrealized Appreciation and Depreciation on Investments

     For the  year  ended  December  31,  1997,  the  Fund  recorded  total  net
unrealized  depreciation  of $8.13 million of which $2.78 million was a reversal
of net unrealized  depreciation for investments sold during 1997.  Approximately
$3.9 million recorded in 1997 related to net unrealized depreciation recorded in
the market value of publicly traded  securities held by the Fund at December 31,
1997.  This compares to a net unrealized  depreciation of $23.3 million of which
$27.5 million was net unrealized appreciation in market value of publicly traded
securities  held by the Fund at December 31, 1996.  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 depreciation in market value of publicly traded
securities  held by the Fund at December 31,  1995.  The Fund's  cumulative  net
unrealized  depreciation  on  investments  at December  31, 1997  totaled  $18.9
million.

     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.

     As of December 31, 1997,  approximately  57% of the Fund's  investments 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, 1997.  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 Signature  Brands USA, Playtex
and Stanley Furniture reflect their closing market price at December 31, 1997.
<PAGE>
     The Signature Brands USA, 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  Signature  Brands USA and Stanley
Furniture  pursuant to Rule 144, under the securities act of 1933 and therefore,
any resale of Signature  Brands USA 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 Signature  Brands USA,  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.

         For additional  information,  please refer to the Supplemental Schedule
of Unrealized Appreciation and Depreciation (Schedule 2).

Realized Gains and Losses

     Net realized gains on investments for the year ended December 31, 1997 were
$10,880,887  compared to a net realized  gain of  $63,695,316  in 1996 and a net
realized gain of $75,808,174 for 1995.

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

Cash Distributions

     On January 8, 1998, the  Individual  General  Partners  approved the fourth
quarter 1997 cash  distribution  totaling  $18,775,734,  which  consisted of Net
Distributable Capital Proceeds,  after Fund expenses,  (of which $13,546,897 was
return of capital  from the sale of  Stanley  Furniture  and  Walter  Industries
Common  Stock)  during the quarter  ending  December 31, 1997.  The total amount
distributed  to  Limited  Partners  was  $18,587,955,  or $38.13  per Unit.  The
Managing General Partner  received  $187,779 in proportion to its 1% interest in
the Fund. The distributions were made on January 21, 1998.

     Because all of the Fund's debt holdings were  previously  sold or redeemed,
remaining  portfolio  interest income expected to be received by the Fund is not
sufficient  to cover the  Fund's  expenses.  As a result,  any  interest  income
received  will be used  to pay  Fund  expenses  and  may  not be  available  for
distribution. The majority of future cash distributions to Limited Partners will
be derived from recovered capital from asset sales, and gains, if any, which are
dependent   upon  future  market   conditions   and  therefore  are   inherently
unpredictable.  Cash distributions,  therefore, are likely to vary significantly
in amount and may not be made in every quarter.

     Should a Limited  Partner  decide to sell his Units,  any such sale will be
recorded  on the  books  and  records  of the  Fund  quarterly,  only  upon  the
satisfactory  completion and acceptance of the Fund's transfer documents.  There
can be no assurances  that such  transfer will be effected  before any specified
date. Additionally,  pursuant to the Partnership Agreement,  until a transfer is
recognized,  the Limited  Partner of record (i.e. the transferor) is entitled to
receive all the benefits and burdens of ownership of Units,  and any  transferee
has no rights to distributions  of sale proceeds  generated at any time prior to
the recognition of the transfer and assignment. Accordingly,  Distributable Cash
from  Investments for a quarter and  Distributable  Capital  Proceeds from sales
after  transfer or assignment  have been entered into,  but before such transfer
and  assignment is  recognized,  would be payable to the  transferor and not the
transferee.

<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>             <C>
                              Total            Total Distributed to         Per Unit        Managing
                           Distributed          Limited Partners           Return of        General        Incentive
                              Cash              Amount        Per Unit*      Capital**      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       10.37          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       36.15         181,720              -
Second Quarter 1993            5,086,627       5,035,761          10.33         .86          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        6.52          80,028              -
Second Quarter 1994            1,083,292       1,072,476           2.20        1.22          10,816              -
Third Quarter 1994             5,623,355       5,567,124          11.42         .48          56,231              -
Fourth Quarter 1994            7,602,855       7,526,830          15.44        5.04          76,025              -
First Quarter 1995            44,671,712      44,225,002          90.72       41.20         446,710              -
Second Quarter 1995           19,863,955      19,665,306          40.34       17.13         198,649              -
Third Quarter 1995           114,781,543     113,633,686         233.10       60.61       1,147,857              -
Fourth Quarter 1995            5,391,914       5,338,005          10.95   (a) 13.66          53,909              -
First Quarter 1996            26,916,067      26,646,919          54.66       53.06         269,148              -
GNC Distribution on
  March 29, 1996             101,737,501     100,720,102         206.61       27.94       1,017,399              -
Petco Distribution on
  June 11, 1996               40,289,255      39,886,350          81.82       16.66         402,905              -
Second Quarter 1996            4,027,927       3,987,660           8.18        6.45          40,267              -
Third Quarter 1996               709,056         701,984           1.44   (a)  2.15           7,072              -
Stanley Distribution
  on December 23, 1996        16,860,231      16,691,623          34.24       27.78         168,608              -
Fourth Quarter 1996              650,009         643,485           1.32   (a)  2.04           6,524              -
First Quarter 1997               285,576         282,744            .58   (a)   .79           2,832
Second Quarter 1997           14,181,503      14,039,683          28.80       18.12         141,820
Third Quarter 1997             5,997,616       5,937,616          12.18           -          60,000
Fourth Quarter 1997           49,674,649      49,177,891         100.88       71.08         496,759
                           -------------   -------------      ---------   ---------    ------------    -----------
Totals                     $ 757,108,670   $ 725,328,057      $1,493.17   $  419.31    $  7,570,540    $24,210,073
                           =============   =============      =========   =========    ============    ===========


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

**   The Per Unit Return of Capital  figures are  included in the total Per Unit
     Distribution amount in the previous column.

***  Incentive  distributions paid to the Managing General Partner for exceeding
     the  cumulative  Priority  Return  on  Mezzanine   Investments  to  Limited
     Partners.

(a)  Return of Capital  amounts  received in such  quarters were reduced by Fund
     expenses .
</TABLE>
<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, 1997 and December 31, 1996

Statements of Operations
   For the Years Ended December 31, 1997, 1996 and 1995

Statements of Changes in Net Assets
   For the Years Ended December 31, 1997, 1996 and 1995

Statements of Cash Flows
   For the Years Ended December 31, 1997, 1996 and 1995

Statements of Changes in  Partners'  Capital
   For the Years Ended December 31, 1997, 1996 and 1995

Schedule of Portfolio Investments - December 31, 1997

Notes to Financial Statements

Supplementary Schedule of Realized Gains and Losses (Schedule 1)

Supplementary Schedule of Unrealized Appreciation and Depreciation (Schedule 2)

PART III - OTHER INFORMATION

Item 10. Directors and Executive Officers of the Registrant
Item 14. Exhibits Financial Statement Schedules and Reports on Form 8-K.





<PAGE>

                       Report of Independent Accountants


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,
1997 and 1996, 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,  1997,  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, 1997 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  $35,253,000  at
December 31, 1997 (61.4% 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.  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.

     As further  discussed in Note 1, the Fund is scheduled to terminate on June
15, 1998. The Individual  General  Partners have the right to extend the term of
the Fund.

     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





March 19, 1998
<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)

<S>                                                                    <C>             <C>
                                                                           December 31,     December 31, 
                                                                               1997              1996
                                                                         ---------------   ---------------

ASSETS:
Investments - Notes 2, 8, 9
Portfolio Investments at fair value
    Managed Companies (cost $53,480 at December 31,
         1997 and $93,468 at December 31, 1996)                          $        35,227   $        86,067
    Non-Managed Companies (cost $720 at December 31,
         1997 and $9,597 at December 31, 1996)                                        26             6,183
    Temporary Investments, at amortized cost (cost $18,062 at
         December 31, 1997 and $4,040 at December 31, 1996)                       18,125             4,047
Cash                                                                                   1                10
Prepaid Loan Fees - Notes 2, 4                                                       384             1,022
Prepaid Expenses and Other Receivables                                                 6               307
Receivable for Investment Sold                                                     3,926              --
                                                                         ---------------   ---------------
TOTAL ASSETS                                                             $        57,695   $        97,636
                                                                         ===============   ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                  $           110   $           122
    Reimbursable Administrative Expenses Payable                                     116               103
    Independent General Partner Expenses Payable                                      23                23
                                                                         ---------------   ---------------
Total Liabilities                                                                    249               248
                                                                         ---------------   ---------------
Partners' Capital - Note 2
    Managing General Partner                                                         918             1,317
    Limited Partners (487,489 Units)                                              56,528            96,071
                                                                         ---------------   ---------------
Total Partners' Capital                                                           57,446            97,388
                                                                         ---------------   ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                  $        57,695   $        97,636
                                                                         ===============   ===============


                     See the Accompanying Notes to Financial Statements.

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


<S>                                                                    <C>                <C>               <C>
                                                                               For the Years Ended December 31,
                                                                         ------------    ------------    ------------
                                                                                 1997            1996            1995
                                                                         ------------    ------------    ------------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                                 $        912           1,444    $      3,804
Discount                                                                          601           1,451           1,339
Dividend & Other Income                                                        11,614             167             609
                                                                         ------------    ------------    ------------
    TOTAL INCOME                                                               13,127           3,062           5,752
                                                                         ------------    ------------    ------------
EXPENSES:
Investment Advisory Fee - Note 5                                                1,194           1,283           2,771
Fund Administration Fee - Note 6                                                  300             299           1,330
Loan Fees - Notes 2, 4                                                            700             701             738
Independent General Partners' Fees and Expenses - Note 7                          227             208             304
Legal and Professional Fees                                                       855           1,559           1,584
Reimbursable Administrative Expenses - Note 6                                     519             415             171
Insurance Expense                                                                   8               8               9

                                                                         ------------    ------------    ------------
    TOTAL EXPENSES                                                              3,803           4,473           6,907
                                                                         ------------    ------------    ------------
NET INVESTMENT INCOME (LOSS)                                                    9,324          (1,411)         (1,155)
                                                                         ------------    ------------    ------------
NET REALIZED GAIN (LOSS) ON INVESTMENTS -
     NOTE 8 AND SCHEDULE 1                                                     10,881          63,695          75,808
                                                                         ------------    ------------    ------------
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                                             (1,133)        (84,416)         (7,571)
        Nonpublic Securities                                                   (7,000)         61,098          17,492
                                                                         ------------    ------------    ------------
             Subtotal                                                          (8,133)        (23,318)          9,921
                                                                         ------------    ------------    ------------
NET INCREASE IN NET ASSETS
   RESULTING FROM OPERATIONS                                             $     12,072    $     38,966    $     84,574
                                                                         ============    ============    ============

</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)


<S>                                                                      <C>           <C>           <C>
                                                                              For the Years Ended December 31,
                                                                         -----------    -----------    -----------
                                                                                1997           1996           1995
                                                                         -----------    -----------    -----------
FROM OPERATIONS:

Net Investment Income (Loss)                                             $     9,324    $    (1,411)   $    (1,155)

Net Realized Gain on Investments                                              10,881         63,695         75,808

Net Change in Unrealized Appreciation (Depreciation) on Investments           (8,133)       (23,318)         9,921
                                                                         -----------    -----------    -----------

Net Increase in Net Assets Resulting from Operations                          12,072         38,966         84,574

Cash Distributions to Partners                                               (52,014)      (195,931)      (186,920)
                                                                         -----------    -----------    -----------

Total Decrease                                                               (39,942)      (156,965)      (102,346)

NET ASSETS:

Beginning of Period                                                           97,388        254,353        356,699
                                                                         -----------    -----------    -----------

End of Period                                                            $    57,446    $    97,388    $   254,353
                                                                         ===========    ===========    ===========


</TABLE>
                 See the Accompanying Notes to Financial Statements.

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

<S>                                                                            <C>              <C>            <C>
                                                                                   For the Years Ended December 31,
                                                                              -----------    -----------    -----------
                                                                                     1997           1996           1995
                                                                              -----------    -----------    -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest and Dividend Income                                                $    13,370    $     2,598    $     6,219
  Investment Advisory Fee                                                          (1,194)        (1,283)        (2,771)
  Fund Administration Fee                                                            (300)          (299)        (1,330)
  Legal and Professional Fees                                                        (883)        (1,393)        (1,911)
  Loan Fees and Expenses                                                              (53)           (62)          (116)
  Independent General Partners' Fees and Expenses                                    (227)          (213)          (296)
  (Purchase) Sale of Temporary Investments, Net                                   (14,021)         3,317          3,141
  Reimbursable Administrative Expenses                                               (506)          (483)          --
  Proceeds from Sale of Portfolio Company Investments                              55,819        187,705        186,596
                                                                              -----------    -----------    -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                          52,005        189,887        189,532
                                                                              -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash Distributions to Partners                                                  (52,014)      (195,931)      (186,920)
                                                                              -----------    -----------    -----------
NET CASH APPLIED TO FINANCING ACTIVITIES                                          (52,014)      (195,931)      (186,920)
                                                                              -----------    -----------    -----------
  Net Increase (Decrease) in Cash                                                      (9)        (6,044)         2,612
  Cash at Beginning of Period                                                          10          6,054          3,442
                                                                              -----------    -----------    -----------
CASH AT END OF PERIOD                                                         $         1    $        10    $     6,054
                                                                              ===========    ===========    ===========

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

Net Investment Income (Loss)                                                  $     9,324    $    (1,411)   $    (1,155)
                                                                              -----------    -----------    -----------
ADJUSTMENTS TO RECONCILE NET INVESTMENT INCOME (LOSS)
    TO NET CASH PROVIDED BY OPERATING ACTIVITIES
  (Increase) Decrease in Investments                                               34,844        123,947        116,079
  (Increase) Decrease in Receivable for Investments Sold                           (3,926)         3,377         (2,150)
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivables                                                243           (458)           466
  (Increase) Decrease in Prepaid Expenses                                             638            748            530
  Increase (Decrease) in Independent General Partner Fees Payable                    --               (5)             7
  Increase (Decrease) in Reimbursable Administrative Expenses Payable                  13            (68)           171
  Increase (Decrease) in Legal and Professional Fees Payable                          (12)            62           (224)
  Net Realized Gain on Investments                                                 10,881         63,695         75,808
                                                                              -----------    -----------    -----------
TOTAL ADJUSTMENTS                                                                  42,681        191,298        190,687
                                                                              -----------    -----------    -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                                     $    52,005    $   189,887    $   189,532
                                                                              ===========    ===========    ===========


</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
                                                                             General         Limited
                                                                             Partner         Partners           Total
                                                                         ------------    ------------    ------------
For the Twelve Months Ended December 31, 1995  
Partners' Capital at January 1, 1995                                     $      1,908    $    354,791    $    356,699
Allocation of Net Investment Loss                                                 (12)         (1,143)         (1,155)
Allocation of Net Realized Gain on Investments                                    758          75,050          75,808
Allocation of Net Change in Unrealized Depreciation                                99           9,822           9,921
Cash Distributions to Partners                                                 (1,869)       (185,051)       (186,920)
                                                                         ------------    ------------    ------------
Partners' Capital at December  31, 1995                                  $        884    $    253,469    $    254,353
                                                                         ============    ============    ============

For the Twelve Months Ended December 31, 1996
Partners' Capital at January 1, 1996                                     $        884    $    253,469    $    254,353
Allocation of Net Investment Loss                                                 (14)         (1,397)         (1,411)
Allocation of Net Realized Gain on Investments                                    637          63,058          63,695
Allocation of Net Change in Unrealized Depreciation                             1,769         (25,087)        (23,318)
Cash Distributions to Partners                                                 (1,959)       (193,972)       (195,931)
                                                                         ------------    ------------    ------------
Partners' Capital at December  31, 1996                                  $      1,317    $     96,071    $     97,388
                                                                         ============    ============    ============

For the Twelve Months Ended December 31, 1997
Partners' Capital at January 1, 1997                                     $      1,317    $     96,071    $     97,388
Allocation of Net Investment Income                                                93           9,231           9,324
Allocation of Net Realized Gain on Investments                                    109          10,772          10,881
Allocation of Net Change in Unrealized Depreciation                               (81)         (8,052)         (8,133)
Cash Distributions to Partners                                                   (520)        (51,494)        (52,014)
                                                                         ------------    ------------    ------------
Partners' Capital at December 31, 1997                                   $        918    $     56,528    $     57,446
                                                                         ============    ============    ============

</TABLE>

               See the Accompanying Notes to Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                           DECEMBER 31, 1997
                                                       (DOLLARS IN THOUSANDS)
                                                             

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

                    BEEFAMERICA, INC. - Notes 9,10,15
14,000 Shares       BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (b)(e)     09/09/88   $ 14,000 $  1,749
10,000 Shares       BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (b)(e)      09/09/88     10,000    1,251
                      $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
                      $41,997 15.5% Sr.Sub Interim Nt
                      Purchased 09/9/88                  $ 20,000
                      $80,951 15% Sub Nt
                      Purchased 09/9/88                  $ 38,928
                      Exchanged 03/29/96 for
                      Cash Proceeds                      $ 26,000
                      10% Sr Pref Stk                    $ 14,000
                      4% Jr Pref Stk                     $ 10,000
                      Realized Loss                      $ (8,928)
                      5,661.11 Shares Class A Pref. Stk
                      Purchased 04/10/91                 $ 40,050
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $(40,050)
                      51,000 Shares Common Stk
                      Purchased various                  $  2,000
                      Value at restructuring 3/29/96     $      0
                      Realized Loss                      $ (2,000)                                    ------------------------------
                      Total Net Realized Loss            $(50,978)                                    $ 24,000 $  3,000        5.62
                                                                                                      ------------------------------



              See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                             DECEMBER 31, 1997
                                                        (DOLLARS IN THOUSANDS)
                                                              (CONTINUED)
                                                                                                                   Fair         % Of
                                                                                         Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>

                    CHADWICK-MILLER, INC. - Notes 9,10,13
  15,406 Warrants   CMI Holding Corp., Preferred Stock Purchase Warrants (b)(e)            12/16/88   $ 12,916   $    -
  39,487 Warrants   CMI Holding Corp., Common Stock Purchase Warrants (b)(e)                Various      3,736        -
                      (7.5% of fully diluted common equity) (h)
                      35,161 Shares Common Stock 
                      Purchased  06/30/93                $    352
                      Sold  09/03/93                     $    352
                      Realized Gain                      $      0 
                      $5,000 Senior Note 
                      Purchased  12/16/88                $  5,000 
                      Sold  11/23/94                     $  5,000
                      Realized  Gain                     $      0
                      189,996 Shares Preferred Stock
                      192,933 Shares Common Stock 
                      100,000 Common Stock Warrants
                      Purchased Various                  $ 16,652
                      Exchanged July 15, 1996 
                      15,406  Preferred Stock Warrants
                      39,487  Common Stock Warrants      $ 16,652
                      Realized Gain                      $      0                                     ------------------------------
                      Total Realized Gain                $      0                                       16,652        -         0.00
                                                                                                      -----------------------------

                    COLE NATIONAL CORPORATION (g)
5,563 Warrants      Cole National Corporation, Common Stock Purchase Warrants(b)           09/26/90          -        -
                      (0.0% of fully diluted common equity (h)
                      assuming exercise of warrants)
                      $589 Senior Bridge Note
                      Purchased 09/25/90                 $    589
                      Sold 11/15/90                      $    589                                     ------------------------------
                      Realized Gain                      $      0                                            -        -         0.00
                                                                                                      ------------------------------
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(b)(g)                             12/28/88      3,255   14,414
                      (2.6%  of  fully  diluted  common equity) (h) 
                      $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   14,414        27.00
                                                                                                      ------------------------------

              See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                         ML-LEE ACQUISITION FUND, L.P.
                                                       SCHEDULE OF PORTFOLIO INVESTMENTS
                                                                DECEMBER 31, 1997
                                                            (DOLLARS IN THOUSANDS)
                                                                  (CONTINUED)

                                                                                                                   Fair         % Of
                                                                                         Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                    SIGNATURE BRANDS USA, INC. (a) - Notes 9,15
                    (formerly HEALTH O METER PRODUCTS, INC.
952,500 Shares      Signature Brands USA, Inc., Common Stock (b)(g)                        04/28/88   $  1,270  $ 4,048
610,553 Shares      Signature Brands USA, Inc., Common Stock (b)(g)                        08/17/94      3,282    2,595
                      (14.7% of fully diluted common equity) (h)
                      $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    6,643        12.44
                                                                                                      ------------------------------



                    STANLEY FURNITURE COMPANY, INC. (a)(c) - Notes 8, 9, 15
  400,719 Shares    Stanley Furniture Co., Inc., Common Stock(b)(f)(g)                      Various      5,021   11,170           
                      (16% of fully diluted common equity)(h)                   
                      $2,000 Loan participation
                      Purchased 03/12/92                 $  2,000
                      Repaid 04/05/93                    $  2,000
                      Realized Gain                      $      0                          
                      Purchased Various                  $ 13,973
                      Sold  11/13/96                     $ 14,664
                      Sold   12/13/96                    $  2,199
                      Realized Gain                      $  2,890                       
                      Purchased Various                  $    395
                      Sold 02/07/97                      $    756
                      Realized Gain                      $    361
                      Purchased Various                  $  9,113 
                      Sold 06/30/97                      $ 14,547
                      Realized Gain                      $  5,434
                      Purchased Various                  $  5,021
                      Sold 11/18/97                      $ 10,018  
                      Realized Gain                      $  4,997                                     ------------------------------
                      Total Net Realized Gain            $ 13,682                                        5,021   11,170        20.93
                                                                                                      ------------------------------

         


                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN MANAGED COMPANIES                                             $ 53,480  $35,227        65.99
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                               ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      DECEMBER 31, 1997
                                                  (DOLLARS IN THOUSANDS)
                                                       (CONTINUED)
                                                                                                                   Fair         % Of
                                                                                         Investment Investment    Value        Total
Shares/Warrants     Investment                                                                 Date    Cost(f) (Note 2)  Investments
<S>                 <C>                                                                    <C>         <C>       <C>          <C>
                   NON-MANAGED COMPANIES

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(b)                                    11/24/87   $    250  $     -
  1,430 Shares      Homeland Holding Corp., Common Stock(b)                                08/10/90        440        -
  1,506 Warrants    Homeland Holding Corp., Common Stock
                    Purchase Warrants (b)                                                  08/10/90          -        -
                      $5,000 15.5% Subordinated Notes
                      Purchased 11/24/87                    $5,000
                      Sold 09/15/88                         $5,075
                      Realized Gain                         $   75 
                      185,048 Shares Common Stock
                      Purchased 8/10/90                     $  440
                      Exchanged 10/2/96
                      1,430 Shares Common Stock             $  440
                      1,506 Common Stock Purchase Warrants  $    0
                      Realized Gain                         $    0                  
                      Total Realized Gain                   $   75  

                                                                                                      ------------------------------
                                                                                                           690        -         0.00
                                                                                                      ------------------------------

                    TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares       TLC Beatrice Int'l Holdings., Inc., Common Stock(b)                    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         0.05
                                                                                                      ------------------------------


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


                    TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                              720       26         0.05
                                                                                                      ==============================
                    SUMMARY OF MEZZANINE INVESTMENTS

                    Preferred Stock                                                                     24,000    3,000         5.62
                    Common Stock and Warrants                                                           30,200   32,253        60.42
                                                                                                      ------------------------------
                    TOTAL MEZZANINE INVESTMENTS                                                       $ 54,200  $35,253        66.04
                                                                                                      ==============================


See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                       DECEMBER 31, 1997
                                                    (DOLLARS IN THOUSANDS)
                                                          (CONTINUED)

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

                    COMMERCIAL PAPER

$ 10,000            American General Corp., 5.81% due 1/12/98                         12/04/97        $  9,937  $ 9,982        18.70
$  7,262            Clipper Receivable 5.97% due 1/02/98                              12/18/97           7,244    7,261        13.60
$    882            Ford Motor Credit Corp., 6.15% due 1/02/98                        12/24/97             881      882         1.66
                                                                                                      ------------------------------
                    TOTAL INVESTMENT IN COMMERCIAL PAPER                                                18,062   18,125        33.96
                                                                                                      ------------------------------
                    TOTAL TEMPORARY INVESTMENTS                                                         18,062   18,125        33.96
                                                                                                      ------------------------------
                    TOTAL INVESTMENT PORTFOLIO                                                        $ 72,262  $53,378       100.00
                                                                                                      ==============================



(a)  Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b)  Restricted non-income producing security.
(c)  Issuers of which the Fund, as of December 31, 1997,  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.
(d)  Represents original cost and excludes accretion of discount of $64 for Temporary Investments.
(e)  Non-accrual investment status.
(f)  Inclusive of receipt of payment-in-kind securities.
(g)  Publicly traded class of securities.
(h)  Percentages of Common Equity have not been audited by Price Waterhouse LLP.
</TABLE>
See the Accompanying Notes to Financial Statements.


<PAGE>
                          ML-LEE ACQUISITION FUND, L.P.
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997


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.

     The Managing General Partner,  subject to the supervision of the Individual
General  Partners,  is  responsible  for  overseeing  and  monitoring the Fund's
investments.  Mezzanine Investments, L.P. (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.

     The  Fund  will  terminate  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 such  extension  is in the best
interest  of the  Fund.  Following  such  time  periods  the Fund will have five
additional years to liquidate its remaining investments.  At the meeting held on
February 12, 1998, the Individual  General Partners indicated that it was likely
they  would  elect to  extend  the term of the Fund for an  additional  two-year
period. The Individual General Partners expressed their intention to vote on the
matter at their meeting scheduled for June 5, 1998.

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.

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.

     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, 1997.  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, 1997, the current  estimated fair value of these
investments may have changed significantly since that point in time.
<PAGE>
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, 1996, the Fund had in
its portfolio of investments $1.1 million of payment-in-kind debt securities. As
of December 31, 1997 and December  31,  1996,  the Fund had in its  portfolio of
investments  $3.7  million and $6.5  million,  respectively  of  payment-in-kind
equity securities.

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.

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 in proportion to the
Partners'  Capital  Contributions.   Profits  and  losses,  when  realized,  are
allocated  in  accordance  with  the  provisions  of the  Partnership  Agreement
summarized in Note 3.

3. Allocation of Profits and Losses

     Pursuant  to  the  Partnership   Agreement,   all  profits  from  Temporary
Investments  generally are  allocated 99% to the Limited  Partners and 1% to the
Managing  General Partner.  Profits from Mezzanine  Investments are, in general,
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  balance of 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.
<PAGE>
4.  Leverage

     The Fund entered into an amended credit  agreement,  dated as of August 13,
1991 (the "Credit  Facilities"),  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 Facilities consisted of a $100 million term
loan and a $40 million  secured  revolving  credit line. 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.  As a result of  paydowns  of the term loan the  Fund's  outstanding
balance  was  paid  in full as of  March  29,  1994.  Additionally,  the  Credit
Facilities  were reduced to $7.5 million,  all of which is available at December
31, 1997. The Credit Facilities will mature on July 31, 1998. In connection with
the  Credit  Facilities,  the Fund has  pledged  its  remaining  debt and equity
portfolio securities to its lenders.

     In connection with the Credit  Facilities,  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 amount expensed for the year ended December 31, 1997 was $637,505.

     An annual Loan  Administration Fee of $25,000 for the administration of the
     credit  facility.  The amount expensed for the year ended December 31, 1997
     was $24,932.

     An  Unused  Commitment  Fee of 1/2 of 1% per  annum of the  unused  line of
     credit.  The amount  expensed  for the year  ended  December  31,  1997 was
     $37,812.

     For the years ended  December 31, 1997,  1996 and 1995,  the Fund  incurred
     $700,249, $701,021 and $738,029, respectively, in total loan fees.

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,  1997,  1996 and  1995,  the Fund  paid  $1,193,717,
$1,282,991 and $2,770,934,  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.  Beginning  October 19, 1995, the Fund
Administration Fee is calculated at an annual fee of $300,000 plus out-of-pocket
expenses  incurred  by the Fund  Administrator,  as  described  below.  The Fund
Administration Fee is paid quarterly,  in advance.  For the years ended December
31, 1997,  1996,  and 1995,  the Fund paid  $300,000,  $299,335 and  $1,330,212,
respectively, in Fund Administration Fees.

     Beginning  October 19, 1995, in accordance with the Partnership  Agreement,
the  Fund   Administrator   is  being   reimbursed  by  the  Fund  for  100%  of
administrative  expenses incurred.  Actual out-of-pocket expenses ("reimbursable
expenses") primarily consist of printing,  audits, tax preparation and custodian
fees.  Total  out-of-pocket  expenses  incurred  by the Fund for the year  ended
December  31,  1997,  1996  and  1995  were  $519,134,   $414,544  and  $171,950
respectively.

<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, 1997,  1996 and 1995,  the Fund  incurred
$227,171, $207,827 and $303,527,  respectively, in Independent General Partners'
Fees and Expenses.

8.   Investment Transactions

     During  February  1997,  the Fund sold 31,515  shares of Stanley  Furniture
("Stanley") for $24 per share.  The Fund received total proceeds of $756,335 and
recognized a gain of $361,480.

     On June 27,  1997,  the Fund  along  with  affiliates  of the Thomas H. Lee
Company entered into a Stock Purchase  Agreement (the "Agreement") with Stanley.
Pursuant to the  Agreement,  Stanley  purchased an aggregate  750,000  shares of
Stanley  Common  Stock  from the  Selling  Stockholders  for $20 per  share.  In
connection with the sale, the Fund sold 727,344 shares and received  proceeds of
$14,546,880. The Fund recognized a gain of $5,433,911 on this transaction.

     On August 27,  1997,  the Fund  together  with certain  other  stockholders
including  affiliates  of Thomas H. Lee Company  (the  "Selling  Stockholders"),
entered  into  a  Stock  Purchase   Agreement  pursuant  to  which  the  Selling
Stockholders  agreed to sell all of the issued and  outstanding  Common Stock of
Alliance to an unrelated third party for approximately $7.8 million or $7.78 per
share (the "Transaction"). In addition, immediately prior to the consummation of
the  Transaction,  Alliance  redeemed  all  of  the  outstanding  shares  of the
Company's  Preferred  Stock,  and paid accrued but unpaid dividends with respect
thereto. Also, Alliance's outstanding indebtedness was repaid in full, including
accrued and unpaid interest. The Transaction was completed on October 3, 1997.

     As  a  result  of  these  transactions,   the  Fund  received  proceeds  of
approximately  $30.9 million or $62.75 per Unit. These proceeds are comprised of
$11.9 million for repayment of  indebtedness  (including  all accrued and unpaid
interest), and $18.9 million for the Common and Preferred Stock held by the Fund
(which includes approximately $5.5 million of preferred dividends). In addition,
the Fund's outstanding  guarantee of Alliance debt, as discribed in Note 11, was
released.  Net  Distributable  proceeds of $62.75 per Unit were  distributed  to
Limited Partners of record as of October 3, 1997.

     On November  11,  1997,  Stanley  announced  the  repurchase  of a total of
413,201 shares of Common Stock from the Fund and Affiliates of the Thomas H. Lee
Co. for $25 per share. As a result,  the Fund sold a total of 400,718 shares and
received  proceeds of $10 million or $20.34 per Unit,  which were distributed to
Limited Partners of record as of November 11, 1997.

     Pursuant to Rule 144 under the  Securities  Act of 1933,  the Fund sold its
435,895 shares of Walter  Industries Inc. Common Stock during the fourth quarter
of 1997.  The Fund received  total proceeds of $8,964,717 and realized a gain of
$88,188.

     Because  the Fund  originally  invested  in  high-yield  private  placement
securities,  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  its  risks   associated  with  its
investments in high-yield securities,  it has procedures in place to continually
monitor  its 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.

     Should bankruptcy proceedings commence,  either voluntarily or by action of
the court against a portfolio company,  the ability of the Fund to liquidate the
position or collect proceeds from the action may be delayed or limited.
<PAGE>
9.   Unrealized Appreciation and Depreciation of Investments

     For  information  please refer to the  Supplemental  Schedule of Unrealized
Appreciation and Depreciation (Schedule 2).

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 on July 1, 1993

11. Litigation

     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  (the  "Class"),  against the Fund's  Managing  General
Partner, ("MGP"), Individual General Partners, Investment Adviser and certain of
their affiliates.  The complaint alleged 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 MGP with respect to that year and sought monetary damages in
the amount of $7,554,855, together with interest, and other relief. After trial,
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  Partnership
Agreement and as a result, held the General Partners 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 MLPF&S  because they
were not  parties to the  Partnership  Agreement.  On June 13,  1996,  the Court
amended its  decision,  dismissing  ML Mezzanine,  Inc.,  the corporate  general
partner  of the  Fund's  MGP  because  it was  not a  party  to the  Partnership
Agreement.  On July 25, 1996, judgment was entered against remaining  Defendants
in the amount of $10,399,505.  The remaining Defendants filed a Notice of Appeal
on October 4, 1996. The appeal was fully briefed, and submitted to the Court for
decision.  Thereafter,  the parties agreed to settle this action with certain of
the remaining  defendants  paying $8 million to the Class. On June 25, 1997, the
Court preliminarily approved the settlement,  ordered notice to be mailed to the
Class,  and scheduled a final hearing to approve the  settlement  and plantiffs'
counsel's  application for attorney's fees, for September 15, 1997. On September
15, 1997,  the Court held a final  hearing,  at which it approved the settlement
and signed a Final Order dismissing the action, which released the class' claims
against the  defendants.  The Fund paid  litigation  expenses to the indemnified
parties based upon amounts which are deemed  reimbursable in accordance with the
indemnification  provisions  of the  Partnership  Agreement  and included  these
amounts in Legal and Professional Fees.
 <PAGE>
     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.  In its Order and  Opinion  dated
December 30, 1996, the court granted in part and denied in part the  defendants'
motion to dismiss  the second  amended  complaint  holding  that a number of new
claims and  theories  asserted  by  plaintiffs  are  dismissed  as  time-barred.
Plaintiffs have moved for reconsideration of the Court's Order. On September 30,
1997,  Plainfiff's motion was denied without  prejudice.  The plaintiff seeks an
accounting,  rescission,  rescissory  or actual  damages and  punitive  damages.
Plaintiffs  have moved to certify the case as a class  action.  Defendants  have
opposed that motion which is currently  pending before the Court. The defendants
in this  action  believe  that the claims in the second  amended  complaint  are
without merit.  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.  In the  opinion  of legal  counsel,  the  outcome of this case is not
determinable at this time. The Fund has incurred  litigation  expenses which are
recorded in Legal and Professional Fees.

     On August 2,  1996,  an action  was  commenced  against  General  Nutrition
Companies,  Inc.  ("GNC"),  its  officers,  directors  and certain of its former
shareholders,  including the Fund, in the United States  District  Court for the
Western  District  of  Pennsylvania.  Plaintiffs  assert  that GNC is liable for
violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Section
1-501(a) of the Pennsylvania  Securities Act, arising out of allegedly false and
misleading  statements  in the  prospectus  and  registration  statement for the
February 7, 1996 public  offering of GNC common  stock,  and for  violations  of
Section  10  (b)  of  the   Securities   Exchange  Act  of  1934  and  negligent
misrepresentation   arising  out  of  allegedly  false  and  misleading   public
statements  during the period from the public  offering  through  May 28,  1996.
Plaintiffs also allege that certain officers, directors and shareholders of GNC,
including the Fund, as well as the  underwriters  for the public  offering,  are
liable for certain of such  violations of the federal and state  securities laws
and/or  control  person  liability  in  connection   therewith,   and  negligent
misrepresentation. Plaintiffs seek certification of the action as a class action
purportedly  on behalf of all  persons,  other than  defendants,  who  purchased
shares of GNC common stock during the proposed class action period from February
7, 1996 through May 28, 1996. After the defendants filed a motion to dismiss the
action  in  its  entirety,  the  plaintiffs  filed  an  amended  complaint.  The
defendants  thereafter  filed a motion to dismiss the amended  complaint  in its
entirety,  which  motion has been fully  briefed and is  awaiting  action by the
Court.  The  defendants in this action  believe that the claims against them are
without merit. In the opinion of legal counsel,  the outcome of this case is not
determinable at this time.

<PAGE>
12.  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 1997, the Managing  General Partner  received cash  distributions in
the amount of $520,156 representing its 1% in the Fund.

13.  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, 1997,
the reserve balance was reduced to  approximately  $2.6 million due to follow-on
investments  in CMI Holding  Corp.,  Diet Center  Inc.,  Duro-Test  Corporation,
Signature Brands and Petco.  Additionally,  $1.4 million of the reserve has been
returned to  partners,  $2.9  million was paid to First  Chicago to pay down the
Fund's loan and approximately $300,000 has been used to fund quarterly expenses.
On February 12, 1998, the Independent  General  Partners  approved an additional
reserve of $1.65 million for Fund expenses.  This reserve was  established  from
the proceeds received from the sale of Stanley Furniture in January 1998 to fund
anticipated cash shortfalls in the future.

14. 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.  As of December  31,  1997,  the tax basis of the
Fund's assets are greater than the amounts reported in the financial  statements
by $4.9  million.  This  difference  is  primarily  attributable  to  unrealized
appreciation  and  depreciation  recorded  on  investments  which  has not  been
recognized for tax purposes.
<PAGE>

15.  Subsequent Events

     On January 8, 1998, the  Individual  General  Partners  approved the fourth
quarter 1997 cash  distribution  totaling  $18,775,734,  which  consisted of Net
Distributable  Capital  Proceeds,  after Fund expenses (of which $13,546,897 was
return of capital  from the sale of  Stanley  Furniture  and  Walter  Industries
Common  Stock)  during the quarter  ending  December 31, 1997.  The total amount
distributed  to  Limited  Partners  was  $18,587,955,  or $38.13  per Unit.  The
Managing General Partner  received  $187,779 in proportion to its 1% interest in
the Fund. The distributions were made on January 21, 1998.

     On January  6, 1998 the Fund and  affiliates  of the  Thomas H Lee  Company
including  ML-Lee   Acquisition  Fund  II,  L.P.  and  ML-Lee  Acquisition  Fund
(Retirement  Accounts) II, L.P.,  (the "Lee  Affiliates",  and together with the
Fund, the ("Selling Stockholders") sold their remaining holdings of common stock
in  Stanley.  The  common  stock of each of the  Selling  Stockholders  was sold
pursuant  to a Form S-3  Registration  Statement,  which was filed by Stanley on
December  22,  1997  and  declared  effective  by the  Securities  and  Exchange
Commission on December 23, 1997. In connection  with the sale, the Fund sold its
remaining  400,719  shares of common  stock and  received  net proceeds of $10.8
million or $27 per share. On February 12, 1998, the Independent General Partners
established  a reserve  of $1.65  million  from  these  proceeds  to pay  future
expenses of the Fund.  Net  Distributable  Capital  Proceeds  from the sale,  as
defined in the Partnership Agreement, of $9.2 million or $18.63 per Unit will be
distributed to Limited Partners of record as of January 6, 1998.

     On  February  28,  1998,  Signature  Brands  USA  and  Sunbeam  Corporation
("Sunbeam")  executed a definitive merger agreement whereby Sunbeam will acquire
all  the   outstanding   shares  of  Signature   Brands  USA  Common  Stock  for
approximately  $250  million  ($8.25 per share) by means of a tender  offer (the
"Tender Offer"),  and assume all the debt of Signature  Brands USA.  Pursuant to
the Tender Offer, which was executed on March 6, 1998, the Fund tendered all its
shares of Signature  Brands USA Common Stock and expects to receive  proceeds of
approximately $13 million. The Fund estimates that the maximum net Distributable
Capital  Proceeds  per Unit  will be  $26.19.  Any  distribution  of  these  net
Distributable   Capital   Proceeds   after  the  payment  of  expenses  and  the
establishment of reserves, as provided for in the Fund's Partnership  Agreement,
will be distributed  to the Fund's Limited  Partners of record as of the date of
the expiration of this Tender Offer,  which is scheduled to be on April 2, 1998,
unless the Tender Offer is extended.

     On March 3, 1998,  the Fund sold its remaining  investment in  BeefAmerica,
consisting of 14,000 shares Sr.  Preferred Stock and 10,000 shares Jr. Preferred
Stock (the  "Securities"),  for $1 million to Lajara II LLC, a limited Liability
Company owned by the Management of BeefAmerica  Operating Company.  The proceeds
consist of a $1 million  Promissory Note payable to the Fund on or before May 2,
1998.  The  Securities  have been pledged to secure the obligation of Lajara II,
LLC under the Promissory Note. The Fund will recognize a loss of $23 million.

<PAGE>
<TABLE>
<CAPTION>

                                   SCHEDULE 1
                          ML-LEE ACQUISITION FUND, L.P.
                SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
                      FOR THE YEAR ENDED DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)

<S>                                         <C>             <C>             <C>            <C>

                                                Number Of      Investment
SECURITY                                   Shares/Principal         Cost    Net Proceeds   Realized Gain
                                           ---------------  ------------   -------------   -------------


Stanley Furniture Company Inc. 
    Common Stock                                  31,515   $         395   $         756   $         361

Stanley Furniture Company Inc. 
    Common Stock                                 727,344           9,113          14,547           5,434

Stanley Furniture Company Inc. 
    Common Stock                                 400,718           5,021          10,019           4,998

Walter Industries Inc. 
    Common Stock                                 435,895           8,877           8,965              88
                                                           -------------   -------------   -------------

TOTAL REALIZED GAINS                                       $      23,406   $      34,287   $      10,881
                                                           =============   =============   ============= 

</TABLE>

     See Notes to Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                                   SCHEDULE 2
                          ML-LEE ACQUISITION FUND, L.P.
       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                     FOR THE PERIOD ENDED DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
<S>                                <C>          <C>     <C>           <C>        <C>          <C>         <C>         <C>
                                                               Total Unrealized
                                                                 Appreciation
                                                                (Depreciation)
                                                                      at
                                         Investment      Fair    December 31,                                                1993
SECURITY                                       Cost      Value       1997        1997       1996       1995       1994    and prior
---------------------------------------   ---------  ---------    ---------  ---------   --------   --------   -------    ---------
PUBLICLY TRADED SECURITIES

Signature Brands USA
  Common Stock*                           $   4,552  $   6,643    $   2,091  $  (1,758)  $   2,735   $   293   $ (5,291)  $   6,112

Playtex
  Common Stock*                               3,255     14,414       11,159      3,166         701       528    (10,319)     17,083

Stanley Furniture
  Common Stock*                               5,021     11,170        6,149     (5,315)     23,580    (5,351)    (9,030)      2,265
                                                                  ---------  ---------   ----------  --------  ---------   --------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                               $  19,399  $  (3,907)  $  27,016   $(4,530)  $(24,640)  $  25,460
                                                                  ---------  ---------   ---------   -------   --------   ---------

NONPUBLIC SECURITIES:

BeefAmerica Incorporated
  Jr. and Sr.Preferred Stock              $  24,000  $   3,000    $ (21,000) $  (7,000)  $ (14,000)  $    --   $     --   $      --
  Other Securities**                           --           --           --         --      90,978        --         --     (90,978)

Chadwick-Miller, Inc. 
  Common Stock Warrants*                      3,736         --       (3,736)        --      (1,929)       --         --      (1,807)
  Preferred Stock Warrants*                  12,916         --      (12,916)        --     (12,916)       --         --          --

Magellan Health Service
  Common Stock Warrants*                          4         --           (4)        --          --        --         --          (4)

SWO Holdings Corporation
  Common Stock*                                 690         --         (690)        --      (1,035)       --         --         345
                                                                  ---------   --------   ---------   -------   --------   ---------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM
  NONPUBLIC SECURITIES                                            $ (38,346) $  (7,000)  $  61,098   $    --   $     --   $ (92,444)
                                                                  ---------    -------   ---------   -------   --------   ---------

Reversal of Unrealized Depreciation
  for Investments Sold in 1997:

Celebrity
  Common Stock                            $    --    $      --      $    --    $    54   $      30   $    65   $     47    $   (196)

Walter Industries
  Common Stock                                 --           --           --      2,720         436     2,947         --      (6,103)

Reversal of Unrealized Appreciation/
  (Depreciation)for Investments
   Sold prior to 1997:                         --           --           --         --    (111,898)   11,439     33,864      66,595
                                                                    -------    -------   ---------   -------   --------   ---------

Total Unrealized Appreciation/
  (Depreciation)for Investments Sold:                             $    --    $   2,774   $(111,432)  $14,451   $ 33,911   $  60,296
                                                                  ---------    -------   ---------   -------   --------   ---------

 Net Unrealized Appreciation/(Depreciation)                       $ (18,947) $  (8,133)  $ (23,318)  $ 9,921   $  9,271   $  (6,688)
                                                                  =========    =======   =========   =======   ========   =========



*  Restricted Security
** Includes Debt and Equity Securities previously exchanged.

See Notes to Financial Statements.
</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 1997
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  Adviser (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.

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 Exhibit
           1988, given by  Registrant,              10.2 to Registrant's Current Report
           as Borrower, to The First  National      on Form 8-K filed with the Commission
           Bank of Chicago,  as Payee.              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
           between the Registrant and the           Form 8-K filed with the Commission 
           First National Bank of Chicago,          on August 26, 1991.
           as agent for 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,     Incorporated by reference to Exhibit
           dated December 1, 1995 among the         10.4.8 to Registrant's Annual Report on
           Registrant, and the First National       Form 10-K for the year ended December
           Bank of Chicago, as Agent.               31, 1995.

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 31, 1987.
           Inc.

99         Pages 15 through 57 of Prospectus        Incorporated by reference to Exhibit 99 
           dated August 12, 1987, filed pursuant    to Registrant's           
           to Rule424(b) under the Securities       Annual Report on Form 10-K 
           Act of 1933.                             year ended December 31, 1987.     
           
           

27         Financial Data Schedule for the year     Filed Herewith.
           ended December 31, 1997.

(b)      - Registrant Filed Forms 8-K with respect to the following:

               NONE

</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 1998.


                                        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, 1998                  Kevin K. Albert
                                        President, ML Mezzanine Inc.
                                        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, 1998.


              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.              Vice President and 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 1998.


                                          ML-LEE ACQUISITION FUND, L.P.

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

                                          By:      ML Mezzanine Inc.
                                                   its General Partner





Dated:  March 27, 1998                    --------------------------------
                                          Kevin K. Albert
                                          President, ML Mezzanine Inc.
                                          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, 1998.


              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.              Vice President and 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.