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, 1996

                         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,  1996,  the Fund had
outstanding  a total  of  $103.1  million  invested  in  Mezzanine  Investments,
representing  (at cost)  $93.5  million  Managed  and $9.6  million  Non-Managed
portfolio investments. As of December 31, 1996, there were no Bridge Investments
outstanding.

     REVIEW OF INVESTMENTS SOLD DURING 1996

     General Nutrition Companies, Inc. ("GNC")

     GNC is a nationwide  specialty retailer of vitamin and mineral supplements,
personal care, fitness and other health-related products.

     On  February  7,  1996 the  Securities  and  Exchange  Commission  declared
effective a Registration  Statement filed by GNC in connection with the offering
of up to 17,994,176 shares of GNC Common Stock, including 1,635,834 shares which
were  offered  pursuant  to the  underwriters'  over-allotment  option.  Of such
shares,  16,358,342 were sold by certain selling  shareholders of GNC, including
the Fund, and the 1,635,834 shares subject to the  underwriters'  over-allotment
option  were sold by GNC. In  connection  with the  offering,  the Fund sold its
entire  remaining  investment in GNC  consisting  of 4,903,766  shares of common
stock for net proceeds of $101.7  million and realized a gain of $87.9  million.
These net  distributable  proceeds of $206.61 per Unit were distributed on March
29, 1996 to Limited Partners of record as of the date of such sale.
 <PAGE>
     Petco Animal Supplies, Inc. ("Petco")

     On April 4, 1996 Petco filed a  registration  statement with the Securities
and Exchange  Commission for an offering of 5 million shares of Common Stock. Of
the 5  million  shares  offered,  2.6  million  were  offered  by Petco  and the
remaining  shares were offered by certain  current  stockholders,  including the
Fund.  The  offering was effected on April 30, 1996 and the Fund sold its entire
investment  in Petco which  consisted  of  1,472,622  shares of Common Stock and
received  net proceeds  from the sale of  $40,290,965  or $27.36 per share.  Net
distributable  proceeds of $81.82 per Unit were distributed on June 11, 1996, to
Limited Partners of record as of the date of such sale. The Fund realized a gain
of $24,445,187 on the sale.

     SFX Broadcasting, Inc.

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

     REVIEW OF INVESTMENTS IN MANAGED COMPANIES

     Alliance International Group, Inc. ("Alliance")

     Alliance  is a producer of light  gauge and  porcelain  enamel on steel for
wiring and building  surface and building product  applications.  As of December
31, 1996, the investment in Alliance is valued at cost.

     BeefAmerica, Inc. ("BeefAmerica")

     BeefAmerica is an integrated beef packing company  operating  slaughter and
fabrication  processing facilities in Nebraska. On March 29, 1996,  BeefAmerica,
entered into an agreement  whereby  BeefAmerica sold all of the capital stock of
BeefAmerica  Operating  Company,  Inc.  ("Opco"),  to  BAOC  Acquisition,   Inc.
("BAOC"),  a company owned by the President of Opco and certain other investors.
Opco was the sole operating asset of BeefAmerica.  As a result of such sale, the
Fund, as chief creditor of  BeefAmerica,  received cash proceeds of $26 million,
$10  million  in  Junior  Preferred  Stock of BAOC,  and $14  million  in Senior
Preferred  Stock of BAOC,  in exchange  for all  subordinated  notes held by the
Fund. Although a realized loss of $50.98 million was recorded, the Fund reversed
the unrealized  depreciation  totaling $90.98 million on the investment that was
recorded in prior  years.  As a result,  the Fund's  year-end  valuation of this
investment  (including the reversal of unrealized  depreciation from the sale of
the  securities)  for the year  ended  December  31,  1996  reflects  total  net
unrealized  appreciation of approximately $76.9 million,  bringing the aggregate
net unrealized  depreciation to  approximately  $14 million through December 31,
1996.

     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, 1996, the Fund sold 5,769 shares of Celebrity, Inc. Common
Stock for $75,000. Based upon the closing market price at December 31, 1996, the
Fund has recorded  $30,000 of unrealized  appreciation  on its remaining  equity
holding in  Celebrity,  Inc. for the year ended  December  31, 1996.  The Fund's
year-end valuation reflects an aggregate net unrealized  depreciation of $54,000
through 1996.

     Chadwick-Miller, Inc. ("CMI")

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

     In connection with the financial restructuring on November 23, 1994, of CMI
and its holding company,  CMI Holding Corp., the Fund's $5 million 14.75% Senior
Note was redeemed.  The net proceeds  were $5 million,  of which $3.1 million of
such  proceeds  were  classified  as  restricted  cash  and held in  escrow.  In
connection with an additional financial restructuring of Chadwick Miller in July
1996,  the Fund received all proceeds  held in escrow plus accrued  interest and
exchanged all Common and Preferred Stock and Common Stock Purchase Warrants held
for  39,487 new Common  Stock  Purchase  Warrants  and  15,406  Preferred  Stock
Purchase Warrants. No gain or loss was recognized on the transaction. The Fund's
year-end  valuation of this investment  reflects net unrealized  depreciation of
$14.8 million for the year ended  December 31, 1996,  bringing the aggregate net
unrealized  depreciation to  approximately  $16.6 million  through  December 31,
1996.
<PAGE>
     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, 1996,  operates three
separate retail subsidiaries:  Cole Vision,  Things Remembered and Cole Key. The
investment in Cole is valued at cost as of December 31, 1996.

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

     Health o meter  is a  manufacturer  of a  comprehensive  line of  consumer,
medical,  office and food service scales and equipment  under the Health o meter
and Pelouze brand names, as well as related  measuring  instruments and personal
care  products.  Mr. Coffee,  a wholly-owned  subsidiary of Health o meter and a
manufacturer  of  automatic  drip  coffee  makers  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.

     As of December 31, 1996, the Fund holds 1,563,053  shares of Health o meter
common stock which represents 14.7% of the outstanding common equity.

     Based upon the closing  price at December 31, 1996,  the Fund  recorded net
unrealized  appreciation  of $2.7 million on its equity  investment  in Health o
meter for the year ended  December 31, 1996.  The Fund's  year-end  valuation of
this  investment  reflects an  aggregate  of  approximately  $3.8 million in net
unrealized appreciation through December 31, 1996.

     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, 1996,  the Fund
recorded  approximately  $701,000 of net unrealized  appreciation in 1996 on its
equity  holdings in Playtex.  The Fund's  year-end  valuation of this investment
reflects  an  aggregate  of   approximately   $8.0  million  of  net  unrealized
appreciation through December 31, 1996.

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

     Stanley Furniture designs,  manufactures and markets furniture products. On
November 13, 1996,  Stanley  Furniture  completed a public offering of 1,000,000
shares of its common  stock at a price of $16 per share.  These shares were sold
by the Fund and certain  affliates of the Thomas H. Lee Company.  Following  the
offering,  Stanley  purchased  a  total  of  150,000  shares  from  the  selling
stockholders  including the Fund at the same price per share.  Pursuant to these
transactions,  the Fund sold a total of 1,115,256  shares of its Stanley  common
stock for $16.9 million or $15.12 per share.  The Fund recognized a gain of $2.8
million on the transaction.  Net distributable  proceeds of $34.24 per Unit were
distributed  on December 23, 1996 to Limited  Partners of record as of the dates
of such sales.

     Based upon the closing  market  price at December  31,  1996,  the Fund has
recorded net unrealized  appreciation for 1996 of approximately $23.6 million on
its  remaining  equity  holdings  in  Stanley  Furniture.  The  Fund's  year-end
valuation  of this  investment  reflects an  aggregate  of  approximately  $11.5
million net unrealized appreciation through December 31, 1996.

     During February 1997, the Fund sold an additional  31,515 shares of Stanley
Common Stock  pursuant to the provisions of Rule 144 under the Securities Act of
1933, as amended.  Total proceeds from the sale were approximately  $756,335. As
of March 20, 1997, the Fund continues to hold 1,528,781 shares of Stanley Common
Stock.
<PAGE>
     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.

     Walter Industries, Inc. (formerly Hillsborough Holdings Corporation)

     Walter  Industries Inc.  offers a diversified  line of products and related
services   for   eight   broad   business   areas    including    home-building,
mortgage-related  financing,  and building and  industrial  products.  In March,
1995,  the  bankruptcy  court  judge  confirmed  the  reorganization   plan  for
Hillsborough  Holding  Corporation,  which  emerged  from  bankruptcy  as Walter
Industries,  Inc.  Based upon the closing market price at December 31, 1996, the
Fund recorded $436,000 of net unrealized appreciation on its equity holdings for
the year ended  December 31, 1996.  This  investment  reflects an aggregate  net
unrealized depreciation of $2.7 million through December 31, 1996.

     SWO Holdings Corporation

     SWO  Holdings  Corporation  is  an  operator  of  supermarkets  located  in
Oklahoma, southern Kansas and Amarillo, Texas. On October 2, 1996, pursuant to a
Joint  Plan  of  Reorganization  of  Homeland  Holding  Corporation   ("Homeland
Holding")  effective  June 13, 1996,  the Fund  exchanged the 185,048  shares of
Homeland  Holding common stock and received 1,430 shares of new Homeland Holding
common  stock and 1,506  common  stock  purchase  warrants.  No gain or loss was
recognized on the transaction. The Fund's valuation reflects $1.0 million of net
unrealized  depreciation for the year ended December 31, 1996,  bringing the net
aggregate unrealized depreciation to $690,000 through December 31, 1996.


     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, 1996.

Competition

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

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

Item 2.  Properties

     The Fund does not own or lease any physical properties.

Item 3.  Legal Proceedings

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was  denied.  Thereafter,  Deloitte  &  Touche  filed a  petition  for a writ of
Certiorari with South Carolina Supreme Court,  which was granted.  A decision by
the South Carolina Supreme Court is expected in 1997.

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors in interest,  against the Fund's Managing General  Partner,  ("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 have filed a Notice of
Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997.
The Fund may be obligated to indemnity and advance litigation expenses to one or
more of the  defendants  under the terms and  conditions  of  various  indemnity
provisions  of the Fund's  Partnership  Agreement  and separate  indemnification
agreements. The Fund has advanced litigation expenses to the indemnified parties
based  upon  amounts  which  are  deemed  reimbursable  in  accordance  with the
indemnification   provisions  and  has  included  these  amounts  in  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  defandants'
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.  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 and have moved to dismiss them.  Whether or not the
plaintiff  prevails  on any  remaining  claims,  the  Fund may be  obligated  to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity  provisions in the Fund's  Partnership
Agreement  and  separate  indemnification  agreements,  and the  amounts of such
indemnification and expenses could be material. In the opinion of legal council,
the outcome of this case is not determinable at this time. The Fund has incurred
litigation expenses which are recorded in 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.  The  defendants  filed a motion to dismiss the
action  in its  entirety  on  December  2,  1996,  which  motion is still in its
briefing  stages.  The defendants in this action believe that the claims against
them are without  merit.  In the opinion of legal  council,  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, 1996.
<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, 1997,  the last
effective  date of transfer  (as  described  below),  was 36,542.  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.

     Beginning  with  the  December  1994  client  account  statements,   MLPF&S
implemented   new   guidelines  for  providing   estimated   values  of  limited
partnerships and other direct investments reported on client account statements.
As a result,  MLPF&S no longer reports the general partner's estimate of limited
partnership net asset value to Unit holders. Pursuant to such MLPF&S guidelines,
estimated  values for limited  partnership  interests  originally sold by MLPF&S
(such as the  Fund's  Units)  will be  provided  two times per year to MLPF&S by
independent  services.  These  estimated  values will be based on financial  and
other information available to the independent services on the prior August 15th
for  reporting on December  year-end  client  account  statements  and month-end
account  statements  through  May  of the  following  year,  and on  information
available to the services on March 31st for  reporting on June through  November
MLPF&S client  account  statements of the same year.  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, 1996    December 31, 1995  December 31, 1994   December 31, 1993   December 31, 1992
Schedule
  Selected Financial Data

TOTAL FUND INFORMATION:

Net Investment Income (Loss)           $ (1,411,814)      $ (1,155,421)        $  9,305,007     $    125,500        $    13,891,693

Net Realized Gains (Losses) on
  Investments                            63,695,316         75,808,138          (37,008,074)      69,148,273            (15,434,983)
Net Change in Unrealized
  Appreciation(Depreciation) on
  Investments                           (23,317,903)         9,920,766            9,271,721       91,162,444             16,629,394

Cash Distributions to Partners    (a)   195,931,182        186,920,065           43,760,745       56,612,752             24,010,059

Net Assets                               97,387,831        254,353,413          356,699,995      418,892,086            315,068,621
Cost of Mezzanine Investments           103,063,947        223,694,546          336,632,272      387,857,896            471,148,771
Total Assets                             97,635,860        254,776,082          357,777,636      431,723,973            382,150,325
Outstanding Loan Payable                         --                 --                   --        9,594,004             62,235,603

PER UNIT OF LIMITED PARTNERSHIP
INTEREST:
Investment Income                      $       6.21       $      11.68         $      37.10     $      21.65        $         57.75
Expenses                                      (9.08)            (14.03)              (18.20)          (21.39)                (29.53)
                                       ------------       ------------         ------------     ------------       ----------------
Net Investment Income (Loss)                  (2.87)             (2.35)               18.90              .26                  28.22
                                       ============       ============         ============     ============       ================
Net Realized Gains (Losses) on
  Investments                          $     129.35       $     153.95        $      (75.16)    $     140.43        $        (31.35)

Net Change in Unrealized
  Appreciation (Depreciation)                (51.46)             20.15                18.83           185.13                  33.77

Cash Distributions              (a)          397.90             379.60                88.87           114.97                  48.76

Net Asset Value                              197.07             519.95               727.79           854.10                 643.25

</TABLE>

(a)      Includes  $72,697,537 or $147.70 per Limited Partnership Unit return of
         capital  from the  sales  of Mezzanine Investments

         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,  1996,  the Fund had a total of (at cost)  $103,063,947
(including $1,122,216 of payment-in-kind notes and $6,485,801 of payment-in-kind
equity) invested in Mezzanine Investments,  representing $93,467,506 Managed and
$9,596,443 Non-Managed portfolio investments. These investments were financed by
net  offering  proceeds  and debt  financing.  This  represents  a $120  million
decrease versus the total at December 31, 1995 of $223,694,546.  The decrease in
gross assets is due to sales and  redemptions of the Fund's  investments  during
1996. The Fund's Mezzanine  Investments consist of high-yield  subordinated debt
and/or  preferred  stock linked with an equity  participation  in middle  market
companies  typically  issued in private  placement  transactions and are usually
subject  to  restrictions  on the  transfer  or  sale of the  security,  thereby
limiting their liquidity.  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 ("First
Chicago").  The new 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).  The Fund had pledged
substantially  all of its securities to secure repayment of the Credit Facility.
The  agreement  generally  provides for mandatory  prepayments,  and a permanent
reduction in the Credit  Facility,  equal to the lesser of cost or cash proceeds
in the event of the sale or other cash disposition of Mezzanine Investments.

     On  October  29,  1993,  the Fund  amended  its Credit  Facility  Agreement
enabling the Fund to make  prepayments  of the term loan at any time and without
any  corresponding  reduction  to the  revolving  credit  line.  As a result  of
paydowns of the term loan, 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 31,
1997, the Fund had the entire $7.5 million credit line available.

     The Fund is now in its tenth year of operation.  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,
Health o meter and Petco,  along with a  distribution  to partners in the second
quarter of 1993 of  $424,264  and the first  quarter of 1997 of $1  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.  The Fund's  reserve  balance as of
March  20,  1997 was  approximately  $3.1  million  which has been  invested  in
temporary  investments.  As of  the  last  meeting  of the  Independent  General
Partners on February 25, 1997, the  Independent  General  Partners have approved
retention of the reserve at its current level.
<PAGE>
Investment in High-Yield Securities

     The Fund  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.  Most of these  securities are
subject to resale restrictions and have no quoted market price.

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

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

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

Results of Operations

Investment Income and Expenses

     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.  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.

<PAGE>
     For the same period in 1994, total investment  income earned on investments
was $18,265,190 of which  $17,764,759 was earned from Mezzanine  Investments and
$500,431 was earned from Temporary Investments.

     For the year ended December 31, 1996, the Fund had net investment loss from
operations of $1,411,814 as compared to a net investment  loss of $1,155,421 and
net  investment  income of  $9,305,007  for the same  periods  in 1995 and 1994,
respectively.  The decrease in net investment income for the year ended December
31,  1996  compared  to the year ended  December  31,  1995 is the result of the
decrease in interest income  generated from debt investments held by the Fund at
December 31, 1996.  During the twelve month period ending  December 31, 1996 the
Fund held one security that generated interest income. However, the reduction in
interest  income  during  1996  was  partially  offset  by a  reduction  of Fund
expenses;  primarily  Investment  Advisory Fees and Fund Administration Fees and
Expenses.

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

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

     The Investment Adviser and Fund Administrator receive their compensation on
a quarterly  basis.  The total  Investment  Advisory Fee paid to the  Investment
Adviser for the year ended  December  31,  1996 was  $1,282,991,  compared  with
$2,770,934  for the year ended  December  31, 1995 and  $3,652,538  for the year
ended December 31, 1994. 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 1996 as  compared to 1995 and 1994  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, 1996, 1995 and 1994, legal and  professional  fees were $1,559,223,
$1,584,381 and $2,338,418, 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, 1996, 1995 and 1994 were $299,335, $1,330,212 and $1,843,910,
respectively. Beginning October 19, 1995, the Fund Administration Fee changed to
an annual fee of $300,000,  plus 100% of actual out-of-pocket  expenses incurred
by the Fund  Administrator,  as noted below.  For the 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, in accordance with Partnership  Agreement,  the
Fund Administrator is being reimbursed by the Fund for 100% of the out-of-pocket
expenses  incurred.  Total  out-of-pocket  expenses  incurred  by the Fund  were
$414,544 for the year ended December 31, 1996. 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, 1996,  1995 and 1994 totaled  $701,021,  $738,029,  and
$772,593,  respectively.  This decrease in 1996 as compared to the 1995 and 1994
loan fees is the result of reductions in the Credit Facility.

<PAGE>
Net Assets

     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.

     The  Fund's  net  assets  increased  by  $62,192,091  during the year ended
December 31, 1994 due to additional net unrealized  appreciation  of $9,271,721,
net realized  losses of  $37,008,074  and net  investment  income of  $9,305,007
partially offset by cash distributions to partners of $43,760,745 ($4,046,615 of
the of cash  distributions  distributed  in 1993 was return of capital  from the
sales of portfolio investments).

Unrealized Appreciation and Depreciation on Investments

     For the  year  ended  December  31,  1996,  the  Fund  recorded  total  net
unrealized depreciation of $23.3 million, of which $111.9 million was a reversal
of net unrealized  appreciation for investments sold during 1996.  Approximately
$27.5 million recorded in 1996 related to net unrealized  appreciation  recorded
in the market value of publicly  traded  securities held by the Fund at December
31, 1996.  This  compares to a net  unrealized  appreciation  of $9.9 million of
which $11.9 million was related to net unrealized  depreciation  in market value
of publicly  traded/underlying  publicly  traded  securities held by the Fund at
December 31, 1995.  For the year ended  December 31, 1994, the Fund recorded net
unrealized  appreciation  of $9.3 million of which $39.2  million was related to
net  depreciation  in market  value of publicly  traded  securities.  The Fund's
cumulative  net  unrealized  depreciation  on  investments  at December 31, 1996
totaled $10.8 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.

     Approximately  62% of the  Fund's  investments  (at cost) are  invested  in
private placement securities for which there are no ascertainable market values.
Although  the Managing  General  Partner and  Investment  Adviser use their best
judgment in estimating the fair value of these  investments,  there are inherent
limitations in any estimation  technique.  Therefore,  the fair value  estimates
presented  herein are not  necessarily  indicative  of the amount which the Fund
could realize in a current transaction.

     The  information   presented  herein  is  based  on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1996.  Although the Managing General Partner and Investment  Adviser are not
aware of any factors not disclosed  herein that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  since  that  time;  and the  current  estimated  fair  value  of these
investments may have changed significantly since that point in time.

     The Fund's  valuation  of the common  stock of  Celebrity,  Inc.,  Health o
meter,  Playtex,  Stanley Furniture and Walter Industries  reflect their closing
market price at December 31, 1996.
<PAGE>
     The Health o meter,  Playtex and Stanley  Furniture  securities held by the
Fund are restricted  securities  under the Securities and Exchange  Commission's
Rule 144 and can only be sold under that rule, in a registered  public offering,
or pursuant to an  exemption  from the  registration  requirement.  In addition,
resale in some cases is restricted by lockup or other  agreements.  The Fund may
be considered an affiliate of Health o meter and Stanley  Furniture  pursuant to
Rule 144, under the securities act of 1933 and therefore, any resale of Health o
meter or Stanley  Furniture  securities under Rule 144, is limited by the volume
limitations in that rule.  Accordingly,  the values referred to in the financial
statements for the Health o meter, 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, 1996 were
$63,695,316  compared to a net realized  gain of  $75,808,174  in 1995 and a net
realized loss of $37,008,074 for 1994.

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

Cash Distributions

     On February 3, 1997, the Individual  General  Partners  approved the fourth
quarter 1996 cash distribution totaling $650,009,  which consisted of $92,310 of
net investment income from Temporary Investments,  $4,058 return of capital from
the  sale of  Mezzanine  Investments,  $1  million  return  of the  Reserve  for
Follow-On-Investments,  which was reduced to pay Fund expenses of $446,359.  The
total amount  distributed to Limited  Partners was $643,485,  or $1.32 per Unit.
The Managing General Partner received $6,524 in proportion to its 1% interest in
the Fund. The distributions were made on February 14, 1997.
<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              -
GNC Distribution on
  August 14, 1995            114,190,626     113,048,699         231.90       59.86       1,141,927              -
Third Quarter 1995               590,917         584,987           1.20         .75           5,930              -
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              - 
                           -------------   -------------      ---------   ---------    ------------    -----------
Totals                     $ 686,969,326   $ 655,890,123      $1,350.73   $  329.32    $  6,869,130    $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)   Per Unit Return of Capital  amounts  reported, for the fourth  quarter 1995,
      the second quarter 1996 and the fourth  quarter 1996,  respectively,  were
      reduced by $2.71 per Unit, $.71 per Unit and $.72 per Unit, respectively, to pay
      Fund expenses during such quarters.
</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, 1996 and December 31, 1995

Statements of Operations
   For the Years Ended December 31, 1996, 1995 and 1994

Statements of Changes in Net Assets
   For the Years Ended December 31, 1996, 1995 and 1994

Statements of Cash Flows
   For the Years Ended December 31, 1996, 1995 and 1994

Statements of Changes in Partners' Capital
   For the Years Ended December 31, 1996, 1995 and 1994

Schedule of Portfolio Investments - December 31, 1996

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,
1996 and 1995, 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,  1996,  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, 1996 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  $92,228,926  at
December 31, 1996 (94.7% of net assets), whose values have been estimated by the
Managing  General  Partner and the Investment  Adviser (with the approval of the
Independent  General  Partners) in the absence of readily  ascertainable  market
values,  as further described in Note 2. We have reviewed the procedures used by
the Managing  General  Partner and the  Investment  Adviser in arriving at their
estimate  of value and have  inspected  underlying  documentation,  and,  in the
circumstances,  we believe the procedures  are reasonable and the  documentation
appropriate.  However,  those estimated values may differ significantly from the
values that would have been used had a ready market for the securities  existed,
and the differences could be material to the financial statements.

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


PRICE WATERHOUSE LLP
New York, New York

March 20, 1997
<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
             STATEMENTS OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
                             (DOLLARS IN THOUSANDS)

<S>                                                                            <C>                   <C>
                                                                              December 31, 1996       December 31, 1995
                                                                              -----------------       -----------------

ASSETS:
Investments - Notes 2, 8, 9
  Portfolio Investments at fair value
    Managed Companies (amortized cost $93,468
         at December 31, 1996 and $214,099 at December 31, 1995)                $        86,067         $       229,416
    Non-Managed Companies (amortized cost $9,597
         at December 31, 1996 and at December 31, 1995)                                   6,183                   6,782
    Temporary Investments, at amortized cost (cost $4,040 at
         December 31, 1996 and $7,357 at December 31, 1995)                               4,047                   7,370
Cash (of which $6,049 was restricted at December 31, 1995) - Note 8                          10                   6,054
Prepaid Loan Fees - Notes 2, 4                                                            1,022                   1,661
Prepaid Expenses and Other Receivables                                                      307                     116
Receivable for Investments Sold                                                               -                   3,377
                                                                                ---------------         ---------------
TOTAL ASSETS                                                                    $        97,636         $       254,776
                                                                                ===============         ===============

LIABILITIES AND PARTNERS' CAPITAL:

Liabilities
    Legal and Professional Fees Payable                                         $           122         $            60
    Reimbursable Administrative Expenses Payable                                            103                     171
    Independent General Partner Expenses Payable                                             23                      28
    Deferred Interest Income - Note 2                                                         -                     164
                                                                                ---------------         ---------------
Total Liabilities                                                                           248                     423
                                                                                ---------------         ---------------
Partners' Capital - Note 3
    Managing General Partner                                                              1,317                     884
    Limited Partners (487,489 Units)                                                     96,071                 253,469
                                                                                ---------------         ---------------
Total Partners' Capital                                                                  97,388                 254,353
                                                                                ---------------         ---------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL                                         $        97,636         $       254,776
                                                                                ===============         ===============


</TABLE>

              See the Accompanying Notes to Financial Statements.


<PAGE>


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

                                                                     For the Years Ended December 31,
<S>                                                          <C>                <C>               <C>
                                                                 1996                1995              1994
                                                               --------           --------           --------
INVESTMENT INCOME - Notes 2, 8, 10:
Interest                                                       $  1,444           $  3,804           $ 14,683
Discount                                                          1,451              1,339                498
Dividend & Other Income                                             167                609              3,084
                                                               --------           --------           --------
    TOTAL INCOME                                                  3,062              5,752             18,265
                                                               --------           --------           --------
EXPENSES:
Investment Advisory Fee - Note 5                                  1,283              2,771              3,652
Fund Administration Fee - Note 6                                    299              1,330              1,844
Reimbursable Administrative Expenses - Note 6                       415                171               --
Loan Fees - Notes 2, 4                                              701                738                773
Independent General Partners' Fees and Expenses - Note 7            208                304                285
Legal and Professional Fees                                       1,559              1,584              2,338
Insurance Expense                                                     8                  9                 10
Interest Expense                                                     --                 --                 58
                                                               --------           --------           --------
    TOTAL EXPENSES                                                4,473              6,907              8,960
                                                               --------           --------           --------
NET INVESTMENT INCOME (LOSS)                                     (1,411)            (1,155)             9,305
NET REALIZED GAIN (LOSS) ON INVESTMENTS -                      --------           --------           --------
     NOTE 8 AND SCHEDULE 1                                       63,695             75,808            (37,008)
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)           --------           --------           --------
     ON INVESTMENTS - NOTE 9 AND SCHEDULE 2
        Publicly Traded Securities                              (84,416)            (7,571)           (39,245)
        Nonpublic Securities                                     61,098             17,492             48,516
                                                               --------           --------           --------
             Subtotal                                           (23,318)             9,921              9,271
                                                               --------           --------           --------
NET INCREASE (DECREASE) IN NET ASSETS
   RESULTING FROM OPERATIONS                                   $ 38,966           $ 84,574           $(18,432)
                                                               ========           ========           ========

</TABLE>



                  See the Accompanying Notes to Financial Statements.


<PAGE>


<TABLE>
<CAPTION>

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

                                                                     For the Years Ended December 31,
  <S>                                                      <C>                 <C>                 <C>
                                                               1996                1995                1994
                                                            ---------           ---------           ---------
 FROM OPERATIONS:
Net Investment Income (Loss)                                $  (1,411)          $  (1,155)          $   9,305
Net Realized Gain (Loss) on Investments                        63,695              75,808             (37,008)
Net Change in Unrealized Appreciation (Depreciation)
  on Investments                                              (23,318)              9,921               9,271
                                                            ---------           ---------           ---------
Net Increase (Decrease) in Net Assets Resulting
  from Operations                                              38,966              84,574             (18,432)
Cash Distributions to Partners                               (195,931)           (186,920)            (43,761)
                                                            ---------           ---------           ---------
Total Increase (Decrease)                                    (156,965)           (102,346)            (62,193)
NET ASSETS:
Beginning of Period                                           254,353             356,699             418,892
                                                            ---------           ---------           ---------
End of Period                                               $  97,388           $ 254,353           $ 356,699
                                                            =========           =========           =========


</TABLE>

                 See the Accompanying Notes to Financial Statements.

<PAGE>


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

                                                                                       For the Years Ended December 31,
<S>                                                                            <C>              <C>            <C>

Increase (Decrease) in Cash and Cash Equivalents                                   1996             1995               1994
                                                                                ---------        ---------        ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Interest, Dividends and Discount Income                                       $   2,598        $   6,219        $  11,098
  Investment Advisory Fee                                                          (1,283)          (2,771)          (3,652)
  Fund Administration Fee                                                            (299)          (1,330)          (1,844)
  Reimbursable Administrative Expenses                                               (483)              --               --
  Legal and Professional Fees                                                      (1,393)          (1,911)          (2,181)
  Loan Fees and Expenses                                                              (62)            (116)             (73)
  Independent General Partners' Fees and Expenses                                    (213)            (296)            (294)
  (Purchase) Sale of Temporary Investments, Net                                     3,317            3,141           20,643
  Proceeds from Sale of Portfolio Company Investments                             187,705          186,596           39,502
  Purchase of Portfolio Company Investments                                            --               --           (6,344)
  Interest Expense                                                                     --               --              (58)
                                                                                ---------        ---------        ---------
    Net Cash Provided by Operating Activities                                     189,887          189,532           56,797
                                                                                ---------        ---------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of Borrowings, Net                                                       --                --           (9,594)
  Cash Distributions to Partners                                                 (195,931)        (186,920)         (43,761)
                                                                                ---------        ---------        ---------
    Net Cash Applied to Financing Activities                                     (195,931)        (186,920)         (53,355)
                                                                                ---------        ---------        ---------
  Net Increase (Decrease) in Cash                                                  (6,044)           2,612            3,442
  Cash at Beginning of Period                                                       6,054            3,442               --
                                                                                ---------        ---------        ---------
   Cash at End of Period                                                        $      10        $   6,054        $   3,442
                                                                                =========        =========        =========


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


Net Investment Income (Loss)                                                    $  (1,411)       $  (1,155)       $   9,305
                                                                                ---------        ---------        ---------
Adjustments to Reconcile Net Investment Income (Loss)
    to Net Cash Provided by Operating Activities:
  Decrease in Investments                                                         123,947          116,079           79,085
  (Increase) Decrease in Receivable for Investments Sold                            3,377           (2,150)          13,781
  (Increase) Decrease in Accrued Interest,
     Dividend and Discount Receivables                                               (458)             466           (7,167)
  Decrease in Prepaid Expenses                                                        748              530              684
  Increase (Decrease) in Independent General Partner Fees Payable                      (5)               7                3
  Increase (Decrease) in Reimbursable Administrative Expenses Payable                 (68)             171             --
  Increase (Decrease) in Legal and Professional Fees Payable                           62             (224)             171
  Net Realized Gain (Loss) on Investments                                          63,695           75,808          (37,008)
  Decrease in Option Payable                                                           --               --           (2,057)
                                                                                ---------        ---------        ---------
Total Adjustments                                                                 191,298          190,687           47,492
                                                                                ---------        ---------        ---------
Net Cash Provided by Operating Activities                                       $ 189,887        $ 189,532        $  56,797
                                                                                =========        =========        =========

</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, 1994
Partners' Capital at January 1, 1994
Allocation of Net Investment Income                        $        93        $     9,212    $     9,305
Allocation of Net Realized Loss on Investments                    (370)           (36,638)       (37,008)
Allocation of Net Change in Unrealized Appreciation                 93              9,178          9,271
Cash Distributions to Partners                                    (438)           (43,323)       (43,761)
                                                           -----------        -----------    -----------
Partners' Capital at December 31, 1994                     $     1,908        $   354,791    $   356,699
                                                           ===========        ===========    ===========

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 Appreciation                 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 - Note 3
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
                                                           ===========         ==========    ===========


</TABLE>

               See the Accompanying Notes to Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
                                                     ML-LEE ACQUISITION FUND, L.P.
                                                   SCHEDULE OF PORTFOLIO INVESTMENTS
                                                         DECEMBER 31, 1996
                                                       (DOLLARS IN THOUSANDS)

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

                    ALLIANCE INTERNATIONAL GROUP, INC. (a)(e) - Note 11
$10,810             Alliance International Group, Sub. Note 10% due 12/31/97(c)            12/31/87   $10,810    $10,810
$267                Alliance International Group, Def. Int. Note 10% due 03/30/97(c)(h)    03/31/93       267        267
$276                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    06/30/93       276        276
$286                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    09/30/93       286        286
$293                Alliance International Group, Def. Int. Note 10% due 12/31/97(c)(h)    12/31/93       293        293
5,016 Shares        Alliance International Group, Cumulative Redeemable Preferred Stock(d) 04/22/91       502        502
110,000 Shares      Alliance International Group, Cumulative Preferred Stock(d)(h)         12/31/92    11,000     11,000
250,800 Shares      Alliance International Group, Common Stock(d)                          12/31/87     1,951      1,951
785,542.64 Warrants Alliance International Group, Common Stock Purchase Warrants(d)        various          0          0(i)
                     (52.5% of fully diluted common equity assuming exercise
                       of warrants) (k)
                      19,200 Shares Common Stock
                      Purchased 12/31/87                 $149
                      Sold  01/30/89 - 9,600 Shares      $107
                      Sold  01/02/90 - 9,600 Shares      $147                                          ---------------------------- 
                      Realized Gain                      $105                                          25,385     25,385      26.36
                                                                                                       ---------------------------- 

                   BEEFAMERICA, INC. (a) (e) - Notes 8,9
$14,000            BAOC Acquisition, Inc. Sr. Preferred Stock 10% due 04/01/01 (c)(g)      09/09/88    14,000      5,800
$10,000            BAOC Acquisition, Inc. Jr. Preferred Stock 4% due 04/01/01 (c)(g)       09/09/88    10,000      4,200
                      $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)
                      5661.11 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     10,000      10.39
                                                                                                       ---------------------------- 

            

                 See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)

 
  Principal                                                                                                   Fair         % Of
   Amount                                                                     Investment    Investment        Value        Total
Shares/Warrants       Investment                                                 Date         Cost (f)       (Note 2)   Investments
<S>             <C>                                                          <C>           <C>             <C>           <C>
                  CELEBRITY, INC. - Note 9
 5,770 Shares     Celebrity, Inc. Common Stock(b)(j)                           06/16/92        $    75        $   21
                    (0.2% of fully diluted common equity)(k)
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/29/93                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/19/94                         $    75
                    Realized  Gain                        $     0
                    5,769  Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 09/19/95                         $    75
                    Realized Gain                         $     0
                    5,769 Shares of Common Stock
                    Purchased 06/16/92                    $    75
                    Sold 9/21/96                          $    75
                    Realized Gain                         $     0                                ---------------------------------
                    Total Realized Gain                   $     0                                   75            21          0.02
                                                                                                 --------------------------------- 


                   CHADWICK-MILLER, INC. (a)(e) - Notes 8,9,10
  15,406 Warrants  CMI Holding Corp.,
                    Preferred Stock Purchase Warrants (d)(h)                   12/16/88         12,916             -
  39,487 Warrants  CMI Holding Corp., Common Stock Purchase Warrants (d)        Various          3,736             -
                    (7.5% of fully diluted common equity)(k)
                    35,161 Shares Common Stock
                    Purchased  06/30/93                   $   352
                    Sold 09/03/93                         $   352
                    Realized Gain                         $     0
                    $5,000,000 Senior Note
                    Purchased  12/16/88                   $ 5,000
                    Sold  11/23/94                        $ 5,000
                    Realized Gain                         $     0
                    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
                                                                                                ----------------------------------

               See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)


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


                  HEALTH O METER PRODUCTS, INC. (a)  Note 9
952,500 Shares    Health o meter Products, Inc., Common Stock (d)(j)               04/28/88      1,270     5,120
610,553 Shares    Health o meter Products, Inc., Common Stock (d)(j)               08/17/94      3,282     3,281
                    (14.7% of fully diluted common equity)(k)
                    $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     8,401      8.72
                                                                                                 -------------------------



               See the Accompanying Notes to Financial Statements.

</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                          ML-LEE ACQUISITION FUND, L.P.
                        SCHEDULE OF PORTFOLIO INVESTMENTS
                                DECEMBER 31, 1996
                             (DOLLARS IN THOUSANDS)


  Principal                                                                                              Fair      % Of
   Amount                                                                     Investment   Investment    Value      Total
Shares/Warrants         Investment                                               Date        Cost (f)   (Note 2)   Investments
<S>                <C>                                                         <C>          <C>        <C>         <C>
                    PLAYTEX PRODUCTS, INC. (a) - Note 9
1,406,204 Shares    Playtex Products, Inc., Common Stock(d)(j)                  12/28/88   $  3,255     $11,249
                      (2.6%  of  fully  diluted  common equity) (k)
                      $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      11,249           11.69
                                                                                          -------------------------------------

                    STANLEY FURNITURE COMPANY, INC. (a)(e) - Notes 8, 9, 16
1,560,296 Shares    Stanley Furniture Co., Inc., Common Stock(d)(h)(j)         Various       19,549      31,011
                      (32.9% of fully diluted common equity)(k)
                      $2,000 Loan participation
                      Purchased 03/12/92                    $ 2,000
                      Repaid 04/05/93                       $ 2,000
                      Realized Gain                         $     0                          
                      1,115,256 Shares Common Stock
                      Purchased Various                     $13,973
                      Sold  11/13/96                        $14,664
                      Sold  12/13/96                        $ 2,199                       -------------------------------------
                      Realized Gain                         $ 2,890                          19,549      31,011           32.20
                                                                                          -------------------------------------


                      TOTAL INVESTMENT IN MANAGED COMPANIES                               $  93,468    $ 86,067           89.38
                                                                                          =====================================


               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      DECEMBER 31, 1996
                                                    (DOLLARS IN THOUSANDS)

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

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

                    SWO HOLDINGS CORPORATION - Note 9
250,000 Shares      SWO Holdings Corp., Common Stock(d)                        11/24/87        250          0
  1,430 Shares      Homeland Holding Corp., Common Stock(d)                    08/10/90        440          0
  1,506 Warrants    Homeland Holding Corp., Common Stock
                      Purchase Warrants (d)                                    10/02/96          0          0
                      $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       0.00
                                                                                          -------------------------------

                    TLC BEATRICE INTERNATIONAL HOLDINGS, INC.
25,500 Shares       TLC Beatrice Int'l Holdings., Inc., Common Stock(d)        11/30/87         26         26
                      $8,500 13% Subordinated Notes
                      Purchased 11/30/87                    $8,500
                      Sold 08/18/88                         $8,500                        -------------------------------
                      Realized Gain                         $    0                              26         26        0.03
                                                                                          -------------------------------

                  WALTER INDUSTRIES, INC. - Note 9
                  (formerly  Hillsborough  Holdings  Corporation)
435,569 Shares    Walter Industries, Inc., Common Stock(d)(j)                  01/07/88      8,877      6,152
326 Shares        Walter Industries, Inc., Common Stock (d)(j)                 09/13/95          0          5
                     $12,000 17% Note
                     Purchased  1/7/88             $ 12,000
                     Exchanged  12/1/95 for        $490,000
                     cash 435,569
                     common stock                  $  2,527
                     12.19%  Senior Note
                     Realized  Gain                $      0
                     $2,527 12.19% Senior Note
                     Received 12/1/95              $  2,527
                     Sold 12/15/95                 $  2,527
                     Realized Gain                 $      0                               -------------------------------
                                                                                             8,877      6,157        6.39
                                                                                          -------------------------------

                  TOTAL INVESTMENT IN NON-MANAGED COMPANIES                                  9,597      6,183        6.42
                                                                                          ===============================
                  SUMMARY OF MEZZANINE INVESTMENTS
                  Subordinated Notes                                                      $ 11,932   $ 11,932       12.39
                  Preferred Stock                                                           35,502     21,502       22.33
                  Common Stock and Warrants                                                 55,631     58,816       61.08
                                                                                          -------------------------------
                  TOTAL MEZZANINE INVESTMENTS                                             $103,065   $ 92,250       95.80
                                                                                          ===============================


               See the Accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                ML-LEE ACQUISITION FUND, L.P.
                                             SCHEDULE OF PORTFOLIO INVESTMENTS
                                                      December 31, 1996
                                                    (DOLLARS IN THOUSANDS)


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

                  COMMERCIAL PAPER
$1,950            State Street Clipper Receivable, 5.46% due 01/02/97         12/17/96   $  1,945   $  1,950
$2,100            Ford Motor Credit Corp. 5.62% due 01/08/97                  12/24/96      2,095      2,097
                                                                                         -------------------------------
                  TOTAL INVESTMENT IN COMMERCIAL PAPER                                      4,040      4,047        4.20
                                                                                         ------------------------------- 

                  TOTAL TEMPORARY INVESTMENTS                                            $  4,040   $  4,047        4.20
                                                                                         -------------------------------

                  TOTAL INVESTMENT PORTFOLIO                                             $107,105   $ 96,297      100.00%
                                                                                         ===============================



(a)  Represents investments in Affiliates as defined in the Investment Company Act of 1940.
(b)  Non-income producing security.
(c)  Restricted security.
(d)  Restricted non-income producing security.
(e)  Issuers of which the Fund, as of December 31, 1996,  owned more than 25% of
     the voting securities and which therefore were presumed to be controlled by
     the Fund under the Investment Company Act of 1940 as of such date.
(f)  Represents original cost and excludes accretion of discount of $7 for Temporary Investments.
(g)  Non-accrual investment status.
(h)  Inclusive of receipt of payment-in-kind securities.
(i)  Represents an amount of less than one thousand dollars.
(j)  Publicly traded class of securities.
(k)  Percentages  of Common  Equity  ownership  have not been  audited  by Price Waterhouse LLP.

               See the Accompanying Notes to Financial Statements.

</TABLE>

<PAGE>


                          ML-LEE ACQUISITION FUND, L.P.
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996


1.       Organization and Purpose

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

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

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

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

2.  Significant Accounting Policies

Basis of Accounting

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

Valuation of Investments

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

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

         The  information  presented  herein is based on  pertinent  information
available to the Managing General Partner and Investment  Adviser as of December
31, 1996.  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, 1996, the current  estimated fair value of these
investments may have changed significantly since that point in time.

Interest Receivable on Investments

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

Payment-In-Kind Securities

     All  payment-in-kind  securities received in lieu of cash interest payments
by the Fund's portfolio companies are recorded at face value (which approximates
accrued  interest),  unless the  Investment  Adviser  and the  Managing  General
Partner  determine that there is no reasonable  assurance of collecting the full
principal  amounts of such securities.  As of December 31, 1996 and December 31,
1995,   the  Fund  has  in  its   portfolio  of   investments   $1,122,216,   of
payment-in-kind  notes, which excludes  subordinated notes placed on non-accrual
status.  As of December  31, 1996 and  December  31,  1995,  the Fund has in its
portfolio of investments $6,485,801, of payment-in-kind equity.

Investment Transactions

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

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

Deferred Interest Income

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

Loan Facility and Advisory Fees

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

Partners' Capital

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

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

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

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

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

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

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

     The  Partnership  Agreement  does not  specify a method for  allocation  of
unrealized appreciation and depreciation among the Partners. Such allocations do
not affect either cash  distributions  or allocation or taxable income and loss.
The Fund has generally allocated such amounts 99% to the Limited Partners and 1%
to the Managing  General  Partner.  During 1996, it was determined  that certain
prior year  allocations  were not made on this  basis.  The 1996  allocation  of
unrealized  appreciation/depreciation  includes an  adjustment  to correct  this
error.

4.       Leverage

     The Fund  entered  into a credit  agreement,  dated as of August 13, 1991 ,
with  a  lending  group  led by the  First  National  Bank  of  Chicago  ("First
Chicago"),  which  provided  the Fund with a  maximum  credit  facility  of $140
million (the "Credit Facility"). The Credit Facility consisted of a $100 million
term loan and a $40 million secured  revolving  credit line. In October of 1993,
the Fund amended the Credit Facility 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 term
loan was paid in full as of March 29, 1994.  The remaining  credit line has been
further  amended  and  reduced to $7.5  million,  all of which is  available  at
December  31,  1996.  The  Credit  Facility  will  mature on July 31,  1998.  In
connection  with  the  Credit  Facility,  the Fund has  pledged  almost  all its
remaining debt and equity portfolio securities to its lenders.

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

         Nonrecurring loan advisory and loan facility fees of $4,441,580 paid to
         First  Chicago in 1991 in  connection  with the  creation of the Credit
         Facility,  which  are  being  amortized  over  the  life of the  Credit
         Facility.  The total  amortization  during the twelve months ended 1996
         was $639,552.

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

         Unused  Commitment  Fees of  $36,743,  which are equal to 1/2 of 1% per
         annum of the unused Credit Facility.

         For the years ended December 31, 1996, 1995 and 1994, the Fund incurred
         $701,021, $738,029 and $772,593, respectively, in 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,  1996,  1995 and  1994,  the Fund  paid  $1,282,991,
$2,770,934 and $3,652,538,  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  changed  to  an  annual  amount  equal  to  $300,000  plus
out-of-pocket  expenses  incurred by the Fund  Administrator as discussed below.
The Fund  Administration  Fee is calculated and paid quarterly,  in advance.  As
compensation for its services prior to October 19, 1995, the Fund  Administrator
received  from the Fund an annual  amount  equal to the  greater of  $400,000 or
0.45%  of  the  Net  Proceeds  Available  for  Investments  subject  to  certain
reductions as specified in the Fund's Partnership Agreement. For the years ended
December  31, 1996,  1995,  and 1994,  the Fund paid  $299,335,  $1,330,212  and
$1,843,907, respectively, in Fund Administration Fees.

     Beginning October 19, 1995, in accordance with Partnership  Agreement,  the
Fund Administrator is being reimbursed by the Fund for 100% of the out-of-pocket
expenses  incurred.  Total  out-of-pocket  expenses incurred by the Fund for the
year ended  December 31, 1996 were  $414,544.  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.
<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, 1996,  1995 and 1994,  the Fund  incurred
$207,827, $303,527, and $284,682, respectively, in Independent General Partners'
Fees and Expenses.

8.       Investment Transactions

     On  February  7,  1996 the  Securities  and  Exchange  Commission  declared
effective a Registration  Statement filed by GNC in connection with the offering
of up to 17,994,176 shares of GNC Common Stock, including 1,635,834 shares which
were  offered  pursuant  to the  underwriters'  over-allotment  option.  Of such
shares,  16,358,342 were sold by certain selling  shareholders of GNC, including
the Fund, and the 1,635,834 shares subject to the  underwriters'  over-allotment
option  were sold by GNC. In  connection  with the  offering,  the Fund sold its
entire  remaining  investment in GNC  consisting  of 4,903,766  shares of common
stock for net proceeds of $101.7  million and realized a gain of $87.9  million.
These net  distributable  proceeds of $206.61 per Unit were distributed on March
29, 1996 to Limited Partners of record as of the date of such sale.

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

     On March 29,  1996,  BeefAmerica,  Inc.  ("BeefAmerica"),  entered  into an
agreement  whereby  BeefAmerica  sold all of the  capital  stock of  BeefAmerica
Operating Company,  Inc.("Opco"),  to BAOC Acquisition, Inc. ("BAOC"), a company
owned by the  President of Opco and certain other  investors.  Opco was the sole
operating  asset of  BeefAmerica.  As a result of such sale,  the Fund, as chief
creditor of BeefAmerica,  received cash proceeds of $26 million,  $10 million in
Junior  Preferred  Stock of BAOC, and $14 million in Senior  Preferred  Stock of
BAOC,  all of  which  was  received  on  April  1,  1996  in  exchange  for  all
subordinated notes held by the Fund.  Although a realized loss of $50.98 million
was recorded,  the Fund reversed the  unrealized  depreciation  totaling  $90.98
million on the investment that was recorded in prior years.  Please refer to the
Supplemental Schedule of Unrealized Appreciation and Depreciation Schedule 2.

     In  connection  with the sale of Omega  Wire in the first  quarter of 1995,
$1.1 million of proceeds owed to the Fund from the sale were held in escrow.  On
April 5,  1996  the Fund  received  the  Omega  Escrow  Proceeds,  plus  accrued
interest, totaling $1.2 million.

     On April 4, 1996 Petco filed a  registration  statement with the Securities
and Exchange  Commission for an offering of 5 million shares of Common Stock. Of
the 5  million  shares  offered,  2.6  million  were  offered  by Petco  and the
remaining  shares were offered by certain  current  stockholders,  including the
Fund.  The  offering was effected on April 30, 1996 and the Fund sold its entire
investment  in Petco which  consisted  of  1,472,622  shares of Common Stock and
received net proceeds  from the sale of $40.3  million or $27.36 per share which
were  distributed  on June 11, 1996 to partners on record as of the date of such
sale. The Fund realized a gain of $24.4 million on the sale.
<PAGE>
     In  connection  with the financial  restructuring  on November 23, 1994, of
Chadwick-Miller,  Inc. and its holding company, CMI Holding Corp., the Fund's $5
million  14.75% Senior Note was redeemed.  The net proceeds were $5 million,  of
which $3.1 million of such proceeds were  classified as restricted cash and held
in escrow.  As a result of an  additional  financial  restructuring  of Chadwick
Miller in July 1996,  the Fund received all proceeds held in escrow plus accrued
interest and exchanged all Common and Preferred  Stock and Common Stock Purchase
Warrants held for 39,487  Common Stock  Purchase  Warrants and 15,406  Preferred
Stock Purchase Warrants. No gain or loss was recognized on the transaction.

     On  November  1, 1995,  pursuant  to an  Agreement  and Plan of Merger (the
"Agreement"),   Duro-Test  Corporation  effected  a  merger  pursuant  to  which
Duro-Test  was  acquired by a third party for  approximately  $33  million.  Net
proceeds to the Fund were $4.6 million of which $1.7 million was  classified  as
restricted  cash and held in escrow.  On September  30, 1996,  the Fund received
escrow proceeds  totaling $989,738  resulting in an additional  realized loss of
$769,236 on this investment.

     Stanley Furniture designs,  manufactures and markets furniture products. On
November 13, 1996,  Stanley  Furniture  completed a public offering of 1,000,000
shares of its common  stock at a price of $16 per share.  These shares were sold
by the Fund and certain  affliates of the Thomas H. Lee Company.  Following  the
offering,  Stanley  purchased  a  total  of  150,000  shares  from  the  selling
stockholders  including the Fund at the same price per share.  Pursuant to these
transactions,  the Fund sold a total of 1,115,256  shares of its Stanley  common
stock for $16.9 million or $15.12 per share.  The Fund recognized a gain of $2.8
million on the transaction.  Net distributable  proceeds of $34.24 per Unit were
distributed  on December 23, 1996 to Limited  Partners of record as of the dates
of such sales.

     At December  31,  1996,  the Fund had a total of (at cost)  $103.1  million
invested in Mezzanine  Investments  representing  $93.5 million Managed and $9.6
million Non-Managed portfolio investments. For the year ended December 31, 1996,
the proceeds  from the sales of  investments  resulted in net realized  gains of
$63.7 million.  For  additional  information,  please refer to the  Supplemental
Schedule of Realized Gains and Losses - Schedule 1.

    Because  the  Fund  primarily   invests  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  the  risks   associated  with  its
investments in high-yield securities,  it has procedures in place to continually
monitor such risks under a variety of market conditions. Any potential Fund loss
would generally be limited to its investment in the portfolio  company reflected
in  the  portfolio  of  investments.  See  Note  11 for  information  concerning
commitments and guarantees.

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

9.       Unrealized Appreciation and Depreciation of Investments

     For the year ended  December 31,  1996,  the Fund  recorded net  unrealized
depreciation  of $23.3  million  of  which  $111.9  million  was a  reversal  of
unrealized  appreciation  for investments  sold during 1996.  Approximately  $27
million recorded in 1996 related to net appreciation in market value of publicly
traded/underlying  publicly  traded  securities held by the Fund at December 31,
1996.  This compares to a net unrealized  appreciation  of $9.9 million of which
$11.9  million was related to net  unrealized  depreciation  in market  value of
publicly  traded/underlying publicly traded securities at December 31, 1995. For
the year ended December 31, 1994, the Fund recorded net unrealized  appreciation
of $9.3  million,  of which $39.2  million was  related to net  depreciation  in
market value of publicly traded securities. The Fund's cumulative net unrealized
depreciation on investments at December 31, 1996 totaled $10.8 million.

     For additional  information,  please refer to the Supplemental  Schedule of
Unrealized Appreciation and Depreciation (Schedule 2).
<PAGE>
10.  Non-Accrual of Investments

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

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

11.  Commitments and Guarantees

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

12.  Litigation

     On  September  7, 1991,  the Fund brought suit in the Court of Common Pleas
for the  County of  Greenville,  South  Carolina  against  Deloitte  & Touche in
connection  with Deloitte & Touche's audit opinions on the financial  statements
of Emb-Tex Corporation,  formerly an operating subsidiary of a portfolio company
of the Fund. The Fund contends that the value of Emb-Tex Corporation's inventory
and operating income were substantially  overstated in its financial statements.
The Fund seeks actual and punitive  damages in  connection  with the loss of its
aggregate $18 million investment.  Deloitte & Touche obtained a summary judgment
in its favor and the Fund  pursued  an appeal in the  Appellate  Courts of South
Carolina.  On August 21, 1995, the South Carolina Court of Appeals  reversed the
summary  judgment ruling and remanded the case for trial. On September 11, 1995,
Deloitte & Touche filed a petition for rehearing with the Court of Appeals which
was  denied.  Thereafter,  Deloitte  &  Touche  filed a  petition  for a writ of
Certiorari with South Carolina Supreme Court,  which was granted.  A decision by
the South Carolina Supreme Court is expected in 1997.

     On October  18,  1991,  one Limited  Partner of the Fund  commenced a class
action in the Supreme  Court of the State of New York in the County of New York,
on behalf of a class of all  Limited  Partners  of record  during  1990 or their
successors in interest,  against the Fund's Managing General  Partner,  ("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 have filed a Notice of
Appeal on October 4, 1996, and expect to have a hearing on their appeal in 1997.
The Fund may be obligated to indemnity and advance litigation expenses to one or
more of the  defendants  under the terms and  conditions  of  various  indemnity
provisions  of the Fund's  Partnership  Agreement  and separate  indemnification
agreements. The Fund has advanced litigation expenses to the indemnified parties
based  upon  amounts  which  are  deemed  reimbursable  in  accordance  with the
indemnification   provisions  and  has  included  these  amounts  in  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  defandants'
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.  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 and have moved to dismiss them.  Whether or not the
plaintiff  prevails  on any  remaining  claims,  the  Fund may be  obligated  to
indemnify and advance litigation expenses to certain of the defendants under the
terms and conditions of various indemnity  provisions in the Fund's  Partnership
Agreement  and  separate  indemnification  agreements,  and the  amounts of such
indemnification and expenses could be material. In the opinion of legal council,
the outcome of this case is not determinable at this time. The Fund has incurred
litigation expenses which are recorded in 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.  The  defendants  filed a motion to dismiss the
action  in its  entirety  on  December  2,  1996,  which  motion is still in its
briefing  stages.  The defendants in this action believe that the claims against
them are without  merit.  In the opinion of legal  council,  the outcome of this
case is not determinable at this time.

<PAGE>
13.  Related  Party Transactions

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

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

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

     During 1996 the Managing General Partner received cash distributions in the
amount of $1,959,308 representing its 1% interest in the Fund.

14.  Reserves

     In February  1993,  the Fund  established a $15 million  reserve to provide
funds for  follow-on  investments  and to pay  expenses.  Following  the  fourth
quarter 1996 cash  distributions  made on February 14, 1997, the reserve balance
was reduced to  approximately  $3.1 million due to follow-on  investments in CMI
Holding Corp., Diet Center Inc., Duro-Test,  Health o meter and Petco along with
a  distribution  to  partners in the second  quarter of 1993 of  $424,264  and a
payment  of  $2.9  million  to  First  Chicago  to pay  down  the  Fund's  loan.

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

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

     Pursuant  to the  Statement  of  Financial  Accounting  Standards  No.  109
Accounting for Income Taxes,  the Fund is required to disclose any difference in
the tax basis of the Fund's assets and liabilities  versus the amounts  reported
in the  financial  statements.  As of December  31,  1996,  the tax basis of the
Fund's assets are greater than the amounts reported in the financial  statements
by $1.6  million.  This  difference  is  primarily  attributable  to  unrealized
appreciation  and  depreciation  recorded  on  investments  which  has not  been
recognized for tax purposes.

16.      Subsequent Events

     On February 3, 1997, the Individual  General  Partners  approved the fourth
quarter 1996 cash distribution totaling $650,009,  which consisted of $92,310 of
net investment income from Temporary Investments,  $4,058 return of capital from
the sale of  Mezzanine  Investments  and $1 million  return of the  Reserve  for
Follow-On-Investments,  which was reduced to pay fund expenses of $446,359.  The
total amount  distributed to Limited  Partners was $643,485,  or $1.32 per Unit.
The Managing General Partner received $6,524 in proportion to its 1% interest in
the Fund. The distributions were made on February 14, 1997.

     During February 1997, the Fund sold an additional  31,515 shares of Stanley
common stock  pursuant to the provisions of Rule 144 under the Securities Act of
1933, as amended.  Total proceeds from the sale were approximately  $756,335. As
of March 20, 1997, the Fund continues to hold 1,528,781 shares of Stanley Common
Stock.

<PAGE>
<TABLE>
<CAPTION>

                                   SCHEDULE 1
                          ML-LEE ACQUISITION FUND, L.P.
                SUPPLEMENTARY SCHEDULE OF REALIZED GAINS (LOSSES)
                      FOR THE YEAR ENDED December 31, 1996
                             (DOLLARS IN THOUSANDS)

<S>                                           <C>                 <C>                <C>              <C>
SECURITY                                          Number of          Investment         Proceeds         Gain/(Loss)
                                              Shares/Principal           Cost
                                                   Amount
General Nutrition Companies, Inc. 
  Common Stock                                       4,903,766       $   13,759       $  101,741       $   87,982

BeefAmerica, Inc. 
  Subordinated Notes (a)                            $  122,948           58,928           26,000 (b)      (32,928)
  Preferred Stock                                     5,661.11           40,050           24,000 (b)      (16,050)
  Common Stock                                          51,000            2,000             --             (2,000)

SFX Broadcasting, Inc. 
  Common Stock Options                                   8,667             --                126              126


Petco Animal Supplies, Inc. 
  Common Stock                                       1,472,622           15,846           40,291           24,445


Duro-Test
  Restricted Cash                                   $        -            1,759              989             (770)

Stanley Furniture Inc. 
     Common Stock                                    1,115,256           13,973           16,863             2,890
                                                                     ----------       ----------        ----------
                                                                     $  146,315       $  210,010        $   63,695
                                                                     ==========       ==========        ==========

(a)  Includes all BeefAmerica Payment-in-kind Notes.
(b)  Net  proceeds include cash proceeds of $26 million and $24 million
     face amount of Senior and Junior Preferred Stock in BAOC Acquisition, Inc.
     (See Note 8 to the Financial Statements)


</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                   SCHEDULE 2
                          ML-LEE ACQUISITION FUND, L.P.
       SUPPLEMENTARY SCHEDULE OF UNREALIZED APPRECIATION AND DEPRECIATION
                     FOR THE PERIOD ENDED December 31, 1996
                             (DOLLARS IN THOUSANDS)
<S>                                <C>          <C>     <C>           <C>        <C>          <C>         <C>         <C>
                                                       Total Unrealized
                                                         Appreciation           
                                                        (Depreciation)             
                                    Investment    Fair    December 31  
SECURITY                               Cost       Value      1996         1996        1995       1994        1993       1992 & Prior
-----------------------------------  --------   --------   --------     --------    -------    --------    --------    -------------
PUBLICLY TRADED/UNDERLYING
  SECURITIES:

Celebrity
  Common Stock*                         $    75    $    21    $   (54)   $    30    $    65    $     47    $  (188)   $    (8)
Health o meter
  Common Stock*                           4,552      8,401      3,849      2,735        293      (5,291)        --      6,112
Playtex
  Common Stock*                           3,255     11,248      7,993        701        528     (10,319)    (4,466)    21,549
Stanley
  Common Stock*                          19,549     31,011     11,462     23,580     (5,351)     (9,030)    15,263    (13,000)
Walter
  Common Stock                            8,877      6,157     (2,720)       436      2,947          --         --     (6,103)
                                                              -------    -------    -------    --------    -------    -------
TOTAL UNREALIZED APPRECIATION
  (DEPRECIATION) FROM PUBLICLY
  TRADED SECURITIES                                           $20,530    $27,482    $(1,518)   $(24,593)   $10,609    $ 8,550
                                                              -------    -------    -------    --------    -------    -------

NONPUBLIC SECURITIES:

BeefAmerica Incorporated
  Jr. and Sr.Preferred Stock*           $24,000    $10,000   $(14,000)   $(14,000)  $    --    $     --    $    --    $    --
  Senior Subordinated Note                   --         --         --      10,000        --          --    (10,000)        --
  Subordinated Notes                         --         --         --      38,928        --          --    (20,000)   (18,928)
  Preferred Stock                            --         --         --      40,050        --          --         --    (40,050)
  Common Stock                               --         --         --       2,000        --          --         --     (2,000)
Chadwick-Miller, Inc. 
  Common Stock*                           3,736         --     (3,736)    ( 1,929)       --          --     (1,807)        --
  Preferred Stock                        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                                       $(31,346)   $ 61,098   $    --    $     --   $(31,807)  $(60,637)
                                                             --------    --------   -------    --------   --------   --------
Reversal of Unrealized
  Appreciaiton/(Depreciation)
  for Investments Sold in 1996:

General Nutrition Companies, Inc. 
  Common Stock                          $    --     $   --   $     --    $(99,028)  $(26,589)  $ (7,781)  $133,398   $     --
Petco 
  Common Stock                               --         --         --     (12,870)    16,137     (3,267)        --         --
                                                             --------   ---------   --------    -------   --------   --------
Reversal of Unrealized
  Appreciaiton/(Depreciation)
  for Investments Sold prior to 1996:                              --          --     21,891     44,912    (21,038)   (45,765)
                                                             --------   ---------   --------    -------   --------   --------

Total Unrealized Appreciation/                                
  (Depreciation)for Investments Sold:                        $     --   $(111,898)  $ 11,439    $33,864   $112,360   $(45,765)
                                                              -------   ---------   --------    -------   --------   --------
 Net Unrealized Appreciation
   (Depreciation)                                            $(10,816)  $ (23,318)  $  9,921    $ 9,271   $ 91,162   $(97,852)
                                                             ========   =========   ========    =======   ========   ========

* Restricted Security

</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 Annual Report on Form 10-K
           to Rule424(b) under the Securities       for the year ended December 31, 1987.
           Act of 1933.

27         Financial Data Schedule for the year     Filed Herewith.
           ended December 31, 1996.

(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 26th day of March 1997.


                                        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 26, 1997                  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 26th day of March, 1997.


              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 26th day of March 1997.


                                          ML-LEE ACQUISITION FUND, L.P.

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

                                          By:      ML Mezzanine Inc.
                                                   its General Partner





Dated:  March 26, 1997                    --------------------------------
                                          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 26th day of March, 1997.


              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.