<PAGE>   1

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                          COMMISSION FILE NO.: 1-8801

                       GRAHAM-FIELD HEALTH PRODUCTS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                       <C>
                        DELAWARE                                                 11-2578230
             (STATE OR OTHER JURISDICTION OF                                  (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                  IDENTIFICATION NO.)

          81 SPENCE STREET, BAY SHORE, NEW YORK                                     11706
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                 (ZIP CODE)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-2200

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
   COMMON STOCK, PAR VALUE $.025 PER SHARE                NEW YORK STOCK EXCHANGE
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                 NOT APPLICABLE
                                ----------------
                                (TITLE OF CLASS)

     Indicate by check mark whether 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  [ ]     No  [X]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K  [ ].

     Based on the closing price on May 28, 1999, the aggregate market value of
voting stock held by non-affiliates of the registrant was approximately
$53,488,546.

     As of the close of business on May 28, 1999, the registrant had 31,501,680
shares of common stock outstanding, of $.025 par value each.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                       GRAHAM-FIELD HEALTH PRODUCTS, INC.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                     PART I

ITEM I.  BUSINESS:

THE COMPANY

     Graham-Field Health Products, Inc. ("Graham-Field" or the "Company") is a
manufacturer and distributor of healthcare products targeting the home
healthcare, medical/surgical, rehabilitation and long-term care markets in North
America, Europe, Central and South America, and Asia. The Company markets and
distributes a broad range of products under its own brand names and under
suppliers' names throughout the world, a significant portion of which is derived
from the United States. The Company maintains manufacturing and distribution
facilities throughout North America. The Company continuously seeks to expand
its product lines by increasing the number of distributorship agreements with
suppliers, and forming strategic alliances with other companies. The Company's
products are marketed principally to hospital, nursing home, physician, home
healthcare and rehabilitation dealers, healthcare product wholesalers and
retailers, including drug stores, catalog companies, pharmacies, home-shopping
related businesses, and certain governmental agencies.

     The Company's principal products and product lines include wheelchairs and
power wheelchair seating systems, mobility products and bathroom safety
products, medical beds and patient room furnishings, blood pressure and
diagnostic products, adult incontinence products, specialty seating products,
wound care and urologicals, ostomy products, diabetic products, obstetrical
supplies, nutritional supplements, therapeutic support systems and respiratory
equipment and supplies. By offering a wide range of products from a single
source, the Company enables its customers to reduce purchasing costs, including
transaction, freight and inventory expenses.

     The Company's strategic objective is to be a leading provider of medical
products to the rapidly growing home healthcare, medical/surgical,
rehabilitation and long-term care markets by offering a comprehensive product
line, single-source purchasing and technologically advanced, cost-effective
delivery systems. The cornerstone of the Company's sales and marketing strategy
is the Company's Consolidation Advantage Program ("C.A.P."). Through C.A.P., the
Company strives to become the most efficient and reliable low-cost provider of
medical products by offering the Company's customers the ability to reduce their
operating costs significantly by consolidating the purchase of multiple product
lines through a single source. The Company's sales and marketing representatives
consult with the Company's customers to identify the cost efficiencies and
savings that can be derived from purchasing all of their product needs through
the Company. By consolidating the purchase of multiple products through a single
source, the Company's customers can significantly reduce their operating costs
associated with the purchasing process, including the reduction of delivery
expenses, administrative costs and other expenses. The Company believes that its
C.A.P. program significantly improves the level of service to its customers by
streamlining the purchasing process, decreasing order turnaround time, reducing
delivery expenses, and providing inventory on demand.

RECENT DEVELOPMENTS

     Management Changes.  On March 24, 1999, the Company's Board of Directors
appointed John G. McGregor as President and Chief Executive Officer, and J.
Soren Reynertson as Senior Vice President and Chief Financial Officer. Mr.
McGregor is a principal and Mr. Reynertson is a senior associate with Jay Alix &
Associates ("JA&A"), internationally known experts in corporate turnarounds and
financial restructurings. In connection with such appointments, the Company
entered into an agreement with JA&A dated as of March 24, 1999, pursuant to
which JA&A agreed to provide the Company with the services of Mr. McGregor and
Mr. Reynertson and such other personnel as required from time to time.
Simultaneously with these appointments, the Company's Board of Directors elected
Rupert O.H. Morley, the Operations Director of the Company's largest
shareholder, Brierley Investments Limited, as its new Chairman of the Board.

                                        1
<PAGE>   3

     Hiring of Arthur D. Little.  From January 1999 through April 1999, the
Company retained the services of Arthur D. Little, an international consulting
firm with expertise in manufacturing, distribution, and business strategy in the
healthcare industry, to support the initial implementation of the Company's 1999
strategic operating and business plan. The primary goal of the Company's plan is
to return the Company to profitability through the implementation of a broad
range of initiatives. The Company has identified various priority projects
relating to the rationalization of the Company's distribution and manufacturing
network; the elimination of duplicate distribution and manufacturing facilities;
the realignment and consolidation of the Company's various sales forces; the
development of customer focus differentiation strategies, inventory
management/product profitability programs, and product rationalization programs;
the establishment of new product management and customer service process designs
to revitalize the Company's proprietary product lines; the rationalization of
the Company's product lines; and the development of working capital reduction
programs relating to inventory and accounts receivable. The Company is in the
process of implementing the priority projects.

     Hiring of Warburg Dillon Read, LLC.  In April 1999, the Company announced
that it had retained the investment banking firm of Warburg Dillon Read, LLC to
work with management to review all strategic alternatives for the Company to
maximize stockholder value, including, but not limited to, the sale of all or
part of the Company. The Company is in the process of analyzing its strategic
alternatives with its investment banker.

     Recent Losses.   The Company has incurred significant losses in each of the
three years in the period ended December 31, 1998 and in the first quarter of
1999. These losses have arisen as a result of a significant amount of merger,
restructuring and other expenses related to acquisitions completed in 1996 and
1997, the failure to integrate effectively these acquisitions and realize the
benefits and synergies to be derived therefrom, and the impact of intense
competition within the healthcare industry. The losses included significant
charges relating to provisions for accounts receivable, inventory and other
asset write-offs in 1997 and 1998, a provision to increase the valuation
allowance on deferred tax assets in 1998, and certain professional and other
advisory fees in the first quarter of 1999, all of which management believes to
be substantially non-recurring. Further, the Company and certain of its
directors and officers have been named as defendants in at least fifteen
putative class action lawsuits which have been consolidated into an amended
complaint.

     As of June 30, 1998, December 31, 1998, and March 31, 1999, the Company was
not in compliance with certain financial covenants, and other terms and
provisions contained in its Senior Secured Revolving Credit Facility, as amended
(the "Credit Facility"), with IBJ Whitehall Business Credit Corp. (formerly
known as IBJ Schroder Business Credit Corporation), as agent ("IBJ"). On April
22, 1999, the Company entered into an amendment to the Credit Facility, which
was subsequently amended as of May 21 and June 3, 1999 (the "1999 Amendment"),
which provided for, among other things, a waiver of these defaults, an amendment
to certain financial covenants, a new undrawn availability covenant relating to
scheduled interest payments on the Senior Subordinated Notes (as hereinafter
defined), and other terms and provisions consistent with the Company's business
plan for the remainder of 1999, and an extension of the term of the Credit
Facility from December 10, 1999 to May 31, 2000.

     In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 and take other actions to improve its cash flow. These actions include,
but are not limited, to (i) the completion of the activities contemplated by the
Company's 1997 restructuring plan; (ii) the initiation of inventory reduction
and product rationalization programs; (iii) the tightening of credit policies
and payment terms; (iv) the reduction in previously budgeted capital
expenditures; (v) the implementation of streamlined product pricing and product
return guidelines; (vi) the initiation of an aggressive program to collect past
due accounts receivable; and (vii) the realignment and consolidation of sales
forces and territories.

     Notwithstanding the actions described above, the Company currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment.

                                        2
<PAGE>   4

Management also believes that, if necessary, it could sell certain assets to
meet cash requirements, which would require the consent of the lenders under the
Credit Facility.

     Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The Company's consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

     Matters Relating to Accounting Errors and Irregularities.  In March 1999,
the Company reported that an investigation conducted by the Company's Audit
Committee, with the assistance of Rogers & Wells LLP, had found certain
accounting errors and irregularities with respect to the Company's financial
results. Rogers & Wells LLP retained the accounting firm of Arthur Andersen LLP
to assist in conducting the investigation and in providing advice on accounting
matters. Based on the results of the investigation, the Company has restated its
financial results for 1996 and 1997. The financial information contained herein
has been restated to incorporate all relevant information obtained from the
investigation.

     The restated loss before income taxes for the years ended December 31, 1997
and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the
originally reported loss before income taxes for the years ended December 31,
1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net
loss for the years ended December 31, 1997 and 1996 were $26,417,000 and
$13,574,000, respectively, as compared to the originally reported net loss for
the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000,
respectively. In addition, the restated operating revenues for the years ended
December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as
compared to originally reported operating revenues for the years ended December
31, 1997 and 1996 of $261,981,000 and $143,083,000, respectively.

     The Company has also restated the financial results for the first, second
and third quarters of 1998 to correct for certain improperly recorded
transactions. The 1998 adjustments are unrelated to the investigation conducted
by the Company's Audit Committee, which was announced in March 1999.

INDUSTRY OVERVIEW

     Graham-Field distributes its medical, surgical and other healthcare
products primarily into the home healthcare, medical/surgical, rehabilitation
and long-term care markets.

     Home Healthcare.  Graham-Field believes that the home healthcare market is
growing rapidly due to the shift in the provision of healthcare away from more
expensive acute care settings into lower cost home care settings. The rising
cost of healthcare has caused many payors of healthcare expenses to look for
ways to contain costs. Healthcare payors have, in many cases, altered their
reimbursement patterns to encourage home healthcare whenever appropriate.

     The over 65 age group represents the vast majority of home healthcare
patients and continues to grow. In 1993, the United States Census Bureau
estimated that by the year 2000 approximately 35 million people, or 13% of the
population in the United States, will be over 65. Graham-Field believes that
growth of the home healthcare market will exceed that of institutional care, as
many medical professionals and patients prefer home healthcare because it allows
greater patient independence, increased patient responsibility and improved
responsiveness to treatment due to the enhanced psychological benefits of
receiving treatment in comfortable and familiar surroundings. Home healthcare is
more cost effective than facility-based care and, in many cases, more desirable
to the patient.

     Medical/Surgical.  Graham-Field believes that rapid growth in the
medical/surgical distribution industry has resulted primarily from
medical/surgical supply and equipment manufacturers increasing the number and
volume of products sold through distributors and an overall increase in the
volume of medical/surgical supplies being consumed. This overall increase in
consumption is due primarily to the aging of the U.S. population and the
development of new medical procedures.

                                        3
<PAGE>   5

     Historically, the medical/surgical supply distribution industry has been
highly fragmented. During the past ten years, the overall healthcare market has
been characterized by the consolidation of healthcare providers into larger and
more sophisticated entities which are seeking to lower total product costs and
incremental services from their medical/surgical supply distributors. These
trends have led to a significant and ongoing consolidation of the distribution
industry and the formation of a small number of industry participants with
national capabilities.

     Rehabilitation Market.  The rehabilitation market includes a broad range of
medical products provided to individuals in order to minimize physical and
cognitive impairments, maximize functional ability and restore lost functional
capacity. The focus of rehabilitation medical products is to improve the
physical and cognitive impairments resulting from illness or injury, and to
restore or improve functional ability so that individuals can return to work and
lead independent and fulfilling lives. Typically, rehabilitation medical
products are provided by a variety of healthcare professionals including
rehabilitation nurses, physical therapists, occupational therapists, speech
language pathologists, respiratory therapists, recreation therapists, social
workers, psychologists, rehabilitation counselors and others.

     Graham-Field believes that the demand for rehabilitation medical products
will continue to be driven by advances in medical technologies, an aging
population and the recognition on the part of the payor community (insurers,
self-insured companies, managed care organizations and federal, state and local
governments) that appropriately administered rehabilitation medical products can
lower overall healthcare costs as well as improve the quality of life. Studies
conducted by insurance companies demonstrate the ability of rehabilitation
medical products to significantly reduce the cost of future care. Further,
reimbursement changes have encouraged the rapid discharge of patients from
acute-care hospitals while they remain in need of rehabilitation medical
products.

     Long-Term Care Market.  The long-term care market encompasses a broad range
of healthcare products provided to the elderly and to other patients with
medically complex needs who can be cared for outside of the acute care hospital
environment and generally cannot be efficiently and effectively cared for at
home. Long-term care facilities offer skilled nursing care, routine
rehabilitation therapy and other support services, primarily to elderly
patients. Long-term care facilities require ongoing medical and nursing
supervision and access to a broad range of medical products. The Company
believes that the demand for medical products provided to the long-term care
market will increase substantially during the next decade due primarily to
demographic trends, advances in medical technology and the impact of cost
containment measures by government and private pay sources. At the same time,
government restrictions and high construction and start-up costs are expected to
limit the supply of long-term care facilities.

     Graham-Field believes that the major healthcare industry trends impacting
the markets it serves are as follows:

     Consolidation Within the Industry.  Continued growth in managed care and
capitated plans have pressured independent home medical equipment suppliers to
find ways of becoming more cost competitive with national providers. This has
also led to consolidations among manufacturers and distributors as smaller
companies with limited product lines seek out partners with potential for
significant synergies. In addition, certain healthcare product suppliers are
consolidating in order to promote better utilization of resources and improve
service to customers, thereby maintaining margin and market share. Graham-Field
believes healthcare supply companies will be required to use size and economies
of scale to their competitive advantage to be successful.

     In recent years, concern over the rising cost of healthcare has sparked a
marked shift toward lower priced products and services in the industry. This
shift has resulted in the substitution of simpler and more generic products, as
well as price concessions to payors from healthcare providers. As healthcare
moves from largely fee-for-service reimbursement to prepaid and capitated
payment systems, this trend is expected to intensify. Graham-Field believes that
high-volume, full-line providers will have a competitive advantage over those
servicing only niche markets. These trends are causing significant consolidation
of healthcare providers.

                                        4
<PAGE>   6

     Increasing Emphasis on Value-Added Services Oriented Towards Total Cost
Reduction.  Graham-Field believes that the administrative costs associated with
purchasing, tracking and carrying inventory and distributing medical products
are often greater than the cost of the supplies. As a result, customers are
increasingly evaluating distributors not only on the basis of product cost and
timely and accurate delivery, but also on their ability to provide value-added
services that lower the administrative and other overhead costs associated with
medical and surgical supplies. For example, customers increasingly seek
distributors that can deliver inventory on a "just-in-time" basis. In addition,
certain customers are seeking distributors that can provide programs to assist
in inventory management.

     Shift of Healthcare Delivery to Home Healthcare Markets.  Graham-Field
believes that the delivery of healthcare is shifting from acute care settings to
alternate sites, such as physician offices and extended care facilities, due to
cost containment pressures from government and private reimbursement sources.
The growth of managed care has resulted in (i) more procedures being performed
in outpatient settings, (ii) the length of stay for inpatient procedures
continuing to fall and (iii) hospitals sharing financial risk as they take on
capitated contracts from managed care entities. These trends have led to a
general increase in the level of care required by alternate-site patients as
well as the emergence of specialized long-term care facilities, leading to
increased demand for home healthcare products. The Company believes that demand
for home healthcare and medical and surgical supplies in the alternate-site
markets will increase at a faster rate than the overall industry.

BUSINESS STRATEGY

     The Company's strategic objective is to become a leading provider of
low-cost, high-quality medical products to the rapidly growing home healthcare,
medical/surgical, rehabilitation and long-term care markets by offering a
comprehensive product line, single source purchasing and technologically
advanced, cost-effective delivery systems. To achieve this objective and to
improve its profitability, the Company is pursuing the following strategies:

     Offer Comprehensive Product Line.  The Company markets and distributes a
broad range of products under its own brand names and under suppliers' names
throughout the world, and believes that it provides one of the most extensive
product offerings in each of the markets it serves. Through the breadth of its
product offerings and its competitive pricing, the Company strives to be a
single source supplier to the home healthcare, medical/surgical, rehabilitation
and long-term care markets. As a result of recent acquisitions, the Company has
expanded its product line through enhanced manufacturing and out-sourcing
capabilities, which furthers the Company's objective to become the most
efficient and reliable low-cost provider of medical products. The Company
continuously seeks to expand its product lines by increasing the number of
distributorship agreements it has with suppliers, and forming strategic
alliances with other companies.

     Focus on Value-Added Services.  In order to differentiate itself from its
competitors and gain a competitive advantage in the industry, the Company
focuses on providing its customers with value-added services. Currently, the
Company has the following three programs in place which it believes furthers
this objective:

          Consolidation Advantage Program.  The C.A.P. program offers customers
     the ability to significantly reduce their operating costs by consolidating
     the purchase of multiple product lines through a single source. C.A.P.
     significantly improves the level of service to the Company's customers by
     streamlining the purchasing process, decreasing order turnaround time,
     reducing delivery expenses, lowering administrative costs, and providing
     inventory on demand. See "Value Added Services -- Consolidation Advantage
     Program".

          Graham-Field Express.  The Graham-Field Express Program enables the
     Company to provide "same-day" and "next-day" service to home healthcare
     dealers of strategic home healthcare products, including Temco patient
     aids, adult incontinence products, Everest & Jennings wheelchairs, Smith &
     Davis homecare beds, nutritional supplements, and other freight intensive
     and time sensitive products through its satellite Graham-Field Express
     facilities. The Company intends to moderate the growth of the

                                        5
<PAGE>   7

     Graham-Field Express Program and may further consolidate the Graham-Field
     Express distribution network. See "Value-Added Services -- Graham-Field
     Express".

          Seamless Distribution Program.  The Seamless Distribution Program
     enables orders to be shipped from the Company's distribution facilities to
     home healthcare end-users on behalf of the Company's customers. This
     program enables these customers to realize significant reductions in their
     operating costs by eliminating the receiving and shipping process and
     inventory carrying costs, while reducing the product delivery time to end
     users. See "Value-Added Services -- Seamless Distribution Program".

ACQUISITIONS

     Although Graham-Field has historically pursued acquisitions on an
opportunistic basis, the Company does not intend to pursue any acquisitions in
the near future. Set forth below is a summary of acquisitions completed in 1996
and 1997:

<TABLE>
<CAPTION>
DATE                            COMPANY                         LINE OF BUSINESS
----                            -------                         ----------------
<S>                 <C>                                 <C>
September 1996....  V.C. Medical Distributors, Inc.     Medical products distributor in
                                                          Puerto Rico.
November 1996.....  Everest & Jennings International    Manufacturer and distributor of
                      Ltd.                                wheelchairs and homecare beds.
February 1997.....  Motion 2000 Inc. and Motion 2000    Independent wholesalers of
                      Quebec Inc.                         rehabilitation medical
                                                          products in Canada.
March 1997........  Kuschall of America, Inc.           Manufacturer of pediatric
                                                          wheelchairs, high performance
                                                          adult wheelchairs and other
                                                          rehabilitation products.
June 1997.........  LaBac Systems, Inc.                 Manufacturer of custom power
                                                          wheelchair seating systems and
                                                          manual wheelchairs.
August 1997.......  Medi-Source, Inc.                   Wholesaler of medical sundry
                                                          products.
August 1997.......  Medical Supplies of America,        Distributor of home healthcare
                    Inc.                                  products.
December 1997.....  Fuqua Enterprises, Inc.             Manufacturer and distributor of
                    (currently, Lumex/Basic American      durable medical products and
                      Holdings, Inc.)                     furnishings.
</TABLE>

     V.C. Medical.  In September 1996, Graham-Field acquired V.C. Medical
Distributors, Inc. ("V.C. Medical"), a wholesale distributor of medical products
in Puerto Rico. V.C. Medical currently operates under the name "GF Express
(Puerto Rico)," and provides "same-day" and "next-day" service to home
healthcare dealers of certain strategic home healthcare products, including
patient aids, Everest & Jennings wheelchairs and homecare beds, adult
incontinence products and nutritional supplements. Through GF Express (Puerto
Rico), Graham-Field has increased its presence in Puerto Rico.

     Everest & Jennings.  In November 1996, Graham-Field acquired Everest &
Jennings International Ltd. ("Everest & Jennings"). Through its subsidiaries,
Everest & Jennings manufactures a broad line of wheelchairs and distributes
homecare beds. Everest & Jennings' principal manufacturing and distribution
facilities are located in Earth City, Missouri; Toronto, Canada and Guadalajara,
Mexico.

     Motion 2000 and Motion Quebec.  In February 1997, Graham-Field acquired
Motion 2000 and its wholly-owned subsidiary, Motion Quebec. Motion 2000 and
Motion Quebec (collectively, "Motion 2000") currently operate as a division of
Everest & Jennings Canadian Limited, a wholly-owned subsidiary of the Company
("Everest & Jennings Canada"). Motion 2000 distributes a line of rehabilitation
products, including walkers, rollators, cushion products and pediatric
wheelchair products, and manufactures seating products. The strategic
combination of Motion 2000 with the operations of Everest & Jennings Canada,
along with Graham-Field's broad product lines, has positioned Graham-Field as
one of the leading suppliers of the

                                        6
<PAGE>   8

broadest range of products available from a single source in Canada, and as a
leading supplier of rehabilitation products, including high performance adult
and pediatric wheelchairs, home care wheelchairs, patient aids and other
wheelchair products.

     Kuschall.  In March 1997, Everest & Jennings, a wholly-owned subsidiary of
the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products. The acquisition of Kuschall has expanded Graham-Field's
presence in the rehabilitation and pediatric wheelchair market. The pediatric
wheelchair product line of Kuschall has broadened Everest & Jennings'
rehabilitation product lines, and provided Graham-Field with the ability to
market and distribute its products into Japan, New Zealand and Australia through
Kuschall's established distributor relationships.

     LaBac.  In June 1997, Graham-Field acquired LaBac Systems, Inc. ("LaBac"),
a manufacturer and distributor of custom power wheelchair seating systems and
manual wheelchairs. The acquisition of LaBac has provided Graham-Field with one
of the premier custom power wheelchair seating product lines in the healthcare
industry, expanded the Everest & Jennings power wheelchair product lines and
enhanced the manufacturing and research and development capabilities of
Graham-Field. The LaBac products, which have a reputation for excellence and
quality, have broadened the Everest & Jennings and Kuschall product lines and
provided additional support and expertise to Graham-Field in the rehabilitation
market.

     Medi-Source.  In August 1997, Graham-Field acquired Medi-Source, Inc.
("Medi-Source"), a wholesale distributor of medical sundry products to the
medical/surgical market. The acquisition of Medi-Source has expanded
Graham-Field's presence in the medical/surgical market.

     Medapex.  In August 1997, Graham-Field acquired Medical Supplies of
America, Inc. ("Medapex"), a wholesale distributor of home healthcare products.
The acquisition of Medapex has provided Graham-Field with additional
distribution capabilities in the Southeast region of the United States, and
enabled Graham-Field to utilize Medapex's telemarketing operations to provide
increased customer service to the combined customer base.

     Fuqua.  In December 1997, Graham-Field acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua"), which consisted of
two (2) separate and distinct businesses: a medical products business and
leather tanning business. The leather tanning business was subsequently sold by
Graham-Field on January 27, 1998. The medical products business of Fuqua,
through its subsidiaries, Lumex Medical Products, Inc. ("Lumex"), Basic American
Medical Products, Inc. ("Basic American") and Prism Enterprises, Inc. ("Prism"),
manufactures and distributes a variety of products, including medical beds,
patient room furnishings, bathroom safety products, mobility products, specialty
seating products, vacuum pumps, heat and cold packs, and therapeutic support
systems. The acquisition of Fuqua has provided Graham-Field with additional
manufacturing capabilities, with the well-established medical product brand
names of Lumex, Basic American and Prism, and expanded Graham-Field's presence
in the long-term, acute care and consumer markets.

PRODUCTS

     Graham-Field markets and distributes a broad range of healthcare products
under its own brand names and under suppliers' names. Graham-Field's products
are marketed to dealers and other customers, principally hospital, nursing home,
physician, home healthcare and rehabilitation dealers, healthcare product
wholesalers and retailers, including drug stores, catalog companies, pharmacies,
home-shopping related businesses, and certain governmental agencies.

     Product lines marketed by Graham-Field include wheelchairs and power
wheelchair seating systems, mobility products and bathroom safety products,
medical beds and patient room furnishings, blood pressure and diagnostic
products, adult incontinence products, specialty seating products, wound care
and urologicals, ostomy products, diabetic products, obstetrical supplies,
nutritional supplements, therapeutic support systems and respiratory equipment
and supplies.

                                        7
<PAGE>   9

     Basic American operates through its divisions, Simmons Health Care, Omni
Manufacturing and SSC Medical, which manufacture and distribute medical beds,
patient room furnishings, patient aids and mobility products primarily for the
long-term and acute care markets. Basic American serves as one-stop shopping for
a customer looking to refurbish or newly construct a long-term care patient
room. Consistent with the one-stop shopping approach, Basic American maintains
several in-house interior designers who provide design services to customers
looking to refurbish or construct long-term care facilities.

     Prism manufactures and distributes therapeutic heat and cold pack products,
and obstetrical vacuum pump systems for the acute care, long-term care and
consumer markets. Prism also sells heat and cold packs through a "show dealer"
network, which includes cart/kiosk retailing programs located in consumer
outlets.

     Graham-Field's principal manufactured and proprietary products include the
following:

<TABLE>
<CAPTION>
PRODUCT LINE                                           PRIMARY PRODUCTS
------------                                           ----------------
<S>                                        <C>
Everest & Jennings.......................  Wheelchairs
Lumex....................................  Mobility products, bathroom safety
                                           products, and specialty seating products
Smith & Davis............................  Homecare beds
LaBac....................................  Power wheelchair seating systems
Omni.....................................  Medical beds and furnishings
Simmons..................................  Medical beds and furnishings
SSC Medical..............................  Medical beds and furnishings
Prism....................................  Obstetrical supplies, heat and cold packs
Temco....................................  Mobility products, bathroom safety
                                           products, and specialty seating products
Labtron..................................  Blood pressure and diagnostic products
John Bunn................................  Respiratory products
</TABLE>

     The following is a summary of the Company's revenues from its principal
product lines or products:

<TABLE>
<CAPTION>
                                                               % OF TOTAL REVENUE
                                                              --------------------
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Wheelchairs and related positioning products................   22%     33%      7%
Ambulatory and patient aids.................................   12%      8%      5%
Incontinence products.......................................    6%      7%      8%
Sphygmomanometers...........................................    3%      3%      5%
Wound care and ostomy products..............................    4%      4%      6%
</TABLE>

     No other product line or product accounted for more than 5% of annual
revenues in each of the years during the three year period ended December 31,
1998.

     During the year ended December 31, 1998, approximately 42% of
Graham-Field's revenues were derived from products manufactured by Graham-Field,
approximately 26% were derived from imported products (designed and/or
manufactured to Graham-Field's specifications by third parties), and
approximately 32% were derived from products purchased from domestic sources.

VALUE-ADDED SERVICES

     Consolidation Advantage Program.  The C.A.P. program is the cornerstone of
Graham-Field's sales and marketing strategy. Through C.A.P., Graham-Field
strives to become the most efficient and reliable low-cost provider of medical
products. Graham-Field's sales and marketing representatives consult with
Graham-Field's customers to identify the purchasing efficiencies and cost
savings that can be derived from consolidating their purchases of medical
products with Graham-Field. By consolidating the purchase of multiple product
lines through a single source, Graham-Field's customers can significantly reduce
their operating costs. Graham-Field believes that C.A.P. significantly improves
the level of service to Graham-Field

                                        8
<PAGE>   10

customers by streamlining the purchasing process, decreasing order turnaround
time, reducing delivery expenses, and providing inventory on demand.

     Graham-Field Express.  In 1996, as part of Graham-Field's commitment to
providing superior customer service, Graham-Field introduced its Graham-Field
Express Program in the Bronx, New York. This program enables Graham-Field to
provide "same-day" and "next-day" service to home healthcare dealers of
strategic home healthcare products, including Temco and Lumex patient aids,
adult incontinence products, Everest & Jennings wheelchairs, Smith & Davis
homecare beds, nutritional supplements, and other freight intensive and time
sensitive products through its Graham-Field Express satellite facilities. The
Graham-Field Express Program differs from Graham-Field's standard distribution
model in that the Graham-Field Express Program focuses on "same-day" and
"next-day" service to home healthcare dealers of a limited number of strategic
home healthcare products. The Company intends to moderate the growth of the
Graham-Field Express Program and may further consolidate the Graham-Field
Express distribution network.

     As of March 31, 1999, Graham-Field Express facilities were operating from
distribution facilities located in the Bronx, New York; Puerto Rico; Baltimore,
Maryland; Cleveland, Ohio; and Boston, Massachusetts.

     Seamless Distribution Program.  Graham-Field has recently developed a
seamless distribution program which enables Graham-Field to ship orders directly
from its distribution facilities to home healthcare end-users on behalf of
Graham-Field's customers. The Seamless Distribution Program enables customers to
realize significant reductions in their operating costs by eliminating costs
associated with receiving, shipping and inventory management, while reducing the
product delivery time to end-users. This program currently operates from the
Company's distribution facility located in St. Louis, Missouri.

SALES AND MARKETING

     Graham-Field's sales and marketing strategies are developed on a
market-by-market basis through each of its business units -- Home
Healthcare/Rehabilitation, Medical/Surgical, Basic American, Prism and
International. While Graham-Field's sales and marketing strategies are developed
and conducted on a business unit basis, the sale of Graham-Field's products
generally overlap all business units. Each of the business units has a dedicated
sales force consisting of direct, full-time sales employees and independent
sales representatives. The full-time sales employees receive both salary and
commission, while the independent sales representatives work solely on
commission. The rehabilitation specialists representing the Home
Healthcare/Rehabilitation business unit conduct training activities for the
benefit of dealers and their personnel, physical and occupational therapists,
and other healthcare professionals. The training primarily focuses on the
features and benefits of Graham-Field's rehabilitation products, including the
products of Everest & Jennings, Kuschall, LaBac, Lumex and other rehabilitation
product lines of Graham-Field, and also covers the proper fitting and use of
such rehabilitation products. As a result of recent acquisitions, Graham-Field
has expanded its telemarketing program to enhance the sales and marketing
efforts of its sales forces. Graham-Field employs an extensive telemarketing
program, consisting of telemarketing sales personnel located in Atlanta, Georgia
and Bay Shore, New York, which targets approximately 8,000 customers nationwide.

     The international sales group consists of in-house sales employees, as well
as representatives located overseas. In order to expand its presence in the
European market, Graham-Field entered into a five-year exclusive European
distribution agreement in September 1997 for a wide range of its products with
Thuasne, a manufacturer and supplier of medical products throughout Europe. The
European distribution agreement with Thuasne was converted into a non-exclusive
distribution arrangement in January 1999.

     Graham-Field markets its products using a variety of programs and materials
including print advertising, product brochures, an extensive library of product
line video tapes, cooperative advertising programs and sales promotions to
reinforce Graham-Field's ongoing commitment to satisfy the needs of its
customers. A CD-ROM version of Graham-Field's catalog and an Internet
interactive website are currently being developed. In 1998, Graham-Field
continued the implementation of its new marketing programs, which include
several high-visibility marketing programs, including a new strategic
advertising campaign, packaging designs, and new logos and catalogs.
                                        9
<PAGE>   11

CUSTOMERS

     Graham-Field's products are marketed principally to hospital, nursing home,
physician, home healthcare and rehabilitation dealers, healthcare product
wholesalers and retailers, including drug stores, catalog companies, pharmacies,
home-shopping related businesses, and certain governmental agencies. No single
customer or buying group accounted for more than 10% of Graham-Field's revenues
in 1998. Graham-Field has supply arrangements with a number of customers,
including Baxter Healthcare Corporation, Allegiance Healthcare Corporation,
General Medical (a subsidiary of McKesson), Owens & Minor, The Med Group,
Homecare Providers Co-Op, Physician Sales and Services, Sysco Corporation, U.S.
Rehab., Henry Schein, Inc, Equipnet, Inc., VGM Associates, Inc., and Binson's
Home Healthcare Center.

     The Home Healthcare/Rehabilitation business unit markets and sells its
products to durable medical equipment suppliers, home healthcare equipment
suppliers, respiratory supply dealers, specialty retailers and independent
pharmacies. Graham-Field believes that it transacts business with substantially
all significant home healthcare dealers in the United States. The Home
Healthcare/Rehabilitation business unit also markets and sells its products to
the consumer market consisting of drug store chains, mass merchandisers, and
department stores. Consumers who purchase from such customers of Graham-Field
usually do so upon the advice of physicians, hospital discharge planners, nurses
or other professionals. The Medical/Surgical business unit markets and sells its
products to medical and surgical supply dealers. Graham-Field believes that it
sells to substantially all significant medical and surgical supply dealers in
the United States. In general, the dealers, wholesalers and retailers to whom
Graham-Field markets its products also sell other medical products, some of
which compete with Graham-Field's products.

     Basic American and Prism market and sell their products primarily to the
long-term, acute care, and consumer markets. Graham-Field believes that the
existing relationships of Basic American and Prism in the long-term, acute care
and consumer markets may present growth opportunities for Graham-Field to market
and distribute its products into such markets.

DISTRIBUTION NETWORK

     Graham-Field provides same-day and next-day services to its customers
through its distribution network. Graham-Field believes that its ability to
continue to grow its revenue base depends in part upon its ability to provide
its customers with efficient and reliable service. As of March 31, 1999,
Graham-Field distributes its products through six (6) primary points of
distribution located in St. Louis, Missouri; Bronx, New York; Santa Fe Springs,
California; Atlanta, Georgia; Bay Shore, New York; and Toronto, Canada. As of
March 31, 1999, secondary points of distribution include four (4) facilities
located in Cleveland, Ohio; Baltimore, Maryland; Boston, Massachusetts; and
Puerto Rico. Graham-Field also distributes its products from nine (9)
manufacturing facilities located in Earth City, Missouri; Central Falls, Rhode
Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay Shore, New
York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San Antonio, Texas.

MANUFACTURING AND PRODUCT SOURCING

     Principal manufactured and proprietary products (designed and/or
manufactured by Graham-Field or manufactured to its specifications by third
parties) include EVEREST & JENNINGS(R) wheelchairs, LUMEX(R) bathroom safety
products, mobility products and specialty seating systems, AKROS(R) therapeutic
support systems, ORTHOBIOTIC(R) specialty seating systems, POSTURE GLIDE(R)
specialty seating systems, MITYVAC(R) vacuum pumps, ZAPPAC(R) heating packs, EZ
HEAT(R) heating packs, AQUA COOL(R) cooling scarves, SMITH & DAVIS(R) homecare
beds, LABTRON(R) stethoscopes and blood pressure instruments, JOHN BUNN(R)
respiratory aid products, MEDICOPASTE(R) medicated bandages, rubber elastic
bandages, SURVALENT(R) electronic thermometry systems, silver nitrate
applicators, examination lamps and sterile packages under the MSP(R) label,
GRAFCO(R) medical supplies, including silver nitrate applicators and examination
lamps, the TEMCO(R) product line of patient aids, bathroom safety equipment and
patient room equipment, Simmons beds, and Aquatherm specialty cushions and
mattresses for the treatment and prevention of pressure sores.

                                       10
<PAGE>   12

     Graham-Field purchases products from a large number of domestic and foreign
suppliers. Graham-Field has entered into exclusive and non-exclusive
distribution agreements with a number of its domestic and foreign suppliers.
Under such agreements, suppliers may designate the markets into which
Graham-Field can sell the products and may stipulate minimum annual sales
volumes which are to be achieved by Graham-Field. Most of the distribution
agreements are cancelable by either party upon one to six months' notice. Except
as is described in the following paragraph, Graham-Field does not believe that
cancellation of any such agreements would have a material adverse effect on
Graham-Field, because comparable products are obtainable from alternative
sources upon acceptable terms.

     Graham-Field is dependent on the maintenance of its wheelchair supply
agreement (the "Wheelchair Supply Agreement") with P.T. Dharma Polimetal ("P.T.
Dharma"). The term of the Wheelchair Supply Agreement extends until June 30,
2000, and on each June 30 thereafter automatically renews for an additional one
year, unless the Company elects not to extend the agreement or the Company fails
to order at least 50% of the contractually specified minimums and P.T. Dharma
elects to terminate the agreement, or either party terminates the agreement as a
result of a material breach of the agreement after notice and the expiration of
the applicable cure period. If the Wheelchair Supply Agreement is terminated,
there can be no assurance that Graham-Field will be able to enter into a
suitable supply agreement with another manufacturer. The termination of this
agreement in combination with the failure to secure an alternative source of
supply on acceptable terms would result in a material adverse effect on
Graham-Field's business and financial condition. In February 1998, the Company
advanced $3.5 million to P.T. Dharma (the "P.T. Dharma Advance") in
consideration of the grant of a six month option to purchase the wheelchair
assets of P.T. Dharma for a price to be determined. In March 1999, the P.T.
Dharma Advance was converted into a three (3) year loan agreement (the "P.T.
Dharma Loan Agreement"). Under the terms of the P.T. Dharma Loan Agreement, P.T.
Dharma is required to repay the P.T. Dharma Advance to Graham-Field over a
period of three (3) years, with interest at Graham-Field's borrowing rate, as
adjusted from time to time, in monthly installments ranging from $50,000 to
$100,000 per month. The P.T. Dharma Loan Agreement is secured by the shares of
the capital stock of P.T. Dharma and guaranteed by the principal stockholders of
P.T. Dharma.

     Graham-Field currently purchases a substantial portion of its
sphygmomanometers and stethoscopes from a limited number of suppliers in the Far
East. In addition, Graham-Field sources component parts for sphygmomanometers
and stethoscopes and assembles such products in its facility located in Bay
Shore, New York.

PATENTS AND TRADEMARKS

     Graham-Field believes that its business is dependent in part on its ability
to establish and maintain patent protection for its proprietary technologies,
products and processes, and the preservation of its trade secrets. Graham-Field
currently holds a number of United States patents relating to the EVEREST &
JENNINGS(R), LUMEX(R), TEMCO(R), and PRISM(R) product lines. Other companies may
provide similar products which may not be covered by Graham-Field's issued
patents. There can be no assurance that any United States or international
patents issued or licensed to Graham-Field will provide any significant
competitive advantages to Graham-Field or will not be successfully challenged,
invalidated or circumvented or that patents will be issued in respect of patent
applications to which Graham-Field currently holds rights. In addition,
Graham-Field distributes certain patented products pursuant to licensing
arrangements. In the event a licensing arrangement is terminated, Graham-Field
may not be able to continue to distribute the patented product.

     Graham-Field is involved in the ordinary course of business in
patent-related lawsuits or other actions, none of which Graham-Field believes is
material. However, defense and prosecution of patent claims is costly and time
consuming, regardless of an outcome favorable to Graham-Field, and can result in
the diversion of substantial financial and managerial resources from
Graham-Field's primary business activities. Additionally, adverse outcomes of
such claims could have a material adverse effect on Graham-Field's business and
financial condition.

     Graham-Field has registered a significant number of trademarks in the
United States, including "GRAHAM-FIELD," "EVEREST & JENNINGS," "LUMEX," "AKROS,"
"ORTHOBIOTICS,"

                                       11
<PAGE>   13

"POSTURE GLIDE," "MITYVAC," "ZAPPAC," "EZ HEAT," "AQUA COOL," "SMITH & DAVIS,"
"JOHN BUNN," "BRISTOLINE," "SURVALENT," "MEDICOPASTE," "HEALTHTEAM," "LABTRON,"
"GRAFCO," "TEMCO" and "TENDERCLOUD". The registered trademarks are significant
to Graham-Field because they provide Graham-Field with name and market
recognition for its products and distinguish Graham-Field's proprietary products
from its competitors' products.

PRODUCT LIABILITY

     The sale, manufacture and distribution of healthcare products involve an
inherent risk of product liability claims and related adverse publicity.
Although Graham-Field maintains product liability insurance, there can be no
assurance that such coverage will be adequate to protect Graham-Field from
liabilities it may incur. Product liability insurance is expensive, and there
can be no assurance that Graham-Field will be able to continue to obtain and
maintain insurance at acceptable premium rates. Potential losses from liability
claims and the effect which product liability litigation may have on the
reputation and marketability of Graham-Field's products could have a material
adverse effect on Graham-Field's business and financial condition.

GOVERNMENTAL REGULATION

     The healthcare industry is affected by extensive government regulation at
the Federal and state levels. In addition, through the Medicare, Medicaid and
other programs the Federal and state governments are responsible for the payment
of a substantial portion of United States healthcare expenditures. Changes in
regulations and healthcare policy occur frequently and may impact the current
results of the growth potential for and the profitability of products sold by
Graham-Field in each market. Although Graham-Field is not a direct provider
under Medicare and Medicaid, many of Graham-Field's customers are providers
under these programs and depend upon Medicare and/or Medicaid reimbursement for
a portion of their revenue. Changes in Medicare and Medicaid regulations may
adversely impact Graham-Field's revenues and collections indirectly by reducing
the reimbursement rate received by Graham-Field's customers and consequently
placing downward pressure on prices charged for Graham-Field's products.
Graham-Field's C.A.P. program is designed in part to enable customers to respond
to the reduction in reimbursement rates by consolidating the purchase of
multiple product lines through Graham-Field. There can be no assurance, however,
that this program will offset any such reduction in reimbursement rates.

     In certain cases, the ability of the Company's customers to pay for the
products supplied by the Company depends upon governmental and private insurer
reimbursement policies. Consequently, those policies have an impact on the level
of the Company's sales and its ability to collect receivables on a timely basis.
Continuing governmental and private third-party payor cost-cutting efforts have
led and may continue to lead to significant reductions in the reimbursement
levels. Furthermore, governmental reimbursement programs, such as the Medicare
and Medicaid programs, are subject to substantial regulation by Federal and
state governments, which are continually reviewing and revising the programs and
their regulations. There can be no assurance that changes to governmental
reimbursement programs will not have a material adverse effect on the Company.

     The Federal Food, Drug and Cosmetic Act and regulations issued or proposed
thereunder provide for regulation by the Food and Drug Administration ("FDA") of
the marketing, manufacturing, labeling, packaging and distribution of medical
devices and drugs, including Graham-Field's products. Among these regulations
are requirements that medical device manufacturers register with the FDA, list
devices manufactured by them and file product incident reports, product labeling
requirements, and premarket notification filings for certain product classes.
Graham-Field is also required to comply with the FDA's "Current Good
Manufacturing Practices for Medical Devices" regulations, which set forth
requirements for, among other things, Graham-Field's quality system for the
manufacturing and distribution operations.

     The majority of products marketed by Graham-Field constitute Class I
products under FDA regulations. Class I products are generally exempt from
premarketing testing and other filing requirements with the FDA. The balance of
the medical products marketed by Graham-Field are generally classified as Class
II products under FDA regulations, which requires a determination that
substantially equivalent products are already being legally marketed and could
require potentially expensive and time-consuming testing to assure that such

                                       12
<PAGE>   14

products meet recognized performance standards for safety and efficacy, which
may include clinical testing. Unscheduled FDA inspections of Graham-Field's
facilities may occur from time to time to determine compliance with FDA
regulations.

     Graham-Field is in the process of implementing a quality management system
to comply with the requirements of ISO9000/EN46000 ("ISO") and the MDD 93/42/EEC
("CE Marking") on a company-wide basis, which will enhance Graham-Field's
overall standard quality systems and enable Graham-Field to comply with European
regulatory requirements. As of March 15, 1999, Graham-Field had obtained ISO
certification for its manufacturing facilities located in Rhode Island and
Toronto, Canada, and its distribution facility located in Bay Shore, New York.
ISO audits have been conducted at Graham-Field's manufacturing facilities
located in Guadalajara, Mexico, Bay Shore, New York and Earth City, Missouri.
Graham-Field is awaiting the results of the ISO audits conducted at the
manufacturing facilities located in Guadalajara, Mexico, Bay Shore, New York and
Earth City, Missouri, however, there can be no assurance that such audits were
successfully completed for purposes of obtaining ISO certification.

     Graham-Field engages the services of an outside consulting firm to monitor
the effectiveness of Graham-Field's quality management system to ensure that
manufactured and distributed products comply with ISO9000/EN46000, the MDD
93/42/EEC and FDA requirements.

     The impact of FDA regulation on Graham-Field has increased in recent years
as Graham-Field has increased its manufacturing operations. To date,
Graham-Field has not experienced any significant difficulty in complying with
the requirements imposed by the FDA or other government agencies. Graham-Field
believes that the manufacturing and quality control procedures it employs
substantially conform to the requirements of the FDA and does not anticipate
having to make any material expenditures as a result of these requirements.

     Graham-Field competes with many other manufacturers and distributors who
offer one or more products competitive with Graham-Field's products; however,
Graham-Field believes that no single competitor serving Graham-Field's markets
offers as broad a product range as Graham-Field. Graham-Field's principal means
of competition are the breadth of its product range, quality, price and speed of
delivery, and value-added services, including attractive financing programs and
delivery and service alternatives. The C.A.P. program enables Graham-Field to
compete by offering customers reduced operating costs associated with purchasing
by consolidating purchases of multiple products. With respect to Graham-Field's
manufactured and proprietary products, Graham-Field's primary competitors
include Invacare Corporation and Sunrise Medical Corporation. Competition for
the sale of such products is intense and is based on a number of factors,
including quality, reliability, price, financing programs, delivery and service.
Graham-Field believes that the quality, reputation and technological advances
relating to its manufactured and proprietary products are favorable factors in
competing with other manufacturers. Graham-Field purchases certain products from
its competitors and supplies certain of its products to its competitors. Many of
Graham-Field's competitors have substantially greater financial and other
resources than Graham-Field. There can be no assurance that Graham-Field will be
able to compete effectively in its industry or that competitive pressures will
not adversely affect Graham-Field's financial position or results of operations.

EMPLOYEES

     As of December 31, 1998, Graham-Field had 2,023 employees, of which eight
(8) were executive officers, 429 were administrative and clerical personnel, 367
were sales, marketing and customer service personnel and 1,219 were
manufacturing and warehousing personnel.

     Graham-Field is a party to four (4) collective bargaining agreements
covering Graham-Field's facilities located in Bay Shore, New York; Earth City,
Missouri; Toronto, Canada; and Guadalajara, Mexico. The collective bargaining
agreements cover approximately 642 employees. The collective bargaining
agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and
Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13,
1999, July 24, 2003 and December 31, 1999, respectively.

                                       13
<PAGE>   15

     Graham-Field has never experienced an interruption or curtailment of
operations due to labor controversy that had a material adverse effect on
Graham-Field's operations. Graham-Field considers its employee relations to be
satisfactory.

ITEM 2.  PROPERTIES:

     The Company's principal executive offices are located in Bay Shore, New
York.

     As of March 31, 1999, Graham-Field distributes its products through six (6)
primary points of distribution located in St. Louis, Missouri; Bronx, New York;
Santa Fe Springs, California; Atlanta, Georgia; Bay Shore, New York; and
Toronto, Canada. As of March 31, 1999, secondary points of distribution include
four (4) facilities located in Cleveland Ohio; Baltimore, Maryland; Boston,
Massachusetts; and Puerto Rico. Graham-Field also distributes its products from
nine (9) manufacturing facilities located in Earth City, Missouri; Central
Falls, Rhode Island; Guadalajara, Mexico; Denver, Colorado; Toronto, Canada; Bay
Shore, New York; Fond du Lac, Wisconsin; Lawrenceville, Georgia; and San
Antonio, Texas. The manufacturing facilities located in Toronto, Canada;
Guadalajara, Mexico; Bay Shore, New York; Fond du Lac, Wisconsin; and
Lawrenceville, Georgia are owned by the Company. The distribution facility
located in Bay Shore, New York is owned by the Company.

     Graham-Field believes that its facilities are in good repair and provide
adequate capacity for the near term growth of the Company's business.

     Owned and leased properties for Graham-Field's principal facilities are
summarized in the following table.

A.  PRINCIPAL MANUFACTURING FACILITIES:

<TABLE>
<CAPTION>
                                                APPROXIMATE      OWNED OR LEASE
LOCATION                                       SQUARE FOOTAGE    EXPIRATION DATE      PRINCIPAL USE
--------                                       --------------    ---------------    ------------------
<S>                                            <C>               <C>                <C>
100 Spence Street............................     170,000           Owned           Manufacturing,
  Bay Shore, NY                                                                     Distribution
3601 Rider Trail.............................     147,000          7/31/02          Manufacturing,
  Earth City, MO                                                                    Distribution
336 Trowbridge Drive.........................     133,000           Owned           Manufacturing
  Fond du Lac, WI
125 South Street.............................     120,000         12/31/04          Manufacturing,
  Passaic, NJ                                                                       Distribution(1)
111 Snidercroft Road.........................     118,000           Owned           Manufacturing,
  Concord, Ontario, Canada                                                          Distribution,
                                                                                    Research &
                                                                                    Development
400 Rabro Drive East.........................     105,000         12/31/06          Manufacturing,
  Hauppauge, NY                                                                     Distribution(2)
6952 Fair Grounds Parkway....................      70,000          5/31/02          Manufacturing
  San Antonio, TX
Calle 3 #631.................................      64,839           Owned           Manufacturing,
  Zona Industrial                                                                   Distribution
  C.P. 44940
  Guadalajara, Jalisco
  Mexico
362 Industrial Park Drive....................      50,000           Owned           Manufacturing
  Lawrenceville, GA
5 Clermont Street............................      42,000         12/31/99          Manufacturing,
  Johnstown, NY                                                                     Distribution(3)
</TABLE>

                                       14
<PAGE>   16

<TABLE>
<CAPTION>
                                                APPROXIMATE      OWNED OR LEASE
LOCATION                                       SQUARE FOOTAGE    EXPIRATION DATE      PRINCIPAL USE
--------                                       --------------    ---------------    ------------------
<S>                                            <C>               <C>                <C>
3535 South Kipling Street....................      30,300          6/25/07          Manufacturing,
  Lakewood, CO                                                                      Distribution
Calle 26 #2256A..............................      28,399         12/31/99          Manufacturing,
  Zona Industrial                                                                   Distribution
  Guadalajara, Jalisco
  Mexico
131 Clay Street..............................      21,467         12/31/02          Manufacturing,
  Central Falls, RI                                                                 Distribution
</TABLE>

---------------
(1) As of June 1998, the Company consolidated the manufacturing and distribution
    operations located in Passaic, NJ with its manufacturing facility located in
    Bay Shore, NY. The existing Passaic, NJ lease remains in effect.

(2) The Company is in the process of consolidating the manufacturing and
    distribution operations located in Hauppauge, NY with its distribution
    facility located in Bay Shore, NY. As of June 1998, the Company's corporate
    offices in Hauppauge, NY were relocated to the corporate offices located in
    Bay Shore, NY. The existing Hauppauge, NY lease remains in effect.

(3) The Company is in the process of ceasing operations at the manufacturing
    facility located in Johnstown, NY. The Johnstown, NY lease is scheduled to
    expire on December 31, 1999.

B.  PRINCIPAL DISTRIBUTION FACILITIES:

<TABLE>
<CAPTION>
                                           APPROXIMATE      OWNED OR LEASE
LOCATION                                  SQUARE FOOTAGE    EXPIRATION DATE      PRINCIPAL USE
--------                                  --------------    ---------------    ------------------
<S>                                       <C>               <C>                <C>
12055 Missouri Bottom Road..............     144,000           3/31/07         Warehouse,
  St. Louis County, MO                                                         Distribution
81 Spence Street........................     130,000            Owned          Corporate Offices,
  Bay Shore, NY                                                                Warehouse,
                                                                               Distribution
711 Brush Avenue........................      86,152           4/30/02         Warehouse,
  Bronx, NY                                                                    Distribution
11954 East Washington Blvd. ............      80,000            2/1/02         Warehouse,
  Santa Fe Springs, CA                                                         Distribution
120 Royal Woods Court...................      60,000           9/30/08         Warehouse,
  Atlanta, GA                                                                  Distribution
144 East Kingsbridge....................      48,000        Month-to-Month     Warehouse,
  Mount Vernon, NY                                              Lease          Distribution
2935 Bankers Industrial Drive...........      50,000            Owned          Showroom,
  Atlanta, GA                                                                  Warehouse
11725 Missouri Bottom Road..............      43,989           3/31/03         Warehouse,
  Hazelwood, MO                                                                Distribution
Lot 1.0.................................      35,472           3/14/03         Office, Warehouse,
  Northboro Road                                                               Distribution
  Southboro, MA
10145 Philipp Parkway...................      30,000           11/14/04        Warehouse,
  Streetsboro, OH                                                              Distribution
135 Fell Court..........................      30,000           12/21/06        Warehouse,
  Hauppauge, NY                                                                Distribution(1)
8921 Forshee Drive......................      28,255             (2)           Warehouse,
  Jacksonville, FL                                                             Distribution
4880 Hammermill Road....................      25,000            Owned          Warehouse,
  Tucker, GA                                                                   Distribution(3)
</TABLE>

                                       15
<PAGE>   17

<TABLE>
<CAPTION>
                                           APPROXIMATE      OWNED OR LEASE
LOCATION                                  SQUARE FOOTAGE    EXPIRATION DATE      PRINCIPAL USE
--------                                  --------------    ---------------    ------------------
<S>                                       <C>               <C>                <C>
Kilometer 29.4..........................      21,600           10/8/99         Warehouse,
  Road #1                                                                      Distribution
  Entrando por Ferrero
  Caguas, PR
7447 New Ridge Road.....................      20,147           4/30/02         Warehouse,
  Hanover, MD                                                                  Distribution
</TABLE>

---------------
(1) The Company is in the process of consolidating its warehouse and
    distribution operations located in Hauppauge, NY with its distribution
    facility located in Bay Shore, NY. The existing Hauppauge, NY lease remains
    in effect.

(2) As of February 1999, the Company consolidated its warehouse and distribution
    operations in Jacksonville, FL with its distribution operations located in
    Atlanta, GA. The Jacksonville, FL lease has been terminated.

(3) As of January 1999, the Company consolidated its warehouse and distribution
    operations located in Tucker, GA with its distribution operations located in
    Atlanta, GA. In May 1999, the Company executed an agreement to sell the
    distribution facility located in Tucker, GA.

ITEM 3.  LEGAL PROCEEDINGS

     Following the Company's public announcement on March 23, 1998 of its
financial results for the fourth quarter and year ended December 31, 1997, the
Company and certain of its directors and officers were named as defendants in at
least fifteen putative class action lawsuits filed primarily in the United
States District Court for the Eastern District of New York on behalf of all
purchasers of common stock of the Company (including former Fuqua shareholders
who received shares of the Company Common Stock when the Company acquired Fuqua
in December 1997) during various periods within the time period May 1997 to
March 1998. The class actions were consolidated into an amended consolidated
class action complaint as of January 29, 1999, and lead counsel was selected.
The amended consolidated class action complaint asserts claims against the
Company and the other defendants for violations of Sections 11, 12(2) and 15 of
the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder with respect to alleged material misrepresentations and omissions in
public filings made with the Securities and Exchange Commission and certain
press releases and other public statements made by the Company and certain of
its officers relating to the Company's business, results of operations,
financial condition and future prospects, as a result of which, it is alleged,
the market price of the Company Common Stock was artificially inflated during
the putative class periods. The amended consolidated class action complaint
focuses on statements made concerning the Company's integration of its various
recent acquisitions, as well as statements about the Company's inventories,
accounts receivable, expected earnings and sales levels. The plaintiffs seek
unspecified compensatory damages and costs (including attorneys and expert
fees), expenses and other unspecified relief on behalf of the putative classes.

     In March 1999, the Company reported that an investigation conducted by the
Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found
certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997.
While the accounting errors and irregularities are not presently the basis for
the pending class actions, counsel to the class plaintiff have informed the
Company's counsel that plaintiffs may seek to amend the consolidated complaint
to allege claims based on such items.

     The Company intends to defend the lawsuit vigorously, but the Company is
not currently able to evaluate the likelihood of success in this case or the
range of potential loss. However, if the foregoing proceeding were determined
adversely to the Company, management believes that such a judgment could have a
material adverse effect on the Company's financial condition, results of
operations and/or cash flows. In addition, the

                                       16
<PAGE>   18

staff of the SEC has advised the Company that the SEC may conduct an
investigation with respect to the aforementioned accounting errors and
irregularities.

     On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug
Administration arrived at the Company's principal headquarters and one other
Company location and retrieved several documents pursuant to search warrants.
The Company has subsequently been advised by an Assistant United States Attorney
for the Southern District of Florida that the Company is a target of an ongoing
grand jury investigation involving alleged fraud by one or more of the Company's
suppliers relating to the unauthorized diversion of medical products intended
for sale outside of the United States into United States markets. The Company
has also been advised that similar search warrants were obtained with respect to
approximately 14 other participants in the distribution of medical products. The
Company is presently investigating these matters. The Company does not know when
the grand jury investigation will conclude or what action, if any, may be taken
by the government against the Company or any of its employees. Accordingly, the
impact of this investigation on the Company cannot yet be assessed. The Company
intends to cooperate fully with the government in its investigation.

     In March 1994, the Suffolk County Authorities initiated an investigation to
determine whether regulated substances had been discharged in excess of
permitted levels from the Lumex division (the "Lumex Division") located in Bay
Shore, New York, which was acquired by Fuqua in April 1996. An environmental
consulting firm was engaged by the Lumex Division to conduct a more
comprehensive site investigation, develop a remediation work plan and provide a
remediation cost estimate. These activities were performed to determine the
nature and extent of contaminants present on the site and to evaluate their
potential off-site extent. In connection with the acquisition of the Lumex
Division, Fuqua assumed by contract the obligations associated with this
environmental matter. In late 1996, Fuqua conducted surficial soil remediation
at the Bay Shore facilities and reported the results to the Suffolk County
Authorities in March 1997. A ground water work plan was submitted concurrently
with the soil remediation report. In May 1997, the Suffolk County Authorities
stated that they were satisfied with the soil remediation that had been
conducted by Fuqua and provided comments on the ground water work plan.

     In November 1997, the Lumex Division received the results of additional
ground water testing that had been performed in August and September 1997. The
results revealed significantly lower concentrations of contaminants than were
known at the time the "Ground Water Work Plan" was prepared in March 1997. Due
to the relatively low levels of contaminants detected, the Lumex Division
proposed sampling the groundwater on a quarterly basis for two years to ensure
that the groundwater was not significantly affected and deferred implementing
the ground water work plan. In January, April, July and October 1998, and in
January 1999, additional confirmatory samples were taken and analyzed. These
analytic results provide further support that the groundwater is not
significantly contaminated. The Company will continue to monitor the quality of
the groundwater to confirm that it remains acceptable. If the quality of the
groundwater remains acceptable after the two year period expires, the Company
will seek to withdraw its groundwater work plan.

     At December 31, 1998, the Company had reserves for remediation costs and
additional investigation costs which will be required. Reserves are established
when it is probable that a liability has been incurred and such costs can be
reasonably estimated. The Company's estimates of these costs were based upon
currently enacted laws and regulations and the professional judgment of
independent consultants and counsel. Where available information was sufficient
to estimate the amount of liability, that estimate has been used. Where
information was only sufficient to establish a range of probable liability and
no point within the range is more likely than another, the lower end of the
range has been used. The Company has not assumed that any such costs would be
recoverable from third parties nor has the Company discounted any of its
estimated costs, although a portion of the remediation work plan will be
performed over a period of years. The amount of environmental liabilities is
difficult to estimate due to such factors as the extent to which remedial
actions may be required, laws and regulations change or the actual costs of
remediation differ when the final work plan is performed.

     In April 1996, Fuqua acquired the Lumex Division from Cybex International,
Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a
final purchase price adjustment in the asset sale agreement. The final purchase
price adjustment was disputed and, pursuant to the asset sale agreement was
resolved through arbitration. On July 30, 1998, Fuqua received a payment of
$2,468,358 (inclusive of interest)

                                       17
<PAGE>   19

from Cybex, of which $2,384,606 was recorded as a reduction of the excess of
cost over net assets acquired at September 30, 1998.

     In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights as provided under the terms of the asset sale agreement.
In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit
against the seller and certain former officers stating claims for fraud, breach
of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees.
Defendants filed an answer and counterclaim on April 7, 1998, denying liability
and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6
million in settlement of all of Fuqua's claims. As part of the settlement, Cybex
released Fuqua from all liability in connection with Cybex's counterclaim.

     On August 3, 1998, the Company and another defendant, one of the Company's
employees, were served with a lawsuit initiated by JOFRA Enterprises, Inc.
("JOFRA") in New York State Supreme Court, Westchester County. The complaint
seeking damages of $25,000,000 alleges that the Company's hiring of a certain
officer and employees of JOFRA constituted, among other things, unfair
competition and wrongful appropriation of business opportunities. Pursuant to
the defendant-employee's employment agreement, the defendant-employee is seeking
indemnification with respect to such claims. Discovery is proceeding in the
action. The Company considers the plaintiff's allegations to be without merit
and intends to defend this lawsuit vigorously.

     On November 3, 1998, the Company and certain of its directors were named as
defendants in a derivative suit commenced in the Court of Chancery of the State
of Delaware, New Castle County. The lawsuit seeks to rescind a separation
agreement dated as of July 29, 1998 (the "Separation Agreement"), pursuant to
which Irwin Selinger, the former Chairman of the Board and Chief Executive
Officer, resigned as Chairman of the Board, Chief Executive Officer and
President of the Company. The lawsuit also seeks unspecified damages as well as
the recovery of all sums paid to Mr. Selinger pursuant to the Separation
Agreement. The plaintiff alleges that by approving the terms of the Separation
Agreement, the defendants breached their fiduciary duties of loyalty and care to
the Company by obligating the Company to pay Mr. Selinger substantially more
than his former employment agreement had required. The Company considers the
plaintiff's allegations to be without merit, and filed a motion to dismiss the
complaint on various grounds in February 1999. The parties are presently in the
process of briefing the motion to dismiss.

     In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a
company acquired by Graham-Field in June 1997, asserted certain claims against
Graham-Field relating to alleged material misrepresentations and omissions
contained in the purchase agreement, certain press releases and other public
filings made by the Company with the Securities and Exchange Commission relating
to the Company's business, results of operations and financial condition. Under
the terms of the purchase agreement pursuant to which Graham-Field acquired
LaBac for approximately $9.1 million in common stock of Graham-Field, all claims
that are not resolved between the parties are to be submitted to arbitration.
The Company intends to defend the claims vigorously, but the Company is not
currently able to evaluate the likelihood of success in this case or the range
of potential loss.

     The Company and its subsidiaries are parties to lawsuits and other
proceedings, including those relating to product liability and the sale and
distribution of its products. Except as discussed above, while the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that the ultimate liabilities, if any, will have a
material adverse effect on the consolidated financial position or results of
operations or cash flows of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

     Not Applicable.

                                       18
<PAGE>   20

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:

     (a) The common stock of the Company is traded on the New York Stock
Exchange (Symbol: GFI). The following provides the high and low sales prices for
the period from January 1, 1997 through May 28, 1999 as reported on the New York
Stock Exchange.

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              SALES    SALES
                                                              PRICE    PRICE
                                                              -----    -----
<S>                                                           <C>      <C>
1997
  First Quarter.............................................   13 3/4    8 1/2
  Second Quarter............................................   13 3/4    8 3/8
  Third Quarter.............................................   17 7/8   12 9/16
  Fourth Quarter............................................   18 3/4   14

1998
  First Quarter.............................................   19 12/16   7 5/16
  Second Quarter............................................    8 1/16   4
  Third Quarter.............................................    6 4/16   2 5/16
  Fourth Quarter............................................    3 13/16   1 13/16

1999
  First Quarter.............................................    3 9/16   2 5/16
  Second Quarter (through May 28, 1999).....................    2 8/16   1 10/16
</TABLE>

     (b) As of the close of business on May 28, 1999, the number of holders of
record of common stock of the Company was 1,486.

     The New York Stock Exchange (the "Exchange") has certain continued listing
financial criteria. The Company currently does not meet the Exchange's continued
listing criteria and is in discussions with the Exchange concerning its plans to
bring the Company in line with such criteria. There can be no assurance that the
discussions with the Exchange will be successful, or that the Company will be
able to continue to maintain its listing on the Exchange. In the event the
Company's common stock is delisted from the Exchange, the Company would seek to
list its common stock on another exchange or market, however, there can be no
assurance that such efforts would be successful. The delisting of the Company's
common stock on the Exchange may result in reduced liquidity for the Company's
stockholders, which could have a material adverse effect on the Company's
stockholders.

     Under the terms of the Company's Credit Facility with IBJ, which provides
for borrowings, including letters of credit and bankers' acceptances, the
Company is prohibited from declaring, paying or making any dividend or
distribution on any shares of the common stock or preferred stock of the Company
(other than dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of the Company. Notwithstanding the foregoing restrictions, the Company is
permitted to pay cash dividends in any fiscal year in an amount not to exceed
the greater of (i) the amount of dividends due to BIL (Far East Holdings)
Limited and BIL Securities (Offshore) Ltd. (collectively, "BIL") under the terms
of the Series B Cumulative Convertible Preferred Stock (the "Series B Preferred
Stock") and Series C Cumulative Convertible Preferred Stock (the "Series C
Preferred Stock") in any fiscal year, or (ii) 12.5% of net income of the Company
on a consolidated basis, provided, that no event of default shall have occurred
and be continuing or would exist after giving effect to the payment of the
dividends.

                                       19
<PAGE>   21

     As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants and other terms and
provisions contained in the Credit Facility. On April 22, 1999, the Company
entered into an amendment to the Credit Facility, which was subsequently amended
as of May 21 and June 3, 1999 (the "1999 Amendment"), which provided for, among
other things, the waiver of these defaults, an amendment to certain financial
covenants and other terms and provisions contained in the Credit Facility, and
an extension of the term of the Credit Facility from December 10, 1999 to May
31, 2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

     In addition, the Company's Indenture dated as of August 4, 1997 (the
"Indenture") governing the issuance of its $100 million Senior Subordinated
Notes (the "Senior Subordinated Notes") prohibits the Company from declaring or
paying any dividend or making any distribution or restricted payment as defined
in the Indenture (collectively, the "Restricted Payments") (other than dividends
or distributions payable in capital stock of the Company), unless, at the time
of such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.

     The Company anticipates that for the foreseeable future any earnings will
be retained for use in its business and accordingly, does not anticipate the
payment of cash dividends, other than to BIL in accordance with the terms and
provisions of the Series B and Series C Preferred Stock.

ITEM 6.  SELECTED FINANCIAL DATA:

     The following selected financial data of the Company should be read in
conjunction with the Company's consolidated financial statements and notes
thereto appearing herein. The financial data for 1997 and 1996 has been
restated. See Note 16 to the consolidated financial statements. All amounts in
the table are expressed in thousands, except per share amounts.

                                       20
<PAGE>   22

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                        --------------------------------------------------------------
                                        1998(1)       1997(2)         1996(3)      1995(4)      1994
                                        --------   -------------   -------------   --------   --------
                                                   (AS RESTATED)   (AS RESTATED)
<S>                                     <C>        <C>             <C>             <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..........................  $380,866     $262,834        $143,270      $112,414   $106,026
(Loss) income before extraordinary
  item................................  $(48,992)    $(26,417)       $(12,838)     $  1,047   $ (1,979)
Extraordinary item....................        --           --            (736)           --         --
                                        --------     --------        --------      --------   --------
Net (loss) income.....................  $(48,992)    $(26,417)       $(13,574)     $  1,047   $ (1,979)
                                        ========     ========        ========      ========   ========
PER COMMON SHARE DATA:
(Loss) income before extraordinary
  item................................  $  (1.61)    $  (1.33)       $   (.82)     $    .07   $   (.14)
Extraordinary item....................        --           --            (.05)           --         --
                                        --------     --------        --------      --------   --------
Net (loss) income.....................  $  (1.61)    $  (1.33)       $   (.87)     $    .07   $   (.14)
                                        ========     ========        ========      ========   ========
Weighted average number of common and
  dilutive shares outstanding.........    31,111       20,600          15,557        14,315     13,862
                                        ========     ========        ========      ========   ========
BALANCE SHEET DATA (AT PERIOD END):
Total assets..........................  $428,859     $537,337        $204,286      $103,011   $102,454
Working capital.......................    76,376       99,132          14,316        35,061     29,389
Total long-term liabilities, excluding
  current portion and Senior
  Subordinated Notes..................     6,715        7,733           6,535        20,462     22,107
Senior Subordinated Notes.............   100,000      100,000              --            --         --
Stockholders' equity..................   219,867      265,109         113,450        60,970     56,152
</TABLE>

---------------
(1) 1998 includes a charge of $18,310,000 to write-off the Company's deferred
    tax asset, a provision for uncollectible accounts receivable of $11,047,000,
    an allowance of $3,000,000 for the P.T. Dharma Loan Agreement, separation
    charges of $2,548,000, a charge of $2,389,000 for inventory write-downs,
    charges of $2,320,000 related principally to other asset write-offs and
    accrual adjustments, a charge for impairment in excess of cost over net
    assets acquired of $1,873,000, a charge of $954,000 for stock compensation
    and reversals of restructuring and merger accruals no longer required of
    $3,547,000.

(2) 1997 includes restructuring charges of $18,151,000, indirect merger charges
    related to the acquisition of Fuqua of $4,393,000, inventory write-downs of
    $7,732,000, charges of $5,000,000 to increase allowances for accounts and
    notes receivable, $3,300,000 associated with the write-off of purchased
    in-process research and development and a charge of $838,000 for stock
    compensation.

    On December 30, 1997, Graham-Field acquired Fuqua in a transaction pursuant
    to which Graham-Field issued 9,413,689 shares of common stock (excluding
    shares of common stock of Graham-Field to be issued in connection with Fuqua
    stock options assumed by Graham-Field) in exchange for the common stock of
    Fuqua. The acquisition was accounted for as a purchase and, accordingly,
    assets and liabilities were recorded at fair value at the date of
    acquisition and the results of operations are included subsequent to that
    date. The excess of the purchase price over net assets acquired was
    approximately $121.2 million.

    In connection with the acquisition of Fuqua, Graham-Field acquired the
    Leather Operations. It was Graham-Field's intention to dispose of the
    Leather Operations as soon as reasonably practicable following the
    consummation of the acquisition of Fuqua. Accordingly, the net assets of the
    Leather Operations were reflected as "Assets held for sale" in the amount of
    $61,706,000 on the balance sheet as of December 31, 1997. On January 27,
    1998, Graham-Field sold the Leather Operations for $60,167,400 in cash,
    5,000 shares of Series A Preferred Stock of the buying entity with a stated
    value of $4,250,000 (valued at $1,539,000), and the assumption of debt of
    $2,341,250.

    On August 17, 1997, Graham-Field acquired substantially all of the assets
    and certain liabilities of Medi-Source, a privately-owned distributor of
    medical supplies, for $4,500,000 in cash. Graham-Field also

                                       21
<PAGE>   23

    entered into a five (5) year non-competition agreement with the previous
    owner in the aggregate amount of $301,000 payable over the five (5) year
    period. The acquisition was accounted for as a purchase and, accordingly,
    assets and liabilities were recorded at fair value at the date of
    acquisition and the results of operations are included subsequent to that
    date. The excess of the purchase price over net assets acquired was
    approximately $3.7 million.

    On August 28, 1997, Graham-Field acquired all of the issued and outstanding
    shares of the capital stock of Medapex in a transaction accounted for as a
    pooling of interests.

    On June 25, 1997, Graham-Field acquired all of the capital stock of LaBac,
    in a merger transaction. LaBac manufactures and distributes custom power
    wheelchair seating systems and manual wheelchairs throughout North America.
    In connection with the acquisition, LaBac became a wholly-owned subsidiary
    of Graham-Field, and the selling stockholders of LaBac received in the
    aggregate 772,557 shares of common stock of Graham-Field valued at $11.77
    per share in exchange for all of the issued and outstanding shares of the
    capital stock of LaBac. Graham-Field also entered into a three year
    consulting agreement with the selling stockholders and an entity controlled
    by the selling stockholders, and non-competition agreements with each of the
    selling stockholders. The acquisition was accounted for as a purchase and,
    accordingly, assets and liabilities were recorded at fair value at the date
    of acquisition and the results of operations are included subsequent to that
    date. The excess of cost over net assets acquired amounted to approximately
    $7.3 million.

    On March 7, 1997, Everest & Jennings acquired Kuschall, a manufacturer of
    pediatric wheelchairs, high-performance adult wheelchairs and other
    rehabilitation products, for a purchase price of $1,510,000, representing
    the net book value of Kuschall. The purchase price was paid by the issuance
    of 116,154 shares of common stock of Graham-Field valued at $13.00 per
    share. The acquisition was accounted for as a purchase and, accordingly,
    assets and liabilities were recorded at fair value at the date of
    acquisition and the results of operations are included subsequent to that
    date.

    On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary
    of Graham-Field acquired substantially all of the assets and certain
    liabilities of Motion 2000 Inc. and its wholly-owned subsidiary, Motion 2000
    Quebec Inc., for a purchase price equal to Cdn. $2,900,000 (Canadian
    Dollars) (approximately U.S. $2,150,000). The purchase price was paid by the
    issuance of 187,733 shares of common stock of Graham-Field valued at
    U.S.$11.437 per share. The acquisition was accounted for as a purchase and,
    accordingly, assets and liabilities were recorded at fair value at the date
    of acquisition and the results of operations are included subsequent to that
    date. The excess of cost over the net assets acquired amounted to
    approximately U.S.$2.5 million. In 1998, the Company recorded a charge of
    $1,873,000 to reflect an impairment in this asset.

(3) In March 1996, Graham-Field sold its Gentle Expressions breast pump product
    line, and recorded a gain of $360,000.

    On November 27, 1996, the Company acquired Everest & Jennings pursuant to
    the terms and provisions of the Amended and Restated Agreement and Plan of
    Merger dated as of September 3, 1996 and amended as of October 1, 1996, by
    and among Graham-Field, Everest & Jennings, Everest & Jennings Acquisition
    Corp., and BIL. The acquisition was accounted for under the purchase method
    of accounting and, accordingly, the operating results of Everest & Jennings
    have been included in Graham-Field's consolidated financial statements since
    the date of acquisition. The excess of the aggregate purchase price over the
    estimated fair market value of the net deficiency acquired was approximately
    $54.2 million.

    On September 4, 1996, Graham-Field acquired substantially all of the assets
    of V.C. Medical, a wholesale distributor of medical products in Puerto Rico,
    for a purchase price consisting of $1,703,829 in cash, and the issuance of
    32,787 shares of common stock of Graham-Field, valued at $7.625 per share.
    In addition, Graham-Field assumed certain liabilities of V.C. Medical in the
    amount of $296,721. The acquisition was accounted for as a purchase and,
    accordingly, assets and liabilities were recorded at fair value at the date
    of acquisition and the results of operations are included subsequent to that
    date. The excess of cost over the net assets acquired amounted to
    approximately $988,000.

                                       22
<PAGE>   24

    During 1996, Graham-Field recorded charges of $15,146,000 related to the
    acquisition of Everest & Jennings. The charges included $12,500,000
    associated with the write-off of purchased in-process research and
    development costs and $2,646,000 of merger-related expenses.

    The extraordinary item is related to the early retirement of the
    indebtedness underlying the John Hancock Mutual Life Insurance Note and
    Warrant Agreement dated as of March 12, 1992, as amended (the "John Hancock
    Indebtedness"), and represents a "make-whole" payment and the write-off of
    unamortized deferred financing costs associated with this indebtedness.

(4) Effective July 1, 1995, Graham-Field acquired substantially all of the
    assets and liabilities of National Medical Excess Corp. The acquisition was
    accounted for under the purchase method of accounting and accordingly, the
    results of operations are included in the consolidated financial statements
    of Graham-Field subsequent to that date.

    Net income per common share for 1995, which was the same for basic and
    diluted, was computed using the weighted average number of common shares
    (14,278,000 shares) and dilutive common equivalent shares outstanding
    (37,000 shares) during the period.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:

FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives relating to the future economic performance and
financial results of the Company. The forward-looking statements include, but
are not limited to, statements relating to (i) the Company's ability to continue
as a going concern, (ii) the Company's ability to reduce operating expenses and
working capital investment and obtain additional financing to operate the
business, (iii) the expansion of the Company's market share, (iv) the Company's
growth into new markets, (v) the development of new products and product lines
to appeal to the needs of the Company's customers, (vi) the consolidation of the
Graham-Field Express distribution network, (vii) obtaining regulatory and
governmental approvals, (viii) the upgrading of the Company's technological
resources and systems, (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risks related to Year 2000 compliance, and
(x) the retention of the Company's earnings for use in the operation and
expansion of the Company's business.

     Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the Company's ability to continue as a going concern, the
effect of economic and market conditions, the impact of the consolidation of
healthcare practitioners, the impact of healthcare reform, the Company's ability
to effectively integrate acquired companies and realize certain manufacturing,
operational and distribution efficiencies and cost savings, the termination of
the Company's Wheelchair Supply Agreement with P.T. Dharma, the ability of the
Company to maintain its gross profit margins, the ability to obtain financing to
operate the Company's business, the ability of the Company to implement its Year
2000 remediation plan and address the risks related to Year 2000 compliance, the
ability of the Company to successfully defend the class actions arising out of
the Company's public announcement on March 23, 1998 of its financial results for
the fourth quarter and year ended December 31, 1997, the failure of the Company
to successfully compete with the Company's competitors that have greater
financial resources, the loss of key management personnel or the inability of
the Company to attract and retain qualified personnel, adverse litigation
results, the acceptance and quality of new software and hardware products which
will enable the Company to expand its business, the acceptance and ability to
manage the Company's operations in foreign markets, possible disruptions in the
Company's computer systems or distribution technology systems, possible
increases in shipping rates or interruptions in shipping service, the level and
volatility of interest rates and currency values, the impact of current or
pending legislation and regulation, as well as the risks described from time to
time in the Company's filings with the Securities and Exchange Commission, which
include the section entitled "Risk Factors" in the Company's Registration
Statement on Form S-4 dated as of December 19, 1997.

                                       23
<PAGE>   25

     The forward-looking statements are based on current expectations and
involve a number of known and unknown risks and uncertainties that could cause
the actual results, performance and/or achievements of the Company to differ
materially from any future results, performance or achievements, express or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and that in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.

RESTATEMENT

     In March 1999, the Company reported that an investigation conducted by the
Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found
certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997.
The financial information contained herein has been restated to incorporate all
relevant information obtained from the investigation.

     The restated loss before income taxes for the years ended December 31, 1997
and 1996 were $37,009,000 and $11,482,000, respectively, as compared to the
originally reported loss before income taxes for the years ended December 31,
1997 and 1996 of $30,228,000, and $8,955,000, respectively. The restated net
loss for the years ended December 31, 1997 and 1996 were $26,417,000 and
$13,574,000, respectively, as compared to the originally reported net loss for
the years ended December 31, 1997 and 1996 of $22,893,000 and $12,609,000,
respectively. In addition, the restated operating revenues for the years ended
December 31, 1997 and 1996 were $261,672,000 and $142,711,000, respectively, as
compared to originally reported operating revenues for December 31, 1997 and
1996 of $261,981,000 and $143,083,000, respectively.

RESULTS OF OPERATIONS

     On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medapex, which was accounted for as a "pooling of
interests." Accordingly, the Company's financial statements for periods prior to
the combination have been restated to include the results of Medapex for all
periods.

  Operating Revenues

     1998 compared to 1997.  Operating revenues were $378,840,000 for the year
ended December 31, 1998, representing an increase of 45% from the prior year.
The increase in operating revenues was primarily attributable to the acquisition
of Fuqua in December 1997, five other acquisitions completed in 1997, the growth
of Graham-Field's innovative Graham-Field Express program, and the expansion of
the C.A.P. program. On a pro forma basis (as if all acquisitions completed in
1997 were recorded as of January 1, 1997), the Company's revenues increased
approximately 1% for the year ended December 31, 1998. Revenues for the year
ended December 31, 1998 fell below management's expectations primarily due to
intense competition within the healthcare industry and management's focus on the
integration of the acquisitions and the merging of diverse manufacturing and
distribution facilities, information and technology systems, sales forces and
product lines. Management believes that intense competition within the
healthcare industry will continue in 1999.

     In March 1996, Graham-Field Express was introduced to offer "same-day" and
"next-day" service to home healthcare dealers of certain strategic home
healthcare products, including patient aids, adult incontinence products,
Everest & Jennings wheelchairs, Smith & Davis homecare beds, nutritional
supplements and other freight and time sensitive products. As of December 31,
1998, Graham-Field Express facilities were operating from seven (7) distribution
facilities located in the Bronx, New York; Puerto Rico; Dallas, Texas;
Baltimore, Maryland, Cleveland, Ohio, Boston, Massachusetts and Louisville,
Kentucky, as compared to six (6) Graham-Field Express facilities which were
operating as of December 31, 1997. As of

                                       24
<PAGE>   26

March 31, 1999, the Company had eliminated Graham-Field Express facilities
operating in Louisville, Kentucky and Dallas, Texas. Revenues attributable to
Graham-Field Express were approximately $79,051,000 and $50,512,000 for the
years ended December 31, 1998 and 1997, respectively. The Company intends to
moderate the growth of the Graham-Field Express Program and may further
consolidate the Graham-Field Express distribution network.

     1997 compared to 1996.  Operating revenues were $261,672,000 for the year
ended December 31, 1997, or 83% higher than the year ended December 31, 1996.
The increase in operating revenues was primarily attributable to Graham-Field's
expansion of its C.A.P. program, the introduction of the Graham-Field Express
program, the addition of new product lines and the acquisition of Everest &
Jennings in November 1996.

     For the year ended December 31, 1997, revenues attributable to the
Graham-Field Express program were approximately $50,512,000. Revenues of Everest
& Jennings for the period from the date of acquisition to December 31, 1996 were
approximately $3,634,000.

     The increase in operating revenues was achieved despite the decline in
sales to Apria Healthcare Group, Inc. ("Apria") of approximately $5,905,000 for
the year ended December 31, 1996 as compared to the prior year. Graham-Field's
supply agreement with Apria expired on December 31, 1995.

  Interest and Other Income

     1998 compared to 1997.  Interest and other income for the year ended
December 31, 1998 was $2,026,000, as compared to $1,162,000 for the prior year.
The increase is primarily due to interest earned in the amount of $247,000 on
the P.T. Dharma Advance, dividends earned in the amount of $187,500 on preferred
stock acquired in connection with the sale of Fuqua's leather operations in
January 1998, and net sublease income in the amount of $237,000 attributable to
certain Fuqua properties.

     1997 compared to 1996.  Interest and other income increased from $559,000
in 1996 to $1,162,000 in 1997. The increase is primarily due to interest earned
on the unused proceeds from Graham-Field's sale of its Senior Subordinated Notes
on August 4, 1997 and interest earned on customer financing programs.

  Cost of Revenues

     1998 compared to 1997.  Cost of revenues as a percentage of operating
revenues decreased for the year ended December 31, 1998 to 70%, as compared to
74% for the prior year. The Fuqua entities and LaBac contributed higher gross
profit margins, offset in a large part by a higher mix of redistributed
products, primarily through the Graham-Field Express Program, which historically
operates at lower gross profit margins, and by operating inefficiencies incurred
during the integration of acquired companies. As part of Graham-Field's
strategic initiatives relating to product rationalization, charges of $2,389,000
and $7,732,000 are included in cost of revenues for 1998 and 1997, respectively,
for inventory write-downs for certain obsolete and excess inventory. Excluding
the charge associated with the inventory write-downs in 1998 and 1997, cost of
revenues as a percentage of operating revenues would have been approximately 69%
for 1998 and 71% for 1997. Management believes that cost of revenues as a
percentage of operating revenues was adversely affected in 1998 due to intense
competition and pricing pressures within the healthcare industry, which trend is
expected to continue. In addition, the delays associated with the integration of
the acquisitions completed in 1997 negatively impacted Graham-Field's ability to
realize certain manufacturing and operating efficiencies and cost savings.

     1997 compared to 1996.  Cost of revenues as a percentage of operating
revenues increased for the year ended December 31, 1997 to 74%, as compared to
71% for the prior year. As part of Graham-Field's strategic restructuring
initiatives related to product rationalization, a charge of $7,732,000 is
included in cost of revenues for 1997 related to inventory write-downs
associated with the elimination of certain non-strategic inventory and product
lines. Excluding the charge associated with the inventory write-downs, cost of
revenues as a percentage of operating revenues for 1997 would have been 71%.
Nevertheless, management believes that

                                       25
<PAGE>   27

cost of revenues as a percentage of operating revenues was adversely affected in
the fourth quarter of 1997 due to intense competition and pricing pressures
within the healthcare industry.

  Selling, General and Administrative Expenses

     1998 compared to 1997.  Selling, general and administrative expenses as a
percentage of operating revenues for the year ended December 31, 1998 increased
to 37%, as compared to 28% in the prior year. In the fourth quarter of 1998, a
provision for uncollectible accounts and notes receivable of $11,047,000 was
recorded to reflect anticipated losses from one customer in financial difficulty
and several other customer accounts being placed in collection and a provision
of $3,000,000 was recorded related to the P.T. Dharma Loan Agreement. Selling,
general and administrative expense in 1998 also includes separation charges of
$2,548,000, a charge of $2,320,000 principally for other asset write-offs and
accrual adjustments, a charge of $1,873,000 for impairment of excess of cost
over net assets and a charge of $954,000 for stock compensation. Excluding these
items, selling, general and administrative expenses as a percentage of operating
revenues would have been 31% in 1998. The increase in selling, general and
administrative expenses was primarily attributable to higher corporate office
and administrative overhead; increased amortization related to the acquisitions
completed in 1997; the inability of the Company to realize certain cost savings
associated with acquisitions completed in 1997 relating to the consolidation of
corporate offices, manufacturing and distribution facilities, the streamlining
of information and technology systems and the merging of sales forces and
product lines; and the contribution of revenue by the Fuqua entities and LaBac
at a higher percentage of selling, general and administrative expenses.

     1997 compared to 1996.  Selling, general and administrative expenses as a
percentage of operating revenues for the year ended December 31, 1997 increased
to 28%, as compared to 25% in the prior year. In the fourth quarter of 1997, a
provision for uncollectible accounts and notes receivable of $5,000,000 was
recorded to reflect increased credit risk due to the anticipated impact of
changes in state Medicare reimbursement and procurement policies for certain
product lines and the extended payment terms being taken by the Company's
customers. The changes in such reimbursement patterns resulted in an increased
number of days outstanding for receivables. In addition, the Company incurred a
charge of $838,000 in 1997 for stock compensation. Excluding the provision for
uncollectible accounts receivable and charge for stock compensation, selling,
general and administrative expenses as a percentage of operating revenues for
1997 would have been 26%. The increase in selling, general and administrative
expenses was primarily due to higher than anticipated integration costs
associated with the acquisitions completed in 1997. The delays associated with
the integration process also negatively impacted the Company's ability to
realize certain anticipated cost savings relating to the consolidation of
corporate offices, manufacturing and distribution facilities, the streamlining
of information and technology systems and the merging of sales forces and
product lines.

  Interest Expense

     1998 compared to 1997.  Interest expense for the year ended December 31,
1998 increased to $12,652,000, as compared to $7,260,000 for the prior year. The
increase is primarily due to a full year of interest attributable to the
Company's sale on August 4, 1997 of its Senior Subordinated Notes, a higher cost
of borrowings under the Credit Facility, and an increased level of borrowings
under the Credit Facility.

     1997 compared to 1996.  Interest expense for the year ended December 31,
1997 increased to $7,260,000, as compared to $2,762,000 for the prior year. The
increase is primarily due to increased borrowings attributable to Graham-Field's
revenue growth, the expansion of the Graham-Field Express program, and the sale
of the Senior Subordinated Notes on August 4, 1997.

  Merger and Restructuring Related Charges

     1998 compared to 1997.  Merger and restructuring related charges decreased
to record a benefit of $3,547,000 during 1998, as compared to a charge in 1997
of $22,544,000. The decrease is primarily due to the reevaluation of certain
merger and restructuring related charges originally recorded in 1997 that are no
longer needed as of the end of 1998. In 1998, the Company performed a
reevaluation of such accruals and considered

                                       26
<PAGE>   28

the actual costs incurred to complete the strategic restructuring initiatives
and the estimated future costs to complete the initiatives contemplated in the
1997 restructuring plan (the "Restructuring Plan") (see Note 3 to the
consolidated financial statements).

     1997 compared to 1996.  In connection with the acquisition of Fuqua on
December 30, 1997, the Company adopted the Restructuring Plan to implement
certain strategic restructuring initiatives and recorded restructuring charges
of $18,151,000 (the "Restructuring Charges") and indirect merger charges of
$4,393,000 (the "Merger Charges"). The Restructuring Plan was initiated to
create manufacturing, distribution and operating efficiencies and enhance the
Company's position as a low-cost supplier in the healthcare industry. These
steps included a broad range of efforts, including the consolidation of the
Company's Temco manufacturing operations in New Jersey into Fuqua's Lumex
manufacturing facility in New York and relocation of the Company's corporate
headquarters to the Lumex facility. In addition, the Company will be closing
several other distribution facilities and consolidating operations in an effort
to achieve additional cost savings.

     The Restructuring Charges include exit costs of $15,301,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees, and asset write-downs of
$2,200,000 relating to assets to be sold or abandoned. In addition, the Company
recorded a provision for inventory write-downs of $7,732,000 associated with the
elimination of certain non-strategic inventory and product lines that is
included in costs of revenue.

     The Merger Charges were related to the Fuqua acquisition and Medapex
combination and included the write-off of certain unamortized catalog costs with
no future value, certain insurance policies, payment of bonuses related to the
acquisitions, and various transaction costs. The Company also incurred
$3,300,000 of expenses in 1997 related to the write-off of purchased in-process
research and development costs of Fuqua.

     During the fourth quarter of 1996, Graham-Field recorded charges of
$15,146,000 related to the acquisition of Everest & Jennings. The charges
included $12,500,000 associated with the write-off of purchased in-process
research and development costs and $2,646,000 of merger expenses related to
severance payments, the write-off of certain unamortized catalog and software
costs with no future value, the accrual of costs to vacate certain of
Graham-Field's facilities, and the cost of certain insurance policies.

  Net Loss or Income

     1998 compared to 1997.  Loss before income taxes for the year ended
December 31, 1998 was $32,585,000, which includes $20,584,000 of unusual items
(the "1998 Unusual Items"), as compared to a loss before income taxes of
$37,009,000 in 1997, which includes Restructuring Charges, Merger Charges and
other charges in the aggregate amount of $39,414,000.

     The 1998 Unusual Items include a provision for uncollectible accounts and
notes receivable of $11,047,000, a provision of $3,000,000 related to the P.T.
Dharma Loan Agreement, separation charges of $2,548,000, a charge of $2,389,000
related to the inventory write-down for certain obsolete and excess inventory,
charges of $2,320,000 related to other asset write-offs and accrual adjustments,
charges for impairment of excess of cost over net assets acquired of $1,873,000,
a charge of $954,000 for stock compensation, and the reversal of merger and
restructuring related accruals no longer needed of $3,547,000. Excluding the
unusual items and restructuring, merger and other charges recorded in 1998 and
1997, the loss before income taxes was $12,001,000 in 1998, as compared to
income before income taxes of $2,405,000 in 1997. This decrease in income before
income taxes was primarily due to a decrease in cost of revenues as a percentage
of operating revenues offset by an increase in selling, general and
administrative expenses as a percentage of operating revenues, an increase in
amortization expense and an increase in interest expense.

     Net loss for the year ended December 31, 1998 was $48,992,000, as compared
to $26,417,000 for the prior year. An income tax expense of $16,407,000 was
recorded in 1998 compared to an income tax benefit of $10,592,000 in 1997. At
December 31, 1998, the Company had aggregate federal net operating loss
carryforwards of approximately $52,000,000 for income tax purposes, which expire
during the period 2010 through 2018. Approximately $24,164,000 of the net
operating loss carryforwards were acquired primarily in

                                       27
<PAGE>   29

connection with the Everest & Jennings acquisition and are limited to use in any
particular year. For financial reporting purposes, due to prior year losses of
Everest & Jennings, and SRLY limitations, a full valuation allowance of
approximately $12,598,000 was recorded in purchase accounting against the
Everest & Jennings net operating losses and deferred tax assets. Subsequent
realization of any Everest & Jennings tax benefits will be recorded as a
reduction of the excess of cost over net assets acquired.

     As a result of the continuation operating losses in 1998, the Company
increased its deferred tax valuation allowance by $22,996,000, which results in
a full valuation allowance against all net deferred tax assets at December 31,
1998.

     1997 compared to 1996.  Loss before income taxes for the year ended
December 31, 1997 was $37,009,000, as compared to a loss before income taxes and
extraordinary item of $11,482,000 for the prior year. The loss before income
taxes for 1997 includes Restructuring Charges of $18,151,000, Merger Charges of
$4,393,000, a provision for inventory write-downs of $7,732,000, a provision for
uncollectible accounts and notes receivable of $5,000,000, a charge of
$3,300,000 related to the write-off of purchased in-process research and
development costs of Fuqua and charges for stock compensation of $838,000. The
loss before income taxes and extraordinary item for 1996 includes certain
charges of $15,146,000 relating to the acquisition of Everest & Jennings.
Excluding the restructuring, merger and other charges and the write-off of
purchased in-process research and development costs in 1996 and 1997, income
before income taxes decreased from $3,664,000 in 1996 to $2,405,000 in 1997,
primarily due to an increase in interest expense, amortization and selling,
general and administrative expenses as a percent of operating revenues.

     Net loss for the year ended December 31, 1997 was $26,417,000, as compared
to $13,574,000 for the prior year. Graham-Field recorded an income tax benefit
of $10,592,000 for the year ended December 31, 1997, as compared to income tax
expense of $1,356,000 for the prior year. As of December 31, 1997, Graham-Field
had net deferred tax assets of $18,619,000, primarily comprised of future tax
deductions for restructuring and other accruals and reserves related to the
acquisition of Fuqua. A full valuation allowance has been recorded against
Everest & Jennings' net deferred tax assets. When realized, the tax benefit for
such items will be recorded as a reduction of the Everest & Jennings' goodwill.
A valuation allowance on the remaining deferred tax assets was not provided in
1997 because management believed that there would be sufficient earnings in the
carryforward period to utilize such deferred tax assets.

     The net loss in 1996 includes an extraordinary item of $736,000 (net of tax
benefit of $383,000) related to the "make-whole" payment and write-off of
unamortized deferred financing costs associated with the early retirement of the
John Hancock Indebtedness.

     Graham-Field's business has not been materially affected by inflation.

  Liquidity and Capital Resources

     Graham-Field had working capital of $76,376,000 at December 31, 1998, as
compared to $99,132,000 at December 31, 1997.

     Cash used in operating activities for the year ended December 31, 1998 was
$20,937,000, as compared to cash used in operating activities of $39,377,000 in
the prior year. The principal reasons for the decrease in cash used in operating
activities during 1998 were an increase in operating cash flow before changes in
operating assets and liabilities and a decrease in the changes in operating
assets and liabilities. During 1998, the Company had a lower investment in
accounts receivable relative to the investment in 1997 and a decrease in
inventory levels (compared to an increase in inventory levels during 1997) which
were partially offset by reductions in accounts payable and accrued expenses due
principally to 1998 payments on prior year restructuring and merger accruals. In
1998, the Company utilized approximately $4,367,000 in cash related to the
Restructuring and Merger Charges recorded in 1997.

     On December 30, 1997, Graham-Field acquired Fuqua and assumed $62,076,000
of Fuqua indebtedness (the "Fuqua Indebtedness") under Fuqua's revolving credit
facility with SunTrust Bank. On January 28, 1998, Graham-Field sold the Leather
Operations of Fuqua for $60,167,400 in cash, 5,000 shares of Series A Preferred
Stock of the buying entity with a stated value of $4,250,000 (which has been
valued at $1,539,000), and the assumption of debt of $2,341,250. The cash
proceeds from the sale of the Fuqua leather operations

                                       28
<PAGE>   30

were used to repay the indebtedness incurred under the Credit Facility, which
was used to retire the Fuqua Indebtedness.

     The Credit Facility provides for borrowings of up to $50 million (after
giving effect to the 1999 Amendment), including letters of credit and bankers
acceptances arranged by IBJ, as agent. Under the terms of the Credit Facility,
borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998) plus
one percent.

     As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants and other terms and
provisions contained in the Credit Facility. The 1999 Amendment provides for,
among other things, the waiver of these defaults, an amendment to certain
financial covenants, a new undrawn availability covenant relating to scheduled
interest payments on the Senior Subordinated Notes, and other terms and
provisions contained in the Credit Facility, and an extension of the term of the
Credit Facility from December 10, 1999 to May 31, 2000. The 1999 Amendment
reduced the maximum revolving advance amount under the Credit Facility from $80
million to $50 million, and reduced and/or eliminated certain availability and
borrowing base reserves. After giving effect to the 1999 Amendment, which
includes the reduction and/or elimination of certain availability and borrowing
base reserves, the Company's availability to borrow funds under the Credit
Facility remains relatively unchanged. As part of the 1999 Amendment, the
Company is required to pay a waiver fee (the "Waiver Fee") in the amount of
$400,000 on or before June 30, 1999, unless the Company either presents an
acceptable business plan to the banks on or before June 30, 1999, or repays in
full all outstanding obligations under the Credit Facility on or before June 30,
1999. Notwithstanding the foregoing, in the event the Company is in receipt on
or before June 30, 1999 of a commitment letter, letter of intent or agreement to
(i) sell substantially all or a part of the assets or equity securities of the
Company in a sale, merger, consolidation or other similar transaction, which
results in the repayment of all of the outstanding obligations under the Credit
Facility, or (ii) refinance the indebtedness under the Credit Facility (the
transactions referred to in clauses (i) and (ii) are individually referred to as
a "Significant Transaction"), the payment date for the Waiver Fee will be
extended until the earlier to occur of the consummation of a Significant
Transaction, which results in the repayment of all outstanding obligations under
the Credit Facility, or ninety (90) days from June 30, 1999. The Credit Facility
is secured by substantially all of the assets of the Company and the pledge of
the capital stock of certain of the Company's subsidiaries.

     At December 31, 1998, the Company had working capital of approximately
$76.4 million and unused availability under the Credit Facility of approximately
$15.7 million. As of June 1, 1999, after giving effect to the 1999 Amendment
(see Note 6 to the Consolidated Financial Statements), the Company had unused
availability of approximately $7.2 million. The Company has incurred significant
losses in each of the three years in the period ended December 31, 1998 and in
the first quarter of 1999. These losses have arisen as a result of a significant
amount of merger, restructuring and other expenses related to acquisitions
completed in 1996 and 1997, the failure to integrate effectively these
acquisitions and realize the benefits and synergies to be derived therefrom, and
the impact of intense competition within the healthcare industry. The losses
included significant charges relating to provisions for accounts receivable,
inventory and other asset write-offs in 1997 and 1998, a provision to increase
the valuation allowance on deferred tax assets in 1998, and certain professional
and other advisory fees in the first quarter of 1999, all of which management
believes to be substantially non-recurring. Further, the Company and certain of
its directors and officers have been named as defendants in at least fifteen
putative class action lawsuits which have been consolidated into an amended
complaint (see Note 15 to the Consolidated Financial Statements).

     In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 and take other actions to improve its cash flow. These actions include,
but are not limited, to (i) the completion of the activities contemplated by the
Company's restructuring plan as further described in Note 3 to the Consolidated
Financial Statements; (ii) the initiation of inventory reduction and product
rationalization programs; (iii) the tightening of credit policies and payment
terms; (iv) the reduction in previously budgeted capital expenditures; (v) the
implementation of streamlined

                                       29
<PAGE>   31

product pricing and product return guidelines; (vi) the initiation of an
aggressive program to collect past due accounts receivable; and (vii) the
realignment and consolidation of sales forces and territories.

     Notwithstanding the actions described above, the Company currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements, which
would require the consent of the lenders under the Credit Facility.

     Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

     The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates and certain consolidations, mergers and
acquisitions and sales of assets, and restrictions relating to capital
expenditures. In addition, Graham-Field is prohibited from declaring or paying
any dividend or making any distribution on any shares of common stock or
preferred stock of Graham-Field (other than dividends or distributions payable
in its stock, or split-ups or reclassifications of its stock) or applying any of
its funds, property or assets to the purchase, redemption or other retirement of
any such shares, or of any options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay
cash dividends in any fiscal year in an amount not to exceed the greater of (i)
the amount of dividends due BIL under the terms of the Graham-Field Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends. The Credit Facility contains
certain financial covenants, including a net cash flow covenant and leverage
ratio, as well as the requirement that Graham-Field reduce outstanding
borrowings with the net cash proceeds of certain asset sales.

     On August 4, 1997, Graham-Field issued the Senior Subordinated Notes under
Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). On
February 9, 1998, Graham-Field completed its exchange offer to exchange the
outstanding Senior Subordinated Notes for an equal amount of the new Senior
Subordinated Notes, which have been registered under the Securities Act. The new
Senior Subordinated Notes are identical in all material respects to the
previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes
bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The
Senior Subordinated Notes are general unsecured obligations of Graham-Field,
subordinated in right of payment to all existing and future senior debt of
Graham-Field, including indebtedness under the Credit Facility. The Senior
Subordinated Notes are guaranteed (the "Subsidiary Guarantees"), jointly and
severally, on a senior subordinated basis by all existing and future restricted
subsidiaries of Graham-Field (the "Guaranteeing Subsidiaries"). The Subsidiary
Guarantees are subordinated in right of payment to all existing and future
senior debt of the Guaranteeing Subsidiaries, including any guarantees by the
Guaranteeing Subsidiaries of Graham-Field's obligations under the Credit
Facility.

     The Company is a holding company with no assets or operations other than
its investments in its subsidiaries. The subsidiary guarantors are wholly-owned
subsidiaries of the Company and comprise all of the direct and indirect
subsidiaries of the Company. Accordingly, the Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because management has determined that such information is not material to
investors.

                                       30
<PAGE>   32

     The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions, the opening
of additional Graham-Field Express facilities and strategic alliances.

     Under the terms of the Indenture, the Senior Subordinated Notes are not
redeemable at Graham-Field's option prior to August 15, 2002. Thereafter, the
Senior Subordinated Notes are redeemable, in whole or in part, at the option of
Graham-Field, at certain redemption prices plus accrued and unpaid interest to
the date of redemption. In addition, prior to August 15, 2000, Graham-Field may,
at its option, redeem up to 25% of the aggregate principal amount of Senior
Subordinated Notes originally issued with the net proceeds from one or more
public offerings of common stock at a redemption price of 109.75% of the
principal amount, plus accrued and unpaid interest to the date of redemption;
provided that at least 75% of the aggregate principal amount of Senior
Subordinated Notes originally issued remain outstanding after giving effect to
any such redemption.

     The Indenture contains customary covenants including, but not limited to,
covenants relating to limitations on the incurrence of additional indebtedness,
the creation of liens, restricted payments, the sales of assets, mergers and
consolidations, payment restrictions affecting subsidiaries and transactions
with affiliates. In addition, in the event of a change of control of
Graham-Field as defined in the Indenture, each holder of the Senior Subordinated
Notes will have the right to require Graham-Field to repurchase such holder's
Senior Subordinated Notes, in whole or in part, at a purchase price of 101% of
the principal amount thereof plus accrued and unpaid interest to the date of
repurchase. In addition, Graham-Field will be required in certain circumstances
to make an offer to purchase Senior Subordinated Notes at a purchase price equal
to 100% of the principal amount thereof plus accrued and unpaid interest to the
date of purchase, with the net cash proceeds of certain asset sales. The Credit
Facility, however, prohibits Graham-Field from purchasing the Senior
Subordinated Notes without the consent of the lenders thereunder.

     In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.

     Effective as of May 12, 1999, BIL waived certain events of default under a
$4 million note owing by the Company to BIL (the "BIL Note") and exchanged all
of its right, title and interest under the BIL Note, in consideration of the
issuance of 2,036 fully paid, validly issued, non-assessable shares of the
Company's Series D Preferred Stock (the "Series D Preferred Stock"). The shares
of Series D Preferred Stock are non-voting, but have substantially the same
economic rights as 2,036,000 shares of Common Stock. Based on the closing price
of the Common Stock on May 12, 1999, that number of shares would have a market
value of $4,072,000, which equals the aggregate of the unpaid principal amount
and accrued interest on the BIL Note. Simultaneously with the closing of such
transaction, Graham-Field and BIL entered into an agreement dated as of May 12,
1999, which provided Graham-Field with the sole and exclusive option for a
period of one year following May 12, 1999, to convene a meeting of its
stockholders or take such other corporate action, in accordance with applicable
laws and regulatory requirements, as may be required to obtain applicable
corporate approval to exchange each share of Series D Preferred Stock for 1,000
shares of Common Stock.

                                       31
<PAGE>   33

  Year 2000

     The following disclosure is intended to be a "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The Company has developed, and is in the process of
implementing, a Year 2000 ("Y2K") remediation plan in an attempt to address the
risks related to the Y2K compliance of information technology ("IT") systems,
non-IT systems and products, and relationships with third parties. The Company
has three major IT application environments: distribution, manufacturing and
warehouse automation. Management has selected application packages for
distribution and manufacturing functions, which the Company believes are Y2K
compliant based upon representations from the supplier of such application
packages. Management believes, subject to completion of its review of the Y2K
compliance of its critical business partners (as discussed below) and completion
of product testing, that the current warehouse automation systems should be Y2K
compliant. With respect to each of these application environments, the Company
is relying on the Y2K compliance representations of suppliers and other third
parties whose activities may impact the Company's business operations. The
Company will be conducting Y2K compliance testing of these application packages.

     The distribution package includes the corporate general ledger, accounts
payable, accounts receivable, purchasing, inventory control and order entry
functions. General ledger, accounts payable and accounts receivable upgrades
were completed in 1997. Purchasing and inventory control functions have been
upgraded, and order entry is anticipated to be upgraded during the first half of
1999. The manufacturing system upgrade is in process, and one of the five
manufacturing sites has been completed. The remaining manufacturing sites are
currently in the remediation phase with all remediation and testing scheduled to
be completed by the end of the third quarter of 1999.

     In the event that the Company's IT and non-IT systems are not Y2K compliant
in time, the most reasonably likely worst case scenario is that such
non-compliance would result in a material adverse effect on the Company's
business, financial position, and results of operations in future periods. The
Company intends to create a contingency plan during 1999 to address potential
Y2K failures of its critical IT and non-IT systems. This contingency plan will
include, but not be limited to, identification and mitigation of potentially
serious business interruptions, adjustment of inventory levels to meet customer
needs and establishment of crisis response processes to address unexpected
problems. In developing the contingency plan, the Company will be prioritizing
its applications and developing emergency measures to address potential failures
of applications that are deemed significant to the Company's business
operations. Moreover, the Company's contingency plans will attempt to address
Y2K risks in connection with potential Y2K failures experienced by third parties
such as suppliers.

     The Company is in the process of reviewing its relationships with
high-priority business partners, including such areas as payroll, electronic
banking, EDI links and freight systems, to determine their Y2K compliance
status. Although the Company anticipates completing its assessment of the Y2K
compliance of its business partners by the middle of 1999, the Company will be
relying primarily on the representations of these external parties regarding
their readiness for Y2K compliance. The inability of the Company's high-priority
business partners to be Y2K compliant could have a material adverse effect on
the business, financial position and results of operations of the Company.

     With respect to non-IT system issues, the Company is in the process of
assessing the Y2K compliance of its products to determine if there are any
material issues associated with the Y2K problem, including any issues related to
embedded technology in these products. Towards that end, the Company is
attempting to identify its at-risk products (which include date data
processing), prioritize these products, and identify and address pertinent Y2K
concerns. The Company is assessing the Y2K compliance representations made by
suppliers, and anticipates completing its assessment by the third quarter of
1999. Since the Company's Y2K plan is dependent in part upon these suppliers and
other key third parties being Y2K compliant, there can be no assurance that the
Company's efforts in this area will be able to prevent a material adverse effect
on the Company's business, financial position, and results of operations in
future periods should a significant number of suppliers and customers experience
business disruptions as a result of their lack of Y2K compliance.

                                       32
<PAGE>   34

     A Y2K program manager has been assigned to coordinate the computer system
upgrades and the Company's Y2K compliance plan. In 1998, the Company expended
approximately $150,000 on its Y2K plan, primarily related to the costs of
outside consulting and review services. In 1999, the Company expects to expend
approximately $250,000 for outside consulting assistance, and $250,000 in the
form of capital equipment leases to replace equipment that is determined not to
be Y2K compliant. In addition, in 1999, the Company expects to expend $150,000
for an independent Y2K audit, and approximately $350,000 to undertake and
complete system testing. The Company's upgrades of IT systems were not
accelerated due to Y2K issues, and accordingly, such costs are not included in
the costs of the Y2K plan. With respect to non-IT system issues, the Company is
unable to estimate its remediation costs since it does not have information
available upon which to measure the cost of Y2K compliance in this area. While
the total costs to become Y2K compliant in the non-IT system area are not known
at this time, management does not believe that such costs will have a material
effect on the business, financial position, and results of operations of the
Company.

     The Company's statements regarding its Y2K readiness are forward-looking
and, therefore, subject to change as a result of known and unknown factors. The
estimates and expected completion dates described above are based on information
available at this time and may change as additional information and assessment
phase results become available.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

     As of December 31, 1998, the Company did not hold any derivative financial
or commodity instruments. The Company is subject to interest rate risk and
certain foreign currency risk relating to its operations in Mexico and Canada;
however, the Company does not consider its exposure in such areas to be
material. The Company's interest rate risk is related to its Senior Subordinated
Notes, which bear interest at a fixed rate of 9.75%, and borrowings under its
Credit Facility, which bear interest at IBJ's prime rate, as adjusted from time
to time, plus one percent.

                                       33
<PAGE>   35

                           ANNUAL REPORT ON FORM 10-K

                   ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)

                          LIST OF FINANCIAL STATEMENTS
                                      AND
                          FINANCIAL STATEMENT SCHEDULE

                              FINANCIAL STATEMENTS

                                CERTAIN EXHIBITS

                          FINANCIAL STATEMENT SCHEDULE
                          YEAR ENDED DECEMBER 31, 1998

                       GRAHAM-FIELD HEALTH PRODUCTS, INC.
                              BAY SHORE, NEW YORK
<PAGE>   36

FORM 10 - K -- ITEM 8, ITEM 14(a)(1) AND (2)(c) AND (d)

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

         LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

     The following consolidated financial statements of Graham-Field Health
Products, Inc. and subsidiaries are included in Item 8:

<TABLE>
<S>                                                           <C>
Report of Independent Auditors..............................  F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997...  F-3
Consolidated Statements of Operations -- Years ended
  December 31, 1998, 1997 and 1996..........................  F-4
Consolidated Statements of Stockholders' Equity -- Years
  ended December 31, 1998, 1997 and 1996....................  F-5
Consolidated Statements of Cash Flows -- Years ended
  December 31, 1998, 1997 and 1996..........................  F-7
Notes to Consolidated Financial Statements -- December 31,
  1998......................................................  F-9
The following consolidated financial statement schedule of
  Graham-Field Health Products, Inc. and subsidiaries is included
  in Item 14(d):
Schedule II -- Valuation and qualifying accounts............
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

                                       F-1
<PAGE>   37

                         REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
Graham-Field Health Products, Inc.

     We have audited the accompanying consolidated balance sheets of
Graham-Field Health Products, Inc. and subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Graham-Field Health Products, Inc. and subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

     The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 1, the Company has incurred significant
losses in each of the three fiscal years in the period ended December 31, 1998.
In addition, as more fully described in Note 15, the Company has been named as a
defendant in at least fifteen putative class action lawsuits that have been
consolidated into an amended complaint. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Notes 1 and 15. The
consolidated financial statements and financial statement schedule do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

                                          /s/ ERNST & YOUNG LLP

Melville, New York
June 3, 1999

                                       F-2
<PAGE>   38

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                              --------------------------------
                                                                  1998              1997
                                                              -------------   ----------------
                                                                              AS RESTATED, SEE
                                                                                  NOTE 16
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   3,290,000     $  4,430,000
  Accounts receivable, less allowance for doubtful accounts
     of $20,107,000 and $14,368,000, respectively...........     90,969,000       87,212,000
  Inventories...............................................     63,121,000       74,029,000
  Notes receivable and other current assets, less allowance
     for doubtful notes of $5,373,000 in 1998...............      9,252,000        7,317,000
  Recoverable and prepaid income taxes......................      1,441,000        4,422,000
  Deferred tax assets.......................................             --       10,695,000
  Asset held for sale.......................................             --       61,706,000
                                                              -------------     ------------
          TOTAL CURRENT ASSETS..............................    168,073,000      249,811,000
Property, plant and equipment, net..........................     40,188,000       35,890,000
Excess of cost over net assets acquired, net of accumulated
  amortization of $20,664,000 and $11,441,000,
  respectively..............................................    207,554,000      230,063,000
Deferred tax assets.........................................             --        7,924,000
Other assets................................................     13,044,000       13,649,000
                                                              -------------     ------------
          TOTAL ASSETS......................................  $ 428,859,000     $537,337,000
                                                              =============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Credit facility...........................................  $  27,606,000     $ 65,883,000
  Current maturities of long-term debt......................      1,235,000        2,619,000
  Accounts payable..........................................     28,915,000       33,758,000
  Accrued expenses..........................................     33,941,000       48,419,000
                                                              -------------     ------------
          TOTAL CURRENT LIABILITIES.........................     91,697,000      150,679,000
Long-term debt and Senior Subordinated Notes................    106,715,000      107,733,000
Other long-term liabilities.................................     10,580,000       13,816,000
                                                              -------------     ------------
          TOTAL LIABILITIES.................................    208,992,000      272,228,000
STOCKHOLDERS' EQUITY
Series A preferred stock, par value $.01 per share:
  authorized shares 300,000, none issued....................             --               --
Series B preferred stock, par value $.01 per share:
  authorized shares 6,100, issued and outstanding 6,100.....     28,200,000       28,200,000
Series C preferred stock, par value $.01 per share:
  authorized shares 1,000, issued and outstanding 1,000.....      3,400,000        3,400,000
Common stock, par value $.025 per share:
  authorized shares 60,000,000, issued and outstanding
  31,311,104 and 30,574,982, respectively...................        783,000          764,000
Additional paid-in capital..................................    286,503,000      280,179,000
Accumulated deficit.........................................    (97,587,000)     (47,530,000)
Accumulated other comprehensive income (loss)...............     (1,432,000)          96,000
                                                              -------------     ------------
          TOTAL STOCKHOLDERS' EQUITY........................    219,867,000      265,109,000
Commitments and contingencies...............................             --               --
                                                              -------------     ------------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........  $ 428,859,000     $537,337,000
                                                              =============     ============
</TABLE>

                See notes to consolidated financial statements.
                                       F-3
<PAGE>   39

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                   --------------------------------------------
                                                       1998            1997            1996
                                                   ------------    ------------    ------------
                                                                   AS RESTATED,    AS RESTATED,
                                                                   SEE NOTE 16     SEE NOTE 16
<S>                                                <C>             <C>             <C>
Net revenues:
  Medical equipment and supplies.................  $378,840,000    $261,672,000    $142,711,000
  Interest and other income......................     2,026,000       1,162,000         559,000
                                                   ------------    ------------    ------------
                                                    380,866,000     262,834,000     143,270,000
                                                   ------------    ------------    ------------
Costs and expenses:
  Cost of revenues...............................   265,360,000     193,127,000     100,998,000
  Selling, general and administrative............   138,986,000      73,612,000      35,846,000
  Interest expense...............................    12,652,000       7,260,000       2,762,000
  Purchased in-process research and development
     costs.......................................            --       3,300,000      12,500,000
  Merger and restructuring related charges.......    (3,547,000)     22,544,000       2,646,000
                                                   ------------    ------------    ------------
                                                    413,451,000     299,843,000     154,752,000
                                                   ------------    ------------    ------------
Loss before income taxes and extraordinary
  item...........................................   (32,585,000)    (37,009,000)    (11,482,000)
Income taxes (benefit)...........................    16,407,000     (10,592,000)      1,356,000
                                                   ------------    ------------    ------------
Loss before extraordinary item...................   (48,992,000)    (26,417,000)    (12,838,000)
Extraordinary loss on early retirement of debt
  (net of tax benefit of $383,000)...............            --              --        (736,000)
                                                   ------------    ------------    ------------
Net loss.........................................   (48,992,000)    (26,417,000)    (13,574,000)
Preferred stock dividends........................     1,065,000       1,065,000              --
                                                   ------------    ------------    ------------
Net loss attributable to common stockholders.....  $(50,057,000)   $(27,482,000)   $(13,574,000)
                                                   ============    ============    ============
Net loss per common share -- basic and diluted:
Loss before extraordinary item...................  $      (1.61)   $      (1.33)   $       (.82)
Extraordinary loss on early retirement of debt...            --              --            (.05)
                                                   ------------    ------------    ------------
Net loss.........................................  $      (1.61)   $      (1.33)   $       (.87)
                                                   ============    ============    ============
Weighted average number of common shares
  outstanding....................................    31,111,000      20,600,000      15,557,000
                                                   ============    ============    ============
</TABLE>

                See notes to consolidated financial statements.
                                       F-4
<PAGE>   40

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                SERIES B      SERIES C        COMMON STOCK         ADDITIONAL
                                                PREFERRED    PREFERRED    ---------------------     PAID-IN       ACCUMULATED
                                   TOTAL          STOCK        STOCK        SHARES      AMOUNT      CAPITAL         DEFICIT
                                ------------   -----------   ----------   ----------   --------   ------------   -------------
<S>                             <C>            <C>           <C>          <C>          <C>        <C>            <C>
BALANCE, JANUARY 1, 1996 (see
  Note 16)....................  $ 60,882,000                              15,065,286   $377,000   $ 66,891,000   $  (6,386,000)
  Net loss (as restated, see
    Note 16)..................   (13,574,000)                                     --         --             --     (13,574,000)
  Other comprehensive income
    (loss):
  Translation adjustment......       (12,000)                                     --         --             --              --
                                ------------
  Total comprehensive loss....   (13,586,000)
  Issuance of common stock on
    exercise of stock
    options...................       550,000                                 153,255      4,000        711,000              --
  Issuance of stock in
    connection with
    acquisitions..............    65,809,000   $28,200,000   $3,400,000    4,477,720    112,000     34,097,000              --
  Tax benefit from exercise of
    stock options.............        38,000            --           --           --         --         38,000              --
  Retirement of Treasury
    Stock.....................            --            --           --      (45,517)    (1,000)      (164,000)             --
  Dividend accrued on
    Preferred Stock...........       (88,000)           --           --           --         --             --         (88,000)
  Notes receivable from
    officers for sale of
    shares....................      (155,000)           --           --           --         --             --              --
                                ------------   -----------   ----------   ----------   --------   ------------   -------------
BALANCE, DECEMBER 31, 1996
  (as restated, see Note
    16).......................   113,450,000    28,200,000    3,400,000   19,650,744    492,000    101,573,000     (20,048,000)
  Net loss (as restated, see
    Note 16)..................   (26,417,000)           --           --           --         --             --     (26,417,000)
  Other comprehensive income
    (loss):
  Translation adjustment......       108,000            --           --           --         --             --              --
                                ------------
  Total comprehensive loss....   (26,309,000)
  Issuance of common stock on
    exercise of stock
    options...................     1,212,000            --           --      527,975     13,000      2,816,000              --
  Compensation component of
    employee stock options....       838,000            --           --           --         --        838,000              --
  Issuance of stock in
    connection with
    acquisitions..............   175,944,000            --           --   10,490,133    262,000    175,682,000              --
  Issuance of common stock for
    accrued dividends.........       364,000            --           --       41,000      1,000        363,000              --
  Tax benefit from exercise of
    stock options.............       520,000            --           --           --         --        520,000              --
  Retirement of Treasury
    Stock.....................            --            --           --     (134,870)    (4,000)    (1,613,000)             --
  Dividend accrued on
    Preferred Stock...........    (1,065,000)           --           --           --         --             --      (1,065,000)

<CAPTION>
                                                          ACCUMULATED
                                    TREASURY STOCK           OTHER
                                ----------------------   COMPREHENSIVE    NOTES RECEIVABLE
                                 SHARES      AMOUNT      INCOME (LOSS)   FROM SALE OF SHARES
                                --------   -----------   -------------   -------------------
<S>                             <C>        <C>           <C>             <C>
BALANCE, JANUARY 1, 1996 (see
  Note 16)....................
  Net loss (as restated, see
    Note 16)..................
  Other comprehensive income
    (loss):
  Translation adjustment......                            $   (12,000)

  Total comprehensive loss....
  Issuance of common stock on
    exercise of stock
    options...................   (45,517)  $  (165,000)            --
  Issuance of stock in
    connection with
    acquisitions..............        --            --             --
  Tax benefit from exercise of
    stock options.............        --            --             --
  Retirement of Treasury
    Stock.....................    45,517       165,000             --
  Dividend accrued on
    Preferred Stock...........        --            --             --
  Notes receivable from
    officers for sale of
    shares....................        --            --             --         $(155,000)
                                --------   -----------    -----------         ---------
BALANCE, DECEMBER 31, 1996
  (as restated, see Note
    16).......................        --            --        (12,000)         (155,000)
  Net loss (as restated, see
    Note 16)..................        --            --             --                --
  Other comprehensive income
    (loss):
  Translation adjustment......        --            --        108,000                --

  Total comprehensive loss....
  Issuance of common stock on
    exercise of stock
    options...................  (134,870)   (1,617,000)            --                --
  Compensation component of
    employee stock options....        --            --             --                --
  Issuance of stock in
    connection with
    acquisitions..............        --            --             --                --
  Issuance of common stock for
    accrued dividends.........        --            --             --                --
  Tax benefit from exercise of
    stock options.............        --            --             --                --
  Retirement of Treasury
    Stock.....................   134,870     1,617,000             --                --
  Dividend accrued on
    Preferred Stock...........        --            --             --                --
</TABLE>

                                       F-5
<PAGE>   41
<TABLE>
<CAPTION>


GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
                                                  SERIES B     SERIES C       COMMON STOCK          ADDITIONAL
                                                 PREFERRED    PREFERRED   ---------------------        PAID-IN     ACCUMULATED
                                       TOTAL         STOCK        STOCK                  AMOUNT        CAPITAL         DEFICIT
                                ------------   -----------   ----------                  SHARES -------- ------------ -------------
                                                                          ----------
<S>                             <C>            <C>           <C>          <C>          <C>        <C>            <C>
  Notes receivable from
    officers..................       155,000            --           --           --         --             --              --
BALANCE, DECEMBER 31, 1997
  (as restated, see Note
    16).......................   265,109,000    28,200,000    3,400,000   30,574,982    764,000    280,179,000     (47,530,000)
  Net loss....................   (48,992,000)           --           --           --         --             --     (48,992,000)
  Other comprehensive income
    (loss):
  Translation adjustment......      (544,000)           --           --           --         --             --              --
  Minimum pension liability...      (984,000)           --           --           --         --             --              --
                                ------------
  Total comprehensive loss....   (50,520,000)
  Issuance of common stock on
    exercise of stock
    options...................     4,689,000            --           --      645,353     16,000      5,276,000              --
  Compensation component of
    employee stock options....       954,000            --           --           --         --        954,000              --
  Issuance of common stock for
    accrued dividends.........       700,000            --           --      129,654      4,000        696,000              --
  Retirement of Treasury
    Stock.....................            --            --           --      (38,885)    (1,000)      (602,000)             --
  Dividend accrued on
    Preferred Stock...........    (1,065,000)           --           --           --         --             --      (1,065,000)
                                ------------   -----------   ----------   ----------   --------   ------------   -------------
BALANCE, DECEMBER 31, 1998....  $219,867,000   $28,200,000   $3,400,000   31,311,104   $783,000   $286,503,000   $ (97,587,000)
                                ============   ===========   ==========   ==========   ========   ============   =============

<CAPTION>

GRAHAM-FIELD HEALTH PRODUCTS,
CONSOLIDATED STATEMENTS OF STO
                                                           ACCUMULATED
                                    TREASURY STOCK               OTHER
                                ----------------------   COMPREHENSIVE   NOTES RECEIVABLE
                                                AMOUNT   INCOME (LOSS)   FROM SALE OF SHARES
                                        SHARES ----------- ------------- -------------------
                                --------
<S>                             <C>        <C>           <C>             <C>
  Notes receivable from
    officers..................        --            --             --           155,000
BALANCE, DECEMBER 31, 1997
  (as restated, see Note
    16).......................        --            --         96,000                --
  Net loss....................        --            --             --                --
  Other comprehensive income
    (loss):
  Translation adjustment......        --            --       (544,000)               --
  Minimum pension liability...        --            --       (984,000)               --
  Total comprehensive loss....
  Issuance of common stock on
    exercise of stock
    options...................   (38,885)     (603,000)            --                --
  Compensation component of
    employee stock options....        --            --             --                --
  Issuance of common stock for
    accrued dividends.........        --            --             --                --
  Retirement of Treasury
    Stock.....................    38,885       603,000             --                --
  Dividend accrued on
    Preferred Stock...........        --            --             --                --
                                --------   -----------    -----------         ---------
BALANCE, DECEMBER 31, 1998....        --   $        --    $(1,432,000)        $      --
                                ========   ===========    ===========         =========
</TABLE>

                See notes to consolidated financial statements.

                                       F-6
<PAGE>   42

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------
                                                      1998            1997             1996
                                                  ------------    -------------    ------------
                                                                  AS RESTATED,     AS RESTATED,
                                                                   SEE NOTE 16     SEE NOTE 16
<S>                                               <C>             <C>              <C>
OPERATING ACTIVITIES
Net loss........................................  $(48,992,000)   $ (26,417,000)   $(13,574,000)
Adjustments to reconcile net loss to net cash
  (used in) provided by operating activities:
  Depreciation and amortization.................    14,413,000        6,493,000       3,559,000
  Deferred income taxes.........................    16,610,000      (14,134,000)        577,000
  Provisions for losses on accounts
     receivable.................................    11,904,000        6,292,000       1,176,000
  Provision for losses on notes receivable......     4,500,000
  Gain on sale of product line..................            --               --        (360,000)
  Gain on sale of marketable securities.........            --          (41,000)             --
  Loss on disposal of property, plant and
     equipment..................................       197,000          121,000              --
  Purchased in-process research and development
     cost.......................................            --        3,300,000      12,500,000
  Non-cash amounts included in merger and
     restructuring related charges..............    (3,547,000)      20,018,000       1,051,000
  Non-cash compensation component of employee
     stock options..............................       954,000          838,000              --
  Non-cash amounts included in extraordinary
     loss.......................................            --               --         476,000
  Non-cash separation charges...................     2,387,000               --              --
  Non-cash asset impairment.....................     1,873,000               --              --
  Other.........................................     1,592,000               --              --
  Changes in operating assets and liabilities,
     net of effects of acquisitions:
     Accounts receivable........................   (14,073,000)     (27,528,000)    (10,957,000)
     Inventories................................    10,942,000       (5,585,000)     (3,951,000)
     Other current assets and recoverable and
       prepaid income taxes.....................     1,363,000       (3,382,000)     (1,362,000)
     Accounts and acceptances payable and
       accrued expenses.........................   (21,060,000)         648,000      14,206,000
                                                  ------------    -------------    ------------
NET CASH (USED IN) PROVIDED BY OPERATING
  ACTIVITIES....................................   (20,937,000)     (39,377,000)      3,341,000
Proceeds from sale of marketable securities.....            --      104,198,000              --
Proceeds from sale of asset held for sale.......    60,167,000               --              --
Purchase of marketable securities...............            --     (104,157,000)             --
Purchase of property, plant and equipment.......   (10,768,000)      (6,555,000)     (1,085,000)
Acquisitions, net of cash acquired..............      (555,000)     (10,093,000)     (4,371,000)
Decrease in excess of cost over net assets
  acquired......................................     6,144,000               --              --
Proceeds from the sale of property, plant, and
  equipment.....................................        17,000          240,000              --
Proceeds from sale of product line..............            --               --         500,000
Proceeds from sale of assets under leveraged
  lease.........................................            --               --         487,000
Notes receivable from officers..................            --               --        (155,000)
Net decrease (increase) in other assets.........       480,000       (4,321,000)        (41,000)
                                                  ------------    -------------    ------------
NET CASH PROVIDED BY (USED IN) INVESTING
  ACTIVITIES....................................  $ 55,485,000    $ (20,688,000)   $ (4,665,000)
</TABLE>

                                       F-7
<PAGE>   43
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------
                                                      1998            1997             1996
                                                  ------------    -------------    ------------
                                                                  AS RESTATED,     AS RESTATED,
                                                                   SEE NOTE 16     SEE NOTE 16
<S>                                               <C>             <C>              <C>
FINANCING ACTIVITIES
Proceeds from issuance of Senior Subordinated
  Notes.........................................  $         --    $ 100,000,000    $         --
Net (payments) borrowing under credit
  facility......................................   (38,277,000)      51,898,000      11,885,000
Proceeds from long-term debt....................        54,000        1,253,000       4,000,000
Principal payments on long-term debt............    (2,086,000)     (66,177,000)    (24,151,000)
Payments on acceptances payable, net............            --      (19,800,000)             --
Proceeds on exercise of stock options...........     4,621,000        1,212,000         550,000
Payment of preferred stock dividends............            --         (435,000)             --
Proceeds from issuance of preferred stock in
  connection with an acquisition................            --               --      10,000,000
Payments of note issue costs....................            --       (4,642,000)             --
                                                  ------------    -------------    ------------
NET CASH (USED IN) PROVIDED BY FINANCING
  ACTIVITIES....................................   (35,688,000)      63,309,000       2,284,000
                                                  ------------    -------------    ------------
(DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS...................................    (1,140,000)       3,244,000         960,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR..........................................     4,430,000        1,186,000         226,000
                                                  ------------    -------------    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........  $  3,290,000    $   4,430,000    $  1,186,000
                                                  ============    =============    ============
SUPPLEMENTARY CASH FLOW INFORMATION:
  Interest paid.................................  $ 12,811,000    $   3,130,000    $  2,975,000
                                                  ============    =============    ============
  Income taxes paid (net of refunds)............  $ (7,627,000)   $   4,094,000    $    187,000
                                                  ============    =============    ============
</TABLE>

                See notes to consolidated financial statements.
                                       F-8
<PAGE>   44
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1998

1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Description of Business:  Graham-Field Health Products, Inc.
("Graham-Field" or the "Company") is a manufacturer and distributor of
healthcare products targeting the home healthcare, medical/surgical,
rehabilitation and long-term care markets in North America, Europe, Central and
South America, and Asia. The Company markets and distributes a broad range of
products under its own brand names and under suppliers' names throughout the
world. The Company maintains manufacturing and distribution facilities
throughout North America. The Company's products are marketed principally to
hospital, nursing home, physician, home healthcare and rehabilitation dealers,
healthcare product wholesalers and retailers, including drug stores, catalog
companies, pharmacies, home-shopping related businesses, and certain
governmental agencies.

     The Company operates in one reportable segment -- healthcare products. The
Company's principal products and product lines include wheelchairs and power
wheelchair seating systems, mobility products and bathroom safety products,
medical beds and patient room furnishings, blood pressure and diagnostic
products, adult incontinence products, specialty seating products, wound care
and urologicals, ostomy products, diabetic products, obstetrical supplies,
nutritional supplements, therapeutic support systems and respiratory equipment
and supplies. By offering a wide range of products from a single source, the
Company enables its customers to reduce purchasing costs, including transaction,
freight and inventory expenses.

     The following is a summary of the Company's revenues from its principal
product lines or products:

<TABLE>
<CAPTION>
                                                               % OF TOTAL REVENUE
                                                              --------------------
                                                              1998    1997    1996
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Wheelchairs and related positioning products................   22%     33%      7%
Ambulatory and patient aids.................................   12%      8%      5%
Incontinence products.......................................    6%      7%      8%
Sphygmomanometers...........................................    3%      3%      5%
Wound care and ostomy products..............................    4%      4%      6%
</TABLE>

     No other product line or product accounted for more than 5% of annual
revenues for each year.

     The Company's business operations are primarily conducted in North America.
The following is a summary of revenues attributable to customers located in the
United States and foreign countries:

<TABLE>
<CAPTION>
                                               1998            1997            1996
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
United States............................  $350,497,000    $237,227,000    $135,947,000
Foreign..................................    28,343,000      24,445,000       6,764,000
                                           ------------    ------------    ------------
                                           $378,840,000    $261,672,000    $142,711,000
                                           ============    ============    ============
</TABLE>

     At December 31, 1998, 1997 and 1996, the Company had long-lived assets
(property, plant and equipment and excess of cost over net assets acquired)
located in foreign countries (Mexico and Canada) of approximately $5.0 million,
$6.5 million and $2.3 million, respectively. The balance of the Company's long-
lived assets are located in the United States.

     Liquidity, Financial Results and Basis of Presentation:  At December 31,
1998, the Company had working capital of approximately $76.4 million and unused
availability of approximately $15.7 million under its Senior Secured Revolving
Credit Facility, as amended (the "Credit Facility"), with IBJ Whitehall Business
Credit Corp. (formerly known as IBJ Schroder Business Credit Corp.), as agent
(IBJ). As of June 1, 1999, after giving effect to the 1999 Amendment (see Note
6), the Company had unused availability of approximately $7.2 million. The
Company has incurred significant losses in each of the three years in the

                                       F-9
<PAGE>   45
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period ended December 31, 1998 and in the first quarter of 1999. These losses
have arisen as a result of a significant amount of merger, restructuring and
other expenses related to acquisitions completed in 1996 and 1997, the failure
to integrate effectively these acquisitions and realize the benefits and
synergies to be derived therefrom, and the impact of intense competition within
the healthcare industry. The losses included significant charges relating to
provisions for accounts receivable, inventory and other asset write-offs in 1997
and 1998, a provision to increase the valuation allowance on deferred tax assets
in 1998, and certain professional and other advisory fees in the first quarter
of 1999, all of which management believes to be substantially non-recurring.
Further, the Company and certain of its directors and officers have been named
as defendants in at least fifteen putative class action lawsuits which have been
consolidated into an amended complaint (see Note 15).

     As further described in Note 6, the Company was not in compliance with
certain financial covenants, and other terms and provisions contained in the
Credit Facility at June 30, 1998, December 31, 1998 and March 31, 1999. On April
22, 1999 (and as subsequently amended as of May 21 and June 3, 1999), the
Company entered into an amendment to the Credit Facility, which provided for,
among other things, a waiver of these defaults, an amendment to certain
financial covenants, a new undrawn availability covenant relating to scheduled
interest payments on the Senior Subordinated Notes, and other terms and
provisions consistent with the Company's business plan for the remainder of
1999, and an extension of the term of the Credit Facility from December 10, 1999
to May 31, 2000.

     In response to the losses incurred in 1997, 1998 and the first quarter of
1999, management has commenced a program to reduce operating expenses, improve
gross margins and reduce the investment in working capital during the remainder
of 1999 and take other actions to improve its cash flow. These actions include,
but are not limited, to (i) the completion of the activities contemplated by the
Company's restructuring plan as further described in Note 3; (ii) the initiation
of inventory reduction and product rationalization programs; (iii) the
tightening of credit policies and payment terms; (iv) the reduction in
previously budgeted capital expenditures; (v) the implementation of streamlined
product pricing and product return guidelines; (vi) the initiation of an
aggressive program to collect past due accounts receivable; and (vii) the
realignment and consolidation of sales forces and territories.

     Notwithstanding the actions described above, the Company currently expects
that it will be necessary to obtain approximately $5 to $10 million of
additional borrowing availability by August 1999. Management believes that it
will be able to obtain the additional borrowing availability by financing
certain unencumbered real estate or through a secondary financing; however, it
has not yet obtained such financing commitment. Management also believes that,
if necessary, it could sell certain assets to meet cash requirements which would
require the consent of the lenders under the Credit Facility.

     Management believes that such objectives are attainable, however, there can
be no assurance that the Company will be successful in its efforts to improve
its cash flow from operations or that it will be able to obtain such additional
borrowing availability on satisfactory terms in a timely manner to provide
sufficient cash for operations, capital expenditures and regularly scheduled
debt service. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

     Principles of Consolidation:  The consolidated financial statements include
the accounts of the Company and its subsidiaries, each of which is wholly-owned.
All material intercompany accounts and transactions have been eliminated in
consolidation.

     Restatement:  In March 1999, the Company reported that an investigation
conducted by the Company's Audit Committee, with the assistance of outside
counsel, had found certain accounting errors and irregularities with respect to
the Company's financial results. Based on the results of the investigation, the
Company has restated its previously issued Consolidated Financial Statements for
1996 and 1997. The Company has also

                                      F-10
<PAGE>   46
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

restated the financial results for the first, second and third quarters of 1998
to correct for certain accounting errors. The 1998 adjustments are unrelated to
the investigation conducted by the Company's Audit Committee, which was
announced in March 1999. (See Notes 16 and 17.)

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

     Cash Equivalents:  The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.

     Inventories:  Inventories are valued at the lower of cost or market. Cost
is determined principally on the standard cost method for manufactured goods and
on the average cost method for other inventories, each of which approximates
actual cost on the first-in, first-out method.

     Property, Plant and Equipment:  Property, plant and equipment is recorded
at cost, less accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the lesser of the
estimated useful lives of the related assets or, where appropriate, the lease
term.

     Long-Lived Assets:  Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This standard establishes the accounting for the impairment of long-lived
assets, certain identifiable intangibles and the excess of cost over net assets
acquired, related to those assets to be held and used in operations, whereby
impairment losses are required to be recorded when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets and certain identifiable intangibles that
are expected to be disposed of. The adoption of SFAS No. 121 did not have a
material effect on the results of operations or financial condition of the
Company.

     Excess of cost over net assets acquired is amortized on a straight-line
basis over 30 to 40 years. The carrying value of such costs are reviewed by
management as to whether the facts and circumstances indicate that an impairment
may have occurred. If this review indicates that such costs or a portion thereof
will not be recoverable, as determined based on the undiscounted cash flows of
the entities acquired, over the remaining amortization period, the carrying
value of these costs will be measured by comparing the fair value of the group
of assets acquired to the carrying value. If fair values are unavailable, the
carrying value will be measured by comparing the carrying values to the
discounted cash flows. Based upon present operations and strategic plans,
management believes that no impairment of the excess of cost over net assets
acquired has occurred other than as described in Note 2.

     Revenue Recognition Policy:  The Company recognizes revenue when products
are shipped with appropriate provisions for uncollectible accounts and credits
for returns.

     Income Taxes:  The Company and its subsidiaries file a consolidated Federal
income tax return. The Company uses the liability method in accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes".
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

     Earnings Per Common Share Information:  Basic and diluted net loss per
common share was computed using the weighted average number of common shares
outstanding and by assuming the accrual of a dividend of 1.5% on the Series B
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and
Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock")
in the aggregate amount

                                      F-11
<PAGE>   47
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of $1,065,000 in 1998 and 1997. Conversion of the preferred stock and common
equivalent shares was not assumed since the result would have been antidilutive.

     Employee Stock Options:  SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value method of accounting for the issuance of
stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," but are required to disclose in the
financial statement footnotes, pro forma net (loss) income and per share amounts
as if the new method of accounting was applied for all grants made beginning
with 1995. The Company has elected to continue to account for stock issued to
employees in accordance with APB No. 25.

     The Company has a stock option program which is more fully described in
Note 11. Under the Company's stock option program, options are granted with an
exercise price equal to the market price of the underlying common stock of the
Company on the date of grant.

     Concentration of Credit Risk:  The Company is a manufacturer and
distributor of healthcare products targeting the home healthcare,
medical/surgical, rehabilitation and long-term care markets in North America,
Europe, Central and South America, and Asia. The Company's products are marketed
principally to hospital, nursing home, physician, home healthcare and
rehabilitation dealers, healthcare product wholesalers and retailers, including
drug stores, catalog companies, pharmacies, home shopping related businesses,
and certain governmental agencies. Third party reimbursement through private or
governmental insurance programs and managed care programs have increasingly
impacted the Company's customers, which affects a portion of the Company's
business. The Company performs periodic credit evaluations of its customers'
financial condition and in certain instances requires collateral. Receivables
generally are due within 30 to 120 days, except for notes receivable which have
a stated term. In the fourth quarter of 1997, a provision for uncollectible
accounts and notes receivable of $5 million (which provision is included in
selling, general and administrative expenses) was recorded to reflect increased
credit risk due to the anticipated impact of changes in state medicare
reimbursement and procurement policies for certain product lines and the
extended payment terms being taken by the Company's customers. The changes in
such reimbursement patterns resulted in an increased number of days outstanding
for receivables. In 1998, the Company continued to experience deterioration in
its days outstanding for receivables. In the fourth quarter of 1998, the Company
recorded an additional provision of $11 million for accounts and notes
receivable (which provision is included in selling, general and administrative
expenses) to reflect anticipated losses from one customer in financial
difficulty and several other customer accounts placed in collection.

     Concentration of Sources of Supply:  The business of Everest & Jennings
International Ltd. ("Everest & Jennings"), a wholly-owned subsidiary of the
Company, is heavily dependent on its maintenance of a key supply contract.
Everest & Jennings obtains the majority of its commodity wheelchairs and
wheelchair components pursuant to an exclusive supply agreement (the "Wheelchair
Supply Agreement") with P.T. Dharma Polimetal ("P.T. Dharma"), an Indonesian
manufacturer. The term of this agreement extends until June 30, 2000, and on
each June 30 thereafter automatically renews for an additional year unless
Everest & Jennings elects not to extend the agreement or Everest & Jennings
fails to order at least 50% of the contractually specified minimums and P.T.
Dharma elects to terminate the agreement or either party terminates the
agreement as a result of a material breach of the agreement after notice and the
expiration of the applicable cure period. If the Wheelchair Supply Agreement is
terminated, there can be no assurance that Everest & Jennings will be able to
enter into a suitable wheelchair supply agreement with another manufacturer. The
failure by Everest & Jennings to secure an alternate source of supply would
result in a material adverse effect on Graham-Field's business and financial
condition. In February 1998, the Company advanced $3.5 million to P.T. Dharma
(the "P.T. Dharma Advance") in consideration of the grant of a six

                                      F-12
<PAGE>   48
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

month option to purchase the wheelchair assets of P.T. Dharma for a price to be
determined. In March 1999, the P.T. Dharma Advance was converted into a three
year loan arrangement (the "P.T. Dharma Loan Agreement"). Under the terms of the
P.T. Dharma Loan Agreement, P.T. Dharma is required to repay the P.T. Dharma
Advance to Graham-Field over a period of three years, with interest at
Graham-Field's borrowing rate, as adjusted from time to time, in monthly
installments ranging from $50,000 to $100,000 per month. The P.T. Dharma Loan
Agreement is secured by the shares of the capital stock of P.T. Dharma and
guaranteed by the principal stockholders of P.T. Dharma. In the fourth quarter
of 1998, the Company recorded a $3,000,000 provision (included in selling,
general and administrative expenses) against the advance as a result of adverse
political conditions in Indonesia and a deterioration in the financial condition
of P.T. Dharma.

     Foreign Currency Translation:  The financial statements of the Company's
foreign subsidiaries are translated into U.S. dollars in accordance with the
provisions of SFAS No. 52, "Foreign Currency Translation." The assets and
liabilities of subsidiaries, other than the Company's Mexican subsidiary, are
translated at year-end exchange rates. Revenues and expenses are translated at
the average exchange rate for each year. The resulting translation adjustments
for each year are recorded as a separate component of stockholders' equity. For
1997 and 1998, Mexico is considered a highly inflationary economy and,
accordingly, inventories and property plant and equipment for the Company's
Mexican subsidiary are translated at historical rates, while other assets and
liabilities are translated at year-end rates. All foreign currency transaction
gains and losses are included in the determination of income and are not
significant.

     Research and Development:  Research and development costs are expensed as
incurred. The amount of such costs for 1998 and 1997 was $1,003,000 and
$392,000, respectively. Research and development costs for 1996 were not
material. See Note 2 for a discussion of purchased in-process research and
development expensed in connection with certain acquisitions.

     New Accounting Pronouncements:  In March 1998, Statement of Position 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" was issued. SOP 98-1 requires certain costs
associated with developing or obtaining software for internal use to be expensed
as incurred until certain capitalization criteria are met. The Company will
adopt SOP 98-1 prospectively beginning January 1, 1999. Based on the Company's
current information systems plans, which include completing its Year 2000
remediation program and completing the upgrade of its order entry and
manufacturing system, adoption of this statement is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.

     In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued effective for fiscal years beginning after June
15, 1999. SFAS No. 133 requires the recognition of all derivatives in the
consolidated balance sheet as either assets or liabilities measured at fair
value. The Company currently does not use derivative instruments and therefore,
adoption of this statement is not expected to impact the Company.

2.  ACQUISITIONS OF BUSINESSES

     On December 30, 1997, the Company acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an
Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of
September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement,
Sub was merged with and into Fuqua with Fuqua continuing as the surviving
corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua
Merger, each share of Fuqua's common stock, par value $2.50 per share (the
"Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant
to the Fuqua Merger Agreement, was converted into the right to receive 2.1
shares of common stock, par value $.025 per share, of the Company (the

                                      F-13
<PAGE>   49
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Company Common Stock"). There were 4,482,709 shares of Fuqua Common Stock
outstanding on December 30, 1997, which converted into 9,413,689 shares of the
Company Common Stock.

     In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options as adjusted for the exchange ratio of
2.1 is approximately 885,150 shares of the Company Common Stock. For purposes of
calculating the purchase price, the Company Common Stock was valued at $16.69
per share, which represents the average closing market price of the Company
Common Stock for the period three business days immediately prior to and three
business days immediately after the announcement on September 8, 1997 of the
execution of the Fuqua Merger Agreement.

     The acquisition of Fuqua has been accounted for under the purchase method
of accounting and, accordingly, the operating results of Fuqua have been
included in the Company's consolidated financial statements from the date of
acquisition. Fuqua contributed approximately $2,100,000 of revenue for the year
ended December 31, 1997. The Company allocated $3,300,000 of the purchase price
to purchased in-process research and development projects which have not reached
technological feasibility and have no probable alternative future uses and
accordingly, expensed such purchased in-process and research and development
projects in 1997. At the December 31, 1997 acquisition date, the Company
recorded a preliminary estimate of the excess of the aggregate purchase price
over the estimated fair market value of the net assets acquired of approximately
$134.9 million, and during 1998 reduced such amount by $13.7 million following
the receipt of all information necessary to complete the purchase price
allocation. The excess of cost over the estimated fair value of net assets
acquired is being amortized on a straight line basis over 30 years.

     In connection with the Fuqua Merger, the Company acquired the leather
operations of Fuqua ("Leather Operations"). It was the Company's intention to
dispose of this Leather Operations as soon as reasonably practicable following
the consummation of the Fuqua Merger. Accordingly, the net assets of the Leather
Operations have been reflected as "Assets held for sale" in the accompanying
consolidated balance sheet as of December 31, 1997. The net asset value of the
Leather Operations includes the value of the proceeds that were realized from
the sale of the Leather Operations. The Company did not record any earnings or
losses for the Leather Operations for the period December 30, 1997 to January
27, 1998 (date of disposal).

     On January 27, 1998, Fuqua, a wholly-owned subsidiary of the Company,
disposed of the Leather Operations (the "Leather Sale Transaction") through the
sale of all of the capital stock of Irving Tanning Company ("ITC"), Hancock
Ellsworth Tanners, Inc., Kroy Tanning Company, Incorporated and Seagrave Leather
Corporation (collectively, the "Leather Companies"), to the management of ITC
pursuant to a (i) Stock Purchase Agreement dated as of January 27, 1998, by and
among IT Acquisition Corporation ("ITAC"), the Company and Fuqua, and (ii) Stock
Purchase Agreement dated as of January 27, 1998, by and among HEKS Corporation,
the Company and Fuqua. The aggregate selling price for the Leather Companies
consisted of (i) $60,167,400 in cash, (ii) an aggregate of 5,000 shares of
Series A Preferred Stock of ITAC with a stated value of $4,250,000 (which has
been valued at $1,539,000), and (iii) the assumption of debt of $2,341,250. In
addition, as the holder of the ITAC Preferred Stock, the Company is entitled to
appoint one director to the Board of Directors of ITAC.

     On August 28, 1997, the Company acquired all of the issued and outstanding
shares of the capital stock of Medical Supplies of America, Inc., a Florida
corporation ("Medapex"), pursuant to an Agreement and Plan of Reorganization
(the "Reorganization Agreement") dated August 28, 1997, by and among the
Company, S.E. (Gene) Davis and Vicki Ray (collectively the "Medapex Selling
Stockholders"). In accordance with the terms of the Reorganization Agreement,
Medapex became a wholly-owned subsidiary of the Company and the Medapex Selling
Stockholders received in the aggregate 960,000 shares of Company

                                      F-14
<PAGE>   50
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Common Stock in exchange for all of the issued and outstanding shares of the
capital stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of
August 28, 1997 (the "Real Estate Sales Agreement"), by and between the Company
and BBD&M, a Georgia Limited Partnership and an affiliate of Medapex, the
Company acquired Medapex's principal corporate headquarters and distribution
facility in Atlanta, Georgia for a purchase price consisting of (i) $622,335
payable (x) by the issuance of 23,156 shares of the Company Common Stock and (y)
in cash in the amount of $311,167, and (ii) the assumption of debt in the amount
of $477,664. Each of the Medapex Selling Stockholders entered into a two-year
employment agreement and non-competition agreement with the Company. The Medapex
transaction was accounted for as a pooling of interests and the Company's
historical financial statements have been restated to reflect this transaction.

     The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.

<TABLE>
<CAPTION>
                                                         SIX MONTHS
                                                            ENDED           YEAR ENDED
                                                        JUNE 30, 1997    DECEMBER 31, 1996
                                                        -------------    -----------------
<S>                                                     <C>              <C>
Net revenues:
  Graham-Field........................................  $108,713,000       $126,873,000
  Medapex.............................................    10,006,000         16,397,000
                                                        ------------       ------------
  Combined............................................  $118,719,000       $143,270,000
                                                        ============       ============
Extraordinary loss, net:
  Graham-Field........................................  $         --       $   (736,000)
  Medapex.............................................            --                 --
                                                        ------------       ------------
  Combined............................................  $         --       $   (736,000)
                                                        ============       ============
Net income (loss):
  Graham-Field........................................  $  1,474,000       $(13,916,000)
  Medapex.............................................       196,000            342,000
                                                        ------------       ------------
  Combined............................................  $  1,670,000       $(13,574,000)
                                                        ============       ============
</TABLE>

     On August 17, 1997, the Company acquired substantially all of the assets
and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a privately-owned
distributor of medical supplies, for $4,500,000 in cash. The Company also
entered into a five year non-competition agreement with the previous owner in
the aggregate amount of $301,000 payable over the five year period. The
acquisition was accounted for as a purchase, and accordingly, assets and
liabilities were recorded at fair value at the date of acquisition and the
results of operations are included subsequent to that date. The excess of the
purchase price over net assets acquired was approximately $3.7 million.

     On June 25, 1997, the Company acquired all of the capital stock of LaBac
Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction
pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among
the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company,
LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling
Stockholders"). In connection with the acquisition, LaBac became a wholly-owned
subsidiary of the Company, and the LaBac Selling Stockholders received in the
aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in
exchange for all of the issued and outstanding shares of the capital stock of
LaBac. The Company also entered into a three year consulting agreement with the
LaBac Selling Stockholders and an entity controlled by the LaBac Selling
Stockholders, and non-competition agreements with each of the LaBac Selling
Stockholders. The acquisition was accounted for as a purchase and accordingly,
assets and liabilities were recorded at fair value at the date of acquisition
and the results of operations are included subsequent to that date. The excess
of cost over net assets acquired amounted to approximately $7.3 million.

                                      F-15
<PAGE>   51
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer of
pediatric wheelchairs, high-performance adult wheelchairs and other
rehabilitation products, for a purchase price of $1.51 million representing the
net book value of Kuschall. The purchase price was paid by the issuance of
116,154 shares of Company Common Stock valued at $13.00 per share, of which
23,230 shares were delivered into escrow. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date.

     On February 28, 1997, Everest & Jennings Canadian Limited ("Everest &
Jennings Canada"), a wholly-owned subsidiary of the Company, acquired
substantially all of the assets and certain liabilities of Motion 2000 Inc. and
its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal
to Cdn. $2.9 million (Canadian Dollars) (approximately $2.15 million). The
purchase price was paid by the issuance of 187,733 shares of the Company Common
Stock valued at $11.437 per share. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date. The excess of cost over the net assets acquired amounted to
approximately $2.5 million. In the fourth quarter of 1998, the Company recorded
a charge of $1,873,000 to reflect an impairment in this asset as a result of the
loss of exclusive rights to the principal product line of Motion 2000, Inc.
(which charge is included in selling, general and administrative expenses).

     On November 27, 1996, the Company acquired Everest & Jennings pursuant to
the terms and provisions of the Amended and Restated Agreement and Plan of
Merger dated as of September 3, 1996 and amended as of October 1, 1996 (the
"Everest & Jennings Merger Agreement"), by and among the Company, Everest &
Jennings, Everest & Jennings Acquisition Corp., a wholly-owned subsidiary of the
Company ("E&J Sub"), and BIL (Far East Holdings) Limited, a Hong Kong
corporation and the majority stockholder of Everest & Jennings ("BIL"). Under
the terms of the Everest & Jennings Merger Agreement, E&J Sub was merged with
and into Everest & Jennings with Everest & Jennings continuing as the surviving
corporation wholly-owned by the Company (the "Everest & Jennings Merger").

     In the Everest & Jennings Merger, each share of Everest & Jennings' common
stock, par value $.10 per share (the "Everest & Jennings Common Stock"), other
than shares of Everest & Jennings Common Stock cancelled pursuant to the Everest
& Jennings Merger Agreement, was converted into the right to receive .35 shares
of the Company Common Stock. The Company Common Stock was valued at $7.64 per
share, which represents the average closing market price of the Company Common
Stock for the period three business days immediately prior to and three business
days immediately after the announcement of the execution of the Everest &
Jennings Merger Agreement. There were 7,207,689 shares of Everest & Jennings
Common Stock outstanding on November 27, 1996, which converted into 2,522,691
shares of the Company Common Stock.

     In addition, in connection with, and at the effective time of the Everest &
Jennings Merger:

      (i) BIL was issued 1,922,242 shares of the Company Common Stock in
          consideration of the repayment of indebtedness owing by Everest &
          Jennings in the amount of $24,989,151 to Hong Kong and Shanghai
          Banking Corporation Limited, which indebtedness (the "HSBC
          Indebtedness") was guaranteed by BIL. The proceeds of such stock
          purchase were contributed by the Company to Everest & Jennings
          immediately following the Everest & Jennings Merger and used to
          discharge the HSBC Indebtedness. The Company Common Stock was valued
          at $7.64 per share, which represents the average closing market price
          of the Company Common Stock for the period three business days
          immediately prior to and three business days immediately after the
          announcement of the execution of the Everest & Jennings Merger
          Agreement.

      (ii) The Company issued $61 million stated value of the Series B Preferred
           Stock to BIL in exchange for certain indebtedness of Everest &
           Jennings owing to BIL and shares of Everest & Jennings preferred
           stock owned by BIL. The Series B Preferred Stock is entitled to a
           dividend of 1.5% per

                                      F-16
<PAGE>   52
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

           annum payable quarterly, votes on an as-converted basis as a single
           class with the Company Common Stock and the Series C Preferred Stock,
           is not subject to redemption and is convertible into shares of the
           Company Common Stock (x) at the option of the holder thereof, at a
           conversion price of $20 per share (or, in the case of certain
           dividend payment defaults, at a conversion price of $15.50 per
           share), (y) at the option of the Company, at a conversion price equal
           to current trading prices (subject to a minimum conversion price of
           $15.50 and a maximum conversion price of $20 per share) and (z)
           automatically on the fifth anniversary of the date of issuance at a
           conversion price of $15.50 per share. Such conversion prices are
           subject to customary antidilution adjustments. Based on an
           independent valuation, the fair value ascribed to the Series B
           Preferred Stock was $28,200,000.

      (iii) BIL was issued $10 million stated value of the Series C Preferred
            Stock, the proceeds of which are available to the Company for
            general corporate purposes. The Series C Preferred Stock is entitled
            to a dividend of 1.5% per annum payable quarterly, votes on an
            as-converted basis as a single class with the Company Common Stock
            and the Series B Preferred Stock, is subject to redemption as a
            whole at the option of the Company on the fifth anniversary of the
            date of issuance at stated value and, if not so redeemed, will be
            convertible into shares of the Company Common Stock automatically on
            the fifth anniversary of the date of issuance at a conversion price
            of $20 per share, subject to customary antidilution adjustments. The
            fair value ascribed to the Series C Preferred Stock was $3,400,000.

      (iv) Certain indebtedness in the amount of $4 million owing by the Company
           to BIL was exchanged for an equal amount of unsecured subordinated
           indebtedness of the Company maturing on April 1, 2001 and bearing
           interest at the effective rate of 7.7% per annum (the "BIL Note").
           Effective as of May 12, 1999, BIL exchanged all of its right, title
           and interest under the BIL Note, in consideration of the issuance of
           2,036 fully-paid, validly issued, non-assessable shares of the
           Company's non-voting Series D Preferred Stock (the "Series D
           Preferred Stock), par value .01 per share, with an aggregate stated
           value equal to $4,072,000, representing the aggregate of the unpaid
           principal amount and accrued interest on the BIL Note (See Note 18).

     The acquisition of Everest & Jennings has been accounted for under the
purchase method of accounting and, accordingly, the operating results of Everest
& Jennings have been included in the Company's consolidated financial statements
from the date of acquisition. The Company allocated $12,500,000 of the purchase
price to purchased in-process research and development projects which have not
reached technological feasibility and have no probable alternative future uses
and accordingly, the Company expensed the purchased in-process and research
development projects at the date of acquisition. As a result of the acquisition,
the Company incurred $2,646,000 of merger related expenses, principally for
severance payments, the write-off of certain unamortized catalog and software
costs with no future value, the accrual of costs to vacate certain of the
Company's facilities, and certain insurance policies. At December 31, 1996, the
Company recorded a preliminary estimate of the excess of the aggregate purchase
price over the fair market value of the net deficiency acquired of $59.0
million, and during 1997 reduced such amount by $4.8 million following the
receipt of all information necessary to complete the purchase price allocation.
The excess of aggregate purchase price over the fair market value of the net
deficiency acquired is being amortized on a straight line basis over 30 years.
From the date of acquisition, Everest & Jennings contributed approximately
$3,634,000 of revenue for the year ended December 31, 1996.

     On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical Distributors Inc. ("V.C. Medical"), a wholesale distributor of
medical products in Puerto Rico, for a purchase price consisting of $1,704,000
in cash, and the issuance of 32,787 shares of the Company Common Stock valued at
$7.625 per share representing the closing market price of the Company Common
Stock on the last trading day immediately prior to the closing. In addition, the
Company assumed certain liabilities of V.C. Medical in the amount of $297,000.
The shares of the Company Common Stock were delivered into escrow, and have been

                                      F-17
<PAGE>   53
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

held in escrow, subject to the resolution of a claim for indemnification
asserted by the Company. The acquisition was accounted for as a purchase and
accordingly, assets and liabilities were recorded at fair value at the date of
acquisition and the results of operations are included subsequent to that date.
The excess of cost over the net assets acquired amounted to approximately
$988,000.

     The following summary presents unaudited pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996 as if the acquisitions
described above occurred at the beginning of 1996. This information gives effect
to the adjustment of interest expense, income tax provisions, and to the assumed
amortization of fair value adjustments, including the excess of cost over net
assets acquired. Both the 1997 and 1996 pro forma information includes the
write-off of certain purchased in-process research and development costs of
$3,300,000 in 1997 and $15,800,000 in 1996 and merger and restructuring related
charges of $35,276,000 in 1997 and $37,922,000 in 1996 associated with the
strategic restructuring initiatives. The pro forma net loss per common share has
been calculated by assuming the payment of a dividend of 1.5% on both the Series
B Preferred Stock and Series C Preferred Stock in the aggregate amount of
$1,065,000 for each of the years ended December 31, 1997 and 1996. Conversion of
the preferred stock was not assumed since the result would have been
antidilutive.

<TABLE>
<CAPTION>
                                                                   PRO FORMA
                                                          ----------------------------
                                                              1997            1996
                                                          ------------    ------------
<S>                                                       <C>             <C>
Net revenues............................................  $373,879,000    $330,387,000
                                                          ============    ============
Loss before extraordinary item..........................  $(36,154,000)   $(59,734,000)
                                                          ============    ============
Net loss................................................  $(36,154,000)   $(60,470,000)
                                                          ============    ============
Common per share data -- basic and diluted:
Loss before extraordinary item..........................  $      (1.22)   $      (2.02)
                                                          ============    ============
Net loss per common share -- basic and diluted..........  $      (1.22)   $      (2.04)
                                                          ============    ============
Weighted average number of common shares outstanding....    30,525,000      30,105,000
                                                          ============    ============
</TABLE>

     On March 4, 1996, the Company sold its Gentle Expressions(R) breast pump
product line for $1,000,000 of which $500,000 was paid in cash with the balance
paid by the delivery of a secured subordinated promissory note in the aggregate
principal amount of $500,000, payable over 48 months with interest at the prime
rate plus one percent. The Company recorded a gain of $360,000 in 1996, which is
included in other revenue in the accompanying condensed consolidated statements
of operations. As of March 31, 1999, the Company had received approximately
$200,000 of payments under the note, and has commenced an action to recover the
remaining balance of the note and interest thereon. As of December 31, 1998, the
Company has recorded a reserve of $160,000 against this note.

3.  ACQUISITION INTEGRATION AND RESTRUCTURING PLAN

     In connection with the acquisition of Fuqua on December 30, 1997, the
Company adopted a plan to implement certain strategic restructuring initiatives
(the "Restructuring Plan") and recorded $18,151,000 of restructuring charges
(the "Restructuring Charges") and $4,393,000 of indirect merger charges (the
"Merger Charges"). In addition, the Company recorded a provision for inventory
write-downs of $7,732,000 in 1997 associated with the elimination of certain
non-strategic inventory and product lines (which costs are included in costs of
revenue). The Restructuring Plan was initiated to create manufacturing,
distribution and operating efficiencies and enhance the Company's position as a
low-cost supplier in the healthcare industry. The Restructuring Plan included a
broad range of efforts, including the consolidation of the Company's Temco
manufacturing operations in New Jersey into Fuqua's Lumex manufacturing facility
in New York, the relocation of the Company's corporate headquarters to the Lumex
facility and the closure and/or consolidation of certain other distribution
facilities and operations.

                                      F-18
<PAGE>   54
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Restructuring Charges included exit costs of $15,301,000 related to the
elimination of duplicate manufacturing and distribution facilities, severance
costs of $650,000 for approximately 100 employees and asset write-downs of
$2,200,000 relating to assets to be sold or abandoned.

     The Merger Charges related to the Fuqua acquisition and Medapex combination
with respect to the write-off of certain unamortized catalog costs with no
future value, certain insurance policies, payment of bonuses related to the
acquisitions, and various transaction costs. The Company also incurred
$3,300,000 of expenses in 1997 related to the write-off of purchased in-process
research and development costs of Fuqua.

     As of March 31, 1999, the Company had completed the majority of the
initiatives contemplated in the Restructuring Plan, including the consolidation
of the Temco operations into the Lumex manufacturing facility, the relocation of
the corporate headquarters to the Lumex facility and the closure of certain
distribution centers. The Company expects to complete the closure of the other
distribution center contemplated in the Restructuring Plan by June 30, 1999.

     The Company has performed a reevaluation of the required restructuring
accrual after considering the actual costs incurred to complete the initiatives
carried out to date and the estimated future costs to complete the remaining
initiatives contemplated in the Restructuring Plan. In this connection, the
Company identified certain restructuring accruals that are no longer required
and, accordingly, the Consolidated Statement of Operations includes a benefit of
$3,123,000 recorded in the fourth quarter of 1998 to reduce the Restructuring
Plan accruals.

     In connection with the Company's product rationalization program initiated
in the fourth quarter of 1998 and the closure of certain distribution facilities
in connection with the Company's restructuring initiatives, the Company recorded
additional provisions for inventory of $2,389,000 (which provision is included
in cost of revenues).

     The following summarizes the activity in the restructuring accrual for the
years ended December 31, 1997 and 1998:

<TABLE>
<CAPTION>
                            MERGER AND
                           RESTRUCTURING   WRITE OFFS      ACCRUAL                        NET         ACCRUAL
                              CHARGES       AND CASH       BALANCE         CASH        REDUCTION      BALANCE
                            RECORDED IN    PAYMENTS IN   DECEMBER 31,   PAYMENTS IN    RECORDED     DECEMBER 31,
                               1997           1997           1997          1998         IN 1998         1998
                           -------------   -----------   ------------   -----------   -----------   ------------
<S>                        <C>             <C>           <C>            <C>           <C>           <C>
Facility exit costs......   $17,501,000    $(1,294,000)  $16,207,000    $(1,799,000)  $(2,510,000)  $11,898,000
Severance................       650,000             --       650,000       (323,000)     (183,000)      144,000
Merger related...........   $ 4,393,000     (1,598,000)    2,795,000     (2,245,000)     (430,000)      120,000
                            -----------    -----------   -----------    -----------   -----------   -----------
                            $22,544,000    $(2,892,000)  $19,652,000    $(4,367,000)  $(3,123,000)  $12,162,000
                            ===========    ===========   ===========    ===========   ===========   ===========
</TABLE>

     During the fourth quarter of 1996, the Company recorded charges of
$15,146,000 related to the acquisition of Everest & Jennings. The charges
included $12,500,000 related to the write-off of purchased in-process research
and development costs and $2,646,000 for other merger related charges (see Note
2).

     In 1998, the Company identified certain Everest & Jennings merger related
accruals which had been charged to operations in 1996 that are no longer
required as of the end of 1998 and, accordingly, the Consolidated Statement of
Operations includes a benefit of $424,000 recorded in the fourth quarter of 1998
to reduce such accrual.

                                      F-19
<PAGE>   55
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4.  INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                            --------------------------
                                                               1998           1997
                                                            -----------    -----------
<S>                                                         <C>            <C>
Raw materials.............................................  $10,739,000    $16,553,000
Work-in-process...........................................    5,412,000      6,735,000
Finished goods............................................   46,970,000     50,741,000
                                                            -----------    -----------
                                                            $63,121,000    $74,029,000
                                                            ===========    ===========
</TABLE>

5.  PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31
                                                              --------------------------
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
     Land and buildings.....................................  $18,366,000    $16,766,000
     Equipment..............................................   33,909,000     27,796,000
     Furniture and fixtures.................................    3,219,000      2,301,000
     Leasehold improvements.................................    3,865,000      3,170,000
     Construction in progress...............................    1,923,000      1,693,000
                                                              -----------    -----------
                                                               61,282,000     51,726,000
     Accumulated depreciation and amortization..............  (21,094,000)   (15,836,000)
                                                              -----------    -----------
                                                              $40,188,000    $35,890,000
                                                              ===========    ===========
</TABLE>

     The Company recorded depreciation and amortization expense on the assets
included in property, plant and equipment of $5,297,000, $2,395,000 (excluding
amounts recorded in the Restructuring Charge), and $1,778,000, for the years
ended December 31, 1998, 1997 and 1996, respectively.

6.  NOTES AND ACCEPTANCES PAYABLE

     The Company is a party to a senior secured revolving credit facility, as
amended (the "Credit Facility"), which provides for borrowings of up to $50
million (after giving effect to the 1999 Amendment (as defined below)),
including letters of credit and bankers' acceptances, arranged by IBJ Whitehall
Business Credit Corp. ("IBJ"), as agent. Under the terms of the Credit Facility,
borrowings bear interest at IBJ's prime rate (7.75% at December 31, 1998), plus
one percent.

     As of June 30, 1998, December 31, 1998 and March 31, 1999, the Company was
not in compliance with certain financial covenants, and other terms and
provisions contained in the Credit Facility. On April 22, 1999, the Company
entered into an amendment, which was subsequently amended as of May 21 and June
3, 1999 (the "1999 Amendment"), which provided for, among other things, the
waiver of these defaults, an amendment to certain financial covenants, a new
undrawn availability covenant relating to scheduled interest payments on the
Senior Subordinated Notes, and other terms and provisions contained in the
Credit Facility, and an extension of the term of the Credit Facility from
December 10, 1999 to May 31, 2000. The 1999 Amendment reduced the maximum
revolving advance amount under the Credit Facility from $80 million to $50
million, and reduced and/or eliminated certain availability and borrowing base
reserves. After giving effect to the 1999 Amendment, which includes the
reduction and/or elimination of certain availability and borrowing base
reserves, the Company's availability to borrow funds under the Credit Facility
remains relatively unchanged. As part of the 1999 Amendment, the Company is
required to pay a waiver fee (the "Waiver Fee") in the amount of $400,000 on or
before June 30, 1999, unless the Company either presents an acceptable business
plan to the banks on or before June 30, 1999, or repays in full all outstanding
obligations under the Credit Facility on or before June 30, 1999.
Notwithstanding the foregoing, in the event the Company is in receipt on or
before June 30, 1999 of a commitment letter, letter of intent or agreement to

                                      F-20
<PAGE>   56
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) sell substantially all or a part of the assets or equity securities of the
Company in a sale, merger, consolidation or other similar transaction, which
results in the repayment of all of the outstanding obligations under the Credit
Facility, or (ii) refinance the indebtedness under the Credit Facility (the
transactions referred to in clauses (i) and (ii) are individually referred to as
a "Significant Transaction"), the payment date for the Waiver Fee will be
extended until the earlier to occur of the consummation of a Significant
Transaction, which results in the repayment of all outstanding obligations under
the Credit Facility, or ninety (90) days from June 30, 1999. The Credit Facility
is secured by substantially all of the assets of the Company and the pledge of
the capital stock of certain of the Company's subsidiaries.

     As of June 1, 1999, after giving effect to the 1999 Amendment, the Company
had availability to borrow up to approximately $32.1 million under the Credit
Facility, of which approximately $24.9 million was utilized.

     The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the repayment or prepayment of principal
on subordinated debt, including the Notes, the incurrence of additional debt,
liens, transactions with affiliates and certain consolidations, mergers and
acquisitions and sales of assets, and restrictions relating to capital
expenditures. In addition, Graham-Field is prohibited from declaring or paying
any dividend or making any distribution on any shares of common stock or
preferred stock of Graham-Field (other than dividends or distributions payable
in its stock, or split-ups or reclassifications of its stock) or applying any of
its funds, property or assets to the purchase, redemption or other retirement of
any such shares, or of any options to purchase or acquire any such shares.
Notwithstanding the foregoing restrictions, Graham-Field is permitted to pay
cash dividends in any fiscal year in an amount not to exceed the greater of (i)
the amount of dividends due BIL under the terms of the Graham-Field Series B and
Series C Preferred Stock in any fiscal year, or (ii) 12.5% of the net income of
Graham-Field on a consolidated basis, provided that no event of default under
the Credit Facility shall have occurred and be continuing or would exist after
giving effect to the payment of the dividends. The Credit Facility contains
certain financial covenants, including a net cash flow covenant and leverage
ratio, as well as the requirement that Graham-Field reduce outstanding
borrowings with the net cash proceeds of certain asset sales.

     The Credit Facility contains certain customary terms and provisions,
including limitations with respect to the prepayment of principal on
subordinated debt, including the Company's 9.75% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes"), the incurrence of additional debt,
liens, transactions with affiliates, and certain consolidations, mergers and
acquisitions, and sales of assets, dividends and other distributions (other than
the payment of dividends to BIL in accordance with the terms of the Series B and
Series C Preferred Stock). In addition, the Credit Facility contains certain
financial covenants, including a net cash flow covenant and leverage ratio, and
requires specified levels of earnings before interest and taxes, as well as the
requirement that the Company reduce outstanding borrowings with the net cash
proceeds of certain asset sales.

     At December 31, 1998, the Company had aggregate direct borrowings under the
Credit Facility of $27,606,000. The weighted average interest rate on borrowings
in 1998 was 8.9%. Open letters of credit at December 31, 1998 were $1,347,000
relating to trade credit and $1,558,000 for other requirements.

     At December 31, 1997, the Company had aggregate direct borrowings under the
Credit Facility of $65,883,000. On January 27, 1998, the Company used the
proceeds from the sale of the Leather Operations of $60,167,000 to repay
outstanding borrowings under the Credit Facility. The weighted average interest
rate on borrowings in 1997 was 8.5%. Open letters of credit at December 31, 1997
were $2,261,000 relating to trade credit and $1,759,000 for other requirements.

                                      F-21
<PAGE>   57
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7.  LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                     ------------
                                                                 1998           1997
                                                              ----------    ------------
<S>                                                           <C>           <C>
BIL Note(a).................................................  $4,000,000     $4,000,000
Notes payable to International Business Machines Corp.
  ("IBM")(b)................................................      35,000        490,000
Capital lease obligations(c)................................     290,000        759,000
Term loan(d)................................................   1,416,000      1,535,000
Other(e)....................................................   2,209,000      3,568,000
                                                              ----------     ----------
                                                               7,950,000     10,352,000
     Less current maturities................................   1,235,000      2,619,000
                                                              ----------     ----------
                                                              $6,715,000     $7,733,000
                                                              ==========     ==========
</TABLE>

---------------
(a) On July 18, 1996, an affiliate of BIL provided the Company with a loan in
    the amount of $4,000,000, at an effective interest rate of 8.8%. The loan
    was used to fund the acquisition of V.C. Medical and for general corporate
    purposes. In connection with the acquisition of Everest & Jennings, the
    indebtedness owing by the Company to BIL was exchanged for the BIL Note.
    Under the terms of the BIL Note, the principal amount matures on April 1,
    2001 and bears interest at the effective rate of 7.7% per annum and the
    Company has the right to reduce the principal amount of the BIL Note in the
    event punitive damages are awarded against the Company or any of its
    subsidiaries which relate to any existing product liability claims of
    Everest & Jennings and/or its subsidiaries involving a death prior to
    September 3, 1996. Effective as of May 12, 1999, BIL waived certain events
    of default under the BIL Note and exchanged all of its right, title and
    interest under the BIL Note, in consideration of the issuance of 2,036
    shares of the Series D Preferred Stock (See Note 18).

(b) In connection with the development of the Company's St. Louis Distribution
    Center, the Company entered into an agreement with IBM to provide the
    computer hardware and software, and all necessary warehousing machinery and
    equipment including installation thereof. This project was primarily
    financed through IBM by the issuance of the Company's unsecured notes which
    corresponded to various components of the project. The unsecured notes
    mature through October 2000, with interest rates ranging from 7.68% to
    11.53%.

(c) At December 31, 1998, the Company is obligated under certain lease
    agreements for equipment which have been accounted for as capital leases.
    Future minimum payments in the aggregate are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                       AMOUNT
----------------------                                      --------
<S>                                                         <C>
       1999...............................................  $153,000
       2000...............................................   115,000
       2001...............................................    66,000
       2002...............................................    15,000
                                                            --------
       Total..............................................   349,000
       Less amounts representing interest.................   (59,000)
                                                            --------
       Present value of future minimum lease payments.....  $290,000
                                                            ========
</TABLE>

(d) In connection with the Fuqua Merger, the Company assumed a term loan, which
    is payable in monthly installments of $9,900, bearing interest at LIBOR +
    .55% through January 2001, with a final payment due at that time.

(e) Other long-term debt consists primarily of a mortgage payable for the
    Company's Canadian subsidiary in the amount of $490,000 due in monthly
    installments of $20,400 through November 1999, with a final

                                      F-22
<PAGE>   58
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

    payment of approximately $265,000 due in November 1999, and bearing interest
    at 1.25% above prime. As of December 31, 1998, the interest rate was 6.75%.
    In connection with the acquisition of Medapex's principal corporate
    headquarters, the Company assumed debt collateralized by the principal
    headquarters and requiring the payment of interest at 72% of the current
    prime rate. As of December 31, 1998, the outstanding balance was $428,000,
    and the interest rate was 6.12%. In connection with the acquisitions of
    LaBac and Medi-Source, the Company entered into non-competition agreements
    with certain former shareholders of such companies. The non-competition
    agreements have a remaining balance due of $919,000 as of December 31, 1998.
    In addition, the Company assumed certain debt obligations of other acquired
    companies.

The scheduled maturities of the long-term debt obligations, excluding the
present value of minimum payments on capital lease obligations are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                       AMOUNT
----------------------                                     ----------
<S>                                                        <C>
       1999..............................................  $1,123,000
       2000..............................................     438,000
       2001..............................................   5,484,000
       2002..............................................     239,000
       2003..............................................     202,000
       Thereafter........................................     174,000
                                                           ----------
                                                           $7,660,000
                                                           ==========
</TABLE>

8.  SENIOR SUBORDINATED NOTES

     On August 4, 1997, the Company issued its $100 million Senior Subordinated
Notes due 2007 under Rule 144A of the Securities Act of 1933, as amended (the
"Securities Act"). On February 9, 1998, the Company completed its exchange offer
to exchange the outstanding Senior Subordinated Notes for an equal amount of new
Senior Subordinated Notes which have been registered under the Securities Act.
The new Senior Subordinated Notes are identical in all material respects to the
previously outstanding Senior Subordinated Notes. The Senior Subordinated Notes
bear interest at the rate of 9.75% per annum and mature on August 15, 2007. The
Senior Subordinated Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior debt of the
Company, including indebtedness under the Credit Facility arranged by IBJ
Whitehall, as agent. The Senior Subordinated Notes are guaranteed (the
"Subsidiary Guarantees"), jointly and severally, on a senior subordinated basis
by all existing and future restricted subsidiaries of the Company (the
"Guaranteeing Subsidiaries"). The Subsidiary Guarantees are subordinated in
right of payment to all existing and future senior debt of the Guaranteeing
Subsidiaries including any guarantees by the Guaranteeing Subsidiaries of the
Company's obligations under the Credit Facility.

     The Company is a holding company with no assets or operations other than
its investments in its subsidiaries. The subsidiary guarantors are wholly-owned
subsidiaries of the Company and comprise all of the direct and indirect
subsidiaries of the Company. Accordingly, the Company has not presented separate
financial statements and other disclosures concerning each subsidiary guarantor
because management has determined that such information is not material to
investors.

     The net proceeds from the offering of the Senior Subordinated Notes were
used to repay $60.3 million of indebtedness under the Credit Facility and $5
million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes, including the funding for acquisitions and the
opening of an additional Graham-Field Express facility.

     Beginning on August 15, 2002, the Senior Subordinated Notes are redeemable,
in whole or in part, at the option of the Company, at certain redemption prices
plus accrued and unpaid interest to the date of redemption. In addition, prior
to August 15, 2000, the Company may, at its option, redeem up to 25% of the

                                      F-23
<PAGE>   59
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

aggregate principal amount of Senior Subordinated Notes originally issued with
the net proceeds from one or more public offerings of Company Common Stock at a
redemption price of 109.75% of the principal amount, plus accrued and unpaid
interest to the date of redemption; provided that at least 75% of the aggregate
principal amount of Notes originally issued remain outstanding after giving
effect to any such redemption.

     The indenture ("Indenture") governing the Senior Subordinated Notes
contains customary covenants including, but not limited to, covenants relating
to limitations on the incurrence of additional indebtedness, the creation of
liens, restricted payments, the sales of assets, mergers and consolidations,
payment restrictions affecting subsidiaries, and transactions with affiliates.
In addition, in the event of a change of control of the Company as defined in
the Indenture, each holder of the Senior Subordinated Notes will have the right
to require the Company to repurchase such holder's Senior Subordinated Notes, in
whole or in part, at a purchase price of 101% of the principal amount thereof
plus accrued and unpaid interest to the date of repurchase. In addition, the
Company will be required in certain circumstances to make an offer to purchase
Senior Subordinated Notes at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest to the date of purchase, with
the net cash proceeds of certain assets sales. The Credit Facility prohibits the
Company from purchasing the Senior Subordinated Notes without the consent of the
lenders.

     In addition, the Indenture prohibits the Company from declaring or paying
any dividend or making any distribution or restricted payment as defined in the
Indenture (collectively, the "Restricted Payments") (other than dividends or
distributions payable in capital stock of the Company), unless, at the time of
such payment (i) no default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) the Company would be
able to incur at least $1.00 of additional indebtedness under the fixed charge
coverage ratio contained in the Indenture; and (iii) such Restricted Payment,
together with the aggregate of all Restricted Payments made by the Company after
the date of the Indenture is less than the sum of (a) 50% of the consolidated
net income of the Company for the period (taken as one accounting period)
beginning on April 1, 1997 to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such consolidated net income for such period
is a deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
cash proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of capital stock of the Company or of
debt securities of the Company that have been converted into capital stock of
the Company.

9.  SEPARATION CHARGES

     On July 29, 1998, Irwin Selinger resigned as Chairman of the Board, Chief
Executive Officer and President of the Company, and entered into a Separation
Agreement (the "Separation Agreement") with the Company. The Separation
Agreement provides for (i) the continuation of Mr. Selinger's (a) base salary of
$550,000 through July 31, 1999, (b) healthcare and insurance benefits through
July 8, 2001, and (c) automobile lease payments and associated automobile
expenses through July 8, 2001, (ii) the forgiveness of the outstanding principal
amount of $2.2 million and accrued interest under a loan made to Mr. Selinger in
the original principal amount of $2.5 million in 1997, in consideration of Mr.
Selinger's repayment of $500,000 on June 30, 1999, (iii) a three year
non-competition agreement, (iv) the continuation of Mr. Selinger's split dollar
life insurance policy in accordance with the terms of Mr. Selinger's divorce
judgment, (v) a non-disparagement agreement, (vi) mutual releases, and (vii) the
continuation of the Company's indemnification provisions for Mr. Selinger. The
Company has recorded a charge of $2,548,000 in 1998, to reflect the financial
effects of the Separation Agreement (which charge is included in selling,
general and administrative expenses).

10.  EXTRAORDINARY ITEM

     In December 1996, the Company repaid $20,000,000 of indebtedness under the
John Hancock Note and Warrant Agreement with proceeds from the Credit Facility.
In connection with the early retirement of the

                                      F-24
<PAGE>   60
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

John Hancock indebtedness, the Company incurred charges relating to the
"make-whole" payment and the write-off of all unamortized financing costs
associated with the John Hancock Note and Warrant Agreement. The charges
amounted to $736,000 (net of a tax benefit of $383,000), and are reported as an
extraordinary item in 1996 in the accompanying consolidated statements of
operations.

11.  STOCKHOLDERS' EQUITY

  Rights Agreement

     On August 12, 1996, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of the Company Common Stock. The dividend was paid on September 17, 1996
(the "Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $.01 per
share, of the Company (the "Series A Preferred Stock") at a price of $35.00 per
one one-hundredth of a share of Series A Preferred Stock (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of September 3, 1996 (the "Rights Agreement")
between the Company and American Stock Transfer & Trust Company, as Rights Agent
(the "Rights Agent").

     Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons have acquired (an
"Acquiring Person") beneficial ownership of 20% or more of the outstanding
shares of capital stock of the Company entitled generally to vote in the
election of directors ("Voting Shares") or (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors of the Company
prior to such time as any person or group of affiliated persons becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in a person or group becoming an Acquiring Person (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Company Common Stock certificates outstanding as of the
Record Date, by such certificate with a copy of the Summary of Rights which is
attached to the Rights Agreement (the "Summary of Rights"). Notwithstanding the
foregoing, BIL will not be an Acquiring Person by virtue of its ownership of any
Voting Shares acquired in connection with the Company's acquisition of Everest &
Jennings or in accordance with the Amended and Restated Stockholder Agreement
dated as of September 3, 1996, as amended (the "BIL Stockholder Agreement"), by
and between the Company and BIL (the "BIL Voting Shares"), but BIL will become
an Acquiring Person if it acquires any Voting Shares other than BIL Voting
Shares or shares distributed generally to the holders of any series or class of
capital stock of the Company. "BIL Voting Shares" is defined in the Rights
Agreement as (i) any Voting Shares owned by BIL which were acquired by BIL in
connection with the Company's acquisition of Everest & Jennings or in accordance
with the BIL Stockholder Agreement, and (ii) any shares of the Company Common
Stock issued by the Company to BIL upon conversion of or as a dividend on the
shares referred to in clause (i) above.

     The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Company Common Stock. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new Company Common Stock certificates
issued after the Record Date upon transfer or new issuance of the Company Common
Stock will contain a notation incorporating the Rights Agreement by reference.
Until the Distribution Date (or earlier redemption or expiration of the Rights),
the surrender for transfer of any certificates for the Company Common Stock
outstanding as of the Record Date, even without such notation or a copy of the
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Company Common Stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Company Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.

                                      F-25
<PAGE>   61
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 3, 2006 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.

     The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Series A
Preferred Stock (ii) upon the grant to holders of Series A Preferred Stock of
certain rights or warrants to subscribe for or purchase Series A Preferred Stock
at a price, or a securities convertible into Series A Preferred Stock with a
conversion price, less than the then-current market price of Series A Preferred
Stock or (iii) upon the distribution to holders of Series A Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of
Series A Preferred Stock) or of subscription rights or warrants (other than
those referred to above).

     The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the Company Common Stock
or a stock dividend on the Company Common Stock payable in shares of the Company
Common Stock, subdivisions, consolidations or combinations of the Company Common
Stock occurring, in any such case, prior to the Distribution Date.

     Shares of Series A Preferred Stock purchasable upon exercise of the Rights
will not be redeemable. Each share of Series A Preferred Stock will be entitled
to a minimum preferential quarterly dividend payment of $1 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of the Company Common Stock. In the event of liquidation of the Company, the
holders of the Series A Preferred Stock will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per share of the Company Common
Stock. Each share of Series A Preferred Stock will have 100 votes, voting
together with the Company Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of the Company Common Stock
are exchanged, each share of Series A Preferred Stock will be entitled to
receive 100 times the amount received per share of the Company Common Stock.
These rights are protected by customary antidilution provisions.

     Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of the Company Common Stock.

     In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the Purchase Price.

     In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, the Rights Agreement provides that proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive (subject to adjustment) upon exercise that number of
shares of the Company Common Stock having a market value of two times the
Purchase Price. At any time after any person or group becomes an Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding shares of the Company Common Stock the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group, which will have become void), in whole or in part, at an exchange ratio
of one share of the Company Common Stock, or one one-hundredth of a share of
Series A

                                      F-26
<PAGE>   62
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock (or of a share of a class or series of Company Preferred Stock
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).

     The Rights Agreement provides that none of the directors or officers of
Company shall be deemed to beneficially own any Voting Shares owned by any other
director or officer solely by virtue of such persons acting in their capacities
as such, including in connection with the formulation and publication of the
recommendation of the position of the Board of Directors of the Company, and
actions taken in furtherance thereof, with respect to an acquisition proposal
relating to Company or a tender or exchange offer for the Company Common Stock.

     With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock, which may, at the election of the
Company, be evidenced by depositary receipts) and in lieu thereof, any
adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading day prior to the date of exercise.

     At any time prior to a person or group becoming an Acquiring Person, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price"). The redemption of
the Rights may be made effective at such time on such basis with such conditions
as the Board of Directors of the Company in its sole discretion may establish.
Immediately upon any redemption of the rights in accordance with this paragraph,
the right to exercise the Rights will terminate and the only right of the holder
of the Rights will be to receive the Redemption Price.

     The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, including an amendment
to (a) lower certain thresholds described above to not less than the greater of
(i) any percentage greater than the largest percentage of the outstanding Voting
Shares then known to the Company to be beneficially owned by any person or group
of affiliated or associated persons and (ii) 10%, (b) fix a Final Expiration
Date later than September 3, 2006, (c) reduce the Redemption Price or (d)
increase the Purchase Price, except that from and after such time as any person
or group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights (other
than the Acquiring Person and its affiliates and associates).

     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.

     As long as the Rights are attached to the Company Common Stock, the Company
will issue one Right with each new share of the Company Common Stock so that all
such shares will have Rights attached. The Board of Directors of the Company has
reserved 300,000 shares of Series A Preferred Stock for issuance upon exercise
of the Rights.

  Stock Transactions

     On December 30, 1997, the Company acquired Fuqua (see Note 2), in
consideration of the issuance of 9,413,689 shares of the Company Common Stock
(excluding shares of Company Common Stock to be issued in connection with Fuqua
stock options assumed by the Company).

     On June 25, 1997, the Company acquired the capital stock of LaBac (see Note
2), in consideration of the issuance of 772,557 shares of the Company Common
Stock.

     On March 7, 1997, Everest & Jennings, a wholly-owned subsidiary of the
Company, acquired Kuschall (see Note 2), in consideration of the issuance of
116,154 shares of the Company Common Stock.

                                      F-27
<PAGE>   63
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On February 28, 1997, Everest & Jennings Canada, a wholly-owned subsidiary
of the Company, acquired Motion 2000, Inc. and Motion 2000 Quebec, Inc. (see
Note 2), in consideration of the issuance of the 187,733 shares of the Company
Common Stock.

     On November 27, 1996, in connection with the acquisition of Everest &
Jennings (see Note 2), the Company issued an aggregate of 4,444,933 shares of
the Company Common Stock, and $61 million stated value of Series B Preferred
Stock and $10 million stated value of Series C Preferred Stock to BIL. The
Series B Preferred Stock is entitled to a dividend of 1.5% per annum payable
quarterly (in cash or in shares of the Company's common stock at the option of
the Company), votes on an as-converted basis as a single class with the Company
Common Stock of the Company and the Series C Preferred Stock, is not subject to
redemption and is convertible into shares of the Company Common Stock (x) at the
option of the holder thereof, at a conversion price of $20 per share (or, in the
case of certain dividend payment defaults, at a conversion price of $15.50 per
share), (y) at the option of the Company, at a conversion price equal to current
trading prices (subject to a minimum conversion price of $15.50 and a maximum
conversion price of $20 per share) and (z) automatically on the fifth
anniversary of the date of issuance at a conversion price of $15.50 per share.
Such conversion prices are subject to customary antidilution adjustments.

     The Series C Preferred Stock is entitled to a dividend of 1.5% per annum
payable quarterly (in cash or in shares of the Company's common stock at the
option of the Company), with shares of the Company's common stock, votes on an
as-converted basis as a single class with the Company Common Stock and the
Series B Preferred Stock, is subject to redemption as a whole at the option of
the Company on the fifth anniversary of the date of issuance at stated value
and, if not so redeemed, will be convertible into shares of the Company Common
Stock automatically on the fifth anniversary of the date of issuance at a
conversion price of $20 per share, subject to customary antidilution
adjustments.

     On November 27, 1996, the Company amended its certificate of incorporation
to provide for, among other things, an increase in the number of authorized
shares of common stock from 40,000,000 to 60,000,000 shares.

     On September 4, 1996, the Company acquired substantially all of the assets
of V.C. Medical, in consideration of $1,703,829 in cash and the issuance of
32,787 shares of the Company Common Stock.

     In connection with the John Hancock Note and Warrant Agreement, the Company
issued warrants to John Hancock to purchase 345,336 shares of the Company Common
Stock at exercise prices ranging from $5.17 to $5.42. The warrants expire in
February 2000.

  Stock Options

     Under the Company's stock option program (the "Incentive Program"), the
Company is authorized to grant incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock grants and restored
options. Incentive stock options may be granted at not less than 100% of the
fair market value of the Company Common Stock at the date of grant. Stock
options outstanding under the Incentive Program generally vest and are
exercisable at a rate of 50% per annum. Incentive and non-qualified stock
options expire five years from the date of grant. Effective as of December 21,
1995, non-employee directors' were automatically granted directors' options to
purchase 10,000 shares of the Company Common Stock on January 2nd of each year
at an exercise price equal to the fair market value of the Company Common Stock
at the date of grant. Under the terms of the Incentive Program, directors'
options were granted on January 2, 1998 to each of the Company's non-employee
directors to purchase 10,000 shares of the Company Common Stock. In general,
directors' options are exercisable one-third each year for three years, and have
a term of ten years. Effective as of February 1998, the Incentive Program was
amended to eliminate the automatic grant feature for directors' options and
provide that directors' options shall be granted upon terms and conditions
approved by the Company's Stock Option and Compensation Committee. On January 2,
1999, the Company's Stock Option and Compensation Committee granted each of the
non-employee directors a directors' option to

                                      F-28
<PAGE>   64
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase 25,000 shares of the Common Stock at an option price equal to the fair
market value of the Common Stock on the date of grant.

     In 1996, the plan was amended to increase the maximum number of shares
available from 2,100,000 to 3,000,000. On December 30, 1997, the plan was
further amended to increase the maximum number of shares available from
3,000,000 to 4,500,000.

     During 1998, 1997 and 1996, officers of the Company surrendered 38,885,
134,870 and 45,517 shares, respectively, of the Company Common Stock with a fair
market value of $603,000, $1,617,000 and $165,000, respectively, in satisfaction
of the exercise price of stock options to purchase 120,331, 306,669 and 50,000
shares, respectively, of the Company Common Stock. In connection with the
surrender of shares and exercise of stock options in 1998 and 1997, the Company
recorded (as a component of selling, general and administrative expenses) stock
compensation charges of $954,000 and $838,000, respectively, for shares held
less than six months prior to the date of surrender. The shares received in
satisfaction of the exercise price of stock options were recorded as treasury
stock and were retired on a quarterly basis as authorized by the Board of
Directors. Accordingly, all such shares have been restored as authorized and
unissued shares of the Company Common Stock.

     In April 1998, the Company repriced 700,000 stock options with a weighted
average exercise price of $14.55 per share that were granted to certain of the
Company's senior executives during the first quarter of 1998 to new exercise
prices of $7.50 and $7.6875, which were the fair market values of the Company's
common stock at the date of the option repricing.

     In accordance with SFAS No. 123, pro forma information regarding net loss
and loss per common share has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these stock options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 4.64% for 1998, 6.375%
for 1997 and 6.5% for 1996; no dividend yields on the Common Stock, weighted
average volatility factors of the expected market price of the Company's Common
Stock of .84, .46 and .41; and a weighted average expected life of the option of
approximately 3 years.

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options due to changes in subjective input assumptions which may materially
affect the fair value estimate, and because the Company's employee stock options
have characteristics significantly different from those of traded options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
                                               1998            1997            1996
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
Pro forma net loss attributable to common
  stockholders...........................  $(54,089,000)   $(29,037,000)   $(14,063,000)
                                           ============    ============    ============
Pro forma net loss per share -- basic and
  diluted:...............................  $      (1.74)   $      (1.41)   $       (.90)
                                           ============    ============    ============
</TABLE>

                                      F-29
<PAGE>   65
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information with respect to options during the years ended December 31,
1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                             1998                    1997                    1996
                                     ---------------------   ---------------------   ---------------------
                                                  WEIGHTED                WEIGHTED                WEIGHTED
                                                  AVERAGE                 AVERAGE                 AVERAGE
                                                  EXERCISE                EXERCISE                EXERCISE
                                      OPTIONS      PRICE      OPTIONS      PRICE      OPTIONS      PRICE
                                     ----------   --------   ----------   --------   ----------   --------
<S>                                  <C>          <C>        <C>          <C>        <C>          <C>
Options outstanding -- beginning of
  year.............................   2,474,082    $8.44      1,643,175    $5.77        912,645    $5.49
Options granted:
  Incentive options................     412,442     6.00        240,483    12.25        699,121     6.45
  Directors' options...............      40,000    16.31         90,000     9.33         90,000     3.25
  Non-qualified options............   1,069,193     5.35        185,453    11.96         91,764     6.02
  Options outside plan.............     110,000     3.46             --       --             --       --
Fuqua stock options................          --       --        885,150     9.69             --       --
Options exercised..................    (645,353)    8.12       (527,975)    5.36       (103,255)    3.83
Options cancelled and expired......    (459,144)    8.45        (42,204)    8.38        (47,100)    4.87
                                     ----------              ----------              ----------
Options outstanding -- end of
  year.............................   3,001,220    $7.03      2,474,082    $8.44      1,643,175    $5.77
                                     ==========              ==========              ==========
Options exercisable at end of
  year.............................   1,203,343    $8.25      1,594,142    $7.91        582,244    $5.45
                                     ==========              ==========              ==========
Weighted average fair value of
  options granted during the
  year.............................  $     2.63              $     4.22              $     2.10
                                     ==========              ==========              ==========
</TABLE>

     In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options, has been adjusted for the exchange
ratio of 2.1, in accordance with the terms of the Fuqua Merger Agreement.

                                      F-30
<PAGE>   66
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Exercise prices for stock options outstanding and for options exercisable
as of December 31, 1998 were as follows:

<TABLE>
<CAPTION>
             NUMBER OF
NUMBER OF     OPTIONS        RANGE OF
 OPTIONS    EXERCISABLE   EXERCISE PRICES
---------   -----------   ---------------
<S>         <C>           <C>
  685,000       10,000    $ 2.00 - $ 2.99
  280,766      115,766      3.00 -   3.99
   26,050       26,050      4.00 -   4.99
   15,500       15,500      5.00 -   5.99
   32,500       22,500      6.00 -   6.99
1,005,251      299,001      7.00 -   7.99
  150,974       92,371      8.00 -   8.99
  471,350      471,350      9.00 -   9.99
   15,000        7,500     10.00 -  10.99
   55,677       42,838     11.00 -  11.99
  137,500       68,750     12.00 -  12.99
   10,000        3,333     13.00 -  13.99
   19,500        9,750     14.00 -  14.99
   56,152        8,634     15.00 -  15.99
   40,000       10,000     16.00 -  16.99
---------    ---------
3,001,220    1,203,343
=========    =========
</TABLE>

     The weighted average remaining contractual life of the above-described
stock options is approximately 4.5 years.

     Shares of common stock reserved for future issuance as of December 31, 1998
are as follows:

<TABLE>
<CAPTION>
                                                            NUMBER OF
                                                             SHARES
                                                            ---------
<S>                                                         <C>
Stock options.............................................  3,555,565
Warrants issued to John Hancock...........................    345,336
Series B Preferred Stock..................................  3,935,483
Series C Preferred Stock..................................    500,000
                                                            ---------
                                                            8,336,384
                                                            =========
</TABLE>

     The exercise of non-qualified stock options and disqualifying dispositions
of incentive stock options resulted in Federal and state income tax benefits to
the Company equal to the difference between the market price at the date of
exercise or sale of stock and the exercise price of the option. Accordingly,
during 1997 and 1996, approximately $520,000, and $38,000, respectively, was
credited to additional paid-in capital. No such tax benefits were credited to
additional paid-in capital during 1998 as the Company has not realized such tax
benefits due to continuing net operating losses.

                                      F-31
<PAGE>   67
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  INCOME TAXES

     Significant components of the provision (benefit) for income taxes are as
follows:

<TABLE>
<CAPTION>
                                                 1998            1997           1996
                                              -----------    ------------    ----------
<S>                                           <C>            <C>             <C>
Current:
  Federal...................................  $(1,005,000)   $         --    $       --
  State and local...........................      153,000              --            --
  Foreign...................................      236,000       1,073,000         9,000
                                              -----------    ------------    ----------
                                                 (616,000)      1,073,000         9,000
Deferred....................................   17,023,000     (11,665,000)    1,347,000
                                              -----------    ------------    ----------
                                              $16,407,000    $(10,592,000)   $1,356,000
                                              ===========    ============    ==========
</TABLE>

     Pre-tax (loss) income consists of the amounts earned in the United States
versus Foreign locations as follows:

<TABLE>
<CAPTION>
                                               1998            1997            1996
                                           ------------    ------------    ------------
<S>                                        <C>             <C>             <C>
United States............................  $(29,605,000)   $(38,995,000)   $(11,537,000)
Foreign..................................    (2,980,000)      1,986,000          55,000
                                           ------------    ------------    ------------
Total....................................  $(32,585,000)   $(37,009,000)   $(11,482,000)
                                           ============    ============    ============
</TABLE>

     The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes:

<TABLE>
<CAPTION>
                                 1998                       1997                       1996
                        -----------------------    -----------------------    ----------------------
                           AMOUNT       PERCENT       AMOUNT       PERCENT      AMOUNT       PERCENT
                        ------------    -------    ------------    -------    -----------    -------
<S>                     <C>             <C>        <C>             <C>        <C>            <C>
Tax expense (benefit)
  computed at
  statutory rate......  $(11,079,000)     (34%)    $(12,583,000)     (34%)    $(3,904,000)     (34%)
Expenses not
  deductible for
  income tax purposes:
Amortization of excess
  of cost over net
  assets acquired.....     2,825,000        9%          950,000        2%         276,000        2%
In-process R&D
  costs...............            --       --         1,122,000        3%       4,352,000       38%
Other.................     1,514,000        4%          369,000        1%          77,000        1%
Write-off of merger
  and restructuring
  charges.............            --       --         1,835,000        5%              --       --
State tax expense
  (benefit), net of
  Federal benefit.....      (903,000)      (3%)      (1,885,000)      (5%)        155,000        1%
Foreign...............     1,054,000        3%               --       --               --       --
Valuation allowance on
  deferred tax
  assets..............    22,996,000       71%         (400,000)      (1%)        400,000        4%
                        ------------      ---      ------------      ---      -----------      ---
                        $ 16,407,000       50%     $(10,592,000)     (29%)    $ 1,356,000       12%
                        ============      ===      ============      ===      ===========      ===
</TABLE>

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

                                      F-32
<PAGE>   68
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                      1998           1997
                                                   -----------    -----------
<S>                                                <C>            <C>
Deferred Tax Assets:
  Net operating loss carryforwards...............  $20,597,000    $11,934,000
  Tax credits....................................      857,000        562,000
  Accounts receivable allowances.................   10,171,000      4,412,000
  Inventory related..............................    5,809,000      5,387,000
  Deferred rent..................................       78,000        349,000
  Merger and restructuring related charges.......    4,986,000      8,061,000
  Other reserves and accrued items...............    3,445,000      3,942,000
                                                   -----------    -----------
                                                    45,943,000     34,647,000
  Valuation allowance for deferred assets........  (35,114,000)   (12,118,000)
                                                   -----------    -----------
          Total deferred tax assets..............   10,829,000     22,529,000
                                                   -----------    -----------
Deferred Tax Liabilities:
  Tax in excess of book depreciation.............    5,106,000      2,148,000
  Prepaid expenses...............................    4,322,000        940,000
  Amortization of intangibles....................    1,745,000        822,000
                                                   -----------    -----------
          Total deferred tax liabilities.........   11,173,000      3,910,000
                                                   -----------    -----------
          Net deferred tax
            assets/(liabilities).................  $  (344,000)   $18,619,000
                                                   ===========    ===========
</TABLE>

     At December 31, 1998, the Company had aggregate federal net operating loss
carryforwards of approximately $52,000,000 for income tax purposes, which expire
between 2010 and 2018. Approximately $24,164,000 of the net operating loss
carryforwards were acquired primarily in connection with the Everest & Jennings
acquisition and are limited to use in any particular year. At December 31, 1998,
the Company also had alternative minimum tax credits of $857,000 that have no
expiration date.

     For financial reporting purposes, due to prior year losses of Everest &
Jennings, and SRLY limitations, a full valuation allowance was recorded in
purchase accounting in 1996 against the Everest & Jennings net operating losses
and deferred tax assets. Subsequent realization of any tax benefits for those
items will be recorded as a reduction of the excess of cost over net assets
acquired.

     As a result of the continuation of operating losses in 1998, the Company
increased its deferred tax valuation allowance by $22,996,000 which results in a
full valuation allowance against all net deferred tax assets at December 31,
1998.

13.  EMPLOYEE BENEFIT PLANS

     The Company has a non-contributory defined benefit pension plan covering
employees of Everest & Jennings and two non-contributory defined benefit pension
plans for the non-bargaining unit salaried employees ("Salaried Plan") and
employees subject to collective bargaining agreements ("Hourly Plan") at its
Smith & Davis subsidiary. Effective May 1, 1991, benefits accruing under the
Everest & Jennings pension plan were frozen. During 1991, Everest & Jennings
froze the Hourly Plan and purchased participating annuity contracts to provide
for accumulated and projected benefit obligations. In addition, Everest &
Jennings froze the Salaried Plan effective as of January 1, 1993.

     Effective for the fiscal year ended December 31, 1998, the Company adopted
SFAS No. 132, "Employers Disclosure about Pensions and Other Post Retirement
Benefits." The new standard revises disclosure requirements for pensions
benefits, but does not change the measurement or recognition of those plans. The

                                      F-33
<PAGE>   69
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

following tables, prepared in accordance with the new standard, reconcile the
changes in obligations, plan assets and funded status at December 31:

<TABLE>
<CAPTION>
                                                                   1998           1997
                                                                -----------    -----------
<S>                                                             <C>            <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...................    $18,404,000    $17,567,000
  Interest cost.............................................      1,276,000      1,284,000
  Actuarial losses..........................................      1,571,000      1,243,000
  Benefits paid.............................................     (1,702,000)    (1,690,000)
                                                                -----------    -----------
  Benefit obligation at end of year.........................    $19,549,000    $18,404,000
                                                                ===========    ===========
Change in plan assets:
  Fair value of plan assets at beginning of year............    $16,817,000    $14,746,000
  Actual return on plan assets..............................      1,667,000      2,534,000
  Company contributions.....................................        702,000      1,226,000
  Benefits paid.............................................     (1,703,000)    (1,689,000)
                                                                -----------    -----------
  Fair value of plan assets at end of year..................    $17,483,000    $16,817,000
                                                                ===========    ===========
Funded status:
  As of end of year.........................................    $(2,066,000)   $(1,587,000)
  Unrecognized transition obligation........................        (50,000)       (62,000)
  Unrecognized net loss.....................................      1,507,000        125,000
                                                                -----------    -----------
  Accrued benefit cost......................................    $  (609,000)   $(1,524,000)
                                                                ===========    ===========
Amounts recognized in the Consolidated Balance Sheets
  consist of:
  Accrued benefit liability.................................    $(1,593,000)   $(1,806,000)
  Accumulated comprehensive income..........................        984,000        282,000
                                                                -----------    -----------
  Net amount recognized.....................................    $  (609,000)   $(1,524,000)
                                                                ===========    ===========
The components of net periodic pension cost are as follows:
  Interest cost.............................................    $ 1,276,000    $ 1,284,000
  Expected return on plan assets............................     (1,480,000)    (1,428,000)
  Net amortization..........................................        (10,000)       110,000
                                                                -----------    -----------
Net periodic pension cost (income)..........................    $  (214,000)   $   (34,000)
                                                                ===========    ===========
</TABLE>

     The following assumptions were used to determine the projected benefit
obligations and plan assets:

<TABLE>
<CAPTION>
                                      EVEREST &
                                       JENNINGS                  SMITH & DAVIS
                                    --------------      -------------------------------
                                                        SALARIED PLAN      HOURLY PLAN
                                                        -------------      ------------
                                    1998      1997       1998 & 1997       1998 & 1997
                                    ----      ----      -------------      ------------
<S>                                 <C>       <C>       <C>                <C>
Weighted average discount rate....  6.5%      7.0%           7.0%              7.0%
Expected long-term rate of return
  on assets.......................  9.0%      9.0%           9.0%              9.0%
</TABLE>

     As all participants are inactive and the plans are frozen, no compensation
increases were assumed.

     Effective as of July 1, 1998, the Company sponsors one 401(k) Savings and
Investment Plan, pursuant to which the Company contributes 100% of the first 1%
of an employee's base salary up to a maximum of $1,000 per year. In 1997 and
1996, the Company had several subsidiary 401(k) plans, certain of which provided
for Company contributions. Amounts expensed for 1998, 1997 and 1996 were
immaterial.

                                      F-34
<PAGE>   70
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments as of December 31, 1998 and 1997, for
which it is practicable to estimate that value:

     Cash and cash equivalents:  The carrying amounts reported in the
accompanying balance sheets approximate fair value.

     Credit facility and acceptances payable:  The carrying amounts of the
Company's borrowings under its credit facility approximate their fair value.

     Long-term debt and Senior Subordinated Notes:  The fair value of the
Company's Senior Subordinated Notes and BIL Note are based on reported Senior
Subordinated Notes transaction values (which management believes differs from
the value at which such debt could be settled). The fair value of this debt was
approximately $67 million at December 31, 1998 as compared to a carrying value
of $104 million. At December 31, 1997, the carrying value of the Senior
Subordinated Notes and BIL Note approximates fair value.

     The fair values of the Company's other long-term debt are estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements. At December 31, 1998 and
1997, the carrying amounts for this debt approximates fair value.

15.  COMMITMENTS AND CONTINGENCIES

  Operating Leases

     The Company is a party to a number of noncancellable lease agreements for
warehouse space, office space and machinery and equipment rental. As of December
31, 1998 the agreements extend for various periods ranging from 1 to 9 years and
certain leases contain renewal options. Certain leases provide for payment of
real estate taxes and include escalation clauses.

     As of December 31, 1998, minimal annual rental payments under all
noncancellable operating leases (including leases related to exited facilities
for which the Company remains liable) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
-----------------------
<S>                                                       <C>
  1999................................................    $ 7,071,000
  2000................................................      6,195,000
  2001................................................      5,544,000
  2002................................................      4,637,000
  2003................................................      3,185,000
  Thereafter..........................................      8,758,000
                                                          -----------
                                                          $35,390,000
                                                          ===========
</TABLE>

     Rent expense for the years ended December 31, 1998, 1997 and 1996
approximated $5,435,000, $3,896,000, and $2,805,000, respectively.

  Legal Proceedings

     Following the Company's public announcement on March 23, 1998 of its
financial results for the fourth quarter and year ended December 31, 1997, the
Company and certain of its directors and officers were named as defendants in at
least fifteen putative class action lawsuits filed primarily in the United
States District Court for the Eastern District of New York on behalf of all
purchasers of common stock of the Company (including former Fuqua shareholders
who received shares of the Company Common Stock when the Company acquired Fuqua
in December 1997) during various periods within the time period May 1997 to
March 1998. The class actions were consolidated into an amended consolidated
class action complaint as of January 29, 1999, and

                                      F-35
<PAGE>   71
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

lead counsel was selected. The amended consolidated class action complaint
asserts claims against the Company and the other defendants for violations of
Sections 11, 12(2) and 15 of the Securities Act of 1933, as amended, and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 promulgated thereunder with respect to alleged material
misrepresentations and omissions in public filings made with the Securities and
Exchange Commission and certain press releases and other public statements made
by the Company and certain of its officers relating to the Company's business,
results of operations, financial condition and future prospects, as a result of
which, it is alleged, the market price of the Company Common Stock was
artificially inflated during the putative class periods. The amended
consolidated class action complaint focuses on statements made concerning the
Company's integration of its various recent acquisitions, as well as statements
about the Company's inventories accounts receivable, expected earnings and sales
levels. The plaintiffs seek unspecified compensatory damages and costs
(including attorneys and expert fees), expenses and other unspecified relief on
behalf of the putative classes.

     In March 1999, the Company reported that an investigation conducted by the
Company's Audit Committee, with the assistance of Rogers & Wells LLP, had found
certain accounting errors and irregularities with respect to the Company's
financial results for 1996 and 1997. Rogers & Wells LLP retained the accounting
firm of Arthur Andersen LLP to assist in conducting the investigation and in
providing advice on accounting matters. Based on the results of the
investigation, the Company has restated its financial results for 1996 and 1997
(see Note 16). While the accounting errors and irregularities are not presently
the basis for the pending class actions, counsel to the class plaintiff have
informed the Company's counsel that plaintiffs may seek to amend the
consolidated complaint to allege claims based on such items.

     The Company intends to defend the lawsuit vigorously, but the Company is
not currently able to evaluate the likelihood of success in this case or the
range of potential loss. However, if the foregoing proceeding were determined
adversely to the Company, management believes that such a judgment could have a
material adverse effect on the Company's financial condition, results of
operations and/or cash flows. In addition, the staff of the SEC has advised the
Company that the SEC may conduct an investigation with respect to the
aforementioned accounting errors and irregularities.

     On March 27, 1998, agents of the U.S. Customs Service and the Food and Drug
Administration arrived at the Company's principal headquarters and one other
Company location and retrieved several documents pursuant to search warrants.
The Company has subsequently been advised by an Assistant United States Attorney
for the Southern District of Florida that the Company is a target of an ongoing
grand jury investigation involving alleged fraud by one or more of the Company's
suppliers relating to the unauthorized diversion of medical products intended
for sale outside of the United States into United States markets. The Company
has also been advised that similar search warrants were obtained with respect to
approximately 14 other participants in the distribution of medical products. The
Company is presently investigating these matters. The Company does not know when
the grand jury investigation will conclude or what action, if any, may be taken
by the government against the Company or any of its employees. Accordingly, the
impact of this investigation on the Company cannot yet be assessed. The Company
intends to cooperate fully with the government in its investigation.

     In March 1994, the Suffolk County Authorities initiated an investigation to
determine whether regulated substances had been discharged in excess of
permitted levels from the Lumex division (the "Lumex Division") located in Bay
Shore, New York, which was acquired by Fuqua in April 1996. An environmental
consulting firm was engaged by the Lumex Division to conduct a more
comprehensive site investigation, develop a remediation work plan and provide a
remediation cost estimate. These activities were performed to determine the
nature and extent of contaminants present on the site and to evaluate their
potential off-site extent. In connection with the acquisition of the Lumex
Division, Fuqua assumed by contract the obligations associated with this
environmental matter. In late 1996, Fuqua conducted surficial soil remediation
at the Bay Shore facilities and reported the results to the Suffolk County
Authorities in March 1997. A ground water work plan was submitted concurrently
with the soil remediation report. In May 1997, the Suffolk County

                                      F-36
<PAGE>   72
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Authorities stated that they were satisfied with the soil remediation that had
been conducted by Fuqua and provided comments on the ground water work plan. In
November 1997, the Lumex Division received the results of additional ground
water testing that had been performed in August and September 1997. The results
revealed significantly lower concentrations of contaminants than were known at
the time the "Ground Water Work Plan" was prepared in March 1997. Due to the
relatively low levels of contaminants detected, the Lumex Division proposed
sampling the groundwater on a quarterly basis for two years to ensure that the
groundwater was not significantly affected and deferred implementing the ground
water work plan. In January, April, July and October 1998, and in January 1999,
additional confirmatory samples were taken and analyzed. These analytic results
provide further support that the groundwater is not significantly contaminated.
The Lumex Division will continue to monitor the quality of the groundwater to
confirm that it remains acceptable. If the quality of the groundwater remains
acceptable after the two year period expires, the Lumex Division will seek to
withdraw its groundwater work plan.

     At December 31, 1998, the Company had reserves for remediation costs and
additional investigation costs which will be required. Reserves are established
when it is probable that a liability has been incurred and such costs can be
reasonably estimated. The Company's estimates of these costs were based upon
currently enacted laws and regulations and the professional judgment of
independent consultants and counsel. Where available information was sufficient
to estimate the amount of liability, that estimate has been used. Where
information was only sufficient to establish a range of probable liability and
no point within the range is more likely than another, the lower end of the
range has been used. The Company has not assumed that any such costs would be
recoverable from third parties nor has the Company discounted any of its
estimated costs, although a portion of the remediation work plan will be
performed over a period of years. The amount of environmental liabilities is
difficult to estimate due to such factors as the extent to which remedial
actions may be required, laws and regulations change or the actual costs of
remediation differ when the final work plan is performed.

     In April 1996, Fuqua acquired the Lumex Division from Cybex International,
Inc. (formerly Lumex, Inc.) for a purchase price of $40.7 million, subject to a
final purchase price adjustment in the asset sale agreement. The final purchase
price adjustment was disputed and, pursuant to the asset sale agreement was
resolved through arbitration. On July 30, 1998, Fuqua received a payment of
$2,468,358 (inclusive of interest) from Cybex, of which $2,384,606 was recorded
as a reduction of the excess of cost over net assets acquired at September 30,
1998.

     In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights as provided under the terms of the asset sale agreement.
In February 1998, Fuqua filed in the State Court of Fulton County a lawsuit
against the seller and certain former officers stating claims for fraud, breach
of warranty, negligent misrepresentation, Georgia RICO, and attorney's fees.
Defendants filed an answer and counterclaim on April 7, 1998, denying liability
and asserting fifteen defenses. On February 18, 1999, Cybex paid Fuqua $2.6
million in settlement of all of Fuqua's claims. As part of the settlement, Cybex
released Fuqua from all liability in connection with Cybex's counterclaim.

     On August 3, 1998, the Company and another defendant, one of the Company's
employees, were served with a lawsuit initiated by JOFRA Enterprises, Inc.
("JOFRA") in New York State Supreme Court, Westchester County. The complaint
seeking damages of $25,000,000 alleges that the Company's hiring of a certain
officer and employees of JOFRA constituted, among other things, unfair
competition and wrongful appropriation of business opportunities. Pursuant to
the defendant-employee's employment agreement, the defendant-employee is seeking
indemnification with respect to such claims. Discovery is proceeding in the
action. The Company considers the plaintiff's allegations to be without merit
and intends to defend this lawsuit vigorously.

     On November 3, 1998, the Company and certain of its directors were named as
defendants in a derivative suit commenced in the Court of Chancery of the State
of Delaware, New Castle County. The lawsuit seeks to rescind a separation
agreement dated as of July 29, 1998 (the "Separation Agreement"), pursuant to
which

                                      F-37
<PAGE>   73
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

'Irwin Selinger, the former Chairman of the Board and Chief Executive Officer,
resigned as Chairman of the Board, Chief Executive Officer and President of the
Company. The lawsuit also seeks unspecified damages as well as the recovery of
all sums paid to Mr. Selinger pursuant to the Separation Agreement. The
plaintiff alleges that by approving the terms of the Separation Agreement, the
defendants breached their fiduciary duties of loyalty and care to the Company by
obligating the Company to pay Mr. Selinger substantially more than his former
employment agreement had required. The Company considers the plaintiff's
allegations to be without merit, and filed a motion to dismiss the complaint on
various grounds in February 1999. The parties are presently in the process of
briefing the motion to dismiss.

     In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"), a
company acquired by Graham-Field in June 1997, asserted certain claims against
Graham-Field relating to alleged material misrepresentations and omissions
contained in the purchase agreement, certain press releases and other public
filings made by the Company with the Securities and Exchange Commission relating
to the Company's business, results of operations and financial condition. Under
the terms of the purchase agreement pursuant to which Graham-Field acquired
LaBac for approximately $9.1 million in common stock of Graham-Field, all claims
that are not resolved between the parties are to be submitted to arbitration.
The Company intends to defend the claims vigorously, but the Company is not
currently able to evaluate the likelihood of success in this case or the range
of potential loss.

     The Company and its subsidiaries are parties to lawsuits and other
proceedings, including those relating to product liability and the sale and
distribution of its products. Except as discussed above, while the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that the ultimate liabilities, if any, will have a
material adverse effect on the consolidated financial position or results of
operations or cash flows of the Company.

COLLECTIVE BARGAINING AGREEMENTS

     The Company is a party to four (4) collective bargaining agreements
covering Graham-Field's facilities located in Bay Shore, New York; Earth City,
Missouri; Ontario, Canada; and Guadalajara, Mexico. The collective bargaining
agreements cover approximately 642 employees. The collective bargaining
agreements for Bay Shore, New York; Earth City, Missouri; Ontario, Canada; and
Guadalajara, Mexico are scheduled to expire on October 19, 2001, September 13,
1999, July 24, 2003 and December 31, 1999, respectively.

     Graham-Field has never experienced an interruption or curtailment of
operations due to labor controversy that had a material adverse effect on
Graham-Field's operations. Graham-Field considers its employee relations to be
satisfactory.

16. RESTATEMENT

     In March 1999, the Company reported that an investigation conducted by the
Company's Audit Committee, with the assistance of outside counsel, had found
certain accounting errors and irregularities with respect to the Company's
previously reported financial results. Based on the results of the
investigation, the Company has restated its previously issued Consolidated
Financial Statements for 1996 and 1997. The following Consolidated Statements of
Operations and Balance Sheets compare the previously reported and restated
financial information.

     The restatement adjustments in 1997, which had the effect of increasing the
loss before income taxes by $6.781 million, were to correct intercompany balance
differences of $4.9 million and certain costs which were incorrectly added to
the excess of cost over net assets acquired of $1.3 million, as well as other
adjustments related primarily to current period costs incorrectly charged to
restructuring and merger related accruals, and compensation expense in
connection with employee stock options and improperly recognized revenue
including revenue recognized in the incorrect period.

                                      F-38
<PAGE>   74
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The restatement adjustments in 1996, which had the effect of increasing the
loss before income taxes by $2.527 million, were to correct for unrecorded
purchases and expenses of $1.4 million and receivable allowances of $570,000, as
well as other adjustments related primarily to sales revenue recognized in the
incorrect period, and inventory valuation adjustments.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31, 1997   YEAR ENDED DECEMBER 31, 1996
                                        ----------------------------   ----------------------------
                                        AS PREVIOUSLY        AS        AS PREVIOUSLY        AS
                                          REPORTED        RESTATED       REPORTED        RESTATED
                                        -------------   ------------   -------------   ------------
<S>                                     <C>             <C>            <C>             <C>
Net revenues..........................  $263,143,000    $262,834,000   $143,642,000    $143,270,000
Cost of revenues......................   188,695,000     193,127,000     99,641,000     100,998,000
Selling, general and administrative...    70,646,000      73,612,000     34,578,000      35,846,000
Interest expense......................     7,260,000       7,260,000      2,578,000       2,762,000
Purchased-in-process research and
  development.........................     3,300,000       3,300,000     12,800,000      12,500,000
Merger and restructuring charges......    23,470,000      22,544,000      3,000,000       2,646,000
                                        ------------    ------------   ------------    ------------
Loss before income taxes (benefit) and
  extraordinary item..................   (30,228,000)    (37,009,000)    (8,955,000)    (11,482,000)
Income taxes (benefit)................    (7,335,000)    (10,592,000)     2,918,000       1,356,000
                                        ------------    ------------   ------------    ------------
Loss before extraordinary item........   (22,893,000)    (26,417,000)   (11,873,000)    (12,838,000)
Extraordinary loss....................            --              --       (736,000)       (736,000)
                                        ------------    ------------   ------------    ------------
Net loss..............................   (22,893,000)    (26,417,000)   (12,609,000)    (13,574,000)
Preferred stock dividends.............     1,065,000       1,065,000             --              --
                                        ------------    ------------   ------------    ------------
Net loss attributable to common
  shareholders........................  $(23,958,000)   $(27,482,000)  $(12,609,000)   $(13,574,000)
                                        ============    ============   ============    ============
Net loss per common share-basic and
  diluted:
  Loss before extraordinary item......  $      (1.16)   $      (1.33)  $       (.76)   $       (.82)
  Extraordinary item..................            --              --           (.05)           (.05)
                                        ------------    ------------   ------------    ------------
  Net loss............................  $      (1.16)   $      (1.33)  $       (.81)   $       (.87)
                                        ============    ============   ============    ============
</TABLE>

                                      F-39
<PAGE>   75
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                             DECEMBER 31, 1997              DECEMBER 31, 1996
                                        ----------------------------   ----------------------------
                                        AS PREVIOUSLY        AS        AS PREVIOUSLY        AS
                                          REPORTED        RESTATED       REPORTED        RESTATED
                                        -------------   ------------   -------------   ------------
<S>                                     <C>             <C>            <C>             <C>
ASSETS
Cash and equivalents..................  $  4,430,000    $  4,430,000   $  1,241,000       1,186,000
Accounts receivable, net..............    91,451,000      87,212,000     45,703,000      43,726,000
Inventories...........................    73,532,000      74,029,000     48,245,000      48,761,000
Other current assets..................     8,103,000       7,317,000      3,023,000       2,936,000
Recoverable and prepaid
  income taxes........................     4,422,000       4,422,000        256,000         256,000
Deferred tax assets...................    10,695,000      10,695,000             --              --
Asset held for sale...................    61,706,000      61,706,000             --              --
                                        ------------    ------------   ------------    ------------
          Total current assets........   254,339,000     249,811,000     98,468,000      96,865,000
Property, plant and
  equipment, net......................    35,955,000      35,890,000     11,264,000      11,351,000
Excess of cost over net
  assets acquired, net................   240,071,000     230,063,000     91,412,000      88,690,000
Deferred tax assets...................     3,044,000       7,924,000        938,000       2,562,000
Other assets..........................    13,709,000      13,649,000      5,112,000       4,818,000
                                        ------------    ------------   ------------    ------------
          Total assets................  $547,118,000    $537,337,000   $207,194,000    $204,286,000
                                        ============    ============   ============    ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Credit facility.......................  $ 65,883,000    $ 65,883,000   $ 13,985,000      13,985,000
Current maturities of long-term
  debt................................     2,619,000       2,619,000      2,016,000       2,016,000
Accounts payable......................    33,888,000      33,758,000     22,995,000      21,644,000
Acceptances payable...................            --              --     19,800,000      19,800,000
Accrued expenses......................    54,331,000      48,419,000     25,608,000      25,104,000
                                        ------------    ------------   ------------    ------------
          Total current liabilities...   156,721,000     150,679,000     84,404,000      82,549,000
Long-term debt and Senior
  Subordinated Notes..................   107,733,000     107,733,000      6,535,000       6,535,000
Other long-term liabilities...........    13,816,000      13,816,000      1,752,000       1,752,000
                                        ------------    ------------   ------------    ------------
          Total liabilities...........   278,270,000     272,228,000     92,691,000      90,836,000
Preferred stock.......................    31,600,000      31,600,000     31,600,000      31,600,000
Common stock..........................       764,000         764,000        492,000         492,000
Additional paid-in capital............   279,341,000     280,179,000    101,573,000     101,573,000
Accumulated deficit...................   (42,953,000)    (47,530,000)   (18,995,000)    (20,048,000)
Other.................................        96,000          96,000       (167,000)       (167,000)
                                        ------------    ------------   ------------    ------------
          Total stockholders'
            equity....................   268,848,000     265,109,000    114,503,000     113,450,000
                                        ------------    ------------   ------------    ------------
          Total liabilities and
            stockholders' equity......  $547,118,000    $537,337,000   $207,194,000    $204,286,000
                                        ============    ============   ============    ============
</TABLE>

     In addition, the January 1, 1996 accumulated deficit has been increased by
$88,000 to reflect the correction of an error related to sales revenue
recognized in the incorrect period.

17.  QUARTERLY DATA (UNAUDITED)

     Selected unaudited quarterly financial data for 1998 and 1997 is provided
below. Results for 1997 have been restated to correct for the findings from an
independent investigation conducted by the Audit Committee

                                      F-40
<PAGE>   76
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Board of Directors into the accuracy of prior financial statements. See
Note 16 for a description of the restatement adjustments.

     The Company also restated the financial results for the first, second and
third quarters of 1998 to correct for certain improperly recorded transactions.
The 1998 adjustments are unrelated to the investigation conducted by the
Company's Audit Committee, which was announced in March 1999. Such adjustments
increased the net loss reported in the first and second quarters of 1998 by
$971,000 and $249,000, respectively, and decreased the net loss reported in the
third quarter of 1998 by $739,000. The adjustments were primarily related to
previously unrecognized stock compensation charges of $954,000 in the first
quarter of 1998 and an $800,000 reduction in the previously recorded estimated
separation charges in the third quarter of 1998.

<TABLE>
<CAPTION>
                                                           FOR THE QUARTER ENDED
                            -----------------------------------------------------------------------------------
                                  MARCH 31                 JUNE 30              SEPTEMBER 30        DECEMBER 31
                            ---------------------   ---------------------   ---------------------   -----------
                                AS                      AS                      AS
                            PREVIOUSLY      AS      PREVIOUSLY      AS      PREVIOUSLY      AS
                             REPORTED    RESTATED    REPORTED    RESTATED    REPORTED    RESTATED
                            ----------   --------   ----------   --------   ----------   --------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                         <C>          <C>        <C>          <C>        <C>          <C>        <C>
1998:
Net revenues:
  Medical equipment and
     supplies.............   $97,727     $97,893     $ 96,936    $ 97,228    $ 93,831    $93,158     $ 90,561
  Interest and other
     income...............       415         415          520         520         685        685          406
                             -------     -------     --------    --------    --------    -------     --------
                              98,142      98,308       97,456      97,748      94,516     93,843       90,967
Costs and expenses:
  Cost of revenues........    67,102      67,378       67,030      67,251      65,075     64,378       66,353
  Selling, general and
     administrative.......    28,210      29,046       30,239      30,535      32,505     31,765       47,640
  Interest expense........     2,743       2,768        3,015       3,039       3,387      3,412        3,433
  Merger and restructuring
     related charges......        --          --           --          --          --         --       (3,547)
                             -------     -------     --------    --------    --------    -------     --------
                              98,055      99,192      100,284     100,825     100,967     99,555      113,879
                             -------     -------     --------    --------    --------    -------     --------
Income (loss) before
  income taxes
  (benefit)...............        87        (884)      (2,828)     (3,077)     (6,451)    (5,712)     (22,912)
Income taxes (benefit)....       800         800         (800)       (800)     (1,287)    (1,287)      17,694
                             -------     -------     --------    --------    --------    -------     --------
Net income (loss).........   $  (713)    $(1,684)    $ (2,028)   $ (2,277)   $ (5,164)   $(4,425)    $(40,606)
                             =======     =======     ========    ========    ========    =======     ========
Net income (loss) per
  common share:
Net income (loss).........   $  (713)    $(1,684)    $ (2,028)   $ (2,277)   $ (5,164)   $(4,425)    $(40,606)
Preferred stock
  dividends...............       266         266          267         267         266        266          266
                             -------     -------     --------    --------    --------    -------     --------
Net income (loss)
  attributable to common
  shareholders............   $  (979)    $(1,950)    $ (2,295)   $ (2,544)   $ (5,430)   $(4,691)    $(40,872)
                             =======     =======     ========    ========    ========    =======     ========
Common shares
  outstanding -- basic and
  diluted.................    30,839      30,839       31,100      31,100      31,244     31,244       31,287
Basic and diluted loss per
  share...................   $  (.03)    $  (.06)    $   (.07)   $   (.08)   $   (.17)   $  (.15)    $  (1.31)
</TABLE>

---------------
a) No incremental shares related to conversion of the preferred stock and common
   equivalent shares are included due to the loss in each quarter.

b) The first quarter 1998 selling, general and administrative expenses includes
   stock compensation charges of $954.

c) The third quarter 1998 selling, general and administrative expenses includes
   separation charges of $2,548.

                                      F-41
<PAGE>   77
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

d) The fourth quarter 1998 includes certain charges and credits as described
   below:

<TABLE>
<S>                                                             <C>
Write-off of deferred tax asset.............................    $18,310
Provision for uncollectible accounts and notes receivable...     11,047
Provision for P.T. Dharma advance...........................      3,000
Provision for inventory obsolescence........................      2,389
Other miscellaneous charges and credits, net................      2,320
Impairment of excess of cost over net assets acquired.......      1,873
Reversal of 1997 restructuring accrual......................     (3,547)
                                                                -------
                                                                $35,392
                                                                =======
</TABLE>
<TABLE>
<CAPTION>
                                                  FOR THE QUARTER ENDED
                                  ------------------------------------------------------
                                          MARCH 31                      JUNE 30
                                  ------------------------      ------------------------
                                      AS                            AS
                                  PREVIOUSLY         AS         PREVIOUSLY         AS
                                   REPORTED       RESTATED       REPORTED       RESTATED
                                  ----------      --------      ----------      --------
                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                               <C>             <C>           <C>             <C>
1997:
  Net revenues:
  Medical equipment and
    supplies................       $56,191        $56,016        $62,579        $62,307
  Interest and other
    income..................           144            144            252            252
                                   -------        -------        -------        -------
                                    56,335         56,160         62,831         62,559
Costs and expenses:
  Cost of revenues..........        38,438         39,234         42,503         44,224
  Selling, general and
    administrative..........        13,193         14,954         14,765         15,507
  Interest expense..........           994            994          1,169          1,169
  Purchased in-process
    research & development
    costs...................            --             --             --             --
  Merger and restructuring
    related charges.........            --             --             --             --
                                   -------        -------        -------        -------
                                    52,625         55,182         58,437         60,900
                                   -------        -------        -------        -------
Income (loss) before income
  taxes (benefit)...........         3,710            978          4,394          1,659
Income taxes (benefit)......         1,527            407          1,681            560
                                   -------        -------        -------        -------
Net income (loss)...........       $ 2,183        $   571        $ 2,713        $ 1,099
                                   =======        =======        =======        =======
Net income (loss) per common
  share:
Net income (loss)...........       $ 2,183        $   571        $ 2,713        $ 1,099
Preferred stock dividends...            --(a)          --(a)          --(a)          --(a)
                                   -------        -------        -------        -------
Net income (loss)
  attributable to common
  shareholders..............       $ 2,183        $   571        $ 2,713        $ 1,099
                                   -------        -------        -------        -------
Common shares outstanding --
  basic.....................        19,763         19,763         20,204         20,204
Convertible preferred
  stock.....................         4,435          4,435          4,435          4,435
Incremental shares using
  treasury stock method.....           966            966            849            849
                                   -------        -------        -------        -------
Common shares outstanding --
  diluted...................        25,164         25,164         25,488         25,488
                                   =======        =======        =======        =======
Basic earnings per share....       $   .11        $   .03        $   .13        $   .05
Diluted earnings per
  share.....................       $   .09        $   .02        $   .11        $   .04

<CAPTION>
                                              FOR THE QUARTER ENDED
                              ------------------------------------------------------
                                    SEPTEMBER 30                  DECEMBER 31
                              ------------------------      ------------------------
                                  AS                            AS
                              PREVIOUSLY         AS         PREVIOUSLY         AS
                               REPORTED       RESTATED       REPORTED       RESTATED
                              ----------      --------      ----------      --------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>             <C>           <C>             <C>
1997:
  Net revenues:
  Medical equipment and
    supplies................   $70,745        $69,919        $ 72,466       $ 73,430
  Interest and other
    income..................       363            363             403            403
                               -------        -------        --------       --------
                                71,108         70,282          72,869         73,833
Costs and expenses:
  Cost of revenues..........    47,159         50,064          60,595         59,605
  Selling, general and
    administrative..........    16,018         18,186          26,670         24,965
  Interest expense..........     2,394          2,394           2,703          2,703
  Purchased in-process
    research & development
    costs...................        --             --           3,300          3,300
  Merger and restructuring
    related charges.........        --             --          23,470         22,544
                               -------        -------        --------       --------
                                65,571         70,644         116,738        113,117
                               -------        -------        --------       --------
Income (loss) before income
  taxes (benefit)...........     5,537           (362)        (43,869)       (39,284)
Income taxes (benefit)......     2,187           (232)        (12,730)       (11,327)
                               -------        -------        --------       --------
Net income (loss)...........   $ 3,350        $  (130)       $(31,139)      $(27,957)
                               =======        =======        ========       ========
Net income (loss) per common
  share:
Net income (loss)...........   $ 3,350        $  (130)       $(31,139)      $(27,957)
Preferred stock dividends...        --(a)          --(a)          266            266
                               -------        -------        --------       --------
Net income (loss)
  attributable to common
  shareholders..............   $ 3,350        $  (130)       $(31,405)      $(28,223)
                               -------        -------        --------       --------
Common shares outstanding --
  basic.....................    21,078         21,078          21,296         21,296
Convertible preferred
  stock.....................     4,435          4,435              --(b)          --
Incremental shares using
  treasury stock method.....     1,227          1,227              --(b)          --
                               -------        -------        --------       --------
Common shares outstanding --
  diluted...................    26,740         26,740          21,296         21,296
                               =======        =======        ========       ========
Basic earnings per share....   $   .16        $  (.01)       $  (1.47)      $  (1.33)
Diluted earnings per
  share.....................   $   .13        $    --           (1.47)(b)   $  (1.33)(b)
</TABLE>

---------------
(a) Assumes conversion of the preferred stock and elimination of any dividends
    in relation to such preferred stock.

(b) No incremental shares related to conversion of the preferred stock and
    options are included due to the loss in the fourth quarter.

(c) The March 31 and June 30 quarters have been restated to reflect the Medapex
    transaction recorded as a pooling of interests.

                                      F-42
<PAGE>   78
              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) The third quarter 1997 selling, general and administrative expenses includes
    stock compensation charges of $838.

(e) The fourth quarter 1997 loss before income taxes includes certain charges
    described below:

<TABLE>
<S>                                                          <C>
Merger and restructuring related charges.................    $      22,544
Provision for inventory obsolescence.....................            7,732
Provision for uncollectible accounts and notes
  receivable.............................................            5,000
Write-off of purchased in-process research and
  development............................................            3,300
                                                             -------------
                                                             $      38,576
                                                             =============
</TABLE>

18.  SUBSEQUENT EVENTS

     On March 24, 1999, the Board of Directors appointed a new President and
Chief Executive Officer and a new Chief Financial Officer who are employed with
Jay Alix & Associates ("JA&A"), a corporate turnaround and financial
restructuring consulting firm. In connection with such appointments, the Company
entered into an agreement with JA&A (the "Consulting Agreement") which provides
for billings on an hourly basis for services rendered. In addition, JA&A was
granted a stock option with a four year term to purchase 200,000 shares of the
Company Common Stock which vests and becomes exercisable seven months following
the termination of the consulting engagement (or upon the consummation of a sale
of the business, if earlier). The stock option contains an exercise price equal
to the lowest five day average closing price of the Company Common Stock for the
period beginning on March 24, 1999 and ending on the earlier to occur of (i)
consummation of a sale of the business, or (ii) June 22, 1999. The Consulting
Agreement also provides for a contingent success fee in the event of a sale of
all or a portion of the Company's business. The minimum amount payable to JA&A
under the Consulting Agreement, inclusive of any contingent success fee, is
$1,000,000.

     Effective as of May 12, 1999, BIL waived certain events of default under
the BIL Note and exchanged all of its right, title and interest under the BIL
Note, in consideration of the issuance of 2,036 fully-paid, validly issued,
non-assessable shares of the Series D Preferred Stock. The shares of Series D
Preferred Stock are non-voting, but have substantially the same economic rights
as 2,036,000 shares of Common Stock. Based on the closing price of the Common
Stock on May 12, 1999, that number of shares would have a market value of
$4,072,000, which equals the aggregate of the unpaid principal amount and
accrued interest on the BIL Note. Simultaneously with the closing of such
transaction, Graham-Field and BIL entered into an agreement dated as of May 12,
1999, which provided Graham-Field with the sole and exclusive option for a
period of one year following May 12, 1999, to convene a meeting of its
stockholders or take such other corporate action, in accordance with applicable
laws and regulatory requirements, as may be required to obtain applicable
corporate approval to exchange each share of Series D Preferred Stock for 1,000
shares of Common Stock.

                                      F-43
<PAGE>   79

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

              GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                     COL C
COL A                                    COL B                     ADDITIONS                       COL D                 COL E
-----                                 -----------   ---------------------------------------   ----------------        -----------
                                                           1
                                      BALANCE AT       ADDITIONS                2             OTHER CHANGES --        BALANCE AT
                                       BEGINNING    CHARGED TO COSTS     CHARGED TO OTHER     ADD (DEDUCT) --           END OF
            DESCRIPTION                OF PERIOD      AND EXPENSES     ACCOUNTS -- DESCRIBE       DESCRIBE              PERIOD
            -----------               ----------    ----------------   --------------------   ----------------        ----------
<S>                                   <C>           <C>                <C>                    <C>                     <C>
Allowance for doubtful accounts:
Year ended December 31, 1998........  $14,368,000     $11,904,000          $        --          $(6,165,000)(1)(5)    $20,107,000
Year ended December 31, 1997........    8,363,000       6,542,000            1,253,000(3)        (1,790,000)(1)        14,368,000
Year ended December 31, 1996........    1,811,000       1,176,000            5,627,000(2)          (251,000)(1)         8,363,000
Allowance for doubtful notes:
Year ended December 31, 1998........  $        --       4,500,000(4)                --              873,000(5)        $ 5,373,000
Valuation allowance for net deferred
  tax assets:
Year ended December 31, 1998........  $12,118,000     $22,996,000          $        --          $        --           $35,114,000
Year ended December 31, 1997........   12,118,000              --                   --                                 12,118,000
Year ended December 31, 1996........       55,000                           12,063,000(2)                --            12,118,000
</TABLE>

---------------
(1) Net write-offs of accounts receivable.

(2) Represents an allocation of the purchase price of the Everest & Jennings and
    V.C. Medical acquisitions.

(3) Represents accounts receivable allowances of Kuschall and Fuqua acquired
    during 1997.

(4) Reserve set up for advance to PT Dharma and for trade notes receivable.

(5) Transfer of $873,000 reserve amount applicable to notes receivable from
    allowance for doubtful accounts.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

     The response to this Item is submitted as a separate section of this
Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES:

     None.

                                      F-44
<PAGE>   80

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

DIRECTORS OF THE REGISTRANT

     The following table sets forth certain information with respect to the
directors of the Company:

<TABLE>
<CAPTION>
NAME                                           AGE      POSITION WITH COMPANY         DIRECTOR SINCE
----                                           ---      ---------------------         --------------
<S>                                            <C>    <C>                           <C>
Rupert O.H. Morley...........................  33     Chairman of the Board and            1999
                                                      Member of the Executive
                                                      Committee
Louis A. Lubrano.............................  65     Director and Member of the           1984
                                                      Audit and Compensation
                                                      Committees
J. Rex Fuqua.................................  49     Director and Member of the    January 16, 1998 to
                                                      Executive, Audit and            April 17, 1998;
                                                      Compensation Committees        July 29, 1998 to
                                                                                          present
David P. Delaney, Jr.........................  46     Director and Member of the           1995
                                                      Executive Committee
Michael Dreyer...............................  47     Director and Member of the           1998
                                                      Audit and Compensation
                                                      Committees
</TABLE>

---------------
     Mr. Morley has been a director of the Company since February 5, 1999, and
was appointed Chairman of the Board of the Company on March 24, 1999. Mr. Morley
is an Operations Director of Brierley Investments Limited, a New Zealand
investment holding company, an affiliate of BIL. Mr. Morley is also a director
of English, Welsh & Scottish Railways, a UK freight railway company, and a
director of Thistle Hotels plc, a listed UK hotel company. From September 1992
to July 1997, Mr. Morley held various executive positions at The Peninsular &
Oriental Steam Navigation Company, including serving as Managing Director of
Swan Hellenic, a UK cruise line subsidiary, from April 1995 to July 1997.
Pursuant to the Amended and Restated Stockholder Agreement dated as of September
3, 1996, as amended (the "BIL Stockholder Agreement"), by and between the
Company and BIL, Mr. Morley serves as one of BIL's designees to the Company's
Board of Directors.

     Mr. Lubrano has been an investment banker with Herzog, Heine, Geduld, Inc.,
a member New York Stock Exchange firm, since December 1996. From March 1, 1991
to December 1996, Mr. Lubrano was a managing director of Stires & Company, Inc.,
an investment banking firm. From March 1990 to February 1991, Mr. Lubrano was a
director of the Nasdaq Forum. Prior to such time, Mr. Lubrano was a managing
director of Home Group Capital Markets, Inc., an investment banking firm. From
April 1986 to March 1989, he was President of Gabelli & Company, Inc., an
investment banking firm. He is also a director of Andersen Group, Inc., a
diversified manufacturing company.

     Mr. Fuqua has been President and Chief Executive Officer of Realan Capital
Corporation, a privately-held investment corporation since 1985, and the
President and Chief Executive Officer of Fuqua Capital Corporation, a
privately-held investment management corporation, since 1987. Previously, he was
the Chairman of the Board of Directors of Fuqua Enterprises, Inc., a company
engaged in the manufacture and sale of medical products, which was acquired by
the Company on December 30, 1997. Mr. Fuqua also serves as a director of WebMD,
7 Aaron Rents, Inc., and FMB Bankshares, Inc.

     Mr. Delaney has been the President and Chief Executive Officer of Lancer
Financial Group and its principal operating subsidiary, Lancer Insurance
Company, since 1985. Mr. Delaney founded the Lancer Financial Group, which
currently provides insurance coverage and specialized services to the United
States passenger transportation industry. In addition, Mr. Delaney has served as
the Chairman of the Long Island Chapter of the Young President's Organization,
and serves as the Chairperson of the Community Campaign

                                       77
<PAGE>   81

at Mercy Medical Center and is a member of the Advisory Board of the Alliance of
American Insurers. From February 4, 1999 to March 24, 1999, Mr. Delaney served
as the Chairman of the Board of the Company.

     Mr. Dreyer is a certified public accountant and has been the managing
partner of Dreyer, Edmonds & Associates, a regional accounting firm located in
Los Angeles, California since 1982. Prior to that time, Mr. Dreyer was an
employee of Price Waterhouse. Pursuant to the BIL Stockholder Agreement, Mr.
Dreyer serves as one of BIL's designees to the Company's Board of Directors. Mr.
Dreyer also serves as a director of American Shower Door Corporation.

     Each of the persons listed is now serving as a director and was previously
elected by the Company's stockholders, except J. Rex Fuqua, Rupert Morley and
Michael Dreyer who were elected at meetings of the Board of Directors held on
July 29, 1998, February 5, 1999, and December 14, 1998, respectively. No
director is related to any other director or executive officer.

     Each member of the Company's Board of Directors holds office for the term
for which he was elected and until his successor shall have been elected and
qualified, or until the earlier of his resignation, removal from office or
death. The Company's Board of Directors is composed of three classes consisting
of the following members: Class I Director with a term expiring in 2000 -- J.
Rex Fuqua; Class II Directors with a term expiring in 2001 -- David P. Delaney,
Jr. and Michael Dreyer; Class III Directors with a term expiring in
2002 -- Rupert O.H. Morley and Louis A. Lubrano.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information as of May 3, 1999 with
respect to the executive officers of the Company:

<TABLE>
<CAPTION>
                                                              POSITION(S) WITH               YEAR BECAME
NAME                                           AGE                COMPANY                 EXECUTIVE OFFICER
----                                           ---            ----------------            -----------------
<S>                                            <C>    <C>                                 <C>
Donald D. Cantwell...........................  47     Vice President of Information          1997
                                                      Systems
Harvey P. Diamond............................  45     Senior Vice President of               1998
                                                      Corporate
                                                      Sales
Richard S. Kolodny...........................  40     Senior Vice President, General         1993
                                                      Counsel, and Secretary
John G. McGregor.............................  53     Chief Executive Officer and            1999
                                                      President
J. Soren Reynertson..........................  32     Senior Vice President and              1999
                                                      Chief Financial Officer
</TABLE>

     Mr. Cantwell has been the Vice President of Information Systems of the
Company since May 1996, and became an executive officer of the Company on
January 1, 1997. From 1995 to 1996, Mr. Cantwell was the Chief Information
Officer of Dial-A-Mattress, Inc. Prior to such time, Mr. Cantwell held various
management positions with Grumman Corporation for over ten years.

     Mr. Diamond is currently the Senior Vice President of Corporate Sales, and
has held various executive sales and marketing positions with the Company since
November 1998. From April 1995 to November 1998, Mr. Diamond was involved in
various business ventures unrelated to the Company. During the period January
1995 through April 1995, Mr. Diamond was the President, Chief Operating Officer,
and member of the Board of Directors of the Company. Mr. Diamond was the founder
and President of Diamond Medical Equipment Corp., a manufacturer of patient
aids, importer of blood pressure equipment and distributor of a broad line of
home healthcare products including adult incontinence and nutritional support
products, which was acquired by the Company in May 1992.

     Mr. Kolodny is currently the Senior Vice President, General Counsel and
Secretary of the Company, and has been the Vice President, General Counsel and
Secretary since August 1993. From 1990 to 1993, Mr. Kolodny was associated with
the New York law firm of Carro, Spanbock, Kaster & Cuiffo. Prior to such time,
Mr. Kolodny was associated with the New York law firm of Shea & Gould.

                                       78
<PAGE>   82

     Mr. McGregor was appointed President and Chief Executive Officer of the
Company on March 24, 1999. Mr. McGregor is, and has been since 1991, a principal
of Jay Alix & Associates ("JA&A"), a firm specializing in financial
reorganizations, cash management, operational consolidations and other
strategies for underperforming companies. From January 1997 to March 1999, Mr.
McGregor served as President and Chief Executive Officer of Cotton Ginny
Limited, a Canadian retailer of casual wear, and prior to such time, Mr.
McGregor served for a period of three months as the interim Chief Executive of
Philip Services Corporation, a North American integrated provider of industrials
and metals services.

     Mr. Reynertson was appointed Senior Vice President and Chief Financial
Officer of the Company on March 24, 1999. Mr. Reynertson is, and has been since
January 1996, a senior associate of JA&A. From October 1998 to February 1999,
Mr. Reynertson served as interim Chief Financial Officer of Cotton Ginny
Limited, a Canadian retailer of casual wear. From August 1994 to December 1995,
Mr. Reynertson was associated with Price Waterhouse's Dispute Analysis and
Corporate Recovery Group.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of the Common Stock of the Company to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC") and the exchange on which the Common Stock is listed for trading.
Officers, directors and more than ten percent stockholders are required by
regulations promulgated under the Exchange Act to furnish the Company with
copies of all Section 16(a) reports filed.

     Based solely on the Company's review of copies of the Section 16(a) reports
filed for the year ended December 31, 1998, and written representations from
certain reporting persons that no Forms 5 were required for such persons for the
year ended December 31, 1998, the Company believes that all reporting
requirements applicable to its officers, directors, and more than ten percent
stockholders were complied with for the year ended December 31, 1998, except for
(i) a Form 4 filing on behalf of BIL dated as of June 2, 1998, which reported
open market purchases of 11,800 shares and 5,000 shares of Common Stock on June
2, 1997 and June 3, 1997, respectively, and (ii) a Form 4 filing on behalf of
Rodney F. Price, a former BIL designee to the Company's Board of Directors and
former Chief Executive Officer of the Company, to reflect Mr. Price's indirect
ownership of the shares of Common Stock purchased in the open market by BIL on
June 2, 1997 and June 3, 1997.

                                       79
<PAGE>   83

ITEM 11.  EXECUTIVE COMPENSATION:

     The following summary compensation table sets forth certain information
concerning the compensation of the Company's named executive officers (the
"Named Executive Officers") within the meaning of Item 402(a)(3) of Regulation
S-K for each of the three years during the period ended December 31, 1998:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                 LONG TERM
                                                                                                COMPENSATION
                                                                                                   AWARDS
                                                                                                ------------
                                                                                                 SECURITIES
                                                   ANNUAL COMPENSATION                           UNDERLYING
                                          --------------------------------------   RESTRICTED    OPTIONS TO
                                                                  OTHER ANNUAL       STOCK        PURCHASE      ALL OTHER
                                           SALARY      BONUS     COMPENSATION(1)     AWARDS      SHARES(2)     COMPENSATION
NAME AND PRINCIPAL POSITION        YEAR     ($)         ($)            ($)            ($)           (#)            ($)
---------------------------        ----   --------   ---------   ---------------   ----------   ------------   ------------
<S>                                <C>    <C>        <C>         <C>               <C>          <C>            <C>
Rodney F. Price(3)...............  1998         --          --            --          --           10,000(4)           --
  Chairman of the Board and Chief  1997         --          --            --          --           10,000(4)           --
  Executive Officer                1996         --          --            --          --               --              --
Paul Bellamy(5)..................  1998    206,731          --            --          --          475,000(6)           --
  President and Chief Financial    1997         --          --            --          --               --              --
  Officer                          1996         --          --            --          --               --              --
Irwin Selinger(7)................  1998    550,000          --            --          --          250,000(9)    1,879,252(10)
  Former Chairman of the Board,    1997    446,156   1,000,000            --          --          139,944(9)       33,790(11)
  President and Chief Executive    1996    250,000     100,000       180,000(8)       --          245,517(9)       31,098(11)
  Officer
Peter Winocur....................  1998    233,846          --            --          --          210,000              --
  Executive Vice President of
    Sales                          1997    200,000     177,089(12)      27,089(13)    --           18,500              --
  and Marketing                    1996    150,000      75,000            --          --          110,000              --
Ralph Liguori(14)................  1998    223,846          --            --          --          203,797              --
  Executive Vice President of      1997    200,000     107,089(12)      27,089(13)    --           16,000              --
  Operations                       1996    175,000      50,000            --          --           35,000              --
Jeffrey Schwartz(15).............  1998    203,846      15,000            --          --           10,000              --
  President of GF Express          1997    177,885     100,000            --          --           10,000              --
                                   1996     91,731      75,000            --          --           35,000              --
Richard S. Kolodny...............  1998    203,365          --            --          --          213,750              --
  Vice President, General Counsel  1997    175,000     152,089(12)      27,089(13)    --           17,767              --
  and Secretary                    1996    150,000      75,000            --          --           35,000              --
</TABLE>

---------------
 (1) Except as set forth in notes (8) and (13) below, the aggregate amount of
     Other Annual Compensation for each of the Named Executive Officers did not
     equal or exceed the lesser of either $50,000 or 10% of the total of such
     individual's base salary and bonus, as reported herein and is not reflected
     in the table.

 (2) Stock options are granted under the terms and provisions of the Company's
     Incentive Program. For a description of the stock options, see "Executive
     Compensation -- Option Grants in Last Fiscal Year."

 (3) Mr. Price served as Chairman of the Board from July 25, 1998 to February 4,
     1999, and as Chief Executive Officer of the Company from July 29, 1998 to
     February 4, 1999. As Chairman of the Board and Chief Executive Officer, Mr.
     Price did not receive any cash compensation. During his tenure as Chairman
     of the Board and Chief Executive Officer, Mr. Price was reimbursed for
     travel, lodging and meal expenses.

 (4) Under the terms of the Company's Incentive Program, Mr. Price's directors'
     options expire on February 4, 2001.

 (5) Mr. Bellamy served in various executive officer capacities with the Company
     from March 2, 1998 through December 31, 1998, including Vice President,
     Chief Financial Officer, President, and a director

                                       80
<PAGE>   84

     of the Company. From February 5, 1999 through March 24, 1999, Mr. Bellamy
     served as President, Chief Executive Officer and a director of the Company.

 (6) Under the terms of Mr. Bellamy's stock option agreements, Mr. Bellamy's
     stock options expire ninety (90) days following his resignation on March
     24, 1999.

 (7) Mr. Selinger resigned as Chief Executive Officer, President and a director
     of the Company on July 29, 1998, and entered into a Separation Agreement
     (the "Separation Agreement") with the Company. The terms of the Separation
     Agreement provide that Mr. Selinger will continue to receive his base
     salary of $550,000 per year through July 31, 1999. For a description of the
     terms and provisions of the Separation Agreement, see "Employment,
     Termination and Change in Control Arrangements and Other Arrangements."

 (8) On November 27, 1996, the Company forgave indebtedness in the amount of
     $180,000 (inclusive of accrued interest), under a secured loan provided to
     Mr. Selinger on April 1, 1996. The loan was used by Mr. Selinger to
     purchase 50,000 shares of Common Stock in the open market.

 (9) Under the terms of Mr. Selinger's stock option agreements, Mr. Selinger's
     stock options expired ninety (90) days following his resignation on July
     29, 1998.

(10) The amount includes the forgiveness on July 29, 1998 of net indebtedness in
     the amount of $1,841,098 (inclusive of accrued interest and certain other
     expenses) under a loan (the "Selinger Loan") made by the Company to Mr.
     Selinger on December 3, 1997 in the original principal amount of
     $2,500,000. The outstanding principal amount of $2,200,000 and accrued
     interest under the Selinger Loan was forgiven under the terms and
     provisions of the Separation Agreement, in partial consideration of Mr.
     Selinger's agreement to repay $500,000 to the Company on June 30, 1999, and
     a three (3) year non-competition covenant. For a description of the terms
     and provisions of the Separation Agreement, see "Employment, Termination
     and Change in Control Arrangements and Other Arrangements." In addition,
     such amount includes $38,154 relating to the projected actuarial benefit to
     Mr. Selinger for the year ended December 31, 1998 with respect to the
     Company's payment of certain premiums on a life insurance policy owned by a
     trust for the benefit of Mr. Selinger's children on a split-dollar basis.

(11) In June 1992, the Company entered into a split-dollar life insurance
     arrangement for the benefit of Mr. Selinger. During the fiscal years ended
     December 31, 1998, 1997 and 1996, the Company paid the premiums on the life
     insurance policy owned by a trust for the benefit of Mr. Selinger's
     children on a split-dollar basis. With respect to the payment of such
     premiums by the Company, the benefit to Mr. Selinger for the years ended
     December 31, 1998, 1997 and 1996, projected on an actuarial basis was
     $38,154, $33,790 and $31,098, respectively, which is included in the table
     above. Under the terms of the Separation Agreement, the Company is required
     to continue to make such premium payments in accordance with the terms of
     Mr. Selinger's divorce judgment.

(12) Includes the forgiveness of indebtedness in the amount of $27,089
     (inclusive of accrued interest) under secured loans (the "Secured Loans")
     provided to Mr. Winocur, Mr. Kolodny and Mr. Liguori on February 26, 1996.
     The Secured Loans were used by each of Mr. Winocur, Mr. Kolodny and Mr.
     Liguori to purchase 6,000 shares of Common Stock on the open market in
     1996.

(13) Each of Mr. Winocur, Mr. Kolodny and Mr. Liguori were reimbursed for all
     applicable Federal, state and local income taxes relating to the
     forgiveness of indebtedness under the Secured Loans.

(14) On April 29, 1999, the Company provided Mr. Liguori with three (3) months
     prior written notice of termination of employment in accordance with the
     terms of his employment agreement.

(15) On May 14, 1996, Mr. Schwartz joined the Company as the Vice President of
     GF Express. Mr. Schwartz became an executive officer of the Company in June
     1997.

                                       81
<PAGE>   85

OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth certain summary information concerning the
number of stock options granted and the potential realizable value of the stock
options granted to the Company's Named Executive Officers during the fiscal year
ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                                  POTENTIAL REALIZABLE
                                                                                                    VALUE AT ASSUMED
                                     NUMBER OF                                                      ANNUAL RATES OF
                                     SECURITIES     % OF TOTAL                                        STOCK PRICE
                                     UNDERLYING      OPTIONS                                          APPRECIATION
                                      OPTIONS       GRANTED TO     EXERCISE OR                     FOR OPTION TERM(2)
                                     GRANTED IN    EMPLOYEES IN    BASE PRICE     EXPIRATION    ------------------------
NAME                                  1998(1)      FISCAL YEAR       ($/SH)          DATE           5%           10%
----                                 ----------    ------------    -----------    ----------    ----------    ----------
<S>                                  <C>           <C>             <C>            <C>           <C>           <C>
Rodney F. Price....................    10,000            .7%         16.3125               (3)  $   45,068    $   99,589
  Chairman of the Board and Chief
  Executive Officer
Paul Bellamy.......................   200,000          13.4%          7.6875(4)                 $  424,783    $  938,659
  President and Chief Financial       275,000          18.4%           2.875               (5)     218,435       482,684
  Officer
Irwin Selinger.....................   250,000          16.8%           17.00               (6)  $1,174,197    $2,594,668
  Former Chairman of the Board and
  Chief Executive Officer
Peter Winocur......................    10,000(7)         .7%           15.50       01/28/03     $   42,824    $   94,629
  Executive Vice President of         100,000           6.7%          7.6875(4)    02/02/03        212,391       469,330
  Sales & Marketing                   100,000           6.7%           2.875       09/15/03         79,431       175,522
Ralph Liguori......................     3,797(7)         .3%           15.50               (8)  $   16,260    $   35,931
  Executive Vice President of         100,000           6.7%          7.6875(4)    02/02/03        212,391       469,330
  Operations                          100,000           6.7%           2.875       09/15/03         79,431       175,522
Jeffrey Schwartz...................    10,000            .7%          7.6875       04/17/03     $   21,239    $   46,933
  President of GF Express
Richard S. Kolodny.................    13,750(7)         .9%           15.50       01/28/03     $   58,883    $  130,115
  Vice President, General Counsel     100,000           6.7%          7.6875(4)    02/02/03        212,391       469,330
  and Secretary                       100,000           6.7%           2.875       09/15/03         79,431       175,522
</TABLE>

---------------
(1) During the fiscal year ended December 31, 1998, stock options were granted
    under the Company's Incentive Program at an exercise price equal to the fair
    market value of the Common Stock on the date of grant. The stock options,
    other than directors' options, have a term of five years, subject to earlier
    termination in the event of termination of employment for cause. The stock
    options are non-transferable, other than by will or the laws of descent and
    distribution, and vest and are exercisable at the rate of 50% per year
    (other than directors' options, which are exercisable at the rate of 1/3 per
    year), subject to certain exceptions including a change of control of the
    Company and the death of an optionee. The stock options may be exercised by
    payment of cash, shares of Common Stock or other consideration. The
    Company's Incentive Program is administered by the Compensation Committee of
    the Board of Directors.

(2) Represents gain that would be realized assuming the stock options were held
    for the entire five-year period and the stock price increased at compounded
    rates of 5% and 10%, respectively, from the exercise prices set forth in the
    table. These amounts represent assumed rates of appreciation only. Actual
    gains, if any, on stock option exercises will be dependent on overall market
    conditions and on the future performance of the Company. There can be no
    assurance that the amounts reflected in the table will be achieved.

(3) This amount represents the grant of directors' options to purchase 10,000
    shares of Common Stock issued pursuant to the Company's Incentive Program.
    Under the terms of the Company's Incentive Program, Mr. Price's directors'
    options expire on February 4, 2001. For a description of the terms and
    provisions of directors' options, see "Compensation of Directors."

                                       82
<PAGE>   86

(4) Such stock options were repriced in 1998. For a description of the repricing
    of the stock options, see "Stock Option Repricing Table."

(5) Under the terms of Mr. Bellamy's stock options agreements, Mr. Bellamy's
    stock options expire ninety (90) days following his resignation on March 24,
    1999.

(6) Under the terms of Mr. Selinger's stock option agreements, Mr. Selinger's
    stock options expired ninety (90) days following his resignation on July 29,
    1998.

(7) Represents restored stock options granted at the time of an exercise of a
    stock option through a stock swap (payment of the exercise price by
    surrender of previously owned shares of Common Stock). The restored stock
    option was granted for the number of shares tendered to pay the exercise
    price of the related option.

(8) Under the terms of Mr. Liguori's restored stock option agreement, Mr.
    Liguori's restored stock option expires ninety (90) days following his
    effective date of termination of employment of July 29, 1999.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

     The following table provides certain summary information concerning stock
option exercises during the fiscal year ended December 31, 1998 by the Company's
Named Executive Officers and the value of unexercised stock options held by the
Company's Named Executive Officers as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                  NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                                 UNDERLYING UNEXERCISED            "IN THE MONEY"
                                                                    OPTIONS AT FISCAL             OPTIONS AT FISCAL
                                    NUMBER OF        VALUE             YEAR END(3)                   YEAR END(4)
                                 SHARES ACQUIRED   REALIZED    ---------------------------   ---------------------------
NAME                              UPON EXERCISE    ($)(1)(2)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                             ---------------   ---------   -----------   -------------   -----------   -------------
<S>                              <C>               <C>         <C>           <C>             <C>           <C>
Rodney F. Price................         -0-             -0-       10,000            -0-          -0-              -0-
  Former Chairman of the Board
  and Chief Executive Officer
Paul Bellamy...................         -0-             -0-          -0-        475,000          -0-         $137,500
  Former President and Chief
  Executive Officer
Irwin Selinger.................         -0-             -0-          -0-            -0-          -0-              -0-
  Former Chairman of the Board
  and Chief Executive Officer
Peter Winocur..................      30,406        $316,291      121,844        206,250          -0-         $ 50,000
  Executive Vice President of
  Sales and Marketing
Ralph Liguori..................       8,881        $ 78,800       43,131        205,000          -0-         $ 50,000
  Executive Vice President of
  Operations
Jeffrey Schwartz...............         -0-             -0-       32,000         15,000          -0-              -0-
  President of GF Express
Richard S. Kolodny.............      44,000        $468,875       51,267        206,250          -0-         $ 50,000
  Vice President, General
  Counsel and Secretary
</TABLE>

---------------
(1) Values were calculated by multiplying the closing market price of the Common
    Stock as reported on the New York Stock Exchange, Inc. on the date of
    exercise, by the respective number of shares and subtracting the exercise
    price per share.

(2) The shares of Common Stock received upon exercise of the stock options were
    not disposed of by the Named Executive Officers.

(3) Represents the aggregate number of stock options held as of December 31,
    1998.

(4) Values were calculated by multiplying the closing market price of the Common
    Stock as reported on the New York Stock Exchange, Inc. on December 31, 1998
    by the respective number of shares and subtracting the exercise price per
    share, without any adjustment for any termination or vesting contingencies.

                                       83
<PAGE>   87

STOCK OPTION REPRICING TABLE

     The following table sets forth certain summary information concerning the
repricing of stock options held by any of the Company's Named Officers during
the past ten (10) years. See "Report of Compensation Committee -- Stock Option
Repricing."

<TABLE>
<CAPTION>
                                                              MARKET      EXERCISE PRICE
                                          NUMBER OF           PRICE          AT TIME                  LENGTH OF ORIGINAL
                                         SECURITIES          OF STOCK      OF REPRICING      NEW         OPTION TERM
                                     UNDERLYING OPTIONS/    AT TIME OF          OR         EXERCISE   REMAINING AT DATE
                                      SARS REPRICED OR     REPRICING OR     AMENDMENT       PRICE      OF REPRICING OR
NAME                        DATE         AMENDED (#)        AMENDMENT          ($)           ($)          AMENDMENT
----                       -------   -------------------   ------------   --------------   --------   ------------------
<S>                        <C>       <C>                   <C>            <C>              <C>        <C>
Paul Bellamy(1)..........  4/01/98         200,000           $  7.50          $17.93       $  7.50    4 years, 11 months
  Former President         4/17/98         200,000           $7.6875          $ 7.50       $7.6875    4 years, 11 months
  and Chief Executive
  Officer
Peter Winocur............  4/17/98         100,000           $7.6875          $17.00       $7.6875    4 years, 10 months
  Executive Vice
  President of Sales and
  Marketing
Ralph Liguori............  4/17/98         100,000           $7.6875          $17.00       $7.6875    4 years, 10 months
  Executive Vice
  President of Operations
Richard S. Kolodny.......  4/17/98         100,000           $7.6875          $17.00       $7.6875    4 years, 10 months
  Vice President, General
  Counsel
</TABLE>

---------------
(1) On March 2, 1998, Mr. Bellamy was granted a stock option to purchase 200,000
    shares of common stock, which was repriced on April 1, 1998 and on April 17,
    1998. Mr. Bellamy resigned as President, Chief Executive Officer and a
    director of the Company on March 24, 1999. Under the terms of Mr. Bellamy's
    stock options agreements, Mr. Bellamy's stock options expire ninety (90)
    days following his resignation on March 24, 1999.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     There are no compensation committee interlocks between the Company and
other entities involving any of the executive officers of the Company who serve
as executive officers of such other entities.

COMPENSATION OF DIRECTORS

     The directors' cash compensation program provides for the payment of
directors' fees to outside directors of $1,000 for the attendance at each Board
meeting and $500 for each Committee meeting, provided each Committee meeting is
held on a date other than a Board meeting. In addition, no directors' fees are
provided for telephonic Board or Committee meetings which are less than two (2)
hours in duration.

     Under the Company's Incentive Program, directors' options are granted
automatically as of January 2nd of each year that the Incentive Program is in
effect to each director who was neither an employee nor officer of the Company
or any of its subsidiaries (a "Qualifying Director"). Each director's option
entitles the Qualifying Director to whom it is granted to purchase 10,000 shares
of the Common Stock at an option price equal to the fair market value of the
Common Stock on the date of grant. Directors' options vest and are exercisable
at the rate of one-third (1/3) of each grant annually. Directors' options
terminate ten years from the date of grant or two years after a director's
termination, if other than for cause, in which latter case, the directors'
options terminate immediately. Effective as of February 1998, the Company's
Incentive Program was amended to eliminate the automatic grant feature for
directors' options. As currently in effect, the Company's Incentive Program
provides that directors' options may be granted upon terms and conditions
approved by the Compensation Committee. On January 2, 1999, the Compensation
Committee granted to each of the Qualifying Directors a directors' option to
purchase 25,000 shares of the Common Stock at an option price equal to the fair
market value of the Common Stock on the date of grant.

     From February 4, 1999 to March 24, 1999, Mr. Delaney served as Chairman of
the Board of the Company and was paid $12,500 for such services.
                                       84
<PAGE>   88

EMPLOYMENT, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS AND OTHER
ARRANGEMENTS

     On July 29, 1998, Irwin Selinger resigned as Chief Executive Officer,
President and a director of the Company, and entered into the Separation
Agreement, which terminated Mr. Selinger's existing employment agreement and
"change in control" agreement. The Separation Agreement provides for, among
other things, (i) the continuation of Mr. Selinger's (a) base salary of $550,000
through July 31, 1999, (b) health care and insurance benefits through July 8,
2001, and (c) automobile lease payments and associated automobile expenses
through July 8, 2001, (ii) the forgiveness of the outstanding principal amount
of $2.2 million and accrued interest under the Selinger Loan in partial
consideration of Mr. Selinger's repayment of $500,000 on June 30, 1999, (iii) a
three (3) year non-competition covenant, (iv) the continuation of Mr. Selinger's
split dollar life insurance policy in accordance with the terms of Mr.
Selinger's divorce judgment, (v) a non-disparagement agreement, (vi) mutual
releases, and (vii) the continuation of the Company's indemnification provisions
for Mr. Selinger.

     On March 24, 1999, Paul Bellamy resigned as President, Chief Executive
Officer and a director of the Company. On March 2, 1998, Mr. Bellamy entered
into a three-year employment agreement with the Company providing for, among
other things, an initial base salary of $250,000 per year. Under the terms and
provisions of Mr. Bellamy's employment agreement, Mr. Bellamy is not entitled to
receive any severance benefits or other payments upon a voluntary termination of
employment. On September 15, 1998, Mr. Bellamy entered into an agreement with
the Company providing for the payment of certain benefits following the
occurrence of a "change in control" (as defined in such agreement), which
agreement is no longer in effect as a result of Mr. Bellamy's voluntary
termination of employment.

     On June 12, 1998, Andrew A. Giordano resigned as President, Chief Operating
Officer and a director of the Company. On April 17, 1998, Mr. Giordano entered
into a three (3) year employment agreement with the Company providing for an
initial base salary of $350,000 per year, and an agreement with the Company
providing for the payment of certain benefits following the occurrence of a
"change in control" (as defined in such agreement). On April 23, 1998, the
Company loaned $400,000 to Mr. Giordano, which was subsequently repaid in full
with interest on July 31, 1998. In connection with Mr. Giordano's resignation,
Mr. Giordano entered into a four (4) year Consulting Agreement with the Company
on September 17, 1998 (the "Consulting Agreement") to consult with the Company
for no more than ten (10) calendar days per month. As part of the Consulting
Agreement, Mr. Giordano's existing employment agreement and "change in control"
agreement were terminated. The Consulting Agreement provides for, among other
things, (i) four (4) payments of $75,000 per year on each September 17, with the
final payment to be made on September 17, 2001, and (ii) the reimbursement of
reasonable business expenses relating to Mr. Giordano's consultancy with the
Company.

     Effective as of March 15, 1996, Mr. Schwartz entered into a five (5) year
employment agreement with the Company. Under the terms of Mr. Schwartz's
employment agreement, Mr. Schwartz receives an annual base salary of $200,000
and participates in the Company's bonus program. The employment agreement
contains certain non-competition provisions, which are effective until the later
to occur of March 14, 2001 or the date of termination of employment, subject to
certain extension terms. Mr. Schwartz's employment agreement provides that the
Company may terminate the employment of Mr. Schwartz only for cause (as defined
in the employment agreement), death or extended illness or disability. On May
14, 1996, Mr. Schwartz entered into an agreement with the Company providing for
the payment of certain benefits if within two years following the occurrence of
a "change in control"(as defined in each such agreement), Mr. Schwartz is
terminated other than by reason of death, disability, retirement, or for cause,
or if Mr. Schwartz terminates his employment for good reason. Under the terms of
such agreement, Mr. Schwartz is entitled upon the occurrence of a triggering
event to receive his base salary and incentive compensation, if any, through the
date of termination, plus a lump sum severance payment equal to one times Mr.
Schwartz' base salary.

     On April 17, 1998, Mr. Winocur, Mr. Kolodny, and Mr. Liguori entered into
three (3) year employment agreements with the Company. The employment agreements
provide for initial annual base salaries of $230,000, $200,000 and $220,000,
respectively. Under the terms of the employment agreements, each of the

                                       85
<PAGE>   89

executives participates in the Company's bonus program. The terms of the
employment agreements provide that the Company may terminate the executive's
employment for "cause" (as defined in the employment agreements), death or
extended illness or disability without any severance obligation. The Company may
terminate an executive's employment without "cause" under the employment
agreements by providing not less than three (3) months prior written notice to
the executive, in which case the executive shall be entitled to receive (i) his
base salary and benefits through the effective date of termination, (ii) a lump
sum payment equal to the sum of the aggregate base salary that would have been
payable to the executive from the date of termination through the end of the
initial term of the employment agreement, and (iii) all benefits through the end
of the initial term of the employment agreement. On April 29, 1999, the Company
provided Mr. Liguori with three (3) months prior written notice of termination
of employment in accordance with the terms of his employment agreement. In
addition, Mr. Winocur is subject to a non-competition agreement with the
Company, which provides that Mr. Winocur may not compete with the Company for a
period of five (5) years following his termination of employment.

     On September 15, 1998, the Company entered into agreements with Mr.
Winocur, Mr. Liguori and Mr. Kolodny providing for the payment of certain
benefits following the occurrence of a "change in control" (as defined in such
agreements). The terms of such agreements generally provide that if the (i)
executive's employment is terminated, other than for "cause" within thirteen
(13) months following the occurrence of a "change in control", or (ii) executive
terminates his employment for any reason during the thirty (30) day period
immediately following the first anniversary of a "change in control", the
executive shall be entitled to receive upon the date of termination of
employment a lump sum severance payment in cash (or at the executive's sole
exclusive option receive such amounts as salary continuation during the
applicable period), equal to (x) three (3) times the highest annual base salary
paid or payable to the executive during the thirty-six (36) month period
immediately preceding the month in which the "change in control" occurs, and (y)
the aggregate of the maximum bonuses, which could have been earned, vested or
otherwise paid under the Company's bonus program during the term of such bonus
program. The agreements provide that the Company shall continue to provide the
executive and/or his dependents with life, disability, accident and health
insurance benefits, and certain other benefits following the occurrence of a
"change in control". In addition, in the event the executive receives any
payments under such agreements or pursuant to any other plan which become
subject to excise taxes under the Internal Revenue Code of 1986, as amended (the
"Code"), the agreements provide that the Company is required to pay to the
executive a gross-up payment such that after the payment by the executive of all
taxes and any excise taxes imposed upon or attributable to the gross-up payment,
the executive retains an amount of the gross-up payment equal to the excise tax
imposed upon the payments received by the executive.

     On May 17, 1999, the Company hired Robert Mealey as its Senior Vice
President of Operations. In connection with Mr. Mealey's employment with the
Company, the Company entered into an arrangement with Mr. Mealey, which provides
for an eighteen (18) month severance arrangement in the event Mr. Mealey's
employment is terminated following a sale of the Company and Mr. Mealey is not
offered employment with an acquiror upon substantially the same employment terms
as in effect immediately prior to the sale of the Company.

STOCK PERFORMANCE GRAPH

     Set forth below is a line graph comparing the cumulative total stockholder
return of the Common Stock of the Company for the last five years with the
cumulative total return of the Standard & Poor's 500 Stock Index ("S&P 500
Index") and the Standard & Poor's Medical Products and Supplies Index over the
same period assuming the investment of $100 on December 31, 1993 in the Common
Stock of the Company, the Standard & Poor's 500 Stock Index and the Standard &
Poor's Medical Products and Supplies Index ("S&P Health Care Index") (assuming
the reinvestment of all dividends).

                                       86
<PAGE>   90

                COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
                   AMONG GRAHAM-FIELD HEALTH PRODUCTS, INC.,
                     THE STANDARD & POOR'S 500 STOCK INDEX
         AND THE STANDARD & POOR'S MEDICAL PRODUCTS AND SUPPLIES INDEX
[PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
                                                      GRAHAM-FIELD                  S & P 500               S & P HEALTH CARE
                                                    HEALTH PRODUCTS,                ---------               (MEDICAL PRODUCTS
                                                          INC.                                                 & SUPPLIES)
                                                    ----------------                                        -----------------
<S>                                             <C>                         <C>                         <C>
Dec 93                                                   100.00                      100.00                      100.00
Dec 94                                                    79.00                      101.00                      119.00
Dec 95                                                    71.00                      139.00                      200.00
Dec 96                                                   182.00                      171.00                      230.00
Dec 97                                                   351.00                      229.00                      287.00
Dec 98                                                    71.00                      294.00                      413.00
</TABLE>

* ASSUMES $100 INVESTED ON DECEMBER 31, 1993 IN STOCK OR INDEX, INCLUDING
  REINVESTMENT OF DIVIDENDS.

                                       87
<PAGE>   91

                        REPORT OF COMPENSATION COMMITTEE

OVERALL POLICY

     The Company's executive officer compensation program is administered to be
closely linked to corporate performance and the total return to stockholders
over the long-term. The overall objectives of the executive officer compensation
program are to attract and retain the best possible executive talent, to
motivate these executives to achieve the goals inherent in the Company's
business strategy, to link executive and stockholder interests through
participation in the Company's Incentive Program and finally to provide a
compensation package that recognizes individual contributions as well as overall
business results.

     The key elements of the Company's executive officer compensation consist of
base salary, an annual bonus pursuant to the Company's bonus program, and the
grant of stock options under the Company's Incentive Program. The Compensation
Committee reviews and approves the compensation package for the executive
officers of the Company. In addition, while the elements of compensation
described below are considered separately, the Compensation Committee takes into
account the full compensation package afforded by the Company to the individual.

BASE SALARIES

     Base salaries for executive officers (officers with principal
decision-making authority) are initially determined by the Compensation
Committee through a subjective evaluation of the responsibilities of the
position held and the experience of the individual. Annual salary adjustments
and increases are determined by evaluating the performance of the Company and of
each executive officer, and also take into account new responsibilities.

ANNUAL BONUS

     Cash bonuses are granted on a discretionary basis primarily to reward
individual contribution, following years in which the Company achieved projected
earnings and revenue growth. Due to the performance of the Company in 1998, no
cash bonuses were awarded to the executive officers, other than a $15,000 bonus
paid to one executive officer.

STOCK OPTIONS

     Under the Company's Incentive Program, which was approved by the Company's
stockholders, stock options exercisable for Common Stock are granted to the
Company's employees, including executive officers. The Compensation Committee
approves the grant of stock options awards.

     Stock options are designed to align the interests of executives with those
of the stockholders. Stock options are granted with an exercise price equal to
the market price of the Common Stock on the date of grant and generally vest and
are exercisable at the rate of 50 percent per year. This approach is designed to
incentivize the creation of stockholder value over the long term since the full
benefit of a compensation package cannot be realized unless stock price
appreciation occurs over a number of years.

CHIEF EXECUTIVE OFFICER COMPENSATION

     From January 1, 1998 to July 29, 1998, Irwin Selinger served as Chief
Executive Officer of the Company, and was paid a base salary at an annual rate
of $550,000. On February 2, 1998, Mr. Selinger was granted a stock option to
purchase 250,000 shares of the common stock of the Company, which expired ninety
(90) days following his resignation on July 29, 1998. On July 29, 1998, Mr.
Selinger entered into the Separation Agreement, which terminated Mr. Selinger's
existing employment agreement and "change in control" agreement. For a
description of the terms and provisions of the Separation Agreement, see
"Employment, Termination and Change in Control Arrangements and Other
Arrangements."

     From July 29, 1998 to February 4, 1999, Rodney F. Price served as Chief
Executive Officer of the Company, as well as Chairman of the Board. Mr. Price
did not receive any compensation for his services as
                                       88
<PAGE>   92

Chief Executive Officer, but was reimbursed for travel, lodging and other
expenses. On January 2, 1998, Mr. Price was granted directors' options under the
Company's Incentive Program to purchase 10,000 shares of the common stock of the
Company, which expire two (2) years following his resignation on February 4,
1999.

STOCK OPTION REPRICING

     On April 1, 1998, the Compensation Committee determined to lower the
exercise price of stock options granted to Mr. Bellamy on March 2, 1998. In
addition, on April 17, 1998, the Compensation Committee determined to reset the
exercise price of Mr. Bellamy's repriced stock options of April 1, 1998, and
reset the exercise price with respect to stock options granted on February 2,
1998 to Mr. Winocur, Mr. Liguori and Mr. Kolodny. In connection with the
repricing of the stock options, the Compensation Committee cancelled the
previously granted stock options and granted new stock options. The terms of the
new stock options are identical in all respects to the cancelled stock options
except for the exercise price. The purpose and intention of the repricing was to
maintain equity incentives for key employees and to foster loyalty and economic
motivation. The Compensation Committee believes that stock options which are
significantly out of the money provide no particular compensatory incentive to
employees regarding performance, and that the repricing of stock options may
cause executives to forego alternative employment opportunities.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)

     Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to a company's chief executive
officer and the other four most highly compensated individuals who are executive
officers as of the end of the year. Although maintaining tax deductibility is
one consideration among many, the Committee reserves the right to determine from
time to time that compensation arrangements are in the best interest of the
Company and its stockholders despite the fact that such arrangements might not
qualify for tax deductibility. The Company's bonus program is designed so that
individual bonuses are not dependent solely on objective or numerical criteria,
which enables the Committee to apply its independent judgment to reflect
performance against qualitative strategic objectives.

                                          Compensation Committee

                                          J. Rex Fuqua
                                          Louis A. Lubrano
                                          Michael Dreyer

                                       89
<PAGE>   93

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

PRINCIPAL STOCKHOLDERS OF THE COMPANY

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock, Series B Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock") and Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") with respect to each person who, to the
knowledge of the management of the Company, owns beneficially more than five
percent of each class of stock as of May 6, 1999. Beneficial ownership has been
determined for purposes of the following table in accordance with Rule 13d-3 of
the Exchange Act under which a person is deemed to be the beneficial owner of
securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days.

<TABLE>
<CAPTION>
                                                                      SHARES OF             SHARES OF
                                            SHARES OF COMMON     SERIES B PREFERRED    SERIES C PREFERRED
                                           STOCK BENEFICIALLY    STOCK BENEFICIALLY    STOCK BENEFICIALLY
                                                OWNED(1)             OWNED(1)(2)           OWNED(1)(3)
                                           -------------------   -------------------   -------------------
                                           NUMBER OF             NUMBER OF             NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER        SHARES     PERCENT    SHARES     PERCENT    SHARES     PERCENT
------------------------------------       ---------   -------   ---------   -------   ---------   -------
<S>                                        <C>         <C>       <C>         <C>       <C>         <C>
BIL(4)...................................  4,388,353      14%      6,100       100%      1,000       100%
  c/o Brierley Investments Ltd.
  4th Floor, Stratton House
  Stratton Street
  London W1X 5FE
  United Kingdom
J.B. Fuqua(5)............................  2,372,190     7.6%        -0-       -0-         -0-       -0-
  c/o Fuqua Capital, Inc.
  1201 West Peachtree Street, N.E
  Atlanta, Georgia 30309
J. Rex Fuqua(6)..........................  1,595,563     5.1%        -0-       -0-         -0-       -0-
  c/o Fuqua Capital, Inc.
  1201 West Peachtree Street, N.E
  Atlanta, Georgia 30309
Dimensional Fund Advisors(7).............  1,781,926    5.68%        -0-       -0-         -0-       -0-
  1299 Ocean Avenue
  11th Floor
  Santa Monica, CA 90401
</TABLE>

---------------
(1) All shares are beneficially owned and the sole voting and investment power
    is held by the person or entities named, except as otherwise specified
    herein.

(2) The Series B Preferred Stock is beneficially owned by BIL and convertible
    into shares of Common Stock (i) at the option of BIL, at a conversion price
    of $20 per share (or, in the case of certain dividend payment defaults, at a
    conversion price of $15.50 per share), (ii) at the option of the Company, at
    a conversion price equal to current trading prices (subject to a minimum
    conversion price of $15.50 and a maximum conversion price of $20 per share)
    and (iii) automatically on November 27, 2001 at a conversion price of $15.50
    per share. The conversion prices are subject to customary antidilution
    adjustments. The shares of the Series B Preferred Stock are entitled to
    3,935,483 votes, and vote as a single class with the Common Stock and the
    Series C Preferred Stock.

(3) The Series C Preferred Stock is beneficially owned by BIL and subject to
    redemption as a whole at the option of the Company on the fifth anniversary
    of the date of issuance at a stated value plus accrued and unpaid dividends
    and, if not redeemed will be convertible into shares of Common Stock
    automatically at a conversion price of $20 per share, subject to customary
    antidilution adjustments. The shares of the Series C Preferred Stock are
    entitled to 500,000 votes, and vote as a single class with the Common Stock
    and the Series B Preferred Stock.

                                       90
<PAGE>   94

(4) Does not include 6,100 shares of the Series B Preferred Stock and 1,000
    shares of the Series C Preferred Stock owned by BIL (see Notes (2) and (3)
    above). The shares of Common Stock, Series B Preferred Stock and Series C
    Preferred Stock beneficially owned by BIL represent in the aggregate 25% of
    the voting power of the Company's outstanding capital stock as of May 6,
    1999. Pursuant to the BIL Stockholder Agreement, BIL has agreed to vote its
    shares of Common Stock, Series B Preferred Stock, and Series C Preferred
    Stock in accordance with the direction of the Company's Board of Directors
    for any nominees recommended by the Board of Directors and on all proposals
    presented by any other stockholder of the Company. Effective as of May 12,
    1999, BIL exchanged a $4 million note (the "BIL Note") owing by the Company
    to BIL for 2,036 shares of non-voting Series D Preferred Stock (the "Series
    D Preferred Stock"). The amount set forth in the table does not include the
    shares of Series D Preferred Stock.

(5) According to information contained in a Joint Schedule 13D filing dated as
    of August 10, 1998 (the "Fuqua 13D Filing"), the shares of Common Stock
    beneficially owned by J.B. Fuqua include 675,538 shares held by two trusts
    for the benefit of the grandchildren of J.B. Fuqua, of which Mr. Fuqua is
    the trustee, and 146,365 shares held by The J.B. Fuqua Foundation, Inc. (the
    "Fuqua Foundation"), of which Mr. Fuqua is a director and officer. Mr. Fuqua
    shares voting and investment power with J. Rex Fuqua with respect to shares
    held by the Fuqua Foundation. J.B. Fuqua also shares voting and investment
    power with J. Rex Fuqua with respect to 768,600 shares held by Fuqua
    Holdings I, L.P. (the "Fuqua Partnership") as a result of J.B. Fuqua's
    status as an officer and director of Fuqua Holdings, Inc. ("Holdings"), the
    general partner of the Fuqua Partnership.

(6) According to information contained in the Fuqua 13D Filing, J. Rex Fuqua
    shares voting and investment power with J.B. Fuqua with respect to 768,600
    shares held by the Fuqua Partnership as a result of J. Rex Fuqua's status as
    an officer and director of Holdings, the general partner of the Fuqua
    Partnership. In addition, J. Rex Fuqua shares voting and investment power
    with J.B. Fuqua with respect to 146,365 shares held by the Fuqua Foundation,
    of which J. Rex Fuqua is a director and officer.

(7) According to information contained in a Schedule 13G filing dated as of
    February 11, 1999 by Dimensional Fund Advisors Inc. ("Dimensional"),
    Dimensional, an investment advisor registered under Section 203 of the
    Investment Advisors Act of 1940, furnishes investment advise to four
    investment companies registered under the Investment Company Act of 1940,
    and serves as investment manager to certain other investment vehicles,
    including commingled group trusts. (These investment companies and
    investment vehicles are referred to hereinafter as the "Portfolios"). In its
    role as investment advisor and investment manager, Dimensional possesses
    both voting and investment power over the shares of Common Stock owned by
    the Portfolios, and disclaims beneficial ownership of such shares.

                                       91
<PAGE>   95

SECURITY OWNERSHIP OF MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock, Series B Preferred Stock and Series C Preferred Stock
with respect to the Company's directors, the Company's Named Executive Officers,
and by all of the Company's directors and executive officers as a group, as
reported to the Company as of May 6, 1999. Beneficial ownership has been
determined for purposes of the following table in accordance with Rule 13d-3 of
the Exchange Act, under which a person is deemed to be the beneficial owner of
securities if he or she has or shares voting power or investment power in
respect of such securities or has the right to acquire beneficial ownership
within 60 days.

<TABLE>
<CAPTION>
                                                                  SHARES OF            SHARES OF
                                           SHARES OF              SERIES B             SERIES C
                                          COMMON STOCK         PREFERRED STOCK      PREFERRED STOCK
                                          BENEFICIALLY          BENEFICIALLY         BENEFICIALLY
                                            OWNED(1)             OWNED(1)(2)          OWNED(1)(3)
                                      --------------------    -----------------    -----------------
                                       NUMBER                 NUMBER               NUMBER
                                         OF                     OF                   OF
NAME AND ADDRESS OF BENEFICIAL OWNER   SHARES      PERCENT    SHARES    PERCENT    SHARES    PERCENT
------------------------------------  ---------    -------    ------    -------    ------    -------
<S>                                   <C>          <C>        <C>       <C>        <C>       <C>
DIRECTORS:
David P. Delaney, Jr.(4)...........      39,000      *         -0-        -0-       -0-        -0-
  c/o Lancer Financial Group, Inc.
  370 West Park Avenue
  Long Beach, New York 11561
Rupert O.H. Morley(5)..............   4,388,353       14%     6,100       100%     1,000       100%
  c/o Brierley Investments Ltd. 4th
  Floor, Stratton House
  London W1X 5FE
  United Kingdom
J. Rex Fuqua(6)....................   1,595,563      5.1%      -0-        -0-       -0-        -0-
  c/o Fuqua Capital, Inc.
  1201 West Peachtree Street, N.E
  Atlanta, Georgia 30309
Louis A. Lubrano(7)................      76,200      *         -0-        -0-       -0-        -0-
  c/o Herzog, Heine, Geduld, Inc.
  26 Broadway
  New York, New York 10004
Michael Dreyer.....................     130,000      *         -0-        -0-       -0-        -0-
  c/o Dreyer, Edmonds & Associates
  355 South Grand Avenue
  Suite 4150
  Los Angeles, CA 90071-3103
NAMED EXECUTIVE OFFICERS:
Irwin Selinger(8)..................     629,440        2%      -0-        -0-       -0-        -0-
  11 High Ridge Lane
  Matinecock, New York 11771
Rodney F. Price(9).................      10,000      *         -0-        -0-       -0-        -0-
  22 Chester Street
  London SW1X 7BL
  United Kingdom
Paul Bellamy(10)...................     100,000      *         -0-        -0-       -0-        -0-
  Four North Street
  Old Greenwich, CT 06870
Peter Winocur(11)..................     213,550      *         -0-        -0-       -0-        -0-
  c/o Graham-Field Health Products,
  Inc.
  81 Spence Street
  Bay Shore, New York 11706
</TABLE>

                                       92
<PAGE>   96

<TABLE>
<CAPTION>
                                                                  SHARES OF            SHARES OF
                                           SHARES OF              SERIES B             SERIES C
                                          COMMON STOCK         PREFERRED STOCK      PREFERRED STOCK
                                          BENEFICIALLY          BENEFICIALLY         BENEFICIALLY
                                            OWNED(1)             OWNED(1)(2)          OWNED(1)(3)
                                      --------------------    -----------------    -----------------
                                       NUMBER                 NUMBER               NUMBER
                                         OF                     OF                   OF
NAME AND ADDRESS OF BENEFICIAL OWNER   SHARES      PERCENT    SHARES    PERCENT    SHARES    PERCENT
------------------------------------  ---------    -------    ------    -------    ------    -------
<S>                                   <C>          <C>        <C>       <C>        <C>       <C>
Richard S. Kolodny(12).............     159,000      *         -0-        -0-       -0-        -0-
  c/o Graham-Field Health Products,
  Inc.
  81 Spence Street
  Bay Shore, New York 11706
Ralph Liguori(13)..................     131,000      *         -0-        -0-       -0-        -0-
  c/o Graham-Field Health Products,
  Inc.
  81 Spence Street
  Bay Shore, New York 11706
Jeffrey Schwartz(14)...............      42,000        *       -0-        -0-       -0-        -0-
  c/o Graham-Field Health Products,
  Inc.
  81 Spence Street
  Bay Shore, New York 11706
All directors and executive officers
  as a group (15) persons)(15).....   6,876,345     21.4%     6,100       100%     1,000       100%
</TABLE>

---------------
  *  Less than 1%.

 (1) All shares are beneficially owned and the sole voting power and investment
     power is held by the persons named, except as otherwise specified herein.

 (2) The Series B Preferred Stock is beneficially owned by BIL and convertible
     into shares of the Common Stock (i) at the option of BIL, at a conversion
     price of $20 per share (or, in the case of certain dividend payment
     defaults, at a conversion price of $15.50 per share), (ii) at the option of
     the Company, at a conversion price equal to current trading prices (subject
     to a minimum conversion price of $15.50 and a maximum conversion price of
     $20 per share) and (iii) automatically on November 27, 2001 at a conversion
     price of $15.50 per share. The conversion prices are subject to customary
     antidilution adjustments. The shares of the Series B Preferred Stock are
     entitled to 3,935,483 votes, and vote as a single class with the Common
     Stock and the Series C Preferred Stock.

 (3) The Series C Preferred Stock is beneficially owned by BIL and subject to
     redemption as a whole at the option of the Company on the fifth anniversary
     of the date of issuance at a stated value plus accrued and unpaid dividends
     and, if not redeemed will be convertible into shares of Common Stock
     automatically at a conversion price of $20 per share, subject to customary
     antidilution adjustments. The shares of the Series C Preferred Stock are
     entitled to 500,000 votes, and vote as a single class with the Common Stock
     and the Series B Preferred Stock.

 (4) The amount set forth above includes 30,000 shares currently issuable upon
     the exercise of directors' stock options issued pursuant to the Company's
     Incentive Program.

 (5) Consists of shares of Common Stock owned by BIL, which Mr. Morley may be
     deemed to own beneficially as the Operations Director of BIL and one of
     BIL's designees to the Company's Board of Directors. Does not include up to
     3,935,483 shares of Common Stock issuable upon the conversion of the shares
     of the Series B Preferred Stock and up to 500,000 shares of Common Stock
     issuable upon the conversion of the shares of the Series C Preferred Stock
     owned by BIL (see Notes 2 and 3 above). Effective as of May 12, 1999, BIL
     exchanged the BIL Note for 2,036 shares of Series D Preferred Stock. The
     amount set forth in the table does not include the shares of Series D
     Preferred Stock.

 (6) The amount set forth above includes voting and investment power which J.
     Rex Fuqua shares with J.B. Fuqua with respect to 768,600 shares held by the
     Fuqua Partnership as a result of J. Rex Fuqua's status as an officer and
     director of Holdings, the general partner of the Fuqua Partnership. In
     addition, J. Rex

                                       93
<PAGE>   97

     Fuqua shares voting and investment power with J.B. Fuqua with respect to
     146,365 shares held by the Fuqua Foundation, of which J. Rex Fuqua is a
     director and officer.

 (7) The amount set forth above includes 200 shares owned by the Virginia
     Lubrano Trust, and 70,000 shares currently issuable upon the exercise of
     directors' stock options issued pursuant to the Company's Incentive
     Program.

 (8) On July 29, 1998, Mr. Selinger resigned as Chief Executive Officer,
     President and a director of the Company. Based on information available to
     the Company as of May 6, 1999, Mr. Selinger owns 629,440 shares of Common
     Stock, which includes 5,500 shares owned by his wife as to which shares Mr.
     Selinger disclaims any beneficial interest.

 (9) On February 4, 1999, Mr. Price resigned as Chairman of the Board and Chief
     Executive Officer of the Company. Mr. Price served as Chairman of the Board
     from July 25, 1998 through February 4, 1999, and as Chief Executive Officer
     from July 29, 1998 through February 4, 1999. The amount set forth above
     represents 10,000 shares currently issuable upon the exercise of directors'
     stock options issued pursuant to the Company's Incentive Program.

(10) On March 24, 1999, Mr. Bellamy resigned as President, Chief Executive
     Officer and a director of the Company. Mr. Bellamy served in various
     executive capacities with the Company from March 2, 1998 through March 24,
     1999, including Vice President, Chief Financial Officer, President, Chief
     Executive Officer, and a director of the Company. The amount set forth
     above includes 100,000 shares currently issuable upon the exercise of stock
     options issued pursuant to the Company's Incentive Program. Under the terms
     of Mr. Bellamy's stock option agreements, Mr. Bellamy's stock options
     expire ninety (90) days following his resignation on March 24, 1999.

(11) The amount set forth above includes 171,844 shares currently issuable upon
     the exercise of stock options issued pursuant to the Company's Incentive
     Program, and 6,250 shares underlying stock options which are exercisable
     within 60 days of May 6, 1999.

(12) The amount set forth above includes 101,267 shares currently issuable upon
     the exercise of stock options issued pursuant to the Company's Incentive
     Program, and 6,250 shares underlying stock options which are exercisable
     within 60 days of May 6, 1999.

(13) On April 29, 1999, the Company provided Mr. Liguori with three (3) months
     prior written notice of termination of employment. The amount set forth
     above includes 93,131 shares currently issuable upon the exercise of stock
     options issued pursuant to the Company's Incentive Program, and 5,000
     shares underlying stock options which are exercisable within 60 days of May
     6, 1999.

(14) The amount set forth above includes 37,000 shares currently issuable upon
     the exercise of stock options issued pursuant to the Company's Incentive
     Program, and 5,000 shares underlying stock options which are exercisable
     within 60 days of May 6, 1999.

(15) The amount set forth above includes 581,708 shares currently issuable upon
     the exercise of stock options issued pursuant to the Company's Incentive
     Program, and 30,000 shares underlying stock options which are exercisable
     within 60 days of May 6, 1999. Such amount excludes (i) shares of Common
     Stock and (ii) shares currently issuable upon the exercise of stock options
     issued pursuant to the Company's Incentive Program, held by former officers
     and directors.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

     On March 1, 1996, the Company entered into a three (3) year lease with HIP
Realty, Inc. ("HIP") for the Company's facility located in Mount Vernon, New
York. The lease terminated on February 28, 1999, and the Company has occupied
the facility on a month-to-month basis since March 1, 1999 upon the same terms
and conditions as provided under the lease. The lease with HIP Realty provided
for the payment by the Company of an annual rent of $180,000 during the 1998
fiscal year, and the payment of incremental real estate taxes over a base year.
The principal stockholders of HIP are Harvey P. Diamond, the Senior Corporate
Vice President of Sales, and Peter Winocur, the President of the Company's
Labtron Business Unit. The Company believes that the terms of the lease are at
least as favorable to it as those it would have received from an

                                       94
<PAGE>   98

unrelated third party. On April 2, 1999, subject to the terms of the Company's
month-to-month lease arrangement with HIP, the Company subleased a portion of
the facility for a monthly rental of $2,000.

     The Company, through its wholly-owned subsidiary, Lumex/Basic American
Holdings, Inc. (formerly, Fuqua Enterprises, Inc.) ("Fuqua"), subleases certain
office space located in Atlanta, Georgia to Fuqua Capital Corporation
("Capital"), an entity controlled by the Fuqua Family. The sublease has a
remaining term of one year and provides that if Fuqua moves out of the space it
shares with Capital, or there is a change in control of Fuqua, Capital has the
option of taking over the office space now occupied by Fuqua upon terms
favorable to Capital. Pursuant to the terms of the sublease, Capital pays Fuqua
approximately $4,200 per month.

     Effective as of May 12, 1999, BIL waived certain events of default under
the BIL Note and exchanged all of its right, title and interest under the BIL
Note, in consideration of the issuance of 2,036 shares of the Series D Preferred
Stock. The shares of Series D Preferred Stock are non-voting, but have
substantially the same economic rights as 2,036,000 shares of Common Stock.
Based on the closing price of the Common Stock on May 12, 1999, that number of
shares would have a market value of $4,072,000, which equals the aggregate of
the unpaid principal amount and accrued interest on the BIL Note. Simultaneously
with the closing of such transaction, Graham-Field and BIL entered into an
agreement dated as of May 12, 1999, which provided Graham-Field with the sole
and exclusive option for a period of one year following May 12, 1999, to convene
a meeting of its stockholders or take such other corporate action, in accordance
with applicable laws and regulatory requirements, as may be required to obtain
applicable corporate approval to exchange each share of Series D Preferred Stock
for 1,000 shares of Common Stock.

                                       95
<PAGE>   99

                                    PART IV

ITEM 16.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K:

     14(a).  Documents filed as part of this Form 10-K:

     1.  Financial Statements.  The following financial statements are included
in Part II, Item 8:

<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
Report of Independent Auditors..............................    F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997...    F-3
Consolidated Statements of Operations -- Years ended
  December 31, 1998, 1997 and 1996..........................    F-4
Consolidated Statements of Stockholders' Equity -- Years
  ended December 31, 1998, 1997 and 1996....................    F-5
Consolidated Statements of Cash Flows -- Years ended
  December 31, 1998, 1997 and 1996..........................    F-7
Notes to Consolidated Financial Statements -- December 31,
  1998......................................................    F-9
</TABLE>

     2. Financial Statement Schedules.  The following consolidated financial
statement schedule for the company is included in Part II, Item 14(d):

<TABLE>
<S>                                                             <C>
Schedule II -- Valuation and Qualifying Accounts............
</TABLE>

     All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

     3.  Exhibits filed under Item 601 of Regulation S-K.  (Numbers assigned to
the following correlate to those used in such Item 601; asterisks indicate that
an Exhibit is incorporated by reference).
---------------
* incorporated by reference.

                                       96
<PAGE>   100

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
  3.1     Graham-Field's Certificate of Incorporation, as amended,
          incorporated by reference to Exhibit 3(1) to Graham-Field's
          Registration Statement on Form S-1 (File No. 33-40442)......   *
  3.2     Certificate of Amendment of Certificate of Incorporation of
          Graham-Field dated as of November 27, 1996, incorporated by
          reference as Exhibit 3(b) to Graham-Field's Annual Report on
          Form 10-K for the fiscal year ended December 31, 1996 (the
          "1996 Form 10-K")...........................................   *
  3.3     Graham-Field's By-Laws, as amended, incorporated by
          reference as an Exhibit to Graham-Field's Current Report on
          Form 8-K dated as of July 14, 1995..........................   *
  3.4     Amendment to Graham-Field's By-Laws, dated August 12,
          1996........................................................
  3.5     Amendment to Graham-Field's By-Laws, dated December 1, 1997,
          incorporated by reference as Exhibit 3.4 to Graham-Field's
          S-4/A Registration Statement filed on December 19, 1997
          (Registration No.: 333-42561) (the "1997 S-4 Registration
          Statement").................................................   *
  4.1     Certificate of Designations of Graham-Field's Series B
          Cumulative Convertible Preferred Stock, incorporated by
          reference to Annex D to Graham-Field's S-4 Registration
          Statement filed on October 18, 1996 (Registration No.:
          333-14423) (the "1996 S-4 Registration Statement")..........   *
  4.2     Certificate of Designations of Graham-Field's Series C
          Cumulative Convertible Preferred Stock, incorporated by
          reference to Annex E to the 1996 S-4 Registration
          Statement...................................................   *
  4.3     Certificate of Designations of Series A Junior Participating
          Preferred Stock, incorporated by reference to Exhibit 4(c)
          to Graham-Field's Current Report on Form 8-K dated as of
          September 3, 1996 (the "September 1996 Form 8-K")...........   *
  4.4     Rights Agreement dated as of September 3, 1996 between
          Graham-Field and American Stock Transfer & Trust Company, as
          Rights Agent, incorporated by reference to Exhibit 4(b) to
          the September 1996 Form 8-K.................................   *
  4.5     Certificate of Designation of Graham-Field's Series D
          Preferred Stock.............................................
 10.1     Registration Rights Agreement, dated as of September 3,
          1996, between Graham-Field and BIL (Far East Holdings)
          Limited ("BIL"), incorporated by reference to Exhibit 4(g)
          to the September 1996 Form 8-K..............................   *
 10.2     Registration Rights Agreement dated as of June 25, 1997, by
          and among Graham-Field, Gregory A. Peek, and Michael L.
          Peek, incorporated by reference to Exhibit 4(a) to
          Graham-Field's Current Report on Form 8-K dated as of June
          1997 (the "June 1997 Form 8-K").............................   *
 10.3     Registration Rights Agreement dated as of August 28, 1997,
          by and among Graham-Field, S.E. (Gene) Davis, and Vicki Ray,
          incorporated by reference to Exhibit 4(a) to Graham-Field's
          Current Report on Form 8-K dated as of September 1997 (the
          "September 1997 Form 8-K")..................................   *
 10.4     Registration Rights Agreement, dated as of September 5,
          1997, by and between Graham-Field and the Fuqua
          Stockholders, incorporated by reference to Annex D to the
          1997 S-4 Registration Statement.............................   *
 10.5     Registration Rights Agreement, dated as of November 25,
          1997, by and among Graham-Field, Minotto Partners, L.P. and
          Gene J. Minotto, incorporated by reference to Annex E to the
          1997 S-4 Registration Statement.............................   *
</TABLE>

                                       97
<PAGE>   101

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.6     Amended and Restated Agreement and Plan of Merger dated as
          of September 3, 1996, and amended as of October 1, 1996, by
          and among Graham-Field, E&J Acquisition Corp., E&J and BIL,
          incorporated by reference to Exhibit 2(a) to Graham-Field's
          Current Report on Form 8-K dated as of December 12, 1996
          (the "December 1996 Form 8-K")..............................   *
 10.7     Agreement and Plan of Merger dated as of June 25, 1997, by
          and among Graham-Field, LaBac Acquisition Corp., a
          wholly-owned subsidiary of Graham-Field, LaBac Systems,
          Inc., Gregory A. Peek, and Michael L. Peek, incorporated by
          reference to Exhibit 2(a) to the June 1997 Form 8-K.........   *
 10.8     Agreement and Plan of Reorganization dated as of August 28,
          1997, by and among Graham-Field, S.E. (Gene) Davis, and
          Vicki Ray, incorporated by reference to Exhibit 2(a) to the
          September 1997 Form 8-K.....................................   *
 10.9     Agreement and Plan of Merger, dated as of September 5, 1997,
          as amended as of September 29, 1997, by and among
          Graham-Field, GFHP Acquisition Corp. and Fuqua Enterprises,
          Inc., incorporated by reference to Exhibit 2.1 to the 1997
          S-4 Registration Statement..................................   *
 10.10    Stockholder Agreement, dated as of September 3, 1996, and
          amended and restated as of September 19, 1996, among
          Graham-Field, BIL and Irwin Selinger, incorporated by
          reference to Exhibit 4(b) to the December 1996 Form 8-K.....   *
 10.11    Amendment No. 1, dated as of May 1, 1997, to the Amended and
          Restated Stockholder Agreement, dated as of September 3,
          1996, as amended on September 19, 1996, by and among
          Graham-Field, BIL and Irwin Selinger, incorporated by
          reference to Exhibit 4(a) to Graham-Field's Current Report
          on Form 8-K dated as of May 14, 1997........................   *
 10.12    Agreement, dated as of April 17, 1998, by and between
          Graham-Field and the Fuqua Stockholders, incorporated by
          reference to Exhibit 5 to Graham-Field's Quarterly Report on
          Form 10-Q for the quarter ended March 31, 1998..............   *
 10.13    Promissory Note dated as of December 10, 1996 (the "BIL
          Note"), in the principal amount of $4 million made by
          Graham-Field and payable to BIL Securities (Offshore)
          Limited, incorporated by reference to Exhibit 10(vv) to the
          1996 Form 10-K..............................................   *
 10.14    John Hancock Mutual Life Insurance Note and Warrant
          Agreement dated as of March 12, 1992 is incorporated by
          reference to Exhibit 10(ee) to Graham-Field's Annual Report
          on Form 10-K for the fiscal year ended December 31, 1992
          (the "1992 Form 10-K")......................................   *
 10.15    Amendment dated as of December 31, 1992, to the John Hancock
          Mutual Life Insurance Note and Warrant Agreement,
          incorporated by reference to Exhibit 10(ff) to the 1992 Form
          10-K........................................................   *
 10.16    Amendment dated as of June 30, 1993, to the John Hancock
          Mutual Life Insurance Note and Warrant Agreement,
          incorporated by reference as an Exhibit to Graham-Field's
          Quarterly Report on Form 10-Q for the quarter ended
          September 30, 1993..........................................   *
 10.17    Amendment dated as of December 31, 1993, to the John Hancock
          Mutual Life Insurance Note and Warrant Agreement,
          incorporated by reference to Exhibit 10(dd) to Graham-
          Field's Annual Report on Form 10-K for the year ended
          December 31, 1993...........................................   *
 10.18    Amendment dated as of December 30, 1994, to the John Hancock
          Mutual Life Insurance Note and Warrant Agreement,
          incorporated by reference to Exhibit 10(ee) to Graham-
          Field's Annual Report on Form 10-K for the year ended
          December 31, 1994...........................................   *
 10.19    Indenture dated as of August 4, 1997, by and between
          Graham-Field and American Stock Transfer & Trust Company as
          trustee, incorporated by reference to Exhibit 4.1 to
          Graham-Field's S-4 Registration Statement filed on January
          8, 1997 (Registration No. 333-43189)........................   *
</TABLE>

                                       98
<PAGE>   102

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.20    Voting Agreement, dated as of September 5, 1997, by and
          between Graham-Field and Gene J. Minotto, incorporated by
          reference to Annex C to the 1997 S-4 Registration
          Statement...................................................   *
 10.21    Supply Agreement, by and between Everest & Jennings, Inc.
          and P.T. Dharma Polimetal, dated as of March 5, 1999........
 10.22    Supply Agreement dated as of April 3, 1997, between Maxwell
          Products, Inc. and Graham-Field, incorporated by reference
          to Exhibit 99 to Graham-Field's Quarterly Report on Form
          10-Q for the quarter ended June 30, 1997....................   *
 10.23    International Distributorship Agreement dated as of
          September 30, 1997, by and between Graham-Field and Thuasne,
          incorporated by reference to Exhibit 1 to Graham-Field's
          Quarterly Report for the quarter ended September 30, 1997
          (the "September 1997 Form 10-Q")............................   *
 10.24    Letter Agreement to International Distributorship Agreement
          dated as of January 26, 1999, by and between Graham-Field
          and Thuasne.................................................
 10.25    Asset Purchase Agreement dated as of September 4, 1996, by
          and among Graham-Field, Graham-Field Express (Puerto Rico),
          Inc., and V.C. Medical Distributors, Inc., incorporated by
          reference to Exhibit 2(a) to the September 1996 Form 8-K....   *
 10.26    Asset Purchase Agreement dated as of February 10, 1997, by
          and among Graham-Field, Everest & Jennings Canadian Ltd.
          ("E&J Canada"), Motion 2000 Inc. ("Motion 2000"), and Motion
          2000 Quebec Inc.("Motion Quebec"), incorporated by reference
          to Exhibit 2(a) Graham-Field's Current Report on Form 8-K
          dated as of March 12, 1997 (the "March 1997 Form 8-K")......   *
 10.27    Asset Purchase Agreement dated as of August 21, 1997, by and
          among Graham-Field, Graham-Field, Inc., Medi-Source, Inc.,
          Peter Galambos and Irene Galambos, incorporated by reference
          to Exhibit 2 to the September 1997 Form 10-Q................   *
 10.28    Stock Purchase Agreement dated as of March 7, 1997, by and
          among Graham-Field, Everest & Jennings, Inc., Michael H.
          Dempsey, and Naomi C. Dempsey, incorporated by reference to
          Exhibit 2(a) to the March 1997 Form 8-K.....................   *
 10.29    Stock Purchase Agreement dated as of January 27, 1998, by
          and among IT Acquisition Corporation, Graham-Field and
          Lumex/Basic American Holdings, Inc, incorporated by
          reference to Exhibit 2(a) to Graham-Field's Current Report
          on Form 8-K dated as of February 2, 1998 (the "February 1998
          Form 8-K")..................................................   *
 10.30    Stock Purchase Agreement dated as of January 27, 1998, by
          and among HEK'S Corporation, Graham-Field and Fuqua,
          incorporated by reference to Exhibit 2(b) to the February
          1998 Form 8-K...............................................   *
 10.31    Real Estate Sales Agreement dated as of August 28, 1997, by
          and between BBD&M, Ltd. and Graham-Field, incorporated by
          reference to Exhibit 4(g) to the September 1997 Form 8-K....   *
 10.32    The Incentive Program, as amended, incorporated by reference
          to Graham-Field's Registration Statements on Form S-8 (File
          Nos.:33-37179, 33-38656, 33-48860, 033-60679, 333-16993, and
          333-43493)..................................................   *
</TABLE>

                                       99
<PAGE>   103

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.33    Revolving Credit and Security Agreement dated as of December
          10, 1996 (the "Revolving Credit Agreement"), by and among
          IBJ Whitehall Business Credit Corporation (formerly known as
          IBJ Schroder Bank & Trust Company) (as lender and as agent),
          Graham-Field, Graham-Field, Inc., Graham-Field Express,
          Inc., Graham-Field Temco, Inc., Graham-Field Distribution,
          Inc., Graham-Field Bandage, Inc., Graham-Field Express
          (Puerto Rico), Inc., and Everest & Jennings, Inc.,
          incorporated by reference to Exhibit 10 to the December 1996
          Form 8-K....................................................   *
 10.34    Amendment No. 1, dated as of June 25, 1997, to the Revolving
          Credit and Security Agreement dated as of December 10, 1996
          (the "Revolving Credit Agreement"), by and among IBJ
          Whitehall Business Credit Corporation, Graham-Field,
          Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
          Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
          Bandage, Inc., Graham-Field Express (Puerto Rico), Inc., and
          Everest & Jennings, Inc., incorporated by reference to
          Exhibit 10(a) to Graham-Field's Current Report on Form 8-K
          dated as of July 17, 1997 (the "July 1997 Form 8-K")........   *
 10.35    Amendment No. 2, dated as of July 9, 1997, to the Revolving
          Credit Agreement, by and among IBJ Whitehall Business Credit
          Corporation, Graham-Field, Graham-Field, Inc., Graham-Field
          Express, Inc., Graham-Field Temco, Inc., Graham-Field
          Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
          Express (Puerto Rico), Inc., and Everest & Jennings, Inc.,
          incorporated by reference to Exhibit 10(b) to the July 1997
          Form 8-K....................................................   *
 10.36    Amendment No. 3, dated as of July 9, 1997, to the Revolving
          Credit Agreement, by and among IBJ Whitehall Business Credit
          Corporation, Graham-Field, Graham-Field, Inc., Graham-Field
          Express, Inc., Graham-Field Temco, Inc., Graham-Field
          Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
          Express (Puerto Rico), Inc., and Everest & Jennings, Inc.,
          incorporated by reference to Exhibit 10(c) to the July 1997
          Form 8-K....................................................   *
 10.37    Letter Amendment, dated as of September 18, 1997, to the
          Revolving Credit Agreement, by and among IBJ Whitehall
          Business Credit Corporation, Graham-Field, Graham-Field,
          Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc.,
          Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
          Graham-Field Express (Puerto Rico), Inc., and Everest &
          Jennings, Inc., incorporated by reference as Exhibit 10.67
          to the 1997 S-4 Registration Statement......................   *
 10.38    Amendment No. 4 and Joinder Agreement, dated as of December
          30, 1997, to the Revolving Credit Agreement, by and among
          IBJ Whitehall Business Credit Corporation, Graham-Field,
          Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
          Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
          Bandage, Inc., Graham-Field Express (Puerto Rico), Inc.,
          Everest & Jennings, Inc., LaBac Systems, Inc., Medical
          Supplies of American, Inc., Health Care Wholesalers, Inc., H
          C Wholesalers, Inc., Critical Care Associates, Inc.,
          Lumex/Basic American Holdings, Inc., Basic American Medical
          Products, Inc., Lumex Medical Products, Inc., Prism
          Enterprises, Inc., Basic American Sales and Distribution
          Co., Inc., PrisTech, Inc., Lumex Sales and Distribution Co.,
          Inc., MUL Acquisition Corp. II, incorporated by reference to
          Exhibit 10.11 to Graham-Field's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1997 (the "1997 10-
          K").........................................................   *
</TABLE>

                                       100
<PAGE>   104

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.39    Amendment No. 5, dated as of April 13, 1998, to the
          Revolving Credit Agreement by and among IBJ Whitehall
          Business Credit Corporation, Graham-Field, Graham-Field,
          Inc., Graham-Field Express, Inc., Graham-Field Temco, Inc.,
          Graham-Field Distribution, Inc., Graham-Field Bandage, Inc.,
          Graham-Field Express (Puerto Rico), Inc., Everest &
          Jennings, Inc., LaBac Systems, Inc., Medical Supplies of
          American, Inc., Health Care Wholesalers, Inc., H C
          Wholesalers, Inc., Critical Care Associates, Inc.,
          Lumex/Basic American Holdings, Inc., Basic American Medical
          Products, Inc., Lumex Medical Products, Inc., Prism
          Enterprises, Inc., Basic American Sales and Distribution
          Co., Inc., Pristech, Inc., Lumex Sales and Distribution Co.,
          Inc., MUL Acquisition Corp. II, incorporated by reference to
          Exhibit 10.12 to the 1997 Form 10-K.........................   *
 10.40    Waiver and Amendment No. 6 to Revolving Credit and Security
          Agreement dated as of August 12, 1998, by and among IBJ
          Whitehall Business Credit Corporation, Graham-Field,
          Graham-Field, Inc., Graham-Field Express, Inc., Graham-Field
          Temco, Inc., Graham-Field Distribution, Inc., Graham-Field
          Bandage, Inc., Graham-Field Express (Puerto Rico), Inc.,
          Everest & Jennings, Inc., LaBac Systems, Inc., Medical
          Supplies of America, Inc., Health Care Wholesalers, Inc., H
          C Wholesalers, Inc., Critical Care Associates, Inc.,
          Lumex/Basic American Holdings, Inc., Basic American Medical
          Products, Inc., Lumex Medical Products, Inc., Prism,
          Enterprises, Inc., Basic American Sales and Distribution
          Co., Inc., PrisTech, Inc., Lumex Sales & Distribution Co.,
          Inc., and MUL Acquisition Corp. Ltd., incorporated by
          reference to Exhibit No. 10 to Graham-Field's Quarterly
          Report for the fiscal quarter ended June 30, 1998...........   *
 10.41    Pledge Agreement, dated September 15, 1998, made by and
          among IBJ Whitehall Business Credit Corporation,
          Graham-Field, Graham-Field, Inc., Everest & Jennings, Inc.,
          Medical Supplies of America, Inc., Lumex/Basic American
          Holdings, Inc., Basic American Medical Products, Inc., Lumex
          Medical Products, Inc., Prism Enterprises, Inc., and Everest
          & Jennings International Ltd................................
 10.42    Amendment No. 7 to Revolving Credit and Security Agreement
          dated as of April 22, 1999, by and among IBJ Whitehall
          Business Credit Corporation and Graham-Field, Graham-Field,
          Inc., Graham-Field Temco, Inc., Graham-Field Distribution,
          Inc., Graham-Field Bandage, Inc., Graham-Field Express
          (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac
          Systems, Inc., Medical Supplies of America, Inc., Health
          Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care
          Associates, Inc., Lumex/Basic American Holdings, Inc., Basic
          American Medical Products, Inc., Lumex Medical Products,
          Inc., Prism Enterprises, Inc., Basic American Sales and
          Distribution Co., Inc., Pristech, Inc., Lumex Sales and
          Distribution Co., Inc., and MUL Acquisition Corp. II........
 10.43    Letter Amendments dated as of May 21, 1999 and June 3, 1999,
          to the Revolving Credit and Security Agreement, by and among
          IBJ Whitehall Business Credit Corporation and Graham-Field,
          Graham-Field, Inc., Graham-Field Temco, Inc., Graham-Field
          Distribution, Inc., Graham-Field Bandage, Inc., Graham-Field
          Express (Puerto Rico), Inc., Everest & Jennings, Inc., LaBac
          Systems, Inc., Medical Supplies of America, Inc., Health
          Care Wholesalers, Inc., H C Wholesalers, Inc., Critical Care
          Associates, Inc., Lumex/Basic American Holdings, Inc., Basic
          American Medical Products, Inc., Lumex Medical Products,
          Inc., Prism Enterprises, Inc., Basic American Sales and
          Distribution Co., Inc., Pristech, Inc., Lumex Sales and
          Distribution Co., Inc., and MUL Acquisition Corp. II........  --
 10.44    Separation Agreement dated as of July 29, 1998, by and
          between Irwin Selinger and Graham-Field, incorporated by
          reference to Exhibit 10 to Graham-Field's Current Report on
          Form 8-K dated July 29, 1998................................   *
</TABLE>

                                       101
<PAGE>   105

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.45    Consultant Agreement dated as of March 7, 1997, by and
          between Graham-Field and Michael H. Dempsey, incorporated by
          reference to Exhibit 10(b) to the March 1997 Form 8-K.......   *
 10.46    Consulting Agreement dated as of June 25, 1997, by and among
          Graham-Field, Gregory A. Peek, and Michael L. Peek,
          incorporated by reference to Exhibit 4(b) to the June 1997
          Form 8-K....................................................   *
 10.47    Consulting Agreement dated as of September 17, 1998, by and
          between Andrew A. Giordano and Graham-Field, incorporated by
          reference to Exhibit 10(a) to Graham-Field's quarterly
          report for the quarter ended September 30, 1998 (the
          "September 1998 Form 10-Q").................................   *
 10.48    Golden Parachute Agreement, dated as of July 21, 1989, by
          and between Graham-Field and Beatrice Scherer, incorporated
          by reference to Exhibit 10.54 to the 1997 Form 10-K.........   *
 10.49    Employment Agreement, dated as of March 15, 1996, by and
          between Jeffco Express Medical Supply, Inc. and Jeff
          Schwartz, incorporated by reference to Exhibit 10.47 to the
          1997 Form 10-K..............................................   *
 10.50    Golden Parachute Agreement, dated as of May 14, 1996, by and
          between Graham-Field and Jeff Schwartz, incorporated by
          reference to Exhibit 10.51 to the 1997 Form 10-K............   *
 10.51    Employment Agreement dated as of February 28, 1997, by and
          between Graham-Field and Marco Ferrara, incorporated by
          reference to Exhibit 10(b) to the March 1997 Form 8-K.......   *
 10.52    Non-Competition Agreement dated as of June 25, 1997, by and
          among Graham-Field and Gregory A. Peek, incorporated by
          reference to Exhibit 4(c) to the June 1997 Form 8-K.........   *
 10.53    Non-Competition Agreement dated as of June 25, 1997, by and
          among Graham-Field and Michael L. Peek, incorporated by
          reference to Exhibit 4(d) to the June 1997 Form 8-K.........   *
 10.54    Employment Agreement dated as of August 28, 1997, by and
          between Graham-Field and S.E. (Gene) Davis, incorporated by
          reference to Exhibit 4(b) to the September 1997 Form 8-K....   *
 10.55    Non-Competition Agreement dated as of August 28, 1997, by
          and between Graham-Field and S.E. (Gene) Davis, incorporated
          by reference to Exhibit 4(d) to the September 1997 Form
          8-K.........................................................   *
 10.56    Employment Agreement dated as of August 28, 1997, by and
          between Graham-Field and Vicki Ray, incorporated by
          reference to Exhibit 4(c) to the September 1997 Form 8-K....   *
 10.57    Non-Competition Agreement dated as of August 28, 1997, by
          and between Graham-Field and Vicki Ray, incorporated by
          reference to Exhibit 4(e) to the September 1997 Form 8-K....   *
 10.58    Noncompetition Agreement, dated as of September 5, 1997, by
          and among Graham-Field, GFHP Acquisition Corp., J.B. Fuqua
          and J. Rex Fuqua, incorporated by reference to Annex F to
          the 1997 S-4 Registration Statement.........................   *
 10.59    Employment Agreement, dated as of March 2, 1998, by and
          between Graham-Field and Paul Bellamy, incorporated by
          reference to Exhibit 10.46 to the 1997 Form 10-K............   *
 10.60    Amendment No. 1 to Employment Agreement dated as of
          September 15, 1998, by and between Paul Bellamy and
          Graham-Field, incorporated by reference to Exhibit 10(i) to
          the September 1998 Form 10-Q................................   *
 10.61    Agreement dated as of September 15, 1998, by and between
          Paul Bellamy and Graham-Field, incorporated by reference to
          Exhibit 10(b) to the September 1998 Form 10-Q...............   *
</TABLE>

                                       102
<PAGE>   106

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
 10.62    Employment Agreement dated as of April 17, 1998, by and
          between Graham-Field and Richard S. Kolodny, incorporated by
          reference to Exhibit 2 to Graham-Field's Quarterly Report
          for the quarter ended March 31, 1998 (the "March 1998 Form
          10-Q")......................................................   *
 10.63    Amendment No. 1 to Employment Agreement dated as of
          September 15, 1998, by and between Richard S. Kolodny and
          Graham-Field, incorporated by reference to Exhibit 10(j) to
          the September 1998 Form 10-Q................................   *
 10.64    Agreement dated as of September 15, 1998, by and between
          Richard S. Kolodny and Graham-Field, incorporated by
          reference to Exhibit 10(c) to the September 1998 Form
          10-Q........................................................   *
 10.65    Employment Agreement dated as of April 17, 1998, by and
          between Graham-Field and Ralph Liguori, incorporated by
          reference to Exhibit 3 to the March 1998 Form 10-Q..........   *
 10.66    Amendment No. 1 to Employment Agreement dated as of
          September 15, 1998, by and between Ralph Liguori and
          Graham-Field, incorporated by reference to Exhibit 10(k) to
          the September 1998 Form 10-Q................................   *
 10.67    Agreement dated as of September 15, 1998, by and between
          Ralph Liguori and Graham-Field, incorporated by reference to
          Exhibit 10(d) to the September 1998 Form 10-Q...............   *
 10.68    Employment Agreement dated as of April 17, 1998, by and
          between Graham-Field and Peter Winocur, incorporated by
          reference to Exhibit 4 to the March 1998 Form 10-Q..........   *
 10.69    Amendment No. 1 to Employment Agreement dated as of
          September 15, 1998, by and between Peter Winocur and
          Graham-Field, incorporated by reference to Exhibit 10(l) to
          the September 1998 Form 10-Q................................   *
 10.70    Agreement dated as of September 15, 1998, by and between
          Peter Winocur and Graham-Field, incorporated by reference to
          Exhibit 10(e) to the September 1998 Form 10-Q...............   *
 10.71    Employment Agreement dated November 2, 1998, by and between
          Harvey P. Diamond and Graham-Field, incorporated by
          reference to Exhibit 10(f) to the September 1998 Form
          10-Q........................................................   *
 10.72    Non-Competition Agreement dated as of November 2, 1998, by
          and between Harvey P. Diamond and Graham-Field, incorporated
          by reference to Exhibit 10(h) to the September 1998 Form
          10-Q........................................................   *
 10.73    Agreement dated as of November 2, 1998, by and between
          Harvey P. Diamond and Graham-Field, incorporated by
          reference to Exhibit 10(g) to the September 1998 Form
          10-Q........................................................   *
 10.74    Agreement dated as of March 24, 1999, by and between Jay
          Alix & Associates and Graham-Field..........................
 10.75    Letter Agreement dated as of May 12, 1999, by and between
          BIL Securities (Offshore) Limited and Graham-Field..........
 10.76    Letter Agreement dated as of May 12, 1999, by and among BIL
          Securities (Offshore) Limited, BIL (Far East Holdings)
          Limited, and Graham-Field...................................
 21.      Subsidiaries of the Company:
          Graham-Field, Inc.
          (a New York corporation)
          Graham-Field Temco, Inc.
          (a New Jersey corporation)
          AquaTherm Corp.
          (a New Jersey corporation)
</TABLE>

                                       103
<PAGE>   107

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
          Graham-Field Distribution, Inc.
          (a Missouri corporation)
          Graham-Field Bandage, Inc.
          (a Rhode Island corporation)
          Graham-Field European Distribution
          Corporation Limited
          (an Ireland corporation)
          Graham-Field Express (Puerto Rico), Inc.
          (a Delaware corporation)
          Graham-Field Express (Dallas), Inc.
          (a Delaware corporation)
          Zens Data Systems, Inc.
          (a Delaware corporation)
          Graham-Field Sales Corp.
          (a Delaware corporation)
          Everest & Jennings International Ltd.
          (a Delaware corporation)
          Everest & Jennings, Inc.
          (a California corporation)
          Smith & Davis Manufacturing Company
          (a Missouri corporation)
          Everest & Jennings de Mexico S.A. de C.V.
          (a Mexico corporation)
          Everest & Jennings Canadian Limited
          (a Canadian corporation)
          Rabson Medical Sales, Ltd.
          (a New York corporation)
          Kuschall of America, Inc.
          (a California corporation)
          LaBac Systems, Inc.
          (a Colorado corporation)
          Medical Supplies of America, Inc.
          (a Georgia corporation)
          Health Care Wholesalers, Inc.
          (a Georgia corporation)
          H C Wholesalers, Inc.
          (a Georgia corporation)
          Critical Care Associates, Inc.
          (a Georgia corporation)
          Lumex/Basic American Holdings, Inc.
          (a Delaware corporation)
          Basic American Medical Products, Inc.
          (a Georgia corporation)
          Basic American Sales and Distribution Co., Inc.
          (a Delaware corporation)
</TABLE>

                                       104
<PAGE>   108

<TABLE>
<CAPTION>
EXHIBIT                                                                 PAGE
  NO.                             DESCRIPTION                           NO.
-------                           -----------                           ----
<C>       <S>                                                           <C>
          Lumex Medical Products, Inc.
          (a Delaware corporation)
          Lumex Sales and Distribution Co., Inc.
          (a Delaware corporation)
          MUL Acquisition Corp. II
          (a Delaware corporation)
          Prism Enterprises, Inc.
          (a Delaware corporation)
          PrisTech, Inc.
          (a Delaware corporation)
          P.T. Dharma Medipro (49% equity interest)
          (an Indonesia corporation)
          Kerma Medical Products, Inc. (25% equity interest)
          (a Virginia corporation)
 23.      Consent of Independent Auditors.............................
</TABLE>

---------------
* Incorporated by reference.

     14(b). Reports on Form 8-K

               Not Applicable.

                                       105
<PAGE>   109

                                   SIGNATURES

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

                                          GRAHAM-FIELD HEALTH PRODUCTS, INC.

                                          By: /s/ JOHN G. MCGREGOR

                                            ------------------------------------
                                            John G. McGregor, President and
                                            Chief Executive Officer
                                            (Principal Executive Officer)

Date: June 3, 1999

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
                   SIGNATURE                                      TITLE                      DATE
                   ---------                                      -----                      ----
<S>                                               <C>                                    <C>
/s/ JOHN G. MCGREGOR                              President and Chief Executive Officer   June 3, 1999
------------------------------------------------    (Principal Executive Officer)
John G. McGregor

/s/ J. SOREN REYNERTSON                           Senior Vice President, Chief            June 3, 1999
------------------------------------------------    Financial
J. Soren Reynertson                                 and Accounting Officer (Principal
                                                    Financial and Accounting Officer)

/s/ RUPERT O.H. MORLEY                            Chairman of the Board and Director      June 3, 1999
------------------------------------------------
Rupert O.H. Morley

/s/ DAVID P. DELANEY, JR.                         Director                                June 3, 1999
------------------------------------------------
David P. Delaney, Jr.

/s/ J. REX FUQUA                                  Director                                June 3, 1999
------------------------------------------------
J. Rex Fuqua

/s/ LOUIS A. LUBRANO                              Director                                June 3, 1999
------------------------------------------------
Louis A. Lubrano

/s/ MICHAEL DREYER                                Director                                June 3, 1999
------------------------------------------------
Michael Dreyer
</TABLE>

                                       106