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

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

                                   FORM 10-Q


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

For the quarter ended: June 30, 1998              Commission File Number: 1-8147
                       -------------                                      ------


                               MEDIQ Incorporated
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)



           Delaware                                              51-0219413
-------------------------------                             -------------------
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation of organization)                             Identification No.)



One MEDIQ Plaza, Pennsauken, New Jersey       08110
----------------------------------------    ----------
(Address of principal executive offices)    (Zip Code)



        Registrant's telephone number, including area code: (609) 662-3200
                                                            --------------


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

As of August 7, 1998, there were 1,000,000 shares of Common Stock, par value
$.01 per share, outstanding.

<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES
                          Quarter Ended June 30, 1998

                                     INDEX
                                                                           Page
                                                                          Number
                                                                          ------
PART I.  FINANCIAL INFORMATION:

  Item 1.  Financial Statements.

        Condensed Consolidated Statements of Operations-
        Three and Nine Months Ended June 30, 1998 and 1997
        (Unaudited)                                                           4

        Condensed Consolidated Balance Sheets-
        June 30, 1998 (Unaudited) and
        September 30, 1997                                                    5

        Condensed Consolidated Statements of Cash Flows-
        Nine Months Ended June 30, 1998 and 1997
        (Unaudited)                                                           6

        Notes to Condensed Consolidated Financial
        Statements (Unaudited)                                             7-14

  Item 2.  Management's Discussion and Analysis of Financial 
             Condition and Results of Operations.                         15-22

  Item 3.  Quantitative and Qualitative Disclosure about Market Risk.        22


PART II.  OTHER INFORMATION:

  Item 1.  Legal Proceedings                                                 23

  Item 2.  Changes in Securities and Use of Proceeds                         24

  Item 4.  Submission of Matters to a Vote of Security Holders               24

  Item 6.  Exhibits and Reports on Form 8-K.                              24-25


                                       2
<PAGE>



                      MEDIQ INCORPORATED AND SUBSIDIARIES
                          Quarter Ended June 30, 1998






                         PART I. FINANCIAL INFORMATION

                         Item 1. Financial Statements.





                                       3

<PAGE>


                       MEDIQ INCORPORATED AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         Three Months Ended              Nine Months Ended
                                                                               June 30,                      June 30,
                                                                     -------------------------       -------------------------
                                                                        1998            1997           1998            1997
                                                                     ---------       ---------       ---------       ---------
<S>                                                                  <C>             <C>             <C>             <C>      
Revenue:
  Rental                                                             $  33,706       $  31,148       $ 103,700       $  94,341
  Sales                                                                  6,692           5,327          20,671          14,785
  Other                                                                  2,543           3,150           7,549           8,548
                                                                     ---------       ---------       ---------       ---------
                                                                        42,941          39,625         131,920         117,674
Costs and Expenses:
  Cost of sales                                                          5,455           4,261          16,725          12,020
  Operating                                                             14,415          11,263          42,864          33,491
  Selling                                                                3,912           3,152          11,469           9,722
  General and administrative                                             5,186           5,803          14,534          15,837
  Non-recurring merger costs                                            34,204              --          34,567              --
  Depreciation and amortization                                         15,064           7,365          31,650          22,096
                                                                     ---------       ---------       ---------       ---------
                                                                        78,236          31,844         151,809          93,166
                                                                     ---------       ---------       ---------       ---------
Operating Income (Loss)                                                (35,295)          7,781         (19,889)         24,508
Other (Charges) Credits:
  Interest expense                                                      (7,098)         (3,283)        (14,333)        (15,205)
  Equity participation - repurchase of MEDIQ/PRN warrants                   --              --              --         (11,047)
  Gain on sale and market appreciation of Cardinal Health stock             --              --              --           9,213
  Gain on NutraMax note receivable                                          --             565              --           1,760
  Other - net                                                              235            (302)            714             842
                                                                     ---------       ---------       ---------       ---------
Income (Loss) from Continuing Operations before
    Income Taxes and Extraordinary Item                                (42,158)          4,761         (33,508)         10,071
Income Tax Expense (Benefit)                                           (15,632)          2,200         (11,744)          8,644
                                                                     ---------       ---------       ---------       ---------
Income (Loss) before Discontinued operations and
     Extraordinary Item                                                (26,526)          2,561         (21,764)          1,427
Discontinued Operations (net of taxes)                                    --            (1,092)             --          36,083
Extraordinary Item - EarLy Retirement of Debt (net of taxes)            (4,098)            (76)         (4,098)         (7,002)
                                                                     ---------       ---------       ---------       ---------
Net Income (Loss)                                                      (30,624)          1,393         (25,862)         30,508
Dividends on Preferred Stock                                            (1,600)             --          (1,600)             --
                                                                     ---------       ---------       ---------       ---------
Net Income (Loss) Available for Common Shareholders                  $ (32,224)      $   1,393       $ (27,462)      $  30,508
                                                                     =========       =========       =========       =========

</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                        4


<PAGE>


                       MEDIQ INCORPORATED AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                 June 30,        Sept. 30,
                                                                                   1998            1997
                                                                                ----------      ----------
                                                                                (Unaudited)     (See Note)
                                     Assets

<S>                                                                             <C>             <C>       
Current Assets:
  Cash                                                                          $    9,203      $    3,639
  Accounts receivable - net                                                         52,315          39,686
  Inventories                                                                       18,316          13,047
  Deferred income taxes                                                              3,202           6,967
  Income taxes receivable                                                               --           4,917
  Other current assets                                                               1,077           1,495
                                                                                ----------      ----------
        Total Current Assets                                                        84,113          69,751

Property, plant and equipment - net                                                112,706         113,589
Goodwill - net                                                                      89,570          57,056
Deferred financing fees                                                             20,095           7,344
Other assets                                                                        12,250           9,812
                                                                                ----------      ----------
Total Assets                                                                    $  318,734      $  257,552
                                                                                ==========      ==========

                Liabilities and Stockholders' Eguity (Deficiency)

Current Liabilities:
  Accounts payable                                                              $   16,260      $    8,793
  Accrued expenses                                                                  19,395          23,578
  Current portion of Long-term debt                                                  1,611           7,648
                                                                                ----------      ----------

        Total Current Liabilities                                                   37,266          40,019

Senior debt                                                                        275,419         128,131
Subordinated debt                                                                  200,055          10,055
Deferred income taxes and other Liabilities                                         11,913          30,744

Mandatorily Redeemable Preferred Stock:
  Series A preferred stock                                                          79,127              --
  Series C preferred stock                                                          30,355              --

Stockholders' Equity (Deficiency)                                                 (315,401)         48,603
                                                                                ----------      ----------

Total Liabilities and Stockholders' Equity (Deficiency)                         $  318,734      $  257,552
                                                                                ==========      ==========
</TABLE>

Note: The balance sheet at September 30, 1997 has been condensed from the
audited financial statements at that date.

            See Notes to Condensed Consolidated Financial Statements

                                        5


<PAGE>


                       MEDIQ INCORPORATED AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                     Nine Months Ended
                                                                                         June 30,
                                                                                 -------------------------
                                                                                    1998           1997
                                                                                 ---------       ---------
<S>                                                                              <C>             <C>      
Cash Flows from Operating Activities:
   Net income (Loss)                                                             $ (25,862)      $  30,508
   Adjustments to reconcile net income (loss) to net cash used in operating
      activities:
       Income from discontinued operations                                              --         (36,083)
       Gain on sale of Cardinal shares                                                  --          (9,213)
       Equity participation - repurchase of MEDIQ/PRN warrants                          --          11,047
       Other - net                                                                  23,943           1,046
                                                                                 ---------       ---------
   Net cash used in operating activities                                            (1,919)         (2,695)
Cash Flows from Investing Activities:
   Acquisitions                                                                    (11,032)             --
   Proceeds from sale of discontinued operations                                        --         124,995
   Purchase of equipment                                                           (17,909)        (11,589)
   Collections on note receivable                                                    2,250              --
   Repurchase of MEDIQ/PRN warrants                                                     --         (12,500)
   Other                                                                               654          (2,448)
                                                                                 ---------       ---------
   Net cash provided by (used in) investing activities                             (26,037)         98,458
Cash Flows from Financing Activities:
   Repurchase of common and preferred stock                                       (377,416)             --
   Issuance of subordinated notes                                                  190,000              --
   Borrowings                                                                      151,499         214,000
   Debt repayments                                                                (133,872)       (302,228)
   issuance of Series A preferred stock                                             78,235              --
   Issuance of units                                                                75,000              --
   issuance of Series B preferred stock                                             30,000              --
   Issuance of Series C preferred stock                                             30,000              --
   Issuance of common stock                                                         10,000              --
   Deferred financing fees                                                         (20,056)         (8,874)
   Exercise of stock options                                                           130             272
                                                                                 ---------       ---------
   Net cash provided by (used in) financing activities                              33,520         (96,830)
                                                                                 ---------       ---------
Increase (decrease) in cash                                                          5,564          (1,067)
Cash:
   Beginning balance                                                                 3,639           3,219
                                                                                 ---------       ---------
   Ending balance                                                                $   9,203       $   2,152
                                                                                 =========       =========
Supplemental disclosure of cash flow information:
   Interest paid                                                                 $  11,005       $  16,760
                                                                                 =========       =========
   Income taxes paid (refunded)                                                  $  (2,788)      $   5,056
                                                                                 =========       =========
Supplemental disclosure of non-cash investing and financing activities:
   Acquisition of CH MedicaL, Inc. with term loans                               $ (48,501)             --
                                                                                 =========       =========
   Conversion of 7.25% subordinated debentures into common stock                 $      --       $   6,251
                                                                                 =========       =========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                        6
<PAGE>



                       MEDIQ INCORPORATED AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note A - Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of June 30, 1998 and the condensed
consolidated statements of operations and cash flows for the nine months ended
June 30, 1998 and 1997 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at June 30, 1998 and for all periods presented have
been made.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 Annual Report on Form 10-K.
The results of operations for the period ended June 30, 1998 are not necessarily
indicative of the operating results for the full year.

Reclassification of Accounts - Certain reclassifications have been made to
conform prior year balances to the current year presentation.

Note B - Inventories

Inventories, which consist primarily of disposable products and repair parts for
rental equipment, are stated at the lower of cost (first-in, first-out method)
or market.

Note C - The Merger

On May 29, 1998, pursuant to the terms of an Agreement and Plan of Merger dated
January 14, 1998 and amended April 27, 1998 (the "Merger Agreement") between
MEDIQ Incorporated (the "Company") and MQ Acquisition Corporation ("MQ"), MQ was
merged into the Company (the "Merger") with the Company continuing as the
surviving corporation (the "Surviving Corporation"). MQ was a Delaware
corporation organized by Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS") and
certain other investors solely to effect the Merger. In the Merger, holders of
the Company's outstanding common stock, par value $1.00 per share, and preferred
stock, par value $.50 per share, immediately prior to the Merger received, in
exchange for each outstanding share of common stock or preferred stock (except
for shares held directly or indirectly by the Company or MQ, the Rolled Shares
(as defined below) and dissenting shares), $13.75 in cash and 0.075 of a share
of a newly created Series A 13% Cumulative Compounding Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock"), of the Surviving
Corporation. The Series A Preferred Stock has a liquidation preference of $10.00
per share.

The aggregate consideration paid in connection with the Merger was approximately
$390.7 million, which amount includes $20.0 million of Series A Preferred Stock.
In addition, in connection with the Merger (i) certain controlling stockholders
of the Company (the "Rotko Entities") converted a portion of their preferred
equity (the "Rolled Shares") in the Company into 1,340,219 shares of Series B
13.25% Cumulative Compounding Perpetual Preferred Stock, par value $.01 per
share

                                       7

<PAGE>

Note C - The Merger (Continued)

("Series B Preferred Stock") and 109,781 shares of Common Stock, par value $.01
per share ("Common Stock"), of the Surviving Corporation, (ii) Thomas E.
Carroll, Jay M. Kaplan and certain other persons selected by the Company and BRS
(the "Management Stockholders") invested approximately $4.2 million in common
and preferred equity of the Company, and (iii) BRS, certain entities and
individuals affiliated with BRS (together with BRS, the "BRS Entities") and
certain funds affiliated with Ferrer Freeman Thompson & Co. LLC and Galen
Partners III, L.P. (the "Co-Investors") purchased $109.5 million of common and
preferred equity of MQ (the "Equity Contribution"). The transaction has been
accounted for as a recapitalization.

In connection with the Merger, (i) the Company contributed certain of its assets
and liabilities (including the capital stock of all of the subsidiaries of the
Company other than MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new Senior
Secured Credit Facility (the "New Credit Facility") with a syndicate of banks
("Senior Lenders"), (iii) all indebtedness of the Company except approximately
$10.1 million of the Company's 7.5% exchangeable subordinated debentures due
2003 (the "Exchangeable Debentures") and $2.0 million of MEDIQ/PRN's capital
leases were repaid (the "Refinancing"), (iv) the Company sold 140,885 units
("Units"), consisting of one 13% Senior Discount Debenture due 2009 with a
principal amount at maturity of $1,000 ("Debentures") and one warrant to
purchase .6474 of a share of Common Stock ("Warrants"), for gross proceeds
aggregating $75.0 million in a Rule 144A private offering, and (v) MEDIQ/PRN
sold $190.0 million aggregate principal amount of 11% Senior Subordinated Notes
due 2008 (the "Notes") in the same Rule 144A private offering.

The authorized capital stock of the Surviving Corporation consists of (i) Common
Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock, and (iv)
Series C 13.5% Cumulative Compounding Preferred Stock, par value $.01 per share
("Series C Preferred Stock"). The BRS Entities and Co-Investors hold 829,219
shares of the Common Stock, 5,624,565 shares of the Series A Preferred Stock,
1,602,363 shares of the Series B Preferred Stock and 2,896,218 shares of the
Series C Preferred Stock; the Management Stockholders hold 61,000 shares of the
Common Stock, 201,551 shares of the Series A Preferred Stock, 57,417 shares of
the Series B Preferred Stock and 103,781 shares of the Series C Preferred Stock;
the Rotko Entities hold 109,781 shares of the Common Stock, 632,360 shares of
the Series A Preferred Stock and 1,340,219 shares of the Series B Preferred
Stock; and the stockholders of the Company prior to the Merger (other than the
Rotko Entities) hold 1,365,030 shares of the Series A Preferred Stock.

On January 15, 1998, a complaint, purporting to be a class action, was filed in
Delaware Chancery Court, naming the Company and each of its directors as
defendants and seeking to enjoin consummation of the Merger, or, in the
alternative, to recover compensatory damages. Plaintiff alleges generally that
the directors have breached fiduciary duties to stockholders. The Company
believes that the allegations in the complaint are completely without merit and
intends to vigorously defend this case. Based on the information currently
available, the Company believes that resolution of the claim will not have a
material adverse effect on the operations or financial condition of the Company.


Note D - Long-Term Debt

In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility.

                                       8

<PAGE>

Note D - Long-Term Debt  (Continued)

The New Credit Facility consists of three facilities: (i) an eight-year senior
secured $200.0 million term loan facility (the "Term Loan Facility"); (ii) a
six-year revolving credit facility not to exceed $50.0 million (the "Revolving
Credit Facility") and (iii) a six-year senior secured acquisition facility not
to exceed $75.0 million (the "Acquisition Facility"). Loans made under the Term
Loan Facility are referred to as "Term Loans", advances made under the Revolving
Credit Facility are referred to as "Revolving Loans" and loans made under the
Acquisition Facility are referred to as "Acquisition Loans".

Borrowings under the New Credit Facility bear interest at a floating rate based
upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris, or the federal funds effective rate plus 0.5%, plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0%, or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%.

In addition, MEDIQ/PRN is required to pay commitment fees to the Senior Lenders
of 0.5% per year of the undrawn portion of the commitments in respect of the
facilities (subject to adjustment as set forth below). The New Credit Facility
contains provisions under which commitment fees and margins on interest rates
under the facilities will be adjusted in increments based on certain performance
goals.

The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts outstanding under the Acquisition
Facility on November 30, 1999 will amortize on a quarterly basis. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) of MEDIQ/PRN or, if the
Company's ratio of funded debt to pro forma EBITDA for the preceding 12-month
period is less than 5.0 to 1.0, 50% of such Excess Cash Flow.

At June 30, 1998, pursuant to the terms of the New Credit Facility and/or the
Indentures for the Subordinated Notes and the Discount Debentures
("Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.

In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $600,000 which will be reflected as
interest expense in the Company's fourth quarter. In addition, the Company
entered into new interest rate hedging contracts. On a notional amount of $100.0
million, the Company fixed its LIBOR rate at 5.35% until July 2003 as long as
the three month LIBOR rate does not exceed 6.25%. The Company must pay the
actual LIBOR rate when LIBOR exceeds 6.25%. In order to mitigate its interest
rate exposure for LIBOR rates above 6.25%, the Company obtained zero-cost
collars with notional amounts aggregating $100.0 million with ceiling rates of
7.00% and a weighted-average floor rate of 5.03%.

The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN paid the Senior Lenders certain syndication and administration
fees, reimbursed certain expenses and provided certain indemnities, in each case
which are customary for credit facilities of this type.

                                       9
<PAGE>

Note D - Long-Term Debt  (Continued)

The Notes, in the aggregate principal amount of $190.0 million, are unsecured
senior subordinated obligations of MEDIQ/PRN and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable semiannually to holders
of record at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing December 1, 1998.

Each Unit consists of a Debenture with a principal amount at maturity of $1,000
and one Warrant. Each Warrant entitles the holder thereof to purchase .6474
shares of Common Stock from the Company, as the Surviving Corporation of the
Merger, at an exercise price of $0.01 per share, subject to adjustment. The
Warrants will initially entitle the holders thereof to acquire, in the
aggregate, 91,209 shares of Common Stock. The Warrants have been valued at
$743,000 and are reflected as a component of Stockholders' Equity at June 30,
1998. The Debentures and the Warrants will not trade separately until the
commencement of an exchange offer or the effectiveness of a shelf registration
statement for the Debentures or such earlier date after July 28, 1998, as the
Initial Purchasers (as defined in the Indentures) may determine (the "Separation
Date").

The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1 of each year, commencing December
1, 2003 to holders of record at the close of business on the May 15 or November
15 immediately preceding the interest payment date.

The interest rates on the Notes and Debentures are subject to increase in
certain circumstances if the Company does not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied. The Company filed such registration
statement providing for a registered exchange offer on July 13, 1998. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.

The Warrants may be exercised at any time after the first anniversary of the
Issue Date (as defined in the Indentures); provided, however, that holders of
Warrants will be able to exercise their Warrants only if a shelf registration
statement relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act of 1933, and such securities are qualified for sale or exempt
from qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on June 1, 2009. The Warrants will not trade separately
from the Debentures until the Separation Date.

On June 5, 1998, pursuant to the change of control provisions of the indenture
for the Company's Exchangeable Debentures, the Company made a tender offer to
repurchase the remaining outstanding balance of approximately $10.1 million. On
July 3, 1998, the Company redeemed $9.5 million of the Exchangeable Debentures
pursuant to its tender offer and received 623,595 shares of NutraMax common
stock from escrow. Pursuant to the terms of the Company's stock purchase
agreement with NutraMax, the Company returned the shares to NutraMax and
received a $5.6 million cash payment on its note receivable from NutraMax.

                                       10
<PAGE>

Note E - Acquisitions

On May 29, 1998, the Company, through its wholly-owned subsidiary MEDIQ/PRN,
purchased specified assets and rights of CH Industries, Inc., certain direct and
indirect subsidiaries of CH Industries, Inc., including CH Medical, Inc. and
subsidiaries ("CH Medical"), and certain other parties (the "CH Medical
Business") for a purchase price of approximately $48.5 million in cash,
including related costs and expenses, and the assumption of certain specified
obligations related to the CH Medical Business (the "CH Medical Acquisition").
The Company financed the purchase price and related costs and expenses for the
CH Medical Acquisition with the proceeds from Term Loans under the New Credit
Facility (see Note D). CH Medical is a national sales, rental and service
corporation specializing in patient beds, overlays, mattress replacement
systems, pressure relieving pads and surfaces and other therapeutic support
services.

The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on the estimated fair values on May 29, 1998. The
excess of the purchase price over the estimated fair values of the net assets
acquired, $28.5 million, has been recorded as goodwill and is being amortized on
a straight line basis over twenty years. The final allocation of the purchase
price is contingent upon studies and valuations which have not yet been
completed. The Company is unable to predict whether any adjustments as a result
of the foregoing will have a material effect on the initial allocation of
purchase price.

On June 26, 1998, the Company, through its wholly-owned subsidiary MEDIQ/PRN,
acquired certain assets of National Patient Care Systems, Inc. ("NPC") for $11.0
million in cash, including related costs and expenses and contingent
consideration of up to $2.8 million payable over the next two years if certain
revenue targets are achieved by NPC. NPC is a provider of air support therapy
rental equipment including frameless and framed integrated bed systems.

The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired based
on the estimated fair values on June 26, 1998. The excess of the purchase price
over the estimated fair values of the net assets acquired, $6.8 million, has
been recorded as goodwill and is being amortized on a straight-line basis over
twenty years. The final allocation of the purchase price is contingent upon
studies and valuations which have not yet been completed. The Company is unable
to predict whether any adjustments as a result of the foregoing will have a
material effect on the initial allocation of purchase price.

The operations of CH Medical and NPC are included in the Company's Condensed
Consolidated Statement of Operations from their respective effective dates of
acquisition. The following pro forma financial information presents the
consolidated results of operations of the Company as if the acquisitions had
occurred at the beginning of the respective periods. The unaudited pro forma
information is presented for comparative purposes only and does not necessarily
reflect the results of operations of the Company had the acquisitions been made
at the beginning of each fiscal year.


                                           Nine Months Ended   Fiscal Year Ended
                                             June 30, 1998    September 30, 1997
                                           -----------------  ------------------
Revenues                                      $158,012,000      $195,552,000
Loss before discontinued operations and
   extraordinary items                         (26,106,000)       (7,817,000)
Net income (Loss)                              (30,204,000)       19,087,000


                                       11

<PAGE>

Note F - Redeemable Preferred Stock

At June 30, 1998, redeemable preferred stock consists of 15,000,000 authorized
shares, of which 10,000,000 shares have been designated as Series A Preferred
Stock and 5,000,000 shares have been designated as Series C Preferred Stock as
follows:


<TABLE>

<S>                                                                             <C>         
Series A, par value $.01 per share, stated value $10.00 per share,
  7,823,504 shares issued and outstanding, with a liquidation value
  of $78.2 million and accumulated dividends of $.9 million                     $ 79,127,000

Series C, par value $.01 per share, stated value $10.00 per share,
  3,000,000 shares issued and outstanding with a liquidation value
  of $30.0 million and accumulated dividends of $.4 million                       30,355,000
                                                                                ------------
                                                                                $109,482,000
                                                                                ============
</TABLE>

Subject to the legal availability of funds, the Company is required to redeem
its Series A Preferred Stock on December 31, 2011 at a redemption price equal to
$10.00 per share plus all accrued and unpaid dividends. The Company, at its
option, may redeem the Series A Preferred Stock at any time at the redemption
prices set forth below, plus an amount equal to full cumulative dividends:

Redemption Date                                       Redemption Price Per Share
---------------                                       --------------------------
On or before December 31, 1999                               $ 11.00
On or after January 1, 2000, but
   before January 1, 2002                                    $ 10.50
On or after January 1, 2002                                  $ 10.00

Subject to the legal availability of funds, the Company is required to redeem
its Series C Preferred Stock on December 31, 2012 at a redemption price equal to
$10.00 per share plus all accrued and unpaid dividends. The Company, at its
option, may redeem the Series C Preferred Stock at any time at an amount equal
to $10.00 per share plus all accrued and unpaid dividends after distributions
are made on the Series A Preferred Stock and the Series B Preferred Stock.

Accordingly, these preferred stocks subject to mandatory redemption have been
presented separately outside of permanent stockholders' equity in the
accompanying financial statements.

Except as required by Delaware law, the holders of the Series A Preferred Stock
and Series C Preferred Stock do not have any voting rights. The holders of the
Series A Preferred Stock and Series C Preferred Stock are entitled to receive
dividends from the Company on each share of Series A Preferred Stock and Series
C Preferred Stock at annual rates equal to $1.30 and $1.35 per share,
respectively. All dividends will be cumulative and compounding, whether or not
earned or declared, will accrue on a daily basis and will be payable
semi-annually in arrears. Dividends with respect to the Series A Preferred Stock
can only be paid to the extent funds are legally available therefor under
Delaware law. Dividends with respect to the Series C Preferred Stock can only be
paid to the extent funds are legally available therefor under Delaware law and
all distributions have been made on the Company's Series A and Series B
preferred stocks. The New Credit Facility and Indentures restrict the ability of
the Company to pay cash dividends.

Upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of all shares of Series A Preferred Stock and Series C
Preferred Stock then outstanding will be entitled to be paid out of the assets
of the Company available for distribution to its stockholders an amount equal to
$10.00 per share plus all accrued and unpaid dividends.

                                       12

<PAGE>

Note G - Common Stock and Series B Preferred Stock

Common Stock - The Company has 30,000,000 authorized shares of common stock, par
value $.01 per share, with 1,000,000 shares issued and outstanding as of June
30, 1998. The holders of the Common Stock are entitled to one vote per share on
all matters submitted for action by the shareholders. Subject to the rights of
any holders of outstanding preferred stock of the Company, all shares of Common
Stock are entitled to share in dividends as the Board of Directors may declare
from time to time from legally available funds.

Series B Preferred Stock - Except as required by Delaware law, the holders of
the Series B Preferred Stock do not have any voting rights. The holders of the
Series B Preferred Stock are entitled to receive dividends from the Company on
each share of Series B Preferred Stock at an annual rate equal to $1.325 per
share. All dividends will be cumulative and compounding whether or not earned or
declared, will accrue on a daily basis and will be payable semi-annually in
arrears. Dividends with respect to the Series B Preferred Stock can only be paid
to the extent funds are legally available therefor under Delaware law and all
distributions have been made on the Company's Series A Preferred Stock. The New
Credit Facility and Indentures restrict the ability of the Company to pay cash
dividends.

Upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of all shares of Series B Preferred Stock then outstanding
will be entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount equal to $10.00 per share plus all
accrued and unpaid dividends after distributions are made on the Series A
Preferred Stock and before any distribution is made on any Series C Preferred
Stock. The Company is not required to redeem the shares of Series B Preferred
Stock. The Series B Preferred Stock has $.4 million of dividends accrued as
of June 30, 1998.


Note H - New Accounting Pronouncements

The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income," which will result in disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company is not required to adopt this
standard until fiscal 1999. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.

The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is not required to adopt this standard until fiscal 1999.
At this time, the Company has not determined the impact the adoption of this
standard will have on the Company's financial statements.

In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted. The Company does not believe the adoption of this standard will have
a material impact on the Company's financial statements.

                                       13

<PAGE>

Note H - New Accounting Pronouncements (Continued)

In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, although earlier
application is permitted. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.


Note I - Subsequent Events

In July 1998, the Company reached a settlement with its former wholly-owned
subsidiary, MHM Services, Inc. ("MHM") which called for MHM to pay the Company
$3.0 million in cash in full satisfaction of all amounts due the Company. The
Company received the cash in July 1998 and will recognize the settlement in
other income in the fourth quarter of fiscal 1998. The total amount due from MHM
was fully reserved during fiscal years 1997 and 1996.

In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of the Company
whose assets were sold in November 1996, was notified that it is the subject of
an investigation by the Department of Justice and the Office of the Inspector
General of the Department of Health and Human Services. The Company has not yet
been informed as to the nature or scope of the investigation.

In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to acquire
InnoServ for approximately $16.0 million. No date has been scheduled for
closing. Pursuant to the terms of the Company's November 1997 stock purchase
agreement with InnoServ, under a change of control the Company is entitled to
receive a portion of the sales proceeds. However, the calculation of the amount
due to the Company is currently in dispute. Accordingly, the matter is in
arbitration pursuant to the terms of the stock purchase agreement. The Company
fully reserved its investment in InnoServ in fiscal 1997. The Company will
recognize a gain equal to the cash proceeds when they are received.

                                       14

<PAGE>

Some of the information presented in this Form 10-Q constitutes forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. For additional information concerning
important factors which may cause the Company's actual results to differ
materially from expectations and underlying assumptions, please refer to the
reports filed by the Company with the Securities and Exchange Commission.



            ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

The following discussion addresses the financial condition of the Company as of
June 30, 1998 and results of operations for the three and nine month periods
ended June 30, 1998 and 1997. This discussion should be read in conjunction with
the financial statements included elsewhere herein and the Management's
Discussion and Analysis and Financial Statement sections of the Company's Annual
Report on Form 10-K for the year ended September 30, 1997 to which the reader is
directed for additional information.

Seasonality

The Company's rental business is seasonal, with demand historically peaking
during periods of increased hospital patient census, which generally occur in
the winter months during the Company's second fiscal quarter.

Results of Operations

Third Quarter 1998 Compared with Third Quarter 1997

Revenues were $42.9 million for the third quarter of fiscal 1998, as compared to
$39.6 million in the prior year period, an increase of $3.3 million or 8%. This
revenue growth was attributable to an 8% increase in rental revenue and a 26%
increase in sales partially offset by a 19% decrease in other revenue. The
growth in rental revenue was achieved primarily through increased revenues from
the rental of therapeutic support systems as a result of the SpectraCair
acquisition in September 1997 and the CH Medical acquisition in May 1998 and
increased revenues from revenue share arrangements attributable to increased
volume with existing customers. These increases were partially offset by a $2.1
million or 7% decrease in the core rental business primarily as a result of a
shift from rental to purchase by one of the Company's significant home
healthcare customers beginning in May 1997. The increase in sales was primarily
attributable to sales of medical gases which the Company initiated in the fourth
quarter of fiscal 1997 and sales of disposable products, equipment, and
disposable products sold through revenue share arrangements as a result of
increased volume to existing customers. The decrease in other revenue was
primarily attributable to the discontinuance of logistics services provided to
SpectraCair as a result of its acquisition in September 1997, partially offset
by increased revenues from asset management projects.

                                       15
<PAGE>


EBITDA is defined as income from continuing operations before interest, taxes,
depreciation, amortization and non-recurring merger costs. The Company's
definition of EBITDA may not be comparable to similarly titled measures reported
by other companies. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service indebtedness in the
medical equipment rental industry. However, EBITDA should not be considered as
an alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.

EBITDA decreased $1.1 million, or 8%, to $14.0 million in the third quarter of
fiscal 1998 as compared to $15.1 million in the prior year period. The decrease
was primarily attributable to the aforementioned decrease in core rental revenue
and increased selling and operating expenses as the Company continued to invest
in sales and operational personnel to facilitate the growth of the MEDIQ/FST
(formerly SpectraCair) division, disposable sales and outsoucing activities.
EBITDA margins decreased to 32.5% from 38.2% in the prior year period which was
primarily attributable to the growth of sales of parts and disposables and the
Company's revenue share activities which have lower margins than the Company's
core rental business and the increase in selling and operating expenses.

The operating loss was $35.3 million as compared to operating income of $7.8
million for the third quarter of fiscal 1997. The decrease in operating income
was primarily attributable to non-recurring merger costs aggregating $34.2
million which included compensation expense of $19.0 million recorded upon the
exercise of options by employees, payment of special transaction bonuses to
certain current and former members of management of approximately $6.0 million
and the payment of a transaction fee of $6.0 million to BRS and a depreciation
reserve of $6.0 million to write-down certain rental equipment product lines to
net realizable value. Exclusive of the non-recurring merger costs and
depreciation reserve, operating income decreased $2.9 million to $4.9 million as
a result of increased depreciation associated with capital expenditures in
addition to the decrease in EBITDA described above.

Interest expense increased 116% to $7.1 million for the third quarter of fiscal
1998 primarily as a result of the substantial increase in debt incurred in
connection with the Merger and the CH Medical acquisition.

The Company's effective tax rates were disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization.


Nine Months Ended June 30, 1998 Compared with Nine Months Ended June 30, 1997

Revenues were $131.9 million for the nine months ended June 30, 1998, as
compared to $117.7 million in the prior year period, an increase of $14.2
million, or 12%. This revenue growth was attributable to a 10% increase in
rental revenue and a 40% increase in sales partially offset by a 12% decrease in
other revenue. The growth in rental revenue was achieved primarily through
revenues from the rental of therapeutic support systems as a result of the
SpectraCair acquisition in September 1997 and the CH Medical acquisition in May
1998. Rental revenue also increased as a result of revenue share arrangements,
the most significant of which commenced in January 1997. These increases were
partially offset by a 4% decrease in the core rental business primarily as a
result of a shift from rental to purchase by one of the Company's significant
home healthcare customers beginning in May 1997. Exclusive of revenues from such
customer, revenues from the core rental business were comparable to the prior
year. The increase in sales was attributable to sales of disposable products as
a result of increased volume to existing customers, revenue share arrangements,
and sales of medical gases which the Company initiated

                                       16

<PAGE>

in the fourth quarter of fiscal 1997. The decrease in other revenue was
primarily attributable to the discontinuance of logistics services provided to
SpectraCair as a result of its acquisition in September 1997, partially offset
by increased revenues from asset management projects.

EBITDA was $46.3 million for the nine months ended June 30, 1998 and was
comparable with the prior year period. EBITDA margins decreased to 35.1% in the
current period from 39.6% in the comparable prior year period. The margin
decrease was attributable to the same factors that impacted the third quarter.

The operating loss was $19.9 million for the nine months ended June 30, 1998, as
compared to operating income of $24.5 million in the prior year period. The
decrease in operating income was primarily attributable to the non-recurring
merger costs and the depreciation reserve described above. Exclusive of the
non-recurring merger costs and the depreciation reserve, operating income
decreased $4.8 million to $20.7 million as a result of increased depreciation
associated with capital expenditures in the current and prior year in addition
to the decrease in EBITDA for the third quarter described above.

Interest expense decreased 6% to $14.3 million for the nine months ended June
30, 1998 primarily as a result of the substantial reduction of debt with the
proceeds from the sales of discontinued operations in the second quarter of
fiscal 1997 and reduced interest rates as a result of improved leverage in
accordance with the terms of the Company's former Credit Agreement, partially
offset by the substantial increase in debt incurred in connection with the
Merger and the CH Medical acquisition.

The Company's effective tax rates were disproportionate compared to the
statutory rate as a result of the nondeductibility of certain goodwill
amortization.


Recent Developments

The Merger - On May 29, 1998, pursuant to the terms of an Agreement and Plan of
Merger dated January 14, 1998 and amended April 27, 1998 (the "Merger
Agreement") between MEDIQ Incorporated (the "Company") and MQ Acquisition
Corporation ("MQ"), MQ was merged into the Company (the "Merger") with the
Company continuing as the surviving corporation (the "Surviving Corporation").
MQ was a Delaware corporation organized by Bruckmann, Rosser, Sherrill & Co.,
L.P. ("BRS") and certain other investors solely to effect the Merger. In the
Merger, holders of the Company's outstanding common stock, par value $1.00 per
share, and preferred stock, par value $.50 per share, immediately prior to the
Merger received, in exchange for each outstanding share of common stock or
preferred stock (except for shares held directly or indirectly by the Company or
MQ, the Rolled Shares (as defined below) and dissenting shares), $13.75 in cash
and 0.075 of a share of a newly created Series A 13% Cumulative Compounding
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"), of
the Surviving Corporation. The Series A Preferred Stock has a liquidation
preference of $10.00 per share.

The aggregate consideration paid in connection with the Merger was approximately
$390.7 million, which amount includes $20.0 million of Series A Preferred Stock.
In addition, in connection with the Merger (i) certain controlling stockholders
of the Company (the "Rotko Entities") converted a portion of their preferred
equity (the "Rolled Shares") in the Company into 1,340,219 shares of Series B
13.25% Cumulative Compounding Perpetual Preferred Stock, par value $.01 per
share ("Series B Preferred Stock") and 109,781 shares of Common Stock, par value
$.01 per share ("Common Stock"), of the Surviving Corporation, (ii) Thomas E.
Carroll, Jay M. Kaplan and certain other persons selected by the Company and BRS
(the "Management Stockholders") invested approximately $4.2 million in common
and preferred equity of the Company, and (iii) BRS, certain entities and
individuals affiliated with BRS (together with BRS,

                                       17

<PAGE>

the "BRS Entities") and certain funds affiliated with Ferrer Freeman Thompson &
Co. LLC and Galen Partners III, L.P. (the "Co-Investors") purchased $109.5
million of common and preferred equity of MQ (the "Equity Contribution"). The
transaction has been accounted for as a recapitalization.

In connection with the Merger, (i) the Company contributed certain of its assets
and liabilities (including the capital stock of all of the subsidiaries of the
Company other than MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN") to
MEDIQ/PRN (the "Reorganization"), (ii) MEDIQ/PRN entered into a new Senior
Secured Credit Facility (the "New Credit Facility") with a syndicate of
banks ("Senior Lenders"), (iii) all indebtedness of the Company except
approximately $10.1 million of the Company's 7.5% exchangeable subordinated
debentures due 2003 (the "Exchangeable Debentures") and $2.0 million of
MEDIQ/PRN's capital leases were repaid (the "Refinancing"), (iv) the Company
sold 140,885 units ("Units"), consisting of one 13% Senior Discount Debenture
due 2009 with a principal amount at maturity of $1,000 ("Debentures") and one
warrant to purchase .6474 of a share of Common Stock ("Warrants") for gross
proceeds aggregating $75.0 million in a Rule 144A private offering, and (v)
MEDIQ/PRN sold $190.0 million aggregate principal amount of 11% Senior
Subordinated Notes due 2008 (the "Notes") in the same Rule 144A private
offering.

The authorized capital stock of the Surviving Corporation consists of (i) Common
Stock, (ii) Series A Preferred Stock, (iii) Series B Preferred Stock, and (iv)
Series C 13.5% Cumulative Compounding Preferred Stock, par value $.01 per share
("Series C Preferred Stock"). The BRS Entities and Co-Investors hold 829,219
shares of the Common Stock, 5,624,565 shares of the Series A Preferred Stock,
1,602,363 shares of the Series B Preferred Stock and 2,896,218 shares of the
Series C Preferred Stock; the Management Stockholders hold 61,000 shares of the
Common Stock, 201,551 shares of the Series A Preferred Stock, 57,417 shares of
the Series B Preferred Stock and 103,781 shares of the Series C Preferred Stock;
the Rotko Entities hold 109,781 shares of the Common Stock, 632,360 shares of
the Series A Preferred Stock and 1,340,219 shares of the Series B Preferred
Stock; and the stockholders of the Company prior to the Merger (other than the
Rotko Entities) hold 1,365,030 shares of the Series A Preferred Stock.

On January 15, 1998, a complaint, purporting to be a class action, was filed in
Delaware Chancery Court, naming the Company and each of its directors as
defendants and seeking to enjoin consummation of the Merger, or, in the
alternative, to recover compensatory damages. Plaintiff alleges generally that
the directors have breached fiduciary duties to stockholders. The Company
believes that the allegations in the complaint are completely without merit and
intends to vigorously defend this case. Based on the information currently
available, the Company believes that resolution of the claim will not have a
material adverse effect on the operations or financial condition of the Company.

CH Medical Acquisition - On May 29, 1998, the Company, through its wholly-owned
subsidiary MEDIQ/PRN, purchased specified assets and rights of CH Industries,
Inc., certain direct and indirect subsidiaries of CH Industries, Inc., including
CH Medical, Inc. and subsidiaries ("CH Medical"), and certain other parties (the
"CH Medical Business") for a purchase price of approximately $48.5 million in
cash, including related costs and expenses, and the assumption of certain
specified obligations related to the CH Medical Business (the "CH Medical
Acquisition"). The Company financed the purchase price and related costs and
expenses for the CH Medical Acquisition with the proceeds from Term Loans under
the New Credit Facility.

NPC Acquisition - On June 26, 1998, the Company, through its wholly-owned
subsidiary MEDIQ/PRN, acquired certain assets of National Patient Care Systems,
Inc. ("NPC") for $11.0 million in cash, including related costs and expenses and
contingent consideration of up to $2.8 million payable over the next two years
if certain revenue targets are achieved by NPC.

                                       18

<PAGE>

Year 2000 Compliance - The Company's internal business information systems have
been analyzed for Year 2000 compliance and are Year 2000 compliant. The Company
utilizes third-party network equipment and software products, which may or may
not be Year 2000 compliant. While delays in the implementation of the Year 2000
solutions or failure of any critical technology components to operate properly
in the Year 2000 could adversely affect the Company's operations, at this time,
the Company believes that resolution of the Year 2000 issue will not require
material additional costs and will not have a material adverse effect on the
Company's results of operations.

New Accounting Pronouncement - The Financial Accounting Standards Board has
issued SFAS No. 130, "Reporting Comprehensive Income," which will result in
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
is not required to adopt this standard until fiscal 1999. At this time, the
Company has not determined the impact the adoption of this standard will have on
the Company's financial statements.

The Financial Accounting Standards Board has issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is not required to adopt this standard until fiscal 1999.
At this time, the Company has not determined the impact the adoption of this
standard will have on the Company's financial statements.

February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This statement, which improves
disclosure about pensions and other postretirement benefits, is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted. The Company does not believe the adoption of this standard will have
a material impact on the Company's financial statements.

In July 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This statement, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
is effective for fiscal years beginning after June 15, 1999, although earlier
application is permitted. At this time, the Company has not determined the
impact the adoption of this standard will have on the Company's financial
statements.


Liquidity and Capital Resources

Cash used in operating activities was $1.9 million in the nine months ended June
30, 1998, as compared to $2.7 million in the prior year period. The increase was
primarily attributable to improved cash flows from operations and decreased
working capital requirements.

Net cash used in investing activities was $26.0 million, and principally
consisted of capital expenditures for equipment and the acquisition of NPC.

Net cash provided by financing activities was $33.5 million and consisted
primarily of proceeds from the issuance of $190.0 million of Notes, borrowings
under the New Credit Facility of $151.5 million, the issuance of Series A,
Series B and Series C Preferred Stock of $138.2 million

                                       19

<PAGE>

and the issuance of units for gross proceeds of $75.0 million partially offset
by the repurchase of the Company's common and preferred stock of $377.4 million,
the repayment of the Company's former Credit Facility of $133.9 million and
deferred financing fees of $20.1 million.

The Company's principal capital requirements are to fund working capital needs,
meet required debt payments, fund capital expenditures and complete planned
maintenance and expansion. Management anticipates that MEDIQ/PRN's operating
cash flow, together with available borrowings under the New Credit Facility,
will be sufficient to meet its working capital, capital expenditure and debt
service requirements on its debt obligations for the foreseeable future.

In order to finance a portion of the cash consideration paid pursuant to the
Merger, the Company entered into a $325.0 million New Credit Facility that
replaced its former credit facility.

The New Credit Facility consists of three facilities: (i) an eight-year senior
secured $200.0 million term loan facility (the "Term Loan Facility"); (ii) a
six-year revolving credit facility not to exceed $50.0 million (the "Revolving
Credit Facility") and (iii) a six-year senior secured acquisition facility not
to exceed $75.0 million (the "Acquisition Facility"). Loans made under the Term
Loan Facility are referred to herein as "Term Loans", advances made under the
Revolving Credit Facility are referred to herein as "Revolving Loans" and loans
made under the Acquisition Facility are referred to herein as "Acquisition
Loans".

Borrowings under the New Credit Facility bear interest at a floating rate based
upon, at MEDIQ/PRN's option, (i) the higher of the prime rate of Banque
Nationale de Paris, or the federal funds effective rate plus 0.5%, plus, in the
case of the Term Loans, a margin equal to 1.5%, and in the case of the Revolving
Loans and the Acquisition Loans, a margin equal to 1.0%, or (ii) the London
Interbank Offered Rate ("LIBOR") plus, in the case of the Term Loans, a margin
equal to 2.75%, and in the case of the Revolving Loans and Acquisition Loans, a
margin equal to 2.25%.

In addition, MEDIQ/PRN is required to pay commitment fees to the Senior Lenders
equal to 0.5% per year of the undrawn portion of the commitments in respect of
the facilities (subject to adjustment as set forth below). The New Credit
Facility contains provisions under which commitment fees and margins on interest
rates under the facilities will be adjusted in increments based on certain
performance goals.

The Term Loans amortize on a quarterly basis commencing September 30, 1999.
Principal amounts outstanding under the Revolving Credit Facility are due and
payable in full at maturity. Principal amounts outstanding under the Acquisition
Facility on November 30, 1999 will amortize on a quarterly basis. The Term
Loans, Revolving Loans and Acquisition Loans are subject to mandatory
prepayments and reductions in the event of certain extraordinary transactions or
issuances of debt and equity by MEDIQ/PRN or any Facility Guarantor (as defined
in the Credit Agreement). Such loans are required to be prepaid with 75% of the
Excess Cash Flow (as defined in the Credit Agreement) of MEDIQ/PRN or, if the
Company's ratio of funded debt to pro forma EBITDA for the preceding 12-month
period is less than 5.0 to 1.0, 50% of such Excess Cash Flow.

At June 30, 1998, pursuant to the terms of the New Credit Facility and/or the
Indentures for the Subordinated Notes and the Discount Debentures
("Indentures"), the availability under the Revolving Credit Facility and the
Acquisition Facility was limited to $25.9 million and $50.0 million,
respectively.

In July 1998, the Company terminated its existing interest rate hedging
contracts at a cost of approximately $600,000 which will be reflected as
interest expense in the Company's fourth

                                       20

<PAGE>

quarter. In addition, the Company entered into new interest rate hedging
contracts. On a notional amount of $100.0 million, the Company fixed its LIBOR
rate at 5.35% until July 2003 as long as the three month LIBOR rate does not
exceed 6.25%. The Company must pay the actual LIBOR rate when LIBOR exceeds
6.25%. In order to mitigate its interest rate exposure for LIBOR rates above
6.25%, the Company obtained zero-cost collars with notional amounts aggregating
$100.0 million with ceiling rates of 7.00% and a weighted-average floor rate of
5.03%.

The New Credit Facility contains representations and warranties, covenants,
events of default and other provisions customary for credit facilities of this
type. MEDIQ/PRN paid the Senior Lenders certain syndication and administration
fees, reimbursed certain expenses and provided certain indemnities, in each case
which are customary for credit facilities of this type.

The Notes in the aggregate principal amount of $190.0 million, are unsecured
senior subordinated obligations of MEDIQ/PRN and mature on June 1, 2008. The
Notes bear interest at the rate of 11% per year, payable semiannually to holders
of record at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing December 1, 1998.

Each Unit consists of a Debenture with a principal amount at maturity of $1,000
and one Warrant. Each Warrant entitles the holder thereof to purchase .6474
shares of Common Stock from the Company, as the Surviving Corporation of the
Merger, at an exercise price of $0.01 per share, subject to adjustment. The
Warrants will initially entitle the holders thereof to acquire, in the
aggregate, 91,209 shares of Common Stock. The Warrants have been valued at
$743,000 and are reflected as a component of Stockholders' Equity at June 30,
1998. The Debentures and the Warrants will not trade separately until the
commencement of an exchange offer or the effectiveness of a shelf registration
statement for the Debentures or such earlier date after July 28, 1998, as the
Initial Purchasers (as defined in the Indentures) may determine (the "Separation
Date").

The Debentures are unsecured senior obligations of the Company, limited to
$140.9 million aggregate principal amount at maturity, and will mature on June
1, 2009. No cash interest will accrue on the Debentures prior to June 1, 2003.
Cash interest will accrue on the Debentures at the rate of 13% per year from
June 1, 2003, or from the most recent date to which interest has been paid or
provided for, payable on June 1 and December 1 of each year, commencing December
1, 2003 to holders of record at the close of business on the May 15 or November
15 immediately preceding the interest payment date.

The interest rates on the Notes and Debentures are subject to increase in
certain circumstances if the Company does not file a registration statement
providing for a registered exchange offer for the Notes and the Debentures or if
the registration statement is not declared effective on a timely basis or if
certain other conditions are not satisfied. The Company filed such registration
statement providing for a registered exchange offer on July 13, 1998. Such
registration statement has not yet been declared effective by the Securities and
Exchange Commission.

The Warrants may be exercised at any time after the first anniversary of the
Issue Date (as defined in the Indentures); provided, however, that holders of
Warrants will be able to exercise their Warrants only if a shelf registration
statement relating to the Common Stock underlying the Warrants is effective or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside. Unless earlier exercised, the
Warrants will expire on June 1, 2009. The Warrants will not trade separately
from the Debentures until the Separation Date.

                                       21

<PAGE>

On June 5, 1998, pursuant to the change of control provisions of the indenture
for the Company's Exchangeable Debentures, the Company made a tender offer to
repurchase the remaining outstanding balance of approximately $10.1 million. On
July 3, 1998, the Company redeemed $9.5 million of the Exchangeable Debentures
pursuant to its tender offer and received 621,830 shares of NutraMax common
stock from escrow. Pursuant to the terms of the Company's stock purchase
agreement with NutraMax, the Company returned the shares to NutraMax and
received a $5.6 million cash payment on its note receivable from NutraMax.

The New Credit Facility and the Indentures include significant operating and
financial restrictions, such as limits on the Company's ability to incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
make investments and capital expenditures and pay dividends. The Company has
substantial consolidated indebtedness. In addition, the Company expects to incur
additional indebtedness in connection with its post-Merger strategy of pursuing
strategic acquisitions and expanding through internal growth. Such high leverage
has important consequences for the Company, including the following: (a) the
Company's ability to obtain additional financing for such acquisitions, working
capital, capital expenditures or other purposes may be impaired or any such
financing may not be on terms favorable to the Company; (b) interest expense may
reduce the funds that would otherwise be available to the Company for its
operations and future business opportunities; (c) a substantial decrease in net
operating cash flows or an increase in expenses of the Company could make it
difficult for the Company to meet its debt service requirements or pay dividends
or force it to modify its operations; (d) substantial leverage may place the
Company at a competitive disadvantage and may make it more vulnerable to a
downturn in its business or the economy generally (e) certain of such
indebtedness of the Company is at variable rates of interest, which causes the
Company to be vulnerable to increases in interest rates; (f) certain of such
indebtedness is secured by substantially all the assets of the Company and its
subsidiaries, possibly reducing its ability to obtain additional financing; and
(g) the Company may be hindered in its ability to adjust rapidly to changing
market conditions.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In connection with the Merger, all of the Company's outstanding debt with the
exception of the Exchangeable Debentures and capital leases were repaid. A
comparison of the effects of material changes in interest rates from September
30, 1997 to June 30, 1998 is not meaningful. The Company's Debentures and Notes
bear interest at 13% and 11%, respectively. Loans under the Company's New Credit
Facility bear interest at variable rates that fluctuate with prime or LIBOR
subject to the Company's interest rate hedging agreements. Accordingly, the
Company does not believe it is exposed to significant market risk at this time.

                                       22

<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES
                          Quarter Ended June 30, 1998



PART II. OTHER INFORMATION

  Item 1. LEGAL PROCEEDINGS

     In February 1997, the Company was sued in the Superior Court of New Jersey
     by its former wholly-owned subsidiary, MHM Services, Inc. ("MHM"). The suit
     challenged the validity of a note receivable in the original principal
     amount of $11,500,000 (the "MHM Note") that the Company and MHM entered
     into in connection with the spin-off of MHM to the Company's shareholders
     in August 1993. In addition, beginning in February 1997, MHM stopped making
     the required monthly installments on the MHM Note and, therefore, the
     Company gave notice to MHM of its default on the MHM Note and declared all
     sums outstanding under the MHM Note to be immediately due and payable. In
     September 1997, as a result of continued deterioration in MHM's financial
     condition, the Company recorded a reserve for the remaining carrying value
     of the MHM Note, which had been partially reserved in 1996, and the
     aggregate accrued interest on the MHM Note. In October 1997, the Company
     filed a motion for summary judgment against MHM. In November 1997, the
     Court granted summary judgment in favor of the Company and against MHM on
     all counts. Specifically, the Court ruled that the MHM Note was valid and
     enforceable. The Court also rejected MHM's request for a stay pending
     appeal. On April 17, 1998, the Court entered a Final Damages Order in favor
     of the Company in the approximate amount of $11,800,000. In July 1998, the
     Company reached a settlement with MHM which called for MHM to pay the
     Company $3.0 million in cash in full satisfaction of all amounts due the
     Company. The Company received the cash in July 1998 and will recognize the
     settlement in other income in the fourth quarter of fiscal 1998.

     In July 1998, MEDIQ Mobile X-Ray Services, Inc., a subsidiary of the
     Company, whose assets were sold in November 1996, was notified that it is
     the subject of an investigation by the Department of Justice and the Office
     of the Inspector General of the Department of Health and Human Services.
     The Company has not yet been informed as to the nature or scope of the
     investigation.

     In May 1998, InnoServ Technologies, Inc. ("InnoServ") entered into a merger
     agreement with GE Medical Systems, Inc. ("GEMS") by which GEMS agreed to
     acquire InnoServ for approximately $16.0 million. No date has been
     scheduled for closing. Pursuant to the terms of the Company's November 1997
     stock purchase agreement with InnoServ, under a change of control the
     Company is entitled to receive a portion of the sales proceeds. However,
     the calculation of the amount due to the Company is currently in dispute.
     Accordingly, the matter is in arbitration pursuant to the terms of the
     stock purchase agreement. The Company fully reserved its investment in
     InnoServ in fiscal 1997. The Company will recognize a gain equal to the
     cash proceeds when they are received.

                                       23
<PAGE>


  Item 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS

     As noted in Part I of this Form 10-Q, in connection with the Merger (i)
     each share of common stock, par value $1.00 per share, and Series A
     preferred stock, par value $.50 per share, of the Company outstanding
     immediately prior to the Merger was exchanged for (a) $13.75 in cash and
     (b) .075 of a share of Series A Preferred Stock, (ii) the Rotko Entities
     converted a portion of their preferred equity in the Company into Series B
     Preferred Stock and Common Stock, (iii) on or about May 29, 1998 the
     Management Stockholders purchased approximately $4.2 million in common and
     preferred equity of the Company pursuant to a private placement under
     Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
     thereunder, (iv) on May 29, 1998 the Company sold 140,885 Units for gross
     proceeds aggregating $75.0 million in a Rule 144A private offering and (v)
     on May 29, 1998 MEDIQ/PRN sold $190.0 million aggregate principal amount of
     Notes in the same Rule 144A private offering. Information concerning the
     Merger, the securities and the sale of such securities has been previously
     reported by the Company, in addition, the information with respect thereto
     contained in Part I of this Form 10-Q is hereby incorporated by reference
     herein.

     The Units and the Notes were sold to Credit Suisse First Boston,
     NationsBanc Montgomery Securities LLC and Banque Nationale de Paris (the
     "Initial Purchasers"). The aggregate discount to the Initial Purchasers in
     respect of the Units were $2,625,004 and the aggregate discount to the
     Initial Purchasers in respect of the Notes was $5,700,000.



  Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS

     A Special Meeting of Stockholders of the Company was held on May 27, 1998.
     Stockholders of the Company overwhelmingly approved the merger of the
     Company with MQ Acquisition Corporation, a company formed by Bruckmann,
     Rosser, Sherrill & Co., L.P. The following is a presentation of the voting
     results from the May 27, 1998 Special Stockholders' Meeting: FOR -
     64,628,091; AGAINST - 22,425 and ABSTAIN - 26,172.



  Item 6.    EXHIBITS AND REPORTS ON FORM 8-K.

        (a)     Exhibits:

                Exhibit 4        - NPC Purchase Agreement
                Exhibit 27       - Financial Data Schedule appears on page 27.

        (b)     Reports on Form 8-K

                The Company filed the following reports on Form 8-K during the
                quarter ended June 30, 1998.

                Date of Earliest Event Requiring Report:  April 28, 1998.
                Date of Filing: April 28, 1998
                Items Reported: Items 5 and 7
                Subject:        Acquisition of CH Medical, Inc. by MEDIQ/PRN
                                Life Support Services, Inc., a wholly-owned
                                subsidiary of the Company.

                                       24
<PAGE>


                Date of Earliest Event Requiring Report:  April 24, 1998
                Date of Filing: May 20, 1998
                Items Reported: Items 5 and 7
                Subject:        Proforma financial information and audited and
                                unaudited financial statements of CH Medical,
                                Inc.


                Date of Earliest Event Requiring Report:  May 22, 1998
                Date of Filing: May 22, 1998
                Items Reported: Items 5 and 7
                Subject:        Sale of Units by MEDIQ Incorporated and
                                Subordinated
                                Notes by MEDIQ/PRN Life Support Services, Inc.


                Date of Earliest Event Requiring Report:  May 29, 1998
                Date of Filing: June 15, 1998
                Items Reported: Items 1 and 7
                Subject:        Change of Control

                                       25

<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES
                          Quarter Ended June 30, 1998





                                   SIGNATURE




Pursuant to the requirements 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.



                                   MEDIQ Incorporated
                                   ------------------
                                      (Registrant)



August 14, 1998
---------------
  (Date)                       /s/ Jay M. Kaplan
                                   -----------------------------
                                   Jay M. Kaplan
                                   Senior Vice President Finance
                                   and Chief Financial Officer


                                       26