<PAGE>   1
                                                       AUGUST 11, 1999, 08:16 PM

                                    FORM 10-Q

                       Securities and Exchange Commission
                             Washington, D.C. 20549

(MARK ONE)

[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended June 30, 1999

                                                         or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From    to

Commission file number 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.)
</TABLE>

                   81 Spence Street, Bay Shore, New York 11706
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (516) 273-2200
              (Registrant's telephone number, including area code)

                                 Not applicable

(Former name, former address and former fiscal year, if changed since last
report)

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 / /

                Applicable Only to Issuers Involved in Bankruptcy
                  Proceedings During the Preceding Five Years:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes / / No / /

                      Applicable Only to Corporate Issuers:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.

Common Stock, $.025 Par Value --- 31,594,633 shares as of August 5, 1999
<PAGE>   2
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                                    I N D E X

<TABLE>
<CAPTION>
Part I.  Financial Information:                                                                           Page
                                                                                                          ----

<S>                                                                                                      <C>
         Item 1.  Financial Statements:

                           Condensed Consolidated Balance Sheets -
                           June 30, 1999 (Unaudited) and December 31, 1998
                           (Audited)                                                                         3

                           Condensed Consolidated Statements of Operations for
                           the three and six months ended June 30, 1999 and 1998
                           (Unaudited)                                                                       4

                           Condensed Consolidated Statements of Cash Flows for
                           the six months ended June 30, 1999 and 1998 (Unaudited)                         5-6


                           Notes to Condensed Consolidated Financial Statements
                           (Unaudited)                                                                    7-15

         Item 2.  Management's Discussion and Analysis of Financial
                           Condition and Results of Operations                                           16-23

         Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                23


Part II. Other Information:

         Item 1.  Legal Proceedings                                                                         23

         Item 6.  Exhibits and Reports on Form 8-K                                                          23
</TABLE>


                                      -2-
<PAGE>   3
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                      CONDENSED CONSOLIDATED BALANCE SHEETS
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                   June 30,           December 31,
         ASSETS                                                      1999                1998
                                                                -------------        -------------
                                                                 (unaudited)           (audited)
<S>                                                             <C>                  <C>
CURRENT ASSETS:

  Cash and cash equivalents                                     $   2,167,000        $   3,290,000
  Accounts receivable - less allowances for doubtful
   accounts of $20,893,000 and $20,107,000, respectively           83,083,000           90,969,000
  Inventories                                                      54,299,000           63,121,000
  Other current assets                                              6,112,000            9,252,000
  Recoverable and prepaid income taxes                                951,000            1,441,000
                                                                -------------        -------------

         TOTAL CURRENT ASSETS                                     146,612,000          168,073,000

PROPERTY, PLANT AND EQUIPMENT - net                                40,696,000           40,188,000

EXCESS OF COST OVER NET ASSETS ACQUIRED - net of
  accumulated amortization of $24,575,000 and
  $20,664,000, respectively                                       203,735,000          207,554,000

OTHER ASSETS                                                       12,092,000           13,044,000
                                                                -------------        -------------

         TOTAL ASSETS                                           $ 403,135,000        $ 428,859,000
                                                                =============        =============

         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

  Credit facility                                               $  23,127,000        $  27,606,000
  Current maturities of long-term debt                                872,000            1,235,000
  Accounts payable                                                 27,546,000           28,915,000
  Accrued expenses                                                 42,202,000           33,941,000
                                                                -------------        -------------

         TOTAL CURRENT LIABILITIES                                 93,747,000           91,697,000

  Long-term debt and Senior Subordinated Notes                    102,103,000          106,715,000
  Other long-term liabilities                                      10,969,000           10,580,000
                                                                -------------        -------------

         TOTAL LIABILITIES                                        206,819,000          208,992,000

STOCKHOLDERS' EQUITY:

Series A preferred stock                                                   --                   --
Series B preferred stock                                           28,200,000           28,200,000
Series C preferred stock                                            3,400,000            3,400,000
Series D preferred stock                                            4,072,000                   --
Common stock                                                          787,000              783,000
Additional paid-in capital                                        287,073,000          286,503,000
Accumulated deficit                                              (125,833,000)         (97,587,000)
Accumulated other comprehensive loss                               (1,383,000)          (1,432,000)
                                                                -------------        -------------

         TOTAL STOCKHOLDERS' EQUITY                               196,316,000          219,867,000
                                                                -------------        -------------

         TOTAL LIABILITIES AND STOCKHOLDERS'

          EQUITY                                                $ 403,135,000        $ 428,859,000
                                                                =============        =============
</TABLE>

See notes to condensed consolidated financial statements


                                      -3-
<PAGE>   4
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Months Ended                       Six Months Ended
                                                              June 30                                  June 30
                                                ----------------------------------        ----------------------------------
                                                     1999                  1998                1999                1998
                                                -------------        -------------        -------------        -------------
                                                                     (As restated,                             (As restated,
                                                                       see Note 5)                              see Note 5)
<S>                                             <C>                  <C>                  <C>                  <C>
NET REVENUES:

  Medical equipment and supplies                $  73,805,000        $  97,228,000        $ 159,071,000        $ 195,121,000
  Interest and other income                           736,000              520,000              926,000              935,000
                                                -------------        -------------        -------------        -------------
                                                   74,541,000           97,748,000          159,997,000          196,056,000
                                                -------------        -------------        -------------        -------------

COSTS AND EXPENSES:

  Cost of revenues                                 51,954,000           67,251,000          111,460,000          134,629,000
  Selling, general and administrative              29,804,000           30,535,000           59,918,000           59,581,000
  Provision for Class Action settlement
    (Note 9)                                       10,000,000                   --           10,000,000                   --
  Interest expense                                  3,093,000            3,039,000            6,333,000            5,807,000
                                                -------------        -------------        -------------        -------------
                                                   94,851,000          100,825,000          187,711,000          200,017,000
                                                -------------        -------------        -------------        -------------

LOSS BEFORE INCOME TAXES                          (20,310,000)          (3,077,000)         (27,714,000)          (3,961,000)
INCOME TAX BENEFIT                                         --             (800,000)                  --                   --
                                                -------------        -------------        -------------        -------------

NET LOSS                                          (20,310,000)          (2,277,000)         (27,714,000)          (3,961,000)
PREFERRED STOCK DIVIDENDS                             267,000              267,000              533,000              533,000
                                                -------------        -------------        -------------        -------------

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS       $ (20,577,000)       $  (2,544,000)       $ (28,247,000)       $  (4,494,000)
                                                =============        =============        =============        =============

Net loss per common share -
 basic and diluted                              $        (.66)       $        (.08)       $        (.90)       $        (.15)

Weighted average number of
 common shares outstanding                         31,412,000           31,100,000           31,382,000           30,990,000
</TABLE>


See notes to condensed consolidated financial statements.


                                      -4-
<PAGE>   5
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             Six Months Ended
                                                                                             June 30,
                                                                          1999                 1998
                                                                       ------------        ------------
                                                                                          (As restated,
                                                                                           see Note 5)
<S>                                                                    <C>                 <C>
OPERATING ACTIVITIES

 Net loss                                                              $(27,714,000)       $ (3,961,000)
 Adjustments to reconcile net loss
    to net cash provided by (used in) operating activities:

     Provision for Class Action settlement                               10,000,000                  --
     Depreciation and amortization                                        7,499,000           7,470,000
     Provisions for losses on accounts receivable                         2,130,000           1,263,000
     Gain on  sale of property, plant and equipment                        (450,000)                 --
     Non-cash compensation component of
        stock options                                                       108,000             954,000
     Changes in operating assets and liabilities:
        Accounts receivable                                               5,756,000         (12,216,000)
        Inventories                                                       8,822,000          (2,753,000)
        Other current assets and
          recoverable and prepaid income taxes                            3,630,000          (5,854,000)
        Accounts payable, accrued expenses and other liabilities         (2,818,000)        (13,021,000)
                                                                       ------------        ------------
                  NET CASH PROVIDED BY (USED IN)

                           OPERATING ACTIVITIES                           6,963,000         (28,118,000)

INVESTING ACTIVITIES

 Purchases of property, plant and equipment-net                          (2,741,000)         (5,168,000)
 Proceeds from sale of asset held for sale                                       --          60,167,000
 Acquisitions, net of cash acquired                                              --            (393,000)
 Net decrease (increase) in other assets                                    109,000            (495,000)
                                                                       ------------        ------------
                  NET CASH (USED IN) PROVIDED BY

                            INVESTING ACTIVITIES                       $ (2,632,000)       $ 54,111,000
</TABLE>


See notes to condensed consolidated financial statements.


                                      -5-
<PAGE>   6
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                               June 30,
                                                                                   --------------------------------
                                                                                       1999                1998
                                                                                   ------------        ------------
                                                                                                       (As restated,
                                                                                                       see Note 5)
<S>                                                                                <C>                 <C>
FINANCING ACTIVITIES:

Net repayments under Credit Facility                                               $ (4,479,000)       $(30,421,000)
Principal payments on long-term debt                                                   (975,000)         (1,263,000)
Proceeds from exercise of stock options                                                      --           4,687,000
                                                                                   ------------        ------------
   NET CASH USED IN FINANCING ACTIVITIES                                             (5,454,000)        (26,997,000)
                                                                                   ------------        ------------

   DECREASE IN CASH AND CASH
         EQUIVALENTS                                                                 (1,123,000)         (1,004,000)

   CASH AND CASH EQUIVALENTS AT
         BEGINNING OF PERIOD                                                          3,290,000           4,430,000
                                                                                   ------------        ------------

   CASH AND CASH EQUIVALENTS AT
         END OF PERIOD                                                             $  2,167,000        $  3,426,000
                                                                                   ============        ============

SUPPLEMENTARY CASH FLOW INFORMATION:

Interest paid                                                                      $  6,460,000        $  6,228,000
                                                                                   ============        ============
Income taxes (received) paid                                                       $   (786,000)       $    237,000
                                                                                   ============        ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH
         INVESTING AND FINANCING ACTIVITIES:

Payment of accrued dividends by issuance of
  common stock                                                                     $    532,000        $    266,000
                                                                                   ============        ============

Repayment of long-term debt by issuance of
  preferred stock                                                                  $  4,000,000
                                                                                   ============

Investment in preferred stock received as
  partial proceeds from sale of asset                                                                  $  1,539,000
                                                                                                       ============

Decrease in excess of cost over net assets acquired
  offset by increase in other current assets                                                           $  2,385,000
                                                                                                       ============

Increase in excess of cost over net assets acquired offset by adjustments to
  property, plant and equipment, inventory, prepaid and deferred taxes,
  accrued expense and debt                                                                             $    375,000
                                                                                                       ============
</TABLE>


See notes to condensed consolidated financial statements.


                                      -6-
<PAGE>   7
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


1.       GENERAL AND BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The going concern
basis of presentation assumes the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business.

         The Company has incurred significant losses in each of the three years
in the period ended December 31, 1998 and in the first half of 1999. These
losses have arisen as a result of significant merger, restructuring and other
expenses incurred in connection with acquisitions completed in 1996 and 1997,
the failure to integrate effectively these acquisitions and realize the benefits
and synergies to be derived therefrom, the impact of intense competition within
the healthcare industry and declining sales. 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, consulting
and other advisory fees in the first and second quarters 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 (the "Class Action") which have been
consolidated into an amended complaint. The Company has reached an agreement in
principle to settle the Class Action, subject to certain contingencies described
herein. However, there can be no assurance that the settlement will be
consummated. (see Note 9).

         In response to the losses incurred in 1997, 1998 and the first half of
1999, management has commenced a program to reduce operating expenses, improve
gross margins, reduce the investment in working capital 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 8; (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.

         As further described in Note 11, on August 12, 1999, the Company
entered into an amendment (the "August 1999 Amendment") to its Senior Secured
Revolving Credit Facility (the "Credit Facility") with IBJ Whitehall Business
Credit Corporation, as agent ("IBJ"), which provided for a new $4.5 million term
loan (the "Term Loan"), secured by certain real estate and the existing
collateral under the Credit Facility. In addition, the August 1999 Amendment
provides for, among other things, a reduction in the maximum revolving advance
amount under the Credit Facility from $50 million to $35 million, the
elimination of certain availability borrowing base reserves through December 31,
1999, and an amendment to certain financial covenants. After giving effect to
the August 1999 amendment, the Company's availability to borrow under the Credit
Facility (including the Term Loan) increased by approximately $6 million. As of
August 11, 1999, after giving effect to the August 1999 Amendment (including the
Term Loan), the Company has unused availability of approximately $10 million.

         Management believes that its initiatives to improve cash flow from
operations along with the Term Loan and Credit Facility will provide sufficient
liquidity to support working capital needs, capital expenditures and regularly
scheduled debt service for foreseeable future.

         As further described in Note 5 to the Condensed Consolidated Financial
Statements, and as previously described in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, the 1998 quarterly results have been
restated to correct for certain improperly recorded transactions.


                                      -7-
<PAGE>   8
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


         Inventories at June 30, 1999 have been valued at standard cost for
manufactured goods and at average cost for other inventories based primarily on
perpetual records, each of which approximates actual cost on the first-in,
first-out method.

         On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 established new rules for the reporting and display of comprehensive
income and its components, however, the adoption of this Statement had no impact
on the Company's net loss or shareholders' equity. During the three and six
month periods ended June 30, 1999, total comprehensive loss amounted to
$20,292,000 and $27,665,000, respectively. Total comprehensive loss for the
three and six month periods ended June 30, 1998 amounted to $2,387,000 and
4,078,000, respectively.

         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 expended as incurred until certain
capitalization criteria are met. The Company has adopted SOP 98-01 as of January
1, 1999. Based on the Company's current information systems plans, which include
completing its Year 2000 remediation program and the upgrade of its order entry
and manufacturing system, adoption of this statement did not 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, which has subsequently been delayed. 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.

         In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments (consisting only of
normal recurring adjustments, except for the provision for Class Action
settlement) necessary to present fairly the financial position as of June 30,
1999 (unaudited), the results of operations for the three and six months ended
June 30, 1999 and 1998 (unaudited) and the statements of cash flows for the six
months ended June 30, 1999 and 1998 (unaudited).

         It should be noted that the accompanying financial statements and notes
thereto do not purport to be complete disclosures in conformity with generally
accepted accounting principles. While the Company believes that the disclosures
presented are adequate to make the information contained herein not misleading,
it is suggested that these financial statements be read in conjunction with the
financial statements and the notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.

         The results of operations for the three and six months ended June 30,
1999 and 1998 are not necessarily indicative of results for the full year.

2.       EARNINGS PER SHARE

         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") for the quarter and six months ended
June 30, 1999 and


                                      -8-
<PAGE>   9
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


1998. Conversion of the preferred stock and common equivalent shares was not
assumed since the result would have been antidilutive.

3.       INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                                             June 30,                  December 31,
                                                                1999                       1998
                                                            ------------               ------------
<S>                                                         <C>                        <C>
         Raw materials                                      $ 12,273,000               $ 10,739,000
         Work-in-process                                       8,540,000                  5,412,000
         Finished goods                                       33,486,000                 46,970,000
                                                            ------------               ------------
                                                            $ 54,299,000               $ 63,121,000
                                                            ============               ============
</TABLE>


4.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                             June 30,                   December 31,
                                                              1999                          1998
                                                           ------------                 ------------
<S>                                                        <C>                          <C>
        Land and buildings                                 $ 20,011,000                 $ 18,366,000
        Equipment                                            36,346,000                   33,909,000
        Furniture and fixtures                                3,157,000                    3,219,000
        Leasehold improvements                                3,870,000                    3,865,000
        Construction in progress                              1,100,000                    1,923,000
                                                           ------------                 ------------
                                                           $ 64,484,000                 $ 61,282,000
        Accumulated depreciation and
        amortization                                        (23,788,000)                 (21,094,000)
                                                           ------------                 ------------
                                                           $ 40,696,000                 $ 40,188,000
                                                           ============                 ============
</TABLE>


5.       RESTATEMENT

         As previously described in the Company's Annual Report on Form 10K for
the year ended December 31, 1998, the Company has restated its financial results
for the first, second and third quarters of 1998 to correct for certain
improperly recorded transactions. 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.


                                      -9-
<PAGE>   10
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


         The following Consolidated Statements of Operations compare the
previously reported and restated financial information for the three and six
month periods ended June 30, 1998.

<TABLE>
<CAPTION>
                                                Three Months Ended                      Six Months Ended
                                                   June 30, 1998                         June 30, 1998
                                      ----------------------------------        ----------------------------------
                                       As Previously                            As Previously
                                         Reported           As Restated            Reported           As Restated
                                      -------------        -------------        -------------        -------------
<S>                                   <C>                  <C>                  <C>                  <C>
Net revenues                          $  97,456,000        $  97,748,000        $ 195,598,000        $ 196,056,000
Cost of revenues                         67,030,000           67,251,000          134,132,000          134,629,000
Selling, general and
  administrative                         30,239,000           30,535,000           58,449,000           59,581,000
Interest expense                          3,015,000            3,039,000            5,758,000            5,807,000
                                      -------------        -------------        -------------        -------------
Income before income taxes               (2,828,000)          (3,077,000)          (2,741,000)          (3,961,000)
Income taxes                               (800,000)            (800,000)                  --                   --
                                                                                -------------        -------------
Net loss                                 (2,028,000)          (2,277,000)          (2,741,000)          (3,961,000)
Preferred stock dividends                   267,000              267,000              533,000              533,000
                                      -------------        -------------        -------------        -------------
Net loss attributable to common
  shareholders                        $  (2,295,000)       $  (2,544,000)       $  (3,274,000)       $  (4,494,000)
                                      =============        =============        =============        =============
Net loss per common share -
  basic and diluted                   $        (.07)       $        (.08)       $        (.11)       $        (.15)
                                      =============        =============        =============        =============
</TABLE>


6.       INCOME TAXES

         The Company did not record an income tax benefit for the six months
ended June 30, 1999 due to the uncertainty of the future realization of such
benefits.

         At June 30, 1999, the Company had a full valuation allowance recorded
against its net deferred tax assets. The Company will realize these tax benefits
when the Company generates taxable income. $12.1 million of the $44.7 million
valuation allowance is attributable to the acquired net operating loss
carryforward and other deferred tax assets of Everest & Jennings International
Ltd. When realized, the tax benefit related to acquired net operating losses
will be recorded as a reduction of the excess of cost over net assets acquired.

         Realization of the future tax benefits related to the deferred tax
assets is dependent upon many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.

7.       DISPOSAL OF ASSETS

         In connection with the Company's acquisition of Fuqua Enterprises, Inc.
(currently known as Lumex/Basic American Holdings, Inc.) ("Fuqua") on December
30, 1997, the Company acquired the leather operations of Fuqua (the "Leather
Operations"). It was the Company'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, the Company


                                      -10-
<PAGE>   11
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


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. The cash proceeds from
the sale of the Leather Operations were used to repay the indebtedness incurred
under the terms of the Credit Facility, which was used to retire the Fuqua
indebtedness.

8.       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 and
$4,393,000 of indirect merger charges. The plan consists of 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,
relocation of the Company's corporate headquarters to the Lumex facility, and
the closure and/or consolidation of certain other distribution facilities and
operations. As of June 30, 1999 the Company had substantially completed the
initiatives contemplated in the Restructuring Plan.

         The following summarizes the activity in the restructuring and merger
related accrual for the quarter ended June 30, 1999:

<TABLE>
<CAPTION>
                                     ACCRUAL BALANCE          CASH PAYMENTS        ACCRUAL BALANCE
                                    DECEMBER 31, 1998            IN 1999            JUNE 30, 1999
                                    -----------------         ------------          -------------
<S>                                 <C>                       <C>                   <C>
Facility exit and lease costs          $ 11,898,000               (770,000)          $ 11,128,000
Severance                                   144,000                (78,000)                66,000
Merger related                              120,000                     --                120,000
                                       ------------           ------------           ------------
                                       $ 12,162,000           $   (848,000)          $ 11,314,000
                                       ============           ============           ============
</TABLE>


9.       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 (the "Company Common Stock"),
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 (the "Class Action"), 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


                                      -11-
<PAGE>   12
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


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.

         The Company has reached an agreement in principle to settle the Class
Action, subject to certain contingencies described below. Under the terms of the
agreement in principle, the Class Action would be settled for a payment of $20
million, of which $10 million would be funded by the Company's insurance carrier
and $10 million by the Company. The agreement in principle contemplates that the
Company's $10 million contribution would be paid either from the proceeds of the
sale of the Company or, at the Company's option, from funds otherwise available.
Under the terms of the agreement in principle, in the event the shares of the
common stock of the Company are sold for an amount in excess of $3 per share
pursuant to a definitive sale/merger agreement, the shareholder class would also
be entitled to 25% of the premium in excess of $3 per share upon terms and
conditions to be agreed upon between the parties. The plaintiffs may terminate
the settlement if the Company does not enter into a definitive sale/merger
agreement on or before December 31, 1999, unless the Company has funded its $10
million contribution to the settlement prior to an election to terminate the
settlement by the plaintiffs. The Company recorded a provision of $10 million
during the second quarter of 1999 reflecting the Company's share of the proposed
settlement. The agreement in principle is subject to Board approval, the
execution of definitive documentation and subsequent court approval.
Accordingly, there can be no assurance that the settlement will be consummated.

         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 staff of the SEC has commenced an informal investigation with respect to the
aforementioned accounting irregularities. The impact of the investigation on the
Company cannot yet be assessed.

         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, 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


                                      -12-
<PAGE>   13
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


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. The results of the quarterly ground-water sampling
undertaken during 1998 and 1999 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 June 30, 1999, the Company had reserves for the 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.

         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


                                      -13-
<PAGE>   14
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


the plaintiff's allegations to be without merit, and filed a motion to dismiss
the complaint on various grounds in February 1999. The motion is scheduled to be
argued in September 1999.

         In May 1999, the former shareholders of LaBac Systems, Inc. ("LaBac"),
a company acquired by Graham-Field in June 1997, asserted certain claims in the
aggregate amount of approximately $3.2 million (inclusive of prejudgment
interest) 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.

         On June 28, 1999, the Irving Tanning Company ("ITC"), a company
acquired as part of the acquisition of Fuqua on December 30, 1997 and sold by
Graham-Field on January 27, 1998 to a group including the former management of
ITC, asserted a claim for indemnification in the amount of $6.75 million, plus
attorney's fees and costs, against Graham-Field for certain alleged
misrepresentations contained in the purchase agreement. The claim relates to an
alleged material adverse change in the business of ITC from November 22, 1997
through January 27, 1998 and possibly prior to November 22, 1997. Under the
terms of the purchase agreement, all claims that are not resolved between the
parties may be submitted to arbitration and no indemnity payments shall be made
unless all indemnity claims exceed $1.3 million. The Company considers the
indemnity claims to be without merit and intends to defend the claims
vigorously.

         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.

10.      SERIES D PREFERRED STOCK

         Effective as of May 12, 1999, BIL Securities (Offshore) Ltd. ("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.


                                      -14-
<PAGE>   15
         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (UNAUDITED)


11.      CREDIT FACILITY

         On August 12, 1999, the Company entered into the August 1999 Amendment
to its Credit Facility, which provides for borrowings including letters of
credit and bankers acceptances. Under the terms of the August 1999 Amendment,
the Company was provided with a Term Loan of $4.5 million, secured by certain
real estate and the existing collateral under the Credit Facility. The Term Loan
bears interest at IBJ's prime rate plus 2% and provides for the repayment of
principal at the rate of $250,000 per month commencing on September 1, 1999, and
increasing to $500,000 on January 1, 2000, with a balloon payment due upon the
maturity date of the Credit Facility. In addition, the August 1999 Amendment
provides for, among other things, a reduction in the maximum revolving advance
amount under the Credit Facility from $50 million to $35 million, the
elimination of certain availability borrowing base reserves through December 31,
1999, and an amendment to certain financial covenants. Under the terms of the
August 1999 Amendment, the interest rate on borrowings was increased from IBJ's
prime rate (7.75% at June 30, 1999) plus one percent to IBJ's prime rate plus
two percent. After giving effect to the August 1999 Amendment, the Company's
availability to borrow under the Credit Facility (including the Term Loan)
increased by approximately $6 million. As of August 11, 1999, after giving
effect to the August 1999 Amendment (including the Term Loan), the Company had
unused availability of approximately $10 million. In connection with the August
1999 Amendment, the Company paid a commitment fee of $300,000 and a waiver fee
of $400,000, which was provided for under the terms of the 1999 Amendment (as
hereinafter defined).

         Under the terms of the August 1999 Amendment, the Company is required
to pay an additional waiver fee (the "Waiver Fee") in the amount of $200,000 on
or before December 31, 1999, unless the Company either presents an acceptable
business plan to the banks on or before December 31, 1999, or repays in full all
outstanding obligations under the Credit Facility on or before December 31,
1999. Notwithstanding the foregoing, in the event the Company is in receipt on
or before December 31, 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 March 31, 2000. The Credit Facility is
secured by substantially all of the assets of the Company, including the capital
stock of certain of the Company's subsidiaries and certain real estate.

         On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendment"). The 1999 Amendment provided for, among other things, the waiver of
certain financial covenant 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.


                                      -15-
<PAGE>   16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Forward-Looking Statements

         This report on Form 10-Q and the Company's report on Form 10-K for the
year ended December 31, 1998 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, and (ix) the ability of the Company to implement its Year
2000 remediation plan and address the risk related to Year 2000 compliance.

         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 Polimetal ("P.T.
Dharma"), an Indonesian company, 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
this report on Form 10-Q, the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and the Company's Registration Statement on Form S-4
dated as of December 19, 1997.

         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, expressed or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and 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.


                                      -16-
<PAGE>   17
Operating Revenues

         Operating revenues for the three and six month period ended June 30,
1999 were $73,805,000 and $159,071,000, respectively, representing a decrease of
approximately 24.1% and 18.5%, respectively, from the same period in the prior
year. The decrease is primarily due to the implementation of more stringent
credit policies, intense competition in the healthcare industry, the effect of
the Company's product rationalization programs to eliminate unprofitable product
lines, the negative impact of certain customers experiencing financial
difficulty and general market concerns regarding the future direction of the
Company.

Interest and Other Income

         Interest and other income for the three and six month period ended June
30, 1999 was $736,000 and $926,000, respectively, as compared to $520,000, and
$935,000, respectively, for the same periods in the prior year. The net increase
during the second quarter is primarily due to the net gain on the sale of fixed
assets of $450,000 occurring in the quarter, offset by lower interest income
recognized under a loan arrangement with P.T. Dharma and dividends not received
from Irving Tanning in 1999.

Cost of Revenues

         Cost of revenues as a percentage of operating revenues was 70.4% and
70.1%, respectively, for the three and six month periods ended June 30, 1999, as
compared to 69.2% and 69.0%, respectively, recorded in the same periods in the
prior year. Gross margin decreased primarily due to intense competition and
pricing pressures within the healthcare industry and lower factory utilization
during 1999.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses as a percentage of
operating revenues for the three and six month periods ended June 30, 1999 was
40.4% and 37.7%, respectively, as compared to 31.4% and 30.5%, respectively, in
the same periods in the prior year. The increase in selling, general and
administrative expenses as a percentage of operating revenue is primarily the
result of non-recurring accounting, audit and other professional expenses
associated with the accounting investigation conducted by the Company's Audit
Committee relating to the Company's restatement of its financial results for
1996 and 1997, consulting fees incurred in connection with the initial
implementation of the Company's strategic and operating business plan
(collectively, the "Non-Recurring Expenses"), a decrease in operating revenues,
higher bad debt expense in 1999, and costs related to the services rendered by
Jay Alix & Associates, turnaround managers hired in March 1999.

         Excluding the Non-Recurring Expenses, selling, general and
administrative expenses for the three and six month periods ended June 30, 1999
were $28,494,000 and $55,195,000, respectively, as compared to $30,535,000 and
$59,581,000, respectively, in the same periods in the prior year. The reduction
in selling, general and administrative expenses is primarily related to (i)
lower distribution and warehousing costs as a result of cost savings from
certain distribution center closures in the first half of 1999 and lower
variable distribution expenses (principally outbound freight) due to reduced
sales and (ii) lower selling and marketing expenses as a result of lower
personnel costs and reduced commissions due to lower sales.

Class Action Settlement

         The Company has reached an agreement in principle to settle the Class
Action, subject to certain contingencies described below. Under the terms of the
agreement in principle, the Class Action would be settled for a payment of $20
million, of which $10 million would be funded by the Company's insurance carrier
and $10 million by the Company. The agreement in principle contemplates that the
Company's $10 million contribution would be paid either from the proceeds of the
sale of the Company or, at the Company's option, from funds otherwise available.
Under the terms of the agreement in principle, in the event the shares of the
common stock of the Company are sold for an amount in excess of $3 per share
pursuant to a definitive sale/merger agreement, the shareholder class would also
be entitled to 25% of the premium in excess of $3 per share upon terms and
conditions to be agreed upon between the parties. The plaintiffs may terminate
the settlement if the Company does not enter into a definitive sale/merger
agreement on or before December 31, 1999, unless the Company has funded its $10
million contribution to the settlement prior to an election to terminate the
settlement by the plaintiffs. The Company recorded a provision of $10 million
during the second quarter of 1999 reflecting the Company's share of the proposed
settlement. The agreement in principle is subject to Board approval, the
execution of definitive documentation and subsequent court approval.
Accordingly, there can be no assurance that the settlement will be
consummated.


                                      -17-
<PAGE>   18
Interest Expense

         Interest expense for the three and six month periods ended June 30,
1999 increased to $3,093,000 and $6,333,000, respectively, as compared to
$3,039,000 and $5,807,000, respectively, for the same periods in the prior year.
The increase is primarily due to a higher cost of borrowings under the Credit
Facility, partially offset by a decreased level of borrowings in the three month
period ended June 30, 1999.

Net Loss

         Loss before income taxes for the three and six month periods ended June
30, 1999 was $20,310,000 and $27,714,000, respectively, as compared to a loss
before income taxes of $3,077,000 and $3,961,000 for the same periods in the
prior year.

         The increase in the loss before income taxes was primarily due to a
decrease in operating revenues, an increase in cost of revenues as a percentage
of sales, an increase in selling, general and administrative expenses, an
increase in interest expense and a $10 million provision recorded for the
proposed settlement of the Class Action.

         For the three and six month periods ended June 30, 1999, the Company
did not record an income tax benefit because a full valuation allowance was
recorded against the net deferred tax assets. The Company recorded an income tax
benefit of $800,000 for the second quarter of 1998, which offset a provision
recorded in the first quarter ended March 31, 1999.

         The Company's business has not been materially affected by inflation.

Liquidity and Capital Resources

         Cash provided by operating activities for the six months ended June 30,
1999 was $6,963,000 compared to cash used in operating activities of $28,118,000
in the same period in the prior year. This improvement is primarily due to a
reduction in receivables, inventories and other current assets in 1999 and an
increase in accounts payable and accruals in 1999, offset by a reduction in
earnings before non-cash items in 1999. The reduction in inventories and
receivables is the result of the implementation of strategic initiatives to
reduce inventory and collect past due receivables as well as a lower level of
sales.

         The Credit Facility. On August 12, 1999, the Company entered into the
August 1999 Amendment to its Credit Facility, which provides for borrowings
including letters of credit and bankers acceptances. Under the terms of the
August 1999 Amendment, the Company was provided with a Term Loan of $4.5
million, secured by certain real estate and the existing collateral under the
Credit Facility. The Term Loan bears interest at IBJ's prime rate plus 2% and
provides for the repayment of principal at the rate of $250,000 per month
commencing on September 1, 1999, and increasing to $500,000 on January 1, 2000,


                                      -18-
<PAGE>   19
with a balloon payment due upon the maturity date of the Credit Facility. In
addition, the August 1999 Amendment provides for, among other things, a
reduction in the maximum revolving advance amount under the Credit Facility from
$50 million to $35 million, the elimination of certain availability borrowing
base reserves through December 31, 1999, and an amendment to certain financial
covenants. Under the terms of the August 1999 Amendment, the interest rate on
borrowings was increased from IBJ's prime rate (7.75% at June 30, 1999) plus one
percent to IBJ's prime rate plus two percent. After giving effect to the August
1999 Amendment, the Company's availability to borrow funds under the Credit
Facility (including the Term Loan) increased by approximately $6 million. As of
August 11, 1999, after giving effect to the August 1999 Amendment (including the
Term Loan), the Company had unused availability of approximately $10 million. In
connection with the August 1999 Amendment, the Company paid a commitment fee of
$300,000 and a waiver fee of $400,000, which was provided for under the terms of
the 1999 Amendment (as hereinafter defined).

         Under the terms of the August 1999 Amendment, the Company is required
to pay an additional Waiver Fee in the amount of $200,000 on or before December
31, 1999, unless the Company either presents an acceptable business plan to the
banks on or before December 31, 1999, or repays in full all outstanding
obligations under the Credit Facility on or before December 31, 1999.
Notwithstanding the foregoing, in the event the Company is in receipt on or
before December 31, 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 March 31, 2000. The Credit Facility is secured by
substantially all of the assets of the Company, including the capital stock of
certain of the Company's subsidiaries and certain real estate.

         On April 22, 1999, the Company entered into an amendment to the Credit
Facility, which was subsequently amended on May 21 and June 3, 1999 (the "1999
Amendment"). The 1999 Amendment provided for, among other things, the waiver of
certain financial covenant 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.

         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 Senior Subordinated Notes, the incurrence of
additional debt, liens, transactions with affiliates and certain consolidations,
mergers and acquisitions and sales of assets. 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 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.


                                      -19-
<PAGE>   20
         The Senior Subordinated Notes. On August 4, 1997, Graham-Field issued
its $100 million Senior Subordinated Notes (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.

         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


                                      -20-
<PAGE>   21
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 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.

         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 8
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 product pricing and product
return guidelines; (vi) the initiation of an aggressive program to collect past
due accounts receivable; and (vi) the realignment and consolidation of sale
forces and territories.

         Management believes that its initiatives to improve cash flow from
operations along with the Term Loan and Credit Facility will provide sufficient
liquidity to support working capital needs, capital expenditures and regularly
scheduled debt service for the foreseeable future.

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. Graham-Field 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 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


                                      -21-
<PAGE>   22
accounts receivable upgrades were completed in 1997. Purchasing and inventory
control functions have been upgraded. The manufacturing system upgrade is in
process, and three of the six manufacturing sites have 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.

         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.


                                      -22-
<PAGE>   23
         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 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         As of June 30, 1999, 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 two percent.

Part II. Other Information

Item 1.  Legal Proceedings

See Note 9 to the Condensed Consolidated Financial Statements.

Item 6.  Exhibits and Reports on Form 8-K

EXHIBITS:

<TABLE>
<CAPTION>
         Exhibit No.                                  Description
         ----------                                   -----------
<S>                                 <C>
         10.1                       Amendment No. 8 dated as of August 12, 1999,
                                    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 ("IBJ")
                                    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., HC
                                    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 (collectively, the "Graham-Field
                                    Borrowers")

         10.2                       Letter Agreement dated as of August 12, 1999,
                                    by and between IBJ and the Graham-Field
                                    Borrowers.

         10.3                       Mortgage and Security Agreement dated as of
                                    August 12, 1999 by Lumex Medical Products,
                                    Inc. to IBJ Whitehall Business Credit
                                    Corporation, as agent.



Reports on Form 8-K:

Not applicable.
</TABLE>


                                      -23-
<PAGE>   24
                               S I G N A T U R E S

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.

                                      GRAHAM-FIELD HEALTH PRODUCTS, INC.

                                      (Registrant)

Date:    August 13, 1999              /s/ John G. McGregor
                                      -----------------------------------------
                                          John G. McGregor
                                          President and Chief Executive Officer

Date:    August 13, 1999              /s/ Robert J. Gluck
                                      -----------------------------------------
                                          Robert J. Gluck
                                          Senior Vice President and
                                          Chief Financial Officer


                                      -24-
<PAGE>   25
                                EXHIBIT INDEX

<TABLE>
<CAPTION>
         Exhibit No.                                  Description
         ----------                                   -----------
<S>                                 <C>
         10.1                       Amendment No. 8 dated as of August 12, 1999,
                                    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 ("IBJ")
                                    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., HC
                                    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 (collectively, the "Graham-Field
                                    Borrowers").

         10.2                       Letter Agreement dated as of August 12,
                                    1999, by and between IBJ and the
                                    Graham-Field Borrowers.

         10.3                       Mortgage and Security Agreement dated as of
                                    August 12, 1999 by Lumex Medical Products,
                                    Inc. to IBJ Whitehall Business Credit
                                    Corporation, as agent.

</TABLE>