<PAGE>   1
                                    FORM 10-Q
                       Securities and Exchange Commission
                             Washington, D.C. 20549
(MARK ONE)

[x] Quarterly Report Pursuant to Section 13 or 15(d) the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 1998

                                       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)

           Delaware                                             11-2578230
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

                 400 Rabro Drive East, Hauppauge, New York 11788
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (516) 582-5900
              (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 --- 31,311,265 shares as of November 9, 1998
<PAGE>   2
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES


                                    I N D E X


Part I.  Financial Information:                                             Page

      Item 1. Financial Statements:

                  Condensed Consolidated Balance Sheets -
                  September 30, 1998 (Unaudited) and December 31, 1997
                  (Audited)                                                    3

                  Condensed Consolidated Statements of Operations for
                  the three and nine months ended September 30, 1998
                  and 1997 (Unaudited)                                         4

                  Condensed Consolidated Statements of Cash Flows for
                  the nine months ended September 30, 1998 and 1997 
                  (Unaudited)                                                5-6

                  Notes to Condensed Consolidated Financial Statements
                  (Unaudited)                                               7-16

      Item 2. Management's Discussion and Analysis of Financial
              Condition and Results of Operations                          17-22

Part II. Other Information:

      Item 1. Legal Proceedings                                               23

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


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

Item 1. Financial Statements

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

<TABLE>
<CAPTION>
                                                        September 30,      December 31,
         ASSETS                                             1998              1997
                                                        -------------     -------------
                                                         (unaudited)        (audited)
<S>                                                     <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                             $   3,580,000     $   4,430,000
  Accounts receivable - less allowances
  of $8,890,000 and $13,199,000, respectively             103,555,000        91,451,000
  Inventories                                              67,597,000        73,532,000
  Other current assets                                     16,135,000         8,103,000
  Recoverable and prepaid income taxes                      5,224,000         4,422,000
  Deferred tax assets                                      10,326,000        10,695,000
  Asset held for sale                                              --        61,706,000
                                                        -------------     -------------
         TOTAL CURRENT ASSETS                             206,417,000       254,339,000

PROPERTY, PLANT AND EQUIPMENT - net                        38,768,000        35,955,000

EXCESS OF COST OVER NET ASSETS ACQUIRED
  net of accumulated amortization of $17,535,000 and
  $11,512,000, respectively                               231,958,000       240,071,000

DEFERRED TAX ASSETS                                         5,292,000         3,044,000

OTHER ASSETS                                               13,041,000        13,709,000
                                                        -------------     -------------
         TOTAL ASSETS                                   $ 495,476,000     $ 547,118,000
                                                        =============     =============

         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Credit facility                                       $  40,022,000     $  65,883,000
  Current maturities of long-term debt                      1,601,000         2,619,000
  Accounts payable                                         27,476,000        33,888,000
  Accrued expenses                                         39,049,000        54,331,000
                                                        -------------     -------------
         TOTAL CURRENT LIABILITIES                        108,148,000       156,721,000

Long-term debt and Senior Subordinated Notes              106,756,000       107,733,000
Other long-term liabilities                                15,918,000        13,816,000
                                                        -------------     -------------
         TOTAL LIABILITIES                                230,822,000       278,270,000
                                                        -------------     -------------

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
Common stock                                                  800,000           764,000
Additional paid-in capital                                284,495,000       279,341,000
(Deficit)                                                 (51,657,000)      (42,953,000)
Cumulative translation adjustment                            (584,000)           96,000
                                                        -------------     -------------

         TOTAL STOCKHOLDERS' EQUITY                       264,654,000       268,848,000
                                                        -------------     -------------

         TOTAL LIABILITIES AND STOCKHOLDERS'
          EQUITY                                        $ 495,476,000     $ 547,118,000
                                                        =============     =============
</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                  Nine Months Ended
                                                  September 30                        September 30
                                         -------------------------------    -------------------------------
                                             1998              1997             1998              1997
                                         -------------     -------------    -------------     -------------
<S>                                      <C>               <C>              <C>               <C>
NET REVENUES:
  Medical equipment and supplies         $  93,831,000     $  70,745,000    $ 288,494,000     $ 189,515,000
  Interest and other income                    685,000           363,000        1,620,000           759,000
                                         -------------     -------------    -------------     -------------
                                            94,516,000        71,108,000      290,114,000       190,274,000
                                         -------------     -------------    -------------     -------------
COSTS AND EXPENSES:
  Cost of revenues                          65,075,000        47,159,000      199,207,000       128,100,000
  Selling, general and administrative       29,157,000        16,018,000       87,606,000        43,976,000
  Separation charges                         3,348,000                --        3,348,000                --
  Interest expense                           3,387,000         2,394,000        9,145,000         4,557,000
                                         -------------     -------------    -------------     -------------
                                           100,967,000        65,571,000      299,306,000       176,633,000
                                         -------------     -------------    -------------     -------------
(LOSS) INCOME BEFORE INCOME
TAXES                                       (6,451,000)        5,537,000       (9,192,000)       13,641,000

INCOME TAX (BENEFIT)
PROVISION                                   (1,287,000)        2,187,000       (1,287,000)        5,395,000
                                         -------------     -------------    -------------     -------------
NET (LOSS) INCOME                           (5,164,000)        3,350,000       (7,905,000)        8,246,000

PREFERRED STOCK DIVIDENDS                      266,000                --          799,000                --
                                         -------------     -------------    -------------     -------------
NET (LOSS) INCOME AVAILABLE
   TO COMMON SHAREHOLDERS                $  (5,430,000)    $   3,350,000    $  (8,704,000)    $   8,246,000
                                         =============     =============    =============     =============
PER SHARE DATA:

Common shares outstanding - basic           31,244,000        21,078,000       31,079,000        20,363,000
Convertible preferred stock                         --         4,435,000               --         4,435,000
Common equivalent shares outstanding                --         1,226,000               --         1,090,000
                                         -------------     -------------    -------------     -------------
Common shares outstanding - diluted         31,244,000        26,739,000       31,079,000        25,888,000
                                         -------------     -------------    -------------     -------------
Basic (loss) earnings per share          $        (.17)    $         .16    $        (.28)    $         .40
Diluted (loss) earnings per share        $        (.17)    $         .13    $        (.28)    $         .32
</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>
                                                                          Nine Months Ended
                                                                            September 30,
                                                                    -----------------------------
                                                                        1998             1997
                                                                    ------------     ------------
<S>                                                                 <C>              <C>
OPERATING ACTIVITIES:
 Net (loss) income                                                  $ (7,905,000)    $  8,246,000
 Adjustments to reconcile net (loss) income
     to net cash used in operating activities:
     Depreciation and amortization                                    11,306,000        4,700,000
     Deferred income taxes                                            (1,287,000)         935,000
     Provisions for losses on accounts receivable                      1,816,000        1,538,000
     Loss on disposal of property, plant and equipment                    77,000               --
     Non cash separation charges                                       3,187,000               --
     Gain on sale of marketable securities                                    --          (41,000)
     Changes in operating assets and liabilities:
        Accounts receivable                                          (13,798,000)     (24,519,000)
        Inventories                                                    5,519,000       (6,732,000)
        Other current assets and
         recoverable and prepaid income taxes                         (8,121,000)      (4,672,000)
        Accounts payable, accrued expenses and other liabilities     (22,894,000)      (8,468.000)
                                                                    ------------     ------------
                  NET CASH USED IN OPERATING ACTIVITIES              (32,100,000)     (29,013,000)
                                                                    ------------     ------------

INVESTING ACTIVITIES:
 Purchases of property, plant and equipment                           (8,060,000)      (3,637,000)
 Proceeds from sale of asset held for sale                            60,167,000               --
 Purchases of marketable securities                                           --      (97,216,000)
 Proceeds from sale of marketable securities                                  --       84,497,000
 Acquisitions, net of cash acquired                                     (419,000)     (10,006,000)
 Decrease in excess of cost over net assets acquired                   2,338,000               --
 Net decrease (increase) in other assets                                   5,000       (1,657,000)
                                                                    ------------     ------------
                  NET CASH PROVIDED BY (USED IN)
                  INVESTING ACTIVITIES                              $ 54,031,000     $(28,019,000)
                                                                    ------------     ------------
</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>
                                                                   Nine Months Ended
                                                                  September 30, 1998
                                                            -------------------------------
                                                                1998              1997
                                                            -------------     -------------
<S>                                                         <C>               <C>
FINANCING ACTIVITIES:
Proceeds from credit facility and long-term debt            $ 279,523,000     $ 147,138,000
Principal payments on credit facility and long-term debt     (307,026,000)     (162,352,000)
Proceeds on exercise of stock options                           4,722,000         1,052,000
Proceeds from issuance of Senior Subordinated Notes                             100,000,000
Payments on acceptances payable, net                                            (19,800,000)
Payments for note issue costs                                                    (4,565,000)
                                                            -------------     -------------
         NET CASH (USED IN) PROVIDED BY
         FINANCING ACTIVITIES                                 (22,781,000)       61,473,000
                                                            -------------     -------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS                                            $    (850,000)    $   4,441,000

CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD                                         $   4,430,000     $   1,241,000
                                                            -------------     -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD                                               $   3,580,000     $   5,682,000
                                                            =============     =============
SUPPLEMENTARY CASH FLOW INFORMATION:

Interest paid                                               $  11,692,000     $     427,000
                                                            =============     =============
Income taxes paid                                           $     135,000     $   1,804,000
                                                            =============     =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:

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

         In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
as of September 30, 1998 (unaudited), the results of operations for the three
months and the nine months ended September 30, 1998 and 1997 (unaudited) and the
statements of cash flows for the nine months ended September 30, 1998 and 1997
(unaudited).

         Additionally, 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, 1997.

         Inventories at September 30, 1998 have been valued at standard cost for
manufactured goods and at average cost for other inventories based primarily on
perpetual records or the gross profit method.

         On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes 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. SFAS No. 130 requires foreign
translation adjustments, net of tax, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.

         During the three and nine months ended September 30, 1998 and 1997,
total comprehensive (loss) income amounted to $(5,496,000) and $(8,306,000),
respectively, as compared with $3,351,000 and $8,289,000 for the same periods in
1997.

         The results of operations for the three and nine months ended September
30, 1998 and 1997 are not necessarily indicative of results for the full year.

         Certain amounts in the 1997 financial statements have been reclassified
to conform to the 1998 presentation.

2.       EARNINGS PER SHARE

         Earnings per share amounts are calculated in accordance with SFAS No.
128 "Earnings per Share." Diluted earnings per share is calculated for the three
and nine months ended September 30, 1997 assuming the conversion of the Series B
and Series C Cumulative Convertible Preferred Stock and elimination of the
related dividends and conversion of dilutive common equivalent shares
outstanding using the treasury stock method. Conversion of the preferred stock
and common stock equivalent shares was not assumed for the three and nine months
ended September 30, 1998 since the result would have been antidilutive.


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


3.       INVENTORIES

         Inventories consist of the following:

<TABLE>
<CAPTION>
                                              September 30,         December 31,
                                                  1998                  1997
                                             --------------        -------------
<S>                                          <C>                   <C>          
         Raw materials                       $   14,935,000        $  16,553,000
         Work-in-process                          5,859,000            6,735,000
         Finished goods                          46,803,000           50,244,000
                                             --------------        -------------
                                             $   67,597,000        $  73,532,000
                                             ==============        =============
</TABLE>

4.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consist of the following:


<TABLE>
<CAPTION>
                                              September 30,        December 31,
                                                  1998                 1997
                                              ------------         ------------
<S>                                           <C>                  <C>         
Land and buildings                            $ 18,067,000         $ 16,358,000
Equipment                                       32,054,000           29,831,000
Furniture and fixtures                           2,602,000            1,297,000
Leasehold improvements                           3,706,000            3,089,000
Construction in progress                         2,433,000            2,191,000
                                              ------------         ------------
                                                58,862,000           52,766,000
Accumulated depreciation
and amortization                               (20,094,000)         (16,811,000)
                                              ------------         ------------

                                              $ 38,768,000         $ 35,955,000
                                              ============         ============
</TABLE>


5.       INCOME TAXES

        At September 30, 1998, the Company has net deferred tax assets of
approximately $15,618,000, which consist principally of net operating loss
carryforwards and reserves and restructuring charges not currently deductible
for tax return purposes. A valuation allowance of approximately $14,500,000 has
been provided against certain gross deferred tax assets of the Company, of which
approximately $13,300,000 is attributable to the acquired net operating loss
carryforwards and other deferred tax assets of Everest & Jennings International
Ltd. ("Everest & Jennings"). When realized, the tax benefit for those items will
be recorded as a reduction of the excess of cost over net assets acquired. The
remainder represents an allowance against a portion of remaining gross deferred
tax assets as a result of recent acquisitions. For the quarter and nine month
periods ended September 30, 1998, the Company recorded an income tax benefit in
the amount of $1,287,000 representing an effective rate of 14% on the year to
date loss. The effective tax rate differs from the Federal statutory rate due to
the effect of nondeductible goodwill and state and local taxes.

         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. The amount of the net
deferred tax asset considered realizable could be reduced in the near term if
estimates of future taxable income are reduced.


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


         The effective tax rate for 1997 approximates the statutory rate after
adjustment for state taxes and nondeductible goodwill amortization expense.

6.       ACQUISITION OF BUSINESSES

         On December 30, 1997, the Company acquired Fuqua Enterprises, Inc.
(currently, Lumex/Basic American Holdings, Inc.) ("Fuqua") pursuant to an
Agreement and Plan of Merger (the "Fuqua Merger Agreement"), dated as of
September 5, 1997 and amended as of September 29, 1997, by and among Fuqua, GFHP
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the
Company ("Sub"), and the Company. Under the terms of the Fuqua Merger Agreement,
Sub was merged with and into Fuqua with Fuqua continuing as the surviving
corporation wholly-owned by the Company (the "Fuqua Merger"). In the Fuqua
Merger, each share of Fuqua's common stock, par value $2.50 per share (the
"Fuqua Common Stock"), other than shares of Fuqua Common Stock canceled pursuant
to the Fuqua Merger Agreement, was converted into the right to receive 2.1
shares of common stock, par value $.025 per share of the Company (the "Company
Common Stock"). There were 4,482,709 shares of Fuqua Common Stock outstanding on
December 30, 1997, which converted into 9,413,689 shares of the Company Common
Stock.

         In accordance with the terms of the Fuqua Merger Agreement, each Fuqua
stock option was assumed by Graham-Field and was converted into the right to
purchase shares of the Company Common Stock. As of the effective date of the
Fuqua Merger, there were Fuqua stock options outstanding representing the right
to purchase 421,500 shares of Fuqua Common Stock. The equivalent number of
shares of the Company Common Stock to be issued, after giving effect to the
exercise price of the Fuqua stock options as adjusted for the exchange ratio of
2.1, is approximately 364,319 shares of the Company Common Stock. For purposes
of calculating the purchase price, the Company Common Stock was valued at $16.69
per share, which represents the average closing market price of the Company
Common Stock for the period three business days immediately prior to and three
business days immediately after the announcement on September 8, 1997 of the
execution of the Fuqua Merger Agreement.

         The acquisition of Fuqua has been accounted for under the purchase
method of accounting and, accordingly, the operating results of Fuqua have been
included in the Company's consolidated financial statements from the date of
acquisition. The Company allocated $3,300,000 of the purchase price to purchased
in-process research and development projects which have not reached
technological feasibility and have no probable alternative future uses. The
Company expensed the purchased in-process and research and development projects
at the date of acquisition. The excess of the aggregate purchase price over the
estimated fair market value of the net assets acquired was approximately
$132,250,000, as adjusted, which is being amortized on a straight line basis
over 30 years. The purchase price allocations have been made on a preliminary
basis, subject to adjustments which will be finalized by December 31, 1998.

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

         On January 27, 1998, Fuqua disposed of the Leather Operations (the
"Leather Sale Transaction") through the sale of all of the capital stock of
Irving Tanning Company ("ITC"), Hancock Ellsworth


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


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

         On August 28, 1997, the Company acquired all of the issued and
outstanding shares of the capital stock of Medical Supplies of America, Inc., a
Florida corporation ("Medapex"), pursuant to an Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated August 28, 1997, by and
among the Company, S.E. (Gene) Davis and Vicki Ray (collectively the "Medapex
Selling Stockholders"). In accordance with the terms of the Reorganization
Agreement, Medapex became a wholly-owned subsidiary of the Company and the
Medapex Selling Stockholders received in the aggregate 960,000 shares of Company
Common Stock in exchange for all of the issued and outstanding shares of the
capital stock of Medapex. Pursuant to a Real Estate Sales Agreement dated as of
August 28, 1997 (the "Real Estate Sales Agreement"), by and between the Company
and BBD&M, a Georgia limited partnership and an affiliate of Medapex, the
Company acquired Medapex's principal corporate headquarters and distribution
facility in Atlanta, Georgia for a purchase price consisting of (i) $622,335
payable (a) by the issuance of 23,156 shares of the Company Common Stock and (b)
cash in the amount of $311,167, and (ii) the assumption of debt in the amount of
$477,664. Each of the Medapex Selling Stockholders entered into a two-year
employment agreement and non-competition agreement with the Company. The Medapex
transaction was accounted for as a pooling of interests and the Company's
historical financial statements have been restated to reflect this transaction.

         On August 17, 1997, the Company acquired substantially all of the
assets and certain liabilities of Medi-Source, Inc. ("Medi-Source"), a
privately-owned distributor of medical supplies, for $4.5 million in cash. The
Company also entered into a five (5) year non-competition agreement with the
previous owner in the aggregate amount of $301,000 payable over the five (5)
year period. The acquisition was accounted for as a purchase, and accordingly,
assets and liabilities were recorded at fair value at the date of acquisition
and the results of operations are included subsequent to that date. The excess
of the purchase price over net assets acquired was approximately $3.7 million.

         On June 25, 1997, the Company acquired all of the capital stock of
LaBac Systems, Inc., a Colorado corporation ("LaBac"), in a merger transaction
pursuant to an Agreement and Plan of Merger dated June 25, 1997, by and among
the Company, LaBac Acquisition Corp., a wholly-owned subsidiary of the Company,
LaBac, Gregory A. Peek and Michael L. Peek (collectively, the "LaBac Selling
Stockholders"). In connection with the acquisition, LaBac became a wholly-owned
subsidiary of the Company, and the LaBac Selling Stockholders received in the
aggregate 772,557 shares of Company Common Stock valued at $11.77 per share in
exchange for all of the issued and outstanding shares of the capital stock of
LaBac. The Company also entered into a three (3) year consulting agreement with
the LaBac Selling Stockholders and an entity controlled by the LaBac Selling
Stockholders, and non-competition agreements with each of the LaBac Selling
Stockholders. The acquisition was accounted for as a purchase and accordingly,
assets and liabilities were recorded at fair value at the date of acquisition
and the results of operations are included subsequent to that date. The excess
of cost over net assets acquired amounted to approximately $7.3 million.

         On March 7, 1997, Everest & Jennings, Inc., a wholly-owned subsidiary
of the Company, acquired Kuschall of America, Inc. ("Kuschall"), a manufacturer
of pediatric wheelchairs, high-


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


performance adult wheelchairs and other rehabilitation products, for a purchase
price of $1.51 million representing the net book value of Kuschall. The purchase
price was paid by the issuance of 116,154 shares of Company Common Stock valued
at $13.00 per share, of which 23,230 shares were delivered into escrow. The
escrow shares will be released on March 7, 1999, subject to any purchase price
adjustments in favor of the Company and claims for indemnification. The
acquisition was accounted for as a purchase and accordingly, assets and
liabilities were recorded at fair value at the date of acquisition and the
results of operations are included subsequent to that date.

         On February 28, 1997, Everest & Jennings Canadian Limited ("Everest &
Jennings Canada"), a wholly-owned subsidiary of the Company, acquired
substantially all of the assets and certain liabilities of Motion 2000 Inc. and
its wholly-owned subsidiary, Motion 2000 Quebec Inc., for a purchase price equal
to Cdn. $2.9 million (Canadian Dollars) (approximately U.S. $2.15 million). The
purchase price was paid by the issuance of 187,733 shares of the Company Common
Stock valued at $11.437 per share. The acquisition was accounted for as a
purchase and accordingly, assets and liabilities were recorded at fair value at
the date of acquisition and the results of operations are included subsequent to
that date. The excess of cost over the net assets acquired amounted to
approximately $2.5 million.

         The following summary presents unaudited pro forma consolidated results
of operations for the nine months ended September 30, 1997 as if the
acquisitions described above occurred at the beginning of 1997. This information
gives effect to the adjustment of interest expense, income tax provisions, and
to the assumed amortization of fair value adjustments, including the excess of
cost over net assets acquired. The pro forma information does not include the
write-off of certain purchased in-process research and development costs of $3.3
million, and merger, restructuring and other related charges of $31,202,000
associated with the Company's strategic restructuring initiatives recorded in
the fourth quarter ended December 31, 1997.


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


<TABLE>
<CAPTION>
                                                                  Pro Forma
                                                              Nine Months Ended
                                                              September 30, 1997
                                                                 ------------
<S>                                                           <C>         
Net Revenues                                                     $280,855,000
                                                                 ============

Income Before Income Taxes                                       $ 15,411,000

Income Taxes                                                        7,162,000
                                                                 ------------

Net Income                                                       $  8,249,000
                                                                 ============

Net income per common share:

Net income                                                       $  8,249,000

Preferred stock dividends                                              --    (a)
                                                                 ------------

Net income available to common
shareholders                                                     $  8,249,000
                                                                 ============

Common shares outstanding - basic                                  30,333,000
                                                                 ------------

Convertible preferred stock                                         4,435,000
Incremental shares using treasury stock
method                                                              1,378,000
                                                                 ------------

Common shares outstanding - diluted                                36,146,000
                                                                 ============

Basic earnings per share                                         $        .27
Diluted earnings per share                                       $        .23
</TABLE>

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

7.       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 restructuring reserves of approximately
$23,470,000. 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 and relocation of the Company's
corporate headquarters to the Lumex facility. In addition, the Company plans to
consolidate distribution facilities and other operations in an effort to improve
manufacturing, distribution and operating efficiencies.

         Throughout 1998, the Company will continue to evaluate its
Restructuring Plan and additional restructuring charges may be necessary.


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


The following summarizes the activity in the restructuring reserves for the nine
months ended September 30, 1998:


<TABLE>
<CAPTION>
                    Merger and                                      
                   Restructuring                       Reserve                         Reserve
                      charges       Write-offs and    Balances      Write-offs and     Balances
                    recorded in     cash payments    December 31,    cash payments   September 30,
                        1997           in 1997           1997           in 1998          1998
                    -----------      -----------     -----------      -----------     -----------
<S>                <C>              <C>              <C>            <C>              <C>        
Exit costs          $18,237,000      $(1,294,000)    $16,943,000      $  (958,000)    $15,985,000
                                                                    
Severance               650,000               --         650,000         (246,000)        404,000
                                                                    
Merger related        4,583,000       (1,788,000)      2,795,000       (2,245,000)        550,000
                    -----------      -----------     -----------      -----------     -----------
                                                                    
Total reserves      $23,470,000      $(3,082,000)    $20,388,000      $(3,449,000)    $16,939,000
                    ===========      ===========     ===========      ===========     ===========
</TABLE>
                                                                  

8.       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 thirteen putative class action lawsuits filed primarily in the United
States District Court for the Eastern District of New York on behalf of all
purchasers of common stock of the Company (including former Fuqua shareholders
who received shares of the Company Common Stock when the Company acquired Fuqua
in December 1997) during various periods within the time period May 1997 to
March 1998. The complaints assert 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.
Several of the complaints focus on statements made concerning the Company's
integration of its various recent acquisitions. 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
believes that it has complied with all of its obligations under the Federal
securities laws, considers the plaintiffs' allegations to be without merit and
intends to defend these suits vigorously.

         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


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


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, so it cannot yet assess
the impact of this investigation on the Company. The Company intends to
cooperate fully with the government in its investigation.

          In March 1994, the Suffolk County Authorities initiated an
investigation to determine whether regulated substances had been discharged in
excess of permitted levels from Fuqua's Lumex division (the "Lumex Division")
located in Bayshore, New York. An environmental consulting firm was engaged by
the Lumex Division to conduct a more comprehensive site investigation, develop a
remediation work plan and provide a remediation cost estimate. These activities
were performed to determine the nature and extent of contaminants present on the
site and to evaluate their potential off-site extent.

         In connection with Fuqua's April 1996 acquisition of the Lumex
Division, Fuqua assumed the obligations associated with this environmental
matter. In late 1996, Fuqua conducted surficial soil remediation at the Bayshore
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 and Fuqua is waiting for the necessary approvals from the
Suffolk County Authorities before proceeding with execution of the ground water
work plan. Management is not currently able to determine when any required
remediation and monitoring efforts with respect to the ground water
contamination will be completed. In May 1997, the Suffolk County Authorities
approved the soil remediation 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. In January, April and July 
1998, additional confirmatory samples were taken and analyzed. These analytic 
results provide further support that the groundwater is not significantly 
contaminated. The Lumex Division will continue to monitor the quality of the 
groundwater to confirm that it remains acceptable. If after the two year period 
expires, the quality of the groundwater remains acceptable, the Lumex Division 
will seek to withdraw its groundwater work plan.

         At September 30, 1998, the Lumex Division had reserves for remediation
costs and additional investigation costs which will be required. Reserves are
established when it is probable that a liability has been incurred and such
costs can be reasonably estimated. The Lumex Division'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 Lumex Division has not assumed that any such costs
would be recoverable from third parties nor has the Lumex Division 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 are 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 April 3, 1996, Fuqua acquired the Lumex Division from Cybex
International, Inc. (formerly Lumex, Inc.) The purchase price for the Lumex
Division was $40.7 million, subject to a final purchase price adjustment in the
asset sale agreement. The final purchase price adjustment was disputed and,
pursuant to the asset sale agreement was resolved through arbitration. On
February 13, 1998, the arbitrator accepted $3,179,685 in claims by Fuqua, with
interest of $350,690, yielding a net award to Fuqua of $2,384,606.


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


Such amount was recorded as a reduction of the excess of cost over net assets 
acquired at September 30, 1998. On July 30, 1998, the Company received a 
payment of $2,468,358 from Cybex. The Company believes, however that this 
payment does not adequately or completely satisfy the New York judgment and 
intends to file a motion to resettle the New York judgment.

         In March 1997, Fuqua gave notice to the seller to preserve Fuqua's
indemnification rights provided in the asset sale agreement.

         In February 1998, Fuqua filed in the State Court of Fulton County a
lawsuit against the seller and certain former officers and it states claims for
fraud, breach of warranty, negligent misrepresentation, Georgia RICO, and
attorney's fees. Defendants filed an answer and counterclaim on April 7, 1998,
denying liability and asserting fifteen defenses. Defendant Cybex has asserted
four counterclaims, seeking $1,284,288 in damages, plus attorneys' fees and
costs. Fuqua believes that the counterclaims lack merit for several reasons,
including, among others, that the punitive claim for $1,284,288, was decided
adversely to Cybex in the arbitration. On July 31, 1998, Cybex and the
defendants filed a motion to dismiss. The individual defendants have moved to
dismiss based on an alleged lack of personal jurisdiction, and Cybex moved to
dismiss on substantive grounds as to certain counts. By an order dated October
19, 1998, the court granted the motion to dismiss the causes of action involving
the alleged violation of Georgia's RICO statute. The court denied that part of
the motion which sought to dismiss the action against the individual defendants
and the causes of action for fraud and negligent misrepresentation. On October
19, 1998, the court certified appellate review of the order. The Company
believes that any appeal from the order lacks merit and will oppose any appeal
vigorously.

         On August 3, 1998, the Company and another defendant 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. The Company considers the plaintiff's allegations to
be without merit and intends to defend this lawsuit vigorously.


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

         The Company and its subsidiaries are parties to lawsuits and other
proceedings arising out of the conduct of its ordinary course of business,
including those relating to product liability and the sale and distribution of
its products. 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 of the Company.


                                     - 15 -
<PAGE>   16
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --Continued
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (Unaudited)


9.       SELINGER SEPARATION AGREEMENT

         On July 29, 1998, Irwin Selinger resigned as Chairman of the Board,
Chief Executive Officer and President of the Company, and entered into the
Separation Agreement with the Company. The Separation Agreement provides for (i)
the continuation of Mr. Selinger's (a) base salary of $550,000 through July 31,
1999, (b) healthcare and insurance benefits through July 8, 2001, and (c)
automobile lease payments and associated automobile expenses through July 8,
2001, (ii) the forgiveness of Mr. Selinger's $2.2 million loan in consideration
of Mr. Selinger's repayment of $500,000 on June 30, 1999, (iii) a three (3) year
non-competition agreement, (iv) the continuation of Mr. Selinger's split dollar
life insurance policy in accordance with the terms of Mr. Selinger's divorce
judgment, (v) a non-disparagement agreement, (vi) mutual releases, and (vii) the
continuation of the Company's indemnification provisions for Mr. Selinger. The
Company has recorded a charge of $3,348,000 in the quarter ended September 30,
1998, to reflect the financial effects of the Separation Agreement.


                                     - 16 -
<PAGE>   17
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --Continued
               GRAHAM-FIELD HEALTH PRODUCTS, INC. AND SUBSIDIARIES
                                   (Unaudited)


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

Forward-Looking Statements

         This report on Form 10-Q 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 relate to (i)
the expansion of the Company's market share, (ii) the Company's growth into new
markets, (iii) the development of new products and product lines to appeal to
the needs of the Company's customers, (iv) the opening of new distribution and
warehouse facilities, (v) obtaining regulatory and governmental approvals, (vi)
the upgrading of the Company's technological resources and systems and (vii) the
retention of the Company's earnings for use in the operation and expansion of
the Company's business.

         Important factors and risks that could cause actual results to differ
materially from those referred to in the forward-looking statements include, but
are not limited to, the 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, the
termination of the Company's Exclusive 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 additional
financing to expand the Company's business, 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, 1997, and the section entitled "Risk Factors" in 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, express or
implied, by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, and that in light of the
significant uncertainties inherent in forward-looking statements, the inclusion
of such statements should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.

Operating Revenues

         Operating revenues for the quarter and nine month period ended
September 30, 1998 were $93,831,000 and $288,494,000, respectively, representing
an increase of approximately 33% and 52% over the same periods in the prior
year. The increase in operating revenues was primarily attributable to the six
acquisitions completed in 1997, the growth of the Company's "Graham-Field
Express" program and expansion of the Company's Consolidation Advantage Program
("CAP"). On a pro forma 

                                     - 17 -
<PAGE>   18
basis (as if all acquisition completed in 1997 were recorded as of January 1,
1997), the Company's revenues declined by approximately 4% for the quarter and
increased by approximately 3% for the nine month period ended September 30,
1998. Management believes that intense competition within the healthcare
industry will continue in 1998.

         In March 1996, Graham-Field Express was introduced to offer "same-day"
and "next-day" service to home healthcare dealers of certain strategic home
healthcare products, including Lumex and Temco patient aids, adult incontinence
products, Everest & Jennings wheelchairs, Smith & Davis homecare beds,
nutritional supplements and other freight and time sensitive products. As of
September 30, 1998, the Company was operating seven (7) Graham-Field Express
facilities located in the Bronx, New York; San Juan, Puerto Rico; Dallas, Texas;
Baltimore, Maryland; Cleveland, Ohio, Louisville, Kentucky; and Boston,
Massachusetts. The Graham-Field Express facilities in Louisville, Kentucky and
Boston, Massachusetts were opened in the second quarter of 1998. Management
intends to moderate the growth of the Graham-Field Express program in 1998.

Interest and Other Income

         Interest and other income for the three and nine month periods ended
September 30, 1998 was $685,000 and $1,620,000, respectively, as compared to
$363,000 and $759,000 for the same periods in the prior year. The increase is
primarily due to interest earned on the advance to P.T. Dharma (see Liquidity
and Capital Resources) in the amount of $90,000 and $220,000 for the three and 
nine month periods ended September 30, 1998; dividends earned on preferred 
stock acquired in connection with the sale of the Leather Operations in the 
amount of $62,500 and $187,500 for the three and nine month periods ended 
September 30, 1998; and net sublease income attributable to certain Fuqua 
properties in the amount of approximately $82,000 and $227,000 for the three 
and nine month periods ended September 30, 1998.

Cost of Revenues

         Cost of revenues as a percentage of operating revenues was 69.4% and
69.1% for the three and nine month periods ended September 30, 1998, as 
compared to 66.7% and 67.6% recorded in the same periods in the prior year. The
Fuqua entities and LaBac contributed higher gross profit margins, offset in 
large part by a higher mix of redistributed product, primarily through the 
expansion of the GF Express program, which historically operates at lower gross
profit margins and by operating inefficiencies incurred during the integration 
of acquired companies.

Selling, General and Administrative Expenses

         Selling, general and administrative expenses as a percentage of
operating revenues for the three and nine month periods ended September 30,
1998, were 31.1% and 30.4%, as compared to 22.6% and 23.2% recorded in the same
periods in the prior year. The increase is primarily attributable to higher 
corporate office and administrative overhead to integrate the acquisitions 
completed in 1997, and the contribution of revenue by the Fuqua entities and 
LaBac at a higher percentage of selling, general and administrative expenses.

         The Company incurred separation charges of $3,348,000 pursuant to the
Separation Agreement, which are included in the three and nine months periods 
ended September 30, 1998 (see Note 9 to the Condensed Consolidated Financial
Statements). No such amounts were incurred in the same periods in the prior
year.

Interest Expense

         Interest expense for the three and nine month periods ended September
30, 1998 increased to $3,387,000 and $9,145,000, as compared to $2,394,000 and 
$4,557,000 for the same


                                     - 18 -
<PAGE>   19
periods in the prior year. The increase is primarily due to increased borrowings
attributable to the Company's growth, expansion of the Graham-Field Express
Program, and the sale of the Company's $100 million Senior Subordinated Notes
(the "Senior Subordinated Notes") in August 1997.

Year 2000

         The following disclosure is intended to be a "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Readiness Disclosure Act.

         Graham-Field has developed, and is in the process of implementing, a
Year 2000 remediation plan, which relates to the upgrade and standardization of
all business units for Year 2000 application software. Graham-Field has three
major application environments: distribution, manufacturing and warehouse
automation. Management has selected application packages for distribution and
manufacturing functions, and believes, subject to completion of its review of
the Year 2000 compliance of its critical business partners (as discussed below),
that the current warehouse automation system is Year 2000 compliant.

         The distribution package includes the corporate general ledger,
accounts payable, accounts receivable, purchasing, inventory control and order
entry functions. General ledger, accounts payable and accounts receivable
upgrades were completed in 1997. Purchasing and inventory control functions have
been upgraded, and order entry is anticipated to be upgraded in early 1999. The
manufacturing system upgrade is in process, and one of the five manufacturing
sites has been completed. The remaining manufacturing sites are currently in the
remediation phase with all remediation and testing scheduled to be completed by
the middle of 1999. Contingency plans are currently being constructed in the
event the manufacturing system upgrade or order entry upgrade is not Year 2000
compliant by January 1, 2000.

         The Company is in the process of reviewing its external interfaces of
its critical business partners, including such areas as payroll, electronic
banking, EDI links and freight systems to determine their Year 2000 compliance
status. Although the Company anticipates completing the Year 2000 testing phase
and conversion activities of the external interfaces of its business partners by
the middle of 1999, the inability of the Company's business partners to remedy
Year 2000 issues could have a significant impact on the business, financial
position and results of operations of the Company.

         The Company is in the process of analyzing its products to determine if
there are any material issues associated with Year 2000 compliance. Testing and
implementation phases are scheduled to be completed by the middle of 1999.

         A Year 2000 project manager has been assigned to manage the computer
system upgrades, and ensure compliance for all external interfaces. Capital
expenditures on all information system technology amounted to approximately
$100,000 during the nine month period ended September 30, 1998, which was
primarily related to management and verification of Year 2000 remediation
efforts. While the total cost to become Year 2000 compliant is 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.

Net Income

         The Company had a loss before income taxes of $6,451,000 and
$9,192,000, respectively, for the three and nine month periods ended September
30, 1998, as compared to income before income taxes of $5,537,000 and
$13,641,000 for the same periods in the prior year.

         The decrease is primarily due to reduced margins, increased selling,
general and administrative expenses as a percentage of operating revenue, the
increase in interest expense, and separation charges incurred in connection with
the Separation Agreement.

         The Company had a net loss for the three and nine month periods ended
September 30, 1998 of $5,164,000 and $7,905,000, respectively, as compared to
net income of $3,350,000 and $8,246,000, for


                                     - 19 -
<PAGE>   20
the same periods last year. For the quarter and nine month periods ended
September 30, 1998 the Company recorded an income tax benefit in the amount of
$1,287,000 after reflecting the impact of nondeductible goodwill amortization.
The Company recorded income tax provisions of $2,187,000 and $5,395,000 for the
same periods last year. Deferred taxes have not been provided on the
undistributed earnings of the foreign entities as it is management's intention
to invest such earnings in the entities indefinitely.

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

Liquidity and Capital Resources

         The Company had net working capital of $98,269,000 at September 30,
1998, as compared to $97,618,000 at December 31, 1997.

         Cash used in operations for the nine months ended September 30, 1998
was $32,100,000 as compared to $29,013,000 in the same period in the prior year.
The principle reasons for the increase in cash used in operations was a
$8,580,000 decrease in net income (as adjusted for the change in depreciation
and amortization, deferred taxes and non cash separation charges) and a decrease
in accrued expenses of approximately $14,400,000 primarily relating to payments
against restructuring reserves and acquisition accruals (see Note 7 to the
Condensed Consolidated Financial Statements), offset by a decrease in inventory
balances and an increase in accounts receivable balances for the period.

         Management anticipates utilizing approximately $2,100,000 in cash
during the remainder of 1998 related the restructuring and merger accruals
recorded in 1997.

         The increase in other assets included an advance in February 1998 of
$3.5 million to P.T. Dharma, the Company's supplier of commodity wheelchairs, in
consideration of the grant of an option to purchase the wheelchair assets of
P.T. Dharma for a price to be determined. During the option period which expires
on January 31, 1999, the Company is paid interest on the advance at an annual
interest rate of 10.3 percent. The advance is collateralized by shares of the
capital stock of P.T. Dharma, and is to be applied against the purchase price if
a purchase transaction is ultimately consummated. In the event the Company and
P.T. Dharma are unable to agree upon the terms of the transaction, the advance
is to be returned to the Company. In addition, other assets increased in the
third quarter due to the reclassification of certain trade receivable balances,
totalling approximately $3,900,000, which have been converted into notes 
receivable.

         As at December 31, 1997, the allowance for doubtful accounts receivable
was increased $5,000,000 to reflect increased credit risk due to the anticipated
impact of state medicare reimbursement and procurement policies for certain
product lines and the extended payment terms being taken by the Company's
customers. During the nine months ended September 30, 1998, $5,782,000 of fully
reserved accounts receivable was written off against the related reserve for
doubtful accounts.

         The Company periodically evaluates recoverability of its tangible and
intangible assets in accordance with SFAS No. 121. In addition, based on
projected results for the remainder of 1998, the Company believes that it will
be in compliance with the financial covenants contained in its Senior Secured
Revolving Credit Facility, as amended (the "Credit Facility"), arranged by IBJ
Schroder Business Credit Corporation ("IBJ Schroder"). The Company anticipates
that its cash flow from operations, together with its current cash balance, and
the proceeds from its Credit Facility will be sufficient to meet its working
capital requirements. However, actual results and performance could differ.

         The Credit Facility. As of September 30, 1998, the Company was in
compliance with the financial covenants contained in the Credit Facility. At
September 30, 1998, the Company had availability to borrow up to approximately
$57 million under the Credit Facility, of which approximately $40 million was
utilized. Effective as of August 18, 1998, borrowings bear interest at IBJ
Schroder prime rate (8.25% at September 30, 1998) plus 1%. Prior to August 18,
1998, borrowings bore interest at Graham-Field's option, at IBJ Schroders prime
rate or 2.25% above LIBOR, or 1.5% above IBJ Schroder's bankers acceptance rate.
The Credit Facility is secured by all of the assets of Graham-Field and the
capital stock of certain of its subsidiaries.


                                     - 20 -
<PAGE>   21
         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. The Credit Facility contains certain financial covenants, including a
cash flow coverage and leverage ratio, and an earnings before interest, taxes,
depreciation and amortization covenant, as well as the requirement that
Graham-Field reduce outstanding borrowings with the net cash proceeds of certain
asset sales.

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

         The net proceeds from the offering of the Senior Subordinated Notes
were used to repay $60.3 million of indebtedness under the Credit Facility and
$5 million of indebtedness due to BIL. The balance of the proceeds were used for
general corporate purposes.

         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,


                                     - 21 -
<PAGE>   22
prohibits Graham-Field from purchasing the Senior Subordinated Notes without the
consent of the lenders thereunder.

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


                                     - 22 -
<PAGE>   23
Part II. Other Information

Item 1. Legal Proceedings

        See Note 8 to the Condensed Consolidated Financial Statements.


                                     - 23 -
<PAGE>   24
Item 6. Exhibits and Reports on Form 8-K

Exhibits:


10(a)    Consulting Agreement dated as of September 17, 1998, by and between
         Andrew A. Giordano and the Company.

10(b)    Agreement dated as of September 15, 1998, by and between Paul Bellamy
         and the Company.

10(c)    Agreement dated as of September 15, 1998, by and between Richard S.
         Kolodny and the Company.

10(d)    Agreement dated as of September 15, 1998, by and between Ralph Liguori
         and the Company.

10(e)    Agreement dated as of September 15, 1998, by and between Peter Winocur
         and the Company.

10(f)    Employment Agreement dated November 2, 1998, by and between Harvey P.
         Diamond and the Company.

10(g)    Agreement dated as of November 2, 1998, by and between Harvey P.
         Diamond and the Company.

10(h)    Non-Competition Agreement dated as of November 2, 1998, by and between
         Harvey P. Diamond and the Company.

10(i)    Amendment No. 1 to Employment Agreement dated as of September 15, 1998,
         by and between Paul Bellamy and the Company.

10(j)    Amendment No. 1 to Employment Agreement dated as of September 15, 1998,
         by and between Richard S. Kolodny and the Company.

10(k)    Amendment No. 1 to Employment Agreement dated as of September 15, 1998,
         by and between Ralph Liguori and the Company.

10(l)    Amendment No. 1 to Employment Agreement dated as of September 15, 1998,
         by and between Peter Winocur and the Company.


Reports on Form 8-K:

The Company's Current Report on Form 8-K dated as of August 11, 1998 (Date of
Event: July 29, 1998)


                                     - 24 -
<PAGE>   25
                               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: November 12, 1998                 /s/ Rodney F. Price
                                        ----------------------------------------
                                        Rodney F. Price
                                        Chairman of the Board and
                                        Chief Executive Officer



Date: November 12, 1998                 /s/ Paul Bellamy
                                        ----------------------------------------
                                        Paul Bellamy
                                        President and
                                        Chief Financial Officer


                                     - 25 -
<PAGE>   26
Exhibit List on Form 10-Q for Third Quarter



       Consulting Agreement dated as of September 17, 1998, by and
       between Andrew A. Giordano and the Company.

       Agreement dated as of September 15, 1998, by and between Paul
       Bellamy and the Company.

       Agreement dated as of November 2, 1998, by and between Harvey P.
       Diamond and the Company.

       Agreement dated as of September 15, 1998, by and between Richard
       S. Kolodny and the Company.

       Agreement dated as of September 15, 1998, by and between Ralph
       Liguori and the Company.

       Agreement dated as of September 15, 1998, by and between Peter
       Winocur and the Company.

       Employment Agreement dated November 2, 1998, by and between Harvey
       P. Diamond and the Company.

       Amendment No. 1 to Employment Agreement dated as of September 15,
       1998, by and between Paul Bellamy and the Company.

       Amendment No. 1 to Employment Agreement dated as of September 15,
       1998, by and between Richard S. Kolodny and the Company.

       Amendment No. 1 to Employment Agreement dated as of September 15,
       1998, by and between Ralph Liguori and the Company.

       Amendment No. 1 to Employment Agreement dated as of September 15,
       1998, by and between Peter Winocur and the Company.

       Non-Competition Agreement dated as of November 2, 1998, by and
       between Harvey P. Diamond and the Company.