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

                                   FORM 10-K

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

For the fiscal year ended:  September 30, 1996  Commission File Number:  1-8147

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

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

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

Registrant's telephone number, including area code:  (609) 665-9300

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>


                                                             Name of each exchange
Title of each class                                          on which registered
-------------------                                          ---------------------
<S>                                                          <C>                                                         
Common Stock, Par Value $1.00                                American Stock Exchange
Series A Preferred Stock, Par Value $.50                     American Stock Exchange
7.25% Convertible Subordinated Debentures due 2006           American Stock Exchange
7.50% Exchangeable Subordinated Debentures due 2003          American Stock Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:  None

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 requirements
for the past 90 days. YES   X   NO ____
                           ---

The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 20, 1996 (reference is made to
the final paragraph of Part I herein for a statement of the assumptions upon
which this calculation is based):

 Common Stock                            $84,412,000
 Series A Preferred Stock                $13,828,000

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

The number of shares outstanding of each of the registrant's classes of stock as
of December 20, 1996:

         Class
Common Stock                                             18,496,755 Shares
Series A Preferred Stock                                  6,330,501 Shares

                      Documents Incorporated by Reference

Certain portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on March 5, 1997 (which is expected to be
filed with the Commission not later than 120 days after the end of the
registrant's last fiscal year) are incorporated by reference into Part III of
this report.

Exhibit Index appears on page 41.


<PAGE>

                                     PART I

ITEM 1. BUSINESS

General

        MEDIQ Incorporated ("MEDIQ" or the "Company"), through its wholly-owned
subsidiary, MEDIQ/PRN Life Support Services, Inc. ("MEDIQ/PRN"), operates the
largest movable critical care and life support medical equipment rental business
in the United States. MEDIQ/PRN rents a wide variety of movable equipment for
use by acute care hospitals, alternative care facilities, nursing homes, and
home health care companies. MEDIQ/PRN constitutes the Company's principal
business, accounting for 98% and 97% of consolidated revenues from continuing
operations in 1996 and 1995, respectively. MEDIQ/PRN also participates in a
joint venture through a limited liability company. MEDIQ PRN/HNE, L.L.C., d/b/a
SpectraCair, which rents health care providers mattress systems designed to
treat, prevent or manage pressure ulcers. The Company's other operating
subsidiary, MEDIQ Management Services, Inc., is a provider of health care
management and consulting services to health care providers and management and
other administrative services to diagnostic imaging centers. During fiscal 1996,
the Company continued to pursue its previously announced strategy of divesting
substantially all operating assets other than MEDIQ/PRN and MEDIQ Management
Services and using the proceeds thereof to reduce indebtedness.

        In September 1996, the Company entered into an agreement with NutraMax
Products, Inc. ("NutraMax") pursuant to which NutraMax agreed to repurchase all
of its shares owned by the Company, for a purchase price of approximately $36.3
million, or $9.00 per share, and the Company sold its ownership interest in
HealthQuest, Inc. for $75,000 which approximated carrying value. In October
1996, PCI Services, Inc. ("PCI") was acquired by Cardinal Health, Inc.
("Cardinal"). In that transaction the Company received 1,449,000 shares
(adjusted for stock split) of Cardinal stock in exchange for its 46% ownership
interest in PCI. The Company anticipates selling its Cardinal shares during
fiscal 1997. In November 1996, the Company sold substantially all of the assets
of MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray") for $5.3 million in cash
and shares of Integrated Health Services ("IHS") common stock with a value of
$5.2 million with the possibility of the Company receiving additional cash
consideration based upon the occurrence of certain future events. These
transactions essentially complete the implementation of the Company's strategic
plan to dispose of its non-core assets.

        On October 1, 1996, the Company together with its wholly-owned
subsidiary, MEDIQ/PRN entered into a $260 million Credit Agreement with a group
of lenders. The facility comprises a $25 million working capital line of credit,
$135 million in term loans and a $100 million acquisition facility. Initial
drawings on the facility were used to prepay all of the Company's senior debt
(except capital leases) including MEDIQ/PRN's outstanding $100 million 12-1/8%
Senior Secured Notes due 1999, and MEDIQ/PRN's subordinated obligations. The new
facility may also be used, among other things, to finance the redemption or
repurchase of the Company's other publicly-traded debt, or to finance strategic
acquisitions.

        The Company also intends to expand its core businesses through strategic
acquisitions, which would be financed, at least in part, by drawings under its
new credit facility. However, there can be no assurance that any transactions
will occur, or if they occur that they will be successfully integrated with the
Company's existing operations.

        The Company was incorporated in 1977. Its principal offices are located
at One MEDIQ Plaza, Pennsauken, New Jersey.

MEDIQ/PRN Life Support Services, Inc.

        MEDIQ/PRN provides essential cost-effective services to its customers.
In order to maximize operating efficiency, health care providers often choose to
rent movable medical equipment rather than incur the capital costs required to
finance equipment purchases and the on-going expenses required for maintenance
and repair. In addition, renting patient-ready equipment provides a vital
adjunct that permits health care providers to meet periods of increased patient
census without the need for investing capital in stand-by equipment. MEDIQ/PRN
meets these needs by renting a wide variety of equipment to health care
providers across the continuum of care. As of September 30, 1996, MEDIQ/PRN had
available for rent over 650 different types of medical equipment, including
adult and infant ventilators, adult, infant, neonatal and fetal monitors,
infusion and suction pumps, incubators, infant warmers, pulse oximeters,
sequential compression devices, oxygen concentrators and other movable critical
care 

                                       2
<PAGE>

equipment for use in respiratory care, intensive care, labor and delivery,
pediatric, neonatal intensive care and other departments of acute care general
hospitals and for use in alternative care facilities, nursing homes, and by home
health care providers. MEDIQ/PRN's customers rent equipment, which is delivered
in most cases within two hours of a request, 24 hours a day, 365 days a year
through 74 branch offices in major cities nationwide and 11 independent
distributors. MEDIQ/PRN offers its customers a wide selection of rental programs
including (i) daily, weekly or monthly rentals with fixed rate terms, (ii)
longer-term rentals with pricing related to the length of the rental term, and
(iii) "usage" rentals on a per use, per hour or per day basis.

        MEDIQ/PRN also offers its Comprehensive Asset Management Program (CAMP),
which analyzes a customer's total critical care equipment activity from all
sources for the previous year. CAMP includes a menu of logistics and outsourcing
services for movable medical equipment assets including equipment, personnel,
maintance, documentation and tracking. MEDIQ/PRN also has programs where it
acquires all or part of the customer's equipment and rents the equipment back to
the customer, eliminating the customer's burdens of ownership, under utilization
and seasonal usage. MEDIQ/PRN's customers can benefit from the use of CAMP
through the reduction of biomedical and other hospital staff, lower equipment
maintenance expenses and the elimination or reduction of capital expenditures
for equipment. MEDIQ/PRN also offers its CAMP (Registered) Plus logistics
program that provides similar management services for multi-site health care
networks to manage, service and transport movable patient care equipment. A
proprietary bar-code based asset management system provides customers maximum
utilization of owned equipment. The system provides information used to track
equipment, capture lost patient charges, control inventory and equipment
migration, reduce the need for supplemental rentals and manage overall capital
planning.

        MEDIQ/PRN provides a logistics and distribution service to equipment
manufacturers to reduce their transportation costs through utilization of
MEDIQ/PRN's national branch office network.

        MEDIQ/PRN also distributes a variety of disposables, accessories, and
repair parts used with critical care equipment. MEDIQ/PRN provides one-stop
shopping for supplies from all the leading manufacturers, and is the exclusive
distributor of accessories and supplies for all the respiratory care equipment
manufactured by Siemens Medical Systems, Inc.

        MEDIQ/PRN also provides complete service, including
annual/major/electrical safety inspections, preventive maintenance and repairs
for most brands and models of critical care equipment through a nationwide team
of over 140 trained, experienced biomedical technicians. Service and repairs can
be performed on-site, or pick up and delivery is available for servicing at one
of MEDIQ/PRN's 85 locations or two major service centers.

        MEDIQ/PRN meets the needs of its customers for pre-owned equipment with
a complete remarketing program of every major equipment category. Health care
facilities can acquire pre-owned critical care equipment substantially below the
cost of purchasing new units.

        MEDIQ/PRN also offers its customers complete programs for ventilator
reconditioning including replacement of parts, calibration, operational
verification and cosmetics.

        No single customer accounted for more than 10% of MEDIQ/PRN's revenues
during fiscal 1996 or 1995.

Seasonality

        MEDIQ/PRN's business is seasonal, with demand historically peaking
during periods of increased hospital census, which generally occurs in the
winter months during the Company's second fiscal quarter.

                                       3
<PAGE>

Quality Assurance

        Quality control/quality assurance and risk management procedures are
conducted for all of MEDIQ/PRN's medical equipment by trained biomedical
technicians to ensure compliance with safety, testing and performance standards
at all branch offices. All equipment is serviced and tested prior to delivery to
customers in accordance with MEDIQ/PRN's Pre-Delivery Inspection Program, which
is primarily derived from the Emergency Care Research Institute's ("ECRI's")
programs. Most types of medical equipment rented by MEDIQ/PRN require routine
servicing at scheduled intervals based upon hours of usage or passage of time,
including complete testing and inspection of all components that may need to be
replaced or refurbished. Routine servicing is conducted by MEDIQ/PRN's trained
personnel at all of its branch locations. Major repairs are performed at
MEDIQ/PRN's Pennsauken, New Jersey or Santa Fe Springs, California maintenance
facilities by its biomedical equipment technicians.

Suppliers

        MEDIQ/PRN acquires substantially all of its medical equipment, repair
parts, accessories or disposable products from approximately 100 suppliers.
MEDIQ/PRN has entered into a long-term agreement with a vendor to purchase $7
million of certain products. MEDIQ/PRN is not dependent upon any single supplier
and believes that alternative purchasing sources of medical equipment are
available to MEDIQ/PRN should they be needed.

Competition

        The medical equipment rental industry is highly competitive, and
MEDIQ/PRN encounters competition in all regions in which it operates.
MEDIQ/PRN's competitors include (i) national and regional medical equipment
rental and leasing companies and medical equipment distributors which rent
medical equipment to health care providers; (ii) medical equipment manufacturers
which sell medical equipment directly to health care providers; and (iii)
general leasing and financing companies and financial institutions, such as
banks, which finance the acquisition of medical equipment by health care
providers. MEDIQ/PRN believes that key factors influencing the decision
regarding the selection of a medical equipment rental vendor include
availability and quality of medical equipment, service and price.

 Discontinued Operations

        In the fourth quarter of fiscal 1996, the Company entered into an
agreement with NutraMax (NASDAQ:NMPC), a leading private label health and
personal care products company. Pursuant to this agreement, the Company
anticipates selling to NutraMax all of the 4,037,258 shares of NutraMax common
stock owned by the Company at a price of $9.00 per share. Under the terms of the
agreement, the Company will receive from NutraMax $19.9 million in cash and an
interest-bearing promissory note in the amount of $16.4 million. The note is
payable when NutraMax shares owned by the Company, which currently are held in
escrow in support of the Company's 7.50% Exchangeable Subordinated Debentures,
are released from that escrow. The NutraMax shares are to be released from
escrow upon the purchase or redemption of the 7.50% debentures. Upon closing of
the transaction, the Company will realize an after-tax gain of $6.2 million. The
cash proceeds from this transaction will be used to reduce debt.

        On October 11, 1996, PCI, a leading provider of integrated
pharmaceutical packaging services, was acquired by Cardinal. As a result, the
Company received 966,000 shares of Cardinal stock which, based on the closing
price on October 11, 1996 had a market value of $79.2 million. The Company
recognized an after tax gain of $31.8 million in the first quarter of fiscal
1997. In December 1996, Cardinal's common stock split 3 for 2 and, accordingly,
the Company now owns 1,449,000 shares of Cardinal which have an aggregate market
value of $81.3 million based upon the closing price of $56.125 per share on
December 20, 1996. The Company anticipates selling its Cardinal shares in fiscal
1997 and using the proceeds to reduce debt.

                                       4
<PAGE>

        In the second quarter of fiscal 1995, the Company adopted a plan to sell
the following four non-core businesses: Medifac, Inc. ("Medifac"), a provider of
health care facility planning, architectural and development services; Health
Examinetics, Inc. ("Health Examinetics"), a provider of mobile health testing
services; MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray"), a provider of
portable X-ray and EKG services; and MEDIQ Imaging Services, Inc. ("MEDIQ
Imaging"), a provider of diagnostic imaging services in mobile and fixed sites.
In the fourth quarter of fiscal 1995, the Company revised the plan to include
the operations of HealthQuest, Inc. ("HealthQuest"), a provider of case
management and utilization review services. As a result, operating results and
net assets of these five businesses have been reported as discontinued
operations. Discontinued operations also include the Company's equity investment
in InnoServ Technologies, Inc. ("InnoServ") (NASDAQ:ISER) which, through its
various subsidiaries, provides hospitals, clinics and private physicians'
offices with maintenance services for diagnostic imaging equipment, shared
mobile computed tomography and cardiac catheterization services and other
radiological parts and supplies. The Company owns 2,030,000 shares of InnoServ
common stock, or approximately 40% of the outstanding shares. The present
business operations of InnoServ include the business of the Company's former
subsidiary, MEDIQ Equipment and Maintenance Services, Inc., which was merged
with InnoServ in 1994. The Company anticipates divesting its investment in
InnoServ in fiscal 1997. See footnote B to the Company's consolidated financial
statements for certain financial information about discontinued operations.

        In November 1996, the Company sold substantially all of the assets of
Mobile X-Ray to Symphony Diagnostics, Inc., a subsidiary of Integrated Health
Services, Inc. (NYSE:IHS) for $5.3 million in cash and shares of Integrated
Health Services common stock with a value of $5.2 million at the closing with
the possibility of the Company receiving additional cash consideration based
upon the occurrence of certain future events.

        In September 1996, the Company sold its ownership interest in
HealthQuest, Inc. for cash of $75,000 which approximated its carrying value.

        In August 1995, the Company sold the assets of MEDIQ Imaging to NMC
Diagnostic Services, Inc., a division of W. R. Grace and Co. for approximately
$17 million in cash and the assumption of $9.7 million of debt.

        In June 1995, the Company sold Medifac and certain related assets to the
management of Medifac for approximately $11 million in cash and notes, and the
assumption of $26.9 million of non-recourse debt.

        The Company expects to sell Health Examinetics to its management for
cash and an interest bearing note aggregating $1.7 million. The Company
presently anticipates that the sale transaction will be completed in
fiscal 1997.

Financial Information about Industry Segments

        The Company operates primarily in one business segment, exclusive of
discontinued operations. The Company, through MEDIQ/PRN, rents medical equipment
on a short-term basis nationwide. In fiscal 1996, this segment represented more
than 90% of the consolidated revenues, operating profits and assets exclusive of
corporate assets, which include net assets of discontinued operations of $54.7
million at September 30, 1996.

Government Regulations

        The Company's businesses are subject to Federal, state and local
regulations relating to the operation of such businesses. The Company is unable
to predict whether, or to what extent, new legislation or regulations affecting
its businesses will be enacted and, if enacted, what impact they will have on
the Company. In addition, government reimbursement of medical expenses are, to
an increasing extent, made at fixed rates unrelated to actual costs.
Consequently, hospitals and other health care 

                                       5
<PAGE>


providers are expected to continue to emphasize cost-containment and
cost-efficiency measures, which the Company believes will increase the demand
for its products and services. The following is a summary of some of the
significant regulations currently affecting the operations of MEDIQ/PRN and the
Company's other operations.

        Compliance with FDA Regulations - The FDA regulates companies which
manufacture, prepare, propagate, compound or process medical devices. Device
manufacturers must comply with registration and labeling regulations, submit
premarket notifications or obtain premarketing approvals, comply with medical
device reporting, tracking and post-market surveillance regulations and with
device good manufacturing practices ("GMPs"), and are subject to FDA inspection.
The GMP regulations specify the minimum standards for the manufacture, packing,
storage, and installation of medical devices, and impose certain record keeping
requirements. The FDA currently does not regulate MEDIQ/PRN or organizations
which provide similar services as MEDIQ/PRN as device manufacturers. However,
any company which services, repairs or reconditions medical devices could be
subject to regulatory action by the FDA if its activities cause the devices to
become adulterated or mislabeled. In addition, no assurance can be given that in
the future the FDA will not regulate as device manufacturers companies such as
MEDIQ/PRN, which acquire ownership of devices, recondition or rebuild such
devices and rent them to customers or which service, repair or recondition
devices owned by others. The Company is unable to predict the cost of compliance
if any such regulations were to be adopted. MEDIQ/PRN is required to comply with
certain other device tracking and reporting regulations administered by the FDA.

        See also "Legal Proceedings" herein for certain additional information.

Employees

        As of December 1, 1996, the Company and its wholly-owned subsidiaries
have approximately 800 employees, of which approximately 100 are employees of
discontinued operations. The Company believes relations with employees are
satisfactory.


ITEM 2. PROPERTIES

        The Company's principal facility is located in Pennsauken, New Jersey,
where the Company's corporate offices and a portion of its operating activities
are located, including MEDIQ/PRN's corporate offices. The Company and its
wholly-owned subsidiaries also lease office and warehouse space in approximately
80 locations throughout the United States for local and regional operations. The
properties owned and leased by the Company and its wholly-owned subsidiaries are
believed to be adequate for the Company's operations.

ITEM 3. LEGAL PROCEEDINGS

        MEDIQ Imaging, the assets of which were sold by the Company in August
1995, is presently the subject of a criminal and civil investigation by the
United States Attorney's Office for the District of New Jersey and the
Department of Health and Human Services. The investigation has focused on advice
given by certain MEDIQ Imaging employees to physician customers of MEDIQ Imaging
relating to the reassignment of certain Medicare claims. The Company and MEDIQ
Imaging voluntarily reported the issue to the U.S. Government in January 1995
after learning that the advice given by the employees may have been inconsistent
with the regulations relating to reassignment. The Company and MEDIQ Imaging
have been cooperating in the investigation. In August 1995, in connection with
the sale of MEDIQ Imaging, the Company provided the U.S. Government with a
guarantee of approximately $7.1 million in connection with any settlement or
judgment obtained by the U.S. Government. Management believes that there has
been no violation of any statute or regulation by MEDIQ Imaging or any of its
officers, directors or employees. Although the Company believes there has been
no violation, if the U.S. Government obtains a judgment, the amount of the
judgment against MEDIQ Imaging may exceed the guarantee amount. However,

                                       6
<PAGE>

management and outside counsel are not aware of any evidence that would enable
the U.S. Government to proceed against the Company beyond the limits of the
guarantee.

        MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray"), the assets of which
the Company sold in November 1996, is presently the subject of an investigation
by the Wage and Hour Division of the United States Department of Labor (the
"DOL"). The DOL has indicated that it believes that the practice of treating
technologists as exempt professionals is incorrect. The Company maintains that
the practice of treating x-ray technologists as exempt is correct and proper. A
request for an official position statement has been sent to the Wage and Hour
Administrator of the DOL. The DOL has indicated that it will broaden the scope
of the investigation to include technologists at all other Mobile X-Ray
locations. Potential liability is retroactive from the day a lawsuit is
initiated by the Solicitor of Labor and could include double liquidated damages
and penalties. No suit has been filed at this time.

        On November 28, 1995, in the United States District Court for the Middle
District of Pennsylvania, ATS Medical Servces, Inc. ("ATS"), a former subsidiary
of the Company, and the president of ATS each pled guilty to one count of
misprision of a felony in violation of Title 18, United States Code, Section 4.
In addition, ATS agreed to repay the government $2.1 million for excess
reimbursement received by ATS from the Medicare Program from 1988 through 1992.
The payment is part of a settlement agreement entered into between ATS, the
United States Government and Gerard Callie, a former ATS employee, who had filed
a civil lawsuit on behalf of the government against ATS pursuant to the False
Claim Act, Title 31, United States Code, Sections 3729 - et seq., relating to
ATS's alleged excess reimbursement. The court sentenced ATS, on June 24, 1996,
to a term of probation of two years. The court imposed no fine on ATS. A
mandatory special assessment of $200 was imposed and paid by ATS. In November
1996, in connection with the sale of Mobile X-Ray, the outstanding balance of
this obligation was paid with a portion of the proceeds of the sale.

        On June 12, 1996, the Company, ATS and Mobile X-Ray Services were sued
in the United States District Court for the Middle District of Pennsylvania by
Gerard and Sharon Callie, who are both former employees of ATS. The lawsuit
alleges that the Callies were wrongfully terminated and asserts claims pursuant
to the whistleblower provisions of the False Claims Act and the Pennsylvania
Wage Payment and Collection Law. The plaintiffs made a demand for damages
totaling nearly $800,000. The Company believes it has no liability and intends
to vigorously defend this case.

        In addition, the Company has pending several legal claims incurred in
the normal course of business, which in the opinion of management, will not have
material effect on the consolidated financial statements. See Note I to the
Company's Consolidated Financial Statements.


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

        No matters were submitted to a vote of security holders during the
quarter ended September 30, 1996.


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


        For the purposes of calculating the aggregate market value of the shares
of common stock of the Company held by nonaffiliates, as shown on the cover page
of this report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares beneficially owned by directors and
executive officers of the Company. However, this should not be deemed to
constitute an admission that all directors and executive officers of the Company
are, in fact, affiliates of the Company, or that there are not other persons who
may be deemed to be affiliates of the Company. Further information concerning
shareholdings of officers, directors and principal shareholders is included in
the Company's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission.


                                       7
<PAGE>

                                    PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 
        STOCKHOLDER MATTERS

        The Company's Common Stock and its Series A Preferred Stock, which is
convertible into Common Stock, are listed on the American Stock Exchange. The
following table sets forth the high and low sales prices for the Company's
Common and Preferred Stocks on the American Stock Exchange for the past two
fiscal years.

                                    Common Stock       Preferred Stock
                                    ------------       ---------------
Fiscal year ended September 30,     High      Low       High      Low
-------------------------------     ----      ---       ----      ---
        1996:

                First Quarter      $5.438    $4.000    $4.500    $4.125
                Second Quarter      5.438     4.000     5.000     4.000
                Third Quarter       6.500     4.938     6.125     4.875
                Fourth Quarter      6.000     5.500     5.625     5.500

        1995:

                First Quarter      $4.063    $3.563    $3.813    $3.625
                Second Quarter      5.750     3.750     5.500     3.750
                Third Quarter       6.188     5.125     5.750     5.063
                Fourth Quarter      6.188     5.063     5.875     5.375

  
        As of December 1996, there were approximately 2,000 holders of record of
the Company's Common Stock and approximately 350 holders of record of the
Company's Preferred Stock. Since a portion of the Company's Common Stock and
Preferred Stock is held in "street" or nominee name, the Company is unable to
determine the exact number of beneficial holders.

        The Company did not pay any dividends in fiscal 1996 or 1995. The terms
of the Company's Credit Agreement, entered into on October 1, 1996, preclude the
payment of cash dividends until October 1, 1997.


                                       8
<PAGE>



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated financial data presented below has been
derived from the audited financial statements of the Company. This data is
qualified in its entirety by reference to, and should be read in conjunction
with the Company's Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
herein.


<TABLE>
<CAPTION>

                                                             Year Ended September 30,
                                           --------------------------------------------------------
                                           1996       1995(2)        1994          1993        1992
                                           ----       -------        ----          ----        ----
                                                     (in thousands, except per share data)
<S>                                      <C>          <C>          <C>          <C>          <C>
Summary Statement of Operations Data:
      
Revenues                                 $ 136,066    $ 132,241    $  81,498    $  89,994    $ 102,195
Operating income                            25,446       24,202        1,354        8,614        4,573
Interest expense                           (27,307)     (29,241)     (21,335)     (21,043)     (18,815)
Other (1)                                   (4,695)       1,381        7,381        1,918       (6,810)
Loss from continuing operations
   before income tax expense (benefit)      (6,556)      (3,658)     (12,600)     (10,511)     (21,052)
Loss from continuing operations             (6,178)      (3,346)      (8,254)      (5,145)     (11,220)

Per Share Data:

Loss from continuing operations          $    (.25)   $    (.14)   $    (.34)   $    (.21)   $    (.47)
Cash dividends per common share          $    --      $    --      $     .09    $     .12    $     .06
Cash dividends per preferred share       $    --      $    --      $     .05    $     .07    $     .03
Weighted average shares outstanding         24,967       24,604       24,405       24,366       24,007



                                                                 September 30,
                                               -----------------------------------------------------       
                                               1996       1995       1994(2)      1993          1992
                                               ----       ----       -------      ----          ----
                                                                 (in thousands)
Summary Balance Sheet Data:

Current assets                                $ 44,793   $ 44,436   $ 35,041     $ 42,500     $ 48,431
Investments in discontinued operations          54,717     70,162     99,911       98,095      116,598
Property, plant and equipment                  122,706    132,823    149,051      117,748      112,621
Total assets                                   297,863    334,169    377,795      308,827      315,280
Current liabilities                             35,054     64,685     59,610       47,001       45,303
Senior debt, net of current portion            192,461    136,949    162,436      115,604      131,014
Subordinated debt, net of current portion       41,229     81,907    103,388       86,229       63,539
Stockholders' equity                            17,445     31,517     36,280       44,574       58,748
                                                                                          
</TABLE>



Notes to Selected Consolidated Financial Data
(1)  The Company recorded a $6 million reserve on the note receivable from MHM
     Services, Inc. ("MHM") in 1996. Net gains (losses) from the sale of assets
     were $.6 million, ($.4) million, $4.7 million, ($.3) million and $3.0
     million in 1996, 1995, 1994, 1993 and 1992, respectively. In 1992, the
     Company recorded a loss reserve of $10.6 million for an investment in a
     real estate limited partnership.
(2)  On September 30, 1994, MEDIQ/PRN acquired the critical care and life
     support rental equipment inventory of KCI. The purchase price, which was
     primarily financed with long-term debt, approximated $88 million, including
     transaction costs and the assumption of certain capital lease obligations.

                                       9
<PAGE>

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

General

        During fiscal 1996 the Company continued to pursue its previously
announced strategy of divesting substantially all operating assets other than
MEDIQ/PRN and MEDIQ Management Services and using the proceeds thereof to reduce
indebtedness.

        In September 1996, the Company entered into an agreement with NutraMax
Products, Inc. ("NutraMax") pursuant to which NutraMax agreed to repurchase all
of its shares owned by the Company, for a purchase price of approximately $36.3
million, or $9.00 per share, and the Company sold its ownership interest in
HealthQuest, Inc. for $75,000 which approximated carrying value. In October
1996, PCI Services, Inc. ("PCI") was acquired by Cardinal Health, Inc.
("Cardinal"). In that transaction the Company received 1,449,000 shares
(adjusted for stock split) of Cardinal stock in exchange for its 46% ownership
interest in PCI. The Cardinal shares are anticipated to be sold during fiscal
1997. Accordingly, the Company's equity investments and equity in earnings of
PCI and NutraMax have been classified as discontinued operations in the
Company's consolidated financial statements. In November 1996, the Company sold
substantially all of the assets of MEDIQ Mobile X-Ray Services, Inc. ("Mobile
X-Ray") for $5.3 million in cash and shares of Integrated Health Services
("IHS") common stock with a value of $5.2 million with the possibility of the
Company receiving additional cash consideration based upon the occurrence of
certain future events. These transactions essentially complete the
implementation of the Company's strategic plan to dispose of its non-core
assets.

        With the $88 million acquisition in 1994 of the movable medical
equipment of KCI Therapeutic Services, Inc., a subsidiary of Kinetic Concepts,
Inc. ("KCI"), MEDIQ/PRN, the Company's core business, strengthened its position
as the leading company in the United States renting movable critical care to
acute care hospitals, alternative care facilities, nursing homes and health care
providers on an "as-needed basis." With the successful integration of these
assets into its 85 office distribution network, MEDIQ/PRN expanded its market
presence into all 50 states, increased market share and improved its service
standards.

        The Company intends to continue to seek to expand its core businesses
through other strategic acquisitions. However, there can be no assurances that
the Company will be successful in identifying suitable acquisition candidates,
consummating any transactions or, if it completes any acquisition transaction,
in successfully integrating the operations of any acquired entity.

        The Company's other operating subsidiary is MEDIQ Management Services,
Inc., a provider of management and consulting services to health care providers
and management and other administrative support services to diagnostic imaging
centers. MEDIQ/PRN also participates in a joint venture through a limited
liability company, MEDIQ PRN/HNE, L.L.C., d/b/a SpectraCair, which rents health
care providers mattress systems designed to treat, prevent or manage
pressure ulcers.

Discontinued Operations

        In the fourth quarter of fiscal 1996, the Company entered into an
agreement with NutraMax (NASDAQ:NMPC), a leading private label health and
personal care products company. Pursuant to this agreement the Company
anticipates selling to NutraMax all of the 4,037,258 shares of NutraMax common
stock owned by the Company at a price of $9.00 per share. Under the terms of the
agreement, the Company will receive from NutraMax $19.9 million in cash and an
interest-bearing promissory note in the amount of $16.4 million. The note is
payable when NutraMax shares owned by the Company, which currently are held in
escrow in support of the Company's 7.50% Exchangeable Subordinated Debentures,
are released from that escrow. The NutraMax shares are to be released from
escrow upon the purchase or redemption of the 7.50% debentures. Upon the closing
of the transaction, the Company will realize an after-tax gain of $6.2 million.
The cash proceeds from this transaction will be used to reduce debt.

                                       10
<PAGE>

        On October 11, 1996, PCI, a leading provider of integrated
pharmaceutical packaging services, was acquired by Cardinal. As a result, the
Company received 966,000 shares of Cardinal stock which, based on the closing
price on October 11, 1996 had a market value of $79.2 million. The Company
realized an after tax gain of $31.8 million in the first quarter of fiscal 1997.
In December 1996, Cardinal's common stock split 3 for 2 and the Company now owns
1,449,000 shares which have an aggregate market value of $81.3 million based
upon the closing price of $56.125 per share on December 20, 1996. The Company
anticipates selling its Cardinal shares in fiscal 1997 and using the proceeds to
reduce debt.

        In the second quarter of fiscal 1995, the Company adopted a plan to sell
the following four non-core businesses: Medifac, Inc. ("Medifac"), a provider of
health care facility planning, architectural and development services; Health
Examinetics, Inc. ("Health Examinetics"), a provider of mobile health testing
services; MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray"), a provider of
portable X-ray and EKG services; and MEDIQ Imaging Services, Inc. ("MEDIQ
Imaging"), a provider of diagnostic imaging services in mobile and fixed sites.
In the fourth quarter of fiscal 1995, the Company revised the plan to include
the operations of HealthQuest, Inc. ("HealthQuest"), a provider of case
management and utilization review services. As a result, operating results for
fiscal 1995 and net assets of these five businesses for fiscal 1995 and 1996
have been reported as discontinued operations. Discontinued operations also
include the Company's equity investment in InnoServ Technologies, Inc. which is
anticipated to be divested during fiscal 1997.

        In November 1996, the Company sold substantially all of the assets of
Mobile X-Ray to Symphony Diagnostics, Inc., a subsidiary of Integrated Health
Services, Inc. (NYSE:IHS) for $5.3 million in cash and shares of Integrated
Health Services common stock with a value of $5.2 million at the closing with
the possibility of the Company receiving additional cash consideration based
upon the occurrence of certain future events.

        In September 1996, the Company sold its ownership interest in
HealthQuest, Inc. for $.75,000 which approximated its carrying value.

        In August 1995, the Company sold the assets of MEDIQ Imaging to NMC
Diagnostic Services, Inc., a division of W.R. Grace & Co., for approximately $17
million in cash and the assumption of $9.7 million of debt.

        In June 1995, the Company sold Medifac and certain related assets to the
management of Medifac for approximately $11 million, consisting of $6 million in
cash and $5 million in notes, and the assumption of $26.9 million of
non-recourse debt.

        The Company expects to sell Health Examinetics to its management for
cash and an interest bearing note aggregating $1.7 million. The Company
presently anticipates that the sale transaction will be completed in fiscal
1997.

Results of Operations

Fiscal Year 1996 Compared with Fiscal Year 1995

        Revenues from continuing operations were $136.1 million, as compared to
$132.2 million in the prior year, an increase of $3.9 million, or 3%. Revenue
growth aggregating $6.2 million was primarily attributable to the sale of repair
parts, accessories and disposable products, outsourcing services and sales of
equipment. This growth was partially offset by lower equipment rentals as a
result of the absence in fiscal 1996 of a sustained flu season, the non-renewal
of a number of long-term rental

                                       11
<PAGE>

contracts as a result of customer purchases and a trend in the marketplace of
better utilization of equipment of customers partially offset by an increase in
the number or rental customers. The Company expects this trend to continue, with
increased potential for its CAMP and CAMP Plus programs as customers seek to
reduce capital and operating expenses.

        Operating income from continuing operations was $25.4 million, as
compared to $24.2 million in 1995, an increase of $1.2 million, or 5%. The
improvement in operating income was attributable to reductions in corporate
overhead of $4.1 million, as compared to fiscal 1995, as a result of
non-recurring expenses in fiscal 1995 associated with the activities of the
Special Committee of the Board of Directors and the reduction in corporate
personnel in connection with the corporate restructuring plan adopted in the
first quarter of fiscal 1996. This reduction was partially offset by a
restructuring charge of $2.2 million for employee severance costs incurred in
connection with a plan approved by the Board of Directors to downsize corporate
functions and consolidate certain activities with the operations of MEDIQ/PRN.

        Interest expense decreased 7%, to $27.3 million, from $29.2 million in
1995. The decrease was primarily attributable to a net reduction in indebtedness
and was partially offset by an increase in the interest rate of MEDIQ/PRN's $100
million Senior Secured Notes from 11-1/8% to 12-1/8% effective October 1, 1995.

        Interest income of $1.5 million was consistent with the prior year and
was primarily derived from the Company's note receivable from MHM Services,
Inc., ("MHM" formerly a wholly-owned subsidiary of the Company which was
spun-off to shareholders in August 1993).

        Other charges and credits for 1996 included the establishment of a
reserve on the note receivable from MHM of $6 million as a result of the
Company's analysis of the financial condition of MHM and a charge of $.6 million
related to the excess of the purchase price over the carrying value of a warrant
issued by MEDIQ/PRN in 1992 to a lender in connection with the financing of an
acquisition. The purchase price of the warrant was $1.6 million. These charges
were partially offset by gains on the sales of operating assets of $.6 million.
Fiscal 1995 included a loss of $1.1 million from the sale of the Company's
equity interest in New West Eyeworks, Inc. in April 1995 for $3.0 million, and
income of $.6 million representing a portion of the contingent proceeds earned
in 1995 from the prior year sale of the Company's interest in a kidney stone
treatment center.

        The pretax loss from continuing operations before extraordinary item was
$6.6 million for 1996, as compared to a pretax loss of $3.7 million in the prior
year. The increase in pretax loss was attributable to the reserve on the note
receivable from MHM, the restructuring charge and the charge related to the
repurchase of the MEDIQ/PRN warrant partially offset by net reductions in
interest expense and corporate overhead. The pretax loss in 1995 included
non-recurring expenses of $1.7 million related to the strategic activities of
the Board of Directors and a loss of $1.1 million on the sale of the Company's
equity interest in New West Eyeworks.

        The income tax benefit related to continuing operations was $.4 million,
as compared to a benefit of $.3 million in the prior year. The Company's
effective tax rates were disproportionate compared to the statutory rates as a
result of goodwill amortization and the non-recognition for state income tax
purposes of certain operating losses.

        Revenues from discontinued operations (excluding equity investors) were
$36.8 million in 1996, as compared to $78.4 million in 1995. The net loss from
discontinued operations was $10.7 million in 1996, as compared to $1.6 million
in 1995, and consisted principally of revisions to the estimates of sales
proceeds for the disposal of the Company's investments in discontinued
operations, including reserves relating to investigations as discussed in Item
3. "Legal Proceedings" and Note I to the Consolidated Financial Statements.

        In connection with repayments of debt, the Company realized an
extraordinary gain of $1.7 million, or $1.1 million net of taxes in 1996.

                                       12
<PAGE>

Fiscal Year 1995 Compared with Fiscal Year 1994

        Revenues from continuing operations were $132.2 million, as compared to
$81.5 million in the prior year, an increase of $50.7 million, or 62%. This
revenue growth was primarily attributable to the KCI acquisition. The Company
incorporated the additional movable medical equipment obtained from the
acquisition on September 30, 1994 into its national distribution network with
the addition of six branch offices, which resulted in substantially higher
revenues.

        Operating income from continuing operations was $24.2 million, as
compared to $1.4 million in 1994. The improvement in operating income was
attributable to additional revenues and improved operating margins resulting
from the KCI acquisition. Non-operating activities, including corporate
overhead, accounted for operating losses of $7.8 million in 1995, as compared to
$6.1 million in 1994.

        Operating income from continuing operations in 1995 was adversely
affected by corporate general and administrative expenses of approximately $1.7
million incurred in connection with the Company's corporate strategic activities
during the year. These activities, which included the formation and activities
of a Special Committee of the Board of Directors to explore alternative ways of
maximizing shareholder value, were concluded in October 1995 when the Board
accepted the recommendation of the Special Committee to reject two outstanding
offers to acquire the Company and terminate any further efforts to sell the
Company at that time.

        Interest expense increased 37%, to $29.2 million, from $21.3 million in
1994. Increased debt associated with financing MEDIQ/PRN's acquisition of KCI on
September 30, 1994, resulted in higher interest expense, partially offset by
lower interest at the corporate level. Net cash proceeds from the sale of
discontinued operations in June and August 1995 aggregating approximately $24
million were used to reduce notes payable to banks and other long-term debt.

        Interest income was $1.5 million in 1995 and $1.4 million in 1994 and
was primarily derived from the Company's note receivable from MHM.

        Other charges and credits for 1995 included a loss of $1.1 million from
the sale of the Company's equity interest in New West Eyeworks, Inc. in April
1995 for $3.0 million, and income of $.6 million representing a portion of the
contingent proceeds earned in 1995 from the prior year sale of the Company's
interest in a kidney stone treatment center. Fiscal 1994 included a gain of $4.0
million related to the sale of the kidney stone treatment center and gains
totaling $1.4 million from dividends and the sale of other assets, including a
portion of the Company's equity interest in New West Eyeworks.

        The pretax loss was $3.7 million for 1995, as compared to a pretax loss
of $12.6 million in the prior year. The improvement in pretax income was
attributable to MEDIQ/PRN and the success of its integration of the assets
acquired in the KCI acquisition into its nationwide distribution network. Fiscal
1995 included non-recurring expenses of $1.7 million related to the strategic
activities of the Board of Directors and a loss of $1.1 million on the sale of
the Company's equity interest in New West Eyeworks. The pretax loss in 1994
included gains from the sale of the Company's interest in a kidney stone
treatment center and other assets totaling $5.4 million.

        The income tax benefit related to continuing operations was $.3 million,
as compared to $4.3 million in the prior year. The Company's effective tax rates
were disproportionate compared to the statutory rates as a result of goodwill
amortization and the non-recognition for state income tax purposes of certain
operating losses.

                                       13
<PAGE>

        Revenues from discontinued operations were $78.4 million in 1995, as
compared to $86.6 million in 1994. The net loss from discontinued operations was
$1.6 million in 1995, consisting of net income of $3.1 million from operations
partially offset by a net loss on disposal of $4.7 million  as compared to net
income of $1.0 million in the prior year.

Liquidity and Capital Resources

        In 1996, cash provided by operating activities increased to $29.1
million, as compared to $24.7 million in the prior year. This increase was
principally the result of increased operating income and reduced working capital
requirements.

        Net cash used in investing activities was $16.9 million for 1996,
primarily attributable to expenditures for rental medical equipment totaling
$18.1 million, the repurchase of the MEDIQ/PRN warrant for $1.6 million
partially offset by proceeds from the sale of assets and discontinued operations
of $5.5 million. The Company presently anticipates capital expenditures of
approximately $14 million during fiscal 1997, primarily for rental medical
equipment. The Company intends to finance the rental medical equipment
expenditures with cash from operations.

        Net cash used in financing activities was $11.9 million for 1996 and
consisted primarily of debt repayments of $39 million partially offset by
borrowings of $25.7 million and proceeds from exercise of stock options of $1.4
million.

        On October 1, 1996, the Company, together with MEDIQ/PRN entered into a
$260 million Credit Agreement with a group of lenders led by Banque Nationale de
Paris as Administrative Agent and Initial Issuing Bank and NationsBank, N.A. as
the Documentation Agent (the "Credit Agreement"). The Credit Agreement provides
for four separate loans, a Term A loan ($35 million), a Term B loan ($100
million), an Acquisition Revolver ($100 million) and a Working Capital Revolver
($25 million). The amounts available under the Credit Agreement allowed the
Company to refinance substantially all of its existing senior debt, its
outstanding lines of credit, all of MEDIQ/PRN's subordinated debt, and
MEDIQ/PRN's $100 million 12-1/8% Senior Secured Notes due 1999. Upon completion
of the financing, the Company had $40 million available under the Acquisition
Revolver and $10 million available under the Working Capital Revolver both of
which were available to the Company upon continued compliance with certain
financial covenants and/or ratios.

        The loans bear interest at either the prime rate plus a factor or at a
Eurodollar rate plus a factor. The factor changes quarterly based upon the
Company's leverage ratio. On October 1, 1996, the Company's interest rate on the
Term A loan, the Acquisition Revolver and the Working Capital Revolver was prime
(8.25% at September 30, 1996) plus 1.25% or Eurodollar (5.38 % at September 30,
1996) plus 2.75% and the interest rate on the Term B loan was prime plus 1.75%
or Eurodollar plus 3.25%. The loans are collateralized by substantially all of
the assets of the Company. The proceeds from the sales of PCI, NutraMax, Mobile
X-Ray and Health Examinetics aggregating approximately $128 million, must be
utilized to repay outstanding advances under the Acquisition Revolver upon
receipt.

        The Term A loan is payable in quarterly installments of $1.2 million
beginning December 31, 1996 through September 30, 2001 and in quarterly
installments of $2.75 million from December 31, 2001 through September 30, 2002.
The Term B loan is payable in quarterly installments of $.25 million beginning
December 31, 1996 through September 30, 2002, quarterly installments of $8.5
million in fiscal 2003 and quarterly installments of $15 million in fiscal 2004.
The Company can borrow and repay under the Acquisition Revolver until March 31,
1998 in accordance with the Credit Agreement. On March 31, 1998, the Acquisition
Revolver converts to a term loan which will be repaid in quarterly installments
beginning on June 30, 1998. The first two installments will be at 5.0% of the
converted

                                       14
<PAGE>

balance and all remaining quarterly payments will be at 5.625% of the converted
balance. The Working Capital Revolver terminates on September 30, 2002 at which
time all outstanding balances are due.

        The Credit Agreement requires the Company to maintain certain financial
ratios and imposes certain other financial and dividend limitations. The terms
of the Company's Credit Agreement preclude the payment of dividends until
October 1, 1997.

        As a result of the refinancing, the Company recognized in the first
quarter of 1997, an extraordinary charge of $13 million before taxes resulting
from the write-off of deferred charges and premiums incurred related principally
to the tender offer to purchase the $100 million Senior Secured Notes, and a
non-recurring charge of $11 million for the purchase of a warrant to purchase
10% of MEDIQ/PRN issued in connection with financing the KCI acquisition.

        Accordingly, the Company has reflected the outstanding balances of its
lines of credit, subordinated debt and Senior Secured Notes as long-term senior
debt on its Consolidated Balance Sheet at September 30, 1996.

        The Company may also use a portion of the new credit facility to redeem
or repurchase its 7.25% convertible subordinated debentures and its 7.50%
exchangeable subordinated debentures. However, except to the extent required by
the terms of the indentures pursuant to which these debentures were issued,
there can be no assurance that any such redemption or repurchase will occur.

        In accordance with the terms of the Credit Agreement, effective November
15, 1996, the Company entered into interest rate hedge transactions which
terminate in January 2000. Under one of these transactions, on $50 million of
borrowings, the Company's base Eurodollar borrowing rate is fixed at 6.26% per
annum, instead of a floating Eurodollar rate. Under the second hedge
transaction, on an additional $50 million of borrowings, the Company's base
Eurodollar rate cannot be lower than 5.25% or greater than 7.43%.

        The Company's 7.25% convertible subordinated debentures due 2006 require
the Company to offer to repurchase a portion of the debentures if stockholders'
equity is $40 million or less at the end of two consecutive fiscal quarters.
Since June 30, 1994, the Company's stockholders' equity has been less than $40
million. The Company repurchased $22.5 million principal amount of debentures in
fiscal 1996. As of September 30, 1996, the Company is required to either
repurchase or offer to redeer $11.25 million of debentures in fiscal 1997. These
debentures were reclassified to long-term senior debt in connection with the
terms of the refinancing discussed above since the redemption of the 7.25%
debentures must be made from drawings on the Acquisition Revolver. In November
and December 1996, the Company repurchased an aggregate of $2.2 million of the
debentures at approximately face value in the open market. The Company is
required to either repurchase or offer to redeem $9.05 million of debentures
prior to January 30, 1997 pursuant to the terms of the mandatory redemption
provisions of the indenture. Additionally, the Company is required to either
repurchase or offer to redeem $11.25 million of debentures prior to July 30,
1997 and semi-annually thereafter until all of the debentures are repurchased or
stockholders' equity is more than $40 million. Accordingly, the Company has
classified $22.5 million as senior debt in accordance with the terms of the
Credit Agreement.

        As of September 30, 1996, the Company had lines of credit aggregating
$31 million, bearing interest at rates ranging from prime (8.25% at September
30, 1996) to prime plus 1.5%. At September 30, 1996, the Company had $26.4
million in borrowings and $2.0 million of letters of credit outstanding under
these facilities. As a result of the refinancing discussed above, the
outstanding amounts under these facilities are reflected as long-term senior
debt in the Company's Consolidated Balance Sheet at September 30, 1996.

                                       15
<PAGE>

        The Company expects that its primary sources of liquidity for operating
activities will be generated through cash flows from MEDIQ/PRN. Proceeds from
the sale of discontinued operations and miscellaneous assets will be used to
repay long-term debt. The Company believes that sufficient funds will be
available from operating cash flows, the sale of assets and the new credit
facility to meet the Company's anticipated operating and capital requirements,
including obligations to redeem or repurchase in the open market a portion or
all of the 7.25% and/or 7.50% debentures as previously discussed.


                                       16
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                                                           Page
                                                                           ----
Independent Auditors' Report                                                18

Consolidated Statements of Operations -
 Three Years Ended September 30, 1996                                       19

Consolidated Balance Sheets - September 30, 1996 and 1995                   20

Consolidated Statements of Stockholders' Equity -
 Three Years Ended September 30, 1996                                       21

Consolidated Statements of Cash Flows -
 Three Years Ended September 30, 1996                                       22

Notes to Consolidated Financial Statements                                 23-37



                                       17
<PAGE>



                          Independent Auditors' Report


Board of Directors and Stockholders
MEDIQ Incorporated
Pennsauken, New Jersey


        We have audited the accompanying consolidated balance sheets of MEDIQ
Incorporated and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. Our audits also
include the financial statement schedules listed in the index at Item 14(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of MEDIQ Incorporated and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.






DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania
December 26, 1996


                                       18
<PAGE>


                      MEDIQ INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                          Year Ended September 30,
                                                                     -----------------------------------
                                                                     1996           1995            1994
                                                                     ----           ----            ----
                                                                    (in thousands, except per share data)

<S>                                                              <C>            <C>            <C>        
Revenues                                                         $   136,066    $   132,241    $    81,498

Costs and Expenses:
  Operating                                                           57,468         53,164         38,654
  Selling and administrative                                          20,795         24,714         20,364
  Restructuring                                                        2,200           --             --
  Depreciation and amortization                                       30,157         30,161         21,126
                                                                 -----------    -----------    -----------
                                                                     110,620        108,039         80,144
                                                                 -----------    -----------    -----------
Operating Income                                                      25,446         24,202          1,354

Other (Charges) Credits:
  Interest expense                                                   (27,307)       (29,241)       (21,335)
  Interest income                                                      1,452          1,502          1,395
  Other                                                               (6,147)          (121)         5,986
                                                                 -----------    -----------    -----------
Loss from Continuing Operations before
  Income Tax Benefit and Extraordinary Charge                         (6,556)        (3,658)       (12,600)

Income Tax Benefit                                                      (378)          (312)        (4,346)
                                                                 -----------    -----------    -----------

Loss from Continuing Operations before
  Discontinued Operations and Extraordinary Charge                    (6,178)        (3,346)        (8,254)

Discontinued Operations:
  Income from operations (net of income taxes of
  $2,025,000 in 1996; $3,393,000 in 1995 and $301,000 in 1994)         3,929          3,132            936
  Loss on disposal (net of income taxes of ($5,406,000)
  in 1996 and $953,000 in 1995)                                      (14,598)        (4,733)          --
                                                                 -----------    -----------    -----------
                                                                     (10,669)        (1,601)           936
                                                                 -----------    -----------    -----------

Loss before Extraordinary Charge                                     (16,847)        (4,947)        (7,318)

Extraordinary Gain, Early Retirement of Debt
  (net of income tax expense of $587,000)                              1,143           --             --
                                                                 -----------    -----------    -----------
Net Loss                                                         $   (15,704)   $    (4,947)   $    (7,318)
                                                                 ===========    ===========    =========== 

Earnings Per Share:
  Income (Loss) from:
    Continuing Operations                                        $      (.25)   $      (.14)   $      (.34)
    Discontinued Operations                                             (.43)          (.06)           .04
                                                                 -----------    -----------    -----------
  Loss before Extraordinary Gain                                        (.68)          (.20)          (.30)
  Extraordinary Gain                                                     .05           --             --
                                                                 -----------    -----------    -----------
  Net Loss                                                       $      (.63)   $      (.20)   $      (.30)
                                                                 ===========    ===========    ===========
Weighted Average Shares Outstanding                                   24,967         24,604         24,405
                                                                 ===========    ===========    ===========
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       19
<PAGE>




                      MEDIQ INCORPORATED AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                 September 30,
                                                                               ----------------
                                                                               1996        1995
                                                                               ----        ----
                                                                                (in thousands)
                                     Assets
                                     ------
<S>                                                                         <C>          <C>
Current Assets:

  Cash                                                                      $   3,219    $   2,966
  Accounts receivable (net of allowance of $2,383,000 in
    1996 and $2,207,000 in 1995)                                               30,233       27,884
  Inventories                                                                   6,614        4,181
  Deferred income taxes                                                         2,447        4,310
  Other current assets                                                          2,280        5,095
                                                                            ---------    ---------
        Total Current Assets                                                   44,793       44,436

Investment in discontinued operations - restricted                             54,717       70,162
Note receivable from MHM                                                        3,967       10,733
Property, plant and equipment                                                 122,706      132,823
Goodwill                                                                       58,321       61,744
Other assets                                                                   13,359       14,271
                                                                            ---------    ---------
Total Assets                                                                $ 297,863    $ 334,169
                                                                            =========    =========

                      Liabilities and Stockholders' Equity
                      ------------------------------------
Current Liabilities:
  Accounts payable                                                          $   8,907    $   6,694
  Accrued expenses                                                             17,169       20,230
  Other current liabilities                                                       458          461
  Current portion of long-term debt                                             8,520       37,300
                                                                            ---------    ---------
        Total Current Liabilities                                              35,054       64,685

Senior debt                                                                   192,461      136,949
Subordinated debt                                                              41,229       81,907
Deferred income taxes                                                           7,254       13,414
Other liabilities                                                               4,420        5,697

Commitments and contingencies                                                    --           --

Stockholders' Equity:
  Preferred stock ($.50 par value:  Authorized 20,000,000 shares;
    issued Series A: 6,688,000 in 1996 and 6,752,000 in 1995)                   3,344        3,376
  Common stock ($1 par value:  Authorized 40,000,000 shares;
    issued 19,191,000 in 1996 and 19,127,000 in 1995)                          19,191       19,127
  Capital in excess of par value                                               21,517       22,124
  Accumulated deficit                                                         (21,771)      (6,067)
  Treasury stock, at cost (preferred shares:  377,000 in 1996 and
     377,000 in 1995; common shares:  772,000 in 1996 and 1,275,000
     in 1995)
                                                                               (4,836)      (7,043)
                                                                            ---------    ---------
        Total Stockholders' Equity                                             17,445       31,517
                                                                            ---------    ---------
Total Liabilities and Stockholders' Equity                                  $ 297,863    $ 334,169
                                                                            =========    =========

</TABLE>


                 See Notes to Consolidated Financial Statements


                                       20
<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                       
                               Preferred Stock        Common Stock                  Retained 
                               ---------------      ----------------   Capital in   Earnings 
                               Shares               Shares             Excess of  (Accumulated  Treasury
                               Issued    Amount     Issued    Amount   Par Value    Deficit)     Stock
                               ------   -------     ------   -------   ---------  ------------  --------

<S>                            <C>      <C>         <C>      <C>       <C>        <C>           <C>      
Balance October 1, 1993         6,838   $ 3,419     19,042   $19,042   $23,349    $ 8,281       $ (9,517)

Net loss                                                                           (7,318)
Dividends                                                                          (2,083)
Conversion of preferred stock
  to common stock                 (22)      (11)        22        22       (11)
Issuance of stock                                                         (600)                    1,309
Stock options exercised                                                   (381)                      779
                                -----   -------     ------   -------   -------   --------       --------
Balance September 30, 1994      6,816     3,408     19,064    19,064    22,357     (1,120)        (7,429)

Net loss                                                                           (4,947)
Conversion of preferred stock
  to common stock                 (64)      (32)        63        63       (31)
Stock options exercised                                                   (202)                      386
                                -----   -------     ------   -------   -------   --------       --------
Balance September 30, 1995      6,752     3,376     19,127    19,127    22,124     (6,067)        (7,043)

Net loss                                                                          (15,704)
Conversion of preferred stock
  to common stock                 (64)      (32)        64        64       (32)
Stock options exercised                                                   (575)                   2,207
                                -----   -------     ------   -------   -------   --------      --------
Balance September 30, 1996      6,688   $ 3,344     19,191   $19,191   $21,517   $(21,771)     $ (4,836)
                                =====   =======     ======   =======   =======   ========      ======== 
</TABLE>


                 See Notes to Consolidated Financial Statements


                                       21

<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                    Year Ended September 30,
                                                                                             --------------------------------------
                                                                                               1996           1995           1994
                                                                                             --------       --------       --------
<S>                                                                                          <C>            <C>            <C>      

Cash Flows From Operating Activities                                                                        (in thousands)
Net loss                                                                                     $(15,704)      $ (4,947)      $ (7,318)
Adjustments to reconcile net loss to net cash provided by operating activities:
        Depreciation and amortization                                                          30,157         30,161         21,126
        Provision for doubtful accounts                                                         1,237            993            984
        Provision for deferred income taxes (benefit)                                             209          1,182         (3,146)
        Accretion of acquisition indebtedness                                                     621          1,402           --
        Reserve on note receivable from MHM                                                     6,000           --             --
        Cash provided by discontinued operations                                                3,240          7,532          3,073
        (Income) loss from discontinued operations                                             10,669          1,601           (936)
        Extraordinary item, early extinguishment of debt                                       (1,730)          --             --
        Other                                                                                     488            373         (4,468)
        Increase (decrease), net of effects from acquisitions:
              Accounts receivable                                                              (2,428)       (11,305)         1,527
              Inventories                                                                      (2,433)         1,758            175
              Accounts payable                                                                  2,213           (108)        (1,615)
              Accrued expenses                                                                 (2,973)        (3,036)         2,303
              Other current assets and liabilities                                               (498)          (907)         1,839
                                                                                             --------       --------       --------
Net cash provided by operating activities                                                      29,068         24,699         13,544

Cash Flows From Investing Activities
Proceeds from sale of assets                                                                    3,976         10,957          8,251
Proceeds from sale of discontinued operations                                                   1,500         23,858           --
Purchase of equipment                                                                         (18,073)       (11,548)        (7,320)
Acquisitions                                                                                     --             --          (70,528)
Note receivable from SpectraCair                                                               (3,250)          --             --
Payment of Note receivable from SpectraCair                                                     3,250           --             --
Repurchase of MEDIQ/PRN warrant                                                                (1,625)          --             --
Other                                                                                          (2,727)        (5,016)        (3,775)
                                                                                             --------       --------       --------
Net cash provided by (used in) investing activities                                           (16,949)        18,251        (73,372)

Cash Flows From Financing Activities
Borrowings                                                                                     25,747          1,190         67,540
Debt repayments                                                                               (39,045)       (42,853)       (19,299)
Dividends                                                                                        --             --           (2,722)
Proceeds from exercise of options                                                               1,432            184            398
                                                                                             --------       --------       --------
Net cash provided by (used in) financing activities                                           (11,866)       (41,479)        45,917
                                                                                             --------       --------       --------

Increase (decrease) in cash                                                                       253          1,471        (13,911)

Cash:
  Beginning balance                                                                             2,966          1,495         15,406
                                                                                             --------       --------       --------
  Ending balance                                                                             $  3,219       $  2,966       $  1,495
                                                                                             ========       ========       ========

Supplemental disclosure of cash flow information:
  Interest paid                                                                              $ 25,563       $ 26,200       $ 20,440
                                                                                             ========       ========       ========
  Income taxes paid (refunded)                                                               $    557       $    205       $ (2,886)
                                                                                             ========       ========       ========
Supplemental disclosure of non-cash investing and financing activities:
  Equipment financed with long-term debt and capital leases                                  $    840          1,808       $  5,937
                                                                                             ========       ========       ========
  Portion of acquisitions financed by sellers                                                $   --         $   --         $ 19,384
                                                                                             ========       ========       ========
  Liabilities assumed in connection with acquisitions                                        $   --         $   --         $  2,804
                                                                                             ========       ========       ========

</TABLE>


                 See Notes to Consolidated Financial Statements

                                       22

<PAGE>

Note A - Summary of Significant Accounting Policies

         Principles of consolidation - The consolidated financial statements
include the accounts of MEDIQ Incorporated and its subsidiaries (the "Company").
Investments in companies owned 20% to 50% are accounted for under the equity
method of accounting. All other investments are stated at the lower of cost or
net realizable value. In consolidation, all significant intercompany
transactions and balances have been eliminated.

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

         Property, plant and equipment - Rental equipment, machinery and
equipment, buildings and improvements, and land are recorded at cost. Capital
leases are recorded at the lower of fair market value or the present value of
future lease payments. The Company provides straight-line depreciation and
amortization over the estimated useful lives (rental equipment and machinery and
equipment - 3 to 10 years and buildings and improvements - 10 to 25 years).

         Goodwill - The cost of acquired businesses in excess of net assets is
amortized on a straight-line basis primarily over periods of 20 years.
Accumulated amortization was $15.3 million and $12 million as of September 30,
1996 and 1995, respectively.

         Carrying value of long-term assets - The Company evaluates the carrying
value of long-term assets, including rental equipment, goodwill and other
intangible assets, based upon current and anticipated undiscounted cash flows,
and recognizes an impairment when it is probable that such estimated cash flows
will be less than the carrying value of the asset. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value.

         Revenue recognition policy - Rental revenue is recognized in accordance
with the terms of the related rental agreement and the usage of the related
rental equipment. Revenues from other operating activities are recognized as
services are rendered or as income is earned.

         Subsidiary and unconsolidated affiliate stock transactions - Gains
(losses) resulting from the issuance or repurchase of stock by subsidiaries and
unconsolidated affiliates are recognized by the Company as equity participation
in the Consolidated Statements of Operations.

        Earnings (loss) per share - Primary net earnings (loss) per share are
computed by dividing net earnings (loss) by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents include shares issuable upon conversion of the
Company's convertible preferred stock, convertible subordinated debt and
exercise of outstanding stock options.

         Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates and assumptions.

         New Accounting Pronouncements - In October 1995, the Financial
Accounting Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123"), which will be adopted
by the Company in fiscal year 1997 as required by the statement. The Company has
elected to continue to measure such compensation expense using the method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees,"as permitted by SFAS 123. When adopted, SFAS 123 will not
have a significant effect on the Company's financial position or results of
operations but will require the Company to provide expanded disclosure regarding
its stock-based employee compensation plans.

                                       23
<PAGE>

Note A - Summary of Significant Accounting Policies (Continued)

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

Note B - Dispositions

        During fiscal 1996, the Company continued to pursue its previously
announced strategy of divesting substantially all operating assets other than
MEDIQ/PRN and Management Services, Inc. and using the proceeds thereof to reduce
indebtedness.

Discontinued Operations

        In the fourth quarter of fiscal 1996, the Company entered into an
agreement with NutraMax (NASDAQ:NMPC), a leading private label health and
personal care products company. Pursuant to this agreement, the Company
anticipates selling to NutraMax all of the 4,037,258 shares of NutraMax common
stock owned by the Company at a price of $9.00 per share. Under the terms of the
agreement, the Company will receive from NutraMax $19.9 million in cash and an
interest-bearing promissory note in the amount of $16.4 million. The note is
payable when NutraMax shares owned by the Company, which currently are held in
escrow in support of the Company's 7.50% Exchangeable Subordinated Debentures,
are released from that escrow. The NutraMax shares are to be released from
escrow upon the purchase or redemption of the 7.50% debentures. Upon closing of
the transaction, the Company will realize an after-tax gain of $6.2 million. The
cash proceeds from this transaction will be used to reduce debt.

        On October 11, 1996, PCI, a leading provider of integrated
pharmaceutical packaging services, was acquired by Cardinal. As a result, the
Company received 966,000 shares of Cardinal stock which, based on the closing
price on October 11, 1996 had a market value of $79.2 million. The Company
recognized an after tax gain of $31.8 million in the first quarter of fiscal
1997. In December 1996, Cardinal's common stock split 3 for 2 and, accordingly
the Company now owns 1,449,000 shares which have an aggregate market value of
$81.3 million based upon the closing price of $56.125 per share on December 20,
1996. The Company anticipates selling its Cardinal shares in fiscal 1997 and
using the proceeds to reduce debt.

         In the second quarter of fiscal 1995, the Company adopted a plan to
sell the following four non-core businesses: Medifac, Inc. ("Medifac"), a
provider of health care facility planning, architectural and development
services; Health Examinetics, Inc. ("Health Examinetics"), a provider of mobile
health testing services; MEDIQ Mobile X-Ray Services, Inc. ("Mobile X-Ray"), a
provider of portable X-ray and EKG services; and MEDIQ Imaging Services, Inc.
("MEDIQ Imaging"), a provider of diagnostic imaging services in mobile and fixed
sites. In the fourth quarter of fiscal 1995, the Company revised the plan to
include the operations of HealthQuest, Inc. ("HealthQuest"), a provider of case
management and utilization review services and the Company's equity investment
in InnoServ Technologies, Inc. which is anticipated to be divested during fiscal
1997.

         The Company's prior year consolidated financial statements have been
restated to report the net assets and operating results of these businesses and
equity investments as discontinued operations.

         In November 1996, the Company sold substantially all of the assets of
Mobile X-Ray to Symphony Diagnostics, Inc., a subsidiary of Integrated Health
Services, Inc. (NYSE:IHS) for $5.3 million in cash and shares of Integrated
Health Services common stock with a value of $5.2 million at the closing with
the possibility of the Company receiving additional cash consideration based
upon the occurrence of certain future events.

                                       24

<PAGE>

Note B - Dispositions (Continued)

        In September 1996, the Company sold its common stock investment in
HealthQuest, Inc. to management for approximately $75,000 which approximated its
carrying value.

         In August 1995, the Company sold the assets of MEDIQ Imaging Services,
Inc., the Company's mobile and fixed site ultrasound and nuclear imaging
business, to NMC Diagnostic Services Inc., a division of W.R. Grace & Co., for
approximately $17 million in cash, and the assumption of $9.7 million of debt.

         In June 1995, the Company sold Medifac, Inc., a health care facility
planning, design and project management firm, and related assets to the
management of Medifac for approximately $11 million, consisting of $6 million in
cash and $5 million in notes, and the assumption of $26.9 million of
non-recourse debt.

         In August 1994, the Company merged its MEDIQ Equipment and Maintenance
Services, Inc. ("MEMS") subsidiary with InnoServ, and the Company received
2,030,000 shares of InnoServ common stock, or approximately 40% of the
outstanding shares, and warrants to purchase at $6.25 per share an additional
325,000 shares of common stock. No gain or loss resulted from the merger. The
Company anticipates divesting its investment in InnoServ in fiscal 1997.

        The Company expects to sell Health Examinetics to its management for
cash and an interest bearing note aggregating $1.7 million. The Company
presently anticipates that the sale transaction will be completed in the second
quarter of fiscal 1997.

The investment in discontinued operations as of September 30, 1996 consisted of
(in thousands):

                                     September 30,
                                ---------------------
                                  1996          1995
                                -------       -------
       Current assets           $50,331       $55,362
       Current liabilities        9,185         8,841
                                -------       -------
       Net current assets        41,146        46,521
       Net fixed assets           5,387         4,726
       Other noncurrent assets    8,184        18,915
                                -------       -------
                                $54,717       $70,162
                                =======       =======

Revenues from discontinued operations (excluding equity investees) were $36.8
million, $78.4 million and $86.6 million in 1996, 1995 and 1994 respectively.

Sale of Other Assets

         In December 1993, the Company exercised warrants to purchase 229,518
shares of common stock of New West Eyeworks, Inc. ("New West") in connection
with New West's initial public offering. The warrants were issued to the Company
in 1988 together with $5.1 million of New West preferred stock as partial
consideration for the sale of a business. In connection with the offering, the
Company received $1.9 million, representing a partial redemption of the
preferred shares, net proceeds from the sale of 82,500 shares of common stock
and partial payment of accumulated preferred stock dividends and accrued
interest. The Company received an additional 57,143 shares of New West common
stock in payment of the balance of accumulated dividends and interest. The
Company recorded income of $1.2 million in 1994 related to the sale of New West
common stock and the payment of dividends and interest. In April 1995, the
Company sold its remaining investments in New West common stock and preferred
stock for aggregate consideration of $3 million resulting in a $1.1 million
pretax loss.

         In September 1994, the Company sold its rights under a management
contract related to a kidney stone treatment center for $4 million in cash and
$3 million contingent upon future results of operations. The sale resulted in a
pretax gain of $4 million in 1994 and $.6 million in 1995 representing a portion
of the contingent proceeds.

                                       25
<PAGE>

Note C - Restructuring Charge

         In the first quarter of fiscal 1996, the Company recorded a
restructuring charge of $2.2 million for employee severance costs incurred in
connection with a plan approved by the Board of Directors to downsize corporate
functions and consolidate certain activities with the operations of MEDIQ/PRN.
The plan resulted in the termination of 29 employees in fiscal 1996. The Company
paid approximately $.9 million of severance benefits in fiscal 1996 with the
balance of the restructuring obligation due over the next two fiscal years.


Note D - Acquisition

         On September 30, 1994, the Company acquired the critical care and life
support rental equipment inventory of KCI Therapeutic Services, Inc., a
subsidiary of Kinetic Concepts, Inc. ("KCI"). The purchase price was
approximately $88 million, including transaction costs and the assumption of
certain capitalized lease obligations. The purchase price was allocated to
assets acquired and liabilities assumed based on fair values at the date of the
acquisition. The excess of the purchase price over fair values of the net assets
acquired of $44.5 million was recorded as goodwill and is being amortized over
twenty years.


Note E - Property, Plant and Equipment
<TABLE>
<CAPTION>

                                                              September 30,
                                                ----------------------------------------
                                                   1996                           1995
                                                   ----                           ----
                                                             (in thousands)
<S>                                             <C>                             <C>     
Rental equipment                                $211,948                        $205,773
Equipment and fixtures                            11,460                          10,316
Building and improvements                          7,486                           7,272
Land                                                 149                             149
                                                --------                        --------
                                                 231,043                         223,510
Less accumulated depreciation
  and amortization                              (108,337)                        (90,687)
                                                --------                        --------
                                                $122,706                        $132,823
                                                ========                        ========
</TABLE>

Depreciation and amortization expense related to property, plant and equipment
was $26.3 million, $26.1 million and $19.7 million in 1996, 1995 and 1994,
respectively.


 Note F - Accrued Expenses
<TABLE>
<CAPTION>

                                                              September 30,
                                                ----------------------------------------
                                                   1996                          1995
                                                   ----                          ----
                                                          (in thousands)
<S>                                             <C>                             <C>     
Interest                                        $  5,359                       $  5,301
Payroll and related taxes                          3,255                          3,093
Pension                                            2,188                          2,875
Property and other taxes                           1,872                          2,128
Other                                              4,495                          6,833
                                                --------                       --------
                                                $ 17,169                       $ 20,230
                                                ========                       ========
</TABLE>


Note G - Notes Payable to Financial Institutions

As of September 30, 1996, the Company had $31 million of lines of credit which
bear interest at rates ranging from prime (8.25% at September 30, 1996) to prime
plus 1.5% and are secured primarily by a portion of the shares of common stock
of NutraMax and PCI owned by the company, certain accounts receivable, a pledge
of the common stock of MEDIQ/PRN and a second mortgage on real estate. At
September 30, 1996, $26.0 million in borrowings and $2.0 million of letters of
credit were outstanding under these facilities. The amount of available credit
fluctuated based upon the amount of eligible accounts receivable. The average
amount outstanding under lines of credit in 1996 was $17.7 million and the
weighted average interest rate computed on the monthly outstanding balance was
9.3%.

                                       26

<PAGE>



Pursuant to the Company's Credit Agreement more fully discussed in Note H, the
Company refinanced these lines of credit. The Credit Agreement includes a
working capital revolver of $25 million and expires on September 30, 2002.
Accordingly, the amounts outstanding under the existing lines of credit as of
September 30, 1996 have been reclassified to long-term senior debt in the
Company's Consolidated Balance Sheet.


Note H - Long-Term Debt

Senior debt consisted of the following:


<TABLE>
<CAPTION>

                                                                 September 30,
                                                              -------------------
                                                                1996       1995
                                                              --------   --------
                                                                 (in thousands)
<S>                                                           <C>        <C>   
Corporate debt:
  Lines of Credit                                             $ 14,020   $   --
  Revolving credit facility                                       --          567
  Term loan                                                       --        1,815
  7.25% convertible subordinated debentures due 2006            22,500       --
Subsidiary debt:
  Lines of Credit                                               12,010       --
  Senior secured notes due 1999                                100,000    100,000
  Term loan payable monthly through 2000 at prime plus 2%       27,448     37,493
  Term loans payable                                              --        2,828
  Capital lease obligations payable in varying installments
    through 1999 at fixed rates from 9% to 13.6%                 6,204      9,046
  10% subordinated notes due 2004                                8,799       --
  10% subordinated notes due 1999                               10,000       --
                                                              --------   --------
                                                               200,981    151,749
Less current portion                                             8,520     14,800
                                                              --------   --------
                                                              $192,461    136,949
                                                              ========   ========
</TABLE>


Subordinated debt consisted of the following:

                                                               September 30,
                                                            --------------------
                                                              1996        1995
                                                            --------    --------
                                                               (in thousands)
Corporate debt:
  7.5% exchangeable subordinated debentures due 2003        $ 34,500    $ 34,500
  7.25% convertible subordinated debentures due 2006           6,729      51,729

Subsidiary debt:
  10% subordinated notes due 2004                                 --       8,664
  10% subordinated notes due 1999                                 --       9,514
                                                            --------    --------
                                                              41,229     104,407
Less current portion                                              --      22,500
                                                            --------    --------
                                                            $ 41,229    $ 81,907
                                                            ========    ========

        On October 1, 1996, the Company, together with MEDIQ/PRN entered into a
$260 million Credit Agreement with a group of lenders led by Banque Nationale de
Paris as Administrative Agent and Initial Issuing Bank and NationsBank, N.A. as
the Documentation Agent (the "Credit Agreement"). The Credit Agreement provides
for four separate loans, a Term A loan ($35 million), a Term B loan ($100
million), an Acquisition Revolver ($100 million) and a Working Capital Revolver
($25 million). The amounts available under the Credit Agreement allowed the
Company to refinance substantially all of its existing senior debt, its
outstanding lines of credit, all of MEDIQ/PRN's subordinated debt, and
MEDIQ/PRN's $100 million 12-1/8% Senior Secured Notes due 1999. Upon completion
of the financing, the Company had $40 million available

                                       27

<PAGE>

under the Acquisition Revolver and $10 million available under the Working
Capital Revolver both of which were available to the Company upon compliance
with certain financial covenants and/or ratios.

        The loans bear interest at either the prime rate plus a factor or at a
Eurodollar rate plus a factor. The factor changes quarterly based upon the
Company's leverage ratio. The Company's interest rate on the Term A loan, the
Acquisition Revolver and the Working Capital Revolver is prime (8.25% at
September 30, 1996) plus 1.25% or Eurodollar (5.38 % at September 30, 1996) plus
2.75% and the interest rate on the Term B loan is prime plus 1.75% or Eurodollar
plus 3.25%. The loans are collateralized by substantially all of the assets of
the Company. The proceeds from the sales of PCI, NutraMax, Mobile X-Ray and
Health Examinetics aggregating approximately $128 million must be utilized to
repay outstanding advances under the Acquisition Revolver upon receipt.

        The Term A loan is payable in quarterly installments of $1.2 million
beginning December 31, 1996 through September 30, 2001 and in quarterly
installments of $2.75 million from December 31, 2001 through September 30, 2002.
The Term B loan is payable in quarterly installments of $.25 million beginning
December 31, 1996 through September 30, 2002, quarterly installments of $8.5
million in fiscal 2003 and quarterly installments of $15 million in fiscal 2004.
The Company can borrow and repay under the Acquisition Revolver until March 31,
1998 in accordance with the Credit Agreement. On March 31, 1998, the Acquisition
Revolver converts to a term loan which will be repaid in quarterly installments
beginning on June 30, 1998. The first two installments will be at 5.0% of the
converted balance and all remaining quarterly payments will be at 5.625% of the
converted balance. The Working Capital Revolver terminates on September 30, 2002
at which time all outstanding balances are due.

        The Credit Agreement requires the Company to maintain certain financial
ratios and imposes certain other financial and dividend limitations. The terms
of the Company's Credit Agreement preclude the payment of cash dividends until
October 1, 1997.

        As a result of the refinancing, the Company recognized in the first
quarter of 1997, an extraordinary charge of $13 million before taxes resulting
from the write-off of deferred charges and premiums incurred related principally
to the tender offer to purchase the $100 million 12-1/8% Senior Secured Notes
due 1999, and a non-recurring charge of $11 million for the purchase of a
warrant to purchase 10% of MEDIQ/PRN issued in connection with financing the KCI
acquisition.

        Accordingly, the Company has reflected the outstanding balances of its
lines of credit, certain subordinated debt and Senior Secured Notes as long-term
senior debt on its Consolidated Balance Sheet at September 30, 1996.

        In accordance with the terms of the Credit Agreement, effective November
15, 1996, the Company entered into interest rate hedge transactions which
terminate in January 2000. Under one of these transactions, on $50 million of
borrowings, the Company's base Eurodollar borrowing rate is fixed at 6.26% per
annum, instead of a floating Eurodollar rate. Under the second hedge
transaction, on an additional $50 million of borrowings, the Company's base
Eurodollar rate cannot be lower than 5.25% or greater than 7.43%.

        The 7.5% debentures are exchangeable for an aggregate of 2,255,000
shares of NutraMax common stock owned by the Company, or an equivalent of $15.30
per share, and are redeemable in whole or in part at the option of the Company
after July 1996. Interest is payable semi-annually on January 15 and July 15. On
October 1, 1996, the Company repurchased $6.7 million of its 7.5% debentures in
the open market at a discount resulting in a pretax gain of $.4 million. This
gain was recorded in the first quarter of fiscal 1997 as an extraordinary item.

                                       28

<PAGE>


Note H - Long-Term Debt (Continued)

        The 7.25% debentures are convertible at any time prior to maturity into
shares of the common stock of the Company at $7.50 per share. Interest is
payable semi-annually on June 1 and December 1. Annual sinking fund payments are
scheduled to commence in June 1997. However, because of prior open market
purchases of these debentures, the Company will not be required to make the
initial sinking fund payments. The Company is also required to offer to
repurchase a portion of the debentures if stockholders' equity is $40 million or
less at the end of two consecutive fiscal quarters. Since June 30, 1994, the
Company's stockholders' equity has been less than $40 million. As of September
30, 1996, the Company is required to either repurchase or offer to redeem $11.25
million of the debentures in fiscal 1997. These debentures were reclassified to
long-term senior debt in connection with the terms of the refinancing discussed
above since the redemption of the 7.25% debentures must be made from drawings on
the Acquisition Revolver. In November and December 1996, the Company repurchased
an aggregate of $2.2 million of the debentures at approximately face value in
the open market. The Company is required to either repurchase or offer to redeem
$9.05 million of debentures prior to January 30, 1997 pursuant to the terms of
the mandatory redemption provisions of the indenture. The Company is required to
either repurchase or offer to redeem an additional $11.25 million of debentures
prior to July 30, 1997 and semi-annually thereafter until all of the debentures
are repurchased or stockholders' equity is more than $40 million.

        In connection with repayments of debt the Company realized an
extraordinary gain of $1.7 million, or $1.1 million net of taxes, in 1996.

Maturities of long-term debt giving effect to the refinancing described above
are as follows:

<TABLE>
<CAPTION>

Year Ending September 30,                Senior                Subordinated              Total
-------------------------               --------               ------------             --------
                                                              (in thousands)
<C>                                     <C>                     <C>                     <C>     
1997                                    $  8,520                $      --               $  8,520
1998                                      16,648                    6,729                 23,377
1999                                      27,073                       --                 27,073
2000                                      25,838                       --                 25,838
2001                                       4,892                       --                  4,892
Thereafter                               118,010                   34,500                152,510
                                        --------                ---------               --------
                                        $200,981                $  41,229               $242,210
                                        ========                =========               ========
</TABLE>

Note I - Commitments and Contingencies

Leases - The Company leases certain equipment, automobiles and office space.  
The future minimum lease payments under noncancelable operating leases and 
capital leases are as follows:

<TABLE>
<CAPTION>
                                                        Capital                 Operating
Year Ending September 30,                                Leases                   Leases
-------------------------                               -------                 ---------
                                                                (in thousands)
<C>                                                     <C>                     <C>     
1997                                                    $  3,227                $  4,506
1998                                                       2,245                   3,052
1999                                                       1,435                   1,537
2000                                                         127                     957
2001 and thereafter                                           --                     325
                                                        --------                --------
Total minimum lease payments                               7,034                $ 10,377
                                                                                ========
Amount representing interest                                 830
                                                        --------
Present value of minimum lease payments                 $  6,204
                                                        ========
</TABLE>

                                       29

<PAGE>


Note I - Commitments and Contingencies (Continued)

Total rent expense under operating leases was $5.2 million, $5.4 million and
$5.2 million in 1996, 1995 and 1994, respectively. The leases, which are for
terms of up to 5 years, contain options to renew for additional periods.

At September 30, 1996, rental equipment and machinery and equipment included
assets under capitalized lease obligations of $11.8 million, less accumulated
amortization of $3.6 million.

Purchase Commitments - Pursuant to a Distribution Agreement with a vendor dated
April 1, 1996, as amended, MEDIQ/PRN has agreed to purchase $7 million of
certain products by March 31, 1997. Through September 30, 1996, MEDIQ/PRN
purchased $3.5 million under such agreement.

Guarantees - The Company guarantees a loan of MEDIQ PRN/HNE, L.L.C. in the
aggregate amount of $7.5 million. To support the guarantee the Company has a
certificate of deposit in the amount of $1.0 million with the lender.

Investigations and Legal Proceedings - MEDIQ Imaging, the assets of which were
sold by the Company in August 1995, is presently the subject of a criminal and
civil investigation by the United States Attorney's Office for the District of
New Jersey and the Department of Health and Human Services. The investigation
has focused on advice given by certain MEDIQ Imaging employees to physician
customers of MEDIQ Imaging relating to the reassignment of certain Medicare
claims. The Company and MEDIQ Imaging voluntarily reported the issue to the U.S.
Government in January 1995 after learning that the advice given by the employees
may have been inconsistent with the regulations relating to reassignment. The
Company and MEDIQ Imaging have been cooperating in the investigation. In August
1995, in connection with the sale of MEDIQ Imaging, the Company provided the
U.S. Government with a guarantee of approximately $7.1 million in connection
with any settlement or judgment obtained by the U.S. Government. Management
believes that there has been no violation of any statute or regulation by MEDIQ
Imaging or any of its officers, directors or employees. Although the Company
believes there has been no violation, if the U.S. Government obtains a judgment,
the amount of the judgment against MEDIQ Imaging may exceed the guarantee
amount. However, management and outside counsel are not aware of any evidence
that would enable the U.S. Government to proceed against the Company beyond the
limits of the guarantee.

MEDIQ Mobile X-Ray Services, Inc., the assets of which the Company sold in
November 1996, is presently the subject of an investigation by the Wage and Hour
Division of the United States Department of Labor (the "DOL"). The DOL has
indicated that it believes that the practice of treating technologists as exempt
professionals is incorrect. The Company maintains that the practice of treating
x-ray technologists as exempt is correct and proper. A request for an official
position statement has been sent to the Wage and Hour Administrator of the DOL.
The DOL has indicated that it will broaden the scope of the investigation to
include technologists at other Mobile X-Ray locations. Potential liability is
retroactive from the day a lawsuit is initiated by the Solicitor of Labor and
could include double liquidated damages and penalties.

        On November 28, 1995, in the United States District Court for the Middle
District of Pennsylvania, ATS Medical Servces, Inc. ("ATS"), a former subsidiary
of the Company, and the president of ATS each pled guilty to one count of
misprision of a felony in violation of Title 18, United States Code, Section 4.
In addition, ATS agreed to repay the government $2.1 million, which was accrued
in fiscal 1994, for excess reimbursement received by ATS from the Medicare
Program from 1988 through 1992. The payment is part of a settlement agreement
entered into between ATS, the United States Government and Gerard Callie, a
former ATS employee, who had filed a civil lawsuit on behalf of the government
against ATS pursuant to the False Claim Act, Title 31, United States Code,
Sections 3729 - et seq., relating to ATS's alleged excess reimbursement. The
court sentenced ATS, on June 24, 1996, to a term of probation of two years. The
court imposed no fine on ATS. A mandatory special assessment of $200 was imposed
and paid by ATS. In November 1996, in connection with the sale of Mobile X-Ray,
the outstanding balance of this obligation was paid with a portion of the
proceeds of the sale.

On June 12, 1996, the Company, ATS and Mobile X-Ray were sued in the United
States District Court for the Middle District of Pennsylvania by Gerard and
Sharon Callie, who are both former employees of ATS. The lawsuit alleges that
the Callies were wrongfully terminated and asserts claims pursuant to the
whistleblower provisions of the False Claims Act and the Pennsylvania Wage
Payment and Collection Law. The plaintiffs made a demand for damages totaling
nearly $800,000. The Company believes it has no liability and intends to
vigorously defend this case.

                                       30

<PAGE>

Although the Company has recorded additional reserves aggregating $4.0 million
in 1996 based upon management's estimate of the eventual outcome of the
investigations and lawsuit discussed above, the ultimate outcome of the
investigations and lawsuit cannot presently be determined. These reserves are
included in the Company's reserve for disposal of discontinued operations.
Accordingly, no provision for any other loss that may result upon resolution of
these matters has been made in the Company's consolidated financial statements.

In addition, the Company has pending several legal claims incurred in the normal
course of business, which in the opinion of management, will not have a material
effect on the consolidated financial statements.

Note J - Fair Value of Financial Instruments

Estimated fair value of financial instruments is provided in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments". The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

                Accounts receivable and accounts payable - The carrying amounts
of these items are an estimate of their fair values at September 30, 1996.

                Long-term debt (excluding capital lease obligations) - The fair
value of the Company's publicly traded debt is based on quoted market prices.
Interest rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities are used to estimate fair value for
debt issues for which quoted market prices are not available. The carrying
amount and estimated fair value of long-term debt are $216.2 million and $218.7
million, respectively.

The fair value estimates presented herein are based on information available to
management as of September 30, 1996, and have not been comprehensively revalued
for purposes of these financial statements since that date. Current estimates of
fair value may differ significantly from the amounts presented herein.

Note K  - Common and Preferred Stock

Series A preferred stock is convertible on a one-for-one basis into shares of
common stock, votes generally with the common stock as a single class, and in
all such votes, has ten votes per share. The preferred stock participates in
cash dividends at a rate equal to 60% of the amount paid on the common stock and
has a $.50 per share preference in the event of dissolution or liquidation.

                                       31

<PAGE>


Note L - Income Taxes

Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                          Year Ended September 30,
                                                      ------------------------------
                                                         1996      1995       1994
                                                        ------    ------     ------ 
                                                              (in thousands)

<S>                                                   <C>        <C>        <C>       
        Current:
                Federal                               $    --    $    --    $    --
                State                                     272        122         40
                                                      -------    -------    -------
                                                          272        122         40
                                                      -------    -------    -------

        Deferred:
                Federal                                  (810)    (1,432)    (5,211)
                State                                     160        998        825
                                                      -------    -------    -------
                                                         (650)      (434)    (4,386)
                                                      -------    -------    -------

        Total income tax benefit                      $  (378)   $  (312)   $(4,346)
                                                      =======    =======    =======
</TABLE>

Note L - Income Taxes (Continued)

The differences between the Company's income tax expense (benefit) and the
income tax expense (benefit) computed using the U.S. federal income tax rate
were as follows:


                                                     Year Ended September 30,
                                                  ------------------------------
                                                    1996       1995       1994
                                                   ------     ------     ------
                                                          (in thousands)

Statutory federal tax expense (benefit)           $(2,229)   $(1,244)   $(4,284)
State income taxes, net of federal income taxes     1,201        739        571
Goodwill amortization                                 368        344        370
Effects of dispositions of subsidiaries              --         --       (1,174)
Other items - net                                     282       (151)       171
                                                  -------    -------    -------
Income tax benefit                                $  (378)   $  (312)   $(4,346)
                                                  =======    =======    =======


Significant components of the Company's deferred tax assets and liabilities were
as follows:

                                                              September 30,
                                                         ----------------------
                                                            1996         1995
                                                           ------       ------
Liabilities:                                                  (in thousands)
  Depreciation                                           $ 30,105      $ 31,148
  Intangible assets                                        13,887        11,481
  Accrued Expenses                                          4,720         3,812
  Prepaid Expenses                                             76           217
  Other                                                       674         2,471
                                                         --------      --------
        Gross deferred tax liabilities                     49,462        49,129
Assets:
  Net operating and capital loss carry forwards            29,478        27,662
  Tax credit carry forwards                                 5,878         5,747
  Accrued expenses and reserves                             8,721         8,696
  Intangible assets                                           231           429
  Other                                                     3,504           261
                                                         --------      --------
        Gross deferred tax assets                          47,812        42,795
  Valuation allowance                                      (3,157)       (2,770)
                                                         --------      --------
                                                           44,655        40,025
                                                         --------      --------
Net deferred tax liability                                $ 4,807       $ 9,104
                                                         ========      ========

Deferred taxes of $2.0 million, $1.6 million and $1.2 million were recorded in
1996, 1995 and 1994, respectively, for the undistributed earnings of
unconsolidated affiliates, which are reported as discontinued operations in
fiscal 1996.

                                       32

<PAGE>

At September 30, 1996 for income tax purposes, the Company had alternative
minimum tax credit carry forwards of approximately $5.1 million, net operating
loss carry forwards of $51.7 million expiring through 2009, and capital loss
carry forwards of $25.5 million expiring in 1999. State net operating loss carry
forwards were $52.6 million, expiring through 2009. The Company also had a carry
forward of Investment Tax Credit and Rehabilitation Tax Credit of $.7 million
expiring through 2003.


Note M - Related Party Transactions

In connection with the spin-off of MHM Services, Inc. ("MHM") in fiscal 1993,
MHM was obligated to the Company pursuant to a promissory note with MHM in the
original amount of $11.5 million due in August 1998. The note bears interest at
the prime rate plus 1.5% and required interest payments only through fiscal
1995. Principal and interest payments commenced October 1, 1996. As a result of
the Company's analysis of MHM's financial condition, the Company established a
reserve of $6 million on the note as of September 30, 1996. The Company recorded
interest income related to the MHM note of $1.1 million, $1.2 million and $.9
million in 1996, 1995 and 1994, respectively.

In 1996, 1995 and 1994, the Company incurred legal fees of approximately
$657,000, $700,000 and $250,000 respectively, to a law firm in which the
Company's Chairman of the Board of Directors is a partner.

In 1996, the Company incurred consulting fees of approximately $126,000 to a law
firm of which another member of the Board of Directors is a partner.

The Company derived revenues of $175,000, $340,000 and $327,000 in 1996, 1995
and 1994, respectively, pursuant to agreements to provide financial management,
legal and risk management services to PCI, NutraMax and MHM.

Note N - Stock Option Plans

Under the Company's stock option plans, options may be granted to officers and
key employees of the Company and its subsidiaries. No option may be granted for
a term in excess of ten years from the date of grant. As of September 30, 1996,
633,000 of the outstanding stock options were exercisable under the plan. The
exercise prices of outstanding options represented the fair market value at
dates of grant. The Company's Board of Directors has reserved a sufficient
number of shares for the exercise of outstanding stock options.

A summary of the Company's stock option plan activity for common and preferred
shares for the three years ended September 30, 1996 follows:

                                          Number of      Option Price
                                            Shares         Per Share
                                          ----------------------------
                                        (in thousands)
Outstanding at October 1, 1993              1,705       $2.73 to $4.51
   Exercised                                 (114)           $3.06
   Terminated                                (149)      $2.73 to $4.51
                                            -----
Outstanding at September 30, 1994           1,442       $2.73 to $4.51
   Granted                                     21       $4.02 to $4.13
   Exercised                                  (60)      $2.73 to $3.49
   Terminated                                (292)      $2.73 to $4.49
                                            -----
Outstanding at September 30, 1995           1,111       $2.73 to $4.51
   Granted                                  1,153       $4.00 to $5.31
   Exercised                                 (575)      $2.84 to $3.49
   Terminated                                 (78)      $3.49 to $4.53
                                            -----
Outstanding at September 30, 1996           1,611       $2.73 to $5.31
                                            =====

                                       33

<PAGE>


Note O - Pension Plan

The Company maintains a noncontributory pension plan which provides retirement
benefits to substantially all employees. Employees generally are eligible to
participate in the plan after one year of service and become fully vested after
five years of service. The plan provides defined benefits based on years of
credited service and compensation. The Company makes contributions that are
sufficient to fully fund its actuarially determined cost, generally equal to the
minimum amounts required by ERISA. Assets of the plan consist primarily of
stocks, bonds and annuities.

Net periodic pension expense is comprised of the following:

<TABLE>
<CAPTION>
                                                                         Year ended September 30,
                                                            -----------------------------------------------
                                                              1996               1995                1994
                                                             ------             ------              ------
                                                                            (in thousands)
<S>                                                         <C>                 <C>                 <C>    
Service cost - benefits earned during the period            $   609             $   785             $ 1,193
Interest cost on projected benefit obligation                 1,066                 929                 894
Actual return on plan assets                                 (1,463)             (1,642)               (436)
Net amortization and deferrals                                  544                 851                (331)
                                                            -------             -------             -------
Net periodic pension expense                                $   756             $   923             $ 1,320
                                                            =======             =======             =======
</TABLE>


The following table presents the funded status of the Company's pension plan and
the amounts reflected in the Consolidated Balance Sheets:

                                                              September 30,
                                                           ---------------------
                                                              1996       1995
                                                             ------     ------
                                                               (in thousands)

Actuarial present value of benefit obligations:
  Vested benefits                                          $(13,141)   $(10,427)
                                                           ========    ========
  Accumulated benefit obligation                           $(13,713)   $(11,291)
                                                           ========    ========

Projected benefit obligation                               $(14,539)   $(12,606)
Plan assets at fair value                                    13,663      11,493
Projected benefit obligation in excess of plan assets          (876)     (1,113)
Unrecognized net gain                                        (1,673)     (2,345)
Balance of unrecorded transition obligation                     361         647
                                                           --------    --------
Accrued pension liability                                  $ (2,188)   $ (2,811)
                                                           ========    ========

The actuarial assumptions used in determining net periodic pension costs were:

                                                    Year ended September 30,
                                                    ------------------------
                                                      1996    1995   1994
                                                     ------  ------ ------

Discount rate                                           8%     8%     8%
Expected long-term return on plan assets                8%     8%     8%
Weighted average rate of increase in
  compensation levels                                   5%     4.5%   4.5%


                                       34

<PAGE>

Note P - Business Segment Data

The Company operates primarily in one business segment, exclusive of
discontinued operations which include Mobile X-Ray, MEDIQ Imaging, Health
Examinetics, Medifac and HealthQuest. Discontinued operations also include the
Company's equity investments in PCI, NutraMax and InnoServ. The Company, through
its subsidiary MEDIQ/PRN, rents medical equipment on a short-term basis
nationwide. This segment represents more than 90% of the consolidated revenues,
operating profit and assets exclusive of corporate assets, which include net
assets of discontinued operations of $54.7 million.

Note Q - Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial data (in thousands except per share data) for 1996
and 1995 is as follows:

<TABLE>
<CAPTION>
                                                        First         Second     Third       Fourth
1996                                                   Quarter        Quarter   Quarter      Quarter
----                                                   -------        -------   -------      -------

<S>                                                   <C>            <C>        <C>         <C>     
Revenues  (A)                                         $ 32,093       $ 36,999   $ 34,386    $ 32,588
Operating income  (A)                                    2,912(B)      10,161      6,899       5,474
Income (loss) from continuing operations                (2,370)         1,273        293      (5,374) (C)
Income (loss) from discontinued operations               1,002          1,542     (1,514)    (11,699) (D)
Extraordinary item                                       1,001           --          153         (11)
Net income (loss)                                         (367)         2,815     (1,068)    (17,084)

Earnings per share:
Income (loss) from continuing operations                  (.09)           .05        .01        (.22)
Income (loss) from discontinued operations                 .04            .06       (.06)       (.47) 

Extraordinary item                                         .04            .11        .01          --
Net income                                                (.01)           .11       (.04)       (.69)

<CAPTION>
                                                         First        Second      Third       Fourth
1995                                                    Quarter       Quarter    Quarter      Quarter
----                                                    -------       -------    -------      -------
<S>                                                   <C>            <C>        <C>         <C>     
Revenues  (A)                                         $ 31,842       $ 37,036   $ 33,098    $ 30,265
Operating income (loss)  (A)                             4,742         10,310      6,547       2,603
Income (loss) from continuing operations                (1,338)           869       (503)     (2,374)
Income (loss) from discontinued operations               1,127            918       (689)     (2,957)
Net income (loss)                                         (211)         1,787     (1,192)     (5,331)

Earnings per share:

Income (loss) from continuing operations                  (.05)           .03       (.02)       (.10)
Income (loss) from discontinued operations                 .04            .04       (.03)       (.12)
Net income (loss)                                         (.01)           .07       (.05)       (.22)
</TABLE>

(A) Reflects seasonal nature of MEDIQ/PRN's business.
(B) Includes non-recurring expenses related to the restructuring charge. 
(C) Reflects $6 million reserve on MHM note receivable. 
(D) Reflects adjustment of the Company's reserve for the disposal of 
    discontinued operations.

                                       35

<PAGE>

Note R - Investments in Unconsolidated Affiliates

The Company's investments in unconsolidated affiliates, which are classified as
discontinued operations in the Company's Consolidated Financial Statements, 
consist of NutraMax Products, Inc. and PCI Services, Inc.  The following summary
presents the Company's approximate ownership interest, carrying value and market
value as of September 30.

                         1996                               1995
          ---------------------------------     -------------------------------
          Ownership    Carrying      Market     Ownership   Carrying     Market
          Interest       Value        Value     Interest      Value       Value
          --------     --------      ------     ---------   --------     ------
                                        (in thousands)

PCI          46%       $28,127      $ 78,344       47%      $24,494     $26,234
NutraMax     47%        20,919        37,345       47%       18,598      40,373
                       -------       -------                -------     -------
                       $49,046      $115,689                $43,092     $66,607
                       =======      ========                =======     =======

Summarized consolidated financial information for unconsolidated affiliates is
as follows:

NutraMax Products, Inc. --  Condensed Consolidated Balance Sheet

<TABLE>
<CAPTION>
                                                        Sept. 28,               Sept. 30,
                                                          1996                    1995
                                                          ----                    ----
                                                                (in thousands)
<S>                                                     <C>                     <C>     
ASSETS:
Total current assets                                    $ 32,882                $ 23,552
Property and equipment, net                               29,207                  23,714
Goodwill, net                                             13,415                  13,978
Other assets                                               7,374                   1,830
                                                        --------                --------
                                                        $ 82,878                $ 63,074
                                                        ========                ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Total current liabilities                               $ 23,391                $  9,400
Long term debt, less current maturities                   11,780                  12,550
Deferred income taxes and other liabilities                1,890                   1,891
Stockholders' equity                                      45,817                  39,233
                                                        --------                --------
                                                        $ 82,878                $ 63,074
                                                        ========                ========
</TABLE>

NutraMax Products, Inc. --  Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                       Year Ended
                                                --------------------------------------------------------
                                                Sept. 28,               Sept. 30,                Oct. 1,
                                                   1996                   1995                    1994
                                                  ------                 ------                  ------

<S>                                             <C>                     <C>                     <C>     
Net Sales                                       $ 80,479                $ 63,111                $ 55,958
Cost of Sales                                     57,686                  45,916                  38,752
                                                --------                --------                --------
Gross profit                                      22,793                  17,195                  17,206
Selling, general and administrative expenses      11,662                   8,694                   9,281
                                                --------                --------                --------
Operating Income                                  11,131                   8,501                   7,925
Other credits (charges)                           (1,768)                 (1,111)                   (833)
                                                --------                --------                --------
Income before income tax expense                   9,363                   7,390                   7,092
Income tax expense                                 3,680                   2,916                   2,832
                                                --------                --------                --------
Net income                                      $  5,683                $  4,474                $  4,260
                                                ========                ========                ========
</TABLE>

                                       36

<PAGE>


Note R - Investments in Unconsolidated Affiliates (Continued)

PCI Services, Inc. - Condensed Consolidated Balance Sheets

                                                          June 30,      Sept. 30
                                                            1996          1995
                                                            ----          ----
ASSETS:                                                        (in thousands)
Total current assets                                      $ 44,750      $ 36,214
Property, plant and equipment, net                          84,733        61,901
Goodwill, net                                               18,843        10,182
Other assets                                                 3,253           670
                                                          --------      --------
                                                          $151,579      $108,967
                                                          ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities                                 $ 27,828      $ 24,034
Long-term debt, less current maturities                     55,339        27,208
Deferred income taxes and other liabilities                  7,033         4,189
Stockholders' equity                                        61,379        53,536
                                                          --------      --------
                                                          $151,579      $108,967
                                                          ========      ========

PCI Services, Inc. - Condensed Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                 Nine Months               Year Ended
                                                Ended June 30,            September 30,
                                                    1996              1995           1994
                                                    ----              ----           ----
                                                                 (in thousands)
<S>                                               <C>                 <C>           <C>     
Net revenue                                       $121,819           $129,785      $121,177
Cost of goods sold                                  91,061            101,586        96,092
                                                  --------            --------     -------- 
Gross profit                                        30,758             28,199        25,085
Operating expenses                                  19,220             18,554        17,561
                                                  --------            --------     -------- 
Income before income tax expense                    11,538              9,645         7,524
Income tax expense                                   3,901              4,073         2,168
                                                  --------            --------     -------- 
Net income                                        $  7,637            $ 5,572      $  5,356
                                                  ========            =======      ========
</TABLE>                                                                       


The summarized consolidated financial information for the current year for PCI
presented above is for the nine months ended and as of June 30, 1996. On October
11, 1996, PCI was acquired by Cardinal. Accordingly, financial information as of
and for the period ended September 30, 1996 is not available.

                                       37

<PAGE>

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

         Not Applicable

                                    PART III
                                    --------


Incorporated by Reference

                The information called for by Item 10 "Directors and Executive
Officers of the Registrant", Item 11 "Executive Compensation", Item 12 "Security
Ownership of Certain Beneficial Owners and Management" and Item 13 "Certain
Relationships and Related Transactions" is incorporated herein reference to the
Company's definitive proxy statement for its Annual Meeting of Shareholders
scheduled to be held March 5, 1997, which definitive proxy statement is expected
to be filed with the Commission not later than 120 days after the end of the
fiscal year to which this report relates.

                                       38

<PAGE>


                                    PART IV
                                    -------


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K

(a)(1)    Financial Statements and Supplementary Data

                  Report of Independent Auditors                          18
                  Consolidated Statement of Operations                    19
                  Consolidated Balance Sheets                             20
                  Consolidated Statements of Stockholders' Equity         21
                  Consolidated Statements of Cash Flows                   22
                  Notes to Consolidated Financial Statements             23-37

        The response to this portion of Item 14 is submitted as a separate
        section of this report.

(a)(2)  Financial Statement Schedules

        Included in Part IV of this report:

                Schedule II - Valuation and Qualifying Accounts and Reserves

        Other Schedules are omitted because of the absence of conditions under
                which they are required.

(a)(3)  Exhibits

        The exhibits are listed in the Index to Exhibits appearing below.

(b)  The following reports on Form 8-K were filed during the quarter ended
September 30, 1996.


Date of Earliest Event Requiring Report:   July 24, 1996
Date of Filing:                            July 30, 1996
Items Reported:                            Item 5
Subject:                                   PCI Services, Inc. merger
                                           with Cardinal Health, Inc.

Date of Earliest Event Requiring Report:   August 22, 1996
Date of Filing:                            August 30, 1996
Items Reported:                            Item 5
Subject:                                   Commencement of cash tender offer to
                                           purchase all of MEDIQ/PRN's 12 1/8%
                                           Senior Secured Notes Due 1999.

Date of Earliest Event Requiring Report:   September 9, 1996 (Date of Report)
Date of Filing:                            September 23, 1996
Items Reported:                            Item 5
Subject:                                   Agreement of sale with
                                           NutraMax Products, Inc.

(c)     Exhibits

                                       39


<PAGE>

<TABLE>
<CAPTION>

Exhibit #       Description                                Incorporation Reference
---------       -----------                                -----------------------

<S>             <C>                                        <C>
2.1             Agreement and Plan of Merger               Exhibit 2.1 to Schedule 13D
                among Cardinal Health, Inc.,               filed by Cardinal Health,
                Panther Merger Corp., PCI Services,        Inc. July 29, 1996
                Inc. and MEDIQ dated July 23, 1996.        
                                                           
2.2             Amended and restated Stock Purchase        Exhibit 2(a) to Form 10-K Annual
                Agreement among MEDIQ, MEDIQ Investment    Report filed by NutraMax Products,
                Services, Inc. and NutraMax Products,      Inc. for the fiscal year ended
                Inc. dated November 20, 1996               September 28, 1996
                                                           
2.3             Affiliate Letter to Cardinal Health,       Exhibit 4 to Current Report on Form 8-K
                Inc. from MEDIQ dated August 16,           filed October 21, 1996
                1996.                                      
                                                           
2.5             Asset Purchase Agreement by and            Filed herewith
                among MEDIQ Mobile X-Ray Services,         
                Inc., MEDIQ and Symphony Diagnostic        
                Services No. 1, Inc. dated                 
                November 6, 1996.                          
                                                           
3.1             Certificate of Incorporation.              Exhibit 3.1 to Annual Report
                                                           on Form 10-K filed on
                                                           January 12, 1996
                                                           
3.2             By-Laws.                                   Exhibit 3.2 to Annual Report
                                                           on Form 10-K filed on
                                                           January 12, 1996
                                                           
4.1             Credit Agreement among MEDIQ/PRN           Filed herewith
                Life Support Services, Inc., the           
                Lender Parties party thereto, Banque       
                Nationale de Paris, as Administrative      
                Agent and as Initial Issuing Bank,         
                and NationsBank, N.A., as                  
                Documentation Agent dated October 1, 1996.
                                                          
4.2             Security Agreement among MEDIQ/PRN         Exhibit 4 to Schedule 13D
                Life Support Services, Inc., the           filed October 11, 1996
                Lender Parties party thereto,              
                Banque Nationale de Paris, as              
                Administrative Agent and as Initial        
                Issuing Bank, and NationsBank, N.A.        
                as Documentation Agent dated               
                October 1, 1996                            
                                                           
4.3             Indenture dated as of June 1, 1986         Exhibit 4.1 to S-2
                between MEDIQ and Mellon Bank, N.A.        Registration Statement
                for 7.25% Convertible Subordinated         No. 33-5089 originally filed
                Debentures due 2006.                       on May 2, 1986, as amended
                                                           
4.4             Convertible Subordinated                   Exhibit 4.2 to S-2
                Debentures due 2006.                       Registration Statement
                                                           No. 33-5089 originally filed
                                                           on May 2, 1986, as amended
</TABLE>

                                       40

<PAGE>
                                                           
<TABLE>
<CAPTION>

Exhibit #       Description                                Incorporation Reference
---------       -----------                                -----------------------

<S>             <C>                                        <C>
4.5             Indenture dated as of July 1, 1993         Exhibit 4.1 to S-2
                between MEDIQ and First Union Bank,        Registration Statement
                N.A. (formerly First Fidelity Bank,        No. 33-61724 originally filed
                N.A.) for 7.50% Exchangeable               on April 28, 1993, as amended
                Subordinated Debentures due 2003.          
                                                           
4.6             7.50% Exchangeable Subordinated            Exhibit 4.2 to S-2 Registration
                Debentures due 2003                        Statement No. 33-61724 originally
                                                           filed on April 28, 1993 as amended
                                                           
4.7(a)          Indenture dated as of July 6, 1992         Exhibit 4.1 to Form 10-K
                by and between MEDIQ/PRN Life              Annual Report of MEDIQ/PRN
                Support Services, Inc. and United          Life Support Services, Inc.
                Jersey Bank, as Trustee.                   for fiscal 1992
                                                           
4.7(b)          Supplemental Indenture, dated as           Exhibit 4.8(b) to Form 10-K
                of September 30, 1994, between             Annual Report for the fiscal
                MEDIQ/PRN Life Support Services,           year ended September 30, 1994.
                Inc. and United Jersey Bank, as            
                Trustee.                                   
                                                           
4.7(c)          Second Supplemental Indenture              Filed herewith
                between MEDIQ/PRN Life Support             
                Services, Inc. and Summit Bank             
                f/k/a United Jersey Bank, as Trustee       
                dated October 1, 1996.                     
                                                           
4.7(d)          Amendment to Security Agreement between    Filed herewith
                MEDIQ/PRN Life Support Services, Inc.      
                and Summit Bank f/k/a United Jersey        
                Bank and as Trustee dated October 1,       
                1996.                                      
                                                           
4.7(e)          Defeasance Trust Agreement among           Filed herewith
                Summit Bank f/k/a United Jersey Bank       
                and MEDIQ/PRN Life Support Services,       
                Inc. dated October 1, 1996.                

10.6            MEDIQ Executive Security Plan              Exhibit 10.6 to Form 10-K
                                                           Annual Report filed on
                                                           January 12, 1996
                                                           
10.7(a)         1987 Stock Option Plan                     Exhibit 10.7 to Form 10-K
                                                           Annual Report filed on
                                                           January 12, 1996
                                                           
10.7(b)         Amendment to 1987 Stock Option             Filed herewith
                Plan.                                      
                                                           
10.8            Employment contract with Michael F.        Exhibit 10.8 to Form 10-K
                Sandler dated as of June 26, 1995.         Annual Report filed on
                                                           January 12, 1996
</TABLE>

                                       41

<PAGE>

<TABLE>
<CAPTION>

Exhibit #       Description                                Incorporation Reference
---------       -----------                                -----------------------

<S>             <C>                                        <C>
                                                           
10.9            Employment contract with Thomas E.         Exhibit 10.9 to Form 10-K
                Carroll dated as of April 27, 1995.        Annual Report filed on
                                                           January 12, 1996
                                                           
10.10           Employment contract with Jay M.            Exhibit 10.10 to Form 10-K
                Kaplan dated as of June 20, 1995.          Annual Report filed on
                                                           January 12, 1996
                                                           
11              Statement re computation of per share      Filed herewith
                earnings.                                  
                                                           
21              Subsidiaries of the Registrant.            Filed herewith
                                                           
23              Consent of Deloitte & Touche LLP           Filed herewith
                                                           
27              Financial Data Schedule                    Filed herewith
                                                           
99.1            Financial Statements of NutraMax           Items 8 and 14 of the Annual Report on
                Products, Inc. (approximately 47%          Form 10-K of NutraMax Products, Inc.
                owned by MEDIQ as of September 30,         for the fiscal year ended September 28,
                1996).                                     1996.  (File No. 0-18671).
</TABLE>
                                                           
                                                        
(d)     Financial Statements of Unconsolidated Affiliates:

        The financial statements of NutraMax Products, Inc., an unconsolidated
affiliate of the company, which are required to be filed pursuant to Item 14(d)
of Form 10-K are filed herein through incorporation by reference under Rule
12b-23, promulgated under the Securities Exchange Act of 1934, as amended (the
"Act"), to the Annual Report on Form 10-K of NutraMax Products, Inc. filed under
the Act, which are included as an exhibit to this Annual Report on Form 10-K
pursuant to Rule 12b-23(c), and such exhibit is incorporated by reference to
this Annual Report on Form 10-K under Rule 12b-32, promulgated under the act.

        The financial statements of PCI Services, Inc., an unconsolidated
affiliate of the Company, which are required to be filed pursuant to Item 14(d)
of Form 10-K shall, pursuant to Rule 3-09(b) of Regulation S-X, will not be
filed as a result of the acquisition of PCI by Cardinal Health, Inc. on October
11, 1996.

                                       42

<PAGE>

                      MEDIQ INCORPORATED AND SUBSIDIARIES

                                  SCHEDULE II

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                 YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
                                 (in thousands)

<TABLE>
<CAPTION>

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

        COL. A                               COL. B                 COL. C                      COL. D         COL. E

------------------------------------------------------------------------------------------------------------------------
                                                                   Additions

        Description                          Balance at    Charged to           (1)                            Balance at
                                             Beginning     Costs and        Charged to            (2)          End of
                                             of Period     Expenses         Other Accounts     Deductions      Period
------------------------------------------------------------------------------------------------------------------------

<S>                                            <C>         <C>                 <C>              <C>             <C>   
Year ended September 30, 1996:
        Allowance for doubtful accounts        $2,207      $ 1,237             $     --         $(1,061)        $2,383
                                               ======      =======             ========         =======         ======

Year ended September 30, 1995:
        Allowance for doubtful accounts        $2,195      $   993             $     --         $   981         $2,207
                                               ======      =======             ========         =======         ======

Year ended September 30, 1994:
        Allowance for doubtful accounts        $1,968      $   984             $    246         $ 1,003         $2,195
                                               ======      =======             ========         =======         ======
</TABLE>



(1)  Primarily represents allowances for doubtful accounts related to 
     acquisitions.

(2)  Represents accounts directly written-off net of recoveries.

                                       43


<PAGE>

                                   SIGNATURES
                                   ----------

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

Dated: December 29, 1996              MEDIQ Incorporated

                                          /s/Thomas E. Carroll
                                          ------------------------------
                                      BY: Thomas E. Carroll
                                          President and
                                          Chief Executive Officer


                                          /s/Michael F. Sandler
                                          ------------------------------
                                      BY: Michael F. Sandler
                                          Senior Vice President - Finance,
                                          Treasurer and Chief Financial Officer

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

<TABLE>
<CAPTION>

Signature                                         Title                                Date
---------                                         -----                                ----

<S>                                     <C>                                     <C> 
/s/ Thomas E. Carroll                   Director, Chief Executive               December 29, 1996
---------------------------             Officer and President
Thomas E. Carroll                      


/s/ Michael F. Sandler                  Director and Chief                      December 29, 1996
---------------------------             Financial Officer
Michael F. Sandler                      


                                        Director                                December 29, 1996
---------------------------
Sheldon M. Bonovitz                     


/s/ Lionel H. Felzer                    Director                                December 29, 1996
---------------------------
Lionel H. Felzer


                                        Director                                December 29, 1996
---------------------------
Mark Levitan


                                        Director                                December 29, 1996
---------------------------
H. Scott Miller


/s/ Michael J. Rotko                    Chairman of the Board                   December 29, 1996
---------------------------             and Director
Michael J. Rotko                        


/s/ Jacob Shipon                        Vice Chairman of the                    December 29, 1996
---------------------------             Board and Director
Jacob Shipon                            
</TABLE>