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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549


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FORM10-K


|                                                                |                                                                                            
|--------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|x                                                               | ANNUAL REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE 
 SECURITIES EXCHANGE ACT OF 1934    
|                                                                | FOR THE
 FISCAL YEAR ENDED SEPTEMBER 30, 2007.                                             
|o                                                               | TRANSITION REPORT PURSUANT TO
 SECTION 13 OR 15(d) OF THE 
 SECURITIES EXCHANGE ACT OF 1934
|FOR THE
 TRANSITION PERIOD
 FROM                        
    TO
|COMMISSION
 FILE NUMBER 0-18793                                
|                                                               
|VITAL SIGNS, INC.                                              
|(Exact
 name of registrant as specified in its charter)        

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(LOGO)


|                                                                 |                                          
|---------------------------------------------------------------- | -----------------------------------------
|New
 Jersey                                                      | 11-2279807                               
|(State or
 other jurisdiction of
 incorporation or organization) | (I.R.S.
 Employer
 Identification Number)

20 Campus
Road, Totowa, New Jersey 07512; (973) 790-1330(Address and telephone
number, including area code,
of registrants principal executive office)


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


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


|                           
|---------------------------
|Title of
 each class       
|                           
|Common
 Stock, no par value

Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No

Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. o Yes x
No

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

Indicate
by checkmark 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. o

Indicate
by checkmark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. o Large
accelerated filer x Accelerated
filer o Non-Accelerated filer

Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act) o Yes x No

The
aggregate market value of the voting and non-voting common equity of the
registrant held by non-affiliates (for this purpose, persons and entities other
than executive officers, directors, and 5% or more shareholders) of the
registrant, as of the last business day of the registrants most recently
completed second fiscal quarter (March 31, 2007), was approximately
$398,176,946

Number
of shares of Common Stock outstanding as of December 14, 2007: 13,286,050


Documents
incorporated by reference: Definitive Proxy Statement for 2008 Annual Meeting
of Shareholders (Part III).

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VITAL
SIGNS, INC.TABLE OF CONTENTS

|        |  |                                                                                                                    |  |     
|------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                                    |  | Page
|        |  |                                                                                                                    |  |     
|        |  |                                                                                                                    |  |     
|        |  | PART I                                                                                                             |  |     
|Item 1  |  | Business                                                                                                           |  | 2   
|Item 1A |  | Risk
 Factors                                                                                                      |  | 17  
|Item 1B |  | Unresolved
 Staff Comments                                                                                         |  | 27  
|Item 2  |  | Properties                                                                                                         |  | 27  
|Item 3  |  | Legal
 Proceedings                                                                                                 |  | 27  
|Item 4  |  | Submission
 of Matters to a Vote of Security Holders                                                               |  | 28  
|Item 4A |  | Executive
 Officers of the Registrant                                                                              |  | 28  
|       
|        |  | PART II                                                                                                            |  |     
|Item 5  |  | Market for
 the Registrants Common Equity, Related Stockholder Matters and Issuer
 Purchases of Equity Securities |  | 30  
|Item 6  |  | Selected
 Financial Data                                                                                           |  | 31  
|Item 7  |  | Managements
 Discussion and Analysis of Financial Condition and Results of Operations                             |  | 33  
|Item 7A |  | Quantitative
 and Qualitative Disclosures About Market Risk                                                        |  | 47  
|Item 8  |  | Financial
 Statements and Supplementary Data                                                                       |  | 48  
|Item 9  |  | Changes in
 and Disagreements with Accountants on Accounting and Financial Disclosure                              |  | 49  
|Item 9A |  | Controls
 and Procedures                                                                                           |  | 49  
|Item 9B |  | Other
 Information                                                                                                 |  | 52  
|        |  | PART III                                                                                                           |  |     
|Item 10 |  | Directors,
 Executive Officers and Corporate Governance                                                            |  | 53  
|Item 11 |  | Executive
 Compensation                                                                                            |  | 53  
|Item 12 |  | Security
 Ownership of Certain Beneficial Owners, Management and Related Stockholder
 Matters                      |  | 53  
|Item 13 |  | Certain
 Relationships and Related Transactions, and Director Independence                                         |  | 54  
|Item 14 |  | Principal
 Accountant Fees and Services                                                                            |  | 54  
|        |  |                                                                                                                    |  |     
|        |  | PART IV                                                                                                            |  |     
|Item 15 |  | Exhibits
 and Financial Statement Schedules                                                                        |  | 55  

In this Annual Report,
references to Vital Signs, the Company, we, us, and our refer to
Vital Signs, Inc. and its subsidiaries. Actar®, Actar D-FibTM,
Babysafe, Breas®, Breas HA50, Breas PV403, Breas SC20, Broselow®,
Broselow-Hinkle, Broselow-Luten, C-CO2, Code Blue II, Color
Coding Kids®, CUFF-ABLE, enFlow®, iMask, iSleep by Breas®, InfusaScan®,
INFUSABLE®, Limb-q, Misty OX®, Pedi Blue II, RediTubeTM,
SteeLiteTM, SURE-LOK, TurboHeater, Vital Seal, Vital View, Vital
View II , Vivo 30, Vivo 40 and Vivo by Breas® are Company trademarks. The
Company also has several registered and unregistered color scheme trademarks
related to the Broselow product line. All other trademarks used in this Annual
Report are the property of their respective owners.


Fiscal year in this Annual
Report means the twelve months ended on September 30th. Unless the
context expressly indicates a contrary intention, all references to years in
this Annual Report are to fiscal years.

-1-

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PART 1

Item 1. Business

Vital
Signs, Inc. was initially incorporated in New York in 1972 and reincorporated
in New Jersey in 1988. The Companys principal executive office is located at
20 Campus Road, Totowa, New Jersey 07512; the telephone number at this location
is (973) 790-1330.

The Company and markets

Vital
Signs is a leading designer, manufacturer, and marketer of airway management
products for the anesthesia, respiratory/critical care, interventional
cardiology/radiology, and sleep disorder markets. The Company sells its
products in over 73 countries worldwide. The Company offers one of the broadest
single-patient-use anesthesia and respiratory/critical care product lines in
the industry and has developed numerous innovative products that are now
considered industry standards. In addition, the Company sells therapeutic
products for patients suffering from sleep disorders and provides sleep
disorder diagnoses at sleep laboratories and Company-operated centers. The
Company provides technology services to FDA-regulated companies.


In
response to rising health-care costs, managed care companies and other
third-party payors in the Companys anesthesia and respiratory/critical care
businesses are placing pressure on health care providers to reduce costs.
Although this could hamper a health-care providers revenue growth, the Company
believes that these cost-reduction efforts have increased the market preference
for the Companys single-patient-use medical products because these products
improve health care professionals productivity, minimize transfer of
infections and disease, reduce overall provider costs, and improve patient
care. As a result of the following factors, the Company believes that
single-patient-use medical products have become the products of choice in the
United States anesthesia and respiratory/critical care markets.

| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                  
| |  | improved
 patient care - by
 reducing the risk of contracting infections from reusable products that have
 been inadequately sterilized, thereby reducing the risk of additional patient
 care;                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                  
| |  | cost
 effectiveness - by
 lowering the labor costs associated with sterilizing, reassembling and re-testing
 reusable products, lowering inventory costs, reducing the initial capital
 outlays for new reusable products, and allowing costs to be charged directly
 to individual patients; and
| |   |                                                                                                                                                                                                                                                                                                  
| |  | reduced
 set up time and improved productivity - single-patient-use products packaged in
 disposable kits allow medical practitioners to reduce set up time and perform
 more procedures.                                                                                                        

The
Company views international markets as a significant growth opportunity as
single-patient-use products have not fully penetrated those markets. The trend
towards single-patient-use products replacing traditional reusable products is
accelerating in developing countries as health care standards improve due to
heightened concerns about cross-contamination and sterilization costs as well
as high incidences of communicable diseases and nosocomial infections.

The
Company categorizes its product and service offerings within five business
segments: anesthesia, respiratory/critical care, sleep disorder, interventional
cardiology/radiology and pharmaceutical technology services. (See Note 20)

Anesthesia

Anesthesia
products were the Companys first line of business over 30 years ago and
continue to be its leading source of revenue. The Companys single-patient-use
anesthesia products and systems deliver oxygen and anesthesia from a gas
source, such as an anesthesia machine, to a patients pulmonary system. These
products also remove anesthetic gases, carbon dioxide, and expiratory oxygen
from a patient and link a patient to various monitors. The principal anesthesia
products consist of face masks, breathing circuits, and general anesthesia
products.

The
breadth of the Companys product offerings provides an advantage of selling
customized circuits comprised of multiple products that are compatible with the
anesthesia equipment manufactured by most companies. The Company also
manufactures a wide range of accessories and components for use with its

-2-

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anesthesia products,
including heat/moisture exchangers, bacterial/viral filters, anesthesia
breathing bags (including latex-free bags), airways, and temperature-monitoring
devices.

The
Companys primary anesthesia products and systems include:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Anesthesia
 breathingcircuits are single-patient-use devices used to
 ventilate and carry oxygen and anesthesia to a patient while under general
 anesthesia during surgery as well as to connect the patient to an anesthesia
 machine and to monitors. The traditional system is referred to as a circuit
 because it is comprised of two tubes, one carrying inspiratory gases to a
 patient and the other carrying expiratory gases away from a patient. Each
 traditional breathing circuit consists of flexible hoses, a breathing bag,
 and a Y and elbow attachment. Because the breathing circuit needs of
 hospitals vary significantly, the Company offers a large variety of circuits
 compatible with various anesthesia equipment. The Company expanded its
 breathing circuit products as the result of technological advances in the
 areas of gas sampling, temperature monitoring, humidification, and
 bacterial/viral filtration. In late 2000, the Company introduced the patented
 product Limb-OTM, a single limb breathing circuit used for
 general anesthesia, transport and/or critical care situations. The single
 limb incorporates a patented technology with a septum to separate inspiratory
 and expiratory gases. The expiratory portion of the tube contains warmed
 exhalation gas which helps to warm the inspiratory gas. The Limb-OTM
 competes with the traditional two limb system on the basis of the added
 benefit of heat and moisture provided to the patient and the reduction of
 bulk and weight associated with traditional two limb circuits and is an
 alternative to the tube within a tube circuit.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Face
 masks are
 single-patient-use devices that cover the nose and mouth of a patient while
 general anesthesia is administered. The Company was first to sell the now
 standard air-filled clear cushion face mask for single-patient anesthesia and
 respiratory use. This soft air-filled cushion face mask provides a better
 seal on most patients than other face masks, thereby improving the delivery
 of anesthetic gases and oxygen to the patient. A clear face mask also permits
 the clinician to better observe certain patient problems, such as
 life-threatening aspiration, while the patient is anesthetized. The Company
 offers various sizes and types of face masks and anticipates that the usage
 of single-patient-use face masks in surgical procedures internationally will
 continue to increase as single-patient-use products become more acceptable in
 international hospitals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | General
 anesthesia systems
 are customized single-patient-use anesthesia kits that can include more than
 20 of the Companys single-patient-use products, such as air filled cushion
 face masks, breathing circuits, blood pressure cuffs, and temperature
 monitoring probes. The Company markets these kits under the name GAS. Company sales representatives
 assist each customer in determining the particular products that its
 institution desires in its anesthesia kits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Pressure
 infusors are
 single-patient-use devices utilized hospital-wide to apply pressure to a
 sealed bag of fluid, such as intravenous solutions or blood products. The
 Companys INFUSABLE® pressure
 infusor is a patented system consisting of a pressure gauge, an inflatable
 bladder, and a bulb to pump air into the bladder. INFUSABLE® has a mesh netting to hold a package of sterile
 fluid or solution bag and can deliver blood or fluids to a patient at a
 rapid rate, usually under trauma conditions or at a level designed to
 maintain the pressure required by the monitoring system. The Companys
 InfusaScanTM pressure infusor incorporates a clear window to
 enable bar coding scanning of fluid contents to prevent medication errors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Fiberoptic
 laryngoscope systems
 are single-patient-use devices used by anesthesiologists to correctly place
 an endotracheal tube within the trachea of a patient. The Companys Vital View and Greenlight II
systems
 have single-patient-use blades that offer several advantages over traditional
 reusable metal blade laryngoscope systems, including lowering the risk to
 both patient and physician of infection associated with reusable metal blades.
 Both systems incorporate the latest LED technology that produces unsurpassed
 brightness for increased visibility. Hospital capital outlays for emergency
 crash carts can be reduced by purchasing the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

-3-

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |   | Companys single-patient-use
 system rather than a reusable fiberoptic system. The new SteeLite
 single-patient-use stainless steel blades provide the strength of reusable
 metal blades at a cost-effective price.                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Laryngeal
 airway devicesare
 single-patient-use airway devices used for airway management during general
 anesthesia procedures. The Company has several patented features intended to
 address known complications, including a reinforced tongue within the tip of
 the sealing cuff to resist over-folding and ribbed slots to minimize the
 possibility of occlusion by a patients epiglottis.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Blood
 and fluid warming devices
 are used during delivery of IV fluids or of blood during surgery to lower the
 risk of infection and decrease post-operative recovery time. The Companys
 new enFlow®blood and fluid warming product has a
 unique single-patient-use dry-heating technology that provides rapid,
 consistent temperature in close physical proximity to the patient.            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Oral/nasal
 tracheal tubes and styletsare single-patient-use airway devices used
 during general anesthesia procedures and mechanical ventilation. The
 Companys RediTubeis a
 tracheal tube combined with a pre-loaded stylet incorporated into a single
 product to reduce costs and reduce SKUs. The product comes in both cuffed and
 uncuffed versions.                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     

For
    fiscal 2007, 2006 and 2005, the anesthesia segment contributed 36.4%, 36.5%,
    and 35.1%, respectively, on net revenue.

Respiratory/critical
  care

The
Company has supplied products to the respiratory/critical care market for over
25 years. Single-patient-use respiratory/critical care products assist
hospitals with infection control programs by reducing infections caused by
cross-contamination when products are used by more than one patient. These
products also offer patient benefits because they are generally lighter than
reusable products which results in better patient care, for example, by causing
less torque on the endotracheal tube. The Company believes that there is an increasing
incidence of respiratory illnesses, such as asthma and emphysema, due in part
to an increasingly susceptible aging population, environmental pollution,
smoking-related illnesses, as well as communicable diseases with significant
respiratory impact, such as tuberculosis, HIV, and influenza. People with these
conditions have a need for Vital Signs products in acute care, such as manual
resuscitators and arterial blood gas kits.

The
Companys primary respiratory products are arterial blood gas (ABG) syringes
and kits, manual resuscitators, and single-use blood pressure cuffs. The
Company also distributes critical care equipment kits and modules that are
color-coded so emergency room workers can quickly and accurately determine the
proper equipment size to use with pediatric patients. In addition, the
Company manufactures a wide range of accessories and components for use with
its respiratory/critical care products and systems, including bacterial/viral
filters and heat and moisture exchangers.

The
Companys primary respiratory/critical care products and systems include:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Arterial
 blood gas syringes and collection kits are used to collect arterial blood for
 blood gas analyses routinely performed in hospitals on patients suspected of
 having metabolic, respiratory, or other cardiopulmonary difficulties. The
 Company offers a broad line of disposable arterial blood gas syringes and
 collection systems in both standard configurations and in customized kits
 that meet a hospitals specific needs and to function with the hospitals
 blood gas analyzers. The Company offers syringes containing the SURE-LOK needle protection device to
 protect the health care worker from the risk of being punctured by a needle.                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Manual
 resuscitators are
 single-patient-use devices that are hand-squeezed to force oxygen into a
 patients lungs and are used throughout the hospital in a variety of
 settings. For example, patients on a ventilator require the use of a
 resuscitator prior to tracheal suctioning procedures. Another use is in
 providing oxygen while transporting the patient between the operating room
 and other critical care units. In addition, resuscitators are typically
 placed strategically throughout the hospital to provide assistance to patients
 who have stopped breathing and require resuscitation. The Companys Code Blue
 II resuscitators alleviate certain problems involved in
 mouth-to-mouth emergency resuscitation, including the risk to both the
 rescuer and the

-4-

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | individual of transmitting
 infections and are sold in different sizes for infants, children, and adults.
 Most reusable manual resuscitators are costly to sterilize and require
 re-assembly that may result in errors that compromise proper function. In
 contrast, Code Blue II
 resuscitators are relatively inexpensive and are delivered fully assembled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Blood
 pressure cuffs are
 single-patient-use devices that are wrapped around the arm or thigh of a
 patient to obtain a blood pressure reading. The Companys CUFF-ABLETM
 single-patient-use blood pressure cuffs provide hospitals with an alternative
 to traditional reusable blood pressure cuffs that can become contaminated by
 touch with blood and other bodily fluids. While all patients admitted to
 hospitals are candidates for their own dedicated blood pressure cuffs, the
 Company believes that the primary market for disposable cuffs has been where
 infection control is a high priority and where there is a break in the skin. CUFF-ABLETM blood pressure
 cuffs are sold in a variety of sizes (including neonatal) and are adaptable
 to all manual and electronic blood pressure monitors that utilize blood
 pressure cuffs. The Company recently introduced the Click-It Universal
 Connection System that makes hospital-wide standardization simple and easy
 because it eliminates misconnections common with luer fittings and ensures
 compatibility with both manual and electronic blood pressure monitors.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Hyperinflation
 systems are devices
 used for patient resuscitation. The Company offers both its Babysafe and traditional hyperinflation
 systems for infant resuscitation in transport and prior to tracheal
 suctioning. These products are used in labor and delivery rooms and in
 neonatal intensive care units, where controlling the spread of infection is particularly
 critical. BabySafe adjusts and
 limits the level of pressure that can be delivered during resuscitation, and
 oxygen can be delivered with limited risk of barotrauma. These systems are
 available in a variety of configurations and sizes to meet infant needs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Continuous
 positive airway pressure systems, or CPAP systems, consist of a compact flow-generator connected to a
 dual-port, air-filled cushion face mask and are used as therapy for various
 respiratory diseases. The face mask is attached to a single-patient-use
 positive end expiratory pressure valve designed to maintain positive airway
 pressure in the lungs, allowing for more oxygen to diffuse into a patients
 blood system. The Companys face mask CPAP systems provide a less-invasive
 and more-comfortable way of supplying oxygen to certain patients than
 conventional ventilator-based systems by eliminating the need to insert an
 endotracheal tube into the patients trachea and then attaching the patient
 to a ventilator. The Companys face mask CPAP systems are also used in the
 hospital and pre-hospital setting to treat patients with cardiogenic
 pulmonary edema and other respiratory deficiencies.                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Heated
 humidification systems
 provide a flow of warm moist air to a patient at risk from loss of body
 temperature and drying of the lung linings. The Companys MistyOx® line consists of two
 respiratory products that deliver hydration to a patient, a nebulizer which
 delivers medium to high flow and high concentrations of oxygen to patients,
 combined with a regulated heater. These products may be used by infants,
 children, and adults in many areas of the hospital, including emergency,
 recovery and critical care.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | CPR
 training mannequins
 are training aids for teaching cardiopulmonary resuscitation, or CPR. The
 Companys Actar® training
 mannequin provides a low-cost alternative to many of the other training
 mannequins on the market. Its low cost allows each trainee to practice on
 their own mannequin rather than waiting to take turns on a single mannequin
 shared by an entire class. The Companys newest model, Actar D-FIBTM, incorporates
 additional functionality to meet the updated requirements of the American
 Heart Association and the Red Cross. New features include jaw thrust, abdominal
 thrust, and anatomical landmarks for proper defibrillation training.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Broselow® pediatric
 emergency products. The Broselow/Hinkle Pediatric Emergency
 System and the Broselow-Luten System are part of the Companys Color Coding
 Kids® product line. These products resulted from extensive clinical efforts
 by James Broselow, M.D., Robert Luten, M.D., and Alan Hinkle, M.D. to enable
 emergency care providers to determine the appropriate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

-5-

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | equipment size for infants
 in emergency situations. This system takes advantage of the direct
 correlation between a pediatric patients body length and the proper size of
 emergency supplies. This patented system, licensed to Vital Signs, consists
 of a tape measure having nine color zones, a corresponding series of
 color-coded single-patient-use emergency kits or modules and a nylon
 organizer bag custom-designed to hold all the supplies needed in either a
 trauma, cardiac or respiratory pediatric emergency.

For
fiscal 2007, 2006, and 2005, the respiratory/critical care segment contributed
22.6%, 22.1%, and 22.0%, respectively, of net revenue.

Sleep disorder

Building
upon the Companys airway-management expertise and long-term experience with
continuous positive airway pressure (CPAP) systems, the Company began providing
sleep disorder, personal ventilation products, and sleep diagnosis
services in the late 1990s. The
Company designed its sleep disorder products to deliver airflow to patients
undergoing therapy for the treatment of obstructive sleep apnea with the
objective of increasing patient comfort and acceptance of the treatment.

The
Company believes it is the only firm that both operates sleep centers to
diagnose obstructive sleep apnea as well as manufactures and sells products
designed to treat the condition. The Company offers sleep diagnostic
services exclusively in the United States through its Sleep Services of America
subsidiary. The Sleep Services of America subsidiary was created in January 2002
as a result of the merger with the sleep diagnostic service business of The
Johns Hopkins Health System Corporation. As of September 30, 2007, the Company operated 101 accounts, primarily
inclusive of 72 sleep diagnosis laboratories and centers and 22 hospital
locations serviced with mobile PSG equipment in nine states in the United
States and Washington D.C. The Companys Sleep Services of America
business is accredited by the Joint Commission on Accreditation of Healthcare
Organizations in ambulatory healthcare.

At
these sleep laboratories and centers, which typically accommodate two or
three patients per night, the
Company conducts sleep studies to determine whether patients suffer from sleep
disorders and, if so, the severity of their condition. If a patient is
determined to suffer from obstructive sleep apnea, the Company offers the
patient and their referring physician a comprehensive sleep program. This
program includes a patient consult, diagnosis, titration procedure (this is the
process of determining the optimal pressure to prescribe for the CPAP device),
and therapeutic intervention, thus providing a one-stop-shop approach to
service a patients needs.

Obstructive
sleep apnea, or OSA, is one of the most common sleep problems. Obstructive
sleep apnea is a condition that causes the soft tissue in the back of the
throat to narrow and repeatedly close during sleep. Oxygen deficiency, elevated
blood pressure, and increased heart rate associated with OSA are related to increased
risk of cardiovascular morbidity, stroke, and heart attack. Additionally, OSA
may result in excessive daytime sleepiness and reduced cognitive functions,
including memory loss, lack of concentration, depression, and irritability.
According to the National Heart, Lung and Blood Institute of the National
Institutes of Health, in 2006 more than 12 million people in the United States
suffered from sleep apnea. The Company
believes that a substantial portion of those with OSA remain
undiagnosed. Increased awareness
of OSA among doctors and patients in recent years is expected to continue
fueling growth of the OSA diagnostic and treatment industry.

OSA
diagnosis requires monitoring a patient during sleep. During overnight testing,
which usually takes place in a clinical setting, respiratory parameters and
sleep patterns are monitored along with other vital signs, providing
information about the quality of an individuals sleep. A report by Frost &
Sullivan indicated that by 2003, there were approximately 2,800 sleep
laboratories and centers in the United States. The Company believes this
represents a significant expansion over the number of such laboratories and
centers that previously existed in the United States.

CPAP
therapy is the primary method for treating obstructive sleep apnea, partly
because it is less invasive and more cost-effective than surgery. Unlike
surgery, which may only result in reduced snoring, CPAP therapy actually
reduces or eliminates the occurrence of obstructive sleep apnea. During CPAP
therapy, a patient sleeps with a nasal or facial mask connected by a tube to a
small portable airflow generator that delivers room air at a predetermined
continuous positive pressure. The continuous air

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pressure acts as a pneumatic
splint to keep the patients upper airway open and unobstructed. As a result,
the cycle of airway closures, which leads to the disruption of sleep and other
symptoms that characterize obstructive sleep apnea, is prevented or
dramatically reduced.

CPAP
is generally not a cure but a therapy for managing the chronic condition of
obstructive sleep apnea, and therefore, must be used on a daily basis as long
as treatment is required. Patient compliance has been a major factor in the
efficacy of CPAP treatment. Recent CPAP product innovations have improved
patient comfort and compliance compared with earlier generations of CPAP units.

The
Companys principal sleep disorder products, currently marketed primarily
outside of the United States, are personal non-invasive ventilation-support
systems that are used in the treatment of obstructive sleep apnea to prevent
temporary airway closure during sleep. The Companys sleep disorder and
personal ventilation products that have been cleared for sale in the United
States in both hospitals and homes include the HA50TM, iSleep
10TM,
iSleep
20TM,
iSleep
20+TM,
HAO1TM,
VIVO 30TM,
and VIVO
40TM.
The Companys principal sleep disorder and personal ventilation products are
listed below.

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CPAP flow generators are electromechanical
 devices which deliver continuous positive airway pressure through a nasal or
 full face mask to a patient suffering from obstructive sleep apnea in order
 to keep the patients airway open during sleep. Given the importance of
 patient compliance in treating obstructive sleep apnea, the Company designed
 its full range of products to be easy to use, lightweight, small, and quiet,
 making them relatively unobtrusive at the bedside. The Breas iSleep 10TM
 is a basic low-cost CPAP; the Breas iSleep 20TM is an enhanced CPAP device
 for treatment of obstructive sleep apnea; the iSleep 20+TM is
 a premium CPAP device with additional refinement and features to facilitate
 tracking of patient compliance; and the self-adjusting Breas iSleep 20iTM
 is a CPAP device based on the Companys unique, patented i-technology for breathing
 pattern recognition. This latter device responds to subtle changes in
 breathing patterns, as individual pressure requirements vary over time, to
 proactively minimize apneic events; whereas traditional, constant CPAP
 devices must be set to a maximum pressure that is usually higher than
 required throughout the night and thus may create discomfort for the user.
 With the iSleep
 20TM, the mean treatment pressure is lower as airway
 pressure is adjusted automatically. Clinical studies have demonstrated that
 patients prefer the lower pressure provided by these units to other available
 devices.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Bi-level CPAPs are electromechanical devices
 which allow inspiratory and expiratory pressures to be independently
 adjusted. The iSleep 22TM and premium iSleep 25TM
 devices treat more severe obstructive sleep apnea and are designed to be
 especially comfortable for the user.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Ventilators are electromechanical devices
 used to assist a patient with respiratory problems both in a clinical setting
 or at home. The Breas Vivo 30
 and Vivo 40 bi-level
 ventilators are advanced devices that allow separate pressure levels for
 inspiratory and expiratory phases of each individual breath. Ventilation can
 be matched to the patients own breathing pattern by setting inspiratory and
 expiratory levels independently to provide a more comfortable and more
 natural respiratory support. These ventilators may also be operated from an external
 battery to be used during transportation and while traveling. The Breas
 PV403 is an advanced
 multi-mode homecare ventilator that provides volume and pressure ventilation
 for patients suffering from respiratory failure such as neuromuscular (e.g.
 Duchenes Muscular Dystrophy) or other restrictive or obstructed lung
 diseases. The PV403 has both
 internal and external battery capability and is well suited to be used for
 transport and traveling.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Humidification systemsare an important factor in the comfort of
 many patients using CPAP devices or ventilators. The Breas HA50 and Breas HAO1TM
 are heated humidifiers designed to deliver humidified air efficiently at
 desired temperatures. The Breas HAO1TM is the Companys
 latest generation humidifier device, designed for complete integration with
 the iSleepTM
 and VIVOTM
 product lines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

The
Companys ability to sell its sleep disorder and personal ventilation products
in Company sleep laboratories and centers is restricted by strict federal regulations
that prohibit the medical facility from diverging from a physicians
prescription. If a physician prescribes a sleep disorder or personal
ventilation

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product by
name other than a Company product at a Company sleep laboratory or center, the
Company is prohibited by federal regulations from substituting its own product.

For
fiscal 2007, 2006, and 2005, sleep disorder and personal ventilation products
and services accounted for 23.8%, 21.2%, and 21.0%, respectively, of net
revenue.

Interventional
Cardiology/Radiology

Interventional
cardiology is a subspecialty of cardiology that deals specifically with
catheter based treatment of structural heart diseases; interventional radiology
is a subspecialty of radiology where minimally-invasive procedures are
performed using image guidance, either for diagnostic or treatment purposes.
The Company believes that the long term prospects for this business segment are
good as less-invasive procedures increase to minimize surgerys risk, cost,
trauma, aftercare, and procedure time.

The
Companys interventional cardiology/radiology business provides vascular access
and vascular device delivery and serves a substantial number of medical device
companies on an ongoing manufacturing and R&D project basis. The business
operates as a high-end OEM that designs, develops, and manufactures precision
devices that facilitate access to the cardiovascular system by medical
professionals in the electrophysiology, cardiology, radiology, critical care,
and anesthesia markets. The products include percutaneous-valved introducers,
peelaway-valved introducers, guiding sheaths, and device delivery sheaths.
Other products include guide wires, needles, over-the-needle catheters,
hemostasis valves, obturators, dilators, slicers, transvalvular insertion
tools, and contamination shields.

Generally,
the business makes finished sterile medical devices and bulk non-sterile
products based on customer specifications. However, the business can also design,
develop, and manufacture proprietary finished medical devices that are
distributed by customers under their private label. As an OEM, the business
depends on its customers for distribution of the medical devices produced by
the Company. It is a highly-competitive business that can have major technology
shifts. While the Company expects the business to grow over the next few years,
the actual growth will vary depending on the customer base. Products are sold
to other health care product providers either as a component of a kit or as a
finished product. Customers include Johnson & Johnson, Bard, and Boston
Scientific.

For
fiscal 2007, 2006, and 2005, interventional cardiology/radiology segment
contributed 14.0%, 12.6%, and 13.2%, respectively, of net revenue.



Pharmaceutical
technology services

Pharmaceutical,
diagnostic, biotechnology, and medical device companies are regulated by the
United States Food and Drug Administration or FDA. The FDAs regulatory
framework covers virtually every aspect of these companies operations and
mandates that these companies maintain highly-detailed records to demonstrate
compliance with complex requirements. FDA enforcement of its requirements has
increased significantly in recent years, and the FDA has publicly stated that
compliance will be more strictly scrutinized. The FDA may invoke extensive
enforcement powers against companies that fail to comply with FDA regulations.
These companies may be delayed or prevented from commercializing new products
or product enhancements and may have existing products removed from the market.

The
tasks of developing FDA compliance programs and monitoring their performance
are complex and time-consuming. The Company believes that many FDA-regulated
companies do not maintain the internal staff necessary to meet FDA requirements
scrutiny, and these companies require consultants to help them become and
remain compliant. FDA-regulated companies are under ongoing scrutiny with
regard to the quality and compliance of critical computer systems and will
continue to require external help to develop and implement these systems.

For
more than 20 years, the Company has provided regulatory consulting services to
clients, helping them develop and validate systems and processes for their
manufacturing, IT infrastructure, research and development, facilities,
laboratory, and quality assurance departments. In 2002, with the acquisition of
Stelex, the Company expanded these services to include computer systems compliance.
In addition, the Company developed and currently markets proprietary software
products used in conjunction with the Companys services to help clients comply
with FDA regulations. The Company delivers these technology services to
FDA-regulated companies primarily in the pharmaceutical sector, as well as to
medical device,

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diagnostic, and
biotechnology companies. Clients include some of the largest pharmaceutical
companies in the world.

At
September 30, 2007 and 2006 the pharmaceutical technology services staff
consisted of 87 and 99 professionals, respectively. In addition, the Companys
Vital Path subsidiary developed and currently markets proprietary software
products to help clients comply with FDA regulations. For fiscal 2007,
2006, and 2005, pharmaceutical technology services accounted for 5.6%, 7.6%,
and 8.7%, respectively, of net revenue. The Pharmaceutical technology services
segment was classified as discontinued operations in the first, second and
third quarters of Fiscal 2007. The Company believes that the public
announcement of this classification caused demand for the Companys
pharmaceutical technology services to decline. When the Company sought to sell
this business, the offers received were inadequate. When the Company wrote the
business down to fair value and reclassified the business to continuing
operations during the fourth quarter of fiscal 2007, the offers received formed
the basis for determining fair value.

Sales,
marketing, and distribution

United
States of America

Anesthesia
and respiratory/critical care. The Company markets
anesthesia and respiratory/critical care products primarily to hospitals and
other health-care providers. Hospitals and other health care providers
determine the channel through which they receive Vital Signs products, either
directly from the Company or through a distributor of their choice. At
September 30, 2007 and 2006, the United States sales force consisted of 53 and
55 sales representatives as well as seven and six regional sales managers,
respectively. The Company trains its sales force in the need, use, application,
and advantages of its products.

Many
of the Companys customers belong to group purchasing organizations that
provide their members access to medical products by negotiating discounts with
manufacturers. Unlike distributors, group purchasing organizations do not
themselves make purchases, carry inventory or physically handle product. The
Company has agreements with several leading group purchasing organizations,
including Amerinet, Broadlane, Consorta, Healthtrust, MedAssets (HSCA),
Novation, and Premier. During fiscal 2007, 2006 and 2005, 28%, 33% and 34%, respectively,
of the anesthesia and respiratory/critical care segments sales
to United States hospitals and other health care providers came through group
purchasing organization contracts.

Sleep
disorder.Sales of sleep therapeutic and personal
ventilation equipment in the United States has been minimal to date, due partly
to the time required to obtain necessary FDA clearances and also to the
dominant position that the Companys competitors have in the home-supply dealer
channel. The Companys principal means of selling sleep disorder and personal
ventilation products is through the introduction of those products to patients
visiting the Companys sleep laboratories and centers.

The
primary focus is to increase the patient volumes at existing laboratories and
centers and negotiate contracts with new sleep laboratories and centers. The
Company differentiates itself from its competitors by providing hospitals with
a range of marketing options from direct marketing to an al la carte selection of services that
increases the number of beds or improves existing-bed utilization.

Interventional
Cardiology/Radiology.
Sales of finished sterile medical devices and bulk non-sterile products are
primarily based on customer specification and also on proprietary finished
medical devices that are distributed by customers under their private label. As
an OEM, the business depends on its customers for distribution of the medical
devices the Company produces.

Pharmaceutical
technology services. Sales are through a direct sales force of ten and nine at
September 30, 2007 and 2006, respectively. The pharmaceutical technology
services sales team in the United States and Puerto Rico sells FDA-compliance
services to pharmaceutical companies, diagnostic and biotechnology companies,
and medical device manufacturers.

International
sales

The
Company sells products in over 73 countries worldwide. For fiscal 2007, 2006,
and 2005, international sales were approximately 24.6%, 23.7%, and 24.2%,
respectively, of net revenues.

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The Company
operates a wholly-owned subsidiary in the United Kingdom that distributes and
sells anesthesia and respiratory/critical care throughout the United Kingdom
and Ireland. It employs sixteen individuals, including six sales
representatives and one field-based sales manager. Anesthesia and
respiratory/critical care products are sold in over twenty European and other
international markets primarily through individual distribution channel.

Sales
in Asia, Latin America, Canada, India and Europe/Middle East are supervised by
six regional managers whose responsibilities include, but are not limited to,
the identification, qualification, appointment and continued training and
support of local, territory-specific distributors.

The
Company sells sleep disorder and personal ventilation products through Breas
direct sales force to home health care distributors in France, Germany,
Scandinavia, Spain, and the United Kingdom, and through an independent
distribution network in other countries. At September 30, 2007, Breas direct
sales force consisted of 27 professionals.

See
Managements discussion and analysis of financial condition and results of
operations for additional information concerning international sales.

Research and
development



Product
development and innovation is an essential part of the Companys success. As of
September 30, 2007 there were 46 engineers, scientists, and technicians in
research and development. The Company supplements its research with outside
consultants from time to time. The primary research and development activities
in fiscal 2007 were (1) developing SteeLiteTM single-use metal
laryngoscope blades, (2) completing the enFlow® IV Fluid/Blood Warming System
following the Enginivity LLC acquisition in August 2007, and (3) expanding the
line of ventilation products at the Companys Breas subsidiary.



The
Company incorporates technical, manufacturing, operations, sales and marketing,
and clinical expertise within its research and development processes. The
research and development staff works with health care providers to respond to
customer product needs and with Company sales and marketing teams to anticipate
industry trends. The Company has successfully reduced new product development costs
by utilizing its manufacturing capabilities to rapidly produce quantities of
prototype products suitable for trial use and sale.

Manufacturing and quality control

Vital
Signs manufactures substantially all of its anesthesia breathing circuits,
bacterial/viral filters, blood pressure cuffs, pressure infusors, arterial
blood gas syringes, heated humidification circuits, nebulizers, manual
resuscitators, introducers, and sleep therapy products. Manufacturing processes
include tube extrusion, injection molding, radio frequency welding, product
assembly, product testing, packaging, and distribution. In some instances,
plastic components incorporated in certain products are molded to Company
specifications by outside custom injection molders who utilize molds that are
designed and, in substantially all instances, owned by the Company. In these
instances, Company suppliers are presented with written specifications to
assure that components are manufactured in conformity with design and other specifications.
The Company purchases resins, the primary raw material used in a variety of
anesthesia and respiratory products, in bulk.

The
Companys manufacturing processes and systems provide quality products, react
quickly to changes in demand, and generate manufacturing efficiencies. These
capabilities allow the Company to contain costs, control quality, and maintain
security of proprietary processes. The Company continually evaluates its
manufacturing processes, with the objective of increasing automation,
streamlining production, and enhancing efficiency to achieve cost savings and
improve quality.

Because
the products are utilized in operating rooms and critical care units of
hospitals, the Company must meet the FDAs Quality System Regulations in all of
its facilities. The Company is required to maintain records of all raw
materials received and used in the manufacturing process along with complete
histories of all devices manufactured. For Europe distribution, the Companys
quality systems are third-party certified to be in compliance with ISO 13485
standards.

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Key
supplier relationships

The
Company had exclusive rights to an air-filled cushion anesthesia face mask
through a collaboration arrangement with Respironics. Face masks are used in
a variety of the Companys anesthesia circuits and manual resuscitators.
On February 2, 2007, the Company announced that it was ending its relationship
with Respironics and had formed a Chinese joint venture to manufacture face
masks. Respironics was the Companys sole face mask supplier until the
formation of the Chinese joint venture.

As
of August 2007, Respironics sold all of its tooling, equipment, know-how and
intellectual property for manufacturing air-filled cushion masks to the
Company, agreed to continue manufacturing masks during the transition process,
and agreed to cooperate with the startup of the Companys Chinese joint
venture. The joint venture is ramping up mask production and is currently supplying
40% of the Companys mask needs.

If
the Company becomes unable to fully transition the face mask manufacture to the
joint venture or if the supply of face masks would be interrupted, the Company
would be required to find alternative suppliers. The Company believes that alternative face mask suppliers exist; however, there is
no assurance that, in the event of a face mask supply
interruption, the Company could maintain a delivery of face masks in a quantity
and at a cost that would not have a material adverse effect on the Companys
business and operating results.

Intellectual property

The
Company primarily relies upon trade secrets and continuing technological
innovations to develop and maintain its competitive position and seeks patent
protection for inventions that provide its products a competitive advantage.
When determined appropriate, the Company has enforced and plans to continue to
enforce and defend its patent rights. In an effort to protect trade secrets,
the Company requires certain employees, consultants, and advisors to execute
confidentiality, proprietary information, and invention assignment agreements
upon commencement of employment or consulting relationships.

Some
patents are for significant technologies that are utilized in the Companys
anesthesia, respiratory/critical care, and sleep disorder business segments.
The Companys ongoing success depends in part on the ability to maintain its
patents, obtain new patents, and develop new products and applications without
infringing on the patent or other proprietary rights of third parties. In the
medical industry, there has been substantial litigation involving the
intellectual property rights of medical device manufacturers, and the Company
has been involved in several legal proceedings, often at significant expense.
The Company cannot assure that any of its patents will not be circumvented or
successfully challenged, that its patents will provide competitive advantages,
or that pending or future patent applications will be granted. The Company also
cannot assure that its products or proprietary rights do not infringe upon the
rights of third parties. If an infringement were established, the Company could
be required to pay damages or enter into royalty or licensing agreements with
onerous terms, and/or be enjoined from making, using, or selling the infringing
product.

Regulation

Medical
device regulation

As
a manufacturer of medical devices, the Company is subject to regulation by,
among other governmental entities, the FDA and the corresponding agencies of
the states and foreign countries in which the Company operates. The Company
must comply with a variety of regulations, including the Quality System
Regulations of the FDA, and is subject to periodic inspections by the FDA and
applicable state and foreign agencies. Enforcement of the Quality System
Regulations has increased significantly in recent years, and the FDA has
publicly stated that medical compliance will be more strictly scrutinized. If
the FDA believes that its regulations have not been fulfilled, it may invoke
extensive enforcement powers. Non-compliance with applicable regulatory
requirements can result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure to receive pre-market clearances, withdrawal
of clearances, and criminal prosecution. The FDA also has the authority to
require recall, repair, replacement or refund of the cost of any device
manufactured or distributed by the Company. Current FDA enforcement policy
prohibits the marketing of cleared medical devices for un-cleared uses.

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After
clearance is given, the FDA or foreign regulatory agencies may withdraw
clearances or approvals or require the Company to change the device,
manufacturing process, labeling, supply additional proof of product safety and
effectiveness, or to recall, repair, replace, or refund the cost of the medical
device. The process of obtaining clearances or approvals to market products can
be costly, time consuming, and can delay the marketing and sale of the
Companys products. Federal, state, and foreign regulations regarding the
manufacture and sale of medical devices are also subject to change. The Company
cannot predict what impact, if any, such changes might have on its business.

From
time to time the Company may take recall actions with respect to particular
lots of a specific product. Such actions are recorded in Company records and
are available to the FDA during inspections. The Company also may file notices
with the FDA describing such actions.

The
FDA classifies medical devices into three classes that determine the degree of
regulatory control that the manufacturer must meet. Class I is the least
stringent, and these medical devices are subject to general controls, including
reporting certain types of device-related events to the FDA, labeling, and
adherence to the Quality System Regulations. Class II devices are customarily
subject to general and special controls including Section 510(k) clearance,
performance standards, post-market surveillance, patient registries, and FDA
guidelines. Class III is the most stringent, and these medical devices are
those that must receive pre-market approval by the FDA to ensure device safety
and efficacy. Class III includes life-sustaining, life-supporting, and certain
implantable devices, as well as new devices that have not been found to be
substantially equivalent to legally-marketed Class I or Class II devices. The
pre-market approval process may take several years and requires submitting
extensive performance and clinical information.

Most
Vital Signs products are either Class I or Class II. If the Company were to
develop any Class III medical devices, the time, effort, and expense required
to obtain the necessary approvals would be substantial.

International
sales of medical devices are subject to foreign government regulations, which
vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA clearance, and the requirements may differ significantly.

The
European Union has adopted legislation and Medical Device Directives that
regulate the design, manufacture, clinical trials, labeling, and adverse event
reporting for medical devices. This regulation establishes a Competent
Authority in each member state to monitor and ensure compliance with the Directive.
Each Competent Authority, in turn, then nominates a Notified Body to oversee
the conformity assessment procedures set forth in the Directive, under which
manufacturers demonstrate that their devices comply with the requirements of
the Directive and are entitled to bear the CE marking. CE is an
abbreviation for Conformité Européene, or European Conformity, and the CE
marking, when placed on a product, indicates compliance with the requirements
of the applicable directive. Only medical devices properly bearing the CE
marking may be commercially distributed throughout the European Union.

The
Company has approval to affix the CE marking on all of its major product lines.
As new products are introduced, the Company intends to gain approval for CE
marking. While no additional pre-market approvals in individual European Union
countries are required prior to marketing of a device bearing the CE mark,
practical complications with respect to marketing introduction may occur. For
example, different labeling requirements among EU countries exist.

Over
the last several years numerous countries, such as Australia, China, Japan, and
India have imposed new regulations on the registration of medical devices which
in some instances have significantly lengthened the registration process.
Non-compliance with foreign regulations may carry the same or increased risks,
liabilities, and exposures as non-compliance with FDA requirements. Foreign
regulatory authorities also have the authority to require the Company to
repair, replace, or refund the cost of any device that the Company manufactures
or distributes.

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Health
care regulation

Some
of the services provided in the Companys sleep disorder business segment are
subject to additional regulation from various state and local regulatory
authorities. A trend is developing in the United States to require the
licensing of technical personnel to perform sleep disorder diagnostic testing
procedures. Licensed personnel are more highly compensated than unlicensed
personnel.

Sleep
diagnostic service providers are subject to regulation by United States federal
and state authorities aimed at combating fraud and abuse in the health care
industry. The federal government has enacted statutes and corresponding
regulations addressing, among other things, kickbacks, self-referral, the
submission of false claims for reimbursement, and the failure to follow
physician prescriptions. Many states have enacted similar statutes. The federal
laws apply in any case where the Company may provide a product or service that
is reimbursable under the Medicare or Medicaid programs, or where the Company
is requesting reimbursement from Medicare or Medicaid.

The
Companys ability to sell its Breas products in Company sleep laboratories and
centers is restricted by federal regulations that prohibit the Company from
diverging from a physicians prescription. If a physician prescribes a CPAP
product by name other than a Breas product, at one of the Companys sleep
laboratories and centers, the Company is prohibited from substituting a Breas
product.

The
federal government is authorized to impose criminal, civil, and administrative
penalties on a health-care provider who files a false claim for reimbursement
from Medicare or Medicaid. Even where a claim has not been submitted to
Medicare or Medicaid, criminal penalties may be imposed against the provider if
the government can show that the claims constitute mail fraud or wire fraud.
The government has increasingly been applying penalties in a broadening range
of circumstances, for example, in instances where reimbursement has been made
or sought for medically unnecessary services or for services that fall below
clinical standards for quality care. The federal anti-kickback law prohibits
the offering, solicitation, payment or receipt of anything of value which is
intended to induce the referral of Medicare or Medicaid patients, or to induce
the ordering of items or services that are reimbursable under those programs.
The federal anti-kickback law has been interpreted to apply where one purpose
of an arrangement is to induce referrals, even if it is not the primary purpose
of the arrangement. Arrangements that meet certain so-called safe harbors are
deemed not to violate the federal anti-kickback law, but the failure of a
particular arrangement to meet a safe harbor also does not necessarily mean
that such an arrangement is illegal.

The
federal self-referral law, commonly referred to as the Stark Law, prohibits a
physician from referring a patient to another health care provider for certain
designated health products and services reimbursable by Medicare or Medicaid if
the referring physician has a financial relationship with that provider. Financial
relationship has been broadly defined in the applicable regulations to include
both direct and indirect relationships, and includes both ownership interests
and compensation as forms of financial relationships. As with the federal
anti-kickback laws safe harbors, the Stark Law and its regulations exclude
certain arrangements from the general prohibition, provided that specific
criteria applicable to each arrangement are met.

The
penalties for violating these federal laws include criminal sanctions and
fines, potential treble damages, and civil and administrative penalties, which
may include, but not be limited to, exclusion from the Medicare and Medicaid
programs, and the repayment to the federal government of any reimbursement that
the provider received in violation of the law.

Many
states have enacted laws similar to the federal fraud and abuse laws. There is
a great degree of variability among these states in terms of the applicability
and requirements of each of their laws. For instance, some states laws are
applicable only to services or products reimbursable under Medicaid, while
others apply to all health care services regardless of the source of payment.
By way of further example, some states do not prohibit referrals to a provider
with which the referring physician has a financial relationship, but only
require that the patient be informed of the relationship before the referral is
made.

In
addition, the Company is also subject to numerous foreign, federal, state, and
local laws and regulations relating to such matters as safe working conditions,
environmental protection, and fire hazard control.

-13-

---



Privacy
regulation

Some
of the Companys business activities require that it collect and/or use information
about individuals and their medical conditions. As a result, the Company is
subject to regulation by both United States and foreign authorities to protect
individual privacy by requiring confidentiality of patient information.

In
1996, the United States Congress enacted the Health Insurance Portability and
Accountability Act, which mandated, among other things, the promulgation of
regulations to address the privacy of health information and to reduce many of
the costs and administrative burdens of the health care industry. These
regulations have been developed by the United States Department of Health and
Human Services and address three general areas: standardization of electronic
transactions, security of health information systems, and privacy of protected
health information. Collectively, these regulations are intended to establish
federal standards concerning the use, disclosure, and protection of health
information which, by its nature, can be linked to specific individuals. In addition
to limited access to protected health information of Company employees, the
Companys Sleep Services of America subsidiary collects protected health
information of its clients.

The
Health Insurance Portability and Accountability Act also establishes civil and
criminal fines and penalties for the improper use and disclosure of
individually identifiable health information. The regulations continue to
evolve as the United States Department of Health and Human Services continues
to receive public comment and revise certain of the regulations, most notably
those addressing privacy. There is no meaningful history of enforcement efforts
by the federal government at this time. It is, therefore, not possible to
ascertain the likelihood of enforcement efforts in connection with the Health
Insurance Portability and Accountability Act regulations or the potential fines
and penalties that may result from the violation thereof.

Foreign
governments are increasingly addressing concerns related to the privacy of
information collected about their citizens with laws and regulations designed
to protect the confidentiality of such information.

Third
party reimbursement

The
cost of medical care in the United States and many other countries is funded
substantially by government and private insurance programs. Although the
Company does not generally receive payment for its products or services
directly from these payors (other than in connection with the Companys sleep
diagnostic services), the Companys continued success is dependent upon the
ability of patients, hospitals, and home care distributors to obtain adequate
reimbursement for Company products and sleep services. In most major markets,
Vital Signs products are purchased primarily by hospitals and medical centers
that are generally either government funded, invoice third-party payors
directly, or invoice patients that receive reimbursement from third-party
payors. Other than direct hospital sales (and the Companys sleep diagnostic services
and resulting sales of CPAP equipment), the Companys remaining sales are to
distributors and manufacturers of other medical products that then sell to
these customers.

Sleep-diagnostic
services provided in Company sleep laboratories and centers to patients are
generally covered by private insurance. In those instances, the patient is
responsible for their co-payment portion of the fee, and the Company invoices
the patients insurance company for the balance. The Company contracts with hospitals
on a fee for service basis, and the hospital assumes the billing risk.

In
the United States, third-party payors include Medicare, Medicaid, and private
health insurance providers. These payors may deny reimbursement if they
determine that a device has not received appropriate FDA clearance, is not used
in accordance with approved applications, or is experimental, medically
unnecessary, or inappropriate. Third-party payors are also increasingly
challenging prices charged for medical products and services, and certain
private insurers have initiated reimbursement systems designed to reduce health
care costs. The trend towards managed health care and the growth of health
maintenance organizations that control and significantly influence health care
service and product purchases, as well as ongoing legislative proposals to
reform health care, may all result in lower prices for the Companys products
and services. The Company cannot assure that its products and services will be
considered cost-effective by third-party payors, reimbursement will be
available or continue to be available,

-14-

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or that
payors reimbursement policies will not adversely affect the Companys ability
to sell its products and services on a profitable basis, if at all.

Competition

The
Companys markets are highly competitive. The principal bases for competition
include product features, price, quality, customer service, technique,
performance, market reputation, breadth of product offerings, and effectiveness
of sales and marketing. The Company believes that its products compete
favorably with respect to these factors.

The
Company competes on a product-by-product bases with various companies, many of
which have greater financial and marketing resources, broader business
segments, or both. The Companys primary competitors in each of its product and
service categories include the following entities and their affiliates:

|                                     |  |                                                                                                                                                                                   
|------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product/service category             |  | Primary competitors                                                                                                                                                               
|                                     |  |                                                                                                                                                                                   
|Anesthesia                           |  | Bespak
 Medline Industries
 Smith Industries                                                                                                                                      
|                                     |  |                                                                                                                                                                                   
|Respiratory/critical
 care           |  | Ambu
 International A/S
 Cardinal Health
 Critikon, Inc./General Electric Medical Services
 Fisher & Paykel Healthcare
 Teleflex
 Covidien (formerly Tyco International)
 Invacare
|                                     |  |                                                                                                                                                                                   
|Sleep
 disorder                      |  | Fisher &
 Paykel Healthcare
 Resmed
 Respironics
 Covidien (formerly Tyco International)
 Various hospital and locally maintained sleep centers                                   
|                                     |  |                                                                                                                                                                                   
|Interventional
 cardiology/radiology |  | Enpath
 Medical
 Teleflex Medical                                                                                                                                                 
|                                     |  |                                                                                                                                                                                   
|Pharmaceutical
 technology services  |  | Day &
 Zimmerman
 Taratec
 The Washington Group
 Numerous regional consulting companies.                                                                                          

-15-

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Employees

The
Company believes that its relations with its employees are good. None of the
Companys employees are members of unions, although certain employees outside
of the United States have statutory benefits comparable to collective
bargaining agreements. As of September 30, 2007, the Company had 1,257
full-time employees shown as follows:

|                                  |  |                       |       | 
|--------------------------------- |  | --------------------- | ----- | 
|Department                        |  | Number of 
 employees |      
|                                  |  |                       |      
|Manufacturing and quality control |  |                       | 653   | 
|Sales and marketing               |  |                       | 159   | 
|Sleep center technical personnel  |  |                       | 157   | 
|Regulatory consultants            |  |                       | 66    | 
|Research and development          |  |                       | 46    | 
|Administration                    |  |                       | 176   | 
|                                  |  |                       |       | 
|Total                             |  |                       | 1,257 | 
|                                  |  |                       |       | 

Website

The
Company maintains a website at www.vital-signs.com that provides
proxy statements, press releases, and SEC reports on Forms 3, 4, 5, 8-K, 10-K,
and 10-Q (and any amendments to those reports) that are filed with the SEC.
These reports and other materials are made available as soon as reasonably
practicable after such material is electronically filed with or furnished to
the SEC. Press releases are also issued via electronic transmission to provide
access to Company financial and product news. In addition, the Company provides
notification of and access to voice and Internet broadcasts of its quarterly
and annual results.

-16-

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Item 1A. Risk
Factors

The
reader should carefully consider the risks described below and all other
information contained in this Annual Report. If any of the following risks, as
well as other risks and uncertainties that are not yet identified or that the
Company currently thinks are immaterial, actually occur, the Companys
business, financial condition, and results of operations could be materially
and adversely affected. In that event, the trading price of the Companys
shares could decline, and shareholders may lose all or a substantial part of
their investment.

Risks related to the Companys industry

Public and private
sector health care organizations continue to exert substantial cost containment
pressures that could adversely impact the Companys selling prices and
profitability.

In recent years,
both the public and private sectors have made widespread efforts to control
health care costs, including the prices of products sold by the Company. Such
efforts may have a material adverse effect on the pricing of, and the demand
for, Company products. Health care organizations are evaluating approaches to
reduce costs by decreasing the frequency with which a treatment, device, or
product is used and by making more diagnostic procedures available for
home-based testing as opposed to laboratory or hospital based testing. Cost
containment also has caused the health-care purchasing decision-making function
to shift from the physician to the administrator at the health care
institution, resulting in an increased emphasis on reduced price, as opposed to
product features and clinical benefits. Efforts by U.S. governmental and
private payors to contain costs will likely continue, and the Company expects
that international health care markets will follow a similar trend toward cost
containment.

The time and expense
needed to obtain regulatory approval and respond to changes in regulatory
requirements could adversely affect the Companys ability to commercially
distribute its products and services and generate sales revenue.

The Company is
subject to extensive worldwide regulation with respect to product clearance and
enforcement activities. This results in long product approval cycles,
uncertainty with respect to the timing of the introduction of new or modified
products, uncertain regulatory approvals, and substantial expenses. The
Companys products are subject to extensive regulation by the United States
Food and Drug Administration (the FDA) and certain similar foreign regulatory
agencies. Additionally, some of the Companys sleep disorder services are
subject to additional regulation from various local regulatory agencies.

The
FDA regulates the pre-clinical and clinical testing, manufacturing, labeling,
distribution, and promotion of medical devices. It can take several years to
receive the appropriate clearances from the FDA, and the Company cannot assure
that it will always obtain such clearances. If the Company decides to develop
any products that are categorized by the FDA as Class III medical devices, the
time, effort and expense required to obtain the necessary clearances will
increase significantly. In addition, the products that the Company manufactures
or distributes pursuant to FDA clearances are subject to pervasive and
continuing regulations by the FDA. Non-compliance with applicable requirements
can result in, among other things, warning letters, fines, injunctions, civil
penalties, recalls or seizures of products, total or partial suspension of
production, failure of the government to grant pre-market clearance for
devices, withdrawal of marketing clearances, and criminal prosecution. The FDA
also has the authority to require the Company to repair, replace, or refund the
cost of any device that it manufactures or distributes.

International
sales of medical devices are subject to foreign government regulations, which
vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA clearance, and the requirements may differ significantly. Over the last
several years several countries, such as Australia, China, Japan, and India
have imposed new regulations on the registration of medical devices which in
some instances have significantly lengthened the registration process.
Non-compliance with foreign regulations may carry the same or increased risks,
liabilities, and exposures as non-compliance with FDA requirements. Foreign
regulatory authorities also have the authority to require the Company to
repair, replace, or refund the cost of any device that the Company manufactures
or distributes.

-17-

---



Certain
business activities require that the Company collect and/or use information
about individuals and their medical conditions. As a result, the Company is
subject to complex regulations by both United States and foreign authorities to
protect individual privacy by requiring that the Company maintain the
confidentiality of patient information. Implementation and compliance with
these regulations are costly.

Even after receiving
FDA and foreign regulatory clearance or approval, the Companys products may be
subject to product recalls, which may harm the Company.

The
FDA and similar governmental authorities in other countries have the authority
to make a mandatory recall or order the market removal of the Companys
products in the event of material deficiencies or defects in medical device
design, manufacture, or labeling. Any recall of Company products may materially
adversely affect the Companys profitability, divert managerial resources, and
harm the Companys reputation.

The Company may lose
significant customers as a result of substantial consolidation within the
health care industry.

Over
the past several years, the health care industry, including many of the
Companys customers, has undergone significant consolidation, and the Company
expects this trend to continue. The Company is subject to risks and
uncertainties that result from mergers and acquisitions involving its
customers. If, as a result of such mergers or combinations, the Companys
customers lose control of the purchasing function, decide to use one of the
Companys competitors or reduce their orders for Company products, the
Companys revenues may be materially adversely affected.

Government and
private insurance plans may not reimburse the Companys customers for the
Companys products, which could result in reductions in sales or selling prices
for Company products.

The
cost of medical care in the United States and many other countries is funded
substantially by government and private insurance programs. If such funding
becomes limited or unavailable to the Companys customers, the Companys
business may be adversely affected. Although the Company does not generally
receive payment for its products or services directly from these payors other
than for its sleep diagnostic services, the Companys continued success is
dependent upon the ability of patients or the Companys customers to obtain
adequate reimbursement for Company products and services. In most major
markets, Company products are purchased primarily by hospitals which in turn
bill third-party payors or bill patients directly who then seek reimbursement from
third-party payors.

In
the United States, third-party payors include Medicare, Medicaid, and private
health insurance providers. These payors may deny reimbursement if they
determine that a device has not received appropriate FDA clearance, is not used
in accordance with approved indications, or is experimental, unnecessary, or
deemed to be inappropriate treatment for the patient. Third-party payors are
also increasingly challenging prices charged for medical products and services.
The Company cannot assure that its products will be considered cost-effective
by third-party payors, reimbursement will be available, or that payors
reimbursement policies will not adversely affect the Companys ability to sell
its products on a profitable basis, if at all.

Health
care reimbursement systems vary from country to country and, accordingly, the
Company cannot assure that third-party reimbursement available under one system
will be available for procedures utilizing Company products under any other
reimbursement system. Lack of, or inadequate reimbursement by, government and
other third-party payors for Company products would have a material adverse
effect on the Companys business, financial condition, and results of
operations.

Health care reform
proposals are gaining substantial support in the United States Congress and
state legislatures and could impact the profitability of the Companys
business.

The
United States health care industry is subject to several reform proposals,
including more stringent regulations. It is uncertain whether and when such
proposals would become legal requirements affecting the Companys business, but
the Company cannot assure that any such changes will not have a material
adverse effect on the Companys business. Changes in the law or new
interpretations of existing laws may have a dramatic effect on the costs
associated with doing business and the amount of reimbursement the Companys
customers receive from both government and third-party payors. Federal, state
and local

-18-

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government
representatives will, in all likelihood, continue to review and assess
alternative regulations and payment methodologies.

Health
care legislation and regulation by state legislatures regarding licensure
requirements for healthcare professionals could impact the profitability of the
Companys business.

Several
states in which the Companys Sleep Services of America business operates have
taken steps to improve licensure requirements for polysomnographic sleep technicians
that monitor patients during sleep diagnostic procedures. As licensing
requirements are imposed, the pool of qualified personnel tends to shrink
leading to a drive for higher salaries. The Company cannot assure that these
changes in the pool of available qualified employees will not have an impact on
the Companys ability to maintain its profit margins at historic levels.

The Company incurs
expenses to comply with environmental, health and safety laws and regulations.

The
Company is subject to numerous environmental, health and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. The Company incurs expenses to comply with such laws and regulations
and any violation of these laws and regulations could have a material adverse
effect on the Companys business, financial condition, and results of
operations.

Risks related to the Companys business

The markets for the
Companys products and services are highly competitive, and the Company
competes against substantially larger companies.

Competition
among medical device companies is intense. If the Company is unable to compete
effectively with existing or future competitors, it may be prevented from
retaining the Companys existing customers or from attracting new customers,
which could materially impair the Companys business. There are a number of
companies that currently offer, or are in the process of developing, products
that compete with products that the Company offers. The Company cannot assure
that some of these competitors will not succeed in developing products that are
more effective and/or less expensive than those currently used or produced by
the Company or that would render some products offered by the Company obsolete
or non-competitive. Many of the Companys competitors have greater financial,
research and development, manufacturing, and marketing resources than the
Company has and may be in a better position than the Company is to withstand
the adverse effects on gross margins and profitability caused by price
decreases prevalent in this competitive environment.

The presence of
group purchasing organizations may affect the Companys competitive position,
pricing and ultimately profits.

The
Companys ability to sell its products to hospitals depends on the Companys
relationships with group purchasing organizations. In fiscal 2007, Company
sales of anesthesia and respiratory/critical care products related to group
purchasing arrangements amounted to $27.3 million, representing 28% of total
net revenue from United States hospital sales. In 2008, Company contracts with
several of the group purchasing organizations will terminate unless the parties
mutually agree to renew them. In fiscal 2007, the Company had net revenues of
$5.0 million under the contracts subject to termination or renewal in 2008. The
Company cannot assure that it will be able to renew these contracts at the
current or substantially similar terms. If the Company is unable to keep its
relationships and develop new relationships with group purchasing
organizations, the Companys competitive position would likely suffer. In
addition, some group purchasing organizations have tested the use of new
internet bidding procedures in order to maximize their abilities to negotiate
lower prices with suppliers. Movement to these bidding modalities has been
implemented by some organizations and has resulted in lower pricing in some
instances. The Company cannot assure that continued movement to these bidding modalities
will not increase. This may result in lower pricing or failure to secure
contracts with these organizations.

The Company could
lose customers and its business could be adversely affected if its competitors
implement new technologies before the Company does.

The
market for Company products is characterized by frequent product improvements
and evolving technology. The Companys revenue and profitability could be
adversely affected by technological change.

-19-

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To compete
effectively, the Company must anticipate and adapt to technological changes and
offer, on a timely basis, competitively priced products with new and improved
features that meet evolving industry standards and customer preferences. The
Company may choose to develop or invest in new technologies that prove to be
ineffective, do not gain market acceptance, or are incompatible with
technologies of the Companys customers. As new technologies develop, the
Company may be forced to implement these new technologies at a substantial cost
in order to remain competitive. In addition, competitors may implement new
technologies which allow them to offer lower-priced and/or superior quality
products which may render Company products obsolete or uncompetitive.

The Company is
dependent on a single supplier for one of its key products.

Face masks are used
in a variety of the Companys anesthesia circuits and manual resuscitators. On
February 2, 2007, the Company announced that it was ending its relationship
with Respironics. In the first quarter of 2007, the Company formed a Chinese
joint venture to manufacture face masks. Respironics was the Companys sole
face mask supplier until the formation of the Chinese joint venture.
Respironics has continued to provide products to the Company during the
transition to the joint venture, and Respironics has sold substantial
manufacturing assets to the Company.

If
the Company becomes unable to fully transition the face mask manufacture to the
joint venture or if the supply of face masks would be interrupted, the Company
would find alternative suppliers. The Company believes
that alternative face mask suppliers exist; however, there is no assurance that, in the event of a face mask supply interruption, the Company
could maintain a delivery of face masks in a quantity and at a cost that would
not have a material adverse effect on the Companys business and operating
results.

The Company is
dependent on a limited number of suppliers for key components of some of its
products and delivery delays or the loss of vendors could adversely affect the
Companys business.

The
Company relies on vendors to supply the key components of some of its products.
The Company is dependent on petroleum-based resins for most of its products.
The fluctuations in petroleum prices due to market conditions or international
events and the limited number of resin suppliers could result in increased
production costs or the interruption of raw materials.

The
Company cannot assure that it will not experience delays from resin suppliers
or vendors of key components in the future. In the event the Company is unable
to obtain components for any of its products, or is unable to obtain components
on commercially reasonable terms, the Company may not be able to manufacture or
distribute its products on a timely and competitive basis, or at all. If the
Company experiences any delays in component availability, the cost incurred in
switching business to alternate suppliers could have a material adverse effect
on the Companys business, financial condition, and results of operations.

If the Company loses
key personnel, or is unable to attract and retain additional highly skilled
personnel required to lead the Company and to enable the Company to grow its
activities, the Companys business would likely suffer.

To
successfully expand the Companys operations, it will need to attract and
retain additional, highly skilled individuals, particularly in the areas of
sales, marketing, manufacturing, and finance. If the Company cannot attract
sufficient skilled individuals, it may not be able to successfully grow its
business, and the Companys business, financial condition, and results of
operations would be materially adversely affected.

The Companys
success depends upon developing new products and product enhancements, which
entails considerable time and expense.

The
Company places a high priority on developing new products to add to its product
portfolio and on the development of enhancements to its existing products.
Product development involves substantial expense, and the Company cannot be
certain that a completed product will generate sufficient revenue to justify
the resources that the Company devotes to research and development. The time
and expense required to develop new products and product enhancements is
difficult to predict, and the Company cannot assure that it will succeed in
developing, introducing, and marketing new products and product

-20-

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enhancements.
The Companys inability to successfully develop and introduce new or enhanced
products on a timely basis, at all, or to achieve market acceptance of such
products, could materially impair the Companys business.

Price changes in the
raw materials the Company uses could have a material adverse effect on its
financial condition and results of operations.

The
principal raw material used to produce Company products is plastic resin, a
petro-chemical compound. The Company has elected to purchase plastic resin
under short-term contracts rather than entering into long-term contracts,
commodity futures, or derivative instrument transactions. The Company is,
therefore, subject to fluctuations in the price of plastic resin that may
result from changes in the price of petroleum-based products, increases or
decreases in demand during a given period, or for other reasons. As a result of
price competition, the Company may be unable to pass on to customers the higher
manufacturing costs incurred if there were a significant increase in the price
of plastic resin or other raw materials, which would negatively impact the
Companys profit margins and results of operations.

If the Company is
unable to identify, complete, and integrate future acquisitions, its business
may suffer.

The
Company has supplemented internal growth with product, technology, and business
acquisitions in the past, and intends to do so in the future. The Companys
acquisition strategy is subject to inherent risks, including the following:

| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | viable acquisition
 candidates may not be available to the Company on price and other terms that
 are satisfactory;                                                                                 
| |   |                                                                                                                                                                                                     
| |  | the Company
 may be unable to integrate acquired companies effectively into its business;                                                                                                           
| |   |                                                                                                                                                                                                     
| |  | the Company
 may be unsuccessful in commercializing products that it manufactures pursuant
 to acquired or licensed patents;                                                                        
| |   |                                                                                                                                                                                                     
| |  | acquired
 companies may require more capital resources and/or management attention than
 the Company anticipates at the time of acquisition;                                                        
| |   |                                                                                                                                                                                                     
| |  | the Company
 may have limited or no direct prior experience in new markets or countries
 that it enters;                                                                                            
| |   |                                                                                                                                                                                                     
| |  | the Company
 may be unable to retain the key employees of the acquired business who are
 necessary to manage these businesses;                                                                      
| |   |                                                                                                                                                                                                     
| |  | the Company
 may suffer adverse customer reaction to the business combination;                                                                                                                      
| |   |                                                                                                                                                                                                     
| |  | the
 Companys due diligence may fail to identify liabilities and exposures which,
 once discovered, materially adversely affect its ability to operate the newly
 acquired business profitably; and
| |   |                                                                                                                                                                                                     
| |  | management
 focus on the Companys existing businesses may be diverted.                                                                                                                             

In
addition, an acquisition could materially impair the Companys operating
results by causing it to incur debt or requiring it to amortize acquisition
expenses and acquired assets.

The Company cannot
be certain that its product liability insurance will be sufficient to protect
it against significant exposure to product liability risks.

The Company is
exposed to potential product liability resulting from the use of its products.
The Company presently maintains product liability insurance coverage of $15.0
million in the aggregate. This product liability policy generally protects the
Company against claims of bodily injury or property damage arising out of any
products manufactured, sold or distributed by the Company. If a judgment in a
product liability suit were entered against the Company or the Company entered
into a settlement agreement in excess of a policy limit or outside the scope of
coverage, including punitive damages, the Companys

-21-

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profitability and financial condition may be materially adversely affected. The
Company cannot assure that its current level of insurance will be sufficient to
cover product liability claims or that such coverage will remain available to
the Company on satisfactory terms, if at all. The Company maintains a
professional errors and omissions policy for potential claims arising from the
pharmaceutical technologies business segment and for Sleep Services of America.

The Company
manufactures and sells a significant portion of its products in markets outside
the United States, subjecting the Company to various risks relating to
international activities.

International
sales accounted for approximately 24.6% of total net revenue during fiscal
2007. Such sales are subject to several risks that are separate and distinct
from those the Company faces in its United States operations, including:

| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties
 in enforcing agreements and collecting receivables through certain foreign
 legal systems;                                                                                               
| |   |                                                                                                                                                                                                        
| |  | foreign
 customers who may have longer payment cycles than customers in the United
 States;                                                                                                            
| |   |                                                                                                                                                                                                        
| |  | difficulties
 in enforcing intellectual property rights;                                                                                                                                               
| |   |                                                                                                                                                                                                        
| |  | currency
 losses that may arise as a result of the fact that not all of the Companys
 sales are denominated in United States dollars;                                                                 
| |   |                                                                                                                                                                                                        
| |  | compliance
 with foreign medical device manufacturing and sales regulations in the
 countries in which the Company sells and/or manufactures its products;                                             
| |   |                                                                                                                                                                                                        
| |  | changes in
 trade policies and in domestic and foreign tax policies in the countries in
 which the Company sells and/or manufactures its products;                                                     
| |   |                                                                                                                                                                                                        
| |  | possible
 changes in export or import restrictions in the countries in which the
 Company sells and/or manufactures its products;                                                                      
| |   |                                                                                                                                                                                                        
| |  | the
 modification or introduction of other governmental policies or regulations in
 the countries in which the Company sells and/or manufactures its products;
 and                                    
| |   |                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                        
| |  | political
 uncertainties in countries that the Company sells and/or manufactures its
 products, in particular in the Peoples Republic of China, where the Company
 manufactures anesthesia face masks.
| |   |                                                                                                                                                                                                        

Any such
factor may affect the Companys international operations and its potential for
growth in markets outside of the United States and may have a significant
adverse effect on the sales of Company products and its profitability.

If the Company is
unable to maintain relationships with distributors, the Companys business may
be adversely affected.

Certain hospitals
require the Company to sell products through distributors. For fiscal 2007,
approximately 22.6% of the Companys net revenue was distributed through
Cardinal Health Corporation and Owens & Minor, Inc. There has also been consolidation
in the hospital distribution business with Owens & Minor having recently
purchased McKesson-General Medical. If the Companys relationships with
these distributors were damaged and the Company was unable to develop relationships
with other distributors, the Companys business, financial condition, and
results of operations could be materially adversely affected. The Company has
been disputing with Cardinal Health over inappropriate and unauthorized cash
payment discounts that Cardinal Health continues to deduct from payments. If
the Company is unable to resolve this dispute through negotiation, it may initiate
legal action against Cardinal Health. The Company cannot assure that Cardinal
Health will not attempt to terminate business relationships with the Company
should the Company sue Cardinal Health.

The Company may not
be able to obtain new patents or protect its existing patents, which could
enable third-parties to use the Companys technology.

-22-

---



The Companys
ability to compete effectively depends in part on the Companys ability to
maintain the proprietary nature of its technologies and manufacturing
processes, which includes the ability to obtain, protect, and enforce patents
on its technology and products. If the Company is unable to obtain new patents
and protect its existing patents, the Companys competitive position may
suffer. The Company owns or has licensed patents that cover several aspects of
its anesthesia, respiratory/critical care, and sleep disorder segments. Others
may challenge the Companys patents and, as a result, the Companys patents
could be narrowed, invalidated, or rendered unenforceable. Competitors may
develop products similar to the Companys products, which the Companys patents
do not cover. In addition, the Companys current and future patent applications
may not result in the issuance of patents in the United States or foreign
countries. Further, there is a substantial backlog of patent applications at
the United States Patent and Trademark Office, and the approval or rejection of
patent applications may take several years. Additionally, many of the Companys
products are not protected by patents, but rather are distinguished by product
features that others may seek to copy. As some of the Companys older patents
expire, the Company has explored new inventions to add to those products. In
certain instances when a patent expires, the Company may rely on its trademarks
to provide protection for the Company.

The Companys
competitive position is dependent in part upon unpatented trade secrets that
the Company may not be able to protect.

The
Companys competitive position is also dependent upon unpatented trade secrets.
Trade secrets are difficult to protect, and the Company cannot assure that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Companys trade secrets. If
other companies are successful in copying the Companys trade secrets and
developing products similar to the Companys, the Company may lose its
competitive position and revenue may be significantly impacted.

The
Company seeks to protect its trade secrets, know-how, and other unpatented
proprietary technology, in part, with confidentiality agreements with select
employees. The Company cannot assure, however, that:

| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | these
 agreements will not be breached;                                                                                                                            
| |   |                                                                                                                                                                    
| |  | the Company
 will have adequate remedies for any breach; or                                                                                                        
| |   |                                                                                                                                                                    
| |  | trade
 secrets, know-how, and other unpatented proprietary technology will not
 otherwise become known to or independently developed by the Companys
 competitors.

The
Company holds licenses with third parties that are necessary to produce some of
the Companys products. The loss of such licenses would prevent the Company
from manufacturing, marketing, and selling these products, which could harm the
Companys business.

The Companys
success is dependent in part on its ability to operate without infringing or
misappropriating the proprietary rights of others.

The
Company has been sued in the past and may be sued again in the future, for
infringing the intellectual property rights of others. In addition, the Company
may find it necessary, if threatened, to initiate a lawsuit seeking a
declaration from a court that the Company does not infringe the proprietary
rights of others or that others rights are invalid or unenforceable. Even if
the Company prevails in such litigation, infringement proceedings can be very
expensive and time-consuming. If the Company does not prevail in infringement
litigation, it may be required to pay damages and expenses, and would be
required to stop the infringing activity or obtain a license. Any required
license may not be available on acceptable terms, or at all. In addition, some
licenses may be nonexclusive, and, therefore, the Companys competitors may
have access to the same technology. If the Company fails to obtain a required
license or is unable to design around a patent, the Company may be unable to
sell some of its products, which could have a material adverse effect on the
Companys business. The Company may decide not to introduce a product in the
United States or a foreign country based on potential risk of patent
infringement litigation.

-23-

---



Government regulation
restricts the manner in which the Company may sell its obstructive sleep apnea
products to customers of the Companys sleep centers and the manner in which
the Company relates to referring physicians.

The Company
operates sleep centers and laboratories in the United States that diagnose
obstructive sleep apnea and other sleep disorders. The Companys ability to
sell its Breas products in Company sleep centers and laboratories is restricted
by strict regulations which prohibit the Company from diverging from a
physicians prescription. If a physician prescribes a continuous positive
airway pressure, or CPAP, product other than a Breas product at one of the
Companys sleep centers and laboratories, the Company is generally prohibited
by federal regulations from substituting a Breas product. Federal anti-kickback
and anti-referral regulations strictly limit the extent to which the Company
may provide anything of value to physicians who refer Medicare or Medicaid
patients to Company sleep centers and laboratories. Any failure by the Company
to comply with these regulations may result in significant regulatory actions,
including criminal prosecution and large fines, which could have a material
adverse effect upon the Companys business, financial condition, and results of
operations.

If the Company is
unable to support its continued growth, the Companys business may suffer.

As
the Company grows, the complexity of its operations increases, placing greater
demands on the Companys management. The Companys ability to manage its growth
effectively depends in part upon its ability to implement and improve its
financial and management information systems on a timely basis and to affect
other changes in its business. If the Company fails to manage its growth
effectively, its business could suffer. Unexpected difficulties during
expansion, the failure to attract and retain qualified employees, the failure
to successfully replace or upgrade its management information systems, the
failure to manage costs, the inability to respond effectively to growth
opportunities, or the inability to plan for future expansion could cause the
Companys growth to slow down or could require the Company to reduce its size.

A significant shift
in technologies or methods used in the treatment of sleep apnea could make the
Companys sleep centers and products obsolete or less attractive.

The
development of new technologies or methods could reduce the demand for Company
sleep centers and laboratories and its sleep disorder products. For example,
pharmaceutical advances could result in different methods of treating sleep
apnea and a reduced need for the Companys CPAP therapy products. The emergence
of a low-invasive cost effective surgery to treat sleep apnea could also
diminish the demand for the Companys sleep products and its sleep centers and
laboratories. Regulatory and/or insurance reimbursement changes to current
standards on reimbursement for home-based sleep disorder diagnostic testing may
adversely impact the Companys revenues.

If a natural or man-made
disaster strikes one or more of the Companys manufacturing facilities, the
Company may be unable to manufacture certain products for a substantial amount
of time and the Companys revenue and profitability could decline.

The
Company has four manufacturing facilities located in the United States and one
manufacturing facility located in Sweden. The Company is also a partner in a
joint venture manufacturing facility in China. These facilities, the
manufacturing equipment, and personnel know-how that the Company uses to
produce its products would be difficult to replace and could require
substantial lead-time to repair or replace. The Companys facilities may be
affected by natural or man-made disasters. In the event that one of the
Companys facilities was affected by a disaster, the Company would attempt to
shift production to its other manufacturing facilities or rely on third-party
manufacturers. The Companys other facilities or a third-party manufacturer may
not have the capability to effectively supply the affected products. Although
the Company has insurance for property damage and business interruption, this
insurance may not be sufficient in scope or amount to cover all of the
potential losses and may not continue to be available to the Company on
acceptable terms, or at all.

-24-

---



Requirements
associated with the evaluation of internal controls required by Section 404 of
the Sarbanes-Oxley Act of 2002 have required and will require significant
Company resources and management attention.

Although the
Company believes that it is currently in compliance with Section 404 of the
Sarbanes-Oxley Act, the Company may in the future identify material
deficiencies that it may not be able to remediate on a timely basis. If the
Company is not able to continue to comply with the requirements of Section 404
in a timely manner, the Company could become subject to scrutiny by regulatory
authorities, such as the Securities and Exchange Commission, or SEC, or the
NASDAQ Global Select Market, and the trading price of the Companys stock could
decline. Moreover, effective internal controls, particularly those related to
revenue recognition, are necessary for the Company to produce reliable
financial reports and are important in helping the Company prevent financial
fraud. If the Company cannot provide reliable financial reports or prevent
fraud, its business and operating results could be harmed, investors could lose
confidence in the Companys reported financial information, and the trading
price of the Companys stock could drop significantly.

Risks related to purchasing the Companys
common stock

The Companys
quarterly operating results are subject to fluctuation which may impact its
stock price.

The
Companys operating results have, from time to time, fluctuated on a quarterly
basis and may be subject to similar fluctuations in the future. These
fluctuations may result from a number of factors, including:

| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 introduction of new products by the Company or its competitors;                                                                                                                                                    
| |   |                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                         
| |  | acquisitions;                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                         
| |  | actions
 taken by group purchasing organizations;                                                                                                                                                                       
| |   |                                                                                                                                                                                                                         
| |  | timing of
 orders by the Companys customers;                                                                                                                                                                           
| |   |                                                                                                                                                                                                                         
| |  | the mix of
 Company product sales;                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                         
| |  | competitive
 pricing in different regions in which the Company sells its products;                                                                                                                                      
| |   |                                                                                                                                                                                                                         
| |  | timing and
 cost of regulatory clearances and approvals of Company products;                                                                                                                                            
| |   |                                                                                                                                                                                                                         
| |  | the cost,
 effect, and success of the Companys promotional and marketing programs;                                                                                                                                     
| |   |                                                                                                                                                                                                                         
| |  | the effect
 of the flu season on the Companys respiratory/critical care business;                                                                                                                                      
| |   |                                                                                                                                                                                                                         
| |  | loss of any
 of the Companys key management or technical personnel;                                                                                                                                                    
| |   |                                                                                                                                                                                                                         
| |  | product
 liability lawsuits against the Company;                                                                                                                                                                        
| |   |                                                                                                                                                                                                                         
| |  | changes in
 health care policy in the United States and internationally;                                                                                                                                                
| |   |                                                                                                                                                                                                                         
| |  | conditions
 in the financial markets in general or changes in general economic
 conditions;                                                                                                                             
| |   |                                                                                                                                                                                                                         
| |  | changes in
 stock market analyst recommendations regarding the Companys common stock,
 other comparable companies or the medical device industry generally, or lack
 of analyst coverage of the Companys common stock;
| |   |                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                         
| |  | changes in
 accounting principles and/or critical accounting estimates;                                                                                                                                                 
| |   |                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                         
| |  | expenditures
 incurred by the Company for research and development; and                                                                                                                                                 

-25-

---



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | expenditures
 incurred by the Company to comply with enhanced regulatory obligations and
 internal control requirements.

Any
of these factors may cause the price for the Companys common stock to fluctuate
and therefore decrease the value of any investment in the Company.

A substantial
portion of the Companys assets includes goodwill and an impairment in the
value of goodwill would have the effect of decreasing the Companys earnings or
increasing its losses.

As of September 30,
2007, goodwill represented 24.8% of total assets. If the Company is required
to record an impairment charge to earnings relating to goodwill, it will decrease
earnings or increase losses. Goodwill represents the excess of the total
purchase price of acquisitions over the fair value of the net assets acquired.
The accounting standards on goodwill and other intangible assets that the
Company adopted as of October 1, 2001 require goodwill to be reviewed at least
annually for impairment, and does not permit amortization. In the event that
impairment is identified, a charge to earnings will be recorded and the
Companys stock price may decline as a result. For fiscal 2007, the Company
recorded $15.1 million of impairment charges related to its Stelex subsidiary
and an acquisition made by Sleep Services of America.

A large percentage
of the Companys outstanding common stock is held by insiders, and, as a
result, the trading market for the Companys common stock is less liquid and
the Companys stock price can be volatile.

As of December 14,
2007, the Company had 13,286,050 shares of common stock outstanding.
Approximately 16.7% of these shares are beneficially owned by Terry D. Wall,
chief executive officer, and his wife, an additional 11.8% of these shares are
beneficially owned by trusts established for the benefit of the Walls
children, and an additional 9.6% of these shares are beneficially owned by an
estate planning trust established by Terry D. Wall. Such trusts are
administered by trustees who have no current or prior relationship with Vital
Signs. Companies like Vital Signs, with a relatively small percentage of shares
held by the public, can be subject to a more volatile stock price. The Companys
stock price, and therefore shareholders investments in the Company, may be
volatile.

The Companys major
shareholders exercise significant influence on the Company and they may pursue
policies with which other shareholders disagree.

As stated above,
Mr. Wall has a significant influence in electing Company directors, appointing
new management, and approving any action requiring shareholder approval,
including any amendment to the Companys certificate of incorporation and
approval of mergers or sales of substantially all assets. This influence may
also have the effect of delaying or preventing a change in control of the
Company or discouraging others from making tender offers for the Companys
shares, which could prevent stockholders from receiving a premium for their
shares.

The Companys
certificate of incorporation, by-laws, and New Jersey law contain provisions
that could discourage another company from acquiring the Company and may
prevent attempts by its stockholders to replace or remove the Companys current
management.

Anti-takeover
provisions in the Companys certificate of incorporation make it more difficult
for a third-party to acquire the Company, even if doing so would be beneficial
to shareholders. These provisions include:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 authorization of the issuance of up to 10,000,000 shares of the Companys
 preferred stock without further approval of shareholders;
| |   |                                                                                                                                          
| |  | the election
 of directors on a staggered term basis; and                                                                                
| |   |                                                                                                                                          
| |  | the
 elimination of shareholder action by written consent.                                                                               

Similarly,
the Companys by-laws establish procedures, including advance notification
procedures, with regard to the nomination, other than by or at the direction of
the Companys board of directors, of candidates for election as directors or
for shareholder proposals to be submitted at shareholder meetings.

-26-

---



The
Company is also subject to the New Jersey Shareholders Protection Act, an
anti-takeover provision, that prevents a shareholder owning 10% or more of a
New Jersey public corporations outstanding voting stock from engaging in
business combinations with that corporation for five years following the date
the shareholder acquired 10% or more of the corporations outstanding voting stock,
unless board approval is obtained prior to the time that the shareholder
reaches the 10% threshold.

These
provisions are expected to discourage different types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to first negotiate with the Companys board of
directors. At the same time, however, these provisions make it more difficult
for a third-party to successfully acquire the Company, even if the acquisition
were beneficial to the Companys shareholders, and thus could prevent
shareholders from receiving a premium for their shares.

Item 1B. Unresolved
Staff Comments

Not applicable

Item 2. Properties

The
Company believes that its properties are adequate for its current needs. In
addition, the Company believes that adequate space can be obtained to meet its
foreseeable business needs. The following chart identifies the principal
properties which the Company owns or leases. The properties listed below relate
to the anesthesia and respiratory/critical care business segments, except for
the Molnlyke, Sweden, Glen Burnie, Maryland and Atlanta, Georgia properties
which relate to the Companys sleep segment; Malvern, Pennsylvania, which
relates to the Companys interventional cardiology/radiology business segment;
and Bensalem, Pennsylvania, which relates to the Companys pharmaceutical
technology services business segment.

| |                                                                                    |             | 
| | ---------------------------------------------------------------------------------- | ----------- | 
| |                                                                                    |             | 
| | Location                                                                           | Square Feet | 
| |                                                                                    |             | 
| | Totowa, New
 Jersey* (executive offices, principal manufacturing, and warehouse)   | 158,000     | 
| | Englewood,
 Colorado* (manufacturing, warehouse, and office space)                 | 88,000      | 
| | Burnsville,
 Minnesota (manufacturing, warehouse, and office space)                | 38,862      | 
| | Molnlyke,
 Sweden* (Breasmanufacturing, warehouse, and office space)              | 27,000      | 
| | Malvern,
 Pennsylvania (Thomas Medicalmanufacturing, warehouse, and office space) | 32,691      | 
| | Bensalem,
 Pennsylvania (Stelexoffice space)                                      | 16,516      | 
| | Glen Burnie,
 Maryland (Sleep Services of Americaoffice space)                    | 9,980       | 
| | Atlanta,
 Georgia (SSA office space and sleep laboratories)                       | 27,652      | 
| | Littlehampton,
 United Kingdom (Vital Signs, Ltdwarehouse and office space)       | 12,000      | 
|
| | *
 The Company Owns this Facility.                                                 |             | 
| |                                                                                    |             | 

Item 3. Legal
Proceedings

Vital Pharma
shareholder litigation

On December 6,
1999, a complaint was filed against the Company on behalf of former
shareholders of the Companys Vital Pharma subsidiary alleging breach of
contract for failure to pay earnout payments allegedly due under the stock
purchase agreement executed in connection with the acquisition of Vital Pharma
in January 1996. In response to the lawsuit, the Company filed a seven-count
counterclaim against the plaintiffs. In August 2000, the court ordered the
plaintiffs to submit their claims relating to the earnout calculation to
binding arbitration and stayed all other proceedings pending the outcome of the
arbitration. The arbitration hearing commenced on January 26, 2004. In August
2006, the arbitrator issued a decision awarding the plaintiffs $915,000.
Plaintiffs originally claimed damages in the pre-interest amount of
approximately $8.0 million. Subsequently, in the plaintiffs post-arbitration
brief to the arbitrator, plaintiffs argued that the final calculation of their
damages could be in excess of $14 million. The Company established a reserve in
connection with this proceeding in the amount of $915,000, included in other
liabilities in the consolidated balance sheet.

The
lawsuit was stayed during the pendency of the arbitration. On October 20, 2006,
the stay was lifted and the Companys counterclaim was restored to the courts
calendar. While the plaintiffs assert that several of their claims were also
restored, the Company believes that, except for one limited claim by one

-27-

---



of the named
plaintiffs, all of plaintiffs original claims were adjudicated through the
arbitration proceedings.

On
November 11, 2006, plaintiffs filed their motion in the Federal Court to
confirm the arbitrators award which was granted. However, the Company is not
obligated to pay the award until resolution of the entire case. Plaintiff has
told the Company of his intention to seek judicial relief for payment of the
award prior to that final resolution.

Do You Snore, LLC Litigation

On
December 10, 2007 Sleep Services of America filed a lawsuit in the Superior
Court, Fulton County, Georgia against Renee McPhee and others relating to Sleep
Service of Americas acquisition in April 2007 of the assets of Do You Snore,
LLC, Southern Medical Equipment and Advanced Sleep Technologies of Georgia. The
complaint assert causes of action in breach of the acquisition agreement,
fraud, breach of non-competition agreement, misappropriation of intellectual
property and other causes of action. Ms. McPhee is the sole shareholder of Do
You Snore, LLC and a significant shareholder of the other entities. Sleep
Services of America believes that Ms. McPhee in concert with others is
violating her non-competition agreement and misappropriating business which but
for her action would have gone to Sleep Services of America.

Other litigation

The Company is also
involved in other legal proceedings arising in the ordinary course of business.
The Company cannot predict the outcome of its legal proceedings with certainty,
but based upon the Companys review of pending legal proceedings, the Company
does not believe the ultimate disposition of pending legal proceedings brought
against the Company will be material to its financial condition. Predictions
regarding the impact of pending legal proceedings constitute forward-looking
statements. The actual results and impact of such proceedings could differ
materially from the impact anticipated, primarily as a result of uncertainties
involved in the proof of facts in legal proceedings.

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

Not
Applicable

Item 4A. Executive
Officers of the Registrant

The
Companys executive officers are as follows:

|                   |  |      |  |                                                        
|------------------ |  | ---- |  | -------------------------------------------------------
|Name               |  | Age* |  | Positions With the Company                             
|                   |  |      |  |                                                        
|Terry D.
 Wall     |  | 66   |  | President,
 Chief Executive Officer and Director       
|Mark D.
 Mishler   |  | 49   |  | Executive
 Vice President and Chief Financial Officer  
|Alex Chanin        |  | 39   |  | Executive
 Vice President and Chief Information Officer
|John R.
 Easom     |  | 49   |  | Executive
 Vice President, Global Business Development 
|Anthony P. Martino |  | 61   |  | Vice President, Quality and Regulatory Affairs         

|  |                           
|- | --------------------------
|* | As of
 September 30, 2007.

Terry
D. Wall founded Vital Signs in 1972 and has been
President, Chief Executive Officer, and a director of Vital Signs since that
time. He received a Bachelor of Science degree in 1963 from the University of
Maryland and a Master of Business Administration degree from Pace University in
1975.

Mark
D. Mishler joined Vital Signs as Executive Vice President and Chief
Financial Officer in November 2007. Prior to joining the Company, he was
Corporate Controller of Fedders Corporation, a publicly-traded manufacturer
of air management equipment firm, from November 2005 to November 2007. Prior
to that was Corporate Controller of Amcast Industrial Corporation a publicly-traded
manufacturer of technology-intensive metal products, from April 1998 to April
2005. Previously, Mr. Mishler was Division Controller for Siemens Medical Systems.
He earned Bachelors degrees in both Chemistry and Biology from Indiana University
and his MBA from The University of Michigan. Mr. Mishler is a Certified Public
Accountant and a Certified Management Accountant.

-28-

---



Alex
Chanin has served as Executive Vice President and
Chief Information Officer for Vital Signs since January 2004. He served as
President of the Companys Stelex, Inc. subsidiary from 2003 to 2004 and Vice
President of Stelex from April 2002 to 2003. In 1991, Mr. Chanin was one of the
founding partners of Stelex, prior to the Companys acquisition of Stelex. Mr.
Chanin holds Bachelor of Science degrees in Computer Science and Electrical
Engineering from Drexel University and a Master of Science in Computer
Engineering from Princeton University.

John
R. Easom has served as Executive Vice President of Global Business
Development since January of 2007. He joined Vital Signs in October 2002 and
has held various senior management positions responsible for marketing, product
development, business planning and development. Prior to joining Vital Signs,
Mr. Easom held management positions within Hackensack and Mountainside
Hospitals before joining Foster Medical (currently Apria), Glassrock Home
Health Care a division of BOC, and Affinity Ventures an M&A firm. He is a
degreed and credentialed Respiratory Care Practitioner, and has a BS in Allied
Health from Montclair State University.

Anthony
P. Martino joined Vital Signs as Vice President,
Research and Development in 1996. He has served as Vice President, Quality and
Regulatory Affairs since December 1996. Prior to joining the Company, Mr.
Martino spent 26 years with Becton Dickinson, a medical products manufacturer
holding management positions in research and development, engineering, and
quality assurance and regulatory affairs. He holds a BSME degree from the New
Jersey Institute of Technology.

Each of the
Companys executive officers serves as such at the pleasure of the Board.

-29-

---



PART II

|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities

The
Companys Common Stock (the Common Stock) is traded on the over-the-counter
market and quoted on the Global Select Market of the National Association of
Securities Dealers Automated Quotation System (NASDAQ) under the symbol
VITL. The following table sets forth the high and low closing sales prices of
the Common Stock on the NASDAQ Global Select Market, and the cash dividends
declared per share of Common Stock, for the periods indicated:

|                                        |  |      |       |     |   |                   |  |   |      | 
|--------------------------------------- |  | ---- | ----- | --- | - | ----------------- |  | - | ---- | 
|                                        |  | High |       | Low |   | DividendPer Share | 
|                                        |  |      |       |     |   |                   | 
|Fiscal Year Ended September 30, 2006:   |  |      |       |     |   |                   |  |   |      | 
|Quarter ended December 31, 2005         |  | $    | 48.50 |     | $ | 42.52             |  | $ | 0.07 | 
|Quarter ended March 31, 2006            |  |      | 55.40 |     |   | 42.29             |  |   | 0.07 | 
|Quarter ended June 30, 2006             |  |      | 55.33 |     |   | 47.62             |  |   | 0.09 | 
|Quarter ended September 30, 2006        |  |      | 57.50 |     |   | 47.33             |  |   | 0.09 | 
|                                        |  |      |       |     |   |                   |  |   |      | 
|Fiscal Year
  Ended September 30, 2007: |  |      |       |     |   |                   |  |   |      | 
|Quarter ended December 31, 2006         |  | $    | 59.00 |     | $ | 48.82             |  | $ | 0.09 | 
|Quarter ended March 31, 2007            |  |      | 55.15 |     |   | 48.05             |  |   | 0.09 | 
|Quarter ended June 30, 2007             |  |      | 60.49 |     |   | 51.16             |  |   | 0.10 | 
|Quarter ended September 30, 2007        |  |      | 57.90 |     |   | 47.99             |  |   | 0.10 | 

As
of December 1, 2007, there were approximately 250 holders of record of the
Common Stock. This figure does not represent the actual number of beneficial
owners of shares of the Companys Common Stock because shares are frequently
held in street name by securities dealers and others for the benefit of
individual owners who have the right to vote their shares.

During
fiscal 2007, the Company declared and paid cash dividends of $0.38 per share.
The Company expects to continue to pay dividends on its Common Stock. However,
the dividend declarations are subject to the discretion of the Companys board
of directors and will depend upon various factors, including the Companys
financial condition, capital requirements, loan agreement restrictions, and
earnings, as well as such other factors as the Companys board may deem
relevant.

The
following table gives information about the Companys Common Stock that may be
issued upon the exercise of options, warrants and rights under all of the
Companys existing equity compensation plans as of September 30, 2007. These
plans include the Companys 2003 Investment Plan, prior Investment Plan, as
amended and restated as of May 30, 2001, 1991 Director Stock Option Plan, 1990
Employee Stock Option Plan, as amended and restated as of December 1, 1997, and
the 2002 Stock Incentive Plan. No warrants or rights are outstanding under the
foregoing plans:

|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----- |  |  |  |  | --------- |  | 
|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 
|Plan Category                                            |  | (a)Number ofSecuritiesto be Issued UponExercise ofOutstanding Options,Warrants and Rights |  | (b)Weighted-averageExercise Price ofOutstanding Options,Warrants and Rights |  | (c)Number of SecuritiesRemaining Available forFuture Issuance UnderEquity Compensation Plans(Excluding SecuritiesReflected in Column (a)) | 
|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           | 
|                                                        
|Equity Compensation Plans
  Approved by Shareholders     |  |                                                                                           |  | 504,734                                                                     |  |                                                                                                                                           |  | $ | 40.74 |  |  |  |  | 1,387,296 |  | 
|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 
|Equity Compensation Plans Not Approved by
  Shareholders |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 
|Total:                                                   |  |                                                                                           |  | 504,734                                                                     |  |                                                                                                                                           |  | $ | 40.74 |  |  |  |  | 1,387,296 |  | 
|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 
|                                                         |  |                                                                                           |  |                                                                             |  |                                                                                                                                           |  |   |       |  |  |  |  |           |  | 

-30-

---



Item 6. Selected Financial Data

The
following selected consolidated financial data should be read in conjunction
with the Companys consolidated financial statements and notes to those
consolidated financial statements, and Managements discussion and analysis
of financial condition and results of operations. The consolidated statement
of income data for the years ended September 30, 2007, 2006 and 2005, and the
consolidated balance sheet data as of September 30, 2007 and 2006, are derived
from the Companys audited consolidated financial statements, which are
included elsewhere in this Annual Report. The consolidated statement of income
data for the years ended September 30, 2004 and 2003, and the consolidated
balance sheet data as of September 30, 2005, 2004 and 2003, are derived
from audited consolidated financial statements of the Company, which are not
included in this Annual Report.


-31-

---



|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                                      
|Year ended September 30, 
  (In thousands of dollars, except per share amounts)                        |  | 2007 |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                                                                      
|Consolidated statement of income data:                                                                 |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net revenue (4) (5)                                                                                    |  | $    | 205,257 |      | $ | 202,124 |   | $    | 193,180 |      | $ | 183,131 |   | $ | 181,662 |  
|Cost of goods sold and services performed                                                              |  |      | 101,438 |      |   | 100,027 |   |      | 95,507  |      |   | 91,374  |   |   | 90,054  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Gross profit                                                                                           |  |      | 103,819 |      |   | 102,097 |   |      | 97,673  |      |   | 91,757  |   |   | 90,054  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Operating expenses:                                                                                    |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Selling, general and administrative (5)                                                                |  |      | 57,135  |      |   | 52,182  |   |      | 51,025  |      |   | 50,115  |   |   | 51,338  |  
|Research and development                                                                               |  |      | 7,511   |      |   | 7,034   |   |      | 7,011   |      |   | 7,036   |   |   | 5,871   |  
|Other (income) expense, net                                                                            |  |      | 527     |      |   | 880     |   |      | (78     | )    |   | 612     |   |   | 717     |  
|Impairment (1) (5)                                                                                     |  |      | 15,121  |      |   |        |   |      |        |      |   |         |   |   | 133     |  
|Restructuring charge                                                                                   |  |      |        |      |   |        |   |      | 213     |      |   | 539     |   |   |        |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total operating expenses                                                                               |  |      | 80,294  |      |   | 60,096  |   |      | 58,171  |      |   | 58,302  |   |   | 58,059  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Operating income (4)                                                                                   |  |      | 23,525  |      |   | 42,001  |   |      | 39,502  |      |   | 33,455  |   |   | 31,995  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Interest income                                                                                        |  |      | (4,909  | )    |   | (3,294  | ) |      | (1,697  | )    |   | (1,254  | ) |   | (904    | )
|Interest expense                                                                                       |  |      | 56      |      |   |        |   |      | 36      |      |   | 26      |   |   | 910     |  
|Income unconsolidated investment                                                                       |  |      | (1,498  | )    |   | (1,728  | ) |      | (832    | )    |   | (430    | ) |   | (251    | )
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total other (income) expense                                                                           |  |      | (6,351  | )    |   | (5,022  | ) |      | (2,493  | )    |   | (1,658  | ) |   | (245    | )
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Income from continuing operations before
  provision for income taxes and non-controlling interest (4) |  |      | 29,876  |      |   | 47,023  |   |      | 41,995  |      |   | 35,113  |   |   | 32,240  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Provision for income taxes                                                                             |  |      | 9,985   |      |   | 15,828  |   |      | 15,093  |      |   | 12,498  |   |   | 12,802  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Income from continuing operations before
  non-controlling interest (4)                                |  |      | 19,891  |      |   | 31,195  |   |      | 26,902  |      |   | 22,615  |   |   | 19,438  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Non-controlling interest in net income of
  subsidiary                                                 |  |      | 683     |      |   | 911     |   |      | 602     |      |   | 447     |   |   | 248     |  
|Income from continuing operations (2) (3)
  (4)                                                        |  |      | 19,208  |      |   | 30,284  |   |      | 26,300  |      |   | 22,168  |   |   | 19,190  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Earnings from continuing operations per
  common share:                                                |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Basic (4)                                                                                              |  | $    | 1.45    |      | $ | 2.34    |   | $    | 2.08    |      | $ | 1.73    |   | $ | 1.49    |  
|Diluted (4)                                                                                            |  |      | 1.45    |      |   | 2.32    |   |      | 2.06    |      |   | 1.72    |   |   | 1.48    |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Basic weighted-average number of shares
  outstanding                                                  |  |      | 13,238  |      |   | 12,966  |   |      | 12,616  |      |   | 12,793  |   |   | 12,905  |  
|Diluted weighted-average number of shares
  outstanding                                                |  |      | 13,277  |      |   | 13,040  |   |      | 12,789  |      |   | 12,907  |   |   | 12,985  |  
|                                                                                                       |  |      |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Dividends declared and paid per common
  share                                                         |  | $    | 0.38    |      | $ | 0.32    |   | $    | 0.27    |      | $ | 0.24    |   | $ | 0.19    |  

|    |                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In fiscal
  2007, the Company recorded an impairment of $13.2 million for the Companys
  Stelex, Inc. subsidiary and a $1.9 million impairment of long lived assets
  pertaining to the acquisition of Do You Snore, LLC, Advanced Sleep
  Technologies of Georgia, Inc. and Southern Medical Equipment, Inc. (See Note
  13)
|    |                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                               
|(2) | In fiscal
  2003, the Company reclassified its Vital Pharma business as a discontinued
  operation.                                                                                                                                                                                                                           

-32-

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Accordingly, the results of Vital Pharma are not included in
  continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | The Pharmaceutical
  technology services segment was classified as discontinued operations in the
  first, second and third quarters of Fiscal 2007. The Company believes that
  the public announcement of this classification caused demand for the
  Companys pharmaceutical technology services to decline. When the Company
  sought to sell this business, the offers received were inadequate. When the
  Company wrote the business down to fair value and reclassified the business
  to continuing operations during the fourth quarter of fiscal 2007, the offers
  received formed the basis for determining fair value.                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | The
  historical financial information presented in this Annual Report has been
  reclassified with respect to the income from unconsolidated investment in our
  sleep disorder segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | The Company recognized
  several, non-cash charges in 2007 which directly impacted the Companys
  results of operations. The Company increased its distributor rebate allowance
  by an additional $4.7 million which reduced sales and gross profit. Operating
  expenses included goodwill impairment charges of $13.2 million for the Stelex
  business and a $1.9 million impairment of long lived assets pertaining to the
  Companys April 2007 acquisition of Do You Snore, LLC. Additionally,
  operating expenses included an increase in the allowance for unauthorized
  customer discounts of $1.2 million. Combined, these items reduced operating
  income by $21.0 million. Net income was reduced by $13.7 million, or $1.02
  per diluted share.

|                                               |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                              
|At September 30,
  (In thousands of dollars)   |  | 2007 |         | 2006 |   | 2005    |  | 2004 |         | 2003 |  
|                                               |  |      |         |      |   |         |  |      |         |      |  
|Consolidated balance sheet data:               |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 
|Cash and cash equivalents                      |  | $    | 48,920  |      | $ | 41,242  |  | $    | 18,412  |      | $ | 15,700  |  | $ | 18,260  | 
|Short term investments                         |  |      | 86,671  |      |   | 85,565  |  |      | 63,355  |      |   | 60,768  |  |   | 37,400  | 
|Working capital                                |  |      | 183,440 |      |   | 169,791 |  |      | 119,555 |      |   | 112,853 |  |   | 98,469  | 
|Total assets                                   |  |      | 330,944 |      |   | 305,854 |  |      | 253,702 |      |   | 236,064 |  |   | 223,078 | 
|Total long term debt including current portion |  |      | 1,354   |      |   |        |  |      |        |      |   |        |  |   | 1,690   | 
|                                               |  |      |         |      |   |         |  |      |         |      |  
|Total shareholders equity                     |  | $    | 306,581 |      | $ | 285,813 |  | $    | 232,706 |      | $ | 216,223 |  | $ | 202,222 | 
|                                               |  |      |         |      |   |         |  |      |         |      |  
|                                               |  |      |         |      |   |         |  |      |         |      |   |         |  |   |         | 

For
information regarding acquisitions affected during the past five years, see
Managements discussion and analysis of financial condition and results of
operations - Overview.

Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the Companys consolidated financial statements and notes to
those consolidated financial statements, included elsewhere in this Annual
Report.


Forward Looking Statements

This
Annual Report contains forward-looking statements (as such term is defined in
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) that are based on the Companys managements beliefs and
assumptions and on information currently available to the Company. These
statements may be found throughout this Annual Report, particularly in Items 1,
1A, and this Item 7. These sections contain discussions of some of the factors
that could cause actual results to differ materially from the results projected
in the Companys forward-looking statements. When used in this Annual Report,
the words or phrases will likely result, expects, intends, will
continue, is anticipated, estimates, projects, management believes,
we believe, and similar expressions are intended to identify forward-looking
statements within the meaning of the Exchange Act and the Securities Act.
Forward-looking statements include plans and objectives of management for
future operations. These forward-looking statements involve risks and
uncertainties and are based on assumptions that may not be realized. Actual
results and outcomes may differ materially from those discussed or anticipated.

-33-

---



All
forward-looking statements are subject to known and unknown risks and
uncertainties, including those discussed in Item 1A, that could cause actual
results to differ materially from historical results and those presently
anticipated or projected. No forward-looking statement is a guarantee of future
performance. The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The reader should view the Companys cautionary statements as being applicable
to all related forward-looking statements whenever they appear in:

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | this Annual
  Report and materials referred to in this Annual Report; and
| |   |                                                                          
| |  | the
  Companys press releases.                                          

Overview

Vital
Signs is a leading designer, manufacturer, and marketer of airway management
products for the anesthesia, respiratory/critical care, interventional
cardiology/radiology, and sleep disorder markets. The Company sells its
products in over 73 countries worldwide. The Company offers one of the broadest
single-patient-use anesthesia and respiratory/critical care product lines in
the industry and has developed numerous innovative products that are now
considered industry standards. In addition, the Company sells therapeutic
products for patients suffering from sleep disorders and provides sleep
disorder diagnoses at sleep laboratories and Company-operated centers. The
Company also provides technology services to FDA-regulated companies.


Anesthesia

Anesthesia
products were the Companys first line of business over 30 years ago and
continue to be its leading source of revenue. The Companys single-patient-use
anesthesia products and systems deliver oxygen and anesthesia from a gas
source, such as an anesthesia machine, to a patients pulmonary system. These
products also remove anesthetic gases, carbon dioxide, and expiratory oxygen
from a patient and link a patient to various monitors. The principal anesthesia
products consist of face masks, breathing circuits, and general anesthesia
products. See Item 1 - Business - Principal products and services -
Anesthesia.


Anesthesia
segment revenues are driven primarily by hospitals performing general surgeries
and by the aging of the populations in the geographical markets that the
Company serves. In addition, because substantially all of the Companys
anesthesia products are single-patient-use products, the Company benefits when
hospitals undertake programs to reduce the frequency of nosocomial infections,
which originate or occur within the hospital. Revenues in this segment are
negatively impacted by the trend among hospitals to allow group purchasing
organizations to negotiate long-term contracts with medical device
manufacturers. See Item 1 - Business - Sales, marketing and distribution -
United States sales. Expenses in the Companys anesthesia segment are driven
primarily by the cost of raw materials, labor costs, and freight expenses.
During recent periods, the Companys petrochemical based raw materials, such as
resin, have been impacted by high gas prices and gas shortages.

In
the first quarter of 2007, the Company formed a Chinese joint venture to
manufacture face masks. Respironics was the Companys sole face mask supplier
until the formation of the Chinese joint venture. Respironics has continued to
provide products to the Company during the transition to the joint venture, and
the Company purchased substantial manufacturing assets from Respironics.


In
March 2005, the Company acquired the disposable airway management device
business from a subsidiary of Baxter International, Inc. for approximately
$10.1 million, including related transaction costs. This acquisition was
structured as an asset purchase, and the Company acquired disposable airway
management device manufacturing assets valued at approximately $1.3 million and
inventory of anesthesia circuits, face masks, heat and moisture exchanger
filters, and other associated anesthesia components valued at approximately
$1.2 million. The excess of the purchase price over the fair value of the net assets
acquired of approximately $7.7 million was allocated to goodwill. The results
of operations of this business, including revenues of approximately $4.5
million, are included in the Companys results of operations for the anesthesia
segment from March 2, 2005.

-34-

---



Respiratory/critical
care

The
Companys primary respiratory/critical care products are arterial blood gas
syringes and kits, manual resuscitators, and blood pressure cuffs. The
Companys respiratory/critical care segment responds to the growing needs of
hospitals to provide respiratory relief and emergency care. The Company
believes that there is an increasing incidence of respiratory illnesses, such
as asthma and emphysema, due in part to an increasingly susceptible aging population,
environmental pollution, smoking-related illnesses, as well as communicable
diseases with significant respiratory impact, such as tuberculosis, HIV, and
influenza. These trends, together with concerns regarding the spread of
nosocomial infections, drive the Companys sales of respiratory products. As in
the Companys anesthesia segment, revenues in this segment have been negatively
impacted by the emergence of group purchasing organizations and expenses in
this segment are driven principally by raw material, labor, and freight costs.

On
August 15, 2007, the Company acquired the assets of Enginivity, LLC and its
enFlow® IV fluid and blood warmer patented technology. The aggregate cash
purchase price is comprised of (i) an initial payment of $5.9 million with an
additional $0.5 million payable to the primary inventor of the technology over
the next three years. The excess of the purchase price over the fair value of
the net assets acquired, which has been primarily allocated to goodwill, was
approximately $5.7 million. Since the acquisition of Enginivity, LLC and its
related operations, are immaterial, no pro forma information has been presented.


Sleep Disorders

The
Company believes it is the only firm that both operates sleep centers to
diagnose obstructive sleep apnea as well as manufactures and sells products
designed to treat that condition. The Company offers sleep diagnostic
services exclusively in the United States through its Sleep Services of America
subsidiary created in January 2002 with the acquisition of the sleep diagnostic
service business of The Johns Hopkins Health System Corporation. As of September 30, 2007, the Company
operated 101 accounts, including 72 sleep diagnosis laboratories and centers
and 22 hospital locations serviced with mobile PSG equipment in nine states in
the United States and Washington D.C. The Companys Sleep Services of
America business is accredited by the Joint Commission on Accreditation of
Healthcare Organizations in ambulatory healthcare.


On
April 2, 2007 the Companys Sleep Services of America subsidiary acquired the
assets of Do You Snore, LLC, Southern Medical Equipment, Inc. and Advanced
Sleep Technologies of Georgia, Inc. each of which is located in Atlanta,
Georgia. Do You Snore, LLC and Advanced Sleep Technologies of Georgia Inc.
primarily provide sleep diagnostic services in both free standing and hospital
owned sleep laboratories, and Southern Medical Equipment is a provider
primarily of CPAP equipment to sleep apnea patients. These acquisitions allow
Sleep Services of America to expand its geographic reach along the South East
Coast, as well as expand its strategy of providing the patient with the
complete range of sleep services.

On
June 28, 2007, the Companys Sleep Services of America subsidiary acquired the
assets of Southern Sleep Technologies, LLC and Southern Home Respiratory Care,
LLC. Southern Sleep Technologies, LLC primarily provides sleep diagnostic
services in both free standing and hospital owned sleep laboratories, and
Southern Home Respiratory Care, LLC is a provider primarily of CPAP equipment
to sleep apnea patients.

The
Companys Breas Medical AB, or Breas, subsidiary is a European manufacturer of
personal ventilators for obstructive sleep apnea and long term ventilation. The
Companys sleep disorder products deliver continuous positive airway pressure,
or CPAP, to patients in a method designed to increase patient comfort and
acceptance of the treatment. The Company has manufactured and distributed CPAP
systems for more than a decade, principally in international markets. These
sales depend on the prevalence of sleep disorders and the acceptance by
patients and care-givers in developed markets of treatment modalities for
obstructive sleep apnea. Like the Companys anesthesia and respiratory/critical
care businesses, the Companys Breas subsidiary faces the challenge of
controlling raw material, labor, and freight costs. There have been only
limited sales of the Companys sleep disorder products in the United States due
to dominance by the Companys competitors in selling to home supply dealers.
The Companys United States strategy is to sell these products primarily
through the Companys sleep centers.


-35-

---



Interventional
cardiology/radiology

The
Companys interventional cardiology/radiology business provides vascular access
and vascular device delivery and serves a substantial number of medical device
companies on an ongoing manufacturing and R&D project basis. The business
operates as a high-end OEM that designs, develops, and manufactures precision
devices that facilitate access to the cardiovascular system by medical
professionals in the electrophysiology, cardiology, radiology, critical care,
and anesthesia markets. The products include percutaneous-valved introducers,
peelaway-valved introducers, guiding sheaths, and device delivery sheaths.
Other products include guide wires, needles, over-the-needle catheters,
hemostasis valves, obturators, dilators, slicers, transvalvular insertion
tools, and contamination shields. The Companys interventional
cardiology/radiology business provides vascular access and vascular device
delivery and serves a substantial number of medical device companies on an
ongoing manufacturing and R&D project basis.


While
this business benefits from the overall development of less-invasive procedures
in healthcare, it is highly dependent upon the conversion of development concepts
to commercial products by its customers. The customer base is, in turn, subject
to regulatory approval considerations as well as competitive pressures.

Pharmaceutical
technology
services

For
more than 20 years, the Company has provided regulatory consulting services to
clients, helping them develop and validate systems and processes for their
manufacturing, IT infrastructure, research and development, facilities,
laboratory, and quality assurance departments. In 2002, with the acquisition of
Stelex, the Company expanded these services to include computer systems
compliance. In addition, the Company developed and currently markets
proprietary software products used in conjunction with the Companys services
to help clients comply with FDA regulations. The Company delivers these
technology services to FDA-regulated companies primarily in the pharmaceutical
sector, as well as to medical device, diagnostic, and biotechnology companies.
Clients include some of the largest pharmaceutical companies in the world. The
Companys principal costs in this segment are labor costs and also incur
technology-related expenses as part of the Companys software development. The Pharmaceutical technology segment was
classified as discontinued operations in the first, second and third quarters
of Fiscal 2007. The public announcement caused their sales to decline, in turn
the offers received for their purchase were inadequate and the Company wrote
the business down to fair value and reclassified the business to, held and
used.


Summary

For
the twelve months ending September 30, 2007, the Companys consolidated
revenue grew 1.6% to $205.3 million. Without the effect of foreign currency exchange,
sales would have grown 0.4%. The Companys gross profit increased
1.7% to $103.8 million, operating income decreased 44.0% to $23.5 million, income
from continuing operations fell 36.6% to $19.2 million, and net income fell 36.4%
to $19.1 million. Basic earnings per share decreased 38.2% to $1.44, and diluted
earnings per share decreased 37.7% to $1.44 per share.


The
Company recognized several one-time, non-cash charges in 2007. The Company
increased its distributor rebate allowance by an additional $4.7 million which
reduced sales and gross profit. Operating expenses included goodwill impairment
charges of $13.2 million for the Stelex business and a $1.9 million impairment
of long lived assets pertaining to the Companys April 2007 acquisition of Do
You Snore, LLC. Additionally, operating expenses included an increase in the
allowance for unauthorized customer discounts of $1.2 million. Combined, these
items reduced operating income by $21.0 million. Net income was reduced by
$13.6 million, or $1.02 per diluted share.

Excluding
these one-time, non-cash items, sales would have increased by 3.9% instead of
the 1.6% increase reported, and operating income would have increased by 6.1%
instead of the reported decrease.


-36-

---



Net income
would have increased by 6.7% instead of the reported decrease, and diluted EPS
would have been $2.46.


Net
revenues

The
amount and percentage of the Companys net revenue by business segment
follows:

|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         |  |  |       |  
|---------------------------------------------------------- |  | ------------- | ------- | ---- |  | ----- | ---------- | - | ------- |  |  | ---------- | - | - | ------- |  |  | ----- | -
|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         |  |  |       |  
|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         |  |  |       |  
|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         |  |  |       |  
|Fiscal year ended September 30, 
(In thousands of dollars) |  | 2007          |         | 2006 |  | 2005  |           
|                                                          
|                                                           |  | Net
  revenue |         |      |  |       | Netrevenue |   |         |  |  | Netrevenue |   |   |         | 
|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         | 
|Anesthesia                                                 |  | $             | 74,800  |      |  | 36.4  | %          | $ | 73,794  |  |  | 36.5       | % | $ | 67,896  |  |  | 35.1  | %
|Respiratory/critical care                                  |  |               | 46,296  |      |  | 22.5  |            |   | 44,571  |  |  | 22.1       |   |   | 42,423  |  |  | 22.0  |  
|Sleep disorder                                             |  |               | 48,770  |      |  | 23.8  |            |   | 42,850  |  |  | 21.2       |   |   | 40,660  |  |  | 21.0  |  
|Interventional cardiology/radiology                        |  |               | 28,637  |      |  | 14.0  |            |   | 25,538  |  |  | 12.6       |   |   | 25,441  |  |  | 13.2  |  
|Pharmaceutical technology services                         |  |               | 11,487  |      |  | 5.6   |            |   | 15,371  |  |  | 7.6        |   |   | 16,760  |  |  | 8.7   |  
|Rebate allowance adjustment (Note 18)                      |  |               | (4,733  | )    |  | (2.3  | )          |   |        |  |  |           |   |   |        |  |  |      |  
|                                                           |  |               |         |      |  |       |            |   |         |  |  |            |   |   |         |  |  |       |  
|Total (1)                                                  |  | $             | 205,257 |      |  | 100.0 | %          | $ | 202,124 |  |  | 100.0      | % | $ | 193,180 |  |  | 100.0 | %

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
  historical financial information presented in this Annual Report has been
  reclassified with  respect to the
  income from unconsolidated investment in our sleep disorder segment.

For
product sales, revenue is recognized when title to the product passes to the
customer. Except for certain domestic distributors, title passes when the
Company ships the product. For sales through certain domestic distributors,
title passes when the product is received by the distributor. For service
revenue in the sleep disorder and pharmaceutical technology services segments,
revenue is recognized when the service is performed.

Gross
revenues associated with the Companys anesthesia and respiratory/critical
care products are reduced by the amount of rebates due on sales to distributors.
See
-Critical accounting policies - Revenue recognition for a description
of how the Company calculates those rebates. Sales to distributors represented
28.9%, 28.3%, and 26.2% of the Companys net sales during the fiscal years
ended September 30, 2007, 2006, and 2005, respectively.

A
reconciliation of gross to net product sales and a comparison with service
revenues follows:

|                                                           |  |      |         |      |   |         |   |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                           |  |      |         |      |   |         |   |   |         |  
|                                                           |  |      |         |      |   |         |   |   |         |  
|Fiscal year ended September 30,(In
  thousands of dollars) |  | 2007 |         | 2006 |   | 2005    |  
|                                                           |  |      |         |      |   |         |  
|Gross sales                                                |  | $    | 250,166 |      | $ | 238,020 |   | $ | 220,504 |  
|Rebates (1)                                                |  |      | (74,798 | )    |   | (64,643 | ) |   | (55,917 | )
|Other deductions (2)                                       |  |      | (3,309  | )    |   | (4,415  | ) |   | (4,006  | )
|                                                           |  |      |         |      |   |         |   |   |         |  
|Net sales                                                  |  |      | 172,059 |      |   | 168,962 |   |   | 160,581 |  
|Service revenues                                           |  |      | 33,198  |      |   | 33,162  |   |   | 32,599  |  
|                                                           |  |      |         |      |   |         |   |   |         |  
|Total net revenues (3)                                     |  | $    | 205,257 |      | $ | 202,124 |   | $ | 193,180 |  

|    |                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See
  Critical accounting policies - Revenue recognition for information
  regarding rebate calculations. (See Notes 1 and 18)                                                         
|    |                                                                                                                                                                                          
|(2) | Other
  deductions consist of discounts, returns, and allowances for credits.                                                                                                            
|    |                                                                                                                                                                                          
|(3) | The
  historical financial information presented in this Annual Report has been
  reclassified with respect to the income from unconsolidated investment in our
  sleep disorder segment.
|    |                                                                                                                                                                                          

Research and
development

The
focus and cost of the Companys research and development efforts varies from
year to year and quarter to quarter based on the specific business needs. The
primary focus of the Companys research and


-37-

---



development
activities in fiscal 2007 was developing the Companys SteeLiteTM
single-patient-use metal laryngoscope blades, expanding the Companys line of
ventilation products at its Breas subsidiary, and completing the Companys
enFlow® IV Fluid/Blood Warming System. The Company incurred research and
development expenses of $7.5 million for fiscal year 2007 and $7.0 million for
fiscal years 2006 and 2005.


International sales

The
Companys products are sold in over 73 countries worldwide. The Companys
international sales by segment are shown below:


|                                                            |  |                |        |                               |      |                |  |                               |        |                |      |                               |  |   |        |  |      |   | 
|----------------------------------------------------------- |  | -------------- | ------ | ----------------------------- | ---- | -------------- |  | ----------------------------- | ------ | -------------- | ---- | ----------------------------- |  | - | ------ |  | ---- | - | 
|                                                            |  |                |        |                               |      |                |  |                               |        |                |      |                               |  |   |        |  |      |   | 
|Fiscal year ended September 30,
  (In thousands of dollars) |  | 2007           |        | 2006                          |      | 2005           | 
|                                                            |  |                |        |                               |      |                | 
|                                                            |  | Net
  revenues |        | Percent of
  total
  revenues |      | Net
  revenues |  | Percent of
  total
  revenues |        | Net
  revenues |      | Percent of
  total
  revenues | 
|                                                            |  |                |        |                               |      |                |  |                               |        |                |      |                               | 
|Anesthesia                                                  |  | $              | 10,907 |                               | 5.3  | %              |  | $                             | 9,999  |                | 4.9  | %                             |  | $ | 8,357  |  | 4.3  | % | 
|Respiratory/critical care                                   |  |                | 12,461 |                               | 6.0  |                |  |                               | 12,888 |                | 6.4  |                               |  |   | 13,617 |  | 7.1  |   | 
|Sleep disorder                                              |  |                | 27,059 |                               | 13.2 |                |  |                               | 25,059 |                | 12.4 |                               |  |   | 24,820 |  | 12.8 |   | 
|Interventional cardiology/radiology                         |  |                |       |                               |     |                |  |                               |       |                |     |                               |  |   |       |  |     |   | 
|                                                            |  |                |        |                               |      |                |  |                               |        |                |      |                               |  |   |        |  |      |   | 
|Pharmaceutical technology services                          |  |                |       |                               |     |                |  |                               |       |                |     |                               |  |   |       |  |     |   | 
|                                                            |  |                |        |                               |      |                |  |                               |        |                |      |                               |  |   |        |  |      |   | 
|Total                                                       |  | $              | 50,427 |                               | 24.6 | %              |  | $                             | 47,946 |                | 23.7 | %                             |  | $ | 46,794 |  | 24.2 | % | 
|                                                           

For
international sales other than in the United Kingdom, where the Company
operates its own sales and distribution office, the Company relies primarily on
third-party distributors. International sales in anesthesia and
respiratory/critical care segments increased $482,000 (2.1%) for the twelve
months ended September 30, 2007 over the comparable period last fiscal year.

Foreign currency exchange risks

The
Companys international business exposes it to foreign currency exchange
risks, primarily with international sales of sleep disorder and personal ventilation
products by the Companys Breas subsidiary. These sales are translated from
Swedish kroner to United States dollars. The relative decline of the Swedish
kroner compared with the United States dollar, from fiscal 2007 to 2006,
resulted in decreases in Breas reported revenue and operating income. See
Quantitative and qualitative disclosures about market risk below.


Acquisitions

As
    part of the Companys growth strategy, the Company pursued licensing
    agreements, strategic acquisitions and the purchase of technology. During
    the five-year period ended September 30, 2007, the Company made the following
    acquisitions:


| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company
  acquired a disposable airway management device business from a subsidiary of
  Baxter International, Inc. in March 2005 to improve its market share in the
  anesthesia segment.                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | The Company
  acquired the assets of Futall AB, a Swedish company holding the rights to
  certain carbon dioxide detection technology of the type used by the Company
  in its C-CO2 product on November 14, 2005. The assets consisted of
  intellectual property rights including patents and trade secrets,
  manufacturing equipment, customer lists, and office equipment.                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | The
  Companys Sleep Services of America subsidiary acquired the assets of Do You
  Snore, LLC, Southern Medical Equipment, Inc. and Advanced Sleep Technologies
  of Georgia, Inc. each of which is located in Atlanta, Georgia on April 2,
  2007. Do You Snore, LLC and Advanced Sleep Technologies of Georgia, Inc. primarily
  provide sleep diagnostic services in both free standing and hospital owned
  sleep laboratories, and Southern Medical Equipment is a provider primarily of
  CPAP equipment to sleep apnea patients. These acquisitions allow Sleep
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

-38-

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Services of America to expand its geographic reach along the South East
  Coast, as well as expanding its strategy of providing the patient with the
  complete range of sleep services. Sleep Services of
  America is uniquely positioned to address the patients needs, by guiding
  them through the diagnostic procedure, through the set up and use of CPAP
  treatment devices and through the follow-up services. Subsequent to the
  acquisition, Sleep Services determined that it had been defrauded by a
  selling shareholder and others. Sleep Services has initiated litigation
  against these individuals. (See Note 2)
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | The
  Companys Sleep Services of America subsidiary acquired the assets of
  Southern Sleep Technologies, LLC and Southern Home Respiratory Care, LLC on
  June 28, 2007. Southern Sleep Technologies, LLC primarily provides sleep
  diagnostic services in both free standing and hospital owned sleep
  laboratories, and Southern Home Respiratory Care, LLC is a provider primarily
  of CPAP equipment to sleep apnea patients.                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | The Company
  acquired the assets of Enginivity, LLC and its enFlow® IV fluid and blood
  warmer patented technology on August 15, 2007. The assets consisted of
  intellectual property rights including patents and trade secrets. Since the
  acquisition of Enginivity, LLC is immaterial, no pro forma information has
  been presented.                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | These acquisitions have been accounted for as purchases
      and, accordingly, are included in the Companys consolidated financial
    statements from the respective dates of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | In the first
  quarter of fiscal 2007, the Company formed a Chinese joint venture to
  manufacture face masks. Respironics was the Companys sole face mask supplier
  until the formation of the Chinese joint venture. Respironics has continued
  to provide products to the Company during the transition to the joint
  venture, and Respironics has sold substantial manufacturing assets to the Company.                                                                                                                                                                                                                          

Results of operations

The
following table sets forth, for the periods indicated, certain statement of
income data as a percentage of the Companys net revenue.

|                                                     |  |      |      |      |  |       |   |  |       |  
|---------------------------------------------------- |  | ---- | ---- | ---- |  | ----- | - |  | ----- | -
|                                                     |  |      |      |      |  |       |   |  |       |  
|Fiscal years ended September 30,                     |  | 2007 |      | 2006 |  | 2005  |  
|                                                     |  |      |      |      |  |       |  
|Consolidated statement of income data:               |  |      |      |      |  |       |  
|Net revenue                                          |  |      | 100  | %    |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                                   |  |      | 49.4 |      |  | 49.5  |   |  | 49.4  |  
|Gross profit:                                        |  |      |      |      |  |       |   |  |       |  
|Anesthesia                                           |  |      | 51.7 |      |  | 51.2  |   |  | 53.2  |  
|Respiratory/critical care                            |  |      | 54.8 |      |  | 52.7  |   |  | 52.7  |  
|Sleep disorder                                       |  |      | 52.0 |      |  | 51.9  |   |  | 46.2  |  
|Interventional cardiology/radiology                  |  |      | 56.3 |      |  | 52.3  |   |  | 54.9  |  
|Pharmaceutical technology services                   |  |      | 26.4 |      |  | 34.1  |   |  | 38.6  |  
|Total                                                |  |      | 50.6 |      |  | 50.5  |   |  | 50.6  |  
|Operating expenses:                                  |  |      |      |      |  |       |   |  |       |  
|Selling, general and administrative                  |  |      | 27.8 |      |  | 25.8  |   |  | 26.4  |  
|Research and development                             |  |      | 3.7  |      |  | 3.5   |   |  | 3.6   |  
|Impairment charge                                    |  |      | 7.3  |      |  |      |   |  |      |  
|Restructuring charge                                 |  |      |     |      |  |      |   |  | 0.1   |  
|Other (income) expense, net                          |  |      | 0.3  |      |  | 0.4   |   |  | 0.0   |  
|Total operating expenses                             |  |      | 39.1 |      |  | 29.7  |   |  | 30.1  |  
|Interest income, net                                 |  |      | (2.4 | )    |  | (1.6  | ) |  | (0.9  | )
|Non-controlling interest in net income of subsidiary |  |      | (0.3 | )    |  | (0.4  | ) |  | (0.4  | )
|Provision for income taxes                           |  |      | 4.9  |      |  | 7.8   |   |  | 7.8   |  
|Income from continuing operations                    |  |      | 9.4  |      |  | 15.0  |   |  | 13.6  |  
|Net income                                           |  |      | 9.3  |      |  | 14.9  |   |  | 13.7  |  
|                                                     |  |      |      |      |  |       |   |  |       |  
|                                                     |  |      |      |      |  |       |   |  |       |  

-39-

---



Comparison of
results for the year ended September 30, 2007 to the year ended September 30,
2006

Net revenues

Total
net revenue increased by 1.6%, from $ 202.1 million for fiscal 2006 to $205.3
million for fiscal 2007. The percentage increase would have been 0.4% without
the impact of favorable foreign exchange rates within the Companys sleep
disorder segment. All other segments international sales are in U.S.
dollars.  Excluding the one-time rebate
adjustment, net revenue would have increased 3.9%.


Of
the Companys total net revenue, $154.9 million, or 75.4%, were domestic sales,
and $50.4 million, or 24.6%, were international sales. Domestic revenues
increased by 0.4%, from $154.2 million for fiscal 2006 to $154.9 million for
fiscal 2007. Excluding the one-time rebate adjustment, the domestic sales
increase would have been 3.5%. International sales increased by 5.2%, from
$47.9 million for fiscal 2006 to $50.4 million for fiscal 2007. The
international sales increase would have been a 0.1% without the impact of
favorable foreign currency exchange within the Companys sleep disorder
segment. All other segments international sales are in U.S. dollars.

Net
revenues by business segment for fiscal 2007 compared with fiscal 2006 are
shown below:

Net revenue by business segment

|                                                            |  |      |         |      |   |                  |  |  |        |  
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | ---------------- |  |  | ------ | -
|                                                            |  |      |         |      |   |                  |  |  |        |  
|                                                            |  |      |         |      |   |                  |  |  |        |  
|For the year ended September 30,(In
  thousands of dollars) |  | 2007 |         | 2006 |   | Percent
  change | 
|                                                            |  |      |         |      |   |                  | 
|Consolidated statement of income data:                      |  |      |         |      |   |                  |  |  |        |  
|Anesthesia                                                  |  | $    | 74,800  |      | $ | 73,794           |  |  | 1.4    | %
|Respiratory/critical care                                   |  |      | 46,296  |      |   | 44,571           |  |  | 3.9    |  
|Sleep disorder                                              |  |      | 48,770  |      |   | 42,850           |  |  | 13.8   |  
|Interventional cardiology/radiology                         |  |      | 28,637  |      |   | 25,538           |  |  | 12.1   |  
|Pharmaceutical technology services                          |  |      | 11,487  |      |   | 15,371           |  |  | (25.3  | )
|Rebate allowance adjustment  (Note 18)                      |  |      | (4,733  | )    |   |                 |  |  | (100.0 | )
|                                                            |  |      |         |      |   |                  |  |  |        |  
|Total                                                       |  | $    | 205,257 |      | $ | 202,124          |  |  | 1.6    | %
|                                                            |  |      |         |      |   |                  |  |  |        |  

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
  historical financial information presented in this Annual Report has been
  reclassified with  respect to the
  income from unconsolidated investment in our sleep disorder segment.
|    |                                                                                                                                                                                           

Anesthesia. Sales of anesthesia products increased
by 1.4% from $73.8 million for fiscal 2006 to $74.8 million for fiscal 2007.
This increase was due to broad based growth led by Limb-q and Infusors.
Domestic sales of anesthesia products increased 0.2%, from $63.8 million to
$63.9 million. International sales of anesthesia products increased 9.0%, from
$10.0 million to $10.9 million.

Respiratory/critical
care. Sales of
respiratory/critical care products increased by 3.9%, from $44.6 million for
fiscal 2006 to $46.3 million for fiscal 2007, primarily attributable to a 39.0%
increase in sales of the Companys Broselow color coded products. Domestic
sales of respiratory/critical care products increased by 6.8%, from $31.7 million
to $33.8 million. International sales of respiratory/critical care products
decreased by 3.3% from $12.9 million for fiscal 2006 to $12.5 million for
fiscal 2007, reflecting primarily declines in sales of ABG and Blue
Resuscitators.


Sleep
disorder. Sleep
disorder segment revenues increased by 13.8% from $42.9 million for fiscal 2006
to $48.8 million for fiscal 2007. The percentage increase would have been 7.7%
excluding the impact of foreign currency exchange rates.

Net
revenues at Sleep Services of America (SSA), the Companys domestic sleep
disorder diagnostic business, increased 22.0%, from $17.8 million to $21.7
million, resulting primarily from the acquisitions of Do You Snore, LLC and
Southern Sleep Technologies, Inc.

At
Breas, the Companys European manufacturer of personal ventilators and CPAP
devices, revenue increased 8.0%, from $25.1 million during fiscal 2006 to $27.1
million during fiscal 2007.

Interventional cardiology/radiology.
Interventional cardiology/radiology segment revenues increased by

-40-

---



12.1% from
$25.5 million for fiscal 2006 to $28.6 million for fiscal 2007.

Pharmaceutical technology services.
Service revenues in the Companys pharmaceutical technology services segment
decreased by 25.3%, from $15.4 million for fiscal 2006 to $11.5 million for
fiscal 2007, resulting in part from a decrease in spending by major
pharmaceutical companies and also from the Company publicly classifying
businesses in this segment as discontinued operations during the first three
fiscal quarters of 2007. These businesses are no longer discontinued operations
and are classified as held and used.


Gross profit

The
Companys gross profit dollars and margins by segment are shown below:

|                                                          |  |                |         |                         |  |                |   |                         |         |  |  |      |  
|--------------------------------------------------------- |  | -------------- | ------- | ----------------------- |  | -------------- | - | ----------------------- | ------- |  |  | ---- | -
|                                                          |  |                |         |                         |  |                |   |                         |         |  |  |      |  
|For the year ended September 30,(In thousands of dollars) |  | 2007           |         | 2006                    | 
|                                                          |  |                |         |                         | 
|                                                          |  | Gross
  profit |         | Gross
  profit
  margin |  | Gross
  profit |   | Gross
  profit
  margin |        
|                                                          |  |                |         |                         |  |                |   |                         |         |  |  |      |  
|Anesthesia                                                |  | $              | 38,678  |                         |  | 51.7           | % | $                       | 37,784  |  |  | 51.2 | %
|Respiratory/critical care                                 |  |                | 25,370  |                         |  | 54.8           |   |                         | 23,485  |  |  | 52.7 |  
|Sleep disorder                                            |  |                | 25,343  |                         |  | 52.0           |   |                         | 22,231  |  |  | 51.9 |  
|Interventional cardiology/radiology                       |  |                | 16,131  |                         |  | 56.3           |   |                         | 13,356  |  |  | 52.3 |  
|Pharmaceutical technology services                        |  |                | 3,030   |                         |  | 26.4           |   |                         | 5,241   |  |  | 34.1 |  
|Rebate allowance adjustment (Note 18)                     |  |                | (4,733  | )                       |  |               |   |                         |        |  |  |     |  
|                                                          |  |                |         |                         |  |                |   |                         |         |  |  |      |  
|Total                                                     |  | $              | 103,819 |                         |  | 50.6           | % | $                       | 102,097 |  |  | 50.5 | %
|                                                          |  |                |         |                         |  |                |   |                         |         |  |  |      |  

---

Gross
profit dollar and margin improvements in the Companys anesthesia and
respiratory/critical care segments are due to increased sales as well as
improved labor productivity and manufacturing cost controls.

The
gross profit dollar increase in the sleep disorder segment resulted from the
sales volume increases in diagnostic services and introducing new sleep
disorder/personal ventilation products. The gross profit margin in domestic
sleep disorder diagnostic services increased from 53.5% in fiscal 2006 to 54.7%
in fiscal 2007. The gross profit at Breas decreased from 50.7% in fiscal 2006
to 49.8% in fiscal 2007 due to an unfavorable sales mix.


The
gross profit dollar increase in the interventional cardiology/radiology segment
resulted primarily from a richer mix of cardiac rhythm management and electrophysiology
devices combined with lean enterprise and six sigma manufacturing improvements.
The gross margin in interventional cardiology/radiology products increased from
52.3% in fiscal 2006 to 56.3% in fiscal 2007.

The
gross profit dollar and margin decreases in the pharmaceutical technology
services segment resulted from lower sales volume. The gross profit margin
decreased from 34.1% in fiscal 2006 to 26.4% in fiscal 2007, reflecting
difficulties in leveraging certain costs over a declining revenue base.


Operating expenses

Selling
general and administrative expenses. Selling, general and administrative expenses
increased by 9.5%, from $52.2 million for fiscal 2006 to $57.1 million for fiscal
2007. The increase resulted primarily from bad debt expenses of $1.2 million,
associated with a reserve for unauthorized discounts and other bad debt and
consolidating expenses of $ 1.5 million pertaining to the Companys
acquisitions within the sleep disorder segment.


Research
and development.Research
and development expenses increased by 6.8%, from $7.0 million for fiscal 2006
to $7.5 million for fiscal 2007, primarily as a result of the Companys focus
on the development of SteeLiteTM single-patient-use metal
laryngoscope blades, expanding the Companys line of ventilation products, and
completing the enFlow® IV Fluid/Blood Warming System.

Impairment Charge.The Company recorded an impairment
of $13.2 million for the Companys Stelex, Inc. subsidiary and $1.9 million
impairment of long-lived assets pertaining to the acquisition of Do You Snore,
LLC, Advanced Sleep Technologies of Georgia, Inc. and Southern Medical
Equipment, Inc. (See Note 13)


-41-

---



Other items

Interest
income, net.Interest
income increased $1.6 million from $3.3 million for fiscal 2006 to $4.9 million
for fiscal 2007, resulting from increased cash and cash equivalents being
invested and higher interest rates.

Income
tax.The provision
for income tax expense for fiscal 2007 and 2006 was $10.0 million and $15.8
million, respectively, reflecting effective tax rates of 33.4% and 33.7% for
these periods, respectively.


Discontinued
operations.The
net loss from the Companys Vital Pharma discontinued operation was almost zero
for fiscal 2007 (consisting of litigation expenses), compared with $(0.2)
million for fiscal 2006. (See Note 2)

Comparison
of results for the year ended September 30, 2006 to the year ended September
30, 2005

Net revenues

Total
net revenue increased by 4.6% from $193.2 million for fiscal 2005 to $202.1
million for fiscal 2006. The percentage increase would have been 5.3% excluding
the impact of unfavorable foreign currency exchange rates within the Companys
sleep disorder segment. All other segments international sales are in U.S.
dollars. Of the Companys total net revenue, $154.2 million, or 76.3%, were
domestic sales, and $47.9 million, or 23.7%, were international sales. Domestic
revenues increased by 5.3% from $146.4 million for fiscal 2005 to $154.2
million for fiscal 2006. International sales increased by 2.4%, from $46.8
million for fiscal 2005 to $47.9 million for fiscal 2006.


Net
revenues by business segment for fiscal 2006 compared with fiscal 2005 are
shown below.

Net revenue by business segment

|                                                          |  |      |         |      |   |                   |  |  |      |  
|--------------------------------------------------------- |  | ---- | ------- | ---- | - | ----------------- |  |  | ---- | -
|                                                          |  |      |         |      |   |                   |  |  |      |  
|For the year ended September 30,(In thousands of dollars) |  | 2006 |         | 2005 |   | Percent 
  change | 
|                                                          |  |      |         |      |   |                   | 
|Consolidated statement of income data:                    |  |      |         |      |   |                   |  |  |      |  
|Anesthesia                                                |  | $    | 73,794  |      | $ | 67,896            |  |  | 8.7  | %
|Respiratory/critical care                                 |  |      | 44,571  |      |   | 42,423            |  |  | 5.1  |  
|Sleep disorder                                            |  |      | 42,850  |      |   | 40,660            |  |  | 5.4  |  
|Interventional cardiology/radiology                       |  |      | 25,538  |      |   | 25,441            |  |  | 0.4  |  
|Pharmaceutical technology services                        |  |      | 15,371  |      |   | 16,760            |  |  | (8.3 | )
|                                                          |  |      |         |      |   |                   |  |  |      |  
|Total (1)                                                 |  | $    | 202,124 |      | $ | 193,180           |  |  | 4.6  | %

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The
  historical financial information presented in this Annual Report has been
  reclassified with  respect to the
  income from unconsolidated investment in our sleep disorder segment.
|    |                                                                                                                                                                                           

Anesthesia.
Sales of anesthesia products increased
by 8.7% from $67.9 million for fiscal 2005 to $73.8 million for fiscal 2006.
This increase was due to broad based growth led by Limb-q and
Infusors. Domestic sales of anesthesia products increased by 7.2%, from $59.5
million to $63.8 million. International sales of anesthesia products increased
19.7%, from $8.4 million to $10 million.


Respiratory/critical
care.Sales of
respiratory/critical care products increased by 5.1% from $42.4 million for
fiscal 2005 to $44.6 million for fiscal 2006, primarily resulting from
increased sales of blood pressure cuffs and resuscitation products. Domestic
sales of respiratory/critical care products increased by 10.0% from $28.8
million to $31.7 million. International sales of respiratory/critical care
products decreased by 5.4% from $13.6 million for fiscal 2005 to $12.9 million
for fiscal 2006, primarily reflecting declines in sales of ABG products.

Sleep
disorder. Sleep disorder segment revenues increased by
5.4% from $40.7 million for fiscal 2005 to $42.9 million for fiscal 2006. The
percentage increase would have been 8.75% excluding the impact of foreign
currency exchange rates.

-42-

---



The
net revenues at Sleep Services of America (SSA), the Companys domestic sleep
disorder diagnostic business, increased by 12.7% from $15.8 million to $17.8
million primarily from improved utilization at existing laboratories and sleep
centers.

At
Breas, the Companys European manufacturer of personal ventilators and CPAP
devices, revenue increased by 1.0% from $24.8 million during fiscal 2005 to
$25.1 million during fiscal 2006. During fiscal 2005, a Breas component vendor
did not deliver a sufficient quantity of a key component which delayed
introducing a new sleep disorder and personal ventilation product line. The
Company pre-announced the new product line availability, but without delivery,
customers cancelled orders both for the new products and for pre-existing
products. Limited shipments of the new product line began during the fourth
quarter of fiscal 2005.

Interventional
cardiology/radiology.The Companys interventional
cardiology/radiology segment revenues increased by 0.4% from $25.4 million for
fiscal 2005 to $25.5 million for fiscal 2006. The flat revenues were primarily
the result of one major customer discontinuing a division to which Thomas
Medical supplied two types of vascular closing devices.

Pharmaceutical
technology services. Service revenues in the pharmaceutical technology services segment
decreased by 8.3% from $16.8 million for fiscal 2005 to $15.4 million for
fiscal 2006 due in part from a decrease in spending within its customer base
comprising major pharmaceutical companies.

Gross profit

The
Companys gross profit dollars and margins by segment are shown below:

|                                                             |  |                |         |                         |  |                |   |                         |        |  |  |      |  
|------------------------------------------------------------ |  | -------------- | ------- | ----------------------- |  | -------------- | - | ----------------------- | ------ |  |  | ---- | -
|                                                             |  |                |         |                         |  |                |   |                         |        |  |  |      |  
|For the year ended September 30,
  (In thousands of dollars) |  | 2006           |         | 2005                    | 
|                                                             |  |                |         |                         | 
|                                                             |  | Gross
  profit |         | Gross
  profit
  margin |  | Gross
  profit |   | Gross
  profit
  margin |       
|                                                            
|Anesthesia                                                   |  | $              | 37,784  |                         |  | 51.2           | % | $                       | 36,106 |  |  | 53.2 | %
|Respiratory/critical care                                    |  |                | 23,485  |                         |  | 52.7           |   |                         | 22,357 |  |  | 52.7 |  
|Sleep disorder                                               |  |                | 22,231  |                         |  | 51.9           |   |                         | 18,770 |  |  | 46.2 |  
|Interventional cardiology/radiology                          |  |                | 13,356  |                         |  | 52.3           |   |                         | 13,976 |  |  | 54.9 |  
|Pharmaceutical technology services                           |  |                | 5,241   |                         |  | 34.1           |   |                         | 6,464  |  |  | 38.6 |  
|                                                             |  |                |         |                         |  |                |   |                         |        |  |  |      |  
|Total                                                        |  | $              | 102,097 |                         |  | 50.5           | % | $                       | 97,673 |  |  | 50.6 | %
|                                                             |  |                |         |                         |  |                |   |                         |        |  |  |      |  

---

Gross
profit dollar improvements in the anesthesia and respiratory/critical care
segments correspond to the sales volume increases in those segments. The
decline in gross profit margin resulted from including the lower-margin Baxter
disposable airways product line into the sales mix.


The
gross profit dollar increase in the sleep disorder segment resulted from the
sales volume increases in diagnostic services and introducing new sleep
disorder/personal ventilation products. The gross profit margin increased from
50.6% in fiscal 2005 to 53.5% in fiscal 2006. The gross profit at Breas
increased from 43.4% in fiscal 2005 to 50.7% in fiscal 2006 as the sales mix
changed to include an increased percentage of higher margin new personal
ventilation products.

The
gross profit dollar decreased in the Companys interventional
cardiology/radiology segment resulted primarily from one major customer
discontinuing a division that Thomas Medical supplied two types of vascular
closing devices. The gross margin in interventional cardiology/radiology
products decreased from 54.9% in fiscal 2005 to 52.3% in fiscal 2006.

The
gross dollar decreases in the pharmaceutical technology services segment
resulted from the sales volume decrease in spending within its customer base.
The gross profit margin decreased from 38.6% in fiscal 2005 to 34.1% in fiscal
2006, reflecting difficulties in leveraging certain costs over a declining
revenue base.

-43-

---



Operating Expenses

Selling,
general and administrative expenses. Selling, general and administrative expenses
increased by 2.3% from $51.0 million for fiscal 2005 to $52.2 million for
fiscal 2006. The increase resulted primarily from option expenses of $1.1
million due to implementing of SFAS 123(R) for stock option accounting.

Research
and development. Research
and development expenses remained consistent at $7.0 million for fiscal 2005
and fiscal 2006. The Company reduced its spending at Breas, where the research
and development efforts in designing the new family of CPAP and ventilation
equipment have been substantially completed, offset by an increase of $0.4
million from stock option expenses.

Other
(income)/ expense, net. For fiscal 2006, other expense, net of $0.9 million resulted from
increased legal fees relating to enforcing the Companys rights against a
former employee. The Company was successful in its prosecution, but has not yet
collected any amount on the Companys judgment and thus has not recorded any
revenue to offset expenses. For fiscal 2005, other income, net of ($0.1)
million resulted from a litigation settlement, gains on sales of assets, and
realized foreign currency exchange gains, offset in part by charitable
contributions consisting of product donations.


Other items

Interest
income, net. Interest
income increased $1.6 million from $1.7 million for fiscal 2005 to $3.3 million
for fiscal 2006, resulting from an increase in cash and cash equivalents being
invested (reflecting, in part, the Companys February 2006 public offering of
common stock) and an increase in interest rates.

Income
tax.The
provision for income tax expense for fiscal 2006 and 2005 was $15.8 million and
$15.1 million, respectively, reflecting effective tax rates of 33.7% and 35.9%
for these periods. The tax rate decreased to 33.7% resulted from a
manufacturing credit. (See Note 17)


Discontinued
operations. The
net loss from the Companys Vital Pharma discontinued operations was $(0.2)
million for fiscal 2006 (consisting of litigation expenses), compared with a
$0.1 million gain for fiscal 2005. (See Note 2)


Liquidity and capital resources

The
Company believes that the funds generated from operations, along with the
Companys current working capital position, will be sufficient to satisfy the
Companys capital requirements for at least the next twelve months.

Cash flows

Historically,
the Companys primary capital requirements were to finance business
acquisitions and to support operations. The Company funded these requirements
primarily through internally generated cash flows.


During
fiscal 2007, operating activities provided cash of $30.5 million. Investing
activities used $23.1 million of cash, including $9.8 million for the
acquisition of Do You Snore, LLC, Southern Medical Equipment, Inc., and
Advanced Sleep Technologies of Georgia, Inc.; $2.3 million for the acquisition
of Southern Sleep Technologies, LLC and Southern Home Respiratory Care, LLC;
and $5.5 million for the acquisition of Enginivity. Capital additions were $5.9
million. Financing activities used cash of $2.8 million, consisting of $5.0
million paid for dividends, which were offset in part by $1.9 million received
from exercises of stock options, $0.7 million from the tax benefit of stock
option exercises, and $.4 of Notes payable acquired with acquisitions.


During
fiscal 2006, operating activities provided cash of $12.4 million. Investing
activities used $11.3 million of cash, including $2.3 million for the
acquisition of the Futall AB and capital additions of $9.1 million. Financing
activities provided cash of $20.3 million, primarily consisting of $18.5
million from the sale of common stock.


During
fiscal 2005, operating activities provided cash of $28.4 million. Investing
activities used $15.5 million of cash, including $9.9 million for the
acquisition of Baxter disposable airway management product line and capital
additions of $5.6 million. Financing activities used cash of $9.4 million,
primarily consisting of $9.1 million for common stock repurchases.


-44-

---



Cash and working capital

Cash
and cash equivalents were $48.9 million at September 30, 2007 as compared with
$41.2 million at September 30, 2006. At September 30, 2007, the Companys
working capital was $183.4 million compared to $169.8 million at September 30,
2006. At September 30, 2007, the Companys current ratio was 11.3 to 1 and
at September 30, 2006 the current ratio was 12.1 to 1.


Debt

The
Company acquired $1.4 million of debt used to finance inventory with the April
    2007 acquisition of Do You Snore, LLC, Southern Medical Equipment, Inc.,
    and Advanced Sleep Technologies of Georgia, Inc.


Working capital and capital expenditures

The
Companys current policy is to retain cash and earnings for use in the
Companys business, pay cash dividends, business acquisitions, product
acquisitions and product development, among other things. The Company regularly
evaluates and negotiates with domestic and foreign medical device companies regarding
potential business or product line acquisitions, licensing arrangements, and
strategic alliances.


Capital
expenditures for fiscal 2007 were $5.1 million, and included equipment, molds
and building improvements at the Companys New Jersey facility ($0.7 million),
capitalized costs of software development ($1.5 million), computer hardware and
software to upgrade management information systems ($0.4 million), building
improvements at manufacturing facilities ($0.07 million), molds and equipment
at both Thomas Medical Products ($0.4 million) and Colorado manufacturing plant
($1.0 million), new laboratory equipment ($0.8 million) for sleep labs, and
patents ($0.2 million).


Dividend and stock buybacks

The
Companys board of directors approved $5.0 million in dividends (amounting to
$0.38 per share) in fiscal year 2007. On December 10, 2007, the Board approved
a quarterly dividend in the amount of $0.10 per common share payable on January
2, 2008 to shareholders of record on December 21, 2007.


Commitments and contingencies

At
September 30, 2007, future payments due under the Companys operating leases
and other long-term obligations are described below:

Payments Due by Period


|                                                    |  |       |       |                      |   |                             |  |                               |       |                        |   |       |  |  |   |     |  | 
|--------------------------------------------------- |  | ----- | ----- | -------------------- | - | --------------------------- |  | ----------------------------- | ----- | ---------------------- | - | ----- |  |  | - | --- |  | 
|                                                    |  |       |       |                      |   |                             |  |                               |       |                        |   |       |  |  |   |    
|(In thousands of dollars)
  Contractual obligations |  | Total |       | Less than
  one year |   | One year
  to three
  years |  | Three
  years to
  five years |       | More than
  five years |  
|                                                    |  |       |       |                      |   |                             |  |                               |       |                        |  
|Operating leases                                    |  | $     | 6,662 |                      | $ | 2,023                       |  | $                             | 3,133 |                        | $ | 1,155 |  |  | $ | 352 |  | 
|Long-term debt                                      |  |       | 1,354 |                      |   | 868                         |  |                               | 486   |                        |   |      |  |  |   |    |  | 
|Capital leases                                      |  |       |      |                      |   |                            |  |                               |      |                        |   |      |  |  |   |    |  | 
|Fin 48                                              |  |       |      |                      |   |                            |  |                               |      |                        |   |      |  |  |   |    |  | 
|Purchase obligations                                |  |       |      |                      |   |                            |  |                               |      |                        |   |      |  |  |   |    |  | 
|Total                                               |  | $     | 8,016 |                      | $ | 2,891                       |  | $                             | 3,619 |                        | $ | 1,155 |  |  | $ | 352 |  | 

---

Other

At
September 30, 2007, 2006 and 2005, the Company did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, that would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually-narrow limited purposes. In addition, the Company does
not engage in trading activities involving non-exchange traded contracts. As
such, the Company is not materially exposed to any financing, liquidity,
market, or credit risk that could arise if the Company had engaged in such
relationships. The Company does not have material relationships or transactions
with persons or entities that derive benefits from their non-independent
relationship with the Company or related parties.


-45-

---



Critical accounting estimates


The
following critical accounting estimates affect significant judgments used in
the preparation of the Companys consolidated financial statements. The
Companys consolidated financial statements are prepared in conformity with
generally accepted accounting principles, which require the Company to make
estimates and judgments that affect the Companys reported amount of assets,
liabilities, revenues, and expenses, as well as related disclosures of
contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to asset impairment, revenue
recognition, allowance for doubtful accounts, and contingencies and litigation.
These estimates are based on the information that is currently available to the
Company and on various other assumptions that the Company believes to be
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.

The
Company believes that the following critical accounting estimates affect the
more significant judgments used in the preparation of its consolidated
financial statements:


Revenue recognition

Net
revenues consist of sales of the Companys anesthesia, respiratory/critical
care, sleep disorder and personal ventilation, and interventional
cardiology/radiology products and revenues from the Companys sleep disorder
diagnostic services and pharmaceutical technology services. For all product
sales, revenue is recognized when title to the product passes to the customer.
For product sales to all customers except for certain domestic distributors,
title passes upon shipment of the product. For sales through certain domestic
distributors, title passes when the product is received by the distributor. For
service revenue, revenue is recognized when the service is performed.


The
Companys sales to United States distributors are made at the Companys distributor
list price. Because the end-user (i.e., a hospital) is typically entitled, on a
case by case basis, to a price lower than the Companys distributor list price,
the distributor is then due a rebate, equal to the difference between the
distributor list price and the final lower contract price, when shipment is
made to the end user. In order to properly reflect the Companys sales to
distributors, the Company records the gross sale at its distributor list price,
less the amount of the expected rebate, to arrive at the net sale. This net
sale is the amount the Company expects to receive in cash from the distributor
on the sale.


On
a monthly basis, each distributor provides the Company with documentation of
shipments to particular end-users and computes a rebate claim on such
shipments. Once the distributor has provided the Company with this claim, the
distributor will deduct the computed rebate from its net remittance.

The
amount of the estimated rebate that has not yet been taken by the distributor
through the reduction of a payment is included in the allowance for rebates,
which reduces the accounts receivable on the Companys balance sheet. This
allowance is calculated by adding the amount of rebates claimed by the
distributors through documentation but not yet reimbursed plus an estimate by
the Company of the amount of future rebates due on any inventory that the
distributors are holding at the end of each period.

The
allowance for rebates was $10.5 million, $8.1 million, and $7.3 million at
September 30, 2007, 2006, and 2005 respectively. Rebate expense was $74.8
million, $64.6 million, and $55.9 million for the years ended September 30,
2007, 2006, and 2005 respectively.

Amortization of goodwill


In
accordance with SFAS No. 142, the Company ceased amortizing goodwill and
performed an annual impairment analysis based upon discounted cash flows to
assess the recoverability of the goodwill. The Company last completed this
impairment test during the three month period ended March 31, 2007 and found no
impairment. The Company also reviews the carrying value of other long-lived
assets on a periodic basis, or whenever events or changes in circumstances
indicate that the amounts may not be recoverable. If the Company determines
that the carrying amount of an asset may not be recoverable, the Company then
estimates the future undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. The Company will recognize an
impairment loss if the carrying value of the assets exceeds the estimated
future undiscounted cash flows of those assets (See Note 1 and Note 13).
Goodwill amounted to $82.0 million, $79.3 million, and $77.2 million at
September 30, 2007, 2006, and 2005, respectively.


-46-

---



Allowance for doubtful accounts

The
Company maintains an allowance for doubtful accounts for estimated losses if
its customers fail to make required payments, which results in bad debt expense
in operating expenses. The Companys allowance for doubtful accounts was $4.5
million, $0.4 million, and $0.5 million at September 30, 2007, 2006, and 2005,
respectively. The increase in the allowance was primarily attributable to a
$1.2 million increase for unauthorized cash payment discounts by one of the
Companys large distributors and the consolidation of the Companys sleep
disorder acquisition. The Company determines the adequacy of this allowance by
evaluating individual customer receivables, considering the customers
financial condition and credit history, and analyzing current economic
conditions. If the financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.


Claims and proceedings

The
Company is subject to various claims and legal actions in the ordinary course
of its business. These matters frequently arise in disputes regarding the
rights to intellectual property, where it is difficult to assess the likelihood
of success and even more difficult to assess the probable ranges of recovery.
Although the Company currently is not aware of any legal proceeding that is
reasonably likely to have a material adverse effect on its financial position
and results of operations other than legal proceedings for which accruals have
been provided, if the Company becomes aware of any such claims against itself,
the Company will evaluate the probability of an adverse outcome and provide
accruals for such contingencies to the extent that such contingencies are
measurable.

Inventory obsolescence

The
Company establishes an allowance for inventory obsolescence. The allowance is
determined by performing an aging analysis of the inventory; based upon this
allowance, inventory is stated at the lower of cost, using the first in, first
out method, or its net realizable value. The Companys inventory allowance for
obsolescence was $0.6 million, $0.5 million, and $0.7 million at September 30,
2007, 2006, and 2005.

Recent accounting pronouncements

For
information regarding new accounting pronouncements, see Note 1.


Item 7A. Quantitative
and Qualitative Disclosures about Market Risk


The
Company is exposed to market risks, including the impact of material price
changes and changes in the market value of its investments and, to a lesser
extent, interest rate changes and foreign currency fluctuations. In the normal
course of business, the Company seeks to limit the impact of market risks on
earnings and cash flows.

The
impact of interest rate changes is not material to the Companys financial
condition. The Company does not enter into interest rate transactions for
speculative purposes.

For
fiscal 2007, the Companys international net revenue represented approximately
24.6% of its total net revenues. The Companys Breas subsidiary, located in
Sweden, represented 53.7% of its total international net revenues during fiscal
2007. The Company does not enter into any derivative transactions, including
foreign currency transactions, for speculative purposes. The Company has not
entered into any derivative instrument transactions, such as foreign currency
exchange forward or option contracts, as of September 30, 2007.

The
Companys primary risk involving price changes relates to raw materials used in
its operations. The Company is exposed to changes in the prices of resins and
latex for the manufacture of its products. The Company does not enter into
commodity futures or derivative instrument transactions. The Company seeks to
maintain commercial relations with multiple suppliers and when prices for raw
materials rise to attempt to source alternative supplies.


-47-

---



Item 8. Financial Statements and Supplementary Data

The
following audited consolidated financial statements and related reports are set
forth in this Annual Report on the following pages:


|                                                                                                                                            |  |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                                                                                                                            |  | Page | 
|                                                                                                                                            |  |      | 
|Report of Independent Registered Public
 Accounting Firm                                                                                    |  | F-1  | 
|Consolidated Balance Sheets as of September
 30, 2007 and 2006                                                                              |  | F-2  | 
|Consolidated Statements of Income for the
 years ended September 30, 2007, 2006 and 2005                                                    |  | F-3  | 
|Consolidated
      Statement of Stockholders
 Equity and other Comprehensive Income for the years ended September 30, 2007,
 2006 and 2005 |  | F-4  | 
|Consolidated Statement of Cash flows for
 the years ended September 30, 2007, 2006 and 2005                                                 |  | F-5  | 
|Notes
      to the Consolidated Financial Statements                                                                                        |  | F-6  | 

-48-

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board
of Directors and Stockholders
Vital Signs, Inc.


We
have audited the accompanying consolidated balance sheets of Vital Signs, Inc.
and Subsidiaries as of September 30, 2007 and 2006 and the related consolidated
statements of income, stockholders equity and other comprehensive income and
cash flows for each of the three years in the period ended September 30, 2007.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vital
Signs, Inc. and Subsidiaries as of September 30, 2007 and 2006, and the results
of their operations and their cash flows for each of the three years in the period
ended September 30, 2007, in conformity with United States generally accepted
accounting principles.

We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the internal
control over financial reporting of Vital Signs, Inc. and Subsidiaries as of
September 30, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated December
14, 2007 expressed an unqualified opinion thereon.


GOLDSTEIN GOLUB
KESSLER LLPNew York, New York

December 14, 2007


F-1

---



VITAL SIGNS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS


|                                                                                                                                  |  |                           |         |      |   |         | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---- | - | ------- | 
|                                                                                                                                  |  | September 30,             |        
|                                                                                                                                  |  |                           |        
|                                                                                                                                  |  | 2007                      |         | 2006 |  
|                                                                                                                                  |  |                           |         |      |  
|                                                                                                                                 
|                                                                                                                                  |  | (In thousands of dollars) |        
|ASSETS                                                                                                                            |  |                           |         |      |   |         | 
|Current Assets:                                                                                                                   |  |                           |         |      |   |         | 
|Cash and cash equivalents (Note 1)                                                                                                |  | $                         | 48,920  |      | $ | 41,242  | 
|Short term investments (Note 1 and 3)                                                                                             |  |                           | 86,671  |      |   | 85,565  | 
|Accounts receivable, less allowances for
 rebates and doubtful accounts of $14,979 and $8,526, respectively (Notes 1,
 18 and 19) |  |                           | 36,915  |      |   | 34,284  | 
|Inventory (Notes 1 and 4)                                                                                                         |  |                           | 19,778  |      |   | 19,006  | 
|Prepaid expenses (Note 5)                                                                                                         |  |                           | 4,140   |      |   | 4,453   | 
|Deferred income taxes (Notes 1 and 17)                                                                                            |  |                           | 192     |      |   |        | 
|Other current assets (Note 6)                                                                                                     |  |                           | 4,650   |      |   | 596     | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Total current assets                                                                                                              |  |                           | 201,266 |      |   | 185,146 | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Property, plant and equipmentnet (Notes 1
 and 7)                                                                                |  |                           | 32,383  |      |   | 33,129  | 
|Goodwillnet (Notes 1 and 2)                                                                                                      |  |                           | 81,984  |      |   | 79,272  | 
|Deferred income taxes (Notes 1 and 17)                                                                                            |  |                           | 4,732   |      |   | 801     | 
|Other assets (Notes 1 and 8)                                                                                                      |  |                           | 10,579  |      |   | 7,506   | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Total Assets                                                                                                                      |  | $                         | 330,944 |      | $ | 305,854 | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                             |  |                           |         |      |   |         | 
|Current Liabilities:                                                                                                              |  |                           |         |      |   |         | 
|Accounts payable                                                                                                                  |  | $                         | 7,120   |      | $ | 5,488   | 
|Current portion of long-term debt (Note 9)                                                                                        |  |                           | 868     |      |   |        | 
|Accrued expenses (Note 10)                                                                                                        |  |                           | 9,453   |      |   | 9,136   | 
|Income taxes payable (Note 17)                                                                                                    |  |                           | 385     |      |   | 731     | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Total current liabilities                                                                                                         |  |                           | 17,826  |      |   | 15,355  | 
|Long-term debt (Note 9)                                                                                                           |  |                           | 486     |      |   |        | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Total liabilities                                                                                                                 |  |                           | 18,312  |      |   | 15,355  | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Non-controlling
    share in subsidiary                                                                                           |  |                           | 6,051   |      |   | 4,686   | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Commitments and contingencies (Notes 2, 14
 and 15)                                                                               |  |                           |         |      |   |         | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Stockholders Equity (Note 16):                                                                                                   |  |                           |         |      |   |         | 
|Common stockno par value; authorized
 40,000,000 shares, issued and outstanding 13,286,050 and 13,218,850,
 respectively         |  |                           | 48,922  |      |   | 44,798  | 
|Accumulated other comprehensive income
 (Note 1)                                                                                  |  |                           | 5,696   |      |   | 3,181   | 
|Retained earnings                                                                                                                 |  |                           | 251,963 |      |   | 237,834 | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Stockholders equity                                                                                                              |  |                           | 306,581 |      |   | 285,813 | 
|                                                                                                                                  |  |                           |         |      |   |         | 
|Total Liabilities and Stockholders
Equity                                                                                        |  | $                         | 330,944 |      | $ | 305,854 | 
|                                                                                                                                  |  |                           |         |      |   |         | 

See Notes to Consolidated Financial
Statements


F-2

---



VITAL SIGNS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME


|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                           |  | For the Year Ended September 30,                   |        
|                                                                                                                           |  |                                                    |        
|                                                                                                                           |  | 2007                                               |         | 2006 |   | 2005    |  
|                                                                                                                           |  |                                                    |         |      |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |  
|                                                                                                                           |  | (In thousands of dollars, exceptper share amounts) |        
|Revenue: (Note 1)                                                                                                          |  |                                                    |         |      |   |         |   |   |         |  
|Net sales                                                                                                                  |  | $                                                  | 172,059 |      | $ | 168,962 |   | $ | 160,581 |  
|Service revenue                                                                                                            |  |                                                    | 33,198  |      |   | 33,162  |   |   | 32,599  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Total revenue                                                                                                              |  |                                                    | 205,257 |      |   | 202,124 |   |   | 193,180 |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Cost of goods sold and services performed:                                                                                 |  |                                                    |         |      |   |         |   |   |         |  
|Cost of goods sold                                                                                                         |  |                                                    | 83,139  |      |   | 81,632  |   |   | 77,381  |  
|Cost of services performed                                                                                                 |  |                                                    | 18,299  |      |   | 18,395  |   |   | 18,126  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Total cost of services performed                                                                                           |  |                                                    | 101,438 |      |   | 100,027 |   |   | 95,507  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Gross profit                                                                                                               |  |                                                    | 103,819 |      |   | 102,097 |   |   | 97,673  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Operating expenses:                                                                                                        |  |                                                    |         |      |   |         |   |   |         |  
|Selling, general and administrative                                                                                        |  |                                                    | 57,135  |      |   | 52,182  |   |   | 51,025  |  
|Research and development                                                                                                   |  |                                                    | 7,511   |      |   | 7,034   |   |   | 7,011   |  
|Other (income) expense, net (Note 12)                                                                                      |  |                                                    | 527     |      |   | 880     |   |   | (78     | )
|Impairment charges (Notes 2 and 13)                                                                                        |  |                                                    | 15,121  |      |   |        |   |   |        |  
|Restructuring charge (Note 11)                                                                                             |  |                                                    |        |      |   |        |   |   | 213     |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Total operating expenses                                                                                                   |  |                                                    | 80,294  |      |   | 60,096  |   |   | 58,171  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Operating income                                                                                                           |  |                                                    | 23,525  |      |   | 42,001  |   |   | 39,502  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Other (income)/expense:                                                                                                    |  |                                                    |         |      |   |         |   |   |         |  
|Interest income                                                                                                            |  |                                                    | (4,909  | )    |   | (3,294  | ) |   | (1,697  | )
|Interest expense                                                                                                           |  |                                                    | 56      |      |   |        |   |   | 36      |  
|Income from unconsolidated investment                                                                                      |  |                                                    | (1,498  | )    |   | (1,728  | ) |   | (832    | )
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    | (6,351  | )    |   | (5,022  | ) |   | (2,493  | )
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Income from continuing operations before provision for income taxes,
 non-controlling interest and discontinued operations |  |                                                    | 29,876  |      |   | 47,023  |   |   | 41,995  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Provision for income taxes (Note 17)                                                                                       |  |                                                    | 9,985   |      |   | 15,828  |   |   | 15,093  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Income from continuing operations before non-controlling
interest                                                          |  |                                                    | 19,891  |      |   | 31,195  |   |   | 26,902  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Non-controlling share in net income of subsidiary                                                                          |  |                                                    | 683     |      |   | 911     |   |   | 602     |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Income from continuing operations                                                                                          |  |                                                    | 19,208  |      |   | 30,284  |   |   | 26,300  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Income/(loss) from discontinued operations:                                                                                |  |                                                    | (49     | )    |   | (167    | ) |   | 89      |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Net income                                                                                                                 |  | $                                                  | 19,159  |      | $ | 30,117  |   | $ | 26,389  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Earnings (loss) per common share:                                                                                          |  |                                                    |         |      |   |         |   |   |         |  
|Basic income per share from continuing operations                                                                          |  | $                                                  | 1.45    |      | $ | 2.34    |   | $ | 2.08    |  
|Discontinued operations                                                                                                    |  |                                                    | (0.01   | )    |   | (0.01   | ) |   | 0.01    |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Basic net earnings per share                                                                                               |  | $                                                  | 1.44    |      | $ | 2.33    |   | $ | 2.09    |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Diluted income per share from continuing
operations                                                                        |  | $                                                  | 1.45    |      | $ | 2.32    |   | $ | 2.06    |  
|Discontinued operations                                                                                                    |  |                                                    | (0.01   | )    |   | (0.01   | ) |   |        |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Diluted net earnings per share                                                                                             |  | $                                                  | 1.44    |      | $ | 2.31    |   | $ | 2.06    |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Basic weighted-average number of shares outstanding                                                                        |  |                                                    | 13,238  |      |   | 12,966  |   |   | 12,616  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Diluted weighted-average number of shares outstanding                                                                      |  |                                                    | 13,277  |      |   | 13,040  |   |   | 12,789  |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  
|Dividends declared and paid per common share                                                                               |  | $                                                  | 0.38    |      | $ | 0.32    |   | $ | 0.27    |  
|                                                                                                                           |  |                                                    |         |      |   |         |   |   |         |  

See Notes to Consolidated Financial Statements


F-3

---



VITAL SIGNS,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY 
AND OTHER COMPREHENSIVE INCOME


|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|------------------------------------------------------------------------ |  | --------------------------------------------------- | ---------- | ------ | ------------------ | ------ | --------------------- | ------------------------------------------------ | --------------------- | - | - | ------- | - | - | ------- | - | - | ------ | -
|                                                                         |  |                                                     |            |        |                    |        |                       | Accumulated
 Other
 Comprehensive
 Income (Loss) |                       |   |   |         |   |   |         |   |   |       
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |  
|                                                                         |  | Common Stock                                        |            |        | Retained
 Earnings |        | Stockholders
 Equity |                                                  | Comprehensive
 Income |  
|                                                                         |  | Shares                                              |            | Amount |                    |        |                       |                                                  |                      
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |       
|                                                                         |  | (In thousands of dollars, except per share amounts) |           
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Balance at September 30, 2004                                            |  | $                                                   | 12,715,243 |        | $                  | 24,279 |                       | $                                                | 3,059                 |   | $ | 188,885 |   | $ | 216,223 |   |   |       |  
|Net income                                                               |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | 26,389  |   |   | 26,389  |   | $ | 26,389 |  
|Repurchase of common stock                                               |  |                                                     | (238,400   | )      |                    | (9,084 | )                     |                                                  |                      |   |   |        |   |   | (9,084  | ) |   |       |  
|Common stock issued under various incentive plans                        |  |                                                     | 116,736    |        |                    | 3,101  |                       |                                                  |                      |   |   |        |   |   | 3,101   |   |   |       |  
|Tax benefit from employees and directors stock option
plans (Note
 16) |  |                                                     |           |        |                    | 536    |                       |                                                  |                      |   |   |        |   |   | 536     |   |   |       |  
|Foreign currency translation gain/(loss)                                 |  |                                                     |           |        |                    |       |                       |                                                  | (1,047                | ) |   |        |   |   | (1,047  | ) |   | (1,047 | )
|Dividends paid ($.27 per share)                                          |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | (3,412  | ) |   | (3,412  | ) |   |       |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Balance at September 30, 2005:                                           |  |                                                     | 12,593,579 |        |                    | 18,832 |                       |                                                  | 2,012                 |   |   | 211,862 |   |   | 232,706 |   |   |       |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Comprehensive income                                                     |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   |        |   |   |        |   | $ | 25,342 |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Net income                                                               |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | 30,117  |   |   | 30,117  |   | $ | 30,117 |  
|Repurchase of common stock                                               |  |                                                     | (5,000     | )      |                    | (217   | )                     |                                                  |                      |   |   |        |   |   | (217    | ) |   |       |  
|Common stock issued under various incentive plans                        |  |                                                     | 196,271    |        |                    | 4,192  |                       |                                                  |                      |   |   |        |   |   | 4,192   |   |   |       |  
|Tax benefit from employees and directors stock option
plans (Note
 16) |  |                                                     |           |        |                    | 2,013  |                       |                                                  |                      |   |   |        |   |   | 2,013   |   |   |       |  
|Foreign currency translation gain/(loss)                                 |  |                                                     |           |        |                    |       |                       |                                                  | 1,169                 |   |   |        |   |   | 1,169   |   |   | 1,169  |  
|Secondary offering                                                       |  |                                                     | 434,000    |        |                    | 18,490 |                       |                                                  |                      |   |   |        |   |   | 18,490  |   |   |       |  
|Dividends paid ($.32 per share)                                          |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | (4,145  | ) |   | (4,145  | ) |   |       |  
|Option compensation expense                                              |  |                                                     |           |        |                    | 1,488  |                       |                                                  |                      |   |   |         |   |   | 1,488   |   |   |       |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Balance at September 30, 2006                                            |  |                                                     | 13,218,850 |        |                    | 44,798 |                       |                                                  | 3,181                 |   |   | 237,834 |   |   | 285,813 |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Comprehensive income                                                     |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   |        |   |   |        |   | $ | 31,286 |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Net income                                                               |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | 19,159  |   |   | 19,159  |   |   | 19,159 |  
|Common stock issued under various incentive plans                        |  |                                                     | 67,200     |        |                    | 1,891  |                       |                                                  |                      |   |   |        |   |   | 1,891   |   |   |       |  
|Tax benefit from employees and directors stock option
plans (Note
 16) |  |                                                     |           |        |                    | 670    |                       |                                                  |                      |   |   |        |   |   | 670     |   |   |       |  
|Foreign currency translation gain/(loss)                                 |  |                                                     |           |        |                    |       |                       |                                                  | 2,515                 |   |   |        |   |   | 2,515   |   |   | 2,515  |  
|Dividends paid ($.38 Per share)                                          |  |                                                     |           |        |                    |       |                       |                                                  |                      |   |   | (5,030  | ) |   | (5,030  | ) |   |       |  
|Option compensation expense                                              |  |                                                     |           |        |                    | 1,563  |                       |                                                  |                      |   |   |        |   |   | 1,563   |   |   |       |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Balance at September 30, 2007                                            |  |                                                     | 13,286,050 |        | $                  | 48,922 |                       | $                                                | 5,696                 |   | $ | 251,963 |   | $ | 306,581 |   |   |        |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  
|Comprehensive income                                                     |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   | $ | 21,674 |  
|                                                                         |  |                                                     |            |        |                    |        |                       |                                                  |                       |   |   |         |   |   |         |   |   |        |  

See Notes to Consolidated Financial
Statements


F-4

---



VITAL SIGNS,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                                                                  |  | For the Year Ended September 30, |        
|                                                                                                                                                  |  |                                  |        
|                                                                                                                                                  |  | 2007                             |         | 2006 |   | 2005    |  
|                                                                                                                                                  |  |                                  |         |      |   |         |  
|                                                                                                                                                  |  | (In thousands of dollars)        |        
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Cash flows from operating activities:                                                                                                             |  |                                  |         |      |   |         |   |   |         |  
|Net income                                                                                                                                        |  | $                                | 19,159  |      | $ | 30,117  |   | $ | 26,389  |  
|Add (income) loss from discontinued
operations                                                                                                    |  |                                  | 49      |      |   | 167     |   |   | (89     | )
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Income from continuing operations                                                                                                                 |  |                                  | 19,208  |      |   | 30,284  |   |   | 26,300  |  
|Adjustments to reconcile income from continuing
operations to net cash
 provided by continuing operations:                                        |  |                                  |         |      |   |         |   |   |         |  
|Depreciation and amortization                                                                                                                     |  |                                  | 6,537   |      |   | 5,817   |   |   | 5,816   |  
|Deferred income taxes                                                                                                                             |  |                                  | (4,460  | )    |   | 519     |   |   | 1,126   |  
|Impairment charge                                                                                                                                 |  |                                  | 15,122  |      |   |        |   |   |        |  
|Non-cash compensation expense                                                                                                                     |  |                                  | 1,563   |      |   | 1,488   |   |   |        |  
|Non-controlling interest in income of subsidiary                                                                                                  |  |                                  | 683     |      |   | 911     |   |   | 602     |  
|Tax benefit for stock options                                                                                                                     |  |                                  |        |      |   |        |   |   | 536     |  
|Changes in operating assets and liabilities: Net of assets acquired
 and liabilities assumed:                                                     |  |                                  |         |      |   |         |   |   |         |  
|(Increase)/in short term investments                                                                                                              |  |                                  | (1,106  | )    |   | (22,210 | ) |   | (2,587  | )
|(Increase)/decrease in accounts receivable                                                                                                        |  |                                  | (479    | )    |   | 417     |   |   | (2,810  | )
|(Increase)/decrease in inventory                                                                                                                  |  |                                  | 438     |      |   | (2,139  | ) |   | 1,063   |  
|(Increase)/in prepaid expenses and other current
assets                                                                                           |  |                                  | (3,546  | )    |   | (1,068  | ) |   | (479    | )
|(Increase)/decrease in other assets                                                                                                               |  |                                  | (2,749  | )    |   | 1,431   |   |   | (2,395  | )
|Increase/(decrease) in accounts payable                                                                                                           |  |                                  | (1,181  | )    |   | (1,659  | ) |   | 1,910   |  
|(Decrease)/increase in accrued expenses                                                                                                           |  |                                  | 846     |      |   | 989     |   |   | (46     | )
|(Decrease) in income taxes payable                                                                                                                |  |                                  | (346    | )    |   | (2,245  | ) |   | (716    | )
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Net cash provided by continuing operations                                                                                                        |  |                                  | 30,530  |      |   | 12,535  |   |   | 28,320  |  
|Net cash provided by (used in) discontinued
operations                                                                                            |  |                                  | (49     | )    |   | (167    | ) |   | 89      |  
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Net cash provided by operating activities                                                                                                         |  |                                  | 30,481  |      |   | 12,368  |   |   | 28,409  |  
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Cash flows from investing activities:                                                                                                             |  |                                  |         |      |   |         |   |   |         |  
|Acquisition of property, plant and
equipment                                                                                                      |  |                                  | (3,450  | )    |   | (7,411  | ) |   | (3,493  | )
|Capitalization of software development
costs                                                                                                      |  |                                  | (1,491  | )    |   | (1,314  | ) |   | (1,880  | )
|Capitalization of patent costs                                                                                                                    |  |                                  | (202    | )    |   | (343    | ) |   | (206    | )
|Acquisition of Do You Snore LLC, Southern Medical
Equipment, Inc and
 Advanced Sleep Technologies of Georgia, Inc, Net of Cash Acquired of $148.8 |  |                                  | (9,785  | )    |   |        |   |   |        |  
|Acquisition
    of Southern Sleep Technologies, LLC and Southern Home
 Respiratory Care LLC                                                       |  |                                  | (2,255  | )    |   |        |   |   |        |  
|Acquisition
    of Enginivity, Net of Cash Acquired $6.4                                                                                          |  |                                  | (5,869  | )    |   |        |   |   |        |  
|Acquisition of Futall AB                                                                                                                          |  |                                  |        |      |   | (2,273  | ) |   |        |  
|Acquisition of Baxter disposable airways product
line                                                                                             |  |                                  |        |      |   |        |   |   | (9,932  | )
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Net cash from investing activities                                                                                                                |  |                                  | (23,052 | )    |   | (11,341 | ) |   | (15,511 | )
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Cash flows from financing activities:                                                                                                             |  |                                  |         |      |   |         |   |   |         |  
|Net proceeds from sale of common stock                                                                                                            |  |                                  |        |      |   | 18,491  |   |   |        |  
|Dividends paid                                                                                                                                    |  |                                  | (5,030  | )    |   | (4,145  | ) |   | (3,412  | )
|Tax benefit on stock options in excess of benefit
provided                                                                                        |  |                                  | 670     |      |   | 2,013   |   |   |        |  
|Proceeds from exercise of stock options                                                                                                           |  |                                  | 1,891   |      |   | 4,192   |   |   | 3,101   |  
|Repurchase of common stock                                                                                                                        |  |                                  |        |      |   | (217    | ) |   | (9,084  | )
|Payments
    on debt                                                                                                                              |  |                                  | (366    | )    |   |        |   |   |        |  
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Net cash (used in) provided by financing
activities                                                                                               |  |                                  | (2,835  | )    |   | 20,334  |   |   | (9,395  | )
|Effect of foreign currency translation                                                                                                            |  |                                  | 3,084   |      |   | 1,469   |   |   | (791    | )
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Net increase in cash and cash equivalents                                                                                                         |  |                                  | 7,678   |      |   | 22,830  |   |   | 2,712   |  
|Cash and cash equivalents at beginning of year                                                                                                    |  |                                  | 41,242  |      |   | 18,412  |   |   | 15,700  |  
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                                                                                          |  | $                                | 48,920  |      | $ | 41,242  |   | $ | 18,412  |  
|                                                                                                                                                  |  |                                  |         |      |   |         |   |   |         |  
|Supplemental disclosures of cash flow information:                                                                                                |  |                                  |         |      |   |         |   |   |         |  
|Cash paid during the year for:                                                                                                                    |  |                                  |         |      |   |         |   |   |         |  
|Interest                                                                                                                                          |  | $                                | 56      |      | $ |        |   | $ | 36      |  
|Income taxes                                                                                                                                      |  |                                  | 11,169  |      |   | 15,127  |   |   | 12,457  |  
|Supplemental schedule of non-cash financing
activities:                                                                                           |  |                                  |         |      |   |         |   |   |         |  
|Fair value of common stock received as payment for
exercise of stock
 options                                                                     |  |                                  |        |      |   | 1,586   |   |   |        |  

See Notes to Consolidated Financial Statements


F-5

---



Notes to the Consolidated
Financial Statements


Note 1Summary
of Significant Accounting Policies and Principal Business Activities

Business Activities

Vital
Signs, Inc. (VSI) and its subsidiaries (collectively, the Company) design,
manufacture and market single-patient-use products for the anesthesia,
respiratory/critical care, sleep/personal ventilation and interventional
cardiology/radiology markets. In addition, the Company has subsidiaries that
provide services, one for the diagnosis of sleep disorders through sleep
clinics, and the other for pharmaceutical technology services.


Principles of Consolidation

The
consolidated financial statements include the accounts of VSI and its
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. For comparability, certain 2006 and 2005 amounts
in the consolidated financial statements have been reclassified, where
appropriate, to conform to the financial statement presentation used in 2007.


Accounts Receivable

Accounts
receivable are reported at their outstanding unpaid principal balances reduced
by an allowance for rebates and an allowance for doubtful accounts. The Company
records an allowance for rebates on sales to distributors, which is the
difference between the established distributor price and the lower price to
which the end-user is entitled, when shipment is made to the end-user. In order
to properly reflect the Companys sales to distributors, the Company records
the gross sale (at the Companys established distributor price), less the
amount of the expected rebate, to arrive at the net sale. This net sale is the
amount that the Company expects to receive in cash from the distributor on the
sale. The Company also records an allowance for doubtful accounts based on
certain percentages of aged receivables and historical payment experience. The
Company writes off accounts receivable against the allowance when a balance is
determined to be uncollectible.


Inventory

Inventory,
net of allowances for obsolete and slow-moving goods, is stated at the lower of
cost (first-in, first-out method) or market.

Depreciation

Depreciation
and amortization of property, plant and equipment is provided for by the
straight-line method over the estimated useful lives of the related assets.

Income Taxes

Income
taxes are based upon amounts included in the consolidated statement of income.
Deferred income taxes represent the tax effect of temporary differences between
the basis of assets and liabilities for income tax and financial reporting
purposes.


Revenue Recognition

For
product sales to all customers except for certain domestic distributors (where
revenue, net of allowances, is recognized upon delivery of goods to that
customer), revenue, net of allowances, is recognized upon shipment to the
customer, when title passes. The Company establishes allowances for rebates and
sales returns. Substantially all of the Companys sales returns relate to
shipping errors or damaged goods. For service revenue, revenue is recorded when
the service is performed.

The Companys
revenues in the anesthesia and respiratory/critical care segments include sales
made to distributors. During the 2007, 2006, and 2005 fiscal years, these sales
accounted for approximately 28.9%, 28.3%, and 26.4%, respectively, of the total
revenue of the Company. Price rebates are available to the distributor based
upon the difference between the established price (distributor list) and the
lower price that the distributor is entitled to after selling the goods to the
end-user hospital (distributor final). The Company estimates and records the
applicable rebates that have been or are expected to be granted or made for


F-6

---



products sold
during the period. These amounts are deducted from sales for that period. (See
Note 18)


Shipping and Handling

Costs
incurred for shipping and handling fees are included in selling, general and
administrative expenses and amounted to $6,137,000, $6,863,000, and $5,128,000
for the years ended September 30, 2007, 2006, and 2005, respectively.


Goodwill and Other Intangibles

The
Company reviews the carrying value of long-lived assets, including goodwill, on
a periodic basis, or whenever events or changes in circumstances indicate that
the amounts may not be recoverable. If the events or circumstances indicate
that the carrying amount of an asset may not be recoverable, the Company
estimates the future undiscounted cash flows expected to result from the use of
the asset and its eventual disposition. An impairment loss will be recognized
if the carrying value of the assets exceeds the estimated future undiscounted
cash flows of those assets.

The
Company performs an annual impairment analysis based upon discounted cash flows
to assess the recoverability of the goodwill, in accordance with the provisions
of SFAS No. 142. The Company completed this annual impairment test during the
period ended March 31, 2007 and found no impairment at the time.

Subsequent
to the impairment testing performed March 31, 2007, it was determined that the
carrying value of the assets associated with the Companys pharmaceutical
technology services subsidiary, Stelex, exceeded the estimated future undiscounted
cash flows of those assets.  Subsequent to the April 2, 2007 acquisition of Do
You Snore, LLC, the Company determined that the acquisitions long-lived assets
were impaired. (See Note 13)


Goodwill
consists of the following:

|                                                                                                                           |  |                                 |         |      |   |        | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------ | 
|                                                                                                                           |  | For the Year EndedSeptember 30, |        
|                                                                                                                           |  |                                 |        
|                                                                                                                           |  | 2007                            |         | 2006 |  
|                                                                                                                           |  |                                 |         |      |  
|                                                                                                                           |  | (In thousands of dollars)       |        
|Beginning
  balance:                                                                                                       |  | $                               | 79,272  |      | $ | 77,167 | 
|Goodwill
  resulting from an increase in non-controlling interest in SSA                                                   |  |                                 | 682     |      |   |       | 
|Goodwill
  acquired: Futall                                                                                                |  |                                 |        |      |   | 2,105  | 
|Goodwill
  acquired: Enginivity                                                                                            |  |                                 | 5,655   |      |   |       | 
|Goodwill
  acquired: Do You Snore, LLC & Advanced Sleep Technologies of Georgia, Inc
  and Southern Medical Equipment, Inc |  |                                 | 7,758   |      |   |       | 
|Goodwill
  acquired: Southern Sleep Technologies, LLC and Southern Home Respiratory
  Care, LLC                            |  |                                 | 1,798   |      |   |       | 
|Impairment
  of Stelex Goodwill                                                                                            |  |                                 | (13,181 | )    |   |       | 
|                                                                                                                           |  |                                 |         |      |   |        | 
|Ending
  balance                                                                                                           |  | $                               | 81,984  |      | $ | 79,272 | 
|                                                                                                                           |  |                                 |         |      |   |        | 

Other
Intangibles consists of the following and are included in Other Assets on the
balance sheet:

|                                                                           |  |                                     |     |      |   |   | 
|-------------------------------------------------------------------------- |  | ----------------------------------- | --- | ---- | - | - | 
|                                                                           |  | For the Year Ended 
  September 30, |    
|                                                                           |  |                                     |    
|                                                                           |  | 2007                                |     | 2006 |  
|                                                                           |  |                                     |     |      |  
|                                                                           |  | (In thousands of dollars)           |    
|Trademark,
  provider numbers, and customer lists:                         |  |                                     |     |      |   |   | 
|Southern Sleep Technologies, LLC and
  Southern Home Respiratory Care, LLC |  | $                                   | 200 |      | $ | — | 
|Amortization                                                               |  |                                     | (3  | )    |   | — | 
|                                                                           |  |                                     |     |      |   |   | 
|Ending
  Balance                                                           |  | $                                   | 197 |      | $ | 0 | 
|                                                                           |  |                                     |     |      |   |   | 

F-7

---



Cash and Cash Equivalents

The
Company considers all highly-liquid investments with a maturity of three months
or less when purchased to be cash equivalents. The Company believes it is not
exposed to any significant credit risk with respect to its highly-liquid
investments in money market securities and its commercial banking facilities.

Short Term Investments

Management
determines the appropriate classification of securities at the time of purchase
pursuant to the Vital Signs, Inc. Investment Policy.

During
    fiscal 2006, the
Company reclassified its auction rate securities (ARS) on its balance sheet
in accordance with GAAP. The Company believes that the investments in ARS are:
short term and highly liquid, readily convertible to known amounts of cash, and
present an insignificant risk of change in value due to market changes in interest
rates.


Net Income per Share of Common Stock

Basic
net income per common share is computed using the weighted-average number of
shares outstanding. Diluted net income per common share is computed using the
weighted-average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options to purchase common stock.

The
following table sets forth the computation of basic and diluted net income per
share:

|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|------------------------------------------------------ |  | ----------------------------------------------------- | ------ | ---- | - | ------ | - | - | ------ | 
|                                                       |  | For the Year Ended September 30,                      |       
|                                                       |  |                                                       |       
|                                                       |  | 2007                                                  |        | 2006 |   | 2005   |  
|                                                       |  |                                                       |        |      |   |        |  
|                                                       |  | (In thousands of dollars, except
  per share amounts) |       
|Income
  applicable to common shares:                  |  |                                                       |        |      |   |        |   |   |        | 
|Income from continuing operations                      |  | $                                                     | 19,208 |      | $ | 30,284 |   | $ | 26,300 | 
|Income/(loss) from discontinued
operations             |  |                                                       | (49    | )    |   | (167   | ) |   | 89     | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Net income                                             |  | $                                                     | 19,159 |      | $ | 30,117 |   | $ | 26,389 | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Weighted-average
  shares outstanding:                 |  |                                                       |        |      |   |        |   |   |        | 
|Basic weighted-average common shares
  outstanding     |  |                                                       | 13,238 |      |   | 12,966 |   |   | 12,616 | 
|Dilutive effect of employee stock options              |  |                                                       | 39     |      |   | 74     |   |   | 173    | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Diluted weighted-average outstanding
shares            |  |                                                       | 13,277 |      |   | 13,040 |   |   | 12,789 | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Earnings/(loss)
  per common share:                    |  |                                                       |        |      |   |        |   |   |        | 
|Basic                                                  |  |                                                       |        |      |   |        |   |   |        | 
|Income per share from continuing
operations            |  | $                                                     | 1.45   |      | $ | 2.34   |   | $ | 2.08   | 
|Income/(loss) per share from discontinued
  operations |  |                                                       | (0.01  | )    |   | (0.01  | ) |   | 0.01   | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Net earnings                                           |  | $                                                     | 1.44   |      | $ | 2.33   |   | $ | 2.09   | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Diluted                                                |  |                                                       |        |      |   |        |   |   |        | 
|Income per share from continuing
operations            |  | $                                                     | 1.45   |      | $ | 2.32   |   | $ | 2.06   | 
|Income/(loss) per share from discontinued
  operations |  |                                                       | (0.01  | )    |   | (0.01  | ) |   | 0.00   | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 
|Net earnings                                           |  | $                                                     | 1.44   |      | $ | 2.31   |   | $ | 2.06   | 
|                                                       |  |                                                       |        |      |   |        |   |   |        | 

Capitalized Software

SFAS
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed, requires capitalization of software development
costs incurred subsequent to the establishment of technological feasibility and
prior to the availability of the product for general release to customers. Software
development costs are included in other assets. Amortization of capitalized
software costs begins when the product is available for general release to
customers and is computed as the greater of: (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future
gross revenues for that product or (b) the straight-line method over the
estimated economic life (generally three years) and charged to cost of goods
sold.


F-8

---



Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts in the financial statements. Actual results could
differ from those estimates.

Accounting for Stock-Based Compensation

Effective
October 1, 2005, the Company began recording compensation expense associated
with stock options in accordance with SFAS No. 123(R), Share-Based Payment.
Prior to October 1, 2005, the Company accounted for stock-based compensation
related to stock options under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25; therefore, the Company measured
compensation expense for its stock option plans using the intrinsic value
method, that is, as the excess, if any, of the fair market value of the
Companys stock at the grant date over the amount required to be paid to
acquire the stock, and provided the disclosures required by SFAS Nos. 123 and
148. The Company has adopted the modified prospective transition method
provided under SFAS No. 123(R), and as a result, has not retroactively adjusted
results from prior periods. Under this transition method, compensation expense
associated with stock options recognized in fiscal years 2007 and 2006
includes: 1) expense related to the remaining unvested portion of all stock
option awards granted prior to October 1, 2005, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123 and
2) expense related to all stock option awards granted subsequent to October 1,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). (See Note 16)


Recent Accounting Pronouncements

In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48), which provides criteria
for the recognition, measurement, presentation, and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be recognized only if
it is more likely than not that the position is sustainable based on its
technical merits. The FIN 48 is effective for fiscal years beginning after
December 15, 2006, which is October 1, 2007 for the Company. Preliminary
estimates are that the Company may recognize liability of $2.0 - $3.0 million,
with the offset being to the opening balance of retained earnings.

In
February 2007, the Financial Accounting Standards Board released FAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities, which takes
effect for the first fiscal year beginning after November 15, 2007. Under FAS
159, entities are provided with an option to report selected financial assets
and liabilities at fair value. The standard permits an entity to elect the fair
value option on an instrument-by-instrument basis. In addition, FAS 159
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities.


In
December 2007, the Financial Accounting Standards Board released two new rules,
FAS 141(R), Business Combinations (effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008), and FAS 160, Non-controlling
Interests in Consolidated Financial Statements (effective for annual periods
beginning December 15, 2008). These new rules are products of a joint project
    between the FASB and the International Accounting Standards Board and continue
the movement toward the greater use of fair values in financial reporting. FAS
141(R) will significantly change how future business acquisitions
are accounted for and will impact financial statements both on the acquisition
date and in subsequent periods. FAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as non-controlling interests
and classified as a component of equity.


The
Company does not believe that any other recently issued but not yet effective
accounting standards will have a material effect on the Companys consolidated
financial position or results of operations.

F-9

---



Translation of Foreign Currency Financial
Statements

The
financial position and results of operations of the Companys foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at current exchange
rates, and related revenue and expenses are translated at average monthly
exchange rates. The aggregate effect of translation adjustments is reflected as
a separate component of stockholders equity (accumulated other comprehensive
income/(loss)) until there is a sale or liquidation of the underlying foreign
subsidiary.

Note 2Acquisitions/Dispositions

Do You Snore, LLC, Southern Medical
Equipment, Inc. and Advanced Sleep Technologies of Georgia, Inc.

On
April 2, 2007 the Companys Sleep Services of America subsidiary acquired the
assets of Do You Snore, LLC, Southern Medical Equipment, Inc. and Advanced
Sleep Technologies of Georgia, Inc. each of which is located in Atlanta,
Georgia. Do You Snore, LLC and Advanced Sleep Technologies of Georgia Inc.
primarily provide sleep diagnostic services in both free standing and hospital
owned sleep laboratories, and Southern Medical Equipment is a provider
primarily of CPAP equipment to sleep apnea patients. These acquisitions allow
Sleep Services of America to expand its geographic reach along the South East
Coast, as well as expand its strategy of providing the patient with the
complete range of sleep services.


The
aggregate cash purchase was comprised of (i) an initial payment of $9.8 million
with an additional $2.0 million payable upon collection of accounts receivable
and (ii) a 10% earnout over the next three years. The assets acquired,
consisting primarily of accounts receivable, inventory and fixed assets,
amounted to $2.5 million and the liabilities assumed amounted to approximately
$1.6 million, consisting principally of a $1.1 million note payable for leased
equipment and inventory. The excess of the purchase price over the fair value
of the net assets acquired, which has been preliminarily allocated to goodwill
and may be subject to adjustment, was approximately $7.8 million and is
included in the sleep disorder segment. Goodwill was recognized in accordance
with Statement of Financial Standards No. 142. Since the acquisition of Do You
Snore, LLC and its related operations, are immaterial, no pro forma information
has been presented.


As
a result of the acquisition, the Companys ownership in Sleep Services of
America increased from 70% to 73%, with John Hopkins Health System Corporation
owning 26% and 1% owned by various other investors.


Upon
the completion of the valuation of the assets acquired, the Company determined
that Sleep Services of America had substantial claims against the sellers. The
results of this valuation are reflected as a long-lived asset impairment of
$1.9 million, in accordance with SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets. On December 10, 2007, Sleep Services
of America initiated a lawsuit against Renee McPhee, Randall Lenz, and Jeffrey
Kunkes for breach of contract, fraud and other causes of action related to the
sale of Do You Snore, LLC, Southern Medical Equipment, Inc. and Advanced Sleep
Technologies of Georgia, Inc.


The
results of operations of Do You Snore, LLC, Southern Medical Equipment, Inc.
and Advanced Sleep Technologies of Georgia, Inc. have been included in the
sleep disorder segment since April 2, 2007.


Southern Sleep Technologies, LLC and Southern
Home Respiratory Care, LLC

On
June 28, 2007, the Companys Sleep Services of America subsidiary acquired
the assets of Southern Sleep Technologies, LLC and Southern Home Respiratory
Care, LLC. Southern Sleep Technologies, LLC primarily provides sleep diagnostic
services in both free standing and hospital owned sleep laboratories, and
Southern Home Respiratory Care, LLC is a provider primarily of CPAP equipment
to sleep apnea patients. The aggregate cash purchase price is comprised of (i)
an initial payment of $2.3 million with an additional $0.8 million payable upon
the collection of accounts receivable and, (ii) a 10% earnout over the next
three years. The assets acquired, consisting primarily of accounts receivable,
amounted to $0.8 million and the liabilities assumed amounted to approximately
$0.4 million, consisting principally of
accounts payable and a $0.2 million note payable for leased equipment. The
excess


F-10

---



of the purchase price over the fair value of the net assets
    acquired, which has been preliminarily allocated to goodwill, was approximately
    $1.8 million and is included in the sleep disorder segment. Goodwill was
    recognized in accordance with Statement of Financial Standards No. 142. Since
    the acquisition of Southern Sleep Technologies, LLC, and its related operations,
are immaterial, no pro forma information has been presented.


As
a result of the acquisition, the Companys ownership in Sleep Services of
America increased from 73% to 75%, with John Hopkins Health System Corporation
owning 24% and 1% owned by various other investors.


The
results of operations of Southern Sleep Technologies, LLC and Southern Home
Respiratory Care, LLC have been included in the sleep disorder segment since
June 28, 2007.

Enginivity, LLC


On
August 15, 2007, the Company acquired the assets of Enginivity, LLC and its
enFlow® IV fluid and blood warmer patented technology. The aggregate cash
purchase price is comprised of an initial payment of $5.9 million.The excess
of the purchase price over the fair value of the net assets acquired, which has
been preliminarily allocated to goodwill, was approximately $5.7 million. Goodwill
was recognized in accordance with Statement of Financial Standards No. 142. Since
the acquisition of Enginivity, LLC and its related operations, are immaterial,
no pro forma information has been presented.


The
results of operations of Enginivity, LLC, have been included in the
respiratory/critical care segment since August 15, 2007.


Futall AB


On
November 14, 2005, the Company acquired the assets of Futall AB, a Swedish
company holding the rights to certain carbon dioxide detection technology
similar to the type used by the Company in its C-CO2 product. The assets
consisted of intellectual property rights including patents and trade secrets,
manufacturing equipment, and office equipment. The purchase price is comprised
of (i) an initial payment of $2.0 million, and (ii) a royalty on future sales.
Royalties of $0.2 million have been earned by the selling shareholders of
Futall and charged to operations. The transaction includes the acquisition of certain
patents valued at approximately $0.2 million. The excess of the purchase price
over the fair value of the net assets acquired, to goodwill, was approximately
$2.1 million and is included in the anesthesia and respiratory/critical care
segments. Goodwill was recognized in accordance with Statement of Financial
Standards No. 142. Since the acquisition of Futall AB, and its related
operations, are immaterial, no pro forma information has been presented.


Baxter disposable airway management product


On
March 2, 2005, the Company acquired a disposable airway management device
business from a subsidiary of Baxter International, Inc. to improve the
Companys market share in the anesthesia segment. The purchase price for
the acquisition, including related costs, was approximately $10.1 million. The
transaction includes the acquisition of certain manufacturing assets related
to the business valued at approximately $1.3 million, as well as inventory
including anesthesia circuits, face masks, heat and moisture exchanger filters
and other associated anesthesia components valued at approximately $1.2
million. The excess of the purchase price over the fair value of the net assets
acquired, which has been allocated to goodwill, was approximately $7.7 million,
and is included in the anesthesia segment. Goodwill was recognized in
accordance with Statement of Financial Standards No. 142. Goodwill is
deductible for income tax purposes. The results of operations of this business,
including revenues of approximately $4.5 million, are included in the Companys
results of operations from March 2, 2005.


The
following summary, pro forma, unaudited data of the Company reflects the
acquisition of the


F-11

---



Baxter
disposable airway management device business as if the acquisition had occurred
on October 1, 2004.


|                                                  |  |                                  |   |         |  | 
|------------------------------------------------- |  | -------------------------------- | - | ------- |  | 
|                                                  |  |                                  |  
|In thousands of dollars, except per share amounts |  | Fiscal Year
 Ended September 30, |  
|                                                  |  |                                  |  
|                                                  |  | 2005                             |  
|                                                  |  |                                  |  
|Net sales                                         |  |                                  | $ | 199,118 |  | 
|                                                  |  |                                  |   |         |  | 
|Net income                                        |  |                                  |   | 27,391  |  | 
|                                                  |  |                                  |   |         |  | 
|Basic net
 income per common share                |  |                                  | $ | 2.17    |  | 
|                                                  |  |                                  |   |         |  | 
|Diluted net
 income per common share              |  |                                  | $ | 2.14    |  | 

Such pro forma
data is not necessarily indicative of future results of operations.


Vital Pharma, Inc.Discontinued Operations

In
September 2002, the Company adopted a formal plan to sell its Vital Pharma,
Inc. subsidiary, and as a result, classified the Vital Pharma business as a
discontinued operation. Vital Pharma, a fully integrated contract manufacturer
that utilizes blow-fill-seal technology, represented a product line that was
outside the Companys core business. The results of the discontinued operations
have been reported separately as discontinued operations in the consolidated
statement of income in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.


On
October 30, 2003, the Company sold its Vital Pharma subsidiary to ProClinical,
Inc. The Company received $0.5 million in cash and a three-year note receivable
from ProClinical for $2.0 million. The note accrues interest at 8%, 10%,
    and 12% in the first, second and third years of the note, respectively. Interest
    is payable quarterly. ProClinical has defaulted on the payment of the note
    and the Company has brought foreclosure action in connection with its security
interests on the assets sold to ProClinical. No gain or further loss was
recorded on the sale.

Vital
Pharma had been a defendant in 59 separate lawsuits in connection with its
packaging of a certain product for Lifecore Biomedical, Inc. (See Note 15)


Summarized
selected financial information for the discontinued operations is as follows:

| |                                             |  |                                  |     |      |   |      |   |   |     |  
| | ------------------------------------------- |  | -------------------------------- | --- | ---- | - | ---- | - | - | --- | -
| |                                             |  | For the Year Ended September 30, |    
| |                                             |  |                                  |    
| |                                             |  | 2007                             |     | 2006 |   | 2005 |  
| |                                             |  |                                  |     |      |   |      |  
| |                                             |  | (In thousands of dollars)        |    
| | Revenue                                     |  | $                                |    |      | $ |     |   | $ |    |  
| |                                             |  |                                  |     |      |   |      |   |   |     |  
| | Income/(loss)
 before income tax benefit    |  |                                  | (74 | )    |   | (253 | ) |   | 135 |  
| | Income tax
 (provision) benefit             |  |                                  | 25  |      |   | 86   |   |   | (46 | )
| |                                             |  |                                  |     |      |   |      |   |   |     |  
| | Income/(loss)
 from discontinued operations |  | $                                | (49 | )    | $ | (167 | ) | $ | 89  |  
| |                                             |  |                                  |     |      |   |      |   |   |     |  

There
were no assets or liabilities attributable to discontinued operations as of
September 30, 2007 and 2006 on the consolidated balance sheet.


Cash
flows of the discontinued operations consisted of the following for the years
ended September 30, 2007, 2006, and 2005:

| |                                                         |  |                           |     |      |   |      |   |   |    | 
| | ------------------------------------------------------- |  | ------------------------- | --- | ---- | - | ---- | - | - | -- | 
| |                                                         |  | 2007                      |     | 2006 |   | 2005 |  
| |                                                         |  |                           |     |      |   |      |  
| |                                                         |  | (In thousands of dollars) |    
| | Income/(loss)
 from discontinued operations             |  | $                         | (49 | )    | $ | (167 | ) | $ | 89 | 
| |                                                         |  |                           |     |      |   |      |   |   |    | 
| | Net cash
 provided by/(used in) discontinued operations |  | $                         | (49 | )    | $ | (167 | ) | $ | 89 | 
| |                                                         |  |                           |     |      |   |      |   |   |    | 

F-12

---



Note 3Short-Term
Investments

The
following is a summary of Trading Securities:

| |                              |  |                           |        |      |   |        | 
| | ---------------------------- |  | ------------------------- | ------ | ---- | - | ------ | 
| |                              |  | September 30,             |       
| |                              |  |                           |       
| |                              |  | 2007                      |        | 2006 |  
| |                              |  |                           |        |      |  
| |                              |  | (In thousands of dollars) |       
| | Trading
 Securities          |  | $                         | 86,671 |      | $ | 85,565 | 
| |                              |  |                           |        |      |   |        | 
| | Total
 Short-Term Investment |  | $                         | 86,671 |      | $ | 85,565 | 
| |                              |  |                           |        |      |   |        | 

See
Note 1, Summary of Significant Accounting Policies and Principal Business
Activities.


Note 4Inventory

Inventory
consists of the following:

| |                                   |  |                           |        |      |   |        |  
| | --------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
| |                                   |  | September 30,             |       
| |                                   |  |                           |       
| |                                   |  | 2007                      |        | 2006 |  
| |                                   |  |                           |        |      |  
| |                                   |  | (In thousands of dollars) |       
| | Raw
 materials                    |  | $                         | 13,177 |      | $ | 13,045 |  
| | Finished
 goods                   |  |                           | 7,230  |      |   | 6,456  |  
| | Allowance
 for obsolete inventory |  |                           | (629   | )    |   | (495   | )
| |                                   |  |                           |        |      |   |        |  
| | Inventory                         |  | $                         | 19,778 |      | $ | 19,006 |  
| |                                   |  |                           |        |      |   |        |  

Allowance
for obsolete and slow moving goods at September 30, 2007 and 2006 were $629,000
and $495,000, respectively. Provisions charged to expense were $231,000,
$168,000, and $127,000 for fiscal 2007, 2006, and 2005, respectively. Amounts
written off against the allowance were $97,000, $409,000, and $542,000 for
fiscal 2007, 2006, and 2005, respectively.

Note 5Prepaid
Expenses

Prepaid
expenses consist of the following:

| |                       |  |                           |       |      |   |       | 
| | --------------------- |  | ------------------------- | ----- | ---- | - | ----- | 
| |                       |  | September 30,             |      
| |                       |  |                           |      
| |                       |  | 2007                      |       | 2006 |  
| |                       |  |                           |       |      |  
| |                       |  | (In thousands of dollars) |      
| | Prepaid
 Income taxes |  | $                         | 1,436 |      | $ | 1,362 | 
| | Prepaid taxes other   |  |                           | 215   |      |   | 527   | 
| | Prepaid
 insurance    |  |                           | 818   |      |   | 1,515 | 
| | Other                 |  |                           | 1,671 |      |   | 1,049 | 
| |                       |  |                           |       |      |   |       | 
| |                       |  | $                         | 4,140 |      | $ | 4,453 | 
| |                       |  |                           |       |      |   |       | 

Note 6Other
Current Assets

Other
current assets consist of the following:

| |                        |  |                           |       |      |   |     | 
| | ---------------------- |  | ------------------------- | ----- | ---- | - | --- | 
| |                        |  | September 30,             |      
| |                        |  |                           |      
| |                        |  | 2007                      |       | 2006 |  
| |                        |  |                           |       |      |  
| |                        |  | (In thousands of dollars) |      
| | Non-trade
 receivables |  | $                         | 456   |      | $ | 286 | 
| | Restricted
 cash       |  |                           | 2,800 |      |   |    | 
| | Other                  |  |                           | 1,394 |      |   | 310 | 
| |                        |  |                           |       |      |   |     | 
| |                        |  | $                         | 4,650 |      | $ | 596 | 
| |                        |  |                           |       |      |   |     | 

F-13

---



Note 7Property,
Plant and Equipment

Property,
plant and equipment, at cost, consists of the following:

| |                                                 |  |                           |         |           |   |             |   |  |                | 
| | ----------------------------------------------- |  | ------------------------- | ------- | --------- | - | ----------- | - |  | -------------- | 
| |                                                 |  | September 30,             |         |           |  
| |                                                 |  |                           |         | Estimated |  
| |                                                 |  | 2007                      |         | 2006      |   | Useful Life |  
| |                                                 |  |                           |         |           |   |             |  
| |                                                 |  | (In thousands of dollars) |         |           |   |            
| |                                                 |  |                           |         |           |   |            
| | Land                                            |  | $                         | 2,395   |           | $ | 2,364       |   |  |                | 
| | Building and
 building improvements             |  |                           | 19,363  |           |   | 18,937      |   |  | 30 to 40 years | 
| | Equipment
 and molds                            |  |                           | 35,417  |           |   | 33,394      |   |  | 5 to 20 years  | 
| | Fixtures and
 office equipment                  |  |                           | 5,180   |           |   | 4,920       |   |  | 5 to 15 years  | 
| | Transportation
 equipment                       |  |                           | 140     |           |   | 143         |   |  | 5 years        | 
| |                                                 |  |                           |         |           |   |             |   |  |                | 
| |                                                 |  |                           | 62,495  |           |   | 59,758      |   |  |                | 
| | Less
 accumulated depreciation and amortization |  |                           | (30,112 | )         |   | (26,629     | ) |  |                | 
| |                                                 |  |                           |         |           |   |             |   |  |                | 
| |                                                 |  | $                         | 32,383  |           | $ | 33,129      |   |  |                | 
| |                                                 |  |                           |         |           |   |             |   |  |                | 

Depreciation
    expense for fiscal year end 2007 and 2006 was $5.3 million and $4.6 million,
    respectively.

Note 8Other
  Assets

Other
assets consist of the following:

| |                          |  |                           |        |      |   |       | 
| | ------------------------ |  | ------------------------- | ------ | ---- | - | ----- | 
| |                          |  | September 30,             |       
| |                          |  |                           |       
| |                          |  | 2007                      |        | 2006 |  
| |                          |  |                           |        |      |  
| |                          |  | (In thousands of dollars) |       
| |                          |  |                           |       
| | Deposits on
 equipment   |  | $                         | 3,872  |      | $ | 1,586 | 
| | Capitalized
 software    |  |                           | 3,305  |      |   | 3,262 | 
| | Prepaid
 royalties       |  |                           | 391    |      |   | 470   | 
| | Equity
 interest at cost |  |                           | 432    |      |   | 432   | 
| | Other                    |  |                           | 2,579  |      |   | 1,756 | 
| |                          |  |                           |        |      |   |       | 
| |                          |  | $                         | 10,579 |      | $ | 7,506 | 
| |                          |  |                           |        |      |   |       | 

Capitalized
software, inclusive primarily of personnel and consulting costs, consists of
the following:

| |                                        |  |                           |        |      |   |        |  
| | -------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
| |                                        |  | September 30,             |       
| |                                        |  |                           |       
| |                                        |  | 2007                      |        | 2006 |  
| |                                        |  |                           |        |      |  
| |                                        |  | (In thousands of dollars) |       
| |                                        |  |                           |       
| | Software
 development costsStelex Inc |  | $                         | 156    |      | $ |       |  
| | Software
 development costsVital Path |  |                           | 1,626  |      |   | 1,452  |  
| | Software
 development costsBreas SA   |  |                           | 5,340  |      |   | 4,677  |  
| | Accumulated
 amortization              |  |                           | (3,817 | )    |   | (2,867 | )
| |                                        |  |                           |        |      |   |        |  
| |                                        |  | $                         | 3,305  |      | $ | 3,262  |  
| |                                        |  |                           |        |      |   |        |  

For
fiscal years 2007, 2006, and 2005 amortization was $1,447,000, $1,074,000, and
$1,429,000, respectively.

Note 9Long-Term Debt

Long
term debt consists of the following:


| |                                                |  |                           |       |      |   |   | 
| | ---------------------------------------------- |  | ------------------------- | ----- | ---- | - | - | 
| |                                                |  | September 30,             |      
| |                                                |  |                           |      
| |                                                |  | 2007                      |       | 2006 |  
| |                                                |  |                           |       |      |  
| |                                                |  | (In thousands of dollars) |      
| |                                                |  |                           |      
| | Inventory
 financing assumed with acquisitions |  | $                         | 1,354 |      | $ |  | 
| | Less current
 portion                          |  |                           | (868  | )    |   |  | 
| |                                                |  |                           |       |      |   |   | 
| |                                                |  | $                         | 486   |      | $ |  | 
| |                                                |  |                           |       |      |   |   | 

F-14

---



Note 10Accrued
Expenses

Accrued
expenses consist of the following:

| |                                   |  |                             |       |      |   |       | 
| | --------------------------------- |  | --------------------------- | ----- | ---- | - | ----- | 
| |                                   |  | September 30,               |      
| |                                   |  |                             |      
| |                                   |  | 2007                        |       | 2006 |  
| |                                   |  |                             |       |      |  
| |                                   |  | (In thousands of 
 dollars) |      
| |                                   |  |                             |       |      |   |       | 
| | Payroll and
 related costs        |  | $                           | 3,051 |      | $ | 2,681 | 
| | Professional
 fees                |  |                             | 1,715 |      |   | 1,857 | 
| | Sales
 expenses                   |  |                             | 72    |      |   | 40    | 
| | Other taxes
 payable              |  |                             | 169   |      |   | 147   | 
| | Deferred tax
 liability (Note 17) |  |                             | 20    |      |   | 357   | 
| | Other                             |  |                             | 4,426 |      |   | 4,054 | 
| |                                   |  |                             |       |      |   |       | 
| |                                   |  | $                           | 9,453 |      | $ | 9,136 | 
| |                                   |  |                             |       |      |   |       | 

Note 11Restructuring
Expense

Restructuring
expense consists of the following:

| |                              |  |                                 |   |      |   |      |  |   |     | 
| | ---------------------------- |  | ------------------------------- | - | ---- | - | ---- |  | - | --- | 
| |                              |  | For the Year EndedSeptember 30, |  
| |                              |  |                                 |  
| |                              |  | 2007                            |   | 2006 |   | 2005 | 
| |                              |  |                                 |   |      |   |      | 
| |                              |  | (In thousands of dollars)       |  
| | Closing of
 California plant |  | $                               |  |      | $ |     |  | $ | 213 | 
| |                              |  |                                 |   |      |   |      |  |   |     | 
| |                              |  | $                               |  |      | $ |     |  | $ | 213 | 
| |                              |  |                                 |   |      |   |      |  |   |     | 

Note 12Other Expense/(Income)Net


Other
operating expense/(income)net consists of the following:


| |                                        |  |                                 |     |      |   |      |  |   |      |  
| | -------------------------------------- |  | ------------------------------- | --- | ---- | - | ---- |  | - | ---- | -
| |                                        |  | For the Year EndedSeptember 30, |    
| |                                        |  |                                 |    
| |                                        |  | 2007                            |     | 2006 |   | 2005 | 
| |                                        |  |                                 |     |      |   |      | 
| |                                        |  | (In thousands of dollars)       |    
| | Legal                                  |  | $                               | 410 |      | $ | 296  |  | $ |     |  
| | Charitable
 contributions of inventory |  |                                 | 84  |      |   | 113  |  |   | 73   |  
| | Acquisition
 costs                     |  |                                 |    |      |   | 298  |  |   |     |  
| | Other                                  |  |                                 | 33  |      |   | 173  |  |   | (151 | )
| |                                        |  |                                 |     |      |   |      |  |   |      |  
| |                                        |  | $                               | 527 |      | $ | 880  |  | $ | (78  | )
| |                                        |  |                                 |     |      |   |      |  |   |      |  

Note 13 Asset Impairment

In
accordance with Statement of Financial Standards No. 142, Goodwill and
Other Intangible Assets, the Companys pharmaceutical technology services
segment recognized a goodwill impairment charge of $13.2 million in the fourth
quarter of fiscal 2007. The pharmaceutical technology services segment was classified
as discontinued operation in the first, second, and third quarters of fiscal
2007. The Company believes that the public announcement of this classification
caused demand for the Companys pharmaceutical technology services segment
to decline. When the Company sought to sell this business, the offers received
were inadequate.


Per Statement of Financial Standards No. 142, Goodwill of a
reporting unit shall be tested for impairment if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying value. The offers received served as a basis
to estimate the segments fair value for the impairment write-off. The $13.2
million asset impairment is recognized as an impairment charge in operating
expenses on the Consolidated Statements of Income. The segment has been
re-classified to held and used during the fourth quarter of fiscal 2007.


In
accordance with Statement of Financial Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company recognized
a long-lived asset impairment charge of $1.9 million in the fourth quarter of
fiscal 2007, reflecting a decline in the Company sleep disorder company acquired
on April 2, 2007.


F-15

---



Upon the completion of an independent valuation of the assets acquired, the
long-lived assets were classified as impaired. The Company is currently
pursuing legal action against the seller asserting fraudulent
misrepresentations, breach of non-competition agreement and other substantial
claims. The $1.9 million asset impairment is recognized as an impairment charge
in operating expenses on the Consolidated Statements of Income.


Note 14Commitments

Leases

The
Company has entered into non-cancelable operating leases providing for the
lease of office and warehouse facilities, equipment and certain other assets.
Rent expense, aggregating $1,945,000, $1,517,000, and $1,474,000 has been
charged to operations for the years ended September 30, 2007, 2006, and 2005,
respectively. The Companys commitments under such leases follow:


|                          |  |                             |   |      
|------------------------- |  | --------------------------- | - | -----
|Year Ending September 30, |  | (In
 thousands of
 dollars) |  
|2008                      |  |                             |   | 2,023
|2009                      |  |                             |   | 1,764
|2010                      |  |                             |   | 1,368
|2011                      |  |                             |   | 676  
|2012                      |  |                             |   | 479  
|2013 and thereafter       |  |                             |   | 352  
|                          |  |                             |   |      
|                          |  |                             | $ | 6,662
|                          |  |                             |   |      

Note 15Contingent Liabilities

Various
lawsuits, claims and proceedings have been or may be instituted or asserted
against the Company in the normal course of business, including those
pertaining to patent and trademark issues and product liability matters. Where
the Company has deemed a loss probable, the amount of the expected loss has
been accrued. While the amounts claimed or expected to be claimed may be
substantial, the ultimate liability cannot now be determined because of the
inherent uncertainties surrounding the litigation and the considerable
uncertainties that exist. Predictions regarding the impact of pending legal
proceedings constitute forward-looking statements. The actual results and
impact of such proceedings could differ materially from the impact anticipated,
primarily as a result of uncertainties involved in the proof of facts in legal
proceedings.


However,
based on facts currently available, management believes that the disposition of
matters that are pending or asserted will not have a materially adverse effect
on the financial position of the Company.

On
December 6, 1999, a complaint was filed against the Company on behalf of former
shareholders of the Companys Vital Pharma subsidiary alleging breach of
contract for failure to pay earnout payments allegedly due under the stock
purchase agreement executed in connection with the Companys purchase of
Vital Pharma in January 1996. In response to the lawsuit, the Company filed a
seven count counterclaim against the plaintiffs. In August 2000, the court ordered
the plaintiff to submit its claims relating to the earnout calculation to
binding arbitration and stayed all other proceedings pending the outcome of the
arbitration. The arbitration hearing commenced on January 26, 2004. In August
2006, the arbitrator issued a decision awarding the plaintiffs $0.9 million.
Plaintiffs originally claimed damages in the pre-interest amount of
approximately $8.0 million. Subsequently, in plaintiffs post-arbitration
brief to the arbitrator, plaintiffs argued that the final calculation of their
damages could be in excess of $14 million. The Company has recorded a reserve
in connection with this proceeding in the amount of $0.9 million, included in
accrued expenses in the balance sheet.


The
lawsuit was stayed during the pendency of the arbitration. On October 20, 2006,
the stay was lifted and the Companys counterclaim, as well as plaintiffs
remaining claim, were restored to the courts calendar. While plaintiff
asserts that several of its claims were also restored, the Company believes that
except for one limited claim by one of the names of plaintiffs original
claims were adjudicated through the arbitration proceedings. The lawsuit is now
in the discovery phase.

F-16

---



Beginning
    in the Companys 2003 fiscal year and running through the Companys 2005 fiscal
    year, a number of negligence and product liability lawsuits were filed against
    the Companys Vital Pharma, Inc. subsidiary, primarily in Palm Beach County,
    Florida, over an anti-adhesion product for gynecological surgery known as
    Intergel. Intergel was manufactured by Lifecore Biomedical, Inc. and
    distributed by Ethicon, Inc., a subsidiary of Johnson & Johnson. The
    Companys subsidiary, Vital Pharma, packaged the Intergel product into plastic
    containers. A global settlement was reached in all matters, and the Company
    paid only a token settlement amount, which was covered by its insurance.
    Lifecore, through its insurer, had been reimbursing a significant portion of
    Vital Pharmas legal fees and costs for all of the litigation relating
    to Intergel in which Vital Pharma had been involved. Notwithstanding this
    reimbursement, Vital Pharma and its insurer had incurred substantial legal
    fees and expenses which were not reimbursed. During November 2007 that matter
    was successfully settled in favor of Vital Pharma and its insurer for $149,000. On
      November 11, 2006, plaintiffs filed their motion in the Federal Court to
      confirm the arbitrators award which was granted. However, the Company
      is not obligated to pay the award until resolution ofthe entire case. Plaintiff
    has told the Company of his intention to seek judicial relief for payment
    of the award prior to that final resolution Do You Snore, LLC Litigation On
      December 10, 2007 Sleep Services of America filed a lawsuit in the Superior
      Court, Fulton County, Georgia against Renee McPhee and others relating
      to Sleep Service of Americas acquisition in April 2007 of the assets
      of Do You Snore, LLC, Southern Medical Equipment and Advanced Sleep Technologies
    of Georgia. The complaint assert causes of action in breach of the acquisition
    agreement fraud, breach of non-competition agreement, misappropriation of
    intellectual property and other causes of action. Ms. McPhee is the sole
    shareholder of Do You Snore, LLC and a significant shareholder of the other
    entities. Sleep Services of America believes that Ms. McPhee in concert
    which others is violating her non-competition agreement and misappropriating
    business which but for her action would have gone to Sleep Services of
    America.


Note 16Stockholders Equity

Preferred Stock

The
Company has authorized 10,000,000 shares of no par value preferred stock. No
shares were issued or outstanding at September 30, 2007 or 2006.

Stock Options

Effective
October 1, 2005, the Company began recording compensation expense associated
with stock options in accordance with SFAS No. 123R, Share-Based Payment.
Prior to October 1, 2005, the Company accounted for stock-based compensation
related to stock options under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25; therefore, the Company measured
compensation expense for its stock option plans using the intrinsic value
method, that is, as the excess, if any, of the fair market value of the
Companys stock at the grant date over the amount required to be paid to
acquire the stock, and provided the disclosures required by SFAS Nos. 123 and
148. The Company has adopted the modified prospective transition method
provided under SFAS No. 123R, and as a result, has not retroactively adjusted results
from prior periods. Under this transition method, compensation expense
associated with stock options recognized in fiscal year 2006 includes: 1)
expense related to the remaining unvested portion of all stock option awards
granted prior to October 1, 2005, based on the grant date fair value estimated
in accordance with the original provisions of SFAS No. 123; and 2) expense
related to all stock option awards granted subsequent to October 1, 2005, based
on the grant date fair value estimated in accordance with the provisions of
SFAS No. 123R.

As
a result of the adoption of SFAS No. 123R, the Companys net income for
the twelve month period ended September 30, 2007 and 2006, includes $1.0 million
of compensation expense included in selling, general and administrative expenses
and $.4 million in research and development expenses in each year and related
reductions in income tax expenses of $.7 million and $2.0 million, respectively.
The compensation expense related to all of the Companys
stock-based compensation arrangements is recorded as a component of both selling,
general and administrative and research and development expenses. Prior to the
Companys
adoption of SFAS No. 123R, the Company presented tax benefits resulting from
the exercise of stock options as cash flows from operating activities on the
Companys condensed statements of cash flows. SFAS No. 123R requires that
cash flows resulting from tax deductions in excess of the cumulative compensation
cost recognized for options exercised (excess tax benefits) be classified as
cash inflows from financing activities and cash outflows from operating
activities.


At
September 30, 2007, the Company had two stock option plans. The Vital Signs
2003 Investment Plan provides for the grant of options to employees, officers
and directors to purchase the Companys common stock. The 2003 Investment
Plan is a renewal of the Companys 1994 Investment Plan, which expired in
January 2004. One million shares of the Companys common stock have been
authorized for share purchase and option grants. Options may be granted at prices
not less than fair value at the date of grant. The options have a ten-year life.
Options generally vest after a two-year period. Shares purchased by persons who
are not executive officers or directors may be financed through the Company.
The 2002 Stock Incentive Plan provides for the grant of options to employees,
officers, directors and consultants to purchase a maximum of 1,000,000 shares.
Although the 2002 Stock Incentive Plan allows for the grants of stock options
to consultants, to date no options have been granted to consultants under that
plan.

F-17

---



Options may be granted
at prices not less than fair value at the date of grant. The options have a
ten-year life. Options generally vest ratably over a five-year period
commencing on the first anniversary of the grant with respect to options
granted to employees under the 2002 Stock Incentive Plan. The vesting period
for options granted to directors under the 2002 Stock Incentive Plan is
generally five years. The 2002 Stock Incentive Plan expires on May 31, 2012.
    As of September 30, 2007, 691,718 shares have been granted under this plan.


For
stock option grants prior to October 1, 2005, the estimated fair value of each
option award granted was determined on the date of grant using the
Black-Scholes option valuation model. For stock option grants on and after
October 1, 2005, the estimated fair value of each option award granted was
determined on the date of grant using a lattice based option valuation model.
The following weighted-average assumptions were used for option grants during
the twelve month period ended September 30, 2007, 2006 and 2005.

|                                    |  |                                   |   |                |       |                 |  |       |   | 
|----------------------------------- |  | --------------------------------- | - | -------------- | ----- | --------------- |  | ----- | - | 
|                                    |  | Twelve Months Ended September 30, |  
|                                    |  |                                   |  
|                                    |  | 2007                              |   | 2006           |       | 2005            | 
|                                    |  |                                   |   |                |       |                 | 
|Risk-free interest rate             |  | 4.70                              | % |                | 4.70  | %               |  | 4.33  | % | 
|Expected volatility of common stock |  | 32.33                             | % |                | 34.75 | %               |  | 33.00 | % | 
|Dividend yield                      |  | 0.63                              | % |                | 0.65  | %               |  | 0.70  | % | 
|Expected option term                |  | 3.4-6.8
 years                    |   | 3.3-6.8
 years |       | 5.0-10.0
 years | 

The
risk-free interest rate for the twelve months ended September 30, 2007 and 2006
is based on the five year U.S. Treasury bill rate on the day of the grant. For
    the twelve months ended September 30, 2005 the rate is based on the implied
    yield on a U.S. Treasury bond with constant maturities with a remaining term
    equal to the expected term of the option. The expected volatility is based
    on the historical volatility of the Companys stock. For options granted
    during the twelve months ended September 30, 2006 and 2007, the expected
    volatility computation is based on the average of the volatility over the
    most recent five year daily and the ten year monthly period. For options
    granted during the twelve months ended September 30, 2005, the expected volatility
    computation is based on the volatility over a 1.67 year period prior to the
    date of grant of such options.


F-18

---



A
summary of the status of the Companys vested stock options are as follows:

|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|---------------------------------------------------- |  | ----------------- | -------- | ---------------------------------------------- | - | ------------------------------------------------------------ |  | --------------------------- | ---- |  | - | --------- | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|                                                     |  | Number
 of Shares |          | Weighted
 -Average
 Exercise
 Price per
 Share |   | Weighted-
 Average
 Remaining
 Contractual
 Term (in
 years) |  | Aggregate
 Intrinsic
 Value |     
|                                                     |  |                  
|Options outstanding at September 30, 2004            |  |                   | 554,529  |                                                | $ | 25.79                                                        |  |                             | 6.35 |  | $ | 3,432,662 | 
|Options granted                                      |  |                   | 160,082  |                                                |   | 39.74                                                        |  |                             |     |  |   |          | 
|Options exercised                                    |  |                   | (116,670 | )                                              |   | 27.06                                                        |  |                             |     |  |   |          | 
|Options forfeited or expired                         |  |                   | (15,730  | )                                              |   | 27.76                                                        |  |                             |     |  |   |          | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|Options outstanding at September 30, 2005            |  |                   | 582,211  |                                                | $ | 29.32                                                        |  |                             | 6.34 |  | $ | 9,765,615 | 
|                                                    
|Options granted                                      |  |                   | 172,938  |                                                |   | 49.51                                                        |  |                             |     |  |   |          | 
|Options exercised                                    |  |                   | (227,583 | )                                              |   | 25.39                                                        |  |                             |     |  |   |          | 
|Options forfeited or expired                         |  |                   | (14,151  | )                                              |   | 33.45                                                        |  |                             |     |  |   |          | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|Options outstanding at September 30, 2006            |  |                   | 513,415  |                                                | $ | 37.75                                                        |  |                             | 9.11 |  | $ | 9,684,635 | 
|                                                    
|Options granted                                      |  |                   | 62,500   |                                                |   | 52.10                                                        |  |                             |     |  |   |          | 
|Options exercised                                    |  |                   | (67,200  | )                                              |   | 28.14                                                        |  |                             |     |  |   |          | 
|Options forfeited or expired                         |  |                   | (3,981   | )                                              |   | 45.65                                                        |  |                             |     |  |   |          | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|Options outstanding at September 30, 2007            |  |                   | 504,734  |                                                | $ | 40.74                                                        |  |                             | 7.37 |  | $ | 5,753,685 | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|Options vested and exercisable at September 30, 2007 |  |                   | 250,047  |                                                | $ | 33.79                                                        |  |                             | 6.19 |  | $ | 4,588,853 | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 
|                                                     |  |                   |          |                                                |   |                                                              |  |                             |      |  |   |           | 

The
weighted-average fair value of each option granted during the twelve month
periods ended September 30, 2007, 2006 and 2005, estimated as of the grant date
using a lattice based option valuation model (2007) and (2006) and the
Black-Scholes option valuation model (2005), was $14.00 per option, $13.32 per
option and $20.56 per option, respectively.

A
summary of the status of the Companys non-vested shares is presented below:

|                                        |  |                   |         |                                               |  |                                                              |       |  |  |  |      | 
|--------------------------------------- |  | ----------------- | ------- | --------------------------------------------- |  | ------------------------------------------------------------ | ----- |  |  |  | ---- | 
|                                        |  | Number of
 Shares |         | Weighted
 -Average
 Exercise Price
 per Share |  | Weighted-
 Average
 Remaining
 Contractual
 Term (in
 years) |      
|                                        |  |                   |         |                                               |  |                                                              |      
|Non-vested shares at September 30, 2006 |  |                   | 293,324 |                                               |  | $                                                            | 44.40 |  |  |  | 7.88 | 
|Options granted                         |  |                   | 62,500  |                                               |  |                                                              | 52.10 |  |  |  | 9.45 | 
|Options vested                          |  |                   | (98,137 | )                                             |  |                                                              | 41.04 |  |  |  | 7.55 | 
|Options forfeited or expired            |  |                   | (3,000  | )                                             |  |                                                              | 46.09 |  |  |  | 8.01 | 
|                                        |  |                   |         |                                               |  |                                                              |       |  |  |  |      | 
|Non-vested shares at September 30, 2007 |  |                   | 254,687 |                                               |  | $                                                            | 47.57 |  |  |  | 8.52 | 
|                                        |  |                   |         |                                               |  |                                                              |       |  |  |  |      | 

F-19

---



As
of September 30, 2007, there was $3.0 million of unrecognized compensation cost
related to non-vested stock option awards, which is expected to be recognized
over a remaining weighted-average vesting period of 3.50 years.

For
stock options granted prior to the adoption of SFAS No. 123R, the following table
illustrates the pro forma effect on net income and earnings per common share as
if the Company had applied the fair value recognition provision of SFAS No.
123, as amended by SFAS No. 148, to apply the accounting rules under APB
Opinion No. 25 and related interpretations in accounting for its stock options
in determining stock-based compensation for awards under the plan:

|                                                  |  |                                                  |   |        |  | 
|------------------------------------------------- |  | ------------------------------------------------ | - | ------ |  | 
|                                                  |  |                                                  |   |        |  | 
|(In
 thousands of dollars, except share amounts)  |  | Twelve
 Month 
 Period ended
 September 30, 2005 |  
|                                                  |  |                                                  |   |        |  | 
|Net incomeas reported                            |  |                                                  | $ | 26,389 |  | 
|Stock compensation expense                        |  |                                                  |   | 1,322  |  | 
|Net incomePro forma                              |  |                                                  |   | 25,067 |  | 
|Basic net income per common shareas
 reported    |  |                                                  |   | 2.09   |  | 
|Diluted net income per commons
 shareas reported |  |                                                  |   | 2.06   |  | 
|Basic net income per common sharepro
 forma      |  |                                                  |   | 1.99   |  | 
|Diluted net income per common
 sharepro forma    |  |                                                  | $ | 1.96   |  | 
|                                                  |  |                                                  |   |        |  | 

In
fiscal 2002, the Companys board of directors and stockholders approved
the adoption of the 2002 Stock Incentive Plan, which provides for the grant of
options to employees, officers, directors and consultants to purchase a maximum
of 1,000,000 shares. Although the Vital Signs option plans allow for the
grants of stock options to consultants, to date none have been granted to
consultants. Options may be granted at prices not less than fair value at the
date of grant. The options have a ten-year life.

Options
generally vest ratably over a five-year period commencing on the first
anniversary of the grant with respect to options granted under the 2002 Stock
Incentive Plan and over two years with respect to the Companys options granted
as part of its Investment Plan. The 2002 Stock Incentive Plan expires on May
31, 2012. As of September 30, 2007, 691,718 shares had been granted under this
plan.

In
connection with the plans described above and other plans which are no longer
in force, options covering 2,090,233 shares (excluding lapsed shares) have been
granted through September 30, 2007.

The following
table summarizes information about vested and non-vested stock options
outstanding at September 30, 2007:


|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |         |  |  |       |  | 
|------------------------ |  | --------------------------------------- |  | ------------------------------------------------ | --- | ----------------------------- |  | --------------------------------------- |  | ----------------------------- | ------- |  |  | ----- |  | 
|                         |  | Options
 Outstanding                    |  | Options
 Exercisable                             |    
|                         |  |                                         |  |                                                  |    
|Range ofExercise
 Prices |  | NumberOutstanding
 atSeptember
 30,2007 |  | Weighted-AverageRemainingContractualLife (Years) |     | Weighted-AverageExercisePrice |  | NumberExercisable
 atSeptember
 30,2007 |  | Weighted-AverageExercisePrice |        
|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |        
|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |         |  |  |       |  | 
|1. $17.56$19.25         |  | 3,882                                   |  |                                                  | 0.3 |                               |  | 18.06                                   |  |                               | 3,882   |  |  | 18.06 |  | 
|2. $20.75$21.25         |  | 27,202                                  |  |                                                  | 2.4 |                               |  | 21.25                                   |  |                               | 27,202  |  |  | 21.25 |  | 
|3. $25.52$27.80         |  | 72,138                                  |  |                                                  | 5.6 |                               |  | 26.97                                   |  |                               | 72,138  |  |  | 26.97 |  | 
|4. $28.52$32.63         |  | 47,063                                  |  |                                                  | 6.0 |                               |  | 30.86                                   |  |                               | 42,664  |  |  | 31.01 |  | 
|5. $33.16$41.26         |  | 126,386                                 |  |                                                  | 7.5 |                               |  | 39.86                                   |  |                               | 64,925  |  |  | 39.67 |  | 
|6. $46.09$54.75         |  | 165,563                                 |  |                                                  | 8.7 |                               |  | 49.66                                   |  |                               | 39,236  |  |  | 49.86 |  | 
|7. $52.10$52.11         |  | 62,500                                  |  |                                                  | 9.5 |                               |  | 52.10                                   |  |                               | 0       |  |  | 0     |  | 
|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |         |  |  |       |  | 
|Total:                   |  | 504,734                                 |  |                                                  | 7.4 |                               |  | 40.74                                   |  |                               | 250,047 |  |  | 33.79 |  | 
|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |         |  |  |       |  | 
|                         |  |                                         |  |                                                  |     |                               |  |                                         |  |                               |         |  |  |       |  | 

F-20

---



Note 17Income Taxes

The
provision for income taxes consists of the following components:

|                                                                       |  |                                  |        |      |   |        |   |   |        |  
|---------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                       |  | For the
 Year EndedSeptember 30, |       
|                                                                       |  |                                  |       
|                                                                       |  | 2007                             |        | 2006 |   | 2005   |  
|                                                                       |  |                                  |        |      |   |        |  
|                                                                       |  | (In
 thousands of dollars)       |       
|Current:                                                               |  |                                  |        |      |   |        |   |   |        |  
|Federal                                                                |  | $                                | 12,117 |      | $ | 11,101 |   | $ | 12,095 |  
|State                                                                  |  |                                  | 1,379  |      |   | 1,418  |   |   | 1,227  |  
|Foreign                                                                |  |                                  | 924    |      |   | 893    |   |   | 691    |  
|Deferred:                                                              |  |                                  |        |      |   |        |   |   |        |  
|Federal                                                                |  |                                  | (3,715 | )    |   | 2,303  |   |   | 1,598  |  
|State                                                                  |  |                                  | (687   | )    |   | 27     |   |   | 176    |  
|Foreign                                                                |  |                                  | (58    | )    |   |       |   |   | (648   | )
|                                                                       |  |                                  |        |      |   |        |   |   |        |  
|                                                                       |  |                                  | 9,960  |      |   | 15,742 |   |   | 15,139 |  
|                                                                       |  |                                  |        |      |   |        |   |   |        |  
|Federal tax provision (benefit) from
 discontinued operations (Note 2) |  |                                  | (25    | )    |   | (86    | ) |   | 46     |  
|                                                                       |  |                                  |        |      |   |        |   |   |        |  
|Income tax expense from continuing
 operations                         |  | $                                | 9,985  |      | $ | 15,828 |   | $ | 15,093 |  
|                                                                       |  |                                  |        |      |   |        |   |   |        |  

The
breakdown of U.S. and foreign income from continuing operations before income
taxes for the year ended September 30 is as follows:

|                                        |  |                            |        |      |   |        |  |   |        | 
|--------------------------------------- |  | -------------------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                        |  | 2007                       |        | 2006 |   | 2005   | 
|                                        |  |                            |        |      |   |        | 
|                                        |  | (In
 thousands of dollars) |       
|                                        |  |                            |       
|United States                           |  | $                          | 26,856 |      | $ | 44,019 |  | $ | 41,894 | 
|Foreign                                 |  |                            | 3,020  |      |   | 3,004  |  |   | 101    | 
|                                        |  |                            |        |      |   |        |  |   |        | 
|Total income from continuing operations |  | $                          | 29,876 |      | $ | 47,023 |  | $ | 41,995 | 
|                                        |  |                            |        |      |   |        |  |   |        | 

The
tax effect of temporary differences that give rise to the net short-term
deferred tax (liability)/ assets are presented below:

|                                                  |  |                              |       |      |   |      |  
|------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ---- | -
|                                                  |  | September
 30,               |      
|                                                  |  |                              |      
|                                                  |  | 2007                         |       | 2006 |  
|                                                  |  |                              |       |      |  
|                                                  |  | (In
 thousands of 
 dollars) |      
|                                                  |  |                              |      
|Bad debt                                          |  | $                            | 1,089 |      | $ |     |  
|Net operating loss carryforward from
 acquisition |  |                              | 140   |      |   | 449  |  
|Stelex goodwill                                   |  |                              | (324  | )    |   | (323 | )
|Baxter goodwill                                   |  |                              | (189  | )    |   | (189 | )
|Other                                             |  |                              | (524  | )    |   | (294 | )
|                                                  |  |                              |       |      |   |      |  
|                                                  |  | $                            | 192   |      | $ | (357 | )
|                                                  |  |                              |       |      |   |      |  

F-21

---



The
tax effects of temporary differences that give rise to the net long-term
deferred tax assets are presented below:

|                                                         |  |                           |        |      |   |       |  
|-------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ----- | -
|                                                         |  | September 30,             |       
|                                                         |  |                           |       
|                                                         |  | 2007                      |        | 2006 |  
|                                                         |  |                           |        |      |  
|                                                         |  | (In thousands of dollars) |       
|                                                         |  |                           |       
|Net operating loss carryforward from acquisition         |  | $                         |       |      | $ | 141   |  
|Accelerated
  depreciation                               |  |                           | (1,763 | )    |   | (568  | )
|Stelex
  goodwill                                        |  |                           | (1,280 | )    |   | (957  | )
|Stelex
  impairment                                      |  |                           | 4,877  |      |   |      |  
|DYS/SME
  impairment                                     |  |                           | 718    |      |   |      |  
|Baxter
  goodwill                                        |  |                           | (291   | )    |   | (102  | )
|Loss on
  sales of discontinued operation (Vital Pharma) |  |                           | 700    |      |   | 700   |  
|Foreign net
  operating loss carryforward                |  |                           | 1,012  |      |   | 954   |  
|State net
  operating loss carryforward                  |  |                           | 878    |      |   | 878   |  
|Stock
  compensation expense                             |  |                           | 952    |      |   | 627   |  
|Other                                                    |  |                           | (509   | )    |   | (310  | )
|                                                         |  |                           |        |      |   |       |  
|                                                         |  | $                         | 5,294  |      | $ | 1,363 |  
|                                                         |  |                           |        |      |   |       |  
|Less:
  Valuation allowance                              |  |                           | (562   | )    |   | (562  | )
|                                                         |  |                           |        |      |   |       |  
|                                                         |  | $                         | 4,732  |      | $ | 801   |  
|                                                         |  |                           |        |      |   |       |  

At
September 30, 2007, the Company has federal net operating loss carryforwards
    of approximately $380,000 to offset future taxable income. These net operating
loss carryforwards expire through 2008. Under Section 382 of the Internal
Revenue Code, the annual amount available to offset consolidated taxable income
is limited to approximately $380,000 in fiscal 2008. In addition, at September
30, 2007, the Company has available approximately $10,000,000 of New Jersey net
operating loss carryforwards to offset future state taxable income. The New
Jersey operating loss carryforwards, as extended, expire from 2009 through
2010. Utilization of these net operating losses has been suspended for
deduction carryover for privilege periods beginning during calendar years 2002
and 2003, but this suspension extends the seven-year carryforward period by two
years. A full net operating loss deduction is allowed for privilege periods
beginning on or after January 1, 2006. The Company has established a partial
valuation allowance against the New Jersey net operating loss carryforwards,
based upon managements estimate of future taxable earnings available to offset
the net operating loss.

The
total provision for income taxes differs from that amount which would be
computed by applying the U.S. federal income tax rate to income before
provision for income taxes. The reasons for these differences are as follows:

|                                                                        |  |                                    |      |      |  |      |   |  |      |  
|----------------------------------------------------------------------- |  | ---------------------------------- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                                        |  | For the Year Ended
  September 30, |     
|                                                                        |  |                                    |     
|                                                                        |  | 2007                               |      | 2006 |  | 2005 |  
|                                                                        |  |                                    |      |      |  |      |  
|                                                                        |  |                                    |      |      |  |      |  
|Statutory
  federal income tax rate                                     |  |                                    | 35.0 | %    |  | 35.0 | % |  | 35.0 | %
|State income
  taxes net of federal tax benefit                         |  |                                    | 3.0  |      |  | 2.0  |   |  | 2.1  |  
|Tax exempt
  interest                                                   |  |                                    | (3.6 | )    |  | (1.6 | ) |  | (1.1 | )
|Benefit from
  foreign sales corporation and extraterritorial exclusion |  |                                    | (0.0 | )    |  | (0.5 | ) |  | (0.7 | )
|Manufacturing
  credit                                                  |  |                                    | (1.2 | )    |  | (0.8 | ) |  |     |  
|Other                                                                   |  |                                    | 0.2  |      |  | (0.4 | ) |  | 0.6  |  
|                                                                        |  |                                    |      |      |  |      |   |  |      |  
|Effective
  income tax rate                                             |  |                                    | 33.4 | %    |  | 33.7 | % |  | 35.9 | %
|                                                                        |  |                                    |      |      |  |      |   |  |      |  

F-22

---



Income taxes
  payable consist of the following:

|                                         |  |                           |        |        |   |        |       
|---------------------------------------- |  | ------------------------- | ------ | ------ | - | ------ | ------
|                                         |  | September 30,             |       
|                                         |  |                           |       
|                                         |  | 2007                      |        | 2006   |  
|                                         |  |                           |        |        |  
|                                         |  | (In thousands of dollars) |       
|Federal
  income taxes (prepaid) payable |  | $                         | (807   | )      | $ | (1,227 | )     
|State income
  taxes  (prepaid) payable  |  |                           | (426   | )      |   | 264    |       
|Foreign
  income taxes payable           |  |                           | 182    |        |   | 332    |       
|                                         |  |                           |        |        |   |        |       
|                                         |  | $                         | (1,051 | )  (b) | $ | (631   | )  (a)
|                                         |  |                           |        |        |   |        |       

|(a) | This balance consists of $1,362,000 of prepaid income taxes included in
prepaid expenses on the accompanying consolidated balance sheet (see Note
5) net of income taxes payable of $731,000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                              
|(b) | This balance consists of $1,436,000 of income taxes included in prepaid
expenses on the accompanying consolidated balance sheet (see Note 5) net of
income taxes payable of $385,000.        
|    |                                                                                                                                                                                              

For
the years ended September 30, 2007, 2006 and 2005, the Company recognized for
income tax purposes a tax benefit of $1,402,000, $1,488,000, and $536,000,
respectively, for compensation expense related to its stock option plan for
which no corresponding charge to operations has been recorded. Such amount has
been added to common stock in each year.


Note 18Allowance for Rebates and Doubtful
Accounts

Information
relating to the allowance for rebates and doubtful accounts is as follows:

|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|----------------- |  | ------------------------- | ----- | ------------- | - | ---------------- |  | ---------------------------- | ------ |  | - | ------ | 
|                  |  | Beginning
  Balance       |       | Charges
  (A) |   | Deductions
  (B) |  | Balance
  at End
  of
  Year |       
|                  |  |                           |       |               |   |                  |  |                              |       
|                  |  | (In thousands of dollars) |      
|2005              |  |                           |      
|Rebates           |  | $                         | 8,162 |               | $ | 55,917           |  | $                            | 56,747 |  | $ | 7,332  | 
|Doubtful accounts |  |                           | 563   |               |   | 4                |  |                              | 78     |  |   | 489    | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|                  |  | $                         | 8,725 |               | $ | 55,921           |  | $                            | 56,825 |  | $ | 7,821  | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|2006              |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|Rebates           |  | $                         | 7,332 |               | $ | 64,643           |  | $                            | 63,873 |  | $ | 8,102  | 
|Doubtful accounts |  |                           | 489   |               |   | 170              |  |                              | 235    |  |   | 424    | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|                  |  | $                         | 7,821 |               | $ | 64,813           |  | $                            | 64,108 |  | $ | 8,526  | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|2007              |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|Rebates           |  | $                         | 8,102 |               | $ | 74,798           |  | $                            | 72,387 |  | $ | 10,513 | 
|Doubtful accounts |  |                           | 424   |               |   | 4,076            |  |                              | 34     |  |   | 4,466  | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 
|                  |  | $                         | 8,526 |               | $ | 78,874           |  | $                            | 72,421 |  | $ | 14,979 | 
|                  |  |                           |       |               |   |                  |  |                              |        |  |   |        | 

|    |                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Charges
  represent estimated rebates deducted from gross revenues and estimated
  provision for doubtful accounts.                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                    
|(B) | Deductions
  represent rebates credited to the wholesaler and the write-off of
  uncollectible accounts.                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                    
|(C) | In the
  fourth quarter of fiscal 2007, the Company increased its distributor rebate
  allowance by $4.7 million after obtaining new information from its two
  largest distributors on their inventory levels. In addition, the Company
  increased its reserve for bad debt $1.2 million for unauthorized customer
  cash payment discounts with one distributor.

Note 19Significant
Customers

A
portion of the Companys hospital customers are serviced by national and
regional medical supply distributors. During fiscal years 2007, 2006 and 2005,
respectively, 27%, 28%, and 26%, of the Companys net revenue were made in this
distribution channel. In each fiscal year 2007, 2006 and 2005, one of the large
national distributors represented approximately 13%, 11%, and 10%,
respectively, of net revenue. The same customer represented approximately 14%
and 8% of outstanding accounts receivable at September 30, 2007 and 2006,
respectively.

F-23

---



Note 20Segment
Information


Vital
Signs, Inc. sells single-patient-use medical products to the anesthesia,
respiratory, critical care, interventional cardiology/radiology, and emergency
markets. The Company provides pharmaceutical technology services, principally
to the pharmaceutical companies and also, from time to time, to medical device,
diagnostic, and biotechnology companies. The Company has aggregated its
business units into five reportable segments: anesthesia, respiratory/critical care,
sleep, interventional cardiology/radiology and pharmaceutical technology
services. There are no material intersegment sales. Anesthesia and
Respiratory/Critical Care share certain manufacturing facilities, sales and
administration support; therefore the operating expenses, total assets, and
capital expenditures are not specifically identifiable. However, the Company
has allocated operating expenses, total assets, and capital expenditures on a
net sales basis. Management evaluates performance on gross profits and
operating results of the five business segments. Summarized financial
information concerning the Companys reportable segments is shown in the
following table.


|                        |  |            |                           |                                |   |        |   |                                          |        |                                        |   |                                 |   |              |         |   |   |        |   |   |         |  
|----------------------- |  | ---------- | ------------------------- | ------------------------------ | - | ------ | - | ---------------------------------------- | ------ | -------------------------------------- | - | ------------------------------- | - | ------------ | ------- | - | - | ------ | - | - | ------- | -
|                        |  | Anesthesia |                           | Respiratory/
  Critical
  Care |   | Sleep  |   | Interventional
  Cardiology/
  Radiology |        | Pharmaceutical
  Technology
  Services |   | Rebate
  Allowance
  Adjustment |   | Consolidated |        
|                        |  |            |                           |                                |   |        |   |                                          |        |                                        |   |                                 |   |              |        
|                        |  |            | (In thousands of dollars) |                               
|2007                    |  |            |                           |                                |   |        |   |                                          |        |                                       
|Net sales               |  | $          | 74,800                    |                                | $ | 46,296 |   | $                                        | 48,770 |                                        | $ | 28,637                          |   | $            | 11,487  |   | $ | (4,733 | ) | $ | 205,257 |  
|Gross profit            |  |            | 38,678                    |                                |   | 25,370 |   |                                          | 25,343 |                                        |   | 16,131                          |   |              | 3,030   |   |   | (4,733 | ) |   | 103,819 |  
|Gross profit percentage |  |            | 51.7                      | %                              |   | 54.8   | % |                                          | 52.0   | %                                      |   | 56.3                            | % |              | 26.4    | % |   |       |   |   | 50.6    | %
|Operating income        |  |            | 13,489                    |                                |   | 8,348  |   |                                          | 3,046  |                                        |   | 12,553                          |   |              | (13,911 | ) |   |       |   |   | 23,525  |  
|Total assets            |  |            | 157,897                   |                                |   | 97,727 |   |                                          | 56,658 |                                        |   | 13,172                          |   |              | 5,490   |   |   |       |   |   | 330,944 |  
|Capital expenditures    |  |            | 1,649                     |                                |   | 1,021  |   |                                          | 1,423  |                                        |   | 451                             |   |              | 599     |   |   |       |   |   | 5,143   |  
|2006                    |  |            |                           |                                |   |        |   |                                          |        |                                        |   |                                 |   |              |         |   |   |        |   |   |         |  
|Net sales               |  | $          | 73,794                    |                                | $ | 44,571 |   | $                                        | 42,850 |                                        | $ | 25,538                          |   | $            | 15,371  |   | $ |       |   | $ | 202,124 |  
|Gross profit            |  |            | 37,784                    |                                |   | 23,485 |   |                                          | 22,231 |                                        |   | 13,356                          |   |              | 5,241   |   |   |       |   |   | 102,097 |  
|Gross profit percentage |  |            | 51.2                      | %                              |   | 52.7   | % |                                          | 51.9   | %                                      |   | 52.3                            | % |              | 34.1    | % |   |       |   |   | 50.5    | %
|Operating income        |  |            | 16,526                    |                                |   | 9,981  |   |                                          | 4,341  |                                        |   | 10,034                          |   |              | 1,119   |   |   |       |   |   | 42,001  |  
|Total assets            |  |            | 145,226                   |                                |   | 87,715 |   |                                          | 42,965 |                                        |   | 11,254                          |   |              | 18,694  |   |   |       |   |   | 305,854 |  
|Capital expenditures    |  |            | 4,218                     |                                |   | 2,335  |   |                                          | 1,684  |                                        |   | 497                             |   |              | 334     |   |   |       |   |   | 9,068   |  
|2005                    |  |            |                           |                                |   |        |   |                                          |        |                                        |   |                                 |   |              |         |   |   |        |   |   |         |  
|Net sales               |  | $          | 67,896                    |                                | $ | 42,423 |   | $                                        | 40,660 |                                        | $ | 25,441                          |   | $            | 16,760  |   | $ |       |   | $ | 193,180 |  
|Gross profit            |  |            | 36,106                    |                                |   | 22,357 |   |                                          | 18,770 |                                        |   | 13,976                          |   |              | 6,464   |   |   |       |   |   | 97,673  |  
|Gross profit percentage |  |            | 53.2                      | %                              |   | 52.7   | % |                                          | 46.2   | %                                      |   | 54.9                            | % |              | 38.6    | % |   |       |   |   | 50.6    | %
|Operating income        |  |            | 15,471                    |                                |   | 11,722 |   |                                          | 666    |                                        |   | 10,319                          |   |              | 1,324   |   |   |       |   |   | 39,502  |  
|Total assets            |  |            | 131,050                   |                                |   | 54,546 |   |                                          | 35,518 |                                        |   | 13,306                          |   |              | 19,282  |   |   |       |   |   | 253,702 |  
|Capital expenditures    |  |            | 892                       |                                |   | 761    |   |                                          | 2,758  |                                        |   | 781                             |   |              | 387     |   |   |       |   |   | 5,579   |  
|                        |  |            |                           |                                |   |        |   |                                          |        |                                        |   |                                 |   |              |         |   |   |        |   |   |         |  

The following table presents
revenues by geographic area:

|                |  |                             |         |      |   |         |  |   |         | 
|--------------- |  | --------------------------- | ------- | ---- | - | ------- |  | - | ------- | 
|                |  | September 30,               |        
|                |  |                             |        
|                |  | 2007                        |         | 2006 |   | 2005    | 
|                |  |                             |         |      |   |         | 
|                |  | (In
  thousands of dollars) |        
|United
  States |  | $                           | 154,830 |      | $ | 154,178 |  | $ | 146,386 | 
|Europe          |  |                             | 34,816  |      |   | 34,495  |  |   | 33,516  | 
|Asia            |  |                             | 5,242   |      |   | 5,685   |  |   | 3,716   | 
|Other           |  |                             | 10,369  |      |   | 7,766   |  |   | 9,562   | 
|                |  |                             |         |      |   |         |  |   |         | 
|                |  | $                           | 205,257 |      | $ | 202,124 |  | $ | 193,180 | 
|                |  |                             |         |      |   |         |  |   |         | 

F-24

---



Note 21Employee
Benefit Plans

The
Company has established a savings incentive plan for substantially all
employees of the Company which is qualified under section 401(k) of the
Internal Revenue Code. The savings plan provides for contributions to an
independent trustee by both the Company and its participating employees. Under
the plan, employees may contribute up to 80% of their pretax base pay up to the
dollar limits set by law. The Company matches 25% of the first 6% of
participant contributions. Participants vest immediately for their own
contributions and for the Companys contributions. Company contributions were
approximately $409,000, $397,000, and $365,000, for the years ended September
30, 2007, 2006 and 2005, respectively.

Note 22Quarterly
Financial Data (unaudited)

The
following is a summary of the unaudited quarterly results of operations for the
years ended September 30, 2007 and 2006:

Fiscal Year Ended September 30, 2007

|               |  |                                         |         |                     |   |                 |  |          |        |               |   |              |   |             |       |            |   |                                                            |   |   |       |   |   |       |   |  |   |         |  | 
|-------------- |  | --------------------------------------- | ------- | ------------------- | - | --------------- |  | -------- | ------ | ------------- | - | ------------ | - | ----------- | ----- | ---------- | - | ---------------------------------------------------------- | - | - | ----- | - | - | ----- | - |  | - | ------- |  | 
|               |  | Income
  from Continuing Operations     |         | Net
  Income (Loss) |   | Balance
  Sheet | 
|               |  |                                         |         |                     |   |                 | 
|               |  | Total
  Revenue                         |         | Gross
  Profit      |   | Income          |  | BasicEPS |        | Diluted
  EPS |   | Net
  Income |   | Basic
  EPS |       | DilutedEPS |   | Cash
  and cash
  equivalent and
  Short-term
  Investment |  
|               |  |                                         |         |                     |   |                 |  |          |        |               |   |              |   |             |       |            |   |                                                            |  
|               |  | (In
  thousands of dollars, except EPS) |        
|1st Quarter    |  | $                                       | 47,718  |                     | $ | 24,207          |  | $        | 7,292  |               | $ | 0.55         |   | $           | 0.55  |            | $ | 7,294                                                      |   | $ | 0.55  |   | $ | 0.55  |   |  | $ | 139,036 |  | 
|2nd Quarter    |  |                                         | 52,648  |                     |   | 27,354          |  |          | 8,622  |               |   | 0.65         |   |             | 0.65  |            |   | 8,602                                                      |   |   | 0.65  |   |   | 0.65  |   |  |   | 139,901 |  | 
|3rd Quarter    |  |                                         | 54,407  |                     |   | 28,589          |  |          | 8,641  |               |   | 0.65         |   |             | 0.65  |            |   | 8,624                                                      |   |   | 0.65  |   |   | 0.65  |   |  |   | 136,253 |  | 
|4th Quarter(a) |  |                                         | 50,484  |                     |   | 23,669          |  |          | (5,347 | )             |   | (0.40        | ) |             | (0.40 | )          |   | (5,361                                                     | ) |   | (0.41 | ) |   | (0.41 | ) |  |   | 135,591 |  | 
|               |  |                                         |         |                     |   |                 |  |          |        |               |   |              |   |             |       |            |   |                                                            |   |   |       |   |   |       |   |  |   |         |  | 
|               |  | $                                       | 205,257 |                     | $ | 103,819         |  | $        | 19,208 |               | $ | 1.45         |   | $           | 1.45  |            | $ | 19,159                                                     |   | $ | 1.44  |   | $ | 1.44  |   |  |   |         |  | 
|               |  |                                         |         |                     |   |                 |  |          |        |               |   |              |   |             |       |            |   |                                                            |   |   |       |   |   |       |   |  |   |         |  | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The Company
  recognized several one-time, non-cash charges in 2007. The Company increased
  its distributor rebate allowance by an additional $4.7 million which reduced
  sales and gross profits. Operating expenses included goodwill impairment
  charge of $13.2 million for the Stelex business and a $1.9 million
  impairment of long-lived assets pertaining to the Companys April 2007
  acquisition of Do You Snore, LLC. Additionally, operating expenses included
  an increase in the allowance for unauthorized customer cash payment discounts
  of $1.2 million. Combined, these items reduced operating income by $12.0
  million. Net income was reduced by $13.6 million, or $1.02 per diluted share.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Excluding
  these one-time, non-cash items, sales would have increased by 3.9% instead of
  the 1.6% increase reported, and operating income would have increased by 6.1%
  instead of the reported decrease. Net income would have increased by 6.7%
  instead of the reported decrease, and diluted EPS would have been $2.46.                                                                                                                                                                                                                                                                                                                                                                                           

|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              |  |   |      |  |   |      |  |  |   |         |  | 
|------------------------------------ |  | ------------------------------------- | ------- | ------------------- | - | --------------- |  | -------- | ------ | ------------- | - | ------------ |  | ----------- | ---- | ---------- | - | ------------------------------------------------------------ |  | - | ---- |  | - | ---- |  |  | - | ------- |  | 
|Fiscal Year Ended September 30, 2006 | 
|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              |  |   |      |  |   |      |  |  |   |         |  | 
|                                     |  | Income
  from Continuing Operations   |         | Net
  Income (Loss) |   | Balance
  Sheet | 
|                                     |  |                                       |         |                     |   |                 | 
|                                     |  | Total
  Revenue                       |         | Gross
  Profit      |   | Income          |  | BasicEPS |        | Diluted
  EPS |   | Net
  Income |  | Basic
  EPS |      | DilutedEPS |   | Cash
  and cash
  equivalents and
  Short-term
  Investments | 
|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              | 
|                                     |  | (In thousands of dollars, except EPS) |        
|1st Quarter                          |  | $                                     | 47,285  |                     | $ | 23,758          |  | $        | 6,661  |               | $ | 0.53         |  | $           | 0.53 |            | $ | 6,660                                                        |  | $ | 0.53 |  | $ | 0.53 |  |  | $ | 86,033  |  | 
|2nd Quarter                          |  |                                       | 50,816  |                     |   | 25,584          |  |          | 7,452  |               |   | 0.58         |  |             | 0.57 |            |   | 7,468                                                        |  |   | 0.58 |  |   | 0.57 |  |  |   | 108,254 |  | 
|3rd Quarter                          |  |                                       | 51,690  |                     |   | 26,478          |  |          | 7,918  |               |   | 0.60         |  |             | 0.60 |            |   | 7,944                                                        |  |   | 0.60 |  |   | 0.60 |  |  |   | 119,293 |  | 
|4th Quarter                          |  |                                       | 52,333  |                     |   | 26,277          |  |          | 8,253  |               |   | 0.63         |  |             | 0.62 |            |   | 8,045                                                        |  |   | 0.62 |  |   | 0.61 |  |  |   | 126,807 |  | 
|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              |  |   |      |  |   |      |  |  |   |         |  | 
|                                     |  | $                                     | 202,124 |                     | $ | 102,097         |  | $        | 30,284 |               | $ | 2.34         |  | $           | 2.32 |            | $ | 30,117                                                       |  | $ | 2.33 |  | $ | 2.31 |  |  |   |         |  | 
|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              |  |   |      |  |   |      |  |  |   |         |  | 
|                                     |  |                                       |         |                     |   |                 |  |          |        |               |   |              |  |             |      |            |   |                                                              |  |   |      |  |   |      |  |  |   |         |  | 

F-25

---



Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial Disclosure

Not
applicable.

Item 9A. Controls
and Procedures

Evaluation of Disclosure Controls and
Procedures

During
the fourth quarter of fiscal 2007, the Companys management, including its
principal executive officer and principal financial officer, evaluated its
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) related to the recording,
processing, summarizing, and reporting of information in the periodic reports
that the Company files with the SEC. These disclosure controls and procedures
have been designed to ensure that material information relating to Vital Signs,
including the Companys subsidiaries, is made known to its management,
including these officers, by other of its employees, and that this information
is recorded, processed, summarized, evaluated, and reported, as applicable,
within the time periods specified in the SECs rules and forms. Due to the
inherent limitations of control systems, not all misstatements may be detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The Companys controls and procedures can only
provide reasonable, not absolute, assurance that the above objectives have been
met.

Based
on their evaluation as of September 30, 2007, the Companys principal executive
officer and principal financial officer have concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure
that the information required to be disclosed by us in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms.

Managements Report on Internal Control Over
Financial Reporting

The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Companys internal control
system is a process designed to provide reasonable assurance to its management
and board of directors regarding the preparation and fair presentation of
published financial statements.

The
Companys internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that
receipts and expenditures are being made only in accordance with authorizations
of the Companys management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have a material effect on its
financial statements.

All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

The
Companys management assessed the effectiveness of Vital Signs internal
control over financial reporting as of September 30, 2007. In making this
assessment, the Company used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on its assessment the Company believes
that, as of September 30, 2007, Vital Signs internal control over financial
reporting is effective based on those criteria.

49


---



The Companys
independent registered public accounting firm that audited the consolidated
financial statements has issued an audit report on its assessment of, and the
effective operation of, Vital Signs internal control over financial reporting
as of September 30, 2007. This report appears below.

50

---



Report of Independent Registered Public
Accounting Firm

The Board of Directors and Stockholders
Vital Signs, Inc.

We have audited Vital Signs, Inc. and Subsidiaries internal control over financial reporting as of September 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, Vital Signs, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Vital Signs, Inc. and Subsidiaries as of September 30, 2007 and 2006 and our report dated December 14, 2007 expressed an unqualified opinion thereon.





GOLDSTEIN GOLUB KESSLER LLPNew York, New York
December 14, 2007

51

---



Changes in Internal Controls Over Financial
Reporting

There have
been no changes in the Companys internal control over financial reporting that
occurred during the last fiscal quarter to which this Annual Report on Form
10-K relates that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

Item 9B. Other
Information

Not
applicable.

52

---



PART III

Item 10. Directors,
Executive Officers and Corporate Governance

The registrant incorporates by reference herein information to be set forth in
its definitive proxy statement for its 2008 annual meeting of shareholders that
is responsive to the information required with respect to this Item provided,
however, that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
  information that is responsive to the information required with respect to
  this Item is provided by means of an amendment to this Annual Report on Form
  10-K filed with the Securities and Exchange Commission prior to the filing of
  such definitive proxy statement; or                                            
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | if such
  proxy statement is not mailed to shareholders and filed with the Securities
  and Exchange Commission within 120 days after the end of the registrants
  most recently completed fiscal year, in which case the registrant will
  provide such information by means of an amendment to this Annual Report on
  Form 10-K.

Item 11. Executive
Compensation

The registrant
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2008 annual meeting of shareholders that is responsive
to the information required with respect to this Item; provided, however, that
such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
  information that is responsive to the information required with respect to
  this Item is provided by means of an amendment to this Annual Report on Form
  10-K filed with the Securities and Exchange Commission prior to the filing of
  such definitive proxy statement; or                                            
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | if such
  proxy statement is not mailed to shareholders and filed with the Securities
  and Exchange Commission within 120 days after the end of the registrants
  most recently completed fiscal year, in which case the registrant will
  provide such information by means of an amendment to this Annual Report on
  Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners,
Management and Related Stockholder Matters

The registrant
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2008 annual meeting of shareholders that is responsive
to the information required with respect to this Item; provided, however, that
such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
  information that is responsive to the information required with respect to
  this Item is provided by means of an amendment to this Annual Report on Form
  10-K filed with the Securities and Exchange Commission prior to the filing of
  such definitive proxy statement; or                                            
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | if such
  proxy statement is not mailed to shareholders and filed with the Securities
  and Exchange Commission within 120 days after the end of the registrants
  most recently completed fiscal year, in which case the registrant will
  provide such information by means of an amendment to this Annual Report on
  Form 10-K.

53


---



Item 13. Certain
Relationships and Related Transactions, and Director Independence

The registrant
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2008 annual meeting of shareholders that is responsive
to the information required with respect to this Item; provided, however, that
such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
  information that is responsive to the information required with respect to
  this Item is provided by means of an amendment to this Annual Report on Form
  10-K filed with the Securities and Exchange Commission prior to the filing of
  such definitive proxy statement; or                                            
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | if such
  proxy statement is not mailed to shareholders and filed with the Securities
  and Exchange Commission within 120 days after the end of the registrants
  most recently completed fiscal year, in which case the registrant will
  provide such information by means of an amendment to this Annual Report on
  Form 10-K.

Item 14. Principal
Accountant Fees and Services

The registrant
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2008 annual meeting of shareholders that is responsive
to the information required with respect to this Item; provided, however, that
such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
  information that is responsive to the information required with respect to
  this Item is provided by means of an amendment to this Annual Report on Form
  10-K filed with the Securities and Exchange Commission prior to the filing of
  such definitive proxy statement; or                                            
| |   |                                                                                                                                                                                                                                                                                                                                     
| |  | if such
  proxy statement is not mailed to shareholders and filed with the Securities
  and Exchange Commission within 120 days after the end of the registrants
  most recently completed fiscal year, in which case the registrant will
  provide such information by means of an amendment to this Annual Report on
  Form 10-K.

54


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PART IV

Item
15. Exhibits and Financial Statement
Schedules

|      |                                                                                                                                                        
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(a-1) | The
 financial statements listed in the index set forth in Item 8 of this Annual
 Report on Form 10-K are filed as part of this Annual Report.         
|      |                                                                                                                                                        
|(a-2) | All
 schedules have been omitted because they are not applicable or the required
 information is included in the financial statements or notes thereto.
|      |                                                                                                                                                        
|(a-3) | The
 following exhibits are incorporated by reference herein or annexed to this
 Annual Report:                                                        

|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Exhibit |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.1     |  | Restated
 Certificate of Incorporation is incorporated by reference to Exhibit 3.1 to
 the Companys Annual Report on Form 10-K for the year ended September 30,
 2005.                                                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.2     |  | Certificate
 of Amendment to the Restated Certificate of Incorporation is incorporated by
 reference to Exhibit 3.2 to the Companys Annual Report on Form 10-K for the
 year ended September 30, 2006.                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.3     |  | By-laws, as
 amended and restated, are incorporated by reference to Exhibit 10.1 to the
 Companys Annual Report on Form 10-K for the year ended September 30, 2006.                                                                                                                                                                                                                                                                                     
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1    |  | 1990
 Employee Stock Option Plan, as amended, is incorporated by reference to
 Exhibit 10.1 to the Companys Annual Report on Form 10-K for the year ended
 September 30, 1997                                                                                                                                                                                                                                                                           
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.2    |  | 1991
 Director Stock Option Plan, as amended, is incorporated by reference to
 Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended
 September 30, 1999.                                                                                                                                                                                                                                                                          
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.3    |  | Agreement
 between the Company and Respironics, Inc., dated effective as of July 1, 1993,
 is incorporated by reference to Exhibit 10.4 to the Companys Annual Report
 on Form 10-K for the year ended September 30, 1993. Amendment to Agreement
 between the Company and Respironics, Inc., dated September 14, 1999 is
 incorporated by reference to Exhibit 10.3 to the Companys Annual Report on
 Form 10-K for the year ended September 30, 1999.
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.4    |  | Forms of
 Option Agreements with various employees of the Company are incorporated by
 reference to Exhibit 10.6 to the Companys Registration Statement on Form S-1
 (No. 33-39107) initially filed with the Commission on February 21, 1991.                                                                                                                                                                                                           
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.5    |  | Vital Signs
 Investment Plan, as amended is incorporated by reference to Exhibit 10.5 to
 the Companys Annual Report on Form 10-K for the year ended September 30,
 1999.                                                                                                                                                                                                                                                                               
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.6    |  | Stock Option
 Grants to Terry D. Wall and Barry Wicker, replacing stock options granted to
 Messrs. Wall and Wicker pursuant to the 1993 Executive Stock Option Plan, is
 incorporated by reference to Exhibit 10.8 to the Companys Annual Report on
 Form 10-K for the year ended September 30, 1996.                                                                                                                                                  
|10.7    |  | Vital Signs
 2002 Stock Incentive Plan, is incorporated by reference to the Companys
 Annual Report on Form 10-K for the year ended September 30, 2003                                                                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.8    |  | Vital Signs
 2003 Investment Plan is incorporated by reference to the Companys proxy
 statement filed with the SEC on September 2, 2003.                                                                                                                                                                                                                                                                                                                
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|14.1    |  | Code of
 Ethics is incorporated by reference to the Companys Annual Report on Form
 10-K for the year ended September 30, 2003.                                                                                                                                                                                                                                                                                                                         
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|21.1    |  | Subsidiaries
 of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|23.1    |  | Consent of
 Goldstein Golub Kessler LLP.                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|24.1    |  | Power of
 Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.1    |  | Certification
 of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
 2002.                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.2    |  | Certification
 of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
 2002.                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|32.1    |  | Certification
 of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|32.2    |  | Certification
 of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 




55

---



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, this
14th day of December, 2007.





| |     |                  
| | --- | -----------------
| |     | VITAL SIGNS, INC.
| |     |                  
| | By: | /s/              
| |     |                  
| |     |                  

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
dates indicated.

|                        |  |                                                  |     
|----------------------- |  | ------------------------------------------------ | ----
|Signature               |  | Title                                            | Date
|                        |  |                                                  |     
|                       
|/s/ TERRY D. WALL*      |  | President,
 Chief Executive Officer and Director |     
|                        |  |                                                  |     
|(Terry D. Wall)         |  |                                                  |     
|                        |  |                                                  |     
|/s/ HOWARD DONNELLY*    |  | Director                                         |     
|                        |  |                                                  |     
|(Howard Donnelly)       |  |                                                  |     
|                        |  |                                                  |     
|/s/ DAVID MACCALLUM*    |  | Director                                         |     
|                        |  |                                                  |     
|(David MacCallum)       |  |                                                  |     
|                        |  |                                                  |     
|/s/ RICHARD L. ROBBINS* |  | Director                                         |     
|                        |  |                                                  |     
|(Richard L. Robbins)    |  |                                                  |     
|                        |  |                                                  |     
|/s/ GEORGE A. SCHAPIRO* |  | Director                                         |     
|                        |  |                                                  |     
|(George A. Schapiro)    |  |                                                  |     
|                        |  |                                                  |     
|/s/ C.
 BARRY WICKER*   |  | Director                                         |     
|                        |  |                                                  |     
|(C. Barry Wicker)       |  |                                                  |     
|                        |  |                                                  |     
|/s/ MARK D.  MISHLER*   |  | Chief
 Financial and Accounting Officer          |     
|                        |  |                                                  |     
|(Mark D. Mishler)       |  |                                                  |     

|     |     | 
|---- | --- | 
|*By: | /s/ | 
|     |     | 

56

---



INDEX TO EXHIBITS

|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Exhibit |   | Description                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.1     |  | Restated
 Certificate of Incorporation is incorporated by reference to Exhibit 3.1 to
 the Companys Annual Report on Form 10-K for the year ended September 30,
 1995.                                                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.2     |  | Certificate of Amendment
 to the Restated Certificate of Incorporation is incorporated by reference to
 Exhibit 3.2 to the Companys Annual Report on Form 10-K for the year ended
 September 30, 2006.                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|3.3     |  | By-laws, as amended and restated,
 are incorporated by reference to Exhibit 3.3 to the Companys Annual Report
 on Form 10-K for the year ended September 30, 2006.                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.1    |  | 1990
 Employee Stock Option Plan, as amended, is incorporated by reference to
 Exhibit 10.1 to the Companys Annual Report on Form 10-K for the year ended
 September 30, 1997                                                                                                                                                                                                                                                                           
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.2    |  | 1991
 Director Stock Option Plan, as amended, is incorporated by reference to
 Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended
 September 30, 1999.                                                                                                                                                                                                                                                                          
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.3    |  | Agreement
 between the Company and Respironics, Inc., dated effective as of July 1,
 1993, is incorporated by reference to Exhibit 10.4 to the Companys Annual
 Report on Form 10-K for the year ended September 30, 1993. Amendment to
 Agreement between the Company and Respironics, Inc., dated September 14, 1999
 is incorporated by reference to Exhibit 10.3 to the Companys Annual Report
 on Form 10-K for the year ended September 30, 1999.
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.4    |  | Forms of
 Option Agreements with various employees of the Company are incorporated by
 reference to Exhibit 10.6 to the Companys Registration Statement on Form S-1
 (No. 33-39107) initially filed with the Commission on February 21, 1991.                                                                                                                                                                                                           
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.5    |  | Vital Signs
 Investment Plan, as amended is incorporated by reference to Exhibit 10.5 to
 the Companys Annual Report on Form 10-K for the year ended September 30,
 1999.                                                                                                                                                                                                                                                                               
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.6    |  | Stock Option
 Grants to Terry D. Wall and Barry Wicker, replacing stock options granted to
 Messrs. Wall and Wicker pursuant to the 1993 Executive Stock Option Plan, is
 incorporated by reference to Exhibit 10.8 to the Companys Annual Report on
 Form 10-K for the year ended September 30, 1996.                                                                                                                                                  
|10.7    |  | Vital Signs
 2002 Stock Incentive Plan, is incorporated by reference to the Companys
 Annual Report on Form 10-K for the year ended September 30, 2003                                                                                                                                                                                                                                                                                                  
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.8    |  | Vital Signs
 2003 Investment Plan is incorporated by reference to the Companys proxy
 statement filed with the SEC on September 2, 2003.                                                                                                                                                                                                                                                                                                                
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|14.1    |  | Code of
 Ethics is incorporated by reference to the Companys Annual Report on Form
 10-K for the year ended September 30, 2003.                                                                                                                                                                                                                                                                                                                         
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|21.1    |  | Subsidiaries
 of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|23.1    |  | Consent of
 Goldstein Golub Kessler LLP.                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|24.1    |  | Power of
 Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.1    |  | Certification
 of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
 2002.                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|31.2    |  | Certification
 of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
 2002.                                                                                                                                                                                                                                                                                                                                                      
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|32.1    |  | Certification
 of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|32.2    |  | Certification
 of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 

57

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