SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

[X]     Annual  Report   Pursuant  to  Section  13  or  15(d)  of  the
        Securities  Exchange Act of 1934  [No Fee Required]  For the fiscal
        year ended September 30, 1996.

[  ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934 [No Fee Required]
        For the transition period from      to
                                        ----

                         Commission File Number 0-18793


                                VITAL SIGNS, INC.

             (Exact name of registrant as specified in its charter)

      New Jersey                                      11-2279807
(State or other jurisdiction of         (I.R.S. Employer Identification Number)
 incorporation or organization)
                                 20 Campus Road,
                            Totowa, New Jersey 07512
                                 (201) 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  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

     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. [ X ]

     Aggregate  market  value  of  voting  stock  held by  non-affiliates  as of
December  1,  1996 was  approximately  $129,000,000.  Number of shares of Common
Stock outstanding as of December 1, 1996: 13,071,383.

     Documents  incorporated by reference:  Definitive  Proxy Statement for 1997
Annual Meeting of Shareholders (Part III).


<PAGE>



                                VITAL SIGNS, INC.

                                TABLE OF CONTENTS

                                                                     Page
Part I

Item 1.          Business                                              2
Item 2.          Properties                                           15
Item 3.          Legal Proceedings                                    15
Item 4.          Submission of Matters to a Vote of
                    Security Holders                                  15
Item 4A.         Executive Officers of the Registrant                 16
Part II
Item 5.          Market for the Registrant's Common
                    Equity and Related Stockholder Matters            18
Item 6.          Selected Financial Data                              18
Item 7.          Management's Discussion and Analysis
                    of Results of Operations and
                    Financial Condition                               20
Item 8.          Financial Statements and Supplementary
                    Data*                                             25
Item 9.          Changes in and Disagreements with
                    Accountants on Accounting and
                    Financial Disclosure                              25
Part III
Item 10.         Directors of the Registrant                          26
Item 11.         Executive Compensation                               26
Item 12.         Security Ownership of Certain Beneficial
                    Owners and Management                             26
Item 13.         Certain Relationships and Related
                    Transactions                                      26
Part IV
Item 14.         Exhibits, Financial Statement Schedules  and
                    Reports on Form 8-K                               27

Signatures                                                            29


*Financial Statements follow page 25.


<PAGE>



                                     PART I

Item 1.  Business

Introduction

     Vital  Signs,  Inc.  was  initially  incorporated  in New York in 1972.  On
December 19, 1988,  Vital Signs,  Inc.  reincorporated  in New Jersey  through a
merger  with a then  newly  formed  New  Jersey  corporation.  Unless  otherwise
indicated,  all references in this Annual Report to the "Company" refer to Vital
Signs,  Inc.,  its  predecessor  New York  corporation  and  their  consolidated
subsidiaries.  References to "Vital  Signs" refer solely to the parent  company.
Vital Signs' principal  executive offices are located at 20 Campus Road, Totowa,
New Jersey 07512; its telephone number at that location is (201) 790-1330.

     Vital  Signs  and  its   subsidiaries   design,   manufacture   and  market
single-patient use medical products for anesthesia,  respiratory,  critical care
and emergency.  Single-patient use products have captured an increasing share of
the medical products market from reusable  products,  primarily because of their
cost  advantages  and improved  patient care  features,  including  reducing the
potential of transmitting infections from one patient to another.

     The Company has pioneered the development and  introduction of a variety of
single-patient  use products.  In 1975,  the Company  commenced the marketing of
clear,  non-conductive  anesthesia breathing circuits.  The first clear plastic,
single-use   air-filled   cushion   face  mask  for   anesthesia   delivery  and
resuscitation  was launched by the Company in 1981. In 1984, the Company was the
first  organization to introduce a single-patient use manual  resuscitator.  The
first single-  patient use  laryngoscope  system for use in  anesthesia  and the
critical  care arenas was  developed  and  launched by the Company in 1988.  The
Company has developed a general anesthesia kit (1989), which can combine over 20
disposable items in one convenient, cost-effective package; and the first single
patient use infant  resuscitation  circuit with an adjustable  pressure limiting
valve (1992), used to protect the infant's lung against over pressurization.  In
the last three years the Company has  developed a  stylet-tracheal  tube for the
removal of meconium  during high risk  deliveries;  a  pediatric  emergency  kit
utilizing  a unique  color  coded  measuring  tape to select  the  proper  sized
equipment;  and a device  for  measuring  the effect of  neuromuscular  blockage
during  anesthesia.  In October,  1996, the Company  introduced its new flexible
face  mask  ("Flexmask(TM)"),  a flush  device  for  vascular  access  catheters
("Vasceze(TM)")  and a closed  suction system  designed for ventilated  patients
("Isocath(TM)").

     For    additional     information    regarding    these    products,    see
"Business-Products."

     The  Company's  strategy is to sell its  principal  products  to  hospitals
through its own sales force and  third-party  distributors.  The worldwide sales
force  consisted  of 102 sales  employees at October 1, 1996  compared  with 104
sales employees at October 1, 1995.



<PAGE>



     This Annual Report on Form 10-K contains, and from time to time the Company
expects to make,  certain  forward-looking  statements  regarding  its business,
financial  condition and results of  operations.  In  connection  with the "Safe
Harbor"  provisions  of the Private  Securities  Reform Act of 1995 (the "Reform
Act"), the Company intends to caution investors that there are several important
factors that could cause the Company's actual results to differ  materially from
those projected in its forward-looking statements, whether written or oral, made
herein or that may be made  from  time to time by or on  behalf of the  Company.
Investors  are  cautioned   that  such   forward-looking   statements  are  only
predictions and that actual events or results may differ materially. The Company
undertakes no obligation to publicly release the results of any revisions to the
forward-looking  statements to reflect events or circumstances or to reflect the
occurrence of unanticipated events.

     The  Company  wishes  to ensure  that any  forward-looking  statements  are
accompanied  by  meaningful  cautionary  statements  in order to comply with the
terms of the safe harbor  provided by the Reform Act.  Accordingly,  the Company
has set forth a list of important  factors that could cause the Company's actual
results to differ materially from those expressed in forward-looking  statements
or predictions  made herein and from time to time by the Company.  Specifically,
the Company's  business,  financial condition and results of operations could be
materially different from such  forward-looking  statements and predictions as a
result of (i)  competitive  factors  that  could  affect the  Company's  primary
markets,  including the results of competitive bidding procedures implemented by
Group Purchasing Organizations,  interruptions or delays in manufacturing and/or
sources of supply,  and increased market acceptance of competitors'  existing or
new products,  (ii) adverse  determinations arising in the context of regulatory
matters  (see  "--Regulation") or legal  proceedings (see Item 3 of this  Annual
Report on Form 10K) and  (iii)  legislative  changes  impacting  the  healthcare
market.

Acquisitions - Current Fiscal Year

     In January 1996, the Company  acquired the outstanding  stock of HealthStar
Pharmaceutical  Services, Inc., a contract manufacturer utilizing blow-fill-seal
technology  for use in the pharmaceuti cal and medical fields. See "--Services" 
and Note 2 to the Company's Consolidated Financial Statements.

     In fiscal 1996,  the Company  acquired the  remaining 50% interest in Coast
Medical,  Inc, a manufacturer of OEM medical products.  The Company had acquired
its initial 50% interest in Coast  Medical  Inc.,  in April 1992. On December 4,
1995 the Company  acquired the MistyOx  product line. That product line consists
of three sets of products used in the delivery of hydration to patients.

     Historically,  the Company has made both product and business acquisitions.
Although no  assurances  can be given with respect to future  acquisitions,  the
Company's   acquisition   strategy  currently  is  focused  upon  the  following
objectives:  (i)  identification and acquisition of companies and/or products in
the anesthesia,  respiratory and critical care fields with the goal of expanding
the  products  that  can be sold  by the  Company's  direct  sales  force,  (ii)
expansion of sales and marketing  capabilities  to  international  markets,  and
(iii) unique research and development capabilities.



<PAGE>



Products

Principal Products.

The Company markets a wide variety of single-patient use anesthesia, respiratory
and related critical care products. Its principal products are described below:

Anesthesia Products:

     Face  Masks.  In 1981,  the  Company  introduced  the first  clear  plastic
air-filled cushion face mask for single-patient  anesthesia and respiratory use.
The soft air-filled cushion face mask has been clinically  documented to provide
a better  seal on most  patients  than  other face  masks,  thus  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. The Company offers various sizes and types of face
masks.  The Company  anticipates that the usage of single patient use face masks
in surgical procedures internationally will continue to expand as single-patient
use products become increasingly accepted in foreign hospitals.  In October 1996
the Company introduced a flexible face mask product (Flexmask(TM)).

     Anesthesia  Breathing  Circuits.  The  Company  offers  a wide  variety  of
single-patient use anesthesia breathing circuits,  which are used to connect the
patient  to  the  anesthesia  machine  and to  various  patient  monitors.  Each
breathing  circuit consists of at least two flexible hoses, a breathing bag, and
a "Y" and elbow attachment.  Since the breathing circuit needs of hospitals vary
significantly,  the Company  offers a large  variety of circuits  designed to be
compatible with anesthesia  equipment  manufactured by numerous other companies.
Technological advances in the areas of gas sampling,  temperature monitoring and
humidification  have  provided the Company with an  opportunity  to develop many
additional varieties of circuits.

     INFUSABLE(R) Disposable Pressure Infusor.  Invasive pressure monitoring has
been used since the early 1970's as a means of monitoring  blood and other fluid
pressures  of patients  in certain  critical  care  situations.  The  monitoring
process  involves  inserting a catheter,  usually into the artery or vein of the
patient,  connecting  the catheter to a transducer (a device which  converts the
pressure  impulse  from the  patient's  blood into an  electrical  signal),  and
transmitting  the  electrical  signal to a  monitoring  screen.  The  monitoring
process uses a fluid-filled  conduit to connect the catheter to the  transducer.
The fluid  generally is a saline  solution  forced into the system by a pressure
infusor. A company acquired by Vital Signs introduced its patented  INFUSABLE(R)
disposable  pressure  infusor  to the  market in late 1986 and early  1987.  The
Company's  infusor,  which  is  used in  invasive pressure monitoring and rapid 
infusion of  fluids,  consists  of an  inflatable  bladder,  a bulb to pump  air
into the bladder  and a  pressure  gauge.   The infusor also has a mesh netting 
into which a package of sterile fluid or "solution bag" is placed.  The fluid is
connected to the monitoring  system and the pressure on the solution bag is set 
at a pressure level designed to maintain the pressure required by the monitoring
system.

     General  Anesthesia  Systems.  The Company  assembles  and markets  General
Anesthesia  System  customized  anesthesia  kits, which can include more than 20
products,  such as  air-filled  cushion face masks,  breathing  circuits,  blood
pressure  cuffs and  temperature  monitoring  probes.  In marketing  the General
Anesthesia  System  kits,  the  Company's  sales  representatives  use  detailed
questionnaires  to assist in determining  the  particular  products the hospital
desires  in its  anesthesia  kits.  The  Company  then  manufactures  a  General
Anesthesia System kit to meet the hospital's specific needs.


<PAGE>



     Thermadrape(R)  Heat  Retentive  and  Insulating  Drape is a patented  heat
retentive  surgical  covering  designed to be a safe,  effective and  affordable
alternative to the active warming blanket.  The  Thermadrape(R)  drape minimizes
perioperative heat loss and allows patients to avoid (i) the increased metabolic
rate  and  oxygen  uptake   associate  with   post-operative   shivering,   (ii)
vasoconstriction,  (iii) delayed drug  clearance and other side effects of "cold
stress" and (iv) needless  discomfort.  Configurations  include  blankets,  head
covers, leggings and wraps. Sizes range from pediatric to adult.

     Temp  Probe(TM)  Temperature  Probes.  The  Company  offers  a  variety  of
temperature probes (esophageal,  tympanic,  skin and general purpose) to monitor
patients  undergoing  anesthetic  procedures.   The  Company  has  expanded  its
temperature line to accommodate the various physiological patient monitors found
in hospitals.  The Company's esophageal stethoscope monitors temperature,  while
also providing the clinician with the patient's heart and lung sounds.  In 1995,
the ESG(TM)  esophageal  stethoscope  with gastric suction was introduced.  This
stethoscope  adds a gastric  suction  function to the measurement of temperature
and amplification of heart and lung sounds.

     Vital  View(TM)   Single-Patient  Use  Fiberoptic  Laryngoscope  System  is
designed to assist the  anesthesiologist  in correctly  placing an  endotracheal
tube within the trachea of the patient.  This system has several advantages over
traditional metal blade  laryngoscope  systems,  including  lowering the risk to
both the patient and  physician  of infection  associated  with  reusable  metal
blades and handles. In addition, hospital capital outlays for stocking emergency
crash carts can be reduced by purchasing the Vital View(TM) system rather than a
reusable Fiberoptic system.

     ParaGraph(R) Neuromuscular Blockade Monitor. The ParaGraph(R) neuromuscular
blockade monitor and related  ParaStim(TM)  single-use sensor products provide a
simple,   accurate  and   cost-effective   means  of  assessing   the  level  of
neuromuscular  blockade, a common procedure in anesthetic practice.  The Company
acquired  rights with respect to these patented  products during Fiscal 1993 and
began sale of these products during Fiscal 1994.

     The Vital Pak(TM)  Procedural  Delivery System bundles  together all of the
anesthesia  supplies used in a specific procedure (for example,  coronary artery
bypass grafts)  including  complementary  products  manufactured by others,  for
example  sterile  pulmonary  artery  catheter  kits.  The Company  sources these
products  directly  from the  manufacturer  for the  Vital  Pak.  Each  hospital
customizes  the contents of the Vital Pak(TM) system to match their patient care
needs and protocols. This standardization enables the hospital to develop highly
efficient processes for utilization and patient charge accounting.

Respiratory and Critical Care Products:

     Manual Resuscitator Products.  Manual resuscitators are ventilation devices
which are squeezed by hand to force oxygen into a patient's lungs. They 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.



<PAGE>



     The Company was the first to offer single-patient use manual resuscitators.
The  Company's  CODE  BLUE(TM)  and  VITAL  BLUE(TM)  resuscitators  are used in
emergency  situations  and in a variety of  medical  procedures.  CODE  BLUE(TM)
resuscitators are sold in different sizes for infants, children and adults. Both
resuscitators  alleviate certain problems  involved in mouth-to-mouth  emergency
resuscitation,  including  the risk to both the  rescuer and the  individual  of
transmitting  infections.  Most  reusable  manual  resuscitators  are  costly to
sterilize  and  difficult to fully  reassemble.  In contrast,  CODE BLUE(TM) and
VITAL  BLUE(TM)  resuscitators  are  relatively  inexpensive,  and already fully
assembled.  The Company also offers a specialized  line of infant  resuscitation
products  (BabySafe(TM),  PediBlue(TM) and BabyBlue(TM)  resuscitators)  used in
labor and delivery rooms and in neonatal intensive care units, where controlling
the spread of infection is  particularly  critical.  BabySafe(TM)  resuscitators
offer the  ability  to  adjust  and  limit  the  level of  pressure  that can be
delivered  during  resuscitation.  Oxygen can be  delivered  without the risk of
barotrauma.  Baby Safe(TM),  PediBlue(TM)  and  BabyBlue(TM)  resuscitators  are
available in a variety of configurations  and sizes to meet the needs of infants
and children.

     CleenCuff(TM),  Flufficuff(TM),  and CUFF-ABLE(R) Blood Pressure Cuffs. The
Company  manufactures  and sells  single-patient  use blood pressure cuffs which
provide  hospitals with an  alternative  to traditional  reusable blood pressure
cuffs that can become  contaminated with blood and other body fluids.  While all
patients  admitted to hospitals are  candidates  for their own  dedicated  blood
pressure  cuff,  the  Company  believes  that to date  the  primary  market  for
disposable cuffs has been for cases where infection  control is a high priority.
The Company's 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.

     ACTAR(R) and INFANTRY(R) CPR Training Manikins.  The Company manufactures a
product  line  of  patented   cardiopulmonary   resuscitation  ("CPR")  training
manikins.  ACTAR(R) manikins are made from four basic  components--a head, chest
plate,  compression  piston and  disposable  lung.  The  Company  also sells the
INFANTRY(R)  infant-size CPR training manikins.  While maintaining the necessary
features and anatomical  landmarks for CPR practices,  ACTAR(R) and  INFANTRY(R)
manikins  are far  smaller  and  less  expensive  than the  full  size  manikins
typically used for CPR training.  The smaller size and affordable pricing enable
each  person in a CPR  training  class to  practice  with his or her own manikin
rather than sharing a single demonstration model.

     Continuous  Positive Airway Pressure ("CPAP")  Systems.  The Company's face
mask CPAP systems provide a less invasive and more  comfortable way of providing
oxygen to certain  patients  than  conventional  ventilator-based  systems.  The
Company's  face mask CPAP systems  eliminate the need to insert an  endotracheal
tube into the  patient's  trachea  and attach the patient to a  ventilator.  The
Company believes that its CPAP systems generally represent a significant advance
in the treatment of Adult  Respiratory  Distress  Syndrome  (ARDS) and have been
found to be  clinically  effective in the treatment of certain  traumatic  chest
injuries and  postoperative  atelectasis  (collapse of the air sacs in the lungs
and other  disease  states).  The system  consists of a compact  flow  generator
connected  to a  dual-valved,  air-filled  cushion  face mask.  The face mask is
attached to a single-patient  use PEEP (positive end expiratory  pressure) valve
designed to maintain  positive  airway  pressure in the lung,  thus allowing for
more oxygen to diffuse into the patient's blood system.



<PAGE>



     HCH(TM)  Heat  and  Moisture  Exchangers  are  designed  to  ensure  proper
humidification  and reduce heat loss for patients  either  during  anesthesia or
while  attached to mechanical  ventilators.  These  products also  eliminate the
problems associated with heated humidifiers and heated wire systems which can be
hazardous  to  patients by  overheating  and  causing  burns to the  respiratory
system.  Single-patient use heat and moisture exchangers also reduce the risk of
infection associated with reusable heated humidifiers.

     Broselow/Hinkle(TM)  Pediatric  Emergency System.  The  Broselow/Hinkle(TM)
pediatric  emergency system is the product of extensive  clinical efforts by Dr.
James  Broselow  and  Dr.  Alan  Hinkle  which  takes  advantage  of the  direct
correlation  between a  pediatric  patient's  body length and the proper size of
emergency supplies and correct drug dosages.  This patented system,  licensed to
the  Company,   consists  of:  a  tape  measure  having  seven  color  zones,  a
corresponding series of color-coded single-patient use emergency kits or modules
and a nylon  organizer bag cus  tom-designed  to hold all the supplies needed in
either a trauma,  cardiac or respiratory pediatric emergency.  With this system,
emergency  room  and EMS  personnel  can be  confident  that  all  the  supplies
necessary to manage a pediatric emergency are readily identified,  available and
organized in a manner that  minimizes  reaction  time.  The  Broselow/Hinkle(TM)
pediatric  emergency  system may also be sold by the Company in the pediatrician
office market.

     Kurtis MSD(TM) Meconium Suction Device. The Kurtis MSD(TM) meconium suction
device was developed by a practicing neonatalogist,  Peter Kurtis, M.D.. When an
infant shows signs of having  aspirated  meconium,  the device  provides  rapid,
controlled  intubation and meconium suctioning of newborns in the delivery room.
The Kurtis MSD(TM)  meconium suction device combines three (3) devices which are
normally  used  in the  procedure  and,  therefore,  makes  the  procedure  less
cumbersome.

     Misty Ox(R)  Respiratory  Products.  The MistyOx (R) line consists of three
respiratory  product lines that deliver  hydration to a patient.  The first is a
pre-filled bubble humidifier to deliver low flow and low concentration of oxygen
to patients,  the second is a nebulizer to deliver  medium to high flow and high
concentrations  of  oxygen  to  patients,  and the  third is the  addition  of a
regulated  heater  to the  nebulizer.  These  products  may be used on  infants,
children and adults in many areas of the hospital, including emergency, recovery
and critical care.

     Isocath(TM). In October 1996, the Company introduced its Isocath(TM) closed
suction system,  designed for hospital patients on a ventilator.  Isocath(TM) is
used when an endotracheal tube is inserted in a patient located in the intensive
care  setting of a hospital.  Additionally,  suctioning,  one of the most common
procedures in intensive  care, is performed to keep the patient's  lungs free of
secretions.  Isocath(TM)  allows the suction  catheter  to be advanced  into the
endotracheal tube without disconnecting the patient from the ventilator. Isocath
was  designed  with an  "isolation"  chamber to isolate  the  catheter  from the
patient's airway while permitting cleaning of the catheter without inadvertently
lavaging the patient.

     Vasceze(TM).   In  October  1996,  the  Company  introduced  a  needleless,
disposable,  pre-filled  vascular catheter flush device used with IV sets in the
home care and hospital  market.  Vasceze(TM) is a one piece design  manufactured
using the  "blow-fill-seal"  process.  Vasceze(TM)  is filled with either sodium
chloride or heparin  solutions.  The  product is uniquely  designed to deliver a
flush  solution at  pressures  less than that of 10.cc  syringes and other flush
devices.



<PAGE>


Services

     HealthStar  Pharmaceutical  Services,  Inc.  ("HealthStar") was acquired in
January  1996.  HealthStar's  principal  focus is  utilization  of the Company's
expertise in  blow-fill-seal  technology for contract  packaging  customers that
need   sterile   packaging   (primarily   pharmaceutical   and  medical   device
manufacturers).  HealthStar can also build  blow-fill-seal  machines for sale to
customers that desire to manufacture in their own plants.

     The Validation Group provides  consulting  services to companies engaged in
the  manufacture of medical devices and  pharmaceuticals,  mainly in the area of
compliance  with  regulations  promulgated  by the Food and Drug  Administration
("FDA").

Market Data

     The  following  table sets forth,  for each of the past three fiscal years,
the dollar amount and approximate  percentage of net  sales--continuing  product
lines represented by the Company's anesthesia products, respiratory and critical
care products, and other products.

<TABLE>
<CAPTION>
                                               Year Ended September 30,
                                   ---------------------------------------------------------------
                                         1994                      1995                1996
                                   ---------------------- ---------------------- -----------------
                                   Amount        %       Amount        %           Amount      %
                                                            (Dollars in Millions)
<S>                              <C>           <C>      <C>           <C>        <C>         <C> 
Anesthesia                       $  49.9       60.2     $  54.1       61.7       $  56.4     62.7
Respiratory and Critical Care       32.8       39.6        33.6       38.3          31.7     35.3
Services / Other                      .2         .2          .0         .0           1.8      2.0
                                  ------      -----      ------    -------        ------    ------
Total                             $ 82.9      100.0%    $  87.7      100.0%       $ 89.9    100.0%
                                  ======      =====     =======    =======        ======    ======

</TABLE>

Sales, Marketing and Customers

     Historically,  the Company's  strategy has been to sell its  anesthesia and
respiratory  products to  hospitals in the United  States  through its own sales
force and third-party  distributors.  Given the increased use of national supply
distributors  by hospitals over the last few years,  the Company's sales through
these national distributors, such as Baxter and Owens & Minor, have increased to
36% of  sales--continuing  product lines for Fiscal 1996.  The  Company's  sales
force  participates  with these  national  distributors  in making  sales to the
hospital.  The Company believes this strategy provides it with an advantage over
many of its competitors,  including competitors who have larger sales forces but
whose salespersons do not focus solely upon anesthesia and respiratory products.
Vital  Signs'  sales  force,   which  focuses   primarily  upon  anesthesia  and
respiratory  products,  consisted of 84 salespersons in the United States and 18
salespersons internationally at October 1, 1996.

     The Company  utilizes  an  independent  distributor  for its  Actar(R)  CPR
training  manikins and other  pre-hospital  and  emergency  care  products.  The
Company has begun to allocate  resources  to the  development  of a  distributor
network for the home care market.

     As new  products are  developed  which can be sold by the  Company's  sales
force,  management  educates  and  trains  the  sales  force in the  need,  use,
application  and  advantages of the Company's  products.  The Company also holds
quarterly  training  sessions  for  all  salespersons  and  conducts  additional
training as it deems appropriate.


<PAGE>



     The Company's  marketing  staff,  which works closely with its sales force,
collects  and  analyzes  customer   responses  to  new  and  existing  products,
participates in the Company's product development program and assists in product
training.  In  addition,  the  Company's  marketing  staff  develops  and  helps
implement various internal and external promotional activities.

     As have other providers within the medical and healthcare  industries,  the
Company has been  confronted with the rising  purchasing  power of buying groups
such as Premier  Purchasing  Partners,  Tenet,  Columbia  Healthcare and others.
While the Company has been successful in signing an agreement with Premier for a
broad range of anesthesia products,  no assurances can be given of the Company's
ability to secure other  contracts.  The buying power exerted by these  entities
will have a negative  impact on the Company's  margins.  Industry wide estimates
are that such  buying  groups  will  continue  to exert  their power to decrease
prices.

     On November 18,  1996,  the Company  announced it won a dual source  supply
agreement with Premier Purchasing Partners LP ("Premier") covering a broad range
of anesthesia products,  including breathing circuits and face masks. Premier is
the largest  healthcare  buying group in the United States. As part of Premier's
group purchasing  commitment program, the agreement features savings for Premier
hospitals and systems  which agree to buy 90 percent of the products  covered by
the agreement from Vital Signs or one other supplier.  Pricing for the five-year
agreement is effective February 1, 1997.

International Operations

     For the year ended  September 30, 1996,  international  sales accounted for
approximately  8% of net  sales--continuing  product  lines,  as  compared  with
approximately 5% during 1995 and approximately 3% during 1994.

     Historically,  the  Company has sold its  products  in  European  and other
international markets through distributors.  However,  approximately three years
ago the  Company  sought  expansion  in  Europe  by  establishing  direct  sales
organizations  in the United  Kingdom and Germany.  In November 1995, the German
operations were closed and the sales force was replaced by a distributor.

     In November 1995, the Company announced an exclusive  three-year  agreement
with the Baxter Respiratory  Therapy division of Baxter Europe to distribute the
Company's anesthesia, respiratory and critical care products in France, Ireland,
Belgium, Holland, Spain and Portugal where Baxter has a significant direct sales
force.  Under the  agreement,  the  Company's  UK  subsidiary  will serve as the
exclusive  distributor  of certain of Baxter's  respiratory  products in Britain
where the Company's UK subsidiary maintains a direct sales organization.

     Beginning in August 1995,  Mediziv,  a subsidiary of the company located in
Israel,  assumed  responsibility  for  certain  of the  assembly  and  logistics
requirements  for the  Company's  European  operations.  In  September  1996 the
operations of Mediziv were refocused by discontinuing the manufacture of certain
product lines and  concentrating on manufacturing  Vital Signs' products for the
International market.

     In January  1996,  the Company  opened a sales office in Beijing to support
sales  development  in the  Peoples  Republic  of China  and Hong  Kong  through
distributors. The Company's sales in China for fiscal 1996 are not significant.




<PAGE>



     In September  1996, the Company  announced the execution of agreements with
Teva Medical,  Ltd., a subsidiary  of Teva  Pharmaceuticals,  a leading  Israeli
provider of healthcare  products.  Teva Medical will be the Company's  exclusive
distributor  in Israel,  Egypt and Jordan  and will  manufacture  certain of the
Company's products.  The Company will also distribute certain of Teva's products
in the United States and United Kingdom.

     It is the  Company's  intention to augment the  international  sales effort
through strategic alliances wherever possible, although no assurance can be made
that any such alliances can be completed.

Research and Development

     The Company regards the element of innovation in its product lines to be an
essential  part of its overall  strategy.  The principal  focus of the Company's
research  and  development  effort is to develop  product  solutions to problems
experienced by health care professionals.  The Company's  principal  development
activities are directed toward expanding clinical  applications of the Company's
existing products, resulting in improvements to the anesthesia products (such as
the face  mask,  breathing  circuits  and  anesthesia  kits)  where the  Company
maintains a  substantial  market  position.  Moreover,  the  internal  R&D staff
maintains collaborative relationships with external professionals.

     During  Fiscal  1996 the  Company's  principal  R & D focus  was on two new
product  opportunities.  Both products were launched in October 1996.  The first
product,  a flush device for vascular access  catheters  (Vasceze(TM)),  will be
utilized in both the  hospital  setting and in the  rapidly  expanding  homecare
field.  In December  1995,  the Company  received  510k  clearance by the FDA to
market this new device for both saline and heparin  applications.  Manufacturing
of Vasceze(TM) is being  performed in Germany and was in full  production by the
end of December, 1996.

     The other  addition to the  Company's  products is the  Isocath(TM)  closed
suction system designed for use on ventilated  patients.  The Isocath(TM) system
has already  received FDA 510k  clearance for marketing the system in the United
States. The single-use system reduces the risk of infection for both patient and
care giver. Although initial marketing of Isocath(TM) started in October,  1996,
full production is planned for January,  1997. The Company's statement regarding
its plans for full production constitutes a forward-looking  statement under the
Reform  Act.  Actual   commencement   of  full   production   could  be  delayed
substantially  beyond January 1997 as a result of unanticipated  difficulties in
the manufacturing process.

     The Company  expects to continue to rely in part on its internal  staff and
in  part on  outside  professionals  to  perform  research  and  development  on
anesthesia and  respiratory  products.  The Company's  research and  development
expenses  aggregated   approximately   $4,493,000,   $3,865,000  and  $3,595,000
respectively, for Fiscal 1994, 1995 and 1996.

Medical Advisor

     The Company has  retained the services of Bernard  Wetchler,  M.D.,  as the
Company's  Medical  Director  in order  to  provide  the  Company  with  medical
expertise in all facets of the delivery of anesthesia services.  Dr. Wetchler is
Clinical  Professor of  Anesthesiology  at the University of Illinois College of
Medicine, as well as Chair,  Executive Committee,  World Federation of Societies
of  Anesthesiologists;  past  President of the American  Society for  Ambulatory
Anesthesia; and past President, Illinois Society of Anesthesiologists.



<PAGE>



EchoCath, Inc.

     The Company owns a minority  interest in EchoCath,  Inc.,  ("EchoCath"),  a
publically  held  corporation  organized  to develop,  produce and sell  certain
catheter products that utilize  ultrasound guided  technology.  Terence D. Wall,
the Company's  President and Chief Executive Officer,  and Anthony J. Dimun, the
Company's Chief Financial Officer, also own minority interests in EchoCath.  The
Company's  interest in EchoCath is accounted for under the equity method through
which the Company's entire investment has been charged to operations.

Product Liability Exposure

     As with other  health  care  product  suppliers,  the Company is exposed to
potential  product liability  resulting from the use of the Company's  products.
The  Company  presently  carries  product  liability  insurance  coverage  which
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 product  liability suit were filed and a judgment entered against
the Company or the Company  entered into a settlement  agreement,  the business,
results of operations and financial condition of the Company could be materially
adversely  affected if such  judgment or  settlement  exceeded the limits of the
Company's coverage.

     There can be no assurance  that the Company's  insurance will be sufficient
to cover  product  liability  claims that could arise or that such coverage will
remain available to the Company on satisfactory terms, if at all.

Manufacturing and Quality Control

     General

     The Company's  facilities  in Totowa,  New Jersey;  Burnsville,  Minnesota;
Malvern,  Pennsylvania;  Orange,  California;  Riviera Beach,  Florida;  Barkan,
Israel and Kuala Lumpur,  Malaysia are the principal manufacturing locations for
certain of the Company's  products,  including  anesthesia  breathing  circuits,
filters, blood pressure cuffs,  infusables,  manual resuscitators and catheters,
and  are  utilized  for  the  assembly,  testing  and  packaging  of many of its
products.  Plastic components incorporated in certain products are molded to the
Company's  specifications  by outside custom injection molders who utilize molds
that are designed and, in most  instances,  owned by the Company.  The Company's
suppliers  typically are presented  with written  specifications  to assure that
components are manufactured in conformity with the Company's design.

     Given  the  ultimate  use of  many of the  Company's  products  within  the
operating  room and  critical  care units of  hospitals,  the  Company  conducts
quality  control  testing  in its  various  facilities.  Substantially  all such
testing is subject to  governmental  regulation.  Pursuant to United States Food
and Drug Administration ("FDA") regulations, the Company is required to maintain
records of all raw  materials  received,  tested  and used in the  manufacturing
process. See "Regulation."



<PAGE>



     Re-engineering Efforts

     During  Fiscal  1994,  1995  and  1996,  in  light  of the  cost  sensitive
environment  resulting  from various health care reform  proposals,  the Company
implemented  productivity  improvement  programs with the help of an independent
consultant.  This  program  resulted  in  cost  efficiencies  in  manufacturing,
administration  and other operating  functions with a reduction in the Company's
work force by approximately ten percent. The management of the Company continues
to monitor and  challenge  processes  and costs across its  operations  with the
objective of continuous cost reduction/productivity improvement.

     Significant Suppliers

     In 1980,  the Company  acquired the rights to its  air-filled  cushion face
mask--the Company's highest volume product--through a collaboration  arrangement
with  Respironics,  Inc.  ("Respironics").  The Company purchases its face masks
from Respironics, a single source which manufactures the face mask from sites in
Hong Kong and the People's  Republic of China.  The Company's  supply  agreement
with Respironics requires  Respironics to supply air-filled,  cushion face masks
of various  specifications  to the Company on an exclusive  basis for anesthesia
purposes, and obligates the Company to purchase all of its anesthesia face masks
from  Respironics as long as  Respironics is the low cost supplier.  The Company
has had a series of supply  agreements  with  Respironics  since June 1980;  the
current  supply  agreement  will govern the supply of  anesthesia  face masks by
Respironics to the Company through June 1997. Discussions are ongoing concerning
the extension of this agreement.

     If the supply of face masks from Respironics should be interrupted or cease
for any  reason,  the  Company  would seek to find  alternative  developers  and
suppliers of face masks. In such event, the Company would experience  disruption
in its  business.  No  assurance  can be  given  that,  in the  event of such an
interruption  or cessation,  the Company could,  in fact,  maintain its required
supply of face masks in a quantity  and at a cost that would not have a material
adverse  effect on the  business  and  operating  results  of the  Company.  The
Company's  policy is to maintain a sufficient  stock of face masks to lessen the
impact of any temporary production or supply disruption. The Company's agreement
with  Respironics  provides  certain  protections to the Company with respect to
molds utilized by Respironics.

     The Company's new Vasceze(TM)  product is manufactured in Germany.  Because
of  the  complicated   manufacturing  process  involved,  a  disruption  in  the
manufacturing  procedure would impact the Company's abilities to fill orders for
Vasceze(TM) in the short term. For substantially all other products, the Company
believes that  alternative  sources of supply are available for such  components
and that the loss of any such supplier would not have a material  adverse effect
upon the Company's financial condition.

Sales Backlog

     The Company does not believe  that  backlog is a meaningful  measure of its
business, since its objective is to ship all orders within relatively short time
frames.




<PAGE>



Competition

     The  principal   competitive  factors  in  the  Company's  markets  include
innovative product design, product quality,  established customer relationships,
name recognition, distribution and price. The Company believes that its products
compete  favorably  with  respect  to these  factors,  although  certain  of the
Company's  competitors  may have greater  financial and  marketing  resources or
broader product lines.

     The Company's  competitive  environment can be characterized as fragmented,
often with as many as twelve  different  companies  competing  with  regard to a
specific product. As a result, the Company's  competition varies from product to
product.  The Company's primary  competitors include Intertech Resources Inc., a
subsidiary of Smith Industries (face masks,  breathing  circuits,  resuscitators
and  anesthesia  kits),  Baxter  International  Inc.,  (breathing  circuits  and
anesthesia kits), King Systems (face masks and anesthesia  circuits),  Stat Labs
(pressure  infusors) and Critikon  (blood pressure  cuffs).  The Company's newly
introduced Vasceze product faces competition from Solopak,  Sanofi-Winthrop  and
Wyeth/Ayerst,  who provide  pre-filled  syringe  catheter  devices.  The primary
competitors  for the  Company's  Isocath  product are Ballard  Medical and Smith
Industries.

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 sells its  products.  The
Company must comply with a variety of  regulations,  including  the Current Good
Manufacturing  Practice  ("CGMP")  regulations  of the FDA,  and is  subject  to
periodic  inspections  by the FDA and  applicable  state and  foreign  agencies.
Enforcement of CGMP  requirements  has increased  significantly in recent years,
and the  FDA  has  publicly  stated  that  compliance  would  be  more  strictly
scrutinized.  If the FDA believes that its regulations  have not been fulfilled,
it may  invoke  extensive  enforcement  powers.  Noncompliance  with  applicable
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 premarket clearances or approvals,
withdrawal of approvals and criminal prosecution. The FDA also has the authority
to request repair,  replacement or refund of the cost of any device manufactured
or distributed by the Company.

     Medical devices are classified by the FDA into three classes that determine
the  degree of  regulatory  control to which the  manufacturer  of the device is
subject.  In general,  Class I devices involve compliance with CGMP requirements
and are  subject to other  general  controls  including  premarket  notification
(510k).  Class II devices are  subject to the same  controls as Class I and also
may be subject to specific  controls (e.g.,  performance  standards,  postmarket
surveillance,  patient  registries  and  FDA  guidelines)  and  are  subject  to
pre-market  notification  (510k).  Class III devices are those devices for which
pre-market  approval  ("PMA") (as  distinct  from  pre-market  notification)  is
required  before  commercial  marketing  to  assure  the  products'  safety  and
effectiveness.



<PAGE>



     To date, all of the Company's  products are classified as either Class I or
Class II. Many new medical devices and some  modifications  to existing  medical
devices,  including most of the Company's products,  are subject to a pre-market
notification  process  pursuant to Section 510(k) of the Federal Food,  Drug and
Cosmetic Act. Further, current FDA enforcement policy prohibits the marketing of
approved or cleared medical  devices for unapproved or uncleared uses.  Products
which do not receive clearance through the FDA's 510(k) notification process are
subject  to much  lengthier  and more  complex  pre-marketing  approval  ("PMA")
procedures.

     No assurance can be given that the FDA or foreign regulatory  agencies will
give on a timely basis, if at all, the requisite clearances or approvals for any
of the Company's medical devices which are under  development.  Moreover,  after
clearance  or approval is given,  these  agencies may have the power to withdraw
clearances  or  approvals  or  require  the  Company to change the device or its
manufacturing  process or labeling, to supply additional proof of its safety and
effectiveness  or to recall,  repair,  replace or refund the cost of the medical
device,  if it is shown to be hazardous or  defective.  The process of obtaining
clearances or approvals to market  products can be costly and time consuming and
can delay the marketing and sale of the Company's products.

     The FDA has recently  finalized changes to its CGMP regulations,  including
design  controls,  which will likely  increase the cost of compliance  with CGMP
requirements.  Federal,  state and foreign regulations regarding the manufacture
and sale of medical devices are subject to additional change. In the future, the
Company  cannot  predict what  impact,  if any,  such changes  might have on its
business.

     Over the past several  years,  the public and the federal  government  have
focused considerable attention on reforming the health care system in the United
States.  The  Clinton  Administration  pledged  to bring  about a reform  of the
nation's health care system and, in September 1993,  President  Clinton outlined
the  Clinton  Administration's  plan for health  care  reform.  Included  in the
proposal were calls to control or reduce  public and private  spending on health
care,  to reform the payment  methodology  for health care goods and services by
both the public (Medicare and Medicaid) and private sectors, which could include
overall limitations on federal spending for health care benefits, and to provide
universal  access to health care.  While the political  climate  appears to have
changed with respect to sweeping  health care reform,  health care reforms on an
issue  by issue  basis  have  been  reported  to be a focus  in the new  Clinton
Presidential term, and such reforms may ultimately be enacted.  No assurance can
be given that any such  reforms will not have a material  adverse  effect on the
Company. Any such effect may be magnified by the advent of "managed care," which
may render sales to hospitals  more cost  sensitive and which has already had an
impact within the medical industry and related fields.

     The  Company is also  subject  to  numerous  federal,  state and local laws
relating to such matters as safe working  conditions,  environmental  protection
and fire hazard control.  There can be no assurance that the Company will not be
required to incur significant  expenses to comply with such laws and regulations
in the future.



<PAGE>



Patents

     While the Company  possesses  certain  patents,  has filed  certain  patent
applications  and has  increased  its efforts to acquire  and  develop  patented
products,  the Company believes that the ownership of patents is not critical to
its ability to compete with respect to most of the products in its product line.
The Company has,  however,  pursued  patent  protection  when in the  reasonable
judgement  of  management  such  efforts may tend to provide  the  Company  with
competitive advantages.

Employees

     At  September  30, 1996,  the Company had 647  full-time  employees  and 11
part-time employees.  The Company believes that its relations with its employees
are satisfactory.

Item 2.  Properties

     The  Company's  executive  offices,   principal   manufacturing  plant  and
principal  warehouse  facilities  are  located  in  Totowa,  New  Jersey.  These
facilities,  consisting of  approximately  154,000 square feet, are owned by the
Company.  The Company's other  substantial  facilities --  approximately  35,000
square  feet  in   Burnsville,   Minnesota;   14,348  square  feet  in  Malvern,
Pennsylvania;  39,600 square feet in Riviera Beach, Florida;  17,756 square feet
in Orange, California and 17,690 square feet in Barkan, Israel are leased by the
Company. The Company also leases office, assembly and warehouse space in England
and Malaysia.

Item 3.  Legal Proceedings

     In September  1994, two separate  complaints were filed against the Company
(one in U.S.  District Court for the Northern District of Illinois and the other
in U.S.  District Court for the Western  District of  Louisiana),  each of which
allege patent infringement with respect to certain of the Company's resuscitator
products and seek money damages and injunctive  relief. The Louisiana matter was
withdrawn by the  plaintiff  and the suit was dismissed in 1996. In the Illinois
action discovery will close shortly and the matter will be placed on the court's
trial  calendar   awaiting  a  trial  date.  The  Company  denies  the  material
allegations  of the Illinois  complaint  and intends to  vigorously  defend this
matter.

     The Company is involved in other legal proceedings  arising in the ordinary
course of business.  The Company  cannot predict the outcome of all of its legal
proceedings  with  certainty.  However,  based upon its review of pending  legal
proceedings, the Company does not believe that its pending legal proceedings are
material to its financial condition, its results of operations or its liquidity.
Predictions  regarding  the  impact  of  pending  legal  proceedings  constitute
forward-looking  statements  under the Reform  Act.  The  actual  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.



<PAGE>



Item 4A.  Executive Officers of the Registrant

     The Company's executive officers are as follows:

                                                        Positions with
Name                             Age*                     the Company

Terence D. Wall                  55            President, Chief Executive
                                               Officer and Director
Anthony J. Dimun                 53            Executive Vice President,
                                               Chief Financial Officer,
                                               Treasurer, Secretary and
                                               Director
Dennis Fenstermaker              50            Vice President - Manufacturing
                                               and General Manager

Barry Wicker                     56            Executive Vice President -
                                               Sales and Marketing, and Director
*  As of September 30, 1996.

     Terence D. Wall founded the Company in 1972 and has been  President,  Chief
Executive  Officer and a director of the  Company  since that time.  He has also
invested in and serves on the Board of Directors of EchoCath and certain  health
care businesses,  including  Sonokinetics Corp., a manufacturer of an ultrasonic
orthopedic cement removal device  ("Sonokinetics"),  Bionix Inc., a manufacturer
of biosorbable medical devices for orthopedic and other applications ("Bionix"),
and Exogen,  a  manufacturer  of an  ultrasonic  bone healing  device.  Prior to
founding the Company,  he held various  sales and marketing  positions  with The
Foregger  Co. (a  manufacturer  of  anesthesia  products  and a division  of Air
Products and Chemicals,  Inc.), the medical division of Westinghouse Corporation
and the medical division of American Optical Corporation. 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. For the foreseeable
future,  the Company will remain  dependent  upon the efforts of Mr.  Wall.  The
Company does not maintain key man life insurance on Mr. Wall's life.

Anthony J. Dimun, a certified  public  accountant,  has been a director of the
Company since August 1987. On March 1, 1991,  Mr. Dimun became an Executive Vice
President and the Chief Financial Officer of the Company and on December 1, 1991
he became the  Secretary  and  Treasurer  of the  Company.  Mr.  Dimun is also a
shareholder  and Board  member of EchoCath  and Bionix.  From July 1989  through
February  1991,  he served as Senior Vice  President of First  Atlantic  Capital
Ltd., a United States affiliate of an international merchant banking group. From
August 1987 until December 1987, he served as Executive  Vice  President,  Chief
Financial Officer and Treasurer of the Company.  From 1978 until August 1987, he
was a partner in the accounting firm of Goldstein Golub Kessler & Company, P.C.,
which has examined the  Company's  financial  statements  for more than the past
five  years.  He served  as a senior  audit  manager  with  Ernst &  Whinney  (a
predecessor  of Ernst & Young)  prior  to  joining  Goldstein  Golub  Kessler  &
Company,  P.C.  in 1976.  He  received a Bachelor  of Science  degree from Rider
University in 1965.

     Dennis  Fenstermaker  joined  the  Company  in  June  1992 as  Director  of
Manufacturing and became Vice President - Manufacturing and General Manager in 



<PAGE>



October 1993. Prior to joining the Company,  he  held various  manufacturing and
engineering  management  positions  with  Sterling  Drug  Inc. (a pharmaceutical
manufacturer  and distributor)  for more than ten years,  including  Director of
Engineering   Services  and  Plant  Manager,  and  with  Johnson  &  Johnson  (a
manufacturer  and  distributor of health care products) for more than ten years.
Mr. Fenstermaker earned a Bachelor of Science degree in Commerce and Engineering
Sciences from Drexel University in 1969 and a Master of Business  Administration
degree from Rider University in 1973.

     Barry Wicker has served as a director and an  Executive  Vice  President of
the Company since 1985 (with primary  responsibility  for sales and  marketing).
Mr. Wicker joined the Company in 1978 as National  Sales Manager and became Vice
President  - Sales in 1981.  Prior  to  joining  the  Company,  he held  various
marketing and sales positions with The Foregger Co. over a 20 year period.

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



<PAGE>



                                     PART II

Item 5. Market for the Registrant's  Common Equity and Related  Stockholder
Matters

     The  Company's   Common  Stock  (the  "Common  Stock")  is  traded  in  the
over-the-counter market and quoted on the National Market System of the National
Association of Securities  Dealers Automated  Quotation System  ("NASDAQ").  The
following  table sets forth the high and low closing  sales prices of the Common
Stock on the NASDAQ National Market System,  and the cash dividends declared per
share of Common  Stock, for the periods  indicated:  
<TABLE>
<CAPTION>

                                                                                          Dividend 
                                                          High             Low            Per Share
                                                          ----             ---            ---------

<S>                                                      <C>             <C>            <C>     
   Fiscal Year Ended September 30, 1995:

    Quarter ended December 31, 1994                      $11-7/8         $10-1/8        $   .02
    Quarter ended March 31, 1995                          14-1/4          10-7/8            .02
    Quarter ended June 30, 1995                           17-1/4          13                .02
    Quarter ended September 30, 1995                      22-3/4          16-1/8            .03

    Fiscal Year Ended September 30, 1996:

    Quarter ended December 31, 1995                      $26-3/8        $ 17-3/8       $    .03
    Quarter ended March 31, 1996                          31-5/8          23-5/8            .03
    Quarter ended June 30, 1996                           25-1/2          18-1/2            .03
    Quarter ended September 30, 1996                      23-1/2          18-3/4            .03

</TABLE>
     As of September 30, 1996, there were approximately 475 holders of record of
the Common Stock.

     During Fiscal 1996,  the Company  declared and paid cash dividends of $0.12
per  share.  Payment  of cash  dividends  in the  future  will  depend  upon the
financial  condition,  capital  requirements,  loan agreement  restrictions  and
earnings of the Company, as well as such other factors as the Board of Directors
may deem relevant.

Item 6.  Selected Financial Data

     The following selected  consolidated  financial data have been derived from
the Company's audited consolidated  financial statements.  The information below
should be read in conjunction  with the  consolidated  financial  statements and
related notes included elsewhere in this Annual Report on Form 10-K.

     Certain  acquisitions  occurring on or before September 30, 1996, including
HealthStar  Pharmaceutical  Services, Inc. (acquired in January 1996), Misty Ox
(acquired in December 1995), Coast Medical,  Inc.  (acquired in October,  1995),
Mediziv Medical Products,  Ltd.  (acquired in July 1995),  Actar Airforce,  Inc.
(acquired in June 1992),  Thomas Medical Products,  Inc.  (acquired in September
1992), and O.R. Concepts,  Inc. (acquired in November 1992), have been accounted
for as  purchases  and,  accordingly,  are only  reflected  herein for dates and
periods  on and after the  respective  acquisition  dates.  See the Notes to the
Consolidated Financial Statements.


<PAGE>

<TABLE>
<CAPTION>

                                                              Year Ended September 30, 
                                        _______________________________________________________________________
                                          1992             1993            1994           1995           1996 
                                                           (In thousands, except per share data) 


<S>                                   <C>               <C>           <C>            <C>          <C>       
Income Statement Data:
Net sales--continuing product lines   $   65,661        $  77,182     $  82,937      $  87,651    $   89,922
Net sales--product line disposed                            2,696         2,187          1,902           808
Cost of goods sold                       (27,019)         (34,247)      (37,594)       (38,279)      (38,418)
                                        --------         --------      --------       --------      --------
Gross profit                              38,642           45,631        47,530         51,274        52,312
                                        --------         --------      --------        -------      --------
Operating expenses:
   Selling, general and administrative    20,463           23,685        27,317         23,629        23,491
   Research and development                2,963            3,856         4,493          3,865         3,595
   Interest income                          (585)            (773)         (781)        (2,406)       (2,508)
   Merger and litigation expenses          1,167
   Interest expense                          611              640           555            382           346
   Special charges                                                       10,643
   Other (income) expense                 (1,156)            (731)         (969)           162        (1,635)
   Goodwill amortization                                      381           462            354           643
                                         --------         --------      --------        -------      --------
                                          23,463            27,058        41,720        25,986        23,932
                                         --------         --------      --------        ------      --------

Income before provision for
   income taxes                           15,179           18,573         5,810         25,288         28,380
Provision for income taxes                 4,776            5,899         4,132          9,154          9,591
                                         -------         --------       -------       ---------    ----------
Net income                             $  10,403         $ 12,674      $  1,678       $ 16,134     $   18,789
                                       =========         ========      ========       ========     ==========
Net income per share                   $     .81         $    .98      $    .13       $   1.24     $     1.44
                                       =========         =========     =========      ========     ==========
Dividends per share                    $                 $             $    .02       $    .09     $      .12
                                       =========         =========     =========      ========     ==========
Weighted average number of
   shares outstanding                     12,876           12,990        12,994         12,991          13,045
                                       =========         =========     =========      =========    ===========



                                                              September 30,
                                        ____________________________________________________________________
                                         1992             1993          1994           1995         1996
                                                       (In thousands)
Balance Sheet Data:

   Working capital                     $ 45,529         $ 46,869      $ 50,409        $ 32,885     $ 44,820
   Total assets                          78,950           92,200        91,773         110,421      123,756
   Long-term debt, excluding
     current installments                 6,433            5,829         3,700           3,200        2,700
   Total stockholders' equity            63,814           76,138        77,658          92,645      110,239

</TABLE>

-------- 
1  The  Company  disposed of its  endoscopic  product line during  Fiscal 1996, 
has reflected  net  sales of that product line as a separate line  item in  the 
table set  forth  above  and has included in other (income) expense for  Fiscal 
1996 a $174,000 gain on the sale of that product line.  Expenses of that product
line  were  not material to the Company's  results of  operations  (other  than 
expenses included  in  a  special charge  for  Fiscal 1994).  Accordingly, such 
expenses  are included within cost of goods sold and operating expenses in  the 
table set forth above.

2 The reduction in working  capital  in  Fiscal  1995 is  primarily attributable
to the acquisition of certain  marketable  securities which are not classified 
as current assets and the acquisition of Mediziv.  See  "Management's Discussion
and Analysis of Financial Condition and Results of Operations".



<PAGE>



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

     Introduction

     The Company disposed of its endoscopic product line during Fiscal 1996. See
Item 6 of this Annual  Report on Form 10-K.  In its  analysis  of the  Company's
results of operations,  management views net sales from continuing product lines
(i.e.,  excluding the revenues derived from its endoscopic  product line) as the
relevant  revenue  base  from  which to make  analytic  comparisons.  Since  the
expenses of the  endoscopic  product  line were not  material  to the  Company's
results of  operations  (other than expenses  included in a special  charge for
Fiscal 1994) and did not vary substantially prior to the discontinuation of that
product line,  management's  analysis below includes within all line items other
than sales the results of operations of both the  Company's  continuing  product
lines and the Company's discontinued endoscopic product line.

     Results of Operations

     The following table sets forth, for the periods indicated,  the  percentage
increase or decrease of certain  items  included in the  Company's  consolidated
statements of income.

                                      Increase (Decrease) from Previous Year (1)
                                      Fiscal 1995             Fiscal 1996
                                      Compared with           Compared with
                                      Fiscal 1994             Fiscal 1995
                                      ----------------        -----------

Net sales--continuing product lines         5.7%                   2.6%
Cost of good sold                           1.8                     .4
Gross profit                                7.9                    2.0
Selling, general and
  administrative expenses                 (13.5)                   (.6)
Research and development
  expenses                                (14.0)                  (7.0)
Income before provision
  for income taxes                        335.2                   12.2
Provision for income taxes                121.5                    4.8
Net income                                861.5                   16.5


______________
(1)  Percentage  changes with respect to certain line items in the Company's
     consolidated  statements of income have been omitted since they are not
     meaningful.  The substantial changes from Fiscal 1994 to Fiscal 1995 in
     the last three line items above  relate  primarily  to special  charges
     taken during the fourth quarter of Fiscal 1994.


<PAGE>

       Fiscal 1996 Compared to Fiscal 1995 (See "Introduction")

     Net  sales--continuing  product lines for the year ended September 30, 1996
increased by 2.6% compared with the same period last year.  The increase was due
primarily  to an increase in unit sales and the  acquisition  of the Misty Ox(R)
product  line and  HealthStar  Pharmaceutical  Services.  Prices  did not have a
material effect on net sales during these periods.

     Sales of anesthesia products (representing 62.7% of net sales -- continuing
product  lines),  grew 4.3% from the year ended  September  30, 1995 to the year
ended  September  30,  1996.  Sales of critical  care and  respiratory  products
(representing 35.3% of net sales -- continuing product lines) decreased by 5.7%.
Other  products,  accounting for 2.0% of net sales -- continuing  product lines,
increased  by 100% from the  comparable  period in Fiscal 1995,  reflecting  the
Company's acquisition of HealthStar Pharmaceutical Services.

     Gross profit  increased by 2% in absolute  dollar amount,  primarily due to
the  Company's  re-engineering  and cost  reduction  efforts  offset by sales of
certain products with gross margins below the Company's average gross margin, as
well as the sales  price  pressure  that is evident  within  the cost  conscious
health care industry today. Such re-engineering efforts consisted of a revuew of
material business  processes with the goal of assuring that business  objectives
were being met on a cost-efficient basis.

     Selling,  general and administrative  expenses decreased as a percentage of
sales--continuing  product  lines from  27.0% of sales to 26.1% of sales.  Total
selling,  general and administrative expenses decreased by .6%, as the result of
the Company's  re-engineering  efforts, offset by increases in freight and sales
costs to  support  international  sales  growth  and the  acquisitions  of Coast
Medical, Inc., and HealthStar Pharmaceutical Services.

     Research and development (R&D) expenses  decreased by approximately 7.0% in
dollar volume, as the result of re-engineering.  The Company continues to make a
commitment to new product development as evidenced by its recent announcement of
two new products (a  single-use  flush device and a  single-use  closed  suction
catheter). See "Business-Research and Development".

     Other   income/expense   primarily   includes  dividend  income  earned  on
investments,  gain on the sales of cash  investments and the gain on sale of the
Company's  O.R.   Concepts'   endoscopic  product  line,  offset  by  charitable
contributions of inventory.  In addition,  during the fourth quarter the Company
recognized  other income of  $1,000,000  relating to the sale of its interest in
Cardiologics,  L.L.C., a joint venture engaged in the early stage development of
cardiovascular  products.  The sale,  made to a related party,  was completed in
order to enable the Company to focus its efforts  upon its core  product  lines,
anesthesia and critical care.

     The Company's  effective tax rates were 33.8% and 36.2% for Fiscal 1996 and
1995,  respectively.  The 1996 rate was less than the combined Federal and State
statutory  rates  primarily as a result of the utilization of capital loss carry
forwards.



<PAGE>



     On November 18,  1996,  the Company  announced it won a dual source  supply
agreement with Premier Purchasing  Partners LP ("Premier"),  an affiliate of the
largest  healthcare  purchasing  group in the United  States  (see page 9). This
agreement  covers a variety of  anesthesia  products and provides for  favorable
pricing in exchange  for  committed  purchasing  volume  (90%) of usage from the
member  hospitals.  The agreement covers a five year term and begins February 1,
1997. Based on current membership data,  management  anticipates that the effect
on operating income and gross margin contribution (dollars) will not be dilutive
in  spite  of  lower  pricing  and  gross  margin  percentages.  This  statement
constitutes a forward-looking statement under the Reform Act. The effects of the
contract  could  differ  materially  from these  estimates  as the  contract  is
implemented, if the volume of purchases is less than anticipated, if the Company
is  required  to incur  unanticipated  selling  expenses  or if the  product mix
purchased does not result in anticipated manufacturing efficiencies.

Fiscal 1995 Compared to Fiscal 1994 (see "Introduction")

     Net  sales--continuing  product lines for the year ended September 30, 1995
increased by 5.7% compared with the same period last year.  The increase was due
primarily  to an  increase  in unit sales and the  introduction  of certain  new
products.  Prices  did not have a  material  effect  on net sales  during  these
periods.

     Sales of anesthesia products (representing 61.7% of net sales -- continuing
product  lines)  grew 8.4% from the year ended  September  30,  1994 to the year
ended  September  30,  1995.  Sales of critical  care and  respiratory  products
(representing 38.3% of net sales -- continuing product lines) increased by 2.4%.

     Gross profit increased by 7.9% in absolute dollar amount,  primarily due to
the Company's  re-engineering and cost reduction efforts commenced in the fourth
quarter of Fiscal 1994.

     Selling,  general and administrative  expenses decreased as a percentage of
sales--continuing  product  lines from  32.9% of sales to 27.0% of sales.  Total
selling,  general  and  administrative  expenses  decreased  by  13.5%,  largely
attributable  to direct sales force  reductions in Germany and O.R.  Concepts as
the Company moved from direct sales to sales through  dealers.  The Company also
commenced (in Fiscal 1994) a broad-based re-engineering process in its operating
areas which accounted for a large portion of the reduction in such expenses.

     Research  and  development  (R&D)  expenses  decreased  by 14.0% in  dollar
volume,  primarily  due  to  reduced  activity  in  O.R.  Concepts  due  to  the
anticipated future sale of that business. On a percentage of sales -- continuing
product lines basis, these expenses decreased by 1%.

     Other   income/expense   primarily   includes  dividend  income  earned  on
investments, offset by charitable contributions of inventory. Dividend income in
Fiscal 1995  decreased  by $1.4  million,  primarily  due to a shift to interest
bearing investments.


<PAGE>




     Net earnings for both the September  1994 fourth  quarter and year end were
impacted by special charges in the fourth quarter which  aggregated  $10,643,000
before tax. These special charges included the following:

     (i)  German  Operations.   The  Company's  activities  in  Germany  through
September  30, 1994  consisted of a direct  sales force of seven  persons and an
administrative,  distribution  and assembly  facility that serviced local German
customers and distributors  throughout Europe. Through September 30, 1994, costs
associated with such efforts were  disproportionate to anticipated  revenues.  A
decision  was made to  restructure  the  manner  in which the  Company's  German
operations  function  both  as to  marketing  and  distribution.  This  decision
resulted in a special charge to operations of $1.3 million.

     (ii) O.R.  Concepts.  Sales and operating  results of the Company's  O.R.C.
subsidiary  have been  disappointing  since  the  acquisition  in  Fiscal  1993.
Accordingly,  in the fourth quarter, a decision was made to write down a portion
of the goodwill  initially  recognized  with respect to this  acquisition and to
record  reserves  relating  to  severance  costs and other  aspects of  O.R.C.'s
reduced operations.  The total fourth quarter special charges relating to O.R.C.
was $3.9 million.

     (iii) Cost Reduction Program. During Fiscal 1994, the Company implemented a
program to reduce costs and improve operating  efficiencies.  The fourth quarter
special  charges  include  $.9  million  attributable  to  (i)  fees  paid  to a
consultant  for  recommendations  made relating to the Company's  manufacturing,
administrative and other internal functions and (ii) associated severance costs.

     (iv) Investment Portfolio Losses. During the fourth quarter of fiscal 1994,
the Board of Directors  revised its  investment  strategies  and retained  three
consultants to manage the Company's marketable securities.  As a result of these
actions,  the  Company  was  required  to  recognize  losses  of  $3.0  million,
reflecting  declines in the market  value of certain  debt  securities  (none of
which were derivative securities) held by the Company.

     (v) Other. The Company made other reevaluations, relating to various assets
and  liabilities  on its balance  sheet,  which  resulted in  aggregate  special
charges of $1.6 million.

     The Company's  effective tax rates were 36.2% and 71.1% for Fiscal 1995 and
1994,  respectively.  The 1995 rate was less than the combined Federal and State
statutory  rates  primarily as a result of the utilization of capital loss carry
forwards,  R & D and other tax credits  and a reduced tax rate on capital  gains
and dividend income.



<PAGE>




Liquidity and Capital Resources

     The Company  continues  to rely upon cash flow from its  operations  (which
produced  $15.7  million of cash in fiscal 1996) as well as the funds  generated
from its initial and second public  offerings and certain bank  borrowings.  The
combined net carrying value of marketable securities,  cash and cash equivalents
and long-term marketable  securities was approximately  $46,536,000 at September
30, 1996, an increase of $1,520,000  over the prior year. The increase  resulted
primarily from the sale of the O.R.  Concepts  endoscopic  product line and cash
from  operations,  offset by  acquisitions  of  property,  plant and  equipment,
dividend payments,  principal  payments on the Company's  long-term debt and the
acquisitions of Coast Medical, Inc., HealthStar  Pharmaceutical  Services, Inc.,
and the Misty Ox product line.

     At September 30, 1996, the Company had working capital of $44.8 million and
its current  ratio was 6.1 to 1, as  compared  to $32.9  million and 3.6 to 1 at
September  30, 1995.  The Company  continues to maintain a  substantial  working
capital  position.  Its  current  policy is to retain such  working  capital and
earnings  for use in its  business,  subject  to the  payment  of  certain  cash
dividends. Such funds may be used for product development,  product acquisitions
and business  acquisitions,  among other things. The Company regularly evaluates
and  negotiates  with domestic and foreign  medical device  companies  regarding
potential business or product line acquisitions or licensing arrangements by the
Company.

     The  Company has a $10 million  line of credit  with Chase  Manhattan  Bank
("Chase").  Chase has also expressed its intention to provide  additional  funds
for the Company's future acquisitions, provided that each such acquisition meets
certain criteria. The terms for any borrowing would be negotiated at the date of
origination.

     Management  believes that the funds generated from  operations,  along with
the  Company's  current  working  capital  position  and  bank  credit,  will be
sufficient to satisfy the Company's  capital  requirements  for the  foreseeable
future.

<PAGE>




Item 8.  Financial Statements and Supplementary Data

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

Independent Auditor's Report                                      F-1

Consolidated Balance Sheet as of
  September 30, 1995 and 1996                                     F-2

Consolidated Statement of Income
  for the years ended
  September 30, 1994, 1995 and 1996                               F-3

Consolidated Statement of Stockholders'
  Equity for the years ended
  September 30, 1994, 1995 and 1996                                F-4

Consolidated Statement of Cash
  Flows for the years ended
  September 30, 1994, 1995 and 1996                                F-5

Notes to Consolidated Financial Statements                         F-6



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

         Not applicable.

  

<PAGE>



                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Vital Signs, Inc.


We have audited the  accompanying  consolidated  balance  sheets of Vital Signs,
Inc.  and  Subsidiaries  as of  September  30,  1996 and  1995  and the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period  ended  September  30,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of  Vital  Signs,  Inc.  and
Subsidiaries  as of  September  30,  1996  and  1995  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.


GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York

November 14, 1996


                                       F-1

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                     ASSETS
                                                              September 30,
                                                       1996                 1995
                                                            (in thousands)
Current Assets:
   Cash and cash equivalents (Note 1)               $   17,747         $  8,334
   Marketable securities (Notes 1 and 5)                   602            3,757
   Accounts receivable, less allowance 
     for doubtful accounts of $169 
     and $285, respectively (Notes 15 and 16)           13,887           15,300
   Inventory (Notes 1 and 3)                            13,013           11,325
   Prepaid expenses and other 
     current assets (Note 4)                             8,279            6,936
                                                     ----------          -------
       Total current assets                             53,528           45,652
Property, Plant and Equipment - net (Notes 1 and 6)     21,131           12,674
Marketable Securities (Notes 1 and 5)                   28,187           32,925
Goodwill (Notes 1 and 2)                                16,619           15,419
Other Assets                                             4,291            3,751
                                                    ----------         ---------
       Total Assets                                  $ 123,756         $110,421
                                                    ==========         =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                                 $    4,066         $  3,017
   Current portion of long-term debt (Note 7)              500              500
   Accrued expenses                                      2,406            4,936
   Amounts payable relating to acquisitions                236            2,911
   Deferred income taxes payable (Notes 1 and 13)        1,500            1,403
                                                     ---------           -------
       Total current liabilities                         8,708           12,767
Deferred Income Taxes Payable (Notes 1 and 13)           1,334              993
Long-term Debt (Note 7)                                  2,700            3,200
Other liabilities                                          775              816
                                                    ----------         ---------
       Total Liabilities                                13,517           17,776
                                                    ----------         ---------
Commitments and Contingencies (Notes 2, 10 and 11)
Stockholders' Equity  (Note 12)
       Common stock - no par value; 
          authorized 40,000,000 shares,
          issued 13,062,701 and 12,999,078 
          shares, respectively                          29,666           29,015
       Allowance for aggregate unrealized loss on1
         marketable securities (Notes 1 and 5)            (426)            (100)
       Retained earnings                                80,999           63,730
                                                   ------------       ----------
         Stockholders' equity                          110,239           92,645
                                                   ------------       ----------
         Total Liabilities and Stockholders' Equity $  123,756        $ 110,421
                                                   ============        =========

                 See notes to consolidated financial statements
                                       F-2

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME


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

Net sales-continuing product 
  lines(Notes 1 and 16)                   $  89,922     $   87,651   $   82,937
Net sales-product line disposed                 808          1,902        2,187

Cost of goods sold                          (38,418)       (38,279)     (37,594)
                                           --------       --------      --------

Gross profit                                 52,312         51,274       47,530
                                           --------       --------     ---------

Operating expenses:
   Selling, general and administrative       23,491         23,629       27,317
   Research and development                   3,595          3,865        4,493
   Interest income                           (2,508)        (2,406)        (781)
   Interest expense (Note 7)                    346            382          555
   Special charges (Note 9)                                              10,643
   Other (income) expense (Notes 1, 8 and 14)(1,635)           162         (969)
   Goodwill amortization                        643            354          462
                                          ----------     ---------    ----------
                                             23,932         25,986       41,720
                                          ----------     ----------   ----------

Income before provision for income taxes     28,380         25,288        5,810
Provision for income taxes (Notes 1 and 13)   9,591          9,154        4,132
                                          ---------     ----------    ----------

Net income                               $   18,789      $  16,134    $   1,678
                                         ==========      =========    ==========

Net income per share (Note 1)           $      1.44      $    1.24    $     .13
                                        ===========      =========    ----------

Weighted average number of shares            13,045         12,991       12,994
                                        ===========       ========    ==========



                 See notes to consolidated financial statements
                                       F-3

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                  Allowance for
                                                                                Aggregate Unrealized
                                                                                     Loss on
                                                        Common Stock                 Marketable          Retained      Stockholders'
                                                     Shares      Amount              Securities          Earnings          Equity
                                                     ------      ------              ----------          --------      -------------
                                                                        (dollars in thousands)

<S>                                               <C>            <C>                  <C>                <C>              <C>      
Balance at September 30, 1993                     13,000,116     $  29,081            $  (313)           $   47,370       $  76,138

Purchase of treasury
   stock net of reissuance                            (9,554)         (115)                                     (21)           (136)
Adjustment to the allowance for aggregate
   unrealized loss on marketable securities                                               238                                   238
Dividends paid ($.02 per share)                                                                                (260)           (260)
Net income                                                                                                    1,678           1,678
                                                 -----------     ---------            --------           ----------       ---------
Balance at September 30, 1994                     12,990,562        28,966                (75)               48,767          77,658

Purchase of treasury
   stock net of reissuance                              (459)           (6)                                      (1)             (7)
Exercise of stock options                              8,975            55                                                       55
Adjustment to the allowance for aggregate
   unrealized loss on marketable securities                                               (25)                                  (25)
Dividends paid ($.09 per share)                                                                              (1,170)         (1,170)
Net income                                                                                                   16,134          16,134
                                                 -----------     ----------           --------             ---------        --------
Balance at September 30, 1995                     12,999,078        29,015               (100)               63,730          92,645


Reissuance of treasury
   stock net of purchase                               4,129            (8)                                      45              37
Exercise of stock options                             59,494           659                                                      659
Adjustment to the allowance for aggregate
   unrealized loss on marketable securities                                              (326)                                 (326)

Dividends paid ($.12 per share)                                                                              (1,565)         (1,565)

Net income                                                                                                   18,789          18,789
                                                  ----------     ---------            -------            ----------       ---------
Balance at September 30, 1996                     13,062,701     $  29,666            $  (426)           $   80,999       $ 110,239
                                                  ==========     =========            ========           ==========       =========

</TABLE>



                 See notes to consolidated financial statements
                                       F-4

<PAGE>


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

                                                    For the Year Ended
                                                       September 30,
                                               --------------------------------
                                               1996          1995          1994
                                               ----          ----          ----
                                                       (in thousands)
Cash flows from operating activities:
   Net income                             $   18,789     $ 16,134       $ 1,678
   Adjustments to reconcile net 
     income to net cash provided
     by operating activities:
       Depreciation and amortization           2,322        1,535         1,315
       Deferred income taxes                     438          674          (931)
       Amortization of goodwill                  643          354           462
       Amortization of deferred credit          (100)        (100)         (100)
       Net (gain) loss on sales of available-
          for-sale securities                   (608)        (429)          774
       Net gain on sale of product line         (174)
       Write down of goodwill                                             3,000
       Write down of fixed assets                                           213
       Debt issue costs                                                     124
       Changes in operating assets and 
          liabilities:
          (Increase) decrease in 
             marketable securities                          2,768        (1,517)
          (Increase) decrease in 
             accounts receivable               2,319       (3,323)          242
          (Increase) in inventory             (1,963)        (967)       (1,040)
          (Increase) decrease in 
             prepaid expenses and 
             other current assets             (1,481)       1,509        (1,686)
          (Increase) decrease in other assets   (431)         639            75
          Increase (decrease) in accounts payable
             and accrued expenses             (4,068)         367         2,916
                                              -------      ------       --------
             Net cash provided by 
               operating activities           15,686       19,161         5,525
                                              -------      ------       --------
Cash flows from investing activities:
   Acquisition of property, plant 
     and equipment                            (8,611)      (2,026)       (2,278)
   Cash received for the sale of product line  2,786
   Proceeds from the maturity of a held-
     to-maturity security                                                 1,020
   Purchases of available-for-sale securities(44,882)     (68,864)      (16,870)
   Proceeds from sales of available-
     for-sale securities                      53,057       41,221        12,342
   Payment for purchase of subsidiaries, 
     net of cash acquired                     (7,254)      (2,237)         (766)
                                              -------      -------      --------
       Net cash used in investing activities  (4,904)     (31,906)       (6,552)
                                              -------      -------      --------
Cash flows from financing activities:
   Dividends paid                             (1,565)      (1,170)         (260)
   (Purchase) reissuance of treasury stock        37           (7)         (136)
   Proceeds from exercise of stock 
     options and warrants                        659           55
   Debt issue costs                                                         (22)
   Principal payments of long-term 
     debt and notes payable                     (500)      (1,211)       (2,454)
                                              -------     --------       -------
       Net cash used in financing activities  (1,369)      (2,333)       (2,872)
                                              -------     --------      --------

Net increase (decrease) in cash 
     and cash equivalents                      9,413      (15,078)       (3,899)
Cash and cash equivalents at beginning of year 8,334       23,412        27,311
                                              ------      --------      --------
Cash and cash equivalents at end of year  $   17,747    $   8,334      $ 23,412
                                           =========    =========       ========
Supplemental  disclosures  of cash flow  information:  
     Cash paid during the year for:
       Interest                           $      394    $     389      $    611
       Income taxes                       $    9,306    $   6,058      $  6,575
Supplemental schedule of noncash 
     investing activities:
     Accrued amounts relating to purchase
       of subsidiaries                    $      125    $   3,336
     Settlement of disputed amounts in
       connection with the purchase 
       of a subsidiary                                                 $    707
     Forgiveness of note receivable as 
       payment for purchase of subsidiary $      333

                 See notes to consolidated financial statements
                                       F-5

<PAGE>
                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Significant Accounting Policies:

     Business Activity:

     Vital Signs, Inc. ("VSI") and its subsidiaries (collectively the "Company")
design,  manufacture and market  single-patient use respiratory,  anesthesia and
related critical care products to hospitals and other health care facilities.

     Principles of Consolidation:

     The consolidated  financial  statements include the accounts of the Company
and its majority-owned  subsidiaries.  All significant intercompany transactions
and balances have been eliminated.

     Inventory:

     Inventory 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  result  from  differences  between the time
certain  expenses are recognized for financial  reporting  purposes and the time
when the items are actually reported for income tax purposes.

     Revenue Recognition:

     Revenue  from sales of  products is  recognized  at the date of shipment to
customers.

     Amortization of Goodwill:

     Goodwill  arising  from  business  acquisitions  accounted  for  under  the
purchase method is amortized over 40 years using the straight-line method.

     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.



                                       F-6

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Significant Accounting Policies (continued):

     Income Per Share of Common Stock:

     Income  per share of  common  stock has been  computed  using the  weighted
average  number of shares of common stock  outstanding  during each period.  The
dilutive effect of common stock equivalents is not material.

     Marketable Securities:

     Management  determines the appropriate  classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt  securities  are  classified as  held-to-maturity  when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost,  adjusted for  amortization of premiums
and discounts to maturity.  Such amortization is included in investment  income.
Interest on securities  classified as held-to-maturity is included in investment
income.

     Certain  marketable equity securities and debt securities not classified as
held-to-maturity  are  classified  as   available-for-sale.   Available-for-sale
securities are carried at fair value, with the unrealized gains and losses,  net
of tax, reported in a separate component of stockholders'  equity. The amortized
cost of debt  securities  in this  category  is  adjusted  for  amortization  of
premiums and discounts to maturity.  Such amortization is included in investment
income.

     Realized   gains  and  losses   and   declines   in  value   judged  to  be
other-than-temporary on available-forsale  securities are included in investment
income.  The cost of  securities  sold is based on the  specific  identification
method. Dividends on securities classified as available-for-sale are included in
other (income) expenses.

     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 the Impairment of Long-Lived Assets:

     The Company  adopted  Statement of Financial  Accounting  Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", on October 1, 1996. Management believes this change will not be
significant to the consolidated financial statements.

     Accounting for Stock-Based Compensation:

     The Company intends to elect to continue to measure compensation cost using
APB Opinion No. 25 as is  permitted by the  Statement  of  Financial  Accounting
Standards  ("SFAS") No. 123,  "Accounting  for  Stock-Based  Compensation."  The
disclosure  required by SFAS No. 123 is effective for financial  statements with
fiscal years beginning after December 15, 1995 (the Company's fiscal 1997).


                                       F-7

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2 - Acquisitions/Dispositions:

1995 Acquisition:

     In July 1995,  the  Company  acquired,  in a purchase  transaction,  an 85%
ownership interest in Mediziv Medical Products, Ltd., ("Mediziv") a closely held
Israeli company primarily engaged in the business of developing,  assembling and
selling  single use products for use in anesthesia  and critical  care. VSI paid
$2,200,000,  consisting  of a cash  payment to the  sellers and  refinancing  of
Mediziv's  funded  indebtedness.  The  sellers  are  also  eligible  to  receive
contingent payments based on sales of Mediziv's products through the fiscal year
ending in 2000, including minimum payments of $790,000 (present value $500,000).
The  estimated  fair value of the assets  acquired  amounted to  $1,175,000  and
liabilities assumed amounted to $2,550,000 with goodwill of $1,686,000 reflected
at the date of acquisition.

1996 Acquisitions/Disposition

     In January 1996, the Company acquired,  in a purchase  transaction,  all of
the   outstanding   stock   of   HealthStar   Pharmaceutical   Services,   Inc.,
("HealthStar")  a company  engaged  in both the  manufacture  of  equipment  and
contract   manufacturing    services   utilizing   specialized    blow-fill-seal
manufacturing  technology  for the  pharmaceutical  and  medical  industry.  The
Company paid  $1,595,000  at closing.  The sellers are also  eligible to receive
contingent  payments based on earnings  before taxes,  as defined,  in each year
ending  December  31, 1996,  1997 and 1998.  Management  does not believe  these
targets will be achieved for the year ending  December 31, 1996.  The  estimated
fair  value of the  assets  acquired  approximated  $2,850,000  and  liabilities
assumed  approximated  $1,550,000  with  goodwill  of  approximately  $1,300,000
reflected at the date of acquisition.

     In December 1995 the Company  entered into a purchase  agreement for all of
the net assets  related to the Misty Ox product line. The purchase price paid at
closing by the Company was  $2,025,000.  The estimated  fair value of the assets
acquired  amounted to $2,014,000 and  liabilities  assumed  amounted to $113,000
with goodwill of $250,000 reflected at the date of acquisition.

     During fiscal 1996, the Company sold its O.R. Concepts  endoscopic  product
line and recognized a gain of $174,000 (Note 8).

     The effect of the  operations of  HealthStar  and the Misty Ox product line
from October 1, 1995 to the dates of  acquisition  on the  Company's  results of
operations for the year ended  September 30, 1996 was  immaterial.  In addition,
the  effect of the  operations  of Mediziv  from  October 1, 1994 to the date of
acquisition  and the effect of the  operations  of  HealthStar  and the Misty Ox
product line on the Company's results of operations for the year ended September
30, 1995 was immaterial.  Accordingly,  proforma financial information regarding
these transactions has not been presented.


                                       F-8

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 3 - Inventory:

     Inventory consists of the following:  

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

                 Raw materials            $   9,617      $    8,274
                 Finished goods               3,396           3,051
                                          ---------      ----------

                                         $   13,013      $   11,325
                                          =========      ==========

Note 4 - Prepaid Expenses and Other Current Assets:

     Prepaid expenses and other current assets consist of the following:

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

           Prepaid employee fringe benefits          $ 3,964        $  4,155
           Notes and interest receivable (see Note 14) 1,919             882
           Prepaid income taxes                        1,330           1,038
           Prepaid insurance                             270             310
           Other                                         796             551
                                                       ------        --------
                                                     $ 8,279        $  6,936
                                                     =======        ========

Note 5 - Marketable Securities:

     The   following  is  a  summary  of   available-for-sale   securities   and
held-to-maturity securities:

<TABLE>
<CAPTION>
                                                   Available-for-Sale-Securities
                                   ______________________________________________________________
                                      September 30, 1996                       September 30, 1995
                                                           (in thousands)
                                                                Gross                                        Gross
                                                             Unrealized                                     Unrealized
                                    Fair                       Holding         Fair                         Holding
                                    Value         Cost         Losses          Value         Cost           Losses
                                    -----         ----       -----------       -----         ----           -----------
<S>                                <C>          <C>         <C>             <C>           <C>               <C>
U.S. Government
   obligations                     19,412       19,835          (423)       $  19,167     $  19,160     $      7
Corporate obligations               3,314        3,404           (90)           2,161         2,168           (7)
Federal mortgage
       obligations                  6,063        6,272          (209)          14,709        14,879         (170)
                               ----------     --------     ----------       ---------     ---------     ---------

                               $   28,789     $ 29,511     $    (722)       $  36,037     $  36,207     $   (170)
                               ==========     ========     ==========       =========     =========     =========



                                       F-9
</TABLE>

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



At  September   30,  1996   investments   in  debt   securities   classified  as
available-for-sale securities mature as follows:

<TABLE>
<CAPTION>
                                                                     Maturity
                                                                      (in thousands)
                                           0 - 1 Year         1 - 5 Years     5 - 10 Years       10 - 30 Years
                                           ----------         -----------     ------------       -------------

<S>                                         <C>              <C>       
U.S. Government obligations                 $     200        $   19,212
Corporate obligations                             402             2,912
Federal mortgage obligations                                        160         $  1,182           $   4,721
                                            ---------        -----------         -------            --------
                                            $     602        $   22,284         $  1,182           $   4,721
                                            =========        ==========         ========            ========


                                                           Held-To-Maturity Securities
                                         September 30, 1996                           September 30, 1995
                                ----------------------------------------       ----------------------------------
                                                                (in thousands)
                                                              Gross                                        Gross
                                                           Unrealized                                   Unrealized
                                  Fair        Amortized      Holding           Fair        Amortized      Holding
                                  Value         Cost          Gain             Value         Cost           Gain
                                  -----       ---------      --------       ---------     ---------     ----------
Private export fund                ---          ---           ---           $     664     $     645     $     19
                               ==========    =========     =========        =========     =========     ========
Total                           $  28,789                                   $  36,682
                               ==========                                   =========

</TABLE>
At  September   30,  1995   investments   in  debt   securities   classified  as
held-to-maturity mature in 1 - 5 years.

     Realized  gains  and  losses  are  determined  on  the  basis  of  specific
identification.  During the year ended  September  30, 1996 sales  proceeds  and
gross realized gains and losses on securities  classified as  available-for-sale
securities were  $53,056,643,  $652,000 and ($44,000)  respectively.  During the
year ended September 30, 1995 sales proceeds and gross realized gains and losses
on  securities  classified as  availablefor-sale  securities  were  $41,221,076,
$448,000 and ($19,000)  respectively.  During the year ended September 30, 1994,
sales proceeds and gross  realized gains and losses on securities  classified as
available  for  sale  securities  were   $12,342,000,   $19,000  and  ($793,000)
respectively.

     During the year ended September 30, 1994,  gross losses included in results
of   operations    resulting   from    transfers   of   securities    from   the
available-for-sales  category  into the trading  category were  $1,486,000.  The
decision  to  transfer  the  securities  was  based on the  Company's  change in
investment philosophy which required the Company to liquidate  substantially all
of its portfolio.

     Results of operations for the years ended  September 30, 1995 and September
30, 1994, respectively,  include charges of $4,000 and $1,730,000 for unrealized
losses on trading  securities.  There were no unrealized  gains or losses during
the year ended  September 30, 1996.  Stockholders  equity at September 30, 1996,
1995  and  1994  includes  an  unrealized  holding  loss  on  available-for-sale
securities of $426,000, $100,000 and $75,000 respectively.



                                      F-10

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 6 - Property, Plant and Equipment:

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

<TABLE>
<CAPTION>

                                                                      September 30,     
                                                                    --------------------         Estimated 
                                                                    1996            1995        Useful Life
                                                                    ----            ----        -----------
                                                                      (in thousands)

<S>                                                           <C>              <C>       
          Land                                                $     1,631      $      690
          Building and building improvements                       10,784           8,457       30 to 40 years
          Equipment and molds                                      14,790           8,243        5 to 10 years
          Fixtures and office equipment                             3,183           2,653        5 to 15 years
          Transportation equipment                                    278              43        5 years
                                                              -----------         -------
                                                                   30,666          20,086
          Less accumulated depreciation
            and amortization                                        9,535           7,412
                                                              -----------         -------
                                                              $    21,131       $  12,674
                                                              ===========       =========
</TABLE>

          Substantially  all of the Company's  property,  plant and equipment is
pledged as collateral for the Company's long-term debt (see Note 7).

Note 7 - Long-term Debt:

          Long-term debt consists of the following:

                                                         September 30,
                                                         1996             1995
                                                              (in thousands)

          Industrial Revenue Bonds ("IRB") payable     $   3,200      $    3,700
          Less current portion                               500             500
                                                       ---------      ----------
   
                                                       $   2,700      $    3,200
                                                       =========      ==========

     Based on the borrowing rates  currently  available to the Company for loans
with similar terms and average maturities,  the fair value of the long-term debt
approximates the carrying amount.

     The  Company  entered  into the IRB  payable in varying  installments  with
interest at rates ranging from 6.75% to 8.625% per annum through December 2009.

     The IRB, among other matters, contains certain financial covenants,  limits
the payment of dividends to any class of stock and restricts  the  incurrence of
additional  debt, as defined in the agreement.  For the year ended September 30,
1996,  the  Company  was  in  compliance  with  all of  the  required  financial
covenants.

     Maturities of long-term debt are as follows:

         Year ending September 30,                        (in thousands)
                                                           ------------
               1997                                       $      500
               1998                                              200
               1999                                              200
               2000                                              200
               2001                                              200
         Thereafter                                            1,900
                                                               ______
                                                          $    3,200
                                                          ===========

                                      F-11

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     At September 30, 1996, the Company has a $10,000,000  line of credit with a
bank which expires December 31, 1996. No balance was outstanding under this line
of credit at September 30, 1996.

Note 8 - Other (Income) Expense:

     Other (income) expense consists of the following:

<TABLE>
<CAPTION>
                                                                For the Year Ended
                                                                  September 30,
                                                        ----------------------------------
                                                        1996           1995           1994
                                                        ----           ----           ----
                                                                  (in thousands)
<S>                                                  <C>          <C>            <C>        
     Dividend income                                 $   (75)     $     (90)     $   (1,441)
     Amortization of deferred credit                    (100)          (100)           (100)
     Charitable contributions of inventory               563            161             452
     Net capital gain on sale of marketable securities  (609)          (166)
     Gain on sale of endoscopic product line            (174)
     Gain on sale of Cardiologics (Note 15)           (1,000)
     Other                                              (240)           357             120
                                                    ---------      --------      ----------
                                                     $(1,635)      $    162      $     (969)
                                                   ==========      ========      ===========
</TABLE>

Note 9 - Special Charges:

          During the fourth  quarter of Fiscal  1994,  the  Company  changed its
investment  philosophy,  reassessed  the carrying  values of certain  assets and
liabilities and made several decisions to streamline the Company's operations in
order to position the Company to be more  competitive  within the cost sensitive
healthcare  industry.  The  effect  of these  decisions  was a charge  to fourth
quarter operations as follows:
                                                               (in thousands)
           O.R. Concepts Inc.:
              Goodwill write-down                               $    3,000
              Severance costs and other asset write-downs              865
           European operations restructuring costs                   1,331
           U.S. operations cost reduction program                      869
           Investment losses                                         2,962
           Asset and liability re-evaluations                        1,616
                                                                ----------
                                                                $   10,643
                                                                ==========

     These charges include:  (i) costs associated with the Company's decision to
reduce its German  operations,  (ii) the write-down of a portion of the goodwill
recorded in connection with the  acquisition of O.R.  Concepts,  Inc.,  together
with other cost  reductions  relating to the operations of O.R.  Concept,  Inc.,
(iii)  consulting  fees and  severance  costs  relating to cost  reductions  and
operating  efficiencies  implemented by the Company,  and (iv) losses recognized
within  the  Company's  investment  portfolio  resulting  from a  change  in the
Company's  investment strategy whereby the Company recognized current unrealized
losses in connection with certain securities transferred from available-for-sale
securities to trading  securities (see Note 5).  Additionally,  certain of these
securities were sold prior to September 30, 1994. This change was recommended to
protect the investment  portfolio from further unrealized losses.  Additionally,
asset  and  liability  re-evaluations  include  a  reserve  for  tax  assessment
($600,000) and other miscellaneous amounts.


                                      F-12

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 10 - Commitments:

     Leases:

     The Company has entered into  noncancelable  operating leases providing for
the lease of office  and  warehouse  facilities,  equipment  and  certain  other
assets. The equipment leases require the Company to make monthly rental payments
of  approximately  $30,000 for 72 months and grant the Company a purchase option
to acquire such assets at fair market value (as defined) at the end of the 48th,
60th,  and 72nd  months.  Rent  expense,  aggregating  $724,000,  $992,000,  and
$760,000  respectively,  has been  charged  to  operations  for the years  ended
September 30, 1996, 1995 and 1994, respectively.  The Company's commitment under
such leases is as follows:

       Year ending September 30,                               (in thousands)
             1997                                              $      638
             1998                                                     622
             1999                                                      93
             2000                                                      10
                                                               ----------
                                                               $    1,363
                                                               ==========

     Employment Agreements:

     The Company has entered into employment agreements,  aggregating $1,007,000
annually which expire at various dates through April, 2000.


Note 11 - Litigation:

     In September  1994, two separate  complaints were filed against the Company
(one in U.S.  District Court for the Northern District of Illinois and the other
in U.S.  District Court for the Western  District of  Louisiana),  each of which
allege patent infringement with respect to certain of the Company's resuscitator
products and seek money damages and injunctive  relief. The Louisiana matter has
been withdrawn by the plaintiff and the suit has been dismissed. In the Illinois
action discovery will close shortly and the matter will be placed on the court's
trial  calendar   awaiting  a  trial  date.  The  Company  denies  the  material
allegations  of the Illinois  complaint  and intends to  vigorously  defend this
matter.

     The Company is involved in other legal proceedings  arising in the ordinary
course of business.  The Company  cannot predict the outcome of all of its legal
proceedings  with  certainty.  However,  based upon its review of pending  legal
proceedings, the Company does not believe that its pending legal proceedings are
material to its financial condition, its results of operations or its liquidity.


Note 12 - 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, 1996 or 1995.


                                      F-13

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 12 - Stockholders' Equity (continued):

Stock Options:

Transactions relating to stock options are as follows:
                                              
<TABLE>
<CAPTION>
                                                Number                           Price
                                               of Shares                        Per Share

<S>                                             <C>                  <C>            <C>      
Balance September 30, 1993                     587,639              $    5.55    -  $   24.25
   Granted                                     122,313              $    9.25    -  $   14.75
   Exercised
   Expired                                     (36,955)              $  14.25    -  $   23.50
                                           -----------

Balance September 30, 1994                     672,997               $   5.55    -  $   24.25
   Granted                                      20,142               $  10.50    -  $   17.87
   Exercised                                    (8,975)              $   6.09    -  $    6.09
   Expired                                    (143,029)              $   9.25    -  $   24.25
                                            -----------

Balance September 30, 1995                     541,135               $   5.55    -  $   22.00
   Granted                                     409,044               $  21.25    -  $   22.25
   Exercised                                   (59,494)              $   5.55    -  $   22.00
   Expired/cancelled                          (274,225)              $   9.25    -  $   22.00
                                            ----------

Balance September 30, 1996                     616,460               $   5.55    -  $   22.25
                                             =========               ========       =========

</TABLE>

     At September 30, 1996,  221,223 options were  exercisable at prices ranging
from $5.55 to $22.25 per share.

     The  Company's  Board of  Directors  and  stockholders  have  approved  the
adoption of a stock option plan for employees, a stock option plan for directors
and a stock option plan for two executive  officers  which provide for the grant
of options to purchase a maximum of 775,000  shares,  100,000 shares and 200,000
shares,  respectively,  of the Company's common stock. Options may be granted at
prices  not less than  fair  value at the date of grant.  The  Company  has also
granted options pursuant to contractual arrangements.

     During 1994, a new stock option and investment  plan (covering a maximum of
300,000  shares) was  adopted.  Under this plan,  participants  were granted two
stock options for each share of the Company's  common stock that they  acquired.
The options are granted at fair value at date of grant.  Such stock  options are
subject to a defined  vesting  schedule.  Shares  purchased by employees  may be
financed by payroll deductions.

     Options covering 571,654 shares (excluding lapsed shares) have been granted
in connection with these plans through September 30, 1996.



                                      F-14

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13 - Income Taxes:

The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>

                                                                    For the Year Ended
                                                                       September 30,
                                                           -----------------------------------
                                                            1996           1995           1994
                                                            ----           ----           ----
                                                                       (in thousands)
<S>                                                    <C>            <C>             <C>
Current:
   Federal                                             $   8,130      $   7,371      $    4,068
   State                                                   1,004          1,064             894
   Foreign                                                    19             38             101

Deferred:
   Federal                                                   383            615            (817)
   State                                                      55             66            (114)
                                                          --------      --------      ---------
                                                       $   9,591      $   9,154      $    4,132
                                                       ==========      =========     ==========
</TABLE>

     The tax effects of temporary differences that give rise to the net deferred
tax liabilities are presented below: 

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

           Prepaid expenses                                1,567      $  1,513
           Accelerated depreciation                          762           874
           Undistributed DISC earnings                       808           912
           Accrued liabilities                              (303)         (903)
           Capital losses                                    500         1,254
           Valuation allowance attributable to
            capital loss carry forward                      (500)       (1,254)
                                                        ---------     ---------
                                                       $   2,834      $  2,396
                                                       =========      =========

     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, 
                                                   -----------------------------
                                                   1996          1995      1994
                                                   ----          ----      ----
                                                          (in thousands)

Statutory federal income tax rate                  35.0%        35.0 %     34.0
O.R. Concepts goodwill write down                                          17.6
Net capital losses (gains) on investments          (2.0)         (.2)      17.4
State income taxes net of federal
  tax benefit                                       2.4          2.9        8.9
Dividend exclusion/tax exempt interest              (.3)         (.2)      (5.9)
Other                                              (1.3)        (1.3)       (.9)
                                                   -----        -----     ------

     Effective income tax rate                     33.8%        36.2%      71.1%
                                                   =====        =====     ======

                                      F-15

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     The  Company's  capital  losses  may be carried  forward  to offset  future
capital  gains.  Such  capital  loss  carryforwards  aggregate  $2.3 million for
federal  income tax purposes,  expiring at various dates through 2000,  and $1.3
million for financial reporting purposes.

Note 14 - Related Party Transactions:

     During fiscal 1996,  the Company  entered into a joint venture  arrangement
(Cardiologics, L.L.C.) with the objective to develop specialized cardio-vascular
products  ("Cardiologics").  Approximately  $100,000 of research and development
expense was incurred by the Company in fiscal  1996.  During  fiscal  1996,  the
Company's  management  made a decision to sell its equity  interest in the joint
venture for several business  reasons,  including the time frame to commercially
introduce the product,  the research,  development  and clinical  costs that are
likely to be incurred,  as well as that the primary  market focus of the product
is  outside  of the core  anesthesia  and  critical  care  product  focus of the
Company.

     During  September 1996, the Company sold its interest for a note receivable
of  $1,000,000  plus  repayment of expenses  paid on  Cardiologics  behalf which
resulted in a gain of $1,000,000.  The investment was sold to a private  venture
capital fund whose primary  investor is the President and principal  stockholder
of the Company.  The note is due during the year ended  September 30, 1997.  The
Company has received a payment on this note amounting to $500,000  subsequent to
September 30, 1996 and reimbursement of the $100,000 of research and development
costs.

Note 15 - Allowance for Doubtful Accounts:

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

<TABLE>
<CAPTION>
                                             Balance at       Charged to                       Balance
                                             Beginning        Costs and                        at End
               Description                   of Period        Expenses        Deductions      of Period
               -----------                   ----------       -----------     ----------      ---------
                                                                  (in thousands)
Allowance for doubtful accounts:
   Year ended September 30,
<S>       <C>                                <C>              <C>             <C>             <C>    
          1994                               $   100          $   145         $   95   (A)    $   150
                                              =======          =======         ======         =======

          1995                               $   150          $   302         $  167   (A)    $   285
                                              =======          =======         ======         =======

          1996                               $   285          $    45         $  161   (A)    $   169
                                              =======          =======         ======         =======
</TABLE>


(A) Write-off of uncollectible accounts receivable.

Note 16 - Significant Customers:

     A portion of the Company's hospital customers are serviced via national and
regional medical supply  distributors.  During fiscal 1996, 36% of the Company's
sales  were  made  in  this  distribution  channel.  One of the  large  national
distributors  represented  approximately  14% of net  sales--continuing  product
lines. The same customer  represents  approximately 11% of outstanding  accounts
receivable at September 30, 1996.

                                      F-16

<PAGE>



                                    PART III


     Item 10. Directors of the Registrant.


     The registrant incorporates by reference herein information to be set forth
in its definitive  proxy  statement for its 1997 annual meeting of  stockholders
that is  responsive  to the  information  required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange  Commission  within 120 days after the end of the registrant's most
recently  completed fiscal year, 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 1997 annual meeting of  stockholders
that is  responsive  to the  information  required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange  Commission  within 120 days after the end of the registrant's most
recently  completed fiscal year, 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 and Management.


     The registrant incorporates by reference herein information to be set forth
in its definitive  proxy  statement for its 1997 annual meeting of  stockholders
that is  responsive  to the  information  required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange  Commission  within 120 days after the end of the registrant's most
recently  completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.


     Item 13. Certain Relationships and Related Transactions.


     The registrant incorporates by reference herein information to be set forth
in its definitive  proxy  statement for its 1997 annual meeting of  stockholders
that is  responsive  to the  information  required with respect to this Item. If
such proxy statement is not mailed to stockholders and filed with the Securities
and Exchange  Commission  within 120 days after the end of the registrant's most
recently  completed fiscal year, the registrant will provide such information by
means of an amendment to this Annual Report on Form 10-K.

<PAGE>

                                     PART IV

Item 14.        Exhibits, Financial Statement Schedules and Reports on Form 8-K

         (a)    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.

         (b)    All  schedules   have  been  omitted   because  they  are  not
                applicable  or the  required  informa  tion is included in the
                financial statements or notes thereto.

         (c)    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, 1995.

  3.2           By-laws, as amended, are incorporated by reference to Exhibit 
                3.2  to  the  Company's  Registration  Statement  on  Form  S-1 
                (No. 33-35864) initially filed with the Commission on July 13, 
                1990.

  4.1           1984  Economic  Development   Authority  Loan   Agreement  is 
                incorporated  by  reference  to  Exhibit 4.2  to  the Company's 
                Registration  Statement on  Form  S-1  (No. 33-35864)  initially
                filed with the Commission on July 13, 1990.

  4.2           Amended and Restated  Loan  Agreement  between the Company and
                the New Jersey  Economic  Development  Authority,  dated as of
                November 1, 1990, is  incorporated by reference to Exhibit 4.2
                to the  Company's  Registration  Statement  on Form  S-1  (No.
                33-34107)  initially filed with the Commission on February 21,
                1991.

  4.3           Letter of Credit and Reimbursement Agreement, dated August 27,
                1993, between the Company and Chemical Bank New Jersey N.A. is
                incorporated  by  reference  to Exhibit  4.3 to the  Company's
                Annual  Report on Form 10-K for the year ended  September  30,
                1993.

 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, 1993.

 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, 1993.

 10.3           1993 Executive  Stock Option Plan is incorporated by reference
                to Exhibit 10.3 to the  Company's  Annual  Report on Form 10-K
                for the year ended September 30, 1993.







<PAGE>


Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K 
               (continued).

Exhibit        Description

 10.4          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.

 10.5          Forms of  Option  Agreements  with  various  employees  of the
               Company is  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.

 10.6          Agreement, dated November 6, 1992, among the Company and certain 
               shareholders of O.R. Concepts, Inc., is incorporated by reference
               to Exhibit 2.1 to the Company's Current Report on Form 8-K filed 
               with the Commission on November 30, 1992.

 10.7          Vital Signs Investment Plan, as amended.

10.8           Stock  Option  Grants  to  Terence  D. Wall  and  Barry  Wicker, 
               replacing stock options  granted  to  Messrs.  Wall  and  Wicker 
               pursuant to the 1993 Executive Stock Option Plan.

10.9           Agreement to sell the Registrant's 51% interest in Cardiologics, 
               L.L.C., including the related promissory note, security agreement
               and guarantee.

21.1           Subsidiaries of the Registrant.

23.1           Consent of Goldstein Golub Kessler & Company, P.C.

24.1          Power of Attorney

27.1          Financial Data Schedule

     (d)      During the quarter ended September 30, 1996, the Company did not 
              file any Current Reports on Form 8-K.









<PAGE>




                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its  behalf by the  undersigned,  thereunto  duly  authorized,  this 27th day of
December, 1996.

                                       VITAL SIGNS, INC.


                                       By:/s/ Anthony J. Dimun
                                       _________________________________________
                                       Anthony J. Dimun,
                                       Executive Vice President

     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.

Signatures                         Title                               Date


/s/ Terence D. Wall*              President, Chief            December 27, 1996
--------------------
Terence D. Wall                   Executive Officer
                                    and Director


/s/ David J. Bershad*             Director                    December 27, 1996
---------------------
David J. Bershad


/s/ Anthony J. Dimun              Executive Vice President,   December 27, 1996
Anthony J. Dimun                  Chief Financial Officer,
                                  Treasurer (Chief Financial
                                  and Accounting Officer)
                                    and Director


/s/ Joseph J. Thomas*             Director                    December 27, 1996
---------------------
Joseph J. Thomas


/s/ John Toedtman*                Director                    December 27, 1996
----------------------
John Toedtman


/s/ Barry Wicker*                 Executive Vice President    December 27, 1996
-----------------                 and Director
Barry Wicker                       


* By: /s/ Anthony J. Dimun
      _____________________
     Anthony J. Dimun
     Attorney-in-Fact

<PAGE>

                                  EXHIBIT INDEX

           Exhibit      Description

            10.7      Option and Investment Plan as amended.

            10.8      Stock Option Grants to Terence D. Wall and Barry Wicker, 
                      replacing stock options granted to Messrs. Wall and Wicker
                      pursuant to the 1993 Executive Stock Option Plan.

            10.9      Agreement  to  sell  the   Registrant's  51%  interest  in
                      Cardiologics,  L.L.C.,  including  the related  promissory
                      note, security agreement and guarantee.

            21.1      Subsidiaries of the Registrant.

            23.1      Consent of Goldstein Golub Kessler & Company, P.C.

            24.1      Power of Attorney

            27.1      Financial Data Schedule