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, 1997.

[  ]  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
incorporation or organization)                              Number)

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

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

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

                               Title of each class

                           Common Stock, no par value

     Indicate  by  checkmark  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, 1997 was approximately $113,700,000.

     Number of shares  of Common  Stock  outstanding  as of  December  1,  1997:
12,715,415

     Documents  incorporated by reference:  Definitive  Proxy Statement for 1998
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                                   16
Item 4A.         Executive Officers of the Registrant                  17

                                     Part II

Item 5.          Market for the Registrant's Common
                   Equity and Related Stockholder Matters              19
Item 6.          Selected Financial Data                               19
Item 7.          Management's Discussion and Analysis
                    of Results of Operations and
                    Financial Condition                                21
Item 8.          Financial Statements and Supplementary
                    Data*                                              26
Item 9.          Changes in and Disagreements with
                    Accountants on Accounting and
                    Financial Disclosure                               26

                                    Part III

Item 10.         Directors of the Registrant                           27
Item 11.         Executive Compensation                                27
Item 12.         Security Ownership of Certain Beneficial
                    Owners and Management                              27
Item 13.         Certain Relationships and Related
                    Transactions                                       27
                                     Part IV

Item 14.         Exhibits, Financial Statement Schedules  and
                    Reports on Form 8-K                                28

Signatures                                                             30

__________________
*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 (973) 790-1330.

     Vital  Signs  and  its   subsidiaries   design,   manufacture   and  market
single-patient  use medical products for the anesthesia,  respiratory,  critical
care and  emergency  markets.  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.  The Company was the first
organization to introduce a single-patient use manual  resuscitator in 1984. 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 developed a general anesthesia kit, 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, used to
protect the  infant's  lung against over  pressurization.  In 1997,  the Company
began  distributing  products  manufactured by Marquest Medical  Products,  Inc.
("Marquest"),  such as  arterial  blood  gas  syringes  and kits,  small  volume
nebulizers and heated humidification circuits (see Acquisitions - Current Fiscal
Year).

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

     The Company's strategy is to sell its anesthesia,  respiratory and critical
care  products to hospitals  through its own sales force.  The Company sells its
emergency  and  alternate   site/homecarecare   products   through  third  party
distributors.  The  worldwide  sales force  consisted of 213 sales  employees at
October 1, 1997  compared  with 102 sales  employees at October 1, 1996.  In the
third quarter of fiscal 1997, the Company embarked on a new strategy with regard
to its domestic sales force. The Company announced its intention to increase its
sales  force by as much as 100% and to divide its sales  force into two  groups,
one to  concentrate  on the  sale  of  anesthesia  products,  and the  other  to
concentrate on respiratory and critical care products.


<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  Litigation Reform Act of 1995 (the
"Reform Act"), the Company intends to caution investors that there are 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  from such
statements. The Company undertakes no obligation to publicly release the results
of any revisions to its forward-looking  statements to reflect subsequent 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, liquidity 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 and/or the success of
the  Company's   expanded  sales  force,   (ii)   interruptions   or  delays  in
manufacturing  and/or sources of supply,  (iii) the Company's ability to control
costs,  (iv) market  acceptance of competitors',  existing or new products,  (v)
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 (vi) legislative changes impacting the healthcare market.

Acquisitions - Current Fiscal Year

     The Company acquired the outstanding  stock of Marquest  Medical  Products,
Inc., a manufacturer  of disposable  medical devices and supplies for use in the
respiratory  care,  critical  care  and  anesthesia  markets.  As  part  of  the
acquisition  transaction,  the Company  acquired certain  equipment,  patent and
lease  rights  from  Scherer  Healthcare,  Inc.  ("Scherer").  Scherer  held the
ownership rights to Marquest's blood gas collection  product line as a result of
a previous sale leaseback transaction with Marquest.  The effective date of this
transaction for financial reporting purposes is April 1, 1997. See Note 2 of the
Company's Consolidated Financial Statements.

     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 is focused upon the following  objectives:  (i)
identification  and acquisition of companies  and/or products in the anesthesia,
respiratory  and critical care and  emergency  fields with the goal of expanding
the  products  that  can be sold  by the  Company's  direct  sales  force,  (ii)
expansion of sales to international markets, and (iii) acquiring unique research
and development capabilities.


<PAGE>

                                    Products

Principal Products

The  Company   markets  a  wide  variety  of   single-patient   use  anesthesia,
respiratory,  critical care and emergency  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 international hospitals.

     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 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.
The Company recently began offering circuits that deliver heated  humidification
to patients (see Acquisitions Current Year). Technological advances in the areas
of gas sampling,  temperature  monitoring and  humidification  have provided the
Company with opportunities to expand its breathing circuit offerings.

     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.  The Company introduced its patented  INFUSABLE(R)  disposable pressure
infusor  to the  market in late  1986 and  early  1987.  The  Company's  infusor
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 assembles 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.  Thermadrape(R)  products  minimize
preoperative  heat loss and allow patients to avoid (i) the increased  metabolic
rate  and  oxygen  uptake  associated  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.


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.

     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.


<PAGE>


     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.

     Gas-Lyte(R)and Quick-ABG(R).  The Company offers a broad line of disposable
arterial blood gas ("ABG") syringes and collection  systems.  Blood gas syringes
are used to  collect  blood  for  blood  gas  analysis  routinely  performed  in
hospitals  on  patients  suspected  of having  metabolic,  respiratory  or other
cardiopulmonary difficulties.  The blood gas sample is processed through a blood
gas  analyzer.  Blood  gas  analyzers  are  manufactured  by  a  wide  range  of
manufacturers.   The  Company   offers  its  ABG   products  in  both   standard
configurations  and in "kits" that are customized to meet a specific  hospital's
needs.

     RespirGard II (R) Nebulizer  System,  Acorn II (R) and Wisperjet  (TM). The
Company manufactures a product line of aerosolized  medication delivery systems,
consisting  primarily of disposable small volume nebulizers.  Nebulizers atomize
medications  for inhalation into the lungs. A range of nebulizers are offered to
accommodate  user preferences as well as the requirements for different types of
respiratory treatment.

     Heated  Humidification  Systems. The Company manufactures a set of products
to  provide a flow of warm  moist air to  patients  who are at risk from loss of
body  temperature  and drying of the lung  linings.  These  products  consist of
electronic  humidifiers  that  utilize  single use heated  and  non-heated  wire
breathing circuits as well as single use humidification chambers. In addition to
their use in respiratory  care, these products also have applications for use in
anesthesia applications.

     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.

     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.  Single-patient use heat and moisture
exchangers  also reduce the risk of infection  associated  with reusable  heated
humidifiers.


<PAGE>



     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 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) is a 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.  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(TM)  was designed  with a patented  "isolation"  chamber to
isolate the catheter from the patient's airway while permitting  cleaning of the
catheter  without  inadvertently  lavaging the patient.  As a result of clinical
feedback this product is undergoing certain design changes.  The Company expects
to re-launch  this product to its customer base in the second  quarter of fiscal
1998.

     Vasceze(TM) is a needleless, disposable, pre-filled vascular catheter flush
device used with IV sets in the homecare 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 those of 10.cc
syringe and other flush devices.  The Company is in the process of expanding its
size offerings of the  Vasceze(TM)  product line to accommodate a wider range of
hospital protocols.


Emergency Products

     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.



<PAGE>



     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  custom-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.


Thomas Medical Products.

     Thomas Medical  Products,  Inc. ("TMP") is an OEM manufacturer and contract
development  organization which is driven by significant scientific,  technical,
engineering, manufacturing and QA/Regulatory expertise in the disposable medical
device area.  TMP  manufactures  devices which provide  access  primarily to the
vascular  system  by  medical   professionals   and  include  products  such  as
introducers,  sheaths, dilators, hemostasis valves and catheters. TMP's products
are sold  primarily to other  healthcare  product  providers to be used in their
product  or as part of  surgical  kits.  TMP sells to many of the  major  device
manufacturers.

Services

     Vital Pharma, Inc. (formerly known as HealthStar  Pharmaceutical  Services,
Inc.) ("Vital Pharma"),  was acquired in January 1996. Vital Pharma's  principal
focus is utilization of the Company's expertise in blow-fill-seal technology for
manufacturing  the  Vasceze(TM)  product  line  and  for  third  party  contract
packaging customers that require sterile packaging (primarily pharmaceutical and
medical device  manufacturers).  Vital Pharma has the capabilities to design and
assemble   blow-fill-seal   machines  for  sale  to  customers  that  desire  to
manufacture in their own facilities.

     Another division of Vital Pharma, 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/services:

<TABLE>

<CAPTION>

                                                          Year Ended September 30,
                                   -------------------------------------------------------------
                                             1997                   1996               1995
                                   ---------------------- ---------------------- ---------------
                                      Amount      %       Amount           %          Amount      %
                                                            (Dollars in Millions)

<S>                                   <C>       <C>         <C>           <C>        <C>        <C>
Anesthesia                           $58.0      56.0        $56.4        62.7    $  54.1     61.7
Respiratory and Critical Care         41.0      39.6         31.7        35.3       33.6     38.3
Services / Other                       4.6       4.4          1.8         2.0         .0       .0
                                     -----     ------      ------       ------    ------  -------
Total                               $103.6     100.0%       $89.9       100.0%    $ 87.7    100.0%
                                    ======     ======       ======      ======    ======  ========
</TABLE>



<PAGE>

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. The Company's sales to hospitals through national  distributors,  such as
Allegiance, Owens & Minor and McKesson/General Medical, approximate 37% of sales
for Fiscal 1997.  The Company's  sales force  participates  with these  national
distributors in making sales to the hospital.

     In  fiscal  1997 and  1996,  one of the  large  international  distributors
represented  approximately 13% and 14% of net  sales--continuing  product lines.
The same customer represented  approximately 10% and 11% of outstanding accounts
receivable at September 30, 1997 and 1996 respectively.

     In the fourth quarter of 1997, the Company announced that with the addition
of the Marquest  product lines, it was expanding its sales force and dividing it
into two  separate  sales  groups.  One sales  group is  focused on the sales of
anesthesia  products.  The  second  sales  group  is  focused  on the  sales  of
respiratory/critical  care products. The Company has implemented that program by
hiring and training the expanded  sales force.  On October 1, 1997,  the Company
had a total of 179 direct sales  employees.  Of that number,  88 are involved in
the sale of anesthesia products,  88 are involved in the sale of respiratory and
critical care  products and 3 supporting  alternate  site and national  accounts
sales.  In  addition,   the  Company  has  14  sales  professionals  engaged  in
international sales.

     The Company will  continue to develop its sales  capacity in the  alternate
site (non-hospital) market place. It is expected that this segment of the market
will grow faster than the overall  market in the next few years.  The  Company's
effort in this are broken down into two  markets,  respiratory  and IV products.
The alternate site respiratory  product sales are handled by two sales managers,
who  oversee an  independent  representative  network.  This  network  currently
numbers twenty  representatives and is expected to grow to forty-five by the end
of the second  quarter of fiscal 1998.  The Company's IV products are handled by
one  sales  manager  who  works  with a group  of six  specialty  dealers.  This
structure allows the Company to have broad coverage in the alternate site market
while at the same time avoiding the fixed costs of an internal sales force.

     The Company  utilizes  an  independent  distributor  for its  Actar(R)  CPR
training manikins and other pre-hospital and emergency care products.

     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.

     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

<PAGE>

signing an agreement  with Premier for a broad range of anesthesia  products and
certain  respiratory/critical care products (as described below), Tenet for both
anesthesia and respiratory/critical care products, Columbia for its ABG products
and other buying groups,  no assurances can be given as to the Company's ability
to secure other  contracts or as to the impact of such contracts on the Company.
The buying  power  exerted by these  entities  is expected to continue to 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,  face masks and ABG kits.
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 the Company or one other supplier. Pricing for the
five-year agreement is effective from February 1, 1997. The Company continues to
work with member  hospitals to secure both  commitment and contract  compliance.
The additional market share as a result of this agreement with Premier cannot be
measured at this time.

International Sales

     For the year ended  September 30, 1997,  international  sales accounted for
approximately 10% of net sales as compared with approximately 8% during 1996 and
approximately 5% during fiscal 1995.

     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  a direct  sales
organization in the United  Kingdom.  The Company has built a network of over 85
independent distributors to sell the Company's anesthesia, respiratory, critical
care and emergency products in major international markets. 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.

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

     During  Fiscal 1997 the Company  continued  to focus its R&D efforts on two
new products.  The first product,  a flush device for vascular access  catheters
(Vasceze(TM)),  can be utilized in both the hospital  setting and in the rapidly
expanding  alternate  site  field.  Versions  of 


<PAGE>
the device are offered for both saline and heparin applications.  The Company is
working  towards  the  development  of  additional  sizes of Vasceze  which will
accommodate  the protocols at a wider  variety of hospitals  and alternate  site
providers.

     17 The Company continues to enhance the features of the Isocath(TM)  closed
suction system designed for use on ventilated  patients.  The single-use  system
reduces the risk of infection for both patient and care giver.  While originally
introduced in October,  1996, an improved  version will be  reintroduced  in the
second  quarter  of fiscal  1998.  See  "Principal  Products -  Respiratory  and
Critical Care Products - Isocath(TM)".

     The Company has also  undertaken  research and  development  efforts in the
following areas: (i) developing new versions of its resuscitator products;  (ii)
new versions of its heated humidifiers; (iii) new versions of blood gas syringes
to enhance  the ABG product  line and (iv)  various  other  projects in both the
anesthesia and critical care areas.

     The Company  expects to continue to rely in part on its internal  staff and
on outside  professionals  to perform research and development on anesthesia and
respiratory products. The Company's research and development expenses aggregated
$3,865,000,  $3,595,000 and $3,869,000,  respectively, for Fiscal 1995, 1996 and
1997.


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  Vice  President,   World  Federation  of  Societies  of
Anaesthesiologists;    past    President    of;   the   American    Society   of
Anesthesiologists,  the  Society for  Ambulatory  Anesthesia;  and the  Illinois
Society of Anesthesiologists.


Product Liability Exposure

     As with  other  healthcare  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.



<PAGE>


Manufacturing and Quality Control

     General

     The  Company's  facilities  in Totowa,  New  Jersey;  Englewood,  Colorado;
Burnsville, Minnesota; Malvern, Pennsylvania; Orange, California; Riviera Beach,
Florida; and Barkan, Israel, are the principal  manufacturing  locations for the
Company's products,  including  anesthesia  breathing circuits,  filters,  blood
pressure  cuffs,  infusables,  ABG  syringes,  heated  humidification  circuits,
nebulizers,  manual resuscitators and catheters.  The Company performs assembly,
testing and packaging in these locations. In many instances,  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  and used in the  manufacturing  process
along with complete histories of all devices manufactured. See "Regulation."

     Significant Suppliers

     In 1980,  the Company  acquired the rights to its  air-filled  cushion face
mask through a collaboration arrangement with Respironics, Inc. ("Respironics").
Face  masks  are  used in a  variety  of the  Company's  circuits  and are  sold
individually   to  customers.   The  Company   purchases  its  face  masks  from
Respironics,  a single source which  manufactures  the face mask in 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 2001.

     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.


<PAGE>



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.

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,
nebulizers,  ABG kits,  anesthesia  kits and closed  suction  products),  Baxter
International Inc., (breathing circuits and anesthesia kits), King Systems (face
masks  and  anesthesia   circuits),   Hudson   Respiratory  Care,  Inc.  (heated
humidification  systems  and  other  respiratory  products),   Allegiance,  Inc.
(nebulizers and heated  humidification  systems),  Ballard Medical, Inc. (closed
suction  products)  and Critikon  (blood  pressure  cuffs).  The  Company's  new
Vasceze(TM) product faces competition from Wyeth/Ayerst, and Abbott, who provide
pre-filled syringe catheter devices.

     Competition for Vital Pharma's contract  manufacturing  business comes from
Automated  Liquid  Processing  and Holopak both of whom are larger in scope than
VPI.  The  Validation  Group  competes  with a large  number of  privately  held
organizations.

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 



<PAGE>

involve  compliance  with CGMP  requirements  and are  subject to other  general
controls including pre-market  notification (510k). Class II devices are subject
to the same  controls  as Class I and also may be subject to  specific  controls
(for example; design controls,  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.


     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 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.

     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 healthcare system in the United
States.  The  Clinton  Administration  pledged  to bring  about a reform  of the
nation's  healthcare  system and, in September 1993,  President Clinton outlined
the  Clinton  Administration's  plan  for  healthcare  reform.  Included  in the
proposal were calls to control or reduce  public and private  spending on health
care, to reform the payment  methodology  for  healthcare  goods and services by
both the public (Medicare and Medicaid) and private sectors, which could include
overall limitations on federal spending for healthcare benefits,  and to provide
universal  access to  healthcare.  While the political  climate  appears to have
changed with respect to sweeping  healthcare  reform,  healthcare  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


<PAGE>


with such laws and regulations in the future.

Patents

     While the Company possesses over 80 patents and licensed 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, 1997,  the Company had 1,027  full-time  employees and 10
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  also owns  manufacturing,  warehouse  and office space in
Englewood,  Colorado consisting of 88,000 square feet. In March 1997 the Company
purchased the previously  leased facility utilized by Vital Pharma consisting of
13,600 square feet in Riviera Beach,  Florida.  The Company's other  substantial
facilities -- approximately 35,000 square feet in Burnsville,  Minnesota; 45,000
square feet in Aurora,  Colorado;  20,000 square feet in Malvern,  Pennsylvania;
18,000  square  feet in Orange,  California  and 18,000  square  feet in Barkan,
Israel -- are leased by the Company.  The Company also leases  office,  assembly
and warehouse space in Riviera Beach, Florida and England.


Item 3. Legal Proceedings

     On October 31, 1997, the U.S.  District Court for the Northern  District of
Illinois  entered a judgment  in favor of Vital  Signs in a patent  infringement
action brought by Smith  Industries  regarding manual  resuscitators.  The Court
found the Smith  Industries  patent to be invalid and that Vital Signs' products
did not infringe. Smith Industries has filed a Notice Of Appeal.

     In May 1995, Vital Signs filed an action in the U.S.  District Court in New
Jersey,  subsequently amended, against a former employee and his patent attorney
alleging, inter alia, causes of action for breach of contract,  misappropriation
of trade  secrets and tortious  interference  with  contractual  relations.  The
patent at issue in the case  relates to the  Company's  vascular  flush  device,
Vasceze(TM).  The defendants counter-claimed for, inter alia, breach of contract
and patent  infringement.  Subsequently,  the  ex-employee  defendant  added the
Company's   outside  patent  counsel  as  a  defendant  in  the   counter-claim.
Separately,  an arbitration was held in connection with an employment  agreement
between the ex-employee and Vital Signs.  Pursuant to an arbitration award Vital
Signs paid the ex-employee  approximately  $100,000. In June 1997 the defendants
filed a motion for summary judgement seeking dismissal of Vital Signs' case and


<PAGE>



judgement  for the  defendants  on each of their  causes of action  including  a
declaration of their ownership rights to the subject  patents.  All parties have
submitted their legal briefs and are awaiting the Court's decision.  In order to
protect its interests,  the Company filed a  corresponding  action in Germany in
December  1996  in order to oppose defendants' actions with regard to a possible
European  patent.  The Company  intends to continue  to  vigorously  protect its
rights in this matter and to prosecute  its legal  actions to the full extent of
the law.

     On March 24, 1997 and on April 9, 1997,  separate  actions  were  commenced
against  the  Company in New Jersey and  California,  respectively,  by Marquest
dealers who had  received  notification  that their  dealer  relationships  with
Marquest  were to be  terminated.  While the  lawsuits are not  identical,  they
assert  similar claims  against the Company with regard to  misappropriation  of
confidential  information and violation of certain statutory provisions relating
to the protection of dealership  rights.  In addition,  the action in California
asserts  claims for  violation of the  Robinson-Patman  Act. Each of the actions
also names Marquest as a defendant and similar  claims are asserted  against it.
The Company and Marquest  responded to the  California  action by asserting that
the exclusive  venue for such a proceeding was in an  arbitration  proceeding in
Denver,  Colorado.  The court granted the defendants'  motion and the California
action has been dismissed.  To date the plaintiff has not initiated  arbitration
proceedings.  The New Jersey  action  (filed in the U.S.  District  Court in New
Jersey) is in the discovery phase.

     On November 12, 1997, a declaratory  judgment action was commenced  against
the Company in the U.S.  District Court in the Central District of California by
a competitor  seeking to  invalidate a patent held by the Company in  connection
with its Isocath(TM)  product.  This action is related to an infringement notice
filed against the plaintiff by the Company. The Company believes that the action
is  meritless  and intends to both  vigorously  defend its patent  rights and to
enforce them against the competitor.

     In September 1996, a patent  infringement action was filed in Japan against
a Marquest  dealer in connection with the sale in Japan of certain of Marquest's
ABG syringes.  Pursuant to a written  agreement  with that dealer,  a demand was
made on Marquest for indemnity for the patent infringement action.  Marquest has
been honoring the terms of that  indemnification  and has  reimbursed  the legal
fees associated with defending the dealer in the litigation. Japanese litigation
procedures differ from that found in the United States.  However,  the matter is
still in the early stages of litigation.  The Company has continued to honor the
indemnification since acquiring Marquest.

     The  Company is also  involved in other  legal  proceedings  arising in the
ordinary course of business.

     The  Company  cannot  predict  the  outcome of its legal  proceedings  with
certainty.  However,  based upon its review of pending  legal  proceedings,  the
Company  does not believe  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.


<PAGE>


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

     Not applicable.

Item 4A. Executive Officers of the Registrant

     The Company's executive officers are as follows:
<TABLE>
<CAPTION>

                                                               Positions with
Name                                  Age*                     the Company

<S>                                   <C>                     <C>                          
Terence D. Wall                       56                      President, Chief Executive
                                                              Officer and Director
Anthony J. Dimun                      54                      Executive Vice President,
                                                              Chief Financial Officer,
                                                              Treasurer, Secretary and
                                                              Director
Dennis Fenstermaker                   51                      Vice President - Manufacturing
                                                              and General Manager

Christian Malmqvist                   46                      Executive Vice President - International Operations

Daniel L. Reuvers                     34                      Vice President - National Accounts

Barry Wicker                          57                      Executive Vice President -
                                                              Sales and Marketing, and Director

</TABLE>

______________________________
* As of September 30, 1997.

     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  certain  health  care
businesses,  including Bionx Inc., a manufacturer of biosorbable medical devices
for orthopedic and other applications  ("Bionx"),  and Exogen, a manufacturer of
an ultrasonic  bone healing  device.  Until  September  18, 1997,  Mr. Wall also
served as a Director of  EchoCath,  a  developer  and  manufacturer  of catheter
products that use ultrasound video technology. 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 


<PAGE>



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 Bionx.  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
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 healthcare  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.

     Christian  Malmqvist  joined the Company in July,  1995 as Vice President -
International Operations. Prior to joining the Company he held various sales and
marketing  positions  with  Ohmeda,  Inc.,  a  healthcare  supplier  serving the
anesthesia and critical care fields,  during a 17 year tenure. Mr. Malmqvist has
a masters  degree in Business  Administration  from  Stockholm  University and a
Bachelor's degree in Business Administration from Lund University (Sweden).

     Dan Reuvers  joined the Company in 1987. He has served  virtually all sales
related functions over the last 10 years,  including Vice President of Sales and
his current position of Vice President of National Accounts.  In addition to his
experience at Vital Signs,  Mr. Reuvers  previously  served as Director of Sales
for a start-up respiratory equipment company.

     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>

                                                                                               Dividend 
                                                                      High           Low       Per Share


          Fiscal Year Ended September 30, 1996:

<S>       <C>                                                      <C>             <C>         <C>  
          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

          Fiscal Year Ended September 30, 1997:

          Quarter ended December 31, 1996                          $  27-3/8       $ 19-1/2     $ .04
          Quarter ended March 31, 1997                                25-7/8         21-3/4       .04
          Quarter ended June 30, 1997                                 24-3/4         16-3/4       .04
          Quarter ended September 30, 1997                            19-1/4         15-3/8       .04

</TABLE>


     As of September 30, 1997, there were approximately 450 holders of record of
the Common Stock.

     During Fiscal 1997,  the Company  declared and paid cash dividends of $0.16
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, 1997, including
Marquest Medical Products,  Inc.  (effective for financial reporting purposes on
April 1, 1997), Vital Pharma, Inc. (formerly known as 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),  have been  accounted for as purchases
and,  accordingly,  are only reflected herein for dates and periods on and after
the  respective  dates noted  above.  See Note 2 of the  Company's  Consolidated
Financial Statements.


<PAGE>
<TABLE>
<CAPTION>

                                                                             Year Ended
                                                                            September 30,
                                              1997           1996            1995           1994         1993
                                                                      (In thousands, except per share data)
Income Statement Data:
<S>                                     <C>              <C>            <C>            <C>          <C>       
Net sales--continuing product lines(1) $103,562       $ 89,922       $  87,651        $ 82,937       $  77,182
Net sales--product line disposed          ---              808           1,902           2,187           2,696
Cost of goods sold                       48,840         38,418          38,279          37,594          34,247
                                        -------         ------         -------         -------          ------
Gross profit                             54,722         52,312          51,274          47,530          45,631
Operating expenses:
   Selling, general and administrative   27,247         23,491          23,629          27,317          23,685
   Research and development               3,869          3,595           3,865           4,493           3,856
   Interest income                       (2,242)        (2,508)         (2,406)           (781)           (773)
   Interest expense                         537            346             382             555             640
   Special charges                        6,700                                         10,643
   Other (income) expense                   844         (1,635)            162            (969)           (731)
   Goodwill amortization                    862            643             354             462             381

   Income before provision for
     income taxes                        16,905         28,380          25,288           5,810           18,573
   Provision for income taxes             5,619          9,591           9,154           4,132            5,899
                                         
   Net income                            11,286         18,789          16,134           1,678           12,674
 
   Net income per share                     .88           1.44            1.24             .13              .98
 
   Dividends per share                 $    .16        $    .12         $    .09       $    .02        $    ---
                              
   Weighted average number of
     shares outstanding                  12,881         13,045          12,991          12,994          12,990

                                                                                         
                                                                          September 30,
                                            1997            1996           1995           1994           1993
                                                                         (In thousands)
Balance Sheet Data:

  Working capital                      $  38,102(3)         44,820         32,885(2)      50,409         46,869
  Total assets                           136,948           123,756        110,421         91,773         92,200
  Long-term debt, excluding
     current installments                  5,529(3)          2,700          3,200          3,700          5,829
  Total stockholders' equity             112,229           110,239         96,645         77,658         76,138

</TABLE>


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

     -------- 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.

     3 The decrease in working  capital and increase in long-term debt in Fiscal
1997 is due primarily to the acquisition of Marquest Medical Products,  Inc. and
the acquisition of shares pursuant to a previously  announced stock buyback. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

<PAGE>


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   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.

Recent Acquisition

     On March 14, 1997, Vital Signs,  Inc.  announced that it had entered into a
definitive agreement to acquire Marquest Medical Products,  Inc. Concurrent with
that transaction, the Company entered into an agreement with Scherer Healthcare,
Inc.  ("Scherer"),  which was the majority shareholder of Marquest,  to acquire,
for cash,  certain product rights  previously  sold by Marquest to Scherer.  The
Company  entered into  inducement  agreements  with Scherer and Robert  Scherer,
Scherer's  principal  shareholder,  in connection with the commitment of Scherer
and  Robert  Scherer  to vote  their  shares  in favor of the  transaction.  The
transaction was approved by the shareholders of Marquest and Scherer on July 28,
1997. The effective date of this acquisition for financial reporting purposes is
April 1, 1997.

     The Company paid approximately $20 million including  acquisition costs and
incurred the $2,500,000 writeoff of in process research and development, charged
to  1997  operations,   described   below.  The  assets  acquired   amounted  to
approximately $15,000,000 and liabilities assumed approximated $13,000,000. This
transaction  has been accounted for as a purchase.  Goodwill as a result of this
acquisition approximated $15,000,000.  See the Current Reports on Form 8-K filed
on March 20,  1997 and August 1, 1997 and the notes to the  Company's  financial
statements for additional information.

Premier Contract

     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. This agreement covers
a variety of anesthesia products and ABG kits and provides for favorable pricing
for the group in exchange for  committed  purchasing  volume (90%) of usage from
the member  hospitals.  The  agreement  covers a five year term and is effective
from February 1, 1997.  The Company  continues to work with member  hospitals to
secure both  commitment and contract  compliance.  Any  additional  market share
gained as a result of this agreement cannot be measured at this time.



<PAGE>



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 1997             Fiscal 1996
                                       Compared with           Compared with
                                        Fiscal 1996             Fiscal 1995
                                   -------------------        --------------

Net sales-continuing product lines         15.2%                  2.6
Cost of goods sold                         27.1                    .4
Gross profit                                4.6                   2.0
Selling, general and
  administrative expenses                  16.0                   (.6)
Research and development
  expenses                                  7.6                  (7.0)
Income before provision
  for income taxes                        (40.4)                 12.2
Provision for income taxes                (41.4)                  4.8
Net income                                (39.9)                 16.5

Fiscal 1997 Compared to Fiscal 1996

     Net  sales--continuing  product lines for the year ended September 30, 1997
increased by 15.2% compared with the same period last year. The increase was due
primarily to the acquisition of Marquest Medical Products, Inc. ("Marquest") and
increased  activity at Vital Pharma,  Inc. ("VPI").  Prices on existing products
declined on average approximately 1.7% in the year ended September 30, 1997 when
compared to the same period in 1996.

     Sales of anesthesia  products  (representing  56% of net  sales--continuing
product  lines) grew 2.8% from the prior year as unit  increases  offset selling
price declines.  Sales of critical care and respiratory  products  (representing
39.6% of net sales--continuing  product lines) increased by 29.3% largely due to
the acquisition of Marquest. Other products, accounting for 4.4% of net sales --
continuing product lines, increased by 156% from the comparable period in Fiscal
1996, reflecting the increased activity at VPI.

     While net sales  increased  by 15.2%,  gross  profit  increased  by 4.6% in
absolute dollar amount.  The  discrepancy  between the increase in sales and the
increase in gross profit is the result of higher sales of certain  products with
gross  margins  below the Company's  average  gross margin  (primarily  sales of
Marquest  products  and the  increase in activity at VPI),  as well as the sales
price  pressure that is evident within the cost  conscious  healthcare  industry
today.  On a consolidated  basis the Company's  gross profit  percentage for the
year  ended  September  30,  1997 was 52.8%  compared  to 57.6% in the same time
period of the last fiscal year.

     Selling,  general and administrative  expenses increased by 16.0% in dollar
amount,  as the result of the  acquisition  of  Marquest,  increases in costs to
support international sales growth and the increased activity at VPI.

_________________
     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 1996 to Fiscal 1997 in the last
three line items above  relate  primarily  to a special  charge taken during the
third quarter of Fiscal 1997.


<PAGE>

     Research  and  development  expenses  ("R&D")  increased  7.6%,  due to the
acquisition of Marquest.  The Company  continues to make an active commitment to
new product development.

     In the third quarter of fiscal 1997, the Company  recorded a special charge
related to the  acquisition of Marquest in the amount of $6,700,000.  $2,500,000
($.20 per share net of tax) of this  charge  represents  the cost of in  process
research and  development  acquired in the Marquest  transaction  (which must be
expensed in accordance  with purchase  accounting  rules) and $4,200,000 of this
charge  represents  costs  to  consolidate   certain   duplicate   manufacturing
facilities as a result of the Marquest transaction ($.22 per share net of tax).

     Other  income/expense,  which includes  dividend  income,  realized capital
gains and losses, legal and other expenses related to non-operational  items and
currency gains and losses, decreased by $2,479,000 from the year ended September
30, 1996 to the year ended  September  30, 1997.  In the 1996 period the Company
realized  significant  capital  gain and other  income,  particularly  a gain of
$1,000,000  realized as the sale of a joint  venture in 1996,  while in the 1997
period the level of capital gain and other income declined. In addition,  higher
legal costs (approximately  $1,800,000) incurred in conjunction with the defense
of the Smith Industries lawsuit impacted other income/expense  adversely.  For a
further discussion of this action see Part I, Item 3.

     The  Company's  effective tax rates were 33.2% and 33.8% for the year ended
September 30, 1997 and 1996 respectively.  The rate for the year ended September
30,  1997 is less than the  federal  and state  combined  statutory  rate due to
certain   non-recurring   deductions   and  the   utilization  of  capital  loss
carryforwards.  The rate for the year ended  September 30, 1996 is less than the
combined  Federal  and  State  statutory  rates  primarily  as a  result  of the
utilization of capital loss  carryforwards.  The Company's effective tax rate is
expected to be somewhat higher in fiscal 1998 than the fiscal 1997 rate.

Fiscal 1996 Compared to Fiscal 1995

     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  acquisitions  of the Misty Ox(R)
product line and HealthStar  Pharmaceutical Services (now known as Vital Pharma,
Inc.). 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,  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.  The  re-engineering  efforts  consisted  of a review of


<PAGE>


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.

     Other   income/expense   primarily   includes  dividend  income  earned  on
investments  and 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.

     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.


Liquidity and Capital Resources

     The Company continues to rely upon cash flow from its operations as well as
the funds  generated  from its initial and second public  offerings.  During the
year  ended  September  30,  1997,  cash and  cash  equivalents  and  short-term
marketable   securities   decreased  by  $14,239,000  and  long-term  marketable
securities   decreased  by  $9,981,000.   The  Company  acquired   Marquest  for
approximately $20 million in cash. Capital  expenditures of $9,988,000 were made
to improve  efficiencies  and support new  business  opportunities.  In addition
$7,782,000  of treasury  stock was acquired  pursuant to a previously  announced
buy-back plan, and the Company paid $2,082,000 of dividends  during Fiscal 1997.
The  combined  total  of  cash  and  cash  equivalents,   short-term  marketable
securities  and  long-term   investments  was  approximately  $22.3  million  at
September 30, 1997 as compared to $46.5 million at September 30, 1996.

     At  September  30,  1997,  the  Company  had $3.7  million in cash and cash
equivalents.  On that date, the Company's  working capital was $38.1 million and
the current  ratio was 3.9 to 1, as  compared  to $44.8  million and 6.1 to 1 at
September 30, 1996.  The decline in the current ratio and in working  capital is
due primarily to the  acquisition  of Marquest and the Company's  buyback of its
Common Stock.


<PAGE>


     The Company's  current policy is to retain working capital and earnings for
use in its  business,  subject  to the  payment of certain  cash  dividends  and
treasury  stock  repurchases.  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. This statement constitutes a forward-looking  statement under the Reform
Act.  The  Company's  liquidity  could be  adversely  impacted  and its need for
capital  could  materially  change if costs are  higher  than  anticipated,  the
Company were to undertake acquisitions demanding significant capital,  operating
results differ significantly from recent experience or adverse events affect the
Company's operations.

Recent Accounting Pronouncements

     In March 1997, the Financial  Accounting  Standards Board issued  Statement
No. 128,  Earnings Per Share ("SFAS 128"),  which modifies existing guidance for
computing  earnings per share and requires the  disclosure  of basic and diluted
earnings  per share.  The  effective  date of SFAS 128 is December  15, 1997 and
early  adoption is not permitted.  The Company  intends to adopt SFAS 128 during
the quarter ended December 31, 1997. There will be no significant  effect to the
Company's  reported  earnings  per  share as a result  of the  adoption  of this
pronouncement.

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting  Comprehensive  Income, and Statement No. 131,  Disclosures about
Segments of an Enterprise  and Related  Information.  The Company is required to
adopt these Statements in fiscal 1999.  Adoption of these Statements is expected
to have no impact on the Company's consolidated  financial position,  results of
operations or cash flows.



<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, 1996 and 1997                                      F-2

Consolidated Statement of Income
  for the years ended
  September 30, 1995, 1996 and 1997                                F-3

Consolidated Statement of Stockholders'
  Equity for the years ended
  September 30, 1995, 1996 and 1997                                F-4

Consolidated Statement of Cash
  Flows for the years ended
  September 30, 1995, 1996 and 1997                                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,  1997 and  1996  and the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period  ended  September  30,  1997.  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,  1997  and  1996  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.


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

November 13, 1997


<PAGE>

<TABLE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                     ASSETS
                                                                                            September 30,
                                                                                   1997                      1996
                                                                                          (in thousands)
Current Assets:
<S>                                                                          <C>                        <C>      
   Cash and cash equivalents (Note 1)                                        $     3,685                $  17,747
   Marketable securities (Notes 1 and 5)                                             425                      602
   Accounts receivable, less allowance for doubtful accounts
     of $101 and $169, respectively (Notes 16 and 17)                             16,405                   13,887
   Inventory (Notes 1 and 3)                                                      19,559                   13,013
   Prepaid expenses and other current assets (Note 4)                             11,187                    8,279
                                                                                --------                ---------
       Total current assets                                                       51,261                   53,528
   Property, Plant and Equipment - net (Notes 1 and 6)                            33,825                   21,131
   Marketable Securities (Notes 1 and 5)                                          18,206                   28,187
   Goodwill and other intangible assets (Notes 1 and 2)                           28,907                   16,619
   Other Assets                                                                    4,749                    4,291
                                                                                --------                ---------
       Total Assets                                                           $  136,948                $ 123,756
                                                                                ========                =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

          Current Liabilities:
             Accounts payable                                                 $     6,204                $   4,066
             Current portion of long-term debt (Note 7)                               611                      500
             Accrued expenses (Note 8)                                              6,114                    2,406
             Amounts payable relating to acquisitions                                 230                      236
             Deferred income taxes payable (Notes 1 and 14)                          ----                    1,500
                                                                                ---------                ---------
                Total current liabilities                                          13,159                    8,708
          Deferred Income Taxes Payable (Notes 1 and 14)                            1,366                    1,334
          Long-term Debt (Note 7)                                                   5,529                    2,700
          Other liabilities (Note 9)                                                4,665                      775
                                                                                ---------                ---------
                Total Liabilities                                                  24,719                   13,517
                                                                                ---------                ---------
          Commitments and Contingencies (Notes 2, 11 and 12)
          Stockholders' Equity  (Note 13)
                Common stock - no par value; authorized 40,000,000 shares,
                  outstanding 12,674,673 and 13,062,701 shares, respectively       22,149                   29,666
                Allowance for aggregate unrealized loss on
                  marketable securities (Notes 1 and 5)                              (129)                    (426)
                Retained earnings                                                  90,209                   80,999
                                                                                ---------                ---------
                  Stockholders' equity                                            112,229                  110,239
                                                                                ---------              -----------
                  Total Liabilities and Stockholders' Equity                    $ 136,948              $   123,756
                                                                                =========              ===========

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                       VITAL SIGNS, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENT OF INCOME


                                                                        For the Year Ended
                                                                            September 30,
                                                             ------------------------------------------
                                                              1997              1996              1995
                                                              ----               ----             ----
                                                              (in thousands except per share amounts)

<S>                                                     <C>               <C>                <C>        
Net sales-continuing product lines                      $   103,562       $    89,922        $    87,651
  (Notes 1 and 17)
Net sales-product line disposed (Note 2)                        ---               808              1,902

Cost of goods sold                                           48,840            38,418             38,279
                                                          -----------          ------           --------

Gross profit                                                 54,722            52,312             51,274
                                                          -----------          ------           --------

Operating expenses:
   Selling, general and administrative                       27,247            23,491             23,629
   Research and development                                   3,869             3,595              3,865
   Interest income                                           (2,242)           (2,508)            (2,406)
   Interest expense (Note 7)                                    537               346                382
   Special charge (Note 2)                                    6,700               ---                ---
   Other (income) expense (Notes 1, 10 and 15)                  844            (1,635)               162
   Goodwill amortization                                        862               643                354
                                                           --------          --------            -------
                                                             37,817            23,932             25,986


Income before provision for income taxes                     16,905            28,380             25,288

Provision for income taxes (Notes 1 and 14)                   5,619             9,591              9,154
                                                           --------        ----------          ---------

Net income                                              $    11,286       $    18,789         $   16,134
                                                           ========         =========           ========

Net income per share (Note 1)                           $       .88       $      1.44         $     1.24
                                                           ========         =========           ========

Weighted average number of shares                            12,881            13,045             12,991
                                                           ========        ==========           ========

                 See notes to consolidated financial statements

</TABLE>


<PAGE>

<TABLE>


<CAPTION>
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY



                                                                                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, 1994                     12,990,562     $  28,966            $   (75)           $  48,767       $  77,658

Purchase of common
   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 common
   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

Purchase of common
   stock net of reissuance                          (410,689)       (7,788)                                       6         (7,782)
Exercise of stock options                             22,661           271                                                     271
Adjustment to the allowance for aggregate
   unrealized loss on marketable securities                                               297                                  297
Dividends paid ($.16 per share)                                                                              (2,082)        (2,082)
Net income                                                                                                   11,286         11,286
                                                ------------     -----------         --------            ----------      ----------
Balance at September 30, 1997                     12,674,673     $  22,149           $   (129)           $   90,209      $ 112,229
                                                ============     ===========         =========           ==========      ========== 

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                       VITAL SIGNS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                                                                            For the Year Ended
                                                                                                September 30,

                                                                                     1997             1996           1995
                                                                                     ----             ----           ----
Cash flows from operating activities:                                                             (in thousands)
<S>                                                                             <C>                  <C>           <C>      
   Net income                                                                   $   11,286           $18,789   $   16,134
   Adjustments  to  reconcile  net income to net cash provided by operating
    activities:
       Depreciation and amortization                                                 2,891             2,322        1,535
       Deferred income taxes                                                        (1,628)              438          674
       Amortization of goodwill                                                        862               643          354
       Amortization of deferred credit                                                (100)             (100)        (100)
       Net gain on sales of available-for-sale securities                             (698)             (608)        (429)
       Net gain on sale of product line                                                ---              (174)         ---
       Net gain on sale of fixed assets                                                (27)              ---          ---
       Write off of purchased research and development                               2,500               ---          ---
       Plant consolidation special charge                                            4,200               ---          ---
   Changes in operating assets and liabilities:
          Decrease in marketable securities                                            ---               ---        2,768
          (Increase) decrease in accounts receivable                                    82             2,319       (3,323)
          (Increase) in inventory                                                   (3,738)           (1,963)        (967)
          (Increase) decrease in prepaid expenses and other current assets          (2,069)           (1,481)       1,509
          (Increase) decrease in other assets                                         (841)             (431)         639
          Increase (decrease) in accounts payable
             and accrued expenses                                                     (495)           (4,068)         367
                                                                                -----------    --------------  ----------
             Net cash provided by operating activities                              12,225            15,686       19,161
                                                                                -----------    --------------   ---------
Cash flows from investing activities:
   Acquisition of property, plant and equipment                                     (9,988)           (8,611)      (2,026)
   Sale of property, plant and equipment                                               543               ---          ---
   Cash received for the sale of product line                                          ---             2,786          ---
   Purchases of available-for-sale securities                                      (57,165)          (44,882)     (68,864)
   Proceeds from sales of available-for-sale securities                             68,318            53,057       41,221
   Acquisition of subsidiaries, net of $3,200 of cash acquired (1997)              (16,791)           (7,254)      (2,237)
                                                                                -----------    --------------   ----------
       Net cash used in investing activities                                       (15,083)           (4,904)     (31,906)
                                                                                -----------    --------------   ----------
Cash flows from financing activities:
   Dividends paid                                                                   (2,082)           (1,565)      (1,170)
   (Purchase) reissuance of common stock                                            (7,782)               37           (7)
   Proceeds from exercise of stock options                                             271               659           55
   Increase in long term debt and notes payable                                      8,282               ---          ---
   Principal payments of long-term debt and notes payable                           (9,893)             (500)      (1,211)
                                                                                -----------    --------------  -----------
       Net cash used in financing activities                                       (11,204)           (1,369)      (2,333)
                                                                                -----------    --------------  -----------

Net increase (decrease) in cash and cash equivalents                               (14,062)            9,413      (15,078)
Cash and cash equivalents at beginning of year                                      17,747             8,334       23,412
                                                                                ----------     -------------   ----------
Cash and cash equivalents at end of year                                        $    3,685     $      17,747   $    8,334
                                                                                ==========     =============   ==========
Supplemental  disclosures  of cash flow  information:
  Cash paid during the year for:
       Interest                                                                 $      379     $         394   $      389
       Income taxes                                                             $    9,660     $       9,306   $    6,058
Supplemental schedule of noncash investing activities:
   Accrued amounts relating to purchase of subsidiaries                         $      100     $         125   $    3,336

   Forgiveness of note receivable as payment for purchase of subsidiary         $       67     $         333          ---

</TABLE>

<PAGE> 

Note 1 - Summary of Significant Accounting Policies and Principal Business 
         Activities:

         Business Activities:

         Vital  Signs, Inc. ("VSI")  and  its  subsidiaries   (collectively the 
"Company") design,  manufacture and market  single-patient use products for the 
anesthesia, respiratory, critical care and emergency markets.

         Principles of Consolidation:

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

 .        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.

         Goodwill and Other Intangible Assets:

         Goodwill and other intangible assets arising from business acquisitions
accounted  for under the  purchase  method are  amortized  over periods up to 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.



<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Summary of  Significant  Accounting  Policies  and  Principal  Business
         Activities (continued):

         Net Income Per Share of Common Stock:

         Net  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-for-sale 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 Stock-Based Compensation:

         The Company measures stock based 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."

         In  March,  1997,  the  Financial  Accounting  Standards  Board  issued
Statement No. 128,  Earnings Per Share ("SFAS  128"),  which  modifies  existing
guidance for computing  earnings per share and requires the  disclosure of basic
and diluted  earnings per share.  The effective date of SFAS 128 is December 15,
1997 and early adoption is not permitted.  The Company intends to adopt SFAS 128
during the quarter ended December 31, 1997. There will be no significant  effect
to the Company's reported earnings per share as a result of the adoption of this
pronouncement.




<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Summary of  Significant  Accounting  Policies  and  Principal  Business
         Activities (continued):

Recent Accounting Pronouncements:

     In June,  1997, the Financial  Accounting  Standards Board issued Statement
No. 130, Reporting Comprehensive Income and Statement No. 131, Disclosures about
Segments of an Enterprise  and Related  Information.  The Company is required to
adopt these Statements in fiscal 1999.  Adoption of these Statements is expected
to have no impact on the Company's consolidated  financial position,  results of
operations or cash flows.

Note 2 - Acquisitions/Dispositions:

1997 Acquisition

     The Company  acquired  all of the  outstanding  stock of  Marquest  Medical
Products, Inc. ("Marquest"), a company engaged in the manufacture of respiratory
products.  The  Company  paid  approximately  $20.0  million  in cash  including
acquisition  costs and incurred the $2.5 million writeoff of in process research
and  development,  charged  to 1997  operations,  discussed  below.  The  assets
acquired  amounted  to  approximately   $15  million  and  liabilities   assumed
approximately  $13  million.  This  transaction  has  been  accounted  for  as a
purchase,  and resulted in an excess of purchase price over net assets  acquired
of approximately $15 million.

     The effective date of the acquisition for financial  reporting  purposes is
April 1,1997. The balance sheet and results of operations for Marquest have been
included in these consolidated financial statements as of April 1, 1997.

     In connection  with the  acquisition  of Marquest,  the Company  recorded a
special  charge of $6.7 million in the quarter ended June 30, 1997.  This charge
represents  $2,500,000 of in process research and development  costs acquired in
the Marquest  transaction  (which must be expensed in  accordance  with purchase
accounting  rules)  along  with  $4,200,000  in costs for the  consolidation  of
duplicative manufacturing operations as a result of this transaction.

     The following  summary,  pro forma,  unaudited data of the Company reflects
the  acquisition  of Marquest as if it had  occurred on October 1, 1995 and 1996
respectively:

                                                    Pro forma/Unaudited
                                                   (Dollars in Thousands)
                                                   Fiscal 1997      Fiscal 1996

Net sales-continuing operations                $    114,801      $     112,693
                                               ============      =============

Net income                                     $     10,904      $      17,955
                                               ============      =============

Net income per common share                    $        .85      $        1.38
                                               ============      =============


<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 2 - Acquisitions/Depositions (continued):

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.
HealthStar's name was changed to Vital Pharma in 1997 ("VPI").  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. The December 31, 1996 target was not achieved
and the December 31, 1997 target will not be achieved.  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 10).

     The  effect of the  operations  of VPI 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 and to the date of
acquisition  and the  effect of the  operations  of VPI 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.

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.

Note 3 - Inventory:

          Inventory consists of the following:    
                                                       September 30,
                                                     -----------------
                                                     1997         1996
                                                     ----         ----
                                                       (in thousands)

Raw materials                                      $  14,474      $    9,617
Finished goods                                         5,085           3,396
                                                   $  19,559      $   13,013
                                                   =========      ==========
<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 4 - Prepaid Expenses and Other Current Assets:

       Prepaid expenses and other current assets consist of the following:

                                                       September 30,
                                                   1997             1996
                                                       (in thousands)

Prepaid employee fringe benefits             $     3,744      $   3,964
Notes and interest receivable (see Note 15)        1,468          1,919
Prepaid income taxes                               4,083          1,330
Prepaid insurance                                    340            270
Other                                              1,552            796
                                             -----------      ---------
                                             $    11,187      $   8,279
                                             ===========      =========

Note 5 - Marketable Securities:

     The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
                                            Available-for-Sale-Securities
                              September 30, 1997                                     September 30, 1996
                                                                   (in thousands)

                                                              Gross                                        Gross
                                                           Unrealized                                   Unrealized
                                  Fair                       Holding           Fair                       Holding
                                  Value         Cost         Losses            Value         Cost         Losses

<S>                            <C>            <C>          <C>              <C>           <C>
U.S. Government
   obligations                 $   11,039    $  11,127     $     (88)       $  19,412     $  19,835     $    (423)
Corporate obligations               2,970        3,000           (30)           3,314         3,404           (90)
Federal mortgage
       obligations                  4,197        4,297          (100)           6,063         6,272          (209)


                               $   18,206    $  18,424     $    (218)      $    28,789    $     29,511  $   (722)
                               ==========    =========     ==========        =========       =========  =========
</TABLE>

At  September   30,  1997   investments   in  debt   securities   classified  as
available-for-sale securities mature as follows:

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

<S>                                                <C>        
U.S. Government obligations                        $    11,039
Corporate obligations                                    2,970
Federal mortgage obligations                                49        $       745       $     3,403
                                                   -----------         ----------        ----------
                                                   $    14,058        $       745       $     3,403
                                                   ===========        ===========       ===========

</TABLE>

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5 - Marketable Securities (continued):

     Realized  gains  and  losses  are  determined  on  the  basis  of  specific
identification.  During the year ended  September  30, 1997 sales  proceeds  and
gross realized  gains and losses on securities  classified as available for sale
securities were $68,318,052,  $784,014 and $(86,576),  respectively.  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   available-for-sale   securities  were  $41,221,076,
$448,000 and ($19,000), respectively.

     Results of  operations  for the years ended  September  30, 1995  include a
charge of $4,000  for  unrealized  losses on trading  securities.  There were no
unrealized  gains or losses during the year ended September 30, 1996, on trading
securities.  Trading  securities  at September 30, 1997 amounted to $425,000 and
results  of  operations  for the year  ended  September  30,  1997  includes  an
unrealized gain of $46,000.  Stockholders equity at September 30, 1997, 1996 and
1995  includes  an  unrealized  holding  loss,  net of related tax  benefit,  on
available-for-sale securities of $129,000, $426,000 and $100,000, respectively.

Note 6 - Property, Plant and Equipment:

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

<TABLE>

                                                        September 30,           Estimated
                                                          1997            1996    Useful Life
                                                               (in thousands)

<S>                                                 <C>             <C>           <C>  
Land                                                $     3,015     $     1,631
Building and building improvements                       15,430          10,784   30 to 40 years
Equipment and molds                                      23,778          14,790    5 to 10 years
Fixtures and office equipment                             1,009           3,183    5 to 15 years
Transportation equipment                                    309             278    5 years
                                                      -----------     ----------
                                                         43,541          30,666
          Less accumulated depreciation
            and amortization                              9,716           9,535
                                                      -----------     ----------
                                                     $   33,825     $    21,131
                                                      ===========     ==========
</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
                                                             -----------------
                                                            1997           1996
                                                            ----           ----
                                                                (in thousands)

          Industrial Revenue Bonds ("IRB") payable    $   2,700      $    3,200
          Swiss Notes Payable                             3,007             ---
          Other                                             433            ---
                                                          -----           ------
          Total long-term debt                            6,140           3,200

          Less current portion                              611             500
                                                         ------           ------
                                                      $   5,529        $   2,700
                                                       ========         ========


<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 7 - Long-term Debt (continued):

     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,
1997, the Company was in compliance with all of the required financial covenants
with the  exception  of an  interest  coverage  ratio for which the  Company has
received a waiver.

     The Swiss  notes  bear  interest  at a rate of 8% per  annum,  payable on a
semi-annual basis. The notes are due on March 31, 1999.

       Maturities of long-term debt are as follows:

       Year ending September 30,                             (in thousands)
                                                              ------------
            1998                                              $      611
            1999                                                   3,102
            2000                                                     254
            2001                                                     254
            2002                                                     219
            Thereafter                                             1,700
                                                              $    6,140

     At September 30, 1997, the Company has a $10,000,000  line of credit with a
bank which expires  September 30, 1998.  No balance was  outstanding  under this
line of credit at September 30, 1997.

Note 8 - Accrued Expenses:

        Accrued expenses consist of the following:
                                                          September 30,
                                                     1997             1996
                                                         (in thousands)
            Manufacturing plant consolidation      $   1,879         $     ---
            Commissions                                  501               265
            Interest                                     437                89
            Payroll, bonuses and vacations             1,485               968
            Professional fees                            322               366
            Salespeople's expenses                        90                85
            Income and other taxes payable               696               213
            Other                                        704               420
                                                    --------         ---------

                                                   $   6,114         $   2,406
                                                   =========         =========



<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 9 - Other Liabilities:

          Other liabilities consist of:
                                                             September 30
                                                       1997               1996
                                                            (in thousands)

           Amount related to acquisitions         $     4,474         $     464
           Deferred tax credits                           191               291
                                                  -----------         ---------

                                                  $     4,665         $     755
                                                  ===========         =========


Note 10 - Other (Income) Expense:

          Other (income) expense consists of the following:

<TABLE>
<CAPTION>

                                                                  For the Year Ended
                                                                    September 30,
                                                              1997           1996           1995
                                                                       (in thousands)
<S>                                                       <C>          <C>           <C>        
          Dividend income                                 $   (46)     $     (75)    $      (90)
          Amortization of deferred credit                    (100)          (100)           (100)
          Charitable contributions of inventory               156            563             161
          Net capital gain on sale of marketable securities  (698)          (609)           (166)
          Gain on sale of building                            (20)           ---             ---
          Gain on sale of endoscopic product line             ---           (174)            ---
          Gain on sale of Cardiologics (Note 15)              ---         (1,000)            ---
          Litigation costs                                  1,878            263             ---
          Other                                              (326)          (503)            357
                                                           -------      ---------       --------
                                                          $   844      $  (1,635)       $    162
                                                           =======     ==========       ========

</TABLE>

Note 11 - Commitments:

     Leases:

     The Company has entered into  noncancelable  operating leases providing for
the lease of office  and  warehouse  facilities,  equipment  and  certain  other
assets. Rent expense,  aggregating $1,185,000,  $724,000, and $992,000, has been
charged to operations  for the years ended  September  30, 1997,  1996 and 1995,
respectively. The Company's commitment under such leases is as follows:

         Year ending September 30,                              (in thousands)
                1998                                              $    1,889
                1999                                                   1,384
                2000                                                   1,231
                2001                                                   1,233
              Thereafter                                                 971
                                                                   ---------
                                                                  $    6,708
                                                                  ==========

<PAGE>


                       VITAL SIGNS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 11 - Commitments (continued):

     Employment Agreements:

     The  Company  has  entered  into   employment   agreements,   approximating
$1,300,000 annually which expire at various dates through September, 2001.

Note 12 - Contingent Liabilities:

     Various lawsuits,  claims and proceedings have been or may be instituted or
asserted against the Company, including those pertaining to patent and trademark
issues,  product  liability,  and safety and health  matters.  While the amounts
claimed or expected to be claimed may be  substantial,  the  ultimate  liability
cannot now be determined  because of the considerable  uncertainties that exist.
Therefore,  it  is  possible  that  results  of  operations  or  liquidity  in a
particular  period  could  be  materially  affected  by  certain  contingencies.
However,  based on  facts  currently  available,  management  believes  that the
disposition  of matters that are pending or asserted  will not have a materially
adverse effect on the financial position of the Company.

     For a detailed  discussion  of current  legal  actions,  see Item 3 of this
annual report on Form 10-K.

Note 13 - 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, 1997 or 1996.

Stock Options:

Transactions relating to stock options are as follows:
                                                                Weighted Average
                                                  Number             Price
                                                of Shares          Per Share

Balance September 30, 1994                       672,997         $     16.51
   Granted                                        20,142         $     13.91
   Exercised                                      (8,975)        $      6.09
   Expired                                      (143,029)        $     21.94
                                              ----------

Balance September 30, 1995                       541,135         $     15.16
   Granted                                       409,044         $     22.03
   Exercised                                     (59,494)        $     11.09
   Expired/canceled                             (274,225)        $     17.21
                                              ----------

Balance September 30, 1996                       616,460         $     19.20
   Granted                                        67,607         $     19.44
   Exercised                                     (22,661)        $     12.04
   Expired/canceled                              (27,091)        $     20.16
                                              -----------        

Balance September 30, 1997                       634,315         $     19.44
                                              ===========        ===============



<PAGE>



                       VITAL SIGNS, INC. AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



     The  weighted  average fair value per share of options  granted  during the
years ended  September 30, 1997,  1996,  and 1995  amounted to $7.60,  $9.38 and
$6.06 respectively.


Note 13 - Stockholders' Equity (continued):

   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
900,000  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 612,170 shares  (excluding  lapsed shares) have been granted
in connection with these plans through September 30, 1997.

   The Company has elected,  in accordance  with the provisions of SFAS No. 123,
to apply the  current  accounting  rules  under APB  Option  No. 25 and  related
interpretations  in  accounting  for its stock  options  and,  accordingly,  has
presented the  disclosure-only  information  as required by SFAS No. 123. If the
Company had elected to  recognize  compensation  cost based on the fair value of
the  options  granted  at the grant  date as  prescribed  by SFAS No.  123,  the
Company's  net  income  and net  income  per  common  share for the years  ended
September  30,  1997,  1996 and 1995  would  approximate  the pro forma  amounts
indicated in the table below:

<TABLE>
<CAPTION>

    Year Ended September 30,                    1997               1996            1995
    ---------------------------------------------------------------------------------------

<S>                                         <C>               <C>              <C>        
      Net income - as reported              $    11,286       $   18,789       $    16,134

      Net income - pro forma                $    10,867       $   18,380       $    16,118

      Net income per common share-
            as reported                     $       .88       $     1.44       $      1.24

      Net income per common share-
            pro forma                       $       .84       $     1.41       $      1.24

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option-pricing  model  with the  following  weighted-average
assumptions  used  for the  years  ended  September  30,  1997,  1996  and  1995
respectively:  expected  volatility of 35%, 39% and 40% respectively,  risk-free
interest rate of 6.3%, 6.4%, and 6.9% respectively,  dividend yield rate of .8%,
 .6%, and .7% respectively, and all options have expected lives of 5 years.



<PAGE>


Note 13 - Stockholders' Equity (continued):

The following table summarizes information about fixed stock options outstanding
at September 30, 1997:

<TABLE>
<CAPTION>
                                   Options Outstanding                                         Options Exercisable
                             Number            Weighted-                                  Number
                            Outstanding         Average       Weighted                  Exercisable            Weighted
                                at             Remaining       Average                      at                  Average
          Range of         September 30,      Contractual     Exercise                 September 30,           Exercise
       Exercise Prices         1997              Life           Price                       1997                 Price
       ---------------     ------------    --------------   ------------           --------------------     ----------

<C>    <C>                    <C>               <C>         <C>                          <C>                 <C>     
1      $ 5.55- $ 6.84         59,500            2.7         $   6.73                     59,500              $   6.73
2      $ 9.25- $10.50         14,135            6.8         $   9.67                      8,149              $   9.62
3      $14.00- $15.25         45,288            5.5         $  14.72                     43,194              $  14.73
4      $16.75 -$19.50         69,731            8.3         $  17.95                     23,830              $  18.72
5      $20.63- $22.50        431,555            8.2         $  22.08                     81,962              $  21.96
6      $24.50 -$24.50         14,106            9.3         $  24.50                      ---                    ---
                            --------            ---            -----                    --------             ---------

             Total           634,315            7.5         $   19.44                   216,635              $  15.51
                           =========       ==============   =========                ===========             ==========
</TABLE>


Note 14 - Income Taxes:

The provision for income taxes consists of the following components:

<TABLE>
<CAPTION>
                                                                      For the Year Ended
                                                                            September 30,
                                                                  1997           1996           1995
                                                                           (in thousands)
<S>                                                          <C>             <C>            <C> 
    Current:
         Federal                                             $    6,293      $   8,130      $    7,371
         State                                                      764          1,004           1,064
         Foreign                                                    190             19              38

     Deferred:
          Federal                                                (1,295)           383             615
          State                                                    (333)            55              66
                                                             ----------      ---------      ----------
                                                             $    5,619      $   9,591      $    9,154
                                                             ==========      =========      ==========
</TABLE>

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


                                                       September 30,
                                                    1997              1996

   Prepaid expenses                             $   1,226          $ 1,567
   Undistributed DISC earnings                         96               96
   Manufacturing plant consolidation cost          (1,482)            ---
   Other                                               ---            (163)
                                                 ---------         --------

                                                $    (160)         $ 1,500
                                                ==========         =======


<PAGE>




Note 14 - Income Taxes (continued):

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

                                                       September 30, 
                                                      1997       1996
                                                       (in thousands)

         Accelerated depreciation                $     823      $      762
         Undistributed DISC earnings                   599             712
         Other                                         (56)           (140)
         Capital losses                                211             500
         Valuation allowance attributable to
             capital loss carry forward               (211)           (500)
                                                  ---------      ----------
                                                  $   1,366      $    1,334
                                                  =========      ==========

     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, 
                                                       1997      1996      1995 
                                                            (in thousands)

Statutory federal income tax rate                      35.0%     35.0%     35.0%
Write off of purchased Research and Development         5.2       ---       ---
Net capital gains on investments                       (1.5)     (2.0)      (.2)
State income taxes net of federal tax benefit           1.6       2.4       2.9
Benefit of tax loss in subsidiary                      (6.9)      ---       ---
Dividend exclusion/tax exempt interest                 (0.3)      (.3)      (.2)
Other                                                    .1      (1.3)     (1.3)
                                                      ------     -----     -----

     Effective income tax rate                         33.2%     33.8%     36.2%
                                                      ======     =====     =====



Note 15 - 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.





<PAGE>



Note 15 - Related Party Transactions (continued):

     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  was  completely  satisfied  during  the  year  ended
September 30, 1997.


Note 16 - 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>   
                1995                               $   150          $   302            $    167 (A)       $  285
                                                   =======          =======            ========           ======

                1996                               $   285          $    45            $    161 (A)       $  169
                                                   =======          =======            ========           ======

                1997                               $   169          $   101            $    169 (A)       $  101
                                                   =======          =======            ========           ======
</TABLE>


(A) Write-off of uncollectible accounts receivable.


Note 17 - Significant Customers:

         A portion of the Company's hospital customers are serviced via national
and regional  medical  supply  distributors.  During fiscal years 1997 and 1996,
respectively,  37% and 36% of the Company's sales were made in this distribution
channel.  In  fiscal  1997 and  1996,  one of the  large  national  distributors
represented  approximately 13% and 14% of net  sales--continuing  product lines.
The same customer represented  approximately 10% and 11% of outstanding accounts
receivable at September 30, 1997 and 1996 respectively.


<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 1998 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 1998 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 1998 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 1998 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  information  is  included in the
                  financial statements or notes thereto.

         (c)      The following exhibits are incorporated by reference herein or
                  annexed to this Annual Report:


<PAGE>
                              Exhibit Description

 2.1             Agreement and Plan of Merger,  dated March 14, 1997, among the
                 Company,  an  acquisition  subsidiary,  and  Marquest  Medical
                 Products,  Inc.  ("MMPI")  is  incorporated  by  reference  to
                 Exhibit 2.1 to the Company's  Current Report on Form 8-K dated
                 March 20, 1997.

 2.2             Inducement Agreement, dated March 14, 1997, between the Company
                 and Scherer Healthcare, Inc., relating to the Registrant's MMPI
                 merger, is  incorporated  by  reference  to Exhibit 2.2 to the 
                 Company's Current Report on Form 8-K dated March 20, 1997.

  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 incorpor-
                 ated 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.

 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             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.

<PAGE>

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

                              Exhibit Description


10.4             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.

10.5             Vital Signs Investment Plan, as  amended,  is  incorporated by 
                 reference  to  Exhibit   99.1  to  the  Company's registration 
                 statement on Form S-8 (No. 333-37927).

10.6             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, is 
                 incorporated  by  reference  to  Exhibit 10.8 to the Company's 
                 annual report on Form 10-K for the year ended September 30, 
                 1996.

10.7             Agreement to sell the Registrant's 51% interest in Cardiologics
                 L.L.C., including the related promissory note and guarantee, is
                 incorporated  by  reference  to  Exhibit 10.9 to the Company's 
                 annual report on Form 10-K for  the  year  ended September 30, 
                 1996.

 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)     On August 1, 1997,  the Company filed a Current Report on Form
                 8-K concerning  the completion of the  acquisition of Marquest
                 Medical Products, Inc.




<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 15th day of
December, 1997.

                                VITAL SIGNS, INC.


                                        By:      /s/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 15, 1997
_______________________      Executive Officer
Terence D. Wall              and Director


/s/ David J. Bershad*        Director                          December 15, 1997
_______________________
David J. Bershad


/s/Anthony J. Dimun          Executive Vice President,         December 15, 1997
_______________________      Chief Financial Officer,
Anthony J. Dimun             Treasurer (Chief Financial
                             and Accounting Officer)
                             and Director


/s/ Joseph J. Thomas*        Director                          December 15, 1997
______________________
Joseph J. Thomas


/s/ John Toedtman*           Director                          December 15, 1997
______________________
John Toedtman


/s/ Barry Wicker*            Executive Vice President          December 15, 1997
-----------------            and Director
Barry Wicker                 


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


<PAGE>