SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the fiscal year ended September 30, 2001.
                                       OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the transition period from ____________________ to ________________

                       Commission File Number: 001-10382

                         VALLEY FORGE SCIENTIFIC CORP.
             (Exact name of registrant as specified in its charter)

                 PENNSYLVANIA                        23-2131580
(State or other jurisdiction of                (I.R.S. employer
 incorporation or organization)                identification no.)
                 136 Green Tree Road, Oaks, Pennsylvania 19456
             (Address of principal executive offices and zip code)
                           Telephone: (610) 666-7500
              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                                  Name of Each Exchange
     Title of Each Class                           on which Registered

      Common Stock, no par value                   Boston Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                 Yes   X        No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   X

The aggregate market value of voting stock held by non-affiliates of the
registrant, computed by reference to the closing bid and ask prices as reported
by the Nasdaq system on December 14, 2001 was $15,012,000.

At December 14, 2001 there were 8,067,812 shares of the Registrant's Common
Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

      Certain information required by Items 10, 11, 12 and 13 of Form 10-K is
incorporated by reference from the Definitive Proxy Statement for the Annual
Meeting of Stockholders of the Registrant, or an Amendment to this Annual
Report on Form 10-K, to be filed within 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.

<PAGE>

                         VALLEY FORGE SCIENTIFIC CORP.
                                   FORM 10-K
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
                               TABLE OF CONTENTS

                                     PART I

                                                                    PAGE

Item 1. Business                                                       1

Item 2.  Properties                                                   16

Item 3.  Legal Proceedings                                            16

Item 4.  Submission of Matters to a Vote of Security Holders          16

                                    PART II

Item 5. Market for Registrant's Common Stock and Related
         Stockholder Matters                                          16

Item 6.  Selected Financial Data                                      17

Item 7.  Management Discussion and Analysis of Financial
          Condition and Results of Operation                          17

Item 7A.  Quantitative and Qualitative Disclosure About Market Risks  24

Item 8.  Financial Statements and Supplementary Data                  25

Item 9.  Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                         25

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant          25

Item 11.  Executive Compensation                                      25

Item 12.  Security Ownership of Certain Beneficial
           Owners and Management                                      25

Item 13.  Certain Relationships and Related Transactions              25

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules
           and Reports on Form 8-K                                    26

 Bident(R) is our registered trademark and DualWave(TM)
  is our trade name. MALIS(R) is the trademark of
  Dr. Leonard I. Malis. All other trademarks or trade names
  referred to in this Report are the property of their
  respective owners.

                                      (i)
<PAGE>

                         VALLEY FORGE SCIENTIFIC CORP.
                                     PART I

Item 1.  BUSINESS

    This report on Form 10-K contains certain forward looking statements
regarding future events with respect to Valley Forge Scientific Corp.  ("Valley
Forge Scientific", "we", "us" and "our" refer to Valley Forge Scientific Corp.,
a Pennsylvania corporation, unless the context otherwise requires).  Actual
events or results could differ materially due to a number of factors,
including, those described herein and in the documents incorporated herein by
reference and those factors described under the headings "Forward Looking
Statements."

Nature of Our Business

     Valley Forge Scientific, which was incorporated on March 27, 1980,
designs, develops, manufactures and sells medical devices.  Our core business
is in our bipolar electrosurgical generators and related instrumentation, based
on our patented DualWave(TM) technology. Our DualWave(TM) technology involves
the use of two waveforms, one to perform bipolar cutting of tissue and the
other to perform bipolar coagulation, or sealing, of blood vessels.  We believe
we offer the only electrosurgical system on the market with both bipolar
cutting and bipolar coagulation in a single device.  Our bipolar systems are
designed to replace other surgical tools, such as monopolar systems, lasers and
conventional scalpels used in soft tissue surgery.

     All electrosurgical units utilize handheld instruments to deliver the
current from the generator to the patient's tissue.  Traditional monopolar
instruments have a single, monopolar, electrode tip that advances a spark
between the electrode tip and the tissue.  The electrical current generated is
attracted to a grounding pad attached to the patient's thigh or buttock and
electrical current and heat are diffused to tissues between the surgical site
and the site of the grounding pad.  This can result in heat damage, charring
and unpredictable/prolonged healing in the surgical area, as well as collateral
damage to tissues along the electrical pathway to the grounding pad.  The
monopolar method of cutting and coagulation is also rendered obsolete in
delicate areas of the human body, specifically the brain and spine, due to the
inability to control current and heat spread.

     Bipolar electrosurgery is descriptive of the means of current delivery to
the patient.  Bipolar electrosurgery employs a unique delivery system to
overcome the safety hazards associated with the grounding pad in monopolar
electrosurgery.  In bipolar electrosurgery a handheld instrument with two tips
is used to deliver the current to soft tissue and blood vessels.  The two
electrode tips are closely juxtaposed, so that current flows only between the
two electrodes, affecting only the tissue or blood vessel between the two
electrodes.  Current is confined to the immediate surgical site so that no
grounding pad is required and peripheral tissue damage is virtually eliminated.

     Our bipolar electrosurgery system, provides the surgeon one waveform to
safely and precisely cut, core and divide tissue and another waveform to
provide a gentle and precise coagulation. Our cutting waveform uses molecular
resonance to cut, instead of heat through an advancing spark, which is used in
monopolar systems.  With the virtual elimination of heat and

                                      [1]
<PAGE>

current spread, our technology can be used anywhere in the human body safely,
specifically the brain and spine.  Our unique coagulation waveform uses a
totally aperiodic and non-rhythmic waveform, eliminating the molecular
resonance and the possibility of inadvertently cutting tissue when the surgeon
intends to coagulate.  These precise and differentiated waveforms allow
surgeons to work in direct contact with nerves, blood vessels, bone and metal
implants without the inherent dangers associated with other methods of
electrosurgery.

     Our bipolar systems consist of a solid state microprocessor controlled
generator, utilizing our patented DualWave(TM) bipolar circuitry technology, an
array of disposable hand-held instruments to perform a variety of surgical
procedures, single-use disposable cords which attach the hand-held bipolar
instrument to the generator and other modules and accessories.

     We do not market or sell our products directly to the end users. Instead,
we contract with national and international leading medical products sales
organizations to market and sell our products to the end-users. In
neurosurgery, our neurosurgery bipolar systems are marketed worldwide by Codman
& Shurtleff, Inc., a subsidiary of Johnson & Johnson, Inc. In dentistry, our
Bident(R) bipolar dental system is marketed by Bident International, L.L.C.
Our neurosurgery bipolar systems are used by neurosurgeons worldwide. Our
strategy is to expand our product offerings in neurosurgery, broaden the market
for our bipolar systems and bipolar instrumentation in the dental market and
other surgical markets including, general surgery, tumor ablation outside of
the central nervous system, laparoscopic surgery, gynecology, urology,
dermatology, maxillofacial surgery, ear, nose and throat (ENT), minimally
invasive surgery including movement disorders and chronic pain control.

     Our neurosurgery bipolar systems, which were first introduced into the
market by Codman & Shurtleff in 1983, account for a significant amount of our
sales. We began selling complementary disposable hand-held instrumentation for
use with our neurosurgery bipolar system in 1999. Based on our established base
of neurosurgery bipolar systems, we expect the sales of our disposable
hand-held instruments to increase as surgeons utilize them to accomplish key
objectives more precisely and effectively than traditional hand-held
instruments.  Our Bident(R) bipolar dental system was introduced into the
dental market by Bident International, L.L.C. in 1999, and we are pleased with
the progress of our sales in this field in this short period of time.

     We have 510(k) clearance to market our bipolar electrosurgical generators
and disposable instrumentation, based on our patented DualWave(TM) technology,
from the United States Food and Drug Administration, the FDA. Our Bident(R)
bipolar dental system has also been granted 510(k) clearance by the FDA.  Our
neurosurgery bipolar system is CE marked, which is a requirement to sell the
product in most of Western Europe.

     To complement the sales of our bipolar systems, we also manufacture for
sale surgical magnifying loupes, a microsurgical stool, titanium surgical mesh
for repair of the skull and a natural dental preparation for use in healing and
lessening post surgical discomfort.  As markets for our bipolar systems expand,
we may manufacture and sell other complementary products.

                                      [2]
<PAGE>

Our Business Strategy

    Our objective is to expand upon the success of our patented DualWave(TM)
technology in neurosurgery and to broaden the market for our bipolar systems
and bipolar instrumentation in the dental market and other surgical markets.
Our strategies to achieve this goal are as follows:

     Expansion of Product Base. We plan to continue  to aggressively proceed in
the development of additional products based on our DualWave(TM) technology and
develop new technologies to satisfy the needs of the medical community. By
working with leading practitioners in their fields, we look to refine existing
features and develop new features, enhancements and new instrumentation to
provide surgeons with more functionality.

     Expansion of Use of Bipolar Systems Based on Our Patented Bipolar
Technology.  Building upon our patented DualWave(TM) technology and its use in
neurosurgery and the dental market, we want to expand into other surgical
markets including, general surgery, tumor ablation outside of the central
nervous system, laparoscopic surgery, gynecology, urology, dermatology,
maxillofacial surgery, ENT, minimally invasive surgery including movement
disorders and chronic pain control.

     Use Our Generators to Drive Disposable Instrumentation Sales. The sales of
our disposable hand-held instruments and disposable tubing sets are influenced
by two factors: the increased installed base of our bipolar generators and the
increased product offerings of disposables. We are moving forward in both
directions. As more disposable hand-held instruments are offered in
neurosurgery and the dental market, and as our bipolar generators are sold in
other fields, we expect sales of complementary disposable hand-held instruments
and cord and tubing sets to increase.

     Continue to Establish Strategic Partnerships to Commercialize Our Product
Offerings. We utilize third parties to market our products to end-users. We
award distribution contracts to third party companies that have established
themselves as leaders in applicable field(s) to market our products to
end-users. In neurosurgery, we have chosen to contract with Codman & Shurtleff,
Inc., a subsidiary of Johnson & Johnson, to market our products. In the dental
market, we have chosen to contract with Bident International, L.L.C. to market
our products.  As we open new markets, we plan to select national/international
leading medical sales organizations specializing in the applicable field(s) to
launch our new products in the marketplace.

     In neurosurgery, there are numerous published clinical reports and
follow-up studies on the use of our system, which support the marketing efforts
of our neurosurgery bipolar systems. In dentistry, leading practitioners have
written numerous articles and clinical reports supporting the use of our
system.  We intend to utilize the reports and studies currently published for
marketing in other fields, however, we will need continued recommendations and
endorsements by influential surgeons in various surgical disciplines for market
acceptance of our bipolar systems in fields other than neurosurgery.

                                      [3]

Electrosurgery

     Surgical procedures are performed using a variety of methods and
instruments, including electrosurgical generators.  Electrosurgical generators
perform two specific functions, tissue cutting and coagulation (sealing) of
blood vessels.

     The application of hot cautery to seal blood vessels has been in existence
for more than 5,000 years.  Early cauterization techniques employed iron
instruments heated in an open flame, then introduced into the wound.   The
electrosurgical generator was first introduced in 1924, by noted neurosurgeon,
Dr. Harvey Cushing, who partnered with a Harvard University physicist, Dr.
William Bovie to design a spark gap electrosurgical generator.  The generator
worked by advancing a spark to tissue, to generate heat, providing
cauterization.

    Today's electrosurgical generators have become more sophisticated,
utilizing radiofrequency, or RF, waves to cut and coagulate tissue.  Modern
electrosurgical generators are distinguished as either "monopolar" or
"bipolar".  The classification refers to the method by which electricity is
delivered to the patient and returned to the generator.  Fundamental electrical
principles apply.  Electricity must complete a circle.  It must have a
beginning point, a return path, and an ending point.

Monopolar Electrosurgical Systems

     In monopolar electrosurgery, a single RF sine wave is created in the
generator to provide cutting and coagulation.  Connected to the generator is an
insulated, hand held instrument with only one tip.  This is the "active
electrode".  The return path of this applied electricity is through the
patient's body, to a grounding pad attached to the patient's body, usually the
thigh or buttocks, which returns the electricity to the generator, completing
the circuit.  Traditional monopolar electrosurgical cutting uses high
temperature heat to burn away targeted tissue. This  typically results in
thermal (heat) damage, charring and unpredictable/prolonged healing in the
surgical area.  Monopolar cutting does not work well in a wet field due to
short circuiting, which exacerbates tissue damage due to heat and dryness.

     There are three significant safety hazards recognized with the monopolar
system:

         * There is considerable heat buildup at the surgical site;
         * The electricity must travel through the patient's body to reach the
           grounding pad, damaging healthy blood vessels and tissue along its
           path; and

         * The patient can be burned by the electricity leaving the body at the
           site of the grounding pad.

     Monopolar units do not provide a separate waveform or delivery system for
coagulation. The surgeon changes the angle of the instrument touching tissue,
using the heat buildup of the instrument itself to coagulate tissue.

                                      [4]
<PAGE>

Bipolar Electrosurgical Systems:

    Bipolar electrosurgery is descriptive of the means of current delivery to
the patient.  In bipolar systems, the RF sine wave is generated, and delivered
to the surgical site via a handheld instrument, with two tips instead of one.
The two tips provide the "active" and "return" electrodes.  The electricity
generated is applied only to the tissue between the two tips of the instrument.
The electricity is returned to the generator through the instrument, removing
the patient from the electrical circuit and eliminating not only the need for a
grounding pad, but the inherent safety hazards associated with monopolar
electrosurgery.

    The typical electrosurgical units on the market, which offers bipolar
coagulation features, relies upon monopolar electrosurgery to provide the
cutting function. The monopolar cutting is accomplished with monopolar
instrumentation, requiring a grounding pad just as it is accomplished in
monopolar systems. Coagulation is typically accomplished by inserting pauses
into their cutting waveform.

     Along with inherent dangers of monopolar cutting, we believe that the use
of only one waveform to perform both functions of cutting and coagulation is
not as safe as using two waveforms to perform the two separate and distinct
functions of cutting and coagulation.  By using one waveform, there is always
the potential to cut when the surgeon is trying to coagulate, and thus
perforate blood vessels inadvertently.

Valley Forge Scientific Technology

     The foundation of our bipolar electrosurgical systems lies in our patented
DualWave(TM) technology. DualWave(TM) technology is the delivery of two
separate waveforms to perform the two separate and distinct functions of
cutting and coagulation.

     We believe that Valley Forge Scientific manufactures the only
electrosurgical units that offer both bipolar cutting and bipolar coagulation.
We are able to achieve both of these functions through our patented
DualWave(TM) technology.  We do not believe that it is either safe or effective
to use the same waveform for coagulation that is used for cutting. With the
virtual elimination of heat and current spread, our technology can be used in
direct contact with nerves, bones, blood vessels and metal implants, and can be
used anywhere in the human body safely, specifically the brain and spine.

    Our bipolar systems consist of a solid state microprocessor controlled
generator, utilizing our patented DualWave(TM) technology, an array of
disposable hand-held bipolar instruments, which perform a variety of surgical
and dental procedures, and single-use disposable cords, which attach the
hand-held bipolar instrument to the generator. We also develop, manufacture and
sell modules and other accessories to handle specific functions required by a
particular surgical discipline. For example, in neurosurgery we sell an
irrigation module, which allows the neurosurgeon to pump a saline solution into
the surgical field while cutting tissue or coagulating blood vessels, and a
specially designed single-use plastic tube set, which connects the electrical
current from the generator and fluid from the irrigation module to the
hand-held instrument.

    Our cutting waveform uses molecular resonance to cut, rather than heat
through an advancing spark.  Our generator contains a rigidly stabilized
voltage control to provide an extremely gentle cut, using about one fifth the
power of other generators. The cutting current,

                                      [5]
<PAGE>

which is delivered only to the tissue between the two tips of the instrument,
offers safety advantages by the absence of current spread and markedly reduced
heating of adjacent tissues. This makes our product safe to use in all areas of
the human body, specifically in the most sensitive areas, the brain and the
spine.

    Our coagulation waveform is unique in that it is totally aperiodic and
nonrhythmic.  The timing of electrical bursts within the waveform are randomly
spaced, and the waveform itself is random in timing so that it is truly
aperioidic.  Regardless of how high the voltage setting of the unit, or how
long the surgeon applies the current, the coagulation waveform simply will not
cut.   Our stiffly regulated constant voltage supply allows for precise, gentle
and progressive coagulation in either totally dry or fully irrigate fields,
including fields totally submerged in saline. These effects are produced in our
generators through the lowest possible output impedance.

    Our bipolar electrosurgical generators deliver both cutting and coagulation
through bipolar handheld instruments, providing both the active electrode and
the return path through the handheld instrument back to the generator.  The
performance of our bipolar disposable handheld instruments is also enhanced by
an irrigated field, further minimizing the risk of heat buildup and correlating
tissue damage. Our bipolar systems are designed to replace other surgical
tools, such as monopolar electrosurgical systems, lasers and conventional
instruments, such as scalpels, used in soft tissue surgery.

    We believe that our bipolar systems, using our patented DualWave(TM)
technology, can be used in all procedures involving cutting tissue or
coagulating blood vessels throughout the human body.

    Our neurosurgery bipolar systems, which were first introduced into the
market by Codman & Shurtleff in 1983, account for a significant amount of our
sales.  In 1999, our first disposable hand-held cutting and coagulation
instruments were introduced in the neurosurgery market by Codman & Shurtleff.
To date, a total of seven neurosurgical disposable hand-held instruments
utilizing our DualWave(TM) technology have been introduced into the market.
Based on our established base of neurosurgery bipolar systems, we expect that
sales of our disposable hand-held instruments to increase as surgeons utilize
them to accomplish key objectives more precisely and effectively than
traditional handheld instrumentation.  Our Bident(R) bipolar dental system was
introduced into the dental market by Bident International, L.L.C. in 1999, and
we are pleased with the progress of our sales in this field in this short
period of time.

The Neurosurgery Market

    There are more than 3,600 Board Certified Neurological Surgeons,
neurosurgeons, in the United States, and more than 5,800 worldwide.
Neurological surgery is a medical specialty dealing with disorders of the
brain, skull, spinal cord, cranial and spinal nerves, the autonomic nervous
system and the pituitary gland.  It is believed that approximately 500,000
brain and spine surgery procedures are performed each year in the United
States.

    A prominent use of bipolar electrosurgical instrumentation in neurosurgey
is tumor removal.  There are over 100 different types of brain tumors.  More
than 180,000 Americans are diagnosed with brain tumors each year.  The most
common brain tumors in adults are:

                                      [6]
<PAGE>

glioblastoma, meningioma, and oligodendroglioma.  Approximately 2,200 children
are diagnosed with a brain tumor each year, with the most common being
medulloblastoma and astrocytoma. The first line of treatment for these tumors
is typically surgical removal of the tumor.

    For each bipolar neurosurgical procedure, the neurosurgeon needs a
hand-held instrument that will cut, divide, core or remove tissue and tumors
and coagulate blood vessels. The neurosurgeon also needs to connect that
instrument with a cord/tubing set to the bipolar generator and irrigation unit,
which provides fluids to the surgical site.  This area of practice demands that
the cord/tubing sets be single-use and the growing preference is that the
hand-held instruments be disposable in order to minimize costs and to avoid the
limitations of the sterilization process.

    In neurosurgery, a bipolar electrosurgical system is the modality of
choice, largely due to the efforts of Dr. Leonard I. Malis, one of our
directors.  Dr. Malis, who is Professor and Chairman Emeritus of the Mount
Sinai School of Medicine Department of Neurosurgery, designed and developed the
first commercial bipolar coagulator in 1955, and pioneered the use of bipolar
electrosurgery for use in the brain.  Dr. Malis is a frequent author and
lecturer on neurosurgery and bipolar electrosurgery.

Our Neurosurgery Bipolar System.

    Our neurosurgery bipolar systems, which were developed in conjunction with
Dr. Malis, are used to cut, core and divide tissue and tumors and coagulate
blood vessels in the brain and spine. Our neurosurgery bipolar systems, which
are marketed and sold by Codman & Shurtleff to end users under the MALIS(R)
tradename, are used by neurosurgeons worldwide.

    Our neurosurgery bipolar system is a surgical device intended to perform
two separate functions:  bipolar cutting of tissue and bipolar coagulation of
blood vessels.  Our system is comprised of the bipolar electrosurgical
generator, an irrigation module, foot pedal, connecting cables, and an array of
disposable bipolar hand-held instrumentation in varying sizes and shapes
connected to the generator via a single-use disposable bipolar cord and tubing
set.

    Our bipolar generator delivers our patented DualWave(TM) bipolar cutting
and bipolar coagulation through radio frequency waveforms. Our irrigation
modules deliver fluids, such as saline, to the surgical field through a
hand-held instrument.  Surgeons can use our disposable bipolar hand-held
instruments to cut  tissue and to seal blood vessels in an irrigated surgical
field.  The surgeon can control the mode of operation with the foot pedal and
power setting with keys on the front panel of the controller.

    Our disposable bipolar hand-held instruments are approved for sale in
various tip sizes and shapes.   We currently sell seven different models of
disposable hand-held instruments for neurosurgery, which provide the surgeon
control and precision for different procedures during surgery.  We believe that
the typical use per surgical procedure is one to two disposable instruments and
one disposable cord/tubing set.

    Our current neurosurgery products, which are marketed and sold by Codman &
Shurtleff,

                                      [7]
<PAGE>

consist of the following:

          Generators/Irrigators

          - MALIS(R) CMC-III Bipolar Generator  (High power
            cutting/coagulation)

          - MALIS(R) Bipolar Synergy Generator (Low power coagulation)

          - MALIS(R)  Irrigation Module

          Disposable Instrumentation and Cord sets

          - MALIS(R) Bipolar Cutting Loops - 3x5mm

          - MALIS(R) Bipolar Cutting Loops - 5x5mm

           - MALIS(R) Bipolar Cutting Loops - 5x10mm

           - MALIS(R) Bipolar Cutting Loops - 10x10mm

           - MALIS(R) Bipolar Cutting Pen

           - MALIS(R) Bipolar Coagulation Ball - 3mm

           - MALIS(R) Bipolar Coagulation Ball - 5mm

           - MALIS(R) Bipolar Cord/Irrigation Tubing Set

           - MALIS(R) Bipolar Cord

The Dental Market

    There are an estimated 150,000 professionally active dentists in the United
States.  As primary oral health care providers; approximately 80% of dentists
are generalists, and approximately 20% are specialists.    More than 90% of
active dentists are in private practice.  There are approximately 55 dental
schools in the U.S. and Canada, and in 1999, there were over 17,000 students
enrolled in U.S. dental schools.   We believe that dental services accounted
for in excess of $55 billion dollars of the national healthcare expenditures
and that approximately 50% of these expenditures are paid by private health
insurance.

    There are currently more than 20 different bipolar electrosurgical
procedures with the American Dental Association, ADA, codes eligible for
insurance reimbursement.  Examples of commonly performed procedures include:

          * Gingivectomey / Gingivoplasty (surgical treatment of gingivitis),

          * Connective tissue graft,

          * Surgical removal of residual tooth roots,

          * Crown and bridge preparation,

          * Biopsy of oral tissue,

          * Excision of cysts or tumors, benign and malignant, and

          * Surgical removal of impacted or erupted tooth.

Our Bident(R) Bipolar Dental System

    Our Bident(R) bipolar dental system uses the same DualWave(TM) technology
used in our neurosurgery bipolar systems to allow dentists to work in direct
contact with metal implants, nerves, bone and blood vessels, essentially
eliminating collateral tissue damage from current spread and heat buildup.  Our
Bident(R) bipolar dental system is marketed and sold to end users by Bident
International, L.L.C.

                                      [8]
<PAGE>

    Dentists, similar to neurosurgeons, are particularly affected by the
limitations of monopolar electrosurgical systems to work safely around metal
implants, bone, nerves and blood vessels due to the nature of delicate
structures they work within. We believe, the elimination of the grounding pad
through bipolar delivery of our current to cut and coagulate in our Bident(R)
bipolar dental system is also an important factor to dentists concerned with
both safety, and patient perception/fear of the equipment used in the general
dentistry setting.

    Our Bident(R) bipolar dental system is a surgical device, which performs
two separate functions: bipolar tissue cutting and bipolar coagulation of blood
vessels. The size, features and overall power output of the generator itself is
different than our neurosurgery bipolar system, to meet the need for a cost
effective, office style generator for the dentist.  The system is comprised of
the electrosurgical generator, foot pedal, connecting cables and an array of
disposable bipolar hand-held instruments which are attached to the generator
via a single use bipolar cord.

    Dentists can use our disposable bipolar hand-held instruments to cut tissue
and to seal blood vessels in an irrigated surgical field.  The dentist can
control the mode of operation with the foot pedal and power setting with keys
on the front panel of the generator.

    Our disposable bipolar hand-held instruments are available in various tip
sizes, shapes and angles to perform the varying procedures performed by the
dentist.   We currently sell sixteen different models of disposable bipolar
hand-held instruments for dental procedures.  We believe that the typical use
for each dental surgical procedure is one to two disposable instruments and one
disposable cord set.

    Our current bipolar dental products, which are marketed and sold by Bident
International, L.L.C., consist of the following:

         Generator

         - Bident Bipolar Surgical System

         Bipolar Instrument and Cord Sets

         - Bipolar Flap Access Pen

         - Bipolar Gingivoplasty Pen

         - Bipolar Gingivectomy Pen

         - Bipolar Gingival Troughing Pen 5 mm (.012")

         - Bipolar Gingivectomy Pen (.020")

         - Bipolar Coagulating Ball 3mm

         - Bipolar Coagulating Ball 3mm (30(o))

         - Bipolar Gingivoplasty Loop 1.5x9mm

         - Bipolar Gingivoplasty Loop 1.5x9mm (30(o))

         - Bipolar Gingivoplasty Loop 3x5mm

         - Bipolar Gingivoplasty Loop 3x5mm (30(o))

         - Bipolar Gingivoplasty Loop 3x8mm

         - Bipolar Gingivoplasty Loop 3x8mm (30(o))

         - Bipolar Gingivoplasty Loop 5x5mm

         - Bipolar Gingivoplasty Loop 5x5mm (30(o))

         - Bipolar Cord Set

                                      [9]
<PAGE>

Other Surgical Markets

    Our strategy is to expand the market for our bipolar systems and disposable
bipolar instruments and cord sets in other surgical markets including general
surgery, tumor ablation outside of the central nervous system, laproscopic
surgery, gynecology, urology, dermatology, maxillofacial, surgery, ENT,
minimally invasive surgery including movement disorders and chronic pain
control.

    The Board of American Medical Specialties certifies surgeons in various
surgical disciplines.  As of September 2000, the number of practicing
Diplomates by specialty include:  General Surgery 32,998; Thoracic Surgery
5,113; Urology 9,118; Plastic Surgery 5,054; Dermatology 8,612; Anesthesiology
29,696; Colon and Rectal Surgery 1,115; OB/GYN 32,447 and Orthopeadic Surgery
18,935.  We believe that in excess of  40 million inpatient surgical procedures
are performed, and in excess of 30 million outpatient surgical procedures are
performed, in the United States on an annual basis in these surgical fields.
We have developed bipolar generators and certain instrumentation to address the
needs of surgeons in certain of these fields.  As we open new markets, we plan
to select national/international leading medical sales organizations
specializing in the applicable field(s) to launch our bipolar systems in the
market place.

Manufacturing and Supplies

    The manufacturing of our bipolar generators and irrigation systems are
conducted by our wholly-owned subsidiary, Diversified Electronics Company,
Inc., in Philadelphia, Pennsylvania.  Our products are manufactured from
several components, most of which are supplied to us by third parties.  Most of
the components we use in the manufacture of our products are available from
more than one supplier.  For some components, however, there are relatively few
alternate sources of supply and we rely upon single source suppliers or
contract manufacturers.  For example, we currently subcontract the
manufacturing of our disposable instruments with a single contract manufacturer
and we subcontract the manufacture of our disposable cord and tube sets with a
single manufacturer.  Our profit margins and our ability to develop and deliver
such products on a timely basis may also be adversely affected by the lack of
alternative sources of supply.

    Our manufacturing process is subject to the regulatory requirements of the
Federal Good Manufacturing Practice Regulations as promulgated by the FDA,
which mandate detailed quality assurance and record-keeping procedures and
subjects us to unscheduled periodic regulatory inspections.  We conduct quality
assurance audits throughout the manufacturing process and believe that we are
in compliance with all applicable government regulations.

Marketing and Sales

    We do not directly market or sell our products to end-users. Instead, we
sell almost all of our products to or through national/international
distributors, which include affiliates of major medical sales organizations.

                                      [10]
<PAGE>

    Codman & Shurtleff.  For almost twenty years, we have entered into
distribution agreements with Codman & Shurtleff to sell and distribute our
products in the field of neurosurgery.  On December 11, 2000, we entered into a
new distribution agreement with Codman & Shurtleff under which Codman &
Shurtleff was granted the exclusive worldwide right to sell our bipolar
neurosurgery system and certain other products in the fields of neurocranial
and neurospinal surgery through December 31, 2003 on the condition that Codman
makes minimum purchases of $4,000,000 per calendar year, as may be adjusted by
mutual agreement of the parties.  If Codman fails to satisfy the minimum
purchase obligations, our remedy is to terminate the agreement or convert it to
a nonexclusive agreement.  We primarily perform product development,
manufacturing and clinical and regulatory functions for our neurosurgery
bipolar systems.

    For the 2001, 2000 and 1999 fiscal years, we had sales to Codman of
approximately $4,169,000, $3,696,000 and $3,577,000, respectively.  Orders are
generally filled on a current basis in each calendar year.  Approximately 79%
of our sales revenue was derived from sales to Codman in fiscal 2001 and
approximately 84% and 96% of our sales were derived from sales to Codman in
fiscal 2000 and 1999, respectively.

    Bident International, L.L.C.  In 1999, we entered into a supply and
distribution agreement with Bident International, L.L.C., an affiliate of
Garfield Refining Company, covering the sale of our Bident(R) bipolar dental
system in the field of dentistry.  We primarily perform product development,
manufacturing and clinical and regulatory functions for our Bident(R) bipolar
dental system.

    Boston Scientific Corporation.  In 1993, we entered into a supply and
distribution agreement with  Boston Scientific Corporation covering the
exclusive worldwide marketing rights of our bipolar coagulators for use in the
fields of gastroenterology and endoscopy, through March 2002. We are in the
process of terminating this agreement by mutual consent and plan to enter into
an agreement with Boston Scientific Corporation to provide primarily product
support for the installed base of Boston Scientific's "Symmetry Endo-Bipolar
Generator" and the Mini-Symmetry(TM) generators.

    Our neurosurgery bipolar systems are sold in certain foreign markets by
Codman & Shurtleff and our Bident(R) bipolar dental system is sold in certain
foreign markets by Bident International, L.L.C. Prior to sales in certain
foreign markets, we will need to comply with applicable foreign government
regulations.

    Our business is not affected to any material extent by seasonal factors.

Competition

    We believe that principal competitive factors with our bipolar products are
product features and quality, safety, ease of use, cost, acceptance by leading
physicians, and improved patient outcomes.  We believe that our patented
DualWave(TM) technology, which delivers both bipolar cutting and bipolar
coagulation with two separate waveforms, distinguishes our bipolar
electrosurgical systems from electrosurgical systems sold by other entities,
which do not offer both bipolar cutting and bipolar coagulation. We believe
that our unique bipolar electrosurgical products offer enhanced capabilities
and safety advantages as compared to other electrosurgical systems.

                                      [11]
<PAGE>

    The medical device industry is intensely competitive in almost all segments
and tends to be dominated in large more mature markets by a relatively small
group of large and well financed companies. We also compete with smaller,
entrepreneurial companies.  There can be no assurance that these or other
companies will not succeed in developing, or have not already developed,
technologies or products that are more effective than ours or that would render
our technology or products obsolete or uncompetitive.

Neurosurgery

    In neurosurgery, we believe that we are the principal manufacturer of
bipolar electrosurgical systems.  Our neurosurgery bipolar system competes
against manufacturers of electrosurgical systems, including ValleyLab and Erbe.
In addition, we compete with a variety of tissue removal systems designed for
removing brain and cranial-based tumors, such as an ultrasonic tissue
aspiration system also manufactured by ValleyLab.

Dental Market

    In the dental market, we believe that we are the only manufacturer of
bipolar electrosurgical systems.  Our Bident(R) bipolar dental system competes
with monopolar electrosurgical systems manufactured by Ellman, and laser and
other monopolar electrosurgical systems manufactured by other companies.

Other Surgical Markets

    In other surgical markets, our bipolar generator and disposable instruments
will compete with large companies, such as ValleyLab, Ellman and Conmed, which
manufacture and sell electrosurgical medical devices. Our systems will also
compete with laser systems and other technologies manufactured by other
companies.

Research and Development

    We are continually working on enhancements to our generator products and on
new disposable instrumentation along with other products to meet the needs of
surgeons in various surgical disciplines.  We also are exploring new
applications for our patented DualWave(TM) technology in other surgical
markets.

    For the 2001, 2000 and 1999  fiscal years, we expended $352,773, $338,318
and $301,078,  respectively, for research and development. We anticipate that
we will continue to incur research and development costs in connection with
development of products.

    Substantially all of our research and development is conducted internally.
In the 2002 fiscal year, we anticipate that we will fund all our research and
development with current assets and revenues from operations.

                                      [12]
<PAGE>

Government Regulation

    The marketing and sale of our products in the United States is governed by
the Federal Food, Drug and Cosmetic Act (the "Act") administered by the FDA, as
well as varying degrees of regulation by a number of state and foreign
governmental agencies.  The Act requires certain clearances from the FDA before
medical devices can be marketed.

    FDA regulations are wide ranging and govern, among other things:

         * product design and development;
         * product testing;
         * product labeling;
         * product storage;
         * premarket clearance or approval;
         * advertising and promotion; and
         * product sales and distribution.

    Noncompliance with applicable regulatory requirements can result in
enforcement action, which may include:

         * warning letters;
         * fines, injunctions and civil penalties against us;
         * recall or seizure of our products;
         * operating restrictions, partial suspension or total shutdown of our
           production;
         * refusing our requests for premarket clearance or approval of new
           products;
         * withdrawing product approvals already granted; and
         * criminal prosecution.

    All medical devices introduced into the market since 1976, which include
substantially all of our products, are required by the FDA as a condition of
sale and marketing to secure either a 510(k) premarket notification clearance
or an approved premarket approval application ("PMA"). A 510(k) premarket
notification clearance indicates FDA agreement with an applicant's
determination that the product for which clearance has been sought is
substantially equivalent to another medical device that was on the market prior
to 1976 or that has received 510(k) premarketing notification clearance.  The
process of obtaining a 510(k) premarket notification clearance can typically
take several months and commonly involves the submission of limited clinical
data and supporting information while the PMA process typically will last more
than a year and requires the submission of significant quantities of clinical
data and manufacturing information.

    To comply with the FDA regulations, we may incur substantial costs relating
to laboratory and clinical testing of new and existing products and the
preparation and filing of documents in formats required by the FDA. In
addition, we may also encounter delays in bringing new or existing devices to
market as a result of being required by the FDA and foreign governmental
authorities to conduct and document additional investigations of product safety
and effectiveness.

                                      [13]
<PAGE>

    For European distribution, we have received ISO 9001certification for our
neurosurgery bipolar system and are allowed  to use the CE mark on our
neurosurgery bipolar system after assembling appropriate documentation.
Failure to maintain the CE Mark will preclude our distributor  from selling our
products in Europe.  We cannot assure you that we will be successful in
maintaining certification requirements.

    We have received 510(k) clearance to market our bipolar electrosurgical
generator and disposable instrumentation.  We have also received clearance to
market our Bident(R) bipolar dental system for dental procedures.    We cannot
assure you that we will be able to obtain necessary clearances or approvals to
market any other products, or existing products for new intended uses, on a
timely basis, if at all.  Delays in receipt or failure to receive clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on business, financial condition, results of operations and
future growth prospects.

    Under FDA regulations, after a device receives 510(k) clearance, any
modification that could significantly affect its safety or effectiveness, or
that would constitute a major change in the intended use of the device,
technology, materials, packaging, and certain manufacturing process may require
a new 510(k) clearance.  The FDA requires a manufacturer to make this
determination in the first instance, but the FDA can review any such decision,
and if it disagrees it can require a manufacturer to obtain a new 510(k)
clearance or it can seek enforcement action against the manufacturer.

    We are also required to maintain compliance with the Quality System
Regulation, or QSR.  The QSR incorporates the requirements of Good
Manufacturing Practice and relates to product design, testing, and
manufacturing quality assurance, as well as the maintenance of records and
documentation.  The FDA enforces the QSR through inspections.  We cannot assure
you that we or our key components suppliers are or will continue to be in
compliance, will not encounter any manufacturing difficulties, or that we or
any of our subcontractors or key component suppliers will be able to maintain
compliance with regulatory requirements.  Failure to do so will have a material
adverse effect on our business, financial condition, results of operations and
future growth prospects.

    We may not promote or advertise our products for uses not within the scope
of our clearances or approvals or make unsupported safety and effectiveness
claims.  We believe that we are in material compliance with regulations
promulgated by the FDA, and that such compliance has been and is anticipated to
be without adverse effect on our business.

Patents and Trademarks

    Our ability to compete in an effective manner depends in part on developing
and maintaining proprietary aspects of our bipolar technology.  We own two
principal United States patents, covering an aggregate of 109 claims, which are
directed towards our DualWave(TM) bipolar technology used in our bipolar
electrosurgical system. We also own two patents which are used in our
disposable hand-held bipolar instruments.

                                      [14]
<PAGE>

    We have applied for United States patents on additional disposable
instrumentation and electronic circuitry. Our practice and experience is to
apply for patents which are important to the development or sale of a product.

    Dr. Leonard I. Malis, one our principal shareholders and directors, has
also entered into an agreement with us to license the MALIS(R) trademark to us,
at no cost, to the extent the name has not been licensed to Codman & Shurtleff.

    We cannot assure you that the patents we have obtained, or any patents that
we may obtain as a result of our patent applications, will provide any
competitive advantages for our products or that they will not be successfully
challenged, invalidated or circumvented in the future.  In addition, we cannot
assure you that competitors, many of whom have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with our ability
to make, use and sell our products either in the United States or in
international markets.

    Other companies and entities have filed patent applications or have been
issued patents relating to monopolar and/or bipolar electrosurgical methods and
devices. We do not believe that our products currently infringe any valid and
enforceable claims of the issued patents that we have reviewed. We cannot
assure you that we will not have to defend ourselves in court against
allegations of infringement of third-party patents.

    In addition to patents, we rely on trade secrets and proprietary know-how,
which we seek to protect, in part, through confidentiality and proprietary
information agreements.  We require our key employees and consultants to
execute confidentiality agreements upon the commencement of an employment or
consulting relationship with us.  These agreements generally provide that all
confidential information developed or made known to the individual by us during
the course of the individual's relationship with us, is to be kept confidential
and not disclosed to third parties.  These agreements also generally provide
that inventions conceived by the individual in the course of rendering services
to us shall be our exclusive property.  We cannot assure you that employees
will not breach the agreements, that we would have adequate remedies for any
breach or that our trade secrets will not otherwise become known to or be
independently developed by competitors.

Employees

    At September 30, 2001, we and our subsidiaries had 26 full-time employees,
including executive officers.  From time to time we retain part-time employees,
engineering consultants, scientists and other consultants.  All full-time
employees participate in our health benefit plan.  None of our employees are
represented by a union or covered by a collective bargaining agreement. We
consider our relationship with our employees to be satisfactory.

Forward Looking Statements

    The information provided in this report may contain forward looking
statements or statements which arguably imply or suggest certain things about
our future. These include, but are not limited to statements about: (1) any
competitive advantage we may have as a result of our installed base of
electrosurgical generators in the field of neurosurgery; (2) our belief that
our

                                      [15]

products exceed industry standards or favorably compete with other companies'
new technological advancements; (3) the success of certain recently introduced
products and disposable instrumentation and products in the field of
neurosurgery and the dental market; and (4) our ability to attract distributors
for our products outside of neurosurgery and the dental market and the
acceptance of our products in those markets. These statements are based on
assumptions that we believe are reasonable, but a number of factors could cause
our actual results to differ materially from those expressed or implied by
these statements. We do not intend to update these forward looking statements.
Investors are advised to review the Additional Cautionary Statements section,
which follows the Management's Discussion and Analysis of Financial Condition
and Results of Operations section (Item 7) of this Report, for more information
about risks that could affect our financial results.

Item 2.  PROPERTIES.

    We currently lease approximately 4,200 square feet of office and warehouse
space at a base monthly rent of  $4,643 (with increases based on increases in
the producer price index) in an office building in Oaks, Pennsylvania,
approximately 12 miles northwest of Philadelphia, Pennsylvania. The current
lease is for a term of five years ending June 30, 2005.  Our manufacturing
operations are conducted by our wholly owned subsidiary, Diversified
Electronics Company, Inc., in a building owned by that subsidiary with
approximately 15,000 square feet in Philadelphia, Pennsylvania.  We have
entered into a contract to sell this building, and in 2002 plan to lease a new
facility to consolidate our two existing facilities in a single location.

Item 3.  LEGAL PROCEEDINGS.

    From time to time we are subject to litigation claims.  As of September 30,
2001, there are no material pending legal proceedings to which we are a party
or to which any of our property is the subject.

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

    No matters were submitted to a vote of the securityholders during the
fourth quarter of fiscal year 2001.

                                    PART II

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

    Our common stock, no par value, is quoted on the Boston Stock Exchange
under the symbol VLF, and traded in the over-the-counter market, and is
included in the Nasdaq - Small Cap Issues under the symbol VLFG.  The table
below sets forth the range of high and low closing bid quotations per share of
Common Stock as reported on Nasdaq.  Quotations represent prices between
dealers and do not necessarily represent actual transactions. None of the
prices shown reflect retail mark-ups, mark-downs, or commissions.

                                      [16]
<PAGE>

COMMON STOCK                                            High-Bid      Low-Bid
 Fiscal 2001:
  First Quarter                                         $1.63         $0.87
  Second Quarter                                         3.25          1.34
  Third Quarter                                          3.25          1.06
  Fourth Quarter                                         3.20          2.75
Fiscal 2000:
  First Quarter                                         $4.94         $2.75
  Second Quarter                                         4.00          2.50
  Third Quarter                                          2.69          1.00
  Fourth Quarter                                         2.63          1.12

    At December 14, 2001, we had 103 shareholders of record.

    We have not paid any dividends to date, nor do we expect to do so in the
foreseeable future.

Item 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

    The selected financial data set forth below should be read in conjunction
with the "Management's Discussions and Analysis of Financial Condition and
Results of Operations" and our financial statements and notes thereto appearing
elsewhere in this Form 10-K.
<S>                               <C>          <C>         <C>         <C>         <C>
Statement of Operations Data:     2001         2000        1999        1998        1997
                                  ----         ----        ----        ----        ----
Net Sales                         $5,263,485   $4,397,939  $3,721,528  $3,879,977  $3,977,965
Income (loss) from Operations        485,746     (110,817)   (197,810)    (63,521)     19,701
Net Income (loss)                 $  330,221   $  (54,312) $ (124,973) $  (34,374) $    6,533
                                     =======      =======     ========    =======     =======
Basic Earnings (loss) per share   $     0.04   $    (0.01) $    (0.02) $    (0.00) $     0.00
                                        ====         ====        ====        ====        ====
Diluted Earnings (loss) per share $     0.04   $    (0.01) $    (0.02) $    (0.00) $     0.00

Balance Sheet Data:
At September 30,                  2001         2000        1999        1998        1997
                                  ----         ----        ----        ----        ----
Current Assets                    $3,516,992   $3,093,698  $3,161,394  $3,216,510  $3,139,256
Total Assets                       4,171,214    3,852,079   4,034,443   4,204,211   4,254,070
Current Liabilities                  283,186      182,185     166,618     161,120     187,817
Long Term Liabilities                 19,280       20,661      16,885      18,445      11,093
Retained Earnings (deficit)          120,024     (210,197)   (155,885)    (30,912)      3,462
Stockholders' Equity               3,868,748    3,649,233   3,850,940   4,024,646       4,055,160
</TABLE>
                                      [17]
<PAGE>

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

     The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-K.  Statements in this Management's Discussion and Analysis of
Financial Conditions and Results of Operations which express that we 'believe,"
"anticipate," "expect" or "plan to" as well as other statements which are not
historical fact, are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.  Actual events or results may
differ materially as a result of the risks and uncertainties described herein
and elsewhere including, but not limited to, those factors discussed in
"ADDITIONAL CAUTIONARY STATEMENTS section in this Item 7.  We do not intend to
update these forward looking statements.

Overview

    We design, develop, manufacture and sell medical devices.  Our core
business is in our bipolar electrosurgical generators and related
instrumentation, based on our patented DualWave(TM) technology.  Our bipolar
systems allow a surgeon or dentist to cut tissue in a manner that minimizes
collateral damage to surrounding healthy tissue and to coagulate blood vessels
quickly, safely and efficiently. By essentially eliminating damage to
surrounding healthy tissue, the surgeon can work safely in direct contact with
nerves, blood vessels, bone and metal implants. Our bipolar systems are
designed to replace other surgical tools, such as monopolar systems, lasers and
conventional instruments, used in soft tissue surgery.

    Our patented DualWave(TM) technology is applicable to many surgical
markets.  Our bipolar systems are currently used to perform many types of
neurosurgery, spine surgery and dental surgery.  We have entered into a
distribution agreement with Codman & Shurtleff, Inc., a subsidiary of Johnson &
Johnson, Inc., to market our neurosurgery bipolar systems.  We have also
entered into a distribution agreement with Bident International, L.L.C., a
subsidiary of Garfield Refinery, Inc., to market our Bident(R) dental bipolar
system.

    Historically, we have derived a significant portion of our sales from our
neurosurgery bipolar system. In fiscal 2000 and 2001, we also received a
contribution to our sales revenue from sales of our Bident(R) bipolar dental
system.  Our strategy includes expanding our patented DualWave(TM) technology
in neurosurgery and to broaden the market for our bipolar systems and
instrumentation in the dental market and other surgical markets. Our strategy
also includes having our existing base of neurosurgery bipolar generators and
our dental bipolar generators, as well as bipolar generators we sell in other
fields drive our sale of disposable hand-held instruments and tubing sets.

Results of Operations

Revenues

    Sales of $5,263,485, for fiscal 2001 were 20% greater than sales of
$4,397,939 for fiscal 2000 and 41% greater than sales of $3,721,528 for 1999.
The increases year-over-year are due to increasing unit sales of current
products and unit sales of newly introduced products in the dental market and
in the field of neurosurgery.  Codman & Shurtleff accounted for 79% of our
sales in 2001 and 84% and 96% of our sales in 2000 and 1999, respectively.

                                      [18]
<PAGE>

    We commenced selling our disposable hand-held instruments to Codman &
Shurtleff for use in neurosurgery in 1999. We believe that as neurosurgeons
become aware of the advantages of disposable instrumentation over traditional
instrumentation and our introduction of more types of disposable hand-held
instruments, our sales of disposable hand-held instruments in neurosurgery in
absolute dollars and also as a percentage of total sales in neurosurgery will
increase.

    On December 11, 2000, we entered into a new distribution agreement with
Codman & Shurtleff under which Codman & Shurtleff was granted the exclusive
worldwide right to sell our neurosurgery bipolar systems and certain other
products in the field of neurocranial and neurospinal surgery through December
31, 2003 on the condition that Codman & Shurtleff makes minimum purchases of $4
million per calendar year, as may be adjusted by mutual agreement of the
parties.  If Codman fails to satisfy the minimum purchase obligations, our
remedy is to terminate the agreement or convert it into a nonexclusive
agreement.

    We also commenced selling our Bident(R) bipolar dental system in 1999.
Since then, sales of the Bident(R) bipolar dental system, which includes a
bipolar generator, disposable hand-held instruments and a single use cord set
to connect the generator to the hand-held instrument, have risen to
approximately $1,009,000, or 19% of our sales, in 2001, from approximately 8%
of our sales in 2000 and less than 1% of our sales in 1999.  Since there are
many more dentists than there are neurosurgeons, we believe that sales of our
Bident(R) bipolar dental system will become a much more significant part of our
revenues in the future.

    Sales of disposable products accounted for approximately $1,999,000, or 38%
of our sales, in 2001 as compared to approximately $1,763,000, or 40% of our
sales, and approximately $1,712,000, or 46% of our sales, in 2000 and 1999,
respectively.  Approximately 57% of our 2001 sales related to sales of bipolar
electrosurgical generators, irrigators and accessories as compared to
approximately 59% and 54% of our sales in 2000 and 1999, respectively.

Cost of Product Sales

    Cost of sales for fiscal 2001 was $2,692,036, or 51% of sales, compared
with $2,443,406, or 56% of sales, for 2000. During fiscal 1999, cost of sales
was $2,064,586, or 55% of sales.  The absolute dollar increase of $248,630 in
cost of sales for fiscal 2001 over fiscal 2000 and the $378,820 increase for
fiscal 2000 over fiscal 1999 were due to increased unit sales of disposable
products and generators. Gross margin was 49% for 2001 as compared to 44% for
2000 and 45% for 1999.

    The increase in gross margin as a percentage of sales is attributable to
changes in product mix, increased manufacturing efficiency and increased
production volume.  We cannot be sure that gross margins will remain at current
levels or show improvement in the future due to the distribution channels used,
product mix, and fluctuation in manufacturing production levels and overhead
costs as new products are introduced.  In addition, inefficiencies in
manufacturing new products and the distribution channels utilized to sell those
products may adversely impact gross margin.

                                      [19]
<PAGE>

Operating Expenses

    We continued our commitment to research and development in 2001 by
increasing our research and development expense to $352,773, a 4% increase over
research and development expenditures of $338,318 for 2000.  Research and
development expenses were $301,078 in 1999. Research and development expenses
were 7% of sales in 2001 as compared to 8% of sales in 2000 and 1999.  The
increases in spending in 2001 and 2000 are attributable primarily to continued
development of new products in neurosurgery and the dental market, and the
continued development of new products for new markets.

    Selling, general and administrative expense increased to $1,652,289, or 31%
of sales, in 2001, from $1,646,438, or 37% of sales, in 2000, and from
$1,462,926, or 39% of sales, in 1999.  Overall, the increase in selling,
general and administrative expenses in absolute dollars was attributable to
expenses to grow our business.  In 2002, we plan to lease a new facility to
consolidate our two present facilities in a single location in order to achieve
efficiencies and to accommodate future growth.  As a result, we anticipate that
our office lease expenses will increase in the future. We also anticipate that
other general and administrative expenses will decrease as a percentage of
sales, but will increase in dollar amounts as we incur additional business
development activities.

Interest and Other Income, net

    Interest and other income, net, increased slightly for 2001 to $39,428 from
$38,243 for  2000 and from $35,348 for 1999.  At the end of 2001, we had
$1,500,622 in cash and cash equivalents as compared to $965,240 at the end of
2000 and $1,158,462 at the end of 1999.  We anticipate that interest and other
income, net, will increase due to the increased cash balances.

Income Tax Benefit/(Provision)

    The provision for income taxes was $194,953 for 2001 as compared to an
income tax benefit of $18,262 and $37,489 for 2000 and 1999, respectively.  Our
effective tax rate in 2001 was approximately 37%.

Net Income (Loss)

    Net income before the cumulative effect of the adoption of SAB 101
increased to $330,221 for 2001, as compared to a net loss of $54,312 for fiscal
2000, and a net loss of $124,973 for 1999.  Basic and diluted income per share
was $.04 for 2001 as compared to a loss per basic and diluted share of $.01 and
$.02 for 2000 and 1999, respectively. Net income for the current fiscal year
reflects an increase in sales and gross margin.  Although we have been
profitable on a quarterly basis since the third quarter of fiscal 2000, due to
our operating history and numerous other factors, we cannot be sure that we can
sustain revenue growth or profitability.

Liquidity and Capital Resources

    At the end of 2001, we had $3,233,806 in working capital compared to
$2,911,513 at the end of 2000 and $2,994,776 at the end of 1999.  The primary
measures of our liquidity are cash, cash equivalents, accounts receivable and
inventory balances, as well as our borrowing ability.  The cash and cash
equivalents are highly liquid with original maturities of ninety days or less.

                                      [20]
<PAGE>

    Cash generated by operating activities was $678,990 for fiscal 2001, which
was mainly attributable to increased operating profits, a decrease in accounts
receivable and deferred tax assets and an increase in accounts payable, accrued
expenses and income taxes payable. This was partially offset by increases in
inventories and prepaid items.

    Accounts receivable net of allowances decreased by $22,105 in 2001 to a
total of $605,150 at the end of fiscal 2001.  The decrease in accounts
receivable was principally due to the reduction in the number of days our
invoices were outstanding.

    Inventories increased by $21,689 in 2001 to a total of $1,199,536 at the
end of 2001 compared to $1,177,847 at the end of 2000.  The increase was
primarily to support the anticipated increasing sales activity.  We expect
future inventory levels to increase in absolute dollar value in order to
support sales volume increases and as we expand into additional markets.

    Net property and equipment decreased to $145,800 at the end of 2001 as
compared to $165,535 for 2000.  Cash used for financing activities was $110,706
in 2001 as a result of the repurchase of 84,050 shares of our common stock in
the first quarter of 2001 pursuant to our stock repurchase program.  All 84,050
shares of common stock repurchased were retired or were in the process of being
retired as of September 30, 2001.  As of September 30, 2001, we repurchased an
aggregate of 166,697 shares of common stock pursuant to our repurchase program.
Under the repurchase program, our board of directors is authorized to purchase
up to 200,000 shares of our common stock.

    On November 6, 2001, we entered into an agreement, subject to certain
contingencies, to sell the building in which our manufacturing operations are
conducted for $117,500.  After the sale of the building, we plan to lease a new
facility to consolidate all our operations in a single location.

    At September 30, 2001, we plan to finance our operating and capital needs
principally with cash from sales, cash, cash equivalents, and related interest
and existing capital resources, which we believe will be sufficient to fund our
operations in the near future.  However, should it be necessary, we believe we
could borrow adequate funds at competitive rates and terms.  Our future
liquidity and capital requirements will depend on numerous factors, including
the success in commercializing our existing products, development and
commercialization of products in fields other than neurosurgery and the dental
market, the ability of our suppliers to continue to meet our demands at current
prices, the status of regulatory approvals and competition.

    We have a line of credit of $1,000,000 with First Union National Bank which
calls for interest to be charged at the bank's national commercial rate.  The
credit accommodation is unsecured and requires us to have a tangible net worth
of no less than $3,000,000.  At September 30, 2001, there was no outstanding
balance on this line.

Forward Looking Statements

    The information provided in this report may contain "forward looking"
statements or statements which arguably imply or suggest certain things about
our future. Statements which express that we  "believe", "anticipate",
"expect", or "plan to" as well as other statements which

                                      [21]
<PAGE>

are not historical fact, are forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward looking
statements include, but are not limited to statements about: (1) any
competitive advantage we may have as a result of our installed base of
electrosurgical generators in the field of neurosurgery; (2) our  belief that
our products exceed industry standards or favorably compete with other
companies' new technological advancements; (3) the success of certain recently
introduced products and disposable instrumentation and products in the field of
neurosurgery and the dental market; and (4) our ability to attract distributors
for our products outside of neurosurgery and the dental market, and the
acceptance of our products in those markets. These statements are based on
assumptions that we believe are reasonable, but a number of factors could cause
our actual results to differ materially from those expressed or implied by
these statements. We do not intend to update these forward looking statements.
You are advised to review the "Additional Cautionary Statements" section below
for more information about risks that could affect the financial results of
Valley Forge Scientific.

Additional Cautionary Statements

We Face Intense Competition

    The markets for our current and potential products are intensely
competitive.    Some surgical procedures which utilize or could utilize our
products could potentially be replaced or reduced in importance by alternative
medical procedures or new drugs which could render our products obsolete or
uncompetitive in these markets.

Our Growth Depends on Introducing New Products and the Market Penetration by
Third Party Distributors

    Our growth depends on the acceptance of our products in the marketplace,
the market penetration achieved by the companies which we sell to, and rely on,
to distribute our products, and our ability to introduce new and innovative
products that meet the needs of medical professionals.  There can be no
assurance that we will be able to continue to introduce new and innovative
products or that the products we introduce, or have introduced, will be widely
accepted by the marketplace, or that companies which we have contracted to
distribute our products will continue to achieve market penetration in the
field of neurosurgery and achieve market penetration in the dental market and
surgical disciplines and markets outside of neurosurgery.  Our failure to
continue to introduce new products or gain wide spread acceptance of our
products would adversely affect our operations.

We Depend on Attracting New Distributors for Our Products

    In order to successfully commercialize our products in new markets, we will
need to enter into distribution arrangements with companies who can distribute
our products in those fields successfully.  The commercial success of our
products outside the field of neurosurgery is thus uncertain.

Our Products are Extensively Regulated Which Could Delay Product Introduction
or Halt Sales

    The process of obtaining and maintaining required regulatory approvals is
lengthy, expensive and uncertain.  Although we have not experienced any
substantial regulatory delays to

                                      [22]
<PAGE>

date, there is no assurance that delays will not occur in the future, which
could have a significant adverse effect on our ability to introduce new
products on a timely basis.  Regulatory agencies periodically inspect our
manufacturing facilities to ascertain compliance with "good manufacturing
practices" and can subject approved products to additional testing and
surveillance programs.  Failure to comply with applicable regulatory
requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
penalties.  While we believe that we are currently in compliance, if we fail to
comply with regulatory requirements, it could have an adverse effect on our
results of operations and financial condition.

We Face Uncertainty Over Reimbursement

    Failure by physicians, hospitals and other users of our products to obtain
sufficient reimbursement from health care payors for procedures in which our
products are used or adverse changes in governmental and private third-party
payors' policies toward reimbursement for such procedures would have a material
adverse effect on our business, financial condition, results of operations and
future growth prospects.

We May Be Unable to Effectively Protect Our Intellectual Property

    Our ability to compete effectively depends in part on developing and
maintaining the proprietary aspects of our bipolar technology. We cannot assure
you that the patents we have obtained, or any patents we may obtain, will
provide any competitive advantages for our products.  We also cannot assure you
that those patents will not be successfully challenged, invalidated or
circumvented in the future.  In addition, we cannot assure you that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, have not already applied for or
obtained, or will not seek to apply for and obtain, patents that will prevent,
limit or interfere with our ability to make, use and sell our products either
in the United States or in international markets. Patent applications are
maintained in secrecy for a period after filing.  We may not be aware of all of
the patents and patent applications potentially adverse to our interests.

We May Become Subject to a Patent Litigation

    The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage.  We cannot assure you that we will not become subject
to patent infringement claims or litigation or interference proceedings
declared by the United States Patent and Trademark Office to determine the
priority of invention.


We May have Product Liability Claims

    Our products involve a risk of product liability claims.  Although we
maintain product liability insurance at coverage levels which we believe are
adequate, there is no assurance that, if we were to incur substantial liability
for product liability claims, insurance would provide adequate coverage against
such liability.

                                      [23]
<PAGE>

Our Operating Results May Fluctuate

    We have experienced operating losses at various times since our inception,
and only recently has our retained earnings reached $120,024.  Our results of
operations may fluctuate significantly from quarter to quarter based on
numerous factors including the following:

      * the introduction of new product lines;
      * the level of market acceptance of our products;
      * achievement of research and development milestones;
      * timing of the receipt of orders and product shipments;
      * timing of expenditures;
      * increased penetration in existing applications;
      * manufacturing or supply distributions;
      * product returns; and
      * receipt of necessary regulation approvals.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      Not Applicable.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    See Index to Financial Statements and Financial Statement Schedules on page
F-1 herein.  Selected quarterly financial data is set forth in Note 15 to the
Financial Statements.

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

      Not applicable.

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The information concerning directors and officers called for by Item 10 of
Form 10-K will be set forth either: (i) in our Definitive Proxy Statement for
our Annual Meeting of Stockholders, or (ii) in an amendment to this Annual
Report on Form 10-K, which in either case will be filed within 120 days after
the end of the fiscal year covered by this Annual Report on Form 10-K, and is
incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

                                      [24]
<PAGE>

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information called for by Items 11, 12 and 13 of Form 10-K will be set
forth either: (i) in our Definitive Proxy Statement for our Annual Meeting of
Stockholders, or (ii) in an amendment to this Annual Report on Form 10-K, which
in either case will be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated herein by
reference.

                                    PART IV

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

 a. and d. Financial Statements and Financial Statement Schedules.

    See Index to Financial Statements and Financial Statement Schedules on Page
F-1, herein.

 b. Reports on Form 8-K.

      None.

 c. Exhibits

    The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.

 (2) Agreement and Plan of Merger.

  (a)    Agreement and Plan of Merger between Valley Forge Scientific Corp. and
         Diversified Electronic Corporation dated August 31, 1994. (3)

 (3) Articles of Incorporation and By-Laws.

  (a) Articles of Incorporation, restated to include amendment to Articles of
      Incorporation dated August 26, 1999. (8) (Exhibit 3(a))

  (b) Second Amended and Restated By-Laws of the Company.

 (4) Instruments defining the Rights of Security Holders, including Indentures.

  (a) Form of Common Stock Certificate - (1) (Exhibit 4(a)).

                                      [25]
<PAGE>

 (10) Material Contracts.

      (a) 2001 Stock Plan (10)

      (b) 2000 Nonemployee Directors Stock Option Plan (11)

      (c) Assignment of Know-How Agreement, dated June 30, 1989 - (1) (Exhibit
          10(g)).

      (d) Assignment of Patents - Bipolar Electrosurgical Systems, June 30,
          1989 - (1) (Exhibit 10(h)).

      (e) Assignment of Patents - Binocular Magnification System, June 30, 1989
          -(1) (Exhibit 10(i)).

      (f) Assignment of Malis trade name, dated June 30, 1989 - (1) (Exhibit
          10(j)).

      (g) 401(k) and Profit-Sharing Plan - (2) (Exhibit 10(x)).

      (h) Promissory Note from Jerry L. Malis to the Company. (4) (Exhibit
          10(k))

      (i) Employment Agreement Jerry L. Malis. (4) (Exhibit 10(m))

      (j) Registration Rights Agreement between the Company and Bernard H.
          Shuman (4) (Exhibit 10(p))

      (k) Commercial Lease Agreement between GMM Associates and the Company
          dated July 1, 1995 (5) (Exhibit 10(p))

      (l) Promissory Note from Jerry L. Malis to the Company (7) (Exhibit
          10(p)).

      (m) Distribution Agreement between the Company and Codman & Shurtleff,
          Inc., dated December 11, 2000 (9) (Exhibit 10.1)

      (n) Addendum to Commercial Lease Agreement between the Company and GMM
          Associates dated as of July 1, 2000 (9) (Exhibit 10.2)

 (21) Subsidiaries of Registrant

          Subsidiaries of Valley Forge Scientific Corp. (6) (Exhibit 21)


 (23) Consent of Samuel Klein & Company
      ___________

 (1) Previously filed with the Registration Statement of the Company on Form
     S-18, Registration No. 33-31008-NY, and incorporated herein by reference.
 (2) Previously filed with the Registration Statement of the Company on Form
     S-18, Registration No. 33-35668-NY, and incorporated herein by reference.
 (3) Previously filed with the Company's Form 8-K dated August 31, 1994, and
     incorporated herein by reference.

                                      [26]
<PAGE>

 (4) Previously filed with the Company's Form 10-K for the year ended September
     30, 1994, and incorporated herein by reference.
 (5) Previously filed with the Company's Form 10-K for the year ended September
    30, 1995, and incorporated herein by reference.
 (6) Previously filed with the Company's Form 10-K for the year ended September
     30, 1997, and incorporated herein by reference.
 (7) Previously filed with the Company's Form 10-K for the year ended September
     30, 1998 and incorporated herein by reference.
 (8) Previously filed with the Company's Form 10-K for the year ended September
     30, 1999 and incorporated herein by reference.
 (9) Previously filed with the Company's form 10-Q for the quarter ended
     December 31, 2000, and incorporated herein by reference.
(10) Previously filed with the Registration Statement of the Company on Form
     S-8 Registration No.333-72296, filed on October 26, 2001 and incorporated
     herein by reference
(11) Previously filed with the Registration Statement of the Company on Form
     S-8 Registration No.333-72134, filed on October 24, 2001 and incorporated
     herein by reference.

                                      [27]
<PAGE>

                                   SIGNATURES

    Pursuant to the requirements of the 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 on this 20th day of
December, 2001

                                        VALLEY FORGE SCIENTIFIC CORP.


                                        By:  /s/ Jerry L. Malis
                                             Jerry L. Malis, President

    Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.


     Signature                      Title                           Date


/s/ Jerry L. Malis          Chairman of the Board,           December 20, 2001
 Jerry L. Malis             President (chief executive
                            officer and principal
                            financial and accounting
                            officer)

/s/ Louis Uchitel           Director                         December 20, 2001
Louis Uchitel

/s/ Leonard I. Malis        Director                         December 20, 2001
Leonard I. Malis

/s/ Bruce A. Murray         Director                         December 20, 2001
Bruce A. Murray


/s/ Robert H. Dick          Director                         December 20, 2001
Robert H. Dick

                                      [28]
<PAGE>

                         VALLEY FORGE SCIENTIFIC CORP.
                    For Fiscal Year Ended September 30, 2001
                                   FORM 10-K
        Index to Financial Statements and Financial Statement Schedules


Independent Auditor's Report                                          F-2

Balance Sheets - September 30, 2001 and 2000                          F-3

Statements of Operations -
      Years Ended September 30, 2001, 2000 and 1999                   F-4

Statements of Stockholders' Equity -
      Years ended September 30, 2001, 2000 and 1999                   F-5

Statements of Cash Flows -
      Years ended September 30, 2001, 2000 and 1999                   F-6

Notes to Financial Statements                                         F-7
___________________

    All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.

                                     [F-1]
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors and Stockholders
Valley Forge Scientific Corp. and Subsidiaries
Oaks, Pennsylvania

We have audited the accompanying consolidated balance sheets of Valley Forge
Scientific Corp. and Subsidiaries as of September 30, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2001.
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 auditing standards generally
accepted in the United States of America.  Those standards require that we plan
and perform the audits 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 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 presents fairly, in
all material respects, the financial position of Valley Forge Scientific Corp.
and Subsidiaries as of September 30, 2001 and 2000, and the results of
operations and cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States of America.




                                     /s/ Samuel Klein and Company

                                       SAMUEL KLEIN AND COMPANY


Newark, New Jersey
December 4, 2001


                                     [F-2]
<PAGE>
                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS



                                                      September 30,
ASSETS                                            2001                2000
------                                            ----                ----
Current Assets:
  Cash and cash equivalents                    $ 1,500,622        $   965,240
  Accounts receivable, net                         605,150            627,255
  Inventory                                      1,199,536          1,177,847
  Prepaid items and other current assets           107,304            114,042
  Deferred tax assets                              104,380            209,314
                                                 ---------          --------
          Total Current Assets                   3,516,992          3,093,698

Property, Plant and Equipment, net                 145,800            168,535
Intangible Assets, net of accumulated
 amortization                                      502,976            582,200
Other Assets                                         5,446              7,646
                                                 ---------          ---------
          Total Assets                         $ 4,171,214        $ 3,852,079
                                                 =========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current Liabilities:
  Accounts payable and accrued expenses        $   191,786        $   182,185
  Income taxes payable                              91,400                  -
                                                   -------            -------
          Total Current Liabilities                283,186            182,185

Deferred Tax Liability                              19,280             20,661
                                                    ------            -------
          Total Liabilities                        302,466            202,846
                                                   -------            -------
Commitments and Contingencies

Stockholders' Equity:
  Preferred stock                                         -                 -
  Common stock (no par, 20,000,000 shares
    authorized, shares issued and outstanding
    at September 30, 2001 - 8,067,812 and at
    September 30, 2000 - 8,151,862)              3,748,724          3,859,430
  Retained earnings (deficit)                      120,024           (210,197)
                                                 ---------          ---------
                                                 3,868,748          3,649,233
                                                 ---------         ----------
          Total Liabilities
           and Stockholders' Equity            $ 4,171,214        $ 3,852,079
                                                 =========          =========

____________________

The accompanying notes are an integral part of these financial statements.
                                     [F-3]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS


                                         For the Years Ended September 30,
                                           2001         2000        1999
                                           ----         ----        ----
Net Sales                                $ 5,263,485  $ 4,397,939  $ 3,721,528

Cost of Sales                              2,692,036    2,443,406    2,064,586
                                           ---------    ---------    ---------
Gross Profit                               2,571,449    1,954,533    1,656,942
                                           ---------    ---------    ---------
Other Costs:
 Selling, general and administrative       1,652,289    1,646,438    1,462,926
 Research and development                    352,773      338,318      301,078
 Amortization                                 80,641       80,594       90,748
                                           ---------    ---------     --------
         Total Other Costs                 2,085,703    2,065,350    1,854,752
                                           ---------    ---------    ---------
Income (Loss) from Operations                485,746     (110,817)    (197,810)

Other Income:
 Interest income                              39,428       38,243       35,348
                                            --------      -------      -------
Income (Loss) before Income Taxes            525,174      (72,574)    (162,462)

Provision for (Benefit of) Income Taxes      194,953      (18,262)     (37,489)
                                             -------       ------       ------
Net Income (Loss)                        $   330,221  $   (54,312) $  (124,973)
                                             =======      =======      =======

Income (Loss) per Share:
 Basic income (loss) per common share    $      0.04  $     (0.01) $     (0.02)
                                                ====         ====         ====
 Diluted income (loss) per common share  $      0.04  $     (0.01) $     (0.02)
                                                ====         ====         ====
 Basic common shares outstanding           8,081,890    8,193,034    8,229,505

 Diluted common shares outstanding         8,152,946    8,193,034    8,229,505

 ____________________

The accompanying notes are an integral part of these financial statements.

                                     [F-4]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

             FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999



                                  Common Stock
                                  No Par Value
                               Number       Common      Retained    Total
                               of           Stock       Earnings    Stockholders
                               Shares       Amount     (Deficit)    Equity
                               ---------    ---------   ---------   -----------
Balances, September 30, 1998   8,229,384   $4,055,558   $ (30,912)   $4,024,646

Purchases and Retirement of
  Common Shares                  (17,200)     (60,706)          -       (60,706)

Exercise of Employee Stock
  Options                          5,125       11,973           -        11,973

Net Loss for the Year Ended
  September 30, 1999                   -            -    (124,973)     (124,973)
                               ---------   ----------     -------      --------
Balances, September 30, 1999   8,217,309    4,006,825    (155,885)    3,850,940

Purchases and Retirement of
  Common Shares                  (65,447)    (147,395)          -      (147,395)

Net Loss for the Year Ended
  September 30, 2000                   -            -     (54,312)      (54,312)
                               ---------    ---------     -------     ---------
Balances, September 30, 2000   8,151,862    3,859,430    (210,197)    3,649,233

Purchases and Retirement of
  Common Shares                  (84,050)    (110,706)          -      (110,706)

Net Income for the Year Ended
  September 30, 2001                   -            -     330,221       330,221
                               ---------    ---------     -------      --------
Balances, September 30, 2001   8,067,812   $3,748,724   $ 120,024    $3,868,748
                               =========    =========     =======      ========
____________________

The accompanying notes are an integral part of these financial statements.

                                     [F-5]
<PAGE>
                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS


                                       For the Years Ended September 30,
                                         2001         2000        1999
                                         ----         ----        ----
Cash Flows from Operating Activities:
 Net income (loss)                       $  330,221   $  (54,312)  $ (124,973)
 Adjustments to reconcile
  net income (loss) to net
  cash provided by (used in)
  operating activities:
   Depreciation and amortization            118,601      118,980      133,767
   Allowance for loans and
    advances to employee                     48,384            -            -
   Interest accrued on loans and
    advances to employees                    (4,737)      (3,732)      (4,296)

Changes in assets and liabilities,
 net of effect from:
  (Increase) decrease in accounts
   receivable, net                           22,105      (86,799)     370,702
 (Increase) decrease in inventory           (21,689)      (7,338)      34,471
  Decrease in recoverable
   income taxes                                   -            -        4,636
 (Increase) decrease in deferred
  tax assets                                104,934      (16,279)     (40,052)
  (Increase) decrease in other assets         2,200       (2,834)        (340)

  (Increase) in prepaid items
   and other current assets                 (20,649)         (13)      (5,540)
  Increase in accounts payable
   and accrued expenses and
   income taxes payable                     101,001       15,567        5,498
  Increase (decrease) in deferred
   tax liability                             (1,381)       3,776       (1,560)
                                            -------      -------       ------
  Net cash provided by (used in)
   operating activities                     678,990      (32,984)     372,313
                                            -------       ------     -------
Cash Flows from Investing Activities:
 Proceeds from repayment of employee
  loans                                       6,150        3,575          600
 Loans and advances to employees            (22,410)     (14,940)     (20,700)
 Acquisition of intangible assets            (1,416)           -            -
 Purchase of property, plant
 and equipment                              (15,226)      (1,478)     (18,775)
                                            -------      -------      -------
  Net cash used in investing
   activities                               (32,902)     (12,843)     (38,875)
                                            -------      -------      -------
Cash Flows from Financing Activities:
 Proceeds from exercise of employee
  stock options                                   -            -       11,973
 Repurchase of common stock                (110,706)    (147,395)     (60,706)
                                            -------      -------       ------
  Net cash used in financing
   activities                              (110,706)    (147,395)     (48,733)
                                            -------      -------      -------
Net Increase (Decrease)
 in Cash and Cash
  Equivalents                               535,382     (193,222)     284,705

Cash and Cash Equivalents,
 beginning of year                          965,240    1,158,462      873,757
                                            -------    ---------      -------
Cash and Cash Equivalents,
 end of year                             $1,500,622   $  965,240   $1,158,462
                                          =========      =======    =========

Supplemental Disclosures
of Cash  Flow Information:
 Cash paid during the year for:
  Interest                               $        -   $        -   $        -
                                          =========    =========     ========
  Income taxes                           $    1,500   $    2,500   $        -
                                          =========    =========     ========
____________________

The accompanying notes are an integral part of these financial statements.
                                     [F-6]
<PAGE>


                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Valley Forge Scientific Corp. ("VFSC") was incorporated on March 27, 1980 in
the Commonwealth of Pennsylvania and is engaged in the business of developing,
manufacturing and selling medical devices and products.  On August 18, 1994,
VFSC formed a wholly-owned subsidiary, Diversified Electronics Company, Inc.
("DEC"), a Pennsylvania corporation, in order to continue the operations of
Diversified Electronic Corporation, a company which was merged with and into
VFSC on August 31, 1994.  In January 1993, VFSC formed a wholly-owned
subsidiary, Valley Consumer Products, Inc. ("VCP") to market specific product
lines.  During each of the years reported with these financial statements VCP
has been inactive.  Collectively, VFSC, DEC and VCP are referred to herein as
the "Company".

Principles of Consolidation and Basis of Presentation

The accompanying financial statements consolidate the accounts of the parent
company and its wholly-owned subsidiaries.  All significant intercompany
accounts and transactions have been eliminated in consolidation.

Use of Management's Estimates

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

Cash and Cash Equivalents

The Company considers cash equivalents to be all highly liquid investments with
original maturities of three months or less.  Substantially all cash and cash
equivalents are custodied with one major financial institution.

Segment Information

The Company has one operating segment that comprises its bipolar electrical
generators and instrumentation products.  The Company's business is conducted
entirely in the United States.  Significant customers are discussed elsewhere
in Note 10.

Fair Value of Financial Instruments

Carrying amounts of certain of the Company's financial instruments, including
cash and cash equivalents, trade receivables, accounts payable and other
accrued liabilities, approximate fair value because of their short maturities.

Revenue Recognition

The Company sells its products to national and international distributors which
include affiliates of major medical products companies.  A significant part of
the Company's sales are made pursuant to distribution agreements with these
Companies which typically provide exclusive distribution rights of specified
products in a defined medical field, within a territory or territories, during
the term of such agreements.  The agreements typically include a price list for
the specified product or products which is fixed for a period of time, after
which these prices are subject to adjustment by the Company due to changes in
manufacturing cost or technological improvements to the products.

                                     [F-7]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

Product revenue is recognized when the product has been shipped which is when
the title and risk of loss has been transferred to the customer.  Service
revenue substantially relates to repairs of product and is recognized when the
service has been completed.  Revenues from license and royalty fees are
recorded when earned.

The Company reduces revenue for customer returns and allowances.  In addition,
the Company accrues for warranty cost and other allowances based on its
experience and reflects these accruals in cost of sales or administrative
expense as applicable.

The Company adopted Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" (SAB 101) in the first quarter of fiscal year ended
September 30, 2001.  The adoption of SAB 101 did not have a material impact on
the Company's operating results or financial position.

Inventory

Inventory is stated at the lower of cost, determined by the moving average cost
method, or market.  The Company provides inventory allowances based on
slow-moving and obsolete inventories.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost.  Depreciation is computed
by the straight-line method over the estimated useful lives of the assets,
which vary from three to thirty-nine years.  Leasehold improvements are being
amortized over the related lease term or estimated useful lives, whichever is
shorter.

Upon retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the gains or losses
are reflected in the results of operations.  Routine maintenance and repairs
are charged to expense as incurred.

Intangible Assets

Intangible assets, consisting of patents, licensing agreements, proprietary
know-how, cost of acquisition and goodwill are amortized to operations under
the straight-line method over their estimated useful lives or statutory lives,
whichever is shorter.  Goodwill resulting from business acquisitions represents
the excess of the purchase price paid over the fair market value of net assets
acquired and is being amortized over 20 years.  Acquisition costs have been
capitalized and are being amortized over 5 years, all other intangible assets
are being amortized over periods ranging from 15 to 17 years.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142).  SFAS 142 requires goodwill to be tested for impairment under
certain circumstances, and written off when impaired, rather than being
amortized as previous standards required.  The Company is currently assessing
the impact of SFAS 142 on its operating results and financial condition.

                                     [F-8]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of an impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based
on the fair value of the asset.  Long-lived assets and certain identifiable
intangible assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell.

Research and Development

Costs associated with development of new products are charged to operations as
incurred.

Advertising Costs

Advertising expenditures relating to the advertising and marketing of the
Company's products and services are expensed in the period the advertising
costs are incurred.  Substantially all cost of such product marketing and
advertising has been borne by the Company's major distributors.

Income Taxes

Tax provisions and credits are recorded at enacted tax rates for taxable items
included in the consolidated statements of operations regardless of the period
for which such items are reported for tax purposes.  Deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.  Deferred
tax assets are reduced by a valuation allowance when the determination can be
made that it is more likely than not that some portion or all of the related
tax assets will not be realized.

Comprehensive Income

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" (SFAS
130).  This statement establishes rules for the reporting of comprehensive
income and its components which require that certain items such as foreign
currency translation adjustments, unrealized gains and losses on certain
investments in debt and equity securities, minimum pension liability
adjustments and unearned compensation expense related to stock issuances to
employees be presented as separate components of stockholders' equity.  The
adoption of SFAS 130 had no impact on total shareholders' equity for any of the
years presented in these financial statements.

                                     [F-9]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) per Share

The Company computes earnings or loss per share in accordance with the
Financial Accounting Standards Board Statement No. 128 "Earnings Per Share"
(SFAS 128) which replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share.  Unlike primary earnings
per share, basic earnings per share excludes the dilutive effects of options,
warrants and convertible securities and thus is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding.  Diluted earnings per share is similar to the previously
fully diluted earnings per share.  Diluted earnings per share reflects the
potential dilution that could occur if securities or other agreements to issue
common stock were exercised or converted into common stock.  Diluted earnings
per share is computed based upon the weighted average number of common shares
and dilutive common equivalent shares outstanding.

Accounting for Stock-Based Compensation

The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation".  As permitted under SFAS 123, the Company has continued to apply
accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25).
Under APB 25, compensation expense is determined on the measurement date, that
is, the first date on which both the number of shares the employee is entitled
to receive and the exercise price, if any, are known.  Compensation expense, if
any, is the excess of the market price of the stock over the exercise price on
the measurement date.  The amount of compensation expense, if any, is charged
to operations over the vesting period.

In accounting for options granted to persons other than employees (as defined
under SFAS 123), the provisions under SFAS 123 were applied.  As required by
SFAS 123, the fair value of these options was estimated at the grant date using
the Black-Scholes option pricing model.

Recent Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (SFAS 141) and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).  SFAS 141
requires all business combinations to be accounted for using the purchase
method of accounting and is effective for all business combinations initiated
after June 30, 2001.  SFAS 142 requires goodwill to be tested for impairment
under certain circumstances, and written off when impaired, rather than being
amortized as previous standards required.  SFAS 142 is effective for fiscal
years beginning after December 15, 2001.  Early application is permitted for
entities with fiscal years beginning after March 15, 2001 provided that the
first interim period financial statements have not been previously issued.  The
adoption of SFAS 141 had no effect on the Company's operating results or
financial condition.  The Company is currently assessing the impact of SFAS 142
on its operating results and financial condition.

Reclassifications

Certain reclassifications have been made to the prior year balances to conform
to the current year's presentation.

                                     [F-10]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

2.  ACCOUNTS RECEIVABLE

The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts.  The Company's estimate is based on historical
collection experience and a review of the current status of trade accounts
receivable.  It is reasonably possible that the company's estimate of the
allowance for doubtful accounts will change.  Accounts receivable consists of
the following:

                                                    September 30,
                                                  2001               2000
                                                  ----               ----
   Accounts receivable                        $  637,066         $  652,255
   Less: Allowances                               31,916             25,000
                                                 -------            -------
                                              $  605,150         $  627,255
                                                 =======            =======
3.  INVENTORY

The Company provides an allowance for slow moving and potentially obsolete
inventories.  Inventory consists of the following, net of these allowances:

                                                    September 30,
                                                  2001               2000
                                                  ----               ----
    Finished goods                            $   78,083         $   11,751
    Work-in-process                              464,533            638,343
    Materials and parts                          656,920            527,753
                                                 -------            -------
                                              $1,199,536         $1,177,847
                                               =========           =========
                                     [F-11]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

4.  PROPERTY, PLANT AND EQUIPMENT

                        Useful Life                 September 30,
                         (Years)              2001               2000
                        -----------           ----               ----
    Land                   -                  $   11,953         $    11,953
    Building &
     improvements        15-39                    91,917              86,917
    Furniture &
     fixtures             5- 7                    16,669              16,669
    Laboratory
     equipment            5-10                   360,644             359,119
    Office
     equipment               5                   136,578             127,877
    Leasehold
     improvements         3- 5                     9,413               9,413
                                                 -------             -------
                                                 627,174             611,948
    Less: Accumulated
     depreciation and
     amortization                                481,374             443,413
                                                 -------             -------
                                              $  145,800         $   168,535
                                                 =======             =======

Depreciation is reflected in both cost of sales and selling, general and
administrative expenses.  Total depreciation for the years ended September 30,
2001, 2000 and 1999 was $37,961, $38,386 and $43,019, respectively.

On November 6, 2001, the Company entered into an agreement to sell the building
in which it conducts its manufacturing operations for an amount of $117,500.
The agreement is subject to certain contingencies. The Company continues to
operate from this facility and therefore continues to recognize depreciation
expense.  The Company is evaluating other facilities in which to conduct their
manufacturing operations, including potential long-term leasing opportunities.

5.  INTANGIBLE ASSETS

Intangible assets consist of the following:

                        Useful Life                 September 30,
                         (Years)                 2001                2000
                        -----------              ----                ----
 Patents/trademarks/
  licensing agreements      17                $  560,388         $   558,972
 Proprietary know-how       15                   452,354             452,354
 Acquisition costs           5                    55,969              55,969
 Excess of purchase over
  net assets acquired in
  connection with an
  acquisition               20                   351,123             351,123
                                                 -------             -------
                                               1,419,834           1,418,418
 Less: Accumulated
  amortization                                   916,858             836,218
                                               ---------           ---------
                                              $  502,976         $   582,200
                                                 =======             =======
Total amortization for the years ended September 30, 2001, 2000 and 1999 was
$80,640, $80,594 and $90,748, respectively.

                                     [F-12]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

6.  OTHER RECEIVABLES

The Company from time to time has made advances and loans to certain employees.
These loans and advances are unsecured, payable on demand and have stated
interest rates ranging from 4.57% to 8.20%, the then current "Applicable
Federal Rate" as set forth under the Internal Revenue Code as of each date of
advance or loan.  During the fourth quarter of fiscal year ending September 30,
2001, as a result of the termination subsequent to year end of an employee from
whom approximately $49,500 remained outstanding, the Company recorded an
allowance of approximately $48,400 against the amount owed by this individual.

As of September 30, 2001 and 2000, the balance of these loans net of the
allowances was approximately $6,700 and $32,300, respectively, and is reflected
on the balance sheet under the caption "prepaid expenses and other current
assets".

7.  RELATED PARTY TRANSACTIONS

Loans Receivable

On July 6, 1998, Jerry L. Malis, a principal shareholder, director and officer
of the Company, borrowed $15,015 from the Company.  The note is payable on
demand and has a stated rate of interest of 5.42%, the then current "Applicable
Federal Rate" as set forth under the Internal Revenue Code.  The Company has
additional loans due from Jerry L. Malis payable on demand with similar
interest terms as stated above ranging from 4.83% to 6.97%.  The collective
loans, which total $50,819 as of September 30, 2001, are partially secured by
5,833 shares of common stock of the Company.  As of September 30, 2001 and
2000, the pledged stock had a value of approximately $17,000.

On July 7, 1999, Bernard H. Shuman, a principal shareholder, director and
officer of the Company, borrowed $12,000 from the Company.  The note is payable
on demand and has a stated rate of interest of 5.32%, the then current
"Applicable Federal Rate" as set forth under the Internal Revenue Code.  On
December 17, 1999 the principal balance plus accrued interest was paid in full.

The balance of these loans is reflected on the balance sheet under the caption
"prepaid expenses and other current assets" and as of September 30, 2001 and
2000, was $50,819 and $48,167, respectively, including accrued interest of
$12,984 and $10,332, respectively.

Consulting Services

During 1999, 2000 and 2001 the Company engaged R.H. Dick and Company, Inc., a
corporation owned by Robert H. Dick, a director of the Company, to provide
certain investment banking and consulting services.  For the years ended
September 30, 2001, 2000 and 1999 the Company incurred consulting expenses from
these services in an amount totaling $17,500, $5,594 and $5,000, respectively.
As of September 30, 2001 and 2000 the Company owed R.H. Dick and Company $5,187
and $  -  , respectively.  The liability is reflected on the balance sheet
under the caption "accounts payable and accrued expenses".

                                     [F-13]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

8.  LINE OF CREDIT

The Company has a line of credit of $1,000,000 with First Union National Bank
which calls for interest to be charged equal to the bank's national commercial
rate.  The line is unsecured and any borrowing under the line would be payable
on demand, require monthly interest payments on any unpaid principal and a
reduction of any loan balance to zero for a minimum of thirty consecutive days
during each twelve month period.  In addition, the loan covenant calls for a
minimum tangible net worth of no less than $3,000,000 during the term of the
extended line of credit.  At September 30, 2001 and 2000 there were no
outstanding balances on this line.

9.  COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject from time to time to litigation arising from the normal
course of business.  In management's opinion, any such contingencies would be
covered under its existing insurance policies or would not materially affect
the Company's financial position or results of operations.

On July 25, 2001 the Company was named as a defendant in a lawsuit filed in the
United States District Court for the Eastern District of Pennsylvania by a
former employee alleging gender discrimination and sexual harassment.  The
plaintiff seeks an amount in excess of $150,000.  The Company believes the
claim is without merit and intends to vigorously defend itself against this
plaintiff.  The claim is in the preliminary state of discovery.

Regulatory Compliance

The Company is subject to regulatory requirements throughout the world.  In the
normal course of business, these regulatory agencies may require companies in
the medical industry to change their products or operating procedures, which
could affect the Company.  The Company regularly incurs expenses to comply with
these regulations and may be required to incur additional expenses.  Management
is not able to estimate any additional expenditures outside the normal course
of operations which will be incurred by the Company in future periods in order
to comply with these regulations.

                                     [F-14]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Employment Agreements

Effective July 1, 1994, the Company entered into employment agreements with
Jerry L. Malis and Thomas J. Gilloway, for terms of 63 months expiring
September 30, 1999.  The agreements provided for annual base salaries to Mr.
Malis and Mr. Gilloway of $148,720 and $126,940, respectively, with annual base
salary increases at 10% commencing October 1, 1994.  In addition, the
agreements provide that Messrs. Malis and Gilloway may each receive such other
cash and stock bonuses and benefits as may be determined from time to time by
the Board of Directors.  On September 30, 1999, the Company amended the
employment agreements with Messrs. Malis and Gilloway, to extend the terms for
an additional year effective October 1, 1999.  Under the extended terms, the
agreements provided for an annual base salary of $198,950 for Jerry L. Malis
and $90,000 for Thomas J. Gilloway.  Although the agreement for Messrs. Malis
and Gilloway have not been further extended, the Company continues to provide
compensation to them at the annual rate of $198,950 and $90,000, respectively.
For the year ending September 30, 1999 the officers waived their right to the
10% increase of base salary provided for under the agreement.  The base
salaries for the years ended September 30, 2001, 2000 and 1999 were
approximately $199,000, $199,000 and $188,000 for Jerry L. Malis and
approximately $69,000, $91,000 and $100,000 for Thomas J. Gilloway,
respectively.  The reduction of Mr. Gilloway's base salary for the years ended
September 30, 1999 and 2000 was due to the reduction of services to part-time
effective January 1, 1999.  Mr. Gilloway passed away on February 18, 2001 and
the Company continued to pay a salary to his spouse until June 29, 2001.  The
amount reflected as paid to him for the year ended September 30, 2001 includes
the amount paid to his spouse subsequent to his death.

On August 31, 1994, pursuant to the merger agreement with Diversified, the
Company entered into an employment agreement with Bernard H. Shuman, the former
President of Diversified and a then current Vice President of the Company, for
a term of 59 months commencing September 1, 1994.  The agreement provided for a
salary of $50,000 per annum through July 31, 1995 and thereafter at $105,000
per annum through July 31, 1999.  In addition, the agreement provided that Mr.
Shuman may receive such other compensation and benefits as the Board of
Directors of the Company may decide.  The employment agreement may be
terminated for cause.  Although the agreement was not extended, the Company
continued to provide compensation at an annual base of $105,000.  Effective
June 30, 2001 Bernard H. Shuman retired from the Company.  The Company has
agreed to provide certain employee benefits, including health insurance
coverage, for a period of three years.  The base salary for Bernard H. Shuman
for the year ended September 30, 2001 was approximately $78,750 and for each of
the years ended September 30, 2000 and 1999 was approximately $105,000.

401(k) Plan and Profit Sharing

The Company's 401(k) Plan and Profit Sharing Plan cover full-time employees who
have attained the age of 21 and have completed at least one year of service
with the Company.  Under the 401(k) Plan, an employee may contribute an amount
up to 25% of his compensation to the 401(k) Plan on a pretax basis not to
exceed the current Federal limitation of $10,500 per year (as adjusted for cost
of living increase).  Amounts contributed to the 401(k) Plan are
nonforfeitable.

Under the Profit Sharing Plan, a member in the plan participates in the
Company's contributions to the Plan as of December 31 in any year, with
allocations to individual accounts based on annual compensation.  An employee
does not fully vest in the plan until completion of three years of employment.
The Board of Directors determines the Company's contributions to the plan on a
discretionary basis.  The Company has not made any contributions to date.

                                     [F-15]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plans

On July 6, 1988, the Company adopted a Nonqualified Employee Stock Option Plan
(the 1988 "Plan") pursuant to which 500,000 shares of Common Stock have been
reserved for issuance to employees, officers, directors or consultants of the
Company.  Options granted pursuant to this plan were nontransferable and
expired if not exercised after ten years from the date of grant or for such
lesser term as approved by the Board of Directors.  Options may be granted in
such amounts and at such prices as determined by the Board of Directors, but
the price per share shall not be less than the fair market value of the
Company's Common Stock as of the date of grant.

On January 16, 2001, pursuant to the adoption of the 2001 Stock Plan (the "2001
Plan") the 1988 plan was terminated.  As of the date the plan was terminated, a
total of 404,800 options pursuant to the plan were granted and outstanding.

On December 12, 2000, the Company adopted a Non-employee Directors Stock Option
Plan ("Directors Plan") pursuant to which 150,000 shares of Common Stock have
been reserved for issuance to non-employee directors of the Company.  The
Directors Plan was approved by the Company's stockholders on March 14, 2001.
Shares issued pursuant to options granted under this plan may be issued from
shares held in the Company's treasury or from authorized and unissued shares.
Under this plan, each Director, on an annual basis, shall be automatically
granted 10,000 options upon the first business day after being elected a
director. The options are immediately vested on the date of grant.
Discretionary options granted pursuant to this plan shall be determined by the
Board of Directors or a duly appointed stock option committee (the
"Committee").  Options granted pursuant to this plan shall be nonqualified
stock options as defined in Section 422 of the Internal Revenue Code, will be
nontransferable and expire if not exercised after ten years from the date of
grant or for such lesser term as approved by the Committee.  All Options shall
be issued at a price per share equal to the fair market value of the Company's
Common Stock as of the date of grant.

On January 16, 2001, the Company adopted the 2001 Stock Plan (the "2001 Plan")
pursuant to which 345,000 shares of Common Stock have been reserved for
issuance to employees, officers and consultants of the Company.  The 2001 plan
was approved by the Company's stockholders on March 14, 2001.  Shares issued
pursuant to this plan may be issued from shares held in the Company's treasury
or from authorized and unissued shares.  Options granted pursuant to this plan
will be nontransferable, except in the event of a participant's death, to which
the options shall be transferable to the participant's designated beneficiary
or as permitted by law.  The options shall expire if not exercised after ten
years from the date of grant or for such lesser term as approved by the Board
of Directors or a duly appointed committee.  Options issued to employees who
are then later terminated for cause shall immediately be forfeited.  Options
may be granted in such amounts and at such prices as determined by the Board of
Directors or the duly appointed committee, but the price per share shall not be
less than the fair market value of the Company's Common Stock as of the date of
grant in the case of an incentive stock option and not less than 85% of the
fair market value of the Company's Common Stock as of the date of grant in the
case of a Non-qualified stock option, as defined in section 422 of the Internal
Revenue Code.

As referred to in Note 1, the Company has adopted the disclosure provisions of
SFAS 123, "Accounting for Stock Based Compensation".  As permitted under this
statement, the Company retained its current method of accounting for stock
compensation in accordance with APB 25.

                                     [F-16]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plans (Continued)

Following is a summary of the Company's various stock option plans:

                                                             Weighted
                                               Exercise      Average   Remaining
                                               Price         Exercise  Life
                                     Shares    Per Share     Price    (Years)
                                     ------    ---------     -------   -------
Options outstanding
 October 1, 1998                     396,900   $1.56-$5.13   $2.56     4.61

Granted                                4,000    3.75          3.75     9.08
Exercised                             (5,125)   2.13- 2.50    2.34        -
Surrendered, forfeited or
 expired                              (3,100)   4.12- 5.13    4.49        -
                                     -------    ----------    ----     ----
Options outstanding at
 September 30, 1999                  392,675    1.56- 5.13    2.56     3.72

Granted                                    -             -       -        -
Exercised                                  -             -       -        -
Surrendered, forfeited or
 expired                            (104,600)   1.56- 5.13    1.66        -
                                     -------     ---------     ----    ----
Options outstanding at
 September 30, 2000                  288,075    1.94- 4.25    2.88     3.68

Granted                              347,000    1.13- 2.75    2.01     9.38
Exercised                                  -             -       -        -
Surrendered, forfeited or
 expired                            (152,000)   1.94- 3.63    2.76     1.92
                                     -------    ----------    ----     ----
Options outstanding at
 September 30, 2001                  483,075   $1.13-$4.25   $2.29     7.39
                                     =======    ==========    ====     ====

                                     [F-17]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plans (Continued)

Pro forma information regarding net income and earnings per share is required
by FASB 123 and has been determined as if the Company had accounted for the
employee stock options under the fair value method of that statement.  The fair
value for options granted during the years ended September 30, 2001, 2000 and
1999 was estimated at each date of grant.  The fair value of these options was
estimated using a Black-Scholes option valuation model with the following range
of weighted average assumptions:

                                               For the Years Ended
                                                   September 30,
                                      2001            2000            1999
                                      ----            ----            ----
Risk-free interest (based
 on U.S. Government strip
 bonds on the date of grant
 with maturities approximating
 the expected option term)            4.86% -  5.29%    -               5.28%

Dividend yields                       0%               -                   0%

Volatility factors of the
 expected market price of the
 Company's Comon Stock (based
on historical data)                   90.0% - 96.0%     -              65.6%

Expected life of options              10 years          -              10 Years

The weighted average fair value of options granted during the years ended
September 30, 2001, 2000 and 1999 were as follows:

Stock Prices Equal to
 Exercise Price                       $1.77       $   -            $2.90

Stock Prices in Excess
 of Exercise Price                    $   -       $   -            $   -

Stock Prices Less than
 Exercise Price                       $2.10       $   -            $   -

                                     [F-18]
<PAGE>

                VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plan  (Continued)

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimated, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.  In management's opinion
existing stock option valuation models do not provide a reliable single measure
of the fair value of employee stock options that have vesting provisions and
are not transferable.  In addition, option pricing models require the input of
highly subjective assumptions, including expected stock price volatility.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  In accordance with
SFAS 123, only stock options granted after September 30, 1995 have been
included for the Company's pro forma information as follows:

Additional compensation expense,
 net of tax effect                     $ 56,328     $      -    $   6,892
Pro forma net income (loss)            $273,893     $(54,312)   $(131,865)

Pro forma income (loss) per share:
 Basic                                 $   0.03     $  (0.01)   $   (0.02)
 Diluted                               $   0.03     $  (0.01)   $   (0.02)

Operating Leases

The Company leases approximately 4,200 square feet of office and warehouse
space in an office building in Oaks, Pennsylvania, from GMM Associates, a
Pennsylvania general partnership, whose partners are Jerry L. Malis, Thomas J.
Gilloway (deceased as of February 18, 2001) and Leonard I. Malis, principal
shareholders, directors and/or officers of the Company.  The lease which
commenced on July 1, 1995 for a term of five years provided for a monthly base
rent of $4,716 (with increases based on increases in the consumer price index)
which include costs associated with real estate taxes, maintenance and
utilities.  During December 2000 the lease was extended for an additional term
of five years effective as of July 1, 2000 and calls for a monthly base rent of
$4,643 (with increases on June 30th of each year based on increases in the
Producer Price Index).  All other terms remain the same.  The related expense
for this lease for the years ended September 30, 2001, 2000 and 1999 was
$56,115, $56,376 and $55,707, respectively.  As of September 30, 2001, the
Company was current on all rental obligations due the related party.

The Company has also entered into leases for certain equipment under operating
lease agreements with terms ranging between two and three years.

                                     [F-19]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

9.  COMMITMENTS AND CONTINGENCIES (Continued)

Operating Leases (Continued)

A schedule of future minimum payments under operating leases is as follows:

Year ending September 30,
                                       Related            Other
                                       Party              Operating
                                       ---------          ---------
     2002                              $  55,716          $  22,645
     2003                                 55,716             16,967
     2004                                 55,716              1,360
     2005                                 41,787                  -
                                        --------            -------
                                       $ 208,935          $  40,972
                                         =======             ======

10.  MAJOR CUSTOMERS

For the years ended September 30, 2001, 2000 and 1999, a significant part of
the Company's revenues were derived from one major customer pursuant to
distribution agreements under which the Company granted the exclusive right to
sell its electrosurgical systems and other products developed by the Company in
the field of neurosurgery.  Revenues derived from this customer are
approximately as follows:

                                                          Percent of
                                                          Total
                                       Revenues           Revenues
                                       --------           --------
     Year ended September 30, 2001     $ 4,169,000        79%

     Year ended September 30, 2000     $ 3,696,000        84%

     Year ended September 30, 1999     $ 3,577,000        96%

In addition, for the year ended September 30, 2001, revenue derived from
another customer totaled approximately $1,009,000 representing approximately
19% of the Company's total revenue.

At September 30, 2001 and 2000, these two customers accounted for approximately
98% and 84%, respectively, of the Company's accounts receivable.

                                     [F-20]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

11.  STOCKHOLDERS' EQUITY

Common Stock

On August 26, 1999, the Company filed an amended and restated Certificate of
Incorporation increasing the shares of Common Stock the Company is authorized
to issue from 10,000,000 to 20,000,000 shares with no stated par value.

The holders of Common Stock have no preemptive rights and the Common stock has
no redemption, sinking fund or conversion provisions.  Each share of Common
Stock is entitled to one vote on any matter submitted to the holders and to
equal rights in the assets of the Company upon liquidation.  All of the
outstanding shares of Common Stock are fully paid and nonassessable.

On May 9, 1999, the Board of Directors of the Company approved a stock
repurchase program superceding a prior program whereby the Company may, from
time to time, repurchase on the open market up to 200,000 shares of the
Corporation's Common Stock.  In April 2000, the Company announced the
continuation of the stock repurchase plan.  During the fiscal years ended
September 30, 2001, 2000 and 1999, the Company repurchased for retirement
84,050, 65,447 and 17,200 shares at an aggregate cost of $110,706, $147,395 and
$60,706, respectively.

Preferred Stock

The Company is authorized to issue 487 shares of preferred stock, $1,000 par
value.  The holders of the preferred stock would have no voting rights or
preemptive rights.  Upon liquidation of the Company, a $1,000 per share
liquidating dividend must be paid upon each issued and outstanding share of
preferred stock before any liquidating dividend is paid on the Common Stock.
For each of the years September 30, 2001, 2000 and 1999, there were no issued
or outstanding preferred shares, and the Company has no intention to issue any
preferred stock in the immediate future.

                                     [F-21]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

12.  EARNINGS (LOSS) PER SHARE

                                        For the Years Ended
                                            September 30,
                                 2001           2000            1999
                                 ----           ----            ----
Basic income (loss) Per Share:
 Income (loss) available to
 common shareholders             $  330,221     $   (54,312)    $  (124,973)
                                    =======         =======        ========
Weighted average shares
 outstanding                      8,081,890       8,193,034       8,229,505
                                  =========       =========       =========
Basic Income (Loss) Per Share    $     0.04     $     (0.01)    $     (0.02)
                                       ====            ====            ====
Diluted Income (Loss) Per Share:
 Income (Loss) available to
 common shareholders             $  330,221     $   (54,312)    $  (124,973)
                                    =======          ======         =======
Weighted average shares
 outstanding                      8,081,890       8,193,034       8,229,505

Dilutive shares issuable in
 connection with stock plans         71,056               -               -
                                  ---------       ---------       ---------
Dilutive common shares
 outstanding                      8,152,946       8,193,034       8,229,505
                                  =========       =========       =========
Diluted Income (Loss) Per Share  $     0.04     $     (0.01)    $     (0.02)
                                       ====            ====            ====

Options to purchase 70,200, 288,075 and 392,675 shares of common stock were
outstanding during the years ended September 30, 2001, 2000 and 1999,
respectively, and were not included in the computation of diluted earnings per
share in accordance with SFAS 128, as the potential shares are considered
anti-dilutive.

                                     [F-22]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

13.  PROVISION FOR (BENEFIT OF) INCOME TAXES

Provision for (benefit of) income taxes is as follows:

                                            For the Years Ended
                                                September 30,
                                    2001          2000             1999
                                    ----          ----             ----
     Current:
      Federal                       $  74,100     $        -       $        -
      State                            17,300              -                -
                                     --------           ----             ----
                                       91,400              -                -
                                     --------           ----             ----
     Deferred:
      Federal                          93,840        (15,884)         (24,975)
      State                             9,713         (2,378)         (12,514)
                                     --------        -------           ------
                                      103,553        (18,262)         (37,489)
                                     --------        -------           ------
                                    $ 194,953     $  (18,262)      $  (37,489)
                                      =======        =======          =======

The Company's effective tax rate was 37.2%, (25.2)% and (23.1)% for the years
ended September 30, 2001, 2000 and 1999, respectively.  Reconciliation of
income tax at the statutory rate to the Company's effective rate is as follows:

                                            For the Years Ended
                                                September 30,
                                    2001          2000             1999
                                    ----          ----             ----

  Computed at the expected
   statutory rate                   34.0%          (18.1)%        (28.7)%
  State taxes net of federal
   tax benefit                       5.9            (6.1)          (6.1)
   Other                            (2.7)           (1.0)          11.7
                                    -----            -----         -----
                                    37.2%          (25.2)%        (23.1)%
                                    =====           ======         ======

                                     [F-23]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)

13.  PROVISION FOR (BENEFIT OF) INCOME TAXES (Continued)

Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes.  Deferred income taxes are
provided in recognition of these temporary differences.  The items that give
rise to the deferred income tax assets and deferred income tax liability are as
follows:

                                            For the Years Ended
                                                September 30,
                                    2001          2000           1999
                                    ----          ----           ----
Deferred Tax Asset:
 Difference in capitalization
  of inventory cost                 $  54,499     $  89,600      $  76,515
 Difference in reporting
  bad debts                            32,067        10,148          3,470
 Federal and State of Pennsylvania
  net operating loss carry forward     14,527       106,005        109,839
 Tax credits and other
  current assets                        3,287         8,506          8,156
                                      -------       -------        -------
  Total deferred tax asset            104,380       214,259        197,980
 Valuation allowance                        -        (4,945)        (4,945)
                                      -------       -------        -------
 Total Net Deferred Tax Asset       $ 104,380     $ 209,314      $ 193,035
                                      =======       =======        =======
 Deferred Tax Liability:
  Difference in reporting
   depreciation and
   amortization on long-term assets $  19,280     $  20,661      $  16,885
                                       ------        ------         ------
  Total Deferred Tax Liability      $  19,280     $  20,661      $  16,885
                                       ======        ======         ======

The Company has State net operating loss carryforwards of approximately
$245,000 which are available to reduce future taxable income and which expires
at various times up through the year ended September 30, 2011.

14.  CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of short-term cash investments and trade
receivables.  The Company maintains substantially all of its banking activities
with one bank and cash balances throughout the year generally exceeded the
federally insured limits of the FDIC and SIPC of $100,000.  The Company invests
these cash balances which exceed $100,000 in money market accounts and money
market mutual funds. During 1999 and a portion of 2000, the Company also
invested in U.S. Treasury Securities. At September 30, 2001 and 2000 the
balances the Company held in these securities was approximately $1,500,000 and
$965,000, respectively.  Management believes that the risk associated with
trade receivables, which are principally due from two customers, is adequately
provided for in the allowance for doubtful accounts.

                                     [F-24]
<PAGE>

                 VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Continued)



15.  QUARTERLY RESULTS (UNAUDITED)

The following table presents selected unaudited quarterly operating results for
the Company's eight quarters ended September 30, 2001 for continuing
operations.  The Company believes that all necessary adjustments have been made
to present fairly the related quarterly results.

Fiscal 2001        First       Second      Third       Fourth
----------         Quarter     Quarter     Quarter     Quarter     Total
                   -------     -------     -------     -------     -----
Net sales          $1,065,106  $1,251,804  $1,554,642  $1,391,933  $5,263,485
Gross profit          494,371     669,589     803,963     603,526   2,571,449
Operating income       11,418     137,166     235,236     101,926     485,746
Net income             17,812      83,592     155,530      73,287     330,221
Basic and diluted
 net income per
 comon share       $     0.00  $     0.01  $     0.02  $     0.01  $     0.04

Fiscal 2000
----------

Net sales          $1,107,613  $  708,441  $1,262,207  $1,319,678  $4,397,939
Gross profit          526,719     296,699     617,663     513,452   1,954,533
Operating income       27,416    (236,039)     72,853      24,953    (110,817)
Net income (loss)      21,401    (150,232)     47,973      26,546     (54,312)
Basic and diluted
 net income per
 comon share       $     0.00  $    (0.02) $     0.01  $     0.00  $    (0.01)

                                     [F-25]
<PAGE>

                         VALLEY FORGE SCIENTIFIC CORP.
                          Form 10-K for the year ended
                               September 30, 2001

INDEX TO EXHIBITS*



Exhibit Number          Description                            Page Number
-------------           ------------                           -----------

3(b)               Second Amended and Restated Bylaws

23                 Consent of Samuel Klein & Company

  * Only exhibits actually filed are listed.  Exhibits incorporated by
reference are set forth in the exhibit listing in Item 14 on the Report on Form
10-K

                                     [F-26]