<PAGE> 1
             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, 1998.
                      OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934. [FEE REQUIRED] 
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 November 18, 1998 as $23,962,360.

At December 21, 1998 there were 8,229,384 shares of the Registrant's Common
Stock outstanding.

<PAGE> 2

             DOCUMENTS INCORPORATED BY REFERENCE
          
      As stated in Part III of this annual report on Form 10-K, portions of the
following documents are incorporated herein by reference:
                    
                    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.

                                -2-

<PAGE> 3

                             PART I

Item 1.   BUSINESS

Nature of Business

     Valley Forge Scientific Corp. and its subsidiaries (collectively
referred to as the "Company") is principally engaged in the development
and manufacture of medical devices and other health care products. The
Company is a leading manufacturer of bipolar electrosurgical products. 
Through its new generation of products, the Company is broadening  the
market for its products from neurosurgery to other surgical disciplines. The
Company sells its products to or through national and international
distributors, which include affiliates of major health care corporations.  The
Company was incorporated in the Commonwealth of Pennsylvania on
March 27, 1980.

     The Company's principal products consist of bipolar electrosurgical
systems, disposable instrumentation and accessories, and related products
and accessories. These bipolar electrosurgical systems are based on
patented circuitry and allow a surgeon to coagulate blood vessels and/or cut
tissue. Bipolar coagulation and cutting are conducted through the use of a
surgical hand-held instrument, which is connected via a bipolar cord to a
solid state microprocessor controlled generator. 

     In bipolar electrosurgery, the current flow occurs at the tips of a
bipolar instrument. This is quite different from conventional monopolar
electrosurgical systems, in which the current passes from an active pen
electrode through the patient to a grounding pad which acts as a dispersive
electrode. The Company's bipolar electrosurgical systems enable a surgeon
to bloodlessly cut, core and divide tissue without the use of a grounding
pad and its inherent safety hazards. 

     The Company has developed disposable bipolar instruments which
are to be used with the Company's bipolar electrosurgical generators for
hospital and office procedures in the fields of neurosurgery, gynecology,
dentistry,  arthroscopy, general and laparoscopic surgery and plastic
surgery. These instruments  are available in twelve separate and distinct
patterns and allow the practitioner to perform essentially bloodless
procedures in each of the foregoing disciplines.  The disposable bipolar
instruments are connected to the bipolar electrosurgical generator through
a single-use bipolar cord or bipolar cord/irrigation tubing set  ("C/T Set"),
which are sold by the Company.

     To provide irrigation for the bipolar electrosurgical systems, the
Company also manufactures and sells the MALIS Irrigation System. The
irrigation system provides controlled irrigation for bipolar cutting and
coagulation in a wet surgical field. The irrigation system is connected to the
bipolar electrosurgical system and bipolar instrument through a single-use
C/T Set, which is sold by the Company.
     
     The Company also manufactures and sells  surgical magnifying
loupes, a microsurgical stool and titanium surgical mesh.
 
     Of the Company's sales of $3,879,977 in fiscal 1998,
approximately 93% were made to Johnson & Johnson Professional, Inc. ("J
& J"), formerly known as Codman & Shurtleff, Inc., as compared to 92%
and 89% in fiscal 1997 and 1996, respectively.  The bipolar electrosurgical
systems and the irrigation system accounted for approximately 64% of the
Company's sales in fiscal 1998 and approximately 76% and 54% of the
sales in fiscal 1997 and 1996, respectively. Sales of C/T Sets and bipolar
cord sets accounted for

                                -3-

<PAGE> 4

approximately 33% of the Company's sales in fiscal 1998 and approximately 21%
and 35% in 1997 and 1996, respectively. Sales of disposable instruments
accounted for approximately 2% of the Company's  sales in fiscal 1998.

Developments

     In September 1998, the Company agreed to extend the term of its
existing distribution agreement with J&J from December 31, 1998 to
December 31, 1999 in exchange for J&J agreeing to make minimum
purchases of the Company's products for the 1999 calendar year in the
amount of $5,000,000.  The distribution agreement which was entered into
in May 1991, required J&J to make minimum purchases of $1,100,000 for
the 1998 calendar year.

     On March 31, 1998, the Company was issued a patent by the
United States Patent and Trademark Office for its bipolar cutting loop
electrodes, which are used in the Company's disposable bipolar
electrosurgical instruments. 

     On February 18, 1998, the Company licensed the technology and
production molds associated with its CPR Mask System to Medical
Products Manufacturing, L.L.C. in exchange for a license fee of ten percent
of gross sales of the CPR Mask System and other products utilizing the
technology.

     In the fourth quarter of 1998, the Company received permission from the
United States Food and Drug Administration ("FDA") to market its Bi-Dent
bipolar generator and disposable instrumentation for dental procedures.
Subsequent to the end of the Company's 1998 fiscal year, the
Company entered into a Supply and Distribution Agreement with Garfield
Refining Company for the sale of the company's Bi-Dent bipolar
generator and disposable instrumentation and accessory
products in the field of Dentistry.

Products

     The Company's business constitutes a single business segment. 
                                                       
     Bipolar Electrosurgical Systems

     MALIS* CMC-III High Power Bipolar Cutting/Coagulation
System. This third generation system was first introduced into the
neurosurgery market by J & J in October 1991 and is marketed by J&J
under an existing distribution agreement.  The MALIS* CMC-III High
Power Cutting/Coagulation System provides high power in the cutting
mode and allows the surgeon to cut through any tissue.  

     MALIS* CMC-III -IEC  Bipolar Cutting/Coagulation System.  This
system incorporates the same features as the MALIS* CMC-III, with
certain modifications in order to meet the current standards for marketing
the unit worldwide.  The unit has received IEC-601 certification and bears
the international "CE" mark.  This unit is marketed by J&J under an
existing distribution agreement

     MALIS* Bipolar Synergy System.  A 50 watt coagulator for
neurosurgical use with updated coagulation technology.  This system is
marketed by J&J under an existing distribution agreement.

     Bipolar Endoscopic Coagulator. These generators are used as a
coagulators in endoscopic procedures, and are the subject of an existing
distribution agreement with Boston Scientific Corporation.  The products
are marketed by the Microvasive division of Boston Scientific Corporation
under its "Symmetry Endo-Bipolar Generator" and "MINI-SYMM" trade
names.

                                -4-

<PAGE> 5

     Bi-Safe-I Cutter/Coagulator for Office Gynecological Procedures. 
This generator meets the need for the bipolar modality in the physician's
office and offers significant cost and time savings over other available
equipment.  This generator  is being marketed by BEI Medical Systems,
Inc. ("BEI") pursuant to an existing  supply and distribution agreement.

     VFS 200 Bipolar System.  This system is now being marketed
under the MALIS* CMC- III- IEC trade name by J&J. The system is used
in magnetic imaging therapy, which uses magnetic resonance imaging
equipment in conjunction with operative procedures, generally a tumor
biopsy.  To the Company's knowledge, the VFS 200, with its unique
circuitry, is the only electrosurgical system which can be used in the same
room with MRI equipment.

     Bi-Dent Cutter/Coagulator for Dentistry.  This generator has been
developed for use by the dental practitioner, and it is being marketed by
Garfield Refining Company pursuant to a distribution agreement entered
into on October 8, 1998.

     Disposable Instrumentation

     Bipolar Electrosurgical Pen.  The pen is a hand-held single-use
instrument designed to be used with  any of the Company's bipolar cutting
generators.

     Bipolar Myoma Coagulation Electrodes for Laparoscopic Use. The
bipolar myoma coagulation electrodes are single-use instruments  to be
used in conjunction with the Bi-Safe I and  Bi-Safe-II Systems for
gynecological procedures, which are being marketed by BEI.

     Bipolar Cutting Loop Electrodes.  The bipolar loop electrodes are 
single use instruments  with modifications of the alloy to provide faster and
cleaner cutting. The loop electrodes are to be used in conjunction with the
Company's bipolar cutting/coagulation systems. 
     
     Bipolar Coagulation Ball Electrodes.    The bipolar ball electrodes
are single use instruments  to be  used for coagulation in conjunction with
the Company's bipolar cutting/coagulation systems  in  various surgical
disciplines.

     MALIS* Irrigation System

     The MALIS* Irrigation System is principally used in conjunction
with the Company's bipolar electrosurgical systems to provide controlled
irrigation for bipolar coagulation and cutting in a wet surgical field. The
system consists of an impulse pumped electrical generator which pumps
and regulates the flow of liquid through irrigation tubing, including, the
disposable MALIS* C/T Set, which is manufactured and sold by the
Company.  The irrigation system may also be used as a stand-alone unit.

                                -5-

<PAGE 6> 

     Other Products

     MALIS* Bipolar Cord/Irrigation Tubing Set. A disposable
coextruded bipolar forceps cord combined with an irrigation tubing set
which simultaneously delivers electrical current and irrigation fluid to a
surgical hand-held instrument. A new C/T Set is used for each surgical
procedure. The C/T Set, which is marketed by J & J, is used in conjunction
with the Company's bipolar electrosurgical systems, the irrigation system,
and disposable instrumentation.

     Bipolar Cord Set. A single-use bipolar cord set which provides
electrical current, without  irrigation,  from the Company's bipolar
generators to the Company's disposable bipolar instruments.

     Titanium Surgical Mesh. Interwoven titanium used in neurosurgery
for the repair of skull and spinal column defects, which is marketed by J&J.

     Surgical Magnifying Loupes. The loupes enable the surgeon to
magnify the surgical field.  The product's multi-lens design provides
correction of spherical and color aberrations and maximum depth of field. 
The loupes are presently available at powers of 2.5x, 3.25x and 4.0x
magnification. The loupes are sold under the MALIS* and NEUROPTIC
trademarks.

     Surgical Stool. A battery operated electrically controlled stool
which allows the surgeon to adjust his seating position up or down as the
microscope is raised or lowered throughout the surgical procedure.  The
product has been designed for surgeons in all disciplines who operate with
a microscope.  The surgical stool is sold under the MALIS* and
SCOPEMATE trademarks.

     CPR Mask System. This is a single-use disposable cardiopulmonary
resuscitation (CPR) mask system.   In 1996, the Company was granted a United
States patent on the mask system.  The mask system is currently manufactured
and marketed by Medical Products Manufacturing, L.L.C. pursuant to a License
Agreement.

     New Products to be Introduced into the Market

     The Company has developed several new bipolar generators, which
are based on the technology employed in the MALIS* High Power Bipolar
Cutting and Coagulation System, as well as a bipolar accessory products 
which are to be used in conjunction with these new generators. These
products are designed to be sold in the neurosurgery, orthopedic,
laparoscopic, urology, gynecology and plastic surgery fields.

     Bi-Safe-II High Power Bipolar Cutter/Coagulator for OB/GYN
Procedures.  The Company has developed a unique high power bipolar
cutter/coagulator for use in OB/GYN hospital procedures.  This generator
has features which are unique and are designed to reduce the time required
for surgical procedures.  The Company has received FDA permission to
market the generator. This generator will be marketed by BEI through an
existing supply and distribution agreement.

        * A registered trademark of Dr. Leonard I. Malis

                                -6-

<PAGE 7> 

     VFS 300 High Power Bipolar Cutter/Coagulator.  This unit has a
technology which enables the physician to cut tissue and/or coagulate blood
vessels while the electrodes are totally submerged in electrically conducted
fluids, such as saline.  The Company has received FDA permission to
market this system and intends to market the system for use in arthroscopy
and other surgical disciplines.

     MALIS* Bipolar Lesion Generation System.  The Company has
developed a final pre-production prototype of a bipolar lesion generation
system which precisely controls interruption of nervous system pathways
in order to alleviate symptoms of diseases such as Parkinsonism and other
movement disorders, trigeminal neuralgia, and the pain of intractable
cancer.

     MALIS* Disposable Lesion Electrodes.  The Company has developed final
pre-production  prototypes of electrodes in various sizes and tip geometries
for use in conjunction with the MALIS* Bipolar Lesion Generation System.

Manufacturing and Supplies

     For over 14 years, prior to August 31, 1994, the manufacturing,
assembly and packaging of the Company's electrosurgical products were
subcontracted to Diversified Electronic Corporation ("Diversified"), a
specialty electronics manufacturer, which provided contract manufacturing
and research and development to an established base of customers.  On
August 31, 1994, the Company vertically integrated the manufacturing,
assembly and packaging of its electrosurgical generators by acquiring
Diversified.  Since August 31, 1994, Diversified Electronics Company, Inc.
("DEC"), a wholly owned subsidiary of the Company, has conducted the
operations of Diversified.  In 1998, DEC concentrated its manufacturing
efforts almost exclusively on the Company's products.

     The Company currently contracts the manufacturing of its bipolar
C/T Set, bipolar cord set, and  disposable bipolar instrumentation with third
parties. Each product is currently manufactured by a single contract
manufacturer. The Company and its contract manufacturers purchase
product components from multiple sources.

     The Company's manufacturing process is subject to the regulatory
requirements of the Federal Good Manufacturing Practice Regulations as
promulgated by the FDA, which mandates detailed quality assurance and
record-keeping procuedures and subjects the Company to unscheduled periodic
regulatory inspections.  The Company conducts quality assurance audits
throughout the entire manufacturing process to ensure that all medical
products comply with the applicable government regulations. 


Marketing and Sales

     The Company does not directly market or sell its principal products
to end-users. Instead, the Company sells almost all of its products to or
through national or international distributors which include affiliates of
major health care corporations. 

     In May 1991, the Company entered into a distribution agreement with
J & J, under which J & J is granted the exclusive right to sell
the Company's bipolar electrosurgical systems, irrigation system, C/T
Sets, titanium surgical mesh and other products developed by the Company
in the field of neurosurgery through December 31, 1998. Under the terms
of the distribution agreement, J & J is required to purchase no less than
$1,100,000 in 1994 and subsequent years. In September 1998, the term of
this distribution agreement was extended by the Company to December 31,
1999 in exchange for  J&J agreeing to make minimum purchases of the
Company's products for calendar year 1999 in the amount of $5,000,000. 

                                -7-

<PAGE> 8

     For the 1998, 1997 and 1996 fiscal years, the Company had sales
to J & J of $3,616,778, $3,659,557 and  $3,055,531, respectively.  Orders
are generally filled on a current basis in each calendar year.   Approximately
93% of the Company's sales were derived from sales to J & J in
fiscal 1998 and approximately 92% and 89% of sales were made to J & J
in fiscal 1997 and 1996, respectively. Under the terms of a development
agreement with J & J, the Company has agreed to pay J & J through
December 31, 1998 a royalty of 2-1/2% of the net sales of the high power
bipolar electrosurgical system and 2% of the net sales of the C/T Sets
outside of the field of neurosurgery.
          
     The Company has entered into a supply and distribution agreement
with Boston Scientific Corporation covering the exclusive sale of bipolar
electrosurgical coagulators developed by the Company for use in the fields
of gastroenterology and endoscopy for hospital, outpatient clinic and office
based procedures involving  flexible endoscopy through March 2002.
Under the agreement, Boston Scientific Corporation has  agreed to
purchase the "Symmetry Endo-Bipolar Generator" and, upon regulatory
approval in Japan and Europe, the  new MINI-SYMMTM generator for
worldwide distribution.
     
     In the fourth quarter of 1997, the Company entered into an
exclusive, five-year worldwide supply and distribution agreement with BEI.
Under the agreement, BEI has agreed to distribute the Bi-Safe I and
Bi-Safe II bipolar electrosurgical systems and the Company's single use bipolar
instruments for use in gynecology and gynecological laparoscopic surgery in
hospitals, outpatient clinics and physician offices. BEI plans to market the
system in the United States through their internal sales force, its U.S.
distribution network and direct market catalogue and overseas through a network
of overseas distributors that specialize in selling OB/GYN products.  Initial
shipments of generators and certain disposable instruments under this agreement
commenced in 1998.

     The Company's distribution agreement with Padgett Instruments,
Inc. for a bipolar coagulation and cutting system in the plastic and
reconstructive surgery market expired in August 1998 and has not been
renewed.  

     While the Company's products are sold in foreign markets by J &
J, the Company is not aware of the amount of products which are sold in
those markets.  Prior to sales in certain foreign markets, the Company will
need to comply with applicable foreign government regulations.

     The Company currently markets the surgical magnifying loupes
and the surgical stool through independent distributors.

     The Company's business is not affected to any material extent by
seasonal factors.

Competition

     The unique circuitry and patented waveform of the Company's
bipolar electrosurgical systems are distinguished from bipolar
electrosurgical systems sold by other entities. In the neurosurgery market,
the Company believes that it is the principal manufacturer of bipolar
electrosurgical systems. In other medical areas, the Company's products
will compete with monopolar electrosurgical systems, as well as products
based on other technologies, such as laser devices.  The Company believes
that its bipolar electrosurgical products offer enhanced capabilities and
safety advantages as compared to monopolar electrosurgical systems and
laser devices.

                                -8-
<PAGE> 9

     The principal manufacturers of monopolar electrosurgical systems
(currently the standard electrosurgical device used in the general surgery
fields) are Valleylab, an affiliate of U.S. Surgical Corporation, and Birtcher
Medical Systems, Inc. An ultrasound device is sold by Valleylab and laser
devices are sold by companies such as Surgical Laser Technology.

     A number of major medical product suppliers, including U.S.
Surgical Corporation, Ethicon, Inc. (a subsidiary of Johnson & Johnson), and
Bard Endoscopic (a division of C.R. Bard) are selling or preparing to sell
laparoscopic or endoscopic instruments for use with monopolar
electrosurgical systems or other modalities. Certain of the laser surgical
devices currently marketed by such firms as Surgical Laser Technology and
Laserscope are also being used for general surgery. 
     

Research and Development

     For the 1998, 1997 and 1996  fiscal years, the Company expended
$292,165, $307,071and $87,536,  respectively, for research and
development. The Company anticipates that it will continue to incur
research and development costs in connection with development of
products.

     Prior to fiscal 1995, the Company's research and development was
conducted internally as well as subcontracted to third parties.   As a result
of the acquisition of Diversified, the Company's future research and
development has been conducted internally.  Clinical testing of
the products is conducted by physicians, including, Dr. Leonard I. Malis,
a principal shareholder and director of the Company.

     In the 1999 fiscal year, the Company anticipates that it will fund
all its research and development with current assets and revenues from
operations. 

Government Regulation

     The marketing and sale of the Company's products 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.
     
     All medical devices introduced into the market since 1976, which
include substantially all of the Company's 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.  In general, the process of
obtaining a 510(k) clearance typically takes several months and 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, the Company incurs
substantial costs relating to laboratory and clinical testing of new and
existing products and the preparation and filing of documents in formats

                                -9-

<PAGE> 10

required by the FDA. From time to time, the Company 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. 

     The Company believes that it is in material compliance with
regulations promulgated by the FDA and foreign governmental authorities,
and that such compliance has been and is anticipated to be without adverse
effect on its business. 

Patents and Trademarks      

     The Company owns two United States patents for bipolar
electrosurgery relating to the circuitry employed by the Company's bipolar
electrosurgical systems. The first of the patents was issue in 1986 and was
expanded upon with a second patent issued in June 1994. The patents
together cover 109 claims and are an important aspect of the Company's
bipolar electrosurgical systems.  

     On March 31, 1998, the Company was issued a United States
patent for its bipolar cutting loop electrodes, which are used in the
Company's disposable bipolar electrosurgical instruments. 

     In November 1995, the Company was issued a United States patent
for its CPR mask system.

     The Company has applied for United States patents on additional
disposable instrumentation and electronic circuitry.  The Company's practice
is to apply for patents which are important to the development or sale
of a product.

     Dr. Leonard Malis has entered into an agreement with the
Company to license the "MALIS" trademark to the Company, at no cost to
the Company, to the extent the name has not been licensed to Johnson &
Johnson. 

Employees

     At September 30, 1998, the Company and its subsidiaries had 32
full-time employees, including executive officers.  The Company from time
to time retains part-time employees, engineering consultants, scientists and
other consultants.  All full-time employees participate in the Company's
health benefit plan.

     None of the Company's employees are represented by a union or
covered by a collective bargaining agreement. The Company considers its
relationship with its 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 the Company's future. These include, but are not limited to
statements about: (1) any competitive advantage the Company may have
as a result of its installed base  of electrosurgical generators in the field
neurosurgery; (2) the Company's belief that its products exceed industry
standards or favorably compete with other companies' new technological
advancements; and (3) the anticipated success of certain recently introduced
products or products scheduled to be released in the near future for use in
neurosurgery, other surgical disciplines, and the dental market. These
statements are based on assumptions that the Company believes are reasonable,
but a number of factors could cause the Company's actual results to differ
materially from those expressed or implied by these statements. Investors are
advised to review the

                                -10-

<PAGE> 11

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 the financial results of the Company.

Item 2.   PROPERTIES.

     The Company currently leases approximately 4,200 square feet of
office and warehouse space at a base monthly rent of $4,618 (with
increases based on increases in the consumer 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 on June 30, 2000.  On August 31, 1994, the Company acquired a
building with approximately 15,000 square feet of manufacturing and
warehouse space in Philadelphia, Pennsylvania.

Item 3.   LEGAL PROCEEDINGS.

     As of September 30, 1998, there are no material pending legal
proceedings to which the Company is a party or to which any of its
property is the subject.



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

     No matters were submitted to a vote of the shareholders during the
fourth quarter of fiscal year 1998. 


                                PART II

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

     The Company's Common Stock is quoted on the Boston Stock Exchange under
the symbol VLF, and traded in the over-the-counter market, and is included in
the National Association of Securities Dealers Automated Quotation (NASDAQ)
System - 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 the NASDAQ System.  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.  

COMMON STOCK                                      High-Bid      Low-Bid
      Fiscal 1997:
          First Quarter ..........................$ 3 3/8       $2
          Second Quarter..........................  3 5/8        2 1/16
          Third Quarter...........................  5 1/16       2 1/8
          Fourth Quarter..........................  5 1/16       3 1/8
     Fiscal 1998:
          First Quarter ..........................  4 1/4        2 9/16     
          Second Quarter..........................  4 3/3        3 3/16    
          Third Quarter...........................  6 7/8        4 1/8
          Fourth Quarter..........................  5 3/4        2 3/8     

                                -11-

<PAGE> 12

     At December 15, 1998, the Company had 106 shareholders of record.  The
Company believes that there are in excess of 1,000 beneficial shareholders of
its Common Stock.

     The Company has not paid any dividends to date, nor does it expect
to do so in the foreseeable future.

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


            VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

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

Statement of
  Operations Data:       1998         1997         1996         1995         1994(1)   
------------------       ----         ----         ----         ----         -------

Net Sales            $3,879,977     $3,977,965    $3,424,589   $2,688,427   $3,587,379

Income (loss)
  from Operations       (63,521)        19,701       (96,285)    (368,415)     694,159

Net Income (loss)      $(34,374)        $6,533      $(75,116)   ($215,574)    $547,615
                       =========        ======      =========   ==========    ========  
Primary Earnings
  (loss) per share        $(.00)          $.00         $(.01)       $(.03)        $.07
                          ======          ====         ======       ======        ====

Fully Diluted Earnings
  (loss) per share        $(.00)          $.00         $(.01)       $(.03)        $.07
                          ======          ====         ======       ======


Balance Sheet Data:
At September 30,         1998         1997         1996         1995         1994
-------------------      ----         ----         ----         ----         ----

Current Assets        $3,216,510    $3,139,256   $2,987,502   $3,052,414   $3,429,443

Total Assets           4,204,211     4,254,070    4,217,958    4,379,866    4,884,525

Current Liabilities      161,120       187,817      164,595      256,123      353,891

Long Term Liabilities     18,445        11,093        4,736            0      170,775

Retained Earnings
   (deficit)             (30,912)        3,462       (3,071)      72,045      287,619

Stockholders' Equity   4,024,646     4,055,160    4,048,627    4,123,743    4,359,859
</TABLE>

(1)  On August 31, 1994, the Company acquired Diversified Electronic Corporation
     pursuant to an Agreement and Plan of Merger.  After September 1, 1994, the
     operations of Diversified Electronic Corporation were conducted by the
     Company's Diversified Electronics Company, Inc., wholly owned subsidiary.
     The results of operations of Diversified Electronics Company, Inc. from
     September 1, 1994 are included in the results of operations of the Company.

                                -12-

<PAGE> 13

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

Results of Operations

     1998 and 1997 Fiscal Year Compared

     Sales of $3,879,977 for 1998 were $97,988 (2.5%) less than sales for 1997.
The sales decrease was due to changes in sales patterns to  Johnson & Johnson
Professional, Inc. ("J&J"), the Company's principal customer. In 1998, J&J
accounted for 93% of the Company's sales, as compared to 92% and 89% of the
sales in 1997 and 1996, respectively.

     Sales to J&J in 1999 are expected to increase significantly as a result of
the Company's September 2, 1998 agreement with J&J, which amends the Company's
existing distribution agreement with J&J. In the amendment, the Company agreed
to extend the term of the existing distribution agreement from December 31, 1998
to December 31, 1999 in exchange for J&J agreeing to make minimum purchases of
the Company's products for the 1999 calendar year in the amount of $5,000,000.
For 1998, the minimum purchases under the distribution agreement were
$1,100,000.

     Sales of disposable instrumentation for use in the field of gynecology
accounted for approximately 2% of the Company's sales in 1998. The Company
anticipates a significant increase in the dollar amount of sales of disposable
instruments in 1999 with the release of new disposable instruments in the
fields of neurosurgery, gynecology and dentistry. 

     Subsequent to the end of the fiscal 1998, the Company entered into a supply
and distribution agreement with Garfield Refining Company for the sale of the
Company's Bi-Dent bipolar generator and disposable instrumentation and accessory
products in the field of Dentistry. The Company believes that this agreement
will enable the Company's products to enter into the dental market in 1999.

     During 1998, the Company's wholly-owned subsidiary, Diversified Electronics
Company, Inc., concentrated its manufacturing efforts almost exclusively on the
Company's products. In 1999, the Company anticipates this trend to continue as
a result of J&J's commitment to purchase a minimum of $5,000,000 of the
Company's products in the 1999 calendar year and the production of the
Company's newest generators for use in the fields of  neurosurgery,
gynecology, orthopedic surgery and dentistry.

     Approximately 64% of the Company's 1998 sales related to sales of the
bipolar electrosurgical and irrigation systems as compared to approximately 76%
and 54% of the sales in fiscal 1997 and 1996, respectively.  Sales of C/T Sets
and bipolar cords accounted for approximately 33% of the Company's sales in 1998
and approximately 21% and 35% in 1997 and 1996, respectively. 

     The Company's gross profit margin was 48% for 1998 as compared to gross
profit margin of 51% and 46% for 1997 and 1996, respectively.  Selling, general
and administrative expenses decreased by $78,492 (4.9%) in 1998 as compared to
the amounts for 1997.  Research and development expenses decreased by $14,906
(4.9%) to $292,165 in 1998. The research and development expense in 1998
reflects the Company's continued efforts in developing additional disposable
instrumentation and accessory products for its bipolar generators as well as
refining bipolar generators for the neurosurgery, dentistry, and the
laparoscopic arthroscopic and general surgery markets. 

     The Company had a loss from operations of $63,521 for 1998 as compared to
income from operations of  $19,701 for 1997. The Company had a loss  before
taxes of $36,596 in 1998 as compared to

                                -13-

<PAGE> 14

income before taxes of $28,768 in 1997. The Company had a benefit of income
taxes of $2,224 in 1998 as compared to a provision for income taxes of $22,235
in 1997.


     As a result of the foregoing, the Company had a net loss of $34,374 in 1998
as compared to  net income of $6,533  for 1997.  Basic and diluted loss per
share was ($.00) for 1998 compared to earnings per share of $.00 for 1997.

1997 and 1996 Fiscal Year Compared

     Sales of $3,977,965 for 1997 were 16% greater than sales for 1996.  The
sales increase primarily resulted from increased sales to J&J.  In 1997, J&J
accounted for 92% of the Company's sales, as compared to 89% and 76% of the
sales in 1996 and 1995, respectively. The sales gains reflect increased
shipments of the Company's bipolar generators, including the two newest
neurosurgical generators.

     During 1997, the Company's wholly-owned subsidiary Diversified Electronics
Company, Inc. concentrated its manufacturing efforts almost exclusively on
the Company's products.

     Approximately 76% of the Company's 1997 sales related to sales of the
bipolar electrosurgical and irrigation systems as compared to approximately
54% and 69% of the sales in fiscal 1996 and 1995, respectively.  Sales of C/T
Sets accounted for approximately 21% of the Company's sales in 1997 and
approximately 35% and 28% in 1996 and 1995, respectively.

     The Company's gross profit margin was 51% for 1997 as compared to gross
profit margin of 46% and 47% for 1996 and 1995, respectively.  Selling, general
and administrative expenses increased by 7% in 1997 as compared to the amounts
for 1996.  Selling, general and administrative expenses were impacted by higher
sales levels.  Research and development expenses increased by 251% to $307,071
in 1997. The Company's research and development included the further development
and refinement of generators and instrumentation in preparation for their
introduction into the gynecology market and other markets.

     In the fourth quarter of 1997, the Company entered into an exclusive,
five-year worldwide supply and distribution agreement with BEI Medical Systems
Company, Inc. ("BEI"). Under the agreement, BEI has agreed to distribute the
Bi-Safe I and  Bi-Safe II bipolar electrosurgical systems and the Company's
single-use bipolar instruments for use in gynecology and gynecological
laparoscopic surgery in hospitals, outpatient clinics and physician offices.

     The Company had income  from operations of $19,701 for 1997 as compared to
a loss from operations of  $96,285 for 1996. The Company had income before taxes
of $28,768 in 1997 as compared to a loss before taxes of $88,095 in 1996.  The
Company made a provision for  income taxes of $22,235 in 1997 as compared to a
tax benefit of $12,979 in 1996. 

     As a result of the foregoing, the Company had a net income of $6,533 in
1997 as compared to a net loss of  $75,116  for 1996.  Primary and fully diluted
earnings per share was $.00 for 1997 compared to loss per share of $.01 for
1996.

Liquidity and Capital Resources
               
     The primary measures of the Company's liquidity are cash balances
(including short-term investments), accounts receivable and inventory balances,
as well as its borrowing ability.  During 1998, the Company's working capital
increased by $103,951 to $3,055,390.

                                -14-

<PAGE> 15

     For the 1998 fiscal year, the Company provided net cash of $248,524 from
operating activities, which primarily reflected a $205,547 decrease in
inventory, reduced by a $54,258 increase in accounts receivable and a $26,697
decrease in accounts payable.

     During 1998, the Company used $5,854 for the purchase of property, plant,
and equipment and $1,817 for intangible assets.  Cash increased by $240,853 to
$873,757 at September 30, 1998.

     For the 1997 fiscal year, the Company provided net cash of $494,496 from
operating activities, which  primarily reflected a $277,270 decrease in
inventory, a $14,748 decrease in accounts receivable and an increase of $23,222
in accounts payable and accrued expenses. The decrease in accounts receivable
and decrease in inventory was primarily due to higher sales levels.

     Investing activities for 1997 used $24,353 for an increase in intangible
     assets of $10,296 and for the purchase of equipment in the amount of
     $14,057.   Cash increased  by $470,143 in 1997 leaving a balance of
     $632,904 in the Company's cash and cash equivalents at September 30, 1997.

     On March 1, 1996, the Company and Bernard H. Shuman, a director and Vice
President-Technology of the Company, modified the payment terms of a note
originally issued to Mr. Shuman in connection with the Company's merger with
Diversified Electronic Corporation in August 1994, which was due on March
1, 1996.  Pursuant to the modification, the Company paid Mr. Shuman $100,000
to reduce the principal balance for the note on March 1, 1996, $15,000 in
April, 1996 and $70,000 on August 1, 1996.  On August 1, 1996, the note was
canceled.

     The Company has 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 the Company to have
a tangible net worth of no less than $3,000,000.  At September 30, 1998, there
was no outstanding balance on this line.

     At September 30, 1998, the Company had no debt. The Company believes it
has available all funds needed for operations, research and development and
capital expenditures as they may arise in the future.  However, should it be
necessary, the Company believes it could borrow adequate funds at competitive
rates and terms.

Acquisition of Diversified

     On August 31, 1994, the Company acquired Diversified Electronic Corporation
("Diversified"), a company wholly owned by Bernard H. Shuman, pursuant to
a Merger Agreement, in which the Company was the surviving corporation.
After the merger, Diversified Electronics Company, Inc., a wholly owned
subsidiary of the Company, conducted the operations of Diversified.  In the
Merger Agreement, the Company issued the following consideration: (i) cash in
the amount of $161,500; (ii) a noninterest bearing note in the amount of
$185,000 payable on March 1, 1996; (iii) a noninterest bearing note in the
amount of $47,188 which was paid upon the collection of certain accounts
receivable of Diversified; and (iv) 139,334 shares of unregistered common
stock of the Company.  The cash portion of the consideration was funded
with the Company's available cash on hand.  The assets of Diversified consisted
primarily of equipment, fixtures, inventory, and intellectual property.  Prior
to the merger, Diversified Electronics Company, Inc., a wholly owned subsidiary
of the Company, acquired the real property and building, which constituted
Diversified's manufacturing facility, for $95,000 in cash.  

                                -15-

<PAGE> 16

Year 2000 Compliance

     The Company has conducted an evaluation of its internal management
information system and software relating to year 2000 compliance  issues.
In addition, the Company's Manufacturing and Research and Development staffs
have evaluated manufacturing processes and  manufactured products and are
evaluating secondary compliance issues with vendors related to the year 2000.

     At the present time, the Company has not identified any compliance issues
that can not be resolved within the required time frames or will have a material
impact on the Company's business or financial results.

Forward Looking Statements

     Statements in this Annual Report on Form 10-K which express that the
Company "believes", "anticipates", or "plans 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 risks and uncertainties, including
in particular, those described elsewhere in this Form 10-K.

Additional Cautionary Statements

Competition and Risk of Obsolescence from Technological Advances

          The markets in which the Company's products compete are characterized
by continuing technical innovation and increasing competition.  Some surgical
procedures which utilize or could utilize the Company's products could
potentially be replaced or reduced in importance by alternative medical
procedures or new drugs which may adversely affect the Company's business.

Government Regulation

          The process of obtaining and maintaining required regulatory approvals
is lengthy, expensive and uncertain.  Although the Company has not experienced
any substantial regulatory delays to date, there is no assurance that delays
will not occur in the future, which could have a significant adverse effect on
the Company's ability to introduce new products on a timely basis.  Regulatory
agencies periodically inspect the Company's 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 the Company believes they
are currently in compliance, if the Company fails to comply with regulatory
requirements, it could have an adverse effect on the Company's results of
operations and financial condition.
          
Uncertainties within the Health Care Markets

          Political, economic and regulatory influences are subjecting the
health care industry in the United States to rapid, continuing and fundamental
change.  Although Congress has not passed comprehensive health care reform
legislation to date, it is believed that Congress, state legislatures and the
private sector will continue to review and assess alternative health care
delivery and payment systems.  Responding to increased costs and to pressure
from the government and from insurance companies to reduce patient charges,
health care providers have demanded, and in many cases received, reduced prices
on medical devices.  These customers are expected to continue to demand lower
prices in the future.  The Company cannot predict what impact the adoption of
any federal or state health care reform measures, private sector

                                -16-
<PAGE> 17

reform or market forces may have on its business.  However, pricing pressure
is expected to continue to adversely affect profit margins.
 

Product Liability Risk

          The Company's products involve a risk of product liability.  Although
the Company maintains product liability insurance at coverage levels which it
believes are adequate, there is no assurance that, if the Company were to incur
substantial liability for product liability claims, insurance would provide
adequate coverage against such liability.

Product Acceptance and New Products

          The Company's growth depends in part on the acceptance of its products
in the marketplace, the market penetration achieved by the companies which the
Company has contracted with, and relies on, to distribute its products, and its
ability to introduce new and innovative products that meet the needs of medical
professionals.  There can be no assurance that the Company will be able to
continue to introduce new and innovative products or that the products the
Company introduces, or has introduced, will be widely accepted by the
marketplace, or that companies which the Company has contracted to distribute
its products will achieve market penetration in the surgical disciplines and
markets outside of neurosurgery. The failure of the Company to continue to
introduce new products or gain wide spread acceptance of its products would
adversely affect the Company's operations.


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

     Not Applicable.

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

A.   Quarterly Results of Operations.
     
     Not applicable.

B.   Financial Statements and Financial Statement Schedules.

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


Item 9.   DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

               Not applicable.

                                -17-

<PAGE> 18
                             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 the Company's Definitive Proxy
Statement for its 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.




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 the Company's Definitive Proxy Statement for its 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.

                                -18-

<PAGE> 19
                              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 tatements 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. (4)    

     (3) Articles of Incorporation and By-Laws.
          
          (a)  Articles of Incorporation, as amended - (1) (Exhibit 3(a)). 

          (b)  By-Laws of the Company, as amended - (1) (Exhibit 3(b)).


     (4) Instruments defining the Rights of Security Holders, including
         Indentures.
 
          (a)  Form of Common Stock Certificate - (1) (Exhibit 4(a)).


     (10) Material Contracts. 

          (a)  Non-Qualified Employee Stock Option Plan - (1) (Exhibit 10(a)).

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

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

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

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

                                -19-

<PAGE> 20

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

          (g)  Distribution Agreement between Codman & Shurtleff, Inc.
               (Johnson & Johnson Professional, Inc.) and the Company
               (3)(Exhibit 10(b)).

          (h)  Amended and Restated Registration Rights Agreement, dated
               April 3, 1991 - (3)(Exhibit 10(g)).

          (i)  Promissory Note from Jerry L. Malis to the Company. (6)
               (Exhibit 10(k))

          (j)  Promissory Note from the Company to Bernard H. Shuman. (6)
               (Exhibit 10(l))

          (k)  Employment Agreement Jerry L. Malis. (6) (Exhibit 10(m))
     
          (l)  Employment Agreement Thomas J. Gilloway. (6) (Exhibit 10(n))
     
          (m)  Employment Agreement Bernard H. Shuman. (6) (Exhibit 10(o))
     
          (n)  Registration Rights Agreement between the Company and Bernard H.
               Shuman (6) (Exhibit 10(p))

          (o)  Commercial Lease Agreement between GMM Associates and the Company
               dated July 1, 1995 (7) (Exhibit 10(p))
     
          (p)  Promissory Note from Jerry L. Malis to the Company.
     
          (q)  Amendment to Distribution Agreement with Codman & Shurtleff, Inc.
               (Johnson & Johnson Professional, Inc.), dated September 2, 1998.

(21) Subsidiaries of Registrant

               Subsidiaries of Valley Forge Scientific Corp. (8) (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 Registration Statement of the Company on
          Form S-1, Registration No. 33-40545, and incorporated herein by
          reference.
     (4)  Previously filed with the Company's Form 8-K dated August 31, 1994,
          and incorporated herein by reference.
     (5)  Previously filed with the Company's Form 10-K for the year ended
          September 30, 1993, and incorporated herein by reference.
     (6)  Previously filed with the Company's Form 10-K for the year ended
          September 30, 1994, and incorporated herein by reference.
     (7)  Previously filed with the Company's Form 10-K for the year ended
          September 30, 1995, and
          incorporated herein by reference.
     (8)  Previously filed with the Company's Form 10-K for the year ended
          September 30, 1997, and incorporated herein by reference.

                                -20-

<PAGE> 21

                             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 22nd day
of December, 1998

                    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 22, 1998
Jerry L. Malis              President (chief executive
                            officer and principal 
                            financial and accounting
                            officer)


/s/ Thomas J. Gilloway      Executive Vice President,        December 22, 1998
Thomas J. Gilloway          Secretary, Treasurer, Director 

                            
/s/ Leonard I. Malis        Director                         December 22, 1998
Leonard I. Malis                                                  


/s/ Bruce A. Murray        Director                          December 22, 1998
Bruce A. Murray  


/s/ Bernard H. Shuman      Vice President -Technology,       December 22, 1998
Bernard H. Shuman          Director                                     

  
/s/ Robert H. Dick         Director                           December 22, 1998
Robert H. Dick

                                -21-

<PAGE>  F-1

                  VALLEY FORGE SCIENTIFIC CORP.

 Index to Financial Statements and Financial Statement Schedules


Independent Auditor's Report                                                F-2 

Balance Sheets - September 30, 1998 and 1997                                F-3

Statements of Operations - Years Ended September 30, 1998, 1997             F-4
  and 1996

Statements of Stockholders' Equity - Years ended September 30, 1998         F-5
  1997 and 1996

Statements of Cash Flows - Years ended September 30, 1998, 1997 and 1996    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> F-2


                    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, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the 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 present fairly, in
all material respects, the financial position of Valley Forge Scientific Corp.
and Subsidiaries as of September 30, 1998 and 1997, and the results of
operations and cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting
principles.

                            SAMUEL KLEIN AND COMPANY

                                


Newark, New Jersey
December 3, 1998

                                F-2


<PAGE> F-3
            VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                           BALANCE SHEETS

<TABLE>
<S>                                                         <C>        <C>
                                                            September 30,            
ASSETS                                                    1998        1997   
------                                                    ----        ----
Current Assets:
 Cash and cash equivalents                            $   873,757 $   632,904
 Accounts receivable, net                                 911,158     856,900
 Inventory                                              1,204,980   1,410,527
 Prepaid items and other current assets                    68,996      91,393
 Recoverable income taxes                                   4,636       8,352
 Deferred income tax benefit                              152,983     139,180
                                                        ---------   ---------
     Total Current Assets                               3,216,510   3,139,256

Property, Plant and Equipment, net                        229,687     267,612
Intangible Assets, net                                    753,542     842,730
Other Assets                                                4,472       4,472
                                                        ---------   ---------
     Total Assets                                      $4,204,211  $4,254,070
                                                        =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
 Accounts payable and accrued expenses                $   160,607 $   187,817
 Income taxes payable                                         513          -
                                                         ---------  ----------
     Total Current Liabilities                            161,120     187,817

Deferred Income Tax Liability                              18,445      11,093
                                                         --------   ---------- 
     Total Liabilities                                    179,565     198,910
                                                         --------   ----------
Commitments and Contingencies

Stockholders' Equity:
 Preferred stock                                            -           -    
 Common stock (no par, 10,000,000 shares
  authorized, 8,229,384 shares issued and
  outstanding at September 30, 1998 and
  1997)                                                 4,055,558   4,051,698
 Retained earnings (deficit)                              (30,912)      3,462
                                                        ---------   ---------
     Total Stockholders' Equity                         4,024,646   4,055,160
                                                        ---------   ---------
     Total Liabilities and Stockholders' Equity        $4,204,211  $4,254,070
                                                        =========   =========



____________________

The accompanying notes are an integral part of these financial statements.          VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                                F-3
</TABLE>
<PAGE> F-4

                VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                     STATEMENTS OF OPERATIONS

<TABLE>

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

                                              For the Years Ended September 30,            
                                               1998         1997        1996    
                                               ----         ----        ---- 
Net Sales                                    $3,879,977   $3,977,965  $3,424,589

Cost of Sales                                 2,029,145    1,951,342   1,840,130
                                              ---------    ---------   ---------
Gross Profit                                  1,850,832    2,026,623   1,584,459
                                              ---------    ---------   ---------
Other Costs:
  Selling, general and administrative         1,531,183    1,609,615   1,503,000
  Research and development                      292,165      307,071      87,536
  Amortization                                   91,005       90,236      90,208
                                              ---------    ---------   ---------
     Total Other Costs                        1,914,353    2,006,922   1,680,744
                                              ---------    ---------   ---------
Income (Loss) from Operations                   (63,521)      19,701     (96,285)

Other Income (Expense):
  Interest income (expense)                      26,923        9,067       8,190
                                              ---------    ---------   ---------
Income (Loss) Before Income Taxes               (36,598)      28,768     (88,095)

Provision for (Benefit of) Income Taxes          (2,224)      22,235     (12,979)
                                              ---------    ---------   ---------
Net Income (Loss)                            $  (34,374)   $   6,533  $  (75,116)
                                              =========    =========   =========
Earnings (Loss) Per Share:
  Basic earnings (loss) per common share    $     (.00)   $     .00  $     (.01)
                                              =========    =========   =========
  Diluted earnings (loss) per common share  $     (.00)   $     .00  $     (.01)
                                              =========    =========   =========
  Basic common shares outstanding             8,229,384    8,229,384   8,229,384

  Diluted common shares outstanding           8,229,384    8,320,840   8,229,384






____________________

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


                                F-4
</TABLE>
<PAGE> F-5

           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                 STATEMENTS OF STOCKHOLDERS' EQUITY

        FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996

<TABLE>


<S>                                  <C>                 <C>                   <C>                <C>                              
                                             Common Stock          
                                             No Par Value                                 
                                    -------------------------------           Retained             Total
                                    Number of            Common               Earnings          Stockholders'
                                     Shares            Stock Amount           (Deficit)           Equity     
                                    ----------         ------------           ---------         -------------
Balances, October 1, 1995            8,229,384         $4,051,698            $  72,045          $4,123,743

Net Loss for the Year Ended
 September 30, 1996                     -                   -                  (75,116)            (75,116)
                                    ----------         -----------            ---------          ----------
Balances, September 30, 1996         8,229,384          4,051,698               (3,071)          4,048,627

Net Income for the Year Ended
 September 30, 1997                     -                   -                    6,533               6,533
                                    ----------          ---------             ---------          ----------
Balances, September 30, 1997         8,229,384          4,051,698                3,462           4,055,160

Issuance of Non-Qualified Options
 to a Consultant                        -                   3,860                  -                 3,860

Net Loss for the Year Ended
 September 30, 1998                     -                   -                  (34,374)            (34,374)
                                    ----------          ---------             ---------         ----------
Balances, September 30, 1998         8,229,384         $4,055,558            $ (30,912)         $4,024,646
                                    ==========          =========             =========         ==========












____________________

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

                                F-5
</TABLE>
<PAGE> F-6
                VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                         STATEMENTS OF CASH FLOWS
<TABLE>

<S>                                                            <C>                   <C>                <C> 
                                                                   For the Years Ended September 30,     
                                                              1998                  1997                1996   
Cash Flows from Operating Activities:                         ----                  ----                ----     
 Net income (loss)                                        $  (34,374)          $    6,533          $  (75,116)
 Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
   Depreciation and amortization                             134,784              140,095             142,275
   Stock options issued to a consultant                        3,860                 -                   -     

   Changes in assets and liabilities, net of
    effect from:
     (Increase) decrease in accounts receivable              (54,258)              14,748            (166,636)
     (Increase) decrease in inventory                        205,547              277,270            (239,432)
     (Increase) decrease in recoverable income taxes           3,716                4,537             157,482
     (Increase) decrease in deferred income tax benefit      (13,803)              25,969             (11,547)
     (Increase) decrease in other assets                        -                    (100)               -     
     (Increase) decrease in prepaid items and
      other current assets                                    22,397               (4,135)            (27,014)
     Increase (decrease) in accounts payable and
      accrued expenses and income taxes payable              (26,697)              23,222              89,150
     Increase in deferred tax liability                        7,352                6,357               4,736
                                                             -------              -------             -------
      Net cash provided by (used in)
       operating activities                                  248,524               494,496            (126,102)
                                                             -------               -------             -------
Cash Flows from Investing Activities:
 Increase in intangible assets                                (1,817)              (10,296)            (14,508)
 Purchase of property, plant and equipment                    (5,854)              (14,057)            (31,185)
      Net cash used in investing                             -------               -------              -------
       activities                                             (7,671)              (24,353)            (45,693)
                                                             -------               -------              -------
Cash Flows from Financing Activities:
 Net reduction in notes payable                                 -                     -               (180,678)
                                                             -------               -------             -------       
      Net cash used in financing activities                     -                     -               (180,678)
                                                             -------               -------             -------
Net Increase (Decrease) in Cash and Cash Equivalents         240,853               470,143            (352,473)

Cash and Cash Equivalents, beginning of year                 632,904               162,761             515,234
                                                             -------               -------             -------
Cash and Cash Equivalents, end of year                     $ 873,757             $ 632,904           $ 162,761
                                                             =======               =======             =======

Supplemental Disclosures of Cash Flow Information:
 Cash paid during the year for:
  Interest                                                 $      -              $      -            $   14,225
                                                             =======               ========            ========
  Income taxes                                             $      -              $    2,500          $      -     
                                                             =======               ========            ========
____________________

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

                                F-6

</TABLE>
<PAGE> F-7

           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 1996, VCP commenced initial operations and began marketing
the CPR mask system developed by VFSC.  As referred to in Note 2, during 1998
the Company entered into a license agreement for the manufacture and
distribution of the CPR Mask.  Collectively, VFSC, DEC and VCP are referred to
herein as the "Company". 

Cash and Cash Equivalents

The Company considers cash equivalents to be all highly liquid investments with
original maturities of three months or less.

Principals 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 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.

Revenue Recognition

The Company currently sells its products to or through national or international
distributors which include affiliates of major health care corporations.  A
significant part of the Company's sales are made pursuant to a distribution
agreement, as amended September 2, 1998, in the field of neurosurgery effective
through December 31, 1999.  Revenues from sales are recorded on the accrual
basis of accounting, when goods are shipped or when services are provided.
Revenues from license and royalty fees are recorded when earned.

Inventory

Inventory is stated at the lower of cost, determined by the moving average cost
method, or market.

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 forty years.  Leasehold improvements are being
amortized over the related lease term or estimated useful lives, whichever
is shorter.
                                F-7

<PAGE> F-8

           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





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

Property, Plant and Equipment (Continued)

Upon retirement or other disposition of these assets, the cost and related
accumulated depreciation are removed from the accounts and the resulting 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 representing the excess of the purchase price
paid over the fair market value of net assets acquired is being amortized over
20 years.  Acquisition costs have been capitalized and are being amortized over
5 years.

Impairment of Long-Lived Assets
 
Effective October 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."  SFAS 121 requires
that if facts and circumstances indicate that the cost of fixed assets or other
assets may be impaired, an evaluation of recoverability would be performed by
comparing the estimated future undiscounted pre-tax cash flows associated with
the asset to the asset's carrying value to determine if a write-down to market
value or discounted pre-tax cash flow value would be required.

Research and Development

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

Advertising Costs

Advertising expenditures relating to the manufacturing and marketing of the
Company's products and services are expensed in the period the advertising costs
are incurred.  Substantially all cost of such advertising has been born 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 asset will not be realized.


                                F-8

<PAGE> F-9



           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

                    NOTES TO FINANCIAL STATEMENTS
                             (Continued)





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

Comprehensive Income

For the year ended September 30, 1998, the Company 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 loses 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.

Earnings (loss) per Share

As of December 31, 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" ("SFAS 128") replacing 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.  Dilutive 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
      
Effective for the year ending September 30, 1997, the Company 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 Principle 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.

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

Reclassifications

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

                                F-9

<PAGE> F-10








           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





2.  LICENSE AGREEMENT

On February 18, 1998, as amended on March 30, 1998, the Company entered into a
license agreement with Medical Products Manufacturing, LLC ("MPM"), a
manufacturer and distributor of emergency medical equipment, whereby the
Company granted to MPM an exclusive, non-transferable license to use the
Company's equipment and technology of the Company's CPR Masks.  In connection
with this agreement the Company sold its remaining CPR Mask inventory to MPM.
The Company will receive a license fee equal to 10% of gross sales of any and
all products that MPM or its affiliates sell utilizing the mask technology with
a minimum annual license fee.


3.  ACCOUNTS RECEIVABLE

Accounts receivable are comprised of the following:

<TABLE>
    <S>                                                           <C>                  <C>  
                                                                        September 30,
                                                                  1998                1997
                                                                  ----                ----
    Accounts receivable                                        $1,029,456           $ 975,292
    Less: Allowance for doubtful accounts
              and contractual allowances                          118,298             118,392
                                                                ---------            --------                             
                                                               $  911,158           $ 856,900
                                                                =========            ========

4.  INVENTORY

Inventory consists of the following:
                                                                        September 30,         
                                                                 1998                1997    
                                                                 ----                ----
      Finished goods                                          $    21,080        $     32,958
      Work-in-process                                             757,468           1,098,436
      Materials and parts                                         426,432             279,133
                                                                ---------           ---------
                                                               $1,204,980          $1,410,527
                                                                =========           =========
</TABLE>

                                F-10

<PAGE> F-11






           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





5.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
    <S>                                                            <C>                  <C>
                                                                      September 30,        
                                                                   1998                1997   
                                                                   ----                ----
    Land                                                         $ 11,953            $ 11,953
    Building and improvements                                      86,917              86,917
    Furniture and fixtures                                         16,669              16,669
    Laboratory equipment                                          369,579             364,744
    Office equipment                                               97,164              96,145
    Leasehold improvements                                          9,413               9,413
                                                                  -------             -------
                                                                  591,695             585,841
    Less: Accumulated depreciation
              and amortization                                    362,008             318,229
                                                                  -------             -------                           
                                                                 $229,687            $267,612
                                                                  =======             =======

Depreciation is reflected in both cost of sales and selling, general and administrative expenses.  Total depreciation for
the years ended September 30, 1998, 1997 and 1996 is $43,779, $49,859 and $52,067, respectively. 


6.  INTANGIBLE ASSETS

Intangible assets consist of the following:

</TABLE>
<TABLE>
   <S>                                                            <C>                 <C>
                                                                       September 30,       
                                                                  1998                1997   
    Patents/trademarks/licensing                                  ----                ----
     agreements                                                $  558,972          $  557,155
    Proprietary know-how                                          452,354             452,354
    Acquisition costs                                              55,969              55,969
    Excess of purchase price over net
     assets acquired in connection with
     the acquisition of Technical Medical 
     Industries, Inc.                                             351,123             351,123
                                                                  -------             -------                           
                                                                1,418,418           1,416,601
    Less: Accumulated amortization                                664,876             573,871

                                                               $  753,542          $  842,730
                                                                 ========            ========
</TABLE>
                                F-11

<PAGE> F-12



           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





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 are
secured by 5,833 shares of common stock of the Company.  The balance of these
loans is reflected in other current assets and as of September 30, 1998 and
1997 was $41,921 and $25,092 respectively, including accrued interest of $4,086
and $2,272, respectively.

Consulting Services

During 1998, the Company entered into an agreement with R.H. Dick and Company,
a corporation owned by Robert Dick, a director of the Company, under which
R.H. Dick and Company agreed to provide certain investment banking
and consulting services for the years 1998 and 1999.  During October 1998, the
Company paid R.H. Dick and Company $10,000 for these services of which $5,000
was expensed for the year ended September 30, 1998.


8.  NOTES PAYABLE 

The Company has a line of credit of $1,000,000 with First Union bank (formerly
Meridian Bank) which calls for interest to be charged equal to the bank's
national commercial rate.  The unsecured loan is payable on demand requiring
monthly interest payments on the unpaid principal and reduction of the 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 loan.  At
September 30, 1998 and 1997 there were no outstanding balances on
this line.


9.  COMMITMENTS AND CONTINGENCIES

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

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 expenditure outside the normal course
of operations which will be incurred by the Company in future periods in order
to comply with these regulations.

                                F-12
<PAGE> F-13

            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.  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.  For the year
ended September 30, 1996, the officers waived their right to the 10% increase of
base salary for that year.  For the year ended September 30, 1998, the officers
waived their right to a full 10% increase of base salary, opting to reduce the
annual base salary increase from 10% to 5% for 1998.  The base salaries for the
years ended September 30, 1998, 1997 and 1996 were $188,949, $179,951 and
$163,592 for Jerry L. Malis and $161,278, $153,598 and $139,634 for Thomas J.
Gilloway, respectively.

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 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.  The base salary for Bernard H. Shuman for each of the
years ended September 30, 1998, 1997 and 1996 was $105,000.

401(k) Plan and Profit Sharing Plan

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 pre-tax basis not to exceed the
current Federal limitation of $10,000 per year (as adjusted for cost of living
increase).  Amounts contributed to the 401(k) Plan are nonforfeitable.

Under the Profit Sharing Plan, a participant 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 determine the Company's contributions to the plan on a
discretionary basis.  The Company has not made any contributions to date.

Stock Option Plan

On July 6, 1988, the Company adopted a non-qualified employee stock option plan
(the "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 will be non-transferrable and
expire 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 October 24, 1994, the Company granted to employees and a board member stock
options to purchase 20,000 shares of common stock pursuant to the plan, at
$2.50 per share (the closing bid price on the NASDAQ small-cap market on
October 24, 1994).  Options granted expire if not exercised within ten years,
commencing October 24, 1994.

                                F-13

<PAGE> F-14


           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plan (Continued)

On December 22, 1994, the Company granted to each of Jerry L. Malis and Thomas
J. Gilloway stock options to purchase 50,000 shares of Common Stock pursuant to
the Plan at $2.38 per share (the closing bid price on the NASDAQ small-cap
market on December 22, 1994).  Options granted expire if not exercised within
ten years, commencing December 22, 1994. 

On December 22, 1995, the Company granted to its employees stock options to
purchase a total of 8,000 shares of Common Stock pursuant to the Plan at $2.13
per share (the closing bid price on the NASDAQ small-cap market on December
22, 1995).  Options granted expire if not exercised within ten years,
commencing December 22, 1995.

On July 26, 1996, the Company granted to its employees stock options to purchase
a total of 44,000 shares of Common Stock pursuant to the Plan at $2.31 per share
(the closing bid price on the NASDAQ small-cap market on July 26, 1996).
Options granted expire if not exercised within five years, commencing
July 26, 1996.

On November 14, 1997, the Company granted to two directors and one consultant
stock options to each purchase 2,000 shares of Common Stock pursuant to the
plan at $3.38 per share (the closing bid price on the NASDAQ small-cap market
on November 14, 1997).  In accordance with FAS 123 the fair value of the 2,000
options issued to the consultant was estimated at the grant date using the
Black-Scholes Value option pricing model resulting in the recording of $3,860
as consulting expense.

At September 30, 1998, no stock options have been exercised.

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-14

<PAGE> F-15



           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plan (Continued)

Following is a summary of the Company's non-qualified employee stock option 
plan:

<TABLE>
<S>                                                   <C>            <C>                  <C>           <C>
                                                                                         Weighted      Weighted
                                                                    Exercise             Average       Average    
                                                                      Price              Exercise      Remaining  
                                                     Shares         Per Share             Price       Life (Years)
                                                    --------       -----------           --------     ------------
Options outstanding at October 1, 1995              343,400       $1.56 - $5.13       $   2.58          6.24
Granted                                              52,000       $2.13 - $2.31           2.28          9.74     
Exercised                                              -                -                   -             -         
Surrendered, forfeited or expired                      -                -                   -             -         
                                                    -------        ------------           ----          ----
Options outstanding at September 30, 1996           395,400       $1.56 - $5.13           2.54          6.70     

Granted                                                -                -                   -             -         
Exercised                                              -                -                   -             -         
Surrendered, forfeited or expired                    (4,500)      $2.31 - $2.50           2.39          8.06     
                                                    --------      -------------           ----          ----
Options outstanding at September 30, 1997           390,900       $1.56 - $5.13           2.54          5.66     

Granted                                               6,000            3.38               3.38          9.79     
Exercised                                              -                -                   -             -        
Surrendered, forfeited or expired                      -                -                   -             -        
                                                    -------        ------------           ----          ----
                                                                                           
Options outstanding at September 30, 1998           396,900       $1.56 - $5.13       $   2.56          4.61     
                                                    =======        ============           ====          ====

All options outstanding for each of the years ended September 30, 1998, 1997 and 1996 were exercisable.

</TABLE>

                                F-15

<PAGE> F-16






           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plan (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, 1998 and 1997
was estimated at the date of grant while the fair value for the options granted
during the year ending September 30, 1996 was estimated at the date of
implementation of FASB 123.  The fair value of these options was estimated
using a Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
 <S>                                                          <C>               <C>               <C> 
                                                                            September 30,
                                                             1998              1997               1996
                                                             ----              ----               ----      
  Risk-Free interest (based on U.S. Government
  strip bonds on the date of grant with maturities
  approximating the expected option term)                    5.82%               -                6.43%

  Dividend yields                                               0%               -                   0%

  Volatility factors of the expected market price
  of the Company's Common Stock (based on
  historical data)                                           60.5%               -                58.3%


  Expected life of options                                   5 years             -            5.5 years

</TABLE>

The weighted average fair value of options granted during the years ended
September 30, 1998, 1997 and 1996 were $1.93,  $ - and $1.34.

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.



                                F-16

<PAGE> F-17


           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





9.  COMMITMENTS AND CONTINGENCIES (Continued)

Stock Option Plan (Continued)

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 during the years ended September 30, 1998,
1997 and 1996 have been included for the Company's pro forma information as
follows:

<TABLE>
  <S>                                                             <C>                       <C>                     <C>
                                                                                       September 30,
                                                                  1998                     1997                     1996  
                                                                  ----                     ----                     ----
  Additional compensation expense, net of tax effect          $   (4,586)             $     -                  $  (41,445)
  Pro forma net loss                                          $  (38,960)             $     -                  $ (116,561)
  Pro forma loss per share:
                                          Basic               $     (.00)             $     -                  $     (.01)
                                          Diluted             $     (.00)             $     -                  $     (.01)

</TABLE>

Operating Leases

The Company currently 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 and Leonard I. Malis, principal shareholders,
directors and/or officers of the Company.  The lease is for a term of five
years which commenced on July 1, 1995 and calls for a base rent of $4,618 (with
increases based on increases in the consumer price index) which include costs
associated with real estate taxes, maintenance and utilities. The related
expense for this lease for the years ended September 30, 1998, 1997 and 1996
was $54,899, $52,937 and $51,565, respectively.  As of September 30, 1998,
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.

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

   Year ending September 30,

                             Related                        Other
                              Party                       Operating
                             ------                       ---------
       1999                $ 55,411                        $ 31,039
       2000                  41,558                          20,538
       2001                    -                               -     
       2002                    -                               -     
       2003                    -                               -     
                             ------                          ------
                           $ 96,969                        $ 51,577
                             ======                          ======


                                F-17

<PAGE> F-18


           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





9.  COMMITMENTS AND CONTINGENCIES (Continued)

Year 2000 Compliance

As has been widely reported, many computer systems process dates based on two
digits for the year of a transaction and are unable to process dates in the
year 2000 and beyond.  The Company primarily uses licensed software products in
its operations with a significant portion of processes and transactions
centralized in one particular software package.  During 1999, management plans
to upgrade to the most current version of this software package which, among
other things, is Year 2000 compliant.  In addition the Company has previously
replaced or modified other systems that were not Year 2000 compliant.  These
systems have been assessed, and detailed plans have been developed and are
being implemented to make the necessary modifications to insure year 2000
compliance.  The financial impact of making the required system changes for
year 2000 compliance are not expected to have a material effect on the Company's
financial statements.

The Company is continuing its process of formal communication with all of its
significant suppliers and customers to determine the extent to which the Company
is vulnerable to potential third parties failure to remediate their own year
2000 issued.  The Company can give no guarantee that the systems of other
companies on which the Company's systems rely will be remedied for the year
2000 issues on time or that a failure to remedy the problem by another company
would not have a material adverse effect on the Company. 


10.  MAJOR CUSTOMERS

For the years ended September 30, 1998, 1997 and 1996, 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 through December 31, 1998.  This agreement was
extended through December 31, 1999 and the minimum purchase requirement was
increased to $5,000,000 for the 1999 calendar year.  Revenues derived from this
customer are as follows:


        Year ended September 30, 1998       $3,616,778         93%

        Year ended September 30, 1997       $3,659,557         92%

        Year ended September 30, 1996       $3,055,531         89%


At September 30, 1998 and 1997, this customer accounted for approximately 69%
and 80%, respectively, of the Company's accounts receivable while two other
customers represented approximately 22% and 19%, respectively.

                                F-18



<PAGE> F-19




           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





11.  STOCKHOLDERS' EQUITY

Common Stock

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 October 14, 1992, the Board of Directors of the Company approved a stock
repurchase plan whereby the Company may, from time to time, repurchase on the
open market up to 100,000 shares of the Corporation's Common Stock.
During the fiscal year ended September 30, 1995, the Company repurchased for
retirement 10,000 shares at a price of $20,542 resulting in a total of 27,500
shares repurchased since the inception of the repurchase plan at an aggregate
price of $99,924.

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.
As of September 30, 1998, there were no issued or outstanding preferred shares,
and the Company has no intention to issue any preferred stock in the immediate
future.


12.  EARNINGS (LOSS) PER SHARE
<TABLE>

<S>                                                       <C>                        <C>                        <C> 
                                                                           September 30,
                                                         1998                       1997                       1996
                                                         ----                       ----                       ----
Basic Earnings (Loss) Per Share:
  Income (loss) available to common shareholders    $   (34,374)            $      6,533                  $  (75,116)
                                                      =========               ==========                   =========
  Weighted average shares outstanding                 8,229,384                8,229,384                   8,229,384
                                                      =========               ==========                   =========
  Basic Earnings (Loss) Per Share                   $      (.00)            $        .00                  $     (.01)
                                                      =========               ==========                   =========
Diluted Earnings (Loss) Per Share:
  Income (loss) available to common shareholders    $   (34,374)            $      6,533                  $  (75,116)
                                                      =========               ==========                   =========
  Weighted average shares outstanding                 8,229,384                8,229,384                   8,229,384

  Dilutive shares issuable in connection with
    stock plans                                           -                       91,456                         -     
                                                      ---------                ---------                   ---------
  Total shares                                        8,229,384                8,320,840                   8,229,384
                                                      =========                =========
  Diluted Earnings (Loss) Per Share                 $      (.00)            $        .00                  $     (.01)
                                                      =========                =========                    ========

                                F-19

<PAGE> F-20


          VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





12.  EARNINGS (LOSS) PER SHARE (Continued)

Options to purchase 7,400 shares of common stock at exercise prices ranging
from $4.25 to $5.13 per share were outstanding during the year ended
September 30, 1997 but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares.

Options to purchase 396,900 and 395,400 shares of common stock at exercise
prices ranging from $3.38 to $5.13 per share were outstanding during the years
ended September 30, 1998 and 1996, respectively, and were not included in the
computation of diluted earnings per share in accordance with FAS 128, as the
potential shares are considered anti-dilutive due to the Company's loss from
continuing operations.


13.  PROVISION FOR (BENEFIT OF) INCOME TAXES

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

</TABLE>
<TABLE>
  <S>                                         <C>              <C>                 <C>      
                                                 For the Years Ended September 30, 
                                              1998             1997                1996  

  Current:
   Federal                                  $  -            $ (8,911)           $  1,736
   State                                         45              -                   -
                                             ------           -------              -----
                                                 45           (8,911)              1,736
                                             ------           -------              -----
  Deferred:
   Federal                                     (295)          27,104             (49,413)
   State                                     (1,974)           4,042              11,304
                                              -----           ------              -------
                                             (2,269)          31,146             (38,109)
                                              -----           ------              -------
  Adjustment of deferred tax asset for state
    income tax rate changes and expired net
    operating loss carryforwards net of 
    Federal tax effect                         -                 -                 23,394
                                             ------           -------             -------
                                               -                 -                 23,394
                                             ------           -------             -------
                                            $(2,224)          $22,235           $ (12,979)
                                             ======            ======              ======
</TABLE>

In accordance with FASB 109, tax credits arising from net operating losses,
which previously were reported as extraordinary items, have now been restated
as offsets against the provision (benefit) for income taxes.

                                F-20

<PAGE> F-21



           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





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

The Company's effective tax rate was (6.1)%, 77.3% and (14.7)% for the years
ended September 30, 1998, 1997 and 1996, respectively.  Reconciliation of income
tax at the statutory rate to the Company's effective rate is as follows:

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

                                                            For the Years Ended September 30, 
                                                        1998              1997                 1996
                                                        ----              ----                 ----
  Computed at the expected statutory rate              (15.0)%             34.0%              (15.0)%
  State taxes net of federal tax benefit                (6.1)               8.5                 8.4
  Reduction in state tax rate resulting from 
    utilization of tax loss carryforwards                 -                  -                 (8.4)
  Non-deductible expenses                               15.0               24.5                 9.3
  Other                                                   -                10.3                (9.0)
                                                        -----             -----                -----
                                                        (6.1)%             77.3%              (14.7)%
                                                        =====             =====                =====
</TABLE

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 benefit and deferred income tax liability are as
follows:


</TABLE>
<TABLE>
  <S>                                                           <C>                  <C>
                                                                     September 30,     
                                                                1998                 1997  
                                                                ----                 ----
Deferred Tax Asset:
  Difference in capitalization of inventory cost            $ 75,995              $ 73,463
  Difference in reporting bad debts                           48,022                48,059
  State of Pennsylvania net operating loss
   carryforward                                               23,208                22,603
  Tax credits and other current assets                        10,703                  -
                                                             -------                -------
  Total deferred tax asset                                   157,928                144,125
  Valuation allowance                                         (4,945)                (4,945)
                                                             -------                -------
  Net deferred tax asset                                    $152,983               $139,180
                                                             =======                =======
Deferred Tax Liability:
  Difference in reporting depreciation                      $ 18,445               $ 11,093
                                                             -------                -------
 Total Deferred Tax Liability                               $ 18,445               $ 11,093
                                                             =======                =======

The Company has state net operating loss carryforwards of approximately
$352,000 available to reduce future state taxable income which expires in
the year ended September 30, 2001.

                                F-21


<PAGE>  F-22


           VALLEY FORGE SCIENTIFIC CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Continued)





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 exceed the
federally insured limit of $100,000.  The Company invests overnight these cash
balances which exceed $100,000 in U.S. Treasury Securities.  At September 30,
1998 and 1997 the balances the Company held in these securities was $805,000
and $477,000, 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-22








                 VALLEY FORGE SCIENTIFIC CORP.
                  Form 10-K for the year ended
                       September 30, 1998
                                
                       INDEX TO EXHIBITS*

Exhibit
Number     Description                                              

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

10(q)      Amendment to Distribution Agreement with Codman & 
           Shurtleff, Inc. (Johnson & Johnson Professional, Inc.),
           dated September 2, 1998

23         Consent of Samuel Klein & Company

27         Financial Data Schedule
           * Only the exhibits actually filed are listed.  Exhibit incorporated
           by reference are set forth in th exhibit listing in Item 14 of the
           Report for Form 10-K.


                                














































</TABLE>