Edgar Filing: VITAL SIGNS INC

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER: 0-18793

VITAL SIGNS, INC.

(Exact name of registrant as specified in its charter)

New Jersey	11-2279807
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

20 Campus Road

Totowa, New Jersey 07512

(Address of principal executive office, including zip code)

973-790-1330

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o

Accelerated Filer x

Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At May 8, 2007, there were 13,226,013 shares of Common Stock, no par value, outstanding.

VITAL SIGNS, INC.

INDEX

		Page Number
	PART I.
Item 1.	Financial Statements
	Report of Independent Registered Public Accounting Firm	2
	Condensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and September 30, 2006 (Audited)	3
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006 (Unaudited)	4
	Condensed Consolidated Statements of Income for the Six Months Ended March 31, 2007 and 2006 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2007 and 2006 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7-10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-20
Item 3.	Quantitative and Qualitative Disclosure About Market Risks	21
Item 4.	Controls and Procedures	21

	PART II.
Item 1A	Risk Factors	22
Item 6.	Exhibits	23
	Signatures	24
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

Certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Vital Signs, Inc. (the “registrant”, the “Company”, “Vital Signs”, “we”, “us”, or “our”) believes that the disclosures are adequate to assure that the information presented is not misleading in any material respect. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the registrant’s Annual Report on Form 10-K for the year ended September 30, 2006.

The results of operations for the interim periods presented herein are not necessarily indicative of the results to be expected for the entire fiscal year, or any other period.

In this Quarterly Report, references to “Vital Signs,” “we,” “us” and “our” refer to Vital Signs, Inc. and its subsidiaries. Breas™, Broselow® are our trademarks. We also have several registered and unregistered color scheme trademarks related to the Broselow product line. All other trademarks used in this Quarterly Report are the property of their respective owners.

When we refer to our fiscal year in this report, we are referring to the fiscal year ended on September 30^th of that year. Thus, we are currently operating in our fiscal 2007 year, which commenced on October 1, 2006. Unless the context expressly indicates a contrary intention, all references to years in this filing are to our fiscal years.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

VITAL SIGNS, INC.

We have reviewed the accompanying condensed consolidated balance sheet of Vital Signs, Inc. and Subsidiaries as of March 31, 2007 and the related condensed consolidated statements of income for the three months and six months ended March 31, 2007 and 2006 and the condensed consolidated statement of cash flows for the six months ended March 31, 2007 and 2006. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the condensed consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with United States generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Vital Signs, Inc. and Subsidiaries as of September 30, 2006 and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated November 14, 2006 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 3 , 2007

VITAL SIGNS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2007		September 30, 2006
	(Unaudited)		(Audited)
	(In thousands of dollars)

A S S E T S
Current Assets:
Cash and cash equivalents	$	56,458	$	41,242
Short-term investments		81,943			85,565
Accounts receivable, less allowances for rebates and doubtful accounts of $7,779 and $8,526, respectively		33,324			34,284
Inventory		20,747		19,006
Prepaid expenses		2,717		4,453
Other current assets		1,367		596
Assets of discontinued business		18,521		—
Total Current Assets		215,077		185,146
Property, plant and equipment—net		32,049		33,129
Goodwill		66,361		79,272
Deferred income taxes		447		801
Other assets		7,667		7,506
Total Assets	$	321,601	$	305,854

L I A B I L I T I E S A N D S T O C K H O L D E R S’ E Q U I T Y
Current Liabilities:
Accounts payable	$	5,870		$ 5,488
Accrued expenses		8,451		9,136
Accrued income taxes		512		731
Liabilities of discontinued business		124		—
Total Current Liabilities		14,957		15,355
Minority interest		5,182		4,686
Commitments and contingencies
Stockholders’ Equity
Common stock—no par value; authorized 40,000,000 shares, issued and outstanding 13,226,013 and 13,218,850 shares, respectively		45,941		44,798
Accumulated other comprehensive income		4,170		3,181
Retained earnings		251,351		237,834
Stockholders’ equity		301,462		285,813
Total Liabilities and Stockholders’ Equity	$	321,601	$	305,854

(See Notes to Condensed Consolidated Financial Statements)

VITAL SIGNS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the Three Months Ended March 31,
	2007				2006
	(In thousands, except per share amounts)
Revenues:
Net sales	$	45,308		$		42,455
Service revenue		5,085				4,843
		50,393				47,298
Cost of goods sold and services performed:
Cost of goods sold		21,230				20,481
Cost of services performed		2,107				2,147
		23,337				22,628
Gross profit		27,056				24,670
Operating expenses:
Selling, general and administrative		12,721				12,418
Research and development		1,727				1,739
Other expense		136				—
Total operating expenses		14,584				14,157
Operating Income		12,472				10,513
Other income
Interest income		1,091				652
Income from continuing operations before provision for income tax and minority interest		13,563				11,165
Provision for income taxes		4,528				3,725
Income from continuing operations before minority interest		9,035				7,440
Minority interest in net income of subsidiary		254				188
Income from continuing operations		8,781				7,252
Discontinued Operations:
(Loss) income from discontinued operations, net of tax		(180	)			216
Net income	$	8,601		$		7,468
Earnings per Common Share:
Basic
Income per share from continuing operations	$	0.66		$		0.56
Income (loss) per share from discontinued operations	$	(0.01	)	$		0.02
Net earnings per share	$	0.65		$		0.58
Diluted
Income per share from continuing operations	$	0.66		$		0.56
Income (loss) per share from discontinued operations	$	(0.01	)	$		0.02
Net earnings per share	$	0.65		$		0.58
Basic weighted average number of shares outstanding		13,220				12,898
Diluted weighted average number of shares outstanding		13,255				13,001
Dividends declared and paid per common share	$	0.10		$		0.07

(See Notes to Condensed Consolidated Financial Statements)

VITAL SIGNS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

( Unaudited )

	For the Six Months Ended March 31,
	2007				2006
	(In thousands, except per share amounts)
Revenues:
Net sales	$	86,006		$		81,030
Service revenue		10,049				9,406
		96,055				90,436
Cost of goods sold and services performed:
Cost of goods sold		40,750				39,036
Cost of services performed		4,167				4,120
		44,917				43,156
Gross profit		51,138				47,280
Operating expenses:
Selling, general and administrative		24,627				24,083
Research and development		3,572				3,397
Other expense (income) – net		320				(11	)
Total operating expenses		28,519				27,469
Operating Income		22,619				19,811
Other income
Interest income		2,099				1,230
Income from continuing operations before provision for income tax and minority interest		24,718				21,041
Provision for income taxes		7,941				7,043
Income from continuing operations before minority interest		16,777				13,998
Minority interest in net income of subsidiary		496				372
Income from continuing operations		16,281				13,626
Discontinued Operations:
(Loss) income from discontinued operations, net of tax		(386	)			502
Net income	$	15,895		$		14,128
Earnings per Common Share:
Basic
Income per share from continuing operations	$	1.23		$		1.07
Income (loss) per share from discontinued operations	$	(0.03	)	$		0.04
Net earnings per share	$	1.20		$		1.11
Diluted
Income per share from continuing operations	$	1.23		$		1.06
Income (loss) per share from discontinued operations	$	(0.03	)	$		0.04
Net earnings per share	$	1.20		$		1.10
Basic weighted average number of shares outstanding		13,219				12,743
Diluted weighted average number of shares outstanding		13,271				12,840
Dividends declared and paid per common share	$	0.19		$		0.14

(See Notes to Condensed Consolidated Financial Statements)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended March 31,
	2007			2006
	(In thousands of dollars)
Cash Flows from Operating Activities:
Net income	$	15,895		$	14,128
(Income) loss from discontinued operations		386			(502	)
Income from continuing operations		16,281			13,626
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations
Depreciation and amortization		2,472			2,179
Deferred income taxes		447			352
Non-cash compensation expense		857			764
Minority interest in income of subsidiary		496			372
Changes in operating assets and liabilities:
(Increase) decrease in short term investments		3,622			(23,803	)
(Increase) decrease in accounts receivable		(2,144	)		2,714
(Increase) in inventory		(1,499	)		(2,768	)
(Increase) decrease in prepaid expenses and other current assets		574			(925	)
(Increase) in other assets		(927	)		(1,592	)
(Decrease) increase in accounts payable		(270	)		743
(Decrease) in accrued expenses		(748	)		(1,861	)
(Decrease) in income taxes payable		(219)			(1,578	)
Net cash provided by (used in) continuing operations		18,942			(11,777	)
Net cash provided by (used in) discontinued operations		(174	)		544
Net cash provided by (used in) operating activities		18,768			(11,233	)
Cash flows from investing activities:
Acquisition of property and equipment		(1,484	)		(1,900	)
Capitalization of software development costs		(65	)		(461	)
Capitalization of patent costs		(121	)		(138	)
Acquisition of Futall AB		---			(2,276	)
Net cash used in investing activities		(1,670	)		(4,775	)
Cash flows from financing activities:
Net proceeds from sale of common stock		---			18,622
Dividends paid		(2,380	)		(1,764	)
Tax benefit on stock options		49			397
Proceeds from exercise of stock options		238			1,280
Repurchase of common stock		---			(217	)
Net cash (used in)provided by financing activities		(2,093	)		18,318
Effect of foreign currency translation		1,124			214
Net increase in cash and cash equivalents		16,129			2,524
Cash and cash equivalents at beginning of period		40,329			18,207
Cash and cash equivalents at end of period	$	56,458		$	20,731
Supplemental disclosures of cash flow information:
Cash paid during the three months for:
Interest	$	57		$	---
Income taxes	$	3,911		$	7,215

(See Notes to Condensed Consolidated Financial Statements)

VITAL SIGNS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. The condensed consolidated balance sheet as of March 31, 2007, the condensed consolidated statements of income for the three months and six months ended March 31, 2007 and 2006, and the condensed consolidated statements of cash flows for the six months ended March 31, 2007 and 2006, have been prepared by Vital Signs, Inc. (the “registrant”, the “Company”, “Vital Signs”, “we”, “us”, or “our”) and are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position at March 31, 2007 and the results of operations for the three months and six months ended March 31, 2007 and 2006, and the cash flows for the six months ended March 31, 2007 and 2006, have been made.

2. See the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 (the “Form 10-K”) for additional disclosures relating to the Company’s consolidated financial statements.

3. At March 31, 2007, the Company’s inventory was comprised of raw materials of $13,503,146 and finished goods of $ 7,244,030. At September 30, 2006, the Company’s inventory was comprised of raw materials of $12,806,848 and finished goods of $ 6,198,817.

4. In December 2006, the Company commenced a process to sell its Pharmaceutical Technology Services segment. Accordingly, the results for its Pharmaceutical Technology Services segment have been presented as a discontinued operation for all periods presented.

In September 2002, the Company classified its Vital Pharma, Inc. subsidiary as a discontinued operation. On October 30, 2003, the Company sold Vital Pharma, Inc. to Pro-Clinical, Inc. All activity for this transaction is presented in discontinued operations.

		Three Months Ended March 31,			Six Months Ended March 31,
		2007		2006		2007		2006
	(dollars in thousands)
Revenue	$	2,722	$	3,995	$	5,273	$	8,587
Pre-Tax (loss) income		(244)		329		(570)		798
Income tax (expense) benefit		64		(113)		184		(296)
Income (loss) from discontinued operations	$	(180)	$	216	$	(386)	$	502

The assets and liabilities attributable to discontinued operations are stated separately as of March 31, 2007 in the condensed consolidated balance sheet. The assets of the discontinued operations are included in current assets in the accompanying balance sheet because the assets are expected to be sold in the next year. The September 30, 2006 balance sheet has not been reclassified.

The major asset and liability categories attributable to discontinued operations are as follows:

	At March 31, 2007
	(In Thousands)
Cash	$	1,501
Accounts receivable		2,805
Net property		177
Goodwill		12,911
Other assets		1,127

Assets attributable to discontinued operations	$	18,521

Accounts payable and other accrued liabilities		124

Liabilities attributable to discontinued operations	$	124

VITAL SIGNS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. The Company has aggregated its business units into four reportable segments, Anesthesia, Respiratory/Critical Care, Sleep Disorder and Interventional Cardiology/Radiology. As such, management evaluates performance on the basis of gross profits and operating results of the four business segments. There are no material intersegment sales. Anesthesia and Respiratory/Critical Care share certain manufacturing, sales and administration costs; therefore the operating income, total assets, and capital expenditures are not specifically identifiable. However, the Company has allocated these shared costs on a net sales basis to arrive at operating profit for the anesthesia and respiratory/critical care segments. Total assets and capital expenditures for anesthesia and respiratory/critical care have also been allocated on a net sales basis. Summarized financial information concerning the Company’s reportable segments is shown in the following table:

	Anesthesia		Respiratory Critical Care		Sleep Disorders		Interventional Cardiology/ Radiology		Discontinued Operations	Consolidated
Three months Ended March 31,	(dollars in thousands)
2007
Net revenues	$ 18,869		$ 11,961		$ 12,612		$ 6,951			$ 50,393
Gross profit	9,849		6,436		6,886		3,885			27,056
Gross profit percentage	52.2	%	53.8	%	54.6	%	55.9	%		53.7	%
Operating income	4,451		2,823		2,115		3,083			12,472
2006
Net revenues	$ 18,410		$ 10,960		$ 11,632		$ 6,296			$ 47,298
Gross profit	9,416		5,776		6,099		3,379			24,670
Gross profit percentage	51.1	%	52.7	%	52.4	%	53.7	%		52.2	%
Operating income	3,830		2,750		1,509		2,424			10,513

	Anesthesia		Respiratory Critical Care		Sleep Disorders		Interventional Cardiology/ Radiology		Discontinued Operations	Consolidated
Six months Ended March 31,	(dollars in thousands)
2007
Net revenues	$ 36,577		$ 23,281		$ 23,358		$ 12,839			$ 96,055
Gross profit	18,581		12,758		12,742		7,057			51,138
Gross profit percentage	50.8	%	54.8	%	54.5	%	55.0	%		53.2	%
Operating income	8,281		5,272		3,584		5,482			22,619
Total assets	147,720		94,022		49,820		11,518		18,521	321,601
Capital expenditures	808		514		256		92			1,670
2006
Net revenues	$ 35,578		$ 21,505		$ 21,807		$ 11,546			$ 90,436
Gross profit	18,300		11,462		11,458		6,060			47,280
Gross profit percentage	51.4	%	53.3	%	52.5	%	52.5	%		52.3	%
Operating income	7,566		5,353		2,627		4,265			19,811
Total assets	145,470		71,575		37,503		11,104		19,220	284,872
Capital expenditures	1,200		626		503		170			2,499

6. Other comprehensive income for the period ended March 31, 2007 and 2006 consisted of:

(in thousands)	Three Months Ended March 31,				Six Months Ended March 31,
	2007		2006		2007		2006
Net income	$	8,601	$	7,468	$	15,895	$	14,128
Foreign currency translation		(165)		435		989		(112	)
Comprehensive income	$	8,436	$	7,903	$	16,884	$	14,016

7. As a result of the adoption of SFAS No. 123R, the Company’s net income for the six months ended March 31, 2007 and March 31, 2006 includes $857,000 and $764,000, respectively, of compensation expense and $49,000 and $397,000, respectively, of income tax benefits related to the Company’s stock options. The stock based compensation expense is included as a component of both selling, general and administrative and research and development expenses. The stock based compensation expense for selling , general and administrative and research and development for the six months ended March 31, 2006 and 2007 was $592,000 and $626,000, respectively and $172,000 and $231,000, respectively.

8. In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“SFAS 109”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. We do not expect that FIN 48 will have a material effect on our consolidated financial condition or results of operations.

In October 2006, the Securities Exchange Commission issued Staff Accounting Bulletin (SAB) 108, which provides guidance on quantifying and evaluating the materiality of unrecorded misstatements. SAB 108 requires that a company use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. SAB 108 is effective for the first fiscal year ending after November 15, 2006. We do not believe that SAB 108 will have a material effect on our consolidated financial condition or results of operations.

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

9. In connection with a finalization of an Internal Revenue Service examination of the Company’s 2003 and 2004 Federal income tax returns, the Company decreased its tax provision in the first quarter of fiscal 2007 by $419,000.

10. On April 3,2007, the Company’s Sleep Services of America subsidiary acquired the assets of Do You Snore, LLC, Southern Medical Equipment, Inc., and Advanced Sleep Technologies of Georgia, Inc. each is located in Atlanta, Georgia. Do You Snore, LLC and Advanced Sleep Technologies of Georgia Inc. primarily provide sleep diagnostic services in both free standing and hospital owned sleep laboratories, and Southern Medical Equipment is a provider primarily of CPAP equipment to sleep apnea patients. The aggregate cash purchase price is $11.5 million plus a 10% earnout over the next three years.

11. Included in the Company’s revenues in the Anesthesia and Respiratory/ Critical Care segments, are sales made to distributors. For the three month and six month periods ended March 31, 2007, these sales accounted for approximately 30.2% and 31.2%, respectively, of the net sales of the Company. The Company estimates and records the applicable rebates that have been or are expected to be granted or made for products sold during the period. These rebate amounts are estimated to be $17.7 million and $ 34.3 million for the three months and six months ended March 31, 2007 and are deducted from the gross sales to arrive at our reportable net sales for each period.

12. In accordance with Statement of Financial Standards No. 142 (“Goodwill and Other Intangible Assets”), goodwill and intangible assets that have indefinite useful lives are no longer amortized but rather are to be tested for impairment annually or more frequently if impairment indicators arise. The Company completed this impairment test during the three-month period ended March 31, 2007 and found no impairment. If the Company is required to record impairment charges in the future, it could have a material adverse impact on the Company’s results of operations and financial condition.

Summary of Goodwill:

	Six months ended March 31,
		2007			2006
Beginning balance		$	79,272		$	77,167
Goodwill discontinued operations			(12,911	)		---
Goodwill acquired during the period			---			2,105
Ending balance		$	66,361		$	79,272

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and notes to those consolidated financial statements, included elsewhere in this report.

Forward Looking Statements

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

All forward-looking statements are subject to known and unknown risks and uncertainties, including those discussed in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2006, and in Item 1A of Part II of this Quarterly Report, that could cause actual results to differ materially from historical results and those presently anticipated or projected. No forward-looking statement is a guarantee of future performance. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. You should read our cautionary statements as being applicable to all related forward-looking statements whenever they appear in:

	•	this report and materials referred to in this report;

	•	our press releases.

Overview

We are a leading designer, manufacturer and marketer of airway management products for the anesthesia, respiratory/critical care and sleep disorder markets. We sell our products in over 70 countries worldwide. We offer one of the broadest single-patient use anesthesia product lines in the industry and have developed numerous innovative products which are now considered industry standards. In addition, we sell therapeutic products for patients suffering from sleep disorders and provide sleep disorder diagnostic testing services at sleep centers and laboratories that we operate. We also manufacture interventional cardiology/radiology products, and, in our discontinued operations, deliver technological services to companies regulated by the United States Food and Drug Administration ( FDA).

Anesthesia

Our single-patient use anesthesia products and systems are designed to deliver oxygen and anesthesia from a gas source, such as an anesthesia machine, to a patient's pulmonary system, remove anesthetic gases, oxygen and carbon dioxide from a patient and link a patient with various monitors. Our principal anesthesia products consist of face masks, breathing circuits and general anesthesia products. Prior to this fiscal year, we had included within this segment the products sold by our Thomas Medical Products subsidiary. Thomas Medical primarily manufactures vascular access products for sale to other health care product providers to be used in their products, kits or sold as a finished product. The results of Thomas Medical are now reported under the business segment for Interventional Cardiology/Radiology.

Revenues in our anesthesia segment are driven primarily by the extent to which our hospital customers perform general surgeries. In addition, because most of our anesthesia products are single use products, we benefit when hospitals undertake programs to reduce the frequency of infections, known as nosocomial infections, which originate or occur within their settings. Revenues in this segment are negatively impacted by the trend among hospitals to allow group purchasing organizations to negotiate long-term contracts with medical device manufacturers on their behalf. Expenses in our anesthesia segment are driven primarily by the cost of raw materials,

labor costs and freight expenses. For information regarding a prospective change in the supplier of our face masks, see Item 1A of Part II of this Quarterly Report.

Respiratory/critical care

Our primary respiratory/critical care products are arterial blood gas (ABG), syringes and kits, manual resuscitators and blood pressure cuffs. Our Broselow line consists of color-coded products designed to facilitate and expedite the selection of proper equipment and dosing in pediatric medicine. Our respiratory/critical care segment responds to the growing needs of hospitals to provide respiratory relief and emergency care. We believe that in recent years there has been an increasing incidence of respiratory illnesses, such as asthma and emphysema, due in part to an increasingly susceptible aging population, environmental pollution, smoking-related illnesses and communicable diseases with significant respiratory impact, such as tuberculosis, HIV and influenza. These trends, together with concerns regarding the spread of nosocomial infections, drive our sales of respiratory products. As in our anesthesia segment, revenues in this segment have been negatively impacted by the emergence of group purchasing organizations. Expenses in this segment are driven principally by raw material costs, labor costs and freight expenses.

Sleep Disorders

We serve the sleep disorder market as both a provider of diagnostic services and a manufacturer of therapeutic products focused on sleep disorders. Through our Sleep Services of America, or SSA, subsidiary, we provide sleep diagnostic testing services in the United States in free standing laboratories and centers and, through contracts with hospitals, in hospital facilities, for patients suspected of suffering from obstructive sleep apnea. We have focused our efforts on laboratories and centers affiliated with hospitals, such as Johns Hopkins and the University of Maryland. Our diagnostic services business is driven by the growing awareness of the existence and significant consequences of obstructive sleep apnea. Our principal expense in our sleep diagnostic services business is the cost of employing the technicians who operate the sleep laboratories and centers.

Our Breas Medical AB, or Breas, subsidiary is a European manufacturer of personal ventilators for obstructive sleep apnea, respiratory distress and long term ventilation. Our sleep disorder products deliver airflow to patients undergoing therapy for the treatment of obstructive sleep apnea with the objective of increasing patient comfort and acceptance of the treatment. Our sleep disorder products employ continuous positive airway pressure, or CPAP, which is a common method for treating obstructive sleep apnea. We have manufactured and distributed CPAP systems for more than a decade in the international markets. These sales depend principally on the prevalence of sleep disorders and the acceptance by patients and care-givers in developed markets of treatment modalities for obstructive sleep apnea. Like our anesthesia and respiratory/critical care businesses, our Breas subsidiary faces the challenge of controlling raw material, labor and freight costs. To date, we have had only limited sales of our sleep disorder products in the United States due in part to the need to obtain regulatory clearance and in part to the dominance by our competitors in selling to home supply dealers. Our United States strategy is to sell these products primarily through our sleep centers.

Interventional cardiology/radiology

Through our Thomas Medical subsidiary we participate in the interventional cardiology/radiology market. In this business we design, develop, and manufacture precision devices that are used in electrophysiology, cardiology, radiology, critical care and anesthesia procedures. While this business benefits from the overall development of less invasive procedures in healthcare, it is highly dependent upon the conversion of development concepts to commercial products by our research and development team. We sell these products primarily through major cardiology/radiology companies. The customer base is, in turn, subject to stringent regulatory requirements as well as competitive pressures.

Pharmaceutical technology services-Discontinued Operations

In December 2006, the Company commenced a process to sell our Pharmaceutical Technology Services segment. See Note 4 to the Condensed Consolidated Financial Statements.

Through our Pharmaceutical Technology Services segment, we deliver technological services to FDA regulated companies primarily in the pharmaceutical sector. In addition, we also provide services to medical device, diagnostic and biotechnology companies. We advise clients by helping them establish and monitor processes designed to satisfy their regulatory requirements set forth by the FDA and have begun to develop and sell dedicated compliance software to our clients. Our principal costs in this segment are our labor costs.

Net revenues

Net revenues consist of sales of our anesthesia, respiratory/critical care, sleep disorder, interventional cardiology/radiology and personal ventilation products and revenues from our sleep disorder diagnostic services. The amount and percentage of our net revenue derived from each of our business segments were as follows during the periods indicated:

	Three months ended March 31, 2007							Three months ended March 31, 2006
(dollars in thousands)	Net revenue			Percent of total revenue				Net revenue			Percent of total revenue

Anesthesia		$	18,869		37.5	%	$		18,410	38.9		%
Respiratory/critical care			11,961		23.7	%			10,960	23.2		%
Sleep disorder and personal ventilation			12,612		25.0	%			11,632	24.6		%
Interventional cardiology/radiology			6,951		13.8	%			6,296	13.3		%

Total		$	50,393		100.0	%	$		47,298	100.0		%

	Six months ended March 31, 2007							Six months ended March 31, 2006
(dollars in thousands)	Net revenue			Percent of total revenue				Net revenue			Percent of total revenue

Anesthesia		$	36,577		38.1	%	$		35,578	39.3		%
Respiratory/critical care			23,281		24.2	%			21,505	23.8		%
Sleep disorder and personal ventilation			23,358		24.3	%			21,807	24.1		%
Interventional cardiology/radiology			12,839		13.4	%			11,546	12.8		%

Total		$	96,055		100.0	%	$		90,436	100.0		%

For all product sales, revenue is recognized when title to the product passes to the customer. For product sales to all customers except for certain domestic distributors, title passes upon shipment of the product by us. For sales through certain domestic distributors, title passes when the product is received by the distributor.

For service revenue in the sleep disorder segment, revenue is recognized when the service is performed.

Gross revenues associated with our anesthesia and respiratory/critical care products are reduced by the amount of rebates due on sales to distributors.

We have provided a reconciliation of gross to net product sales, as well as a comparison with service revenues, below:

	Three months ended March 31,					Six months ended March 31,
	(in thousands)					(in thousands)
	2007			2006				2007			2006
Gross sales	$	64,218		$	59,362		$	122,623		$	114,130
Rebates		(17,673	)		(15,704	)		(34,260	)		(30,837	)
Other deductions ( 1 )		(1,237	)		(1,203	)		(2,357	)		(2,263	)
Net sales		45,308			42,455			86,006			81,030
Service revenues		5,085			4,843			10,049			9,406
Total net revenues	$	50,393		$	47,298		$	96,055		$	90,436

(1)

Other deductions consist of discounts, returns and allowances.

Research and development

The focus of our research and development efforts, and the amount of such expenses that we incur, vary from year to year and quarter to quarter based on the specific needs of our business. For the three months ended March 31, 2007 and 2006, we incurred $1.7 million of research and development expenses in each quarter. For the six months ended March 31, 2007 and 2006, we incurred $3.6 million and $3.4 million of research and development expenses, respectively.

International sales

Our products are sold in over 70 countries worldwide. The table below sets forth our international sales, by segment, for the periods presented:

	2007				2006
Three months ended March 31, (dollars in thousands)	Net revenue		Percent of total revenue		Net revenue	Percent of total revenue
Anesthesia		$ 2,486	4.9	%	$ 2,344	4.9	%
Respiratory/critical care		3,486	6.9	%	3,274	6.9	%
Sleep disorder		7,528	15.0	%	6,788	14.4	%
Total		$13,500	26.8	%	$ 12,406	26.2	%

	2007				2006
Six months ended March 31, (dollars in thousands)	Net revenue		Percent of total revenue		Net revenue	Percent of total revenue
Anesthesia		$ 4,636	4.8	%	$ 4,254	4.7	%
Respiratory/critical care		6,287	6.5	%	6,374	7.1	%
Sleep disorder		13,310	13.9	%	12,401	13.7	%
Total		$24,233	25.2	%	$ 23,029	25.5	%

Foreign exchange risks

Our international business exposes us to foreign exchange risks, particularly with respect to international sales of our sleep disorder and personal ventilation products by our Breas subsidiary. Sales of such products by our Breas subsidiary are translated from Swedish kroner to United States dollars.

Results of operations

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

			Three Months Ended March 31,						Six Months Ended March 31,
	2007				2006			2007				2006
Consolidated statement of income data:
Net revenue		100.0		%		100.0	%			100.0	%		100.0	%
Cost of goods sold		46.3				47.8				46.8			47.7
Gross profit:
Anesthesia		52.2				51.1				50.8			51.4
Respiratory/critical care		53.8				52.7				54.8			53.3
Sleep disorder		54.6				52.4				54.5			52.5
Interventional cardiology/radiology		55.9				53.7				55.0			52.5
Total		53.7				52.2				53.2			52.3
Operating expenses:
Selling, general and administrative		25.2				26.3				25.6			26.6
Research and development		3.4				3.7				3.7			3.8
Other expense, net		0.3				0.0				0.3			0.0
Total operating expenses		28.9				29.9				29.7			30.4
Interest income, net		(2.2		)		(1.4	)			(2.2	)		(1.4	)
Provision for income taxes		9.0				7.9				8.3			7.8
Income from continuing operations		17.4				15.3				17.0			15.1
Net income		17.1				15.8				16.6			15.6

Comparison of Results for the Three-Months Ended March 31, 2007 to the Three-Months Ended March 31, 2006.

Net Revenue. Net revenues for the three months ended March 31, 2007 increased by 6.5% (an increase of 4.9% excluding the favorable effect of foreign exchange) to $50.4 million as compared to $47.3 million in the comparable period last year. Of our total revenues, $36.9 million, or 73.2%, were derived from domestic sales and $13.5 million, or 26.8%, were derived from international sales. Domestic revenues increased by 5.7%, from $34.9 million for the second quarter of fiscal 2006 to $36.9 million for the second quarter of fiscal 2007. International sales increased by 8.8%, from $12.4 million for the second quarter of fiscal 2006 to $13.5 million for the second quarter of fiscal 2007. The international sales increase would have been a 2.7% increase were it not for foreign exchange rates.

The following are the net revenues by business segment for the three months ended March 31, 2007 compared to the three months ended March 31, 2006:

NET REVENUE BY BUSINESS SEGMENT

Three months ended March 31, (Dollars in thousands)	2007		2006		Percent change
Consolidated statement of income data:
Anesthesia	$	18,869	$	18,410		2.5	%
Respiratory/critical care		11,961		10,960		9.1	%
Sleep disorder		12,612		11,632		8.4	%
Interventional cardiology/radiology		6,951		6,296		10.4	%
Total	$	50,393	$	47,298		6.5	%

Anesthesia. Sales of anesthesia products increased 2.5% from $18.4 million for the three months ended March 31, 2006 to $18.9 million for the three months ended March 31, 2007. Domestic sales of anesthesia products increased 2.0%, from $16.0 million for the three months ended March 31, 2006 to $16.4 million for the three months ended March 31, 2007,primarily from a 15.5% increase in our anesthesia circuits to $7.4 million and a 10.2% increase in

our pressure infusor bag product line. International sales of anesthesia products increased 6.1%, from $2.3 million for the three months ended March 31, 2006 to $2.5 million for the three months ended March 31, 2007, reflecting increases in our pressure infusor bag and face mask product lines.

Respiratory/critical care. Sales of respiratory/critical care products increased 9.1%, from $11.0 million for the three months ended March 31, 2006 to $12.0 million for the three months ended March 31, 2007. Domestic sales of respiratory/critical care products increased by 10.3%, from $7.7 million for the three months ended March 31, 2006 to $8.5 million for the three months ended March 31, 2007, reflecting increases in our ABG and Broselow Color Coded product lines. International sales of respiratory/critical care products increased by 6.5%, from $3.3 million for the three months ended March 31, 2006 to $3.5 million for the three months ended March 31, 2007, reflecting increases in our blood pressure cuff product line.

Sleep Disorder. Net revenues in our sleep disorder segment increased 8.4% (an increase of 1.9% excluding foreign exchange) from $11.6 million for the three months ended March 31, 2006 to $12.6 million for the three months ended March 31, 2007. Excluding the favorable effect of foreign exchange translation (of approximately $0.7 million), revenues for Breas, our European manufacturer of personal ventilators and CPAP devices, increased 10.9%, from $6.8 million during the three months ended March 31, 2006 to $7.5 million during the three months ended March 31, 2007. The net revenues at Sleep Services of America (SSA), our domestic sleep diagnostic business increased 5.0%, from $4.8 million during the three months ended March 31, 2006 to $5.1 million during the six months ended March 31, 2007.

Interventional cardiology/radiology. Our interventional cardiology/radiology segment revenues increased by 10.4% from $6.3 million for the three months ended March 31, 2006 to $7.0 million for the three months ended March 31, 2007, resulting from an increase in our introducer sheath product line.

Gross profit

We have set forth below the dollar amount of our gross profits and our gross profit margins for each of our four continuing segments:

Three months ended March 31, (Dollars in thousands)	2007					2006
	Gross profit		Gross profit margin			Gross profit		Gross profit margin
Anesthesia	$	9,849		52.2	%	$	9,416		51.1	%
Respiratory/critical care		6,436		53.8			5,776		52.7
Sleep disorder		6,886		54.6			6,099		52.4
Interventional cardiology/radiology		3,885		55.9			3,379		53.7
Total	$	27,056		53.7	%	$	24,670		52.2	%

Gross profit dollar improvements in our anesthesia and respiratory/critical care segments correspond to a concerted focus on cost improvement projects in our manufacturing facilities. The implementation of several of these projects has had a positive impact on both our anesthesia and respiratory /critical care segments. The gross profit margin in the anesthesia segment improved 1.1% compared to the prior period. The gross profit margin in the respiratory/critical care segment improved 1.1% compared to the same period last year. The gross profit increase in our sleep disorder segment resulted from an increase in the average revenue per study, as well as a higher gross profit margin on new Breas products. The gross profit margin in sleep disorder diagnostic services increased from 55.7% in the second quarter of fiscal 2006 to 58.6% in the second quarter of fiscal 2007. The gross profit margin in our interventional cardiology/radiology segment increased from 53.7% in the second quarter of fiscal 2006 to 55.9% in the second quarter of fiscal 2007. The increase is attributable to increased sales in our introducer sheath product line.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 2.4%, from $12.4 million for the three months ended March 31, 2006 to $12.7 million for the three months ended March 31, 2007. The increase consists primarily of increased healthcare costs and compensation costs, offset in part by savings in freight costs.

Research and Development Expenses. Research and development expenses remained relatively even for the three months ended March 31, 2006 and for the three months ended March 31, 2007 at $1.7 million.

Other (Income) Expense—Net. Other expense, net, included in operating expenses was $136,000 for the three months ended March 31, 2007. The difference reflects an increase in legal fees relating to the enforcement of our rights against a former employee.

Interest Income and Expense. Interest income increased $0.4 million from $0.7 million for the three months ended March 31, 2006 to $1.1 million during the three months ended March 31, 2007, resulting from the increase in available cash and cash equivalents and short-term investments, as well as increased interest rates.

Provision for Income Taxes. The provision for income tax expense for the three months ended March 31, 2006 and 2007 was $3.7 million and $4.5 million, respectively, reflecting an effective tax rate of 33.4% for both periods.

Discontinued Operations. The net income (loss) from discontinued operations was $216,000 and $(180,000) for the three months ended March 31, 2006 and 2007, net of taxes.

Comparison of Results for the Six-Months Ended March 31, 2007 to the Six-Months Ended March 31, 2006.

Net Revenue. Net revenues for the six months ended March 31, 2007 increased by 6.2% (an increase of 4.5% excluding the favorable effect of foreign exchange) to $96.1 million as compared to $90.4 million in the comparable period last year. Of our total revenues, $71.8 million, or 74.8%, were derived from domestic sales and $24.2 million, or 25.2%, were derived from international sales. Domestic revenues increased by 6.5%, from $67.4 million for the first six months of fiscal 2006 to $71.8 million for the first six months of fiscal 2007. International sales increased by 5.2%, from $23.0 million for the first six months of fiscal 2006 to $24.2 million for the first six months of fiscal 2007. The international sales increase would have been a 1.0% decrease were it not for foreign exchange rates.

The following are the net revenues by business segment for the six months ended March 31, 2007 compared to the six months ended March 31, 2006:

NET REVENUE BY BUSINESS SEGMENT

Six months ended March 31, (Dollars in thousands)	2007		2006		Percent change
Consolidated statement of income data:
Anesthesia	$	36,577	$	35,578		2.8	%
Respiratory/critical care		23,281		21,505		8.3	%
Sleep disorder		23,358		21,807		7.1	%
Interventional cardiology/radiology		12,839		11,546		11.2	%
Total	$	96,055	$	90,436		6.2	%

Anesthesia. Sales of anesthesia products increased 2.8% from $35.6 million for the six months ended March 31, 2006 to $36.6 million for the six months ended March 31, 2007. The increase resulted primarily from a 14.2% increase in sales of our infusor bag product line to $4.2 million and a 7.0% increase in sales of our anesthesia circuits to $13.7 million. Domestic sales of anesthesia products increased 2.0%, from $31.3 million for the six months ended March 31, 2006 to $31.9 million for the six months ended March 31, 2007. International sales of anesthesia products increased 9.0%, from $4.3 million for the six months ended March 31, 2006 to $4.6 million for the six months ended March 31, 2007.

Respiratory/critical care. Sales of respiratory/critical care products increased 8.3%, from $21.5 million for the six months ended March 31, 2006 to $23.3 million for the six months ended March 31, 2007. This result was primarily attributable to a 44.9% increase in sales of our Broselow color coded product line and a 9.3% increase in sales of our blood pressure cuffs. Domestic sales of respiratory/critical care products increased by 12.3%, from $15.1 million for the six months ended March 31, 2006 to $17.0 million for the six months ended March 31, 2007. International sales of respiratory/critical care products decreased by 1.4%, from $6.4 million for the six months ended March 31, 2006 to $6.3 million for the six months ended March 31, 2007, reflecting decreases in sales of our ABG and resuscitator product lines.

Sleep Disorder. Net revenues in our sleep disorder segment increased 7.1% (an increase of 0.5% excluding foreign exchange) from $21.8 million for the six months ended March 31, 2006 to $23.4 million for the six months ended March 31, 2007. Excluding the favorable effect of foreign exchange translation (of approximately $1.4 million),

revenues for Breas, our European manufacturer of personal ventilators and CPAP devices, increased 7.3%, from $12.4 million during the six months ended March 31, 2006 to $13.3 million during the six months ended March 31, 2007. The net revenue at Sleep Services of America (SSA), our domestic sleep diagnostic business, increased 6.8%.

Interventional cardiology /radiology. Our interventional cardiology/radiology segment revenues increased by 11.2% from $11.5 million for the six months ended March 31, 2006 to $12.8 million for the six months ended March 31, 2007, resulting from an increase in revenue in our introducer sheath product line.

Gross profit

We have set forth below the dollar amount of our gross profits and our gross profit margins for each of our four continuing segments:

Six months ended March 31, (Dollars in thousands)	2007					2006
	Gross profit		Gross profit margin			Gross profit		Gross profit margin
Anesthesia	$	18,581		50.8	%	$	18,300		51.4	%
Respiratory/critical care		12,758		54.8			11,462		53.3
Sleep disorder		12,742		54.5			11,458		52.5
Interventional cardiology/radiology		7,057		55.0			6,060		52.5
Total	$	51,138		53.2	%	$	47,280		52.3	%

The gross profit margin remained relatively even in the anesthesia segment from 51.4% for the six months ended March 31, 2006 to 50.8% for the six months ended March 31, 2007. The gross profit margin in the respiratory/critical care segment improved 1.5% from 53.3% for the six months ended March 31, 2006 to 54.8% for the six months ended March 31, 2007, resulting primarily from sales volume increases in our Broselow and blood pressure cuff product lines. The gross profit dollar increase in our sleep disorder segment resulted from increased gross profit margins on new Breas products as well as improved utilization at our sleep diagnostic centers. The gross profit margin in sleep disorder diagnostic services increased from 56.2% for the six months ended March 31, 2006 to 58.5% for the six months ended March 31,2007. The gross profit margin improvement of 2.5% in our interventional cardiology/radiology segment resulted primarily from an increase in sales of introducer sheath product, which is part of our interventional cardiology product line.

Gross profits in our anesthesia segment will likely be impacted in the future by our recently announced decision that we do not intend to renew our manufacturing agreement with Respironics when it expires in the summer of 2007. We have entered into a new face mask supply agreement with a Chinese medical device manufacturer at a cost below the renewal terms offered by Respironics. In addition, we have reached an agreement to form a joint venture with the new manufacturer, subject to required Chinese government approval. We believe that the transition of suppliers will have little to no financial impact for the remainder of the 2007 fiscal year, given our current inventory level. We expect to start realizing cost savings and improved margins from our new supply agreement in fiscal 2008. Actual results could differ materially from this forward-looking statement as a result of a variety of factors, including difficulties associated with ramping-up supply with a new supplier, potential delays in obtaining approval from the Chinese government and other risk factors described in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2006. Reference is also made to Item 1A of Part II of this Quarterly Report.

Operating Expenses

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 2.3%, from $24.1 million for the six months ended March 31, 2006 to $24.6 million for the six months ended March 31, 2007. The increase consists primarily of increased healthcare costs and compensation costs.

Research and Development Expenses. Research and development expenses increased by approximately $0.2 million, or 5.2%, from $3.4 million for the six months ended March 31, 2006 to $3.6 million for the six months ended March 31, 2007.

Other (Income) Expense—Net. Other income, net, included in operating expenses was $(11,000) and $320,000 for the six months ended March 31, 2006 and 2007, respectively. The difference reflects an increase in legal fees relating to the enforcement of our rights against a former employee.

Interest Income and Expense. Interest income increased $.9 million from $1.2 million for the six months ended March 31, 2006 to $2.1 million during the six months ended March 31, 2007, resulting from the increase in available cash and cash equivalents and short-term investments, as well as increased interest rates.

Provision for Income Taxes. The provision for income tax expense for the six months ended March 31, 2006 and 2007 was $7.0 million and $7.9 million, respectively, reflecting effective tax rates of 33.5% and 32.0% for these periods, respectively. The reduction in the effective tax rate resulted primarily from the completion of an Internal Revenue Service examination of our 2003 and 2004 federal income tax returns, where it was determined that certain reserves were no longer required.

Discontinued Operations. The net income (loss) from discontinued operations was $502,000 and $(386,000) for the six months ended March 31, 2006 and 2007, respectively, net of taxes.

Liquidity and Capital Resources

We believe that the funds generated from operating activities, cash and cash equivalents and short term investments, will be sufficient to satisfy our operating and capital requirements during the next twelve months.

Cash flows

Historically, our primary liquidity requirements have been to finance business acquisitions and to support operations. We have funded these requirements primarily through internally generated cash flow.

During the six months ended March 31, 2007, continuing operating activities provided $18.9 million of net cash. Investing activities used $1.7 million of net cash, primarily for capital additions. Financing activities used $2.1 million, consisting of $2.3 million paid for dividends, offset in part by $0.2 million of cash received from the exercise of stock options. On May 7, 2007 we increased our quarterly dividend from $.09 per share to $.10 per share.

During the six months ended March 31, 2006, operating activities used $11.2 million of net cash. Investing activities used $4.8 million of net cash, consisting of $2.3 million for the purchase of rights related to CO2 indicator technology from Futall AB and $2.5 million for capital additions. Financing activities provided $18.3 million, consisting of $18.6 million from the public offering of common stock, $1.3 million of cash received from the exercise of stock option and $0.4 million from tax benefits realized on stock options, offset in part by $1.8 million paid for dividends and $0.2 million for the repurchase of common stock. On May 3, 2006, we increased our quarterly dividend from $.07 per share to $.09 per share.

Cash, Short Term Investments and Working Capital

Cash and cash equivalents and short term investments were $138.4 million at March 31, 2007 as compared to $126.8 million at September 30, 2006.

At March 31, 2007, our working capital was $200.1 million compared to $169.8 million at September 30, 2006. At March 31, 2007, the current ratio was 11.0 to 1.0 and at September 30, 2006, the current ratio was 12.1 to 1.0.

Debt

We have no committed lines of financing.

Working capital policy and capital expenditures

Our current policy is to retain working capital and earnings for use in our business, subject to the payment of certain cash dividends. Such funds may be used for the buyback of our common stock, business acquisitions, product acquisitions and product development, among other things. We regularly evaluate and negotiate with domestic and foreign medical device companies regarding potential business or product line acquisitions, licensing arrangements and strategic alliances. Thus, for example, in April 2007, we announced the acquisition of two sleep diagnostic companies and their associated durable medical equipment company. The aggregate cash purchase price is $11.5 million plus a 10% earnout over the next three years.

Capital expenditures for the first six months of fiscal 2007 were approximately $1.7 million, and included equipment and building improvements at our New Jersey facility ($0.5 million), building improvement and equipment at our Colorado and Minnesota manufacturing plants ($0.5 million) and patents ($0.1 million).

Other

At March 31, 2007 and 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have material relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

On May 7, 2007, our Board of Directors approved a quarterly dividend of $0.10 per share payable on May 31, 2007 to shareholders of record at the close of business on May 18, 2007. Shareholders with settlement dates after the May 18, 2007 record date will not receive this dividend, even if they entered into agreements to purchase their shares before May 18, 2007. Thus, for example, an investor who agrees to purchase shares before May 18, 2007 with a settlement date after May 18, 2007 will not receive the dividend.

Critical accounting estimates

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended September 30, 2006 for a discussion of the estimates and judgments necessary in our accounting for revenue recognition, allowances for rebates and doubtful accounts, allowances for inventory, valuation of long-lived and intangible assets and legal contingencies.

Recent accounting pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“SFAS 109”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is ‘more likely than not” that the position is sustainable based on its technical merits. We do not expect that FIN 48 will have a material effect on our consolidated financial condition or results of operations.

In October 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 108, which provides guidance on quantifying and evaluating the materiality of unrecorded misstatements. SAB 108 requires that a company use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. SAB 108 is effective for the first fiscal year ending after November 15, 2006. We do not believe that SAB 108 will have a material effect on the Company’s financial position or results of operation.

We do not believe that any other recently issued but not yet effective accounting standards will have a material effect on the our consolidated financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including the impact of material price changes and changes in the market value of our investments and, to a lesser extent, interest rate changes and foreign currency fluctuations. In the normal course of business, we seek to limit the impact of market risks on earnings and cash flows.

The impact of interest rate changes is not material to our financial condition. We do not enter into interest rate transactions for speculative purposes.

For the first six months of fiscal 2007, our international net revenue represented approximately 25.2% of our total net revenues. Our Breas subsidiary, located in Sweden, represented 54.9% of our total international net revenues during the first six months of fiscal 2007. We do not enter into any derivative transactions, including foreign currency transactions, for speculative purposes. We have not entered into any derivative instrument transactions, such as foreign exchange forward or option contracts, as of March 31, 2007.

Our primary risk involving price changes relates to raw materials used in our operations. We are exposed to changes in the prices of resins and latex for the manufacture of our products. We do not enter into commodity futures or derivative instrument transactions. Except with respect to our historical practice of maintaining a single source of supply for face masks, we seek to maintain commercial relations with multiple suppliers and when prices for raw materials rise to attempt to source alternative supplies.

Item 4. Controls and Procedures

(a) Disclosure controls and procedures. As of the end of the most recently completed fiscal quarter covered by this report, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by Vital Signs in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal controls over financial reporting. There have been no changes in our internal controls over financial reporting that occurred during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

On February 2, 2007, we announced that we had given notice to Respironics Inc., our supplier of anesthesia face masks, that we will not be renewing our current manufacturing agreement when it expires in the summer of 2007. We also announced that we had entered into a new face mask supply agreement with a Chinese medical device manufacturer at a cost below the renewal terms offered by Respironics. Further, we announced that we have reached a binding agreement to form a joint venture with the new manufacturer, subject to required Chinese government approval. The supply of face masks from Respironics will continue through the end of our current contract. As a result of these developments, we have revised our risk factor relating to our purchase of face masks. The following risk factor supercedes the risk factor description of our relationship with Respironics set forth in our Annual Report on Form 10-K for the year ended September 30, 2006.

We are dependent on a single supplier for one of our key products.

Since 1980, we have purchased our anesthesia face masks from a single source, Respironics, Inc., which maintains a site in the People’s Republic of China at which it manufactures face masks for our anesthesia segment. We have notified Respironics that we will not be renewing our current manufacturing agreement when it expires in the summer of 2007. We have entered into a new face mask agreement with a Chinese medical device manufacturer; we have also entered into a joint venture agreement with that supplier which is subject to the approval of the Chinese government. The joint venture agreement will enable us to invest in this new relationship if necessary to assure us that our new supplier can meet our demands for the quantities of anesthesia face masks that we will require. If we are unable to obtain our anesthesia face masks in the quantities we require, our business and revenue could be materially adversely affected. If the supply of our anesthesia face masks is interrupted or ceases for any reason, we could experience disruption in our business. In the event of such an interruption or cessation, we may not be able to obtain anesthesia face masks in a sufficient quantity or at a cost-effective price, which could have a material adverse effect on our business, financial condition and results of operations.

Item 6. Exhibits

Exhibits

31.1	—	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	—	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	—	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.

		VITAL SIGNS, INC.
		By:	/s/ William Craig
			William Craig Chief Financial Officer

Date: May 8, 2007

EXHIBIT INDEX

Exhibits

31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.