<PAGE>   1

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 For the fiscal year ended May 31, 1997

[ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934 
      For the transition period from _____ to _____

Commission File No. 0-18105

                                VASOMEDICAL, INC.
                (Name of registrant as specified in its charter)

Delaware                                                     11-2871434
(State or other jurisdiction of                              (IRS Employer
of incorporation or organization)                            Identification No.)

180 Linden Avenue, Westbury, New York                        11590
(Address of Principal Executive Offices)                     (Zip Code)

Registrant's telephone number, including area code:          (516) 997-4600

           Securities registered under Section 12(b) of the Act: None

              Securities registered under Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (Title of Class)

         Indicate by a 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 a 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 the voting stock held by non-affiliates
of the registrant as of July 31, 1997, based on the average price on that date,
was $76,798,000. At July 31, 1997, the number of shares outstanding of the
issuer's common stock was 47,155,004.


                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain exhibits are incorporated herein by reference as set forth in
Item 13(a)3, Index to Exhibits, in Part IV.


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                                     PART I

ITEM ONE - BUSINESS

         Except for historical information contained herein, the matters
discussed are forward looking statements that involve risks and uncertainties.
Among the factors that could cause actual results to differ materially are the
following: the effect of the dramatic changes taking place in the healthcare
environment; the impact of competitive procedures and products and their
pricing; unexpected manufacturing problems in foreign supplier facilities;
unforeseen difficulties and delays in the conduct of clinical trials and other
product development programs; the actions of regulatory authorities and
third-party payers in the United States and overseas; uncertainties about the
acceptance of a novel therapeutic modality by the medical community; and the
risk factors reported from time to time in the Company's SEC reports.

GENERAL

         Vasomedical, Inc. (the "Company"), incorporated in Delaware in July
1987, is engaged in the commercialization of EECP(R), a microprocessor-based
medical device for the non-invasive, atraumatic treatment of patients with
coronary artery disease. EECP(R) is marketed worldwide to hospitals, clinics and
other cardiac health care providers.

          In fiscal 1992, the Company, through the purchase of a 55% interest in
Vaso Interim Corp. ("Vaso Interim"), acquired the worldwide exclusive marketing
rights (except in China) to EECP(R) and agreed to fund the research and
development activities of Vasogenics, Inc. ("Vasogenics"), its joint-venture
partner in Vaso Interim and sole minority shareholder. Vasogenics held the
intellectual property rights to the EECP(R) technology, including patents and
manufacturing rights.

          In January 1995, the Company acquired all the capital stock of
Vasogenics for stock consideration and the assumption of certain liabilities. In
connection with the acquisition, the Company retained certain key employees of
Vasogenics who had been involved in the development of the EECP(R) technology.

         EECP(R), which had undergone clinical studies at the State University
of New York's University Medical Center at Stony Brook ("Stony Brook"), received
marketing clearance from the Food and Drug Administration ("FDA") under a 510(k)
premarket notification in February 1995.

         The Company's 61%-owned subsidiary, Viromedics, Inc. ("VMI"), was
formed in 1989 to acquire certain rights to an organic compound intended to be
used as an anti-viral agent. VMI entered into an agreement with the Albert
Einstein College of Medicine ("AECOM") which, as modified in September 1994,
assigned its entire rights and interest in the organic compound in exchange for
the release of all outstanding financial commitments due AECOM and for 20% of
any monetary consideration received by AECOM for VMI's patent rights and
know-how, as defined. To date, no monetary consideration has been received by
VMI.

THE EECP(R) SYSTEM

General Discussion

         Coronary heart disease ("CHD") is the number one cause of death in the
United States. A major complication of CHD is angina pectoris, from which
millions of Americans suffer. It is caused by obstruction of arteries which
supply the heart muscle with blood. The pain associated with angina pectoris can
be disabling, and conventional therapy, when medication fails, consists of
invasive procedures, such as percutaneous transluminal coronary angioplasty
("PTCA") and coronary artery bypass grafting ("CABG"). According to a Report of
the American College of Cardiology/American Heart Association Task Force on
Assessment of Diagnostic and Therapeutic Cardiovascular Procedures, re-occlusion
of dilated vessels occurs within six months of PTCA interventions in 30% to 40%
of cases (Journal of the American College of Cardiology Vol. 22, No. 7) and
localized or diffuse narrowings of vein grafts occur by ten years after CABG
(Circulation Vol. 83, No. 3).



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         In March 1989, Vasogenics received 510(k) marketing clearance from the
FDA for the MC1 model of the EECP(R) system. In February 1995, the Company
received 510(k) marketing clearance for its EECP-MC2 model, which incorporated
the latest technological improvements of external counterpulsation. Marketing
clearance was for use of EECP(R) in the treatment of patients suffering from
stable and unstable angina pectoris, acute myocardial infarction and cardiogenic
shock. The Company has, however, decided to focus initially only on the stable
angina pectoris indication.

         A US patent (which expires in 2005) covering EECP(R) design and
functions was issued in June 1988 to Dr. Zheng of Sun Yat-sen University of
Medical Sciences in China. This patent was assigned to Vasogenics in September
1991 and it is now owned by the Company. Additional international and domestic
patent applications were filed in May 1993. A new US patent was issued in
October 1996 and the Company expects international patents to issue during
fiscal 1998. Such patents cover several specific enhancements to the current
EECP(R) model.

The System
         EECP(R) is an advanced treatment system utilizing fundamental
hemodynamic principles to relieve angina pectoris. Treatment involves the
inflation and deflation of a series of compressive air cuffs applied to the
patient's lower extremities - the calves, lower thighs, and upper thighs,
including the large vascular beds in the buttocks. Timing for inflation and
deflation is regulated by a microprocessor running electrocardiogram ("ECG")
signals through sets of algorithms that monitor safety and precision.

         Upon diastole, the cuffs are inflated sequentially and rapidly from the
calves proximally, creating a retrograde arterial pressure wave that increases
systemic aortic diastolic pressure, coronary perfusion pressure and blood flow.
Compression of the vascular beds of the legs also increases venous return.
Instantaneous decompression of all cuffs at the onset of systole lowers vascular
impedance, thereby decreasing ventricular workload. This latter effect, when
coupled with the augmented venous return, raises cardiac output by as much as
63%.

         Patients usually begin to experience symptomatic relief of angina after
15 or 20 hours of a 35-hour treatment regimen. Positive effects are sustained
between treatments and usually persist years after completion of a full course
of therapy, as reported in the April 15, 1995 issue of the American Journal of
Cardiology.

         The mechanism by which EECP(R) produces long-term patient benefits
remains uncertain, but thallium-201 and exercise stress test results combined
are strongly indicative of an improvement in myocardial perfusion and resolution
of ischemic defects. The most logical explanation for these observations is that
EECP(R) in some way stimulates collateral vessel recruitment and/or growth.
Collateral vessels may be regarded as one of the heart's emergency systems, and
can be called upon to open up and also to be extended by new growth, in response
to ischemia.

         The contribution of collateral blood flow to total myocardial perfusion
has been recognized for decades. Collateral vessels are brought into play by a
critical occlusion in a coronary artery. This causes a drop in perfusion
pressure distal to the occlusion, which, in turn, creates an increased pressure
gradient across the collateral vessel bridging the patent and occluded artery.
The increased pressure gradient is believed to be the main reason for
recruitment of collateral vessels in the early stages of acute myocardial
ischemia. As EECP(R) increases diastolic, and thus coronary perfusion pressure,
it would be expected to increase the intensity of the stimulus and thereby
enhance the recruitment of latent collateral vessels. However, the fact that
most patients do not begin to experience symptomatic benefit until after the
second or third week of treatment suggests the possibility that growth of new
vessels may also be involved. This could, in turn, result from chronic
alteration and resetting of autocrine and endocrine neurohormonal systems,
including concentrations of local growth factors. Studies to explore these
possibilities are already being planned. Factors such as angiotensin II,
endothelin and platelet-derived growth factor ("PDGF") have all been shown to
possess both vasoactive and mitotic properties on vascular smooth muscle. It is
possible that EECP(R) may cause some resetting of the systems (e.g.,
baroreceptors) which regulate blood pressure. If these changes were to involve
some of the aforementioned factors, they might exert their immediate effects on
vascular smooth muscle tone and their long-term effects on vascular smooth
muscle mass.


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         The results of studies carried out at Stony Brook, supported by
previous experience in China, provide the first indications that EECP(R) may
stimulate collateral flow in chronic stable angina. In support of this
suggestion, it is becoming apparent that the best results with this technique
are obtained in patients with at least one patent major epicardial vessel, and
who therefore still have the means to develop collaterals. The response rate in
patients with severe or diffuse triple-vessel disease has been poor.

         The Company's EECP(R) equipment consists of a control unit, an air
compressor, an ECG and pulse monitoring unit, in addition to the series of
compressive cuffs that are wrapped around the lower extremities of the patient.
The EECP(R) timing logic is controlled by a central microprocessor which obtains
signals from the electrical activities of the heart, determines the period for
each heart beat, calculates the precise instant when the heart is contracting or
relaxing and sends out a signal to control the inflation and deflation valves so
as to apply and relieve pressure at the appropriate time.

Clinical Studies

         Early experiments with counterpulsation at Harvard in the 1950s
demonstrated that this technique markedly reduces the workload, and thus oxygen
consumption, of the left ventricle. This basic effect has been demonstrated over
the past 40 years in both animal experiments and in patients. The clinical
benefits of counterpulsation were less consistently observed in early studies
because of equipment that lacked sequential cuff inflation and the
computer-controlled operating system that made sequential cuff inflation and
other features possible. As the technology improved, however, it became apparent
that both internal and external forms of counterpulsation were capable of
improving survival in patients with cardiogenic shock following myocardial
infarction. Later, in the 1980s, Dr. Zheng and colleagues in China reported on
their extensive experience in treating angina using the newly developed enhanced
sequential device - EECP(R). Not only did a course of treatment with EECP(R)
reduce the frequency and severity of anginal symptoms during normal daily
functions and also during exercise, but the improvements were sustained for
years after therapy.

         These results prompted a group of investigators at Stony Brook to
undertake studies with EECP(R) to reproduce the Chinese results, using both
subjective and objective endpoints. The first study group consisted of 18
patients with chronic stable angina, despite medical and surgical intervention,
as well as evidence, assessed by thallium-201 perfusion imaging, of ischemia
during an exercise stress test. EECP(R) treatment was administered for one hour
daily for a total of 36 hours over approximately seven weeks. During the course
of treatment, all 18 patients experienced substantial subjective improvements in
symptoms, and 16 were completely free of angina during normal daily activities.
Looking at objective measures of benefit, a comparison of maximal stress test
results before and after treatment showed that EECP(R) produced a significant
increase (19%) in exercise tolerance in the total patient population.

         Intriguingly, results of thallium-201 scans before and after treatment
also showed a complete resolution of perfusion defects in 12 patients (67%) and
a decrease in the size of the ischemic zone in another two. Thus, 14 of 18
patients (78%) experienced a reduction in ischemia as assessed by radionuclide
imaging.

         A subgroup analysis of exercise stress tests for these patients
revealed that EECP(R) not only produced significant improvements in exercise
duration (22%), but also increases in double product (peak exercise systolic
blood pressure x peak heart rate, a measure of cardiac work). Taking all these
results together, the conclusion was that a program of EECP(R) treatment was
somehow capable of producing a sustained improvement in myocardial oxygen supply
and, hence, an increase in oxygen consumption. The heart was thus able to work
harder for longer periods.

         Subsequent data from a group of 50 angina patients who were treated
with EECP(R) are consistent with the above results. All of these patients
reported a reduction in symptoms and 80% demonstrated improvement by
radionuclide testing. Patients with one- or two-vessel disease were
significantly more likely to respond than those with three-vessel disease.

         Seventeen of the original 18 patients studied, including 13 of the 14
patients who had previously shown a reduction in myocardial ischemia, were
followed up for an average of three years. One of these 13 patients suffered 


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a myocardial infarction, and another underwent a revascularization procedure
during the intervening period. Of the remaining 11 patients, all remained free
of limiting angina. Ten patients underwent repeat stress thallium testing. In
these patients, the mean double product at three years was not significantly
different from the baseline value; however, eight patients (80%) demonstrated
persistent improvements in the results of thallium scintigraphy.

         Another study of 27 patients with angina pectoris indicated that
EECP(R) outpatient therapy appears to exert effects on the heart similar to
those achieved by exercise training. After receiving EECP(R), approximately 80%
of the patients studied increased the amount of time that they were able to
exercise as measured during thallium stress tests. Although exercise usually
causes increases in the heart rate and blood pressure, these patients exhibited
lower than expected heart rate increases and no significant increases in blood
pressure during their stress tests. This indicates that they achieved similar
conditioning benefits from EECP(R) as might be expected from engaging in a
regular program of exercise.

         In this study, 26 men and one woman received 35 hours of EECP(R). A
maximal radionuclide stress test was performed prior to entry into the study.
Upon completion of the EECP(R) treatment course, patients were again tested to
the same cardiac workload and to maximum effort. The radionuclide imaging
results were similar to those reported in previous studies with 78% of patients
having a partial or complete resolution of perfusion defects indicating better
or normalized blood flow to ischemic areas of the heart.

         Only those who had improved post-EECP(R) radionuclide images
demonstrated meaningful increases in maximal exercise times. However, in the
"unimproved" group, there was a significant decrease in post-EECP(R) double
product, indicating a useful decrease in peripheral vascular resistance. The
authors concluded that the two proposed mechanisms of EECP(R), improved stress
perfusion of the ischemic myocardium and decreased peripheral vascular
resistance, are complementary and may explain the improved exercise tolerance
and symptomatic relief sometimes seen in patients with unchanged stress
perfusion imaging.

         A five-year follow-up study of morbidity and mortality in 33 angina
patients treated with EECP(R) was reported by Stony Brook in April 1997. These
patients had received 35 hours of EECP(R) between 1989 and 1996, had documented
CHD and had undergone pre- and post-exercise testing. The initial group of 18
patients previously reported at three years of follow-up was included in this
expanded cohort. Cardiac angiography had been performed in 18 patients, with 16
of these patients having multi-vessel disease; ten of 33 patients treated had
prior myocardial infarction and 13 had undergone either CABG or PTCA, with eight
having undergone both treatments. Of the 33 patients treated, 4 died 1-5 years
after initial treatment with EECP(R), and complete follow-up data concerning
cardiac events was obtained in the 29 surviving patients. Although nine patients
required interim hospitalizations for one or more cardiac conditions, which
consisted of acute myocardial infarcts (4), new CABG or PTCA (6), other cardiac
surgery (1) or unstable angina (1), 20 of the 33 patients treated experienced
none of the above 4-7 years post-EECP(R) treatment. Since over 60% of the
original cohort of 33 patients with advanced CHD are alive and well and without
new events, this five-year follow-up study suggests that EECP(R) is effective
both in the short- and long-term therapy of chronic angina pectoris.

         In 1995, the Company began a large randomized, controlled and
double-blinded multi-center clinical study ("MUST-EECP") in four leading
university hospitals in the United States to further document the extent and
circumstances of patient benefits that can be derived from EECP(R) and to gather
information to support filings for reimbursement approval. These institutions
are: University of California San Francisco, Columbia University College of
Physicians & Surgeons at the Columbia-Presbyterian Medical Center in New York,
Beth Israel Deaconess Hospital, a teaching affiliate of Harvard Medical School,
and Yale University School of Medicine. These institutions were later joined by
Loyola University, University of Pittsburgh and Grant/Riverside Methodist
Hospitals. MUST-EECP was completed in July 1997 and the Company expects to
announce the results in late 1997.

         In fiscal 1998, the Company intends to conduct further studies with
EECP(R) in the United States and abroad to expand the patient data base in the
treatment of angina, as well as to expand the EECP(R) claim structure,
particularly in the area of congestive heart failure and peripheral vascular
disease. Moreover, the Company is 


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sponsoring a long-term quality-of-life and resource-utilization study with
EECP(R) in the same institutions and with the same patients that participated in
MUST-EECP.

The Company's Plans

         The Company's short and long-term plans are to:

         (a) Establish the Company's EECP(R) procedure as a new standard of care
in CHD.

         (b) Complete MUST-EECP in order to i) further document the efficacy of
EECP(R) in the treatment of patients suffering from CHD and ii) understand more
about the patients who can benefit from EECP(R).

         (c) Complete a cost-effectiveness and quality-of-life evaluation of
treatment with EECP(R) to justify reimbursement from the Health Care Financing
Authority ("HCFA"), State Welfare ("Medicaid") agencies, and commercial
insurance companies.

         (d) Engage in a communications campaign to broadly disseminate the
results of MUST-EECP and focus marketing strategies and programs to teaching
hospitals, managed care organizations and major cardiology practices.

         (e) Complete a distribution network in international markets.

         (f) Expand the EECP(R) clinical research program to confirm new claims
(e.g., use in congestive heart failure, peripheral vascular disease and early
acute myocardial infarction).

         (g) Use the Company's proprietary technology to develop upgrades of the
current EECP(R) model and create new products for use in cardiovascular
medicine.

Glossary of Terms

Acute Myocardial Infarction - heart attack

Angina Pectoris - literally "chest pain"

Cardiogenic shock - severe reduction in blood pressure owing to weak pumping
   action of the heart

Collateral circulation - the use (recruitment) of small supplemental, usually
   unused channels through which blood can be made to flow when normal blood
   supply is impeded because of obstructions in coronary arteries

Coronary Artery Bypass Graft or CABG - a surgical transplant of a vein to
   connect the aorta with an obstructed coronary artery

Coronary arteries - those that supply blood to the heart muscle

Diastole - rest period during which the heart chambers fill with blood and the
   heart muscle receives most of its supply of oxygen and other nutrients

Enhanced External Counterpulsation or EECP(R) - "Enhanced" describes the
   Company's proprietary system which increases the level of diastolic
   augmentation by 40-50% over that of earlier devices

Ischemia - lack of blood supply

Occlusion - blockage of blood vessels

Percutaneous Transluminal Coronary Angioplasty or PTCA - insertion of a wire
   into a coronary artery to which a balloon or other instrument is attached for
   the purpose of widening a narrowed vessel

Stenosis - the narrowing of a blood vessel's diameter

Systole - contracting period during which the heart is pumping blood to the rest
   of the body

Thallium - an imaging medium used to detect areas of ischemia within the heart
   muscle

COMPETITION

         Presently, Vasomedical is aware of only one competitor with an external
counterpulsation device. The Company believes that this competitor's involvement
in the market is very limited. There can be no assurance, however, that other
companies will not enter the intended market for EECP(R). Such companies may
have substantially greater financial, manufacturing, marketing and technological
resources than those possessed by the Company and may, therefore, succeed in
developing products or technologies that are more effective than those offered
by the Company and that would render the Company's technology and existing
products obsolete or noncompetitive.

GOVERNMENT REGULATION

         The EECP(R) system is subject to extensive regulation by the FDA.
Pursuant to the Federal Food, Drug and Cosmetic Act, as amended, the FDA
regulates and must approve the clinical testing, manufacture, labeling,
distribution and promotion of medical devices in the United States.



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         If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a device that was legally marketed prior
to May 28, 1976, the date on which the Medical Device Amendments of 1976 was
enacted, the manufacturer may seek marketing clearance from the FDA to market
the device by filing a 510(k) premarket notification. The 510(k) premarket
notification must be supported by appropriate data establishing the claim of
substantial equivalence to the satisfaction of the FDA. Pursuant to recent
amendments to the law, the FDA can now require clinical data or other evidence
of safety and effectiveness. The FDA may have authority to deny the marketing
clearance if the device is not shown to be safe and effective even if the device
is "substantially equivalent" to a device marketed prior to May 28, 1976. The
Company's EECP(R) system can be marketed in the United States based on the FDA's
determination of substantial equivalence. There can be no assurance that the
Company's EECP(R) system will not be reclassified in the future by the FDA and
subject to additional regulatory requirements.

         If substantial equivalence cannot be established or if the FDA
determines that a more extensive review of the device is in order, the FDA will
require the manufacturer to submit a PMA application that must be fully reviewed
and approved by the FDA. Management does not believe that the EECP(R) system
will ultimately require PMA approval for continued commercialization; however,
the Company so designed the protocol for MUST-EECP as to be able to generate
some of the data needed in the event that a PMA is required at some future date.

         Typically it takes one year from the date of filing to complete the PMA
review and approval process. There can be no assurance that the FDA would not
take more than one year to review and approve the EECP(R) application and there
can be no assurance that EECP(R) would receive PMA approval.

         In most countries to which the Company seeks to export the EECP(R)
system, it must first obtain documentation from the local medical device
regulatory authority stating that the marketing of the device is not in
violation of that country's medical device laws. The regulatory review process
varies from country to country. Presently, the Company is in the process of
applying for regulatory approval of the EECP(R) system overseas.

         There can be no assurance that all the necessary FDA clearances,
including approval of any PMA application that may eventually be required, and
overseas approvals will be granted for EECP(R), its future-generation upgrades
or newly developed products, on a timely basis or at all. Delays in receipt of
or failure to receive such clearances could have a material adverse effect on
the Company's financial condition and results of operations.

THIRD PARTY REIMBURSEMENTS

         Health care providers, such as hospitals and physicians, that purchase
or lease medical devices, such as the EECP(R), for use on their patients
generally rely on third-party payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed with these devices. Even if a device
has FDA approval, Medicare and other third-party payers may deny reimbursement
if they conclude that the device is not cost-effective, is experimental or is
used for an unapproved indication.

         The Company is currently engaged in discussions with several large
health care insurers. Although it is unlikely that insurers will grant blanket
coverage for EECP(R) before the results of the Company's multi-center study are
published, the Company will continue to pursue this goal vigorously in fiscal
1998. At a minimum, the Company believes that this dialogue will continue to
define circumstances wherein insurers would consider reimbursement on a
case-by-case basis and create a pathway for rapid review of new data as they
become available. To date, there have been many such reimbursements. In
anticipation of receiving broad-based reimbursement, the Company will pursue,
through the cardiology profession, the establishment of a Current Procedural
Code ("CPT"). Although such code is not essential and there is no assurance that
a new code will be issued, the Company believes that having an up-to-date CPT
code will accelerate the processing of insurance claims.


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         The unavailability of third-party coverage or the inadequacy of the
reimbursement for treatment procedures using EECP(R) would adversely affect the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to forecast what additional legislation or regulation, if any,
relating to the health care industry or third-party coverage and reimbursement
may be enacted in the future or what effect such legislation or regulation would
have on the Company.

INSURANCE

         The Company currently carries product liability insurance of
$5,000,000. However, there can be no assurance that it will be able to continue
to secure such insurance in adequate amounts or at reasonable premiums. Product
liability insurance costs have been increasing rapidly and dramatically during
the last few years and many carriers are reducing coverage, insisting upon large
deductibles and contributions to defense costs, and abandoning lines. Should the
Company be unable to secure adequate product liability insurance, its business
could be seriously damaged by claims arising out of the allegedly improper
manufacture or use of its products.

PATENTS AND TRADEMARKS

         The Company has received two US patents with respect to EECP(R)
expiring 2005 and 2013, respectively. In May 1993, international patent
applications were filed and the Company expects some patents to issue during
fiscal 1998. Additionally, trademarks have been registered for the names "EECP",
"Future Care", "Drug Free" and "Where the Future of Medicine is Today". The loss
of the Company's EECP(R) patents and trademark could have a material adverse
effect upon the Company's business.

EMPLOYEES

         As of July 1, 1997, the Company and its subsidiaries employed
twenty-six persons on a full-time basis consisting of its five executive
officers, eight salespersons, nine clinical, manufacturing and service
professionals/technicians, and four administrative personnel.


ITEM TWO - PROPERTIES

         The Company maintains its office and warehouse at 180 Linden Avenue,
Westbury, New York 11590, where approximately 18,000 square feet of space is
leased from a non-affiliated landlord through October 31, 2000 at an annual cost
of approximately $120,000. Upon the expiration of the lease, the Company, at its
option, may renew the lease for an additional five-year period or purchase the
facility at fair market value, as defined.

ITEM THREE - LEGAL PROCEEDINGS

         In February 1995, the Company received a subpoena duces tecum from the
broker-dealer branch of the Northeast Regional Office of the Securities and
Exchange Commission requesting certain documents from the Company pursuant to a
formal order of private investigation in connection with possible registration
and reporting violations. The Company has complied with the request for such
documents. Whatever the ultimate objectives of the Commission's fact-finding
inquiry may be, the Company intends to cooperate as the investigation proceeds.
As stated in the subpoena, the "investigation is confidential and should not be
construed as an indication by the Commission or its staff that any violations of
law have occurred, nor should it be interpreted as an adverse reflection on any
person, entity or security." This investigation is in its early stages and the
Company is unable to determine the likelihood of an unfavorable outcome or the
existence or amount of any potential loss.

         On or about May 23, 1996, an action was commenced in the Supreme Court
of the State of New York, Nassau County, against the Company, its directors and
certain of its officers and employees for the alleged breach of an agreement to
appoint a non-affiliated party as its exclusive distributor of EECP(R). The
complaint seeks damages in the approximate sum of $50,000,000, declaratory
relief and punitive damages. The Company denies the existence of any agreement,
believes that the complaint is frivolous and without merit and is vigorously
defending the claims as well as asserting substantial counterclaims. This matter
is in its preliminary stages and the Company is unable to determine the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.



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ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of fiscal 1997.


                                     PART II

ITEM FIVE - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

         The Company's Common Stock trades on the Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol VASO. The table below sets forth the
range of high and low bid prices of the Common Stock as reported by Nasdaq for
the fiscal periods specified. These prices represent inter-dealer quotations
without retail markups, markdowns or commissions and do not necessarily
represent actual transactions. The approximate number of record holders of
Common Stock as of July 31, 1997 was 708.

<TABLE>
<CAPTION>
                                                     Fiscal 1997                 Fiscal 1996
                                                 High          Low          High            Low
                                                 ----          ---          ----            ---
<S>                                           <C>          <C>           <C>            <C>
First Quarter                                  4-5/16        2-3/8         1-3/4            3/4
Second Quarter                                 3-1/16      1-15/16         1-5/8          23/32
Third Quarter                                 2-25/32       1-9/16        1-5/16            3/4
Fourth Quarter                                 2-9/16      1-17/32       2-17/32         1-5/16
</TABLE>

         The last bid price of the Company's Common Stock on July 31, 1997 was
$1-3/4 per share. The Company has never paid any cash dividends on its Common
Stock. While the Company does not intend to pay cash dividends in the
foreseeable future, payment of cash dividends, if any, will be dependent upon
the earnings and financial position of the Company, investment opportunities and
such other factors as the Board of Directors deems appropriate. Stock dividends,
if any, also will be dependent on such factors as the Board of Directors deems
appropriate.


                                       8
<PAGE>   10


ITEM SIX - SELECTED FINANCIAL DATA

         The following table summarizes selected financial data for each of the
five years ended May 31, 1997 as derived from the Company's audited consolidated
financial statements. These data should be read in conjunction with the
consolidated financial statements of the Company, related notes and other
financial information.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED MAY 31,
                                                      1997             1996             1995             1994             1993
<S>                                              <C>              <C>                        <C>    <C>              <C>         
STATEMENT OF OPERATIONS

Revenues (1)                                     $  2,096,562     $  2,683,128     $          -     $  1,370,257     $    979,245
                                                 ------------     ------------     ------------     ------------     ------------

Cost of sales and services                          1,020,047          609,136                           404,471           35,313
Selling, general & administrative expenses          4,155,552        3,738,789        2,172,555        4,373,623        5,007,263
Research and development expenses                   1,045,184          364,455          598,178          443,850          896,240
Depreciation and amortization                         333,482          269,443          117,851          433,390          331,840
Provision for losses                                  225,000                           318,000
Minority interests in net losses of
subsidiaries                                                                                            (221,587)        (173,701)
Net loss (gain) on sale or disposition of
subsidiary stock                                                                                         780,299         (900,000)
Interest and financing costs                            8,511          515,451            2,523            3,261          237,500
Interest and other income, net                       (174,810)        (171,001)         (91,813)         (35,897)         (98,285)
                                                 ------------     ------------     ------------     ------------     ------------
                                                    6,612,966        5,326,273        3,117,294        6,181,410        5,336,170
                                                 ------------     ------------     ------------     ------------     ------------
Net loss                                         $ (4,516,404)    $ (2,643,145)    $ (3,117,294)    $ (4,811,153)    $ (4,356,925)
                                                 ------------     ------------     ------------     ------------     ------------

Net loss per common share                        $       (.10)    $       (.07)    $       (.10)    $       (.20)    $       (.21)
                                                 ------------     ------------     ------------     ------------     ------------

Weighted average common shares outstanding
                                                   46,297,142       39,226,258       30,519,640       24,011,515       20,871,453
                                                 ------------     ------------     ------------     ------------     ------------

BALANCE SHEET

Working capital                                  $  1,981,331     $  4,958,973     $    747,070     $  1,410,114     $  2,750,320
                                                 ------------     ------------     ------------     ------------     ------------
Total assets                                     $  4,175,021     $  8,246,151     $  2,753,138     $  2,122,046     $  9,258,143
                                                 ------------     ------------     ------------     ------------     ------------
Long-term debt                                   $          0     $  3,725,000     $          0     $          0     $          0
                                                 ------------     ------------     ------------     ------------     ------------
Minority interests                               $          0     $          0     $          0     $          0     $    697,508
                                                 ------------     ------------     ------------     ------------     ------------
Stockholders' equity (2)                         $  3,020,962     $  3,091,094     $  2,259,991     $  1,528,031     $  4,182,970
                                                 ------------     ------------     ------------     ------------     ------------
</TABLE>

-------------------

(1) Substantially all revenues from fiscal 1994 and 1993 were generated from
subsidiaries which have been disposed of.

(2) No cash dividends were declared during any of the above periods.


                                       9
<PAGE>   11


ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations

Fiscal Years Ended May 31, 1997 and 1996

         The Company generated revenues from the sale and lease of its EECP(R)
device of $2,097,000 and $2,683,000 for the years ended May 31, 1997 and 1996,
respectively. The Company incurred net losses of $4,516,000 and $2,643,000 for
fiscal 1997 and 1996, respectively. Quarterly fiscal 1997 revenues did not
continue at the level achieved in the last quarter of fiscal 1996, which the
Company believes is a result of the continuing absence of blanket reimbursement
coverage for EECP(R) and the inability or unwillingness of certain patients to
pay for treatment. Management believes another factor is that many cardiologists
interested in becoming providers of EECP(R) are awaiting the announcement of the
Company's multicenter clinical study due to occur during the first half of
fiscal 1998. Moreover, quarterly results in fiscal 1997 were adversely affected
by the mix favoring rentals over sales and the non-payment of certain leases.
Although there can be no assurances that EECP(R) will be successfully
commercialized, the Company expects to generate increasing revenues in fiscal
1998, including the expansion of EECP(R) in international markets.

         Gross margins from the EECP(R) are dependent on a number of factors,
particularly the number of units sold or leased during the period, and by
certain fixed period costs, including facilities, payroll and insurance. Gross
margins are furthermore affected by the location of the Company's customers and
the amount and nature of training and other initial costs required to place the
EECP(R) in service for customer use. Accordingly, the gross margin realized
during the current period may not be indicative of future margins.

         Selling, general and administrative (SGA) expenses for the years ended
May 31, 1997 and 1996 were approximately $4,156,000 and $3,739,000,
respectively. The $417,000 increase in SGA expenses for the comparable fiscal
period resulted primarily from a $732,000 increase in payroll, commissions and
related costs associated with the addition of a direct national sales force and
other operating personnel, offset by $168,000 in costs reported in this category
in the prior year, the nature of which are currently allocable to cost of sales
and services since the onset of revenues.

         Research and development (R&D) expenses increased $681,000 compared to
the prior fiscal period. The increase is the result of commitments and expenses
related to the Company's multi-center clinical study for EECP(R) which was
completed July 1997, the initiation of the development of the next generation
model of EECP(R), and commitments and expenses related to a continuing
quality-of-life and resource utilization study being conducted in parallel with
the multicenter clinical study. Such commitments and expenses related to the
aforementioned parallel study (which includes a long-term follow-up phase) and
the continuing mechanical and clinical development of EECP(R) are expected to
continue in fiscal 1998.

         The decrease in interest and financing costs is directly attributable
to the conversion of debt in June 1996.

Fiscal Years Ended May 31, 1996 and 1995

         The Company generated revenues from the sale and lease of its EECP(R)
device during fiscal 1996 of $2,683,000. No revenues were generated in fiscal
1995. The Company incurred net losses of $2,643,000 and $3,117,000 for the years
ended May 31, 1996 and 1995, respectively.

         Approximately $2,284,000 of the Company's fiscal 1996 revenues were
generated in the fourth quarter resulting in the first profitable quarter from
operations in the Company's history. Net earnings for the quarter were $119,000.

         Gross margins from the EECP(R) are dependent on a number of factors,
particularly the number of units sold or leased during the period, and by
certain fixed period costs, including facilities, payroll and insurance.
Furthermore, gross margins are affected by the location of the Company's
customers and the amount and nature of training and other initial costs required
to place the EECP(R) in service for customer use. Accordingly, the gross margin
realized during the current period may not be indicative of future margins.

         Selling, general and administrative (SGA) expenses for the years ended
May 31, 1996 and May 31, 1995 were approximately $3,739,000 and $2,173,000,
respectively. The $1,566,000 increase in SGA expenses for the fiscal year
resulted primarily from a $870,000 increase in payroll and related costs
associated with the addition of management, employment of a direct national
sales force and other operating personnel, particularly those formerly employed
by Vasogenics, which was acquired in January 1995, and an increase of $514,000
in marketing and related costs associated with the commercial introduction of
EECP(R).



                                       10
<PAGE>   12


         The increase in depreciation and amortization expense of $152,000 for
the year ended May 31, 1996 was primarily related to the amortization of
goodwill relating to the Vasogenics acquisition in January 1995.

         Research and development (R&D) expenses decreased $234,000 for the year
ended May 31, 1996. The decrease is a result of i) the expiration of contractual
obligations to support the activities of Vasogenics as a result of the Company's
acquisition of Vasogenics in January 1995 and ii) the timing of commitments and
expenses related to the Company's multicenter clinical study for EECP(R). Such
commitments and expenses are expected to continue in fiscal 1997.

         The increase in interest and financing costs is directly attributable
to interest accrued and amortization of deferred loan costs in connection with
the July 1995 debt issuance.

         Investment income increased during fiscal 1996 due to the Company's
increased cash and investment position resulting from the July 1995 debt
issuance, as well as from proceeds generated from the exercise of warrants.


Liquidity and Capital Resources

         Working capital at May 31, 1997 decreased $2,978,000 to $1,981,000 as
compared to $4,959,000 at May 31, 1996 due to continuing operating losses,
offset by proceeds from the exercise of warrants and the cancellation of
$239,000 of interest due as a result of the conversion of Notes. During the year
ended May 31, 1997, the Company generated net proceeds of $942,000 from the
exercise of common stock purchase warrants.

         In June 1996, the $3,725,000 outstanding principal amount of Notes were
converted into 3,725,000 shares of the Company's common stock. The first quarter
effect of this conversion was to increase stockholders' equity by approximately
$3,335,000, consisting of the debt conversion ($3,725,000) and accrued interest
($239,000), net of unamortized loan costs and conversion fees ($629,000).

         In March 1996, the Company entered into an exclusive agreement with a
third party whereby such third party will purchase, subject to credit approval,
the EECP(R) system on a non-recourse basis and lease the system to the Company's
customers. During fiscal 1997, approximately 54% of the Company's revenues were
derived through such transactions. Although there can be no certainty about
future revenues generated through these transactions, the Company believes that
these transactions will contribute to expected growing revenues and working
capital in the future.

         Subsequent to fiscal 1997, the Company has generated net proceeds of
$241,000 from the exercise of common stock purchase warrants. In addition, on
June 25, 1997, the Company issued 150,000 shares of newly created 5% Series B
Convertible Preferred Stock to one accredited investor at a price of $20 per
share, realizing net cash proceeds of approximately $2,800,000. See Note I in
"Notes To Consolidated Financial Statements."

         Management believes that its present working capital position at May
31, 1997, along with its recently completed convertible preferred stock
financing and the ongoing commercialization of EECP(R), some units of which will
be purchased by the aforementioned medical equipment finance company, will make
it possible for the Company to support its internal overhead expenses and to
implement its business plans at least through May 31, 1998.



                                       11
<PAGE>   13


ITEM EIGHT - FINANCIAL STATEMENTS

         The consolidated financial statements and supplementary data listed in
the accompanying Index to Consolidated Financial Statements are filed as part of
this report.

ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         None.





                                    PART III

ITEM TEN - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company's directors and executive officers as of July 31, 1997 were as
   follows:

<TABLE>
<CAPTION>
                                                    POSITION HELD
NAME                                AGE             WITH THE COMPANY
----                                ---             ----------------
<S>                                 <C>             <C>
Abraham E. Cohen (2)(8)             61              Chairman of the Board
Anthony Viscusi (1)(4)              64              President, Chief Executive Officer and
                                                     Director
Eugene H. Glicksman (2)(4)          57              Executive Vice President and Director
John C.K. Hui (2)(7)                50              Senior Vice President, R&D and
                                                     Manufacturing, and Director
Anthony E. Peacock                  56              Vice President, Marketing/Clinical Affairs
Joseph A. Giacalone                 33              Secretary and Treasurer
Alexander G. Bearn (3)(6)(7)        72              Director
David S. Blumenthal (3)(7)          45              Director
Francesco Bolgiani (3)(5)(6)        58              Director
Kenneth W. Rind (3)(5)              61              Director
E. Donald Shapiro (1)(4)(5)(6)      65              Director
Zhen-sheng Zheng (1)(7)             66              Director
</TABLE>

---------------------------
(1) Member of Class I, to serve until the 1999 annual meeting of stockholders.

(2) Member of Class II, to serve until the 1997 annual meeting of stockholders.

(3) Member of Class III, to serve until the 1998 annual meeting of stockholders.

(4) Member of Executive Committee. The Executive Committee was established to
advise the Board of Directors and make recommendations on matters relating to
the business and operations of the Company. 

(5) Member of Audit Committee. The audit committee reviews annual financial
statements and engages in discussions with the Company's independent public
accountants with respect to the scope and results of the Company's internal
accounting controls and the professional services rendered by the independent
public accountants of the Company.

(6) Member of Compensation Committee. The compensation committee recommends
compensation for the officers and key employees, including incentive plans and
the granting of options.

(7) Member of Medical Advisory Committee. The Medical Advisory Committee acts in
an oversight capacity with respect to medical issues and the Company's ongoing
clinical programs.

(8) Ex-officio member of all committees.


                                       12
<PAGE>   14


PRINCIPAL OCCUPATIONS OF DIRECTORS

         Dr. Alexander G. Bearn has been a director of the Company since
November 14, 1994. Dr. Bearn is a physician, scientist and author who has had
distinguished careers in academe and industry. Since 1966, Dr. Bearn has been an
adjunct professor at Rockefeller University. He has been Chairman of the
Department of Medicine of Cornell University Medical College and Senior Vice
President of Medical and Scientific Affairs at Merck International. He serves on
many boards, including the Board of Trustees of Rockefeller University and of
the Howard Hughes Medical Institute. Dr. Bearn also serves on the board of
Biogen, Inc., a public company.

         Dr. David S. Blumenthal has been a director of the Company since June
30, 1994. Dr. Blumenthal has been a practicing cardiologist in the State of New
York since 1981 and is affiliated with New York Hospital-Cornell Medical Center.

         Francesco Bolgiani has been director of the Company since December 5,
1995. Mr. Bolgiani has been President of Banca del Gottardo of Lugano,
Switzerland from 1980 to 1994 and Deputy Chairman of the Board of Directors of
Banca del Gottardo since 1994.

         Abraham E. Cohen has been Chairman of the Board since June 30, 1994 and
a director of the Company since June 4, 1993, and is presently an independent
consultant. He retired in 1992 as Senior Vice President of Merck & Co., Inc., a
position he had since 1985. From 1979 to 1989, Mr. Cohen was also President of
Merck Sharp & Dohme International, a division of Merck & Co., Inc. Mr. Cohen is
a director of the following public companies: Agouron Pharmaceuticals, Inc.,
Akzo Nobel Nv., Teva Pharmaceutical Industries, Ltd., Neurobiological
Technologies, Inc., Vion Pharmaceuticals, Inc., Blue Stone Capital Partners, LP
and Travellers Series Fund, Inc.

         Eugene H. Glicksman has been Executive Vice President of the Company
since July 1, 1994. Mr. Glicksman was President of the Company from February 2,
1994 to June 30, 1994 and Executive Vice President and Secretary from March 1992
to February 2, 1994. Mr. Glicksman has been a director of the Company since its
inception in July 1987.

         Dr. John C.K. Hui has been a director and Senior Vice President of the
Company since February 2, 1995. Dr. Hui has been an Assistant Professor in the
Department of Surgery in the State University of Stony Brook, New York since
1978. He has also been a scientist in the medical department of Brookhaven
National Laboratories. Dr. Hui was president of and a principal stockholder in
Vasogenics, Inc. at the time of its acquisition by the Company in January 1995.

         Dr. Kenneth W. Rind has been a director of the Company since February
2, 1995. Dr. Rind has been Chairman of Oxford Venture Corporation, an
independent venture capital company since 1981. Previously, Dr. Rind was a
principal at Xerox Development Corporation for five years where he was
responsible for acquisitions and venture capital investments. From 1970 to 1976,
he was Vice President-Corporate Finance at Oppenheimer & Co., Inc. He is also a
director of ESC Medical Systems, Inc., Computer Power, Inc., Alpha Technologies,
Inc. and several private companies.

         E. Donald Shapiro has been a director of the Company since June 4,
1993. Mr. Shapiro has been the Joseph Solomon Distinguished Professor of Law
since 1983 and is a former Dean of The New York Law School, as well as a
Supernumerary Fellow of St. Cross College at Oxford University, England. He has
authored numerous books and articles in the field of medicine and law and is a
recipient of honors and awards both in the United States and overseas. Mr.
Shapiro is a director of the following public companies: Loral Space and
Communications, Inc. (formerly Loral Corporation), Bank Leumi Trust Co., Premier
Laser Systems, Inc., Eyecare Products PLC, Kranzco Realty Trust, Vion
Pharmaceuticals, Inc., Cafe USA, Telepad Corporation and United Industrial
Corporation.


                                       13
<PAGE>   15


         Anthony Viscusi has been President, Chief Executive Officer and
director of the Company since his employment on June 30, 1994. Mr. Viscusi was
Senior Vice President, Worldwide Marketing for the AgVet division of Merck &
Co., Inc. from 1987 to 1993. In 1961, Mr. Viscusi joined the international human
health division of Merck, in which he spent most of his career in various
general management positions, after having taught at Columbia, Wesleyan and
Princeton universities. Mr. Viscusi is a director of Mallinckrodt, Inc.

         Dr. Zhen-sheng Zheng has been a director of the Company since February
2, 1995. Since 1986, Dr. Zheng has been Director of the Cardiovascular Research
Institute at Sun Yat-sen University of Medical Sciences in Guangzhou, China. Dr.
Zheng has been associated with Sun Yat-sen University since 1972 in various
capacities and is also presently Chairman of the National Laboratory for
Assisted Circulation Research in China. Dr. Zheng was a principal stockholder of
Vasogenics, Inc. prior to its acquisition by the Company in January 1995.


ITEM ELEVEN - EXECUTIVE COMPENSATION

         The following summary sets forth the compensation paid or accrued by
the Company during the years ended May 31, 1997, 1996 and 1995 to its Chief
Executive Officer and other named Executive Officers. Named Executive Officers,
other than the Chief Executive Officer, have been included only to the extent
that such individual's compensation exceeded $100,000 in any such year.




SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    Long Term Compensation
                                                                      --------------------------------------------
                                       Annual Compensation                       Awards               Payouts
                              --------------------------------------  ---------------------------   --------------
                                                               Other    Restricted  Shares Covered    Long Term
Name and                                                      Annual      Stock        By Option    Incentive Plan     All Other
Principle Position     Year   Salary (1)     Bonus      Compensation    Awards (2)       Grants       Payout         Compensation
------------------     ----   ----------     -----      ------------    ----------       ------       ------         ------------
<S>                    <C>     <C>           <C>        <C>             <C>         <C>              <C>             <C>
Anthony Viscusi        1997    $168,333           --         --               --         150,000         --               --
President & CEO        1996    $150,000           --         --               --              --         --               --
                       1995    $137,500           --         --               --       1,000,000         --               --
                                                                                                                      
Eugene H. Glicksman    1997    $145,000           --         --       $  169,813              --         --               --
Executive VP           1996    $145,000           --         --       $  169,813              --         --               --
                       1995    $133,333           --         --       $  169,812              --         --               --
                                                                                                                      
John C.K. Hui          1997    $139,167           --         --               --         150,000         --               --
Senior VP              1996    $130,000           --         --               --              --         --               --
                       1995    $ 43,333           --         --               --         300,000         --               --
                                                                                                                      
Anthony E. Peacock     1997    $149,167           --         --               --         150,000         --               --
VP                     1996    $140,000           --         --               --              --         --               --
                       1995    $ 49,584           --         --               --         300,000         --               --
                                                                                                                      
Joseph A. Giacalone    1997    $107,183           --         --               --         105,000         --               --
Secretary/Treasurer    1996    $ 85,000           --         --               --              --         --               --
                       1995    $ 85,000           --         --               --         200,000         --               --
                                                                                                                
</TABLE>

---------------
(1) Dr. Hui's salary includes payments received by him from the Research
Foundation of the State University of New York at Stony Brook under a grant
funded by the Company.

(2) Represents value of common stock issued in 1993 to Mr. Glicksman under a
stock bonus arrangement providing for vesting of 950,000 shares over five years.


                                       14
<PAGE>   16


OPTION/SAR GRANTS IN LAST FISCAL YEAR

         The following table sets forth the number of options granted to the
Company's named Executive Officers in fiscal 1997.

<TABLE>
<CAPTION>
                                                                                       Potential Realizable
                                                                                       Value at Assumed
                                                                                       Annual Rates of Stock
                                                                                       Price Appreciation
                                       Individual Grants                               for Option Term
                    -------------------------------------------------------------------------------------------
                    Total Number
                    of Securities    % of Total
                    Underlying       Options/SARs    Exercise
                    Options/SARs     to Employees    Price         Expiration
Name                Granted (#)      in Fiscal Year  ($/share)        Date                5%             10%
----                -----------      --------------  ---------        ----                --             ---
<S>                  <C>             <C>             <C>           <C>                <C>             <C>     
                           (1)
Anthony Viscusi       150,000             19%            $3.44        5/31/06          $324,000        $822,000
John C.K. Hui         150,000             19%            $3.44        5/31/06          $324,000        $822,000
Anthony E. Peacock    150,000             19%            $3.44        5/31/06          $324,000        $822,000
Joseph A. Giacalone   105,000             13%            $3.44        5/31/06          $227,000        $575,000
</TABLE>

(1) Represents ten-year, non-qualified stock options that vest equally over
three years commencing June 1, 1997. Such vesting is contingent upon continued
employment with the Company.


AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND F/Y-END OPTION VALUES

         The following table sets forth information for each of the named
Executive Officers with respect to the value of options or warrants exercised
during the fiscal year ended May 31, 1997 and the value of outstanding and
unexercised options or warrants held as of May 31, 1997, based upon the market
value of the Common Stock of $1-11/16 per share on that date.

<TABLE>
<CAPTION>
                                                                                                      Value of Unexercised
                                                           Number of Options at                       In-the-Money Options
                                                             Fiscal Year End                          at Fiscal Year End (2)
                      Share Acquired   Value                 ---------------                          ----------------------
Name                  on Exercise (#)  Realized (1)    Exercisable        Unexercisable         Exercisable          Unexercisable
----                  ---------------  ------------    -----------        -------------         -----------          -------------
<S>                   <C>              <C>             <C>                 <C>                  <C>                   <C>     
Anthony Viscusi              -              -            500,000             650,000             $618,750              $618,750
John C.K. Hui                -              -            200,000             250,000             $255,500              $127,750
Anthony E. Peacock           -              -            150,000             300,000             $196,875              $196,875
Joseph A. Giacalone          -              -            270,000             155,000             $285,375              $63,875
</TABLE>

(1) Represents the difference between the closing price of the Common Stock and
the exercise price of the options on the date of exercise multiplied by the
number of shares acquired upon exercise. The calculation does not reflect the
effects of any income taxes which may be due on the value realized. (2)
Represents the difference between the closing market price of the Common Stock
at May 31, 1997 of $1-11/16 per share and the exercise price per share
multiplied by the number of in-the-money options at May 31, 1997.

EMPLOYMENT AGREEMENTS

         The Company maintains employment agreements with its executive
officers, expiring at various dates through January 1999. Such employment
agreements provide, among other things, that in the event there is a change in
the control of the Company, as defined therein, or in any person directly or
indirectly controlling the Company, as also defined therein, the employee has
the option, exercisable within six months of becoming aware of such event, to
terminate his employment agreement. Upon such termination, the employee has the
right to receive as a lump-sum payment certain compensation remaining to be paid
for the balance of the term of the agreement.

         In July 1994, in connection with an employment agreement with its newly
appointed President and Chief Executive Officer, the Company issued five-year
warrants to purchase 1,000,000 shares of its common stock at $.45 per share
(which approximated market value at the date of grant) vesting at 25% per year
beginning June 30, 1995. Such vesting is contingent upon his continued
employment with the Company.

          In October 1994, the Company settled an employment commitment through
December 1997 with its former Chairman and President, aggregating $244,000, for
$35,000. In addition, this former officer forfeited 570,000 shares of the
Company's common stock issued as a stock bonus in December 1992 which had not
vested at the settlement date. This former officer also resigned from the
Company's Board of Directors.



                                       15
<PAGE>   17

         In December 1994, the Company settled an employment commitment through
November 1996 with its former Vice President - Finance, aggregating $190,000,
for $75,000. This former officer also resigned from the Company's Board of
Directors.

         In January 1995, in connection with an employment agreement with its
recently appointed Vice President of Marketing, the Company issued five-year
warrants to purchase 300,000 shares of its common stock at $.38 per share (which
approximated market value at the date of grant) vesting at 25% per year
beginning January 1996. Such vesting is contingent upon his continued employment
with the Company.

         In February 1995, in connection with an employment agreement with its
recently appointed Senior Vice President of R&D and Manufacturing, the Company
issued five-year warrants to purchase 300,000 shares of its common stock at $.40
per share (which approximated market value at the date of grant) vesting at 33%
per year beginning February 1996. Such vesting is contingent upon his continued
employment with the Company.

         Also in February 1995, the Company issued five-year warrants to its
Treasurer to purchase 200,000 shares of the Company's common stock at $.41 per
share (which approximated market value at the date of grant) with 50,000 such
shares vested immediately and the remainder vesting at 33% per year beginning
February 1996. Such vesting is contingent upon his continued employment with the
Company.

1992 NON-QUALIFIED STOCK OPTION PLAN

         In June 1993, the Company's stockholders approved a 1992 Non-Qualified
Stock Option Plan (the "Non-Qualified Plan") for officers, directors, employees
and consultants of the Company, for which the Company had reserved an aggregate
of 1,500,000 shares of common stock. Options are exercisable upon payment in
full of the exercise price, either in cash or in common stock valued at fair
market value on the date of exercise of the option. In November 1994, the
Company's Board of Directors terminated the Non-Qualified Plan. No other options
have been granted under the Non-Qualified Plan and 25,000 options were
outstanding as of the termination date of which 20,000 remain exercisable
through November 1998.

1995 STOCK OPTION PLAN

         In May 1995, the Company's stockholders approved the 1995 Stock Option
Plan (the "1995 Option Plan") for officers and employees of the Company, for
which the Company has reserved an aggregate of 1,500,000 shares of common stock.
The 1995 Option Plan provides that it will be administered by a committee of the
Board of Directors of the Company and the committee will have full authority to
determine the identity of the recipients of the options and the number of shares
subject to each option. Options granted under the 1995 Option Plan may be either
incentive stock options or non-qualified stock options. The option price shall
be 100% of the fair market value of the common stock on the date of the grant
(or in the case of incentive stock options granted to any individual principal
stockholder who owns stock possessing more than 10% of the total combined voting
power of all voting stock of the Company, 110% of such fair market value). The
term of any option may be fixed by the committee but in no event shall exceed
ten years from the date of grant. Options are exercisable upon payment in full
of the exercise price, either in cash or in common stock valued at fair market
value on the date of exercise of the option. The term for which options may be
granted under the 1995 Option Plan expires March 8, 2005. At May 31, 1997,
912,000 options had been granted, of which 892,000 are outstanding under the
1995 Option Plan.

OUTSIDE DIRECTOR STOCK OPTION PLAN

         In May 1995, the Company's stockholders approved an Outside Director
Stock Option Plan (the "Director Plan") for non-employee directors ("Outside
Directors") of the Company, for which the Company has reserved an aggregate of
300,000 shares of common stock. The Director Plan will be administered by the
Board of Directors of the Company. In accordance with the terms of the Director
Plan, each outside director will be granted ten-year, non-qualified stock
options commencing June 1, 1995, and on the first day of each June thereafter,
to purchase those number of shares of the Company's common stock having a market
value of $10,000 at the average closing price of the common stock on NASDAQ or
such other exchange upon which the Company's stock is listed for the five
trading days immediately preceding the date of grant. Options granted to each
Outside Director shall vest after one year, subject to forfeiture under certain
conditions. Options are exercisable upon payment in full of the exercise price,
either in cash or in common stock valued at fair market value on the date of
exercise of the option. On June 1, 1997, 1996 and 1995, options to purchase an
aggregate of 39,550 shares, 31,675 shares, and 77,418 shares of common stock,
respectively, at $1.77, $2.21, and $.78 per share, respectively, were granted to
outside directors.


                                       16
<PAGE>   18


SHAREHOLDER RIGHTS PLAN

          In March 1995, the Company's Board of Directors approved a Shareholder
Rights Plan, under which a dividend distribution of one Right for each
outstanding share of the Company's common stock is authorized. Each Right will
entitle shareholders of record on May 9, 1995 to purchase one-half share of
common stock at a 50% discount to market price if a person or group acquires 20%
or more of the Company's outstanding stock. At present, the Company is not aware
of any such person or group seeking to acquire 20% or more of the Company's
outstanding common stock.

DIRECTOR'S FEES

         It has been the policy of the Company to grant fees of $1,000 per
meeting to each outside director who attends a regularly scheduled or special
meeting of its Board of Directors. Messrs. Cohen and Shapiro do not receive
per-meeting fees but monthly fees of $2,500. In addition, the Company reimburses
out-of-state directors for their cost of travel and lodging to attend such
meetings.

LIMITATION ON LIABILITY OF OFFICERS AND DIRECTORS

         The Company has entered into indemnification agreements with each of
its current officers and directors pursuant to which it has agreed, among other
things, to indemnify these officers and directors to the fullest extent
permitted by Delaware law.


ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth as of July 31, 1997, the number of
shares and percentage of the Company's Common Stock owned, of record and
beneficially, by all persons known by the Company to own beneficially 5% or more
of the Company's Common Stock, by each officer and director of the Company and
by all officers and directors as a group. For purposes of calculating the amount
of beneficial ownership and the respective percentages, the number of shares of
Common Stock which may be acquired by a person upon the exercise of outstanding
options and warrants, are considered outstanding, but shall not be deemed
outstanding for the purpose of computing the percentage of Common Stock owned by
any other person. Unless otherwise indicated, each of the persons set forth
below has sole investment and voting power for the shares of Common Stock listed
therein.

<TABLE>
<CAPTION>
Name and address of                                       Common Stock
Beneficial Owner                                     Beneficially Owned (1)(2)
------------------------------------------------------------------------------
<S>                                                  <C>            
Dr. Alexander G. Bearn (9)(12)(14)(20)                     117,428 shs.  *
1230 York Avenue
New York, New York  10021

Dr. David S. Blumenthal (9)(11)(14)(20)                    117,428 shs.  *
407 East 70th Street
New York, New York  10021

Francesco Bolgiani (15)(20)                                204,525 shs.  *
viale Franscini 8
Lugano, Switzerland CH-6901

Abraham E. Cohen  (4)(5)(8)(14)(20)                        642,428 shs.  (1.4%)
100 United Nations Plaza
New York, New York  10017

Joseph A. Giacalone (6)(7)(19)                             308,000 shs.  *
180 Linden Avenue
Westbury, New York  11590
</TABLE>


                                       17
<PAGE>   19


<TABLE>
<CAPTION>
Name and address of                                       Common Stock
Beneficial Owner                                     Beneficially Owned (1)(2)
------------------------------------------------------------------------------
<S>                                                  <C>            
Eugene H. Glicksman (3)(21)                               1,593,330 shs.  (3.4%)
180 Linden Avenue
Westbury, New York  11590

Dr. John C. K. Hui (17)(18)                               1,210,000 shs.  (2.6%)
180 Linden Avenue
Westbury, New York  11590

Anthony E. Peacock (16)(18)                                 229,000 shs.  *
180 Linden Avenue
Westbury, New York  11590

Dr. Kenneth W. Rind (10)(14)(20)                            267,428 shs.  *
315 Post Road West
Westport, Connecticut  06880

E. Donald Shapiro (4)(5)(8)(14)(20)                         652,428 shs.  (1.4%)
57 Worth Street
New York, New York  10013

Anthony Viscusi (13)(18)                                    925,000 shs.  (1.9%)
180 Linden Avenue
Westbury, New York  11590

Dr. Zhen-sheng Zheng (14)(20)                               117,428 shs.  *
74 Zhangshan Road II
Guangzhou,  510089
P.R. China

Directors and executive officers
  as a group (12 persons)                                 6,384,423 shs.  (12.7%)
</TABLE>



----------

*        Less than 1% of the Company's Common Stock

(1)      No officer or director owns more than one percent of the issued and
         outstanding Common Stock of the Company unless otherwise indicated.
         Ownership represents sole voting and investment power.

(2)      Includes Common Stock issuable under stock options and warrants which
         are exercisable within 60 days.

(3)      Mr. Glicksman may be deemed a "parent" and "promoter" of the Company as
         those terms are defined in the Rules and Regulations under the
         Securities Act of 1933.

(4)      Includes warrants to purchase 150,000 shares of Common Stock at $1.50
         per share expiring in September 1997.

(5)      Includes warrants to purchase 200,000 shares of Common Stock at $1.03
         per share expiring in November 1998.

(6)      Includes warrants to purchase 150,000 shares of Common Stock at $.41
         per share expiring in February 2000.

(7)      Includes warrants and stock options to purchase 120,000 shares of
         Common Stock at $.91 per share expiring in November 1998.

(8)      Includes warrants to purchase 150,000 shares of Common Stock at $.45
         per share expiring in June 1999.

(9)      Includes warrants to purchase 50,000 shares of Common Stock at $1.50
         per share expiring in March 1998.

(10)     Includes warrants to purchase 250,000 shares of Common Stock at $.40
         per share expiring in February 2000.


                                       18
<PAGE>   20


(11)     Includes warrants to purchase 50,000 shares of Common Stock at $.45 per
         share expiring in June 1999.

(12)     Includes warrants to purchase 50,000 shares of Common Stock at $.28 per
         share expiring in November 1999.

(13)     Includes warrants to purchase 750,000 shares of Common Stock at $.45
         per share expiring in June 2000.

(14)     Includes currently exercisable options to purchase 12,903 shares of
         Common Stock at $.78 per share expiring in May 2005 granted pursuant to
         the Outside Director Stock Option Plan.

(15)     Includes 200,000 shares of Common Stock owned by a company in which Mr.
         Bolgiani and his wife have a 50% ownership interest.

(16)     Includes warrants to purchase 150,000 shares of Common Stock at $.38
         per share expiring in January 2000.

(17)     Includes warrants to purchase 200,000 shares of Common Stock at $.40
         per share expiring in February 2000.

(18)     Includes options to purchase 50,000 shares of Common Stock at $3.44 per
         share expiring in May 2006.

(19)     Includes options to purchase 35,000 shares of Common Stock at $3.44 per
         share expiring in May 2006.

(20)     Includes currently exercisable options to purchase 4,525 shares of
         Common Stock at $2.21 per share expiring in May 2006 granted pursuant
         to the Outside Director Stock Option Plan.

(21)     Includes 1,440,000 shares owned by Mr. Glicksman's wife and 153,330
         shares owned by Mr. Glicksman children, as to which Mr. Glicksman
         disclaims beneficial ownership.


ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In the period June 1994 through January 1995, the Company has issued
five-year warrants to several of its existing or newly appointed directors to
purchase an aggregate of 825,000 shares of its Common Stock for prices ranging
from $.28 to $.45 per share (market value at the date of issuance) expiring in
various amounts between June 1999 and February 2000 for services rendered or to
be rendered to the Company. See "Security Ownership".

         In December 1994, the Company sold 500,000 shares of its Class A
Preferred Stock, aggregating $400,000 cash, to five individuals including
Messrs. Viscusi, Cohen and Shapiro. The price paid per preferred share (of $.80
per share) was at a premium to its then Common Stock equivalent price per share.
Each share of the Preferred Stock was entitled to two votes per share and was
convertible, at the holder's option, into two shares of Common Stock. The
Preferred Stock is senior to the Common Stock with respect to liquidation
rights; however, the Preferred Stock is not entitled to any dividends. On May
31, 1995, all such shares of Preferred Stock were converted into Common Stock
according to the terms of the Preferred Stock.

         In January 1995, the Company acquired all of the outstanding capital
stock of Vasogenics, Inc., the sole minority shareholder of the Company's Vaso
Interim Corp. subsidiary, for 5,000,000 shares of the Company's common stock.
Subsequent to the transaction, Dr. Hui, a principal of Vasogenics, Inc., entered
into a three-year employment agreement with the Company (see "Employment
Agreements"). Dr. Zheng, another principal of Vasogenics, Inc., entered into a
consulting agreement with the Company for annual compensation approximating
$40,000.


                                       19
<PAGE>   21


ITEM FOURTEEN-EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)(2) Financial Statements
         See Index to Consolidated Financial Statements on page F-1 at beginning
of attached financial statements.


<TABLE>
<CAPTION>
(a)      Exhibits
---      --------
<S>      <C>      <C>      <C>
         (3)      (a)      Restated Certificate of Incorporation (3)
                  (b)      By-Laws (1)
         (4)      (a)      Specimen Certificate for Common Stock (1)
                  (b)      Certificate of Designation of the Preferred Stock, Series A (6)
                  (c)      Certificate of Designation of the Preferred Stock, Series B (14)
                  (d)      Form of Rights Agreement dated as of March 9, 1995 between Registrant and American
                           Stock Transfer & Trust Company (10)
                  (e)      Stock Purchase Agreement dated June 25, 1997 between Registrant and JNC
                           Opportunity Fund, Ltd. (14)
                  (f)      Registration Rights Agreement dated June 25, 1997 between Registrant and JNC
                           Opportunity Fund, Ltd. (14)
                  (g)      Form of Warrant dated June 25, 1997 (14)
         (10)     (a)      1992 Non-Qualified Stock Option Plan (3)
                  (b)      1995 Stock Option Plan (13)
                  (c)      Outside Director Stock Option Plan (13)
                  (d)      Licensing Agreement dated May 29, 1990 between Albert Einstein College
                           of Medicine of Yeshiva University and Viromedics, Inc. (2)
                  (e)      Agreement dated October 1991 between Vasogenics, Inc. and Registrant (3)
                  (f)      Purchase Agreement dated April 9, 1992 among Registrant, Devaron, Inc., Dr. Yair
                           Devash and Dr. Yacov Ron (3)
                  (g)      Amendment dated November 20, 1992 to Agreement between Registrant and
                           Vasogenics, Inc. (3)
                  (h)      Employment Agreement dated November 1, 1992, as amended November 1, 1993,
                           between Registrant and Eugene H. Glicksman (3) (4)
                  (i)      Modification Agreement dated as of May 13, 1993 to the May 29, 1990 agreement with
                           Albert Einstein College of Medicine of Yeshiva University and Viromedics, Inc. (5)
                  (j)      Employment Agreement dated July 1, 1994, as amended on October 24, 1995, between
                           Registrant and Anthony Viscusi (11) (12)
                  (k)      Settlement Agreement dated September 1, 1994 between Viromedics, Inc. and the
                           Albert Einstein College of Medicine of Yeshiva University (11)
                  (l)      Stock Repurchase Agreement dated October 27, 1994 between Registrant and Devaron,
                           Inc. (7)
                  (m)      Offshore Securities Subscription Agreement dated December 2, 1994 between Registrant
                           and Banca del Gottardo (6)
                  (n)      Confidential Private Placement Memorandum dated December 5, 1994 (6)
                  (o)      Stock Purchase Agreement dated January 24, 1995 between Registrant and Vasogenics,
                           Inc. (8)
                  (p)      Employment Agreement dated January 23, 1995, as amended on October 24, 1995,
                           between Registrant and Anthony E. Peacock (8) (12)
                  (q)      Employment Agreement dated February 1, 1995 between Registrant and John C.K. Hui(8)
                  (r)      Note Purchase, Paying and Conversion Agency Agreement dated July 5, 1995 between
                           Registrant and Banca del Gottardo (9)
</TABLE>


                                       20
<PAGE>   22


         (22)              Subsidiaries of the Registrant

<TABLE>
<CAPTION>
                                                                 Percentage
         Name                       State of Incorporation    Owned by Company
         ----                       ----------------------    ----------------
<S>                                 <C>                       <C>
         Viromedics, Inc.                    Delaware                 61%
         Vaso Interim Corp.                  Delaware                100%
         Vasogenics, Inc.                    New York                100%
</TABLE>

         (27)              Financial Data Schedule (15)

---------

(1)      Incorporated by reference to Registration Statement on Form S-18, No.
         33-24095.
(2)      Incorporated by reference to Report on Form 10-K for the fiscal year
         ended May 31,1991.
(3)      Incorporated by reference to Registration Statement on Form S-1, No.
         33-46377 (effective 7/12/94).
(4)      Incorporated by reference to Report on Form 8-K dated November 1, 1992.
(5)      Incorporated by reference to Report on Form 8-K dated May 13, 1993.
(6)      Incorporated by reference to Report on Form 8-K dated November 14,
         1994.
(7)      Incorporated by reference to Report on Form 10-QSB for the quarter
         ended November 30, 1994.
(8)      Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(9)      Incorporated by reference to Report on Form 8-K/A dated June 26, 1995.
(10)     Incorporated by reference to Registration Statement on Form 8-A dated
         May 12, 1995.
(11)     Incorporated by reference to Report on Form 10-K for the fiscal year
         ended May 31,1994.
(12)     Incorporated by reference to Report on Form 8-K dated October 24, 1995.
(13)     Incorporated by reference to Notice of Annual Meeting of Stockholders
         dated December 5, 1995.
(14)     Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(15)     Filed herewith.


(b)      Form 8-K Reports
         Report on Form 8-K dated June 25, 1997.


                                       21
<PAGE>   23



         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the seventh day of
August, 1997.


                                 VASOMEDICAL, INC.

                                 By: /s/ Anthony Viscusi
                                     ----------------------------------
                                         Anthony Viscusi
                                 President, Chief Executive Officer and Director
                                  (Principal Executive Officer)

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on August 7, 1997 by the following persons in
the capacities indicated:

<TABLE>
<S>                                         <C>
/s/ Alexander G. Bearn                      Director
---------------------------------
Alexander G. Bearn

/s/                                         Director
---------------------------------
David S. Blumenthal

/s/ Francesco Bolgiani                      Director
---------------------------------
Francesco Bolgiani

/s/ Abraham E. Cohen                        Chairman of the Board
---------------------------------
Abraham E. Cohen

/s/ Joseph A. Giacalone                     Secretary and Treasurer (Principal Financial and Accounting Officer)
---------------------------------
Joseph A. Giacalone

/s/ Eugene H. Glicksman                     Executive Vice President and Director
---------------------------------
Eugene H. Glicksman

/s/ John C.K. Hui                           Senior Vice President, R&D and Manufacturing and Director
---------------------------------
John C.K. Hui

/s/ Kenneth W. Rind                         Director
---------------------------------
Kenneth W. Rind

/s/ E. Donald Shapiro                       Director
---------------------------------
E. Donald Shapiro

/s/ Anthony Viscusi                         President, Chief Executive Officer and Director
---------------------------------           (Principal Executive Officer)
Anthony Viscusi                             

/s/ Zhen-sheng Zheng                        Director
---------------------------------
Zhen-sheng Zheng
</TABLE>


                                       22
<PAGE>   24


                       Vasomedical, Inc. and Subsidiaries

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
<S>                                                                          <C>
Report of Independent Certified Public Accountants                           F-2

Financial Statements
         Consolidated Balance Sheets as of May 31, 1997 and 1996             F-3

         Consolidated Statements of Operations for the
           years ended May 31, 1997, 1996 and 1995                           F-4

         Consolidated Statement of Changes in Stockholders'
           Equity for the years ended May 31, 1997, 1996 and 1995            F-5

         Consolidated Statements of Cash Flows for the
           years ended May 31, 1997, 1996 and 1995                           F-6

         Notes to Consolidated Financial Statements                          F-7
</TABLE>


                                      F-1
<PAGE>   25


                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS


To the Stockholders and Board of Directors
  of Vasomedical, Inc.

We have audited the accompanying consolidated balance sheets of Vasomedical,
Inc. and Subsidiaries (the "Company") as of May 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three fiscal years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of May 31, 1997 and 1996, and the consolidated results of their
operations and their consolidated cash flows for each of the three fiscal years
in the period ended May 31, 1997, in conformity with generally accepted
accounting principles.



GRANT THORNTON LLP


Melville, New York
July 29, 1997


                                      F-2
<PAGE>   26


                       Vasomedical, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                     May 31,

<TABLE>
<CAPTION>
                  ASSETS                                                         1997                1996
                                                                              ------------        ------------
<S>                                                                           <C>                 <C>         
CURRENT ASSETS
          Cash and cash equivalents                                           $  1,753,004        $  4,447,806
          Accounts receivable                                                       56,648           1,010,965
          Inventory                                                                953,045             563,272
          Other current assets                                                      86,063             160,987
                                                                              ------------        ------------
                  Total current assets                                           2,848,760           6,183,030

PROPERTY AND EQUIPMENT, net                                                        308,204             211,173
CAPITALIZED COSTS IN EXCESS OF FAIR
     VALUE OF NET ASSETS ACQUIRED, net                                             994,469           1,208,915
DEFERRED LOAN COSTS, net                                                                               619,445
OTHER ASSETS                                                                        23,588              23,588
                                                                              ------------        ------------
                                                                              $  4,175,021        $  8,246,151
                                                                              ------------        ------------

          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
          Accounts payable and accrued expenses                               $    272,978        $    346,250
          Accrued warranty and customer support costs                              321,000             196,000
          Accrued professional fees                                                243,062             133,471
          Accrued commissions                                                       30,389             309,315
          Accrued interest                                                                             239,021
                                                                              ------------        ------------
                  Total current liabilities                                        867,429           1,224,057

LONG-TERM DEBT                                                                                       3,725,000
ACCRUED WARRANTY COSTS                                                             220,000             140,000
OTHER LONG-TERM LIABILITIES                                                         66,630              66,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
          Preferred stock, $.01 par value; 1,000,000
            shares authorized; none issued and outstanding                              --                  --
          Common stock, $.001 par value; 85,000,000 shares
            authorized; 46,782,003 shares and 42,204,113 shares at
            May 31, 1997 and 1996, respectively, issued and outstanding             46,782              42,204
          Additional paid-in capital                                            28,699,219          24,427,338
          Deferred compensation                                                                       (169,813)
          Accumulated deficit                                                  (25,725,039)        (21,208,635)
                                                                              ------------        ------------
                                                                                 3,020,962           3,091,094
                                                                              ------------        ------------
                                                                              $  4,175,021        $  8,246,151
                                                                              ------------        ------------
</TABLE>

The accompanying notes are an integral part of these statements.


                                      F-3
<PAGE>   27


                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             Year ended May 31,
                                            ----------------------------------------------------
                                                 1997                1996                1995
                                            ------------        ------------        ------------
<S>                                         <C>                 <C>                 <C>         
Revenues
  Equipment sales                           $  1,625,150        $  2,507,528        $         --
  Equipment rentals and services                 471,412             175,600                  --
                                            ------------        ------------        ------------
                                               2,096,562           2,683,128                  --
                                            ------------        ------------        ------------

Costs and expenses
  Cost of sales and services                   1,020,047             609,136
  Selling, general and administrative          4,155,552           3,738,789           2,172,555
  Research and development                     1,045,184             364,455             598,178
  Depreciation and amortization                  333,482             269,443             117,851
  Write-off of accounts receivable               225,000
  Provision for uncollectable note                                                       318,000
  Interest and financing costs                     8,511             515,451               2,523
  Interest and other income - net               (174,810)           (171,001)            (91,813)
                                            ------------        ------------        ------------

                                               6,612,966           5,326,273           3,117,294
                                            ------------        ------------        ------------

  NET LOSS                                  $ (4,516,404)       $ (2,643,145)       $ (3,117,294)
                                            ------------        ------------        ------------


Net loss per common share                   $       (.10)       $       (.07)       $       (.10)
                                            ------------        ------------        ------------


Weighted average common shares
  outstanding                                 46,297,142          39,226,258          30,519,640
                                            ------------        ------------        ------------
</TABLE>


The accompanying notes are an integral part of these statements.


                                      F-4
<PAGE>   28



                       Vasomedical, Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                               Additional  
                                               Preferred Stock                    Common stock                 paid-in     
                                             Shares         Amount          Shares            Amount           capital     
                                            --------        ------        -----------        --------        ------------
<S>                                         <C>             <C>           <C>               <C>             <C>         
Balance at June 1, 1994                                                    26,064,432        $ 26,064        $ 17,969,039
Unvested common stock forfeited
  under stock bonus arrangement                                              (570,000)           (570)           (508,868)
Issuance of common stock for cash                                           6,000,000           6,000           1,481,625
Issuance of preferred stock for cash         500,000         5,000                                                382,625
Conversion of preferred stock               (500,000)       (5,000)         1,000,000           1,000               4,000
Issuance of common stock to
  acquire subsidiary                                                        5,000,000           5,000           1,460,000
Common stock issued to consultants
  for services                                                                405,000             405             273,657
Warrants issued to directors and                                                                                
consultants                                                                                                        72,500
Amortization of deferred compensation                                                                                     
Unrealized loss on investments                                                                                            
Net loss                                                                                                                  
                                            --------        ------        -----------        --------        ------------
Balance at May 31, 1995                           --            --         37,899,432          37,899          21,134,578

Common stock issued to consultant
  in connection with debt financing                                           600,000             600             599,400
Common stock issued in lieu of cash                                            
 interest                                                                      89,096              89              89,007   
Conversion of debt                                                            275,000             275             274,725
Exercise of warrants                                                        3,340,585           3,341           2,319,628
Warrants issued to consultants                                                                                     10,000
Amortization of deferred compensation                                                                                     
Realized loss on sale of investments                                                                                      
Net loss                                                                                                                  
                                            --------        ------        -----------        --------        ------------
Balance at May 31, 1996                           --            --         42,204,113          42,204          24,427,338

Conversion of debt                                                          3,725,000           3,725           3,330,850
Exercise of warrants                                                          852,890             853             941,031
Amortization of deferred compensation                                                                                     
Net loss                                                                                                                  
                                            --------        ------        -----------        --------        ------------
Balance at May 31, 1997                           --            --         46,782,003        $ 46,782        $ 28,699,219
                                            --------        ------        -----------        --------        ------------
</TABLE>


<TABLE>
<CAPTION>
                                                                                                       Total
                                             Deferred           Loss                                   stock-
                                              compen-         on invest-        Accumulated           holders' 
                                              sation            ments             deficit              equity   
                                            -----------        ---------        ------------        -----------
<S>                                         <C>                <C>              <C>                 <C>        
Balance at June 1, 1994                     $(1,018,876)       $      --        $(15,448,196)       $ 1,528,031
Unvested common stock forfeited
  under stock bonus arrangement                 509,438                                                      --
Issuance of common stock for cash                                                                     1,487,625
Issuance of preferred stock for cash                                                                    387,625
Conversion of preferred stock                                                                                --
Issuance of common stock to
  acquire subsidiary                                                                                  1,465,000
Common stock issued to consultants
  for services                                                                                          274,062
Warrants issued to directors and                                                                         
consultants                                                                                              72,500
Amortization of deferred compensation           169,812                                                 169,812
Unrealized loss on investments                                    (7,370)                                (7,370)
Net loss                                                                          (3,117,294)        (3,117,294)
                                            -----------        ---------        ------------        -----------
Balance at May 31, 1995                        (339,626)          (7,370)        (18,565,490)         2,259,991

Common stock issued to consultant
  in connection with debt financing                                                                     600,000
Common stock issued in lieu of cash                                                                     
 interest                                                                                                89,096 
Conversion of debt                                                                                      275,000
Exercise of warrants                                                                                  2,322,969
Warrants issued to consultants                                                                           10,000
Amortization of deferred compensation           169,813                                                 169,813
Realized loss on sale of investments                               7,370                                  7,370
Net loss                                                                          (2,643,145)        (2,643,145)
                                            -----------        ---------        ------------        -----------
Balance at May 31, 1996                        (169,813)              --         (21,208,635)         3,091,094

Conversion of debt                                                                                    3,334,575
Exercise of warrants                                                                                    941,884
Amortization of deferred compensation           169,813                                                 169,813
Net loss                                                                          (4,516,404)        (4,516,404)
                                            -----------        ---------        ------------        -----------
Balance at May 31, 1997                     $        --        $      --        $(25,725,039)       $ 3,020,962
                                            -----------        ---------        ------------        -----------
</TABLE>


The accompanying notes are an integral part of this statement.


                                      F-5
<PAGE>   29



                       Vasomedical, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  Year ended May 31,
                                                                   -------------------------------------------------
                                                                      1997               1996               1995
                                                                   -----------        -----------        -----------
<S>                                                                <C>                <C>                <C>         
Cash flows from operating activities
  Net loss                                                         $(4,516,404)       $(2,643,145)       $(3,117,294)
                                                                   -----------        -----------        -----------
  Adjustments to reconcile net loss
    to net cash used in operating activities
      Depreciation and amortization                                    333,482            269,443            117,851
      Provision for losses                                             225,000                               318,000
      Amortization of deferred compensation                            169,813            169,813            169,812
      Amortization of deferred loan costs                                                 272,555
      Warrants issued to directors and consultants                                         10,000             47,500
      Net loss on sale of equipment                                                                            2,950
      Changes in operating assets and liabilities
        Accounts receivable                                            729,317         (1,010,965)
        Inventory                                                     (389,773)          (563,272)
        Other current assets                                            74,924            (40,531)           (82,917)
        Other assets                                                                      (13,807)              (888)
        Accounts payable, accrued expenses and other
          current liabilities                                         (113,978)           820,006            145,794
        Other liabilities                                               77,000            206,000                 
                                                                   -----------        -----------        -----------
                                                                     1,105,785            119,242            718,102
                                                                   -----------        -----------        -----------
     Net cash used in operating activities                          (3,410,619)        (2,523,903)        (2,399,192)
                                                                   -----------        -----------        -----------

Cash flows from investing activities
  Purchase of investments                                                                 (20,034)           (44,858)
  Proceeds from sale of investments                                                       655,556            297,653
  Acquisition/disposition of subsidiaries, net of cash                                                         2,137
  Purchase of property and equipment                                  (216,067)          (186,391)            (2,256)
                                                                   -----------        -----------        -----------
Net cash (used in) provided by investing activities                   (216,067)           449,131            252,676
                                                                   -----------        -----------        -----------

Cash flows from financing activities
  Proceeds from exercise of warrants                                   941,884          2,322,969
  Proceeds from issuance of long-term debt, net                                         3,708,000
  Debt conversion fees                                                 (10,000)
  Proceeds from sale of common stock                                                                      1,487,625
  Proceeds from sale of preferred stock                                                                     387,625
                                                                   -----------        -----------        -----------
Net cash provided by financing activities                              931,884          6,030,969          1,875,250
                                                                   -----------        -----------        -----------

      NET (DECREASE) INCREASE IN
        CASH AND CASH EQUIVALENTS                                   (2,694,802)         3,956,197           (271,266)
Cash and cash equivalents - beginning of year                        4,447,806            491,609            762,875
                                                                   -----------        -----------        -----------
Cash and cash equivalents - end of year                            $ 1,753,004        $ 4,447,806        $   491,609
                                                                   -----------        -----------        -----------

Non-cash investing and financing activities were as follows:
  Issuance of common stock for debt conversion                     $ 3,344,575        $   275,000
  Issuance of common stock in lieu of cash interest                                        89,096
  Issuance of common stock for acquisition                                                               $ 1,465,000
  Issuance of common stock and warrants for services                                      600,000            299,063
</TABLE>


The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>   30


                       Vasomedical, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           May 31, 1997, 1996 and 1995

NOTE A - BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The Company was incorporated in Delaware in July 1987. During fiscal
1996, the Company commenced the commercialization of Enhanced External
Counterpulsation ("EECP(R)"), a microprocessor-based medical device for the
non-invasive, atraumatic treatment of patients with coronary artery disease.
EECP(R) is marketed worldwide to hospitals, clinics and other cardiac health
care providers. To date, substantially all of the Company's revenues have been
generated from customers in the United States.

         In fiscal 1992, the Company, through the purchase of a 55% interest in
Vaso Interim Corp. ("Vaso Interim"), acquired the worldwide exclusive marketing
rights (except in China) to EECP(R) and agreed to fund the research and
development activities of Vasogenics, Inc. ("Vasogenics"), its joint-venture
partner in Vaso Interim and sole minority shareholder. Vasogenics held the
intellectual property rights to the EECP(R) technology, including patents and
manufacturing rights.

          In January 1995, the Company acquired all the capital stock of
Vasogenics for stock consideration and the assumption of certain liabilities. In
connection with the acquisition, the Company retained certain key employees of
Vasogenics who had been involved in the development of the EECP(R) technology.

          EECP(R), which had undergone clinical studies at the State University
of New York's University Medical Center at Stony Brook, received marketing
clearance from the Food and Drug Administration ("FDA") under a 510(k) premarket
notification in February 1995.

          The acquisition of Vasogenics was recorded as a purchase transaction.
The Company fair valued the 5,000,000 shares of common stock it issued in
consideration of the acquisition at $1,465,000 or 75% of the quoted market price
on the acquisition date to recognize the restriction on the subsequent sale of
such shares. The excess of the purchase price over the fair value of assets
acquired and liabilities assumed, aggregating $1,492,000, was capitalized in the
accompanying consolidated balance sheet. Pro-forma operating results, assuming
the acquisition took place at the beginning of fiscal 1995, were as follows:

<TABLE>
<CAPTION>
                                    Year ended May 31,1995
                                    ----------------------
<S>                                 <C>       
          Revenues                         $        -
          Net loss                         (3,238,000)
          Net loss per common share              (.09)
</TABLE>

         Pro-forma adjustments consist of amortization of the excess of cost
over net assets acquired and the issuance of 5,000,000 shares of the Company's
common stock to consummate the acquisition.

         A summary of the significant accounting policies consistently applied
in the preparation of the consolidated financial statements follows:

          1. Principles of Consolidation

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

          2. Inventories

          Inventories consisting of equipment held for sale are stated at the
lower of cost or market; cost is determined using the first-in, first-out
method.


                                      F-7
<PAGE>   31


          3. Property and Equipment

          Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided over the estimated
useful lives of the assets, which range from three to seven years using
accelerated depreciation methods. Leasehold improvements are amortized over the
shorter of the useful life of the related leasehold improvement or the life of
the related lease, generally five years.

          4. Capitalized Costs in Excess of Fair Value of Net Assets Acquired

          The capitalized costs in excess of fair value of net assets acquired
arising from the acquisitions of Vaso Interim and Vasogenics are being amortized
on a straight-line basis over a period of five and seven years, respectively. On
an ongoing basis, management reviews the valuation and amortization of
intangibles to determine possible impairment by considering current operating
results and comparing the carrying value to the anticipated undiscounted future
cash flows of the related assets.

          5. Revenue Recognition

         The Company recognizes revenue from the sale of its EECP(R) device in
the period in which the Company fulfills its obligations under the sale
agreement, including delivery, installation and customer acceptance. The Company
has also entered into lease agreements for its EECP(R) device that are
classified as operating leases. Revenues from operating leases are recognized on
a straight-line basis over the life of the respective leases.

          6. Warranty Costs

          The Company also provides for a warranty period on its EECP(R) system.
The Company provides for estimated warranty costs at the time the related
revenue is earned. As the Company's experience with respect to the commercial
application of EECP(R) is limited, revisions to the Company's warranty cost
estimates may be necessary in the future.

          7. Research and Development

          Research and development costs are expensed as incurred.

          8. Income Taxes

          Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carryforwards for which income tax benefits are expected to be realized in
future years. A valuation allowance has been established to offset the deferred
tax assets as it is more likely than not that all, or some portion, of such
deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.

          9. Use of Estimates

          In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

          10. Net Loss Per Common Share

          Loss per common share is based upon the weighted average number of
common shares outstanding during the year. Common stock equivalents have not
been included in this calculation since their inclusion would be antidilutive.

          11. Statements of Cash Flows

          The Company considers highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of money market funds. The market value of the
cash equivalents approximates cost.


                                     F-8
<PAGE>   32

          12. New Accounting Standard Not Yet Adopted

          In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have a material impact on the disclosure of earnings
per share in the consolidated financial statements.


NOTE B - PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                 May 31,
                                                                      -------------------------
         Property and equipment is summarized as follows:                   1997             1996
                                                                       ---------        ---------
<S>                                                                    <C>              <C>      
                  Office, laboratory and other equipment               $ 151,344        $ 113,929
                  EECP(R)units under operating leases                    281,336          119,318
                  Furniture and fixtures                                  68,808           58,930
                  Leasehold improvements                                  89,760           83,004
                                                                       ---------        ---------
                                                                         591,248          375,181
                  Less accumulated depreciation and amortization        (283,044)        (164,008)
                                                                       ---------        --------- 
                                                                       $ 308,204        $ 211,173
                                                                       ---------        --------- 
</TABLE>

NOTE C - LONG-TERM DEBT

         In July 1995, the Company sold $4,000,000 principal amount of 7%
five-year Convertible Debentures (the "Notes"), convertible into shares of the
Company's common stock at $1.00 per share commencing December 1, 1995 at the
option of the holder. The conversion price was equivalent to the quoted market
price of the Company's common stock when the transaction was negotiated.
Deferred loan costs, aggregating $892,000, incurred in connection with obtaining
the Notes were being amortized over the life of the Notes. In connection with
the sale of the Notes, the Company issued 600,000 shares of its common stock to
the broker/finder for services rendered. In fiscal 1996, $275,000 principal
amount of Notes were converted into 275,000 shares of the Company's common
stock.

         In June 1996, the $3,725,000 outstanding principal amount of Notes were
converted into 3,725,000 shares of the Company's common stock. As a result of
such conversion, accrued interest of $239,000 was also canceled in accordance
with the terms of the Note agreement. The effect of this conversion was to
increase stockholders' equity by $3,335,000, consisting of the debt conversion
($3,725,000) and accrued interest ($239,000), net of unamortized loan costs and
conversion fees ($629,000).


NOTE D - STOCKHOLDERS' EQUITY AND WARRANTS

1. In fiscal 1995, the Company issued warrants to certain directors and outside
consultants to purchase an aggregate of 825,000 and 200,000 shares,
respectively, of the Company's common stock at prices ranging from $.28 to $1.00
per share (then current market value) exercisable through February 2000 for
services rendered or to be rendered to the Company. Based upon trading history,
stock price volatility and other relevant factors, management fair valued those
warrants issued to outside consultants at $.10 per share.

2. During the first quarter of fiscal 1995, the Company issued 50,000 registered
shares of its common stock to an outside consultant for services rendered in
fiscal 1994. The value of common stock issued, aggregating $38,000, represented
the quoted market price at the time of the agreement.

3. In December 1994, the Company sold 6,000,000 shares of its common stock
together with warrants to purchase 600,000 shares of its common stock at $.25
per share expiring in December 1999 to a foreign banking institution pursuant to
a private placement for $1,500,000 cash. In August 1995, warrants to purchase
360,000 shares of common stock were exercised, aggregating $90,000.


                                       F-9
<PAGE>   33


4. Also in December 1994, the Company sold 500,000 shares of its Class A
preferred stock, aggregating $400,000, to five individuals, of which certain
officers and directors purchased 187,500 preferred shares aggregating $150,000.
The price paid per preferred share (of $.80 per share) was at a premium to its
then common stock equivalent price per share. Each share of the preferred stock
was entitled to two votes per share and was convertible, at the holder's option,
into two shares of common stock. The preferred stock was senior to the common
stock with respect to liquidation rights; however, the preferred stock was not
entitled to any dividends. In May 1995, the five individual holders of the
preferred stock exercised their conversion rights and were issued 1,000,000
shares of common stock upon cancellation of the preferred stock.

5. In March 1995, the Company's Board of Directors approved a Shareholder Rights
Plan, under which a dividend distribution of one Right for each outstanding
share of the Company's common stock is authorized. Each Right will entitle
shareholders of record on May 9, 1995 to purchase one-half share of common stock
at a 50% discount to market price if a person or group acquires 20% or more of
the Company's outstanding stock.

6. In May 1995, the Company's stockholders amended its certificate of
incorporation to increase the number of authorized common shares from 45,000,000
shares to 85,000,000 shares.

7. In the first quarter of fiscal 1996, the Company issued 600,000 shares of its
common stock to a broker/finder in connection with its July 1995 Convertible
Debenture financing (see Note C). These shares, valued at $600,000 (such value
being equivalent to the quoted market price of the Company's common stock), were
included in deferred loan costs.

8. In July 1995, the Company issued 89,096 shares of its common stock in lieu of
$89,096 of interest previously accrued for, at the option of the lender.

9. In fiscal 1996, the Company issued warrants to an outside consultant to
purchase 100,000 shares of the Company's common stock at $1.44 per share (then
current market value) exercisable through February 2001 for services rendered to
the Company. Based upon trading history, stock price volatility and other
relevant factors, management fair valued those warrants issued at $.10 per
share.

10. Subsequent to May 31, 1997, warrants to purchase 373,001 shares of common
stock have been exercised, resulting in proceeds to the Company of $241,000.

Warrants

         Warrant activity for the years ended May 31, 1995, 1996 and 1997 is
summarized as follows (see Note H-1):

<TABLE>
<CAPTION>
                                 Non-employee
                                    Directors        Employees        Consultants           Total            Price Range
                                   ----------        ----------        ----------        -----------        -------------
<S>                                <C>               <C>               <C>                <C>              <C>     <C>  
Balance at June 1, 1994               450,000           760,000         6,208,750          7,418,750        $ .72 - $5.00
  Issued                              825,000         1,835,000           815,789          3,475,789        $ .25 - $ .76
Canceled/retired                           --                --          (296,000)         (296,000)        $1.31 - $2.01
                                   ----------        ----------        ----------        -----------        -------------
Balance at May 31, 1995             1,275,000         2,595,000         6,728,539         10,598,539        $ .25 - $5.00
  Issued                                   --                --           100,000            100,000        $        1.44
  Exercised                          (100,000)         (585,000)       (2,655,585)        (3,340,585)       $ .25 - $1.03
  Canceled/retired                         --           (35,000)       (1,985,854)       (2,020,854)        $ .73 - $5.00
                                   ----------        ----------        ----------        -----------        -------------
Balance at May 31, 1996             1,175,000         1,975,000         2,187,100          5,337,100        $ .25 - $1.81
Exercised                                  --           (25,000)         (827,890)          (852,890)       $ .41 - $1.81
  Canceled/retired                         --                --          (141,209)         (141,209)        $1.10 - $1.81
                                   ----------        ----------        ----------        -----------        -------------
Balance at May 31, 1997             1,175,000         1,950,000         1,218,001          4,343,001        $ .25 - $1.50
                                   ----------        ----------        ----------        -----------        -------------
Number of shares exercisable        1,075,000         1,140,000         1,218,001          3,433,001        $ .25 - $1.50
                                   ----------        ----------        ----------        -----------        -------------
</TABLE>


                                      F-10
<PAGE>   34

          The following table summarizes information about warrants outstanding
at May 31, 1997:

<TABLE>
<CAPTION>
                                         Warrants Outstanding                        Warrants Exercisable
                            ------------------------------------------------    -------------------------------
                                               Weighted
                             Number            Average             Weighted        Number              Weighted
                             Outstanding at    Remaining           Average      Exercisable at          Average
                             May 31, 1997      Contractual         Exercise     May 31, 1997           Exercise 
Range of Exercise Prices                       Life (yrs.)          Price                               Price 
---------------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>                 <C>          <C>                    <C> 
$ .25  -  $ .38                590,000             2.6               $ .32         440,000                $.30
$ .38  -  $ .56              2,230,000             2.8               $ .43       1,470,000                $.43
$ .91  -  $1.36              1,023,001             1.3               $1.06       1,023,001               $1.06
$1.36  -  $1.50                500,000             1.1               $1.49         500,000               $1.49
                            ------------------------------------------------    -------------------------------
                             4,343,001             2.2               $ .69       3,433,001                $.76
                            ------------------------------------------------    -------------------------------
</TABLE>


NOTE E - OPTION PLANS

1992 Non-Qualified Stock Option Plan

         In June 1993, the Company's stockholders approved a 1992 Non-Qualified
Stock Option Plan (the "Non-Qualified Plan") for officers, directors, employees
and consultants of the Company, for which the Company reserved an aggregate of
1,500,000 shares of common stock. In November 1994, the Company's Board of
Directors terminated the Non-Qualified Plan.

1995 Stock Option Plan

         In May 1995, the Company's stockholders approved the 1995 Stock Option
Plan (the "1995 Option Plan") for officers and employees of the Company, for
which the Company has reserved an aggregate of 1,500,000 shares of common stock.
The 1995 Option Plan provides that it will be administered by a committee of the
Board of Directors of the Company and that the committee will have full
authority to determine the identity of the recipients of the options and the
number of shares subject to each option. Options granted under the 1995 Option
Plan may be either incentive stock options or non-qualified stock options. The
option price shall be 100% of the fair market value of the common stock on the
date of the grant (or in the case of incentive stock options granted to any
individual principal stockholder who owns stock possessing more than 10% of the
total combined voting power of all voting stock of the Company, 110% of such
fair market value). The term of any option may be fixed by the committee but in
no event shall exceed ten years from the date of grant. Options are exercisable
upon payment in full of the exercise price, either in cash or in common stock
valued at fair market value on the date of exercise of the option. The term for
which options may be granted under the 1995 Option Plan expires March 8, 2005.

Outside Director Stock Option Plan

         In May 1995, the Company's stockholders approved an Outside Director
Stock Option Plan (the "Director Plan") for non-employee directors ("Outside
Directors") of the Company, for which the Company has reserved an aggregate of
300,000 shares of common stock. The Director Plan is administered by the Board
of Directors of the Company. In accordance with the terms of the Director Plan,
each Outside Director will be granted ten-year, non-qualified stock options
commencing June 1, 1995, and on the first day of each June thereafter, to
purchase those number of shares of the Company's common stock having an
aggregate market value of $10,000 at the average closing price of the common
stock on NASDAQ or such other exchange upon which the Company's stock is listed
for the five trading days immediately preceding the date of grant. Options
granted to each Outside Director shall vest after one year. Options are
exercisable upon payment in full of the exercise price, either in cash or in
common stock valued at fair market value on the date of exercise of the option.


                                      F-11
<PAGE>   35


             Activity under all the plans is summarized as follows:

<TABLE>
<CAPTION>
                                                                        Outstanding Options
                                                                  ----------------------------------
                               Shares Available    Number of         Exercise       Weighted Average
                                 for Grant          Shares        Price per Share    Exercise Price
                               ---------------------------------------------------------------------
<S>                            <C>                  <C>           <C>                    <C>  
Balance at June 1, 1994        1,470,000            25,000        $ .91 - $1.03           $ .93
 Shares authorized             1,800,000                --                   --              --
   Plan terminated            (1,470,000)               --                   --              --

                               ---------------------------------------------------------------------
Balance at May 31, 1995        1,800,000            25,000        $ .91 - $1.03           $ .93
   Options granted               (77,418)           77,418                $ .78           $ .78

                               ---------------------------------------------------------------------
Balance at May 31, 1996        1,722,582           102,418        $ .78 - $1.03           $ .81
   Options granted              (943,675)          943,675        $2.00 - $3.44           $3.21
  Options canceled                20,000           (20,000)               $3.44           $3.44

                               ---------------------------------------------------------------------
Balance at May 31, 1997          798,907         1,026,093        $ .78 - $3.44           $2.97
                               ---------------------------------------------------------------------
</TABLE>



         The following table summarizes information about stock options
outstanding at May 31, 1997:

<TABLE>
<CAPTION>
                                           Options Outstanding                  Options Exercisable
                             --------------------------------------------    ---------------------------
                                                Weighted
                                 Number          Average         Weighted       Number          Weighted
                             Outstanding at     Remaining         Average    Exercisable at     Average
                              May 31, 1997     Contractual       Exercise     May 31, 1997      Exercise 
Range of Exercise Prices                       Life (yrs.)         Price                         Price
--------------------------------------------------------------------------------------------------------
<S>                          <C>               <C>               <C>         <C>                <C> 
$.78  -  $1.03                  102,418            7.6              $.81        102,418          $.81
$2.00  -  $2.21                 151,675            9.4             $2.04              -             -
$3.44                           772,000            9.0             $3.44              -             -
                              -----------------------------------------------------------------------
                              1,026,093            8.9             $2.97        102,418          $.81
                              -----------------------------------------------------------------------
</TABLE>
                   
          At May 31, 1996 and 1995, 25,000 shares were exercisable at the
weighted average exercise price of $.93 per share.

         As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") in accounting for stock-based awards under option plans. Under APB 25, the
Company generally recognizes no compensation expense with respect to such
awards. Pro forma information regarding net income and earnings per share is
required by SFAS 123 for awards granted after May 31, 1995 as if the Company had
accounted for its stock-based awards under the fair value method of SFAS 123.
The fair value of the Company's stock-based awards was estimated using the
Black-Scholes option valuation model. The Black-Scholes model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock-based awards have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its stock-based awards. The fair value of
the Company's stock-based awards was estimated assuming no expected dividends
and the following weighted-average assumptions:


                                      F-12


<PAGE>   36

<TABLE>
<CAPTION>
Fiscal year ended May 31,                  1997               1996
-------------------------                  ----               ----
<S>                                       <C>                <C>
Expected life (years)                         5                  5
Expected volatility                         85%                85%
Risk-free interest rate                   6.69%              5.90%
</TABLE>

          The following are the pro forma net loss and net loss per share for
fiscal 1997 and 1996, as if compensation expense for the option grants in fiscal
1997 and 1996 had been determined based on their estimated fair value at the
date of grant:

<TABLE>
<CAPTION>
                                           1997               1996
                                           ----               ----
<S>                                <C>                <C>         
Pro forma net loss                 $(6,675,734)       $(2,685,725)
Pro forma net loss per share             $(.14)             $(.07)
</TABLE>

          The effects on fiscal 1997 and 1996 pro forma net loss and net loss
per share of expensing the estimated fair value of stock options are not
necessarily representative of the effects on reporting the results of operations
for future years as the periods presented include only one and two years,
respectively, of option grants under the Company's plans.

          The weighted-average fair value of options granted during fiscal 1997
and 1996 was $2.29 and $.55, respectively. At May 31, 1997, there were
32,643,003 shares of authorized but unissued common stock reserved for issuance
under all stock option plans, stock warrants and shareholders' rights.

NOTE F - REVENUE CONCENTRATIONS

         In March 1996, the Company entered into an exclusive agreement with a
third party whereby such third party will purchase, subject to credit approval,
the EECP(R) system on a non-recourse basis and lease the system to the Company's
customers. During fiscal 1997 and 1996, approximately 54% and 51%, respectively,
of the Company's revenues were derived through such transactions. Further, the
Company had sales to two individual customers, each accounting for over 10% of
the Company's sales, two of which are included above, aggregating 43% of the
Company's fiscal 1997 revenues. In fiscal 1996, the Company had sales to four
individual customers, each accounting for over 10% of the Company's sales, two
of which are included above, aggregating 54% of such revenues.

NOTE G - INCOME TAXES

         Deferred tax assets or liabilities are computed based on the impact of
"temporary differences" between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate. The tax effects of
temporary differences which give rise to deferred tax assets are summarized as
follows:

<TABLE>
<CAPTION>
                                                                     May 31,
                                                              -----------------------
                                                              1997               1996
                                                              ----               ----
<S>                                                    <C>                <C>        
Deferred tax assets
      Net operating loss and other carryforwards       $ 9,226,000        $ 6,905,000
      Accrued compensation                                 148,000            155,000
      Other                                                304,000            115,000
                                                       -----------        -----------
              Total gross deferred tax assets            9,678,000          7,175,000
      Valuation allowance                               (9,678,000)        (7,175,000)
                                                       -----------        -----------
                                                       $        --        $        --
                                                       -----------        -----------
</TABLE>

         Management has established a valuation allowance for the full amount of
the deferred tax assets based on uncertainties with respect to the Company's
ability to generate future taxable income.

         At May 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $23,400,000, expiring at various
dates through 2012. Further, a Company subsidiary has separate net operating
loss carryforwards available to offset future taxable income, aggregating
approximately $1,700,000, expiring at various dates through 2012.


                                      F-13


<PAGE>   37


NOTE H - COMMITMENTS AND CONTINGENCIES

1. Employment Agreements

         The Company maintains employment agreements with its executive
officers, expiring at various dates through January 1999. Such employment
agreements provide, among other things, that in the event there is a change in
the control of the Company, as defined therein, or in any person directly or
indirectly controlling the Company, as also defined therein, the employee has
the option, exercisable within six months of becoming aware of such event, to
terminate his employment agreement. Upon such termination, the employee has the
right to receive as a lump-sum payment certain compensation remaining to be paid
for the balance of the term of the agreement.

         In July 1994, in connection with an employment agreement with its new
President and Chief Executive Officer, the Company issued five-year warrants to
purchase 1,000,000 shares of its common stock at $.45 per share (which
approximated market value at the date of grant) vesting at 25% per year
beginning June 30, 1995. Such vesting is contingent upon his continued
employment with the Company.

          In October 1994, the Company settled an employment commitment through
December 1997 with its former Chairman and President, aggregating $244,000, for
$35,000 which was charged to operations during fiscal 1995. In addition, this
former officer forfeited 570,000 shares of the Company's common stock issued as
a stock bonus in December 1992 which had not vested at the settlement date. This
former officer also resigned from the Company's Board of Directors.

          In December 1994, the Company settled an employment commitment through
November 1996 with its former Vice President - Finance, aggregating $190,000,
for $75,000 which was charged to operations during fiscal 1995. This former
officer also resigned from the Company's Board of Directors.

         In January 1995, in connection with an employment agreement with its
recently appointed Vice President of Marketing, the Company issued five-year
warrants to purchase 300,000 shares of its common stock at $.38 per share (which
approximated market value at the date of grant) vesting at 25% per year
beginning January 1996. Such vesting is contingent upon his continued employment
with the Company.

         In February 1995, in connection with an employment agreement with its
recently appointed Senior Vice President of R&D and Manufacturing, the Company
issued five-year warrants to purchase 300,000 shares of its common stock at $.40
per share (which approximated market value at the date of grant) vesting at 33%
per year beginning February 1996. Such vesting is contingent upon his continued
employment with the Company.

         Also in February 1995, the Company issued five-year warrants to its
Treasurer to purchase 200,000 shares of the Company's common stock at $.41 per
share (which approximated market value at the date of grant) with 50,000 such
shares vested immediately and the remainder vesting at 33% per year beginning
February 1996. Such vesting is contingent upon his continued employment with the
Company.

         Approximate aggregate minimum annual compensation obligations under
active employment agreements at May 31, 1997, are summarized as follows:

<TABLE>
<CAPTION>
                         Fiscal Year               Amount
                         -----------               ------
<S>                                              <C>     
                            1998                 $607,000
                            1999                  178,000
                                                 --------
                                                 $785,000
                                                 --------
</TABLE>

2. Lease

         The Company occupies office and warehouse space under a noncancelable
operating lease which expires on October 31, 2000, at an annual cost of
approximately $120,000. Rent expense was $118,000, $111,000 and $87,000 in
fiscal 1997, 1996 and 1995, respectively.

         Approximate aggregate minimum annual obligations under this lease
agreement at May 31, 1997 are summarized as follows:

<TABLE>
<CAPTION>
                           Fiscal Year                 Amount
                           -----------                 ------
<S>                                                  <C>     
                              1998                   $121,000
                              1999                    125,000
                              2000                    130,000
                              2001                     55,000
                                                     --------
                                                     $431,000
                                                     --------
</TABLE>


                                      F-14
<PAGE>   38


3. SEC Investigation

         In February 1995, the Company received a subpoena duces tecum by the
broker-dealer branch of the Northeast Regional Office of the Securities and
Exchange Commission ("SEC") requesting certain documents from the Company
pursuant to a formal order of private investigation in connection with possible
registration and reporting violations. The Company has complied with the request
for such documents. Whatever the ultimate objectives of the SEC's fact-finding
inquiry may be, the Company intends to cooperate as the investigation proceeds.
As stated in the subpoena, the "investigation is confidential and should not be
construed as an indication by the SEC or its staff that any violations of law
have occurred, nor should it be interpreted as an adverse reflection on any
person, entity or security." This investigation is in its early stages and the
Company is unable to determine the likelihood of an unfavorable outcome or the
existence or amount of any potential loss.

4. Litigation

         On or about May 23, 1996, an action was commenced in the Supreme Court
of the State of New York, Nassau County, against the Company, its directors and
certain of its officers and employees for the alleged breach of an agreement to
appoint a non-affiliated party as its exclusive distributor of EECP(R). The
complaint seeks damages in the approximate sum of $50,000,000, declaratory
relief and punitive damages. The Company denies the existence of any agreement,
believes that the complaint is frivolous and without merit and is vigorously
defending the claims as well as asserting substantial counterclaims. This matter
is in its preliminary stages and the Company is unable to determine the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.

5. 401(k) Plan

          In April 1997, the Company adopted the Vasomedical, Inc. 401(k) Plan
to provide retirement benefits for its employees. As allowed under Section
401(k) of the Internal Revenue Code, the plan provides tax-deferred salary
deductions for eligible employees. Employees are eligible to participate in the
next quarter enrollment period after employment. Participants may make voluntary
contributions to the plan up to 15% of their compensation. Presently, the
Company does not match contributions towards the plan.

6. Agreement with Foshan

          In connection with the acquisition of Vasogenics in 1995, the Company
assumed commitments under an agreement, expiring November 2008, with Foshan
Analytical Instrument Factory ("Foshan"), a Chinese company, for the contract
manufacture of its current EECP(R) model, subject to certain performance
standards, as defined. At May 31, 1997, the Company had no outstanding purchase
commitments.

7. Related Party

          In fiscal 1996 and 1995, payments for office facilities, services and
equipment of $42,000 and $55,000, respectively, were made to an entity whose
principal stockholder is a director of the Company.


NOTE I - SUBSEQUENT EVENT

         On June 25, 1997, the Company issued 150,000 shares of newly created 5%
Series B Convertible Preferred Stock, $.01 par value, to one accredited investor
pursuant to Regulation D under the Securities Act of 1933 at a price of $20 per
share, for net cash proceeds approximating $2,800,000. The convertible preferred
stock is convertible into common stock of the Company at an effective conversion
price of the lower of (i) $2.18 or (ii) 85% of the average closing bid of the
Company's common stock for the five (5) trading days immediately preceding the
conversion date, as defined in the Certificate of Designation of the convertible
preferred stock. In addition, five-year warrants were issued granting the
investor one warrant for every five shares of common stock which would be
issuable under the convertible preferred stock at an exercise price of $2.18 per
share, as defined.

         The Company will record a deemed dividend of $857,000 in fiscal 1998,
representing the discount resulting from the allocation of proceeds to the
beneficial conversion feature and the fair value of the underlying warrants.
Such deemed dividend will be recognized from the date of issuance through the
date such preferred stock is first convertible (expected to be in September
1997).  


                                      F-15


<PAGE>   39


                                 EXHIBIT INDEX

Exhibit No.

(27)     Financial Data Schedule


                                       1