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                                 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, 1999

[ ]  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
     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 30, 1999, based on the average price on that date, was
$74,816,000.  At July 30, 1999, the number of shares outstanding of the issuer's
common stock was 50,978,568.


                      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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<PAGE>
                                     PART I

ITEM ONE - BUSINESS

     Except for historical  information  contained herein, the matters discussed
are forward looking statements that involve risks and  uncertainties.  When used
herein, words such as "anticipate", "believe", "estimate", "expect" and "intend"
and  similar  expressions,  as they  relate to the  Company  or its  management,
identify forward- looking statements.  Such forward-looking statements are based
on the beliefs of the Company's  management,  as well as assumptions made by and
information currently available to the Company's  management.  Among the factors
that could cause actual  results to differ  materially  are the  following:  the
effect of business and economic  conditions;  the impact of competitive products
and  pricing;   capacity  and  supply   constraints  or  difficulties;   product
development, commercialization or technological difficulties; the regulatory and
trade  environment;  and the  risk  factors  reported  from  time to time in the
Company's  SEC  reports.   The  Company   undertakes  no  obligation  to  update
forward-looking statements as a result of future events or developments.

General
     Vasomedical,  Inc. (the "Company"),  incorporated in Delaware in July 1987,
is  engaged  in  the   commercialization   of  the  EECP(r)  enhanced   external
counterpulsation  ("EECP(r)")  system, a  computer-based  medical device for the
noninvasive,  atraumatic treatment of patients with coronary artery disease. The
EECP(r)  system 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 the EECP(r)  system 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.  Vasogenics
and Vaso Interim were subsequently merged into Vasomedical.

     EECP(r) received marketing  clearance from the Food and Drug Administration
("FDA") under a 510(k) premarket notification in February 1995.

The EECP(r) Enhanced External Counterpulsation System
General Discussion
     According to the American Heart Association, coronary heart disease ("CHD")
is the single largest  killer of American males and females.  CHD caused 481,287
deaths in the  United  States  in 1995.  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, December  1993:2033-2054) and localized or
diffuse  narrowings  occur  in half of  vein  grafts  by ten  years  after  CABG
(Circulation Vol. 83, No. 3, March 1991:1125-1173).

     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
technological improvements of external counterpulsation. Marketing clearance was
for use of the EECP(r)  procedure in the  treatment of patients  suffering  from
stable or unstable angina pectoris,  acute myocardial infarction and cardiogenic
shock.  The Company  decided,  however,  to focus  initially  only on the stable
angina pectoris indication.
<PAGE>
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
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, can raise 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
reversible 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,  in response
to ischemia.

     The results of studies  carried out at the State  University  of New York's
University Medical Center at Stony Brook ("Stony Brook"),  supported by previous
experience  in China,  provided the first  indication  that EECP(r)  therapy may
stimulate  collateral  flow in coronary artery disease  patients.  In support of
this  hypothesis  is the  observation  that the presence of one or more vascular
conduits  without  significant  stenosis appears to be predictive of a favorable
response  to  EECP(r)  therapy.  In fact,  effectiveness  has  been  shown to be
directly  related  to the  number  of patent  coronary  vessels  in the  treated
patients.  The  explanation  appears to be that a proximally  patent  conduit is
necessary  to allow  transmission  of augmented  diastolic  pressure and flow to
distal  coronary  vessels,  by which  collateral  recruitment  or development is
promoted.

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 external  counterpulsation  were not consistently  achieved in early
studies because the equipment used then lacked some of the features found in the
EECP(r)  system,  such as the  computer-controlled  operating  system that makes
sequential cuff inflation  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.
<PAGE>
     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.

     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 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  achieved  an increase  in  exercise  time 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 the Stony Brook center 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.
<PAGE>
     In  1995,   the  Company   began  a  large   randomized,   controlled   and
double-blinded   multicenter   clinical  study  ("MUST-EECP")  in  four  leading
university  hospitals in the United States to confirm at other sites the patient
benefits  observed in open  studies  conducted  at the Stony Brook center and to
provide scientific evidence of this treatment's effectiveness. The 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 were the institutions that  participated in the study.  These
institutions  were later joined by Loyola  University,  University of Pittsburgh
and Grant/Riverside  Methodist  Hospitals.  MUST-EECP was completed in July 1997
and  results  were  announced  at  the  annual  meeting  of the  American  Heart
Association in November 1997 and of the American  College of Cardiology in March
1998.  The results of  MUST-EECP  were  published in the Journal of the American
College of Cardiology, a major peer- review medical journal, in June 1999.

     This  ground-breaking  study  shows  that  EECP(r)  therapy  is a safe  and
effective  choice for more than seven  million  patients  suffering  from angina
pectoris,  a common symptom of CHD. This study provides  scientific  evidence of
this novel treatment's effectiveness, even in patients on maximal medication and
for whom invasive revascularization  procedures are no longer an option. Results
of MUST-EECP  confirm clinical benefits shown in previous open trials: a decline
in anginal  frequency,  an increase in the ability to exercise and a decrease in
exercise- induced signs of myocardial ischemia.

     MUST-EECP  was  conducted  from  May 1995 to July  1997.  One  hundred  and
thirty-nine (139) patients suffering from chronic angina pectoris and on maximal
medication  were  randomized  to receive  treatment or sham.  The sham group was
treated in a manner  identical in every way to the  treatment  group except that
cardiovascular  hemodynamics were not affected.  Neither patients nor physicians
involved with the study knew to which group an individual patient belonged.

     Participants  were  representative of patients with severe CHD. Average age
was 63 years (range 40-81 years):  88% were males; 58% had undergone either CABG
or PTCA; and 49% had  experienced  prior  myocardial  infarctions.  In addition,
among those who  benefited,  74% were in Canadian  Class II or III,  and 55% had
"residual" multivessel coronary artery disease despite revascularization.

     Despite a considerable  amount of medication prior to and during treatment,
patients in the treated group still were able to show improvement  averaging 11%
in the time before the onset of ischemia  demonstrated  by stress ECG.  Those in
the sham (control) group showed no improvement at all. Additionally, even in the
maximally  medicated  patients,  exercise duration  increased 10% in the average
participant  receiving  treatment  as measured by exercise  treadmill;  exercise
duration increased only 6% in the sham group. Study participants followed a four
to seven week  treatment  program.  The  protocol  required  patients to undergo
EECP(r) in one-hour sessions, until they had completed 35 hours of treatment.

     In fiscal 1999,  the Company  completed a long-term  quality-of-life  study
with  EECP(r)  in  the  same  institutions  and  with  the  same  patients  that
participated in MUST-EECP.  The positive results of this study have already been
presented at major scientific meetings, and a publication in a major peer-review
journal is expected during fiscal 2000.

     In pursuit of its claim  expansion  program,  the  Company  applied for and
received FDA approval in April 1998 to study,  under an  Investigational  Device
Exemption  protocol,  the  application of EECP(r) in the treatment of congestive
heart  failure  ("CHF"),  a  disabling  condition  affecting  nearly  5  million
Americans and the most frequent cause of hospitalization for those over 65 years
of age.  The  study is  being  conducted  simultaneously  at the  University  of
Pittsburgh, the University of California San Francisco and the Grant Hospital in
Columbus,Ohio, and is expected to be completed in calendar 1999. CHF occurs when
the heart is unable to pump blood  well  enough to meet the  body's  needs.  The
circulatory  system becomes congested when the heart fails to empty its chambers
sufficiently, leading to an accumulation in the chest and lower limbs. According
to the American Heart Association,  2.5 million men and 2.4 million women in the
United States have CHF.  About 400,000 new cases of the disease occur each year.
The need to find new and effective  methods to treat CHF is pressing,  since the
prevalence of the disease is growing rapidly as a result of the aging population
and the improved  survival  rate of heart  attacks,  while deaths  caused by the
disease increased 116% from 1979 to 1995.
<PAGE>

The Company's Plans
     The  Company's short- and long-term plans are to:
     (a)  Establish EECP(r) therapy as a new standard of care in CHD.
     (b)  Publish the results of its long-term quality-of-life outcomes study in
          a major peer-review medical journal in fiscal 2000.
     (c)  Engage  in   educational   campaigns   designed   to   highlight   the
          cost-effectiveness  and quality-of-life  advantages of EECP(r) therapy
          to State Welfare (Medicaid) agencies,  commercial insurance companies,
          and managed care organizations.
     (d)  Complete a feasibility study for the use of EECP(r) in CHF and present
          preliminary results in calendar 1999.
     (e)  Initiate a pivotal  multicenter study for the use of EECP(r) in CHF in
          fiscal 2000.
     (f)  Complete the  development  of an upgraded  EECP(r) system and initiate
          its in-house assembly in fiscal 2000.
     (g)  Continue to establish a distribution network in international markets.
     (h)  Continue to establish and support  academic  reference  centers in the
          United  States  and  overseas  in order to  accelerate  the growth and
          prestige of EECP(r)  therapy and to increase the number and  diversity
          of  clinical  and  mode-of-action  studies,  as well as the  number of
          presentations, publications, speakers and advocates.
     (i)  Create new products for use in noninvasive 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

Sales and Marketing
Domestic Operations
     The Company's direct sales and marketing team consists of ten (10) regional
and  territory  sales  managers,  five  (5)  clinical  application  specialists,
customer  support  and  communications  managers,  and  directors  of sales  and
marketing.  Their efforts are  supplemented by those of a network of independent
manufacturers' representatives.

     Marketing  activities  are designed to support the  Company's  direct sales
team  and  independent   representatives,   and  include  journal   advertising,
newsletters,  physician  educational  programs,  exhibits  at  trade  shows  and
seminars at professional association meetings.
<PAGE>
     The Company has developed a multi-day,  on-site  clinical  training program
for physicians and therapists.  After initial customer training,  these clinical
applications  specialists  provide  routine on- and off-site  customer  support,
including  the review of clinical  charts,  certification  of new  personnel and
updating of customers on new clinical developments.

     The Company employs service technicians responsible for the installation of
EECP(r)  systems  and,  in many  instances,  on-site  training  of a  customer's
biomedical engineering personnel. The Company provides a one- year warranty that
includes parts and labor.  The Company intends to offer extended  service to our
customers under annual service contracts or on a fee-for-service basis.

     In fiscal 1999 and 1998,  the Company had sales to Parimist  Funding  Corp.
and HPSC, Inc. (medical  equipment  financing firms) in each period,  accounting
for 21% and 10% of the Company's  revenues,  respectively.  In fiscal 1997,  the
Company had sales to the  Heart-Lung  Center of  Hawthorne  and  Metuchen  Heart
Associates, aggregating 43% of the Company's revenues.

International Operations
     The  Company's  key  objective is to appoint  distributors  in exchange for
exclusive marketing rights to EECP(r) in their respective countries. The Company
currently has  distribution  agreements  for Japan,  and some European and Latin
American   countries.   Each  distribution   agreement   contains  a  number  of
requirements  that  must be met  for  the  distributor  to  retain  exclusivity,
including minimum performance  standards.  In most cases,  foreign  distributors
must  either  obtain  an   FDA-equivalent   marketing   clearance  or  establish
confirmation   clinical  evaluations  conducted  by  local  opinion  leaders  in
cardiology. Each distributor is responsible for obtaining any required approval.
There  can be no  assurance  that  any of the  Company's  distributors  will  be
successful  in  obtaining  proper  approvals  for the  EECP(r)  system  in their
respective  countries or that these  distributors  will be  successful  in their
marketing  efforts.  The  Company  plans to enter into  additional  distribution
agreements  to enhance  its  international  distribution  base.  There can be no
assurance  that the Company will be successful  in entering into any  additional
distribution agreements.

     To date, revenues from international  operations have not been significant.
International  sales may be subject to certain  risks,  including  export/import
licenses, tariffs, other trade regulations and local medical regulations. Tariff
and trade  policies,  domestic and foreign tax and economic  policies,  exchange
rate fluctuations and international  monetary  conditions have not significantly
affected the Company's business to date.

Competition
     Presently,  Vasomedical  is aware of only one  competitor  with an external
counterpulsation  device on the  market.  While the Company  believes  that this
competitor's  involvement  in the market is limited,  there can be no  assurance
that this company will not become a  significant  competitive  factor.  Further,
there can be no  assurance  that  other  companies  will not  enter  the  market
intended for EECP(r)  systems.  Such  companies may have  substantially  greater
financial,  manufacturing and marketing  resources and  technological  expertise
than those  possessed by the Company and may,  therefore,  succeed in developing
technologies  or  products  that are more  efficient  than those  offered by the
Company and that would render the  Company's  technology  and existing  products
obsolete or noncompetitive.

Government Regulations
     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.

     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  marketing
<PAGE>
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 more extensive  efficacy and safety data are in order, the FDA will require
the manufacturer to submit a premarket  application  ("PMA") for full review and
approval.  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 a PMA for EECP(r) 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  obtaining  regulatory
approval of the EECP(r) system overseas.

     There can be no assurance that all the necessary FDA clearances,  including
approval of any PMA 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.

     In June 1998, the EECP(r) system was awarded the CE Mark,  which  satisfies
the  regulatory  provisions  for  marketing  in all 15 countries of the European
Union.  The CE  Mark  was  awarded  by  DGM of  Denmark,  an  official  notified
regulatory  body,  under  the  European  Council  Directive  concerning  medical
devices. The CE Mark, in combination with the ISO 9001 certification  awarded by
Underwriter's  Laboratories  (UL) in February  1998,  places the Company in full
compliance  with  requirements  for the  marketing of the EECP(r)  system in the
countries of the European Union. The ISO 9001  Certificate  covers the Company's
design and  manufacturing  operation for the EECP(r) system and recognizes  that
the Company has established and operates a world-class quality system.

     Compliance with current Good Manufacturing Practices ("GMP") regulations is
necessary  to receive  FDA  approval to market new  products  and to continue to
market current  products.  The Company's  manufacturing  (including its contract
manufacturer),   quality   control  and   quality   assurance   procedures   and
documentation  are currently in compliance,  but will be inspected and evaluated
periodically in the future by the FDA.

Third-Party Reimbursements
     Health care providers,  such as hospitals and physicians,  that purchase or
lease medical  devices,  such as the EECP(r)  system,  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.

     In February 1999, the Health Care Financing  Administration  ("HCFA"),  the
federal agency that  administers  the Medicare  program for more than 38 million
beneficiaries,  issued a national  coverage  policy  for the use of the  EECP(r)
system for patients  with  disabling  angina  pectoris  who, in the opinion of a
cardiologist or  cardiothoracic  surgeon,  are not readily  amenable to surgical
interventions,  such as balloon  angioplasty and cardiac  bypass.  In July 1999,
HCFA communicated  payment  instructions for the EECP therapy to its contractors
around the country,  stipulating coverage for services provided on or after July
1,  1999.   HCFA  has   restricted   coverage   "to  those   enhanced   external
<PAGE>
counterpulsation  systems  that have  sufficiently  demonstrated  their  medical
effectiveness in treating patients with severe angina in well-designed  clinical
trials.  Note that a 510(k) clearance by the Food and Drug  Administration  does
not, by itself,  satisfy this  requirement."  Presently,  the Company's  EECP(r)
system  is the  only  such  system  to  have  undergone  a  rigorous  test  in a
controlled,  double-blinded,  randomized,  multicenter  study  (MUST-EECP).  The
results of this study were  published in a peer-review  journal,  the Journal of
the American College of Cardiology ("JACC"), in June 1999.

     The Company  continues its dialogue with several  large  commercial  health
care payers for the  establishment of positive  coverage  policies.  The Company
believes that its discussions with these third-party  payers will, as a minimum,
continue to define  circumstances  that justify  reimbursement on a case-by-case
basis and create a pathway for rapid review of patient data and determination of
medical  necessity.  To date,  there  have been many  such  reimbursements.  The
Company  is  optimistic  that,  given  the  recent  HCFA  coverage  and  payment
decisions,  as well as the publication of the results of MUST-EECP in JACC, many
of these  third-party  payers will issue positive  coverage policies for EECP(r)
therapy in fiscal 2000. In  anticipation  of receiving  approval for broad-based
coverage,  the Company  will  pursue,  through the  cardiology  profession,  the
establishment  of a  Current  Procedural  Code  ("CPT")  specific  to  the  EECP
procedure.  Although  such  code  is not  essential  and  although  there  is no
assurance that a new code will be established,  the Company believes that having
a CPT code  specifically  assigned to EECP will  accelerate  the  processing  of
reimbursement claims.

     Limited  availability  of  third-party  coverage or the  inadequacy  of the
reimbursement  level for  treatment  procedures  using the EECP(r)  system 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
Medicare  coverage and payment level 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 for an aggregate
coverage limit 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
     A US patent (which expires in 2005)  covering  EECP(r) design and functions
was  issued  in  June  1988  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 to the Company in October  1996 (which  expires in 2013),  and
several  international  patents have been issued since then. Such  international
patents  also  expire in 2013.  The  Company  expects  additional  international
patents to issue  during  fiscal  2000.  Such  patents  cover  several  specific
enhancements to the current EECP(r) model.

     Moreover,  a trademark has been registered for the name "EECP", and in 1999
the Company filed for registration of additional trademarks,  including "Natural
Bypass".

     The  Company  pursues a policy of seeking  patent  protection,  both in the
United  States  and  abroad,  for its  proprietary  technology.  There can be no
assurance  that the  Company's  patents  will not be violated or that any issued
patents will provide protection that has commercial significance. Litigation may
be necessary to protect the Company's  patent  position.  Such litigation may be
costly and  time-consuming,  and there can be no assurance that the Company will
be successful in such litigation. The loss or violation of the Company's EECP(r)
patents and trademarks  could have a material  adverse effect upon the Company's
business.
<PAGE>
Employees
     As of July 30, 1999, the Company employed forty-one  full-time persons with
twelve  in  sales,  five in  clinical  applications,  ten in  manufacturing  and
service,  five in  marketing,  and nine in  administration  (including  its four
executive officers).  None of the Company's employees are represented by a labor
union. The Company believes that its employee relations are satisfactory.

Manufacturing
     The Company currently  contracts for the manufacture of its current EECP(r)
system with VAMED Medical Instrument Company Ltd. ("VAMED"),  a Chinese company,
subject to certain performance standards,  as defined. The Company believes that
VAMED will be able to meet the Company's needs for EECP(r) systems.

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 $125,000. 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.  Management  believes  that  the
Company's  facilities are adequate to meet its current needs and should continue
to be adequate for the foreseeable future.

ITEM THREE - LEGAL PROCEEDINGS

SEC Investigation
     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  ("SEC")  requesting  certain  documents  from the  Company
pursuant to a formal order of private  investigation in connection with possible
registration  and reporting  violations.  In July 1999, the Company was notified
that the  investigation  was  terminated  and  that no  enforcement  action  was
recommended to the SEC.

Litigation
     In May 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)  systems.  The
complaint  sought damages in the  approximate  sum of  $50,000,000,  declaratory
relief and punitive damages.  The Company denied the existence of any agreement,
and contended  that the complaint was frivolous and without  merit.  The Company
also asserted substantial counterclaims.  In August 1999, the motion for summary
judgment to dismiss the  complaint  in its  entirety  was  granted.  The time to
appeal the dismissal has not yet expired.

     In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County,  against the Company and other parties.  The action seeks damages in the
sum of  $5,000,000  based  upon  alleged  injuries  resulting  from the  alleged
negligence of the  defendants in the use of the Company's  product.  The Company
and its insurer  believe that the  complaint is frivolous  and without merit and
are vigorously defending the claims.  Furthermore,  management believes that the
damages sought under this complaint are fully covered by insurance.  This matter
is in its  preliminary  stages  and the  Company  is  unable  to  establish  the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.

     In February  1999,  an action was commenced in the  Massachusetts  Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000  based  upon an  alleged  breach  of a sales  contract.  The  Company
believes  that the  complaint is frivolous  and without  merit and is vigorously
defending the claims.  This matter is in its preliminary  stages and the Company
is unable to establish the likelihood of an unfavorable outcome or the existence
or amount of any potential loss.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year.
<PAGE>
                                    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 MarketSM under the symbol VASO.  The  approximate  number of record
holders of Common  Stock as of July 30,  1999 was 882,  which  does not  include
approximately  10,000 beneficial owners of shares held in the name of brokers or
other  nominees.  The  table  below  sets  forth the range of high and low trade
prices of the Common Stock as reported by the Nasdaq SmallCap Market tier of The
Nasdaq Stock MarketSM for the fiscal periods specified.

<TABLE>
<CAPTION>
                                 Fiscal 1999                Fiscal 1998
                               High       Low           High            Low
<S>                           <C>       <C>            <C>            <C>
First Quarter                 $1.688     $.750         $2.063         $1.563
Second Quarter                $1.210     $.625         $3.563         $1.719
Third Quarter                 $2.063     $.656         $2.250         $1.719
Fourth Quarter                $1.500    $1.000         $2.094         $1.500
</TABLE>

     The  last bid  price of the  Company's  Common  Stock on July 30,  1999 was
$1.563 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  pertinent.  Stock dividends,
if any,  also will be dependent on such factors as the Board of Directors  deems
pertinent.
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA

        The following table summarizes  selected  financial data for each of the
five years ended May 31, 1999 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,
                                                1999           1998          1997           1996            1995
<S>                                          <C>            <C>            <C>            <C>             <C>
Statement of Operations

Revenues                                     $6,024,263     $5,225,064     $2,096,562     $2,683,128             $-
                                            -----------------------------------------------------------------------
Cost of sales and services                    1,833,238      1,543,849      1,020,047        609,136
Selling, general & administrative expenses    5,946,405      5,689,704      4,155,552      3,738,789      2,172,555
Research and development expenses               706,934      1,595,970      1,045,184        364,455        598,178
Depreciation and amortization                   463,859        363,101        333,482        269,443        117,851
Provision for losses                                                          225,000                       318,000
Interest and financing costs                     11,880          4,057          8,511        515,451          2,523
Interest and other income, net                 (115,064)      (169,422)      (174,810)      (171,001)       (91,813)
                                            -----------------------------------------------------------------------
                                              8,847,252      9,027,259      6,612,966      5,326,273      3,117,294
                                            -----------------------------------------------------------------------
Net loss                                     (2,822,989)    (3,802,195)    (4,516,404)    (2,643,145)    (3,117,294)

Deemed dividend on preferred stock             (864,000)    (1,132,000)
Preferred stock dividend requirement           (205,163)       (96,717)
                                            -----------------------------------------------------------------------
Loss applicable to common stock             $(3,892,152)   $(5,030,912)   $(4,516,404)   $(2,643,145)   $(3,117,294)
                                            =======================================================================

Net loss per common share
  (basic and diluted)                             $(.08)         $(.11)        $(.10)          $(.07)         $(.10)
                                            =======================================================================
Weighted average common shares
outstanding (basic and diluted)              49,371,574     47,873,711    46,297,142      39,226,258     30,519,640
                                            =======================================================================
Balance Sheet

Working capital                              $2,174,774     $5,046,202    $1,981,331      $4,958,973       $747,070
Total assets                                 $5,198,172     $7,345,246    $4,175,021      $8,246,151     $2,753,138
Long-term debt                                       $0             $0            $0      $3,725,000             $0
Stockholders' equity (1)                     $3,153,533     $5,752,993    $3,020,962      $3,091,094     $2,259,991

<FN>
-------------------
(1) No cash dividends were declared during any of the above periods.
</FN>
</TABLE>
<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Results of Operations
Fiscal Years Ended May 31, 1999 and 1998

     The Company  generated  revenues from the sale and lease of EECP(r) systems
of  $6,024,000  and  $5,225,000  for the  years  ended  May 31,  1999 and  1998,
respectively.  The Company  incurred net losses of $2,823,000 and $3,802,000 for
fiscal 1999 and 1998,  respectively  (before deducting  $864,000 and $1,132,000,
respectively,  in deemed dividends on preferred stock  representing the discount
resulting from the allocation of proceeds to the beneficial  conversion  feature
and  the  fair  value  of  underlying   warrants,   and  $205,000  and  $97,000,
respectively,  in dividend requirements,  in connection with the Company's April
1998 and June 1997 financings).

     The number of cardiology  practices  and  hospitals  interested in becoming
providers of enhanced external  counterpulsation  (EECP) has increased following
the announcement by the Health Care Financing  Administration (HCFA) in February
1999 of its decision to extend  Medicare  coverage  nationally  to the Company's
noninvasive,  outpatient  treatment  for coronary  artery  disease.  HCFA is the
federal   agency  that   administers   the  Medicare   program  for  38  million
beneficiaries. In addition, the results of the Company's randomized,  controlled
multicenter  clinical study of EECP ("MUST-EECP") was published in the June 1999
issue of the Journal of the  American  College of  Cardiology.  Interest in EECP
therapy  has  also  been  spurred  by the  announcement  of the  results  of the
Company's  one-year  follow-up  quality-of-life  outcomes  study at the American
Heart Association  (AHA) annual meeting in November 1998 and additional  reports
presented at the American  College of Cardiology  annual  meeting in March 1999.
Revenues in fiscal 1999,  particularly  in the first two fiscal  quarters,  were
adversely  affected  by the nature of the  commercial  arrangements  under which
those units were placed. The overall increase in Company revenues in fiscal 1999
were attributable to fourth quarter sales of $3,500,000, which were aided by the
HCFA decision  described above.  The Company expects,  especially as a result of
HCFA's recent coverage decision and effective payment date of July 1, 1999, that
several  placements  made in the past under rental or  fee-for-use  arrangements
will  convert  to  financed  leases or  outright  sales in the first and  second
quarters  of fiscal  2000,  although  there can be no  assurance  that this will
occur.

     Gross margins are dependent on a number of factors, particularly the mix of
EECP(r) units sold and rented during the period,  the ongoing costs of servicing
such units, and 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)  system 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,  1999 and 1998 were  approximately  $5,946,000  and
$5,690,000,  respectively.  The  $256,000  increase  in  SGA  expenses  for  the
comparable  fiscal  year  resulted  primarily  from  an  increase  in  marketing
personnel, commissions and other selling expenses related to increased revenues.
Research and development (R&D) expenses in the year ended May 31, 1999 decreased
by $889,000 from the prior fiscal year.  The decrease is related to  significant
prior year expenses for the  completion of the  Company's  multicenter  clinical
study of EECP  (completed  in July 1997) and the  front-loaded  expenses for the
development of an upgraded EECP(r) system. Current period expenses relate to the
long-term   follow-up  phase  of  the  multicenter   clinical  study,   i.e.,  a
quality-of-life  outcomes study  (completed in July 1998),  the expansion of the
International  EECP Patient  Registry at the University of  Pittsburgh,  and the
ongoing  feasibility  study in congestive  heart failure,  all of which, to some
extent, are expected to further affect operating results in fiscal 2000.


Fiscal Years Ended May 31, 1998 and 1997

     The  Company  generated  revenues  from the sale and  lease of its  EECP(r)
system of $5,225,000  and  $2,097,000 for the years ended May 31, 1998 and 1997,
respectively.  The Company  incurred net losses of $3,802,000 and $4,516,000 for
fiscal 1998 and 1997,  respectively  (excluding the fiscal 1998 recognition of a
$1,132,000  deemed  dividend  on  preferred  stock,  representing  the  discount
resulting from the allocation of proceeds to the beneficial  conversion  feature
and  the  fair  value  of the  underlying  warrants,  and  $97,000  in  dividend
requirements,  in  connection  with  the  Company's  June  1997 and  April  1998
financings).
<PAGE>
     Gross margins are dependent on a number of factors, particularly the mix of
EECP(r) units sold and rented during the period,  the ongoing costs of servicing
such units, and 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) system in service for customer use.
     Selling,  general and administrative (SGA) expenses for the years ended May
31, 1998 and 1997 were  approximately  $5,690,000 and $4,156,000,  respectively.
The $1,534,000 increase in SGA expenses in fiscal 1998 from fiscal 1997 resulted
primarily  from  increases  in  marketing  expenses  related to programs for the
dissemination  of  the  Company's   multicenter   clinical  study  results,  new
promotional and educational materials, and the expansion of the Company's direct
sales force.

     Research  and  development  (R&D)  expenses  in the year ended May 31, 1998
increased  by  $551,000  from the prior  period.  The  increase  was a result of
commitments and expenses related to the Company's  multicenter clinical study of
EECP(r),  which was completed in July 1997, the initiation of the development of
an upgraded model of the EECP(r) system,  and a  quality-of-life  outcomes study
started in parallel with the multicenter clinical study.

Liquidity and Capital Resources
     The Company has  financed  its fiscal 1999  operations  primarily  from the
proceeds of equity financings in fiscal 1998 (described below). At May 31, 1999,
the Company had a cash balance of $1,678,000 and working  capital of $2,175,000,
compared to a cash balance of  $4,368,000  and working  capital of $5,046,000 at
May 31, 1998.  The Company's  operating  activities  used cash of $3,028,000 and
$3,858,000  for the years  ended May 31, 1999 and 1998,  respectively.  Net cash
used  during the year ended May 31,  1999  consisted  primarily  of losses  from
operations,   increases  in  accounts  receivable  and  inventories,  offset  by
increases in accounts payable and accrued expenses.

     Investing activities used net cash of $17,000 and $123,000 during the years
ended  May 31,  1999 and 1998,  respectively.  The  principal  uses were for the
purchase of property and  equipment.  At May 31, 1999,  the Company did not have
any material commitments for capital expenditures.
     Financing  activities  provided cash of $355,000 and $6,596,000  during the
years ended May 31, 1999 and 1998,  respectively.  Financing  activities  during
fiscal 1999  consisted  primarily of cash  proceeds from the exercise of Company
common stock  warrants by officers and directors.
     In fiscal 1998,  the Company issued an aggregate of 325,000 shares of newly
created 5% Series B and Series C Convertible  Preferred  Stock to one accredited
investor at a price of $20 per share, realizing net cash proceeds of $6,112,000.
Dividends due on such preferred stock have been, and are expected to be, paid in
shares of the Company's  common stock.  As of May 31, 1999,  all of the Series B
preferred stock (150,000 shares) had been converted into 2,135,946 shares of the
Company's  common stock and none of the Series C preferred  stock had  converted
into  common  stock.  Subsequent  to May 31,  1999,  28,000  shares  of Series C
preferred stock, representing 16% of the total outstanding,  were converted into
approximately 478,000 shares of the Company's common stock.
     Management  believes  that its working  capital  position at May 31,  1999,
along with the ongoing  commercialization of the EECP(r) system (including,  but
not limited to, the conversion of current units under rental or use arrangements
to outright sales or financed  leases),  and possible  further proceeds from the
exercise  of options  and  warrants,  will make it  possible  for the Company to
support its internal  overhead  expenses and to implement its business plans for
the next twelve months.

Impact of the Year 2000 on Information Systems

     The Year 2000 issue arises as the result of computer  programs  having been
written, and systems having been designed,  using two digits rather than four to
define the  applicable  year.  Consequently,  such software has the potential to
recognize  a date using "00" as the year 1900  rather  than the year 2000.  This
could  result in a system  failure or  miscalculations  causing  disruptions  of
operations,  including,  among other  things,  a temporary  inability to process
transactions, send invoices, or engage in similar normal business activities.
     The  Company's  sole product is not expected to be affected by Year 2000 as
it does not rely on date- sensitive software or affected hardware. The Company's
current  accounting  and other  systems were  purchased  "off-  the-shelf".  The
Company has or intends to timely update its  accounting  and other systems which
are  determined  to be affected by Year 2000 by purchasing  Year 2000  compliant
software and hardware available from retail vendors at reasonable costs.
     The Company has  inquired of its major  suppliers  about their  progress in
identifying  and addressing  problems  related to the Year 2000.  Certain of the
Company's  major suppliers have informed the Company that they do not anticipate
problems in their business  operations due to Year 2000 compliance  issues.  The
Company is unable to determine  the extent to which Year 2000 issues will affect
its  other  suppliers,  or the  extent  to which it would be  vulnerable  to the
suppliers'  failure to remediate  any of their Year 2000  problems.  Although no
assurance can be given that all of the Company's major  suppliers'  systems will
be Year 2000 compliant, the Company believes that the risk is not significant.
<PAGE>

ITEM EIGHT - FINANCIAL STATEMENTS
        The consolidated  financial  statements 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 information  required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM ELEVEN - EXECUTIVE COMPENSATION
        The information  required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM TWELVE - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
        The information  required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.

ITEM THIRTEEN - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
        The information  required by this Item will be included in the Company's
definitive Proxy Statement, which will be filed with the Securities and Exchange
Commission in connection with the Company's 1999 Annual Meeting of Stockholders,
and is incorporated herein by reference.
<PAGE>
ITEM FOURTEEN-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Financial Statement Schedules
    ------------------------------------------------------

     (1) See Index to Consolidated Financial Statements on page F-1 at beginning
     of attached financial statements.
     (2) The following  Consolidated Financial Statement Schedule is included in
     Part IV of this report:
          Schedule  II -  Valuation  and  Qualifying  Accounts  (14)  All  other
     schedules are omitted because they are not applicable,  or not required, or
     because the required information is included in the Consolidated  Financial
     Statements or notes thereto.

(c)     Exhibits

          (3)  (a)  Restated Certificate of Incorporation (2)
               (b)  By-Laws (1)
          (4)  (a)  Specimen Certificate for Common Stock (1)
               (b)  Certificate of Designation of the Preferred Stock,  Series A
                    (3)
               (c)  Certificate of Designation of the Preferred Stock,  Series B
                    (10)
               (d)  Form of Rights  Agreement  dated as of March 9, 1995 between
                    Registrant and American Stock Transfer & Trust Company (6)
               (e)  Stock  Purchase   Agreement  dated  June  25,  1997  between
                    Registrant and JNC Opportunity Fund, Ltd. (10)
               (f)  Registration  Rights  Agreement  dated June 25, 1997 between
                    Registrant and JNC Opportunity Fund, Ltd. (10)
               (g)  Form of Warrant dated June 25, 1997 (10)
               (h)  Certificate of Designation of the Preferred Stock,  Series C
                    (12)
               (i)  Stock  Purchase  Agreement  dated  April  30,  1998  between
                    Registrant and JNC Opportunity Fund, Ltd. (12)
               (j)  Registration  Rights  Agreement dated April 30, 1998 between
                    Registrant and JNC Opportunity Fund, Ltd. (12)
               (k)  Form of Warrant dated April 30, 1998 (12)
          (10) (a)  1992 Non-Qualified Stock Option Plan (2)
               (b)  1995 Stock Option Plan (9)
               (c)  Outside Director Stock Option Plan (9)
               (d)  Employment  Agreement  dated  July 1,  1994,  as  amended on
                    October 24, 1995 and March 12, 1998,  between Registrant and
                    Anthony Viscusi (7) (8) (13)
               (e)  Offshore Securities Subscription Agreement dated December 2,
                    1994 between Registrant and Banca del Gottardo (3)
               (f)  Confidential  Private Placement Memorandum dated December 5,
                    1994 (3)
               (g)  Employment  Agreement  dated January 23, 1995, as amended on
                    October 24, 1995 and March 12, 1998,  between Registrant and
                    Anthony E. Peacock (4) (8) (13)
               (h)  Employment  Agreement  dated  February  1, 1995,  as amended
                    March 12,  1998,  between  Registrant  and John C.K. Hui (4)
                    (13)
               (i)  Modification  and Extension  Agreement  dated March 12, 1998
                    between Registrant and Joseph Giacalone (13)
               (j)  Note Purchase,  Paying and Conversion Agency Agreement dated
                    July 5, 1995 between Registrant and Banca del Gottardo (5)
               (k)  1997  Stock  Option  Plan  (11)
               (l)  1999  Stock  Option  Plan  (14)

          (22)      Subsidiary of the Registrant

                                     Percentage
          Name                State of  Incorporation      Owned by Company
          ----                -----------------------      ----------------
          Viromedics, Inc.          Delaware                      61%

          (23)      Consent of Grant Thornton LLP (14)
          (27)      Financial Data Schedule (14)
---------
<PAGE>
(1)  Incorporated  by reference  to  Registration  Statement  on Form S-18,  No.
     33-24095.
(2)  Incorporated  by  reference  to  Registration  Statement  on Form S-1,  No.
     33-46377 (effective 7/12/94).
(3)  Incorporated by reference to Report on Form 8-K dated November 14, 1994.
(4)  Incorporated by reference to Report on Form 8-K dated January 24, 1995.
(5)  Incorporated by reference to Report on Form 8-K/A dated June 26, 1995.
(6)  Incorporated by reference to  Registration  Statement on Form 8-A dated May
     12, 1995.
(7)  Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31,1994.
(8)  Incorporated by reference to Report on Form 8-K dated October 24, 1995.
(9)  Incorporated by reference to Notice of Annual Meeting of Stockholders dated
     December 5, 1995.
(10) Incorporated by reference to Report on Form 8-K dated June 25, 1997.
(11) Incorporated by reference to Notice of Annual Meeting of Stockholders dated
     December 4, 1997.
(12) Incorporated by reference to Report on Form 8-K dated April 30, 1998.
(13) Incorporated  by reference to Report on Form 10-K for the fiscal year ended
     May 31,1998.
(14) Filed herewith.

(b)  Form 8-K Reports
     ----------------
     None
<PAGE>
        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 sixteenth day of
August, 1999.


                                 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 16, 1999 by the following persons in
the capacities indicated:

/s/ Alexander G. Bearn           Director
Alexander G. Bearn

/s/ David S. Blumenthal          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
Joseph A. Giacalone              (Principal Financial and Accounting Officer)

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

_____________________            Director
Kenneth W. Rind

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

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

/s/ Zhen-sheng Zheng             Director
Zhen-sheng Zheng
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Column A         Column B         Column C          Column D         Column E
--------------------------------------------------------------------------------
                Balance at        Additions        Deductions       Balance at
               beginning of                                        end of period
                  period   ------------------------
                              (1)        (2)
                           Charged to  Charged to
                           costs and other accounts
                            expenses
--------------------------------------------------------------------------------
<S>                      <C>  <C>                       <C>               <C>

Year ended
 May 31, 1999
 Allowance for
 doubtful
 accounts (a)            $-                                               $-
               -----------------------------------------------------------------
Year ended
 May 31, 1998
 Allowance for
 doubtful
 accounts (a)            $-                                               $-

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

Year ended
 May 31, 1997
 Allowance for
 doubtful
 accounts (a)            $-   $225,000              $(225,000)(b)        $-
               -----------------------------------------------------------------
<FN>
     (a)  Deducted from accounts receivable.
     (b)  Uncollectible accounts receivable charged against allowance.
</FN>
</TABLE>
<PAGE>

                        Vasomedical, Inc. and Subsidiary

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page
                                                                        ----
Report of Independent Certified Public Accountants                       F-2

Financial Statements
        Consolidated Balance Sheets as of May 31, 1999 and 1998          F-3

        Consolidated Statements of Operations for the
          years ended May 31, 1999, 1998 and 1997                        F-4

        Consolidated Statement of Changes in Stockholders'
          Equity for the years ended May 31, 1999, 1998 and 1997         F-5

        Consolidated Statements of Cash Flows for the
          years ended May 31, 1999, 1998 and 1997                        F-6

        Notes to Consolidated Financial Statements                    F-7 - F-14

                                     F - 1
<PAGE>
                        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 Subsidiary (the "Company") as of May 31, 1999 and 1998, 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, 1999. 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,  1999 and 1998,  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,  1999,  in  conformity  with  generally  accepted
accounting principles.

We have also audited Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended May 31, 1999. In our opinion,  this schedule
presents fairly, in all material  respects,  the information  required to be set
forth therein.

GRANT THORNTON LLP


Melville, New York
August 3, 1999

                                     F - 2
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                          CONSOLIDATED BALANCE SHEETS

                                     May 31,
<TABLE>
<CAPTION>

                                                                        1999          1998
                                                                        ----          ----
                ASSETS
<S>                                                                   <C>          <C>
CURRENT ASSETS
        Cash and cash equivalents                                     $1,678,175   $4,367,986
        Accounts receivable                                            1,585,432      976,341
        Inventories                                                      594,093      678,302
        Other current assets                                             177,713      164,826
                                                                      ----------   ----------
                Total current assets                                   4,035,413    6,187,455

PROPERTY AND EQUIPMENT, net                                              571,368      352,902
CAPITALIZED COST IN EXCESS OF FAIR
     VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization
        of 923,421 and 710,325 at May 31, 1999 and 1998, respectively    568,277      781,373
OTHER ASSETS                                                              23,114       23,516
                                                                      ----------   ----------
                                                                      $5,198,172   $7,345,246
                                                                      ----------   ----------
        LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
        Accounts payable and accrued expenses                           $705,640     $436,730
        Accrued warranty and customer support expenses                   382,000      240,000
        Accrued professional fees                                        271,438      225,833
        Accrued commissions                                              307,951      176,553
        Dividends payable                                                193,610       62,137
                                                                      ----------   ----------
                Total current liabilities                              1,860,639    1,141,253

ACCRUED WARRANTY COSTS                                                   114,000      334,000
OTHER LONG-TERM LIABILITIES                                               70,000      117,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
        Preferred stock, $.01 par value; 1,000,000 shares
         authorized; 175,000 and 225,750 shares at May 31, 1999
          and 1998, respectively, issued and outstanding (liquidation
          preference of $3,500,000 and $4,515,000 at May 31, 1999
          and 1998, respectively)                                          1,750        2,258
        Common stock, $.001 par value; 110,000,000 shares authorized;
          50,402,687 and 48,531,278 shares at May 31, 1999 and 1998,
          respectively, issued and outstanding                            50,403       48,531
        Additional paid-in capital                                    37,749,483   36,458,155
        Accumulated deficit                                          (34,648,103) (30,755,951)
                                                                      ----------   ----------
                                                                       3,153,533    5,752,993
                                                                      ----------   ----------
                                                                      $5,198,172   $7,345,246
                                                                      ----------   ----------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
                                     F - 3
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                               Year ended May 31,
                                                                      ------------------------------------
                                                                         1999        1998         1997
                                                                         ----        ----         ----
<S>                                                                   <C>          <C>          <C>
Revenues
 Equipment sales                                                      $5,335,200   $4,958,333   $1,625,150
 Equipment rentals and services                                          689,063      266,731      471,412
                                                                      ----------   ----------   ----------
                                                                       6,024,263    5,225,064    2,096,562
                                                                      ----------   ----------   ----------
Costs and expenses
 Cost of sales and services                                            1,833,238    1,543,849    1,020,047
 Selling, general and administrative                                   5,946,405    5,689,704    4,155,552
 Research and development                                                706,934    1,595,970    1,045,184
 Depreciation and amortization                                           463,859      363,101      333,482
 Write-off of accounts receivable                                                                  225,000
 Interest and financing costs                                             11,880        4,057        8,511
 Interest and other income - net                                        (115,064)    (169,422)    (174,810)
                                                                      ----------   ----------   ----------
                                                                       8,847,252    9,027,259    6,612,966
                                                                      ----------   ----------   ----------
 NET LOSS                                                             (2,822,989)  (3,802,195)  (4,516,404)

  Deemed dividend on preferred stock                                    (864,000)  (1,132,000)
  Preferred stock dividend requirement                                  (205,163)     (96,717)
                                                                      ----------   ----------   ----------
        LOSS APPLICABLE TO
           COMMON STOCK                                              $(3,892,152) $(5,030,912) $(4,516,404)
                                                                      ----------   ----------   ----------

Net loss per common share (basic and diluted)                              $(.08)       $(.11)       $(.10)
                                                                      ----------   ----------   ----------

Weighted average common shares
 outstanding (basic and diluted)                                      49,371,574   47,873,711   46,297,142
                                                                      ----------   ----------   ----------
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
                                     F - 4
<PAGE>
                        Vasomedical, Inc. and Subsidiary

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                                                         Total
                                                                              Additional      Deferred       Accum-      stock-
                                         Preferred stock     Common stock       paid-in       compen-        ulated     holders'
                                         Shares   Amount   Shares    Amount     capital       sation        deficit      equity
                                         ------   ------   ------    ------   ----------      --------     ---------    --------
<S>                                      <C>     <C>      <C>         <C>       <C>          <C>         <C>            <C>
Balance at June 1, 1996                       -        -  42,204,113 $42,204   $24,427,338   $(169,813)  $(21,208,635)  $3,091,094

Conversion of debt                                         3,725,000   3,725     3,330,850                               3,334,575
Exercise of warrants                                         852,890     853       941,031                                 941,884
Amortization of deferred compensation                                                          169,813                     169,813
Net loss                                                                                                   (4,516,404)  (4,516,404)
                                        -------  -------  ----------  ------    ----------     -------    -----------   ----------
Balance at May 31, 1997                       -        -  46,782,003  46,782    28,699,219           -    (25,725,039)   3,020,962

Issuance of preferred stock             325,000   $3,250                         6,108,650                               6,111,900
Conversion of preferred stock           (99,250)    (992)  1,160,064   1,160          (168)                                      -
Exercise of options and warrants                             568,406     568       483,895                                 484,463
Deemed dividend on preferred stock                                               1,132,000                 (1,132,000)           -
Preferred stock dividend requirement                                                                          (96,717)     (96,717)
Common stock issued in lieu of
  preferred stock dividends                                   20,805      21        34,559                                  34,580
Net loss                                                                                                   (3,802,195)  (3,802,195)
                                        -------  -------  ----------  ------    ----------     -------    -----------   ----------
Balance at May 31, 1998                 225,750    2,258  48,531,278  48,531    36,458,155           -    (30,755,951)   5,752,993

Conversion of preferred stock           (50,750)    (508)    975,882     976          (468)                                      -
Exercise of warrants                                         825,000     825       354,175                                 355,000
Deemed dividend on preferred stock                                                 864,000                   (864,000)           -
Preferred stock dividend requirement                                                                         (205,163)    (205,163)
Common stock issued in lieu of
  preferred stock dividends                                   70,527      71        73,621                                  73,692
Net loss                                                                                                   (2,822,989)  (2,822,989)
                                        -------  -------  ----------  ------    ----------     -------    -----------   ----------
Balance at May 31, 1999                 175,000   $1,750  50,402,687 $50,403   $37,749,483           -   $(34,648,103)  $3,153,533
                                        -------  -------  ----------  ------    ----------     -------    -----------   ----------
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>

                                     F - 5
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                 Year ended May 31,
                                                                                 ------------------
                                                                         1999           1998          1997
                                                                         ----           ----          ----
<S>                                                                  <C>            <C>            <C>
Cash flows from operating activities
  Net loss                                                           $(2,822,989)   $(3,802,195)   $(4,516,404)
                                                                     -----------    -----------    -----------
  Adjustments to reconcile net loss
    to net cash used in operating activities
      Depreciation and amortization                                      463,859        363,101        333,482
      Provision for losses                                                                             225,000
      Amortization of deferred compensation                                                            169,813
      Changes in operating assets and liabilities
        Accounts receivable                                             (609,091)      (919,693)       729,317
        Inventories                                                     (367,791)       203,096       (551,740)
        Other assets                                                     (12,485)       (78,691)        74,924
        Accounts payable, accrued expenses and other current liabilities 587,915        211,687       (113,978)
        Other liabilities                                               (267,000)       164,370         77,000
                                                                     -----------    -----------    -----------
                                                                        (204,593)       (56,130)       943,818
                                                                     -----------    -----------    -----------
     Net cash used in operating activities                            (3,027,582)    (3,858,325)    (3,572,586)
                                                                     -----------    -----------    -----------

Cash flows from investing activities
  Purchase of property and equipment                                     (17,229)      (123,056)       (54,100)
                                                                     -----------    -----------    -----------
     Net cash used in investing activities                               (17,229)      (123,056)       (54,100)
                                                                     -----------    -----------    -----------

Cash flows from financing activities
  Proceeds from exercise of options and warrants                         355,000        484,463        941,884
  Proceeds from issuance of preferred stock, net                                      6,111,900
  Debt conversion fees                                                                                 (10,000)
                                                                     -----------    -----------    -----------
     Net cash provided by financing activities                           355,000      6,596,363        931,884
                                                                     -----------    -----------    -----------

      NET (DECREASE) INCREASE IN
        CASH AND CASH EQUIVALENTS                                     (2,689,811)     2,614,982     (2,694,802)
Cash and cash equivalents - beginning of year                          4,367,986      1,753,004      4,447,806
                                                                     -----------    -----------    -----------
Cash and cash equivalents - end of year                               $1,678,175     $4,367,986     $1,753,004
                                                                     -----------    -----------    -----------
Non-cash investing and financing activities were as follows:
  Deemed dividend on preferred stock                                    $864,000     $1,132,000
  Issuance of common stock in lieu of preferred dividends                 73,692         34,580
  Inventories transferred to property and equipment,
     attributable to operating leases - net                              452,000         71,647       $163,317
  Issuance of common stock upon conversion of debt                                                   3,344,575
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
                                     F - 6
<PAGE>
                        Vasomedical, Inc. and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          May 31, 1999, 1998 and 1997

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 its EECP(r) enhanced  external
counterpulsation system ("EECP(r)"),  a microprocessor-based  medical device for
the noninvasive,  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.

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

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

     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.

     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,  on a  straight-line  basis.
Accelerated  methods  of  depreciation  are  used  for tax  purposes.  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.

     Capitalized Cost in Excess of Fair Value of Net Assets Acquired
     The capitalized cost in excess of the fair value of the net assets acquired
(goodwill) is being  amortized on a  straight-line  basis over a period of seven
years. On an ongoing basis, management reviews the valuation and amortization of
goodwill 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.

                                     F - 7
<PAGE>
     Revenue Recognition
     The Company  recognizes  revenue from the sale of its EECP(r) system 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)  system that are  classified  as
operating   leases.   Revenues  from  operating   leases  are  recognized  on  a
straight-line basis over the life of the respective leases.

     Concentrations of Credit Risk
     The Company  markets the EECP(r) system  principally to hospitals,  clinics
and other cardiac health care providers. The Company performs credit evaluations
of  its  customers'   financial  condition  and  does  not  require  collateral.
Receivables  are  generally  due within 60-90 days.  Credit  losses  relating to
customers have historically been within management's expectations.

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

     Research and Development
     Research and development costs are expensed as incurred.

     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.

     Use of Estimates
     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

     Net Loss Per Common Share
     Basic  earnings  (loss) per common share is computed by dividing net income
(loss) available to common stockholders by the weighted average number of shares
outstanding during the period.  Diluted earnings (loss) per common share reflect
the potential  dilution  that could occur if  securities  or other  contracts to
issue common stock were  exercised or converted into common stock or resulted in
the  issuance of common  stock.  Potential  common  shares  from stock  options,
warrants and  convertible  preferred  stock are excluded in computing  basic and
diluted net loss per share as their effects would be antidilutive.

     Stock Compensation

     The Company measures  stock-based  awards using the intrinsic value method.
As described in Note D, pro forma  disclosure  of the effect on net loss and net
loss per common share has been  computed as if the fair  value-based  method had
been applied in measuring compensation expense.

        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>
NOTE B - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
                                                                              May 31,
                                                                              -------
        Property and equipment is summarized as follows:                  1999       1998
                                                                          ----       ----
                <S>                                                     <C>        <C>
                Office, laboratory and other equipment                  $273,354   $261,964
                EECP(r) units under operating leases                     624,000    186,287
                Furniture and fixtures                                    81,232     81,232
                Leasehold improvements                                    95,610     89,760
                                                                       ---------   --------
                                                                       1,074,196    619,243
                Less accumulated depreciation and amortization          (502,828)  (266,341)
                                                                       ---------   --------
                                                                        $571,368   $352,902
                                                                       ---------   --------
</TABLE>
NOTE C - STOCKHOLDERS' EQUITY AND WARRANTS
Fiscal 1997
     In June 1996,  $3,725,000 in outstanding  principal  amount of 7% five-year
Convertible  Debentures (the "Notes") was 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).

Fiscal 1998
     On June 25, 1997,  the Company  issued  150,000  shares of newly created 5%
Series  B  Cumulative  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 of $2,818,000.  The convertible
preferred  stock had no voting rights and was  convertible  into common stock of
the Company at an effective conversion price of the lower of (i) $2.18 per share
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,
the investor was granted five-year warrants to purchase 405,405 shares of common
stock at an exercise  price of $2.18 per share.  The  Company  recorded a deemed
dividend of  $857,000  in the first  quarter of 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 was
recognized  from the date of issuance  through the date such preferred stock was
first  convertible.  In connection  with this  transaction,  the Company  issued
five-year  warrants to the  broker/finder  to purchase  150,000 shares of common
stock at an exercise  price of $2.18 per share.  These warrants were fair valued
at $123,000.  During fiscal 1998, 99,250 shares of Series B preferred stock were
converted into 1,160,064  shares of common stock.

     On April 30, 1998, the Company completed a second tranche of financing with
the same  accredited  investor  and issued  175,000  shares of newly  created 5%
Series C Cumulative  Convertible  Preferred Stock,  $.01 par value,  pursuant to
Regulation D under the Securities  Act of 1933 at a price of $20 per share,  for
net cash proceeds of $3,294,000.  The convertible  preferred stock has no voting
rights and is  convertible  into  common  stock of the  Company at an  effective
conversion  price of the lower of (i) $2.08 per share 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 (the "Average  Closing  Price"),  as
defined in the Certificate of Designation of the convertible preferred stock. In
addition, the investor was granted five-year warrants to purchase 413,712 shares
of  common  stock at an  exercise  price of $2.08 per  share.  The  Company  has
estimated the value of the deemed dividend,  representing the discount resulting
from the  allocation of proceeds to the  beneficial  conversion  feature and the
fair value of the  underlying  warrants,  to approximate  $936,000.  Such deemed
dividend  was  recognized  from  the date of  issuance  through  the  date  such
preferred   stock  was  first   convertible  (on  or  about  August  15,  1998).
Accordingly,  the Company recognized a deemed dividend of $275,000 in the fourth
quarter of fiscal 1998 and the $661,000  remaining  deemed dividend in the first
quarter of fiscal 1999. In connection with this transaction,  the Company issued
five-year  warrants to the  broker/finder  to purchase  175,000 shares of common
stock at an exercise  price of $2.08 per share.  These warrants were fair valued
at $135,000.

                                     F - 9
<PAGE>
Fiscal 1999
        Based upon negotiations between the Company and the holder of the Series
C preferred  stock in December 1998 relating to the delayed  effectiveness  of a
registration  statement  covering the  underlying  shares of common  stock,  the
conversion  price with respect to the Series C preferred  stock has been reduced
to the lower of (i) $2.00 per share  or (ii)  81% of the Average  Closing Price.
The  Company  has  estimated  the  incremental  value  of the  deemed  dividend,
representing the additional  discount  resulting from the allocation of proceeds
to the beneficial conversion feature, to approximate $203,000.  Accordingly, the
Company  recognized  this  incremental  deemed dividend in the second quarter of
fiscal 1999. In fiscal 1999, the remaining  balance of 50,750 shares of Series B
preferred  stock were converted into 975,882 shares of common stock.  Subsequent
to May 31, 1999,  28,000 shares of Series C preferred  stock were converted into
477,912 shares of common stock.

Warrants
--------
        Warrant  activity  for the years  ended May 31,  1997,  1998 and 1999 is
summarized as follows:
<TABLE>
<CAPTION>
                                               Non-employee
                                                 Directors       Employees       Consultants       Total       Price Range
                                               ------------      ---------       -----------       -----       -----------
<S>                                              <C>             <C>              <C>             <C>          <C>
Balance at June 1, 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
  Issued                                                 -               -        1,144,117       1,144,117    $2.08 - $2.18
  Exercised                                        (50,000)        (30,000)        (483,406)       (563,406)    $.25 - $2.18
  Canceled/retired                                       -               -          (50,000)        (50,000)           $1.50
                                                 ---------       ---------        ---------       ---------    -------------
Balance at May 31, 1998                          1,125,000       1,920,000        1,828,712       4,873,712     $.38 - $2.18
  Exercised                                       (300,000)       (525,000)               -        (825,000)    $.38 -  $.45
  Canceled/retired                                (425,000)       (120,000)        (450,000)       (995,000)    $.91 - $1.50
                                                 ---------       ---------        ---------       ---------    -------------
Balance at May 31, 1999                            400,000       1,275,000        1,378,712       3,053,712     $.38 - $2.18
                                                 ---------       ---------        ---------       ---------    -------------
Number of shares exercisable                       400,000       1,275,000        1,378,712       3,053,712     $.38 - $2.18
                                                 ---------       ---------        ---------       ---------    -------------
<FN>
 The weighted-average fair value of warrants granted during fiscal 1998 was $.80.
</FN>
</TABLE>
        The following table summarizes  information  about warrants  outstanding
and exercisable at May 31, 1999:
<TABLE>
<CAPTION>
                                        Warrants Outstanding and Exercisable
                               ----------------------------------------------------
                                                      Weighted
                               Number Outstanding      Average         Weighted
                               and Exercisable at     Remaining         Average
                                 May 31, 1999      Contractual Life  Exercise Price
Range of Exercise Prices                                (yrs.)
-----------------------------------------------------------------------------------
<S>                                <C>                   <C>             <C>
$.38  -  $.45                      1,675,000             1.7             $.42
$.91                                 200,000             7.4             $.91
$1.44                                100,000             1.8            $1.44
$2.08  -  $2.18                    1,078,712             3.5            $2.13
                                ---------------------------------------------------
                                   3,053,712             2.7            $1.09
                                ---------------------------------------------------
</TABLE>
NOTE D - OPTION PLANS

1995 Stock Option Plan
----------------------
        In May 1995, the Company's  stockholders  approved the 1995 Stock Option
Plan for officers and employees of the Company,  for which the Company  reserved
an  aggregate  of  1,500,000  shares of common  stock.  In  December  1997,  the
Company's Board of Directors terminated the 1995 Stock Option Plan.

Outside Director Stock Option Plan
----------------------------------
        In May 1995,  the Company's  stockholders  approved an Outside  Director
Stock  Option Plan for  non-employee  directors  of the  Company,  for which the
Company  reserved an aggregate of 300,000  shares of common  stock.  In December
1997, the Company's  Board of Directors  terminated  the Outside  Director Stock
Option Plan.
                                     F - 10
<PAGE>
1997 Stock Option Plan
----------------------
        In December  1997,  the Company's  stockholders  approved the 1997 Stock
Option Plan (the "1997 Plan") for officers, directors, employees and consultants
of the  Company,  for which the Company has  reserved an  aggregate of 1,800,000
shares of common stock. The 1997 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 1997
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 1997 Plan expires August 6, 2007.
     In September  1998, the Board of Directors  granted stock options under the
1997 Plan to an  employee  to  purchase  90,000  shares  of  common  stock at an
exercise price of $.75 per share (which represented the fair market value of the
underlying common stock at the time of grant).
     In January 1999, the Company's  Board of Directors  increased the number of
shares  authorized  for  issuance  under  the 1997 Plan by  1,000,000  shares to
2,800,000  shares.  In addition,  the Board of Directors  granted  stock options
under  the 1997 Plan to  directors,  officers,  employees  and a  consultant  to
purchase an aggregate of 830,000  shares,  470,000  shares,  313,500  shares and
150,000 shares of common stock, respectively,  at an exercise price of $.875 per
share (which represented the fair market value of the underlying common stock at
the time of grant).  The stock options  granted to the consultant are contingent
upon meeting  certain  performance  criteria.  Accordingly,  the Company has not
recorded  any charge to  operations  in fiscal 1999  pertaining  to such options
granted to the consultant.
     In July 1999,  the  Company's  Board of  Directors  approved the 1999 Stock
Option Plan (the "1999  Plan"),  for which the Company  reserved an aggregate of
2,000,000  shares of common stock. In addition,  the Board of Directors  granted
stock options under the 1999 Plan to certain  officers and employees to purchase
an aggregate of 175,000 shares and 150,000 shares of common stock, respectively,
at an exercise price of $1.69 per share,  and to an employee to purchase  30,000
shares  of  common  stock  at an  exercise  price  of  $1.53  per  share  (which
represented the fair market value of the underlying  common stock at the time of
the  respective  grants).  Subsequent  to May 31, 1999,  options and warrants to
purchase  70,175 shares of common stock were exercised,  aggregating  $51,250 in
proceeds to the Company.


        Activity under all the plans is summarized as follows:
<TABLE>
<CAPTION>
                                                                         Outstanding Options
                                                  -------------------------------------------------------------
                               Shares Available     Number of Number of        Exercise        Weighted Average
                                  for Grant               Shares            Price per Share     Exercise Price
                               --------------------------------------------------------------------------------
<S>                               <C>                   <C>                 <C>                       <C>
Balance at June 1, 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
  Shares authorized                1,800,000                    -                         -               -
  Plans terminated                  (699,357)                   -                         -               -
  Options granted                 (1,054,050)           1,054,050           $1.77  -  $2.44           $1.91
  Options exercised                        -               (5,000)                    $1.03           $1.03
  Options canceled                    10,000              (15,000)          $1.91  -  $3.44           $2.42
                               --------------------------------------------------------------------------------
Balance at May 31, 1998              855,500            2,060,143            $.78  -  $3.44           $2.44
  Shares authorized                1,000,000
  Options granted                 (1,853,500)           1,853,500            $.75  -   $.88            $.87
  Options canceled                    38,500              (58,500)           $.88  -  $1.91           $1.36
                               --------------------------------------------------------------------------------
Balance at May 31, 1999               40,500            3,855,143            $.75  -  $3.44           $1.70
                               --------------------------------------------------------------------------------

</TABLE>
                                     F - 11
<PAGE>
         The following table summarizes information about stock options
outstanding and exercisable at May 31, 1999:
<TABLE>
<CAPTION>
                                          Options Outstanding                      Options Exercisable
                             -----------------------------------------------   --------------------------
                                                Weighted
                                Number           Average       Weighted           Number         Weighted
                             Outstanding at     Remaining       Average        Exercisable at    Average
                              May 31, 1999   Contractual Life Exercise Price    May 31, 1999   Exercise Price
Range of Exercise Prices                         (yrs.)
-------------------------------------------------------------------------------------------------------------
<S>                             <C>                <C>            <C>             <C>              <C>
$.75   -   $.88                 1,918,918          6.8             $.87             907,418          $.87
$1.77  -  $2.44                 1,169,225          8.0            $1.93             477,225         $1.94
$3.44                             767,000          7.0            $3.44             523,000         $3.44
                              -------------------------------------------------------------------------------
                                3,855,143          7.2            $1.70           1,907,643         $1.84
                              -------------------------------------------------------------------------------
</TABLE>
     As permitted  under  Statement of Financial  Accounting  Standards No. 123,
"Accounting  for  Stock-Based  Compensation"  ("SFAS No. 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. Pursuant to 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 for
awards granted as if the Company had accounted for its stock-based  awards under
the  fair  value  method  of SFAS No.  123.  The  fair  value  of the  Company's
stock-based awards was estimated using the Black-Scholes option valuation model.
The fair value of the Company's  stock-based  awards was  estimated  assuming no
expected dividends and the following weighted-average assumptions:
<TABLE>
<CAPTION>
     Fiscal year ended May 31,          1999           1998          1997
     -------------------------          ----           ----          ----
     <S>                                <C>           <C>           <C>
     Expected life (years)                 5              5             5
     Expected volatility                 80%            85%           85%
     Risk-free interest rate            4.4%          5.68%         6.69%
</TABLE>

        The  following are the pro forma net loss and net loss per share amounts
for fiscal  1999,  1998 and 1997,  as if  compensation  expense for  stock-based
awards had been  determined  based on their  estimated fair value at the date of
grant:
<TABLE>
<CAPTION>

                                        1999           1998           1997
                                        ----           ----           ----
     <S>                           <C>            <C>            <C>
     Pro forma net loss            $(5,534,569)   $(5,702,635)   $(5,607,637)
     Pro forma net loss per share        $(.11)         $(.12)         $(.12)
</TABLE>

        The  weighted-average  fair value of options granted during fiscal 1999,
1998 and 1997 was $.58,  $1.34 and $2.29,  respectively.  At May 31, 1999, there
were approximately  17,000,000 remaining authorized shares of common stock after
reserves for all stock option plans, stock warrants, convertible preferred stock
and shareholders' rights.

NOTE E - REVENUE CONCENTRATIONS

     In March 1996, the Company entered into an exclusive agreement with a third
party, whereby such third party would 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 1998 and 1997, approximately 13% and 54%, respectively,
of the Company's revenues were derived through such transactions.  There were no
revenues derived from such transactions during fiscal 1999.
     In fiscal  1999 and 1998,  the  Company  had sales to one  customer in each
period, accounting for 21% and 10% of the Company's revenues,  respectively.  In
fiscal  1997,  the Company had sales to two  customers,  aggregating  43% of the
Company's revenues.

                                     F - 12
<PAGE>
NOTE F - 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,
                                                        ---------------------------
                                                            1999           1998
                                                            ----           ----
   <S>                                                  <C>             <C>
   Deferred tax assets
        Net operating loss and other carryforwards      $11,913,000     $10,908,000
        Accrued compensation                                 92,000         120,000
        Other                                               247,000         268,000
                                                        -----------     -----------
                Total gross deferred tax assets          12,252,000      11,296,000
        Valuation allowance                             (12,252,000)    (11,296,000)
                                                        -----------     -----------
                                                        $         -     $         -
                                                        -----------     -----------
</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, 1999,  the Company had net operating loss  carryforwards  for
Federal income tax purposes of  approximately  $33,000,000,  expiring at various
dates from 2003 through 2019.

NOTE G - COMMITMENTS AND CONTINGENCIES

Employment Agreements
        The Company maintains employment agreements with its executive officers,
expiring at various  dates  through  January 2002.  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.
        Approximate  aggregate  minimum annual  compensation  obligations  under
active employment agreements at May 31, 1999, are summarized as follows:
<TABLE>
<CAPTION>
                       Fiscal Year             Amount
                       -----------             ------
                         <S>                <C>
                         2000                 $569,000
                         2001                  391,000
                         2002                   93,000
                                            ----------
                                            $1,053,000
                                            ----------
</TABLE>

Leases
        The Company  occupies  office and warehouse  space under a noncancelable
operating  lease which  expires on October 31, 2000.  Rent expense was $125,000,
$121,000 and $118,000 in fiscal 1999, 1998 and 1997, respectively.
        Approximate  aggregate  minimum  annual  obligations  under  this  lease
agreement and other equipment leasing  agreements at May 31, 1999 are summarized
as follows:
<TABLE>
<CAPTION>
                       Fiscal Year             Amount
                       -----------             ------
                          <S>                <C>
                          2000                159,000
                          2001                 81,000
                          2002                 10,000
                          2003                  8,000
                                             --------
                                             $258,000
                                             --------
</TABLE>
                                     F - 13
<PAGE>
SEC Investigation
     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  ("SEC")  requesting  certain  documents  from the  Company
pursuant to a formal order of private  investigation in connection with possible
registration  and reporting  violations.  In July 1999, the Company was notified
that the  investigation  was  terminated  and  that no  enforcement  action  was
recommended to the SEC.

     Litigation In May 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)  systems.  The
complaint  sought damages in the  approximate  sum of  $50,000,000,  declaratory
relief and punitive damages.  The Company denied the existence of any agreement,
and contended  that the complaint was frivolous and without  merit.  The Company
also asserted substantial counterclaims.  In August 1999, the motion for summary
judgment to dismiss the  complaint  in its  entirety  was  granted.  The time to
appeal the dismissal has not yet expired.
     In May 1998, an action was commenced in the New York Supreme Court, Suffolk
County,  against the Company and other parties.  The action seeks damages in the
sum of  $5,000,000  based  upon  alleged  injuries  resulting  from the  alleged
negligence of the  defendants in the use of the Company's  product.  The Company
and its insurer  believe that the  complaint is frivolous  and without merit and
are vigorously defending the claims.  Furthermore,  management believes that the
damages  sought under the complaint are fully covered by insurance.  This matter
is in its  preliminary  stages  and the  Company  is  unable  to  establish  the
likelihood of an unfavorable outcome or the existence or amount of any potential
loss.
     In February  1999,  an action was commenced in the  Massachusetts  Superior
Court, Essex County, against the Company. The action seeks damages in the sum of
$1,000,000  based  upon an  alleged  breach  of a sales  contract.  The  Company
believes  that the  complaint is frivolous  and without  merit and is vigorously
defending the claims.  This matter is in its preliminary  stages and the Company
is unable to establish the likelihood of an unfavorable outcome or the existence
or amount of any potential loss.

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.  No  Company
contributions were made for the fiscal years ended May 31, 1999, 1998 and 1997.

Agreement with VAMED
     In connection with an acquisition in 1995, the Company assumed  commitments
under an  agreement,  expiring  November  2008,  with VAMED  Medical  Instrument
Company Ltd.  ("VAMED")  (formerly  Foshan  Analytical  Instrument  Factory),  a
Chinese  company,  for the contract  manufacture of its current  EECP(r) system,
subject to certain  performance  standards,  as defined.  At May 31,  1999,  the
Company had outstanding purchase  commitments of $168,000.  The Company believes
that VAMED will be able to meet the Company's needs for EECP(r) systems.

                                     F - 14

<PAGE>

                                 EXHIBIT INDEX

Exhibit No.

(10)            1999 Stock Option Plan

(23)            Consent of Grant Thornton LLP

(27)            Financial Data Schedule